SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission File Number 0-8909
----------
EMERGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
South Carolina 57-0513287
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 17526
Greenville, South Carolina 29606
(Address of principal executive offices)
Registrant's telephone number, including area code:
864-235-8056
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each Class: Outstanding at April 30, 1998
- ---------------------------------------- -----------------------------
Common Stock, par value $0.05 per share 9,708,083
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Financial Statements for Emergent Group, Inc.
---------------------------------------------
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 4
Consolidated Statements of Income
for the three months ended March 31, 1998
and March 31, 1997 6
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and
March 31, 1997 7
Notes to Consolidated Financial Statements 8
Financial Statements for Sterling Lending Corporation,
-----------------------------------------------------
a majority-owned subsidiary of Emergent Group, Inc.
---------------------------------------------------
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 19
Consolidated Statements of Income
for the three months ended March 31, 1998
and March 31, 1997 20
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and
March 31, 1997 21
Notes to Consolidated Financial Statements 22
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 42
Item 2. Changes in Securities 42
Item 3. Defaults Upon Senior Securities 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 42
Item 6. Exhibits and Reports on Form 8-K 42
2
<PAGE>
PART I. FINANCIAL INFORMATION
3
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March December
31, 31,
--------- ---------
1998 1997
--------- ---------
(In thousands)
ASSETS
Cash and cash equivalents $ 6,043 $ 7,561
Restricted cash 3,502 2,323
Loans receivable:
Loans receivable held for investment 110,224 100,379
Loans receivable held for sale 225,906 197,236
--------- ---------
Total loans receivable 336,130 297,615
Less allowance for credit losses on loans (7,685) (6,528)
Less unearned discount, dealer reserves,
and deferred loan costs (3,155) (2,658)
--------- ---------
Net loans receivable 325,290 288,429
Other receivables:
Income taxes receivable 536 1,029
Accrued interest receivable 3,713 4,407
Other receivables 4,530 9,651
--------- ---------
Total other receivables 8,779 15,087
Investment in asset-backed securities 20,308 16,439
Interest-only strip securities 49,389 44,440
Net property and equipment 18,579 18,080
Excess of cost over net assets of acquired
businesses, net of accumulated amortization 2,339 2,874
of $1,513 in 1998 and $978 in 1997
Real estate and personal property acquired
through foreclosure 2,358 3,295
Other assets 16,729 17,624
--------- ---------
Total assets $ 453,316 $ 416,152
========= =========
See Notes to Unaudited Financial Statements
4
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March December
31, 31,
-------- --------
1998 1997
-------- --------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse lines of credit $129,611 $ 77,605
Investor savings:
Notes payable to investors 122,811 115,368
Subordinated debentures 19,731 18,947
-------- --------
Total investor savings 142,542 134,315
Senior unsecured debt 125,000 125,000
Accounts payable and accrued liabilities 6,166 6,517
Remittances payable 5,403 4,591
Accrued interest payable 1,644 4,750
-------- --------
Total other liabilities 13,213 15,858
-------- --------
Total liabilities 410,366 352,778
Minority interest 66 --
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.05 per share -
authorized 100,000,000 shares, issued 485 484
and outstanding 9,708,083 shares in 1998 and
9,686,477 shares in 1997
Capital in excess of par value 38,739 38,609
Retained earnings 3,660 24,281
-------- --------
Total shareholders' equity 42,884 63,374
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $453,316 $416,152
======== ========
See Notes to Unaudited Financial Statements
5
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months
Ended March 31,
-----------------------
1998 1997
---------- ----------
(In thousands,
except share data)
REVENUES:
Interest income $ 8,673 $ 6,207
Servicing income 2,782 1,145
Gain on sale of loans:
Cash gain on sale of loans 3,449 1,803
Non-cash gain on sale of loans 2,929 4,415
Loan fee income 3,602 5,878
---------- ----------
Total gain on sale of loans 9,980 12,096
Other revenues 1,539 237
---------- ----------
Total revenues 22,974 19,685
---------- ----------
EXPENSES:
Interest 8,433 3,727
Provision for credit losses 4,829 2,073
Salaries, wages and employee benefits 18,272 8,045
Business development costs 3,479 1,198
Other general and administrative expense 7,902 4,042
---------- ----------
Total expenses 42,915 19,085
---------- ----------
Income (loss) before income taxes
and minority interest (19,941) 600
Provision for income taxes 678 42
---------- ----------
Income (loss) before minority interest (20,619) 558
Minority interest in earnings (loss) of subsidiaries 4 (156)
========== ==========
Net income (loss) $ (20,615) $ 402
========== ==========
Basic earnings (loss) per share of common stock $ (2.12) $ 0.04
========== ==========
Basic weighted average shares outstanding 9,701,993 9,143,170
========== ==========
Diluted earnings (loss) per share of common stock $ (2.12) $ 0.04
========== ==========
Diluted weighted average shares outstanding 9,701,993 9,351,096
========== ==========
See Notes to Unaudited Financial Statements
6
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------
1998 1997
--------- ---------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (20,615) $ 402
Adjustments to reconcile net income to net cash
provided by (used) in operating activities:
Depreciation and amortization 900 567
Benefit for deferred income taxes -- (337)
Provision for credit losses 4,829 2,073
Net (increase) decrease in deferred loan costs (758) 2
Net increase (decrease) in unearned discount and
other deferrals 1,254 (14)
Loans originated with intent to sell (258,714) (198,392)
Proceeds from loans sold 98,864 101,576
Proceeds from securitization of loans 93,817 79,825
Other 5,068 (329)
Changes in operating assets and liabilities
decreasing cash (1,021) (4,267)
--------- ---------
Net cash used in operating activities $ (76,376) $ (18,894)
--------- ---------
INVESTING ACTIVITIES:
Loans originated for investment purposes $ (39,809) $ (22,996)
Principal collections on loans not sold 57,979 24,754
Principal collections on asset-backed securities 173 177
Increase in overcollateralization within asset-backed
securities (3,955) (335)
Proceeds from sale of real estate and personal property
acquired through foreclosure 1,530 1,503
Purchase of property and equipment (1,344) (2,736)
Other (75) (163)
--------- ---------
Net cash provided by investing activities 14,499 204
--------- ---------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit 144,770 225,997
Payments on warehouse lines of credit (92,764) (212,033)
Net increase in notes payable to investors 7,444 2,984
Net increase in subordinated debentures 784 1,880
Proceeds from issuance of additional common stock 131 12
Other (6) --
--------- ---------
Net cash provided by financing activities 60,359 18,840
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,518) 150
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 7,561 1,276
--------- ---------
END OF PERIOD $ 6,043 $ 1,426
========= =========
</TABLE>
See Notes to Unaudited Financial Statements
7
<PAGE>
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PREPARATION
The accompanying consolidated financial statements are prepared in accordance
with the Securities and Exchange Commission's rules regarding interim financial
statements, and therefore do not contain all disclosures required by generally
accepted accounting principles for annual financial statements. Reference should
be made to the financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, including the footnotes thereto.
Certain previously reported amounts have been reclassified to conform to current
year presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
The consolidated balance sheet as of March 31, 1998, and the consolidated
statements of income for the three-month periods ended March 31, 1998 and 1997,
and the consolidated statements of cash flows for the three-month periods ended
March 31, 1998 and 1997, are unaudited and in the opinion of management contain
all known adjustments, which consist of only normal recurring adjustments
necessary to present fairly the financial position, results of operations, and
cash flows of the Company.
KPMG Peat Marwick LLP previously examined and reported on the Company's
financial statements for the year ended December 31, 1997, from which the
consolidated balance sheet as of that date is derived.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's historic accounting policy provided that the estimated lower of
cost or market analysis for loans held for sale be assessed on a disaggregate
basis based solely on the type of loan (e.g. mortgage, commercial and auto).
Beginning in the first quarter of 1998, the Company has elected to further
disaggregate the mortgage loan portfolio for purposes of estimating the lower of
cost or market assessment by evaluating loans secured by first liens, separately
from loans secured by second liens. This change resulted in a loss of
approximately $5.0 million in the first quarter of 1998.
NOTE 3--CASH FLOW INFORMATION
For the three-month periods ended March 31, 1998 and 1997, the Company paid
interest of $11,539,000 and $3,559,000, respectively.
For the three-month periods ended March 31, 1998 and 1997, the Company paid
income taxes of $187,000 and $68,000, respectively.
NOTE 4--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments readily convertible to known
amounts of cash or having a maturity of three months or less to be cash
equivalents.
The Company maintains its primary checking accounts with three principal banks
and makes overnight investments in reverse repurchase agreements with those
banks. The amounts maintained in the checking accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At March 31,
1998, the amounts maintained in overnight investments in reverse repurchase
agreements, which are not insured by the FDIC, totaled approximately $1.4
million. The investments were secured by U.S. Government securities pledged by
the banks.
NOTE 5 - RESTRICTED CASH
The Company is required to establish and maintain cash reserve and collection
accounts with a trustee in connection with the securitization of certain
mortgage and SBA loans. These accounts are shown as restricted cash on the
Company's consolidated balance sheets.
NOTE 6 - ADOPTION OF NEW ACCOUNTING STANDARD
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This Statement establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events during the period other than transactions with owners.
Comprehensive income is divided into net income and other comprehensive income.
Adoption of this Statement did not change total shareholders' equity as
previously reported. Net income and comprehensive income are the same for the
three months ended March 31, 1998 and 1997.
8
<PAGE>
NOTE 7 - INCOME TAXES
A reconciliation of the provision for Federal and state income taxes and the
amount computed by applying the statutory Federal income tax rate to income
before income taxes and minority interest are as follows:
Three Months Ended
March 31,
------------------
1998 1997
------- -------
(in thousands)
Statutory federal rate of 34% applied to pre-tax income
from continuing operations before minority interest $(6,780) $ 204
State income taxes, net of federal income tax benefit 47 18
Change in the beginning of the year balance of the
valuation allowance for deferred tax assets allocated
to income tax expense 7,254 (382)
Nondeductible expenses 33 10
Amortization of excess cost over net assets of acquired
businesses 17 16
Other, net 107 176
------- -------
$ 678 $ 42
======= =======
Provision for income taxes from continuing operations is comprised of the
following:
Three Months Ended
March 31,
------------------
1998 1997
------- -------
(in thousands)
Current
Federal $ 607 $ 103
State and local 71 275
------- -------
678 378
Deferred
Federal -- (88)
State and local -- (248)
------- -------
-- (336)
Total
Federal 607 15
State and local 71 27
------- -------
$ 678 $ 42
======= =======
9
<PAGE>
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
carryforwards. The tax effects of significant items comprising the Company's net
deferred tax asset are as follows:
<TABLE>
<CAPTION>
March December
31, 31,
-------- --------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ (857) $ (796)
Difference between book and tax basis of the interest-only strip
securities associated with the Company's investment in the Real
Estate Investment Trust (4,376) (3,849)
Deferred loan costs (886) (608)
Other (213) (90)
-------- --------
Total gross deferred tax liabilities (6,332) (5,343)
-------- --------
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles 225 216
Allowance for credit losses 3,911 3,525
AMT credit carryforward -- 608
Operating loss carryforward 12,482 4,171
Unrealized gain on loans to be sold 1,058 909
Other 61 65
-------- --------
Total gross deferred tax assets 17,737 9,494
Less valuation allowance (7,254) --
-------- --------
Net deferred tax asset $ 4,151 $ 4,151
======== ========
</TABLE>
The valuation allowance at March 31, 1998 relates to net operating loss ("NOL")
carryforwards. The decision to record the valuation allowance was based on
changes in 1998 earnings projections. Current projections are for a taxable loss
in 1998. The ability to fully utilize all of the NOL's expiring in 1999 is
reduced by the Company's anticipated current year loss and the inability to use
current period earnings classified as "excess inclusion" to offset prior NOL's.
Earnings of approximately $4.0 million in 1997 and $1.7 million in the three
months ended March 31, 1998 were classified as excess inclusion and were not
able to be offset with prior year NOL's. Management believes that it is more
likely than not that the results of future operations and tax planning
strategies available to the Company will generate sufficient taxable income to
realize the net deferred tax asset.
As of March 31, 1998, the Company has available Federal NOL's expiring as
follows (in thousands):
1999 $ 8,463
2000 3,297
2001 1,911
2002 and after 25,334
-------
$39,005
=======
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Company or its subsidiaries.
10
<PAGE>
NOTE 8 - WAREHOUSE LINES OF CREDIT
The Company's mortgage lending subsidiaries are parties to three different
revolving credit facilities providing them with an aggregate line of credit of
$395.0 million. These credit facilities require, among other matters, a
specified debt to net worth ratio and a minimum tangible net worth, and contain
restrictions on the payment of dividends to the Company. One of these credit
facilities, providing a $200.0 million line of credit to HomeGold, Inc., also
limits loans and advances by HomeGold, Inc. to the Company. The Company is
currently in violation of its minimum tangible net worth and maximum leverage
ratio covenants under its credit facilities. The banks have granted the Company
a temporary forebearance related to the above mentioned violations. The Company
will meet with the banks during May 1998 and attempt to obtain waivers or
modifications. However, no assurance can be given that the Company will be
successful at obtaining such waivers or modifications.
The Company's small business lending subsidiaries have various lines of credit
providing them with an aggregate line of credit of $50.0 million. These lines of
credit require, among other things, minimum tangible net worth ratios, maximum
ratios of total liabilities to tangible net worth and minimum interest coverage
ratios, and contain limitations on the amount of capital expenditures in any
fiscal year and restrictions on the payment of dividends.
NOTE 9 - SUBSIDIARY GUARANTORS
In September 1997, the Company sold $125.0 million in aggregate principal amount
of Senior Notes due 2004 ("Senior Notes"). The Senior Notes constitute unsecured
indebtedness of the Company. The Senior Notes mature on September 15, 2004, with
interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at
the option of the Company, in whole or in part, on or after September 15, 2001,
at predetermined redemption prices plus accrued and unpaid interest to the date
of redemption. The indenture pertaining to the Senior Notes contains various
restrictive covenants including limitations on, among other things, the
incurrence of certain types of additional indebtedness, the payment of dividends
and certain other payments, the ability of the Company's subsidiaries to incur
further limitations on their ability to pay dividends or make other payments to
the Company, liens, asset sales, the issuance of preferred stock by the
Company's subsidiaries and transactions with affiliates. At March 31, 1998,
management believes the Company was in compliance with such restrictive
covenants. The Senior Notes are fully and unconditionally guaranteed (the
"Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a
"Guarantee") by certain of the Company's subsidiaries (the "Subsidiary
Guarantors"). With the exception of the Guarantee by the Company's subsidiary
Carolina Investors, Inc. ("CII"), the Subsidiary Guarantees rank pari passu in
right of payment with all existing and future unsubordinated indebtedness of the
Subsidiary Guarantors and senior in right of payment to all existing and future
subordinated indebtedness of such Guarantors. The Guarantee by CII is equal in
priority to CII's notes payable to investors and is senior to CII's subordinated
debentures.
The following tables present consolidating condensed financial data of the
combined subsidiaries of the Company. The Company believes that providing the
condensed consolidating information is of material interest to investors 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. Separate financial
statements for the majority-owned Sterling Lending Corporation are contained
herein.
Investments in subsidiaries are accounted for by the Parent and Subsidiary
Guarantors on the equity method for the purposes of the consolidating financial
data. Earnings of subsidiaries are therefore reflected in the parent's and
Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions. Certain sums in the following tables reflect
immaterial rounding differences.
The Subsidiary Guarantors consist of the following subsidiaries of the Company:
HomeGold, Inc. (100% owned)
Emergent Mortgage Corp. of Tennessee (100% owned)
Carolina Investors, Inc. (100% owned)
Sterling Lending Corporation (80% owned)
Sterling Lending Insurance Agency, Inc. (100% owned
by Sterling Lending Corporation)
Emergent Business Capital, Inc. (100% owned)
Emergent Commercial Mortgage, Inc. (100% owned)
Emergent Financial Corp. (100% owned)
Emergent Business Capital Equity Group (100% owned)
Emergent Insurance Agency Corp. (100% owned)
As of March 31, 1998, 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. Prior to
March 1998, The Loan Pro $, Inc. and Premier Financial Services, Inc. (the
Company's Auto Loan Division subsidiaries) were also guarantors under this
indebtedness.
11
<PAGE>
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
March 31, 1998
(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 $ 1,142 $ 4,500 $ 333 $ 68 $ -- $ 6,043
Restricted cash -- -- -- 3,502 -- 3,502
Loans receivable:
Loans receivable held for investment 742 100,232 -- 9,250 -- 110,224
Loans receivable held for sale -- 225,906 -- -- -- 225,906
Notes receivable from affiliates 72,294 12,386 -- 12 (84,692) --
--------- --------- --------- --------- --------- ---------
Total loans receivable 73,036 338,524 -- 9,262 (84,692) 336,130
Less allowance for credit losses on
loans (371) (7,314) -- -- -- (7,685)
Less unearned discount, dealer
reserves, and deferrals
net of deferred loan costs (100) (2,882) -- (173) -- (3,155)
--------- --------- --------- --------- --------- ---------
Net loans receivable 72,565 328,328 -- 9,089 (84,692) 325,290
Other Receivables:
Accrued interest receivable 43 3,576 -- 94 -- 3,713
Other receivables 104 5,280 275 4 (597) 5,066
--------- --------- --------- --------- --------- ---------
Total other receivables 147 8,856 275 98 (597) 8,779
Investment in subsidiaries 84,774 14,364 -- -- (99,138) --
Investment in asset-backed securities -- 13,471 -- 6,837 -- 20,308
Interest-only strip securities -- 37,107 -- 12,282 -- 49,389
Net property and equipment 1,890 15,308 1,381 -- -- 18,579
Net excess of cost over net assets of
acquired businesses 42 2,894 -- 338 (935) 2,339
Real estate and personal property
acquired through foreclosure 253 2,105 -- -- -- 2,358
Other assets 8,946 9,205 168 624 (2,214) 16,729
--------- --------- --------- --------- --------- ---------
Total assets $ 169,759 $ 436,138 $ 2,157 $ 32,838 $(187,576) $ 453,316
========= ========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Warehouse lines of credit $ -- $ 129,611 $ -- $ -- $ -- $ 129,611
Investor savings:
Notes payable to investors -- 122,811 -- -- -- 122,811
Subordinated debentures -- 19,731 -- -- -- 19,731
--------- --------- --------- --------- --------- ---------
Total investor savings -- 142,542 -- -- -- 142,542
Senior unsecured debt 25,000 -- -- -- -- 125,000
Accounts payable and accrued
liabilities 1,315 6,791 674 197 (2,811) 6,166
Remittances payable -- 5,403 -- -- -- 5,403
Accrued interest payable 560 1,084 -- -- -- 1,644
Due to affiliates -- 92 -- 8,239 (8,331) --
--------- --------- --------- --------- --------- ---------
Total other liabilities 1,875 13,370 674 8,436 (11,142) 13,213
Subordinated debt to affiliates -- 66,223 829 6,000 (73,052) --
--------- --------- --------- --------- --------- ---------
Total liabilities 126,875 351,746 1,503 14,436 (84,194) 410,366
Minority interest -- -- -- 66 -- 66
Shareholders' equity:
Common stock 485 4,094 -- 11 (4,105) 485
Preferred stock -- -- 6,200 -- (6,200) --
Capital in excess of par value 38,739 59,119 -- 18,338 (77,457) 38,739
Retained earnings 3,660 21,179 (5,546) (13) (15,620) 3,660
--------- --------- --------- --------- --------- ---------
Total shareholders' equity 42,884 84,392 654 18,336 (103,382) 42,884
--------- --------- --------- --------- --------- ---------
Total liabilities and shareholders'
equity $ 169,759 $ 436,138 $ 2,157 $ 32,838 $(187,576) $ 453,316
========= ========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
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 $ 174 $ -- 7,561
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 -- (2,098) (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
Interest-only strip securities -- 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:
Warehouse lines of credit $ -- $ 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 25,000 -- -- -- -- 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 63,374 108,445 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>
13
<PAGE>
CONSOLIDATING STATEMENTS OF INCOME
Three Months Ended March 31, 1998
(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 $ 2,061 $ 8,938 $ 10 $ 265 $ (2,601) $ 8,673
Servicing income -- 3,600 -- 454 (1,272) 2,782
Gain on sale of loans:
Cash gain on sale of loans -- 3,292 157 -- -- 3,449
Non-cash gain on sale of loans -- 2,294 635 -- -- 2,929
Loan fee income -- 2,974 594 34 -- 3,602
-------- -------- -------- -------- -------- --------
Total gain on sale of loans -- 8,560 1,386 34 -- 9,980
Other revenues 4 1,166 127 402 (160) 1,539
-------- -------- -------- -------- -------- --------
Total revenues 2,065 22,264 1,533 1,155 (4,033) 22,974
EXPENSES:
Interest 3,659 7,310 80 139 (2,755) 8,433
Provision for credit losses -- 4,829 -- -- -- 4,829
Salaries, wages and employee benefits 1,233 15,756 1,283 -- -- 18,272
Business development costs 2 3,378 99 -- -- 3,479
Other general and administrative expense 428 6,530 879 72 (7) 7,902
-------- -------- -------- -------- -------- --------
Total expenses 5,322 37,803 2,341 211 (2,762) 42,915
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
minority interest, and equity in
undistributed earnings of
subsidiaries (3,257) (15,539) (818) 944 (1,271) (19,941)
Equity in undistributed
earnings of subsidiaries (16,455) (820) -- -- 17,275 --
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and minority interest (19,712) (16,359) (818) 944 16,004 (19,941)
Provision (benefit) for
income taxes 903 (414) 38 151 -- 678
-------- -------- -------- -------- -------- --------
Income (loss) before minority (20,615) (15,945) (856) 793 16,004 (20,619)
interest
Minority interest in
(earnings) loss of
subsidiaries -- -- -- 4 -- 4
-------- -------- -------- -------- -------- --------
Net income (loss) $(20,615) $(15,945) $ (856) $ 797 $ 16,004 $(20,615)
======== ======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
CONSOLIDATING STATEMENTS OF INCOME
Three Months Ended March 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
--------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 30 $ 6,779 $ -- $ -- $ (602) $ 6,207
Servicing income -- 1,145 -- -- -- 1,145
Gain on sale of loans:
Cash gain on sale of loans -- 1,772 31 -- -- 1,803
Non-cash gain on sale
of loans -- 4,415 -- -- -- 4,415
Loan fee income -- 5,780 98 -- -- 5,878
-------- -------- -------- ------ -------- --------
Total gain on sale
of loans -- 11,967 129 -- -- 12,096
Other revenues 37 195 11 -- (6) 237
-------- -------- -------- ------ -------- --------
Total revenues 67 20,086 140 -- (608) 19,685
EXPENSES:
Interest 43 4,273 13 -- (602) 3,727
Provision for credit losses -- 2,073 -- -- -- 2,073
Salaries, wages and
employee benefits 632 6,694 719 -- -- 8,045
Business development costs -- 1,116 82 -- -- 1,198
Other general and
administrative expense (897) 4,304 642 -- (7) 4,042
-------- -------- -------- ------ -------- --------
Total expenses (222) 18,460 1,456 -- (609) 19,085
-------- -------- -------- ------ -------- --------
Income (loss) before income
taxes, minority interest, and
equity in undistributed 289 1,626 (1,316) -- 1 600
earnings of subsidiaries
Equity in undistributed
earnings of subsidiaries 36 -- -- -- (36) --
-------- -------- -------- ------ -------- --------
Income (loss) before income taxes 325 1,626 (1,316) -- (35) 600
and minority interest
Provision (benefit) for
income taxes (60) 103 (1) -- -- 42
-------- -------- -------- ------ -------- --------
Income (loss) before minority
interest 385 1,523 (1,315) -- (35) 558
Minority interest in
(earnings) loss of
subsidiaries 17 (173) -- -- -- (156)
-------- -------- -------- ------ -------- --------
Net income (loss) $ 402 $ 1,350 $ (1,315) $ -- $ (35) $ 402
======== ======== ======== ====== ======== ========
</TABLE>
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 31, 1998
(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>
OPERATING ACTIVITIES:
Net income (loss) $ (20,615) $ (15,945) $ (856) $ 797 $ 16,004 $ (20,615)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in undistributed
earnings of subsidiaries 16,455 820 -- -- (17,275) --
Depreciation and amortization 114 715 69 3 (1) 900
Provision for deferred income taxes 441 (626) 38 147 -- --
Provision for credit losses -- 4,829 -- -- -- 4,829
Loans originated with intent to sell -- (258,714) -- -- -- (258,714)
Principal proceeds from sold loans -- 89,539 9,325 -- -- 98,864
Proceeds from securitization of loans -- 93,817 -- -- -- 93,817
Other -- 5,866 (368) 66 -- 5,564
Changes in operating assets and
liabilities increaseing (decreasing)
cash 661 (424) 198 (1,456) -- (1,021)
----------- ------------- ----------- ----------- ------------ -------------
Net cash provided by (used in)
operating activities (2,944) (80,123) 8,406 (443) (1,272) (76,376)
INVESTING ACTIVITIES:
Loans originated for investment
purposes -- (37,459) -- (2,350) -- (39,809)
Principal collections on loans not
sold -- 57,979 -- -- -- 57,979
Principal collections on asset-
backed securities -- -- -- 173 -- 173
Increase in overcollateralization
from excess spread -- (3,334) -- (621) -- (3,955)
Investment in subsidiary 6,759 (9,366) -- 2,607 -- --
Proceeds from sale of real estate
and personal property
acquired through foreclosure -- 1,530 -- -- -- 1,530
Purchase of property and equipment (50) (1,172) (122) -- -- (1,344)
Other -- (75) -- -- -- (75)
----------- ------------- ----------- ----------- ------------ -------------
Net cash used in investing
activities 6,709 8,103 (122) (191) -- 14,499
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 144,770 -- -- -- 144,770
Payments on notes payable to banks -- (92,764) -- -- -- (92,764)
Net increase in notes payable to
investors -- 7,444 -- -- -- 7,444
Net increase in subordinated
debentures -- 784 -- -- -- 784
Advances (to) from subsidiary (3,461) 9,875 (8,214) 1,800 -- --
Proceeds from issuance of
additional common stock 131 -- -- -- -- 131
Other (6) -- -- (1,272) 1,272 (6)
----------- ------------- ----------- ----------- ------------ -------------
Net cash provided by (used in)
financing activities (3,336) 70,109 (8,214) 528 1,272 60,359
----------- ------------- ----------- ----------- ------------ -------------
Net increase (decrease) in cash
and cash equivalents 429 (1,911) 70 (106) -- (1,518)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 713 6,411 263 174 -- 7,561
----------- ------------- ----------- ----------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,142 $ 4,500 $ 333 $ 68 $ -- $ 6,043
=========== ============= =========== =========== ============ =============
</TABLE>
<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 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
---------- ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 402 $ 1,350 $ (1,315) $ -- $ (35) $ 402
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Equity in undistributed earnings (36) -- -- -- 36 --
of subsidiaries
Depreciation and amortization 47 422 99 -- (1) 567
Provision for deferred income 2 (338) (1) -- -- (337)
taxes
Provision for credit losses -- 2,073 -- -- -- 2,073
Loans originated with intent to -- (196,749) (1,643) -- -- (198,392)
sell
Principal proceeds from sold -- 99,933 1,643 -- -- 101,576
loans
Proceeds from securitization of -- 79,825 -- -- -- 79,825
loans
Other (15) (326) -- -- -- (341)
Changes in operating assets and
liabilities increasing (decreasing)
cash (109) (4,109) 128 (177) -- (4,267)
---------- ----------- ----------- ------------- ------------ ------------
Net cash provided by (used in) 291 (17,919) (1,089) (177) -- (18,894)
operating activities
INVESTING ACTIVITIES:
Loans originated for investment -- (22,996) -- -- -- (22,996)
purposes
Principal collections on loans not -- 24,754 -- -- -- 24,754
sold
Principal collections on -- -- -- 177 -- 177
asset-backed securities
Additional investment in subsidiary (4,739) 2,739 2,000 -- -- --
Proceeds from sale of real estate
and personal property acquired
through foreclosure -- 1,503 -- -- -- 1,503
Purchase of property and equipment (199) (1,674) (863) -- -- (2,736)
Other -- (498) -- -- -- (498)
---------- ----------- ----------- ------------- ------------ ------------
Net cash provided by (used in)
investing activities (4,938) 3,828 1,137 177 -- 204
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 225,997 -- -- -- 225,997
Payments on notes payable to banks -- (212,033) -- -- -- (212,033)
Net increase in notes payable to
investors -- 2,984 -- -- -- 2,984
Net increase in subordinated
debentures -- 1,880 -- -- -- 1,880
Advances (to) from subsidiary 4,500 (4,360) (140) -- -- --
Proceeds from issuance of 12 -- -- -- -- 12
additional common stock
---------- ----------- ----------- ------------- ------------ ------------
Net cash provided by (used in) 4,512 14,468 (140) -- -- 18,840
financing activities
---------- ----------- ----------- ------------- ------------ ------------
Net increase (decrease) in cash and (135) 377 (92) -- -- 150
cash equivalents
CASH AND CASH EQUIVALENTS, BEGINNING 192 958 126 -- -- 1,276
OF YEAR
---------- ----------- ----------- ------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 57 $ 1,335 $ 34 $ -- $ -- $ 1,426
========== =========== =========== ============= ============ ============
</TABLE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF EMERGENT GROUP, INC.)
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------- -------------------
1998 1997
-------------------- -------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 332,849 $ 262,612
Mortgage loans held for sale -- 9,325,758
Less net deferred loan fees -- (368,274)
-------------------- -------------------
Net mortgage loans held for sale -- 8,957,484
Other receivables 274,966 558,703
Property and equipment, net 1,381,035 1,327,532
Other assets 168,031 207,338
-------------------- -------------------
TOTAL ASSETS $ 2,156,881 $ 11,313,669
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities $ 673,883 $ 760,257
Subordinated debt to affiliates, due on demand 829,000 9,543,337
-------------------- -------------------
Total liabilities 1,502,883 10,303,594
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 6,200,000 5,700,000
Accumulated deficit (5,546,002) (4,689,925)
-------------------- -------------------
Total shareholders' equity 653,998 1,010,075
-------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,156,881 $ 11,313,669
==================== ===================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF EMERGENT GROUP, INC.)
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1998 1997
------------------- ---------------------
<S> <C> <C>
REVENUES:
Interest income $ 10,038 $ --
Gain on sale of loans 792,497 31,186
Loan fee income 593,698 87,238
Other revenues 126,948 22,034
------------------- ---------------------
Total revenues 1,523,181 140,458
------------------- ---------------------
EXPENSES:
Interest 80,201 12,716
Salaries, wages and employee benefits 1,282,760 718,559
Management fee to Parent 150,000 195,000
Legal, audit, and professional fees 63,274 73,867
Rent and utilities 155,627 44,809
Telephone 104,533 30,234
Travel and entertainment 72,635 78,800
Business development costs 99,240 82,215
Other general and administrative expenses 332,970 220,803
------------------- ---------------------
Total expenses 2,341,240 1,457,003
------------------- ---------------------
Loss before income taxes (818,059) (1,316,545)
Provision (benefit) for income taxes 38,018 (1,135)
------------------- ---------------------
NET LOSS $ (856,077) $ (1,315,410)
=================== =====================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF EMERGENT GROUP, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------
1998 1997
---------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (856,077) $ (1,315,410)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 68,854 99,451
Provision for deferred income taxes 38,018 (1,135)
Decrease in deferred loan fees (368,274) --
Principal proceeds from loans sold 9,325,758 1,642,890
Loans originated with intent to sell -- (1,642,890)
Changes in operating assets and liabilities 198,652 127,879
---------------------- ---------------------
Net cash provided by (used in) operating activities 8,406,931 (1,089,215)
---------------------- ---------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (122,357) (862,960)
---------------------- ---------------------
Net cash used in investing activities (122,357) (862,960)
---------------------- ---------------------
FINANCING ACTIVITIES:
Cash investment from Parent 500,000 2,000,000
Net cash paid on intercompany borrowings (8,714,337) (139,616)
---------------------- ---------------------
Net cash provided by (used in) financing activities (8,214,337) 1,860,384
---------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 70,237 (91,791)
Cash and cash equivalents at beginning of year 262,612 125,799
---------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 332,849 $ 34,008
====================== =====================
</TABLE>
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
<PAGE>
STERLING LENDING CORPORATION AND SUBSIDIARY
(A MAJORITY-OWNED SUBSIDIARY OF EMERGENT GROUP, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PREPARATION
Sterling Lending Corporation ("Sterling Lending" or "the Company") is an 80%
owned subsidiary of Emergent Group, Inc. ("Parent Company"). Sterling Lending
was organized on March 6, 1996 as Emergent Lending Corp., and the name was
changed to Sterling Lending Corporation on July 24, 1996. Operations began
August 1, 1996.
The accompanying consolidated financial statements include the accounts of
Sterling Lending and Sterling Insurance Agency (100% owned) and are prepared in
accordance with the SEC's rules regarding interim financial statements, and
therefore do not contain all disclosures required by generally accepted
accounting principles for annual financial statements. Reference should be made
to the financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, including the footnotes thereto.
The consolidated balance sheet as of March 31, 1998, and the consolidated
statements of income for the three-month periods ended March 31, 1998 and 1997,
and the consolidated statements of cash flows for the three-month periods ended
March 31, 1998 and 1997, are unaudited and in the opinion of management contain
all known adjustments, which consist of only normal recurring adjustments
necessary to present fairly the financial position results of operations, and
cash flows of the Company. All significant intercompany balances and
transactions between Sterling Lending and its subsidiary have been eliminated in
consolidation.
KPMG Peat Marwick LLP previously examined and reported on the Company's
financial statements for the year ended December 31, 1997, from which the
consolidated balance sheet as of that date is derived.
NOTE 2--CASH FLOW INFORMATION
For the three-month periods ended March 31, 1998 and 1997, the Company paid
interest of $80,201 and $12,716, respectively.
NOTE 3--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments readily convertible to known
amounts of cash or having a maturity of three months or less to be cash
equivalents.
The Company maintains its primary checking account with one bank. The amounts
maintained in the checking account are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $100,000.
NOTE 4--ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This Statement establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events during the period other than transactions with owners.
Comprehensive income is divided into net income and other comprehensive income.
Adoption of this Statement did not change total shareholders' equity as
previously reported. Net income and comprehensive income are the same for the
three months ended March 31, 1998 and 1997.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion should be read in conjunction with the Consolidated
Financial Statements and notes of the Company appearing elsewhere in this
report.
Forward - Looking Information
Certain statements in the financial discussion and analysis by management
that reflect projections or expectations of future financial or economic
performance of the Company, and statements of the Company's plans and objectives
for future operations are "forward-looking" statements. No assurance can be
given that actual results or events will not differ materially from those
projected, estimated, assumed or anticipated in any such forward-looking
statements. Important factors that could result in such differences are many and
include: lower origination volume due to market conditions, higher losses due to
economic downturn or lower real estate values, loss of key employees, adverse
consequences of changes in interest rate environment, deterioration of
creditworthiness of borrowers and risk of default, general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, loss of funding sources, loss of ability to sell loans,
general lending risks, dependence on Federal programs, impact of competition,
regulation of lending activities, and changes in the regulatory environment.
General
The Company is a diversified financial services company headquartered in
Greenville, South Carolina, which originates, purchases, sells, securitizes and
services residential Mortgage Loans (through its "Mortgage Loan Division") and
Small Business Loans (through its "Small Business Loan Division") to sub-prime
customers. Prior to March 1998, the Company also originated, securitized and
serviced Auto Loans. Substantially all of the assets of the Auto Loan Division
were sold in the first quarter of 1998 in order to narrow the Company's
financial services focus, and the Company no longer makes auto loans. The
Company commenced its lending operations in 1991 through the acquisition of
Carolina Investors, Inc. ("CII"), a small mortgage lending company, which had
been in operation since 1963. Since 1996, the Company has been focused
principally on expanding its mortgage loan division and small business loan
division. 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 has incurred 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,
loan origination volume decreased approximately 20% in the first quarter of 1998
as compared to the fourth quarter of 1997. Loan origination volume is
anticipated to stay at this level in the second quarter of 1998, before
increasing in the third and fourth quarters of 1998.
While the above changes had 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 only a small percentage of total retail loans.
16
<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 Three At and For the Years Ended
Months Ended March 31, December 31,
------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Mortgage Loans:
Mortgage loans originated $ 230,446 $ 191,214 $1,082,816 $ 328,649 $ 192,800
Mortgage loans sold 63,891 39,869 435,333 284,794 127,632
Mortgage loans securitized 92,173 77,526 487,563 -- --
Total mortgage loans owned(4) 277,219 159,614 231,145 146,231 88,165
Total serviced mortgage loans(4) 822,298 237,105 768,556 146,231 88,165
Total serviced unguaranteed mortgage
loans(1)(4) 822,298 237,105 700,248 146,231 88,165
Average mortgage loans owned(2) 259,453 165,938 215,790 97,281 74,158
Average serviced mortgage loans(2) 778,028 191,668 443,318 97,281 74,158
Average serviced unguaranteed
mortgage loans(1)(2) 774,542 191,668 411,549 97,281 74,158
Average interest earned(2) 9.27% 10.63% 10.92% 11.97% 12.10%
Small Business Loans:
Small business loans originated $ 35,456 $ 9,506 $ 81,018 $ 68,210 $ 39,560
Small business loans sold 10,538 3,784 41,232 33,060 25,423
Small business loans securitized 1,827 4,626 24,286 12,851 17,063
Total small business loans owned(4) 58,168 24,031 45,186 29,385 20,620
Total serviced small business loans(4) 221,015 145,026 198,876 140,809 108,696
Total serviced unguaranteed small
business loans(3)(4) 92,262 47,544 78,822 44,017 24,867
Average small business loans owned(2) 48,162 25,562 38,427 26,700 23,692
Average serviced small business loans (2) 207,883 144,420 165,053 125,723 98,753
Average serviced unguaranteed small
business loans(2)(3) 85,542 45,781 61,420 34,442 21,819
Average interest earned(2) 14.58% 13.82% 15.89% 12.61% 10.39%
Auto Loans:
Auto loans originated $ 2,983 $ 4,436 $ 15,703 $ 18,287 $ 17,148
Auto loans sold 20,578 -- -- -- --
Auto loans securitized -- -- -- 16,107 --
Total auto loans owned(4) 743 16,140 21,284 13,916 17,673
Total serviced auto loans(4) 743 22,296 21,284 22,033 17,673
Average auto loans owned(2) 21,011 14,834 17,104 11,917 13,078
Average serviced auto loans(2) 21,011 22,259 22,267 21,277 13,078
Average interest earned(2) 20.99% 23.84% 24.05% 23.57% 27.40 %
Total Loans:
Total loans receivable(4) $ 336,130 $ 199,785 $ 297,615 $ 189,532 $ 126,458
Total serviced loans(4) 1,044,056 404,427 988,716 309,073 214,534
Total serviced unguaranteed loans(1)(3)(4) 915,303 306,945 800,354 212,281 130,705
</TABLE>
- ----------
(1) Excludes loans serviced for others with no credit risk to the Company.
(2) Averages are daily averages for all periods, except 1995 averages, which
are computed using beginning and ending balances.
(3) Excludes guaranteed portion of SBA Loans.
(4) Period end.
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 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
17
<PAGE>
with the securitization program and (iv) ongoing administrative and other
operating expenses. The Company's primary operating sources of cash are (i) cash
gains from sale of SBA loan participations and whole-loan mortgage loan sales,
(ii) cash payments of contractual and ancillary servicing revenues received by
the Company in its capacity as servicer for securitized and subserviced loans,
(iii) interest income on loans receivable and certain cash balances, (iv) fee
income received in connection with its retail mortgage loan originations, and
(v) excess cash flow received in each period with respect to interest-only and
residual certificates.
The Company overcollateralizes loans as a credit enhancement on the
mortgage securitization transactions. This requirement creates negative cash
flows in the year of securitization. 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 loans on a whole-loan cash basis, and
is planning to sell loans on a whole-loan cash basis in the second quarter of
1998 rather than engage in a securitization transaction. 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:
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
(In thousands)
Operating Cash Income:
Servicing fees received and excess cash
flow from securitization trusts $ 6,682 $ 1,306
Interest received 9,367 6,180
Cash gain on sale of loans 3,449 1,803
Cash loan origination fees received 3,883 5,933
Securitization hedge gains 38 --
Other cash income 1,549 238
-------- --------
Total operating cash income 24,968 15,460
Operating Cash Expenses:
Securitization costs (851) (900)
Cash operating expenses (28,753) (13,246)
Interest paid (11,539) (3,559)
Taxes paid (187) (68)
-------- --------
Total operating cash expenses (41,330) (17,773)
Cash deficit due to operating
cash income and expenses (16,362) (2,313)
Other Cash Flows:
Cash provided by other payables and
receivables 6,026 885
Cash used in loans held for sale (66,040) (17,466)
======== ========
Net cash used in operating activities $(76,376) $(18,894)
======== ========
Revenues
The principal components of the Company's revenues are (i) interest, fees
and servicing revenues earned on its serviced loans receivable reduced by
interest paid on borrowed funds associated with such serviced loans receivable;
(ii) gains resulting from the sale and securitization of its loans, including
loan origination fees recognized.
18
<PAGE>
For the periods indicated, the following table sets forth certain
information derived from the Company's Consolidated Financial Statements
expressed as a percentage of total revenues.
For the Three Months
Ended March 31,
------------------
1998 1997
----- -----
Interest income 37.8% 31.5%
Servicing income 12.1 5.8
Cash gain on sale of loans 15.0 9.2
Non-cash gain on sale of loans 12.7 22.4
Loan fee income 15.7 29.9
Other revenues 6.7 1.2
----- -----
Total revenues 100.0% 100.0%
===== =====
Interest expense 36.7% 18.9%
Provision for credit losses 21.0 10.5
Salaries, wages and employee benefits 79.5 40.9
Business development costs 15.1 6.1
Other general and administrative expenses 34.4 20.6
Income (loss) from continuing operations
before income taxes (86.7) 3.0
Provision for income taxes 3.0 0.2
Minority interest in earnings (loss) of subsidiaries -- (0.8)
----- -----
Net income (loss) (89.7)% 2.0%
===== =====
Results of Operations
Three Months Ended March 31, 1998, Compared to Three Months Ended March 31, 1997
The Company recognized a net loss of $20.6 million for the three months
ended March 31, 1998 as compared to net income of $402,000 for the three months
ended March 31, 1997. This net loss was mainly due to the Company's loan
production volume being below capacity levels in relation to general and
administrative expense structure and several one-time unusual items in the first
quarter of 1998, which negatively impacted net income. These unusual items
included, among other things, the deferral of approximately $6 million in loan
fees and gain on sale related to March production not sold (resulting from the
Company's decision to slow down the sales process) and a $5.0 million loss
resulting from a decision to change the Company's aggregation methods related to
the lower of cost or market accounting for mortgage loans held for sale.
Total revenues increased $3.3 million, or 17%, to $23.0 million for the
three months ended March 31, 1998 from $19.7 million for the three months ended
March 31, 1997. The higher level of revenues resulted principally from increases
in interest income and servicing income.
Interest income increased $2.5 million, or 40%, to $8.7 million for the
three months ended March 31, 1998 from $6.2 million for the three months ended
March 31, 1997. This growth resulted primarily from the growth experienced by
both the Mortgage Loan Division and the Small Business Loan Division. Interest
income earned by the Mortgage Loan Division increased $1.4 million, or 28%, to
$6.4 million for the three months ended March 31, 1998 from $5.0 million for the
three months ended March 31, 1997. This increase was due principally to the
growth in the average outstanding loan portfolio in the Mortgage Loan Division,
which increased $93.6 million, or 56%, to $259.5 million for the three months
ended March 31, 1998 from $165.9 million for the three months ended March 31,
1997, reflecting the increased loan origination levels generated by that
Division. Average interest earned by the Mortgage Loan Division for the three
months ended March 31, 1998 was 9.3% as compared to 10.6% for the three months
ended March 31, 1997. Interest income earned by the Small Business Loan Division
increased $900,000, or 100%, to $1.8 million for the three months ended March
31, 1998 from $900,000 for the three months ended March 31, 1997. This increase
was due principally to the growth in the average outstanding loan portfolio in
the Small Business Loan Division, which increased $22.6 million, or 88%, to
$48.2 million for the three months ended March 31, 1998 from $25.6 million for
the three months ended March 31, 1997, reflecting the increased loan origination
levels generated by that Division. Average interest earned by the Small Business
Loan Division for the three months ended March 31, 1998 was 14.6% as compared to
13.8% for the three months ended March 31, 1997.
19
<PAGE>
Servicing income increased $1.7 million, or 155%, to $2.8 million for the
three months ended March 31, 1998 from $1.1 million for the three months ended
March 31, 1997. This increase was due principally to the securitization of
Mortgage Loans throughout 1997 and in the first quarter of 1998, for which the
Company retained servicing rights, offset by a write-down of the Company's
interest-only strip securities in the amount of approximately $1.0 million.
Prior to 1997, the Mortgage Loan Division did not securitize its loans,
therefore the serviced portfolio was just beginning to grow during the first
quarter of 1997. The average serviced loan portfolio for the Mortgage Loan
Division increased $586.3 million, or 306%, to $778.0 million for the three
months ended March 31, 1998 from $191.7 million for the three months ended March
31, 1997.
Cash gain on sale of loans increased $1.6 million, or 89%, to $3.4 million
for the three months ended March 31, 1998 from $1.8 million for the three months
ended March 31, 1997. The increase resulted principally from increased sales of
Mortgage Loans due to increased originations. Mortgage Loan originations
increased $39.2 million, or 21%, to $230.4 million for the three months ended
March 31, 1998 from $191.2 million for the three months ended March 31, 1997.
Mortgage Loans sold increased $24.0 million, or 60%, to $63.9 million for the
three months ended March 31, 1998 from $39.9 million for the three months ended
March 31, 1997. The weighted average gain on sale of Mortgage Loans increased to
4.1% for the three months ended March 31, 1998 from 3.7% for the three months
ended March 31, 1997.
Non-cash gain on sale of loans decreased $1.5 million to $2.9 million for
the three months ended March 31, 1998 from $4.4 million for the three months
ended March 31, 1997. The decrease in non-cash gain on sale of loans was due
principally to a $7.9 million gain recognized on securitizations, offset by a
$5.0 million loss resulting from a decision to change the Company's aggregation
methods related to the lower of cost or market accounting for mortgage loans
held for sale. The Mortgage Loan Division securitized $92.2 million in loans in
the first quarter of 1998 and recognized a weighted average non-cash gain on
sale as a percentage of loans securitized of 8.4%, net of expenses. The Mortgage
Loan Division securitized $77.5 million in loans in the first quarter of 1997
and recognized a weighted average non-cash gain on sale as a percentage of loans
securitized of 4.6%, net of expenses.
Loan fees decreased $2.3 million to $3.6 million for the three months ended
March 31, 1998 from $5.9 million for the three months ended March 31, 1997. Loan
fees as a percentage of retail production for the three months ended March 31,
1998 were 4.9% as compared to 5.5% for the three months ended March 31, 1997.
Loan fees are deferred and recognized as interest income over the life of the
loan. All unamortized loan fees, net of origination costs, are realized as part
of the gain on sale of loans when the loans are sold or securitized.
Other revenues increased $1.3 million to $1.5 million for the three months
ended March 31, 1998 from $237,000 for the three months ended March 31, 1997.
Other revenues are comprised principally of underwriting fees, insurance
commissions and management fees. The increase of other revenues resulted
principally from the increased value of securities owned relating to the
commercial mezzanine lending operation in the amount of approximately $400,000
and higher underwriting fees received in 1998 on brokered loans.
Total expenses increased $23.8 million, or 125%, to $42.9 million for the
three months ended March 31, 1998 from $19.1 million for the three months ended
March 31, 1997. Total expenses are comprised of provision for credit losses,
interest expense, salaries, wages and employee benefits, business development,
and other general and administrative expenses. The increased expenses are due
largely to the Company's increased Mortgage Loan retail origination operation.
Total expenses are anticipated to be flat for the remainder of 1998.
Interest expense increased $4.7 million, or 127%, to $8.4 million for the
three months ended March 31, 1998 from $3.7 million for the three months ended
March 31, 1997. 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 to $6.2 million for the
three months ended March 31, 1998 from $3.4 million for the three months ended
March 31, 1997. 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 $49.5 million,
or 26%, to $239.4 million for the three months ended March 31, 1998 from $189.9
million for the three months ended March 31, 1997. In September 1997, the
Company also completed the $125.0 million offering of the Company's Senior Notes
due 2004 with interest payable at 10.75%.
20
<PAGE>
Provision for credit losses increased $2.7 million, or 129%, to $4.8
million for the three months ended March 31, 1998 from $2.1 million for the
three months ended March 31, 1997. The provision was made to maintain the
general reserves for credit losses associated with loans held for investment, as
well as to increase specific reserves for possible losses with regard to
particular loans.
General and administrative expense increased $16.4 million, or 123%, to
$29.7 million for the three months ended March 31, 1998 from $13.3 million for
the three months ended March 31, 1997. This is a result primarily from the
increased personnel costs in the Mortgage Loan Division due to the expansion in
1997 and early 1998 of the portfolio management, underwriting, processing, and
closing departments, and the increased expenses associated with the opening of
retail lending offices in Greenville (first quarter) and Houston (fourth
quarter) in 1997. Salaries, wages and employee benefits increased $10.3 million,
or 129%, to $18.3 million for the three months ended March 31, 1998 from $8.0
million for the three months ended March 31, 1997. Retail production increased
$33.7 million, or 37%, to $124.8 million for the three months ended March 31,
1998 from $91.1 million for the three months ended March 31, 1997. The higher
general and administrative expenses were also the result of expenditures
associated with ramping up for an anticipated higher level of production volume
planned for in 1998.
The Company has recorded current income tax expense of $678,000 for the
three months ended March 31, 1998, even though overall the Company generated a
pre-tax loss for the three months ended March 31, 1998. The current tax is due
on income called "excess inclusion income." Excess inclusion income is a result
of the Company securitizing loans in pools to third party investors. These
transactions generate income for the Company that is included in the overall
loss. However, according to IRS regulations, a portion of that income is subject
to federal tax in the current period regardless of other current period losses
or NOL carryovers otherwise available to offset regular taxable income. The
excess inclusion income approximates the net interest the Company receives on
the loans in the pools after the bondholders are paid their share of the
interest less the sum of the daily accruals, an amount allowed for tax purposes
as a reasonable economic return on the retained ownership interest.
Financial Condition
Net loans receivable increased $36.9 million to $325.3 million at March 31,
1998 from $288.4 million at December 31, 1997. The increase in investment in
asset-backed securities of $3.9 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 the
first quarter of 1998. The interest-only strip security increased by $5.0
million to $49.4 million at March 31, 1998, from $44.4 million at December 31,
1997. This increase resulted primarily from the estimated present value of the
excess cash flow on Mortgage Loans sold with servicing retained of $8.9 million,
offset by amortization of $3.9 million.
Net property, plant and equipment increased by $500,000 to $18.6 million at
March 31, 1998, from $18.1 million at December 31, 1997, while other assets
decreased by $900,000 to $16.7 million at March 31, 1998 from $17.6 million at
December 31, 1997.
The primary source of funding the Company's receivables comes from
borrowings issued under various credit arrangements (including the Credit
Facilities, CII Notes, and the Company's Senior Notes due 2004). At March 31,
1998, the Company had debt outstanding under warehouse lines of credit to banks
of $129.6 million, which compares with $77.6 million at December 31, 1997, for
an increase of $52.0 million. During September 1997, the Company issued $125.0
million of Senior Notes due 2004. At March 31, 1998, the Company had $142.5
million of CII Notes outstanding, which compares with $134.3 million at December
31, 1997, for an increase of $8.2 million.
Total stockholders' equity at March 31, 1998 was $42.9 million, which
compares to $63.4 million at December 31, 1997, a decrease of $20.5 million.
This decrease resulted principally from a net loss of $20.6 million for the
three months ended March 31, 1998.
Allowance for Credit Losses and Credit Loss Experience
The Company is exposed to the risk of loan delinquencies and defaults with
respect to loans retained in its portfolio. With respect to loans to be sold on
a non-recourse basis, the Company is at risk for loan delinquencies and defaults
on such loans while they are held by the Company pending such sale. To provide
for credit losses, the Company charges against current earnings an amount
necessary to maintain the allowance for credit losses at levels expected to
cover inherent losses in loans held for investment.
21
<PAGE>
Summary of Allowance for Credit Losses on Owned Portfolio
The table below summarizes certain information with respect to the
Company's allowance for credit losses on the owned portfolio for each of the
periods indicated.
At and For
the Three
Months
Ended At and For the Years Ended
March 31, December 31,
----------- --------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
(In thousands)
Allowance for credit losses
at beginning of period $ 6,528 $ 3,084 $ 1,874 $ 1,730
Allowance on sold loans (1,247) -- -- --
Net charge-offs (2,425) (5,166) (2,494) (1,563)
Provision charged to expense 4,829 10,030 5,416 2,480
Securitization transfers -- (1,420) (1,712) (773)
-------- -------- -------- --------
Allowance for credit losses
at end of the period $ 7,685 $ 6,528 $ 3,084 $ 1,874
======== ======== ======== ========
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.
Summary of Embedded Allowance for Losses on Securitization Residual Assets
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.
22
<PAGE>
The table below summarizes certain information with respect to the
Company's allowance for losses that is embedded in the securitization residual
assets for each of the periods indicated.
<TABLE>
<CAPTION>
At and For the
Three Months At and For the Years Ended
Ended March 31, December 31,
-------------- --------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest-only strip securities:
Allowance for losses at beginning of
period $ 14,255 $ 848 $ -- $ --
Net charge-offs (7) (1,533) (1,155) --
Anticipated losses netted against gain
on securitizations 2,128 13,278 -- --
Mark to market adjustment (260) -- -- --
Allowance transferred from owned
portfolio -- 1,662 2,003 --
-------- -------- -------- --------
Allowance for losses at the end of the
period $ 16,116 $ 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>
Summary of Allowance for Credit Losses on Serviced Portfolio
The table below summarizes the Company's allowance for credit losses with
respect to the Company's total serviced portfolio (including both owned and
securitized loan pools) for each of the periods indicated.
<TABLE>
<CAPTION>
At and For the
Three Months At and For the Years Ended
Ended March 31, December 31,
--------------- ----------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Allowance for credit losses at beginning of period $ 20,783 $ 4,286 $ 2,647 $ 1,730
Allowance on sold loans (1,247) -- -- --
Net charge-offs (2,432) (6,811) (3,777) (1,563)
Provision charged to expense 4,829 10,030 5,416 2,480
Mark to market adjustment (260) -- -- --
Anticipated losses netted against gain on securitizations 2,128 13,278 -- --
-------- -------- -------- --------
Allowance for credit losses at the end of the period $ 23,801 $ 20,783 $ 4,286 $ 2,647
======== ======== ======== ========
Allowance as a % of total managed portfolio 2.60% 2.60% 2.02% 2.03%
Net charge-offs as a % of average managed portfolio 1.10% 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 $ 7,685 $ 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 16,116 14,255 848 --
-------- -------- -------- --------
Total allowance for credit losses $ 23,801 $ 20,783 $ 4,286 $ 2,647
======== ======== ======== ========
</TABLE>
23
<PAGE>
Management closely monitors delinquencies to measure the quality of its
loan portfolio and the potential for credit losses. The Company's policy is to
generally place a loan on non-accrual status after it becomes 90 days past due,
if collection in full is questionable. Collection efforts on charged-off loans
continue until the obligation is satisfied or until it is determined that such
obligation is not collectible or the cost of continued collection efforts would
exceed the potential recovery. Recoveries of previously charged-off loans are
credited to the allowance for credit losses.
The following sets forth delinquencies and delinquencies as a percentage of
the total serviced portfolio as of the periods indicated.
<TABLE>
<CAPTION>
March 31, December 31, December 31, December 31,
1998 1997 1996 1995
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans past due 30-59 days $ 34,115 $ 29,174 $ 8,412 $ 9,209
As a % of total managed portfolio 3.73% 3.65% 3.96% 7.05%
Loans past due 60-89 days $ 11,527 $ 10,009 $ 2,789 $ 3,142
As a % of total managed portfolio 1.26% 1.25% 1.31% 2.40%
Loans past due 90+ days $ 31,934 $ 22,147 $ 6,662 $ 5,047
As a % of total managed portfolio 3.49% 2.76% 3.14% 3.86%
Total loans past due $ 77,576 $ 61,330 $ 17,863 $ 17,398
As a % of total managed portfolio 8.48% 7.66% 8.41% 13.31%
</TABLE>
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 1998-1
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 77,435,632 120,860,326 130,917,899 118,585,860 62,726,105
2 77,045,312 120,119,653 169,093,916 118,061,792
3 76,709,417 119,364,510 168,182,957 148,291,146
4 75,889,160 118,965,905 166,783,489 146,880,279
5 75,395,969 117,236,893 165,608,534
6 74,630,019 115,870,168 164,084,260
7 73,149,957 113,537,447 161,880,416
8 72,261,386 112,100,397
9 71,342,842 110,468,401
10 70,195,198 107,887,242
11 68,981,147
12 67,149,553
13 65,705,603
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Delinquencies > 30 Days Past Due
- -----------------------------------------------------------------------------------------------------
Months from
Pool Inception 1997-1 1997-2 1997-3 1997-4 1998-1
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 -- 515,954 609,201 402,972 44,600
2 1,499,056 1,631,017 2,042,757 2,132,028
3 858,311 3,930,423 4,498,266 5,049,035
4 3,760,775 5,399,570 8,546,414 7,290,097
5 5,220,385 7,293,855 12,337,604
6 5,849,574 9,790,731 13,432,454
7 6,777,961 11,933,526 15,076,729
8 8,078,783 12,484,893
9 8,475,207 12,471,739
10 9,911,115 11,222,005
11 10,630,824
12 9,169,743
13 9,372,949
<CAPTION>
Delinquencies > 30 Days Past Due As a Percent of Current Balance
- ------------------------------------------------------------------------------------------------------------------
Months from
Pool Inception 1997-1 1997-2 1997-3 1997-4 1998-1 Average
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 0.00% 0.43% 0.47% 0.34% 0.07% 0.26%
2 1.94% 1.36% 1.21% 1.81% 1.58%
3 1.12% 3.29% 2.67% 3.40% 2.62%
4 4.96% 4.54% 5.12% 4.96% 4.90%
5 6.92% 6.22% 7.45% 6.87%
6 7.84% 8.45% 8.19% 8.16%
7 9.27% 10.51% 9.31% 9.70%
8 11.18% 11.14% 11.16%
9 11.88% 11.29% 11.58%
10 14.12% 10.40% 12.26%
11 15.41% 15.41%
12 13.66% 13.66%
13 14.27% 14.27%
Actual Historical Cumulative
Prepayment Speed 13 CPR 11 CPR 7 CPR 6 CPR N/A
</TABLE>
25
<PAGE>
The following sets forth the static pool analysis for delinquencies by
quarter in the Small Business Loan Division's securitized pools.
Current Principal Balance
- --------------------------------------------------------------------------------
Months from
Pool Inception 1995-1 1996-1 1997-1
- --------------------------------------------------------------------------------
1 16,728,904 12,835,117 19,635,971
4 16,293,396 17,198,763 20,655,808
7 15,292,515 17,128,785
10 14,816,770 16,850,017
13 14,147,481 15,768,712
16 13,214,217 15,411,337
19 11,685,931
22 11,367,569
25 10,932,915
28 10,043,467
31 9,263,383
34 8,597,644
Delinquencies > 30 Days Past Due
- --------------------------------------------------------------------------------
Months from
Pool Inception 1995-1 1996-1 1997-1
- --------------------------------------------------------------------------------
1 388,110 69,463 474,946
4 1,504,537 320,625 366,470
7 1,230,648 2,275,021
10 1,160,321 1,602,343
13 1,399,070 1,058,535
16 1,198,855 396,230
19 999,427
22 791,103
25 582,389
28 349,993
31 383,049
34 388,510
Delinquencies > 30 Days Past Due as a % of Current Balance
- --------------------------------------------------------------------------------
Months from
Pool Inception 1995-1 1996-1 1997-1 Average
- --------------------------------------------------------------------------------
1 2.32% 0.54% 2.42% 1.76%
4 9.23% 1.86% 1.77% 4.29%
7 8.05% 13.28% 10.66%
10 7.83% 9.51% 8.67%
13 9.89% 6.71% 8.30%
16 9.07% 2.57% 5.82%
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%
34 4.52% 4.52%
Actual Historical Cumulative
Prepayment Speed 14 CPR 7 CPR N/A
26
<PAGE>
The following table sets forth the Company's allowance for credit losses on
the serviced portfolio at the end of the periods indicated, the credit loss
experience over the periods indicated, and delinquent loan information at the
dates indicated for loans receivable at least 30 days past due.
<TABLE>
<CAPTION>
At and For the
Three Months At and For the Years Ended
Ended March 31, December 31,
------------------- ------------------------------------------
1998 1997 1996 1995
------------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance for Credit Losses as a % of Serviced Loans(1):
Mortgage Loan Division 2.14% 1.98% 0.80% 0.93%
Small Business Loan Division 6.35 6.76 3.84 4.50
Auto Loan Division 50.00 7.58 6.45 4.03
Total allowance for credit losses as a % of
serviced loans 2.60 2.60 2.02 2.03
Net Charge-offs as a % of Average Serviced Loans (2):
Mortgage Loan Division 0.98 0.32 0.81 1.04
Small Business Loan Division (0.05) 2.74 2.71 1.43
Auto Loan Division 10.46 17.17 9.65 3.68
Total net charge-offs as a % of total
serviced loans 1.10 1.38 2.47 1.43
Loans Receivable Past Due 30 Days or More as a % of
Serviced Loans (1):
Mortgage Loan Division 8.95 8.00 7.26 14.43
Small Business Loan Division 3.77 4.17 7.92 9.69
Auto Loan Division 64.04 9.41 17.09 12.83
Total loans receivable past due 30 days
or more as a % of total serviced loans 8.48 7.66 8.41 13.31
Total Allowance for Credit Losses as a % of Serviced
Loans Past Due 90 Days or More (1) 74.80% 94.33% 88.71% 73.21%
</TABLE>
(1) For purposes of these calculations, serviced loans represents all
loans for which the Company bears credit risk, and includes all
portfolio Mortgage Loans and Auto Loans, all securitized loans, and
the Small Business Loans, but excludes the guaranteed portion of the
SBA Loans and Mortgage Loans serviced without credit risk.
(2) Average serviced loans have been determined by using beginning and
ending balances for the period presented except that the 1996, 1997,
and 1998 averages are calculated based on the daily averages for Small
Business Loan Division and Auto Loan Division and monthly averages for
the Mortgage Loan Division (rather than the beginning and ending
balances). The amounts at March 31, 1998 have been annualized.
Over the last several years, and more acutely in 1997 and 1998, the Company
has expanded rapidly. The reduction in 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 future total charge-offs
and delinquencies will generally be higher than they were at March 31, 1998 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 sales of the loans
it originates and purchases, proceeds from the sale of CII Notes, borrowings
under the Credit Facilities and proceeds from 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 decreased to $42.9 million at March 31, 1998 from
$63.4 million at December 31, 1997. This decrease resulted principally from the
net losses incurred by the Company in the first quarter of 1998.
27
<PAGE>
Cash and cash equivalents were $6.0 million at March 31, 1998 and $7.6
million at December 31, 1997. Cash used in operating activities increased to
$76.4 million for the three months ended March 31, 1998, from $18.9 million for
the three months ended March 31, 1997. Cash provided by investing activities
increased to $14.5 million for the three months ended March 31, 1998, from cash
provided by investing activities of $204,000 for the three months ended March
31, 1997. Cash provided by financing activities increased to $60.4 million for
the three months ended March 31, 1998, from cash provided by financing
activities of $18.8 million for the three months ended March 31, 1997. The
increase in cash used in operations was due principally to the net loss for the
three months ended March 31, 1998 and the increase in loan originations during
the first three months of 1998 as compared to the first three months of 1997.
The increase in cash provided by investing activities was principally due to
increased collections on loans not sold. The increase in cash provided by
financing activities was due principally to increased advances on warehouse
lines of credit to fund increased loan originations and first quarter 1998 loss.
At March 31, 1998, the Company's credit facilities ("Credit Facilities")
were comprised principally of warehouse credit facilities of $395.0 million and
a note payable of $4.6 million for the mortgage loan division (the "Mortgage
Loan Division Facility") and warehouse 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
March 31, 1998, the Company had aggregate outstanding borrowings of $105.4
million and aggregate borrowing availability of $60.0 million under the Mortgage
Loan Division Facility and aggregate outstanding borrowings of $24.2 million and
aggregate borrowing availability of $11.4 million under the Small Business Loan
Division Facility. Total Company borrowings and availability at March 31, 1998
under the Credit Facilities were $129.6 million and $71.4 million, respectively.
The Mortgage Loan Division Facility and the Small Business Loan Division
Facility both bear interest at variable rates, ranging from LIBOR + 1.30% to the
bank's prime rate. The warehouse lines of credit of $375.0 million under the
Mortgage Loan Division Facility related to Homegold, Inc. mature on June 30,
1998. The warehouse line of credit of $20.0 million under the Mortgage Loan
Division Facility related to CII matures May 31, 1998 and will not be renewed.
The note payable under the Mortgage Loan Division Facility matures on March 1,
2005. The agreements under the Small Business Loan Division Facility mature on
December 29, 2000. No assurance can be given that the Credit Facilities will be
renewed or renewed under similar terms upon maturity.
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 (including dividends from the
subsidiaries to the Company), making intercompany loans to non-guarantor
subsidiaries, making payments with respect to certain subordinated debt, and
making certain changes to its equity capital structure. The Company is currently
in violation of its minimum tangible net worth and maximum leverage ratio
covenants under its Credit Facilities. The banks have granted the Company a
temporary forebearance related to the above mentioned violations. The Company
will meet with the banks during May 1998 and attempt to obtain waivers or
modifications. However, no assurance can be given that the Company will be
successful at obtaining such waivers or modifications. In the event that the
Company is unable to successfully renegotiate its Credit Facilities, the
Company would not have sufficient sources of funds or liquidity to meet its cash
requirements.
During 1997, the Company sold $125.0 million aggregate principal amount of
Senior Notes due 2004. The Senior Notes due 2004 constitute unsecured
indebtedness of the Company. The Senior Notes due 2004 are redeemable at the
option of the Company, in whole or in part, on or after September 15, 2001, at
predetermined redemption prices plus accrued and unpaid interest to the date of
redemption. The indenture pertaining to the Senior Notes contains various
restrictive covenants including limitations on, among other things, the
incurrence of certain types of additional indebtedness, the payment of dividends
and certain other payments, the ability of the Company's subsidiaries to incur
further limitations on their ability to pay dividends or make other payments to
the Company, liens, assets sales, the issuance of preferred stock by the
Company's subsidiaries and transactions with affiliates. At March 31, 1998,
management believes the Company was in compliance with such restrictive
covenants. The Senior Notes due 2004 are fully and unconditionally guaranteed
(the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each,
a "Guarantee") by certain of the Company's subsidiaries (the "Subsidiary
Guarantors"). With the exception of the Guarantee by CII, the Subsidiary
Guarantees rank pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of
payment to all existing and future subordinated indebtedness of such Guarantors.
The Guarantee by CII is equal in priority to CII's 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 March 31, 1998, CII had an aggregate of $122.8 million of senior notes
outstanding bearing a weighted average interest rate of 7.4%, and an aggregate
of $19.7 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
28
<PAGE>
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.
Loan Sales and Securitizations
The Company offers for sale or securitization substantially all of its
loans. The Company offers for sale on a whole loan basis a significant amount of
its Mortgage Loans (servicing released), including substantially all of its
Mortgage Loans secured by second liens and loans originated through "Strategic
Alliance Mortgage Bankers", and all of its SBA Loan Participations (servicing
retained), principally to secure the additional cash flow associated with the
premiums paid in connection with such sales and to eliminate the credit risk
associated with the second lien Mortgage Loans. However, no assurance can be
given that these loans can be successfully sold. To the extent that the loans
are not sold, the Company retains the risk of loss. At March 31, 1998 and
December 31, 1997, the Company had retained $85.6 million and $69.8 million,
respectively, of second mortgage loans on its balance sheet. These loans contain
substantially higher credit risk than Mortgage Loans secured by first liens.
During the first three months of 1998 and 1997, the Company sold $63.9 million
and $39.9 million, respectively, of Mortgage Loans and $10.5 million and $3.8
million, respectively, of SBA Loan Participations.
Beginning in 1997, on a quarterly basis, the Company securitized
substantial amounts of its Mortgage Loans, totaling $579.7 million through March
31, 1998. Since 1995, the Company has securitized $56.0 million of loans
representing the unguaranteed portions of the SBA Loans and $16.1 million of
Auto Loans. Although securitizations provide liquidity, the Company has utilized
securitizations principally to provide a lower cost of funds and reduce interest
rate risk, while building servicing revenues by increasing the serviced
portfolio. In connection with its Mortgage Loan and SBA Loan securitizations,
the Company has retained subordinate certificates and interest-only and residual
certificates representing residual interests in the trusts.
In securitizations, the Company sells the loans that it originates or
purchases to a trust for cash, and records certain assets and income based upon
the difference between all principal and interest received from the loans sold
and (i) all principal and interest required to be passed through to the
asset-backed bond investors, (ii) all excess contractual servicing fees, (iii)
other recurring fees, and (iv) an estimate of losses on the loans (collectively,
the "Excess Cash Flow"). At the time of the securitization, the Company
estimates these amounts based upon a declining principal balance of the
underlying loans, adjusted by an estimated prepayment and loss rate, and
capitalizes these amounts using a discount rate that market participants would
use for similar financial instruments. These capitalized assets are recorded on
the Company's balance sheet as 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 (gains) losses.
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.
29
<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 March 31, 1998:
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr.
1997 1997 1997 1997 1998
-------------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Loans securitized $77,526,090 $121,214,000 $131,121,432 $157,779,083 $93,965,349
Average stated principal balance 63,288 63,190 68,328 66,039 66,506
Weighted average coupon on loans 11.01% 10.80% 11.19% 11.20% 11.00%
Weighted average original term
to stated maturity 209 months 200 months 200 months 202 months 207 months
Weighted average loan-to-value 80.62 75.94 77.38 76.25 76.77
% of first mortgage loans 100.00 100.00 100.00 100.00 100.00
% secured by primary residence 98.60 98.80 96.19 97.04 97.89
Weighted average pass-through
rate to bondholders 7.40 7.06 6.99 6.86 6.71
Spread of pass-through rate over
comparable Treasury rate 0.89 0.78 0.81 1.00 1.07
Estimated annual losses 0.60 0.60 0.60 0.60 0.60
Ramp period for losses 12 months 12 months 12 months 12 months 12 months
Cumulative losses as a % of
original unpaid balance 2.33 2.24 2.18 2.21 2.20
Annual servicing fee 0.50 0.50 0.50 0.50 0.50
Servicing asset 0.10 0.10 0.10 0.10 0.10
Discount rate implicit in cash
flow before overcollateralization 26.00 22.00 20.00 20.00 20.00
Discount rate applied to cash
flow after 12.00 12.00 12.00 12.00 12.00
overcollateralization
Prepayment speed:
Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR (1) 20 CPR 20 CPR 20 CPR 20 CPR 20 CPR
Tail CPR (1) 18/16 CPR 18/16 CPR 18/16 CPR 18/16 CPR 18/16 CPR
CPR ramp period (1) 12 months 12 months 12 months 12 months 12 months
CPR peak period (1) 24 months 24 months 24 months 24 months 24 months
CPR tail begins (1) 37/49 months 37/49 months 37/49 months 37/49 months 37/49 months
Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185%
Initial overcollateralization
required (2) 3.25 0.00 0.00 0.00 0.00
Final overcollateralization required (2) 6.50 3.75 3.75 3.75 3.75
</TABLE>
(1) CPR ("Constant Prepayment Rate") represents an industry standard of
calculating prepayment speeds. The Company uses a curve based on
various CPR levels throughout the pool's life, based on its estimate
of prepayment performance, as outlined in the table above.
Approximately 2/3 of the loans in the Company's securitization
transactions have a "piggy-backed" second behind the first mortgage
lien, creating a high combined LTV for the customer, which reduces the
Company's loss exposure. Typically, high LTV loans 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. Accordingly, the Company's securitization
transactions have been priced at a 17 to 18 CPR by the securitization
underwriter.
(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 sell its
loans on a whole loan basis in the second quarter of 1998 to provide improved
cash flow, and will evaluate its strategy of securitization versus whole loan
sale on a quarterly basis.
The Company expects to begin receiving Excess Cash Flow on its Mortgage
Loan securitizations approximately 16 months from the date of securitization,
although this time period may be shorter or longer depending upon the
securitization structure and performance of the loans securitized. Prior to such
time, the monoline insurer requires a reserve provision to be created within the
securitization trust which uses Excess Cash Flow to retire the securitization
bond debt until the spread between the outstanding principal balance of the
loans in the securitization trust and the securitization bond debt equals a
specified percentage (depending on the structure of
30
<PAGE>
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 Home Equity Prepayment ("HEP") on the first two deals and 17 HEP on
the second two securitizations. Actual cumulative prepayment speeds have been
running below these assumptions, and the trusts have experienced virtually no
losses to date. 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 March 31, 1998:
<TABLE>
June November January December February
1995 1996 1997 1997 1998
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Loans securitized $17,063,377 $12,850,743 $ 4,626,031 $19,659,945 $ 1,827,479
Average stated principal balance 65,377 152,985 210,274 225,976 365,496
Weighted average spread over
Wall Street Journal Prime Rate 2.71% 2.70% 2.66% 2.48% 2.26%
Weighted average original term
to stated maturity 198 months 258 months 256 months 259 months 289 months
Weighted average loan-to-value 55% 63% 62% 67% 68%
Spread under prime rate 1.35% 1.80% 1.80% 2.00% 2.00%
Estimated annual losses 2.25% 1.25% 1.25% 1.25% 1.25%
Annual servicing fee 0.40% 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% 10.50%
Prepayment speed:
Initial CPR 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR 15 CPR 12 CPR 12 CPR 12 CPR 12 CPR
Tail CPR 14 CPR 11 CPR 11 CPR 11 CPR 11 CPR
CPR ramp period 12 months 12 months 12 months 12 months 12 months
CPR peak period 36 months 36 months 36 months 36 months 36 months
CPR tail begins 37 months 37 months 37 months 37 months 37 months
Annual trustee fee $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000
Initial spread account required 2% 2% 2% 2% 2%
Final spread account required 4% 4% 4% 6% 6%
Subordinate piece retained 10% 10% 9% 10% 10%
</TABLE>
The gains recognized into income resulting from securitization transactions
vary depending on the assumptions used, the specific characteristics of the
underlying loan pools, and the structure of the transaction. The Company
believes the assumptions it has used are appropriate and reasonable.
The Company assesses the carrying value of its interest-only strip
securities and servicing assets for impairment. These assets are carried at
their estimated fair market value. During the three months ended March 31, 1998,
the Company wrote-down the valuation of its interest-only strip securities by
approximately $1.0 million as a result of higher than anticipated prepayments
for the three months ended March 31, 1998. There can be no assurance that
the Company's estimates used to determine the gain on sale of loans,
interest-only strip securities, asset-backed securities and servicing assets
valuations will remain appropriate for the life of each securitization. If
future expectations or 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.
31
<PAGE>
Accounting Considerations
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
method that public entities report information about operating segments in
interim and annual financial statements. Statement No. 131 is not required to be
applied to interim financial statements in the initial year of its application.
It also establishes standards for related disclosures about product and
services, geographical areas and major customers. The adoption of this standard
is not expected to have a material effect on the Company's financial reporting.
Tax Considerations--Net Operating Loss ("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. The Company has generated additional NOL's due to operating
losses incurred in the first quarter of 1998. Federal tax laws provide that net
operating loss carryforwards are restricted or eliminated upon certain changes
of control. Applicable federal tax laws provide that a 50% "change of control,"
which is calculated over a rolling three-year period, would cause the loss of
substantially all of the NOL. Although the calculation of the "change of
control" is factually difficult to determine, the Company believes that it has
had a maximum cumulative change of control of 33% during the relevant three-year
period.
The Company had a federal NOL of approximately $39.0 million remaining at
March 31, 1998.
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 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.
32
<PAGE>
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 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.
33
<PAGE>
PART II. OTHER INFORMATION
34
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 27, 1998, Capital City Acceptance, Inc. ("Capital City") filed an
arbitration demand against Emergent with the American Arbitration
Association in Charlotte, N.C. This demand arises from Capital City's
attempted purchase of Emergent's Auto Loan subsidiaries in January, 1998,
and subsequent failed purchase of the remaining assets of Emergent's Auto
Loan Division (valued by Emergent at less than $500,000) after sale of
substantially all of the assets of the Auto Loan Division to an unrelated
third party. Capital City asserts claims for breach of contract,
appropriation, slander, libel, and fraud in the inducement and requests
actual damages in the amount of $5.2 million, injunctive relief, and
punitive damages in an unspecified amount. Emergent has counterclaimed
against Capital City and brought a third-party claim against its principal,
Robert A. Zander, for conversion, fraud, breach of contract accompanied by
a fraudulent act, misappropriation of trade name, breach of contract,
breach of warranty, and defamation and is vigorously contesting Capital
City's claims.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
The Company is currently in violation of its minimum tangible net worth
and maximum leverage ratio covenants under its Mortgage Credit Facility.
The banks have granted the Company a temporary forebearance related to the
above mentioned violations. The Company will meet with the banks during May
1998 and attempt to obtain waivers or modifications. However, no assurance
can be given that the Company will be succesful at obtaining such waivers
or modifications.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1-- Amended and Restated Articles of Incorporation dated May 27,
1997.
3.2-- Amended and Restated By-Laws dated March 12, 1997.
10.1-- Amendment No. 1 to the Mortgage Loan Warehousing Agreement
dated March 20, 1997, between First Union National Bank of
North Carolina and Emergent Mortgage Corp.
10.2-- Amendment No. 1 to the Interim Warehouse Agreement dated July
25, 1997, between Prudential Securities Credit Corporation and
Emergent Mortgage Corp.
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMERGENT GROUP, INC.
Date: May 15, 1998
By: /s/ Kevin J. Mast
------------------------------------
Kevin J. Mast,
Vice President, Chief Financial
Officer, and Treasurer
35
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
RESTATED ARTICLES OF INCORPORATION
Pursuant to Section 33-10-107 of the 1976 South Carolina Code, as amended,
the corporation hereby submits the following information:
1. The name of the Corporation is Emergent Group, Inc.
2. If the name of the Corporation has ever been changed, all of its former
names:
(a) Golden Tye Corporation
(b) National Railway Utilization Corporation
(c) NRUC Corporation
3. The original articles of incorporation were filed on June 19, 1968.
4. The registered office of the Corporation is 15 South Main Street, Suite
700, in the city of Greenville, South Carolina 29606, and the registered
agent at such address is Robert S. Davis.
5. The Corporation is authorized to issue shares of stock as follows:
a. [x] If the corporation is authorized to issue a single class of
shares, the total number of shares authorized is 100,000,000
shares of Common Stock, par value $0.05.
b. [ ] The Corporation is authorized to issue more than one class of
shares:
Class of Shares Authorized No. of Each Class
The relative rights, preferences, and limitations of the shares of each
class, and of each series within a class, are as follows:
(1) Each share of Common Stock shall be entitled to one vote per share on
all matters to be submitted to shareholders of the Corporation.
6. The optional provisions which the corporation elects to include in the
articles of incorporation are as follows (See ss. 35-2-221 of the South
Carolina Code):
<PAGE>
(a) The Corporation elects not to have preemptive rights.
(b) A director of the corporation shall not be personally liable to the
corporation or any of its shareholders for monetary damages for breach
of fiduciary duty as a director, provided that this provision shall
not be deemed to eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or
its shareholders; (ii) for acts or omissions not in good faith or
which involve gross negligence, intentional misconduct, or a knowing
violation of law; (iii) imposed under Section 33-8-330 of the Act
(improper distribution to shareholder); or (iv) for any transaction
from which the director derived an improper personal benefit.
7. Unless a delayed effective date is specified, this application will be
effective upon acceptance for filing by the Secretary of State (See ss.
33-1-230(b)). ________________
Date: May 27, 1997 EMERGENT GROUP, INC.
By: /s/ Robert S. Davis
-----------------------------------
Robert S. Davis
Vice President -- Administration
BYLAWS OF
EMERGENT GROUP, INC.
Amended and Restated as of March 12, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I.
OFFICES.................................................................................4
Section 1.1 Business Office.......................................................4
Section 1.2 Registered Office.....................................................4
ARTICLE II.
SHAREHOLDERS............................................................................4
Section 2.1 Annual Meeting........................................................4
Section 2.2 Special Meetings......................................................4
Section 2.3 Place of Meeting; Conduct of Meeting..................................6
Section 2.4 Notice of Meeting.....................................................6
Section 2.5 Fixing of Record Date.................................................8
Section 2.6 Shareholder List......................................................9
Section 2.7 Quorum and Voting Requirements........................................9
Section 2.8 Increasing Either Quorum or Voting Requirements......................10
Section 2.9 Proxies..............................................................10
Section 2.10 Voting of Shares; Polls..............................................10
Section 2.11 Corporation's Acceptance of Votes....................................11
Section 2.12 Informal Action by Shareholders......................................12
Section 2.13 Notice of Shareholder Nominations....................................12
Section 2.14 Procedures for Submission of Shareholder Proposals...................14
Section 2.15 Shareholders' Rights to Inspect Corporate Records....................15
Section 2.16 Financial Statements Shall be Furnished to the Shareholders..........16
Section 2.17 Dissenters' Rights...................................................17
ARTICLE III.
BOARD OF DIRECTORS.....................................................................17
Section 3.1 General Powers.......................................................17
Section 3.2 Number, Tenure and Qualifications of Directors.......................17
Section 3.3 Regular Meetings.....................................................18
Section 3.4 Special Meetings.....................................................18
Section 3.5 Notice of Special Meeting............................................18
Section 3.6 Director Quorum......................................................18
Section 3.7 Manner of Acting.....................................................19
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 3.8 Establishing a "Supermajority" Quorum or Voting Requirement..........19
Section 3.9 Action Without a Meeting.............................................20
Section 3.10 Removal of a Director................................................20
Section 3.11 Vacancies............................................................20
Section 3.12 Compensation.........................................................21
Section 3.13 Committees...........................................................21
ARTICLE IV.
OFFICERS...............................................................................22
Section 4.1 Number...............................................................22
Section 4.2 Appointment and Term of Office.......................................22
Section 4.3 Removal..............................................................23
Section 4.4 The Chief Executive Officer..........................................23
Section 4.5 The President........................................................23
Section 4.6 The Vice-Presidents..................................................23
Section 4.7 The Secretary........................................................24
Section 4.8 The Treasurer........................................................24
Section 4.9 Assistant Secretaries and Assistant Treasurers.......................24
Section 4.10 Salaries.............................................................25
ARTICLE V.
INDEMNIFICATION OF DIRECTORS,OFFICERS, AGENTS, AND EMPLOYEES...........................25
Section 5.1 Indemnification of Directors and Officers............................25
Section 5.2 Advance Expenses for Directors and Officers..........................25
Section 5.3 Other Employees and Agents...........................................25
Section 5.4 Nature of Right to Indemnification...................................25
Section 5.5 Request for Indemnification; Determination of Entitlement Thereto....26
Section 5.6 Right of Action; No Presumption......................................26
Section 5.7 Binding Effect on the Corporation....................................26
Section 5.8 No Challenge to Validity.............................................26
Section 5.9 Nonexclusivity.......................................................26
Section 5.10 Severability.........................................................27
Section 5.11 Notices..............................................................27
ARTICLE VI.
CERTIFICATES FOR SHARES AND THEIR TRANSFER.............................................27
Section 6.1 Certificates for Shares..............................................27
Section 6.2 Registration of the Transfer of Shares...............................28
Section 6.3 Restrictions on Transfer of Shares Permitted.........................28
Section 6.4 Acquisition of Shares................................................29
ARTICLE VII.
DISTRIBUTIONS..........................................................................30
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Section 7.1 Distributions........................................................30
ARTICLE VIII.
CORPORATE SEAL.........................................................................30
Section 8.1 Corporate Seal.......................................................30
ARTICLE IX.
AMENDMENTS.............................................................................30
Section 9.1 Amendments...........................................................30
</TABLE>
3
<PAGE>
ARTICLE I.
OFFICES
Section 1.1 Business Office
The original principal office of the corporation shall be within the State
of South Carolina and shall be located in Greenville County. The board of
directors may change the location of the principal office. The corporation shall
maintain at its principal office a copy of certain records, as specified in ss.
2.15 of Article II. The corporation may have such other offices, either within
or without the State of South Carolina, as the board of directors may designate
or as the business of the corporation may require.
Section 1.2 Registered Office
The registered office of the corporation, required by ss. 33-5-101, of the
South Carolina Business Corporation Act of 1988 (hereinafter "the Act") may be,
but need not be, identical with the principal office in the State of South
Carolina, and the address of the registered office may be changed from time to
time.
ARTICLE II.
SHAREHOLDERS
Section 2.1 Annual Meeting
The annual meeting of the shareholders shall be held on such date as may be
designated by the board of directors for the purpose of electing directors and
for the transaction of such other business as may come before the meeting. No
other matters may be brought before the meeting by any shareholder unless
written notice of such matters, together with an adequate description thereof,
shall have been provided to the corporation in compliance with ss. 2.13 or ss.
2.14.
Section 2.2 Special Meetings
(a) Special meetings of the shareholders, for any purpose or purposes,
described in the meeting notice (which may be limited to one or more specific
purpose), may be called by the chief executive officer, or by the board of
directors, and shall be called by the chief executive officer at the request of
the holders of not less than one-tenth of all outstanding votes of the
corporation entitled to be cast on any issue at the meeting. Only such business
shall be conducted at a special shareholder meeting as shall have been brought
before such meeting pursuant to the corporation's notice of meeting given in
accordance with ss. 2.4.
(b) In order that any demand or request of a shareholder or shareholders
for a special meeting of shareholders contemplated by ss. 2.2(a) be validly and
effectively made, such
4
<PAGE>
shareholder or shareholders and such demand or request must comply with the
following procedures:
(1) Any shareholder seeking to request or demand, or to have the
shareholders request or demand, a special meeting shall first, by written notice
to the Secretary of the corporation, request the board of directors to fix a
record date, pursuant to ss. 2.5 hereof, for the purpose of determining the
shareholders entitled to request the special meeting. The board of directors
shall promptly, but in all events within 10 days after the date upon which such
a request is received, fix such a record date. Every request to fix a record
date for determining the shareholders entitled to request a special meeting
shall be in writing and shall set forth the purpose or purposes for which the
special meeting is requested, the name and address, as they appear in the
corporation's books, of each shareholder making the request and the class and
number of shares of the corporation which are owned of record by each such
shareholder, and shall bear the signature and date of signature of each such
shareholder.
In the event of the delivery to the corporation of any request(s) or
demand(s) by shareholders with respect to a special meeting, and/or any related
revocation or revocations, the corporation shall engage independent inspectors
of elections for the purpose of performing a prompt ministerial review of the
validity of the request(s), demand(s) and/or revocation(s).
(2) No request or demand with respect to calling a special meeting of
shareholders shall constitute a valid and effective shareholder request or
demand for a special meeting (i) unless (A) within 60 days of the record date
established in accordance with ss. 2.2(b)(1), written requests or demands signed
by shareholders of record representing a sufficient number of shares as of such
record date to request or demand a special meeting pursuant to ss. 2.2(a) are
delivered to the Secretary of the corporation and (B) each request or demand is
made in accordance with and contains the information required by ss. 2.14(b)(2)
as if such request or demand were a proposal to conduct business at an annual
meeting of the corporation as provided for therein and (ii) until such date as
the independent inspectors engaged in accordance with this ss. 2.2(b)(2) certify
to the corporation that the requests or demands delivered to the corporation in
accordance with clause (i) of this ss. 2.2 (b)(2) represent at least the minimum
number of shares that would be necessary to request such a meeting pursuant to
ss. 2.2(a).
(c) If the corporation determines that a shareholder or shareholders have
satisfied the notice, information and other requirements specified in ss.
2.2(b)(2)(i), then the board of directors shall adopt a resolution calling a
special meeting of the shareholders and fixing the record date therefor for the
purpose of determining the shareholders entitled to notice of and to vote at
such special meeting. Notice of such special meeting shall be provided in
accordance with ss. 2.4(a), provided that such notice shall be given within 30
days (or such longer period as from time to time may be permitted by law) after
the date valid and effective request(s) or demand(s) for such special meeting is
(or are) delivered to the corporation in accordance with ss. 2.2(b)(2)(i).
(d) In fixing a meeting date for the special meeting of shareholders, the
board
5
<PAGE>
of directors may consider such factors as it deems relevant within the good
faith exercise of its business judgment, including, without limitation, the
nature of the action proposed to be taken, the facts and circumstances
surrounding the request, and any plan of the board of directors to call a
special or annual meeting of shareholders for the conduct of related business,
provided that such date shall be determined in accordance with ss. 2.4(a)
hereof.
(e) Nothing contained in this ss. 2.2(b) shall in any way be construed to
suggest or imply that the board of directors or any shareholder shall not be
entitled to contest the validity of any request or demand or revocation thereof,
or to take any other action (including, without limitation, the commencement,
prosecution or defense of any litigation with respect thereto).
Section 2.3 Place of Meeting; Conduct of Meeting
The board of directors may designate any place as the place of meeting for
any annual or special meeting of the shareholders, which may be either within or
without the State of South Carolina. If no designation is made, the place of
meeting shall be the principal office of the corporation. Every meeting of
shareholders shall be chaired by the Chairman of the board of directors, or, in
the absence thereof, such person as the Chairman of the board of directors shall
appoint, or, in the absence thereof or in the event that the Chairman of the
board of directors shall fail to make such appointment, such person as shall be
appointed by vote of the Nominating Committee of the board of directors, or, in
the absence thereof or in the event that such Committee fails to make such
appointment, any officer of the corporation elected by the board of directors.
Section 2.4 Notice of Meeting
(a) Required Notice.
Written notice stating the place, day and hour of any annual or special
shareholder meeting shall be delivered not less than ten nor more than sixty
days before the date of the meeting, either personally or by mail, by or at the
direction of the chief executive officer or the board of directors. Only the
chief executive officer or the board of directors shall have the authority to
set the place, day and hour of any special meeting. Such notice shall be given
to each shareholder of record entitled to vote at such meeting and to any other
shareholder entitled by the Act or the articles of incorporation to receive
notice of the meeting.
Notice shall be deemed to be effective at the earlier of: (1) when
deposited in the United States mail, addressed to the shareholder at his address
as it appears on the stock transfer books of the corporation, with postage
thereon prepaid, (2) on the date shown on the return receipt if sent by
registered or certified mail, return receipt requested, and the receipt is
signed by or on behalf of the addressee, (3) when received, or (4) 5 days after
deposit in the United States mail, if mailed postpaid and correctly addressed,
to an address other than that shown in the corporation's current record of
shareholders.
6
<PAGE>
Any previously scheduled meeting of the shareholders may be postponed, and
any special meeting of the shareholders may be canceled, by resolution of the
board of directors upon public notice given prior to the date previously
scheduled for such meeting of shareholders.
(b) Adjourned Meeting.
If any shareholder meeting is adjourned to a different date, time, or
place, notice need not be given of the new date, time or place, if the new date,
time and place is announced at the meeting before adjournment. If a new record
date for the adjourned meeting is, or must be, fixed (see ss. 2.5 of this
Article II) then notice must be given pursuant to the requirements of paragraph
(a) of this ss. 2.4, to those persons who are shareholders as of the new record
date.
(c) Waiver of Notice.
The shareholders may waive notice of the meeting (or any notice required by
the Act, articles of incorporation, or bylaws), by a writing signed by the
shareholders entitled to the notice, which is delivered to the corporation
(either before or after the date and time stated in the notice) for inclusion in
the minutes or filing with the corporate records.
A shareholder's attendance at a meeting:
(1) waives objection to lack of notice or defective notice of the meeting,
unless the shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting;
(2) waives objection to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the
matter when it is presented.
(d) Contents of Notice.
The notice of each special shareholder meeting shall include a description
of the purpose or purposes for which the meeting is called. Except as provided
in this ss. 2.4(d), or as provided in the corporation's articles, or otherwise
in the Act, the notice of an annual shareholder meeting need not include a
description of the purpose or purposes for which the meeting is called.
If a purpose of any shareholder meeting is to consider either: (1) a
proposed amendment to the articles of incorporation (including any restated
articles requiring shareholder approval); (2) a plan of merger or share
exchange; (3) the sale, lease, exchange or other disposition of all or
substantially all of the corporation's property; (4) the adoption, amendment or
repeal of a bylaw; (5) dissolution of the corporation; or, (6) removal of a
director, the notice must so state and be accompanied by respectively a copy or
summary of the: (1) articles of
7
<PAGE>
amendment; (2) plan of merger or share exchange; (3) transaction for disposition
of all the corporation's property; or (4) bylaw proposal. If the proposed
corporation action creates dissenters' rights, the notice must state that
shareholders are, or may be, entitled to assert dissenters' rights, and must be
accompanied by a copy of Chapter 13 of the Act. If the corporation issues, or
authorizes the issuance of, shares for promissory notes or for promises to
render services in the future, the corporation shall report in writing to all
the shareholders the number of shares authorized or issued, and the
consideration received with or before the notice of the next shareholder
meeting. Likewise, if the corporation indemnifies or advances expenses to a
director (pursuant to ss. 33-16-210 of the Act) this shall be reported to all
the shareholders with or before notice of the next shareholder's meeting.
Section 2.5 Fixing of Record Date
For the purpose of determining shareholders of any voting group entitled to
notice of or to vote at any meeting of shareholders, or shareholders entitled to
receive payment of any distribution or dividend, or in order to make a
determination of shareholders for any other proper purpose, the board of
directors may fix in advance a date as the record date. Such record date shall
not be more than seventy days prior to the date on which the particular action,
requiring such determination of shareholders, is to be taken. If no record date
is so fixed by the board for the determination of shareholders entitled to
notice of, or to vote at a meeting of shareholders, or shareholders entitled to
receive a share dividend or distribution, the record date for determination of
such shareholders shall be at the close of business on:
(a) With respect to an annual shareholders' meeting or any special
shareholders' meeting called by the board or any person specifically
authorized by the board or these bylaws to call a meeting, the day before
the first notice is delivered to shareholders;
(b) With respect to a special shareholders' meeting demanded by the
shareholders, the date the first shareholder signs the demand;
(c) With respect to the payment of a share dividend, the date the
board authorizes the share dividend;
(d) With respect to actions taken in writing without a meeting, the
date the first shareholder signs a consent; and
(e) With respect to a distribution to shareholders (other than one
involving purchase or reacquisition of shares), the date the board
authorizes the distribution. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof unless
the board of directors fixes a new record date which it must do if the
meeting is adjourned to a date more than 120 days after the date fixed for
the original meeting.
8
<PAGE>
Section 2.6 Shareholder List
The officer or agent having charge of the stock transfer books for shares
of the corporation shall make a complete record of the shareholders entitled to
vote at each meeting of shareholders thereof, arranged in alphabetical order,
with the address of and the number of shares held by each. The list must be
arranged by voting group, if such exists, and within each voting group by class
or series of shares. The list must be available for inspection by any
shareholder, beginning on the date on which notice of the meeting is given for
which the list was prepared and continuing through the meeting. The list shall
be available at the corporation's principal office or at a place identified in
the meeting notice in the city where the meeting is to be held. A shareholder,
his agent or attorney is entitled on written demand to inspect, and subject to
the requirements of ss. 2.15 of this Article II, to copy the list at his expense
during regular business hours, and during the period it is available for
inspection. The corporation shall maintain the shareholder list in written form
or in another form capable of conversion into written form within a reasonable
time.
Section 2.7 Quorum and Voting Requirements
(a) General. Unless the articles of incorporation, a bylaw adopted pursuant
to ss. 2.8 of this Article II, or the Act provide otherwise, the presence at any
meeting, in person or by proxy, of the holders of record of a majority of the
shares then issued and outstanding and entitled to vote shall be necessary and
sufficient to constitute a quorum for the transaction of business.
(b) Voting Groups. If the articles of incorporation or the Act provides for
voting by a single voting group on a matter, action on that matter is taken when
voted upon by that voting group. Shares entitled to vote as a separate voting
group may take action on a matter at a meeting only if a quorum of those shares
exists with respect to that matter. Unless the articles of incorporation, a
bylaw adopted pursuant to ss. 2.8 of this Article II, or the Act provide
otherwise, the presence at any meeting, in person or by proxy, of the holders of
record of a majority of the shares of such separate voting group then issued and
outstanding and entitled to vote shall be necessary and sufficient to constitute
a quorum for the transaction of business.
If the articles of incorporation or the Act provide for voting by two or
more voting groups on a matter, action on that matter is taken only when voted
upon by each of those voting groups counted separately. Action may be taken by
one voting group on a matter even though no action is taken by another voting
group entitled to vote on the matter.
(c) Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of the meeting unless a new record date is or must be set under the
Act for the adjourned meeting. If a quorum exists, action on a matter (other
than the election of directors) is approved if the votes cast within the voting
group favoring the action exceed the votes cast opposing the action, unless the
articles of incorporation, a bylaw adopted pursuant to ss. 2.8 of this Article
II, or the Act
9
<PAGE>
require a greater number of affirmative votes.
(d) Adjournment. The Chairman of the meeting or a majority of the shares
represented at the meeting in person or by proxy and entitled to vote thereat
may adjourn the meeting from time to time, whether or not there is a quorum,
unless otherwise proscribed by law. The shareholders present at a duly called
meeting at which a quorum is present, and at any adjournment thereof, may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum.
Section 2.8 Increasing Either Quorum or Voting Requirements
For purposes of this ss. 2.8 a "supermajority" quorum is a requirement that
more than a majority of the votes of the voting group be present to constitute a
quorum; and a "supermajority" voting requirement is any requirement that
requires the vote of more than a majority of the affirmative votes of a voting
group at a meeting.
The shareholders, but only if specifically authorized to do so by the
articles of incorporation, may adopt, amend or delete a bylaw which fixes a
"supermajority" quorum or "supermajority" voting requirement.
The adoption or amendment of a bylaw that adds, changes, or deletes a
"supermajority" quorum or voting requirement for shareholders must meet the same
quorum requirement and be adopted by the same vote and voting groups required to
take action under the quorum and voting requirement then in effect or proposed
to be adopted, whichever is greater.
A bylaw that fixes a "supermajority" quorum or voting requirement for
shareholders may not be adopted, amended, or repealed by the board of directors.
Section 2.9 Proxies
At all meetings of shareholders, a shareholder may vote in person, or vote
by proxy which is executed in writing by the shareholder or which is executed by
his duly authorized attorney-in-fact. Such proxy shall be dated and filed with
the secretary of the corporation or other person authorized to tabulate votes
before or at the time of the meeting. Unless a time of expiration is otherwise
specified, a proxy is valid for eleven months. A proxy is revocable unless
executed in compliance with ss. 33-7-220(d) of the Act, or any succeeding
statute of like tenor and effect.
Section 2.10 Voting of Shares; Polls
Unless otherwise provided in the articles of incorporation, each
outstanding share entitled to vote shall be entitled to one vote upon each
matter submitted to a vote at a meeting of shareholders.
10
<PAGE>
Absent special circumstances, outstanding shares of the corporation are not
entitled to vote if they are owned directly or indirectly by another corporation
in which this corporation owns a majority of the shares entitled to vote for the
election of directors of the other corporation; provided, however, this
provision shall not limit the power of this corporation to vote its own shares
held by it in a fiduciary capacity.
Redeemable shares are not entitled to vote after notice of redemption is
mailed to the holders and a sum sufficient to redeem the shares has been
deposited with a bank, trust company, or other financial institution under an
irrevocable obligation to pay the holders the redemption price on surrender of
the shares.
At any meeting of shareholders, the Chairman of the meeting shall fix and
announce at the meeting the date and time of the opening and closing of the
polls for each matter upon which the shareholders will vote at the meeting.
Section 2.11 Corporation's Acceptance of Votes
(a) If the name signed on a vote, consent, waiver, or proxy appointment
corresponds to the name of a shareholder, the corporation if acting in good
faith is entitled to accept the vote, consent, waiver, or proxy appointment and
give it effect as the act of the shareholders.
(b) If the name signed on a vote, consent, waiver, or proxy appointment
does not correspond to the name of its shareholder, the corporation if acting in
good faith is nevertheless entitled to accept the vote, consent, waiver, or
proxy appointment and give it effect as the act of the shareholder if:
(1) the shareholder is an entity as defined in the Act and the name signed
purports to be that of an officer or agent of the entity;
(2) the name signed purports to be that of an administrator, executor,
guardian, or conservator representing the shareholder and, if the
corporation requests, evidence of fiduciary status acceptable to the
corporation has been presented with respect to the vote, consent,
waiver, or proxy appointment;
(3) the name signed purports to be that of a receiver or trustee in
bankruptcy of the shareholder and, if the corporation requests,
evidence of this status acceptable to the corporation has been
presented with respect to the vote, consent, waiver, or proxy
appointment;
(4) the name signed purports to be that of a pledgee, beneficial owner, or
attorney-in-fact of the shareholder and, if the corporation requests,
evidence acceptable to the corporation of the signatory's authority to
sign
11
<PAGE>
for the shareholder has been presented with respect to the vote,
consent, waiver, or proxy appointment;
(5) two or more persons are the shareholder as co-tenants or fiduciaries
and the name signed purports to be the name of at least one of the
co-owners and the person signing appears to be acting on behalf of all
the co-owners.
(c) The corporation is entitled to reject a vote, consent, waiver, or proxy
appointment if the secretary or other officer or agent authorized to tabulate
votes, acting in good faith, has reasonable basis for doubt about the validity
of the signature on it or about the signatory's authority to sign for the
shareholder.
(d) The corporation and its officer or agent who accepts or rejects a vote,
consent, waiver, or proxy appointment in good faith and in accordance with the
standards of this section are not liable in damages to the shareholder for the
consequences of the acceptance or rejection.
(e) Corporate action based on the acceptance or rejection of a vote,
consent, waiver, or proxy appointment under this section is valid unless a court
of competent jurisdiction determines otherwise.
Section 2.12 Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting if one or more consents in writing, setting forth the action so taken,
shall be signed by all of the shareholders entitled to vote with respect to the
subject matter thereof and are delivered to the corporation for inclusion in the
minute book. If the act to be taken requires that notice be given to non-voting
shareholders, the corporation shall give the non-voting shareholders written
notice of the proposed action at least 10 days before the action is taken, which
notice shall contain or be accompanied by the same material that would have been
required if a formal meeting had been called to consider the action. A consent
signed under this section has the effect of a meeting vote and may be described
as such in any document. Every written consent shall bear the date of signature
of each shareholder who signs the consent and no written consent shall be
effective to take the corporate action referred to therein unless, within sixty
(60) days of the earliest dated written consent received by the corporation, a
written consent or consents signed by all the shareholders entitled to vote on
such corporate action are delivered to the corporation.
Section 2.13 Notice of Shareholder. (a) Only persons who are nominated in
accordance with the procedures set forth in this ss. 2.13 shall be eligible for
election as directors of the corporation. Nomination of persons for election to
the board of directors of the corporation may be made at a meeting of
shareholders (i) by or at the direction of the board of directors or (ii) by any
shareholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the procedures set forth in this ss. 2.13.
(b) All nominations by shareholders shall be made pursuant to timely notice
12
<PAGE>
in proper written form to the Secretary of the corporation.
(1) To be timely, a shareholder's notice shall be delivered to or mailed
and received at the principal executive offices of the corporation not later
than the close of business on the 30th day nor earlier than the close of
business on the 60th day prior to the annual meeting of shareholders at which
directors are to be elected, unless such requirement is expressly waived in
advance of the meeting by formal action of the board of directors. In no event
shall the public announcement of an adjournment of an annual meeting commence a
new time period for the giving of a shareholder's notice as described above. For
purposes of this ss. 2.13, "public announcement" shall mean disclosure in a
press release reported by the Dow Jones News Service, Associated Press or
comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to ss. 13, 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(2) To be in proper written form, such shareholder's notice shall set forth
in writing (a) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, all information relating to such Person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act, including, without limitation, such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; and (b) as to the shareholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination is made (i) the name
and address, as they appear on the corporation's books, of such shareholder and
such beneficial owner and (ii) the class and number of shares of the corporation
which are owned beneficially and of record by such shareholder and such
beneficial owner.
(c) At the request of the board of directors, any person nominated by the
board of directors for election as a director shall furnish to the Secretary of
the corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
(d) In the event that a shareholder seeks to nominate one or more
directors, the Secretary shall appoint two inspectors, who shall not be
affiliated with the corporation, to determine whether a shareholder has complied
with this ss. 2.13. If the inspectors shall determine that a shareholder has not
complied with this ss. 2.13, the inspectors shall direct the Chairman of the
meeting to declare to the meeting that the nomination was not made in accordance
with the procedures prescribed by the By-Laws of the corporation, and the
Chairman shall so declare to the meeting and the defective nomination shall be
disregarded.
(e) Notwithstanding the foregoing provisions of this ss. 2.13, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this 2.13.
(f) Nothing in this ss. 2.13 shall be deemed to affect any rights of
holders of
13
<PAGE>
any series of Preferred Stock to elect directors under specified
circumstances.
Section 2.14 Procedures for Submission of Shareholder Proposals
(a) At any annual meeting of the shareholders of the corporation, only such
business shall be conducted as shall have been brought before the meeting (i) by
or at the direction of the board of directors or (ii) by any shareholder of the
corporation entitled to vote for the election of directors at such meeting who
complies with the procedures set forth in this ss. 2.14.
(b) For business properly to be brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in proper
written form to the Secretary of the corporation and such other business must
otherwise be a proper matter for shareholder action.
(1) To be timely, a shareholder's notice must be delivered to or mailed and
received at the principal executive offices of the corporation not later than
the close of business on the 60th day nor earlier than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days before or more than 60 days after such anniversary
date, notice by the shareholder to be timely must be so delivered not earlier
than the close of business on the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the corporation. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of a shareholder's notice as described above. For purposes
of this ss. 2.14, "Public announcement" shall have the same meaning as set forth
in ss. 2.13.
(2) To be in proper written form, a shareholder's notice to the Secretary
shall set forth in writing as to each matter the shareholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they appear on the
corporation's books, of the shareholder proposing such business and the
beneficial owner, if any, on whose behalf the proposal is made, (iii) the class
and number of shares of the corporation which are owned beneficially and of
record by the shareholder and such beneficial owner and (iv) any material
interest of the shareholder and such beneficial owner in such business.
(c) Notwithstanding anything in these By-Laws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this ss. 2.14. The Chairman of an annual meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
ss. 2.14, and, if he should so determine, he shall so declare to the
14
<PAGE>
meeting and any such business not properly brought before the meeting shall not
be transacted.
(d) Notwithstanding the foregoing provisions of this ss. 2.14, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this ss. 2.14. Nothing in this ss. 2.14 shall be deemed to affect any
rights of shareholders to request inclusion of proposals in the corporation's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2.15 Shareholders' Rights to Inspect Corporate Records
(a) Minutes and Accounting Records.
The corporation shall keep as permanent records minutes of all meetings of
its shareholders and board of directors, a record of all actions taken by the
shareholders or board of directors without a meeting, and a record of all
actions taken by a committee of the board of directors in place of the board of
directors on behalf of the corporation. The corporation shall maintain
appropriate accounting records.
(b) Absolute Inspection Rights of Records Required at Principal Office.
If he gives the corporation written notice of his demand at least five
business days before the date on which he wishes to inspect and copy, a
shareholder (or his agent or attorney) has the right to inspect and copy, during
regular business hours, any of the following records, all of which the
corporation is required to keep at its principal office:
(1) its articles or restated articles of incorporation and all amendments
to them currently in effect;
(2) its bylaws or restated bylaws and all amendments to them currently in
effect;
(3) resolutions adopted by its board of directors creating one or more
classes or series of shares, and fixing their relative rights,
preferences, and limitations, if shares issued pursuant to those
resolutions are outstanding;
(4) the minutes of all shareholders' meetings, and records of all action
taken by shareholders without a meeting, for the past 10 years;
(5) all written communications to shareholders generally within the past
three years, including the financial statements furnished for the past
three years to the shareholders;
(6) a list of the names and business addresses of its current directors
and officers;
15
<PAGE>
(7) its most recent annual report delivered to the South Carolina Tax
Commission; and
(8) if the shareholder owns at least one percent of any class of shares,
he may inspect and copy federal and state income tax returns for the
last 10 years.
(c) Conditional Inspection Right.
In addition, if he gives the corporation a written demand made in good
faith and for a proper purpose at least five business days before the date on
which he wishes to inspect and copy, he describes with reasonable particularity
his purpose and the records he desires to inspect, and the records are directly
connected with his purpose, a shareholder of a corporation (or his agent or
attorney) is entitled to inspect and copy, during regular business hours at a
reasonable location specified by the corporation, any of the following records
of the corporation:
(1) excerpts from minutes of any meeting of the board of directors,
records of any action of a committee of the board of directors on
behalf of the corporation, minutes of any meeting of the shareholders,
and records of action taken by the shareholders or board of directors
without a meeting, to the extent not subject to inspection under
paragraph (a) of this ss. 2.14;
(2) accounting records of the corporation; and
(3) the record of shareholders (compiled no earlier than the date of the
shareholder's demand).
(d) Copy Costs.
The right to copy records includes, if reasonable, the right to receive
copies made by photographic, xerographic, or other means. The corporation may
impose a reasonable charge, covering the costs of labor and material, for copies
of any documents provided to the shareholder. The charge may not exceed the
estimated cost of production or reproduction of the records.
Section 2.16 Financial Statements Shall be Furnished to the Shareholders
(a) The corporation shall furnish its shareholders annual financial
statements, which may be consolidated or combined statements of the corporation
and one or more of its subsidiaries, as appropriate, that include a balance
sheet as of the end of the fiscal year, an income statement for that year, and a
statement of changes in shareholders' equity for the year unless that
information appears elsewhere in the financial statements. If financial
statements are prepared for the corporation on the basis of generally accepted
accounting principles, the annual financial statements for the shareholders also
must be prepared on that basis.
16
<PAGE>
(b) If the annual financial statements are reported upon by a public
accountant, his report must accompany them. If not, the statements must be
accompanied by a statement of the chief executive officer or the person
responsible for the corporation's accounting records:
(1) stating his reasonable belief whether the statements were prepared on
the basis of generally accepted accounting principles and, if not,
describing the basis of preparation; and
(2) describing any respects in which the statements were not prepared on a
basis of accounting consistent with the statements prepared for the
preceding year.
(c) A corporation shall mail the annual financial statements to each
shareholder within 120 days after the close of each fiscal year. Thereafter, on
written request from a shareholder who was not mailed the statements, the
corporation shall mail him the latest financial statements.
Section 2.17 Dissenters' Rights
Each shareholder shall have the right to dissent from, and obtain payment
for, his shares when so authorized by the Act, articles of incorporation, these
bylaws, or in a resolution of the board of directors.
ARTICLE III.
BOARD OF DIRECTORS
Section 3.1 General Powers
Unless the articles of incorporation have dispensed with or limited the
authority of the board of directors by describing who will perform some or all
of the duties of a board of directors, all corporate powers shall be exercised
by or under the authority of, and the business and affairs of the corporation
shall be managed under the direction of, the board of directors.
Section 3.2 Number, Tenure and Qualifications of Directors
The number of directors of the corporation shall be the number designated
by the directors at their initial or organizational meeting. Thereafter, the
number of directors may be increased or decreased by action of the board or
shareholders at any board meeting or annual meeting of shareholders. Each
director shall hold office until the next annual meeting of shareholders or
until removed. However, if his term expires, he shall continue to serve until
his successor shall have been elected and qualified or until there is a decrease
in the number of directors. Directors need not be residents of the State of
South Carolina or shareholders of the corporation unless so required by the
articles of incorporation. The board of directors may, from time to time, elect
one or more persons as Director Emeritus in recognition of that person's
17
<PAGE>
previous service to the corporation. An Emeritus Director shall serve at the
pleasure of the board and shall be entitled to attend meetings of the directors
and participate in the discussions and deliberations of the board of the
directors, but shall not be considered in determining a quorum or vote on any
matter before the board of the directors.
Section 3.3 Regular Meetings
Unless expressly determined otherwise by resolution, a regular meeting of
the board of directors shall be held without other notice than this bylaw
immediately after, and at the same place as, the annual meeting of shareholders.
The board of directors may provide, by resolution, the time and place for the
holding of additional regular meetings without other notice than such
resolution.
Section 3.4 Special Meetings
Unless otherwise provided in the articles, special meetings of the board of
directors may be called by or at the request of the chairman of the board, the
chief executive officer or a majority of the board of directors. The person
authorized to call special meetings of the board of directors may fix any place
as the place for holding any special meeting of the board of directors.
Section 3.5 Notice of Special Meeting
Notice of any special meeting of directors shall be given to each director
at his business or residence in writing by hand delivery, first-class or
overnight mail or courier service, telegram or facsimile or similar
transmission, or orally by telephone. If mailed by first-class mail, such notice
shall be deemed adequately delivered when deposited in the United States mails
so addressed, with postage thereon prepaid, at least 72 hours before such
meeting. If by telegram, overnight mail or courier service, such notice shall be
deemed adequately delivered when the telegram is delivered to the telegraph
company or the notice is delivered to the overnight mail or courier service
company at least twenty-four (24) hours before such meeting. If by facsimile or
similar transmission, such notice shall be deemed adequately delivered when the
notice is transmitted at least twenty-four (24) hours before such meeting. If by
telephone or by hand delivery, the notice shall be given at least twenty-four
(24) hours prior to the time set for the meeting. Any director may waive notice
of any meeting. Except as provided in the next sentence, the waiver must be in
writing, signed by the director entitled to the notice, and filed with the
minutes or corporate records. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
and at the beginning of the meeting (or promptly upon his arrival) objects to
holding the meeting or transacting business at the meeting, and does not
thereafter vote for or assent to action taken at the meeting.
Section 3.6 Director Quorum
18
<PAGE>
A majority of the number of directors in office immediately before the
meeting begins shall constitute a quorum for the transaction of business at any
meeting of the board of directors. Any amendment to this quorum requirement is
subject to the provisions of ss. 3.8 of this Article III.
Section 3.7 Manner of Acting
(a) Required Vote.
The act of the majority of the directors present at a meeting at which a
quorum is present when the vote is taken shall be the act of the board of
directors unless the articles of incorporation require a greater percentage. Any
amendment which changes the number of directors needed to take action, is
subject to the provisions of ss. 3.8 of this Article III.
(b) Telephone Meeting.
Any or all directors may participate in a regular or special meeting by, or
conduct the meeting through the use of, any means of communication by which all
directors participating may simultaneously hear each other during the meeting. A
director participating in a meeting by this means is deemed to be present in
person at the meeting.
(c) Failure to Object to Action.
A director who is present at a meeting of the board of directors or a
committee of the board of directors when corporate action is taken is deemed to
have assented to the action taken unless: (1) he objects at the beginning of the
meeting (or promptly upon his arrival) to holding it or transacting business at
the meeting; or (2) his dissent or abstention from the action taken is entered
in the minutes of the meeting; or (3) he delivers written notice of his dissent
or abstention to the presiding officer of the meeting before its adjournment or
to the corporation immediately after adjournment of the meeting. The right of
dissent or abstention is not available to a director who votes in favor of the
action taken.
Section 3.8 Establishing a "Supermajority" Quorum or Voting Requirement
For purposes of this ss. 3.8, a "supermajority" quorum is a requirement
that more than a majority of the directors in office constitute a quorum; and a
"supermajority" voting requirement is any requirement that requires the vote of
more than a majority of those directors present at a meeting at which a quorum
is present to be the act of the directors.
A bylaw that fixes a supermajority quorum or supermajority voting
requirement may be amended or repealed:
(1) if originally adopted by the shareholders, only by the shareholders
(unless otherwise provided by the shareholders);
19
<PAGE>
(2) if originally adopted by the board of directors, either by the
shareholders or by the board of directors.
A bylaw adopted or amended by the shareholders that forms a supermajority
quorum or supermajority voting requirement for the board of directors may
provide that it may be amended or repealed only by a specified vote of either
the shareholders or the board of directors.
Subject to the provisions of the preceding paragraph, action by the board
of directors to adopt, amend, or repeal a bylaw that changes the quorum or
voting requirement for the board of directors must meet the same quorum
requirement and be adopted by the same vote required to take action under the
quorum and voting requirement then in effect or proposed to be adopted,
whichever is greater.
Section 3.9 Action Without a Meeting
Action required or permitted by the Act to be taken at a board of
directors' meeting may be taken without a meeting if the action is assented to
by all members of the board.
The action may be evidenced by one or more written consents describing the
action taken, signed by each director, and included in the minutes or filed with
the corporate records reflecting the action taken. Action evidenced by written
consents under this section is effective when the last director signs the
consent, unless the consent specifies a different effective date. A consent
signed under this section has the effect of a meeting vote and may be described
as such in any document.
Section 3.10 Removal of a Director
The shareholders may remove one or more directors at a meeting called for
that purpose if notice has been given that a purpose of the meeting is such
removal. The removal may be with or without cause, unless provided otherwise in
the articles of incorporation, and any removal shall be subject to any voting
requirement set forth in the articles of incorporation. If a director is elected
by a voting group of shareholders, only the shareholders of that voting group
may participate in the vote to remove him. A director may be removed for cause
only if the number of votes cast to remove him exceeds the number of votes cast
not to remove him.
Section 3.11 Vacancies
Unless the articles of incorporation provide otherwise, if a vacancy occurs
on a board of directors, including a vacancy resulting from an increase in the
number of directors, the shareholders may fill the vacancy. During such time
that the shareholders fail or are unable to fill such vacancies then and until
the shareholders act:
(a) the board of directors may fill the vacancy; or
20
<PAGE>
(b) if the directors remaining in office constitute fewer than a quorum of
the board, they may fill the vacancy by the affirmative vote of a majority of
all the directors remaining in office.
If the vacant office was held by a director elected by a voting group of
shareholders, only the holders of shares of that voting group are entitled to
vote to fill the vacancy if it is filled by the shareholders.
A vacancy that will occur at a specific later date (by reason of a
resignation effective at a later date) may be filled before the vacancy occurs
but the new director may not take office until the vacancy occurs.
The term of a director elected to fill a vacancy expires at the next
shareholders' meeting at which directors are elected. However, if his term
expires, he shall continue to serve until his successor is elected and qualifies
or until there is a decrease in the number of directors.
Section 3.12 Compensation
Unless otherwise provided in the articles, by resolution of the board of
directors, each director may be paid his expenses, if any, of attendance at each
meeting of the board of directors, and may be paid a stated salary (in cash or
other consideration) as director or a fixed sum for attendance at each meeting
of the board of directors or both. No such payment shall preclude any director
from serving the corporation in any capacity and receiving compensation
therefor.
Section 3.13 Committees
(a) Creation of Committees.
Unless the articles of incorporation provide otherwise, the board of
directors may create one or more committees and appoint members of the board of
directors to serve on them or the chief executive officer, if so delegated by
the board, may appoint members to serve on committees created by the board. Each
committee must have two or more members, who serve at the pleasure of the board
of directors.
(b) Selection of Members.
The creation of a committee and appointment of members to it must be
approved by the greater of (1) a majority of all the directors in office when
the action is taken or (2) the number of directors required by the articles of
incorporation to take such action (or, if not specified in the articles, the
numbers required by ss. 3.7 of this Article III to take action).
(c) Required Procedures.
21
<PAGE>
ss.ss. 3.4, 3.5, 3.6, 3.7, 3.8 and 3.9 of this Article III, which govern
meetings, action without meetings, notice and waiver of notice, quorum and
voting requirements of the board of directors, apply to committees and their
members.
(d) Authority.
Unless limited by the articles of incorporation, each committee may
exercise those aspects of the authority of the board of directors which the
board of directors confers upon such committee in the resolution creating the
committee. Provided, however, a committee may not:
(1) authorize distributions;
(2) approve or propose to shareholders action that the Act requires be
approved by shareholders;
(3) fill vacancies on the board of directors or on any of its committees;
(4) amend the articles of incorporation pursuant to the authority of
directors;
(5) adopt, amend, or repeal bylaws;
(6) approve a plan of merger not requiring shareholder approval;
(7) authorize or approve reacquisition of shares, except according to a
formula or method prescribed by the board of directors; or
(8) authorize or approve the issuance or sale or contract for sale of
shares or determine the designation and relative rights, preferences,
and limitations of a class or series of shares, except that the board
of directors may authorize a committee (or a senior executive officer
of the corporation) to do so within limits specifically prescribed by
the board of directors.
ARTICLE IV.
OFFICERS
Section 4.1 Number
The officers of the corporation shall be a chief executive officer, a
president, a secretary, and a treasurer, each of whom shall be appointed by the
board of directors. Such other officers and assistant officers as may be deemed
necessary, including any vice-presidents, may be appointed by the board of
directors. If specifically authorized by the board of directors, an officer may
appoint one or more officers or assistant officers. The same individual may
simultaneously hold more than one office in the corporation.
22
<PAGE>
Section 4.2 Appointment and Term of Office
The officers of the corporation shall be appointed by the board of
directors for a term as determined by the board of directors. (The designation
of a specified term grants to the officer no contract rights, and the board can
remove the officer at any time prior to the termination of such term.) If no
term is specified, they shall hold office until they resign or die, or until
they are removed in the manner provided in ss. 4.3 of this Article IV.
Section 4.3 Removal
Unless appointed by the shareholders, any officer or agent may be removed
by the board of directors at any time, with or without cause. Any officer or
agent appointed by the shareholders may be removed by the shareholders with or
without cause. Such removal shall be without prejudice to the contract rights,
if any, of the person so removed. Appointment of an officer or agent shall not
of itself create contract rights.
Section 4.4 The Chief Executive Officer
The chief executive officer shall be the principal executive officer of the
corporation and, subject to the control of the board of directors, shall in
general supervise and control all of the business and affairs of the
corporation. He shall, when present, preside at all meetings of the shareholders
and of the board of directors, unless a Chairman of the board of directors shall
have been designated by the board. He may sign, with the secretary or any other
proper officer of the corporation thereunto authorized by the board of
directors, certificates for shares of the corporation and deeds, mortgages,
bonds, contracts or other instruments which the board of directors has
authorized to be executed, except in cases where the signing and execution
thereof shall be expressly delegated by the board of directors or by these
bylaws to some other officer or agent of the corporation, or shall be required
by law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the board of directors from time to time.
Section 4.5 The President
If appointed, in the absence of the chief executive officer or in the event
of his death, inability or refusal to act, the president shall perform the
duties of the chief executive officer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the chief executive
officer. He may sign, with the secretary or any other proper officer of the
corporation thereunto authorized by the board of directors, certificates for
shares of the corporation and deeds, mortgages, bonds, contracts or other
instruments which the board of directors has authorized to be executed, except
in cases where the signing and execution thereof shall be expressly delegated by
the board of directors or by these bylaws to some other officer or agent of the
corporation, or shall be required by law to be otherwise signed or executed; and
in general shall perform all duties incident to the office of president and such
other duties as may be prescribed to him by the chief executive officer or by
the board of directors.
23
<PAGE>
Section 4.6 The Vice-Presidents
If appointed, in the absence of the president or in the event of his death,
inability or refusal to act, the vice president (or, in the event there be more
than one vice-president, the vice-presidents in the order designated at the time
of their election, or in the absence of any designation, then in the order of
their appointment) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the president. (If there is no vice-president, then the treasurer shall perform
such duties of the president.) Any vice-president may sign, with the secretary
or an assistant secretary, certificates for shares of the corporation the
issuance of which have been authorized by resolution of the board of directors;
and shall perform such other duties as from time to time may be assigned to him
by the president or by the board of directors.
Section 4.7 The Secretary
The secretary shall: (a) keep the minutes of the proceedings of the
shareholders and of the board of directors in one or more books provided for
that purpose; (b) see that all notices are duly given in accordance with the
provisions of these bylaws or as required by law; (c) be custodian of the
corporate records and of any seal of the corporation and if there is a seal of
the corporation, see that it is affixed to all documents the execution of which
on behalf of the corporation under its seal is duly authorized; (d) when
requested or required, authenticate any records of the corporation; (e) keep a
register of the post office address of each shareholder which shall be furnished
to the secretary by such shareholder; (f) sign with the president, or a
vice-president, certificates for shares of the corporation, the issuance of
which shall have been authorized by resolution of the board of directors; (g)
have general charge of the stock transfer books of the corporation; and (h) in
general perform all duties incident to the office of secretary and such other
duties as from time to time may be assigned to him by the president or by the
board of directors.
Section 4.8 The Treasurer
The treasurer shall: (a) have charge and custody of and be responsible for
all funds and securities of the corporation; (b) receive and give receipts for
moneys due and payable to the corporation from any source whatsoever, and
deposit all such moneys in the name of the corporation in such banks, trust
companies or other depositories as shall be selected by the board of directors
and (c) in general perform all of the duties incident to the office of treasurer
and such duties as from time to time may be assigned to him by the president or
by the board of directors. If required by the board of directors, the treasurer
shall give a bond for the faithful discharge of his duties in such sum and with
such surety or sureties as the board of directors shall determine.
Section 4.9 Assistant Secretaries and Assistant Treasurers
The assistant secretaries, when authorized by the board of directors, may
sign
24
<PAGE>
with the president or a vice-president certificates for shares of the
corporation the issuance of which shall have been authorized by a resolution of
the board of directors. The assistant treasurers shall respectively, if required
by the board of directors, give bonds for the faithful discharge of their duties
in such sums and with such sureties as the board of directors shall determine.
The assistant secretaries and assistant treasurers, in general, shall perform
such duties as shall be assigned to them by the secretary or the treasurer,
respectively, or by the president or the board of directors.
Section 4.10 Salaries
The salaries of the officers shall be fixed from time to time by the board
of directors.
ARTICLE V.
INDEMNIFICATION OF DIRECTORS,
OFFICERS, AGENTS, AND EMPLOYEES
Section 5.1 Indemnification of Directors and Officers
The corporation shall indemnify any individual made a party to a proceeding
because he is or was a director or officer of the corporation against liability
incurred in the proceeding to the fullest extent permitted by law.
Section 5.2 Advance Expenses for Directors and Officers
The corporation shall pay for or reimburse the reasonable expenses incurred
by a director who is a party to a proceeding in advance of final disposition of
the proceeding to the fullest extent permitted by law.
Section 5.3 Other Employees and Agents. In addition to any indemnification
required by law, the corporation may, to the extent authorized from time to time
by the board of directors, grant rights to indemnification, and rights to be
paid by the corporation the expenses incurred in defending any proceeding in
advance of its final disposition, to any employee or agent of the corporation to
the fullest extent of the provisions of this By-Law with respect to the
indemnification and advancement of expenses of directors and officers of the
corporation.
Section 5.4 Nature of Right to Indemnification. The right to
indemnification conferred in this By-Law shall be a contract right and shall
include the right to be paid by the corporation the expenses incurred in
defending any such proceeding in advance of its final disposition, such advances
to be paid by the corporation within 30 days after the receipt by the
corporation of a statement or statements from the claimant requesting such
advances from time to time; provided, however, that the payment of such
expenses, incurred by a person to whom indemnification is or may be available
under this By-Law, in advance of the final disposition of
25
<PAGE>
a proceeding shall be made only pursuant to Section 33-8-530 of the Act, or such
successor provision as may be in effect from time to time.
Section 5.5 Request for Indemnification; Determination of Entitlement
Therto. To obtain indemnification under this By-Law, a claimant shall submit to
the corporation a written request, including therein or therewith such
documentation and information as is reasonably available to the claimant and is
reasonably necessary to determine whether and to what extent the claimant is
entitled to indemnification. Upon written request by a claimant for
indemnification pursuant to the first sentence of this ss. 5.5, a determination
with respect to the claimant's entitlement thereto shall be made in accordance
with ss. 33-8-550 of the Act, or such successor provision as may be in effect
from time to time. If it is so determined that the claimant is entitled to
indemnification, payment to the claimant shall be made within 10 days after such
determination.
Section 5.6 Right of Action; No Presumption. If a claim under ss. 5.1, 5.2
or 5.3 of this By-Law is not paid in full by the corporation within thirty days
after a written claim pursuant to ss. 5.5 of this By-Law has been received by
the corporation, the claimant may at any time thereafter bring suit against the
corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim to the extent permitted by law. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the requirements of ss. 33-8-530 of the Act, or any successor provision thereto
that may be in effect from time to time, have been complied with) that the
claimant has not met the standard of conduct which makes it permissible under
the Act for the corporation to indemnify the claimant for the amount claimed,
but the burden of proving such defense shall be on the corporation. Neither the
failure of the corporation (including its board of directors, special counsel or
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Act, nor an actual determination by the corporation (including its board of
directors, special counsel or shareholders) that the claimant has not met such
applicable standard of conduct, shall create a presumption that the claimant has
not met the applicable standard of conduct.
Section 5.7 Binding Effect on the Corporation. If a determination shall
have been made pursuant to ss. 5.5 of this By-Law that the claimant is entitled
to indemnification, the corporation shall be bound by such determination in any
judicial proceeding commenced pursuant to ss. 5.6 of this By-Law.
Section 5.8 No Challenge to Validity. The corporation shall be precluded
from asserting in any judicial proceeding commenced pursuant to ss. 5.6 of this
By-Law that the procedures and presumptions of this By-Law are not valid,
binding and enforceable and shall stipulate in such proceeding that the
corporation is bound by all the provisions of this By-Law.
Section 5.9 Exclusivity. The right to indemnification and the payment
26
<PAGE>
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this By-Law shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the articles of incorporation, By-Laws, agreement, vote of shareholders or
directors or otherwise. No repeal or modification of this By-Law shall in any
way diminish or adversely affect the rights of any director, officer, employee
or agent of the corporation hereunder in respect of any occurrence or matter
arising prior to any such repeal or modification.
Section 5.10 Severibility. If any provision or provisions of this By-Law
shall be held to be invalid, illegal or unenforceable for any reason whatsoever:
(1) the validity, legality and enforceability of the remaining provisions of
this By-Law (including, without limitation, each portion of any Section of this
By-Law containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or unenforceable)
shall not in any way be affected or impaired thereby; and (2) to the fullest
extent possible, the provisions of this By-Law (including, without limitation,
each such portion of any Section of this By-Law containing any such provision
held to be invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
Section 5.11 Notices. Any notice, request or other communication required
or permitted to be given to the corporation under this By-Law shall be in
writing and either delivered in person or sent by telecopy, telex, telegram,
overnight mail or courier service, or certified or registered mail, postage
prepaid, return receipt requested, to the Secretary of the corporation and shall
be effective only upon receipt by the Secretary.
ARTICLE VI.
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 6.1 Certificates for Shares
(a) Content.
Certificates representing shares of the corporation shall at minimum, state
on their face the name of the issuing corporation and that it is formed under
the laws of South Carolina; the name of the person to whom issued; and the
number and class of shares and the designation of the series, if any, the
certificate represents; and be in such form as determined by the board of
directors. Such certificates shall be signed (either manually or by facsimile)
by the chief executive officer, president or a vice-president and by the
secretary or an assistant secretary and may be sealed with a corporate seal or a
facsimile thereof. Each certificate for shares shall be consecutively numbered
or otherwise identified.
(b) Legend as to Class or Series.
If the corporation is authorized to issue different classes of shares or
different
27
<PAGE>
series within a class, the designations, relative rights, preferences, and
limitations applicable to each class and the variations in rights, preferences,
and limitations determined for each series (and the authority of the board of
directors to determine variations for future series) must be summarized on the
front or back of each certificate. Alternatively, each certificate may state
conspicuously on its front or back that the corporation will furnish the
shareholder this information on request in writing and without charge.
(c) Shareholder List.
The name and address of the person to whom the shares represented thereby
are issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the corporation.
(d) Transferring Shares.
All certificates surrendered to the corporation for transfer shall be
canceled and no new certificate shall be issued until the former certificate for
a like number of shares shall have been surrendered and canceled, except that in
case of a lost, destroyed or mutilated certificate a new one may be issued
therefor upon such terms and indemnity to the corporation as the board of
directors may prescribe.
Section 6.2 Registration of the Transfer of Shares
Registration of the transfer of shares of the corporation shall be made
only on the stock transfer books of the corporation. In order to register a
transfer, the record owner shall surrender the shares to the corporation for
cancellation, properly endorsed by the appropriate person or persons with
reasonable assurances that the endorsements are genuine and effective. Subject
to the provisions of ss. 33-7-300(d) of the Act (relating to shares held in a
voting trust), and unless the corporation has established a procedure by which a
beneficial owner of shares held by a nominee is to be recognized by the
corporation as the owner, the person in whose name shares stand on the books of
the corporation shall be deemed by the corporation to be the owner thereof for
all purposes.
Section 6.3 Restrictions on Transfer of Shares Permitted
The board of directors (or shareholders) may impose restrictions on the
transfer or registration of transfer of shares (including any security
convertible into, or carrying a right to subscribe for or acquire shares). A
restriction does not affect shares issued before the restriction was adopted
unless the holders of the shares are parties to the restriction agreement or
voted in favor of the restriction.
A restriction on the transfer or registration of transfer of shares may be
authorized:
28
<PAGE>
(a) to maintain the corporation's status when it is dependent on the number
or identity of its shareholders;
(b) to preserve exemptions under federal or state securities law;
(c) for any other reasonable purpose.
A restriction on the transfer or registration of transfer of shares may:
(a) obligate the shareholder first to offer the corporation or other
persons (separately, consecutively, or simultaneously) an opportunity to
acquire the restricted shares;
(b) obligate the corporation or other persons (separately,
consecutively, or simultaneously) to acquire the restricted shares;
(c) require the corporation, the holders or any class of its shares,
or another person to approve the transfer of the restricted shares, if the
requirement is not manifestly unreasonable;
(d) prohibit the transfer of the restricted shares to designated
persons or classes of persons, if the prohibition is not manifestly
unreasonable.
A restriction on the transfer or registration of transfer of shares is
valid and enforceable against the holder or a transferee of the holder if the
restriction is authorized by this section and its existence is noted
conspicuously on the front or back of the certificate. Unless so noted, a
restriction is not enforceable against a person without knowledge of the
restriction.
Section 6.4 Acquisition of Shares
The corporation may acquire its own shares and unless otherwise provided in
the articles of incorporation, the shares so acquired constitute authorized but
unissued shares.
If the articles of incorporation prohibit the reissue of acquired shares,
the number of authorized shares is reduced by the number of shares acquired,
effective upon amendment of the articles of incorporation, which amendment shall
be adopted by the shareholders or the board of directors without shareholder
action. The article of amendment must be delivered to the Secretary of State and
must set forth:
(a) the name of the corporation;
(b) the reduction in the number of authorized shares, itemized by
class and series; and
29
<PAGE>
(c) the total number of authorized shares, itemized by class and
series, remaining after reduction of the shares.
ARTICLE VII.
DISTRIBUTIONS
Section 7.1 Distributions
The board of directors may authorize, and the corporation may make,
distributions (including dividends on its outstanding shares) in the manner and
upon the terms and conditions provided by law and in the corporation's articles
of incorporation.
ARTICLE VIII.
CORPORATE SEAL
Section 8.1 Corporate Seal
The board of directors may provide a corporate seal which may be circular
in form and have inscribed thereon any designation including the name of the
corporation, South Carolina as the state of incorporation, and the words
"Corporate Seal."
ARTICLE IX.
AMENDMENTS
Section 9.1 Amendments
The corporation's board of directors may amend or repeal any of the
corporation's bylaws unless:
(a) the articles of incorporation or the Act reserve this power
exclusively to the shareholders in whole or in part; or
(b) the shareholders in adopting, amending, or repealing a particular
bylaw provide expressly that the board of directors may not amend or repeal
that bylaw; or
(c) the bylaw either establishes, amends, or deletes, a supermajority
shareholder quorum or voting requirement (as defined in ss. 2.8 of Article
II).
Notwithstanding the foregoing, no amendments may be made to the
corporation's bylaws by the board of directors unless such amendments are
proposed at a meeting of the board of directors prior to the meeting at which
such amendments are adopted.
Any amendment which changes the voting or quorum requirement for the board
30
<PAGE>
must comply with Article III ss. 3.8, and for the shareholders, must comply with
Article II ss. 2.8.
The corporation's shareholders may amend or repeal the corporation's bylaws
even though the bylaws may also be amended or repealed by its board of
directors. Any notice of a meeting of shareholders at which bylaws are to be
adopted, amended, or repealed shall state that the purpose, or one of the
purposes, of the meeting is to consider the adoption, amendment or repeal of
bylaws and contain or be accompanied by a copy or summary of the proposal.
Amended and Restated as of March 12, 1997
FIRST AMENDMENT TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
-----------------------------------
FIRST AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment"),
dated as of March __, 1998 by and among EMERGENT MORTGAGE CORP. ("EMC"),
EMERGENT MORTGAGE CORP. OF TENNESSEE ("EMC-TN" and, together with EMC, the
"Companies" and each a "Company"), EMERGENT GROUP, INC. ("Guantor") the Lenders
party to the Credit Agreement (as defined below) (the "Lenders"), FIRST UNION
NATIONAL BANK as administrative agent for the Lenders (in such capacity, the
"Co-Agent").
STATEMENT OF PURPOSE
--------------------
WHEREAS, the Companies, the Lenders, the Administrative Agent and the
Co-Agent are parties to a Mortgage Loan Warehousing Agreement dated as of
December 10, 1997 (the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Credit Agreement as set forth
below; and
WHEREAS, subject to and upon the terms and conditions herein set forth, the
Lenders and the Administrative Agent are willing to continue to make available
to the Companies the credit facilities provided for in the Credit Agreement; and
WHEREAS, a specific condition to the willingness of the Lenders and the
Administrative Agent to continue to make available to the Companies the credit
facilities provided for in the Credit Agreement, is the reaffirmation by the
Guarantor of the Guaranty to which the Guarantor is a party; and
WHEREAS, the Guarantor will derive a material benefit from the continued
availability to the Companies of the credit facilities provided for in the
Credit Agreement and therefore the Guarantor is willing to reaffirm the Guaranty
to which the Guarantor is a party;
NOW, THEREFORE, in consideration of the premises and agreements contained
herein, and for good and valuable consideration, the receipt and sufficiency of
which are acknowledged by the parties hereto, the parties hereto hereby agree as
follows:
1. All capitalized terms used herein and not otherwise defined shall have
the respective meanings provided to such terms in the Credit Agreement, as
amended hereby.
2. Amendments to the Credit Agreement.
a. The definition of the term "Maturity Date" contained in the Credit
Agreement is hereby deleted in its entirety and the following definition is
hereby substituted in lieu thereof:
<PAGE>
"Maturity Date" shall mean the earlier of: (a) June 30, 1998, and (b) the
date the Lenders terminate their obligation to make further Loans hereunder
pursuant to Paragraph 8 above."
b. The parties hereto acknowledge that, effective as of March 31, 1998,
Emergent Mortgage Corp. shall have changed its name to "HomeGold, Inc." and that
from and after March 31, 1998 all references in the Credit Agreement and in the
other Credit Documents to "Emergent Mortgage Corp." or to "EMC" shall be deemed
to be references to "HomeGold, Inc." for all purposes.
3. This Amendment shall become effective as of the date hereof, provided
that the Administrative Agent shall have received by such date the following
items:
a. A copy of this Amendment executed by the Companies, the Guarantor,
each of the Lenders, the Administrative Agent and the Co-Agent (whether
such parties shall have signed the same or different copies);
b. A Reaffirmation of Guaranty of even date herewith in form and
substance satisfactory to the Administrative Agent executed by the
Guarantor;
c. UCC-3 Financing Statements in form and substance acceptable to
Administrative Agent listing the Companies as debtors and the
Administrative Agent as secured party and evidencing EMC's name change;
d. Certificates of even date herewith signed by the President or any
Vice President of each of the Companies and attested to by the Secretary or
any Assistant Secretary of each of the Companies certifying that (i) the
Articles, Bylaws and resolutions of such Company previously delivered to
the Administrative Agent remain in full force and effect except as provided
therein, (ii) such Company remains in good standing, (iii) all
representations and warranties of such Company previously made to the
Lenders remain true, complete and accurate, and (iv) no Event of Default or
Potential Default has occurred and is continuing; and
e. Resolutions of each of the Companies and the Guarantor authorizing
the execution of this Amendment.
4. This Amendment is limited and, except as set forth herein, shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement, or any other document or instrument entered into in connection
therewith.
5. This Amendment may be executed in any number of counterparts by the
different parties hereto on separate counterparts when executed and delivered
2
<PAGE>
shall be an original, but all of which together shall constitute one and the
same instrument. A complete set of counterparts shall be lodged with the
Companies and the Administrative Agent.
6. This Amendment and the rights and obligations of the parties hereunder
shall be construed in accordance with and governed by the laws of the State of
North Carolina.
7. From and after the date hereof, all references in the Credit Agreement
and any other document or instrument entered into in connection herewith, to the
Credit Agreement shall be deemed to be references to the Credit Agreement as
amended hereby.
8. The Guarantor joins in the execution and delivery of this Amendment to
acknowledge and consent to the terms hereof and hereby reaffirms its obligations
under the Guaranty (as modified by the Reaffirmation of Guaranty) and agrees
that the Guaranty (as modified by the Reaffirmation of Guaranty) shall remain in
full force and effect with respect to the Obligations.
9. EACH OF THE LENDERS, THE ADMINISTRATIVE AGENT, THE CO-AGENT, THE
GUARANTOR AND EACH OF THE COMPANIES HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT ANY OF
THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF UNDER OR IN CONNECTION WITH THIS AMENDMENT AND ANY AGREEMENT
CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY
PARTY RELATING HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR
THE LENDERS, THE ADMINISTRATIVE AGENT AND THE CO-AGENT TO ENTER INTO THIS
AMENDMENT.
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
EMERGENT MORTGAGE CORP., a South Carolina
corporation
By: /s/ Kevin J. Mast
------------------------------------------
Name: Kevin J. Mast
----------------------------------------
Title: VP & Treasurer
---------------------------------------
EMERGENT MORTGAGE CORP. OF TENNESSEE, a
South Carolina corporation
By: /s/ Kevin J. Mast
------------------------------------------
Name: Kevin J. Mast
----------------------------------------
Title: VP & Treasurer
---------------------------------------
EMERGENT GROUP, INC., a South Carolina
corporation, as Guarantor
By: /s/ Kevin J. Mast
------------------------------------------
Name: Kevin J. Mast
----------------------------------------
Title: VP & Treasurer
---------------------------------------
FIRST UNION NATIONAL BANK, a national banking
association, as Administrative Agent and as a
Lender
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
BANKBOSTON, N.A., a national banking
association, as Co-Agent and a Lender
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
4
<PAGE>
BANK ONE TEXAS, N.A., a national banking
association
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
BANK UNITED, a federal savings bank
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
COMERCIA BANK, a Michigan banking corporation
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
GUARANTY FEDERAL BANK FSB, a federal savings
bank
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
5
<PAGE>
NATIONAL CITY BANK OF KENTUCKY, a
national banking association
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
SOUTHTRUST BANK, N.A., a national banking
association
By:
------------------------------------------
Name:
----------------------------------------
Title:
---------------------------------------
6
CREDIT INCREASE CONFIRMATION AND
NOTE AMENDMENT
Dated February 17, 1998
Reference is made to (x) the Interim Warehouse, and Security Agreement,
dated as of March 4, 1997. as amended (the "Interim Warehouse Agreement"),
between Prudential Securities Credit Corporation (the "Lender"), Emergent
Mortgage Corp. (the "Borrower") and Emergent Group, Inc. (the "Guarantor"), (y)
the Secured Note, dated as of March 4, 1997, as amended (the "Note"), from the
Borrower to the Lender and (z) the Guarantee, dated as of March 4, 1997, as
amended (the "Guarantee"), by the Guarantor in favor of the Lender. Capitalized
terms used and not otherwise defined herein shall have their respective meanings
set forth in the Interim Warehouse Agreement.
Section 1.
(a) The maximum loan amount of "$30,000,000" referenced in the recitals and
in the first sentence of Section 1(A)(1) of the Interim Warehouse Agreement and
referenced in the Note and Guarantee is hereby deleted and replaced by
"$175,000,000".
(b) The definition of "Maturity Date" in Section (1)(B)(2) and in the Note
and Guarantee is hereby deleted in its entirety and replaced with the following:
Maturity Date means the earlier of (i) June 30. 1998, and (ii) the
date of the Securitization in the second quarter of 1998 (the "Second
Quarter Securitization"); provided, however, that (x) if the Second Quarter
Securitization occurs prior to June 30, 1998 and (y) the securitization
includes a pre-funding feature, then the Maturity Date shall be extended to
the earlier to occur of (A) September 17, 1998 and (B) the end of any
pre-funding period with respect to the Second Quarter Securitization. If
the Second Quarter Securitization does contain a pre-funding feature and
the Maturity Date is so extended, the maximum loan amount following the
Second Quarter Securitization will be, as of any day prior to the Maturity
Date, the amount on deposit in the pre-funding account.
<PAGE>
Section 2.
As amended by Section 1, all provisions of the Interim Warehouse Agreement,
the Note and the Guarantee, as heretofore amended, are reconfirmed as of the
date hereof. Each of the Borrower and the Guarantor, in addition, hereby
reconfirms and remakes as of the date hereof each and every of its
representations, warranties and covenants set forth in the Interim Warehouse
Agreement, the Note and the Guarantee,
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the
day and year first above written.
EMERGENT MORTGAGE CORP.
By: /s/ Kevin J. Mast
------------------------------------------
Name: Kevin J. Mast
Title: VP & Treasurer
EMERGENT GROUP, INC.
By: /s/ Kevin J. Mast
------------------------------------------
Name: Kevin J. Mast
Title: VP,CFO & Treasurer
PRUDENTIAL SECURITIES CREDIT CORPORATION
By:
------------------------------------------
Name:
Title:
CAROLINA INVESTORS, INC.
By: /s/ Kevin J. Mast
------------------------------------------
Name: Kevin J. Mast
Title: VP & Treasurer
3
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 6043
<SECURITIES> 3502
<RECEIVABLES> 341743
<ALLOWANCES> 7685
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 23059
<DEPRECIATION> 4480
<TOTAL-ASSETS> 453316
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
485
0
<COMMON> 0
<OTHER-SE> 38739
<TOTAL-LIABILITY-AND-EQUITY> 453316
<SALES> 0
<TOTAL-REVENUES> 22974
<CGS> 0
<TOTAL-COSTS> 29653
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4829
<INTEREST-EXPENSE> 8433
<INCOME-PRETAX> (19941)
<INCOME-TAX> 678
<INCOME-CONTINUING> (20615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20615)
<EPS-PRIMARY> (2.12)
<EPS-DILUTED> (2.12)
<FN>
Unclassified Balance Sheet
</FN>
</TABLE>