UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31,1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _____________________ to
_______________________
Commission File No. 0-8909
EMERGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
South Carolina 57-0513287
- ------------------------------------------------------------------- ------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
15 South Main Street Suite 750 Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 864-235-8056
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
- --------------------------------- ------------------------------------------
None None
Securities registered under Section 12(g) of the Act:
Title of Each Class
- --------------------------------------------------------------------------------
Common Stock, par value $.05
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 20, 1998, the aggregate market value of voting stock held by
non-affiliates of registrant was approximately $61,362,134.
As of March 20, 1998, 9,708,083 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the Annual Meeting of Shareholders scheduled
for June 10, 1998 to be filed not later than 120 days after December 31, 1997 is
incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Emergent Group, Inc. is a diversified financial services
company that originates, services, sells and securitizes mortgage loans
("Mortgage Loans"), small business loans ("Small Business Loans") and, to a
lesser extent until March 1998, auto loans ("Auto Loans"). The Company makes
substantially all of its loans to non-prime borrowers who have limited access to
credit or who may be considered credit-impaired by conventional lending
standards. Based on industry publications, the Company believes that it is among
the top 25 originators of non-prime Mortgage Loans in the United States.
According to a leading industry publication, the Company was the eighth largest
originator of SBA loans ("SBA Loans") in the United States, by principal amount
of SBA Loans approved, for the SBA's fiscal year ended September 30, 1997.
The Company commenced its lending operations in 1991 with the
acquisition of Carolina Investors, Inc. ("CII"), a South Carolina non-prime
mortgage lender, which had been in business since 1963. Since such acquisition,
the Company has significantly expanded its lending operations and through
December 31, 1997 experienced a compounded annual growth rate in total loan
originations of 84%. During the years 1997, 1996 and 1995, the Company
originated $1.2 billion, $415.1 million, and $249.5 million in loans,
respectively. This loan growth has been accelerated by the successful
implementation during 1996 and 1997 of the Company's retail Mortgage Loan
origination strategy. See " -- Mortgage Loan Division." Of the Company's loan
originations for the year ended December 31, 1997, 92% were Mortgage Loans, 7%
were Small Business Loans and 1% were Auto Loans. The Auto Loan Division was
sold in the first quarter of 1998.
The Company believes the rapid market penetration and growth
of its retail Mortgage Loan operation results in part from its philosophy of
encouraging its retail Mortgage Loan customers to become debt free in the
shortest practicable time-frame. The Company believes that this approach is
unique among its competitors. By providing coupled first and second lien
Mortgage Loans, which typically have terms of 15 years and are used to
consolidate higher interest rate consumer debt, the Company provides customers
with similar monthly payments, but more rapid debt reduction, than typical 30
year mortgages. The Company's originators are trained to emphasize the benefits
of both rapid debt repayment and monthly debt service reduction. In addition,
borrowers are provided access to a free financial counseling program, known as
REAL REWARDS(R), which was developed by the Company to help individual borrowers
accelerate debt repayment and improve their credit ratings.
The Company markets its Small Business Loan operation as a
commercial lender offering a variety of loan products capable of meeting
substantially all of the commercial credit needs of small businesses in various
stages of development. The Company believes it is one of only a few national,
non-bank lending operations which focuses on smaller businesses with debt needs
of generally less than $2.0 million.
2
<PAGE>
The following chart sets forth the Company's major operating
subsidiaries by division. All operating subsidiaries are wholly-owned, unless
otherwise indicated.
(Flow chart appears here with the following text.)
--------------------
Emergent Group, Inc.
--------------------
<TABLE>
<CAPTION>
<S> <C> <C>
- -------------------------------- ---------------------------------------- --------------------------------
Mortgage Loan Division Small Business Loan Division Auto Loan Division (1)
Carolina Investors, Inc. Emergent Business Capital, Inc. The Loan Pro$, Inc.
Emergent Mortgage Corp. Emergent Commercial Mortgage, Inc. Premier Financial Services, Inc.
Sterling Lending Corporation (2) Emergent Financial Corp.
Emergent Equity Advisors, Inc.
Reedy River Ventures Limited Partnership
- -------------------------------- ---------------------------------------- --------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Auto Division was sold in March 1998.
(2) 80% owned subsidiary
MORTGAGE LOAN DIVISION
OVERVIEW
The Company's Mortgage Loan Division makes Mortgage Loans
primarily to owners of single family residences who use the loan proceeds for
such purposes as refinancing, debt consolidation, home improvements and
educational expenditures. The Company believes the non-prime mortgage market is
highly fragmented and growing rapidly. A leading industry publication estimates
that total loan originations for the non-prime mortgage industry grew
approximately 39% to $125.0 billion in 1997 from $90.0 billion in 1996. In
addition, it estimates that the top 25 lenders to the non-prime mortgage loan
industry represented, in aggregate, approximately 57.2% of 1997 loan
originations, with the largest lender representing approximately 5.6% of the
total. A principal component of the Company's strategy is to capture market
share from independent brokers who generally cannot provide the level of
service, rapid response time and operating efficiencies typically associated
with larger lending entities such as the Company.
Substantially all of the Mortgage Loans are made to non-prime
borrowers. These borrowers generally have limited access to credit or are
considered to be credit-impaired by conventional lenders such as thrift
institutions and commercial banks. These conventional lending sources generally
impose stringent and inflexible loan underwriting guidelines and generally
require a longer period of time, as compared to the Company, to approve and fund
loans. Loan applications of non-prime borrowers are generally characterized by
one or more of the following: (1) limited or unfavorable credit history,
including bankruptcy, (2) problems with employment history, (3) insufficient
debt coverage, (4) self-employment or (5) inadequate collateral.
3
<PAGE>
The Company has developed a comprehensive credit analysis
system for its loan originations, which is designed to ensure that credit
standards are maintained and consistent underwriting procedures are followed.
The Company's focus is to capture higher quality non-prime borrowers, and during
1997, 75% and 18% of the Mortgage Loans originated by the Company were to
borrowers internally classified as "AA/A" and "B", respectively. In addition,
60% of the Company's first Mortgage Loans originated in 1997 have maturities of
15 years or less, which provides for more rapid reduction of principal and,
consequently, a faster improvement in loan-to-value ("LTV") ratios compared to
traditional 30 year mortgages.
The Company believes that its customers require or seek a high
degree of personalized service and swift response to their loan applications.
Also, the Company believes that its customers generally focus more on the amount
of the monthly payment than the interest rate charged. Consequently, the
Company's customers many times are less sensitive to the percentage charged,
assuming the amount of the monthly payment is otherwise acceptable. Furthermore,
because the Company's customers are generally credit-impaired for one or more
reasons, the customers are typically not in a position to obtain better rates
from traditional lending institutions.
In 1997, 76% of the Mortgage Loans originated were secured by
first liens. Such first Mortgage Loans had an average principal balance of
approximately $67,000, a weighted average interest rate of approximately 11% and
an average LTV ratio of 78%. Approximately 45%, or $372.8 million, of the
Company's first Mortgage Loans originated during 1997 were originated through
the Company's retail operation. In connection with approximately 72% of such
loans, the Company also made a second Mortgage Loan to the same borrower, which
resulted in combined LTV ratios that averaged 101% and may have been as high as
125%. Such second Mortgage Loans originated during 1997 had an average principal
balance of approximately $23,000 and a weighted average interest rate of
approximately 15%.
The Company believes this structure of coupled first and
second Mortgage Loans generally will result in slower prepayment rates on its
first Mortgage Loans compared with stand-alone first mortgage loans, because
borrowers have less opportunity to refinance, since the second mortgage
generally must be repaid or refinanced in order to refinance the first mortgage.
In order to reduce the Company's credit risk, second Mortgage Loans with a
combined LTV ratio greater than 100% are pre-approved and pre-underwritten by a
third party and generally sold without recourse on a whole loan basis with
certain representations and warranties. Second Mortgage Loans with a combined
LTV ratio less than 100% are underwritten by the Company and generally sold on a
whole loan basis without recourse. However, no assurance can be given that the
second mortgage loans can be successfully sold. To the extent that the loans are
not sold, the Company retains the risk of loss. At December 31, 1997 and 1996,
the Company had retained $69.8 million and $28.1 million, respectively, of
second mortgage loans on its balance sheet.
4
<PAGE>
The Company has invested significantly in technology and
personnel to improve and expand its underwriting, servicing, and collection
functions. The members of the Company's front-line management team have an
average of over 11 years of experience in the non-prime mortgage industry. Also,
a substantial number of the Company's retail underwriters, originators and
servicers hired to date have significant prior industry experience. The Company
believes its current operations are capable of handling substantial increases in
both loan origination volume and securitization servicing capacity with only
modest increases in fixed expenses. The Company believes that this
industry-specific experience, coupled with the Company's underwriting
guidelines, existing MIS systems and servicing infrastructure will enable the
Company to execute successfully its business strategy.
MORTGAGE LOAN ORIGINATION
The Mortgage Loan Division originates Mortgage Loans on a
retail basis through regional offices and on a wholesale basis through
independent mortgage brokers and mortgage bankers (collectively, the "Mortgage
Bankers"). The Company's mortgage lending operations are currently conducted in
44 states through four regional retail offices under the name HomeGold(R), ten
traditional "bricks and mortar" approach retail offices under the name of
Sterling Lending Corporation ("SLC") and approximately 700 Mortgage Bankers. In
order to concentrate its effort on the larger HomeGold(R) retail mortgage
operation (which is larger than SLC), the Company has decided to divest its
smaller SLC lending operation.
The Company has established strategic alliance agreements with
certain Mortgage Bankers (the "Strategic Alliance Mortgage Bankers"), which
require the Strategic Alliance Mortgage Bankers to sell to the Company all of
their loans, which meet the Company's underwriting criteria up to specified
levels in exchange for delegated underwriting, administrative support and
expedited funding. The Company believes that its use of retail and wholesale
origination and strategic alliances is an effective diversification strategy
which enables it to penetrate the non-prime mortgage loan market through
multiple channels.
5
<PAGE>
The following chart outlines the principal activities of the
Company's Mortgage Loan Division.
(Flow chart appears here with the following text.)
<TABLE>
<CAPTION>
<S><C>
--------
Borrower
--------
--------- ------
Wholesale Retail
--------- ------
- ------ ------------------ ------------ ----------------
Broker Strategic Alliance HomeGold(R) Sterling Lending
Wholesale Corporation
- ------ ------------------ ------------ ----------------
Refers loan to Closes loan in Regional retail Decentralized retail
own name and loan organization loan origination
sells loan to
- --------------------------------------------------------------------------------
Emergent Mortgage Corporation
- --------------------------------------------------------------------------------
Sells loan through securitization Sells loan on whole loan
and recognizes gain on sale basis, without recourse, to
represented by interest-only and institutional purchasers for
residual certificates a cash gain on sale
- -------------- ------------------------ ------------------------
Securitization Whole Loan Sale Servicing Sell to CI for Retention
Released in Portfolio
- -------------- ------------------------ ------------------------
Services all securitized loans,
earning a fixed, recurring
servicing fee and ancillary
service income
- --------------
Loan Servicing
Portfolio
- --------------
</TABLE>
6
<PAGE>
The following table sets forth mortgage loan originations by channel for the
period indicated:
LOAN ORIGINATIONS BY CHANNEL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------
1ST MORTGAGE 2ND MORTGAGE
LOANS LOANS TOTAL
---------------- ---------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Retail
Loan originations $ 372,847 $ 189,862 $ 562,709
Average principal balance per loan 66 27 44
Weighted average initial LTV ratio 76 % 104 % 86 %
Weighted average coupon rate 11 15 13
Mortgage Banker Wholesale
Loan originations $ 306,679 $ 48,526 $ 355,205
Average principal balance per loan 75 18 49
Weighted average initial LTV ratio 81 % 92 % 83 %
Weighted average coupon rate 11 14 11
Strategic Alliance Mortgage Banker Wholesale
Loan originations $ 141,661 $ 23,241 $ 164,902
Average principal balance per loan 60 16 42
Weighted average initial LTV ratio 79 % 92 % 81 %
Weighted average coupon rate 11 15 12
Total
Loan originations $ 821,187 $ 261,629 $ 1,082,816
Average principal balance per loan 67 23 45
Weighted average initial LTV ratio 78 % 101 % 84 %
Weighted average coupon rate 11 15 12
</TABLE>
RETAIL OPERATION. The Company, through HomeGold(R), primarily
utilizes a regional approach for all aspects (origination, underwriting,
processing and funding) of its retail Mortgage Loan operation. To a lesser
extent, the Company also utilizes a second approach through SLC, which has
centralized underwriting, funding and processing functions, but a decentralized,
state-by-state approach to origination. However, in order to concentrate its
effort on HomeGold(R), the Company has determined to divest SLC in 1998.
Since the first quarter of 1996, the Company has successfully
focused a significant portion of its resources in developing its retail loan
operation, thereby reducing its dependence on third-party origination sources.
In 1997, retail Mortgage Loan originations represented 52% of the Company's
total Mortgage Loan originations. The Company believes that its retail operation
has significant long-term profit potential because the origination and other
fees (typically paid to the broker-originators) will more than offset the
infrastructure expenses associated with operating a retail operation. The
Company also believes that the retail operation will allow more Company control
over the underwriting process and the borrower relationship, reduce reliance on
wholesale sources and build brand recognition.
7
<PAGE>
HomeGold(R) was established in April 1996 through the opening
of its Indianapolis, Indiana office. Unlike many of its competitors
(particularly non-prime mortgage lenders that began operations as traditional
finance companies), the Company markets its HomeGold(R) retail lending
operations in large part through direct mail and telemarketing methods, as
compared to a traditional "bricks and mortar" retail approach. The Company
believes that this strategy allows it to target different areas of the country
more quickly, depending on the economic, business and other characteristics that
may exist at a particular point in time. The Company also believes that this
strategy avoids the expense typically associated with "bricks and mortar"
operations. The Company uses large regional operating centers consisting of
underwriters, originators and loan processors which enable it to realize
economies of scale and to compete more efficiently than through traditional
retail operations. However, in the fourth quarter of 1997, the Company
experienced inefficiencies in its retail centers due to lower originations per
originator. The inefficiencies are expected to become worse in the first quarter
of 1998, while the Company reorganizes the division. Since April 1996, the
Company has established three additional regional operation centers located in
Phoenix, Arizona; Greenville, South Carolina and Houston, Texas. From May
through December 1996, HomeGold originated $67.6 million in Mortgage Loans. In
1997, HomeGold's Mortgage Loan volume totaled $521.2 million, which constituted
approximately 93% of the Company's total retail Mortgage Loan originations
during this period.
The Company's quarterly retail Mortgage Loan volume since
inception of the Company's retail loan operations in April 1996 is set forth in
the table below.
<TABLE>
<CAPTION>
RETAIL MORTGAGE LOAN ORIGINATIONS
(DOLLARS IN THOUSANDS)
1ST 2ND 3RD QTR 4TH QTR 1ST 2ND 3RD 4TH
QTR QTR QTR QTR QTR QTR
1996 1996 1996 1996 1997 1997 1997 1997
------- ------ --------- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Mortgage Loan
Originations:
Indianapolis HomeGold $ -- $ 3,490 $ 18,490 $ 41,456 $ 55,639 $ 59,245 $ 64,141 $ 48,214
office
Phoenix HomeGold -- -- -- 4,211 25,440 40,998 40,216 42,012
office
Greenville HomeGold -- -- -- -- 8,338 38,240 44,795 42,299
office
Houston HomeGold -- -- -- -- -- -- -- 11,625
office
Sterling Lending -- -- -- 1,195 1,643 10,051 14,646 15,167
Corporation
------- ------ --------- -------- -------- --------- --------- ----------
Total Retail Mortgage Loan
Originations $ -- $ 3,490 $ 18,490 $ 46,862 $ 91,060 $ 148,534 $ 163,798 $ 159,317
======= ====== ========= ======== ======== ========= ========= ==========
</TABLE>
In January 1998, the Company reorganized its Mortgage Loan
Division to provide improved segregation between its originations/sales function
and its underwriting function. In connection with this reorganization, several
managers of Homegold(R) left the Company. This reorganization is expected to
result in significantly reduced volume levels during the first half of 1998,
which will negatively impact operating profits of the Company.
8
<PAGE>
WHOLESALE LENDING OPERATION. All of the Mortgage Loans
originated on a wholesale basis by the Company are originated through Mortgage
Bankers with whom the Company has a relationship. Certain of these Mortgage
Bankers are Strategic Alliance Mortgage Bankers, with which the Company has a
special arrangement, as described below. As a wholesale originator of Mortgage
Loans, the Company funds the Mortgage Loans at closing, although the Mortgage
Loans may be closed in either the Company's name or in the name of the Mortgage
Banker with the Company taking an assignment of the Mortgage Banker's interest.
During 1997, 1996 and 1995, the Company conducted its wholesale loan operations
through approximately 1,000, 330 and 120 Mortgage Bankers, respectively.
Wholesale Mortgage Loan originations during 1997, 1996 and 1995, totaled $520.1
million, $259.8 million and $192.8 million, respectively.
The Company believes that its wholesale lending operation will
continue to play an important part in its business and that the wholesale
operation, when coupled with retail origination channels, will maximize the
Company's potential growth and penetration of the non-prime mortgage loan
market, particularly because there are a large number of independent mortgage
brokers who require outside funding of their loans. The wholesale strategy also
provides more favorable cash flow than a correspondent-based strategy because
such loans are generally funded at par, rather than at the premiums typically
associated with bulk correspondent purchases.
STRATEGIC ALLIANCE MORTGAGE BANKERS. In 1994, the Company
began seeking to enter into strategic alliance agreements with those Mortgage
Bankers that the Company believed were able to consistently generate large
volumes of quality mortgage loans. These strategic alliance agreements generally
require that the Strategic Alliance Mortgage Bankers must first offer to the
Company the right to purchase all of their loans which meet the Company's
underwriting criteria up to specified levels and, subject to certain limitations
and conditions, obligate the Company to purchase such loans. The Strategic
Alliance Mortgage Bankers are accorded additional services, information and
authority by the Company, including the provision of capital through certain
financial arrangements and the provision of additional MIS and accounting
services. These strategic alliance agreements have terms ranging from two to
five years and are generally terminable only at the expiration of their term.
Various strategic alliance agreements are scheduled to terminate beginning in
1999. Notwithstanding the fact that strategic alliance agreements are generally
not terminable prior to the expiration of their terms, in certain instances,
Strategic Alliance Mortgage Bankers have unilaterally terminated such agreements
prior to their stated expiration. In the event the Strategic Alliance Mortgage
Banker terminates the agreement prior to its expiration, the contract generally
provides for a termination fee equal to, at a minimum, all of the premium income
received by the Strategic Alliance Mortgage Banker over the last twelve months.
This termination fee is considered to be a recoupment of previously shared
premiums and, accordingly, is included in the gain on sale of loans. The Company
currently has eight Strategic Alliance Mortgage Bankers. Although compensation
under strategic alliance agreements varies from agreement to agreement, such
compensation generally involves sharing of premiums or losses received upon sale
of the loan. The Strategic Alliance Mortgage Banker also retains all origination
fees.
9
<PAGE>
Strategic Alliance Mortgage Bankers accounted for
approximately $164.9 million, or 15%, of the Company's Mortgage Loans originated
in 1997, approximately $190.7 million, or 58%, of the Company's Mortgage Loans
originated in 1996, and approximately $145.0 million, or 75%, of the Company's
Mortgage Loans originated in 1995.
The Company plans to increase the number of Mortgage Bankers
with which it is affiliated. The Company also seeks to identify specific
Mortgage Bankers either from its group of affiliated Mortgage Bankers or from
unaffiliated Mortgage Bankers and enter into strategic alliance agreements with
these parties.
GEOGRAPHIC DIVERSIFICATION. Since the Company commenced its
retail mortgage operations in 1996, it has significantly expanded its geographic
presence. During 1997, 1996 and 1995, Mortgage Loan originations by state were
as shown below:
<TABLE>
<CAPTION>
State 1997 % 1996 % 1995 %
------------------ ----------- -------- ----------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
North Carolina $ 198,485 18.3 % $ 89,976 27.4 % $ 97,400 50.5 %
South Carolina 147,663 13.6 90,411 27.5 37,600 19.5
Florida 101,612 9.4 39,589 12.0 16,200 8.4
Georgia 80,012 7.4 13,381 4.1 -- --
Michigan 61,836 5.7 10,959 3.3 -- --
Tennessee 55,872 5.2 15,239 4.6 8,800 4.6
Louisiana 53,917 5.0 5,080 1.6 -- --
Indiana 51,046 4.7 16,373 5.0 -- --
Virginia 50,556 4.7 13,666 4.2 9,600 5.0
Maryland 34,410 3.2 89 0.0 -- --
All other states 247,407 22.8 33,886 10.3 23,200 12.0
=========== ======== =========== ======= ========== ========
Total $ 1,082,816 100.0 % $ 328,649 100.0 % $ 192,800 100.0 %
=========== ======== =========== ======= ========== ========
</TABLE>
LOAN UNDERWRITING
In the application and approval process associated with the
Company's retail Mortgage Loan operations, a Company loan officer in a retail
loan origination office obtains an initial loan application, which is processed
through the underwriting department associated with the particular loan
origination office. The Company is responsible for securing all necessary
underwriting information associated with such application. The underwriting
department generally completes its review within one business day after
procurement of all necessary documentation. Upon approval by the underwriting
department, the loan is generally forwarded to an attorney or title company for
closing.
The application and approval process for wholesale Mortgage
Loans depends upon the specific Mortgage Bankers involved in the origination
process. Loans originated through the Strategic Alliance Mortgage Bankers are
initially evaluated and underwritten by the Strategic Alliance Mortgage Bankers.
After the Strategic Alliance Mortgage Bankers have gathered the necessary
underwriting information and evaluated and approved the application, summary
loan information and a funding request are forwarded to the Company for review
on an expedited basis, which review is generally completed within two business
days. After approval by the Company, the Strategic Alliance Mortgage Banker
forwards the loan package to an attorney or title company for closing. In the
origination and assignment process, the Strategic Alliance Mortgage Banker makes
representations and warranties to the Company with respect to the Mortgage Loan,
including a representation that the Mortgage Loan meets the Company's
underwriting criteria. With respect to loans originated through Mortgage Bankers
other than the
10
<PAGE>
Strategic Alliance Mortgage Bankers, the necessary underwriting information is
gathered by both the Mortgage Banker and the Mortgage Loan Division's central
credit department. After review and evaluation, a loan officer in the credit
department makes the final credit decision before funding.
Creditworthiness is assessed through a variety of means,
including calculating debt to income ratios, examining the applicant's credit
history through credit reporting bureaus, verifying an applicant's employment
status and income, and checking the applicant's payment history with respect to
the first mortgage, if any, on the property. The Company uses several procedures
to verify information obtained from an applicant. The applicant's outstanding
balance and payment history on any senior mortgage is verified by calling the
senior mortgage lender. In order to verify an applicant's employment status and
income, the Company generally obtains such verification from the applicant's
employer and, in the case of self-employed borrowers, the Company requires a
copy of the borrower's tax return.
The Company generally requires an independent appraisal on all
loans. Loans in excess of $350,000 generally require two independent appraisals.
The Company generally requires title insurance for all real estate loans. The
Company generally requires real estate improvements to be fully insured as to
fire and other commonly insured-against risks and regularly monitors its loans
to ensure that insurance is maintained for the period of the loan.
The following table provides a general overview of the
Company's principal underwriting criteria for first Mortgage Loans, set forth
according to internal loan classification:
<TABLE>
<CAPTION>
INTERNAL LOAN CLASSIFICATION
---------------- -- --------------- --- --------------- -- --------------- -- ---------------
AA A B C D
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Existing mortgage No 30 day late Maximum of Maximum of Maximum of Cannot be in
history (maximum payments in two 30 day three 30 day four 30 day foreclosure
historical the last 24 late payments late payments late payments
delinquencies) months in last 12 in the last in the last
months; and 12 months; 12 months;
one 60 day maximum of maximum of
late payment one 60 late one 60 day
in the last payment in late payment
24 months the last 24 in the last
months 12 months;
maximum of
one 90 day
late payment
in the last
24 months
Other credit history Maximum of two Maximum of Maximum of 30, 60, and No criteria
(maximum historical 30 day late one 60 day one 90 day 90+ day late
delinquencies) payments in late payment late payment payments
the last 24 in the last in the last acceptable,
months 24 months, 24 months provided that
with minimal the borrower
30 day late has at least
payments in minimal
the last 24 favorable
months credit history
Bankruptcy filings None None in past None in past None in past No criteria
5 years 2 years 2 years
Maximum debt service to
income ratio (1) 45% 45% 45% 50% 50%
Maximum LTV ratio:
Owner occupied 90% 90% 85% 80% 70%
Non-owner occupied 80% 75% 70% 65% No product
</TABLE>
11
<PAGE>
- -----------------------
(1) Maximum debt service to income ratio may increase by 5% in each category
(except AA loans) if disposable income meets certain thresholds.
The following table provides information regarding the
Company's first and second Mortgage Loan originations by credit classification
for the year ended December 31, 1997:
LOAN ORIGINATIONS BY CREDIT CLASSIFICATION
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INTERNAL LOAN CLASSIFICATION
---------------------------------------------------------------------------------------
AA/A B C D TOTALS
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1ST MORTGAGE LOANS
Total $ 584,991 $ 162,279 $ 56,097 $ 17,820 $ 821,187
% of total 71.2 % 19.8 % 6.8 % 2.2 % 100.0 %
Weighted average coupon 10.7 11.7 12.9 14.0 11.1
Weighted average LTV ratio 78.9 78.0 74.3 68.4 78.2
2ND MORTGAGE LOANS
Total $ 224,547 $ 28,447 $ 7,234 $ 1,401 $ 261,629
% of total 85.8 % 10.9 % 2.8 % 0.5 % 100.0 %
Weighted average coupon 14.6 15.0 14.8 14.7 14.7
Weighted average LTV ratio 102.2 92.3 85.9 79.4 100.5
</TABLE>
Loan officers are trained to structure loans that meet the
applicant's needs, while satisfying the Company's lending criteria. If an
applicant does not meet the lending criteria, the loan officer may offer to make
a smaller loan, or request that the borrower obtain a co-borrower or guarantor
in order to bring the application within the Company's lending parameters. The
amount that the Company will lend to a particular borrower is determined by a
number of factors, including the borrower's creditworthiness, the value of the
borrower's equity in the real estate and the ratio of such equity to the home's
appraised value.
In connection with Mortgage Loans, the Company collects
nonrefundable loan fees and various other fees, depending on state law, such as
fees for credit reports, lien searches, title insurance and recordings, and
appraisal fees. In connection with the servicing of the loans, the Company may
receive late fees, prepayment fees and insufficient funds fees, where permitted
by applicable law.
12
<PAGE>
SALE AND SECURITIZATION OF MORTGAGE LOANS
The following table sets forth for the periods indicated,
Mortgage Loans securitized and Mortgage Loans sold on a whole loan basis and
Mortgage Loans originated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
--------------- ---------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Mortgage Loans securitized $ 487,563 $ -- $ --
Mortgage Loans sold 435,333 284,794 127,632
=============== ================ ==============
Total Mortgage Loans sold or securitized 922,896 284,794 127,632
=============== ================ ==============
Total Mortgage Loan originations $ 1,082,816 $ 328,649 $ 192,800
% of Mortgage Loan originations sold or securitized 85 % 87 % 66 %
</TABLE>
The Mortgage Loans to be sold are generally packaged in pools
of approximately $20.0 million and offered to several potential purchasers for
the purpose of obtaining bids. After obtaining bids, the pool is generally sold
to the highest bidder. Historically, the Mortgage Loans have been sold servicing
released (i.e., without retention of the servicing rights and associated
revenues) and on a non-recourse basis, with certain representations and
warranties. The Company is required to repurchase any loan if it is subsequently
determined that any representation and warranty made with respect to such loan
was untrue.
In connection with the sale of Mortgage Loans, the Company
generally receives premiums ranging from 2% to 6% of the principal amount of the
Mortgage Loan being sold, depending on prevailing interest rates and the term of
the loan. During 1997, 1996 and 1995, the weighted average premiums on the
Mortgage Loans sold were 2.75%, 5.86%, and 7.04%, respectively. For the years
ended December 31, 1997, 1996 and 1995, gains recognized by the Company in
connection with the sale of Mortgage Loans were $11.1 million, $18.3 million and
$6.0 million, respectively. Purchasers of Mortgage Loan pools are typically
large financial institutions, many of which purchase the Mortgage Loans for
inclusion in larger pools of loans which, in turn, are sold to institutional
investors.
Beginning in the first quarter of 1997, the Company began
securitizing a substantial portion of its Mortgage Loans. The Company expects to
continue its practice of quarterly Mortgage Loan securitizations, but may choose
to alter this strategy depending on cash flow requirements.
During 1997, the weighted average premium on the securitized
Mortgage Loans was 7.37%. For the year ended December 31, 1997, gains recognized
into income by the Company in connection with the securitization of Mortgage
Loans were $32.6 million. The gains recognized into income resulting from
securitization transactions can 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. See " -- Loan Sales and Securitizations" under Management's
Discussion and Analysis of Financial Condition and Results of Operations.
13
<PAGE>
MORTGAGE LOAN SERVICING, DELINQUENCIES AND COLLECTIONS
SERVICING
The Company maintains a centralized portfolio management
department located in Greenville, South Carolina which services its Mortgage
Loans. Prior to 1997, the Company did not retain the servicing on Mortgage Loans
sold but, beginning in March 1997, began securitizing Mortgage Loans for which
it retains the servicing. Servicing includes accounting for principal and
interest, ensuring that insurance is in place, monitoring payment of real estate
property taxes, and warehouse funding management. The Company does not escrow
funds for purposes of insurance and taxes. However, it has the right to
force-place insurance and pay taxes, which, if paid by the Company, are charged
back to the borrower.
The Company also serves as master servicer for the four
Mortgage Loan securitizations, which it has effected to date. In connection with
such securitizations, the Company's servicing operation was reviewed by the
rating agencies, which rated the bonds issued in connection with such
securitizations.
The Company increased its servicing capabilities and staffing
significantly during 1997 and 1996 in anticipation of increased origination
growth and increased requirements resulting from future loan securitizations. A
centralized quality control department reviews a portion of the Mortgage
Loans subsequent to funding to maintain consistency and compliance wit
the Company's documentation and underwriting standards.
DELINQUENCIES AND COLLECTIONS
Collection efforts generally begin when a Mortgage Loan is
over seven days past due. At that time, the Mortgage Loan Division contacts the
borrower by telephone to determine the reason for the delinquency and attempts
to bring the account current. After an account becomes 15 days past due, a late
notice is sent to the borrower to supplement calls. In general, a right-to-cure
letter is sent at 61 days. Once expired, a foreclosure recommendation is
approved on or before the 98th day and the account is turned over to an
attorney. In addition to written notices, the Company attempts to maintain
telephone contact with the borrower throughout the delinquency period. If the
status of the account continues to deteriorate, the Mortgage Loan Division
undertakes an analysis to determine the appropriate action. In limited
circumstances, when a borrower is experiencing difficulty in making timely
payments, the Mortgage Loan Division may temporarily adjust the borrower's
payment schedule without changing the loan's delinquency status. The
determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments.
When a loan is 90 days past due in accordance with its
original terms, it is generally placed on non-accrual status and foreclosure
proceedings are generally initiated. In connection with such foreclosure, the
loan and the facts surrounding its delinquency are reviewed, and the underlying
property may be reappraised. Regulations and practices regarding foreclosure and
the rights of the mortgagor in default vary greatly from state to state. If
deemed appropriate, the Company will bid in its loan amount at the foreclosure
sale or accept a deed in lieu of foreclosure. The real estate owned portfolio,
which is carried at the lower of carrying
14
<PAGE>
value or appraised fair market value less estimated cost to sell, totaled $2.5
million and $3.0 million at December 31, 1997 and 1996, respectively.
The following table sets forth for the periods indicated
information relating to the delinquency and loss experience of the Company with
respect to its Mortgage Loans serviced:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1997 1996 1995
------------- ------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total serviced Mortgage Loans (period end) (1) $768,556 $ 146,231 $ 88,165
Serviced Mortgage Loans (period end) (2) 700,248 146,231 88,165
Average serviced Mortgage Loans (2) 411,549 97,281 74,158
Delinquency (period end) (3) 30-59 days past due:
Principal balance $ 25,424 $ 4,450 $ 6,833
% of serviced Mortgage Loans (2) 3.63 % 3.04 % 7.75 %
60-89 days past due:
Principal balance $ 9,383 $ 1,530 $ 1,587
% of serviced Mortgage Loans (2) 1.34 % 1.05 % 1.80 %
90 days or more past due:
Principal balance $21,233 $ 4,633 $ 4,300
% of serviced Mortgage Loans (2) 3.03 % 3.17 % 4.88 %
Total delinquencies:
Principal balance $ 56,040 $ 10,613 $ 12,720
% of serviced Mortgage Loans (2) 8.00 % 7.26 % 14.43 %
Real estate owned (period end) $ 2,522 $ 2,959 $ 2,811
Net charge-offs 1,305 792 771
% of net charge-offs to average serviced Mortgage Loans 0.32 % 0.81 % 1.04 %
</TABLE>
(1) Includes loans subserviced for others, where the Company has no credit risk.
(2) Does not include loans subserviced for others, where the Company has no
credit risk.
(3) For 1997, the Company is calculating delinquencies based on number of
payments past due, in accordance with industry standards, compared with
number of days past due used in 1996 1995.
Over the last several years, and more acutely in 1997, the
Company has expanded rapidly. Loans past due as a percentage of serviced
mortgage loans is diluted due to the increased origination volume. The Company
anticipates that its total delinquencies will generally be higher than they were
in 1997 as the portfolio becomes more seasoned.
SMALL BUSINESS LOAN DIVISION
OVERVIEW
The Company's Small Business Loan Division makes loans to
small businesses primarily for the acquisition or refinancing of property, plant
and equipment, working capital and debt consolidation. The Company's principal
strategy in the Small Business Loan Division is to market the Company's SBA
Loans, Asset-Based Small Business Loans and mezzanine loans as products of a
single commercial loan company capable of meeting the range of commercial credit
needs of small businesses in various stages of development. The Company believes
that it is one of only a few national, non-bank lenders that focus on smaller
businesses with debt needs of generally less than $2.0 million, that also offers
such businesses various commercial loan products designed to meet substantially
all of their financing needs. During 1997, 1996 and 1995, Small Business Loan
originations totaled $81.0 million, $68.2 million and $39.6 million,
respectively.
15
<PAGE>
The Small Business Loan Division's lending operation is
conducted through a total of nine offices located in Greenville, SC, Atlanta,
GA, Richmond, VA, Panama City, FL, Tampa, FL, Dallas, TX, Denver, CO, Chicago,
IL, and Princeton, NJ.
Principal loan products of the Small Business Loan Division
are summarized below.
SBA LOANS. In 1997, approximately 79% of the Company's Small
Business Loans were SBA Loans. The Company is one of approximately 12
non-depository entities in the United States utilizing a license to make SBA
Loans. Substantially all of the Company's SBA Loans are Section 7(a) Loans.
During 1997, the Company originated approximately $64.2 million in SBA Loans.
The SBA guarantees on a pro rata basis generally 75% of the original principal
amount of an SBA Loan, subject to a maximum guarantee amount per borrower of
$750,000. The Company sells the SBA Loan Participations in the secondary market.
In connection with such sales, the Company typically receives cash premiums of
approximately 10% of the guaranteed portion being sold. In addition, the Company
retains servicing rights for which it currently receives an average of 1.6% of
the guaranteed portion of the SBA Loans annually over the life of the loan. The
Company securitizes the unguaranteed portions of its SBA Loans. According to a
leading industry publication, the Company was the eighth largest originator of
SBA Loans in the United States, by principal amount of SBA Loans approved, for
the SBA's fiscal year ended September 30, 1997. The Company intends to expand
its SBA Loan operations by utilizing its "Preferred Lender" status (the highest
designation) with the SBA to minimize response time and maximize loan
production, opening additional offices, increasing the number of relationships
with referral sources such as commercial loan brokers ("Commercial Loan
Brokers") and increasing the number of internal business development officers.
ASSET-BASED LOANS. The Small Business Loan Division also
provides asset-based Small Business Loans ("Asset-Based Small Business Loans"),
which are revolving working capital loans secured by accounts receivable,
inventory and equipment to small and medium-sized businesses. The Company's
asset-based lending operation, which began in April 1996, originated
approximately $13.5 million loans in 1997 (based on the aggregate commitment of
loans closed).
MEZZANINE LOANS. In June 1997, the Company acquired Reedy
River Ventures, Limited Partnership ("RRV"), a Small Business Investment
Company, and through this entity, makes mezzanine loans, accompanied by equity
participations. The Company served as General Partner to RRV prior to that time.
At December 31, 1997, RRV had loans receivable outstanding of approximately $7.3
million. The Company expects to utilize RRV, along with the Company's SBA Loans
and Asset-Based Small Business Loans, to present the Company as a single
commercial loan company capable of meeting the commercial credit needs of small
businesses in various stages of development. The Small Business Loan Division,
through Emergent Equity Advisors, Inc., also serves as investment manager for
Palmetto Seed Capital Limited Partnership, an entity which provides venture
capital to start-up companies principally located within South Carolina.
16
<PAGE>
The Company also offers a commercial real estate loan product
originated under Section 504 of the Small Business Act. In addition, in August
1997, the Company received approval from the U.S. Department of Agriculture to
participate in its "Business and Industry" loan program in five states. The
Company continually reviews various additional loan products and expects that it
will continue to focus its SBA lending efforts principally on Section 7(a)
Loans, although future regulatory changes could alter such decision.
SMALL BUSINESS LOAN CUSTOMERS
OVERVIEW: The Company's Small Business Loan customers are
commercial businesses, which generally do not have access to traditional bank
financing. Such financing may be unavailable because of a variety of factors,
including inadequate collateral, insufficient debt coverage, short operating
history, lack of management experience or an unfavorable credit history. The
Company generally obtains the guarantee of the principals involved in the
business.
SBA LOANS: The Company's SBA Loans are made only to borrowers
who meet defined criteria of the SBA as to the definition of a "small business."
The SBA loans are typically made to borrowers in need of start-up financing,
refinancing short-term debt with longer term SBA debt, acquiring another
enterprise, or obtaining long-term financing necessary to grow the business.
Successful SBA borrowers typically secure traditional bank financing in the
future.
ASSET-BASED LOANS: The Company's asset-based loans are made to
borrowers that require monitored working capital financing as compared as
compared with traditional bank financing. The typical borrower may be
undercapitalized, highly leveraged, and experiencing rapid growth. Asset-based
lending is typically of a short-term nature and may serve the borrower's needs
for one to three years before the borrower can obtain more traditional bank
financing.
MEZZANINE LOANS: The Company's mezzanine loans are made to
rapidly growing companies that need capital to expand their business. Although
the mezzanine loan is typically subordinate to other secured borrowings, the
loan normally has an equity participation feature.
SECTION 7(A) LOAN PROGRAM
Section 7(a) Loans are term loans made to commercial
businesses, which qualify under SBA regulations as "small businesses." These
criteria differ based upon the industry in which the potential borrower
operates. These loans may be made only for the purposes set forth in the SBA
regulations, which include principally the acquisition or refinancing of
property, plant and equipment, and for working capital or debt consolidation.
The portion of the loan guaranteed by the SBA, the term of the loan and the
range of interest rates charged are also regulated by the SBA. The Company
underwrites SBA loans utilizing these SBA criteria, as well as by assessing the
available collateral, personal guarantees, and projected earnings and cash flow
of the small business on a case by case basis.
17
<PAGE>
The SBA administers three levels of lender participation in
its Section 7(a) Loan program. Under the first level of lender participation,
known as the Guaranteed Participant Program, the lender gathers and processes
data from applicants and forwards it, along with its request for the SBA's
guarantee, to the local SBA office. The SBA then completes an independent
analysis and makes its decision on the loan application. SBA turnaround time on
such applications can vary greatly, depending on its backlog of loan
applications. Under the second level of lender participation, known as the
Certified Lender Program, the lender (the "Certified Lender") gathers and
processes the application and makes its request to the SBA, as in the Guaranteed
Participant Program procedure. The SBA then performs a review of the lender's
credit analysis on an expedited basis, which review is generally completed
within three working days. The SBA requires that lenders originate loans meeting
certain portfolio quality and volume criteria before authorizing lenders to
participate as Certified Lenders. The SBA grants authorization on a
district-by-district basis. Under the third level of lender participation, known
as the Preferred Lender Program, the lender has the authority to approve a loan
and to obligate the SBA to guarantee the loan without submitting an application
to the SBA for credit review. However, the lender (the "Preferred Lender") is
required to secure confirmation from the SBA that the applicant qualifies as a
small business. Such confirmation generally takes less than 24 hours. The
standards established for participants in the Preferred Lender Program, the
SBA's highest designation, are more stringent than those for participants in the
Certified Lender Program and involve meeting additional portfolio quality and
volume requirements.
The Company has been designated a Preferred Lender by the SBA
in 34 of the 65 SBA districts. The Company generates a substantial majority of
its SBA Loans in these 34 SBA districts. The SBA may suspend or revoke Preferred
Lender status for reasons such as loan performance, failure to make the required
number of loans under the expedited procedures, or violations of applicable
statutes, regulations or published SBA policies and procedures. The SBA performs
periodic audits of its non-bank licensed lenders to ensure compliance with its
policies and procedures.
All SBA Loans originated by the Company have variable interest
rates, limited by SBA regulations to a maximum of prime plus 2.75%, which adjust
quarterly, require monthly payments and are scheduled to amortize fully over
their stated term. SBA Loans originated by the Company have terms ranging from
seven to 25 years depending upon the use of proceeds, with a weighted average
term of approximately 19 years. Generally, 7-year loans are made for working
capital, 10-year loans for equipment and 25-year loans for real estate.
SBA GUARANTEES
Under the Section 7(a) SBA Program, the SBA guarantees on a
pro rata basis up to 75% of the loan amount with a maximum guarantee per
borrower of $750,000.
In the event of a default by a borrower on an SBA Loan, if the
SBA establishes that any resulting loss is attributable to a failure by the
Company to comply with SBA policies and procedures in connection with the
origination, documentation or funding of the loan, the SBA may seek recovery of
funds from the Company. With respect to SBA Loan Participations which have been
sold, the SBA first will honor its guarantee and then seek compensation from the
Company in the event that a loss is deemed to be attributable to such failure to
comply with SBA policies and procedures. The SBA has previously determined two
of the Company's loans to be partially impaired, although the amounts of these
impairments were not material. Currently,
18
<PAGE>
the Company is aware of a potential impairment of guarantee on one loan, which
is currently being reviewed by the SBA. Even if a full impairment were issued on
that loan, the effect on the Company's financial position would not be material.
LOAN ORIGINATION AND APPROVAL
In the past five years, the Company's Small Business Loan
origination offices have made loans in 29 states. The Company's Small Business
Loans generally range in size from $100,000 to $1.5 million. The Company's
average SBA loan size for originations during 1997 and 1996 was $666,000 and
$679,000, respectively.
SBA Loans are originated directly by the Company's loan
officers in its seven branch offices and are primarily generated through
Commercial Loan Brokers located in its market areas. Approximately 60% of the
SBA Loans originated in 1997 were originated through Commercial Loan Brokers,
who generally are paid referral fees by the Company. The Company does not have
any contractual agreements with any of these brokers obligating them to refer
loans to the Company. In 1997, the Company originated Small Business Loans in
connection with approximately 35 Commercial Loan Brokers, and no single
Commercial Loan Broker accounted for more than 20% of the Company's Small
Business Loans. The Company also attempts to maintain strong relationships with
commercial banks, attorneys, accountants and other potential loan referral
sources.
Applicants for SBA Loans are generally required to provide
historical financial statements for three years and/or projected statements of
operations for two years. They are also generally required to provide proof of
equity, personal guarantees and assignments of affiliated leases and life
insurance. Credit reports are generally obtained from independent credit
reporting agencies for all applicants. These reports are reviewed by the SBA
lending operation's credit officers. Independent appraisals are generally
required on real estate pledged as collateral.
The Company's Asset-Based Small Business Loans have variable
rates of interest which range generally from 1.0% to 4.0% above the prime
lending rate. However, these Asset-Based Small Business Loans also provide for
servicing and other processing fees, which cause the effective rate associated
with such loans to average 22% for the loans originated to date. Asset-Based
Small Business Loans are evidenced by variable-rate, revolving credit notes,
which are payable upon demand. However, the Company generally commits to make
the credit facility available for a period of one to two years, provided that
certain covenants and conditions are met. Applicants for Asset-Based Small
Business Loans are generally required to provide cash flow projections and
inventory and accounts receivable aging and turn-over information. Sales and
collection information is provided to the Company on a daily or weekly basis.
All loans made by the Small Business Loan Division generally
must be approved by the Company's credit administration department. All SBA
Loans in excess of $1.0 million must also be approved by either the President or
Director of Portfolio Management of the SBA lending operation. After approval by
such officers, the loan application is produced and forwarded to the SBA office
servicing the location of the applicant. If an SBA Loan is being made in a
district where the Small Business Loan Division is certified as a Preferred
Lender, no prior credit approval of the SBA is required before the loan
transaction can be consummated. However, if the SBA Loan is being made in a
district where the Small Business Loan Division is not certified as a Preferred
Lender, the loan cannot be made until the SBA office approves the loan, issues
an authorization letter and assigns a loan number.
19
<PAGE>
SMALL BUSINESS LOAN SALES AND SECURITIZATIONS
To date, the only Small Business Loans which the Company has
sold or securitized are SBA Loans. The following table sets forth for Small
Business Loans for the periods indicated, loans securitized and loans sold on a
whole loan basis and loan originations.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Small Business Loans securitized $ 24,286 $ 12,851 $ 17,063
Small Business Loans sold 41,232 33,060 25,423
================ ================ ==============
Total Small Business Loans sold or securitized 65,518 45,911 42,486
================ ================ ==============
Total Small Business Loan originations $ 81,018 $ 68,210 $ 39,560
% of Small Business Loan originations sold or
securitized 81 % 67 % 107 %
</TABLE>
LOAN SALES. Upon final disbursement of the proceeds of each
SBA Loan, the Company obtains bids in the secondary market for the SBA Loan
Participation associated with that SBA Loan. The SBA Loan Participation is
generally sold to the highest bidder. The Company retains the unguaranteed
portion of the loan and the servicing rights to the entire loan. The Small
Business Loan Division sells the SBA Loan Participations generally to financial
institutions or other institutional investors. Purchasers of the SBA Loan
Participations share ratably with the Small Business Loan Division (holding the
unguaranteed portion) with respect to all principal collected from the borrowers
with respect to the SBA Loans. SBA lenders are required to pay a fee of 0.5% per
annum to the SBA on the outstanding balance of the guaranteed portion of all
loans, which fee is deducted from remittances to the holders of the SBA Loan
Participations.
In connection with the sale of SBA Loan Participations, the
Small Business Loan Division receives, in addition to excess servicing revenue,
cash premiums of approximately 10% of the guaranteed portion being sold. During
1997, 1996 and 1995, the weighted average premiums on the SBA Loan
Participations sold, together with the additional servicing revenue, aggregated
14.7%, 14.2%, and 13.8%, respectively, of the SBA Loan Participations sold. For
the years ended December 31, 1997, 1996 and 1995, premiums recognized by the
Company in connection with the sale of SBA Loan Participations were $3.1
million, $2.6 million, and $2.7 million, respectively.
SECURITIZATION. In December 1997, November 1996 and June 1995,
the Company securitized approximately $21.5 million (including $1.8 million
which was prefunded and closed in February 1998), $17.5 million (including $4.6
million which was prefunded and closed in January 1997) and $17.1 million,
respectively, of the unguaranteed portions of its SBA Loans. Each securitization
was effected through a grantor trust (the "Trust"), the ownership of which was
represented by Class A and Class B certificates. The Class A Certificates were
purchased by investors, while the Company retained the Class B certificates.
These certificates give the holders thereof the right to receive payments and
other recoveries attributable to the unguaranteed portion of the SBA Loans held
by the Trust. The Class B Certificates issued in December 1997, November 1996
and June 1995 represent approximately 10%, 9% and 10%, respectively, of the
principal amount of the SBA Loans transferred in the securitization and are
20
<PAGE>
subordinate in payment and all other respects to the Class A Certificates.
Accordingly, in the event that payments received by the Trust are not sufficient
to pay certain expenses of the Trust and the required principal and interest
payments due on the Class A Certificates, the Company, as holder of the Class B
Certificates, would not be entitled to receive principal or interest payments
due thereon.
The Company serves as master servicer for the Trusts and,
accordingly, forwards payments received on account of the SBA Loans held by the
Trusts to the trustee of the Trusts, which, in turn, pays the holders of the
certificates in accordance with the terms of and priorities set forth in the
securitization documents. Because the transfer of the SBA Loans to the Trust
constitutes a sale of the underlying SBA loans, no liability is created on the
Company's consolidated financial statements. However, the Company has the
obligation to repurchase the SBA Loans from the Trusts in the event that certain
representations made with respect to the transferred SBA Loans are breached or
in the event of certain defaults by the Company, as master servicer. The Class A
Certificates received a rating of Aaa from Moody's Investors Service, Inc. for
the 1995 transaction and Aa for the 1996 and 1997 transactions. The Class B
Certificates were not rated. In connection with the securitizations, the Small
Business Loan Division received funds substantially equal to the Class A
Certificates' percentage of the total principal amount of the SBA Loans
transferred to the Trusts, net of initial spread account requirements and
certain transaction costs.
Currently the SBA approves securitization structures on a
transaction-by-transaction basis with no minimum required retention percentages.
Current rules also require non-depository SBA lenders to maintain unencumbered
capital of $1.0 million or 10% of the Company's share of outstanding loans,
whichever is greater. The SBA is proposing to modify its rules regarding the
financing and securitization of the unguaranteed portion of loans guaranteed
under Section 7(a) of the Small Business Act. Present regulations provide these
options only to non-depository lenders such as the Company. These proposed rules
would permit both depository and non-depository lenders to pledge or securitize
the unguaranteed portions of SBA Loans. Under the proposal, participating
lenders which undertake securitizations would be required to retain the
equivalent of at least a 5% interest in each loan. The proposed rules would also
increase the amount of required minimum equity for small business lending
companies by 8% of the retained tranche, unless the lender puts up a 5% cash
reserve. The proposed regulations would reduce the economic benefits of
securitization to the Company, and could also impact liquidity of the Company
and availability of funding.
SMALL BUSINESS LOAN SERVICING, DELINQUENCIES AND COLLECTIONS
SERVICING
The Company services substantially all the Small Business
Loans it originates from a central location in Greenville, South Carolina.
Servicing includes collecting payments from borrowers, remitting payments with
respect to securitized loans to the trustee of the trusts, and with respect to
SBA Loan Participations, to Colson Services Corp. ("Colson Services"),
accounting for principal and interest, contacting delinquent borrowers, and
supervising foreclosures. The Company initially reviews loan files to confirm
that the loans were originated in accordance with SBA regulations and Company
policies. Thereafter, the Company conducts periodic reviews of the borrower's
financial condition.
21
<PAGE>
The SBA has contracted with Colson Services to serve as the
exclusive fiscal and transfer agent for the SBA Loan Participations sold in the
secondary market. The Company collects payments from borrowers and remits to
Colson Services amounts due to investors. Colson Services then remits such
amounts to the investors and administers the transfer of SBA Loan Participations
from one investor to another.
DELINQUENCIES AND COLLECTIONS
When an SBA Loan becomes delinquent, the Company contacts the
borrower to determine the circumstances of the delinquency and attempts to
maintain close contact with the borrower until the loan is brought current or is
liquidated. When an SBA Loan becomes 60 days past due, the Company is required
to notify the SBA of such delinquency. Generally, once a loan becomes 90 days
delinquent, the Company places the loan on non-accrual status, delivers a
default notice to the borrower and, upon notification to and approval by the
SBA, begins the legal process of foreclosure and liquidation. Foreclosure
proceedings are generally conducted by the Company, although where the SBA Loan
was not made under the Preferred Lender program, the SBA has the right to
conduct the foreclosure. Any loss after foreclosure and liquidation is allocated
pro rata between the guaranteed and the unguaranteed portions of the SBA Loan.
Generally, after an SBA Loan becomes 60 to 90 days past due, the SBA, upon the
request of the Company (as servicer of the loan), repurchases the guaranteed
portion of the principal balance of the SBA Loan from the holder, together with
accrued interest covering a period of up to 120 days.
The asset-based lending operation monitors its borrowers daily
for availability under the lines of credit. Loans are placed on watch if the
borrower is experiencing tight cash flow and poor profitability. Loans are
placed on non-accrual status if collection of the interest is deemed to be
doubtful. In the event of a default, the Company makes an assessment of the
borrower's financial condition and nature of the default to determine further
action. If repayment of the loan is considered doubtful, a demand letter is sent
and the Company begins the process to take control of the collateral.
When a mezzanine loan becomes delinquent, the Company contacts
the borrower by telephone to determine the circumstances of the delinquency and
attempts to maintain close contact with the borrower until the loan is brought
current or is liquidated. When a mezzanine loan becomes more than 30 days past
due, the Company delivers a default notice to the borrower. When a mezzanine
loan becomes more than 90 days past due, the Company generally places the loan
on non-accrual status and generally begins the legal process of foreclosure and
liquidation.
22
<PAGE>
The following table sets forth for the periods indicated
information relating to the delinquency and loss experience of the Company with
respect to its Small Business Loans serviced:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Total serviced Small Business Loans (period end) $ 198,876 $ 140,809 $ 108,696
Total unguaranteed serviced Small Business Loans 78,822 44,017 24,867
Average unguaranteed serviced Small Business Loans 61,420 34,442 21,819
Delinquency (period end) (1) 30-59 days past due:
Principal balance $ 2,253 $ 1,482 $ 717
% of total unguaranteed serviced Small Business
Loans
60-89 days past due: 2.86 % 3.37 % 2.88 %
Principal balance $ 348 $ 391 $ 1,081
% of total unguaranteed serviced Small Business
Loans 0.44 % 0.89 % 4.35 %
90 days or more past due:
Principal balance $ 686 $ 1,612 $ 612
% of total unguaranteed serviced Small Business
Loans 0.87 % 3.66 % 2.46 %
Total delinquencies:
Principal balance $ 3,287 $ 3,485 $ 2,410
% of total unguaranteed serviced Small Business
Loans 4.17 % 7.92 % 9.69 %
Real estate owned (period end) $ -- $ -- $ 18
Net charge-offs 1,683 932 311
% of net charge-offs to average unguaranteed serviced
Small Business Loans 2.74 % 2.71 % 1.43 %
</TABLE>
(1) For 1997, the Company calculated delinquencies based on number of payments
past due, in accordance with industry standards, compared with
delinquencies based on number of days past due, which was the method used
in 1996 and 1995.
AUTO LOAN DIVISION
Substantially all of the assets of the Auto Loan Division were sold on March 19,
1998 for $20.4 million, which approximated the book value of such Division as
reflected on the Company's financial statements.
COMPETITION
The financial services industry, including the markets in
which the Company operates, is highly competitive. Competition is based on the
type of loan, interest rates, and service. Traditional competitors in the
financial services industry include commercial banks, credit unions, thrift
institutions, credit card issuers, consumer and commercial finance companies,
and leasing companies, many of which have considerably greater financial and
marketing resources than the Company. Moreover, substantial national financial
services networks have been formed by major brokerage firms, insurance
companies, retailers and bank holding companies. The Company believes that it
competes effectively in its markets by providing competitive rates and
efficient, complete services.
23
<PAGE>
The Company faces significant competition in connection with
its Mortgage Loan operations, principally from national companies which focus
their efforts on making mortgage loans to non-prime borrowers. Many of these
companies have considerably greater financial and marketing resources than the
Company. Although these large national companies compete in the mortgage loan
industry, the industry, as a whole, is highly fragmented and no one company has
more than 5.5% of the total mortgage loan market. The Company attempts to
maintain its competitiveness by continuing to expand its retail Mortgage Loan
operation and by maintaining and developing its strong relationships with
Mortgage Bankers. If the Company is not successful in these regards, the
Company's operations could be materially and adversely affected. See " --
Mortgage Loan Division -- Mortgage Loan Origination."
The Company faces significant competition in all markets in
which it makes Small Business Loans to non-prime borrowers. The Company's major
competitors vary from region to region. However, its primary competitors are
small independent banks and larger finance companies. Because SBA Loan interest
rates and terms offered by lenders are relatively uniform, the Company believes
that the principal source of competition in making SBA Loans relates to the
quality of service provided by the lender and the relationships established with
the borrower. Competition with respect to Asset-Based Small Business Loans to
non-prime borrowers is also principally based upon the quality of the service
provided by the lender and the relationships established with the borrower and
secondarily upon the interest rate and other terms of such loans. Competition
for its mezzanine lending operation comes from a variety of sources, ranging
from small private venture funds to larger institutions. The Company believes
that it is important that it maintain good relations with the Commercial Loan
Brokers, accountants and attorneys, who are a significant source of Small
Business Loan originations.
REGULATION
GENERAL
The Company's operations are subject to extensive local, state
and federal regulations including, but not limited to, the following federal
statutes and regulations promulgated thereunder: the Small Business Act, the
Small Business Investment Act of 1958, as amended (the "SBIA"), Title 1 of the
Consumer Credit Protection Act of 1968, as amended (including certain provisions
thereof commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal
Credit Opportunity Act of 1974, as amended (the "ECOA"), the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act of 1970, as amended (the "FCRA"),
the Fair Debt Collection Practices Act, as amended, the Real Estate Settlement
Procedures Act (the "RESPA") and the National Housing Act, as amended. In
addition, the Company is subject to state laws and regulations, including those
with respect to the amount of interest and other charges which lenders can
collect on loans (e.g., usury laws).
In the opinion of management, existing statutes and
regulations have not had a materially adverse effect on the business done by the
Company. However, it is not possible to forecast the nature of future
legislation, regulations, judicial decisions, orders or interpretations, nor
their impact upon the future business, financial condition or prospects of the
Company.
24
<PAGE>
The Company believes that it is in substantial compliance with
state and federal laws and regulations governing its lending activities.
However, there can be no assurance that the Company will not inadvertently
violate one or more of such laws and regulations. Such violations may result in
actions for damages, claims for refunds of payments made, certain fines and
penalties, injunctions against certain practices, and the potential forfeiture
of rights to repayment of loans. Further, adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business.
MORTGAGE LOANS
Mortgage lending laws generally require licensing of the
lender, limitations on the amount, duration and charges for various categories
of loans, adequate disclosure of certain contract terms and limitations on
certain collection practices and creditor remedies. Many states have usury laws
which limit interest rates, although the limits generally are considerably
higher than current interest rates charged by the Company. State regulatory
authorities may conduct audits of the books, records and practices of the
Company's operations. The Company is licensed to do business in each state in
which it does business and in which such licensing is required and believes it
is in compliance in all material respects with these regulations.
The Company's Mortgage Loan origination activities are subject
to TILA. TILA contains disclosure requirements designed to provide consumers
with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. TILA also guarantees consumers a three-day right to cancel
certain credit transactions, including any refinanced mortgage or junior
mortgage loan on a consumer's primary residence. The Company believes that it is
in substantial compliance in all material respects with TILA.
The Company is also required to comply with the ECOA, which,
in part, prohibits creditors from discriminating against applicants on the basis
of race, color, religion, national origin, sex, age or marital status. ECOA
restricts creditors from obtaining certain types of information from loan
applicants. It also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants who are turned down
for credit of the reasons therefor. In instances where a loan applicant is
denied credit or the rate or charge for a loan is increased as a result of
information obtained from a consumer credit agency, another statute, the FCRA,
requires the lender to supply the applicant with the name, address and phone
number of the reporting agency. RESPA was enacted to provide consumers with more
effective advance disclosures about the nature and costs of the settlement
process, and to eliminate kickbacks or referral fees that raised the costs of
settlement services. RESPA applies to virtually all mortgages on residential
real property that is designed principally for occupancy of one to four
families. Specific disclosures mandated by RESPA include, without limitation,
estimates of closing costs, transfers of servicing, affiliated business
arrangements and other settlement information.
25
<PAGE>
SMALL BUSINESS LOANS
The SBA Loans made by the Small Business Loan Division are
governed by federal statutes (the Small Business Act and SBIA) and may be
subject to regulation by certain states. These federal statutes and regulations
specify the types of loans and loan amounts which are eligible for the SBA's
guarantee as well as the servicing requirements imposed on the lender to
maintain SBA guarantees.
The Company is also required to comply with certain portions
of ECOA which are applicable to commercial loans, including SBA Loans. The
Company must comply with ECOA's prohibition against discrimination on the basis
of race, color, religion, national origin, sex, age, or marital status and with
the portion of Regulation B under the ECOA that requires lenders to advise loan
applicants of the reasons their credit request was declined or subject to other
adverse action. The Company believes it is in substantial compliance in all
material respects with ECOA.
The SBA is proposing to modify its rules regarding the
financing and securitization of the unguaranteed portion of loans guaranteed
under Section 7(a) of the Small Business Act. Present regulations provide these
options only to non-depository lenders such as the Company. These proposed rules
would permit both depository and non-depository lenders to pledge or securitize
the unguaranteed portions of SBA Loans. Under the proposal, participating
lenders which undertake securitizations would be required to retain the
equivalent of at least a 5% interest in each loan. The proposed rules would also
increase the amount of required minimum equity for small business lending
companies by 8% of the retained tranche, unless the lender puts up a 5% cash
reserve. The proposed regulations will reduce the economic benefits of
securitization to the Company, and could also impact liquidity of the Company
and availability of funding.
The Company's Asset-Based Small Business Loans and mezzanine
loans are generally not regulated except to the extent set forth above in " --
Regulation -- General."
EMPLOYEES
At December 31, 1997, the Company employed a total of 1,340
full-time equivalent employees. The Company believes that its relations with its
employees are good.
ITEM 2. PROPERTIES
The Company's headquarters are located at 15 South Main
Street, Suite 750, Greenville, South Carolina and are leased. At December 31,
1997, the Company owned four offices and leased 32 offices. None of the leases
or properties owned, considered separately, is believed to be material to the
Company's operations. The Company believes that its leased and owned locations
are suitable and adequate for their intended purposes.
26
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time,
parties to various legal actions arising in the normal course of business.
Management believes that there is no proceeding threatened or pending against
the Company or any of its subsidiaries that, if determined adversely, would have
a materially adverse effect on the operations, profitability or financial
condition of the Company or any of its subsidiaries.
In July 1997, an action was commenced against 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matter was submitted to a vote of security holders during
the fourth quarter of the Company's 1997 fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National
Market under the symbol "EMER".
The following table sets forth the high and low bid prices of
the common stock for the periods indicated, as reported by NASDAQ.
<TABLE>
<CAPTION>
High Bid Low Bid
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter $ 16.25 $ 10.50
Second Quarter $ 12.25 $ 8.75
Third Quarter $ 18.63 $ 10.75
Fourth Quarter $ 20.00 $ 10.50
YEAR ENDED DECEMBER 31, 1996
First Quarter $ 9.00 $ 4.00
Second Quarter $ 12.50 $ 9.00
Third Quarter $ 12.00 $ 7.50
Fourth Quarter $ 14.50 $ 10.50
</TABLE>
27
<PAGE>
On March 20, 1998, the closing price for the Company's common
stock was $8.38. As of March 20, 1998, the Company had 9,708,083 outstanding
shares of common stock held by 826 stockholders of record.
No dividends were paid or declared during 1997 or 1996 and no
dividends are expected to be paid on the common stock for the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical selected financial information of the
Company as of the dates and for the periods indicated. The statement of income
data, cash flow data, and balance sheet data are derived from the audited
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
------------ ---------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest Income $ 34,008 $ 17,908 $ 15,193 $ 10,691 $ 7,692
Servicing income 8,514 3,274 446 212 291
Gain on sale of loans:
Cash gain on sale of loans 14,153 20,862 7,963 4,990 3,193
Non-cash gain on sale of loans 38,675 2,953 1,206 1,460 412
Loan fee income 30,207 4,150 586 276 279
------------ ---------- --------- --------- ---------
Total gain on sale of loans 83,035 27,965 9,755 6,726 3,884
Other revenues 1,399 1,241 884 566 179
------------ ---------- --------- --------- ---------
Total revenues 126,956 50,388 26,278 18,195 12,046
Interest expense 25,133 11,021 8,527 5,879 5,073
Provision for credit losses 10,030 5,416 2,480 2,510 686
General and administrative expenses 84,284 23,490 10,419 7,359 5,624
------------ ---------- --------- --------- ---------
Total expenses 119,447 39,927 21,426 15,748 11,383
------------ ---------- --------- --------- ---------
Income from continuing operations before income 7,509 10,461 4,852 2,447 663
taxes, minority interest and cumulative
effect of change in accounting principle
Provision (benefit) for income taxes (3,900) 718 190 609 (186)
------------ ---------- --------- --------- ---------
Income from continuing operations before
minority interest and cumulative effect
of change in accounting principle 11,409 9,743 4,662 1,838 849
Minority interest in (earnings) loss of (156) 352 (81) (46) (25)
subsidiaries
------------ ---------- --------- --------- ---------
Income from continuing operations before
cumulative effect of change in accounting
principle 11,253 10,095 4,581 1,792 824
Income (loss) from discontinued operations -- -- (3,924) 546 260
Cumulative effect of change in accounting
principle -- -- -- -- 113
============ ========== ========= ========= =========
Net income $ 11,253 $ 10,095 $ 657 $ 2,338 $ 1,197
============ ========== ========= ========= =========
CASH FLOW DATA:
Cash flow due to operating cash income and
expenses $ (17,841) $ 14,174 $ 6,849 $ 4,909 $ 2,424
Cash (used in) provided by loans held for sale
and other (119,260) (92,652) (17,025) 11,811 (830)
============ ========== ========= ========= =========
Net cash (used in) provided by operating
activities $ (137,101) $ (78,478) $(10,176) $ 16,720 $ 1,594
============ ========== ========= ========= =========
BALANCE SHEET DATA:
Total gross loans receivable $ 297,615 $ 189,532 $126,458 $ 95,398 $ 66,279
Total residual assets 63,202 13,215 3,831 1,872 412
Total assets 416,152 224,149 144,931 109,448 84,279
Total debt 336,920 169,596 129,950 95,015 76,195
Total shareholders' equity 63,374 46,635 9,885 9,700 7,362
</TABLE>
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion should be read in conjunction with the
Consolidated Financial Statements and notes of the Company appearing elsewhere
in this report. As used herein, "Discontinued Operations" refers to the
Company's former transportation and apparel operations. Unless otherwise noted,
the discussion contained herein relates to the continuing operations of the
Company, which solely consist of its Financial Services operations.
FORWARD - LOOKING INFORMATION
Certain statements in the financial discussion and analysis by
management that reflect projections or expectations of future financial or
economic performance of the Company, and statements of the Company's plans and
objectives for future operations are "forward-looking" statements. No assurance
can be given that actual results or events will not differ materially from those
projected, estimated, assumed or anticipated in any such forward-looking
statements. Important factors that could result in such differences are many and
include: lower origination volume due to market conditions, higher losses due to
economic downturn or lower real estate values, loss of key employees, adverse
consequences of changes in interest rate environment, deterioration of
creditworthiness of borrowers and risk of default, general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, loss of funding sources, loss of ability to sell loans,
general lending risks, dependence on Federal programs, impact of competition,
regulation of lending activities, and changes in the regulatory environment.
GENERAL
The Company is a diversified financial services company
headquartered in Greenville, South Carolina, which originates, purchases, sells,
securitizes and services mortgage and small business loans to sub-prime
customers. Prior to March 1998, the Company also originated, securitized and
serviced auto loans. The Auto Loan Division was sold in the first quarter of
1998 in order to narrow the Company's financial services focus. 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 acquisition through December 31, 1997, the Company
has experienced a compounded annual growth rate of 84% in loan originations.
Since 1996, the Company has been focused principally on expanding its mortgage
loan division and small business loan division. During the fourth quarter of
1997, the Company opened its fourth retail mortgage regional operating center
and expanded its existing retail mortgage operating centers, in order to
increase capacity. As a result of this expansion, the Company will continue to
incur significant expansion and start-up costs in the first quarter of 1998.
Additionally in the fourth quarter of 1997, the Company restructured its
Mortgage Loan Division. Because of this restructuring, the Company anticipates
that loan origination volume will be lower in the first quarter of 1998
compared to the last few quarters of 1997.
Due to the anticipated higher cost levels and lower volumes,
the Company expects to incur a significant loss in the first quarter of 1998.
While the above changes will have a negative impact on earnings in the first
quarter of 1998, the long-term benefits of these changes are expected to
outweigh this negative impact. In order to concentrate effort on the larger
retail mortgage operation ("Homegold(R)"), the Company has determined to pursue
the divestiture of its smaller retail mortgage origination subsidiary, Sterling
Lending Corp. ("SLC"). This subsidiary was started in June 1996 and has
originated
29
<PAGE>
only a small percentage of total retail loans. This company's first-year
start-up cost resulted in a pre-tax loss of approximately $3.7 million in 1997.
A primary focus of the Company in 1997, in addition to growing
its retail mortgage loan origination business, was to increase its serviced loan
portfolio. The Company's total serviced loans receivable increased to $988.7
million at December 31, 1997, from $309.1 million at December 31, 1996. The
increase in the serviced mortgage loan portfolio has resulted from both the
Company's decision to enter the retail loan origination business and the
increase in both the loan volume from existing and new Mortgage Bankers. Small
Business Loans have increased due to the opening of additional offices, an
increase in the number of commercial loan brokers, which refer loans to the
Small Business Loan Division, and new product offerings. Auto Loans increased
during all such periods, prior to 1997, principally as a result of an increase
in the number of loan production offices and successful efforts at establishing
additional dealer relationships. Beginning in September 1996, the Company
curtailed the expansion of its Auto Loan operations and, since that time, the
Company has experienced a decline in Auto Loan originations. The Company no
longer originates Auto Loans.
30
<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 YEARS ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
Mortgage loans originated $ 1,082,816 $ 328,649 $ 192,800
Mortgage loans sold 435,333 284,794 127,632
Mortgage loans securitized 487,563 -- --
Total mortgage loans owned (period end) 231,145 146,231 88,165
Total serviced mortgage loans (period end) 768,556 146,231 88,165
Total serviced unguaranteed mortgage
loans (period end) (1) 700,248 146,231 88,165
Average mortgage loans owned (2) 215,790 97,281 74,158
Average serviced mortgage loans (2) 443,318 97,281 74,158
Average serviced unguaranteed
mortgage loans (1) 411,549 97,281 74,158
Average interest earned (2) 10.92 % 11.97 % 12.10 %
SMALL BUSINESS LOANS:
Small business loans originated $ 81,018 $ 68,210 $ 39,560
Small business loans sold 41,232 33,060 25,423
Small business loans securitized 24,286 12,851 17,063
Total small business loans owned (period 45,186 29,385 20,620
end)
Total serviced small business loans
(period end) 198,876 140,809 108,696
Total serviced unguaranteed small
business loans (period end) (3) 78,822 44,017 24,867
Average small business loans owned (2) 38,427 26,700 23,692
Average serviced small business loans (2) 165,053 125,723 98,753
Average serviced unguaranteed small
business loans (2) (3) 61,420 34,442 21,819
Average interest earned (2) 15.89 % 12.61 % 10.39 %
AUTO LOANS:
Auto loans originated $ 15,703 $ 18,287 $ 17,148
Auto loans securitized -- 16,107 --
Total auto loans owned (period end) 21,284 13,916 17,673
Total serviced auto loans (period end) 21,284 22,033 17,673
Average auto loans owned (2) 17,104 11,917 13,078
Average serviced auto loans (2) 22,267 21,277 13,078
Average interest earned (2) 24.05 % 23.57 % 27.40 %
TOTAL LOANS:
Total loans receivable (period end) $ 297,615 $ 189,532 $ 126,458
Total serviced loans (period end) 988,716 309,073 214,534
Total serviced unguaranteed loans
(period end) (1)(3) 800,354 212,281 130,705
</TABLE>
- --------------------------------------------------------------------------------
(1) Excludes loans serviced for others with no credit risk to the Company.
(2) Averages are computed using beginning and ending balances for the
period presented, except that the 1996 and 1997 averages are calculated
based on the daily averages for Small Business Loan Division and Auto Loan
Division and monthly averages for Mortgage Loan Division (rather than the
beginning and ending balances).
(3) Excludes guaranteed portion of SBA Loans.
31
<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 increases in the volume
of loans purchased and originated. Currently, the Company's primary operating
cash uses include the funding of (i) Mortgage Loan originations and purchases
pending their securitization or sale, (ii) interest expense on CII investor
savings notes ("CII Notes"), senior unsecured debt and its 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, (
nterest
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 interest-only and residual
certifica
Creating negative cash flow is the requirement to provide
overcollateralization of loans as credit enhancement on the mortgage
securitization transactions. This will continue to negatively impact the
Company's cash flow as additional mortgage securitizations are completed in the
future, unless the Company decides to alter its securitization structures or
sell its residual interests in the securitization trusts. The Company reduces
the negative cash flow impact from the overcollateralization of loans included
in securitizations by continuing to sell whole loans on a cash basis. 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:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
------------- ------------- ---------------
(IN THOUSANDS)
<S> <C>
OPERATING CASH INCOME:
Servicing fees received and excess cash flow from
securitization trusts $ 12,498 $ 3,782 $ 1,259
Interest received 31,716 17,392 14,549
Cash gain on sale of loans 14,153 20,862 8,987
Cash loan origination fees received 31,843 4,714 --
Other cash income 1,875 1,266 491
------------- ------------- ---------------
Total operating cash income 92,085 48,016 25,286
OPERATING CASH EXPENSES:
Securitization costs (3,646) (849) (266)
Securitization hedge losses (2,125) -- --
Cash operating expenses (81,594) (21,625) (9,480)
Interest paid (20,980) (11,046) (8,424)
Taxes paid (1,581) (322) (267)
------------- ------------- ---------------
Total operating cash expenses (109,926) (33,842) (18,437)
CASH FLOW (DEFICIT) DUE TO OPERATING CASH INCOME AND
EXPENSES (17,841) 14,174 6,849
32
<PAGE>
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
------------- ------------- ---------------
(IN THOUSANDS)
OTHER CASH FLOWS:
Cash used in other payables and receivables $ (4,978) $ (5,959) $ (4,850)
Cash used in loans held for sale (114,282) (86,770) (13,767)
Net cash provided by operating activities of
discontinued operations -- 77 1,592
------------- ------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES $ (137,101) $ (78,478) $ (10,176)
============= ============= ===============
</TABLE>
PROFITABILITY
The principal components of the Company's profitability 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; (ii) gains resulting from the sale and securitization
of its loans, including loan origination fees recognized.
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 Year Ended December 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest income 26.8 % 35.5 % 57.8 %
Servicing income 6.7 6.5 1.7
Cash gain on sale of loans 11.1 41.4 30.3
Non-cash gain on sale of loans 30.5 5.9 4.6
Loan fee income 23.8 8.2 2.2
Other revenues 1.1 2.5 3.4
========== ========== ==========
Total revenues 100.0 % 100.0 % 100.0 %
========== ========== ==========
Interest expense 19.8 % 21.9 % 32.5 %
Provision for credit losses 7.9 10.7 9.4
Business development costs 5.9 3.2 2.5
Other general and administrative expenses 60.5 43.4 37.1
Income from continuing operations before income taxes 5.9 20.8 18.5
Income tax expense (benefit) (3.1) 1.4 0.8
Minority interest (0.1) 0.7 (0.3)
Income (loss) from discontinued operations -- -- (14.9)
---------- ---------- ----------
Net income 8.9 % 20.1 % 2.5 %
========== ========== ==========
The Company's net income, as a percentage of revenues,
decreased substantially in 1997 from 1996 as a result of increased expenses
associated with the start-up of three new retail mortgage regional operating
centers for HomeGold(R), expansion of Sterling Lending Corp. retail mortgage
branches to 13, expansion of portfolio management department to handle
anticipated increases to the Company's serviced portfolio, and expansion of
broker wholesale operations. These significant start-up costs were expensed
during 1997 and accordingly, have substantially reduced current operating profit
margins. In the fourth quarter of 1997, the profit margin worsened as a result
of approximately $500,000 additional reserves taken in the Auto Loan Division
(which was sold in March 1998), write-off of approximately $3.0 million for
potential loss on a receivable from a former strategic alliance partner,
approximately $500,000) of additional costs for the Small Business Loan Division
as a result of continued expansion of that business, and approximately $5.3
million in increased costs for the Mortgage Loan Division. Approximately $2.6
million of these increased costs was due to the new Houston Regional Operating
Center for HomeGold(R) which was opened on October 1, 1997. Approximately $1.0
million of the increased costs was due to increased personnel and expansion of
the broker wholesale operations, which is being increased from 4 regions to 7
regions. The remaining increased costs for the Mortgage Loan Division in the
fourth quarter 1997 was due to additional expansion in the other three
HomeGold(R) Regional Operating Centers, additional corporate infrastructure for
MIS and Training, and continued enhancements and expansion of the portfolio
management department. These expansions were partially performed in anticipation
of meeting increased origination estimates. Origination volume, however,
levelled-off in the fourth quarter of 1997, which combined with the continued
expansion, contributed to the decreased operating margins. The Company
anticipates its efficiency ratios for loans originated per originator to
decrease in the first quarter of 1998 as a result of the Company's
reorganization and personnel changes, and accordingly will continue to have
higher costs relative to revenue during the first part of 1998. Management plans
to improve these efficiency ratios, both through evaluating and improving loans
originated per originator as well as to cut operating costs where possible to
improve operating efficiencies by the end of 1998.
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues increased $76.6 million, or 152%, to $127.0
million in 1997 from $50.4 million in 1996. The higher level of revenues
resulted principally from increases in interest income, servicing income, and
gain on sale of loans.
33
<PAGE>
Interest income increased $16.1 million, or 90%, to $34.0
million in 1997 from $17.9 million in 1996. This growth resulted primarily from
the growth experienced by the Mortgage Loan Division. Interest income earned by
the Mortgage Loan Division increased $12.6 million, or 92%, to $26.3 million in
1997 from $13.7 million in 1996. This increase was due principally to the growth
in the average outstanding loan portfolio in the Mortgage Loan Division, which
increased $143.0 million, or 147%, to $240.3 million in 1997 from $97.3 million
in 1996, reflecting the increased loan origination levels generated by that
Division.
Servicing income increased $5.2 million, or 158%, to $8.5
million in 1997 from $3.3 million in 1996. This increase was due principally to
the securitization of Mortgage Loans in 1997, for which the Company retained
servicing rights. Prior to 1997, the Mortgage Loan Division did not securitize
its loans. The Mortgage Loan Division securitized $487.6 million in loans in
1997. The average serviced loan portfolio for the Mortgage Loan Division
increased $343.5 million, or 353%, to $440.8 million from $97.3 million.
Cash gain on sale of loans decreased $6.7 million, or 32%, to
$14.2 million in 1997 from $20.9 million in 1996. The decrease resulted
principally from decreased premiums on sales of Mortgage Loans. The weighted
average gain on sale of Mortgage Loans decreased 3.3%, or 54%, to 2.8% in 1997
from 6.1% in 1996. This decrease in premiums is due primarily to the product
sold in 1997 compared to 1996. In 1996, the majority of loans sold was first
mortgage loans. In 1997, most first mortgage loans originated were securitized,
while second mortgage loans were whole-loan sold. Mortgage Loans sold increased
$150.5 million, or 53%, to $435.3 million in 1997 from $284.8 million in 1996.
Non-cash gain on sale of loans increased $35.7 million to
$38.7 million in 1997 from $3.0 million in 1996. The increase in non-cash gain
on sale of loans was due principally to the securitization of Mortgage Loans in
1997, which was not done prior to 1997. The Mortgage Loan Division securitized
$487.6 million in loans in 1997 and recognized a weighted average non-cash gain
on sale as a percentage of loans securitized of 7.4%, net of expenses. All
non-cash gain on sale of loans in 1996 related to the Small Business Loan
Division.
Loan fees increased $26.0 million to $30.2 million in 1997
from $4.2 million in 1996. The higher loan fees was due principally to the
increase in retail loan originations in the Mortgage Loan Division. The Company
receives substantially higher fees on loans it originates through its retail
operations than it receives on loans purchased. Retail loan originations
increased $493.9 million, or 718%, to $562.7 million in 1997 from $68.8 million
in 1996. 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 $158,000, or 13%, to $1.4 million in
1997 from $1.2 million in 1996. Other revenues are comprised principally of
insurance commissions and management fees. The increase of other revenues
resulted principally from the increase in the Company's loan originations.
Total expenses increased $79.5 million, or 199%, to $119.4
million in 1997 from $39.9 million in 1996. Total expenses are comprised of
provision for credit losses, interest expense, business development, and other
general and administrative expenses.
34
<PAGE>
Interest expense increased $14.1 million, or 128%, to $25.1
million in 1997 from $11.0 million in 1996. The increase in interest expense was
due principally to increased borrowings by the Mortgage Loan Division associated
with increased loan originations and the offering of the Company's Senior Notes
due 2004. Interest expense in the Mortgage Loan Division increased $10.1 million
in 1997 from 1996. Average borrowings attributable to the Mortgage Loan
Division, both under its warehouse credit facilities and in connection with the
sales of notes payable to investors and subordinated debentures, increased
$134.6 million, or 105%, to $262.3 million at December 31, 1997 from $127.7
million at December 31, 1996. 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%.
Provision for credit losses increased $4.6 million, or 85%, to
$10.0 million in 1997 from $5.4 million in 1996. 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.
General and administrative expense increased $60.8 million, or
259%, to $84.3 million in 1997 from $23.5 million in 1996. This is a result
primarily from the increased personnel costs in the Mortgage Loan Division due
to the continued expansion in the portfolio management, underwriting,
processing, and closing departments, and the increased expenses associated with
the opening of retail lending offices in Greenville and Houston in 1997. General
and administrative expenses increased to 13.4% of average serviced loans in 1997
from 9.6% in 1996, principally as a result of the higher costs associated with
the retail mortgage origination facilities. Retail production increased 717% in
1997.
Net income increased $1.2 million, or 12%, to $11.3 million in
1997 from $10.1 million in 1996. The improvement in income was due principally
to the increased growth and profitability of the Small Business Loan Division
and a $3.9 million tax benefit recorded in 1997 due to the recognition of the
deferred tax benefit associated with the net operating loss carryforward.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues increased $24.1 million, or 92%, to $50.4
million in 1996 from $26.3 million in 1995. The increase in revenues resulted
principally from increases in interest and servicing revenue and gain on sale of
loans.
Interest income increased $2.7 million, or 18%, to $17.9
million in 1996 from $15.2 million in 1995. This increase was due principally to
the growth in the serviced loan portfolio in the Mortgage Loan Division.
Interest income earned by the Mortgage Loan Division increased $4.6 million or
51%, to $13.7 million in 1996 from $9.1 million in 1995.
Servicing income increased $2.9 million, or 640%, to $3.3
million in 1996 from $446,000 in 1995. This increase was due to the
securitizations of Small Business Loans and Auto Loans in 1996, for which the
Company retains servicing rights.
35
<PAGE>
Cash gain on sale of loans increased $12.9 million, or 161%,
to $20.9 million in 1996 from $8.0 million in 1995. The increase resulted
principally from increased sales of Mortgage Loans and Small Business Loans
associated with the increased loan originations. Mortgage Loans sold increased
$157.2 million, or 123%, to $284.8 million in 1996 from $127.6 million in 1995.
Small Business Loans sold increased $7.7 million, or 30%, to $33.1 million in
1996 from $25.4 million in 1995. Additionally, the Company received a recoupment
of previously shared premiums of $7.3 million in connection with the settlement
with First Greensboro Home Equity, Inc. and Amerifund Group, Inc., two strategic
alliance partners who terminated their agreements with the Company in 1996.
Non-cash gain on sale of loans increased $1.8 million, or
150%, to $3.0 million in 1996 from $1.2 million in 1995. The increase resulted
principally from the increase in total loans securitized. In 1995, $17.1 million
of Small Business Loans were securitized. In 1996, $29.0 million of Small
Business and Auto Loans were securitized.
Loan fees increased $3.6 million, or 616%, to $4.2 million in
1996 from $586,000 in 1995. The increase in loan fees was due principally to the
increase in loan originations in the Mortgage Loan Division.
Other revenues increased $357,000, or 40%, to $1.2 million in
1996 from $884,000 in 1995. Other revenues are comprised principally of
insurance commissions and management fees. The increase of other revenues
resulted principally from the increase in the Company's loan originations.
Total expenses increased $18.5 million, or 86%, to $39.9
million in 1996 from $21.4 million in 1995. Total expenses are comprised of
interest expense, provision for credit losses and general and administrative
expenses.
Interest expense increased $2.5 million, or 29%, to $11.0
million in 1996 from $8.5 million in 1995. The increase was due principally to
increased borrowings by the Mortgage and Small Business Loan Divisions
associated with increased loan originations. Borrowings attributable to the
Mortgage Loan Division, both under its warehouse credit facilities and in
connection with the sales of notes payable to investors and subordinated
debentures, increased $55.7 million, or 53%, to $160.9 million at December 31,
1996 from $105.2 million at December 31, 1995. Interest expense in the Mortgage
Loan Division increased $2.4 million in 1996 from 1995. Total borrowings
attributable to the Small Business Loan Division decreased $6.1 million, or 41%,
to $8.7 million at December 31, 1996 from $14.8 at December 31, 1995. This
decrease in debt resulted principally from cash received from the securitization
completed in November 1996, which was used to pay down outstanding debt.
Interest expense in the Small Business Loan Division increased $198,000 in 1996
from 1995. There were no borrowings outstanding in the Auto Loan Division as of
December 31, 1996, down from $9.9 million at December 31, 1995. This decrease
resulted principally from cash received from the securitization transaction
completed in March 1996 and from the Company's public offering completed in
November 1996. The offering was used to pay outstanding debt. Interest expense
in the Auto Loan Division decreased $220,000 in 1996 from 1995.
Provision for credit losses increased $2.9 million, or 116%,
to $5.4 million in 1996 from $2.5 million in 1995. The provision was made to
maintain the general reserves for
36
<PAGE>
credit losses associated with loan originations, as well as to increase specific
reserves for possible losses with particular loans.
General and administrative expense increased $13.1 million, or
126%, to $23.5 million in 1996 from $10.4 million in 1995. This is a result of
increased personnel costs in the Mortgage Loan Division due to the continued
expansion in the portfolio management and underwriting departments, and the
increased expenses associated with the opening of retail lending offices in
Indianapolis, Baton Rouge, New Orleans, and Phoenix. General and administrative
expenses increased to 9.62% in 1996 from 5.63% of average serviced loans in
1995, principally as a result of the costs associated with the retail mortgage
origination facilities, for which the related production was sold on a
non-recourse, servicing-released basis, with customary representations and
warranties. Accordingly, costs have been increased relative to the serviced
portfolio.
Net income increased $5.5 million, or 120%, to $10.1 million
in 1996 from $4.6 million in 1995. The improvement in income was due principally
to the increased growth and profitability of the Mortgage Loan Division,
although the Small Business Loan Division's profitability also increased
significantly in 1996 from 1995.
FINANCIAL CONDITION
Net loans receivable increased $103.4 million to $288.4
million at December 31, 1997 from $185.0 million at December 31, 1996. The
increase in investment in asset-backed securities of $12.8 million was due
primarily to the overcollateralization associated with the retention of the
residual interest certificates in the Company's mortgage loan securitizations
completed in each quarter of 1997. The interest only strip security increased by
$40.1 million to $44.4 million at December 31, 1997, from $4.3 million at
December 31, 1996. This increase resulted primarily from the estimated present
value of the excess cash flow on mortgage loans sold with servicing retained of
$44.1 million, offset by amortization of $4.0 million.
Net property, plant and equipment increased by $10.9 million
to $18.1 million at December 31, 1997, from $7.2 million at December 31, 1996.
The Company purchased additional computer equipment to provide system
improvements and equipment supporting electronic document generation, storage,
and retrieval. The Company purchased a 100,000 square foot building for
approximately $4.5 million in late 1997 in Greenville, South Carolina to
facilitate the growth in the Mortgage Loan Division. The Company also purchased
additional furniture and office equipment in connection with the continued
expansion in the portfolio management, underwriting, processing, and closing
departments, and the opening of retail lending offices in Greenville and
Houston.
Other assets increased by $14.1 million to $17.6 million at
December 31, 1997 from $3.5 million at December 31, 1996. The increase results
primarily from $4.4 million in debt origination costs incurred in the offering
of the Company's Senior Notes due 2004, the recording of a deferred tax asset of
approximately $4.2 million, the capitalization of approximately $1.9 million in
direct mail advertising costs, and approximately $1.6 million of capitalized
costs associated with the implementation of a new loan origination and
processing system.
The primary source of funding the Company's receivables comes
from borrowings issued under various credit arrangements (including the Credit
Facilities, CII Notes,
37
<PAGE>
and the Company's Senior Notes due 2004). At December 31, 1997, the Company had
debt outstanding under warehouse lines of credit to banks of $77.6 million,
which compares with $55.5 million at December 31, 1996, for an increase of $22.1
million. During September 1997, the Company issued $125.0 million of Senior
Notes due 2004. At December 31, 1997, the Company had $134.3 million of CII
Notes outstanding, which compares with $114.1 million at December 31, 1996, for
an increase of $20.2 million.
Total stockholders' equity at December 31, 1997 was $63.4
million, which compares to $46.6 million at December 31, 1996, an increase of
$16.8 million. This increase resulted principally from net income of $11.3
million for the year ended December 31, 1997 and the issuance of stock in the
amount of $5.2 million related to the acquisition of the remaining 87% of Reedy
River Ventures that the Company did not previously own.
DISCONTINUED OPERATIONS
TRANSPORTATION SEGMENT
In connection with the Company's strategic plan to focus its
business efforts on the financial services segment, the Company divested its
transportation segment operations during 1994 and 1995. As a result, the
transportation segment has been classified as discontinued operations, and
accordingly, the Company's Consolidated Financial Statements and the Notes
related thereto segregate continuing and discontinued operations. The
transportation segment had a loss of $320,000 in 1995. Operating revenues for
the transportation segment were $390,000 in 1995. These revenues were due
principally to the progressive sale of assets associated with the transportation
segment. The Company does not believe that there are material liabilities,
contingent or otherwise, with respect to its transportation segment.
APPAREL SEGMENT
In connection with the Company's strategic plan to focus its
business efforts on the financial services segment, the Company sold all of the
outstanding stock of Young Generations, Inc. (a former Company subsidiary, which
manufactures children's apparel) ("YGI") in exchange for a non-recourse note in
September 1995, thereby divesting its apparel segment operations. In connection
with the sale of YGI, the Company wrote off all amounts due the Company from YGI
as intercompany debt and amounts due to the Company from the purchasers of the
YGI stock, which amounts totaled $3.9 million, net of income taxes of $156,000.
The Company remains contingently liable for its guarantee of certain bank loans
and certain trade accounts payable, which at December 31, 1997 totaled
approximately $150,000 and were secured by substantially all of YGI's assets. In
1997 and 1996, the Company loaned additional amounts to YGI, $800,000 of which
remained outstanding at December 31, 1997. As a result of the sale of YGI, the
operating results of the apparel segment have been classified as discontinued
operations. The Company does not anticipate loaning any more money to YGI in the
future. The Company may incur additional charges to future earnings as a result
of these guarantees and loans to YGI, if YGI is unable to repay the
indebtedness.
The apparel segment had a net loss of $1.3 million in 1995.
The apparel segment had revenues of $7.3 million in 1995.
38
<PAGE>
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.
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.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON OWNED PORTFOLIO
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
------------------------------------------
1997 1996 1995
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses at beginning of period $ 3,084 $ 1,874 $ 1,730
Net charge-offs (5,166) (2,494) (1,563)
Provision charged to expense 10,030 5,416 2,480
Securitization transfers (1,420) (1,712) (773)
----------- ----------- ------------
Allowance for credit losses at the end of the period $ 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.
In securitization transactions, the interest-only, subordinate
and/or residual certificates bear the risk of default for the entire pool of
securitized loans to the extent of such certificates' value. Accordingly, the
value of the interest-only, subordinate and/or residual certificates 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.
39
<PAGE>
The table below summarizes certain information with respect to
the Company's allowance for losses on the securitization residual assets for
each of the periods indicated.
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-ONLY STRIP SECURITIES:
Allowance for losses at beginning of period $ 848 $ -- $ --
Net charge-offs (1,533) (1,155) --
Anticipated losses net against gain 13,278 -- --
Allowance transferred from owned portfolio 1,662 2,003 --
------------ ----------- -----------
Allowance for losses at the end of the period $ 14,255 $ 848 $ --
============ =========== ===========
ASSET-BACKED SECURITIES:
Allowance for losses at beginning of period $ 354 $ 773 --
Net charge-offs (112) (128) --
Transfer from (to) owned portfolio (242) (291) 773
------------ ----------- -----------
Allowance for losses at end of year $ -- $ 354 $ 773
============ =========== ===========
</TABLE>
The table below summarizes the Company's allowance for credit
losses with respect to the Company's total managed portfolio (including both
owned and securitized loan pools) for each of the periods indicated.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON MANAGED PORTFOLIO
<TABLE>
<CAPTION>
At and For the Year Ended December 31,
------------------------------------------
1997 1996 1995
----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses at beginning of period $ 4,286 $ 2,647 $ 1,730
Net charge-offs (6,811) (3,777) (1,563)
Provision charged to expense 10,030 5,416 2,480
Provision netted against gain on securitizations 13,278 -- --
----------- ----------- ------------
Allowance for credit losses at the end of the period $ 20,783 $ 4,286 $ 2,647
=========== =========== ============
Allowance as a % of total managed portfolio 2.60% 2.02% 2.03%
Net charge-offs as a % of average managed portfolio 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 $ 6,528 $ 3,084 $ 1,874
Allowance for credit losses on asset-backed securities -- 354 773
Allowance for credit losses on interest-only strip
security 14,255 848 --
----------- ----------- ------------
Total allowance for credit losses $ 20,783 $ 4,286 $ 2,647
=========== =========== ============
</TABLE>
40
<PAGE>
Management closely monitors delinquencies to measure the
quality of its loan portfolio and securitized loans 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.
Management monitors securitized pool delinquencies using a
static pool analysis by month by pool balance. Since these pools are new, it is
anticipated that the delinquencies will ramp up during the first one to two
years. Current year results are not necessarily indicative of future
performance. The following sets 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
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 77,435,632 120,860,326 130,917,899 118,585,860
2 77,045,312 120,119,653 169,093,916
3 76,709,417 119,364,510 168,182,957
4 75,889,160 118,965,905 166,783,489
5 75,395,969 117,236,893
6 74,630,019 115,870,168
7 73,149,957 113,537,447
8 72,261,386
9 71,342,842
10 70,195,198
DELINQUENCIES > 30 DAYS PAST DUE
----------------------------------------------------------------------------------
MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4
----------------------------------------------------------------------------------
1 -- 515,954 609,201 402,972
2 1,499,056 1,631,017 2,042,757
3 858,311 3,930,423 4,498,266
4 3,760,775 5,399,570 8,546,414
5 5,220,385 7,293,855
6 5,849,574 9,790,731
7 6,777,961 11,933,526
8 8,078,783
9 8,475,207
10 9,911,115
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE
--------------------------------------------------------------------------------------------------
MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 AVERAGE
--------------------------------------------------------------------------------------------------
1 0.00% 0.43% 0.47% 0.34% 0.31%
2 1.94% 1.36% 1.21% 1.50%
3 1.12% 3.29% 2.67% 2.36%
4 4.96% 4.54% 5.12% 4.87%
5 6.92% 6.22% 6.57%
6 7.84% 8.45% 8.14%
7 9.27% 10.51% 9.89%
8 11.18% 11.18%
9 11.88% 11.88%
10 14.12% 14.12%
ACTUAL HISTORICAL
PREPAYMENT SPEED 11 CPR 9 CPR 5 CPR N/A
</TABLE>
41
<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
7 15,292,515 17,128,785
10 14,816,770 16,850,017
13 14,147,481 15,768,712
16 13,214,217
19 11,685,931
22 11,367,569
25 10,932,915
28 10,043,467
31 9,263,383
<PAGE>
DELINQUENCIES > 30 DAYS
----------------------------------------------------------------------------
MONTHS FROM
POOL INCEPTION 1995-1 1996-1 1997-1
----------------------------------------------------------------------------
1 388,110 69,463 474,946
4 1,504,537 320,625
7 1,230,648 2,275,021
10 1,160,321 1,602,343
13 1,399,070 1,058,535
16 1,198,855
19 999,427
22 791,103
25 582,389
28 349,993
31 383,049
DELINQUENCIES > 30 DAYS 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% 5.55%
7 8.05% 13.28% 10.66%
10 7.83% 9.51% 8.67%
13 9.89% 6.71% 8.30%
16 9.07% 9.07%
19 8.55% 8.55%
22 6.96% 6.96%
25 5.33% 5.33%
28 3.48% 3.48%
31 4.14% 4.14%
ACTUAL HISTORICAL
PREPAYMENT SPEED 13 CPR 8 CPR N/A
</TABLE>
42
<PAGE>
The following table sets forth the Company's allowance for
credit losses on the managed 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 Year Ended December 31,
--------------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS (1):
Mortgage Loan Division 1.98% 0.80% 0.93%
Small Business Loan Division 6.76 3.84 4.50
Auto Loan Division 7.58 6.45 4.03
Total allowance for credit losses as a % of serviced 2.60 2.02 2.03
loans
NET CHARGE-OFFS AS A % OF AVERAGE SERVICED LOANS (2):
Mortgage Loan Division 0.32 0.81 1.04
Small Business Loan Division 2.74 2.71 1.43
Auto Loan Division 17.17 9.65 3.68
Total net charge-offs as a % of total serviced loans 1.38 2.47 1.43
LOANS RECEIVABLE PAST DUE 30 DAYS OR MORE AS A % OF SERVICED LOANS (1):
Mortgage Loan Division 8.00 7.26 14.43
Small Business Loan Division 4.17 7.92 9.69
Auto Loan Division 9.41 17.09 12.83
Total loans receivable past due 30 days or more as a
% of total serviced loans 7.66 8.41 13.31
TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS PAST DUE
90 DAYS OR MORE (1) 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 and
1997 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).
Over the last several years, and more acutely in 1997, the
Company has expanded rapidly. The reduction to net charge-offs and loans past
due as a percentage of total serviced mortgage loans is due, in part, to the
increased origination volume. The Company anticipates that its total charge-offs
and delinquencies will generally be higher than they were at December 31, 1997
as the portfolio becomes more seasoned.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and
long-term sources of debt financing and equity capital. The Company's cash
requirements arise from loan originations and purchases, repayments of debt upon
maturity, payments of operating and interest expenses, expansion activities and
capital expenditures. The Company's primary sources of liquidity are cash flow
from operations, sales of the loans it originates and purchases, proceeds from
the sale of CII Notes, borrowings under the Credit Facilities and proceeds from
43
<PAGE>
securitization of loans. While the Company believes that such sources of funds
will be adequate to meet its liquidity requirements, no assurance of such fact
may be given.
Shareholders' equity increased to $63.4 million at December
31, 1997 from $46.6 million at December 31, 1996, and from $9.9 million at
December 31, 1995. Each of these increases resulted principally from the
retention of income by the Company and, for 1997, the issuance of 494,000
additional shares of common stock at a value of $5.2 million related to the
acquisition of the 87% of RRV that the Company did not already own, and for
1996, a public stock offering with proceeds of $26.1 million.
Cash and cash equivalents were $7.6 million at December 31,
1997, $1.3 million at December 31, 1996, and $1.3 million at December 31, 1995.
Cash used in operating activities increased to $137.1 million for the year ended
December 31, 1997, from $78.5 million for the year ended ended December 31,
1996; cash used in investing activities increased to $20.8 million for the year
ended December 31, 1997, from cash provided by investing activities of $12.2
million for the year ended ended December 31, 1996; and cash provided by
financing activities increased to $164.2 million for the year ended December 31,
1997, from $66.3 million for the year ended ended December 31, 1996. The
increase in cash used in operations was due principally to the increase in loan
originations during 1997. Cash used in investing activities was principally for
the net increase in loans originated for investment purposes. The increase in
cash provided by financing activities was due principally to the receipt of
approximately $120.6 million in proceeds from the offering of the Company's
Senior Notes due 2004 completed in September of 1997. At December 31, 1997, the
Company's credit facilities ("Credit Facilities") were comprised principally of
credit facilities of $395.0 million for the mortgage loan division (the
"Mortgage Loan Division Facility") and credit facilities of $50.0 million for
the small business loan division (the "Small Business Loan Division Facility").
Based on the borrowing base limitations contained in the Credit Facilities, at
December 31, 1997, the Company had aggregate outstanding borrowings of $63.1
million and aggregate borrowing availability of $55.8 million under the Mortgage
Loan Division Facility and aggregate outstanding borrowings of $14.5 million and
aggregate borrowing availability of $13.0 million under the Small Business Loan
Division Facility. Total Company borrowings and availabilty at December 31, 1997
under the Credit Facilities were $77.6 million and $68.8 million, respectively.
The Mortgage Loan Division Facility and the Small Business Loan Division
Facility both bear interest at variable rates, ranging from Fed Funds plus
1.875% to the bank's prime rate. The Credit Facilities have original terms
ranging from three months to three years and are renewable upon the mutual
agreement of the Company and the respective lender.
The Credit Facilities contain a number of financial covenants,
including, but not limited to, covenants with respect to certain debt to equity
ratios, borrowing base calculations and minimum adjusted tangible net worth. The
Credit Facilities also contain certain other covenants, including, but not
limited to, covenants that impose limitations on the Company and its
subsidiaries with respect to declaring or paying dividends, making payments with
respect to certain subordinated debt, and making certain changes to its equity
capital structure. The Company believes that it is currently in substantial
compliance with the loan covenants. In instances where the Company is not in
compliance with such covenants, the Company has obtained a waiver of
noncompliance from the bank.
44
<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. This agreement requires, among other matters, a maximum
ratio of total liabilities to tangible net worth, limitations on the amount of
capital expenditures, and restrictions on the payment of dividends. At December
31, 1997, 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 notes payable to
investors 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 December 31, 1997, CII had an aggregate of $115.4 million
of senior notes outstanding bearing a weighted average interest rate of 7.7%,
and an aggregate of $18.9 million of subordinated debentures bearing a weighted
average interest rate of 5.0%. The senior notes and subordinated debentures are
subordinate in priority to the Mortgage Loan Division Credit Facility. The
senior notes rank PARI PASSU with the senior unsecured debt of the Company.
Substantially all of the CII Notes have one year maturities.
The Company has enhanced its management information systems
during 1997, as well as incurring additional other capital expenditures,
including the purchase of a 100,000 square foot building in late 1997 in
Greenville, South Carolina to facilitate the growth in the Mortgage Loan
Division. The Company expects to incur additional capital expenditures in 1998
for improvements to this building, additional Management Information Systems
improvements, and other capital additions.
LOAN SALES AND SECURITIZATIONS
The Company sells or securitizes substantially all of its
loans. The Company sells on a whole loan basis a minority 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 the
second mortgage loans can be successfully sold. To the extent that the loans are
not sold, the Company retains the risk of loss. At December 31, 1997 and 1996,
the Company had retained $69.8 million and $28.1 million, respectively, of
second mortgage loans on its balance sheet. During 1997, 1996 and 1995, the
Company sold $435.3 million, $284.8 million and $127.6 million, respectively, of
Mortgage Loans and $41.2 million, $33.1 million, and $25.4 million,
respectively, of SBA Loan Participations.
45
<PAGE>
On a quarterly basis in 1997, the Company securitized
substantial amounts of its Mortgage Loans, totaling $487.6 million. Since 1995,
the Company has securitized $54.2 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. These subordinate and residual
interests totaled approximately $63.2 million, net of allowances, at December
31, 1997.
A new securitization structure was completed for the fourth
quarter Mortgage Loan securitization. This structure utilizes a real estate
investment trust ("REIT") and allows sales treatment for financial reporting
purposes, but debt treatment for tax purposes. Accordingly, this structure
eliminates current taxes payable on the book gain, while maintaining the
structural efficiency of tranching, previously only available through a real
estate mortgage investment conduit ("REMIC") transaction. Additionally, under
this structure, the Company has distributed .46% ownership in the REIT to a
certain class of employees, with an initial value of approximately $62,000.
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 interest-only and residual certificates (as
"Interest-Only Strip Securities," "Investment in Asset-backed Securities" and
"Restricted Cash"), and are aggregated and reported on the income statement as
gain on sale of loans, after being reduced (increased) by the costs of
securitization and any hedge losses (gains).
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.
46
<PAGE>
The following sets forth facts and assumptions used by the
Company in arriving at the valuation of the interest-only strip securities and
asset-backed securities relating to its Mortgage Loan securitizations at
December 31, 1997:
<TABLE>
<CAPTION>
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
1997 1997 1997 1997
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Loans securitized $77,526,090 $121,214,000 $131,121,432 $157,779,083
Average stated principal balance 63,288 63,190 68,328 66,039
Weighted average coupon on loans 11.01% 10.80% 11.19% 11.20%
Weighted average original term to stated 209 months 200 months 200 months 202 months
maturity
Weighted average LTV 80.62 75.94 77.38 76.25
% of first mortgage loans 100.00 100.00 100.00 100.00
% secured by primary residence 98.60 98.80 96.19 97.04
Weighted average pass-through rate
to 7.40 7.06 6.99 6.86
bondholders
Spread of pass-through rate over comparable
Treasury rate 0.89 0.78 0.81 1.00
Estimated annual losses 0.60 0.60 0.60 0.60
Ramp period for losses 12 months 12 months 12 months 12 months
Cumulative losses as a % of original UPB 2.33 2.24 2.18 2.21
Annual servicing fee 0.50 0.50 0.50 0.50
Servicing asset 0.10 0.10 0.10 0.10
Discount rate implicit in cash flow
before overcollateralization 26.00 22.00 20.00 20.00
Discount rate applied to cash flow after
overcollateralization 12.00 12.00 12.00 12.00
Prepayment speed:
Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR (1) 20 CPR 20 CPR 20 CPR 20 CPR
Tail CPR (1) 18/16 CPR 18/16 CPR 18/16 CPR 18/16 CPR
CPR ramp period (1) 12 months 12 months 12 months 12 months
CPR peak period (1) 24 months 24 months 24 months 24 months
CPR tail begins (1) 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%
Initial overcollateralization required (2) 3.25 0.00 0.00 0.00
Final overcollateralization required (2) 6.50 3.75 3.75 3.75
</TABLE>
(1) CPR represents an industry standard of calculating prepayment
speeds and refers to Constant Prepayment Rate. 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. Typically, high LTV loans (approximately 2/3 of
the loans in the Company's securitization transactions) are
priced at a slower CPR than traditional home equity loans (22 to
25 CPR) 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.
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 continue
to complete the quarterly securitization of a substantial portion of its
Mortgage Loans, principally because the Company believes that securitization is
potentially more profitable than whole loan sales and because the Company (as
servicer) wants to maintain the relationship with its loan customers. However,
the Company may alter this strategy based on cash flow requirements.
47
<PAGE>
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.
The Company also modified the estimated prepayment speeds on all of its mortgage
loan securitization transactions to peak at 20 CPR, up from the deals' pricing
speeds of 18 HEP on the first two deals and 17 HEP on the second two
securitizations. Actual prepayment speeds have been running below these
assumptions, and the trusts have experienced virtually no losses to date. The
impact in the fourth quarter of the changes in these assumptions was to reduce
fair value of these residual interests by $1.6 million. These changes were the
result of the Company's attempt to refine the modeling of the anticipated cash
flows to better match expected future cash flows.
The following sets forth facts and assumptions used by the
Company in arriving at the valuation of the interest-only strip securities,
asset-backed securities and restricted cash relating to its unguaranteed SBA
Loan securitizations at December 31, 1997:
<TABLE>
<CAPTION>
JUNE NOVEMBER JANUARY DECEMBER
1995 1996 1997 1997
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Loans securitized $ 17,063,377 $ 12,850,743 $ 4,626,031 $ 19,659,945
Average stated principal balance 65,377 152,985 210,274 225,976
Weighted average spread over Wall Street
Journal Prime Rate 2.71% 2.70% 2.66% 2.48%
Weighted average original term to stated
maturity 198 months 258 months 256 months 259 months
Weighted average LTV 55% 63% 62% 67%
Spread under prime rate 1.35% 1.80% 1.80% 2.00%
Estimated annual losses 2.25% 1.25% 1.25% 1.25%
Annual servicing fee 0.40% 0.40% 0.40% 0.40%
Discount rate applied to cash flow after
spread account 10.50% 10.50% 10.50% 10.50%
Prepayment speed:
Initial CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR 15 CPR 12 CPR 12 CPR 12 CPR
Tail CPR 14 CPR 11 CPR 11 CPR 11 CPR
CPR ramp period 12 months 12 months 12 months 12 months
CPR peak period 36 months 36 months 36 months 36 months
CPR tail begins 37 months 37 months 37 months 37 months
Annual trustee fee $ 8,000 $ 8,000 $ 8,000 $ 8,000
Initial spread account required 2% 2% 2% 2%
Final spread account required 4% 4% 4% 6%
Subordinate piece retained 10% 9% 9% 10%
</TABLE>
48
<PAGE>
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.
The Company assesses the carrying value of its interest-only
strip securities and servicing assets for impairment. There can be no assurance
that the Company's estimates used to determine the gain on sale of loans,
interest-only strip securities, and servicing assets valuations will remain
appropriate for the life of each securitization. If actual loan prepayments or
defaults exceed the Company's estimates, the carrying value of the Company's
interest-only strip securities and/or servicing assets may be decreased through
a charge against earnings in the period management recognizes the disparity.
ACCOUNTING CONSIDERATIONS
In June 1997, FASB issued SFAS No. 130 "Reporting
Comprehensive Income" which is effective for annual and interim periods
beginning after December 15, 1997. This statement requires that all items that
are required to be recognized under accounting standards as comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The adoption of this standard is not expected to
have a material effect on the Company's financial reporting.
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 annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. 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.
TAX CONSIDERATIONS--THE NOL
As a result of the operating losses incurred by the Company
under prior management in its discontinued transportation segment operations,
the Company 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.
49
<PAGE>
During 1997, the Company eliminated its valuation allowance
against its deferred tax asset, resulting in a net deferred tax asset of $4.2
million at December 31, 1997. Management based the decision to eliminate the
valuation based on its belief that it is more likely than not that it will
realize the benefit of this deferred tax asset, given the levels of historical
taxable income and current projections for future taxable income over the
periods in which the deferred tax assets would be realized. This resulted in the
Company recognizing a deferred tax benefit for 1997 of $3.8 million. The Company
had a federal NOL of approximately $13.0 million remaining at December 31, 1997.
HEDGING ACTIVITIES
The Company's profitability may be directly affected by
fluctuations in interest rates. While the Company monitors interest rates and
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. 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 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 securitized
loan sales earned by the Company.
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, interest-only and residual classes of certificates 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, interest-only and residual certificates, adversely impacting
earnings. Fluctuating interest rates may also affect the net interest income
earned by the Company resulting from the
50
<PAGE>
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 hired a Year 2000 coordinator to head this
project. 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 yet 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are set forth
herein commencing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
51
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information required by Item 10 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of Report.
1. FINANCIAL STATEMENTS FOR EMERGENT GROUP, INC.:
The Financial Statements are listed in the index to
Consolidated Financial Statements on page F-1 of this
Report.
2. FINANCIAL STATEMENTS FOR STERLING LENDING
CORPORATION, A MAJORITY-OWNED SUBSIDIARY OF
EMERGENT GROUP, INC.:
The financial statements are listed in the index to
Consolidated Financial Statements beginning on
page F-54 of this Report.
3. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
4. EXHIBITS:
The exhibits are listed on the Exhibit Index attached
hereto.
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
1997 REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page
Independent Auditors' Report ........................................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................... F-3
Consolidated Statements of Income............................... F-5
Consolidated Statements of Shareholders' Equity................. F-6
Consolidated Statements of Cash Flows........................... F-7
Notes to Consolidated Financial Statements ..................... F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
EMERGENT GROUP, INC. AND SUBSIDIARIES
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of
EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of EMERGENT GROUP, INC. AND SUBSIDIARIES for
the year ended December 31, 1995, were audited by other auditors whose report
dated January 31, 1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
- ----------------------------------
Greenville, SC
February 27, 1998
F-2
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
ASSETS (In thousands)
Cash and cash equivalents $ 7,561 $ 1,276
Restricted cash 2,323 5,319
Loans receivable:
Loans receivable held for investment 100,379 67,050
Loans receivable held for sale 197,236 122,482
------------- --------------
Total loans receivable 297,615 189,532
Less allowance for credit losses on loans (6,528) (3,084)
Less unearned discount, dealer reserves, and deferred loan costs (2,658) (1,419)
------------- --------------
Net loans receivable 288,429 185,029
Other receivables:
Income taxes receivable 1,029 --
Accrued interest receivable 4,407 2,087
Other receivables 9,651 4,459
------------- --------------
Total other receivables 15,087 6,546
Investment in asset-backed securities 16,439 3,581
Interest-only strip securities 44,440 4,315
Net property and equipment 18,080 7,177
Excess of cost over net assets of acquired businesses, net of accumulated amortization of
$978 in 1997 and $781 in 1996 2,874 2,722
Real estate and personal property acquired through foreclosure 3,295 4,720
Other assets 17,624 3,464
------------- --------------
TOTAL ASSETS $ 416,152 $ 224,149
============= ==============
</TABLE>
F-3
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY (In thousands)
Liabilities:
Warehouse lines of credit $ 77,605 $ 55,494
Investor savings:
Notes payable to investors 115,368 97,987
Subordinated debentures 18,947 16,115
------------- --------------
Total investor savings 134,315 114,102
Senior unsecured debt 125,000 --
Accounts payable and accrued liabilities 6,517 3,958
Remittances payable 4,591 3,519
Accrued interest payable 4,750 597
------------- --------------
Total other liabilities 15,858 8,074
------------- --------------
Total liabilities 352,778 177,670
Minority interest -- (156)
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.05 per share - authorized 100,000,000 shares in 1997 and
30,000,000 shares in 1996, issued and outstanding 9,686,477 shares in 1997 and
9,141,131 shares in 1996 484 457
Capital in excess of par value 38,609 33,150
Retained earnings 24,281 13,028
------------- --------------
Total shareholders' equity 63,374 46,635
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 416,152 $ 224,149
============= ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
(In thousands, except share data)
REVENUES:
Interest income $ 34,008 $ 17,908 $ 15,193
Servicing income 8,514 3,274 446
Gain on sale of loans:
Cash gain on sale of loans 14,153 20,862 7,963
Non-cash gain on sale of loans 38,675 2,953 1,206
Loan fee income 30,207 4,150 586
--------------- ---------------- ----------------
Total gain on sale of loans 83,035 27,965 9,755
Other revenues 1,399 1,241 884
--------------- ---------------- ----------------
Total revenues 126,956 50,388 26,278
--------------- ---------------- ----------------
EXPENSES:
Interest 25,133 11,021 8,527
Provision for credit losses 10,030 5,416 2,480
Salaries, wages and employee benefits 48,044 13,663 5,691
Business development costs 7,486 1,603 653
Other general and administrative expense 28,754 8,224 4,075
--------------- ---------------- ----------------
Total expenses 119,447 39,927 21,426
--------------- ---------------- ----------------
Income from continuing operations before income taxes and
minority interest 7,509 10,461 4,852
Provision (benefit) for income taxes (3,900) 718 190
--------------- ---------------- ----------------
Income from continuing operations before minority interest 11,409 9,743 4,662
Minority interest in (earnings) loss of subsidiaries (156) 352 (81)
--------------- ---------------- ----------------
Income from continuing operations 11,253 10,095 4,581
Discontinued transportation and apparel manufacturing segments:
Loss from operations, net of income tax -- -- 1,573
Loss on disposal of segments, net of income tax -- -- 2,351
--------------- ---------------- ----------------
-- -- 3,924
=============== ================ ================
NET INCOME $ 11,253 $ 10,095 $ 657
=============== ================ ================
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations $ 1.20 $ 1.47 $ 0.71
Discontinued operations -- -- (0.61)
=============== ================ ================
NET INCOME $ 1.20 $ 1.47 $ 0.10
=============== ================ ================
Basic weighted average shares outstanding 9,406,221 6,852,420 6,464,582
=============== ================ ================
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations $ 1.17 $ 1.42 $ 0.69
Discontinued operations -- -- (0.59)
=============== ================ ================
NET INCOME $ 1.17 $ 1.42 $ 0.10
=============== ================ ================
Diluted weighted average shares outstanding 9,598,811 7,099,874 6,668,192
=============== ================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock
------------------------- -----------------------------
Capital in
Shares Shares Issued Excess of Retained
Issued Amount Amount Par Value Earnings Total
------------- ---------- --------------- ------------ ------------ ------------ -----------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 200,575 $ 10 9,803,438 $ 490 $ 6,924 $ 2,276 $ 9,700
Shares issued:
Formerly held by subsidiary -- -- 24,700 1 15 -- 16
Purchased through tender
offer (19,377) (1) (467,288) (23) (535) -- (559)
Retired through reverse
stock split (121,204) (6) (6,242,275) (312) 309 -- (9)
Exercise of stock options 506 -- 19,662 1 79 -- 80
Two for one stock split
in the form of a stock
dividend 60,500 3 3,138,237 157 (160) -- --
Net income -- -- -- -- -- 657 657
------------- ---------- --------------- ------------ ------------ ------------ -----------
Balance at December 31, 1995 121,000 6 6,276,474 314 6,632 2,933 9,885
Shares issued:
Exercise of stock options 2,026 -- 110,668 5 156 -- 161
Conversion of Class A
Common Stock to Common
Stock 6,387,142 319 (6,387,142) (319) -- -- --
Exercise of stock
warrants 111,932 6 -- -- 288 -- 294
Issuance of Common Stock 2,519,031 126 -- -- 26,074 -- 26,200
Net income -- -- -- -- -- 10,095 10,095
------------- ---------- --------------- ------------ ------------ ------------ -----------
Balance at December 31, 1996 9,141,131 457 -- -- 33,150 13,028 46,635
Shares issued:
Exercise of stock options 40,667 2 -- -- 227 -- 229
Exercise of restricted
stock options 2,900 -- -- -- -- -- --
Employee Stock Purchase
Plan 7,534 -- -- -- 67 -- 67
Purchase of Reedy
River Ventures LP 494,195 25 -- -- 5,164 -- 5,189
Other shares issued 50 -- -- -- 1 -- 1
Net income -- -- -- -- -- 11,253 11,253
------------- ---------- --------------- ------------ ------------ ------------ -----------
BALANCE AT DECEMBER 31, 1997 9,686,477 $ 484 -- $ -- $ 38,609 $ 24,281 $ 63,374
============= ========== =============== ============ ============ ============ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------ ---------------- ----------------
<S> <C> <C> <C>
(In thousands)
OPERATING ACTIVITIES:
Net income $ 11,253 $ 10,095 $ 657
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Depreciation and amortization 2,691 1,334 938
Provision (benefit) for deferred income taxes (3,813) (141) 41
Provision for credit losses 10,030 5,416 2,480
Net (increase) decrease in deferred loan costs (1,573) 145 (171)
Net increase (decrease) in unearned discount and
other deferrals 2,812 665 (853)
Loans originated with intent to sell (1,140,333) (387,600) (173,985)
Proceeds from loans sold 517,803 271,858 144,861
Proceeds from securitization of loans 509,781 30,128 15,357
Other (902) (1,481) 125
Changes in operating assets and liabilities
(increasing) decreasing cash (44,850) 8,897 374
------------------- --------------- ----------------
Net cash used in operating activities $ (137,101) $ (78,478) $ (10,176)
------------------- --------------- ----------------
INVESTING ACTIVITIES:
Loans originated for investment purposes $ (133,188) $ (49,173) $ (74,363)
Principal collections on loans not sold 128,552 61,868 50,329
Principal collections on asset-backed securities 1,123 933 177
Increase in overcollateralization within asset-backed
securities (10,311) -- --
Proceeds from sale of real estate and personal property
acquired through foreclosure 6,652 3,383 3,401
Purchase of property and equipment (13,222) (4,894) (1,732)
Other (382) 76 (1,034)
------------------- --------------- ----------------
Net cash provided by (used in) investing activities (20,776) 12,193 (23,222)
------------------- --------------- ----------------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit 1,139,815 509,118 179,381
Payments on warehouse lines of credit (1,117,704) (485,257) (164,989)
Net increase in notes payable to investors 17,381 15,855 25,635
Net increase (decrease) in subordinated debentures 2,832 (70) (4,812)
Net proceeds from issuance of senior unsecured debt 120,578 -- --
Proceeds from issuance of additional common stock 1,260 26,655 52
Other -- -- (887)
------------------- --------------- ----------------
Net cash provided by financing activities 164,162 66,301 34,380
------------------- --------------- ----------------
Net increase in cash and cash equivalents 6,285 16 982
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 1,276 1,260 278
------------------- --------------- ----------------
END OF YEAR $ 7,561 $ 1,276 $ 1,260
=================== =============== ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
F-7
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Emergent Group, Inc. and its subsidiaries ("EGI" or "the Company") are primarily
engaged in the business of originating, selling, securitizing and servicing
first and second residential mortgage loans, commercial loans partially
guaranteed by the United States Small Business Administration ("SBA"),
commercial loans collateralized by accounts receivable and inventory and
mezzanine loans. The funds for these loans are obtained principally through the
utilization of various bank warehouse lines of credit, proceeds from
securitization of loans, and the issuance of senior unsecured debt, notes
payable and subordinated debentures to investors.
Substantially all of the Company's loans are made to non-prime borrowers. These
borrowers generally have limited access to credit or are otherwise considered to
be credit impaired by conventional lenders.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, each of which is wholly-owned except Sterling Lending
Corporation ("Sterling Lending") which is 80% owned. Minority interest
represents minority shareholders' proportionate share of the equity and earnings
of Sterling Lending. All significant intercompany items and transactions have
been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates. These estimates include, among other things,
anticipated prepayments on loans sold with servicing retained, valuation of real
estate owned, assumptions used to value interest-only strip securities and
determination of the allowance for credit losses.
ADOPTION OF NEW ACCOUNTING POLICIES
Effective January 1, 1997, the Company adopted the Statement of Financial
Accounting Standards ("SFAS") No. 125, which supersedes SFAS No. 122 and SFAS
No. 77. This statement provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. SFAS No. 125 distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings.
F-8
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF NEW ACCOUNTING POLICIES (CONTINUED)
Securitization of a financial asset, a portion of a financial asset, or a pool
of financial assets in which the transferor surrenders control over the assets
transferred, is accounted for as a sale under certain circumstances. If the
transfer does not qualify as a sale, the transferred assets will remain on the
balance sheet and the proceeds raised will be accounted for as a secured
borrowing with no gain or loss recognition. The Company's transfers of loans
made in connection with its securitizations in 1997 qualify as sales under this
pronouncement.
After the securitization of mortgage loans held for sale, the asset-backed
securities retained by the Company (whether they are subordinate classes or
interest-only or residual certificates) are classified as trading securities and
reported at fair value under SFAS No. 125 and SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
SFAS No. 125 requires mortgage banking entities that acquire or originate loans
and subsequently sell or securitize those loans and retain the mortgage
servicing rights to allocate the total cost of the loans to the mortgage
servicing rights and the mortgage loans without the mortgage servicing rights.
The Company determines fair value based upon the present value of estimated net
future servicing revenues less the estimated cost that would fairly compensate a
substitute servicer to service the loans. The servicing asset is then recorded
on the balance sheet and accounted for under SFAS No. 125 using the allocation
of cost relative to fair value approach. Servicing assets are amortized in
proportion to, and over the period of, estimated net servicing income (the
excess of servicing revenues over servicing costs).
SFAS No. 125 also requires impairment evaluations of all amounts capitalized as
servicing rights, including those purchased before the adoption of SFAS No. 125,
based upon the fair value of the underlying servicing rights. The Company
evaluates impairment by stratifying the pools based on date of securitization.
The continuing effects of SFAS No. 125 on the Company's financial position and
results of operations will depend on several factors, including among other
things, the amount of acquired or originated loans sold or securitized, the
type, term and credit quality of loans and estimates of future prepayment rates.
F-9
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Since 1995, the Company has securitized $16.1 million of automobile loans and
$54.1 million of small business loans, with $24.3 million in small business loan
securitizations in 1997. The small business loans represent the unguaranteed
portion of SBA loans originated or purchased by the Company. These
securitization transactions in 1995 and 1996 were accounted for under SFAS No.
77 and were reflected as sales under this pronouncement. In 1997, the Company
began securitizing mortgage loans on a quarterly basis. Total mortgage loans
securitized in 1997 was $487.6 million. The various securitizations have
provided the Company with a source of additional funds.
In securitizations, the Company sells the loan 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 interest-only and residual
certificates (as "Interest-Only Strip Securities," "Investment in Asset-backed
Securities" and "Restricted Cash"), and are aggregated and reported in the
consolidated statement of income as gain on sale of loans, after being
reduced (increased) by the costs of securitization and any hedge losses (gains).
The Company believes the assumptions it has used are appropriate and
reasonable. At each reporting period, the Company assesses the fair value of
these residual assets and adjusts the recorded amounts to their estimated
fair value.
The Company also sells 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 by strategic alliance
mortgage brokers, and all of its SBA guaranteed 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.
In addition to the gains recognized from securitizations and whole loan sales,
the Company earns the net interest spread on loans receivable held in its
portfolio, origination fees on its mortgage loans and servicing fees of 0.50%
per annum on the mortgage loans, 0.40% per annum on the SBA loans and 3.00% per
annum on the auto loans it services for others.
Interest income on loans receivable is recognized using the interest method. Net
loan fees and insurance commissions are amortized into income over the life of
the loan, using the interest method. Any unamortized net loan fees and insurance
commissions are recognized into income at the time the loan is sold.
F-10
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Under the terms of the Company's strategic alliance mortgage banker agreements,
the Company provides funding and secondary marketing activities for its
strategic alliance mortgage bankers ("Strategic Alliance Mortgage Banker"). In
exchange, the Strategic Alliance Mortgage Bankers agree to provide the Company
with all of their mortgage loan production that meets the Company's underwriting
criteria. The premiums earned on the secondary market are then split between the
Company and its Strategic Alliance Mortgage Banker. The terms of these
agreements range from 2 to 5 years. In the event the Strategic Alliance Mortgage
Banker terminates the agreement early, the contract generally provides for a
termination fee equal to, at a minimum, all of the premium income received by
the Strategic Alliance Mortgage Banker over the last twelve months. This
termination fee is considered to be a recoupment of previously shared premiums,
and accordingly is included in gain on sale of loans in the Statements of
Income. For the year ended December 31, 1996, two Strategic Alliance Mortgage
Bankers terminated their agreements early. Accordingly, the Company has
recognized $7.3 million in gain on sale of loans in 1996 relating to these
terminations. No gain on sale was recognized in 1997 related to terminations.
CASH AND CASH EQUIVALENTS
The Company maintains its primary checking accounts with three principal banks
and maintains overnight investments in reverse repurchase agreements with those
same banks. The amounts maintained in the checking accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31,
1997 and 1996, the amounts maintained in the overnight investments in reverse
repurchase agreements, which are not insured by the FDIC, totaled $5.3 million
and $282,000, respectively. These investments were collateralized by U. S.
Government securities pledged by the banks.
RESTRICTED CASH
The Company also maintains cash collateral and collection accounts with a
trustee in connection with its securitizations totalling $2.3 million and $5.3
million at December 31, 1997 and 1996, respectively. These accounts are shown as
restricted cash, and are invested in overnight investments or short-term U.S.
Treasury securities.
LOANS RECEIVABLE
Loans receivable consist primarily of first and second residential mortgage
loans, SBA loans, and asset-backed loans. Non-refundable loan fees and direct
costs associated with the origination or purchase of loans are deferred and
netted against outstanding loan balances.
Collateral is often taken to provide an additional measure of security.
Generally, the cash flow or earning power of the borrower represents the primary
source of repayment and collateral liquidation a secondary source of repayment.
The Company determines the need for collateral on a case-by-case or
product-by-product basis. Factors considered include the current and prospective
creditworthiness of the customer, terms of the instrument and economic
conditions.
F-11
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE (CONTINUED)
Interest income on loans receivable is recorded on an accrual basis as earned.
Accrual of interest is generally discontinued when a loan is over 90 days past
due and the collateral is determined to be inadequate or when foreclosure
proceedings begin.
Loans receivable held for sale are carried at the lower of aggregate cost or
market. There was no allowance for market losses on loans receivable held for
sale at December 31, 1997 and 1996.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on management's ongoing evaluation of
the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb inherent losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors including
delinquencies, current economic conditions, prior loan loss experience, the
composition of the serviced loan portfolio, and management's estimate of
anticipated credit losses. Loans, including those deemed impaired, are charged
against the allowance at such time as they are determined to be uncollectible.
Subsequent recoveries are credited to the allowance.
Management considers the year-end allowance appropriate and adequate to cover
inherent losses in the loan portfolio; however, management's judgment is based
upon a number of assumptions about future events, which are believed to be
reasonable. Actual results could differ from these estimates. Thus, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for credit losses or that additional increases in the allowance for credit
losses will not be required.
ACCOUNTING FOR IMPAIRED LOANS
The Company assesses a specific allowance on impaired small business loans, by
reviewing on a loan-by-loan basis each month, the risk characteristics of each
loan. A general allowance is calculated on a monthly basis using the information
described above.
A loan's impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company's policy is to
evaluate impaired loans based on the fair value of the collateral, since the
majority of small business loans originated by the Company are collateral
dependent. Interest income from impaired loans is recorded using the cash
collection method.
F-12
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure represents properties that have been
acquired through actual foreclosures or deeds received in lieu of loan payments.
These assets are recorded at the lower of the carrying value of the loans or the
estimated fair value of the related real estate, net of estimated selling costs.
The excess carrying value, if any, of the loan over the estimated fair value of
the asset is charged to the allowance for credit losses upon transfer. Costs
relating to the development and improvement of the properties are capitalized
whereas those costs relating to holding the property are charged to expense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed principally
using the straight-line method over the estimated useful lives of the assets.
Estimated lives are 15 to 40 years for buildings and improvements, 3 to 7 years
for furniture, fixtures and equipment, and the lease period for leasehold
improvements. Additions to property and equipment and major replacements or
improvements are capitalized at cost. Maintenance, repairs and minor
replacements are expensed when incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles held and used by the Company are
reviewed for impairment whenever management believes events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. No impairment loss was recognized for continuing operations in any
of the three years ended December 31, 1997.
AMORTIZATION
The excess of cost over related net assets of businesses acquired is amortized
using the straight-line method principally over 25 years. On a periodic basis,
the Company reviews goodwill for events or changes in circumstances that may
indicate that the carrying amount of goodwill may not be recoverable. The
Company utilizes estimated future cash flows of the purchased subsidiary in
determining any impairment on the excess of cost over the related net assets.
REMITTANCES PAYABLE
The Company retains the servicing rights on SBA guaranteed loan participations
sold in the secondary market, for which it earns monthly a minimum of 1% of the
outstanding principal balance. The Company receives the payments from the
borrowers and records the portion relating to the sold participation as a
liability.
The Company also retains the servicing rights on its securitization
transactions. The Company receives the payments from the borrowers and records a
liability until the funds are remitted to the Trustee.
F-13
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BORROWER COMMITMENT DEPOSITS
The Company generally receives a commitment deposit from its applicants for SBA
loans prior to closing. The commitment deposits are recorded as a liability when
received, and are reduced for any direct expenses incurred and paid to a third
party in making the loan. Any deposit in excess of these direct expenses is
refunded to the borrower at the time of, or subsequent to, the loan closing.
Borrower commitment deposits are included in accrued liabilities.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Deferred income taxes arise principally from depreciation, unrealized gains on
loans held for sale, certain securitization transactions, amortization of
intangibles, allowances for credit losses, and net operating loss carryforwards.
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize net deferred tax
assets.
MANAGEMENT FEES
The Company serves as investment manager for a venture capital fund for which it
receives management fees. The Company recognizes the management fees on the
accrual basis. These fees are included in other revenues.
ADVERTISING EXPENSE
Advertising, promotional, and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising are
expensed the first time the advertising takes place. External costs related to
direct mailings are capitalized in accordance with Statement of Position 93-7
and amortized over a three-month period. Total expense recognized in 1997 for
direct mailings was approximately $5.9 million and the total amount capitalized
into other assets on the balance sheet at December 31, 1997 was $1.9 million.
F-14
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
The Company foreclosed on, or repossessed property used to collateralize loans
receivable in the amount of $5.4 million, $4.5 million, and $4.0 million in
1997, 1996, and 1995, respectively.
The Company sold real estate held for sale by issuing loans to the buyers in the
amount of $74,000, $40,000, and $689,000 in 1997, 1996, and 1995, respectively.
During 1997, the Company transferred approximately $30.0 million of loans
receivable held for investment to loans receivable held for sale primarily
in connection with the sale of the auto loan division.
The Company paid income taxes of $1.6 million, $322,000, and $267,000 in 1997,
1996, and 1995, respectively. The Company paid interest of $21.0 million, $11.0
million, and $8.4 million in 1997, 1996, and 1995, respectively.
RISK MANAGEMENT
The Company's profitability may be directly affected by fluctuations in interest
rates. While the Company monitors interest rates and 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. Because 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
securitized loan sales earned by the Company. There were no open hedging
positions at year-end.
EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"EARNINGS PER SHARE". SFAS No. 128 replaces APB Opinon 15, "EARNINGS PER SHARE",
and simplifies the computation of EPS by replacing the presentation of primary
EPS with a presentation of basic EPS. Basic EPS includes no dilution and is
computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company. Common stock
equivalents included in the diluted EPS computation consist of stock options,
which are computed using the treasury stock method.
F-15
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to current
year presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
NOTE 2. LOANS RECEIVABLE
The following is a summary of loans receivable by type of loan:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
(In thousands)
Mortgage Loans:
First mortgage residential property $ 152,371 $ 107,246
Second mortgage residential property 69,836 28,090
Real estate loans on rental property 2,609 894
Construction loans 6,329 5,038
----------------- ------------------
Total mortgage loans 231,145 141,268
----------------- ------------------
Commercial Loans:
Guaranteed portion of SBA loans 10,732 9,662
Unguaranteed portion of SBA loans 6,619 10,503
Commercial loans secured by real estate 1,787 2,253
Asset-based commercial lending 18,798 6,967
Mezzanine lending 7,250 --
----------------- ------------------
Total commercial loans 45,186 29,385
----------------- ------------------
Automobile loans 21,284 13,915
Other loans -- 4,964
----------------- ------------------
Total loans receivable $ 297,615 $ 189,532
================= ==================
</TABLE>
Included in the above table are notes receivable from related parties of
$509,000 and $1.1 million at December 31, 1997 and 1996, respectively. Notes
receivable from related parties included advances of $736,000 in 1996 and
repayments of $560,000 and $30,000 in 1997 and 1996, respectively.
First mortgage residential loans generally have contractual maturities of 12 to
360 months with an average interest rate at December 31, 1997 and 1996 of
approximately 11% and 12%, respectively.
F-16
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LOANS RECEIVABLE (CONTINUED)
Second mortgage residential loans have contractual maturities of 12 to 360
months with an average interest rate at both December 31, 1997 and 1996 of
approximately 15%. Construction loans generally have contractual maturities of
12 months with an average interest rate at December 31, 1997 and 1996 of
approximately 11%. SBA loans range in maturity from 7 years to 25 years
depending on the use of proceeds. Interest rates on SBA loans are variable,
adjusted on the first day of each calendar quarter and are generally prime plus
2.00-2.75%. The average interest rate at December 31, 1997 and 1996 for SBA
loans approximated 11%. Asset-based loans generally are due on demand and had
average interest rates at December 31, 1997 and 1996 of approximately 21% and
24%, respectively.
Mezzanine loans have maturities of 5 years and have average interest rates of
approximately 13% at December 31, 1997. Automobile loans have maturities
generally not exceeding 60 months with fixed interest rates averaging 26% in
1997 and 27% in 1996.
At December 31, 1997 and 1996, approximately $1.8 million (net of an allowance
for impaired loans of $241,000) and $3.3 million (net of an allowance for
impaired loans of $576,000), respectively, of loans receivable were impaired.
Impaired loans are considered to be those loans for which it is probable that
the Company will be unable to collect all amounts due according to original
contractual terms of the loan agreement, based on current information and
events. The average impaired loan balance in 1997 was approximately $1,946,000,
and the Company recognized into income approximately $173,000 in interest on
these loans.
Loans sold and serviced for others at December 31, 1997 and 1996 were
approximately $691.1 million and $119.5 million, respectively, and are not
included in assets in the accompanying balance sheets.
The Company's serviced loan portfolio, including loans owned by the Company,
consisted of the following at December 31, 1997 (in thousands).
Mortgage division $ 768,556
Commercial division 198,876
Auto division 21,284
===================
Total serviced loan portfolio $ 988,716
===================
At December 31, 1997, the Company's serviced mortgage loan portfolio by type of
collateral is summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
First mortgage residential property $ 679,128 88.4 %
Second mortgage residential property 70,447 9.2
Real estate loans on rental property 12,652 1.6
Construction loans 6,329 0.8
----------------- ---------------
$ 768,556 100.0 %
================== ===============
</TABLE>
Included in first mortgage residential property is $68.3 million related to
loans, which are subserviced for others.
F-17
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LOANS RECEIVABLE (CONTINUED)
At December 31, 1997, the Company's serviced commercial loan portfolio consisted
of loans to small businesses in the following industries (in thousands):
Limited service lodging $ 65,353 32.9%
Services 45,485 22.9
Retail trade 41,052 20.6
Manufacturing 27,582 13.9
Wholesale distribution 11,457 5.7
Other 7,947 4.0
=============== =============
$ 198,876 100.0%
=============== =============
The Company services loans in 40 states. South Carolina, North Carolina, and
Florida serviced loans represent approximately 19%, 11%, and 10%, respectively,
of the Company's total serviced loan portfolio at December 31, 1997. No other
state represents more than 10% of total serviced loans.
An analysis of the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ----------------- ------------------
<S> <C> <C> <C>
(In thousands)
Balance at beginning of year $ 3,084 $ 1,874 $ 1,730
Provision for credit losses 10,030 5,416 2,480
Net charge offs (5,166) (2,494) (1,563)
Securitization transfers (1,420) (1,712) (773)
------------------ ----------------- ------------------
Balance at end of year $ 6,528 $ 3,084 $ 1,874
================== ================= ==================
</TABLE>
As of December 31, 1997, 1996, and 1995, loans totaling $8.9 million, $4.9
million, and $5.1 million, respectively, were on non-accrual status. The
associated interest income not recognized on these non-accrual loans was
approximately $809,000, $593,000, and $164,000 during the years ended December
31, 1997, 1996, and 1995, respectively.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments expose the Company to credit risk in excess of the amount
recognized in the balance sheet.
F-18
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LOANS RECEIVABLE (CONTINUED)
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at December 31,
1997 related to these items is summarized below:
Contract Amount
----------------------
(In thousands)
Loan commitments:
Approved loan commitments $ 77,653
Unadvanced portion of loans 22,640
----------------------
Total loan commitments $ 100,293
======================
Loan commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the customer.
Collateral held is primarily residential property. Interest rates on loan
commitments are a combination of fixed and variable.
Commitments outstanding at December 31, 1997 consist of adjustable rate
commercial loans and fixed rate residential mortgage loans of $70,655 and
$29,638, respectively, at rates ranging from 8% to 18%. Commitments to
originate loans generally expire within 30 days to 60 days.
NOTE 3. SECURITIZATION RESIDUAL ASSETS
In connection with its mortgage loan securitizations, SBA loan securitizations
and sales, and auto loan securitization, the Company has retained interest-only
strip securities, overcollateralization which is included in asset-backed
securities and cash spread accounts which are included in restricted cash
representing residual interests in the trusts. Collectively, these amounts
represent the residual interests in the trusts. The following table sets forth
the residual assets broken out by type for the periods indicated.
F-19
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. SECURITIZATION RESIDUAL ASSETS (CONTINUED)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996
----------------- -------------
<S> <C> <C>
(In thousands)
Net residual assets resulting from mortgage loan securitizations:
Interest-only strip security $ 34,941 $ --
Investment in asset-backed securities 11,653 --
------------- -------------
46,594 --
Net residual assets resulting from SBA loan securitizations:
Interest-only strip security 9,126 3,940
Restricted cash 2,220 2,312
------------- -------------
11,346 6,252
Net residual assets resulting from auto loan securitization:
Investment in asset-backed securities -- 752
Restricted cash -- 3,007
------------- -------------
-- 3,759
------------- -------------
Total net residual assets resulting from loan
securitizations 57,940 10,011
Net residual assets resulting from guaranteed portion of
SBA loan sales 373 375
------------- -------------
Total net residual assets $ 58,313 $ 10,386
============= =============
</TABLE>
NOTE 4. INTEREST-ONLY STRIP SECURITIES
The following summarizes activity in the interest-only strip securities:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1996 1995
--- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Gross balance, beginning of year $ 5,163 $ 2,054 $ 1,872
Gain on sale of loans 57,516 4,770 1,095
Amortization against servicing revenues (3,984) (1,661) (913)
--- ----------- -- ----------- -- -----------
Gross balance, end of year 58,695 5,163 2,054
Less allowance for losses on interest-only strip security (14,255) (848) --
--- ----------- -- ----------- -- -----------
Interest-only strip security, net $ 44,440 $ 4,315 $ 2,054
=== =========== == =========== == ===========
</TABLE>
F-20
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INTEREST-ONLY STRIP SECURITY (CONTINUED)
An analysis of the allowance for losses, which is embedded in the interest-
only strip security, is as follows:
Years Ended December 31,
---------------------------------------
1997 1996
------------------ -----------------
(In thousands)
Balance at beginning of year $ 848 $ --
Anticipated losses net against gain 13,278 --
Net charge offs (1,533) (1,155)
Transfer from loans receivable 1,662 2,003
------------------ -----------------
Balance at end of year $ 14,255 $ 848
================== =================
The allowance represents management's estimate of losses to be incurred over the
life of the securitized pool.
NOTE 5. INVESTMENT IN ASSET-BACKED SECURITIES
The activity in the investment in asset-backed securities is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(In thousands)
<S> <C> <C> <C>
Gross balance, beginning of year $ 3,935 $ 1,638 $ --
Increase in overcollateralization on
mortgage securitization 10,311 -- --
Transfer of loans 3,724 2,768 1,638
Collections, charge-offs, and other dispositions (1,531) (471) --
--------------- -------------- --------------
Gross balance, end of year 16,439 3,935 1,638
Less allowance for losses on asset-backed securities -- (354) (773)
--------------- -------------- --------------
Investment in asset-backed securities, net $ 16,439 $ 3,581 $ 865
=============== ============== ==============
</TABLE>
F-21
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INVESTMENT IN ASSET-BACKED SECURITIES (CONTINUED)
An analysis of the allowance for losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
------------------ ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 354 $ 773 $ --
Net charge offs (112) (128) --
Transfer from (to) loans receivable (242) (291) 773
------------------ ----------------- ----------------
Balance at end of year $ -- $ 354 $ 773
================== ================= ================
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996
---------------- -------------------
(In thousands)
<S> <C> <C>
Land $ 1,247 $ 279
Buildings and leasehold improvements 6,106 1,279
Equipment and computers 8,792 4,345
Furniture and fixtures 5,318 2,766
Vehicles 404 206
---------------- ----------------
Total property and equipment 21,867 8,875
Less accumulated depreciation (3,787) (1,698)
---------------- ----------------
Net property and equipment $ 18,080 $ 7,177
================ ================
</TABLE>
Depreciation expense was $2.2 million, $901,000, and $769,000 in 1997, 1996, and
1995, respectively.
NOTE 7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
An analysis of real estate and personal property acquired through foreclosure is
as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
---------------- -----------------
(In thousands)
<S> <C> <C>
Balance at beginning of year $ 4,720 $ 3,742
Loan foreclosures and improvements 5,888 4,782
Dispositions, net (7,313) (3,804)
---------------- ----------------
Balance at end of year $ 3,295 $ 4,720
================ ================
</TABLE>
F-22
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. OTHER ASSETS
Other assets consists of the following:
December 31,
----------------------------------------
1997 1996
---------------- -------------------
(In thousands)
Debt origination costs $ 4,767 $ 136
Deferred income tax asset 4,151 337
Servicing asset 1,468 --
Prepaid and other assets 7,238 2,991
---------------- ----------------
Balance at end of year $ 17,624 $ 3,464
================ ================
NOTE 9. WAREHOUSE LINES OF CREDIT
Warehouse lines of credit are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996
----------------- -------------------
(In thousands)
<S> <C> <C>
Warehouse lines of credit to mortgage
subsidiaries $ 63,141 $ 46,774
Warehouse lines of credit to small business
lending subsidiaries 14,464 8,720
----------------- ----------------
$ 77,605 $ 55,494
================= ================
</TABLE>
The Company's mortgage lending subsidiaries have three different
revolving credit agreements. Emergent Mortgage Corp. ("EMC") has a
$200.0 million line of credit with interest at the Federal Funds Rate +
1.875% (7.41% at December 31, 1997) maturing on June 30, 1998. EMC has a
second line of credit of $175.0 million with interest at LIBOR + 1.30%
(7.12% at December 31, 1997) maturing June 30, 1998. Carolina Investors,
Inc. ("CII") has a $20.0 million line of credit with interest at the
Federal Funds Rate + 2.25% (7.78% at December 31, 1997) maturing on May
31, 1998. The lines of credit are collateralized by loans receivable.
The agreements require, among other matters, a specified debt to net
worth ratio, a minimum tangible net worth and limitations on the payment
of dividends. The $200 million line of credit also limits loans and
advances by EMC to the Company. At December 31, 1997, management
believes the Company is in compliance with such restrictive covenants.
In instances where the Company is not in compliance with such covenants,
the Company has obtained a waiver of noncompliance from the bank. At
December 31, 1997, based on available collateral, $55.8 million was
available under these lines of credit.
F-23
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. WAREHOUSE LINES OF CREDIT (CONTINUED)
The Company's small business lending subsidiaries may borrow up to a maximum of
$50.0 million under various lines of credit with interest at the bank's prime
rate (8.50% at December 31, 1997). The lines are limited to and collateralized
by 100% of the outstanding balance of the guaranteed portion of SBA 7(a) loans,
80% of the outstanding balance of the unguaranteed portion of SBA 7(a) loans,
80% of asset-based loans, and 80% of SBA 504 loans as defined in the loan
agreements. The agreements require, among other matters, minimum tangible net
worth ratios, maximum ratios of total liabilities to tangible net worth, minimum
interest coverage ratios, limitations on the amount of capital expenditures in
any fiscal year, and restrictions on the payment of dividends. At December 31,
1997, management believes these subsidiaries were in compliance with such
restrictive covenants. In instances where the Company is not in compliance with
such covenants, the Company has obtained a waiver of noncompliance from the
bank. At December 31, 1997, based on available collateral, $13.0 million was
available under these lines of credit. These agreements mature on December 29,
2000.
The auto lending subsidiaries paid off and terminated their warehouse lines
of credit in 1997 in anticipation of their sale. See Note 23.
Annual aggregate maturities of notes payable at December 31, 1997 are as follows
(in thousands):
1998 $ 63,141
1999 --
2000 14,464
---------------
$ 77,605
===============
NOTE 10. INVESTOR SAVINGS
Investor savings are summarized as follows:
December 31,
----------------------------------------
1997 1996
----------------- -------------------
(In thousands)
Notes payable to investors $ 115,368 $ 97,987
Subordinated debentures 18,947 16,115
----------------- ----------------
$ 134,315 $ 114,102
================= ================
F-24
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INVESTOR SAVINGS (CONTINUED)
Notes payable to investors are issued by a subsidiary company, Carolina
Investors, Inc. ("CII"), in any denomination greater than $10,000 and are
registered under the South Carolina Uniform Securities Act. The notes mature
from one to three years from date of issuance. Interest is payable monthly,
quarterly or at maturity at the option of the investors. Interest rates on the
notes are fixed until maturity and range from 5% to 9%. At December 31, 1997 and
1996, the weighted average rate was 7.69% and 8.08%, respectively. The notes are
subordinated to all bank debt, and are senior to the subordinated debentures.
Subordinated debentures are issued by CII in any denomination greater than $100
and are registered under the South Carolina Uniform Securities Act. The
subordinated debentures mature one year from date of issuance and have interest
rates of 5%. The debentures are subordinated to all bank debt, notes payable to
investors, and senior unsecured debt.
At December 31, 1997 and 1996, notes payable to investors and subordinated
debentures include an aggregate of approximately $26.3 million and $21.0
million, respectively, of individual investments exceeding $100,000.
The investor savings at December 31, 1997 mature as follows (in thousands):
1998 $ 98,644
1999 35,671
----------------
$ 134,315
================
NOTE 11. SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS
In September 1997, the Company sold $125.0 million 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 Senior Notes require, among other matters, a maximum ratio of
total liabilities to tangible net worth, limitations on the amount of capital
expenditures, and restrictions on the payment of dividends. At December 31,
1997, 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.
F-25
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS (CONTINUED)
The following tables represent consolidating condensed financial data of the
combined Subsidiary Guarantors. 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
Subsidiary Guarantors, because it was deemed that such financial statements
would not provide investors with any material additional information.
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 will consist of the following subsidiaries of the
Company:
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)
Emergent Business Capital, Inc. (100% owned)
Emergent Commercial Mortgage, Inc. (100% owned)
Emergent Financial Corp. (100% owned)
Emergent Equity Advisors, Inc. (100% owned)
The Loan Pro$, Inc. (100% owned)
Premier Financial Services, Inc. (100% owned)
As of December 31, 1997, the Subsidiary Guarantors conduct all of the Company's
operations other than its special purpose bankruptcy-remote securitization
subsidiaries and its mezzanine lending operations performed through Reedy River
Ventures Limited Partnership, a small business investment company.
F-26
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ -------------- ------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 713 $ 6,411 $ 263 $ $ -- $ 7,561
174
Restricted cash -- 103 -- 2,220 -- 2,323
Loans receivable:
Loans receivable held for investment -- 93,129 7,250 -- 100,379
Loans receivable held for sale -- 187,911 9,325 -- -- 197,236
Notes receivable from affiliates 71,854 31,851 -- 25 (103,730) --
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total loans receivable 71,854 312,891 9,325 7,275 (103,730) 297,615
Less allowance for credit losses on
loans -- (6,528) -- -- -- (6,528)
Less unearned discount, dealer
reserves, and deferrals
net of deferred loan costs -- (2,466) (368) (192) -- (2,658)
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Net loans receivable 71,854 304,265 8,957 7,083 (103,730) 288,429
Other Receivables:
Accrued interest receivable -- 4,250 63 94 -- 4,407
Other receivables 3,678 6,802 496 -- (296) 10,680
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total other receivables 3,678 11,052 559 94 (296) 15,087
Investment in subsidiaries 108,854 -- -- -- (108,854) --
Investment in asset-backed securities -- 10,139 -- 6,300 -- 16,439
Net interest-only strip security -- 33,337 -- 11,103 -- 44,440
Net property and equipment 1,666 15,086 1,328 -- -- 18,080
Net excess of cost over net assets of
acquired businesses 42 3,426 -- 342 (936) 2,874
Real estate and personal property
acquired through foreclosure -- 3,295 -- -- -- 3,295
Other assets 8,545 10,324 207 237 (1,689) 17,624
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
TOTAL ASSETS 195,352 397,438 11,314 27,553 (215,505) 416,152
======== ========= ============= =========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to banks -- 77,605 -- -- -- 77,605
Investor savings:
Notes payable to investors -- 115,368 -- -- -- 115,368
Subordinated debentures -- 18,947 -- -- -- 18,947
-- -------- --- --------- -------------- -- ----------- -- ---------- -- ---------
Total investor savings -- 134,315 -- -- -- 134,315
Senior unsecured debt 125,000 -- -- -- -- 125,000
Accounts payable and accrued
liabilities 312 7,408 760 22 (1,985) 6,517
Remittances payable -- 4,591 -- -- -- 4,591
Accrued interest payable 3,645 1,105 -- -- -- 4,750
Due to affiliates 3,021 -- -- 7,057 (10,078) --
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total other liabilities 6,978 13,104 760 7,079 (12,063) 15,858
Subordinated debt to affiliates -- 63,969 9,544 16,829 (90,342) --
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total liabilities 131,978 288,993 10,304 23,908 (102,405) 352,778
Shareholders' equity:
Common stock 484 4,259 -- 10 (4,269) 484
Preferred stock -- 4,621 5,700 -- (10,321) --
Capital in excess of par value 38,609 64,570 -- 3,102 (67,672) 38,609
Retained earnings 24,281 34,995 (4,690) 533 (30,838) 24,281
-------- --- --------- ------------- ----------- ---------- ---------
Total shareholders' equity 63,374 108,455 1,010 3,645 (113,100) 63,374
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 195,352 $ 397,438 $ 11,314 $ 27,553 $ (215,505) $ 416,152
======== ========= ============= =========== ========== =========
</TABLE>
F-27
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- ------------- ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 192 $ 958 $ 126 $ -- $ -- $ 1,276
Restricted cash -- -- -- 5,319 -- 5,319
Loans receivable:
Loans receivable -- 67,050 -- -- -- 67,050
Mortgage loans held for sale -- 122,482 -- -- -- 122,482
Notes receivable from affiliates 2,800 6,501 -- 10 (9,311) --
-- -------- --- --------- -------------- -- ----------- -- ---------- -- ---------
Total loans receivable 2,800 196,033 -- 10 (9,311) 189,532
Less allowance for credit losses on
loans -- (3,084) -- -- -- (3,084)
Less unearned discount, dealer
reserves, and deferrals
net of deferred loan costs -- (1,419) -- -- -- (1,419)
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Net loans receivable 2,800 191,530 -- 10 (9,311) 185,029
Other Receivables:
Accrued interest receivable -- 2,083 -- 4 -- 2,087
Other receivables 37 4,360 62 -- -- 4,459
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total other receivables 37 6,443 62 4 -- 6,546
Investment in subsidiaries 42,634 -- -- -- (42,634) --
Net investment for asset-backed
securities -- (354) -- 3,935 -- 3,581
Net interest-only strip security -- 4,315 -- -- -- 4,315
Net property and equipment 526 6,289 362 -- -- 7,177
Net excess of cost over net assets of
acquired businesses 45 3,618 -- -- (941) 2,722
Real estate and personal property
acquired through foreclosure -- 4,720 -- -- -- 4,720
Other assets 1,311 1,851 302 -- -- 3,464
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
TOTAL ASSETS 47,545 219,370 852 9,268 (52,886) 224,149
======== ========= ============= =========== ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to banks -- 55,494 -- -- -- 55,494
Investor savings:
Notes payable to investors -- 97,987 -- -- -- 97,987
Subordinated debentures -- 16,115 -- -- -- 16,115
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total investor savings -- 114,102 -- -- -- 114,102
Accounts payable and accrued
liabilities 545 3,331 82 -- -- 3,958
Remittances payable 2,573 -- 946 -- 3,519
Accrued interest payable -- 597 -- -- -- 597
Due to affiliates 365 -- -- 8,312 (8,677) --
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total other liabilities 910 6,501 82 9,258 (8,677) 8,074
Subordinated debt to affiliates -- -- 634 -- (634) --
-- -------- --- --------- ------------- -- ----------- -- ---------- -- ---------
Total liabilities 910 176,097 716 9,258 (9,311) 177,670
Minority interest -- -- -- -- (156) (156)
Shareholders' equity:
Common stock 457 4,258 -- 10 (4,268) 457
Preferred stock -- 150 1,000 -- (1,150) --
Capital in excess of par value 33,150 16,280 -- -- (16,280) 33,150
Retained earnings 13,028 22,585 (864) -- (21,721) 13,028
-------- --------- -------------- ----------- ---------- ---------
Total shareholders' equity 46,635 43,273 136 10 (43,419) 46,635
-- -------- --- --------- -------------- ----------- -- ---------- -- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 47,545 $ 219,370 $ 852 $ 9,268 $ (52,886) $ 224,149
======== ========= ============== =========== ========== =========
</TABLE>
F-28
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- ------------- -----------
REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 2,620 $ 33,753 $ 50 $ 423 $ (2,838) $ 34,008
Servicing income -- 8,514 -- -- -- 8,514
Gain on sale of loans:
Cash gain on sale of loans -- 12,734 1,419 -- -- 14,153
Non-cash gain on sale of loans -- 38,675 -- -- -- 38,675
Loan fee income -- 28,024 2,137 46 -- 30,207
-- -------- --- --------- --------- ----------- -- ---------- -- ---------
Total gain on sale of loans -- 79,433 3,556 46 -- 83,035
Other revenues 253 923 11 405 (193) 1,399
-- -------- --- --------- --------- ----------- -- ---------- -- ---------
Total revenues 2,873 122,623 3,617 874 (3,031) 126,956
EXPENSES:
Interest 4,436 23,308 193 203 (3,007) 25,133
Provision for credit losses -- 10,030 -- -- -- 10,030
Salaries, wages and employee benefits 4,421 40,032 3,591 -- -- 48,044
Business development costs 25 7,206 255 -- -- 7,486
Other general and administrative
expense (5,026) 30,390 3,302 116 (28) 28,754
-------- --- --------- --------- ----------- ---------- ---------
Total expenses 3,856 110,966 7,341 319 (3,035) 119,447
-------- --------- --------- ----------- ---------- ---------
Income before income taxes, minority
interest, and equity in undistributed
earnings of subsidiaries (983) 11,657 (3,724) 555 4 7,509
Equity in undistributed earnings of
subsidiaries 8,302 -- -- -- (8,302) --
-------- --------- --------- ----------- ---------- ---------
Income before income taxes and
minority interest 7,319 11,657 (3,724) 555 (8,298) 7,509
Provision (benefit) for income taxes: (3,917) (106) 101 22 -- (3,900)
-------- --------- --------- ----------- ---------- ---------
Income before minority interest 11,236 11,763 (3,825) 533 (8,298) 11,409
Minority interest in (earnings) loss
of subsidiaries 17 (173) -- -- -- (156)
-- -------- --- --------- --------- -- ----------- -- ---------- -- ---------
NET INCOME $ 11,253 $ 11,590 $ (3,825) $ 533 $ (8,298) $ 11,253
== ======== === ========= ========= == =========== == ========== == =========
</TABLE>
F-29
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 88 $ 18,277 $ 19 $ -- $ (476) $ 17,908
Servicing income -- 3,274 -- -- -- 3,274
Gain on sale of loans:
Cash gain on sale of loans -- 20,846 16 -- -- 20,862
Non-cash gain on sale of loans -- 2,953 -- -- -- 2,953
Loan fee income -- 4,078 72 -- -- 4,150
-------- ------------- -------- -------------- ------------- ------------
Total gain on sale of loans -- 27,877 88 -- -- 27,965
Other revenues 406 835 -- -- -- 1,241
-------- ------------- -------- -------------- ------------- ------------
Total revenues 494 50,263 107 -- (476) 50,388
EXPENSES:
Interest 457 11,019 21 -- (476) 11,021
Provision for credit losses -- 5,416 -- -- -- 5,416
Salaries, wages and employee benefits 1,931 11,221 511 -- -- 13,663
Business development costs 17 1,557 29 -- -- 1,603
Other general and administrative
expense (1,717) 9,469 472 -- -- 8,224
-------- ------------- -------- -------------- ------------- ------------
Total expenses 688 38,682 1,033 -- (476) 39,927
-------- ------------- -------- -------------- ------------- ------------
Income before income taxes, minority
interest, and equity in undistributed
earnings of subsidiaries (194) 11,581 (926) -- -- 10,461
Equity in undistributed earnings of
subsidiaries 10,116 -- -- -- (10,116) --
-------- ------------- -------- -------------- ------------- ------------
Income before income taxes and
minority interest 9,922 11,581 (926) -- (10,116) 10,461
Provision (benefit) for income taxes 6 774 (62) -- -- 718
-------- ------------- -------- -------------- ------------- ------------
Income before minority interest 9,916 10,807 (864) -- (10,116) 9,743
Minority interest in (earnings) loss
of subsidiaries 179 173 -- -- -- 352
-------- ------------- -------- -------------- ------------- ------------
NET INCOME $ 10,095 $ 10,980 $ (864) $ -- $ (10,116) $ 10,095
======== ============= ======== ============== ============= ============
</TABLE>
F-30
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 313 $ 15,015 $ -- $ -- $ (135) $ 15,193
Servicing income -- 446 -- -- -- 446
Gain on sale of loans:
Cash gain on sale of loans -- 7,963 -- -- -- 7,963
Non-cash gain on sale of loans -- 1,206 -- -- -- 1,206
Loan fee income -- 586 -- -- -- 586
---------- -------------- --------------- -------------- -------------- -----------
Total gain on sale of loans -- 9,755 -- -- -- 9,755
Other revenues (11) 895 -- -- -- 884
---------- -------------- --------------- -------------- -------------- -----------
Total revenues 302 26,111 -- -- (135) 26,278
EXPENSES:
Interest 152 8,510 -- -- (135) 8,527
Provision for credit losses -- 2,480 -- -- -- 2,480
Salaries, wages and employee
benefits 899 4,792 -- -- -- 5,691
Business development costs -- 653 -- -- -- 653
Other general and administrative
expense (425) 4,500 -- -- -- 4,075
---------- -------------- ---------------- -------------- -------------- ----------
Total expenses 626 20,935 -- -- (135) 21,426
---------- -------------- ---------------- -------------- -------------- ----------
Income before income taxes,
minority interest, and equity in
undistributed earnings of subsidiaries (324) 5,176 -- -- -- 4,852
Equity in undistributed earnings of
subsidiaries 4,935 -- -- -- (4,935) --
---------- -------------- ---------------- -------------- -------------- ----------
Income before income taxes and
minority interest 4,611 5,176 -- -- (4,935) 4,852
Provision (benefit) for income taxes 30 160 -- -- -- 190
---------- -------------- ---------------- -------------- -------------- ----------
Income before minority interest 4,581 5,016 -- -- (4,935) 4,662
Minority interest in (earnings)
loss of subsidiaries -- (81) -- -- -- (81)
---------- -------------- ---------------- -------------- -------------- ----------
Income from continuing operations 4,581 4,935 -- -- (4,935) 4,581
Discontinued transportation and
apparel manufacturing
segments:
Loss from operations, net of tax (1,573) -- -- -- -- (1,573)
Loss on disposal of segments (2,351) -- -- -- -- (2,351)
---------- -------------- ---------------- -------------- -------------- ----------
(3,924) -- -- -- -- (3,924)
---------- -------------- ---------------- -------------- -------------- ----------
NET INCOME $ 657 $ 4,935 $ -- $ -- $ (4,935) $ 657
========== ============== ================ ============== ============== ==========
</TABLE>
F-31
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Wholly-owned Non Wholly-owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------- -------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,253 $ 11,590 $ (3,825) $ 533 $ (8,298)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries (8,302) -- -- -- 8,302
Depreciation and amortization 304 2,009 375 7 (4)
Provision for deferred income taxes (3,292) (853) 331 -- --
Provision for credit losses -- 10,030 -- -- --
Loans originated with intent to sell -- (1,098,826) (41,507) -- --
Principal proceeds from sold loans -- 485,622 32,181 -- --
Proceeds from securitization of loans -- 509,781 -- -- --
Other 16 (238) 368 192 --
Changes in operating assets and
liabilities increasing
(decreasing) cash:
Restricted cash -- (103) -- 3,099 --
Other receivables (3,602) (1,187) (434) -- --
Interest only strip security -- (29,022) -- (11,103) --
Accrued interest receivable -- (2,139) (63) (90) --
Other assets 911 (7,468) (52) (237) --
Remittance due loan participants -- 2,018 -- (946) --
Accrued interest payable 3,645 508 -- -- --
Other liabilities (234) 1,280 347 22 --
Intercompany transfers 2,655 (1,385) -- (1,270) --
-------------- -------------- ------------ -------------- --------------
Net cash provided by (used 3,354 (118,383) (12,279) (9,793) --
in) operating activities
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (124,938) -- (8,250) --
Principal collections on loans not sold -- 127,552 -- 1,000 --
Principal collections on asset-backed -- -- -- 1,123 --
securities
Increase in overcollateralization -- (8,797) -- (1,514) --
from excess spread
Additional investment in subsidiary (54,168) 53,389 -- 779 --
Proceeds from sale of real estate
and personal property
acquired through foreclosure -- 6,652 -- -- --
Purchase of property and equipment (1,438) (10,591) (1,193) -- --
Other (11) (371) -- -- --
-------------- -------------- ------------ -------------- --------------
Net cash used in investing activities (55,617) 42,896 (1,193) (6,862) --
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 1,139,815 -- -- --
Payments on notes payable to banks -- (1,117,704) -- -- --
Net increase in notes payable to investors -- 17,381 -- -- --
Net (decrease) increase in -- 2,832 -- -- --
subordinated debentures
Advances (to) from subsidiary (69,054) 38,616 13,609 16,829 --
Proceeds from issuance of senior 120,578 -- -- -- --
unsecured debt
Proceeds from issuance of 1,260 -- -- -- --
additional common stock
-------------- -------------- ------------ -------------- --------------
Net cash provided by (used in) 52,784 80,940 13,609 16,829 --
financing activities
-------------- -------------- ------------ -------------- --------------
Net increase (decrease) in cash and
cash equivalents 521 5,453 137 174 --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 192 958 126 -- --
============== ============== ============ ============== ==============
CASH AND CASH EQUIVALENTS, END OF YEAR $ 713 $ 6,411 $ 263 $ 174 $ --
============== ============== ============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Consolidated
-------------
<S> <C>
OPERATING ACTIVITIES:
Net income $ 11,253
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries --
Depreciation and amortization 2,691
Provision for deferred income taxes (3,814)
Provision for credit losses 10,030
Loans originated with intent to sell (1,140,333)
Principal proceeds from sold loans 517,803
Proceeds from securitization of loans 509,781
Other 338
Changes in operating assets and
liabilities increasing
(decreasing) cash:
Restricted cash 2,996
Other receivables (5,223)
Interest only strip security (40,125)
Accrued interest receivable (2,292)
Other assets (6,846)
Remittance due loan participants 1,072
Accrued interest payable 4,153
Other liabilities 1,415
Intercompany transfers --
-------------
Net cash provided by (used (137,101)
in) operating activities
INVESTING ACTIVITIES:
Loans originated for investment purposes (133,188)
Principal collections on loans not sold 128,552
Principal collections on asset-backed 1,123
securities
Increase in overcollateralization (10,311)
from excess spread
Additional investment in subsidiary --
Proceeds from sale of real estate
and personal property
acquired through foreclosure 6,652
Purchase of property and equipment (13,222)
Other (382)
-------------
Net cash used in investing activities (20,776)
FINANCING ACTIVITIES:
Advances on notes payable to banks 1,139,815
Payments on notes payable to banks (1,117,704)
Net increase in notes payable to investors 17,381
Net (decrease) increase in 2,832
subordinated debentures
Advances (to) from subsidiary --
Proceeds from issuance of senior 120,578
unsecured debt
Proceeds from issuance of 1,260
additional common stock
-------------
Net cash provided by (used in) 164,162
financing activities
-------------
Net increase (decrease) in cash and
cash equivalents 6,285
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,276
=============
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,561
=============
</TABLE>
F-32
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Wholly-owned Non Wholly-owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------- -------------- ----------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 10,095 10,980 (864) -- (10,116)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries (10,120) -- -- -- 10,120
Depreciation and amortization 72 1,162 104 -- (4)
Provision for deferred income taxes 76 (218) 1 -- --
Provision for credit losses -- 5,416 -- -- --
Loans originated with intent to sell -- (386,405) (1,195) -- --
Principal proceeds from sold loans -- 270,663 1,195 -- --
Proceeds from securitization of loans -- 30,128 -- -- --
Other -- (671) -- -- --
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash -- -- -- (4,407) --
Other receivables -- (2,921) (63) -- --
Interest only strip security -- (3,109) -- -- --
Accrued interest receivable 51 (567) -- -- --
Other assets (334) (405) (391) -- --
Remittance due loan participants -- 2,331 -- -- --
Accrued interest payable -- (24) -- -- --
Other liabilities (362) 1,146 81 -- --
Intercompany transfers -- (4,082) -- 4,082 --
Net cash provided by operating
activities of discontinued
operations 77 -- -- -- --
-------------- -------------- ------------- -------------- --------------
Net cash provided by (used (445) (76,576) (1,132) (325) --
in) operating activities
INVESTING ACTIVITIES:
Loans originated for investment purposes (513) (48,660) -- -- --
Principal collections on loans not sold -- 61,868 -- -- --
Principal collections on asset-backed
securities -- 608 -- 325 --
Additional investment in subsidiary (18,825) 18,825 -- -- --
Proceeds from sale of real estate
and personal property
acquired through foreclosure -- 3,383 -- -- --
Purchase of property and equipment (532) (3,985) (377) -- --
Other -- 76 -- -- --
-------------- -------------- ------------- -------------- --------------
Net cash used in investing activities (19,870) 32,115 (377) 325 --
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 509,118 -- -- --
Payments on notes payable to banks -- (485,257) -- -- --
Net increase in notes payable to investors -- 15,855 -- -- --
Net (decrease) increase in subordinated -- (70) -- -- --
debentures
Advances (to) from subsidiary (6,511) 4,876 1,635 -- --
Proceeds from issuance of additional
common stock 26,655 -- -- -- --
-------------- -------------- ------------- -------------- --------------
Net cash provided by (used in)
financing activities 20,144 44,522 1,635 -- --
-------------- -------------- ------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents (171) 61 126 -- --
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 363 897 -- -- --
-------------- -------------- ------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 192 $ 958 $ 126 $ -- $ --
============== ============== ============= ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Consolidated
-----------
<S> <C>
OPERATING ACTIVITIES:
Net income 10,095
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries --
Depreciation and amortization 1,334
Provision for deferred income taxes (141)
Provision for credit losses 5,416
Loans originated with intent to sell (387,600)
Principal proceeds from sold loans 271,858
Proceeds from securitization of loans 30,128
Other (671)
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash (4,407)
Other receivables (2,984)
Interest only strip security (3,109)
Accrued interest receivable (516)
Other assets (1,130)
Remittance due loan participants 2,331
Accrued interest payable (24)
Other liabilities 865
Intercompany transfers --
Net cash provided by operating
activities of discontinued
operations 77
-------------
Net cash provided by (used (78,478)
in) operating activities
INVESTING ACTIVITIES:
Loans originated for investment purposes (49,173)
Principal collections on loans not sold 61,868
Principal collections on asset-backed
securities 933
Additional investment in subsidiary --
Proceeds from sale of real estate
and personal property
acquired through foreclosure 3,383
Purchase of property and equipment (4,894)
Other 76
-------------
Net cash used in investing activities 12,193
FINANCING ACTIVITIES:
Advances on notes payable to banks 509,118
Payments on notes payable to banks (485,257)
Net increase in notes payable to investors 15,855
Net (decrease) increase in subordinated (70)
debentures
Advances (to) from subsidiary --
Proceeds from issuance of additional
common stock 26,655
-------------
Net cash provided by (used in)
financing activities 66,301
-------------
Net increase (decrease) in cash and
cash equivalents 16
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 1,260
-------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,276
=============
</TABLE>
F-33
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Combined Combined
Wholly-owned Non Wholly-owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations
-------------- -------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 657 $ 4,935 $ -- $ -- $ (4,935)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries (4,935) -- -- -- 4,935
Depreciation and amortization 253 685 -- -- --
Provision for deferred income taxes -- 41 -- -- --
Provision for credit losses -- 2,480 -- -- --
Loans originated with intent to sell -- (173,985) -- -- --
Principal proceeds from sold loans -- 144,861 -- -- --
Proceeds from securitization of loans -- 15,357 -- -- --
Other -- (899) -- -- --
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash -- -- -- (912) --
Other receivables -- (1,034) -- -- --
Interest only strip security -- (183) -- -- --
Accrued interest receivable (51) (593) -- -- --
Other assets 293 (223) -- -- --
Remittance due loan participants -- 505 -- -- --
Accrued interest payable -- 103 -- -- --
Other liabilities (274) 1,151 -- -- --
Intercompany transfers 732 (1,467) -- 735 --
Net cash provided by activities of
discontinued operations 1,592 -- -- -- --
-------------- -------------- ----------- -------------- --------------
Net cash provided by (used
in) operating activities (1,733) (8,266) -- (177) --
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (74,363) -- -- --
Principal collections on loans not sold -- 50,329 -- -- --
Principal collections on asset-backed -- -- -- 177 --
securities
Additional investment in subsidiary (1,384) (1,384) -- -- --
Proceeds from sale of real estate and
personal property acquired through
foreclosure -- 3,401 -- -- --
Purchase of property and equipment (25) (1,707) -- -- --
Other (255) (779) -- -- --
-------------- -------------- ------------ -------------- --------------
Net cash used in investing activities (1,104) (24,503) -- 177 --
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 179,381 -- -- --
Payments on notes payable to banks (279) (164,710) -- -- --
Net increase in notes payable to investors -- 25,635 -- -- --
Net (decrease) increase in subordinated
debentures -- (4,812) -- -- --
Advances (to) from subsidiary 1,677 (1,677) -- -- --
Proceeds from issuance of additional
common stock 52 -- -- -- --
Other (568) (319) -- -- --
-------------- -------------- ------------ -------------- --------------
Net cash provided by (used in)
financing activities 882 33,498 -- -- --
-------------- -------------- ------------ -------------- --------------
Net increase (decrease) in cash and 253 729 -- -- --
cash equivalents
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 110 168 -- -- --
-------------- -------------- ------------ -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 363 $ 897 $ -- $ -- $ --
============== ============== ============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Consolidated
-------------
<S> <C>
OPERATING ACTIVITIES:
Net income $ 657
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings
of subsidiaries --
Depreciation and amortization 938
Provision for deferred income taxes 41
Provision for credit losses 2,480
Loans originated with intent to sell (173,985)
Principal proceeds from sold loans 144,861
Proceeds from securitization of loans 15,357
Other (899)
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash (912)
Other receivables (1,034)
Interest only strip security (183)
Accrued interest receivable (644)
Other assets 70
Remittance due loan participants 505
Accrued interest payable 103
Other liabilities 877
Intercompany transfers --
Net cash provided by activities of
discontinued operations 1,592
-------------
Net cash provided by (used
in) operating activities (10,176)
INVESTING ACTIVITIES:
Loans originated for investment purposes (74,363)
Principal collections on loans not sold 50,329
Principal collections on asset-backed 177
securities
Additional investment in subsidiary --
Proceeds from sale of real estate and
personal property acquired through
foreclosure 3,401
Purchase of property and equipment (1,732)
Other (1,034)
-------------
Net cash used in investing activities (23,222)
FINANCING ACTIVITIES:
Advances on notes payable to banks 179,381
Payments on notes payable to banks (164,989)
Net increase in notes payable to investors 25,635
Net (decrease) increase in subordinated
debentures (4,812)
Advances (to) from subsidiary --
Proceeds from issuance of additional
common stock 52
Other (887)
-------------
Net cash provided by (used in)
financing activities 34,380
-------------
Net increase (decrease) in cash and 982
cash equivalents
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 278
-------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,260
=============
</TABLE>
F-34
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. LEASES
The Company leases various property and equipment, office space and automobiles
under operating leases.
The following is a schedule by year of future minimum rental payments for all
operating leases that have initial or remaining noncancellable terms in excess
of one year (in thousands):
1998 $ 2,712
1999 1,992
2000 1,642
2001 1,216
2002 264
----------------
$ 7,826
================
Total rental expense was approximately $2.1 million in 1997, $843,000 in 1996,
and $901,000 in 1995.
NOTE 13. MANAGEMENT AGREEMENTS
The Company manages a venture capital fund. The Company receives management fees
of $320,000 annually. Prior to June 1997, the Company also received management
fees for managing a mezzanine level fund, in which it was a general partner.
During 1995, the Company made a $1.0 million investment into the partnership. In
June 1997, the Company purchased the remaining interests of the partnership. The
Company received management fees of $426,000, $514,000, and $570,000 from the
managed funds during 1997, 1996, and 1995 respectively. The Company may also
receive incentive management fees of 15% of the net portfolio profits of the
venture capital fund, as defined.
F-35
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. OTHER GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses for the years ended December 31, 1997,
1996, and 1995 consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995
------------------ ------------------- -----------------
<S> <C> <C> <C>
Depreciation expense $ 2,220 $ 901 $ 383
Amortization expense 471 433 314
Legal and professional fees 6,749 1,026 687
Travel and entertainment 3,493 1,116 420
Office rent and utilities 2,206 750 324
Telephone 3,411 697 270
Office supplies 2,322 590 216
Other 7,882 2,711 1,461
------------------ ------------------- -----------------
TOTAL OTHER GENERAL AND ADMINISTRATIVE $ 28,754 $ 8,224 $ 4,075
================== =================== =================
</TABLE>
NOTE 15. SHAREHOLDERS' EQUITY
On May 21, 1981, the shareholders approved an employee stock option plan and on
May 22, 1984, the shareholders approved an increase in the number of shares of
common stock, which may be granted from 250,000 to 500,000. Under the terms of
the plan, the Company may grant options to key employees and directors to
purchase up to a total of 500,000 shares of its $.05 par value common stock. The
option price is the fair market value at date of grant. The options expire five
years from date of grant, are not transferable other than on death, and are
exercisable 20% on the date of grant and 20% per year on a cumulative basis for
each year subsequent to the date of grant. No shares are available for grant
under this stock option plan, and there are 18,668 unexercised options
outstanding at December 31, 1997, of which 10,668 are exercisable.
On June 9, 1995, the shareholders approved a stock option plan under which the
Board of Directors may issue 566,668 shares of common stock. In May 1997, the
shareholders approved an increase in the number of shares of common stock, which
may be granted to 716,668. Under the terms of the plan, the Company may grant
options to key employees to purchase up to a total of 716,668 shares of its $.05
par value common stock. The option price is the fair market value at date of
grant. Prices for incentive stock options granted to employees who own 10% or
more of the Company's stock are at 110% of market value at date of grant. The
options expire five to ten years from date of grant, are not transferable other
than on death, and are exercisable 20% on the date of grant and 20% per year on
a cumulative basis for each year subsequent to the date of grant. The remaining
options available for grant under the plan consist of 265,664 common stock
options at December 31, 1997, and there are 459,042 unexercised options
outstanding at December 31, 1997, of which 180,240 are exercisable.
F-36
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SHAREHOLDERS' EQUITY (CONTINUED)
Also on June 9, 1995, the shareholders approved a stock option plan under which
each non-employee member of the Board of Directors receives options to purchase
666 shares of common stock each December 31 beginning in 1995 through 1999.
Under the terms of the plan, the Company may grant options totaling 33,333. The
terms of the plan are identical to the employee stock option plan approved on
June 9, 1995. The remaining options available for grant under this plan consist
of 26,673 common stock options at December 31, 1997, and there are 6,261
unexercised options outstanding at December 31, 1997, of which 2,931 are
exercisable.
On April 18, 1996, the shareholders approved a restricted stock agreement plan
to provide additional incentives to members of the Board of Directors of the
Company who are not employees of the Company. Shares that may be issued pursuant
to the Restricted Stock Agreements under the Plan shall not exceed 50,000 shares
in the aggregate. The Plan provides that, on each grant date, each eligible
director will automatically receive from the Company an Agreement to purchase
for $.05 per share that number of shares having a fair market value equal to
$12,000. For purposes of the Plan, the grant date is January 31 of each calendar
year commencing with the 1996 calendar year. At December 31, 1997, there were
14,500 agreements granted under this plan with 11,600 unexercised agreements
outstanding, all of which are exercisable. Shares subject to a Restricted Stock
Agreement are initially non-transferable and subject to forfeiture. Shares
granted to a recipient become freely transferable and no longer subject to
forfeiture at a rate of 20% of the total number of shares covered by such
agreement on each of the five anniversaries of the grant date, beginning with
the first anniversary of such grant.
The Company offered to buy from the shareholders up to 1,000,000 shares of
common stock for the period March 31, through May 8, 1995 at a price of $1.15
per share. As a result of this offer, the Company purchased approximately
487,000 shares of common stock at an aggregate cost of approximately $560,000.
On June 9, 1995 the shareholders of the Company approved a one-for-three reverse
split of the Common Stock. The certificates for previously issued common stock
were canceled and were forfeited by the holder in order for the holder to
receive replacement certificates for the after reverse split shares. The
shareholders also authorized the increase of post reverse split authorized
shares of common stock to 4,000,000 shares. The Company issued to all
shareholders certificates for one-third of their common shares as of June 9,
1995, upon the shareholder presenting their existing shares. No fractional
shares were issued as a result of the one-for-three reverse stock split. All
fractional shares were redeemed at an equivalent price of $1.25 per share.
The Articles of Incorporation of the Company were amended by vote of the
shareholders at the Annual Meeting of Shareholders on April 18, 1996. The Class
A Common Stock, $0.05 par value, was converted to common stock on a one-for-one
basis effective April 19, 1996. All authorized but unissued shares of Class A
Common Stock were canceled. The number of authorized shares of common stock was
increased from 4,000,000 to 30,000,000 shares. By vote of the shareholders at
the Annual Meeting of Shareholders on May 27, 1997, the number of authorized
shares of common stock was increased from 30,000,000 to 100,000,000.
F-37
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SHAREHOLDERS' EQUITY (CONTINUED)
The Company filed a registration statement with the Securities and Exchange
Commission on September 20, 1996, for the issuance of 3,000,000 shares of common
stock of which 2,119,031 shares were offered by the Company and 880,969 shares
were offered by certain selling shareholders. No officers or directors of the
Company sold any shares in connection with the offering. The offering was
effective on November 8, 1996, as the Company's common stock was listed on the
NASDAQ Stock Market's National Market under the trading symbol, "EMER." On
December 11, 1996, the underwriters of the public offering exercised the option
to purchase an additional 400,000 shares of common stock in accordance with the
terms of the registration statements. Total gross proceeds of approximately
$28,969,000 were raised as a result of the issuance of stock, which was offset
by approximately $2,769,000 in costs and expenses relating to the transaction.
F-38
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SHAREHOLDERS' EQUITY (CONTINUED)
Activity in stock options is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
---------------- -------------- --------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 487,638 339,000 140,000
Issued at: Date of
Grant
- -------------------- ---------
$1.0825 per share 02-17-94 -- -- --
$l.32 per share 01-13-95 -- -- 80,006
$4.625 per share 10-31-95 -- -- 124,000
$5.09 per share 10-31-95 -- -- 32,000
$9.435 per share 12-18-95 -- -- 2,664
$10.38 per share 12-18-95 -- -- 666
$12.25 per share 11-11-96 -- 258,000 --
$11.25 per share 12-15-96 -- 3,330 --
$13.50 per share 02-11-97 1,000 -- --
$13.00 per share 05-02-97 10,000 -- --
$14.25 per share 08-06-97 5,000 -- --
$13.50 per share 09-26-97 21,000 -- --
------------- -------------- --------------
Total Granted 37,000 261,330 239,336
Exercised:
Expired or canceled -- -- --
$1.0825 per share (17,336) (74,197) (29,800)
$1.32 per share (13,332) (29,335) (1,336)
$4.625 per share (9,600) (9,160) (3,200)
$5.09 per share -- -- (6,000)
$10.380 per share (266) -- --
$11.250 per share (133) -- --
------------- -------------- --- --------------
Total exercised canceled or expired 40,667 112,692 40,336
------------- -------------- --------------
Options end of year 483,971 487,638 339,000
============= ============== ==============
Exercisable, end of year 193,839 98,973 83,532
============= ============== ==============
Available for grant, end of year 292,340 179,340 440,671
============= ============== ==============
</TABLE>
F-39
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1995, 121,742 warrants were outstanding; 111,932 of these
warrants were exercised during 1996 for $2.625 per share. The remaining warrants
expired as of December 31, 1996. Accordingly, no warrants are outstanding at
December 31, 1997.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1997, 1996, and 1995 consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income - as reported $ 11,253 $ 10,095 $ 657
Net income - pro forma 10,969 9,875 616
Diluted earnings per share - as reported 1.17 1.42 0.10
Diluted earnings per share - pro forma 1.14 1.39 0.09
</TABLE>
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes valuation model with the following weighted average assumptions:
dividend yield of 0%, expected volatility of 64.0%; risk-free interest rate of
approximately 5.7%, and expected lives of 3 years. The pro forma amounts
disclosed above may not be representative of the effects on reported net income
for future periods.
The Company implemented an Employee Stock Purchase Plan ("ESPP") in 1997. The
ESPP allows eligible employees the right to purchase common stock at the end of
each of two six-month offering periods (January 1 through June 30 and July 1
through December 31). Eligible employees must work 20 or more hours per week and
have been employed for a period of 1 year. The stock is purchased at 85% of the
lower of the market price at the beginning or ending of each six-month offering
period. A liability will be recorded for ESPP withholdings not yet applied
towards the purchase of common stock. The Company's Board of Directors has
authorized 200,000 shares to be issued under the ESPP.
NOTE 16. DISCONTINUED OPERATIONS
In connection with the Company's strategic plan to focus its business efforts on
financial services, the Company's operations in the Apparel and Transportation
segments were discontinued during 1995. The Company divested its apparel segment
operations, which was comprised solely of the operations of Young Generations,
Inc. ("YGI"). On September 30, 1995, the Company sold all of the outstanding
stock (the "stock sale") of YGI to fifteen individuals (the "Buyers"), who were
members of YGI's management team. As a result, the loss on the sale of the stock
and operating results of the apparel segment have been classified as
discontinued operations.
F-40
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. DISCONTINUED OPERATIONS (CONTINUED)
The Company sold the stock for $600,000 under a non-recourse promissory note
from the buyers. As a result of the sale, the Company wrote-off all amounts due
from YGI resulting in a charge of $3.6 million, net of income taxes of $67,700,
reported as a loss from discontinued operations. The Company remains
contingently liable for its guarantee of certain bank loans and certain trade
accounts payable, which at December 31, 1997 totaled approximately $150,000 and
were secured by substantially all of YGI's assets. In 1996 and 1997, the Company
loaned additional amounts to YGI, $800,000 of which remained outstanding at
December 31, 1997.
The Apparel segment, which consists solely of the operations of YGI, had net
losses of $1.3 million for the nine months ended September 30, 1995. YGI had
revenues of $7.3 million for the nine months ended September 30, 1995.
In July 1994 the Company sold an operating railroad for $940,000. In connection
with this sale, the Company received $20,000 cash, and a note receivable of
$920,000, payable in semi-annual payments over five years, with an interest rate
of 10%. In November 1994, the Company assigned the rights to boxcars in a lease
with a Class I railroad for $1.2 million cash. The Company sold additional
railcars in June 1995 for $111,000 cash.
At December 31, 1995, the Company had remaining net assets in the transportation
segment of $77,000, the majority of which the Company sold during 1996.
Revenues applicable to the discontinued operations were:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(in thousands)
<S> <C> <C> <C>
Apparel manufacturing $ -- $ -- $ 7,263
Transportation -- -- 390
Income from operations and gain (loss) on disposal attributable to the
discontinued segments is reported net of income tax expense of:
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(in thousands)
Apparel manufacturing $ -- $ -- $ (22)
Transportation -- -- (53)
</TABLE>
F-41
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. DISCONTINUED OPERATIONS (CONTINUED)
Gain (loss) from operations, net of income tax, consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
<S> <C> <C> <C>
(in thousands)
Apparel manufacturing segment $ -- $ -- $ (1,253)
Transportation segment -- -- (320)
---------------- ---------------- --------------
-- -- (1,573)
---------------- ---------------- --------------
Gain (loss) on disposal of segments, net of income taxes, consists of the
following:
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(in thousands)
Apparel manufacturing segment $ -- $ -- $ (2,324)
Transportation segment -- -- (27)
---------------- ---------------- --------------
-- -- (2,351)
---------------- ---------------- --------------
NOTE 17. INCOME TAXES
Total income tax expense was allocated as follows:
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(in thousands)
Income from continuing operations $ (3,900) $ 718 $ 190
Discontinued operations -- -- (75)
---------------- ---------------- --------------
$ (3,900) $ 718 $ 115
---------------- ---------------- --------------
</TABLE>
F-42
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. INCOME TAXES (CONTINUED)
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>
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(in thousands)
<S> <C> <C> <C>
Statutory Federal rate of 34% applied to pre-tax income
from continuing operations before minority interest $ 2,553 $ 3,557 $ 1,650
State income taxes, net of federal income tax benefit (16) 350 3
Change in the beginning of the year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense (7,508) (3,229) (1,566)
Nondeductible expenses 107 17 5
Amortization of excess cost over net assets of acquired
businesses 66 64 62
Other, net 898 (41) 36
---------------- ---------------- --------------
$ (3,900) $ 718 $ 190
---------------- ---------------- --------------
Provision (benefit) for income taxes from continuing operations is comprised of
the following:
Years Ended December 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- --------------
(in thousands)
Current
Federal $ 289 $ 199 $ 100
State and local (376) 660 49
---------------- ---------------- --------------
(87) 859 149
Deferred
Federal (4,165) (11) 27
State and local 352 (130) 14
---------------- ---------------- --------------
(3,813) (141) 41
Total
Federal (3,876) 188 127
State and local (24) 530 63
---------------- ---------------- --------------
$ (3,900) $ 718 $ 190
---------------- ---------------- --------------
</TABLE>
F-43
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. INCOME TAXES (CONTINUED)
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>
December 31,
-------------------------------------
1997 1996
---------------- ----------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ (796) $ (372)
REIT adjustment (3,849) --
Deferred loan fees (608) --
Other (90) --
---------------- ----------------
Total gross deferred tax liabilities (5,343) (372)
---------------- ----------------
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles 216 205
Allowance for credit losses 3,525 1,672
AMT credit carryforward 608 568
Operating loss carryforward 4,171 4,590
Unrealized gain on loans to be sold 909 1,182
Other 65 --
---------------- ----------------
Total gross deferred tax assets 9,494 8,217
Less valuation allowance -- (7,508)
---------------- ----------------
Net deferred tax asset $ 4,151 $ 337
================ ================
</TABLE>
The valuation allowance at December 31, 1996 consisted of Alternative Minimum
Tax Credit carryforwards, net operating loss carryforwards, and deductible
temporary differences primarily for Federal income tax purposes. Management
believes that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize net deferred tax assets.
Accordingly, there is no valuation allowance recorded at December 31, 1997.
As of December 31, 1997, the Company has available Federal net operating loss
("NOL") carryforwards expiring as follows (in thousands):
1999 $ 7,463
2000 3,297
2001 1,911
2002 and after 362
-------
$13,033
=======
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Company or its subsidiaries.
F-44
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. STATEMENT OF CASH FLOWS
The following information relates to the Statement of Cash Flows for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
(In thousands)
Changes in operating assets and liabilities increasing
(decreasing) cash:
Restricted cash $ 2,996 $ (4,407) $ (912)
Interest-only strip security (40,125) (3,109) (183)
Accrued interest receivable (2,292) (516) (644)
Other receivables (5,223) (2,984) (1,034)
Other assets (6,846) (1,130) 70
Remittance due to loan participants 1,072 2,331 505
Accrued interest payable 4,153 (24) 103
Other liabilities 1,415 865 877
Net cash provided by operating activities of
discontinued operations -- 77 1,592
---------------- ----------------- -----------------
$ (44,850) $ 8,897 $ 374
================ ================= =================
</TABLE>
F-45
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. TRANSACTIONS WITH RELATED PARTIES
The Company engaged in the following related party transactions:
The Company obtains legal services from a firm, certain members of which, when
considered in the aggregate, may be deemed to beneficially own 596,351 shares of
the Company's capital stock. Total charges for these services were approximately
$308,000 in 1997, $756,000 in 1996, and $234,000 in 1995.
The Company provided management services to a mezzanine level small business
investment company partnership fund with significant common shareholders for
which it received fees of $175,000 in 1996 and $250,000 in 1995.
Notes payable to investors and subordinated debentures include amounts due to
officers, directors and key employees of approximately $660,000 and $694,000 at
December 31, 1997 and 1996, respectively. The Company also had notes receivable
from related parties at December 31, 1997 and 1996 of approximately $509,000 and
$1.1 million, respectively.
NOTE 20. EMPLOYEE RETIREMENT PLAN
The Company has a matched savings plan under Section 401(k) of the Internal
Revenue Code covering employees meeting certain eligibility requirements. The
plan allows employees who have completed 30 days of service to participate in
the plan and provides for Company contributions, subject to certain limitations.
Company matching contributions are 50% of employee contributions to a maximum of
6% of compensation for each employee. The Company's contributions under the plan
totaled approximately $761,000 in 1997, $60,000 in 1996, and $76,000 in 1995.
F-46
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued SFAS No. 130 "REPORTING COMPREHENSIVE INCOME," which
is effective for annual and interim periods beginning after December 15, 1997.
This statement requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
In June 1997, FASB issued SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION," which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes standards
for the method that public entities report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. 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.
NOTE 22. CONTINGENCIES
From time to time, the Company or its subsidiaries are defendants in legal
actions involving claims arising in the normal course of its business. The
Company believes that, as a result of its legal defenses and insurance
arrangements, none of these actions, if decided adversely, would have a material
effect on the business, financial condition, results of operations or cash flows
of the Company taken as a whole.
The Company may from time to time enter into forward commitments to sell
residential first mortgage loans to reduce risk associated with originating and
holding loans for sale. At December 31, 1997, the Company had no outstanding
forward commitment contracts.
NOTE 23. SUBSEQUENT EVENTS
On March 19, 1998, the Company sold substantially all of the assets of its auto
loan division for book value, which approximated $20.4 million. No gain or loss
was recognized on this transaction.
On January 29, 1998, the Company announced plans to seek a strategic acquirer of
Sterling Lending.
F-47
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the year ended December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------------- ----------------- ------------------ ------------------
(in thousands, except share data)
REVENUES:
<S> <C> <C> <C> <C>
Interest income $ 6,207 $ 8,817 $ 10,842 $ 8,142
Servicing income 1,145 1,940 2,920 2,509
Gain on sale of loans:
Cash gain on sale of loans 1,803 5,493 4,552 2,305
Non-cash gain on sale of loans 4,415 6,396 10,122 17,742
Loan fee income 5,878 7,337 8,852 8,140
----------------- ----------------- ------------------ ------------------
Total gain on sale 12,096 19,226 23,526 28,187
Other revenues 237 196 328 638
----------------- ----------------- ------------------ ------------------
Total revenues 19,685 30,179 37,616 39,476
EXPENSES:
Interest 3,727 6,055 6,953 8,398
Provision for credit losses 2,073 2,599 2,415 2,943
Salaries, wages and employee benefits 8,045 10,715 13,825 15,459
Business development costs 1,213 1,806 1,980 2,487
General and administrative 4,027 5,908 8,173 10,646
----------------- ----------------- ------------------ ------------------
Total expenses 19,085 27,083 33,346 39,933
----------------- ----------------- ------------------ ------------------
Income before income taxes and
minority interest 600 3,096 4,270 (457)
Provision for income taxes 42 (1,667) (350) (1,925)
Minority interest in earnings
of subsidiaries (156) -- -- --
----------------- ----------------- ------------------ ------------------
Net income $ 402 $ 4,763 $ 4,620 $ 1,468
----------------- ----------------- ------------------ ------------------
Basic earnings per share $ 0.04 $ 0.52 $ 0.48 $ 0.15
----------------- ----------------- ------------------ ------------------
Basic weighted average
shares outstanding 9,143,17666 9,147,570 9,651,566 9,674,044
----------------- ----------------- ------------------ ------------------
Diluted earnings per share $ 0.04 $ 0.51 $ 0.47 $ 0.15
----------------- ----------------- ------------------ ------------------
Diluted weighted average
shares outstanding 9,351,103 9,310,153 9,861,750 9,885,032
================= ================= ================== ==================
</TABLE>
F-48
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the year ended December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
-------------- ----------------- ------------------ ------------------
(in thousands, except share data)
REVENUES:
<S> <C> <C> <C> <C>
Interest income $ 4,324 $ 4,051 $ 4,219 $ 5,314
Servicing income 536 1,027 924 787
Gain on sale of loans:
Cash gain on sale of loans 3,018 4,450 7,870 5,525
Non-cash gain on sale of loans -- -- -- 2,953
Loan fee income 221 205 902 2,821
--------------- ----------------- ---------------- --------------
Total gain on sale of loans 3,239 4,655 8,772 11,299
Other revenues 183 293 655 110
--------------- ----------------- ---------------- ----------------
Total Revenues 8,282 10,026 14,570 17,510
EXPENSES:
Interest 2,741 2,837 2,603 2,840
Provision for credit losses 911 621 1,569 2,315
Salaries, wages and employee benefits 1,824 2,497 3,791 5,551
Business development costs 108 223 456 816
General and administrative 1,295 1,675 1,811 3,444
--------------- ----------------- ---------------- --------------
Total expenses 6,879 7,853 10,230 14,966
--------------- ----------------- ---------------- --------------
Income before income taxes and minority
interest 1,403 2,173 4,340 2,544
Provision for income taxes 42 77 129 470
Minority interest in earnings of
subsidiaries (12) (10) 90 285
--------------- ----------------- ---------------- --------------
Net income $ 1,349 $ 2,086 $ 4,301 $ 2,359
=============== ================= ================ ==============
Basic earnings per share $ 0.21 $ 0.32 $ 0.66 $ 0.30
=============== ================= ================ ==============
Basic weighted average shares
outstanding 6,461,357 6,520,064 6,529,745 7,890,652
=============== ================= ================ ==============
Diluted earnings per share $ 0.20 $ 0.31 $ 0.63 $ 0.29
=============== ================= ================ ==============
Diluted weighted average shares
outstanding 6,735,996 6,785,457 6,777,439 8,100,302
=============== ================= ================ ==============
</TABLE>
F-49
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25. EARNINGS PER SHARE
The Company's shareholders approved a one-for-three reverse split of the
Company's Common and Class A Common Stock in June 1995. Effective January 29,
1996, the Company declared a two-for-one stock split effected in the form of a
100% stock dividend on the Common Stock and Class A Common Stock. The weighted
average number of shares of Common and Class A Common Stock have been restated
for all periods presented to reflect these stock splits.
In 1996, the Company's shareholders approved the conversion of all Class A
Common Stock to Common Stock on a one-for-one basis. Accordingly, at December
31, 1997 and 1996, there was no Class A Common Stock outstanding.
The following table is a reconciliation of the numerators and denominators of
the basic and diluted EPS from continuing operations computations (income in
thousands).
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------------- ------------------------ --------------
BASIC EPS
<S> <C> <C> <C>
Income from continuing operations $ 11,253 9,406,221 $ 1.20
EFFECT OF DILUTIVE SECURITIES
Stock options 192,590
----------------- ------------------------
DILUTED EPS
Income from continuing operations
+ assumed conversions $ 11,253 9,598,811 $ 1.17
================= ======================== ==============
For the Year Ended December 31, 1996
----------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------------- ------------------------ --------------
BASIC EPS
Income from continuing operations $ 10,095 6,852,420 $ 1.47
EFFECT OF DILUTIVE SECURITIES
Stock options 247,454
----------------- ------------------------
DILUTED EPS
Income from continuing operations
+ assumed conversions $ 10,095 7,099,874 $ 1.42
================= ======================== ==============
</TABLE>
F-50
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
----------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------------- ------------------------ --------------
BASIC EPS
<S> <C> <C> <C>
Income from continuing operations $ 4,581 6,464,582 $ 0.71
EFFECT OF DILUTIVE SECURITIES
Stock options 203,610
----------------- ------------------------
DILUTED EPS
Income from continuing operations
+ assumed conversions $ 4,581 6,668,192 $ 0.69
================= ======================== ==============
</TABLE>
NOTE 26. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information whether or not recognized in the balance
sheet, when it is practicable to estimate the fair value. SFAS 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity or
contractual obligations which require the exchange of cash or financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock, property and equipment and
other assets and liabilities.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrum ents for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
LOANS RECEIVABLE HELD FOR INVESTMENT
For residential mortgage loans, commercial loans and automobile loans fair value
is estimated using the market prices received on recent sales or securitizations
of these loans in the secondary market.
LOANS RECEIVABLE HELD FOR SALE
Fair value for mortgage loans held for sale is determined using the anticipated
price to be derived from the sale of the mortgage loans in the secondary market.
F-51
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 26. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INTEREST-ONLY STRIP SECURITY
The fair value of the interest-only strip security is calculated using
prepayment, default and interest rate assumptions that the Company believes
market participants would use for similar instruments at the time of sale.
Projected performance is monitored on an ongoing basis.
INVESTMENT IN ASSET-BACKED SECURITIES
Fair value of the investment in asset-backed securities approximates the
carrying amount.
INVESTOR SAVINGS
Due to their short-term maturity, usually one year, the fair value of the notes
due investors and subordinated debentures is the current carrying amount.
NOTES PAYABLE TO BANKS AND OTHER
The fair value of notes payable to banks and other approximates the carrying
amount. Rates with similar terms and maturities currently available to the
Company are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is determined by using the
anticipated market prices that the loans will generate in the secondary market.
F-52
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Financial Assets:
Cash and cash equivalents $ 7,561 $ 7,561 $ 1,276 $ 1,276
Restricted cash 2,323 2,323 5,319 5,319
Loans receivable, net 91,193 94,841 62,547 65,881
Mortgage loans held for sale 197,236 200,736 122,482 127,381
Interest-only strip security, net 44,440 44,440 4,315 4,700
Investment in asset-backed securities, net 16,439 16,439 3,581 3,935
Financial Liabilities:
Notes payable to banks and other $ 77,605 $ 77,605 $ 55,494 $ 55,494
Investor savings:
Notes due to investors 115,368 115,368 97,987 97,987
Subordinated debentures 18,947 18,947 16,115 16,115
Senior unsecured debt 125,000 125,000 -- --
Commitments to extend credit 100,293 105,308 129,431 136,628
</TABLE>
F-53
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Financial Statements
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Contents
Independent Auditors' Report..............................................F-55
Consolidated Balance Sheets...............................................F-56
Consolidated Statements of Income.........................................F-57
Consolidated Statements of Shareholder's Equity...........................F-58
Consolidated Statements of Cash Flows.....................................F-59
Notes to Consolidated Financial Statements................................F-60
F-54
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
Sterling Lending Corporation and subsidiary
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Sterling Lending
Corporation and subsidiary, a majority-owned subsidiary of Emergent Group, Inc.,
as of December 31, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for the year ended December 31, 1997
and the period from August 1, 1996 (date of inception) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Sterling Lending
Corporation and subsidiary, a majority-owned subsidiary of Emergent Group, Inc.,
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the periods then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
- -----------------------------------
Greenville, SC
February 27,
F-55
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Balance Sheets
December 31, 1997 and 1996
December 31,
-----------------------------
1997 1996
------------ -------------
ASSETS
Cash and cash equivalents $ 262,612 $ 125,799
Mortgage loans held for sale 9,325,758 --
Less net deferred loan fees (368,274) --
------------ -------------
Net mortgage loans held for sale 8,957,484 --
Other receivables 558,703 62,534
Property and equipment, net 1,327,532 361,578
Other assets 207,338 302,251
------------ -------------
Total assets $ 11,313,669 $ 852,162
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 760,257 $ 81,976
Subordinated debt to affiliates, due on demand 9,543,337 634,616
------------ -------------
Total liabilities 10,303,594 716,592
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 5,700,000 1,000,000
Accumulated deficit (4,689,925) (864,430)
------------ -------------
Total shareholders' equity 1,010,075 135,570
------------ -------------
Total liabilities and shareholders' equity $ 11,313,669 $ 852,162
============ =============
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements
F-56
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Income
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Periods Ended December 31,
--------------------------
1997 1996
----------- -----------
REVENUES:
Interest income $ 50,091 $ 19,397
Gain on sale of loans 1,419,421 16,282
Loan fee income 2,137,048 71,852
Other revenues 10,768 --
----------- -----------
Total revenues 3,617,328 107,531
----------- -----------
EXPENSES:
Interest 192,904 21,496
Salaries, wages and employee benefits 3,590,559 510,923
Management fee to Parent 780,000 125,000
Legal, audit, and professional fees 632,321 74,639
Rent and utilities 452,454 36,694
Telephone 310,119 19,430
Travel and entertainment 280,544 36,680
Business development costs 255,497 28,747
Other general and administrative expenses 847,005 179,751
----------- -----------
Total expenses 7,341,403 1,033,360
----------- -----------
Loss before income taxes (3,724,075) (925,829)
Provision (benefit) for income taxes 101,420 (61,399)
----------- -----------
Net loss $(3,825,495) $ (864,430)
=========== ===========
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements
F-57
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
<TABLE>
<CAPTION>
Common Additional Accumulated
Stock Paid-in Deficit Total
Capital
------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Initial cash investment by Parent $ -- $ 1,000,000 $ -- $ 1,000,000
Net loss from inception to
December 31, 1996 -- -- (864,430) (864,430)
------- ----------- ----------- -----------
Balance at December 31, 1996 -- 1,000,000 (864,430) 135,570
Cash investment by Parent -- 4,700,000 -- 4,700,000
Net loss -- -- (3,825,495) (3,825,495)
------- ----------- ----------- -----------
Balance at December 31, 1997 $ -- $ 5,700,000 $(4,689,925) $ 1,010,075
======= =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements
F-58
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Cash Flows
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
<TABLE>
<CAPTION>
Periods Ended December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,825,495) $ (864,430)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 374,620 103,701
Provision for deferred income taxes 331,348 1,135
Increase in deferred loan fees 368,274 --
Principal proceeds from loans sold and securitized 32,181,128 1,195,255
Loans originated with intent to sell (41,506,886) (1,195,255)
Changes in operating assets and liabilities (201,691) (372,485)
------------- -------------
Net cash used in operating activities (12,278,702) (1,132,079)
------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,193,206) (376,738)
------------- -------------
Net cash used in investing activities (1,193,206) (376,738)
------------- -------------
FINANCING ACTIVITIES:
Cash investment from Parent 4,700,000 1,000,000
Net cash received on intercompany borrowings 8,908,721 634,616
------------- -------------
Net cash provided by financing activities 13,608,721 1,634,616
------------- -------------
Net increase in cash and cash equivalents 136,813 125,799
Cash and cash equivalents at beginning of year 125,799 --
------------- -------------
Cash and cash equivalents at end of year $ 262,612 $ 125,799
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements
F-59
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting and Reporting Policies
Organization and Business Activity
Sterling Lending Corporation ("Sterling Lending" or "the Company") is an 80%
owned subsidiary of Emergent Group, Inc. ("Parent Company"). Sterling Lending
was organized on March 6, 1996 as Emergent Lending Corp., and the named was
changed to Sterling Lending Corporation on July 24, 1996. Operations began
August 1, 1996.
Sterling Lending is primarily engaged in the business of originating residential
mortgage loans. The funds for these loans are obtained principally through
Emergent Mortgage Corp., who purchases the loans at closing. Due to the fact
that the Company serves as an originating source for Emergent Mortgage Corp., it
is not subject to credit risk or interest rate risk. The Company earns
origination fees from the borrower at the time the loan is closed, and also
shares in the gain on sale with Emergent Mortgage Corp. when it is sold to
outside parties.
Substantially all of the Company's mortgage loans are made to non-prime
borrowers. These borrowers generally have limited access to credit or are
otherwise considered to be credit-impaired by conventional lenders such as
thrift institutions and commercial banks.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Sterling Lending and Sterling Insurance Agency ("Sterling Insurance") (100%
owned) (collectively known as the "Company"). All significant intercompany
balances and transactions between Sterling Lending and its subsidiary have
been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and revenues and expenses for the period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Cash equivalents include
amounts invested in overnight reverse repurchase agreements. Such agreements
are collateralized by U.S. Government securities pledged by the banks.
F-60
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 1. Summary of Significant Accounting and Reporting Policies (continued)
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of first and second residential
mortgages on one to four family residences located throughout the United
States. Mortgage loans held for sale are carried at the lower of aggregate cost
or market. There was no allowance for market losses on mortgage loans held for
sale at December 31, 1997 and 1996. Non-refundable loan fees and direct costs
associated with the origination or purchase of loans are deferred and netted
against outstanding loan balances.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment and collateral liquidation a
secondary source of repayment. The Company determines the need for collateral
on a case-by-case or product-by-product basis. Factors considered include the
current and prospective creditworthiness of the customer, terms of the
instrument and economic conditions.
Interest income on loans receivable is recorded on an accrual basis as earned.
Accrual of interest is generally discontinued when a loan is over 90 days
past due and the collateral is determined to be inadequate or when foreclosure
proceedings begin. Loan fees and deferred insurance premiums are amortized
into income using the interest method over the life of the loan.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the related assets. Estimated lives are 3 to 7
years for furniture, fixtures and equipment. Leasehold improvements are
amortized on a straight-line basis over the lesser of the estimated useful life
of the improvement or the terms of the respective lease. Additions to property
and equipment and major replacements or improvements are capitalized at cost.
Maintenance, repairs and minor replacements are expensed when incurred.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever management believes events or changes in circumstances indicate that
the carrying value of an asset may not be fully recoverable. No impairment loss
was recognized in 1997 or 1996.
F-61
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 1. Summary of Significant Accounting and Reporting Policies (continued)
Advertising Expense
Advertising, promotional, and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising are
expensed the first time the advertising takes place.
Income Taxes
The Company is included in the consolidated Federal income tax return of its
Parent Company. The tax sharing agreement with the Parent Company provides for
the Company to compute its taxes on a separate return basis, and allows the
Company to reduce its taxes to the extent of available net operating loss (NOL)
carryforwards of its Parent Company. The Company uses Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, which
requires accounting for income taxes using the asset and liability method. Under
the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Deferred income taxes result primarily from differences in
financial and income tax reporting of depreciation. At December 31, 1997 and
1996, the Company had a net deferred tax liability of $332,483 and $1,135,
respectively, which is included in accrued liabilities in the accompanying
consolidated balance sheet.
Note 2. Mortgage Loans Held for Sale
The following is a summary of mortgage loans held for sale by type of loan at
December 31, 1997.
First mortgage residential property $8,391,144
Second mortgage residential property 934,614
----------
Total $9,325,758
==========
First mortgage residential loans generally have contractual maturities of 12 to
360 months with average interest rates of approximately 11%. Second mortgage
residential loans have contractual maturities of 12 to 360 months with average
interest rates of approximately 15%.
F-62
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 2. Mortgage Loans Held for Sale (continued)
The Company currently originates loans in six states. The following is a summary
of mortgage loans held for sale by state at December 31, 1997.
Loan Percentage
Balance of total
------- ----------
Florida $4,033,515 43.2%
Louisiana 2,181,330 23.4%
Mississippi 1,509,854 16.2%
Georgia 797,758 8.6%
Tennessee 568,904 6.1%
North Carolina 234,397 2.5%
---------- -----
Total $9,325,758 100.0%
========== ======
There was no allowance for loan losses recorded at December 31, 1997 as the
mortgage loans are held for sale and recorded at lower of aggregate cost or
market value.
Note 3. Property and Equipment
Property and equipment at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Office equipment and computers $ 648,116 $ 65,938
Leasehold improvements 16,394 729
Furniture, fixtures and equipment 905,434 210,071
---------- ----------
1,569,944 276,738
Less accumulated depreciation and amortization 242,412 15,160
---------- ----------
Property and equipment, net $1,327,532 $ 361,578
========== ==========
</TABLE>
Depreciation expense in 1997 and 1996 was $227,252 and $15,160, respectively.
Note 4. Subordinated Debt to Affiliates
From time to time, the Company borrows money from the Parent Company and other
affiliated companies as subordinated debt which is payable on demand.
Subordinated debt to affiliates at December 31, 1997 consists of $4,750,000 to
the Parent Company and $4,793,337 to Carolina Investors, Inc. ("CII"), an
affiliate of the Company, both with interest payable based on the Wall Street
Journal Prime Rate + 2%, (10.50% at December 31, 1997). Subordinated debt to
affiliates at December 31, 1996 consists of $624,871 to Emergent Mortgage
Corporation and $9,745 to CII, both with interest payable based on the Wall
Street Journal Prime Rate + 2%. Interest expense on these borrowings in 1997 and
1996 was $192,343 and $21,496, respectively.
F-63
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 5. Income Taxes
Income tax expense (benefit) for the periods ended December 31, 1997 and 1996,
consists of the following:
<TABLE>
<CAPTION>
Periods Ended December 31,
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Current:
Federal $ (46,698) $ (18,501)
State and local (183,230) (44,033)
---------- -----------
Total current (229,928) (62,534)
Deferred:
Federal 297,107 324
State and local 34,241 811
---------- -----------
Total deferred 331,348 1,135
Total:
Federal 250,409 (18,177)
State and local (148,989) (43,222)
---------- -----------
Total income tax expense (benefit) $ 101,420 $ (61,399)
========== ===========
</TABLE>
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of significant
items comprising the Company's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Amortization of organizational costs $ 65,740 $ --
Net operating loss carryforward 1,767,687 301,204
Other 3,218 --
------------ -----------
Total deferred tax assets 1,836,645 301,204
Less: valuation allowance (1,767,687) (301,204)
------------ -----------
Net deferred tax assets 68,958 --
Deferred tax liabilities:
Differences between book and tax basis of property (39,042) (1,135)
Deferred loan costs (76,000) --
Difference between book and tax basis of the interest-
only strip security associated with the Company's
investment in the Real Estate Investment Trust (286,399) --
------------ -----------
Total deferred tax liabilities (401,441) (1,135)
------------ -----------
Net deferred tax liability $ (332,483) $ (1,135)
============ ===========
</TABLE>
The net deferred tax liability is included in accounts payable and accrued
liabilities on the balance sheet.
F-64
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 5. Income Taxes (continued)
Income tax expense differs from tax benefit computed by applying the statutory
Federal income tax rate, 34%, to loss before income taxes. The reasons for these
differences for the periods ended December 31, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Periods Ended December 31,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Tax benefit at statutory Federal rate of 34% $(1,266,185) $ (314,782)
Differences result from:
Nondeductible expense 9,400 51
Increase in valuation allowance 1,466,483 301,204
State income taxes, net of federal income tax benefit (98,333) (28,526)
Other (9,945) (19,346)
------------ ------------
$ 101,420 $ (61,399)
============ ============
</TABLE>
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Parent Company or its subsidiaries.
Note 6. Statement of Cash Flows
The following information relates to the Statements of Cash Flows for the
periods ended December 31, 1997 and 1996:
Periods Ended December 31,
--------------------------
1997 1996
----------- -----------
Changes in operating assets and liabilities
increasing (decreasing) cash:
Other receivables (496,169) (62,534)
Other assets (52,455) (390,792)
Accounts payable and accrued liabilities 346,933 80,841
----------- -----------
$(201,691) $(372,485)
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 192,904 $ 21,496
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
F-65
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 7. Retirement Plan
The Company participates in the Parent Company's Matched Savings Plan under
Section 401(k) of the Internal Revenue Code. To be eligible, employees must be
at least 21 years old, have completed at least 30 days of service, and be
considered full-time employees. Under this plan, the Company contributes a
matching contribution of 50% of employee contributions to a maximum of 6% of
compensation for each employee. The Company's contribution to the plan totaled
$55,724 for the year ended December 31, 1997. No contributions were made to the
plan in 1996.
Note 8. Related Parties
The Company was charged management fees of $780,000 and $125,000 in 1997 and
1996, respectively, by the Parent Company for support services, including
accounting and management information systems. The amount charged is determined
at the discretion of the Parent Company's management based on budgeted loan
volume and payroll costs for each of the Parent Company's subsidiaries.
Additionally, the Company obtains legal services from a firm considered to be a
related party. Total charges for these services were $1,658 and $39 in 1997 and
1996, respectively.
Note 9. Operating Leases
The Company leases office space, and office equipment under operating leases.
Future minimum lease payments are as follows:
1998 $ 553,659
1999 527,781
2000 482,122
2001 422,024
2002 55,739
------------
2,041,325
============
Total rent expense was $448,480 and $36,694 in 1997 and 1996, respectively.
Note 10. Dependency on Parent
Due to the Company being in its early stages of operations, loan volumes have
not reached a profitable level as of December 31, 1997. As a result, the
Company is dependent on its Parent Company or affiliated companies for funding
of its operations either through capital contributions or additional
subordinated debt to affiliates.
F-66
<PAGE>
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 11. Contingencies and Loan Commitments
In the normal course of business, the Company makes commitments to extend credit
that are not presented in the accompanying financial statements. Commitments
outstanding at December 31, 1997 aggregated approximately $709,000. There were
no commitments outstanding at December 31, 1996.
From time to time, the Company or its subsidiaries are defendants in legal
actions involving claims arising in the normal course of its business. The
Company believes that, as a result of its legal defenses and insurance
arrangements, none of these actions, if decided adversely, would have a material
effect on its business or financial condition taken as a whole.
In September 1997, the Parent Company made an offering of $125 million of Senior
Notes due 2004. The purpose of the offering was to provide the Parent Company's
group of companies with additional funds with which to continue to expand its
business, particularly its residential mortgage loan business. Most of the
Parent Company's subsidiaries, including SLC, guarantee payment of the Senior
Notes.
Note 12. Subsequent Event
On January 29, 1998, the Parent Company engaged an investment advisor to seek a
strategic acquirer of the Company.
F-67
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C>
3.1-- Amended and Restated Articles of Incorporation dated September 20, 1978: Incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, Commission File
No. 2-62723 (the "1978 Registration Statement").
3.2-- Articles of Amendment as filed with the Secretary of State of
South Carolina on June 5, 1984: Incorporated by reference to
Item 6(a) of the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1984, Commission File No. 0-8909.
3.3-- Articles of Amendment as filed with the Secretary of State of South Carolina on December 27,
1985: Incorporated by reference to Current Report on Form 8-K dated January 2, 1986,
Commission File No. 0-8909.
3.4-- Articles of Amendment as filed with the Secretary of State of
South Carolina on August 23, 1991: Incorporated herein by
reference to Quarterly Report on Form 10-Q for the quarter
ended September 30, 1991, Commission File No. 0-8909.
3.5-- Restated by-laws: Incorporated by reference to Exhibit 3.2 of the 1978 Registration Statement.
3.6-- Amendment to Bylaws: Incorporated by reference to Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991, Commission File No. 0-8909).
3.7-- Form of Warrant: Incorporated herein by reference to the Company's Report on Form 10-K for the
year ended December 31, 1985, File No. 0-8909.
3.8-- Articles of Amendment as filed with the Secretary of State of South Carolina on April 19,
1996: Incorporated by reference to Exhibit 3.1 in the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, Commission File No. 0-8909.
3.9-- Articles of Amendment as filed with the Secretary of State of South Carolina on May 26, 1989:
Incorporated by reference to Exhibit 4.8 of the Company's registration statement on Form S-8,
Commission File No. 333-07923.
3.10-- Articles of Amendment as filed with the Secretary of State of South Carolina on June 14, 1995:
Incorporated by reference to Exhibit 4.9 of the Company's registration statement on Form S-8,
Commission File No. 333-07923.
4.1-- See Exhibits 3.1 through 3.7.
10.1-- Emergent Group, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10.1 of the
Company's Registration Statement on Form S-1, Commission File No. 333-01393.
10.2-- 1995 Officer and Employee Stock Option Plan: Incorporated by reference to Exhibit 10.1 of the
Company's 1995 Notice of Annual Meeting and Proxy Statement, Commission File No. 0-8909.
10.3-- 1995 Director Stock Option Plan: Incorporated by reference to an exhibit filed with the
Company's 1995 Notice of Annual Meeting and Proxy Statement.
10.4-- 1995 Restricted Stock Agreement Plan: Incorporated by reference to Exhibit 10.4 of the
Company's Registration Statement on Form S-1, Commission File No. 333-01393.
10.5-- Loan and Security Agreement dated December 19, 1995 between BankAmerica Business Credit, Inc.
and The Loan Pro$, Inc., and Premier Financial Services, Inc.: Incorporated by reference to
Exhibit 10.5 of the Company's Registration Statement on Form S-1, Commission File No. 333-01.
10.6-- Loan and Security Agreement, as amended by Amendment No. 1 dated April 10, 1995 between
BankAmerica Business Credit, Inc. and Premier Financial Services, Inc.: Incorporated by
reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1, Commission
File No. 333-01393.
10.7-- Loan and Security Agreement, as amended by Amendment Nos. 1, 2 and 3 dated December 29,1993
between NationsBank of Georgia and Emergent Business Capital, as amended: Incorporated by
reference to Exhibit 10.7 of the Company's Registration Statement on Form S-1, Commission File
No. 333-01393.
<PAGE>
10.8-- Loan and Security Agreement dated October 10, 1995 between
NationsBank of Georgia and Emergent Commercial Mortgage, as
amended: Incorporated by reference to Exhibit 10.8 of the
Company's Registration Statement on Form S-1, Commission File
No. 333-01393.
10.9-- Mortgage Loan Warehousing Agreement dated November 22, 1994 between First Union National Bank
of North Carolina and Carolina Investors, Inc. as amended by Amendments No. 1, 2, 3, and 4:
Incorporated by reference to Exhibit 10.9 of the Company's Registration Statement on Form S-1,
Commission File No. 333-01393.
10.10-- Mortgage Loan Warehousing Agreement dated March 6, 1996
between First Union National Bank of North Carolina and
Emergent Mortgage Corp., as amended: Incorporated by reference
to Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
Commission File No. 0-8909.
10.11-- The Pooling and Servicing Agreement dated as of June 29, 1995 between Emergent Business
Capital, Inc. as Seller and Servicer, and First Union National Bank of North Carolina, as
Trustee: Incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K
dated June 29, 1995, Commission File No. 0-8909.
10.12-- Certificate Purchase Agreement between the Placement Agent, as
initial purchaser, and the Company: Incorporated by reference
to Exhibit 28.1 to the Company's Current Report on Form 8-K
dated June 29, 1995, Commission File No. 0-8909.
10.13-- Loan and Security Agreement dated May 31, 1996, between
NationsBank, N.A. (South) and Emergent Financial Corporation.
Incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
10.14-- Amendment No. 1 to Loan and Security agreement dated October 10, 1995, between NationsBank of
Georgia, N.A. and Emergent Commercial Mortgage, Inc. Incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
10.15-- Amendment Number 4 to Loan and Security Agreement dated
December 29, 1993, between NationsBank of Georgia and Emergent
Business Capital, Inc. Incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996.
10.16-- Amendment No. 5 to Loan and Security Agreement dated December 29, 1993 between NationsBank of
Georgia and Emergent Business Capital, Inc. Incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1, Commission File No. 333-01393.
10.17-- Amendment No. 2 to Loan and Security Agreement dated October 10, 1995, between NationsBank of
Georgia, N.A. and Emergent Commercial Mortgage, Inc. Incorporated by reference to Exhibit
10.17 to the Company's Registration Statement on Form S-1, Commission File No.
333-01393.
10.18-- Amendment Nos. 5, 6, and 7 to Mortgage Loan Warehousing Agreement dated March 6, 1996 between
First Union National Bank of North Carolina and Carolina Investors, Inc. Incorporated by
reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, Commission File
No. 333-01393.
10.19-- Amendent Nos. 3 and 4 to Mortgage Loan Warehousing Agreement dated February 4, 1997, and March
5, 1997, respectively, between First Union National Bank of North Carolina and Emergent
Mortgage Corp. Incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
10.20-- Interim Warehouse and Security Agreement dated March 4, 1997, between Prudential Securities
Credit Corporation and Emergent Mortgage Corp. Incorporated by reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
10.21-- Emergent Group, Inc. Employee Stock Purchase Plan: Incorporated by reference to Exhibit 99.1
of the Company's registration statement on Form S-8, Commission File No. 333-20179.
10.22-- Amended and restated Mortgage Loan Warehousing Agreement dated March 20, 1997, between First Union
National Bank of North Carolina and Emergent Mortgage Corp. Incorporated by reference to Exhibit
10.22 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1997.
10.23-- Amended and restated loan and security agreement dated June 13, 1997, between NationsBank, N.A.
and Emergent Financial Corp. Incorporated by reference to Exhibit 10.23 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1997.
10.24-- Amended and restated loan and security agreement dated June 13, 1997, between NationsBank, N.A. and
Emergent Commercial Mortgage. Incorporated by reference to Exhibit 10.24 to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1997.
10.25-- Amended and restated Interim Warehouse Agreement dated July 25, 1997, between Prudential
Securities Credit Corporation and Emergent Mortgage Corp. Incorporated by reference to Exhibit 10.25
to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
10.26-- Amendment No. 3 to Loan and Security Agreement between BankAmerica Business Credit, Inc. and The Loan
Pro$, Inc. dated July 30, 1997. Incorporated by reference to Exhibit 10.26 to the Company's
quarterly report on Form 10-Q for the quarter ended June 30, 1997.
10.27-- Amendment No. 5 to Loan and Security Agreement between BankAmerica Business Credit, Inc. and Premier
Financial Services, Inc. dated August 1, 1997. Incorporated by reference to Exhibit 10.27 to the
Company's quarterly report on Form 10-Q for the quarter ended June 30, 1997.
10.28-- Amended and restated mortgage loan warehousing agreement dated September 30, 1997, between First
Union National Bank and Carolina Investors, Inc. Incorporated by reference to Exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997.
10.29-- First amendment to amended and restated mortgage loan warehousing agreement dated July 31, 1997,
between First Union National Bank and Emergent Mortgage Corporation.
Incorporated by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the
quarter ended September 30, 1997.
10.30-- Annex 1 to the master repurchase agreement dated August 1, 1997, between First Union National Bank
and Emergent Mortgage Corporation. Incorporated by reference to Exhibit 10.3 to the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 1997.
10.31-- Amended and restated loan and security agreement dated August 12, 1997, between NationsBank, N.A.
and Hibernia National Bank and Emergent Business Capital, Inc. Incorporated by reference to Exhibit
10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997.
10.32-- Amendment No. 1, dated September 19, 1997, to the loan and security agreement between NationsBank, N.A.
and Hibernia National Bank and Emergent Business Capital, Inc. Incorporated by reference to Exhibit 10.5
to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997.
10.33-- Amendment No. 1, dated September 19, 1997, to the loan and security agreement between NationsBank, N.A.
and Hibernia National Bank and Emergent Financial Corp. Incorporated by reference to Exhibit 10.6
to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997.
10.34-- Amendment No. 1, dated September 19, 1997, to the loan and security agreement between NationsBank, N.A.
and Hibernia National Bank and Emergent Commercial Mortgage, Inc. Incorporated by reference to Exhibit
10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997.
<PAGE>
11.1-- Statement re: computation of earnings per share.
16.1-- Letter of Elliott, Davis & Company, L.L.P. dated September 5,
1996. Incorporated by reference to Exhibit 16.1 to the
Company's Current Report on Form 8-K dated August 26, 1996,
Commission File No.
0-8909.
21.0-- Listing of subsidiaries.
23.1-- Report of Independent Auditors (Elliott, Davis & Company, L.L.P.) for each of the two years in
the period ended December 31, 1995. Incorporated by reference to Exhibit 23.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
23.2-- Consent of KPMG Peat Marwick LLP to include report of Independent Auditors for the year ended
December 31, 1996, in the: (1) Company's registration statement on Form S-8 dated July 11,
1996, for the Emergent Group, Inc. 1995 Employee and Officer Stock Option Plan, Commission File
No. 333- 07923; (2) Company's registration statement on Form S-8 dated July 11, 1996, for the
Emergent Group, Inc. Restricted Stock Agreement Plan, Commission File No. 333-07927; (3)
Company's registration statement on Form S-8 dated July 11, 1996, for the Emergent Group, Inc.
1995 Director Stock Option Plan, Commission File No. 333-07925; and (4) Company's
registration statement on Form S-8 dated February 14, 1997, for the Emergent Group, Inc.
Employee Stock Purchase Plan, Commission File No. 333-20179.
27.1-- Financial Data Schedule (For SEC Use Only).
</TABLE>
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EMERGENT GROUP, INC.
---------------------------------------
Registrant
April 13, 1998 \s\ John M. Sterling, Jr.
- ------------------------------ ---------------------------------------
(Date) John M. Sterling, Jr., Chairman of
the
Board of Directors and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C>
\s\ Robert S. Davis \s\ Tecumseh Hooper, Jr.
------------------------------------------ -----------------------------------------
Robert S. Davis Tecumseh Hooper, Jr.
Vice President-Administration Director
Director
\s\ John M. Sterling, Jr. \s\ Clarence B. Bauknight
------------------------------------------ -----------------------------------------
John M. Sterling, Jr. Clarence B. Bauknight
Chairman of the Board of Directors Director
and Chief Executive Officer
\s\ Buck Mickel \s\ Porter B. Rose
------------------------------------------ -----------------------------------------
Buck Mickel Porter B. Rose
Director Director
\s\ Jacob H. Martin \s\ Keith B. Giddens
------------------------------------------ -----------------------------------------
Jacob H. Martin Keith B. Giddens
Director President and Chief Operating Officer
Director
April 13, 1998 \s\ Kevin J. Mast
------------------------------------------ -----------------------------------------
(Date) Kevin J. Mast
Vice President,
Chief Financial Officer and Treasurer
</TABLE>
Exhibit 11.1
EMERGENT GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C>
Income (loss) Applicable to Common Stock
Income from continuing operations $ 11,253 $ 10,095 $ 4,581
Income from discontinued operations $ -- $ -- $ (3,924)
---------- ---------- ----------
Net Income $ 11,253 $ 10,095 $ 657
========== ========== ==========
Basic Earnings Per Share Computation
Weighted average number of shares
outstanding during the year 9,406,221 6,852,420 6,464,582
========== ========== ==========
Per share amounts:
Income from continuing operations $ 1.20 $ 1.47 $ 0.71
Income from discontinued operations $ -- $ -- $ (0.61)
---------- ---------- ----------
Net Income $ 1.20 $ 1.47 $ 0.10
========== ========== ==========
Fully Diluted Earnings Per Share Computation
Weighted average number of shares outstanding
during the year 9,406,221 6,852,420 6,464,582
Dilutive effect of Common Stock options and
warrants based on the average market price 192,590 247,454 203,610
---------- ---------- ----------
9,598,811 7,099,874 6,668,192
========== ========== ==========
Per share amounts:
Income from continuing operations $ 1.17 $ 1.42 $ 0.69
Income from discontinued operations $ -- $ -- $ (0.59)
---------- ---------- ----------
Net Income $ 1.17 $ 1.42 $ 0.10
========== ========== ==========
</TABLE>
Exhibit 21.0
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
------------------------------------------- ------------------------------------------------------
<S> <C>
Emergent Mortgage Corporation South Carolina
Emergent Mortgage Corporation of Tennessee (a subsidiary of
Emergent Mortgage Corporation) South Carolina
Emergent Mortgage Holdings Corporation (a subsidiary of
Emergent Mortgage Corporation) Delaware
Emergent Mortgage Holdings Corporation II (a subsidiary of
Emergent Mortgage Corporation) Delaware
Emergent Residual Holdings Corporation (a subsidiary of
Emergent Mortgage Holdings Corporation II) Delaware
Emergent Insurance Agency Corporation South Carolina
Carolina Investors, Inc. South Carolina
Sterling Lending Corporation South Carolina (80% owned)
Sterling Lending Insurance Agency, Inc. (a subsisiary of
Sterling Lending Corporation) Lousiana
Emergent Business Capital, Inc. South Carolina
Emergent Business Capital Holdings Corp. (a subsidiary of
Emergent Business Capital, Inc.) Delaware
Emergent Financial Corp. South Carolina
Reedy River Ventures, L.P. South Carolina Limited Partnership
Emergent Equity Advisors, Inc. South Carolina
Emergent Commercial Mortgage, Inc. South Carolina
The Loan Pro$, Inc. South Carolina (80% owned)
Premier Financial Services, Inc. South Carolina
Emergent Auto Holdings Corp. (a 50% owned subsidiary of
both The Loan Pro$, Inc. and Premier Financial Services, Inc.) Delaware
The Mississippian Railway, Inc. (Inactive) South Carolina
Pickens Liquidation Corp. (Inactive) South Carolina (81% owned)
</TABLE>
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
Emergent Group, Inc.
We consent to incorporation by reference in the registration statements
on Form S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock Plan, (No.
333-07927) 1995 Restricted Stock Agreement Plan, (No. 333-07923) 1995 Officer
and Employee Stock Option Plan and (No. 333-20179) Employee Stock Purchase Plan
of Emergent Group, Inc. of our report dated February 27, 1998, relating to the
consolidated balance sheets of Emergent Group, Inc. and subsidiaries (the
"Company") as of December 31, 1997 and 1996 and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended, which report appears in the 1997 Annual Report on Form 10-K of the
Company.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Greenville, South Carolina
April 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<PERIOD-TYPE> YEAR
<CASH> 9885
<SECURITIES> 60879
<RECEIVABLES> 310044
<ALLOWANCES> 6528
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 21867
<DEPRECIATION> 3787
<TOTAL-ASSETS> 416152
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
<COMMON> 484
0
0
<OTHER-SE> 62890
<TOTAL-LIABILITY-AND-EQUITY> 416152
<SALES> 0
<TOTAL-REVENUES> 126956
<CGS> 0
<TOTAL-COSTS> 84284
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10030
<INTEREST-EXPENSE> 25133
<INCOME-PRETAX> 7509
<INCOME-TAX> (3900)
<INCOME-CONTINUING> 11253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11253
<EPS-PRIMARY> 1.20<F2>
<EPS-DILUTED> 1.17
<FN>
<F1>FOOTNOTE (1) Unclassified Balance Sheet
<F2>EPS-BASIC
</FN>
</TABLE>