SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Quarterly Period ended JUNE 30, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from _________ to _________.
COMMISSION FILE NUMBER 0-8909
-----------------------
HOMEGOLD FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0513287
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
P. O. BOX 17526
GREENVILLE, SOUTH CAROLINA 29606
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
864-235-8056
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
EMERGENT GROUP, INC.
(REGISTRANT'S FORMER NAME, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF EACH CLASS: OUTSTANDING AT JULY 15, 1998
- ------------------------------------------ ----------------------------
COMMON STOCK, PAR VALUE $0.05 PER SHARE 9,708,083
<PAGE>
HOMEGOLD FINANACIAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
<S> <C> <C>
Item 1. Financial Statements for HomeGold Financial, Inc.
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 4
Consolidated Statements of Income
for the six months ended June 30, 1998
and June 30, 1997 and for the three months 6
ended June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998
and June 30, 1997 7
Notes to Consolidated Financial Statements 8
Financial Statements for Sterling Lending Corporation, a majority-owned
subsidiary of HomeGold Financial, Inc.
Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 21
Consolidated Statements of Income
for the six months ended June 30, 1998
and June 30, 1997 and for the three months 22
ended June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows
for the six months ended June 30, 1998
and June 30, 1997 23
Notes to Consolidated Financial Statements 24
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Submission of Matters to a Vote of Security Holders 46
Item 5. Other Information 47
Item 6. Exhibits and Reports on Form 8-K 47
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
3
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(In thousands)
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 43,628 $ 7,561
--------- ---------
Loans receivable:
Loans receivable held for investment 87,370 100,379
Loans receivable held for sale 226,844 197,236
--------- ---------
Total loans receivable 314,214 297,615
Less allowance for credit losses on loans (8,385) (6,528)
Less unearned discount, dealer reserves, and deferred loan costs (4,380) (2,658)
--------- ---------
Net loans receivable 301,449 288,429
Other receivables:
Accrued interest receivable 3,363 4,407
Other receivables 8,151 10,680
--------- ---------
Total other receivables 11,514 15,087
Residual receivables 67,679 63,202
Property and equipment, net 21,559 18,080
Excess of cost over net assets of acquired businesses, net of accumulated
amortization of $1,557 in 1998 and $978 in 1997 2,294 2,874
Real estate and personal property acquired through foreclosure 4,140 3,295
Debt origination costs 6,657 4,767
Deferred income tax asset 4,151 4,151
Servicing asset 1,289 1,468
Other assets 5,523 7,238
--------- ---------
TOTAL ASSETS $ 469,883 $ 416,152
========= =========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
4
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
<S> <C> <C>
Revolving warehouse lines of credit $ 167,763 $ 77,605
Mortgage note payable 3,446 --
Investor savings:
Notes payable to investors 119,319 115,368
Subordinated debentures 18,772 18,947
--------- ---------
Total investor savings 138,091 134,315
Senior unsecured debt 125,000 125,000
Accounts payable and accrued liabilities 6,625 6,517
Remittances payable 4,615 4,591
Accrued interest payable 4,366 4,750
--------- ---------
Total other liabilities 15,606 15,858
--------- ---------
Total liabilities 449,906 352,778
Minority interest 68 --
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.05 per share - authorized 100,000,000 shares,
issued and outstanding 9,708,083 shares in 1998 and 9,686,477 shares
in 1997 485 484
Capital in excess of par value 38,739 38,609
Retained earnings (deficit) (19,315) 24,281
--------- ---------
Total shareholders' equity 19,909 63,374
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 469,883 $ 416,152
========= =========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
5
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 19,190 $ 15,024 $ 10,516 $ 8,817
Servicing income 7,601 3,085 3,379 1,940
Gain on sale of loans:
Cash gain on sale of loans 7,979 7,296 4,530 5,493
Non-cash gain on sale of loans 3,181 10,811 112 6,396
Loan fee income 8,961 13,215 5,359 7,337
----------- ----------- ----------- -----------
Total gain on sale of loans 20,121 31,322 10,001 19,226
Other revenues 2,418 433 880 196
----------- ----------- ----------- -----------
Total revenues 49,330 49,864 24,776 30,179
----------- ----------- ----------- -----------
EXPENSES:
Interest 18,385 9,782 9,952 6,055
Provision for credit losses 6,940 4,672 2,111 2,599
Fair value write-down of residual receivables 8,910 -- 7,330 --
Salaries, wages and employee benefits 34,376 18,760 16,104 10,715
Business development costs 6,535 3,019 3,055 1,821
Other general and administrative expense 14,533 9,935 6,632 5,893
----------- ----------- ----------- -----------
Total expenses 89,679 46,168 45,184 27,083
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority
Interest (40,349) 3,696 (20,408) 3,096
Provision (benefit) for income taxes 3,244 (1,625) 2,566 (1,667)
----------- ----------- ----------- -----------
Income (loss) before minority interest (43,593) 5,321 (22,974) 4,763
Minority interest in earnings (loss) of subsidiaries 2 (156) (2) --
=========== =========== =========== ===========
NET INCOME (LOSS) $ (43,591) $ 5,165 $ (22,976) $ 4,763
=========== =========== =========== ===========
Basic earnings (loss) per share of common stock $ (4.49) $ 0.56 $ (2.37) $ 0.52
=========== =========== =========== ===========
Basic weighted average shares outstanding 9,705,055 9,145,385 9,708,083 9,147,570
=========== =========== =========== ===========
Diluted earnings (loss) per share of common stock $ (4.49) $ 0.55 $ (2.37) $ 0.51
=========== =========== =========== ===========
Diluted weighted average shares outstanding 9,705,055 9,318,050 9,708,083 9,310,153
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
6
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (43,591) $ 5,165
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,809 1,235
Benefit for deferred income taxes -- (2,458)
Provision for credit losses 6,940 4,672
Loans originated with intent to sell (484,107) (494,857)
Proceeds from loans sold 340,747 175,767
Proceeds from securitization of loans 92,316 201,034
Other 6,923 1,831
Changes in operating assets and liabilities
decreasing cash (649) (15,825)
--------- ---------
Net cash used in operating activities $ (79,612) $(123,436)
--------- ---------
INVESTING ACTIVITIES:
Loans originated for investment purposes $ (80,774) $ (62,324)
Principal collections on loans not sold 101,986 57,569
Proceeds from sale of real estate and personal property
acquired through foreclosure 2,143 3,271
Purchase of property and equipment (5,198) (4,136)
Other 17 (280)
--------- ---------
Net cash provided by (used in) investing activities $ 18,174 $ (5,900)
--------- ---------
FINANCING ACTIVITIES:
Advances on revolving warehouse lines of credit $ 263,275 $ 535,895
Payments on revolving warehouse lines of credit (169,671) (417,036)
Net increase in notes payable to investors 3,951 7,743
Net increase (decrease) in subordinated debentures (175) 3,046
Proceeds from issuance of additional common stock 132 857
Other (7) --
--------- ---------
Net cash provided by financing activities $ 97,505 $ 130,505
--------- ---------
Net increase in cash and cash equivalents $ 36,067 $ 1,169
CASH AND CASH EQUIVALENTS:
Beginning of period 7,561 1,276
========= =========
End of period $ 43,628 $ 2,445
========= =========
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
7
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PREPARATION
The accompanying consolidated financial statements are prepared in
accordance with the Securities and Exchange Commission's rules regarding interim
financial statements, and therefore do not contain all disclosures required by
generally accepted accounting principles for annual financial statements.
Reference should be made to the financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, including the
footnotes thereto. Certain previously reported amounts have been reclassified to
conform to current year presentation. Such reclassifications had no effect on
net income or shareholders' equity as previously reported.
The consolidated balance sheet as of June 30, 1998, and the
consolidated statements of income for the six-month and three-month periods
ended June 30, 1998 and 1997, and the consolidated statements of cash flows for
the six-month periods ended June 30, 1998 and 1997, are unaudited and in the
opinion of management contain all known adjustments, which consist of only
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows of the Company.
KPMG Peat Marwick LLP previously examined and reported on the
Company's financial statements for the year ended December 31, 1997, from which
the consolidated balance sheet as of that date is derived.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's historic accounting policy provided that the estimated
lower of cost or market analysis for loans held for sale be assessed on a
disaggregate basis based solely on the type of loan (e.g. mortgage, commercial
and auto). Beginning in 1998, the Company elected to further disaggregate the
mortgage loan portfolio for purposes of estimating the lower of cost or market
assessment by evaluating loans secured by first liens separately from loans
secured by second liens. This change resulted in a loss of approximately $5.0
million for the six months ended June 30, 1998 and had no impact on earnings for
the three months ended June 30, 1998.
NOTE 3--CASH FLOW INFORMATION
For the six-month periods ended June 30, 1998 and 1997, the Company
paid interest of $18.8 million and $8.6 million, respectively.
For the six-month periods ended June 30, 1998 and 1997, the Company
paid income taxes of $1.5 million and $566,000, respectively.
For the six-month periods ended June 30, 1998 and 1997, the Company
foreclosed on property in the amount of $3.2 million and $1.8 million,
respectively.
NOTE 4--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments readily
convertible to cash or having a maturity of three months or less to be cash
equivalents.
The Company maintains its primary checking accounts with three
principal banks and makes overnight investments in reverse repurchase agreements
with those banks. The amounts maintained in the checking accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At June 30,
1998, the amounts maintained in overnight investments in reverse repurchase
agreements, which are not insured by the FDIC, totaled approximately $41.3
million. The investments were secured by U.S. Government securities pledged by
the banks.
8
<PAGE>
NOTE 5 --ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the provisions of
SFAS No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting comprehensive income and its components in a full set of
general purpose financial statements. The objective of the Statement is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events during the period other than transactions
with owners. Comprehensive income is divided into net income and other
comprehensive income. Adoption of this Statement did not change total
shareholders' equity as previously reported. Net income and comprehensive income
are the same for the six-month and three-month periods ended June 30, 1998 and
1997.
NOTE 6--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 and minority interest are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Statutory federal rate of 34% applied to pre-tax income
from continuing operations before minority interest $(13,719) $ 1,257 $ (6,939) $ 1,053
State income taxes, net of federal income tax benefit 225 81 178 63
Change in the beginning of period balance of the
valuation allowance for deferred tax assets allocated
to income tax expense 16,411 (3,059) 9,265 (2,677)
Nondeductible expenses 55 34 22 24
Amortization of excess cost over net assets of acquired
businesses 32 33 15 17
Other, net 240 29 25 (147)
-------- -------- -------- --------
$ 3,244 $ (1,625) $ 2,566 $ (1,667)
======== ======== ========= =========
</TABLE>
Provision for income taxes from continuing operations is comprised
of the following:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------ -------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Current
Federal $ 2,903 $ 260 $ 2,296 $ 157
State and local 341 573 270 298
------- ------- ------- -------
3,244 833 2,566 455
Deferred
Federal -- (2,008) -- (1,920)
State and local -- (450) -- (202)
------- ------- ------- -------
-- (2,458) -- (2,122)
Total
Federal 2,903 (1,748) 2,296 (1,763)
State and local 341 123 270 96
======= ======= ======== ========
$ 3,244 $(1,625) $ 2,566 $ (1,667)
======= ======= ======== ========
</TABLE>
9
<PAGE>
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 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>
June 30, December 31,
-------- --------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ (923) $ (796)
Difference between book and tax basis of the residual receivables
associated with the Company's investment in its affiliated real estate
investment trust (3,567) (3,849)
Deferred loan costs (810) (608)
Other (200) (90)
-------- --------
Total gross deferred tax liabilities (5,500) (5,343)
-------- --------
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles 233 216
Allowance for credit losses 4,174 3,525
AMT credit carryforward -- 608
Operating loss carryforward 18,015 4,171
Write-down on residual receivables 2,033 --
Unrealized gain on loans to be sold 1,213 909
Other 394 65
-------- --------
Total gross deferred tax assets 26,062 9,494
Less valuation allowance (16,411) --
-------- --------
Net deferred tax asset $ 4,151 $ 4,151
======== ========
</TABLE>
The valuation allowance for deferred tax assets at Janury 1, 1997
was $7.5 million. The increase (decrease) in the valuation allowance for the six
months ended June 30, 1998 and the year ended December 31, 1997 was $16.4
million and ($7.5) million, respectively. The valuation allowance at June 30,
1998 relates primarily to net operating loss ("NOL") carryforwards. The decision
to record the valuation allowance was based on changes in 1998 earnings
projections. Current projections are for a taxable loss in 1998. The ability to
fully utilize all of the NOL's expiring in 1999 is reduced by the Company's
anticipated current year loss and the inability to use current period earnings
classified as "excess inclusion" to offset prior NOL's. Earnings of
approximately $9.5 million in the six months ended June 30, 1998 and $4.0
million in 1997 were classified as excess inclusion and were not able to be
offset with prior year NOL's. Management believes that it is more likely than
not that the results of future operations and tax planning strategies available
to the Company will generate sufficient taxable income to realize the net
deferred tax asset. Management continues to evaluate this each quarter, and may
take additional reserves against this asset if deemed necessary in the future.
As of June 30, 1998, the Company has available Federal NOL's
expiring as follows (in thousands):
1999 $ 8,463
2000 3,297
2001 1,911
2002 and after 42,627
--------------------
$ 56,298
====================
There are no known significant pending assessments from taxing
authorities regarding taxation issues at the Company or its subsidiaries.
10
<PAGE>
NOTE 7--WAREHOUSE LINES OF CREDIT
The Company's mortgage lending subsidiaries are parties to a $200
million revolving warehouse line of credit. This line of credit contains no
significant financial covenants other than the maintenance of a minimum
specified amount of investor savings notes to be held by Carolina Investors,
Inc. This line of credit does prohibit HomeGold, Inc., and in certain
circumstances Carolina Investors, Inc., from paying dividends or making
distributions to the Company in excess of 50% of such subsidiaries' cumulative
net income as determined for the most recent four consecutive completed fiscal
quarters on a cumulative rolling basis or if an event of default exists at the
time of, or after giving effect to, the dividend or distribution. It also
restricts the ability of HomeGold, Inc., and in certain circumstances Carolina
Investors, Inc., from making loans or advances to the Company.
The Company's small business lending subsidiaries have various
revolving warehouse lines of credit providing them with an aggregate line of
credit of $60 million. These lines of credit require, among other things,
minimum tangible net worth ratios, maximum ratios of total liabilities to
tangible net worth and minimum interest coverage ratios, and contain limitations
on the amount of capital expenditures in any fiscal year and restrictions on the
payment of dividends. These required financial ratios are calculated on the
Small Business Loan Division's financial statements. These agreements contain no
consolidated financial statement covenants. Most of these lines of credit
contain provisions prohibiting the small business lending subsidiaries party to
those credit facilities from paying dividends, or making distributions to the
Company (unless such provisions are waived by the lender). Reedy River Ventures
Limited Partnership's line of credit restricts its ability to make loans to the
Company, but prevents it from paying dividends or making distributions to the
Company only if an event of default exists or is cured by such dividend or
distribution or if the Company ceases to guarantee the line of credit.
NOTE 8--SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS
In September 1997, the Company sold $125.0 million in aggregate
principal amount of Senior Notes due 2004 ("Senior Notes"). The Senior Notes
constitute unsecured indebtedness of the Company. The Senior Notes mature on
September 15, 2004, with interest payable semi-annually at 10.75%. The Senior
Notes will be redeemable at the option of the Company, in whole or in part, on
or after September 15, 2001, at predetermined redemption prices plus accrued and
unpaid interest to the date of redemption. The indenture pertaining to the
Senior Notes contains various restrictive covenants including limitations on,
among other things, the incurrence of certain types of additional indebtedness,
the payment of dividends and certain other payments, the ability of the
Company's subsidiaries to incur further limitations on their ability to pay
dividends or make other payments to the Company, liens, asset sales, the
issuance of preferred stock by the Company's subsidiaries and transactions with
affiliates. At June 30, 1998, management believes the Company was in compliance
with such restrictive covenants. The Senior Notes are fully and unconditionally
guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured
basis (each, a "Guarantee") by certain of the Company's subsidiaries (the
"Subsidiary Guarantors"). With the exception of the Guarantee by the Company's
subsidiary Carolina Investors, Inc. ("CII"), the Subsidiary Guarantees rank PARI
PASSU in right of payment with all existing and future unsubordinated
indebtedness of the Subsidiary Guarantors and senior in right of payment to all
existing and future subordinated indebtedness of such Guarantors. The Guarantee
by CII is equal in priority to CII's notes payable to investors and is senior to
CII's subordinated debentures.
The following tables present consolidating condensed financial data
of the combined subsidiaries of the Company. The Company believes that providing
the condensed consolidating information is of material interest to investors in
the Senior Notes and has not presented separate financial statements for each of
the wholly-owned Subsidiary Guarantors, because it was deemed that such
financial statements would not provide investors with any material additional
information. Separate financial statements for the majority-owned subsidiary,
Sterling Lending Corporation, are contained herein.
11
<PAGE>
Investments in subsidiaries are accounted for by the Parent and
Subsidiary Guarantors on the equity method for the purposes of the consolidating
financial data. Earnings of subsidiaries are therefore reflected in the parent's
and Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions. Certain sums in the following tables reflect
immaterial rounding differences.
The Subsidiary Guarantors consist of the following subsidiaries of
the Company:
HomeGold, Inc. (f/k/a Emergent Mortgage Corp.)(100% owned)
Emergent Mortgage Corp. of Tennessee (100% owned)
Carolina Investors, Inc. (100% owned)
Sterling Lending Corporation (80% owned)
Sterling Lending Insurance Agency, Inc. (100% owned by Sterling
Lending Corporation)
Emergent Business Capital, Inc. (100% owned)
Emergent Commercial Mortgage, Inc. (100% owned)
Emergent Business Capital Asset Based Lending, Inc. (f/k/a Emergent
Financial Corp.) (100% owned)
Emergent Business Capital Equity Group, Inc. (f/k/a Emergent Equity
Advisors, Inc.) (100% owned)
Emergent Insurance Agency Corp. (100% owned)
As of June 30, 1998, the Subsidiary Guarantors conduct all of the
Company's operations other than the investment of certain residual receivables
through its special purpose bankruptcy-remote securitization subsidiaries and
its mezzanine lending operations, which are performed through Reedy River
Ventures Limited Partnership, a small business investment company. Prior to
March 1998, The Loan Pro$, Inc. and Premier Financial Services, Inc. (the
Company's Auto Loan Division subsidiaries) were also guarantors of this
indebtedness, but their guarantees terminated when substantially all of the
assets of the Auto Loan Division were sold to TranSouth Financial Corporation, a
subsidiary of Associates Financial Services Company, Inc., in March 1998.
12
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries
-------------- ---------------- ---------------- ----------------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 419 $ 43,142 $ -- $ 67
Loans receivable:
Loans receivable held for investment 578 78,792 -- 8,000
Loans receivable held for sale -- 226,844 -- --
Notes receivable from affiliates 48,124 2,747 -- 5,262
-------------- ---------------- ---------------- ----------------
Total loans receivable 48,702 308,383 -- 13,262
Less allowance for credit losses on loans (289) (8,096) -- --
Less unearned discount, dealer reserves, and
deferrals net of deferred loan costs (97) (4,040) -- (243)
-------------- ---------------- ---------------- ----------------
Net loans receivable 48,316 296,247 -- 13,019
Other Receivables:
Accrued interest receivable 12 3,341 -- 10
Other receivables 109 8,217 -- 12
-------------- ---------------- ---------------- ----------------
Total other receivables 121 11,558 -- 22
Investment in subsidiaries 91,758 -- -- --
Residual receivables -- 45,410 -- 22,269
Net property and equipment 1,728 18,479 1,352 --
Net excess of cost over net assets of acquired
businesses 41 2,852 -- 335
Real estate and personal property acquired through
foreclosure 119 4,021 -- --
Other assets 7,193 10,496 109 664
-------------- ---------------- ---------------- ----------------
TOTAL ASSETS $ 149,695 $ 432,205 $ 1,461 $ 36,376
============= =============== =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 164,941 $ -- $ 2,822
Mortgage note payable -- 3,446 -- --
Investor savings:
Notes payable to investors -- 119,319 -- --
Subordinated debentures -- 18,772 -- --
-------------- ---------------- ---------------- ----------------
Total investor savings -- 138,091 -- --
Senior unsecured debt 125,000 -- -- --
Accounts payable and accrued liabilities 867 6,420 366 --
Remittances payable -- 4,615 -- --
Accrued interest payable 3,919 447 -- --
Due to affiliates -- (7,223) -- 7,601
-------------- ---------------- ---------------- ----------------
Total other liabilities 4,786 4,259 366 7,601
Subordinated debt to affiliates -- 51,860 586 --
-------------- ---------------- ---------------- ----------------
Total liabilities 129,786 362,597 952 10,423
Minority interest -- -- -- 68
Shareholders' equity:
Common stock 485 4,083 -- 11
Preferred stock -- -- 7,100 --
Capital in excess of par value 38,739 62,948 -- 25,030
Retained earnings (deficit) (19,315) 2,577 (6,591) 844
-------------- ---------------- ---------------- ----------------
Total shareholders' equity 19,909 69,608 509 25,885
============= =============== =============== ==============
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 149,695 $ 432,205 $ 1,461 $ 36,376
============= =============== =============== ==============
<CAPTION>
Eliminations Consolidated
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ -- $ 43,628
Loans receivable:
Loans receivable held for investment -- 87,370
Loans receivable held for sale -- 226,844
Notes receivable from affiliates (56,133) --
----------------- -----------------
Total loans receivable (56,133) 314,214
Less allowance for credit losses on loans -- (8,385)
Less unearned discount, dealer reserves, and
deferrals net of deferred loan costs -- (4,380)
----------------- -----------------
Net loans receivable (56,133) 301,449
Other Receivables:
Accrued interest receivable -- 3,363
Other receivables (187) 8,151
----------------- -----------------
Total other receivables (187) 11,514
Investment in subsidiaries (91,758) --
Residual receivables -- 67,679
Net property and equipment -- 21,559
Net excess of cost over net assets of acquired
businesses (934) 2,294
Real estate and personal property acquired through
foreclosure -- 4,140
Other assets (842) 17,620
----------------- -----------------
TOTAL ASSETS $ (149,854) $ 469,883
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 167,763
Mortgage note payable -- 3,446
Investor savings:
Notes payable to investors -- 119,319
Subordinated debentures -- 18,772
----------------- -----------------
Total investor savings -- 138,091
Senior unsecured debt -- 125,000
Accounts payable and accrued liabilities (1,028) 6,625
Remittances payable -- 4,615
Accrued interest payable -- 4,366
Due to affiliates (378) --
----------------- -----------------
Total other liabilities (1,406) 15,606
Subordinated debt to affiliates (52,446) --
----------------- -----------------
Total liabilities (53,852) 449,906
Minority interest -- 68
Shareholders' equity:
Common stock (4,094) 485
Preferred stock (7,100) --
Capital in excess of par value (87,978) 38,739
Retained earnings (deficit) 3,170 (19,315)
----------------- -----------------
Total shareholders' equity (96,002) 19,909
=============== ===============
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ (149,854) $ 469,883
=============== ===============
</TABLE>
13
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries
-------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 713 $ 6,411 $ 263 $ 174
Loans receivable:
Loans receivable held for investment -- 93,129 -- 7,250
Loans receivable held for sale -- 187,911 9,325 --
Notes receivable from affiliates 71,854 31,851 -- 25
-------------- ---------------- ---------------- ----------------
Total loans receivable 71,854 312,891 9,325 7,275
Less allowance for credit losses on loans -- (6,528) -- --
Less unearned discount, dealer reserves, and
deferrals net of deferred loan costs -- (2,098) (368) (192)
-------------- ---------------- ---------------- ----------------
Net loans receivable 71,854 304,265 8,957 7,083
Other Receivables:
Accrued interest receivable -- 4,250 63 94
Other receivables 3,678 6,802 496 --
-------------- ---------------- ---------------- ----------------
Total other receivables 3,678 11,052 559 94
Investment in subsidiaries 108,854 -- -- --
Residual receivables -- 43,579 -- 19,623
Net property and equipment 1,666 15,086 1,328 --
Net excess of cost over net assets of acquired
businesses 42 3,426 -- 342
Real estate and personal property acquired through
foreclosure -- 3,295 -- --
Other assets 8,545 10,324 207 237
-------------- ---------------- ---------------- ----------------
TOTAL ASSETS $ 195,352 $ 397,438 $ 11,314 $ 27,553
============== ================ =============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 77,605 $ -- $ --
Investor savings:
Notes payable to investors -- 115,368 -- --
Subordinated debentures -- 18,947 -- --
-------------- ---------------- ---------------- ----------------
Total investor savings -- 134,315 -- --
Senior unsecured debt 125,000 -- -- --
Accounts payable and accrued liabilities 312 7,408 760 22
Remittances payable -- 4,591 -- --
Accrued interest payable 3,645 1,105 -- --
Due to affiliates 3,021 -- -- 7,057
-------------- ---------------- ---------------- ----------------
Total other liabilities 6,978 13,104 760 7,079
Subordinated debt to affiliates -- 63,969 9,544 16,829
-------------- ---------------- ---------------- ----------------
Total liabilities 131,978 288,993 10,304 23,908
Shareholders' equity:
Common stock 484 4,259 -- 10
Preferred stock -- 4,621 5,700 --
Capital in excess of par value 38,609 64,570 -- 3,102
Retained earnings (deficit) 24,281 34,995 (4,690) 533
-------------- ---------------- ---------------- ----------------
Total shareholders' equity 63,374 108,445 1,010 3,645
-------------- ---------------- ---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 195,352 $ 397,438 $ 11,314 $ 27,553
============= =============== =============== ================
<CAPTION>
Eliminations Consolidated
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ 7,561
Loans receivable:
Loans receivable held for investment -- 100,379
Loans receivable held for sale -- 197,236
Notes receivable from affiliates (103,730) --
----------------- -----------------
Total loans receivable (103,730) 297,615
Less allowance for credit losses on loans -- (6,528)
Less unearned discount, dealer reserves, and
deferrals net of deferred loan costs -- (2,658)
----------------- -----------------
Net loans receivable (103,730) 288,429
Other Receivables:
Accrued interest receivable -- 4,407
Other receivables (296) 10,680
----------------- -----------------
Total other receivables (296) 15,087
Investment in subsidiaries (108,854) --
Residual receivables -- 63,202
Net property and equipment -- 18,080
Net excess of cost over net assets of acquired
businesses (936) 2,874
Real estate and personal property acquired through
foreclosure -- 3,295
Other assets (1,689) 17,624
----------------- -----------------
TOTAL ASSETS $ (215,505) $ 416,152
================= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 77,605
Investor savings:
Notes payable to investors -- 115,368
Subordinated debentures -- 18,947
----------------- -----------------
Total investor savings -- 134,315
Senior unsecured debt -- 125,000
Accounts payable and accrued liabilities (1,985) 6,517
Remittances payable -- 4,591
Accrued interest payable -- 4,750
Due to affiliates (10,078) --
----------------- -----------------
Total other liabilities (12,063) 15,858
Subordinated debt to affiliates (90,342) --
----------------- -----------------
Total liabilities (102,405) 352,778
Shareholders' equity:
Common stock (4,269) 484
Preferred stock (10,321) --
Capital in excess of par value (67,672) 38,609
Retained earnings (deficit) (30,838) 24,281
----------------- -----------------
Total shareholders' equity (113,100) 63,374
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ (215,505) $ 416,152
=============== ===============
</TABLE>
14
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined Non
Wholly-Owned Wholly-Owned Combined
Guarantor Guarantor Non-Guarantor
Parent Company Subsidiaries Subsidiaries Subsidiaries
----------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 3,830 $ 19,069 $ 10 $ 577
Servicing income -- 8,104 -- 769
Gain on sale of loans:
Cash gain on sale of loans -- 7,259 720 --
Non-cash gain on sale of loans -- 2,546 635 --
Loan fee income -- 7,422 1,474 65
----------------- ------------------ ---------------- ----------------
Total gain on sale of loans -- 17,227 2,829 65
Other revenues 2,783 2,060 193 489
----------------- ------------------ ---------------- ----------------
Total revenues 6,613 46,460 3,032 1,900
EXPENSES:
Interest 7,356 15,312 112 212
Provision for credit losses 26 6,914 -- --
Fair value write-down of residual
receivables -- 8,910 -- --
Salaries, wages and employee
benefits 1,902 29,716 2,758 --
Business development costs 2 6,275 258 --
Other general and administrative
expense 1,927 13,424 1,856 124
----------------- ------------------ ---------------- ----------------
Total expenses 11,213 80,551 4,984 336
----------------- ------------------ ---------------- ----------------
Income (loss) before income taxes,
minority interest, and equity in
undistributed earnings of
subsidiaries (4,600) (34,091) (1,952) 1,564
Equity in undistributed earnings
of subsidiaries (36,131) (507) -- --
----------------- ------------------ ---------------- ----------------
Income (loss) before income taxes
and minority
Interest (40,731) (34,598) (1,952) 1,564
Provision (benefit) for income
taxes 2,860 435 (51) --
----------------- ------------------ ---------------- ----------------
Income (loss) before minority
interest (43,591) (35,033) (1,901) 1,564
Minority interest in (earnings)
loss of subsidiaries -- -- -- 2
----------------- ------------------ ---------------- ----------------
NET INCOME (LOSS) $ (43,591) $ (35,033) $ (1,901) $ 1,566
================ =============== ============= ==============
<CAPTION>
Eliminations Consolidated
------------------ ---------------------
<S> <C> <C>
REVENUES:
Interest income $ (4,296) $ 19,190
Servicing income (1,272) 7,601
Gain on sale of loans:
Cash gain on sale of loans -- 7,979
Non-cash gain on sale of loans -- 3,181
Loan fee income -- 8,961
------------------ ---------------------
Total gain on sale of loans -- 20,121
Other revenues (3,107) 2,418
------------------ ---------------------
Total revenues (8,675) 49,330
EXPENSES:
Interest (4,607) 18,385
Provision for credit losses -- 6,940
Fair value write-down of residual
receivables -- 8,910
Salaries, wages and employee
benefits -- 34,376
Business development costs -- 6,535
Other general and administrative
expense (2,798) 14,533
------------------ ---------------------
Total expenses (7,405) 89,679
------------------ ---------------------
Income (loss) before income taxes,
minority interest, and equity in
undistributed earnings of
subsidiaries (1,270) (40,349)
Equity in undistributed earnings
of subsidiaries 36,638 --
------------------ ---------------------
Income (loss) before income taxes
and minority
Interest 35,368 (40,349)
Provision (benefit) for income
taxes -- 3,244
------------------ ---------------------
Income (loss) before minority
interest 35,368 (43,593)
Minority interest in (earnings)
loss of subsidiaries -- 2
------------------ ---------------------
NET INCOME (LOSS) $ 35,368 $ (43,591)
================= ===================
</TABLE>
15
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined Non
Wholly-Owned Wholly-Owned Combined
Guarantor Guarantor Non-Guarantor
Parent Company Subsidiaries Subsidiaries Subsidiaries
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 40 $ 16,226 $ -- $ --
Servicing income -- 3,085 -- --
Gain on sale of loans:
Cash gain on sale of loans -- 7,242 54 --
Non-cash gain on sale of loans -- 10,673 138 --
Loan fee income -- 12,485 730 --
---------------- ---------------- ----------------- -----------------
Total gain on sale of loans -- 30,400 922 --
Other revenues 3,067 338 65 --
---------------- ---------------- ----------------- -----------------
Total revenues 3,107 50,049 987 --
EXPENSES:
Interest 212 10,774 38 --
Provision for credit losses -- 4,672 -- --
Salaries, wages and employee benefits 1,555 15,571 1,634 --
Business development costs -- 2,845 174 --
Other general and administrative expense 1,227 10,185 1,562 --
---------------- ---------------- ----------------- -----------------
Total expenses 2,994 44,047 3,408 --
---------------- ---------------- ----------------- -----------------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings of subsidiaries 113 6,002 (2,421) --
Equity in undistributed earnings of
subsidiaries 4,989 -- -- --
---------------- ---------------- ----------------- -----------------
Income (loss) before income taxes and
minority Interest 5,102 6,002 (2,421) --
Provision (benefit) for income taxes (46) (1,578) (1) --
---------------- ---------------- ----------------- -----------------
Income (loss) before minority interest 5,148 7,580 (2,420) --
Minority interest in (earnings) loss of
subsidiaries 17 (173) -- --
---------------- ---------------- ----------------- -----------------
NET INCOME (LOSS) $ 5,165 $ 7,407 $ (2,420) $ --
=============== ============== ============== =============
<CAPTION>
Eliminations Consolidated
----------------- ----------------
<S> <C> <C>
REVENUES:
Interest income $ (1,242) $ 15,024
Servicing income -- 3,085
Gain on sale of loans:
Cash gain on sale of loans -- 7,296
Non-cash gain on sale of loans -- 10,811
Loan fee income -- 13,215
----------------- ----------------
Total gain on sale of loans -- 31,322
Other revenues (3,037) 433
----------------- ----------------
Total revenues (4,279) 49,864
EXPENSES:
Interest (1,242) 9,782
Provision for credit losses -- 4,672
Salaries, wages and employee benefits -- 18,760
Business development costs -- 3,019
Other general and administrative expense (3,039) 9,935
----------------- ----------------
Total expenses (4,281) 46,168
----------------- ----------------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings of subsidiaries 2 3,696
Equity in undistributed earnings of
subsidiaries (4,989) --
----------------- ----------------
Income (loss) before income taxes and
minority Interest (4,987) 3,696
Provision (benefit) for income taxes -- (1,625)
----------------- ----------------
Income (loss) before minority interest (4,987) 5,321
Minority interest in (earnings) loss of
subsidiaries -- (156)
----------------- ----------------
NET INCOME (LOSS) $ (4,987) $ 5,165
=============== ==============
</TABLE>
16
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined Non
Wholly-Owned Wholly-Owned Combined
Guarantor Guarantor Non-Guarantor
Parent Company Subsidiaries Subsidiaries Subsidiaries
----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 1,769 $ 10,130 $ -- $ 312
Servicing income -- 2,064 -- 315
Gain on sale of loans:
Cash gain on sale of loans -- 3,967 563 --
Non-cash gain on sale of loans -- 112 -- --
Loan fee income -- 4,448 880 31
----------------- ------------------- ----------------- -----------------
Total gain on sale of loans -- 8,527 1,443 31
Other revenues 1,451 895 66 87
----------------- ------------------- ----------------- -----------------
Total revenues 3,220 22,616 1,509 745
EXPENSES:
Interest 3,697 8,002 32 73
Provision for credit losses 26 2,085 -- --
Fair value write-down of residual receivables -- 7,330 -- --
Salaries, wages and employee benefits 669 13,960 1,475 --
Business development costs -- 2,896 159 --
Other general and administrative expense 171 6,895 977 52
----------------- ------------------- ----------------- -----------------
Total expenses 4,563 41,168 2,643 125
----------------- ------------------- ----------------- -----------------
Income before income taxes, minority interest,
and equity in undistributed earnings of
subsidiaries (1,343) (18,552) (1,134) 620
Equity in undistributed earnings of
subsidiaries (19,676) 313 -- --
----------------- ------------------- ----------------- -----------------
Income before income taxes and minority
interest (21,019) (18,239) (1,134) 620
Provision (benefit) for income taxes 1,957 849 (89) (151)
----------------- ------------------- ----------------- -----------------
Income before minority interest (22,976) (19,088) (1,045) 771
Minority interest in (earnings) loss of
subsidiaries -- -- -- (2)
----------------- ------------------- ----------------- -----------------
NET INCOME (LOSS) $ (22,976) $ (19,088) $ (1,045) $ 769
============= =============== ============== ================
<CAPTION>
Eliminations Consolidated
----------------- -----------------
<S> <C> <C>
REVENUES:
Interest income $ (1,695) $ 10,516
Servicing income -- 3,379
Gain on sale of loans:
Cash gain on sale of loans -- 4,530
Non-cash gain on sale of loans -- 112
Loan fee income -- 5,359
----------------- -----------------
Total gain on sale of loans -- 10,001
Other revenues (1,619) 880
----------------- -----------------
Total revenues (3,314) 24,776
EXPENSES:
Interest (1,852) 9,952
Provision for credit losses -- 2,111
Fair value write-down of residual receivables -- 7,330
Salaries, wages and employee benefits -- 16,104
Business development costs -- 3,055
Other general and administrative expense (1,463) 6,632
----------------- -----------------
Total expenses (3,315) 45,184
----------------- -----------------
Income before income taxes, minority interest,
and equity in undistributed earnings of
subsidiaries 1 (20,408)
Equity in undistributed earnings of
subsidiaries 19,363 --
----------------- -----------------
Income before income taxes and minority
interest 19,364 (20,408)
Provision (benefit) for income taxes -- 2,566
----------------- -----------------
Income before minority interest 19,364 (22,974)
Minority interest in (earnings) loss of
subsidiaries -- (2)
----------------- -----------------
NET INCOME (LOSS) $ 19,364 $ (22,976)
=============== ==============
</TABLE>
17
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED JUNE 30, 1997
(Unaudited)
(In thousands)
<TABLE>
Combined Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries
-------------- --------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 10 $ 9,447 $ -- $ --
Servicing income -- 1,940 -- --
Gain on sale of loans:
Cash gain on sale of loans -- 5,470 23 --
Non-cash gain on sale of loans -- 6,259 137 --
Loan fee income -- 6,694 643 --
-------------- --------------------- ------------------ ------------------
Total gain on sale of loans -- 18,423 803 --
Other revenues 1,635 154 43 --
-------------- --------------------- ------------------ ------------------
Total revenues 1,645 29,964 846 --
EXPENSES:
Interest 169 6,501 25 --
Provision for credit losses -- 2,599 -- --
Salaries, wages and employee benefits 923 8,877 915 --
Business development costs -- 1,729 92 --
Other general and administrative
expense 729 5,882 919 --
-------------- --------------------- ------------------ ------------------
Total expenses 1,821 25,588 1,951 --
-------------- --------------------- ------------------ ------------------
Income before income taxes, minority
interest, and equity in
undistributed earnings of
subsidiaries (176) 4,376 (1,105) --
Equity in undistributed earnings of
subsidiaries 4,953 -- -- --
-------------- --------------------- ------------------ ------------------
Income before income taxes and
minority interest 4,777 4,376 (1,105) --
Provision (benefit) for income taxes 14 (1,681) -- --
-------------- --------------------- ------------------ ------------------
Income before minority interest 4,763 6,057 (1,105) --
Minority interest in (earnings) loss
of subsidiaries -- -- -- --
-------------- --------------------- ------------------ ------------------
NET INCOME (LOSS) $ 4,763 $ 6,057 $ (1,105) $ --
============= =================== =============== ==============
<CAPTION>
Eliminations Consolidated
---------------- -------------------
<S> <C> <C>
REVENUES:
Interest income $ (640) $ 8,817
Servicing income -- 1,940
Gain on sale of loans:
Cash gain on sale of loans -- 5,493
Non-cash gain on sale of loans -- 6,396
Loan fee income -- 7,337
---------------- -------------------
Total gain on sale of loans -- 19,226
Other revenues (1,636) 196
---------------- -------------------
Total revenues (2,276) 30,179
EXPENSES:
Interest (640) 6,055
Provision for credit losses -- 2,599
Salaries, wages and employee benefits -- 10,715
Business development costs -- 1,821
Other general and administrative
expense (1,637) 5,893
---------------- -------------------
Total expenses (2,277) 27,083
---------------- -------------------
Income before income taxes, minority
interest, and equity in
undistributed earnings of
subsidiaries 1 3,096
Equity in undistributed earnings of
subsidiaries (4,953) --
---------------- -------------------
Income before income taxes and
minority interest (4,952) 3,096
Provision (benefit) for income taxes -- (1,667)
---------------- -------------------
Income before minority interest (4,952) 4,763
Minority interest in (earnings) loss
of subsidiaries -- --
---------------- -------------------
NET INCOME (LOSS) $ (4,952) $ 4,763
============== =================
</TABLE>
18
<PAGE>
NOTE 9--SUBSEQUENT EVENTS
In August 1998, the Company reached an agreement in principle with a
major financial services company for the sale of the majority of the assets of
the Small Business Loan Division for approximately $85.0 million in cash. The
sale excludes the asset-based lending unit, which the Company plans to sell
separately. In July 1998, the Company reached an agreement to sell the stock of
Sterling Lending Corporation for $1.5 million, payable $400,000 in cash at
closing and a promissory note for $1.1 million. Summary statements of financial
condition and operations broken out by ongoing operations and to-be-sold
operations are as follows:
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998
(In thousands) (Unaudited)
<TABLE>
<CAPTION>
Continuing Mortgage Small Business
Mortgage Operation Operations
Operations To Be Sold To Be Sold
------------------- ------------------ --------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 41,790 $ -- $ 1,838
Loans receivable:
Loans receivable held for investment 53,082 -- 34,288
Loans receivable held for sale 186,342 -- 40,502
Notes receivable from affiliates -- -- --
------------------- ------------------ --------------------
Total loans receivable 239,424 -- 74,790
Less allowance for credit losses on loans (5,747) -- (2,638)
Less unearned discount, dealer reserves, and
deferrals net of deferred loan costs (3,060) -- (1,320)
------------------- ------------------ --------------------
Net loans receivable 230,617 -- 70,832
Accrued interest receivable and other receivables 9,395 -- 2,119
Intercompany receivables and investment in
subsidiaries 49,487 -- --
Residual receivables 50,299 -- 17,380
Net property and equipment 19,081 1,352 1,126
Net excess of cost over net assets of acquired
businesses 1,706 -- 588
Real estate and personal property acquired through
foreclosure 4,140 -- --
Net debt origination costs 6,455 -- 202
Deferred income tax asset 2,820 -- 1,331
Servicing asset 1,289 -- --
Other assets 4,395 109 1,019
------------------- ------------------ --------------------
TOTAL ASSETS $ 421,474 $ 1,461 $ 96,435
================== ================= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ 124,467 $ -- $ 43,296
Mortgage note payable 3,446 -- --
Senior unsecured debt 125,000 -- --
Investor savings 138,091 -- --
Other liabilities 10,493 366 4,747
------------------- ------------------ --------------------
Total liabilities 401,497 366 48,043
Minority interest 68 -- --
Intercompany debt -- 586 17,368
Shareholders' equity 19,909 509 31,024
------------------- ------------------ --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 421,474 $ 1,461 $ 96,435
================== ================= ===================
<CAPTION>
Consolidated
Eliminations Total
------------------- ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ -- $ 43,628
Loans receivable:
Loans receivable held for investment -- 87,370
Loans receivable held for sale -- 226,844
Notes receivable from affiliates -- --
------------------- ------------------
Total loans receivable -- 314,214
Less allowance for credit losses on loans -- (8,385)
Less unearned discount, dealer reserves, and
deferrals net of deferred loan costs -- (4,380)
------------------- ------------------
Net loans receivable -- 301,449
Accrued interest receivable and other receivables -- 11,514
Intercompany receivables and investment in
subsidiaries (49,487) --
Residual receivables -- 67,679
Net property and equipment -- 21,559
Net excess of cost over net assets of acquired
businesses -- 2,294
Real estate and personal property acquired through
foreclosure -- 4,140
Net debt origination costs 6,657
Deferred income tax asset 4,151
Servicing asset 1,289
Other assets -- 5,523
------------------- ------------------
TOTAL ASSETS $ (49,487) $ 469,883
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 167,763
Mortgage note payable -- 3,446
Senior unsecured debt -- 125,000
Investor savings -- 138,091
Other liabilities -- 15,606
------------------- ------------------
Total liabilities -- 449,906
Minority interest -- 68
Intercompany debt (17,954) --
Shareholders' equity (31,533) 19,909
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ (49,487) $ 469,883
================= ==================
</TABLE>
19
<PAGE>
HOMEGOLD FINANCIAL , INC.
CONSOLIDATING STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Small Business
Continuing Mortgage Operations Operations Consolidated
Mortgage Operations To Be Sold To Be Sold Total
-------------------- -------------------- -------------- --------------
REVENUES:
<S> <C> <C> <C> <C>
Interest income $ 15,200 $ 10 $ 3,980 $ 19,190
Servicing income 5,986 -- 1,615 7,601
Gain on sale of loans:
Cash gain on sale of loans 4,545 1,355 2,079 7,979
Non-cash gain on sale of loans 2,907 -- 274 3,181
Loan fee income 7,099 1,474 388 8,961
-------------------- -------------------- --------------- --------------
Total gain on sale of loans 14,551 2,829 2,741 20,121
Other revenues 1,422 193 803 2,418
-------------------- -------------------- --------------- --------------
Total revenues 37,159 3,032 9,139 49,330
EXPENSES:
Interest 16,032 112 2,241 18,385
Provision for credit losses 5,776 -- 1,164 6,940
Fair value write-down of residual receivables 8,350 -- 560 8,910
General and administrative expense 43,155 4,872 7,417 55,444
-------------------- -------------------- --------------- --------------
Total expenses 73,313 4,984 11,382 89,679
-------------------- -------------------- --------------- --------------
Loss before income taxesand minority interest (36,154) (1,952) (2,243) (40,349)
Provision (benefit) for income taxes 3,813 (51) (518) 3,244
-------------------- -------------------- --------------- --------------
Loss before minority interest (39,967) (1,901) (1,725) (43,593)
Minority interest in loss of subsidiaries 2 -- -- 2
-------------------- -------------------- --------------- --------------
NET LOSS $ (39,965) $ (1,901) $ (1,725) $ (43,591)
=================== ================= ============ ============
</TABLE>
20
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF HOMEGOLD FINANCIAL, INC. )
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------------ ----------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ -- $ 262,612
Mortgage loans held for sale -- 9,325,758
Less net deferred loan fees -- (368,274)
------------------------ ----------------------
Net mortgage loans held for sale -- 8,957,484
Other receivables -- 558,703
Property and equipment, net 1,352,314 1,327,532
Other assets 109,183 207,338
------------------------
----------------------
TOTAL ASSETS $ 1,461,497 $ 11,313,669
======================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities $ 366,089 $ 760,257
Subordinated debt to affiliates, due on demand 586,368 9,543,337
------------------------ ----------------------
Total liabilities 952,457 10,303,594
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 7,100,000 5,700,000
Accumulated deficit (6,590,960) (4,689,925)
------------------------ ----------------------
Total shareholders' equity 509,040 1,010,075
------------------------ ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,461,497 $ 11,313,669
======================== ======================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
21
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF HOMEGOLD FINANCIAL, INC. )
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
1998 1997 1998 1997
------------------ ---------------- ------------------ ---------------
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 10,038 $ -- $ -- $ --
Gain on sale of loans 1,355,355 191,559 562,858 160,373
Loan fee income 1,474,151 729,869 880,453 642,631
Other revenues 192,934 65,426 65,986 43,392
------------------ ---------------- ------------------ ---------------
Total revenues 3,032,478 986,854 1,509,297 846,396
------------------ ---------------- ------------------ ---------------
EXPENSES:
Interest 112,220 37,723 32,019 25,007
Salaries, wages and employee benefits 2,757,977 1,634,185 1,475,217 915,626
Management fee to Parent 400,000 390,000 250,000 195,000
Legal, audit, and professional fees 78,782 178,290 15,508 104,423
Office rent 286,946 165,642 149,506 125,496
Telephone 209,848 137,948 105,315 107,714
Travel and entertainment 162,206 136,943 89,571 58,143
Business development costs 257,879 173,883 158,639 91,668
Other general and administrative expenses 718,509 553,464 367,352 327,998
---------------
------------------ ---------------- ------------------
Total expenses 4,984,367 3,408,078 2,643,127 1,951,075
------------------ ---------------- ------------------ ---------------
Loss before income taxes (1,951,889) (2,421,224) (1,133,830) (1,104,679)
Provision (benefit) for income taxes (50,854) (1,135) (88,872) --
------------------ ---------------- ------------------
---------------
NET LOSS $ (1,901,035) $ (2,420,089) $ (1,044,958) $ (1,104,679)
================== ================ ================== ===============
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
22
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF HOMEGOLD FINANCIAL, INC. )
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------
1998 1997
----------------------- ------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,901,035) $ (2,420,089)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 141,182 224,919
Provision for deferred income taxes (325,820) (1,135)
Decrease in deferred loan fees (368,274) --
Principal proceeds from loans sold 41,847,196 11,693,720
Loans originated with intent to sell (32,521,438) (11,693,720)
Changes in operating assets and liabilities 588,510 202,122
----------------------- ------------------------
Net cash provided by (used in) operating activities 7,460,321 (1,994,183)
----------------------- ------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (165,964) (1,143,594)
----------------------- ------------------------
Net cash used in investing activities (165,964) (1,143,594)
----------------------- ------------------------
FINANCING ACTIVITIES:
Cash investment from Parent 1,400,000 2,600,000
Net cash received (paid) on intercompany
borrowings (8,956,969) 523,384
----------------------- ------------------------
Net cash provided by (used in) financing activities (7,556,969) 3,123,384
----------------------- ------------------------
Net increase (decrease) in cash and cash equivalents (262,612) (14,393)
Cash and cash equivalents at beginning of period 262,612 125,799
----------------------- ------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 111,406
======================= ========================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
23
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF HOMEGOLD FINANCIAL, INC. )
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PREPARATION
Sterling Lending Corporation ("Sterling Lending") is an 80% owned
subsidiary of HomeGold Financial, Inc. ("Parent Company"). Sterling Lending was
organized on March 6, 1996 as Emergent Lending Corp., and its name was changed
to Sterling Lending Corporation on July 24, 1996. Operations began August 1,
1996.
The accompanying consolidated financial statements include the
accounts of Sterling Lending and Sterling Lending Insurance Agency, Inc. (a 100%
owned subsidiary) and are prepared in accordance with the SEC's rules regarding
interim financial statements, and therefore do not contain all disclosures
required by generally accepted accounting principles for annual financial
statements. Reference should be made to the financial statements included in the
Sterling Lending's Annual Report on Form 10-K for the year ended December 31,
1997, including the footnotes thereto. Certain previously reported amounts have
been reclassified to conform to current period presentation. Such
reclassifications had no effect on net loss or shareholders' equity as
previously reported.
The consolidated balance sheet as of June 30, 1998, and the
consolidated statements of income for the six-month and three-month periods
ended June 30, 1998 and 1997, and the consolidated statements of cash flows for
the six-month periods ended June 30, 1998 and 1997, are unaudited and in the
opinion of management contain all known adjustments, which consist of only
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows of the Company. All significant
intercompany balances and transactions between Sterling Lending and its
subsidiary have been eliminated in consolidation.
KPMG Peat Marwick LLP previously examined and reported on the
Company's financial statements for the year ended December 31, 1997, from which
the consolidated balance sheet as of that date is derived.
NOTE 2--CASH FLOW INFORMATION
For the six-month periods ended June 30, 1998 and 1997, Sterling
Lending paid interest of $112,022 and $37,723, respectively. Sterling Lending
paid no income taxes for the six months ended June 30, 1998 and 1997.
NOTE 3--CASH AND CASH EQUIVALENTS
Sterling Lending considers all highly liquid investments readily
convertible to cash or having a maturity of three months or less to be cash
equivalents.
Sterling Lending maintains its primary checking account with one
bank. The amounts maintained in the checking account are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000.
NOTE 4 --ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1998, Sterling Lending adopted the provisions
of SFAS No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for reporting comprehensive income and its components in a full set of
general purpose financial statements. The objective of the Statement is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events during the period other than transactions
with owners. Comprehensive income is divided into net income and other
comprehensive income. Adoption of this Statement did not change total
shareholders' equity as previously reported. Net income and comprehensive income
are the same for the six-month and three-month periods ended June 30, 1998 and
1997.
NOTE 5--SUBSEQUENT EVENT
In July 1998, the Company reached an agreement to sell the stock of
Sterling Lending Corporation for $1.5 million, payable $400,000 in cash at
closing and a promissory note for $1.1 million. The transaction is expected to
close before the end of the third quarter 1998, although no assurance of this
can be given.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion should be read in conjunction with the HomeGold
Financial, Inc. and Subsidiaries (the "Company") Consolidated Financial
Statements and Notes appearing elsewhere in this report.
FORWARD - LOOKING INFORMATION
Certain statements in the financial discussion and analysis by
management that reflect projections or expectations of future financial or
economic performance of the Company, and statements of the Company's plans and
objectives for future operations are "forward-looking" statements. No assurance
can be given that actual results or events will not differ materially from those
projected, estimated, assumed or anticipated in any such forward-looking
statements. Important factors that could result in such differences are many and
include: lower origination volume due to market conditions, higher losses due to
economic downturn or lower real estate values, loss of key employees, adverse
consequences of changes in interest rate environment, deterioration of
creditworthiness of borrowers and risk of default, general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, loss of funding sources, loss of ability to sell loans,
lower premiums on loan sales, general lending risks, dependence on Federal
programs, impact of competition, regulation of lending activities, and changes
in the regulatory environment.
GENERAL
The Company is a diversified financial services company
headquartered in Greenville, South Carolina, which originates, purchases, sells,
securitizes and services residential mortgage loans (through its "Mortgage Loan
Division") and small business loans (through its "Small Business Loan Division")
to sub-prime customers. Prior to March 1998, the Company also originated,
securitized and serviced auto loans. Substantially all of the assets of the Auto
Loan Division were sold in the first quarter of 1998 to TranSouth Financial
Corporation, a subsidiary of Associates Financial Services Company, Inc. in
order to narrow the Company's financial services focus, and the Company no
longer makes auto loans. In August 1998, the Company reached an agreement in
principle with a major financial servcies company for the sale of the majority
of the assets of the Small Business Loan Division for approximately $85.0
million in cash. The sale excludes the asset-based lending unit, which the
Company plans to sell separately. These sales will allow the Company to focus
exclusively on its Mortgage Loan operations. The sale of the Small Business Loan
Division is expected to result in a gain of approximately $20 million to the
Company, and provides the Company with additional liquidity. This transaction is
expected to close by September 30, 1998, although no assurance of this can be
given.
The Company commenced its lending operations in 1991 through the
acquisition of Carolina Investors, Inc. ("CII"), a small mortgage lending
company, which had been in operation since 1963. Since 1996, the Company has
been focused principally on expanding its Mortgage Loan Division and Small
Business Loan Division. In the fourth quarter of 1997, the Company restructured
its Mortgage Loan Division. Because of this restructuring, loan origination
volume decreased an aggregate of approximately 20% in the first two quarters of
1998 as compared to the fourth quarter of 1997. Loan origination volume in July
has not shown improvement over the second quarter, and the Company is focusing
its resources on efforts to increase the loan origination volume for the last
part of the year. The Company's general and administrative overhead structure
remains too high for the current levels of volume, and further reductions in the
cost structure will be required if volume targets are not met. Much of the cost
savings resulting from personnel reductions made in May of 1998 is not expected
to be evident until the third quarter of 1998 as the result of severance paid
out to terminated employees.
While the above changes had a negative impact on earnings in the
first and second quarter of 1998, the long-term benefits of these changes are
expected to outweigh this negative impact. In order to concentrate on the larger
retail mortgage operation ("HomeGold"), the Company has determined to pursue the
divestiture of its smaller retail mortgage origination subsidiary, Sterling
Lending Corporation ("SLC"). This subsidiary was started in June 1996 and has
originated only a small percentage of total retail loans. In July 1998, the
Company reached an agreement to sell the stock of Sterling Lending Corporation
for $1.5 million, payable $400,000 in cash at closing and a promissory note for
$1.1 million. The transaction is expected to close before the end of the third
quarter 1998, although no assurance of this can be given.
25
<PAGE>
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 AT AND FOR THE YEARS ENDED
MONTHS ENDED JUNE 30, DECEMBER 31,
------------------------------ ------------------------------------------------
1998 1997 1997 1996 1995
-------------- ----------- ------------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Mortgage loans originated $ 437,306 $ 474,261 $ 1,082,816 $ 328,649 $ 192,800
Mortgage loans sold 293,515 158,480 435,333 284,794 127,632
Mortgage loans securitized 92,173 198,740 487,563 -- --
Total mortgage loans owned (4) 238,846 247,892 231,145 146,231 88,165
Total serviced mortgage loans (4) 752,866 444,472 768,556 146,231 88,165
Total serviced unguaranteed mortgage
Loans (1)(4) 752,866 444,472 700,248 146,231 88,165
Average mortgage loans owned (2) 281,646 215,304 215,790 97,281 74,158
Average serviced mortgage loans (2) 808,610 295,352 443,318 97,281 74,158
Average serviced unguaranteed
Mortgage loans (1)(2) 806,876 295,352 411,549 97,281 74,158
Average interest earned (2) 10.01 % 10.19 % 10.92 % 11.97 % 12.10 %
SMALL BUSINESS LOANS:
Small business loans originated $ 65,863 $ 30,996 $ 81,018 $ 68,210 $ 39,560
Small business loans sold 26,192 17,646 41,232 33,060 25,423
Small business loans securitized 1,827 4,626 24,286 12,851 17,063
Total small business loans owned (4) 74,790 44,491 45,186 29,385 20,620
Total serviced small business loans (4) 239,505 169,891 198,876 140,809 108,696
Total serviced unguaranteed small business
Loans (3)(4) 99,825 63,043 78,822 44,017 24,867
Average small business loans owned (2) 55,439 30,485 38,427 26,700 23,692
Average serviced small business loans (2) 217,141 151,082 165,053 125,723 98,753
Average serviced unguaranteed small
Business loans (2) (3) 89,324 53,530 61,420 34,442 21,819
Average interest earned (2) 14.36 % 13.76 % 15.89 % 12.61 % 10.39 %
AUTO LOANS:
Auto loans originated $ 2,983 $ 8,488 $ 15,703 $ 18,287 $ 17,148
Auto loans sold 20,578 -- -- -- --
Auto loans securitized -- -- -- 16,107 --
Total auto loans owned (4) 578 17,680 21,284 13,916 17,673
Total serviced auto loans (4) 578 22,555 21,284 22,033 17,673
Average auto loans owned (2) 10,801 15,869 17,104 11,917 13,078
Average serviced auto loans (2) 10,801 22,435 22,267 21,277 13,078
Average interest earned (2) 20.60 % 24.12 % 24.05 % 23.57 % 27.40 %
TOTAL LOANS:
Total loans receivable (4) $ 314,214 $ 310,063 $ 297,615 $ 189,532 $ 126,458
Total serviced loans (4) 992,949 636,919 988,716 309,073 214,534
Total serviced unguaranteed loans (1)(3)(4) 853,269 530,071 800,354 212,281 130,705
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes loans serviced for others with no credit risk to the Company.
(2) Averages are daily averages for all periods, except 1995 averages, which
are computed using beginning and ending balances.
(3) Excludes guaranteed portion of SBA Loans.
(4) Period end.
26
<PAGE>
OPERATING CASH FLOW
The Company expects to continue to operate on a negative cash flow
basis due to the level of cash required to fund the loans purchased and
originated. Currently, the Company's primary operating cash uses include the
funding of (i) loan originations and purchases pending their securitization or
sale, (ii) interest expense on CII investor savings notes ("CII Notes"), senior
unsecured debt and its revolving warehouse credit facilities ("Credit
Facilities"), (iii) fees, expenses, overcollateralization and tax payments
incurred in connection with the securitization program and (iv) ongoing
administrative and other operating expenses. The Company's primary operating
sources of cash are (i) cash gains from sale of SBA loan participations and
whole-loan mortgage loan sales, (ii) cash payments of contractual and ancillary
servicing revenues received by the Company in its capacity as servicer for
securitized and subserviced loans, (iii) interest income on loans receivable and
certain cash balances, (iv) fee income received in connection with its retail
mortgage loan originations, and (v) excess cash flow received in each period
with respect to residual receivables.
The Company overcollateralizes loans as a credit enhancement on the
mortgage securitization transactions. This requirement creates negative cash
flows in the year of securitization. The Company has determined to conduct its
loan sales so as to improve liquidity. Accordingly, the Company did not
securitize any mortgage loans in the second quarter of 1998 and has also
determined to continue selling all loans on a whole-loan cash basis for the
remainder of 1998, rather than securitizing such loans. Cash flow is also
enhanced by the generation of loan fees in its retail mortgage loan operation
and the utilization of a wholesale loan origination strategy whereby loans are
generally funded at par, rather than at the significant premiums typically
associated with a correspondent-based strategy.
The table below summarizes cash flows provided by and used in
operating activities by quarter in 1998 and 1997:
<TABLE>
<CAPTION>
2ND QTR 1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR
1998 1998 1997 1997 1997 1997
--------------- ------------- -------------- ------------ ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING CASH INCOME:
Servicing fees received and
excess cash
flow from securitization
trusts $ 2,143 $ 2,728 $ 651 $ 714 $ 1,352 $ 970
Interest received 10,867 9,367 8,042 9,762 7,733 6,180
Cash gain on sale of loans 4,530 3,449 2,306 4,551 5,493 1,803
Cash loan origination fees
received 5,959 3,883 7,277 9,498 9,135 5,933
Securitization hedge gains -- 38 -- -- -- --
Other cash income 1,016 1,549 1,046 382 209 238
-------------- ------------- -------------- ----------- ----------- -------------
Total operating cash income 24,515 21,014 19,322 24,907 23,922 15,124
OPERATING CASH EXPENSES:
Securitization costs -- (851) (1,236) (747) (764) (900)
Securitization hedge losses -- -- (129) (390) (1,606) --
Cash operating expenses (24,882) (28,753) (27,086) (23,447) (17,814) (13,246)
Interest paid (7,230) (11,539) (5,186) (7,198) (5,037) (3,559)
Taxes paid (1,280) (187) (469) (546) (498) (68)
-------------- ------------- -------------- ----------- ----------- -------------
Total operating cash
expenses (33,392) (41,330) (34,106) (32,328) (25,719) (17,773)
CASH DEFICIT DUE TO OPERATING
CASH INCOME AND EXPENSES (8,877) (20,316) (14,784) (7,421) (1,797) (2,649)
CASH REVNUES TO CASH EXPENSES RATIO 73% 51% 57% 77% 93% 85%
OTHER CASH FLOWS:
Cash provided by (used in)
other payables and
receivables (9,817) 10,456 335 (5,479) (1,096) 885
Cash used provided by (used in)
loans held for sale 14,982 (66,040) (30,595) 35,091 (101,313) (17,466)
-------------- ------------- -------------- ----------- ----------- -------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (3,712) $ (75,900) $ (45,044) $ 22,191 $ (104,206) $ (19,230)
============== ============= ============== ============= ============== =============
</TABLE>
Certain previously reported amounts have been reclassified to
conform to current year presentation.
REVENUES
The principal components of the Company's revenues are (i) interest,
fees and servicing revenues earned on its serviced loans receivable reduced by
interest paid on borrowed funds associated with such serviced loans receivable;
and (ii) gains resulting from the sale and securitization of its loans,
including loan origination fees recognized.
27
<PAGE>
For the periods indicated, the following table sets forth 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 THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------------- ----------------------------
1998 1997 1998 1997
--------------- --------------- ------------- ---------
<S> <C> <C> <C> <C>
Interest income 38.9 % 30.1 % 42.4 % 29.2 %
Servicing income 15.4 6.2 13.6 6.4
Cash gain on sale of loans 16.2 14.6 18.3 18.2
Non-cash gain on sale of loans 6.4 21.7 0.5 21.2
Loan fee income 18.2 26.5 21.6 24.3
Other revenues 4.9 0.9 3.6 0.7
--------------- --------------- ------------- ---------
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
=============== =============== ============= =============
Interest expense 37.3 % 19.6 % 40.2 % 20.1 %
Provision for credit losses 14.1 9.4 8.5 8.6
Fair value write-down of residual receivables 18.1 -- 29.6 --
Salaries, wages and employee benefits 69.7 37.6 65.0 35.5
Business development costs 13.2 6.1 12.3 6.0
Other general and administrative expenses 29.5 19.9 26.8 19.5
Income (loss) from continuing operations before
income taxes (81.9) 7.4 (82.4) 10.3
Provision (benefit) for income taxes 6.5 (3.3) 10.3 (5.5)
Minority interest in loss of subsidiaries -- (0.3) -- --
--------------- --------------- ------------- ---------
Net income (loss) (88.4)% 10.4 % (92.7)% 15.8 %
=============== =============== ============= =============
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company recognized a net loss of $43.6 million for the six
months ended June 30, 1998 as compared to net income of $5.2 million for the six
months ended June 30, 1997. This net loss was mainly due to the Company's loan
production volume being below capacity levels in relation to general and
administrative expense structure and several unusual items in the first half of
1998, which negatively impacted net income. These unusual items included, among
other things, an $8.9 million write-down in the value of its residual
receivables due to faster than anticipated prepayment speeds on its
securitization pools and a $5.0 million loss resulting from a decision to change
the Company's aggregation methods related to the lower of cost or market
accounting for mortgage loans held for sale.
Total revenues decreased $600,000, or 1%, to $49.3 million for the
six months ended June 30, 1998 from $49.9 million for the six months ended June
30, 1997. The lower level of revenues resulted principally from lower than
anticipated mortgage loan originations and decreases in non-cash gain on sale of
loans as the Company did not complete a mortgage securitization in the second
quarter of 1998. No mortgage loan securitizations are currently planned for the
remainder of 1998, as the Company plans to sell its loans on a whole-loan
servicing-released basis for cash premiums. The decrease in non-cash gain on
sale was partly offset by higher interest income and servicing income.
Interest income increased $4.2 million, or 28%, to $19.2 million for
the six months ended June 30, 1998 from $15.0 million for the six months ended
June 30, 1997. Interest income earned by the Mortgage Loan Division increased
$1.9 million, or 16%, to $14.1 million for the six months ended June 30, 1998
from $12.2 million for the six months ended June 30, 1997. This increase was due
principally to the growth in the average outstanding loan portfolio in the
Mortgage Loan Division, which increased $66.3 million, or 31%, to $281.6 million
for the six months ended June 30, 1998 from $215.3 million for the six months
ended June 30, 1997. The Company plans to reduce the amount of loans held for
sale during the remainder of 1998 through whole-loan sales. Average interest
earned by the Mortgage Loan Division for the six months ended June 30, 1998 was
10.0% as compared to 10.2% for the six months ended June 30, 1997. Interest
income earned by the Small Business Loan Division increased $1.9 million, or
91%, to $4.0 million for the six months ended June 30, 1998 from $2.1 million
for the six months ended June 30, 1997. This increase was due principally to the
growth in the average outstanding loan portfolio in the Small Business Loan
Division, which increased $24.9 million, or 82%, to $55.4 million for the six
months ended June 30, 1998 from $30.5 million for the six months ended June 30,
1997, reflecting the increased loan origination levels generated by that
Division, and the fact that the Company retains the asset-based loans and
mezzanine loans for investment purposes, rather than selling or securitizing
these loans. Average interest earned by the Small Business Loan Division for the
six months ended June 30, 1998 was 14.4% as compared to 13.8% for the six months
ended June 30, 1997.
28
<PAGE>
Servicing income increased $4.5 million, or 145%, to $7.6 million
for the six months ended June 30, 1998 from $3.1 million for the six months
ended June 30, 1997. This increase was due principally to the securitization of
Mortgage Loans throughout 1997 and in the first quarter of 1998, for which the
Company retained servicing rights. Prior to 1997, the Mortgage Loan Division did
not securitize its loans, therefore the serviced portfolio was just beginning to
grow during the first quarter of 1997. The average serviced loan portfolio for
the Mortgage Loan Division increased $513.2 million, or 174%, to $808.6 million
for the six months ended June 30, 1998 from $295.4 million for the six months
ended June 30, 1997.
Cash gain on sale of loans increased $683,000, or 9%, to $8.0
million for the six months ended June 30, 1998 from $7.3 million for the six
months ended June 30, 1997. The increase resulted principally from increased
sales of Mortgage Loans in the first six months of 1998 due to the fact that the
Company did not complete a mortgage securitization in the second quarter of
1998. Mortgage Loans sold increased $135.0 million, or 85%, to $293.5 million
for the six months ended June 30, 1998 from $158.5 million for the six months
ended June 30, 1997. However, the weighted average gain on sale of Mortgage
Loans decreased to 2.0% for the six months ended June 30, 1998 from 3.6% for the
six months ended June 30, 1997.
Non-cash gain on sale of loans decreased $7.6 million, or 70%, to
$3.2 million for the six months ended June 30, 1998 from $10.8 million for the
six months ended June 30, 1997. The decrease in non-cash gain on sale of loans
was due principally to the Company's decision not to complete a mortgage
securitization in the second quarter of 1998, in addition to a $5.0 million
write-down in the first quarter of 1998 resulting from a decision to change the
Company's aggregation methods related to the lower of cost or market accounting
for mortgage loans held for sale. The Mortgage Loan Division securitized $92.2
million in loans for the six months ended June 30, 1998 and recognized a
weighted average non-cash gain on sale as a percentage of loans securitized of
8.6%, net of expenses. The Mortgage Loan Division securitized $198.7 million in
loans for the six months ended June 30, 1997 and recognized a weighted average
non-cash gain on sale as a percentage of loans securitized of 5.0%, net of
expenses. The non-cash gain as a percentage of loans securitized was higher for
the six months ended June 30, 1998 as the result of reduced
overcollateralization requirements on the 1998 first quarter securitization
transaction compared to the Company's initial mortgage loan securitization
completed in the first quarter of 1997.
Loan fees decreased $4.2 million, or 32%, to $9.0 million for the
six months ended June 30, 1998 from $13.2 million for the six months ended June
30, 1997. Loan fees as a percentage of retail production for the six months
ended June 30, 1998 were 4.7% as compared to 5.1% for the six months ended June
30, 1997. Loan fees are deferred and recognized as interest income over the life
of the loan. All unamortized loan fees, net of origination costs, are realized
as part of the gain on sale of loans when the loans are sold or securitized.
Other revenues increased $2.0 million to $2.4 million for the six
months ended June 30, 1998 from $433,000 for the six months ended June 30, 1997.
Other revenues are comprised principally of insurance commissions, underwriting
fees and management fees. The increase of other revenues resulted principally
from the increased value of securities owned relating to the commercial
mezzanine lending operation in the amount of approximately $500,000 and higher
underwriting fees received in 1998 on brokered loans.
Total expenses increased $43.5 million, or 94%, to $89.7 million
for the six months ended June 30, 1998 from $46.2 million for the six months
ended June 30, 1997. Total expenses are comprised of interest expense, provision
for credit losses, fair value write-down of residual receivables, salaries,
wages and employee benefits, business development costs, and other general and
administrative expenses. The increased expenses are due largely to the Company's
increased Mortgage Loan retail origination operations. However, general and
administrative expenses have dropped from more than $10.3 million per month
earlier in 1998 to less than $8.0 million per month in June 1998. In addition,
many of the cost savings resulting from the Company's personnel reductions made
in May 1998 will not be evident until the third quarter of 1998 as a result of
severance paid to terminated employees. Management has reduced general and
administrative expeses to approximately $7.5 million in July 1998 from an
average of $9.9 million per month in the first quarter of 1998 and $8.6 million
per month in the second quarter of 1998. Management expects third quarter
general and administrative expenses to be $4.0 million lower than the second
quarter. General and administrative expenses are expected to be reduced by an
additional $2.0 million per month after September 1998 as a result of the sale
of selected business units.
Interest expense increased $8.6 million, or 88%, to $18.4 million
for the six months ended June 30, 1998 from $9.8 million for the six months
ended June 30, 1997. The increase in interest expense was due principally to
increased borrowings by the Mortgage Loan Division associated with increased
average loan portfolio and the offering of the Company's Senior Notes due 2004.
Interest expense in the Mortgage Loan Division increased to $10.4 million for
the six months ended June 30, 1998 from $8.9 million for the six months ended
June 30, 1997. Average borrowings attributable to the Mortgage Loan Division,
both under its warehouse credit facilities and in
29
<PAGE>
connection with the sales of notes payable to investors and subordinated
debentures, increased to $267.3 million for the six months ended June 30, 1998
from $236.8 million for the six months ended June 30, 1997. In September 1997,
the Company also completed the $125.0 million offering of the Company's Senior
Notes due 2004 with interest payable at 10.75%. For the six months ended June
30, 1998, the Company incurred interest expense of $7.0 million related to the
Senior Notes due 2004.
Provision for credit losses increased $2.2 million, or 47%, to $6.9
million for the six months ended June 30, 1998 from $4.7 million for the six
months ended June 30, 1997. The provision was made to maintain the general
reserves for credit losses associated with loans held for investment, as well as
to increase specific reserves for possible losses with regard to particular
loans, including delinquent loans purchased out of the mortgage securitizations,
which totalled $5.5 million for the six months ended June 30, 1998.
As the result of higher than anticipated prepayments, the Company,
in 1998, modified the estimated prepayment speeds on all of its mortgage loan
securitization transactions to peak at 25 CPR (up from the previous prepayment
speeds of 20 CPR) and modified the estimated prepayment speeds on its 1995-1
small business loan securitization transaction to peak at 25 CPR (up from the
previous prepayment speeds of 15 CPR). This resulted in a write-down of residual
receivables of $8.9 million. No such write-down was necessary in 1997.
General and administrative expense increased $23.7 million, or 75%,
to $55.4 million for the six months ended June 30, 1998 from $31.7 million for
the six months ended June 30, 1997. This is a result primarily from the
increased personnel costs in the Mortgage Loan Division due to the expansion in
1997 and early 1998 of the portfolio management, underwriting, processing, and
closing departments, and the increased expenses associated with the opening of
retail regional operating centers in Greenville (first quarter of 1997) and
Houston (fourth quarter of 1997). Salaries, wages and employee benefits
increased $15.6 million, or 83%, to $34.4 million for the six months ended June
30, 1998 from $18.8 million for the six months ended June 30, 1997. The higher
general and administrative expenses were also the result of expenditures
associated with an anticipated higher level of production volume planned for in
1998, which has not occurred. The Company's volume continues to lag behind
expectations.
The Company has recorded current income tax expense of $3.2 million
for the six months ended June 30, 1998, even though overall the Company
generated a pre-tax loss for the six months ended June 30, 1998. The Company has
not recorded a deferred tax benefit related to the current loss due to
management's assessment of the recoverability of the related deferred tax asset.
The current tax is due on income called "excess inclusion income." Excess
inclusion income is a result of the Company securitizing loans in pools to third
party investors. These transactions generate income for the Company that is
included in the overall loss. However, according to IRS regulations, a portion
of that income is subject to federal tax in the current period regardless of
other current period losses or NOL carryovers otherwise available to offset
regular taxable income. The excess inclusion income approximates the net
interest the Company receives on the loans in the pools after the bondholders
are paid their share of the interest less the sum of the daily accruals, an
amount allowed for tax purposes as a reasonable economic return on the retained
ownership interest.
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
The Company recognized a net loss of $23.0 million for the three
months ended June 30, 1998 as compared to net income of $4.8 million for the
three months ended June 30, 1997. This net loss was mainly due to the Company's
loan production volume being below capacity levels in relation to general and
administrative expense structure and several unusual items in the second quarter
of 1998, which negatively impacted net income. These unusual items included,
among other things, a $7.3 million write-down in the value of its residual
receivables due to faster than anticipated prepayment speeds on its
securitization pools.
Total revenues decreased $5.4 million, or 18%, to $24.8 million for
the three months ended June 30, 1998 from $30.2 million for the three months
ended June 30, 1997. The lower level of revenues resulted principally from lower
than anticipated mortgage loan originations and lower non-cash gain on sale of
loans as a result of no loan securitization transaction being completed in the
second quarter of 1998. No mortgage loan securitizations are currently planned
for the remainder of 1998, as the Company plans to sell its loans on a
whole-loan servicing-released basis for cash premiums.
Interest income increased $1.7 million, or 19%, to $10.5 million
for the three months ended June 30, 1998 from $8.8 million for the three months
ended June 30, 1997. Interest income earned by the Mortgage Loan Division
increased $500,000, or 7%, to $7.7 million for the three months ended June 30,
1998 from $7.2 million for the three months ended June 30, 1997. This increase
was due principally to the growth in the average outstanding loan portfolio in
the Mortgage Loan Division, which increased $40.4 million, or 15%, to $303.4
million for the three months ended June 30, 1998 from $263.0 million for the
three months ended June 30, 1997. The Company plans to reduce the amount of
loans held for sale during the remainder of 1998 through whole-loan sales.
Average interest
30
<PAGE>
earned by the Mortgage Loan Division for the three months ended June 30, 1998
was 10.7% as compared to 10.0% for the three months ended June 30, 1997.
Interest income earned by the Small Business Loan Division increased $1.0
million, or 83%, to $2.2 million for the three months ended June 30, 1998 from
$1.2 million for the three months ended June 30, 1997. This increase was due
principally to the growth in the average outstanding loan portfolio in the Small
Business Loan Division, which increased $25.1 million, or 74%, to $58.8 million
for the three months ended June 30, 1998 from $33.7 million for the three months
ended June 30, 1997, reflecting the increased loan origination levels generated
by that Division, and the fact that the Company retains the asset-based loans
and mezzanine loans for investment purposes, rather than selling or securitizing
these loans. Average interest earned by the Small Business Loan Division for the
three months ended June 30, 1998 was 15.1% as compared to 14.3% for the three
months ended June 30, 1997.
Servicing income increased $1.5 million, or 79%, to $3.4 million for
the three months ended June 30, 1998 from $1.9 million for the three months
ended June 30, 1997. This increase was due principally to the securitization of
Mortgage Loans throughout 1997 and in the first quarter of 1998, for which the
Company retained servicing rights. Prior to 1997, the Mortgage Loan Division did
not securitize its loans, therefore the serviced portfolio was just beginning to
grow during the second quarter of 1997. The average serviced loan portfolio for
the Mortgage Loan Division increased $485.2 million, or 139%, to $833.2 million
for the three months ended June 30, 1998 from $348.0 million for the three
months ended June 30, 1997.
Cash gain on sale of loans decreased $1.0 million, or 18%, to $4.5
million for the three months ended June 30, 1998 from $5.5 million for the three
months ended June 30, 1997. The decrease resulted principally from reduced
premiums recognized on sale of Mortgage Loans in the second quarter of 1998. The
weighted average gain on sale of Mortgage Loans decreased to 1.4% for the three
months ended June 30, 1998 from 3.6% for the three months ended June 30, 1997.
This decrease resulted even though Mortgage Loans sold increased $112.8 million,
or 95%, to $231.4 million for the three months ended June 30, 1998 from $118.6
million for the three months ended June 30, 1997.
Non-cash gain on sale of loans decreased $6.3 million to $112,000
for the three months ended June 30, 1998 from $6.4 million for the three months
ended June 30, 1997. The decrease in non-cash gain on sale of loans was due to
the Company's decision not to complete a mortgage securitization in the second
quarter of 1998. The Mortgage Loan Division securitized $121.2 million in loans
in the second quarter of 1997 and recognized a weighted average non-cash gain on
sale as a percentage of loans securitized of 5.3%, net of expenses.
Loan fees decreased $1.9 million to $5.4 million for the three
months ended June 30, 1998 from $7.3 million for the three months ended June 30,
1997. Loan fees as a percentage of retail production for the three months ended
June 30, 1998 were 4.60% as compared to 4.91% for the three months ended June
30, 1997. Loan fees are deferred and recognized as interest income over the life
of the loan. All unamortized loan fees, net of origination costs, are realized
as part of the gain on sale of loans when the loans are sold or securitized.
Other revenues increased $684,000 to $880,000 for the three months
ended June 30, 1998 from $196,000 for the three months ended June 30, 1997.
Other revenues are comprised principally of insurance commissions, underwriting
fees and management fees. The increase of other revenues resulted principally
from higher underwriting fees received in 1998 on brokered loans.
Total expenses increased $18.1 million, or 67%, to $45.2 million
for the three months ended June 30, 1998 from $27.1 million for the three months
ended June 30, 1997. Total expenses are comprised of interest expense, provision
for credit losses, fair value write-down of residual receivables, salaries,
wages and employee benefits, business development, and other general and
administrative expenses. The increased expenses are due largely to the Company's
increased Mortgage Loan retail origination operations. However, general and
administrative expenses have dropped from more than $10.3 million per month
earlier in 1998 to less than $8.0 million per month in June 1998. In addition,
many of the expense reductions resulting from the Company's personnel cuts made
in May 1998 will not be evident until the third quarter of 1998 as a result of
severance paid to terminated employees. Management has reduced general and
administrative expeses to approximately $7.5 million in July 1998 from an
average of $9.9 million per month in the first quarter of 1998 and $8.6 million
per month in the second quarter of 1998. Management expects third quarter
general and administrative expenses to be $4.0 million lower than the second
quarter. General and administrative expenses are expected to be reduced by an
additional $2.0 million per month after September 1998 as a result of the sale
of selected business units.
Interest expense increased $3.9 million, or 64%, to $10.0 million
for the three months ended June 30, 1998 from $6.1 million for the three months
ended June 30, 1997. The increase in interest expense was due principally to
increased borrowings by the Mortgage Loan Division associated with increased
average loan balances and the offering of the Company's Senior Notes due 2004.
Interest expense in the Mortgage Loan Division increased to
31
<PAGE>
$5.6 million for the three months ended June 30, 1998 from $5.5 million for the
three months ended June 30, 1997. Average borrowings attributable to the
Mortgage Loan Division, both under its revolving warehouse credit facilities and
in connection with the sales of notes payable to investors and subordinated
debentures, increased $3.7 million, or 1%, to $294.8 million for the three
months ended June 30, 1998 from $291.1 million for the three months ended June
30, 1997. In September 1997, the Company also completed the $125.0 million
offering of the Company's Senior Notes due 2004 with interest payable at 10.75%.
For the three months ended June 30, 1998, the Company incurred interest expense
of $3.5 million related to the Senior Notes due 2004.
Provision for credit losses decreased $488,000, or 19%, to $2.1
million for the three months ended June 30, 1998 from $2.6 million for the three
months ended June 30, 1997. The provision was made to maintain the general
reserves for credit losses associated with loans held for investment, as well as
to increase specific reserves for possible losses with regard to particular
loans, including delinquent loans purchased out of the mortgage securitizations,
which totalled $1.8 million for the three months ended June 30, 1998.
As the result of higher than anticipated prepayments, the Company,
in the second quarter of 1998, modified the estimated prepayment speeds on all
of its mortgage loan securitization transactions to peak at 25 CPR, up from the
previous prepayment speeds of 20 CPR. This resulted in the recognition of a
write-down of residual receivables of $7.3 million. No such write-down was
necessary in 1997.
General and administrative expense increased $7.4 million, or 40%,
to $25.8 million for the three months ended June 30, 1998 from $18.4 million for
the three months ended June 30, 1997. This resulted primarily from the increased
personnel costs in the Mortgage Loan Division due to the expansion in 1997 and
early 1998 of the portfolio management, underwriting, processing, and closing
departments, and the increased expenses associated with the opening of retail
regional operating centers in Greenville (first quarter of 1997) and Houston
(fourth quarter of 1997). Salaries, wages and employee benefits increased $5.4
million, or 51%, to $16.1 million for the three months ended June 30, 1998 from
$10.7 million for the three months ended June 30, 1997. The higher general and
administrative expenses were also the result of expenditures associated with an
anticipated higher level of production volume planned for in 1998, which has not
occurred. The Company's volume continues to lag behind expectations.
The Company has recorded current income tax expense of $2.6 million
for the three months ended June 30, 1998, even though overall the Company
generated a pre-tax loss for the three months ended June 30, 1998. The current
tax is due on income called "excess inclusion income." Excess inclusion income
is a result of the Company securitizing loans in pools to third party investors.
These transactions generate income for the Company that is included in the
overall loss. However, according to IRS regulations, a portion of that income is
subject to federal tax in the current period regardless of other current period
losses or NOL carryovers otherwise available to offset regular taxable income.
The excess inclusion income approximates the net interest the Company receives
on the loans in the pools after the bondholders are paid their share of the
interest less the sum of the daily accruals, an amount allowed for tax purposes
as a reasonable economic return on the retained ownership interest.
FINANCIAL CONDITION
Net loans receivable increased $13.0 million to $301.4 million at
June 30, 1998 from $288.4 million at December 31, 1997. The residual receivables
increased by $4.5 million to $67.7 million at June 30, 1998, from $63.2 million
at December 31, 1997. This increase resulted primarily from the retention of the
residual interest certificates in the Company's Mortgage Loan securitization
completed in the first quarter of 1998, offset by $8.9 million of write-downs of
the residual receivables as a result of higher than anticipated prepayments.
Net property and equipment increased by $3.5 million to $21.6
million at June 30, 1998, from $18.1 million at December 31, 1997, while other
assets decreased by $1.7 million to $11.2 million at June 30, 1998 from $12.9
million at December 31, 1997.
The primary source of funding the Company's receivables comes from
borrowings issued under various credit arrangements (including the Credit
Facilities, CII Notes, and the Company's Senior Notes due 2004). At June 30,
1998, the Company had debt outstanding under revolving warehouse lines of credit
to banks of $167.8 million, which compares with $77.6 million at December 31,
1997, for an increase of $90.2 million. During the second quarter of 1998, the
Company obtained a three-year $200 million revolving warehouse line of credit
that was used to replace a warehouse line of credit with another financial
institution that matured on June 30, 1998. During September 1997, the Company
issued $125.0 million of Senior Notes due 2004. At June 30, 1998, the Company
had $138.1 million of CII Notes outstanding, which compares with $134.3 million
at December 31, 1997, for an increase of $3.8 million.
32
<PAGE>
Total shareholders' equity at June 30, 1998 was $19.9 million, which
compares to $63.4 million at December 31, 1997, a decrease of $43.5 million.
This decrease resulted principally from a net loss of $43.6 million for the six
months ended June 30, 1998.
ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE
The Company is exposed to the risk of loan delinquencies and
defaults 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. 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 inherent losses in loans held for investment.
In securitization transactions, the residual receivables bear the
risk of default for the entire pool of securitized loans to the extent of such
certificates' value. Accordingly, the value of the residual receivables retained
by the Company would be impaired to the extent losses on the securitized loans
exceed the amount estimated when determining the residual cash flows.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON OWNED PORTFOLIO
The table below summarizes certain information with respect to the
Company's allowance for credit losses on the owned portfolio for each of the
periods indicated.
<TABLE>
<CAPTION>
AT AND FOR THE AT AND FOR THE
SIX MONTHS THREE MONTHS AT AND FOR THE YEARS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
--------------- --------------- ------------------------------------------------------
1998 1997 1996 1995
----------------------------------- ---------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at
beginning of period $ 6,528 $ 7,685 $ 3,084 $ 1,874 $ 1,730
Net charge-offs (3,836) (1,411) (5,166) (2,494) (1,563)
Provision charged to expense 6,940 2,111 10,030 5,416 2,480
Reversal of allowance on auto
loans sold (1,247) -- -- -- --
Securitization transfers -- -- (1,420) (1,712) (773)
--------------- --------------- ----------------------------------------------------
Allowance for credit losses at
end of the period $ 8,385 $ 8,385 $ 6,528 $ 3,084 $ 1,874
=============== =============== ============== ============== ==============
</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 inherent 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
possible credit losses will not be required.
33
<PAGE>
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON RESIDUAL RECEIVABLES
The table below summarizes certain information with respect to the
Company's allowance for losses that is embedded in the residual receivables for
each of the periods indicated.
<TABLE>
<CAPTION>
AT AND FOR THE AT AND FOR THE
SIX MONTHS THREE MONTHS AT AND FOR THE YEARS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
--------------- --------------- -----------------------------------------
1998 1997 1996 1995
------------------------------------ ------------- -------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESIDUAL RECEIVABLES:
Allowance for losses at beginning of period $ 14,255 $ 16,116 $ 1,202 $ 773 $ --
Net charge-offs (13) (6) (1,645) (1,283) --
Change in anticipated losses embedded in
securitization gain model (1,381) (3,249) 13,278 -- --
Allowance transferred from owned portfolio -- -- 1,420 1,712 773
--------------- --------------- ----------- -------------- ------------
Allowance for losses at the end of the period $ 12,861 $ 12,861 $ 14,255 $ 1,202 $ 773
=============== =============== =========== ============== ============
</TABLE>
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON SERVICED PORTFOLIO
The table below summarizes the Company's allowance for credit losses
with respect to the Company's total serviced portfolio (including both owned and
securitized loan pools) for each of the periods indicated.
<TABLE>
<CAPTION>
AT AND FOR THE
AT AND FOR THE THREE MONTHS
SIX MONTHS ENDED ENDED AT AND FOR THE YEARS ENDED
JUNE 30, JUNE 30, DECEMBER 31,
-------------- -------------- -------------------------------------
1998 1997 1996 1995
--------------------------------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at beginning of period $ 20,783 $ 23,801 $ 4,286 $ 2,647 $ 1,730
Reversal of allowance on auto loans sold (1,247) -- -- -- --
Net charge-offs (3,849) (1,417) (6,811) (3,777) (1,563)
Provision charged to expense 6,940 2,111 10,030 5,416 2,480
Change in anticipated losses embedded in
securitization gain model (1,381) (3,249 13,278 -- --
-------------- -------------- ------------- ------------ -------------
Allowance for credit losses at the end of the period $ 21,246 $ 21,246 $ 20,783 $ 4,286 $ 2,647
============== ============== ============== ============ =============
Allowance as a % of total serviced portfolio 2.49% 2.49% 2.60% 2.02% 2.03%
Annualized net charge-offs as a % of average serviced
portfolio 0.85% 0.61% 1.38% 2.47% 1.43%
The total allowance for credit losses as shown on the
balance sheet is as follows:
Allowance for credit losses on loans $ 8,385 $ 8,385 $ 6,528 $ 3,084 $ 1,874
Allowance for credit losses on residual receivables 12,861 12,861 14,255 1,202 773
-------------- -------------- ------------- ------------ -------------
Total allowance for credit losses $ 21,246 $ 21,246 $ 20,783 $ 4,286 $ 2,647
============== ============== ============== ============ =============
</TABLE>
34
<PAGE>
The following table sets forth the Company's allowance for credit
losses on the serviced portfolio 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 30 days past due.
<TABLE>
<CAPTION>
AT AND FOR THE AT AND FOR THE
SIX MONTHS THREE MONTHS AT AND FOR THE YEARS ENDED
ENDED JUNE 30, ENDED JUNE 30, DECEMBER 31,
--------------------------------
---------------- ---------------
1998 1998 1997 1996 1995
---------------- --------------- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS (1):
Mortgage Loan Division 2.02% 2.02% 1.98% 0.80% 0.93%
Small Business Loan Division 5.74 5.74 6.76 3.84 4.50
Auto Loan Division 50.00 50.00 7.58 6.45 4.03
Total allowance for credit losses as a % of
serviced loans 2.49 2.49 2.60 2.02 2.03
NET CHARGE-OFFS AS A % OF AVERAGE SERVICED LOANS (2):
Mortgage Loan Division 0.68 0.40 0.32 0.81 1.04
Small Business Loan Division 1.04 1.97 2.74 2.71 1.43
Auto Loan Division 12.17 62.39 17.17 9.65 3.68
Total net charge-offs as a % of total
serviced loans 0.85 0.61 1.38 2.47 1.43
LOANS RECEIVABLE PAST DUE 30 DAYS OR MORE AS A % OF
SERVICED LOANS (1):
Mortgage Loan Division 10.98 10.98 8.00 7.26 14.43
Small Business Loan Division 3.31 3.31 4.17 7.92 9.69
Auto Loan Division 59.81 59.81 9.41 17.09 12.83
Total loans receivable past due 30 days
or more as a % of total serviced loans 10.12 10.12 7.66 8.41 13.31
TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED
LOANS PAST DUE 90 DAYS OR MORE (1) 55.10 55.10 94.33 88.71 73.21
</TABLE>
(1) For purposes of these calculations, serviced loans represents
all loans for which the Company bears credit risk, and 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 and Mortgage Loans serviced without
credit risk.
(2) Average serviced loans have been determined by using beginning
and ending balances for the period presented except that the
1996, 1997, and 1998 averages are calculated based on the daily
averages for Small Business Loan Division and Auto Loan Division
and monthly averages for the Mortgage Loan Division (rather than
the beginning and ending balances). The amounts at June 30, 1998
have been annualized.
Management closely monitors delinquencies to measure the quality of
its loan portfolio and the potential for credit losses. The Company's policy is
to generally place a loan on non-accrual status after it becomes 90 days past
due, if collection in full is questionable. Collection efforts on charged-off
loans continue until the obligation is satisfied or until it is determined that
such obligation is not collectible or the cost of continued collection efforts
would exceed the potential recovery. Recoveries of previously charged-off loans
are credited to the allowance for credit losses.
35
<PAGE>
The following sets forth delinquencies as a percentage of the total
serviced portfolio as of the periods indicated.
<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1997 1996 1995
------------ ------------------ -------------------- ----------------- -----------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans past due 30-59 days $ 34,702 $ 34,115 $ 29,174 $ 8,412 $ 9,209
As a % of total serviced portfolio 4.07% 3.73 % 3.65% 3.96% 7.05%
Loans past due 60-89 days $ 13,076 $ 11,527 $ 10,009 $ 2,789 $ 3,142
As a % of total serviced portfolio 1.53% 1.26 % 1.25% 1.31% 2.40%
Loans past due 90+ days $ 38,556 $ 31,934 $ 22,147 $ 6,662 $ 5,047
As a % of total serviced portfolio 4.52% 3.49 % 2.76% 3.14% 3.86%
Total loans past due $ 86,334 $ 77,576 $ 61,330 $ 17,863 $ 17,398
As a % of total serviced portfolio 10.12% 8.48 % 7.66% 8.41% 13.31%
</TABLE>
Management monitors securitized pool delinquencies using a static
pool analysis by month by pool balance. Delinquencies generally increase during
the first one to two years. Current year results are not necessarily indicative
of future performance. The following three tables set forth the static pool
analysis for delinquencies by month in the Mortgage Loan Division's securitized
pools.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BALANCE
- --------------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 77,435,632 120,860,326 130,917,899 118,585,860 62,726,105
2 77,045,312 120,119,653 169,093,916 118,061,792 62,300,302
3 76,709,417 119,364,510 168,182,957 148,291,146 61,609,815
4 75,889,160 118,965,905 166,783,489 146,880,279 60,768,433
5 75,395,969 117,236,893 165,608,534 145,775,696
6 74,630,019 115,870,168 164,084,260 144,465,651
7 73,149,957 113,537,447 161,880,416 143,048,555
8 72,261,386 112,100,397 158,220,175
9 71,342,842 110,468,401 155,854,981
10 70,195,198 107,887,242 153,193,421
11 68,981,147 105,138,088
12 67,149,553 102,142,062
13 65,705,603 98,876,084
14 63,210,889
15 60,052,314
16 58,133,496
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES > 30 DAYS PAST DUE
- ----------------------------------------------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 -- 515,954 609,201 402,972 44,600
2 1,499,056 1,631,017 2,042,757 2,132,028 1,223,964
3 858,311 3,930,423 4,498,266 5,049,035 2,013,525
4 3,760,775 5,399,570 8,546,414 7,290,097 3,872,739
5 5,220,385 7,293,855 12,337,604 10,290,987
6 5,849,574 9,790,731 13,432,454 13,459,369
7 6,777,961 11,933,526 15,076,729 12,375,957
8 8,078,783 12,484,893 17,687,496
9 8,475,207 12,471,739 17,881,539
10 9,911,115 11,222,005 16,148,887
11 10,630,824 12,421,169
12 9,169,743 14,055,100
13 9,372,949 12,095,456
14 10,605,203
15 9,401,614
16 7,957,382
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE
- ----------------------------------------------------------------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 AVERAGE
- ----------------------------------------------------------------------------------------------------------------------------------
1 0.00% 0.43% 0.47% 0.34% 0.07% 0.26%
2 1.94% 1.36% 1.21% 1.81% 1.96% 1.66%
3 1.12% 3.29% 2.67% 3.40% 3.27% 2.75%
4 4.96% 4.54% 5.12% 4.96% 6.37% 5.19%
5 6.92% 6.22% 7.45% 7.06% 6.91%
6 7.84% 8.45% 8.19% 9.32% 8.45%
7 9.27% 10.51% 9.31% 8.70% 9.45%
8 11.18% 11.14% 11.22% 11.17%
9 11.88% 11.29% 11.61% 11.59%
10 14.12% 10.40% 10.89% 11.80%
11 15.41% 11.81% 13.61%
12 13.66% 14.24% 13.95%
13 14.27% 13.08% 13.67%
14 16.78% 16.78%
15 15.66% 15.66%
16 13.98% 13.98%
</TABLE>
Static pool delinquencies were lower in June in each of the
Company's pools other than the 1998-1 pool, which is not yet a seasoned pool.
These decreases are believed to be a result of the Company's recent changes in
management in the portfolio servicing and collections department, and the
enhancements in procedures and processes as a result of these changes. Prior to
these management changes, delinquencies were continuing to increase during April
and May 1998 from the March 1998 levels.
37
<PAGE>
The following sets forth the static pool analysis for delinquencies
by quarter in the Small Business Loan Division's securitized pools.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BALANCE
--------------------------------------------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1995-1 1996-1 1997-1
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 16,728,904 12,835,117 19,635,971
4 16,293,396 17,198,763 20,655,808
7 15,292,515 17,128,785 19,881,542
10 14,816,770 16,850,017
13 14,147,481 15,768,712
16 13,214,217 15,411,337
19 11,685,931 14,669,588
22 11,367,569
25 10,932,915
28 10,043,467
31 9,263,383
34 8,597,644
37 7,607,622
DELINQUENCIES > 30 DAYS PAST DUE
--------------------------------------------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1995-1 1996-1 1997-1
--------------------------------------------------------------------------------------------------------------
1 388,110 69,463 474,946
4 1,504,537 320,625 366,470
7 1,230,648 2,275,021 366,951
10 1,160,321 1,602,343
13 1,399,070 1,058,535
16 1,198,855 396,230
19 999,427 1,324,533
22 791,103
25 582,389
28 349,993
31 383,049
34 388,510
37 220,728
DELINQUENCIES > 30 DAYS PAST DUE AS A % OF CURRENT BALANCE
--------------------------------------------------------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1995-1 1996-1 1997-1 AVERAGE
--------------------------------------------------------------------------------------------------------------------------
1 2.32% 0.54% 2.42% 1.76%
4 9.23% 1.86% 1.77% 4.29%
7 8.05% 13.28% 1.85% 7.72%
10 7.83% 9.51% 8.67%
13 9.89% 6.71% 8.30%
16 9.07% 2.57% 5.82%
19 8.55% 9.03% 8.79%
22 6.96% 6.96%
25 5.33% 5.33%
28 3.48% 3.48%
31 4.14% 4.14%
34 4.52% 4.52%
37 2.90% 2.90%
Actual Historical Cumulative
Prepayment Speed 14 CPR 8 CPR 11 CPR
</TABLE>
38
<PAGE>
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 proceeds
from the sales of the loans it originates and purchases, proceeds from the sale
of CII Notes, borrowings under the Credit Facilities, principal and interest
received from borrowers, loan fees received from borrowers, and receipt of
excess spread on securitization transactions. 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 decreased to $19.9 million at June 30, 1998
from $63.4 million at December 31, 1997. This decrease resulted principally from
the net losses incurred by the Company in the first and second quarters of 1998.
Cash and cash equivalents were $43.6 million at June 30, 1998 and
$7.6 million at December 31, 1997. Cash used in operating activities decreased
to $79.6 million for the six months ended June 30, 1998, from $123.4 million for
the six months ended June 30, 1997. Cash provided by investing activities
increased to $18.2 million for the six months ended June 30, 1998, from cash
used in investing activities of $5.9 for the six months ended June 30, 1997.
Cash provided by financing activities decreased to $97.5 million for the six
months ended June 30, 1998, from cash provided by financing activities of $130.5
million for the six months ended June 30, 1997. The decrease in cash used in
operations was due principally to the increase in whole-loan sales during the
first six months of 1998 as compared to the first six months of 1997, offset
somewhat by the significant net loss for the six months ended June 30, 1998, as
compared to net income for the six months ended June 30, 1997. The increase in
cash provided by investing activities was principally due to increased
collections on loans not sold. The decrease in cash provided by financing
activities was due principally to a reduction in advances on revolving warehouse
lines of credit.
At June 30, 1998, the Company's credit facilities ("Credit
Facilities") were comprised principally of a revolving warehouse credit facility
of $200 million (the "Mortgage Loan Division Facility") and warehouse credit
facilities of $60 million for the Small Business Loan Division (the "Small
Business Loan Division Facility"). The Mortgage Loan Division Facility was
obtained on June 30, 1998, and was used to replace a warehouse line of credit
with another financial institution that matured on June 30, 1998. Based on the
borrowing base limitations contained in the Credit Facilities, at June 30, 1998,
the Company had aggregate outstanding borrowings of $124.5 million and aggregate
borrowing availability of $15.6 million under the Mortgage Loan Division
Facility and aggregate outstanding borrowings of $43.3 million and aggregate
borrowing availability of $9.3 million under the Small Business Loan Division
Facility. Total Company borrowings and availability at June 30, 1998 under the
Credit Facilities were $167.8 million and $24.9 million, respectively. The
Mortgage Loan Division Facility bears interest at variable rates, ranging from
LIBOR + 1.75% to LIBOR + 2.50% and matures on June 30, 2001. The Small Business
Loan Division Facility bears interest at the Prime Rate and mature on December
29, 2000. The Company also has a mortgage note payable of $3.4 million for the
Mortgage Loan Division. The mortgage note payable bears interest at the Prime
Rate + .50% and matures on March 1, 2005.
The Mortgage Loan Division Facility contains no significant
financial covenants other than the maintenance of a minimum specified amount of
investor savings notes to be held by Carolina Investors, Inc. The Small Business
Loan Division Facility contains a number of financial covenants, including, but
not limited to, covenants with respect to certain debt to equity, tangible net
worth, and interest coverage ratios. These required financial ratios are
calculated on the Small Business Loan Division financial statements. The
agreements contain no consolidated financial statement covenants. The Credit
Facilities also contain certain other covenants, including, but not limited to,
covenants that impose limitations on the Company and its subsidiaries with
respect to declaring or paying dividends and certain other distributions
(including dividends and distributions from the subsidiaries to the Company),
making intercompany loans, making payments with respect to certain subordinated
debt, and making certain changes to its equity capital structure. The Mortgage
Loan Division Facility prohibits HomeGold, Inc., and in certain circumstances
Carolina Investors, Inc., from paying dividends or making distributions to the
Company in excess of 50% of such subsidiaries' cumulative net income as
determined for the most recent four consecutive completed fiscal quarters on a
cumulative rolling basis or if an event of default exists at the time of, or
after giving effect to, the dividend or distribution. The majority of the credit
facilities in the Small Business Loan Credit Facility contain provisions
prohibiting subsidiaries of the Company party to the included credit facilities
from paying dividends, or making distributions to the Company (unless such
provisions are waived by the lender). At June 30, 1998, management believes the
Company was in compliance with such restrictive covenants.
39
<PAGE>
During 1997, the Company sold $125.0 million aggregate principal
amount of Senior Notes due 2004. The Senior Notes due 2004 constitute unsecured
indebtedness of the Company. The Senior Notes due 2004 are redeemable at the
option of the Company, in whole or in part, on or after September 15, 2001, at
predetermined redemption prices plus accrued and unpaid interest to the date of
redemption. The indenture pertaining to the Senior Notes contains various
restrictive covenants including limitations on, among other things, the
incurrence of certain types of additional indebtedness, the payment of dividends
and certain other payments, the ability of the Company's subsidiaries to incur
further limitations on their ability to pay dividends or make other payments to
the Company, liens, asset sales, the issuance of preferred stock by the
Company's subsidiaries and transactions with affiliates. At June 30, 1998,
management believes the Company was in compliance with such restrictive
covenants. The Senior Notes due 2004 are fully and unconditionally guaranteed
(the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each,
a "Guarantee") by certain of the Company's subsidiaries (the "Subsidiary
Guarantors"). With the exception of the Guarantee by CII, the Subsidiary
Guarantees rank PARI PASSU in right of payment with all existing and future
unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of
payment to all existing and future subordinated indebtedness of such Guarantors.
The Guarantee by CII is equal in priority to CII's senior notes and is senior to
CII's subordinated debentures.
CII engages in the sale of CII Notes to investors. The CII Notes 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 CII Notes 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, 1998, CII had an aggregate of $119.3 million of senior notes
outstanding bearing a weighted average interest rate of 7.4%, and an aggregate
of $18.8 million of subordinated debentures bearing a weighted average interest
rate of 5.0%. The senior notes and subordinated debentures are subordinate in
priority to CII's obligations under the Mortgage Loan Division Credit Facility.
Substantially all of the CII Notes have one-year maturities.
LOAN SALES AND SECURITIZATIONS
The Company offers for sale or securitization substantially all of
its loans other than those loans designated as held for investment purposes. The
Company offers for sale on a whole loan basis a significant amount of its
Mortgage Loans (servicing released), including substantially all of its Mortgage
Loans secured by second liens and loans originated through "Strategic Alliance
Mortgage Bankers", and all of its SBA Loan Participations (servicing retained),
principally to secure the additional cash flow associated with the premiums paid
in connection with such sales and to eliminate the credit risk associated with
the second lien Mortgage Loans. However, no assurance can be given that these
loans can be successfully sold. To the extent that the loans are not sold, the
Company retains the risk of loss. At June 30, 1998 and December 31, 1997, the
Company had retained $73.1 million and $69.8 million, respectively, of second
mortgage loans on its balance sheet. These loans contain substantially higher
credit risk than Mortgage Loans secured by first liens. During the first six
months of 1998 and 1997, the Company sold $293.5 million and $158.5 million,
respectively, of Mortgage Loans and $26.2 million and $17.6 million,
respectively, of SBA Loan Participations.
Beginning in 1997, on a quarterly basis, the Company securitized
substantial amounts of its Mortgage Loans, totaling $579.7 million through June
30, 1998. The Company did not complete a mortgage securitization in the second
quarter of 1998 and is planning to continue to sell loans on a whole-loan cash
basis for the remainder of 1998 rather than engage in a securitization
transaction. Since 1995, the Company has securitized $56.0 million of loans
representing the unguaranteed portions of the SBA Loans and $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, while building servicing revenues by increasing the serviced
portfolio. In connection with its Mortgage Loan and SBA Loan securitizations,
the Company has retained subordinate certificates and interest-only and residual
certificates representing residual interests in the trusts.
In securitizations, the Company sells the loans that it originates
or purchases to a trust for cash, and records certain assets and income based
upon the difference between all principal and interest received from the loans
sold and (i) all principal and interest required to be passed through to the
asset-backed bond investors, (ii) all excess contractual servicing fees, (iii)
other recurring fees, and (iv) an estimate of losses on the loans (collectively,
the "Excess Cash Flow"). At the time of the securitization, the Company
estimates these amounts based upon a declining principal balance of the
underlying loans, adjusted by an estimated prepayment and loss rate, and
capitalizes these amounts using a discount rate that market participants would
use for similar financial instruments. These capitalized assets are recorded on
the Company's balance sheet as residual receivables, and are aggregated and
reported on the income statement as non-cash gain on sale of loans, after being
reduced (increased) by the costs of securitization and any hedge (gains) losses.
40
<PAGE>
The Company retains the right to service loans it securitizes. Fees
for servicing loans are based on a stipulated percentage (generally 0.50% per
annum on mortgage loans and 0.40% per annum on SBA loans) of the unpaid
principal balance of the associated loans. On its mortgage loan securitizations,
the Company has recognized a servicing asset in addition to its gain on sale of
loans. The servicing asset is calculated as the present value of the expected
future net servicing income in excess of adequate compensation for a substitute
servicer, based on common industry assumptions and the Company's historical
experience. These factors include default and prepayment speeds.
The following sets forth facts and assumptions used by the Company
in arriving at the valuation of the residual receivables relating to its
Mortgage Loan securitizations at June 30, 1998:
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4 1998-1
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Loans remaining in securitization pool $58,133,496 $98,876,078 $153,193,421 $143,048,555 $60,768,433
Weighted average coupon on loans 10.91% 10.78% 11.18% 11.09% 11.01%
Weighted average original term to
stated maturity 192 months 187 months 191 months 198 months 205 months
Weighted average loan-to-value 79.14 74.40 76.38 76.18 76.90
% of first mortgage loans 100.00 100.00 100.00 100.00 100.00
Weighted average pass-through rate to
bondholders 7.40 7.06 6.99 6.86 6.71
Estimated annual losses assumed 0.60 0.60 0.60 0.60 0.60
Anticipated cumulative losses as a % of
unpaid balance 2.10 2.06 1.89 1.78 1.76
Remaining ramp period for losses 0 months 0 months 3 months 6 months 9 months
Annual servicing fee 0.50 0.50 0.50 0.50 0.50
Servicing asset 0.10 0.10 0.10 0.10 0.10
Discount rate implicit in cash flow
before
overcollateralization 26.00 22.00 20.00 20.00 20.00
Discount rate applied to cash flow after
overcollateralization 12.00 12.00 12.00 12.00 12.00
Prepayment speed assumptions:
Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR (1) 25 CPR 25 CPR 25 CPR 25 CPR 25 CPR
Tail CPR (1) 23/21 CPR 23/21 CPR 23/21 CPR 23/21 CPR 23/21 CPR
CPR ramp period (1) 12 months 12 months 12 months 12 months 12 months
CPR peak period (1) 24 months 24 months 24 months 24 months 24 months
CPR tail begins from (1) 37/49 months 37/49 months 37/49 months 37/49 months 37/49 months
Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185%
Initial overcollateralization required (2) 3.25 0.00 0.00 0.00 0.00
Final overcollateralization required (2) 6.50 3.75 3.75 3.75 3.75
</TABLE>
(1) CPR ("Constant Prepayment Rate") represents an industry standard of
calculating prepayment speeds. The Company uses a curve based on various
CPR levels throughout the pool's life, based on its estimate of
prepayment performance, as outlined in the table above. Approximately
2/3 of the loans in the Company's securitization transactions have a
"piggy-backed" second behind the first mortgage lien, creating a high
combined LTV for the customer, while reducing the Company's loss
exposure. Typically, high LTV loans are priced at a slower CPR than
traditional home equity loans and are expected to have less prepayment
volatility under changing interest-rate scenarios.
(2) Based on percentage of original principal balance, subject to step-down
provisions after 30 months.
41
<PAGE>
Each of the Company's Mortgage Loan securitizations have been
credit-enhanced by an insurance policy provided through a monoline insurance
company to receive ratings of "Aaa" from Moody's Investors Services, Inc.
("Moody's") and "AAA" from Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"). The Company plans to sell its
loans on a whole loan basis for the remainder of 1998 to provide improved cash
flow, and will evaluate its strategy of securitization versus whole loan sale on
a quarterly basis.
The Company expects to begin receiving Excess Cash Flow on its
Mortgage Loan securitizations approximately 16 months from the date of
securitization, although this time period may be shorter or longer depending
upon the securitization structure and performance of the loans securitized.
Prior to such time, the monoline insurer requires a reserve provision to be
created within the securitization trust which uses Excess Cash Flow to retire
the securitization bond debt until the spread between the outstanding principal
balance of the loans in the securitization trust and the securitization bond
debt equals a specified percentage (depending on the structure of the
securitization) of the initial securitization principal balance (the
"overcollateralization limit"). Once this overcollateralization limit is met,
excess cash flows are distributed to the Company. The Company begins to receive
regular monthly servicing fees in the month following securitization.
The Company originally used 50 basis points annual losses on its
first three mortgage securitization transactions, but in the fourth quarter of
1997, changed its loss assumption to 60 basis points per annum as a result of
projected higher than anticipated delinquencies within the securitization pools.
Also, in recent months, the prepayment speeds on the Company's Mortgage Loan
securitization pools have increased above the assumptions used in valuing the
residual receivables from the securitizations. The Company modified the
estimated prepayment speeds in the second quarter of 1998 on all of its mortgage
loan securitization transactions to peak at 25 CPR, up from the previous
prepayment speeds of 20 CPR. This modification resulted in a $7.3 million
write-down of the residual receivables in the second quarter of 1998.
The Company assesses the carrying value of its residual receivables
and servicing assets for impairment each quarter. These assets are carried at
their estimated fair market value. During the six months ended June 30, 1998,
the Company wrote-down the valuation of its mortgage residual receivables by
$8.9 million as a result of higher than anticipated mortgage loan prepayments
for the six months ended June 30, 1998. There can be no assurance that the
Company's estimates used to determine the gain on sale of loans, residual
receivables, and servicing assets valuations will remain appropriate for the
life of each securitization.
The following table shows actual prepayment speeds versus projected
prepayment speeds (assumptions used in the Company's calculation of residual
receivables and gain on sale) for each mortgage securitization transaction.
<TABLE>
<CAPTION>
Actual CPR
------------------------------------------------------------------------------------------------
Month From Projected
Inception CPR 1997-1 1997-2 1997-3 1997-4 1998-1
--------- --- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1 0.00% -0.36% 1.49% 0.00% 2.52% 3.81%
2 2.27% 4.30% 5.24% 3.16% 2.48% 6.17%
3 4.54% 3.48% 5.21% 4.58% 3.91% 10.90%
4 6.81% 10.58% 1.95% 7.88% 9.27% 13.62%
5 9.08% 5.90% 14.53% 6.43% 7.02%
6 11.35% 9.95% 11.28% 8.81% 8.64%
7 13.62% 19.95% 19.96% 13.36% 9.52%
8 15.89% 12.06% 12.29% 22.53%
9 18.16% 12.64% 14.28% 14.90%
10 20.43% 16.14% 23.01% 17.06%
11 22.70% 17.35% 24.97%
12 25.00% 26.21% 27.69%
13 25.00% 21.46% 30.72%
14 25.00% 35.92%
15 25.00% 44.87%
16 25.00% 30.91%
17 25.00%
18 25.00%
CUMULATIVE 17.93% 15.35% 10.12% 6.24% 8.71%
</TABLE>
42
<PAGE>
The following table sets forth facts and assumptions used by the
Company in arriving at the valuation of the residual receivables relating to its
unguaranteed SBA Loan securitizations at June 30, 1998:
<TABLE>
<CAPTION>
1995-1 1996-1 1997-1
------------------ ----------------------- --------------------
<S> <C> <C> <C>
Loans remaining in securitization pool $7,607,622 $14,669,588 $ 19,881,542
Weighted average spread over Wall
Street Journal Prime Rate 2.75% 2.66% 2.48%
Weighted average original term to stated maturity 180 months 247 months 258 months
Weighted average original loan-to-value 55% 63% 67%
Spread under prime rate to investor 1.35% 1.80% 2.00%
Estimated annual losses assumed 2.25% 1.25% 1.25%
Annual servicing fee 0.40% 0.40% 0.40%
Discount rate applied to cash flow
after spread account 10.50% 10.50% 10.50%
Prepayment speed assumptions:
Initial CPR 0 CPR 0 CPR 0 CPR
Peak CPR 25 CPR 12 CPR 12 CPR
Tail CPR 15 CPR 11 CPR 11 CPR
CPR ramp period from inception date 12 months 12 months 12 months
CPR peak period from inception date 36 months 36 months 36 months
CPR tail begins from inception date 37 months 37 months 37 months
Annual trustee fee $ 8,000 $ 8,000 $ 8,000
Initial spread account required 2% 2% 2%
Final spread account required 4% 4% 6%
Subordinate piece retained 10% 9% 10%
</TABLE>
The gains recognized into income resulting from securitization
transactions vary depending on the assumptions used, the specific
characteristics of the underlying loan pools, and the structure of the
transaction. The Company believes the assumptions it has used are appropriate
and reasonable.
ACCOUNTING CONSIDERATIONS
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. This Statement establishes standards for the
method that public entities report information about operating segments in
interim and annual financial statements. Statement No. 131 is not required to be
applied to interim financial statements in the initial year of its application.
It also establishes standards for related disclosures about product and
services, geographical areas and major customers. The adoption of this standard
is not expected to have a material effect on the Company's financial reporting.
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. This Statement establishes
accounting and reporting standards for derivative instruments and for hedging
acticvities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company has not assessed the impact of this
standard.
TAX CONSIDERATIONS--NET OPERATING LOSS ("NOL")
As a result of operating losses incurred by the Company, the
Company has generated an NOL. 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, the Company believes that it has
had a maximum cumulative change of control of 33% during the relevant three-year
period. The Company had a federal NOL of approximately $56.3 million remaining
at June 30, 1998.
43
<PAGE>
HEDGING ACTIVITIES
The Company's profitability may be directly affected by fluctuations
in interest rates. While the Company monitors interest rates and from time to
time employs a strategy designed to hedge some of the risks associated with
changes in interest rates, no assurance can be given that the Company's results
of operations and financial condition will not be adversely affected during
periods of fluctuations in interest rates. The Company's interest rate hedging
strategy currently includes shorting interest rate futures and treasury
forwards, and entering into interest-rate lock agreements relating to loans
pending a securitization transaction. The Company currently does not hedge its
loans held for whole-loan sales or its loans held for investment purposes. Since
the interest rates on the Company's warehouse lines of credit used to fund and
acquire loans are variable and the rates charged on loans the Company originates
are fixed, increases in the interest rates after loans are originated and prior
to their sale could have a material adverse effect on the Company's results of
operations and financial condition. The ultimate sale of the Company's loans
generally will fix the spread between the interest rates paid by borrowers and
the interest rates paid to investors in securitization transactions with respect
to such loans, although increases in interest rates may narrow the potential
spread that existed at the time the loans were originated by the Company.
Without hedging these loans, increases in interest rates prior to sale of the
loans may reduce the gain on securitization and whole-loan sale transactions
earned by the Company. At June 30, 1998, the Company did not have any open
hedging positions.
IMPACT OF INFLATION
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates which affect the Company's ability to earn a
spread between interest received on its loans and the costs of its borrowings.
The profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and second
mortgage loan products. Generally, first mortgage production increases relative
to second mortgage production in response to low interest rates and second
mortgage production increases relative to first mortgage production during
periods of high interest rates. A significant decline in interest rates could
decrease the size of the Company's loan servicing portfolio by increasing the
level of loan prepayments. Additionally, to the extent servicing rights,
residual receivables have been capitalized on the books of the Company, higher
than anticipated rates of loan prepayments or losses could require the Company
to write down the value of such servicing rights and residual receivables,
adversely impacting earnings. Fluctuating interest rates may also affect the net
interest income earned by the Company resulting from the difference between the
yield to the Company on loans held pending sales and the interest paid by the
Company for funds borrowed under the Company's warehouse facilities.
YEAR 2000
A critical issue has emerged in the financial community and for
businesses in general regarding whether existing computer programs and systems,
many of which were designed to recognize only two digits in the date field, can
be modified in time to accommodate four digits in the date field as is necessary
to properly distinguish dates on and after January 1, 2000 from dates between
January 1, 1900 and December 31, 1999. The upcoming change in the century is
expected to cause many computer applications to create erroneous results or fail
completely if the problem is not corrected. The Company has established a Year
2000 team to oversee the identification, correction, reprogramming and testing
of the systems and software applications used by the Company and the companies
with which it interacts electronically for Year 2000 compliance as well as to
identify other possible risks associated with the Year 2000 problem. The Company
has completed a hardware, software and vendor interface inventory to identify
all components for testing. It is in the process of replacing and modifying
noncompliant systems of which it is aware. The Company has sent letters to
vendors to request information on Year 2000 compliance and testing arrangements.
A formal test plan is being refined and the Company currently plans to test its
systems prior to December 31, 1998.
Testing of internally developed software has begun.
A risk assessment is being developed by the Year 2000 team as part
of the project. This assessment is expected to be completed by July 1, 1998.
Although the Company has not fully evaluated the cost of modifying and replacing
its systems aimed at achieving Year 2000 compliance, such costs are not
currently expected to be material to the Company's results of operations,
financial condition, and liquidity. The inability of the Company or the parties
with whom it electronically interacts to successfully address Year 2000 issues
could result in interruptions in the Company's business and have a material
adverse effect on its financial condition.
44
<PAGE>
PART II. OTHER INFORMATION
45
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
1. On April 27, 1998, Capital City Acceptance, Inc.
("Capital City") filed an arbitration demand against the
Company with the American Arbitration Association in
Charlotte, NC. This demand arises from Capital City's
attempted purchase of Emergent's Auto Loan subsidiaries
in January, 1998, and subsequent failed purchase of the
remaining assets of Emergent's Auto Loan Division
(valued by Emergent at less than $500,000) after sale of
substantially all of the assets of the Auto Loan
Division to an unrelated third party. Capital City
asserts claims for breach of contract, appropriation,
slander, libel, and fraud in the inducement and requests
actual damages in the amount of $5.2 million, injunctive
relief, and punitive damages in an unspecified amount.
Emergent has counterclaimed against Capital City and
brought a third-party claim against its principal,
Robert A. Zander, for conversion, fraud, breach of
contract accompanied by a fraudulent act,
misappropriation of trade name, breach of contract,
breach of warranty, and defamation and is vigorously
contesting Capital City's claims.
2. Ikbal Gaibi-Rodriguez sued the Company, HomeGold,
Inc., and Carolina Investors, Inc. in U.S. District
Court for the District of Puerto Rico on a breach of
contract claim, alleging that the defendants failed to
comply with the terms of a Confidentiality Agreement,
Development Agreement and Employment Agreement. The
plaintiff sought in excess of $26,000,000 in damages.
Defendant's motion to dismiss was granted in January
1998. Plaintiff has appealed to the U.S. Court of
Appeals for the First Circuit, and oral arguments are
currently scheduled for October 1998.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The shareholders of the Company voted on the
election of directors and two other proposals at
the Annual Meeting of Shareholders held on June
10, 1998.
1. Election of Directors. Approved.
For Against
--- -------
Clarence B. Bauknight 7,975,602 189,350
Larry G. Blackwell 7,995,966 168,986
Keith B. Giddens 7,975,602 189,350
Tecumseh Hooper, Jr. 7,975,602 189,350
Buck Mickel 7,978,576 186,376
J. Robert Philpot, Jr. 7,975,602 189,350
Porter B. Rose 7,995,966 168,986
John M. Sterling, Jr. 7,975,602 189,350
2. Proposal to amend the Company's Articles of
Incorporation for the name change to HomeGold
Financial, Inc. Approved.
For 7,986,390
Against 156,944
Abstained 21,617
3. Proposal to amend the Company's 1995 Employer and
Officer Stock Option Plan to increase stock options
available thereunder for grant by 350,000. Approved.
For 7,283,877
Against 817,904
Abstained 63,170
46
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1-- Articles of Amendment dated June
10, 1998.
10.3-- Mortgage Loan Warehousing
Agreement dated June 30, 1998
between HomeGold, Inc. and
Carolina Investors, Inc., as
Borrowers, and the Financial
Institutions Party Thereto and
the CIT Group/Business Credit,
Inc., as Administrative Agent:
Incorporated by reference to
exhibit 10.1 of the Company's
Current Report on Form 8-K dated
July 7, 1998 (Commission File
No. 0-8909).
10.4-- Loan and Security Agreement
dated as of June 9, 1998 between
NationsBank, N.A. as Lender, and
Reedy River Ventures Limited
Partnership as Borrower.
27.1-- Financial Data Schedule.
b) Reports on Form 8-K
1) On July 7, 1998, the Company filed
a Form 8-K with respect to its new,
three-year, $200 million bank line
credit facility.
2) On July 10, 1998, the Company filed
a Form 8-K with respect to its name
changing to HomeGold Financial,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEGOLD FINANCIAL, INC.
Date: August 14, 1998
By: \s\ Kevin J. Mast
----------------------------------------
Kevin J. Mast,
Vice President, Chief Financial Officer,
And Treasurer
47
Exhibit 3.1
- ---------------------------
SECRETARY OF STATE
FILED
JUNE 24 1998
AM PM
- ---------------------------
7|8|9|10|11|12|1|2|3|4|5|6|
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF AMENDMENT
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as amended,
the undersigned corporation adopts the following Articles of Amendment to its
Restated Articles of Incorporation dated May 27, 1997:
1. The name of the corporation is Emergent Group, Inc.
2. On June 10, 1998 the corporation adopted the following Amendment to its
Articles of Incorporation:
"RESOLVED, that Section 1 of the Restated Articles of Incorporation is
hereby deleted and replaced with the following:
(1) The name of the corporation shall be HomeGold Financial, Inc."
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert "not
applicable" or "NA").
Not Applicable
4. Complete either a or b, whichever is applicable.
x
a. _____ Amendment(s) adopted by shareholder action.
At the date of adoption of the amendment, the number of
outstanding shares of each voting group entitled to vote
separately on the Amendment, and the vote of such shares was:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of Number of Number of Votes Number of Undisputed*
Voting Outstanding Votes Entitled Represented at Shares Voted
Group Shares to be Cast the Meeting For Against
- ----- ------ ---------- ----------- ---------------------
Common 9,708,083 9,708,083 8,164,951 7,986,390 156,944
</TABLE>
b. ______ The Amendment(s) was duly adopted by the incorporators or board
of directors without shareholder approval pursuant to Section
33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South Carolina
Code as amended, and shareholder action was not required.
5. The effective date of these Articles of Amendment shall be July 1, 1998.
Date: June 10, 1998
Emergent Group, Inc.
(Name of Corporation)
/s/ John M. Sterling, Jr.
By: ---------------------------------
CEO
98-025919CC
CERTIFIED TO BE A TRUE AND CORRECT COPY
AS TAKEN FROM AND COMPARED WITH THE
ORIGINAL ON FILE IN THIS OFFICE.
JUL 09 1998
/s/ signature illegible
- ---------------------------------------
SECRETARY OF STATE OF SOUTH CAROLINA
------------------------------
LOAN AND SECURITY AGREEMENT
dated as of June 9, 1998
between
NationsBank, N.A.
as Lender,
and
Reedy River Ventures Limited Partnership
as Borrower.
$10,000,000
------------------------------
<PAGE>
TABLE OF CONTENTS
Section Page
------- ----
1. DEFINITIONS AND ACCOUNTING TERMS..........................................1
1.1 DEFINITIONS........................................................1
1.2 ACCOUNTING TERMS...................................................6
1.3 USE OF DEFINED TERMS...............................................6
1.4 SECTION AND EXHIBIT REFERENCES, ETC................................6
2. AMOUNT AND TERMS OF THE LOANS.............................................7
2.1 THE LOANS..........................................................7
2.2 REPAYMENT OF THE OBLIGATIONS.......................................7
2.3 INTEREST AND OTHER CHARGES.........................................7
2.4 COMPUTATION OF INTEREST AND OTHER CHARGES..........................8
2.5 CHARGES............................................................9
2.6 PAYMENT............................................................9
2.7 PAYMENT ON NON-BANKING DAYS........................................9
2.8 EFFECTIVE DATE AND TERMINATION.....................................9
2.9 STATEMENTS OF ACCOUNT.............................................10
3. SECURITY INTERESTS.......................................................10
4. CONDITIONS PRECEDENT TO ADVANCES.........................................10
4.1 DOCUMENTS.........................................................11
4.2 OTHER CONDITIONS PRECEDENT........................................11
5. CLOSING PROCEDURES.......................................................12
6. GENERAL REPRESENTATIONS AND WARRANTIES...................................12
6.1 ORGANIZATION, STANDING, ETC.......................................12
6.2 ENFORCEABILITY....................................................13
6.3 QUALIFICATION.....................................................13
6.4 COMPLIANCE WITH CERTIFICATE AND AGREEMENT OF LIMITED
PARTNERSHIP AND OTHER INSTRUMENTS, ETC..........................13
6.5 SUBSIDIARIES; PARTNERS............................................14
6.6 FINANCIAL STATEMENTS..............................................14
6.7 CHANGES IN FINANCIAL CONDITION....................................14
6.8 TAX RETURNS AND PAYMENTS..........................................14
6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC........................14
6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC.............................15
6.11 LITIGATION, ETC..................................................15
6.12 ADVERSE DEVELOPMENTS.............................................15
6.13 DISCLOSURE.......................................................15
-i-
<PAGE>
6.14 MARGIN SECURITIES................................................16
6.15 INVESTMENT COMPANY...............................................16
6.16 ERISA............................................................16
6.17 LOCATIONS........................................................16
6.18 SOLVENCY.........................................................16
6.19 NAME CHANGE; MERGER..............................................16
6.20 NECESSARY AUTHORIZATIONS.........................................16
6.21 YEAR 2000 COMPLIANCE.............................................17
7. AFFIRMATIVE COVENANTS....................................................17
7.1 INSURANCE.........................................................17
7.2 TAXES AND LIABILITIES.............................................17
7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC.............................18
7.4 INSPECTION........................................................19
7.5 MAINTENANCE OF LIMITED PARTNERSHIP EXISTENCE; COMPLIANCE WITH
LAWS............................................................19
7.6 USE OF PROCEEDS...................................................19
7.7 NOTICE OF DEFAULT.................................................19
7.8 MAINTENANCE OF PROPERTIES.........................................20
7.9 NOTICE OF ERISA DEVELOPMENTS......................................20
7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE...........................20
7.11 PAYMENT OF LOANS.................................................20
7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION..............21
7.13 TANGIBLE NET WORTH...............................................21
7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH.................21
7.15 INTEREST COVERAGE RATIO..........................................21
7.16 OWNERSHIP........................................................21
7.17 COLLATERAL REPORTING.............................................21
7.18 MAINTENANCE OF NECESSARY AUTHORIZATIONS..........................21
7.19 YEAR 2000 COMPLIANCE.............................................21
8. NEGATIVE COVENANTS.......................................................21
8.1 DEBT..............................................................22
8.2 LIENS.............................................................22
8.3 GUARANTEES........................................................22
8.4 PLAN LIABILITIES..................................................22
8.5 FISCAL YEAR.......................................................23
8.6 OTHER TRANSACTIONS................................................23
8.7 MERGER; SUBSIDIARY; ETC...........................................23
8.8 SALE OF ASSETS....................................................23
8.9 CHANGES IN BUSINESS...............................................23
8.10 DISTRIBUTIONS AND REDEMPTIONS....................................23
8.11 LOANS............................................................23
8.12 PLEDGE OF CREDIT.................................................24
8.13 INVESTMENTS......................................................24
9. POWER OF ATTORNEY........................................................24
-ii-
<PAGE>
10. REMEDIES................................................................24
11. MISCELLANEOUS...........................................................25
11.1 NO WAIVER; CUMULATIVE REMEDIES...................................25
11.2 AMENDMENTS, ETC..................................................25
11.3 ADDRESSES FOR NOTICES, ETC.......................................26
11.4 COSTS, EXPENSES, AND TAXES.......................................27
11.5 COMMERCIAL TRANSACTION...........................................27
11.6 SUCCESSORS AND ASSIGNS...........................................27
11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.......................27
11.8 TIME IS OF THE ESSENCE...........................................28
11.9 HEADINGS.........................................................28
11.10 ENTIRE AGREEMENT................................................28
11.11 SEVERABILITY....................................................28
11.12 COUNTERPARTS....................................................28
11.13 GOVERNING LAW; CONSENT TO JURISDICTION..........................28
11.14 WAIVER OF TRIAL BY JURY.........................................29
Exhibits:
Exhibit A-1 - - Form of EBCEG's Secretary's Certificate (Section 1.1)
Exhibit A-2 - - Form of EGI's Secretary's Certificate (Section 1.1)
Exhibit B-1 - - Form of EBCEG's President's Certificate (Section 1.1)
Exhibit B-2 - - Form of EGI's President's Certificate (Section 1.1)
Exhibit C - - Form of Opinion (Section 1.1)
Schedules:
Schedule 1 - - Liens (Section 8.2)
Schedule 2 - -Trademarks, Trade Names, Name Changes, etc. (Sections
6.10 and 6.19)
Schedule 3 - - Litigation (Section 6.11)
-iii-
<PAGE>
LOAN AND SECURITY AGREEMENT
This Agreement is made as of the 9th day of June, 1998 (the "EFFECTIVE
DATE"), between NationsBank, N.A., as lender (the "LENDER"), and Reedy River
Ventures Limited Partnership, a South Carolina limited partnership, as
borrower (the "BORROWER").
The Borrower wants the Lender to finance the Borrower's portfolio of
commercial loans, and the Lender is willing to make such financing available
upon the conditions and terms set forth in this Agreement.
The Borrower and the Lender therefore agree as follows:
1. DEFINITIONS AND ACCOUNTING TERMS
1.1 DEFINITIONS. The following terms, when capitalized as in this
Section 1.1, shall have the following meanings:
"ADVANCE": the proceeds of a Loan disbursed by Lender to or for the
benefit of the Borrower.
"AFFILIATE" of any designated Person: another Person controlling,
controlled by, or under common control with such designated Person (but not
including the Lender), and shall include (x) the spouse, parents, brothers,
sisters, children, and grandchildren of such designated Person, (y) any
association, partnership, trust, entity, or enterprise in which such
designated Person is a director, officer, or general partner or in which such
designated Person together with Affiliates of such designated Person own in
the aggregate at least a 10% beneficial interest in assets, profits, or
losses, and (z) any Subsidiary of such designated Person.
"BANKING DAY": a day for dealings by and between banks, excluding
Saturday, Sunday, any legal holiday in Atlanta, Georgia, and any other day on
which banking institutions in Atlanta, Georgia are generally closed.
"BORROWING BASE": defined in Section 2.1(a).
"CLOSING FEE": defined in Section 2.3.
"CODE": the Internal Revenue Code of 1986, as amended.
"COLLATERAL": all property described in Section 3 hereof, and all the
Borrower's other property in which the Lender at any time has a security
interest or which at any time are in the Lender's possession or control.
<PAGE>
"DEFAULT": (x) an event, act, or condition that would be an Event of
Default but for the requirement(s) that notice be given or time elapse, or
(y) an Event of Default.
"EARLY TERMINATION DATE": the last Banking Day in the Initial
Warehouse Period, if the Early Termination Event occurs.
"EARLY TERMINATION EVENT": either (i) the Lender and the SBA shall not
have entered into a subordination agreement pursuant to which Liens on the
Collateral in favor of the SBA shall be subordinated to the Lender' Lien on
the Collateral; or (ii) the Borrower shall have notified the Lender in writing
of its election to participate in the "Just in Time" financing program offered
by the SBA.
"EBC": Emergent Business Capital, Inc.
"EBCEG": Emergent Business Capital Equity Group, Inc.
"EBCEG'S PRESIDENT'S CERTIFICATE": the Certificate of EBCEG's
President, substantially in the form of Exhibit B.
"EBCEG'S SECRETARY'S CERTIFICATE": the Certificate of EBCEG's
Secretary, substantially in the form of Exhibit A.
"EBIT": the total earnings of the Borrower and its consolidated
Subsidiaries from all sources, excluding extraordinary items, before
deducting interest or income tax expense, but after deducting depreciation
and amortization expense.
"ECM": Emergent Commercial Mortgage, Inc.
"EGI": Emergent Group, Inc.
"EGI'S PRESIDENT'S CERTIFICATE": the Certificate of EGI's President,
substantially in the form of Exhibit B.
"EGI'S SECRETARY'S CERTIFICATE": the Certificate of EGI's Secretary,
substantially in the form of Exhibit A.
"EFC": Emergent Financial Corp.
"ELIGIBLE LOAN": a commercial loan in respect of which (1) the Borrower
holds the legal documentation evidencing such loan, (2) is not past due more
than 30 days on principal or interest, (3) after the expiration of the Initial
Warehouse Period, has not been warehoused under the facility evidenced by this
Agreement for more than the Warehouse Period applicable to such commercial
loan, and (4) meets all the Lender's other funding requirements which may be
imposed with respect to the loan involved in good faith and in its sole
discretion.
-2-
<PAGE>
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended.
"EVENT OF DEFAULT": any of the following: (1) non-payment, within seven
days after the due date, of any amount payable on any of the Obligations; (2)
failure to perform any material agreement or meet any obligation of the
Borrower or any of its Affiliates contained herein; (3) nonpayment when due of
any premium on any insurance policy required to be maintained under Section
7.1 hereof; (4) the existence of a default under any other agreement between
the Borrower, ECM, EBC or EFC and the Lender or any Affiliate of the Lender;
(5) any statement, representation, or warranty of the Borrower made in writing
herein or in any other writing at any time furnished or made by the Borrower
to the Lender is untrue in any material respect as of the date furnished or
made; (6) suspension of the operation of the Borrower's present business; (7)
any Obligor becomes insolvent or unable to pay debts as they mature, admits in
writing that it is so, makes a conveyance fraudulent as to creditors under any
state or federal law, or makes an assignment for the benefit of creditors, or
a proceeding is instituted by or against any Obligor alleging that such
Obligor is insolvent or unable to pay debts as they mature, or a petition
under any provision of Title 11 of the United States Code (entitled
"Bankruptcy"), as amended, is brought by or against any Obligor; (8) the entry
of any judgment for more than $50,000 against any Obligor other than EGI or
$1,000,000 against EGI; PROVIDED, that the entry of such judgment shall not
constitute an Event of Default so long as the applicable Obligor is both
diligently appealing such judgment through appropriate proceedings and has
created an appropriate reserve in respect of such judgment; (9) creation,
assertion, or filing of any Lien (other than a Permitted Lien) against any of
the property of the Borrower; (10) dissolution, merger, or consolidation of
any Obligor (other than a merger or consolidation of the Borrower with or into
the Guarantor or any wholly owned Subsidiary of the Guarantor); (11)
termination or withdrawal of any guarantee for any of the Obligations, or the
failure for any other reason of any such guarantee or agreement to be
enforceable by the Lender in accordance with its terms; (12) transfer of a
substantial part of the property of any Obligor; (13) sale, transfer, or
exchange, either directly or indirectly, of a controlling interest of the
Borrower, other than to the Guarantor or any wholly-owned Subsidiary of the
Guarantor; (14) appointment of a receiver for the Collateral or for any
property in which the Borrower has an interest; (15) seizure of the Collateral
by any third party; (16) at least 25% (face value) of the Borrower's loan
portfolio are at least 90 days past due, and have remained at least 90 days
past due for at least 30 days; or (17) the Lender in good faith believes that
the prospect of payment or performance of the Obligations has been materially
and adversely impaired.
"GAAP": generally accepted accounting principles applied in a manner
consistent with the financial statements described in Section 6.6.
"GENERAL PARTNERS": EBCEG and EGI.
"GUARANTEE": the document by that name, dated the date of this
Agreement, of the Guarantor, in favor of the Lender.
"GUARANTOR": EGI.
-3-
<PAGE>
"HEREIN", "HEREOF", "HEREUNDER", etc.: in, of, under, etc. this
Agreement (and not merely in, of, under, etc. the section or provision where
that reference appears).
"INCLUDING": containing, embracing, or involving the enumerated
item(s), but not necessarily limited to such item(s).
"INITIAL WAREHOUSE PERIOD": the period beginning on the Effective Date
and ending 270 days from the Effective Date.
"INSURANCE": the policy or policies of insurance described in Section
7.1, including all required endorsements thereto.
"INTEREST": interest expense of the Borrower and its consolidated
Subsidiaries during the period for which such computation is being made.
"LIEN": any mortgage, pledge, deed of trust, assignment, security
interest, encumbrance, hypothecation, lien, or charge of any kind, including
any conditional sale or other title retention agreement, any lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction.
"LOANS": the loan(s) under Section 2.1(a) in the principal amount of up
to $10,000,000, plus any Overadvances, made by the Lender to the Borrower
under this Agreement.
"NECESSARY AUTHORIZATIONS": as defined in Section 6.20.
"OBLIGATIONS": all present and future (a) duties, obligations, and
liabilities of the Borrower to the Lender under this Agreement, or under any
document or agreement executed and delivered pursuant to or in connection with
this Agreement, (b) sums owing to the Lender for goods or services purchased
by the Borrower from any other firm financed by the Lender, (c) obligations
under all notes and contracts of suretyship, guarantee, or accommodation made
by the Borrower in favor of the Lender, and (d) all other obligations of the
Borrower to the Lender, however and whenever created, arising, or evidenced,
whether direct or indirect, through assignment from third parties, absolute,
contingent, or otherwise, primary or secondary, now or hereafter existing, or
due or to become due.
"OBLIGOR": the Borrower, any guarantor, or any other party at any time
primarily or secondarily, directly or indirectly liable on any of the
Obligations.
"OPINION": the legal opinion, of counsel to the Borrower satisfactory
to the Lender, substantially in the form of Exhibit C.
"OR": at least one, but not necessarily only one, of the alternatives
enumerated.
-4-
<PAGE>
"OVERADVANCES": loans by the Lender to the Borrower in excess of those
described in Section 2.1(a).
"PERMITTED CONVERSION": as defined in Section 7.5(b).
"PERMITTED LIEN": a Lien permitted by Section 8.2.
"PERSON": any individual, joint venture, partnership, firm,
corporation, limited liability company, trust, unincorporated organization,
or other organization or entity, or a governmental body or any department or
agency thereof.
"PLAN": any present or future employee benefit plan (as defined in
Section 3 of ERISA) and any trust created thereunder, covered by Title I or
Title IV of ERISA, established or maintained for employees of the Borrower or
the Guarantor.
"PRIME RATE": the rate of interest announced by NationsBank, N.A. from
time to time as its "Prime Rate".
"PROJECTIONS": the Borrower's forecasted consolidated and consolidating
balance sheets, profit-and-loss statements, and cash-flow statements, all
prepared on a basis consistent with the Borrower's historical financial
statements, together with appropriate supporting details and a statement of
underlying assumptions.
"REPORTABLE EVENT": as defined in Title IV of ERISA.
"SBA": the Small Business Administration.
"SECURITIES": any share(s) of beneficial or equity interest or capital
stock or any other instrument commonly understood to be a "security",
excluding promissory notes issued for money borrowed in commercial
transactions.
"SOLVENT": has capital sufficient to carry on its business and
transactions and all business and transactions in which it is about to engage,
is able to pay its debts as they mature, and owns property having a value,
both at fair valuation and at present fair saleable value, greater than the
amount required to pay its debts.
"SUBSIDIARY" of any designated corporation: any other corporation more
than 20% of the shares of voting stock of which is owned, directly or
indirectly, by such designated corporation, including subsidiary of a
subsidiary.
"TANGIBLE NET WORTH": the total assets of the Borrower and its
consolidated Subsidiaries minus Total Liabilities (excluding from the
definition of total assets the amount of (a) any write-up in the book value of
any asset resulting from a revaluation thereof, (b) treasury stock, (c)
-5-
<PAGE>
Receivables and other amounts due from stockholders and other Affiliates, (d)
unamortized debt discount and expense and (e) patents, trademarks, trade
names, goodwill, deferred charges, organizational expenses and other
intangible assets, all determined in accordance with GAAP).
"TOTAL LIABILITIES": all obligations of the Borrower and its
consolidated Subsidiaries to pay money.
"WAREHOUSE PERIOD": for any commercial loan made by the Borrower, a
period of 180 days from the date such loan is disbursed.
1.2 ACCOUNTING TERMS. All accounting terms used herein shall be
construed in accordance with GAAP applied consistently with those principles
applied in the preparation of the financial statements referred to in Section
6.6, and all financial data submitted pursuant to this Agreement shall be
prepared in accordance with GAAP. In the event of ambiguities in GAAP, the
more conservative principle or interpretation shall be used.
1.3 USE OF DEFINED TERMS. Any defined term used in the plural preceded
by "the" encompasses all members of the relevant class. Any defined term used
in the singular preceded by "any" indicates any number of the members of the
relevant class. Any agreement or instrument referred to in Section 1.1, or the
term "Agreement", means such agreement or instrument as from time to time
supplemented and amended. A definition in singular form applies to the plural
form of the term, and vice versa.
1.4 SECTION AND EXHIBIT REFERENCES, ETC. References to sections,
exhibits, and the like refer to those in or attached to this Agreement unless
otherwise specified.
2. AMOUNT AND TERMS OF THE LOANS
2.1 THE LOANS. (a) REVOLVING LOANS. The Lender agrees to make loans to
the Borrower, and the Borrower agrees to borrow from the Lender, upon request
of the Borrower from time to time, up to 75% of the Borrower's Eligible Loans
(the sum of the Eligible Loans being the "BORROWING BASE"); PROVIDED, that the
total amount of all Loans outstanding at any time under this sentence shall
not exceed the lesser of the Borrowing Base and $10,000,000. The amounts of
such Loans shall be determined in the sole discretion of the Lender to be
consistent with the value of the Eligible Loans, taking into account all
fluctuations of the value thereof in light of the Lender's experience and
sound business principles. Such determinations shall be subject to the
requirements of good faith on the Lender's part, the Borrower's undertakings
hereunder, and especially the Borrower's grant to the Lender of a security
interest in the Collateral as security for the Loans and all other Obligations
of the Borrower to the Lender, which will, of necessity, fluctuate in amount,
and to the condition that the Lender at all times be fully secured. To the
extent necessary to reduce the total amount of all Loans outstanding to the
maximum amount then available under this Section 2.1, the Borrower shall pay
to the Lender, on demand, the amount of outstanding Loans in excess of that
maximum amount.
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An Eligible Loan shall be included in the Borrowing Base when the
Borrower has provided the Lender with a copy of the original loan
documentation for that loan (to the extent requested by the Lender), and such
other documentation as the Lender reasonably requests, by fax or otherwise.
(b) OVERADVANCES. The Lender may make Overadvances as, in its sole and
absolute discretion, it determines to lend. Any such Overadvances may be
evidenced by a written agreement between the Lender and the Borrower, which
agreement may provide, at the Lender's option, for interest and fees on such
Overadvances in addition to those specified hereunder. Except to the extent
otherwise provided in any such agreement, any such Overadvances shall be
"Loans", shall be repayable upon demand, and shall in all other respects be
subject to the terms and conditions of this Agreement.
2.2 REPAYMENT OF THE OBLIGATIONS. The Borrower (a) shall pay the then
outstanding principal balance of the Loans, together with all accrued interest
thereon, on the date on which this Agreement is terminated; and (b) shall pay
from time to time such portion of the outstanding principal balance of the
Loans, together with all accrued interest thereon, that exceeds the
limitations contained in Section 2.1 hereof, each such payment of excess
principal being due immediately upon the occurrence of such excess.
2.3 INTEREST AND OTHER CHARGES. The Loans shall bear interest on the
average daily net balance thereof, calculated monthly, at a fluctuating rate
of interest equal to the Prime Rate. Changes in the rate of interest shall be
effected monthly to reflect changes in the Prime Rate, as follows: The rate
shall be adjusted on the first day of each month based on the Prime Rate in
effect at the close of business on the last Banking Day of the preceding
calendar month. Interest shall be due and payable monthly, on the first day of
each month, for the preceding month. The final payment of all accrued and
unpaid interest shall be due and payable on the date that the outstanding
principal amount of the Loans is paid or due and payable in full. After an
Event of Default, interest shall also be due and payable upon the Lender's
demand from time to time.
The Lender shall inform the Borrower of the amount of interest due and
payable as of each payment date set forth in the preceding paragraph, and the
Borrower shall pay the interest when due or the Lender may, in its discretion,
charge such amount to the Borrower's account under this Agreement.
As additional consideration for the credit facility established in
Section 2.1, the Borrower agrees to pay to the Lender (a) a facility fee,
payable on the first day of each month for the preceding month, equal to the
average unused principal portion of the maximum loan facility hereunder (i.e.,
$10,000,000 minus the average daily principal amount of Loans outstanding)
times 0.125% per annum; and (b) a closing fee of $50,000 (the "CLOSING FEE"),
payable in three installments, with the first such installment of $16,700
being payable on the date on which the initial Advance is made hereunder, the
second such installment of $16,700 being payable on June 1, 1999, and the
third such installment of $16,600 being payable on June 1, 2000.
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For interest computation purposes, Borrower's account will be credited
for each remittance received on the day that the underlying funds are
collected; the day of receipt of funds shall be deemed to be the following
Banking Day if the receipt is after the Lender's cutoff time (which is 1:30
p.m. Eastern Standard Time) for receipt of funds or if such day is not a
Banking Day.
If the outstanding principal amount of the Loans becomes due and payable
or if any payment of principal or interest is not timely made, or (unless the
Lender notifies the Borrower to the contrary in writing) following the
occurrence and during the continuance of any Event of Default, interest shall
accrue on the unpaid principal balance of the Loans or on such defaulted
principal payment, from the date that the Loans became so due and payable or
that the defaulted payment was not timely made, as applicable, at a rate of 4%
per annum above the Prime Rate. Changes in the rate shall be effected monthly
to reflect changes in the Prime Rate as follows: The rate shall be adjusted on
the first day of each month based on the Prime Rate in effect at the close of
business on the last Banking Day of the preceding calendar month. Such
interest shall continue to accrue until the date of payment of all principal
and accrued but unpaid interest or such defaulted payment, as applicable, and
shall be due and payable upon demand from time to time by the Lender.
2.4 COMPUTATION OF INTEREST AND OTHER CHARGES. Interest on the Loans,
and other periodic charges hereunder, shall be computed on the basis of a
360-day year and actual days lapsed.
2.5 CHARGES. The Borrower and the Lender hereby agree that the only
charges imposed by the Lender upon the Borrower for the use of money in
connection herewith are and shall be the interest described in Section 2.2.
All other charges imposed by the Lender upon the Borrower in connection with
the Loans, any commitment fees, collection fees, letter of credit fees,
facility fees, origination fees, prepayment charges or early termination fees,
default charges, late charges, attorneys' fees, and reimbursement for costs
and expenses paid by the Lender to third parties, or for damages incurred by
Lender, are and shall be deemed to be charges made to compensate the Lender
for underwriting or administrative services and costs and other services or
costs performed and incurred, and to be performed and incurred, by the Lender
in connection with the Loans, and shall under no circumstances be deemed to be
charges for the use of money.
In no event shall the amount of interest due or payable hereunder exceed
the maximum rate of interest allowed by applicable law, and if any such
payment is made by the Borrower or received by the Lender, then such excess
sum shall be credited as a payment of principal, unless the Borrower notifies
the Lender, in writing, that the Borrower elects to have such excess sum
returned to it forthwith. It is the express intent hereof that the Borrower
not pay and the Lender not receive, directly or indirectly, in any manner
whatsoever, interest in excess of that which may be lawfully paid by the
Borrower under applicable law.
2.6 PAYMENT. All payments by the Borrower shall be made to the Lender at
its address referred to in Section 11.3 hereof in lawful money of the United
States of America and in immediately available funds.
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2.7 PAYMENT ON NON-BANKING DAYS. Except as expressly set forth herein to
the contrary, whenever any payment to be made hereunder shall be stated to be
due on a day which is not a Banking Day, such payment shall be made on the
following Banking Day, and such extension of time shall be included in the
computation of interest.
2.8 EFFECTIVE DATE AND TERMINATION. This Agreement shall be effective on
the Effective Date, and shall continue in full force and effect until December
29, 2000 and from year to year thereafter unless terminated on December 29,
2000 or any anniversary thereof by either party's giving to the other not less
than 60 days' prior written notice. Notwithstanding the foregoing, (i) the
Borrower shall have the right to terminate this Agreement by giving the Lender
not less than 30 days' prior written notice; and (ii) this Agreement shall
automatically terminate on the Early Termination Date if the Early Termination
Event occurs. If Borrower shall terminate this Agreement prior to December 29,
2000, Borrower shall pay the Lender an early termination fee equal to $35,000
for any termination before December 29, 1998, $17,500 for any termination on
or after December 29, 1998 but before December 29, 1999, and $8,750 for any
termination on or after December 29, 1999 but before December 29, 2000. No
termination fee shall be payable for any termination of this Agreement on or
after December 29, 2000, or if this Agreement is replaced by a new credit
agreement with the Lender, or if this Agreement terminates as a result of the
Early Termination Event.
Upon the occurrence and during the continuance of an Event of Default,
the Lender shall have the right to terminate this Agreement at any time
without notice.
Notwithstanding any termination of this Agreement, the Lender shall
retain all of its rights and remedies hereunder (including its security
interest in the Collateral), and the Borrower shall continue to be bound by
all the terms, conditions, and provisions hereof until all of the Obligations
of every nature have been fully disposed of, concluded, finally paid,
satisfied, and liquidated.
2.9 STATEMENTS OF ACCOUNT. The Lender shall render a statement of
account monthly, and, absent manifest error, such statement rendered by the
Lender shall bind the Borrower and the Lender (unless the Borrower or the
Lender notifies the other in writing to the contrary within 60 days after the
date of each statement rendered; and any such notice shall be deemed an
objection only to those items specifically objected to therein).
3. SECURITY INTERESTS
As security for the full payment and performance of the Obligations, the
Borrower hereby grants to the Lender a security interest in all of the
following property and interests in property of the Borrower, whether now
owned or existing or acquired or arising in the future or in which the
Borrower now has or in the future acquires any rights, and wherever located:
(a) all right, title, and interest in any loan made by the Borrower,
including all related documentation, and all guarantees, collateral, and other
security therefor,
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(b) all of the Borrower's accounts, inventory, general intangibles,
instruments, chattel paper, documents, equipment, and other goods,
(c) all accessions to, substitutions for, and replacements, products,
and proceeds of any of the foregoing, including insurance proceeds and rental
payments, and
(d) all books and records (including customer lists, credit files,
computer programs, print-outs, and other computer materials and records)
pertaining to any of the foregoing.
The Borrower shall execute and deliver all supplemental documentation
that the Lender from time to time requests to perfect or maintain the
perfection of the security interest granted in this Section, and shall pay (or
reimburse the Lender for) the cost of filing or recording any such
documentation, on demand.
4. CONDITIONS PRECEDENT TO ADVANCES
4.1 DOCUMENTS. The determination by the Lender to make Advances is
subject to the Lender's having received the following, in form and substance
satisfactory to the Lender:
(a) the Guaranty,
(b) EBCEG's Secretary's Certificate,
(c) EGI's Secretary's Certificate,
(d) EBCEG's President's Certificate,
(e) EGI's President's Certificate,
(f) certified copies of all documents evidencing other necessary
corporate action and governmental approvals, if any, with respect to
this Agreement,
(g) the Opinion,
(h) appropriate UCC-1 financing statements,
(i) the documentation described in Section 5.1 for each loan for
which an Advance is made, and
(j) such other documentation as the Lender reasonably requests.
4.2 OTHER CONDITIONS PRECEDENT. In addition to the foregoing, any
obligation of the Lender to make each Advance is subject to the following
conditions precedent: (a) the
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representations and warranties contained in Section 6 (except 6.13, 6.17, and
6.19) hereof shall be correct on and as of the date of the Advances with the
same effect as though made on and as of such date, except to the extent that
such representations and warranties relate solely to an earlier date; (b) since
the date of the statements referred to in Section 6.6 hereof, no materially
adverse change shall have occurred in the Borrower's business, prospects,
condition, affairs, operations, or assets, nor in its right or ability to carry
on its operations; (c) no Default shall exist or would result from the Advance;
(d) the Lender in its reasonable discretion determines that such Advance will be
fully secured, as provided for in Section 2.1, and will not cause the
outstanding balance of the Loans to exceed the limits described in Section 2.1;
(e) the Lender shall be satisfied in its reasonable discretion that all
necessary approvals have been obtained from the SBA for such Advance; and (f) in
the case of the first Advance, the Lender shall have received from the Borrower
the first installment of the Closing Fee (which may be paid by the Lender's
deducting that amount from the first Advance hereunder). The Closing Fee shall
be non-refundable; provided, however, that if the Borrower shall be required to
repay the outstanding principal balance of the Loans following an Early
Termination Event, then (i) the Lender agrees that it shall refund an amount
equal to $16,700 multiplied by a fraction, (x) the numerator of which shall be
twelve (12) minus the number of months that have elapsed from the Effective Date
to the date of such prepayment, rounded up to the next whole month, and (y) the
denominator of which shall be twelve (12); and (ii) the Borrower's obligation to
pay the remaining installments of the Closing Fee shall terminate.
5. CLOSING PROCEDURES.
Before the Lender funds an Advance for an Eligible Loan, the Borrower
shall provide the Lender with a copy of all original loan documentation for
that loan (to the extent requested by the Lender), and such other
documentation as Lender reasonably requests, by fax or otherwise. The Borrower
shall deliver the original of each underlying note to the Lender by the fifth
Banking Day following the closing for the related Eligible Loan. In addition,
if the Borrower requests a Loan for which the Borrowing Base would be
insufficient without the Lender's having a perfected security interest in the
related underlying note, then if and to the extent that the Lender so
requests, the Borrower shall execute and deliver to the Lender the underlying
note and all other documents relating to that Eligible Loan, and properly
executed assignments of each such document, in recordable form acceptable to
the Lender in its sole discretion.
The originals of all such collateral, loan, and other documents shall be
held by the Borrower (other than the note(s), which shall be held by the
Lender) unless specifically requested by the Lender. The Lender may hold any
such specifically-requested documents until the Lender releases its security
interest in such Collateral (unless an Event of Default exists, in which case
the Lender shall have its right to pursue the rights and remedies).
Neither the Lender's execution of this Agreement nor its taking of any
action contemplated or permitted hereunder shall constitute or be deemed to be
an assumption of any of the Borrower's liabilities or obligations.
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6. GENERAL REPRESENTATIONS AND WARRANTIES.
In order to induce the Lender to enter into this Agreement and to make
Advances hereunder, the Borrower represents and warrants the following:
6.1 ORGANIZATION, STANDING, ETC. The Borrower is a limited partnership
(or, following a Permitted Conversion, a corporation) duly organized, validly
existing, and in good standing under the laws of South Carolina, and has all
requisite power and authority (limited partnership and otherwise) to own and
operate its properties and to carry on its business as now conducted and
proposed to be conducted; and the Borrower has all requisite power and
authority (limited partnership and otherwise) to execute, deliver, and perform
its obligations under this Agreement and all other documents executed in
connection therewith.
6.2 ENFORCEABILITY. This Agreement, and all other documents executed in
connection with the Loans, when delivered for value received, shall constitute
valid and binding obligations of the Borrower enforceable in accordance with
their terms.
6.3 QUALIFICATION. The Borrower is duly qualified, licensed, or
domesticated, and in good standing as a foreign limited partnership (or,
following a Permitted Conversion, a foreign corporation) duly authorized to do
business, in all jurisdictions in which the character of its properties owned
or the nature of its activities conducted makes such qualification, licensing,
or domestication necessary, except where the failure to be so qualified,
licensed or domesticated could not reasonably be expected to have a materially
adverse effect on (i) the Borrower's condition (financial or otherwise),
Collateral or any other assets or properties; (ii) the ability of the Borrower
to perform its obligations hereunder or under any other document, agreement or
instrument executed in connection herewith; or (iii) the Lender's rights and
remedies hereunder.
6.4 COMPLIANCE WITH CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP AND
OTHER INSTRUMENTS, ETC. (a) The Borrower is not in violation of any material
term of its certificate and agreement of limited partnership or other
organizational document (including, following a Permitted Conversion, the
Borrower's articles or certificate of incorporation and bylaws), and no event,
status, or condition has occurred or exists which upon notice or lapse of
time, or both, would constitute a violation thereof; (b) to the best of its
knowledge, the Borrower is not in violation of any material term of any
mortgage, indenture, or agreement relating to outstanding borrowings to which
it is a party, or of any judgment, decree, or order to which it is subject, or
of any other instrument, lease, contract, or agreement to which it is a party,
or of any statute, or governmental rule or regulation applicable to it, and no
event, status, or condition has occurred or exists which upon the giving of
notice or lapse of time, or both, would constitute a material violation of any
such term; (c) the Borrower's execution, delivery, and performance of this
Agreement and the other instruments and agreements provided for by this
Agreement to which the Borrower is, or is to be, a party, and the carrying out
of the transactions contemplated hereby and thereby have been duly authorized
by all requisite action on the part of the Borrower (limited partnership and
otherwise) and will not result in any violation of the certificate
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and agreement of limited partnership or any other organizational documents of
the Borrower (including, following a Permitted Conversion, the Borrower's
articles or certificate of incorporation and bylaws), or violate or constitute a
default under any term of anything described in clause (b) above, or result in
the creation of any mortgage, lien, encumbrance or charge upon any of the
properties or assets of the Borrower pursuant to any term of anything
described in clause (b) above; and (d) there is no term of anything described
in clause (b) above which materially adversely affects or in the future may
(so far as the Borrower can now foresee) materially adversely affect the
Borrower's business, prospects, condition, affairs, operations, properties, or
assets.
6.5 SUBSIDIARIES; PARTNERS. The Borrower has no Subsidiary. EGI owns,
directly or indirectly, 100% of the of the Borrower. The General Partners are
the only general partners of the Borrower.
6.6 FINANCIAL STATEMENTS. The Borrower has furnished the Lender with
copies of the fiscal year-end consolidated and consolidating balance sheet of
EGI and its consolidated subsidiaries as at December 31, 1997, and the
consolidated and consolidating statements of income and of cash flows of such
corporations for such fiscal year, which annual financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public accountants;
and copies of such financial statements for each month thereafter through
March 31, 1998, duly certified by the chief financial officer of EGI. Such
financial statements are complete and have been prepared in accordance with
GAAP applied on a basis consistent with the accounting principles applied in
the preceding fiscal period, and present fairly the financial condition of EGI
as at the dates indicated and the results of the operations of EGI for such
periods. Such financial statements show all liabilities (direct, indirect, and
contingent, including guarantee and surety obligations) of the Borrower and
the Guarantor as of the respective dates thereof, except those arising in the
ordinary course of business since the date of the last of such financial
statements.
6.7 CHANGES IN FINANCIAL CONDITION. Since the date of the March 31, 1998
financial statements referenced in Section 6.6, there has been no change in
the assets, liabilities, or financial condition of the Borrower or the
Guarantor from that set forth or reflected in the fiscal year-end balance
sheet referred to in Section 6.6, other than changes in the ordinary course of
business, none of which has been, either in any case or in the aggregate,
materially adverse.
6.8 TAX RETURNS AND PAYMENTS. All federal, state, and local tax returns
and reports of the Borrower or the Guarantor required to be filed have been
filed, and all taxes, assessments, fees, and other governmental charges upon
the Borrower or the Guarantor, or upon any of the properties, assets, incomes,
or franchises of either, which are due and payable in accordance with such
returns and reports, have been paid, other than those presently (a) payable
without penalty or interest, or (b) contested in good faith and by appropriate
and lawful proceedings prosecuted diligently. The aggregate amount of the
taxes, assessments, charges, and levies so contested is not material to the
condition (financial or otherwise) and operations of the Borrower or the
Guarantor. The charges, accruals, and reserves on the books of the Borrower
and the Guarantor in respect of federal, state, and local taxes for all fiscal
periods to date are adequate, and the
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Borrower knows of no unpaid assessment for additional federal, state, or local
taxes for any such fiscal period or of any basis therefor.
6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC. The Borrower has (a)
good and marketable title to its properties and assets, including the
Collateral and the properties and assets reflected in the fiscal year-end
balance sheet referred to in Section 6.6, except properties and assets
disposed of since the date of such balance sheet in the ordinary course of
business, and (b) good and marketable title to its leasehold estates and such
properties, assets, and leasehold interests are subject to no covenant,
restriction, easement, right, lease, or Lien, other than Permitted Liens.
6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC. The Borrower owns or has the
right to use all of the patents, trademarks, service marks, trade names,
copyrights, franchises, and licenses, and rights with respect thereto,
necessary for the conduct of its business as now conducted, without any known
conflict with the rights of others, and, in each case, subject to no Lien,
lease, license, or option, except as specified on Schedule 2. Each such asset
or agreement is in full force and effect, and the holder thereof has fulfilled
and performed all of its obligations with respect thereto. No event has
occurred or exists which permits, or after notice or lapse of time or both
would permit, revocation or termination, or which materially adversely affects
or in the future may materially adversely affect, the rights of such holder
thereof with respect thereto. No other license or franchise is necessary to
the operations of the business of the Borrower as now conducted or proposed to
be conducted. The Borrower does not do business (and has not done business
since the date that it was formed) under any trade names or tradestyles other
than those listed on Schedule 2.
6.11 LITIGATION, ETC. Except as specified on Schedule 3, there are no
actions, proceedings, or investigations, however described or denominated,
pending or (to the knowledge of the Borrower) threatened (or any basis
therefor known to the Borrower) which, either in any case or in the aggregate,
might result in any materially adverse change in the Borrower's or the
Guarantor's business, prospects, condition, affairs, operations, properties,
or assets, or in its right or ability to carry on its operations as now
conducted or proposed to be conducted, or might result in any material
liability on the part of the Borrower or the Guarantor, and none which
questions the validity of this Agreement or any of the other instruments or
agreements provided for by this Agreement or of any action taken or to be
taken in connection with the transactions contemplated hereby or thereby.
6.12 ADVERSE DEVELOPMENTS. Since the date of the latest financial
statements referred to in Section 6.6, neither the financial condition,
business operations, affairs, or prospects of the Borrower or the Guarantor,
nor the properties or assets of either, have been materially adversely
affected in any way as the result of any legislative or regulatory change, or
any revocation, amendment, or termination, or any pending or threatened such
action, or any franchise or license or right to do business, or any fire,
explosion, flood, drought, windstorm, earthquake, accident, casualty, labor
trouble, riot, condemnation, requisition, embargo or Act of God or the public
enemy or of armed forces, or otherwise, whether or not insured against.
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6.13 DISCLOSURE. Neither this Agreement nor the financial statements
referred to in Section 6.6 nor any other document, certificate or statement
furnished to Lender by or on behalf of the Borrower or the Guarantor in
connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein or herein not misleading.
6.14 MARGIN SECURITIES. The Borrower is not engaged principally or as
one of its important activities in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System). No part
of the proceeds of the Loans has been or will be used, directly or indirectly,
to purchase or carry any margin securities within the meaning of Regulation U.
6.15 INVESTMENT COMPANY. The Borrower is not an "investment company"
within the meaning of Section 3 of the Investment Company Act of 1940, as
amended.
6.16 ERISA. The Borrower, the Guarantor, and each Plan is in compliance
with those portions of ERISA and the Code pertaining to each Plan. No Plan
that is subject to the minimum funding standards of ERISA or the Code has
incurred any accumulated funding deficiency within the meaning of ERISA or the
Code. Neither the Borrower nor the Guarantor has incurred, and no facts lead
the Borrower to believe it or the Guarantor will incur, any liability to the
Pension Benefit Guaranty Corporation in connection with any Plan. The assets
of each Plan that is subject to Title IV of ERISA are sufficient to provide
the benefits under such Plan which the Pension Benefit Guaranty Corporation
would guarantee the payment thereof if such Plan terminated, and are also
sufficient to provide all other benefits due under the Plan. No Reportable
Event has occurred and is continuing with respect to any Plan. No Plan nor any
trust created under a Plan, nor any trustee or administrator thereof, has
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) which would subject any Plan, any trust created
thereunder, or any trustee or administrator thereof, or any party dealing with
any Plan or any such trust, to the tax or penalty on "prohibited transactions"
imposed by Section 502 of ERISA or Section 4975 of the Code.
Neither the Borrower nor the Guarantor is required to contribute to or
is contributing to a "multiemployer pension plan" (as defined in the
Multiemployer Pension Plan Amendments Act of 1980), and neither the Borrower
nor the Guarantor has any "withdrawal liability" (as defined in such Act) to
any multiemployer pension plan.
6.17 LOCATIONS. The Borrower's principal place of business and chief
executive office is located at its address specified in Section 11.3.
6.18 SOLVENCY. The Borrower is Solvent.
6.19 NAME CHANGE; MERGER. During the past five years, the Borrower has
not changed its corporate name or been party to a merger or consolidation,
except as specified in Schedule 2.
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6.20 NECESSARY AUTHORIZATIONS. The Borrower has been duly licensed as a
Small Business Investment Company by the SBA, and has all other material
permits, licenses, franchises, consents, authorizations and approvals from all
governmental authorities, including, without limitation, the SBA, and all
other Persons in each case necessary or desirable for the conduct of the
Borrower's business (collectively, the "NECESSARY AUTHORIZATIONS"). Each such
Necessary Authorization is in full force and effect, and the Borrower has
fulfilled and performed all of its obligations with respect thereto. No event
has occurred or exists which permits, or after notice or lapse of time or both
would permit, revocation or termination, or which materially adversely affects
or in the future may materially adversely affect, the rights of the Borrower
with respect to any Necessary Authorizations. No other material license or
franchise is necessary to the operations of the business of the Borrower as
currently conducted.
6.21 YEAR 2000 COMPLIANCE. EGI has (a) initiated a review and assessment
of all areas within its and each of its Subsidiaries' (including the
Borrower's) business and operations (including those affected by suppliers,
vendors and customers) that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by the Borrower or
any of its Subsidiaries (or suppliers, vendors and customers) may be unable to
recognize and perform properly date-sensitive functions involving certain
dates prior to and any date after December 31, 1999), (b) developed a plan and
timeline for addressing the Year 2000 Problem on a timely basis, and (c) to
date, implemented that plan in accordance with that timetable. Based on the
foregoing, the Borrower believes that all computer applications (including
those of its suppliers, vendors and customers) that are material to its or any
of its Subsidiaries' business and operations are reasonably expected on a
timely basis to be able to perform properly date-sensitive functions for all
dates before and after January 1, 2000 (that is, be "YEAR 2000 COMPLIANT").
7. AFFIRMATIVE COVENANTS.
The Borrower covenants, for so long as any Loan is outstanding or any of
the other Obligations remains unpaid or unperformed, as follows:
7.1 INSURANCE. The Borrower shall insure its property against all risks
to which it is exposed, including loss, damage, fire, theft, and all other
such risks, and in such amounts, as would be prudent for similar businesses
similarly situated, including loss, damage, fire, theft, and all other such
risks, and in such amounts, with such companies, under such policies, and in
such form as shall be reasonably satisfactory to the Lender. In addition, the
Borrower will maintain comprehensive public liability and worker's
compensation insurance and such other insurance against loss or damage as are
customarily carried by corporations similarly situated, with reputable
insurers, in such amounts, with such deductibles, and by such methods as shall
be adequate and in any event in amounts of not less than the amounts generally
maintained by other companies engaged in similar businesses.
7.2 TAXES AND LIABILITIES. The Borrower shall pay and discharge, when
due, all taxes, assessments, and governmental charges or levies imposed upon
it or its income or profits, or
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against its properties, and all lawful claims which, if unpaid, might become a
lien or charge upon any of its properties; PROVIDED, that the Borrower shall not
be required to pay any such tax, assessment, charge, levy, or claim so long as
it is being contested in good faith and by appropriate and lawful proceedings
diligently pursued and with respect to which adequate reserves have been set
aside on its books.
7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC. The Borrower will deliver to
Lender:
(a) within 30 days after the end of each of the first 11 months in
each fiscal year of the Borrower a consolidating balance sheet of the Borrower
and its consolidated Subsidiaries together with a separate balance sheet for
EBCEG, if such balance sheet has not been combined with the Borrower's balance
sheet, in each case as at the end of such period and statements of income and
of cash flows of such corporations for such period and for the year-to-date
period then ended, setting forth in each case in comparative form the figures
for the corresponding period of the previous fiscal year, in form and detail
as reasonably required by the Lender, and certified as complete and correct by
the Vice President/Finance of EBCEG, together with a certificate by the
President of each General Partner stating that, as of the date of such
certification, no Default exists (or, if any Default exists, specifying the
nature thereof and what action the Borrower has taken, is taking or proposes
to take with respect thereto);
(b) within 90 days after the end of each fiscal year, a
consolidated balance sheet of EGI and a consolidating balance sheet of EGI and
its consolidated subsidiaries (including the Borrower) as at the end of such
fiscal year, and statements of profit and loss, shareholders' equity, and
changes in cash flows of such corporations for such year, setting forth in
each case in comparative form the figures for the previous fiscal year in form
and detail as reasonably required by the Lender, and accompanied by an
unqualified report and opinion on such financial statements (including on the
supplemental schedules) from KPMG Peat Marwick LLP (or other certified public
accountants reasonably satisfactory to the Lender), which report and opinion
shall be prepared in accordance with GAAP, together with a certificate by the
chief financial officer of EGI of the character specified in Section 7.3(a),
and a certificate by such accountants stating whether or not their examination
has disclosed the occurrence or existence of any Default, and, if their
examination has disclosed a Default, specifying the nature and period of
existence thereof, and demonstrating as at the end of such accounting period
in reasonable detail compliance during such accounting period with Sections
6.18, 7.6, 7.13, 7.14, 7.15, 8.10, 8.11, and 8.13;
(c) copies of all other statements or reports prepared by or
supplied to the Borrower by its accountants or auditors reflecting the
financial position of the Borrower;
(d) within 30 days after the end of each fiscal year, Projections
for the next three years, year-by-year; and
(e) with reasonable promptness, such other data and information as
the Lender from time to time reasonably requests.
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7.4 INSPECTION. The Borrower will permit authorized representatives
designated by the Lender (a) to visit and inspect any of the properties of the
Borrower, including its books and records (and to make extracts therefrom),
and to discuss its affairs, finances, and accounts with its officers,
directors, employees, and accountants, all at such reasonable times and as
often as the Lender reasonably requests, and (b) to attend the Borrower's
credit committee meetings. The Borrower will at all times keep accurate and
complete records with respect to the Collateral.
7.5 MAINTENANCE OF LIMITED PARTNERSHIP EXISTENCE; COMPLIANCE WITH LAWS.
(a) The Borrower shall at all times preserve and maintain in full force and
effect its limited partnership (or, following a Permitted Conversion,
corporate) existence, powers, rights, licenses, permits, and franchises in the
jurisdiction of its organization, and shall operate in full compliance with
all applicable laws, statutes, regulations, certificates of authority, and
orders in respect of the conduct of its business, and shall qualify and remain
qualified as a foreign limited partnership in each jurisdiction in which such
qualification is necessary or appropriate in view of its business and
operations.
(b) The Borrower has advised the Lender that, in order to comply with
regulatory requirements of the SBA applicable to the Borrower, it intends to
convert from a limited partnership to a corporation, which may occur through a
merger, asset transfer or otherwise. The Lender agrees that it shall not
unreasonably withhold its consent to such conversion, so long as (i) the
Borrower, or the Borrower's successor-in-interest, as the case may be,
executes and delivers, or causes to be executed and delivered, such
agreements, documents and instruments as the Lender may require to confirm the
enforceability of the this Agreement against the Borrower or the Borrower's
successor in interest, as the case may be (including, without limitation, the
enforceability of the obligation to pay or perform the Obligations), the
validity, perfection and priority of the Lender's Lien in the Collateral, the
enforceability of the Guarantee, and such other matters in connection
therewith as the Lender, in its sole judgment, may require (including, without
limitation, such opinions of counsel as the Lender may require); and (ii) such
conversion, in the sole judgment of the Lender, otherwise does not adversely
impact the Obligations, the Collateral, the validity, perfection or priority
of the Lender's Lien in the Collateral, or the Lender's rights hereunder or
under the Guarantee or any other Loan Document. A conversion by the Borrower
from a limited partnership to a corporation that has been consented to in
writing by the Lender is a "PERMITTED CONVERSION".
7.6 USE OF PROCEEDS. The proceeds of the Loans will be used solely for
repaying existing debt, for funding commercial loans and for general corporate
purposes. No part of the proceeds will be used to cause a violation of Section
6.14.
7.7 NOTICE OF DEFAULT. The Borrower shall promptly notify the Lender in
writing upon the occurrence or existence of any known Default, and shall
provide to the Lender with such written notice a detailed statement by a
responsible officer of the Borrower of all relevant facts and the action being
taken or proposed to be taken by the Borrower with respect thereto.
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7.8 MAINTENANCE OF PROPERTIES. The Borrower shall maintain or cause to
be maintained in good repair, working order, and condition all properties used
or useful in its business, and from time to time will make or cause to be made
all appropriate repairs, renewals, and replacement thereof. The Borrower will
not do or permit any act or thing which might impair the value or commit or
permit any waste of its properties or any part thereof or permit any unlawful
occupation, business, or trade to be conducted on or from any of its
properties.
7.9 NOTICE OF ERISA DEVELOPMENTS. As soon as possible and in any event
within 30 days after the Borrower knows or has reason to know of any
Reportable Event or "prohibited transaction" (as defined in Section 6.16) with
respect to any Plan or that the Pension Benefit Guaranty Corporation or the
Borrower has instituted or will institute proceedings under ERISA to terminate
a Plan subject to Title IV of ERISA, or a partial termination of a Plan has or
is alleged to have occurred, or any litigation regarding a Plan or naming the
trustee of a Plan or the Borrower or the Guarantor with respect to a Plan is
threatened or instituted, the Borrower shall provide to the Lender the written
statement of the chief financial officer of the Borrower setting forth details
of such Reportable Event, prohibited transaction, termination proceeding,
partial termination, or litigation and the action being or proposed to be
taken with respect thereto, together with copies of the notice of such
Reportable Event or any other notices, applications, or forms submitted to the
Pension Benefit Guaranty Corporation, Internal Revenue Service, or United
States Department of Labor, and copies of any notices or correspondence
received from the Pension Benefit Guaranty Corporation, Internal Revenue
Service, or United States Department of Labor, and copies of any pleadings,
notices, or other documents relating to such litigation.
7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE. The Borrower shall promptly
give to the Lender written notice (a) of all threatened or actual actions,
suits, investigations, or proceedings by or before any court, arbitrator, or
governmental department, commission, board, bureau, agency or other
instrumentality (state, federal, or foreign), affecting the Borrower or the
Guarantor or the rights or other properties of the Borrower or the Guarantor,
except any litigation or proceedings which is not likely to materially affect
the financial condition of the Borrower or the Guarantor or to impair the
right or ability of the Borrower or the Guarantor to discharge the
Obligations; (b) of any materially adverse change in the condition (financial
or otherwise) of the Borrower or the Guarantor; and (c) of any seizure or levy
upon any part of any of the Borrower's properties under any process or by a
receiver, which properties have an aggregate value equal to or in excess of
$5000.
7.11 PAYMENT OF LOANS. The Borrower shall punctually pay the principal
and interest on the Loans, and all other sums falling due hereunder or under
any other documents executed in connection with the Loans, in accordance with
the terms hereof and thereof.
7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION. The Borrower
shall notify the Lender immediately of each change in the Borrower's name and
trade names, in the location of the Borrower's principal place of business, in
each location where any of the Collateral is kept, and the office where the
Borrower's books and records are kept.
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7.13 TANGIBLE NET WORTH. The Borrower shall maintain at all times a
Tangible Net Worth of not less than $5,000,000 during 1998, $10,000,000 during
1999, and continuing to increase by $1,000,000 each fiscal year thereafter.
7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. The Borrower
shall maintain at all times a ratio of Total Liabilities to Tangible Net Worth
of not more than 4 to 1.
7.15 INTEREST COVERAGE RATIO. The Borrower shall maintain for the
four-quarter period concluding at the end of each fiscal year of the Borrower,
a ratio of EBIT to Interest of at least 1.5 to 1.
7.16 OWNERSHIP. EGI shall, directly or through a wholly owned
Subsidiary, own all of the interests (whether general partnership, limited
partnership, corporate or otherwise) of the Borrower.
7.17 COLLATERAL REPORTING. The Borrower shall provide to the Lender, on
a weekly basis, a borrowing base certificate in form acceptable to the Lender.
The Borrower shall provide to the Lender such other collateral reports as the
Lender may request from time to time.
7.18 MAINTENANCE OF NECESSARY AUTHORIZATIONS. The Borrower shall at all
times preserve and maintain in full force and effect each of its Necessary
Authorizations, including, without limitation, its Small Business Investment
Company license, and shall operate in full compliance with such Necessary
Authorizations.
7.19 YEAR 2000 COMPLIANCE. The Borrower will promptly notify the Lender
in the event the Borrower discovers or determines that any computer
application (including those of its suppliers, vendors and customers) that is
material to its or any of its Subsidiaries' business and operations will not
be Year 2000 Compliant (as defined in Section 6.21).
8. NEGATIVE COVENANTS.
The Borrower covenants, for so long as any of the Loans is outstanding
or any of the other Obligations remains unpaid or unperformed, as follows:
8.1 DEBT. The Borrower will not obtain or attempt to obtain from any
party (other than for the purpose of repaying the Obligations in full upon the
termination of this Agreement) any loans, advances, or other financial
accommodations or arrangements other than (a) the Obligations, (b) debt
underlying any purchase money security interest permitted by Section 8.2 not
to exceed, in aggregated principal amount, $100,000, (c) unsecured borrowings
not to exceed in the aggregate $500,000 minus any such debt owed by EBC, EFC
or ECM at any one time outstanding, (d) unsecured trade credit, incurred in
the ordinary course of business, having commercially customary terms, (e) debt
arising in connection with the issuance of debentures guaranteed by the SBA;
PROVIDED, that such debentures are fully subordinated to the Obligations on
terms and conditions satisfactory to the Lender, and (f) unsecured borrowings
from EGI or any Affiliate of EGI;
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PROVIDED, that such borrowings are fully subordinated to the Obligations on
terms and conditions satisfactory to the Lender.
8.2 LIENS. The Borrower shall not create, incur, assume, or suffer to
exist any Lien of any kind upon any of its property or assets (including the
Collateral), whether now owned or hereafter acquired, except (a) Liens in
favor of the Lender; (b) Liens existing on the date hereof and specified on
Schedule 1; (c) Liens on property securing all or part of the purchase price
of such property if (1) such Lien is created contemporaneously with the
acquisition of such property, (2) such Lien attaches only to the specific
item(s) of property so acquired, (3) such Lien secures only the debt incurred
to acquire such property, and (4) the debt secured by such Lien is permitted
by Section 8.1; (d) Liens for taxes, or for other claims, that are not then
due, and (e) Liens in favor of the SBA; PROVIDED ,that such Liens are fully
subordinated to the Liens in favor of the Lender on terms and conditions
satisfactory to the Lender.
8.3 GUARANTEES. The Borrower shall not guarantee, endorse, become surety
with respect to, or otherwise become directly or contingently liable for or in
connection with the obligations of any other Person, except by endorsement of
negotiable instruments for deposit or collection and similar transactions in
the ordinary course of business.
8.4 PLAN LIABILITIES. The Borrower shall not permit the aggregate
present value of accrued benefits of any Plan subject to Title IV of ERISA,
computed in accordance with actuarial principles and assumptions applied on a
uniform and consistent basis by an enrolled actuary of recognized standing
acceptable to the Lender, to exceed the aggregate value of assets of the Plan,
computed on a fair market value basis, or permit the aggregate present value
of vested benefits of any Plan subject to Title IV of ERISA, computed in
accordance with actuarial principles and assumptions applied on a uniform and
consistent basis by an enrolled actuary of recognized standing acceptable to
the Lender, to exceed the aggregate value of assets of the Plan, computed on a
fair market value basis.
8.5 FISCAL YEAR. The Borrower will not change its fiscal year from a
year ending on December 31 without prior written notice to the Lender.
8.6 OTHER TRANSACTIONS. The Borrower will not engage in any transaction
with any of its officers, directors, employees, or Affiliates, except for an
"arms-length" transaction on terms no more favorable to the other party than
would be granted to an unaffiliated Person, which transaction shall be
approved by its disinterested directors and shall be disclosed in a timely
manner to the Lender before being consummated.
8.7 MERGER; SUBSIDIARY; ETC. The Borrower will not merge or consolidate
with any other Person, form or acquire any Subsidiary, or issue any additional
partnership interests or capital stock to any Person other than EGI or a
wholly owned Subsidiary of EGI.
8.8 SALE OF ASSETS. The Borrower will not sell, lease or otherwise
transfer all or any substantial part of its assets material to its operations,
except in the ordinary course of its
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business; PROVIDED, that it may in any calendar year dispose of items of
equipment having an aggregate market value of not more than $250,000, minus any
such equipment disposed of by EBC, EFC or ECM, if the Borrower uses the proceeds
of such disposition to acquire property of a similar nature.
8.9 CHANGES IN BUSINESS. The Borrower will not engage in any business
other than the business presently conducted by it on the date of this
Agreement and business of substantially the same type or directly related
thereto.
8.10 DISTRIBUTIONS AND REDEMPTIONS. The Borrower will not declare or pay
any dividends or distributions to any holder of any partnership interest,
capital stock or other ownership interest of the Borrower, or apply any of its
property or assets to the purchase, redemption, or other retirement of, or set
apart any sum for the payment of any distributions in respect of, or for the
purchase, redemption, or other retirement of, or make any other distribution
by reduction of capital or otherwise in respect of, any partnership interest,
capital stock or other ownership interest of the Borrower; PROVIDED, that the
Borrower may make declare and pay dividends and other distributions in respect
of partnership interests or capital stock of the Borrower owned by EGI so long
as (i) there shall not then exist and be continuing any Default or Event of
Default; (ii) no Default or Event of Default shall result from such
declaration, payment or distribution; and (iii) the Guarantee executed by EGI
remains at all times in full force and effect.
8.11 LOANS. The Borrower will not make any loans or advances to or
extend any credit to any Person except (a) the extension of trade credit in
the ordinary course of business, (b) advances to employees not to exceed to
any one employee an outstanding total of $5,000 minus any advances to such
employee by EBC, EFC or ECM, and (c) loans which, in the reasonable and good
faith determination of the Borrower, constitute Eligible Loans when made.
8.12 PLEDGE OF CREDIT. The Borrower will not pledge the Lender's credit
for any purpose whatsoever.
8.13 INVESTMENTS. The Borrower shall not purchase, acquire, or otherwise
invest in any Person except: (a) loans which, in the reasonable and good faith
determination of the Borrower, constitute Eligible Loans when made, (b) equity
investments in borrowers of Eligible Loans, (c) direct obligations of the
United States of America maturing within one year from the acquisition
thereof, (d) certificates of deposit issued by, or investment accounts in,
banks or financial institutions having a net worth of not less than
$50,000,000, (e) commercial paper rated A-1 by Standard & Poor's Corporation
or P-1 by Moody's Investors Service, Inc., (e) overnight repurchase agreements
issued by the Lender, any corporate Affiliate of the Lender, or any other bank
having a net worth of $50,000,000 or more, or (f) assets received from
foreclosing on a loan.
9. POWER OF ATTORNEY.
The Borrower hereby appoints and constitutes the Lender as its
attorney-in-fact to do any of the following if an Event of Default exists: to
receive, open, and dispose of all mail addressed to
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the Borrower pertaining to Collateral (or appearing to the Lender possibly to
pertain to Collateral); to notify the postal authorities to change the address
and delivery of mail addressed to the Borrower to such address as the Lender
shall designate; to endorse the Borrower's name upon any notes, acceptances,
checks, drafts, money orders, and other forms of payment that come into the
Lender's possession, and to deposit or otherwise collect the same; to sign the
Borrower's name on any document relating to any Collateral; to execute in the
name of the Borrower any affidavits and notices with regard to any and all lien
rights; and to do all other acts and things necessary to carry out this
Agreement. The Borrower hereby waives notice of presentment, protest, and
dishonor of any instrument so endorsed by the Lender.
All the Lender's acts as attorney-in-fact are hereby authorized,
ratified, and approved by the Borrower, and the Borrower agrees that, as
attorney-in-fact, the Lender shall not be liable for any acts of omission or
commission, nor for any error of judgment or mistake of fact or law, except to
the extent of loss or damage caused directly and primarily by the Lender's
gross negligence or willful misconduct. This power, being coupled with an
interest, is irrevocable so long as this Agreement remains in effect or any of
the Obligations remains outstanding.
10. REMEDIES.
Upon the occurrence and during the continuance of any Event of Default,
the entire outstanding principal amount of the Loans, together with all
accrued but unpaid interest thereon, and all other of the Obligations shall,
at the option of the Lender, immediately become absolute and due and payable,
without presentation, demand of payment, protest, notice for demand of
payment, protest and notice of nonpayment, or any other notice of any kind
with respect thereto, all of which are hereby expressly waived by the Borrower
to the full extent permitted by law. The Lender may exercise from time to time
any rights and remedies available to it under the Uniform Commercial Code and
other applicable law in Georgia or any other applicable jurisdiction. The
Borrower agrees, after the occurrence of any Event of Default, immediately to
assemble at the Borrower's expense all the Collateral at a convenient place
acceptable to the Lender, and to surrender such property to the Lender. The
Borrower agrees to pay all reasonable and documented costs that the Lender
pays or incurs to collect the Obligations or enforce its rights hereunder. The
Borrower agrees that the Lender may charge the Borrower's account for, and
that the Borrower will pay on demand, all reasonable and documented costs and
expenses, including 15% of the total amount involved as attorneys' fees (not
to exceed the amount of attorneys' fees actually incurred), incurred: (i) to
liquidate any Collateral, (ii) to obtain or enforce payment of any
Obligations, or (iii) to prosecute or defend any action or proceeding either
against the Lender or against the Borrower concerning any matter growing out
of or connected with this Agreement or any Receivable or any Obligation. The
Borrower agrees that the Lender may apply any proceeds from disposing of the
Collateral first to any security interest(s), lien(s), or encumbrance(s) prior
to the Lender's security interest.
Upon the occurrence and during the continuance of an Event of Default,
the Lender shall be entitled to hold or set off any sums and all other
property of the Borrower's, at any time to the credit
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of the Borrower or in the possession of the Lender, whether by pledge or
otherwise, or upon or in which the Lender may have a lien or security interest.
Recourse to security shall not at any time be required, and the Borrower
shall at all times remain liable for the repayment to the Lender of all
Obligations in accordance with their terms, regardless of the existence or
non-existence of any Event of Default.
11. MISCELLANEOUS.
11.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of
the Lender in exercising any right, power, or remedy hereunder, or under any
other document or agreement given by the Borrower or received by the Lender in
connection herewith, shall operate as a waiver thereof, and no waiver shall be
valid unless in writing signed by the Lender (and then only to the extent
therein stated); nor shall any single or partial exercise of any such right,
power, or remedy preclude any other or further exercise thereof or the
exercise of any other right, power, or remedy hereunder or thereunder. The
remedies herein and therein provided are cumulative and not exclusive of any
remedies provided by law or in equity.
11.2 AMENDMENTS, ETC. No amendment, modification, termination, or waiver
of any provision of this Agreement or of any other document or agreement given
by the Lender or received by the Borrower in connection herewith, nor consent
to any departure by the Borrower therefrom, shall in any event be effective
unless it is in writing and signed by the Lender and the Borrower (and then
such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given). No notice to or demand on the
Borrower in any case shall entitle the Borrower to any other or further notice
or demand in similar or other circumstances.
11.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands, and
other communications provided for hereunder, other than routine communications
in the ordinary course of business, shall be in writing (including telecopies)
and mailed, telecopied, or delivered as follows:
if to the Borrower:
Reedy River Ventures Limited Partnership
15 S. Main Street
Greenville, South Carolina 29601
Attention: Mark S. Keegan, Chief Legal Counsel
Fax: 864-271-8374
with a copy to:
Cary H. Hall, Jr.
Wyche, Burgess, Freeman & Parham
44 East Camperdown Way
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Greenville, South Carolina 29601
Fax: (864) 235-8900
if to the Lender:
NationsBank, N.A.
Business Credit Division
P. O. Box 3406
Atlanta, Georgia 30302-3406
Attention: John F. Bohan
Fax: (404) 607-6437
or, as to each party, at such other address as it designates in a written
notice to the other party complying as to the delivery with the terms of this
Section. Except as otherwise expressly provided in this Agreement, all such
notices, requests, demands, and other communications shall, when mailed or
telecopied, be effective five Banking Days after being deposited in the mails
(postage paid) or when sent over a telecopier owned or operated by a party
hereto with an answerback response set forth on the sender's copy of the
document, addressed as aforesaid, and otherwise shall be effective upon
receipt.
11.4 COSTS, EXPENSES, AND TAXES. The Borrower shall pay to the Lender,
on demand, all reasonable costs and expenses paid or incurred by the Lender in
connection with the preparation, reproduction, execution, delivery,
administration, or enforcement of this Agreement and other instruments and
documents from time to time delivered in connection with this Agreement,
including the reasonable and documented fees and expenses of outside counsel
for the Lender, and in connection with the Lender's initial evaluation of the
line of credit contemplated by this Agreement (including travel and field exam
expenses). The Lender's attorneys' fees (exclusive of expenses) incurred in
connection with the negotiation, preparation, execution and delivery of this
Agreement and the other instruments and documents executed and delivered on
the Effective Date shall not exceed $14,000, so long as (i) the Effective Date
occurs on or before May 1, 1998, (ii) Lender's attorneys devote no more than
twenty (20) hours to matters related to the SBA, and (iii) no unforeseen
issues arise and no additional time is spent negotiating this Agreement. In
addition, the Borrower shall pay any and all stamp and other taxes and
recording and filing fees payable or determined to be payable in connection
with the execution and delivery of this Agreement and all other instruments
and documents from time to time delivered in connection with this Agreement,
and shall save and hold harmless the Lender from and against any and all
liabilities with respect to or resulting from any delay in paying or failure
to pay such taxes or fees.
11.5 COMMERCIAL TRANSACTION. THE BORROWER HEREBY ACKNOWLEDGES THAT THE
OBLIGATIONS AROSE OUT OF A "COMMERCIAL TRANSACTION" (AS DEFINED IN O.C.G.A.
ss. 44-14-260(1), CONCERNING FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY),
AND AGREES THAT AFTER ANY EVENT OF DEFAULT (AS "Event of Default" IS DEFINED
IN SECTION 1.1),
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THE LENDER SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT
NOTICE OR HEARING. THE BORROWER KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL
RIGHTS IT MAY HAVE TO ANY NOTICE OR POSTING OF A BOND BY THE LENDER PRIOR TO
SEIZURE BY THE LENDER (OR THE LENDER'S TRANSFEREES, ASSIGNS, OR SUCCESSORS IN
INTEREST) OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE
BORROWER AS A "WAIVER" AS DEFINED IN O.C.G.A. ss. 44-14-260(3) (RELATING TO
FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY).
11.6 SUCCESSORS AND ASSIGNS. All of the terms of this Agreement, and
each of the documents and agreements executed and delivered pursuant to this
Agreement, shall bind, benefit, and be enforceable by the successors and
assignees of the parties hereto, whether so expressed or not. The Borrower
shall not assign or transfer this Agreement, or any of its rights hereunder,
without the prior written consent of the Lender. The Lender shall not assign
or transfer this Agreement, or any of its rights hereunder, without the prior
written consent of the Borrower.
11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
warranties, covenants, and agreements contained herein or made in writing by
the Borrower in connection herewith shall survive the execution and delivery
of this Agreement and any and all other documents and instruments relating to
or arising out of any of the foregoing.
11.8 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement.
11.9 HEADINGS. The headings in this Agreement are for convenience of
reference only, and are not a substantive part of the agreement.
11.10 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto and supersede all prior agreements
and understandings relating to the subject matter hereof and thereof.
11.11 SEVERABILITY. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. In case any one or more of the provisions in this Agreement
shall for any reason be held to be prohibited by or invalid under applicable
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
11.12 COUNTERPARTS. This Agreement may be executed in separate
counterparts.
11.13 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE
OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH (UNLESS
SPECIFICALLY STIPULATED TO THE CONTRARY IN SUCH DOCUMENT OR AGREEMENT), AND
THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE
GOVERNED BY, AND
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<PAGE>
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF GEORGIA (DISREGARDING
ANY CONFLICTS-OF-LAWS RULE THAT WOULD APPLY THE LAW OF ANY OTHER JURISDICTION).
THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY
UNITED STATES FEDERAL OR STATE COURT SITTING IN ATLANTA, GEORGIA, IN ANY ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER
DOCUMENTS OR AGREEMENTS DESCRIBED OR CONTEMPLATED HEREIN, AND THE BORROWER
HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH UNITED STATES FEDERAL OR
STATE COURT. SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER
PROCESS WHICH MAY BE SERVED ON THE BORROWER IN ANY SUCH ACTION OR PROCEEDING MAY
BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO THE BORROWER IN
ACCORDANCE WITH SECTION 11.3 HEREOF.
11.14 WAIVER OF TRIAL BY JURY. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, THE BORROWER AND THE LENDER EACH WAIVE ALL RIGHTS TO A TRIAL BY JURY IN
ANY ACTION OR PROCEEDING RELATING TO TRANSACTIONS ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS DESCRIBED OR CONTEMPLATED
HEREIN.
-27-
<PAGE>
IN WITNESS WHEREOF, the Borrower and the Lender have executed this Loan
and Security Agreement.
REEDY RIVER VENTURES LIMITED
PARTNERSHIP
[Seal]
By: Emergent Group, Inc.,
Its General Partner
By: /s/ Keith Giddens
Name: Keith Giddens
Title: President
Attest: /s/ C. Thomas Wyche
Name: C. Thomas Wyche
Title: Secretary
By: Emergent Business Capital Equity
Group, Inc.,
Its General Partner
By: /s/ Capers Easterby
Name: Capers Easterby
Title: President
Attest: /s/ Mark S. Keegan
Name: Mark S. Keegan
Title: Secretary
Accepted this 9th day of June, 1998, in Atlanta, Georgia.
NATIONSBANK, N.A.
By: /s/ John F. Boher?
Title: Senior Vice President
<PAGE>
EXHIBIT A-1
EBCEG's Secretary's Certificate
for the Benefit of
NationsBank, N.A.
I, Mark S. Keegan, Secretary of EMERGENT BUSINESS CAPITAL EQUITY GROUP,
INC., a South Carolina corporation (the "GENERAL PARTNER"), hereby certify
that:
1. The General Partner is one of the general partners of Reedy River
Ventures Limited Partnership, a South Carolina limited partnership (the
"Borrower")
2. Attached hereto as Exhibit 1 is a certified copy of the articles of
---------
incorporation of the General Partner as originally filed, together with all
amendments thereto.
3. Attached hereto as Exhibit 2 is a true and correct copy of the
---------
by-laws of the General Partner. Those by-laws have not been amended, modified,
or revoked, and are in full force and effect as of the date hereof.
4. Attached hereto as Exhibit 3 is a good standing certificate for the
---------
General Partner issued by the South Carolina Secretary of State on
_______________, 1998.
5. The General Partner has since the date of the certificate referred to
in paragraph 4 above through the date hereof remained in good standing under the
laws of the state of South Carolina.
6. Attached hereto as Exhibit 4 is a certified copy of the certificate
---------
and agreement of limited partnership of the Borrower as originally filed,
together with all amendments thereto. Such certificate and agreement of
limited partnership is the only agreement among the Borrower's general
partners and limited partners concerning the governance and capitalization of
the Borrower, and has not been further amended, modified or revoked and is in
full force and effect as of the date hereof.
7. Attached hereto as Exhibit 5 is a good standing certificate for the
---------
Borrower issued by the South Carolina Secretary of State on _______________,
1998.
8. No suit or proceeding for the dissolution or liquidation of the
Borrower has been instituted or is now threatened.
9. Attached hereto as Exhibit 6 is a true and complete copy of
---------
resolutions of the Board of Directors of the General Partner, duly adopted by
unanimous written consent of the Board of Directors of the General Partner.
The corporate action in adopting those resolutions was duly taken
<PAGE>
at that meeting in accordance with the provisions of law and of the General
Partner's articles of incorporation and by-laws, and those resolutions are now
in full force and effect and have not been modified in any respect.
10. The resolutions referred to in paragraph 9 authorized the General
Partner, and its officers referred to therein, to execute and deliver on behalf
of the Borrower, and to do all things necessary or appropriate for the payment
and performance of all the Borrower's obligations under, the Loan and Security
Agreement (the "AGREEMENT") dated as of _______________, 1998, between
NationsBank, N.A. (the "LENDER") and the Borrower, and all certificates,
agreements and other documents to be executed and delivered to the Lender by
the Borrower pursuant to the Agreement, and pursuant to the specific
resolutions referred to in paragraph 9.
11. The following persons have been duly elected, have duly qualified,
as of the date of the execution of the Agreement were, and on the date hereof
are, officers of the General Partner, holding the offices set opposite their
names below, and the signatures set opposite their names below are their
genuine signatures:
Name Title Signature
- ---- ----- ---------
- --------------------- -------------------- -------------------------
- --------------------- -------------------- -------------------------
- --------------------- -------------------- -------------------------
IN WITNESS WHEREOF, I have signed this Certificate and affixed to it the
General Partner's seal on ________________, 1998.
------------------------------------
Secretary
[Seal]
-2-
<PAGE>
EXHIBIT A-2
EGI's Secretary's Certificate
for the Benefit of
NationsBank, N.A.
I, C. Thomas Wyche, Secretary of EMERGENT GROUP, INC., a South Carolina
corporation (the "GENERAL PARTNER"), hereby certify that:
1. The General Partner is one of the general partners of Reedy River
Ventures Limited Partnership, a South Carolina limited partnership (the
"Borrower")
2. Attached hereto as Exhibit 1 is a certified copy of the articles of
---------
incorporation of the General Partner as originally filed, together with all
amendments thereto.
3. Attached hereto as Exhibit 2 is a true and correct copy of the
---------
by-laws of the General Partner. Those by-laws have not been amended, modified,
or revoked, and are in full force and effect as of the date hereof.
4. Attached hereto as Exhibit 3 is a good standing certificate for the
---------
General Partner issued by the South Carolina Secretary of State on
_______________, 1998.
5. The General Partner has since the date of the certificate referred to
in paragraph 4 above through the date hereof remained in good standing under the
laws of the state of South Carolina.
6. Attached hereto as Exhibit 4 is a certified copy of the certificate
---------
and agreement of limited partnership of the Borrower as originally filed,
together with all amendments thereto. Such certificate and agreement of
limited partnership is the only agreement among the Borrower's general
partners and limited partners concerning the governance and capitalization of
the Borrower, and has not been further amended, modified or revoked and is in
full force and effect as of the date hereof.
7. Attached hereto as Exhibit 5 is a good standing certificate for the
---------
Borrower issued by the South Carolina Secretary of State on _______________,
1998.
8. No suit or proceeding for the dissolution or liquidation of the
Borrower has been instituted or is now threatened.
9. Attached hereto as Exhibit 6 is a true and complete copy of
---------
resolutions of the Board of Directors of the General Partner, duly adopted by
unanimous written consent of the Board of Directors of the General Partner.
The corporate action in adopting those resolutions was duly taken
<PAGE>
in accordance with the provisions of law and of the General Partner's articles
of incorporation and by-laws, and those resolutions are now in full force and
effect and have not been modified in any respect.
10. The resolutions referred to in paragraph 9 authorized the General
Partner, and its officers referred to therein, to execute and deliver on behalf
of the Borrower, and to do all things necessary or appropriate for the payment
and performance of all the Borrower's obligations under, the Loan and Security
Agreement (the "AGREEMENT") dated as of _______________, 1998, between
NationsBank, N.A. (the "LENDER") and the Borrower, and all certificates,
agreements and other documents to be executed and delivered to the Lender by the
Borrower pursuant to the Agreement, and pursuant to the specific resolutions
referred to in paragraph 9.
11. The following persons have been duly elected, have duly qualified,
as of the date of the execution of the Agreement were, and on the date hereof
are, officers of the General Partner, holding the offices set opposite their
names below, and the signatures set opposite their names below are their
genuine signatures:
Name Title Signature
- ---- ----- ---------
- ---------------------- ---------------------------- --------------------------
- ---------------------- ---------------------------- --------------------------
- ---------------------- ---------------------------- --------------------------
IN WITNESS WHEREOF, I have signed this Certificate and affixed to it the
General Partner's seal on June ____, 1998.
---------------------------
Secretary
[Seal]
-2-
<PAGE>
EXHIBIT 4
----
Board of Directors' Resolutions
----
RESOLVED, that the officers of this Corporation be and they hereby are
jointly and severally authorized and directed to take all actions necessary or
desirable on behalf of the Corporation, to cause Reedy River Ventures Limited
Partnership, a South Carolina limited partnership (the "Borrower") to borrow
from NationsBank, N.A. ("NATIONSBANK"), from time to time such sums as they or
any of them may deem necessary or desirable in connection with the operation
of the business of the Borrower, upon such terms and conditions as shall be
obtained through negotiation with NationsBank, and to execute one or more or
financing agreements and promissory notes in respect thereto in the name of
the Borrower for the payment of such amounts so borrowed, and further to
extend, renew, renegotiate, refinance, or otherwise modify such terms and
conditions by agreement with NationsBank.
FURTHER RESOLVED, that the officers of this Corporation be and they
hereby are jointly and severally authorized and directed to request, from time
to time, on behalf of this Corporation, as they deem necessary or desirable
for the operation of the business of the Borrower, that NationsBank make
advances and overadvances to the Borrower, such advances and overadvances to
become subject to the terms and conditions of any agreement with regard to the
loan financing of accounts receivable existing at the time of such request or
any modification, extension, renewal, or renegotiation thereof.
FURTHER RESOLVED, that the officers of this Corporation be and they
hereby are jointly and severally authorized and directed, from time to time,
on behalf of this Corporation, to secure any such loans, advances,
overadvances, or other indebtedness of the Borrower to NationsBank however
arising, by pledging, or by granting full lien rights and full security title
and security interest in and to, any and all of the assets of the Borrower,
both real and personal, and such officers are jointly and severally authorized
to execute any and all instruments necessary or desired by NationsBank in any
manner as may now or hereafter be recognized by the laws of the United States
or any state, or of any foreign state.
FURTHER RESOLVED, that any such officers of this Corporation be and are
hereby jointly and severally authorized and directed, on behalf of this
Corporation, to do such other things and to execute such other documents as
may be necessary or desirable to effect the foregoing transactions, including
the execution of financing statements and such other notices or instruments as
may be necessary or requested by NationsBank.
FURTHER RESOLVED, that all acts and deeds of any officer of this
Corporation heretofore performed on behalf of this Corporation to enter into,
execute perform, carry out, or otherwise pertaining to the arrangements and
intentions authorized by these resolutions be and they hereby are ratified,
approved, confirmed, and declared binding upon the Borrower.
FURTHER RESOLVED, that the Secretary of this Corporation shall certify
to NationsBank the names of the presently duly elected and qualified officers
of this Corporation and shall from time to time hereafter as each change in
identity of those officers is made, immediately certify such change to
NationsBank, and NationsBank shall be fully protected in relying on such
certification(s) (or the absence thereof), and shall be indemnified and saved
harmless by this Corporation from any claim, demand, expense, loss, or damage
resulting from or growing out of honoring the signature of any officer so
certified or for refusing to honor any signature not so certified.
FURTHER RESOLVED, that the foregoing resolutions shall remain in full
force and effect until the close of business on the banking day after written
notice of their amendment or rescission shall have been received by
NationsBank and that receipt of such notice shall not affect any action taken
by NationsBank prior thereto.
FURTHER RESOLVED, that the Secretary of this Corporation be, and hereby
is, authorized and directed to certify to NationsBank the foregoing
resolutions and that the provisions thereof are in accordance with the
provisions of law and of the articles of incorporation and by-laws of this
Corporation.
-2-
<PAGE>
EXHIBIT B-1
General Partner's President's Certificate
for the Benefit of
NationsBank, N.A.
I, Capers Easterby, President of Emergent Business Capital Equity Group,
Inc., a South Carolina corporation (the "GENERAL PARTNER"), do hereby certify,
pursuant to Section 4.1 of the Loan and Security Agreement (the "AGREEMENT")
between NationsBank, N.A. (the "LENDER") and Reedy River Ventures Limited
Partnership, a South Carolina limited partnership (the "BORROWER"), dated as
of ______________, 1998, that _____________________ has been duly elected, has
duly qualified, as of the date of the execution of the Agreement was, and on
the date hereof is, the Secretary of the General Partner, and that the
signature appearing below is a true specimen of his signature.
- ---------------------------------
[Name], Secretary
June ___, 1998.
---------------------------------
Capers Easterby
President
<PAGE>
EXHIBIT B-2
General Partner's President's Certificate
for the Benefit of
NationsBank, N.A.
I, Keith Giddens, President of Emergent Group, Inc., a South Carolina
corporation (the "GENERAL PARTNER"), do hereby certify, pursuant to Section
4.1 of the Loan and Security Agreement (the "AGREEMENT") between NationsBank,
N.A. (the "LENDER") and Reedy River Ventures Limited Partnership, a South
Carolina limited partnership (the "BORROWER"), dated as of ______________,
1998, that _____________________ has been duly elected, has duly qualified, as
of the date of the execution of the Agreement was, and on the date hereof is,
the Secretary of the General Partner, and that the signature appearing below
is a true specimen of his signature.
- ---------------------------------
[Name], Secretary
June ___, 1998.
-----------------------------
Keith Giddens
President
<PAGE>
EXHIBIT C
[To Be Retyped on Letterhead
of Counsel to the Borrower]
June ____, 1998
NationsBank, N.A.
P.O. Box 3406
Atlanta, Georgia 30302-3406
Re: Reedy River Ventures Limited Partnership
Ladies and Gentlemen:
We have acted as counsel to Reedy River Ventures Limited Partnership, a
South Carolina limited partnership (the "BORROWER"), in connection with its
execution and delivery of the that certain Loan and Security Agreement dated
as of June __, 1998 (the "LOAN AGREEMENT") between the Borrower and
NationsBank, N.A. (the "LENDER") and certain related documents. Unless
otherwise specified in this opinion letter, the terms used herein have the
same meanings as in the Loan Agreement.
We also have acted as counsel to Emergent Group, Inc. in connection
with its execution and delivery of the Guarantee.
In so acting, we have examined the Loan Agreement, the Guaranty, and
originals or copies of all other documents that we deemed relevant and
necessary as a basis for the opinions hereinafter set forth.
Based upon the foregoing, we are of the opinion that:
(1) The Borrower is a limited partnership duly organized and
validly existing in good standing under the laws of South Carolina, and has
all requisite power and authority to conduct its business, to own and operate
its properties, and to execute, deliver, and perform all of its obligations
under the Loan Agreement. The Borrower has no Subsidiary. The Borrower is duly
qualified, licensed, or domesticated and in good standing as a foreign limited
partnership duly authorized to do business in all jurisdictions in which the
character of its properties owned or the nature of its activities conducted
makes such qualification, licensing, or domestication necessary (as set forth
in Section 7.3 of the Loan Agreement).
<PAGE>
(2) The Borrower's execution, delivery, and performance of the
Loan Agreement have been duly authorized by all necessary action and do not
and will not (a) require any consent or approval of the limited partners of
the Borrower or violate the certificate and agreement of limited partnership
or other organizational documents of the Borrower, (b) violate any provision
of any law, rule, or regulation (including Regulation X of the Board of
Governors of the Federal Reserve System) of the United States or of South
Carolina, or, to the best of our knowledge, any order, judgment, injunction,
decree, determination, or award of any court, arbitrator, or governmental
department, agency, or other instrumentality, (c) to the best of our
knowledge, result in a breach of or constitute a default under any agreement
or instrument to which the Borrower is a party or by which it or its
properties may be bound or affected, or (d) result in, or require, to the best
of our knowledge, the creation or imposition of any Lien upon or with respect
to any of the properties now owned or hereafter acquired by the Borrower
(other than the Liens created by the Loan Agreement). To the best of our
knowledge, the Borrower is not in violation of any provision of any of the
items described in clause (b) of this paragraph or in default under any
provision of any of the items described in clause (c) of this paragraph.
(3) No authorization, consent, approval, license, or exemption of,
or filing or registration with, the any court or governmental department,
agency, or other instrumentality of the United States (including the Small
Business Administration) or of the State of South Carolina is or will be
necessary to the Borrower's valid execution, delivery, or performance of the
Loan Agreement or for the payment to the Lender of all sums due and payable
thereunder.
(4) The Loan Agreement has been duly executed and delivered by the
Borrower, and constitutes the Borrower's legal, valid, and binding obligation,
enforceable against the Borrower in accordance with its terms.
(5) To the best of our knowledge, there are no actions, suits, or
proceedings pending or threatened against or affecting the Borrower or the
Guarantor or the properties of the Borrower or the Guarantor before any court,
arbitrator, or governmental department, commission, board, bureau, agency, or
other instrumentality (state, federal, or foreign) which, if determined
adversely to the Borrower or the Guarantor, would have a materially adverse
effect on the financial condition, properties, or operations of the Borrower
or the Guarantor, or create a Lien on any property of the Borrower or the
Guarantor.
(6) You should perfect all the security interests granted under
the Loan Agreement (in Collateral for which a security interest can be
perfected by filing UCC-1 financing statements) by filing a UCC-1 financing
statement in the attached form with the South Carolina Secretary of State.
Upon the filing of such financing statement, you will have a perfected
first-priority security interest in such Collateral, and no further recording
or filing in South Carolina or any other jurisdiction is necessary or
advisable in order to establish and perfect such first-priority security
interest.
-2-
<PAGE>
(7) The Guarantee has been duly authorized, executed, and
delivered by the Guarantor, and constitutes the Guarantor's legal, valid, and
binding obligations, enforceable against the Guarantor in accordance with its
terms.
This opinion is limited to the laws of the United States and of South
Carolina. The opinions in paragraphs nos. 4, 7, and 8 are given as if the laws
of South Carolina governed the Loan Agreement and the Guarantees, despite
their express choice of Georgia law as the law governing their construction
and interpretation. No opinion is given as to the validity of the choice of
law in the Loan Agreement and the Guarantee.
Our opinions set forth herein as to the validity, binding effect, and
enforceability of the Loan Agreement and the Guarantee are specifically
qualified to the extent that the validity, binding effect, or enforceability
of any obligations of the Borrower and the Guarantor thereunder or the
availability or enforceability of any of the remedies provided therein, may be
subject to or limited by (i) applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium, and other statutory or
decisional laws, heretofore or hereafter enacted or in effect, affecting the
rights of creditors generally to the extent the same may constitutionally be
applied including, without limitation, decisional or statutory law concerning
recourse by creditors to security in the absence of notice of a hearing; (ii)
the exercise of judicial or administrative discretion in accordance with
general equitable principles; (iii) the possible unenforceability of any
provision requiring or in effect requiring that waivers or amendments of any
provision of the Loan Agreement or the Guarantee, or any related document, may
be effected only in writing; (iv) the possible unenforceability of provisions
imposing increased interest rates or late payment charges upon delinquency in
payment or default, to the extent that any such provision is deemed a
"penalty"; (v) limitations imposed by rules and statutes regarding forum,
venue, pleading, service of process, qualification to do business, and
statutes of limitation; or (vi) limitations on the availability or
enforceability of the remedies of specific performance or injunctive relief
and of waivers contained in the Loan Agreement or the Guarantee, all of which
may be limited by equitable principles or applicable laws, rules, regulations,
court decisions, and constitutional requirements.
All opinions rendered herein are limited to the existing laws of the
State of South Carolina and laws of the United States of America, all as in
effect on the date hereof, and we express no opinion as to any other laws,
rules, or regulations of such jurisdictions or matters governed by such laws,
rules, or regulations; nor do we undertake, by delivery hereof or otherwise,
to advise you of any changes in such laws, rules, or regulations.
This opinion is made as of the date hereof, and we undertake no (and
hereby disclaim any) obligation to advise you of any change in any matter set
forth herein. This opinion is limited to the matters expressly set forth
herein and no opinion is implied or may be inferred beyond the matters
-3-
<PAGE>
expressly stated herein. This opinion is solely for your benefit in connection
with the Loan Agreement and the Guarantee and may not be relied upon in any
manner by any other person.
Very truly yours,
WYCHE, BURGESS, FREEMAN &
PARHAM, P.A.
By:_______________________________
Cary H. Hall, Jr.
-4-
<PAGE>
SCHEDULE 1
Liens
-----
NONE
<PAGE>
SCHEDULE 2
Trademarks, Tradenames, Name Changes, etc.
------------------------------------------
Tradenames:
1. Reedy River Ventures
2. Emergent Equity Advisors
3. Emergent Business Capital
4. Emergent Equity Group
5. Emergent SBIC
Name Changes:
The Borrower's original name was Reedy River Ventures. On October 5, 1995, the
Borrower amended its certificate and agreement of limited partnership to
change its name to Reedy River Ventures Limited Partnership.
<PAGE>
SCHEDULE 3
Current Litigation List
- --------------------------------------------------------------------------------
Gaibi Matter
- ------------
In July, 1997, an action was commenced against Emergent Group, Inc., Emergent
Mortgage Corp., and Carolina Investors, Inc. (collective, the "Company") in the
United States District Court for the District of Puerto Rico. The complaint
alleges that the Company breached the terms of a confidentiality agreement with
the plaintiff concerning the possibility of commencing residential mortgage loan
operations in Puerto Rico. The complaint also alleges that the Company breached
an employment agreement with the plaintiff and a development agreement with him
to begin operations in Puerto Rico. The Company, through its counsel in Puerto
Rico, filed a motion to dismiss all of these claims, which motion was granted
by the Court on January 26, 1998. The plaintiff has filed a notice of appeal
from this order.
Reedy River Matter
- ------------------
Reedy River Ventures, L.P. ("Reedy River"), is a third party defendant in an
action pending in U.S. District Court for the district of South Carolina,
Greenville Division, captioned Southern Weaving Company, Azalea Capital, L.L.C.,
-------------------------------------------------
Rodney L. Grandy, Jr., and Douglas Kingsmore v. Golub Associates, Inc., LEG
- ---------------------------------------------------------------------------
Partners SBIC, L.P., and LEG Partners, L.P. v. Reedy River Ventures, Ltd.
- -------------------------------------------------------------------------
Partners. The plaintiffs allege that in 1996-1997, they pursued the purchase of
- ---------
the assets of a division of Woven Electronics Corporation. In connection with
that purchase, they sought financing from the defendants. The plaintiffs allege
that the defendants did not act in good faith and decided not to go forward
with the financing, and, ultimately, Reedy River provided financing to the
plaintiffs for the transaction. The plaintiffs and defendants have asserted a
variety of claims and actions against each other, and the defendants also
brought a third party claim against Reedy River alleging that Reedy River
tortiously interfered with their actual and prospective contractual relations
with the plaintiffs. Reedy River believes the claims stated against it are
encompassed by an indemnity provision in a Loan and Security Agreement
between Reedy River and WEC Acquisition Corporation and has given notice under
that provision. Reedy River has denied the defendant's claims and is vigorously
contesting the case. At this point, discovery in the case has just begun, and
the defendants have not set out a calculation of their claimed damages.
The Borrower believes that neither of the above-referenced matters has or is
reasonably expected to have a material adverse effect on the business,
operations, condition (financial or otherwise), assets, liabilities, prospects,
or properties of the Borrower.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-1-1998 APR-1-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<PERIOD-TYPE> 6-MOS 3-MOS
<CASH> 43628 43628
<SECURITIES> 0 0
<RECEIVABLES> 321348 321348
<ALLOWANCES> 8385 8385
<INVENTORY> 0 0
<CURRENT-ASSETS> 0<F1> 0<F1>
<PP&E> 26811 26811
<DEPRECIATION> 5252 5252
<TOTAL-ASSETS> 469883 469883
<CURRENT-LIABILITIES> 0<F1> 0<F1>
<BONDS> 0 0
<COMMON> 485 485
0 0
0 0
<OTHER-SE> 38739 38739
<TOTAL-LIABILITY-AND-EQUITY> 469883 469883
<SALES> 0 0
<TOTAL-REVENUES> 49330 24776
<CGS> 0 0
<TOTAL-COSTS> 64354 33121
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 6940 2111
<INTEREST-EXPENSE> 18385 9952
<INCOME-PRETAX> (40349) (20408)
<INCOME-TAX> 3244 2566
<INCOME-CONTINUING> (43591) (22976)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (43591) (22976)
<EPS-PRIMARY> (4.49)<F2> (2.37)<F2>
<EPS-DILUTED> (4.49) (2.37)
<FN>
<F1> FOOTNOTE (1) * Unclassified Balance Sheet
<F2>EPS-BASIC
</FN>
</TABLE>
