UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31,1998
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 No. 0-8909
HOMEGOLD FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
South Carolina 57-0513287
- ------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
3901 Pelham Road, Greenville, South Carolina 29615
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 864-289-5000
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
- ---------------------------- ------------------------------------------------
None None
Securities registered under Section 12(g) of the Act:
Title of Each Class
- --------------------------------------------------------------------------------
Common Stock, par value $.05
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 22, 1999, the aggregate market value of voting stock held by
non-affiliates of registrant was approximately $12.9 million.
As of March 22, 1999, 9,811,599 shares of the Registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for the Annual Meeting of Shareholders scheduled
for May 12, 1999 to be filed not later than 120 days after December 31, 1998 is
incorporated by reference into Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and its
subsidiaries (collectively, "HGFN" or "the Company") are primarily engaged in
the business of originating, selling, securitizing and servicing first and
second residential mortgage loan products ("Mortgage Loans"). Prior to November
1998, the Company also engaged in the business of originating, selling,
securitizing and servicing small-business loan products partially guaranteed by
the United States Small Business Administration ("SBA") and small-business loans
collateralized by accounts receivable and inventory and mezzanine loans
(collectively, "Small-Business Loans"). Prior to March 1998, the Company also
engaged, to a lesser extent, in making auto loans ("Auto Loans"). The Company
makes substantially all of its loans to non-prime borrowers who have limited
access to credit or who may be considered credit-impaired under conventional
lending standards.
The Company commenced its lending operations in 1991 with the
acquisition of Carolina Investors, Inc. ("CII"), a South Carolina non-prime
mortgage lender, which had been in business since 1963. Since such acquisition,
the Company has significantly expanded its lending operations and through
December 31, 1997 experienced a compounded annual growth rate in total loan
originations of 84%. During 1998, loan production dropped 33% from 1997 levels.
During the years 1998, 1997 and 1996, the Company originated $904.1 million,
$1.3 billion and $436.8 million in loans, respectively. The loan growth in prior
years was accelerated by the implementation of the Company's retail Mortgage
Loan origination strategy during 1997 and 1996. See " -- Mortgage Loan
Products." Of the Company's loan originations for the year ended December 31,
1998, 84% were Mortgage Loans, 16% were Small Business Loans and less than 1%
were Auto Loans. Substantially all of the auto loan assets were sold in the
first quarter of 1998, while substantially all of the small-business loan assets
were sold in fourth quarter 1998. The Company no longer makes Small Business or
Auto Loans.
HomeGold Financial, Inc.'s major operating subsidiaries are
HomeGold, Inc. and Carolina Investors, Inc.
MORTGAGE LOAN PRODUCTS
OVERVIEW
The Company provides Mortgage Loan Products primarily to owners
of single family residences who use the loan proceeds for such purposes as
refinancing, debt consolidation, home improvements and educational expenditures.
The Company believes the non-prime mortgage market is highly fragmented and
growing rapidly. A leading industry publication estimates that total loan
originations for the non-prime mortgage industry grew approximately 32% to $165
billion in 1998 from $125.0 billion in 1997. In addition, it estimates that the
top 25 lenders to the non-prime mortgage loan industry represented, in
aggregate, approximately 53% of 1998 loan originations (through September 30,
1998), with the top five lenders representing approximately 27% of the total.
2
<PAGE>
Substantially all of the Mortgage Loans are made to non-prime
borrowers. These borrowers generally have limited access to credit, or are
considered credit-impaired by conventional lenders such as thrift institutions
and commercial banks. These conventional lending sources generally impose
stringent and inflexible loan underwriting guidelines and generally require a
longer period of time, as compared to the Company, to approve and fund loans.
Loan applications of non-prime borrowers are generally characterized by one or
more of the following: (1) limited or unfavorable credit history, including
bankruptcy, (2) problems with employment history, (3) insufficient debt
coverage, (4) self-employment or (5) inadequate collateral.
The Company has developed a comprehensive credit analysis system
for its loan originations, which is designed to ensure that credit standards are
maintained and consistent underwriting procedures are followed. The Company's
focus is to capture higher quality non-prime borrowers. During 1998, 77% of the
Mortgage Loans originated by the Company were to borrowers internally classified
as "AA/A/A-", while 14% of such loans were internally classified as "B".
The Company believes that its customers require or seek a high
degree of personalized service and swift response to their loan applications.
Also, the Company believes that its customers generally focus more on the amount
of the monthly payment than the interest rate charged. Furthermore, because the
Company's customers are generally credit-impaired for one or more reasons, the
customers are typically not in a position to obtain better rates from
traditional lending institutions.
In 1998, approximately 56%, or $371.1 million, of the Company's
Mortgage Loans originated during 1998 were originated through the Company's
retail operation with remainder being originated by wholesale brokers. In 1998,
76% of the Mortgage Loans the Company originated were secured by first-liens.
These first-lien Mortgage Loans had an average principal balance of
approximately $65,000, a weighted average interest rate of approximately 10.4%
and an average loan-to value ("LTV") ratio of 82.1%.
Approximately 24% of the Mortgage Loans originated by the Company
were secured by a second lien Mortgage Loan, some of which were to the same
borrower as the first-lien mortgage loan, which resulted in combined LTV ratios
that averaged 101% on these loans and may have been as high as 125% under the
Company's guidelines. Such second-lien Mortgage Loans originated during 1998 had
an average principal balance of approximately $24,000 and a weighted average
interest rate of approximately 14%.
In order to reduce the Company's credit risk, second-lien
Mortgage Loans with a combined LTV ratio greater than 100% are generally
pre-approved and pre-underwritten by a third party and generally sold without
recourse on a whole loan basis with certain representations and warranties.
Second-lien Mortgage Loans with a combined LTV ratio less than 100% are
underwritten by the Company. These loans are generally sold on a whole loan
basis without recourse. However, no assurance can be given that the second-lien
mortgage loans can be sold. To the extent that the loans are not sold, the
Company retains the risk of loss. At December 31, 1998 and 1997, the Company had
retained $19.0 million and $69.8 million, respectively, of second-lien mortgage
loans on its balance sheet. While the Company has not historically securitized
its second-lien mortgage loans, it may choose to do so in the future.
3
<PAGE>
The Company has invested significantly in technology and the
training of personnel to improve and expand its underwriting, servicing, and
collection functions. The Company believes its current operations are capable of
supporting increases in both loan origination volume and securitization
servicing capacity with only modest increases in fixed expenses.
MORTGAGE LOAN ORIGINATION
The Company originates its Mortgage Loan products on a retail
basis using direct mail marketing techniques. Responses are directed through the
Company's call center in Greenville, South Carolina. Mortgage loans are
originated on a wholesale basis through approximately 700 independent mortgage
brokers and mortgage bankers (collectively, the "Mortgage Bankers"). The Company
conducts its mortgage lending operations in 44 states.
The Company believes that its use of retail and wholesale
origination is an effective diversification strategy which enables it to
penetrate the non-prime mortgage loan market through multiple channels.
The following table sets forth mortgage loan originations by channel for the
period indicated:
LOAN ORIGINATIONS BY CHANNEL
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------
1ST MORTGAGE 2ND MORTGAGE
LOANS LOANS TOTAL
------------- -------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Retail
Loan originations $ 258,631 $ 112,503 $ 371,134
Average principal balance per loan $ 63 $ 28 $ 52
Weighted average initial LTV ratio 81% 105% 88%
Weighted average coupon rate 10.79% 14.42% 11.89%
Wholesale
Loan originations $ 243,822 $ 44,488 $ 288,310
Average principal balance per loan $ 67 $ 17 $ 59
Weighted average initial LTV ratio 81% 95% 83%
Weighted average coupon rate 10.05% 13.82% 10.63%
Total
Loan originations $ 502,453 $ 156,991 $ 659,444
Average principal balance per loan $ 65 $ 24 $ 55
Weighted average initial LTV ratio 81% 102% 86%
Weighted average coupon rate 10.43% 14.25% 11.34%
</TABLE>
4
<PAGE>
RETAIL OPERATION. Since 1996, the Company has focused a
significant portion of its resources in developing its retail loan products and
in developing its related delivery systems. In this manner, the Company reduced
its dependence on third-party origination sources. In 1998, retail Mortgage Loan
originations represented 56% of the Company's total Mortgage Loan originations
compared to 52% and 46% in 1997 and 1996, respectively. Retail Mortgage Loan
originations during 1998, 1997 and 1996 totaled $371.1 million, $562.7 million,
and $68.8 million, respectively. The Company believes that its retail operation
has significant long-term profit potential because it expects that the
origination and other fees (typically paid to the broker-originators) will more
than offset the infrastructure expenses associated with operating a retail
operation. The Company also believes that the retail operation will allow more
Company control over the underwriting process and its borrower relationship. The
retail operation will also reduce reliance on wholesale sources, while building
brand recognition.
The Company's retail operation was established in April 1996.
Unlike many of its competitors (particularly non-prime mortgage lenders that
began operations as traditional finance companies), the Company markets its
HomeGold(R) retail lending operations in large part through direct mail and
telemarketing methods, as compared to a traditional "bricks and mortar" retail
approach in which loans are originated out of local, walk-in retail offices. The
Company believes that this strategy allows it to target different areas of the
country more quickly, depending on the economic, business and other
characteristics that may exist at a particular point in time. The Company also
believes that this strategy avoids the expense typically associated with "bricks
and mortar" operations. The Company currently uses a central operating center
consisting of originators, underwriters, and loan processors which it believes
will enable it to realize economies of scale and to compete more efficiently
than through a decentralized retail operation. The Company utilized multiple,
regional operating centers in Greenville, Indianapolis, Phoenix, and Houston in
most of 1998 and in 1997 and 1996. These regional operating centers were
consolidated into the Greenville retail operation in November of 1998. The
Company believes that it is more cost efficient to operate as one centralized
operation.
The Company's quarterly retail Mortgage Loan volume for 1998 and 1997 is
set forth in the table below:
RETAIL MORTGAGE LOAN ORIGINATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
4th 3rd 2nd 1st 4th 3rd 2nd QTR 1st
QTR QTR QTR QTR QTR QTR QTR
1998 1998 1998 1998 1997 1997 1997 1997
------- -------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail Mortgage Loan
Originations:
Indianapolis $ 7,228 $ 25,586 $ 28,832 $ 33,274 $ 48,214 $ 64,141 $ 59,245 $ 55,639
Phoenix 9,355 26,323 22,971 33,381 42,012 40,216 40,998 25,440
Greenville 13,150 29,589 29,542 21,486 42,299 44,795 38,240 8,338
Houston 2,295 8,469 15,026 21,487 11,625 -- -- --
Sterling Lending -- 10,613 17,391 15,136 15,167 14,646 10,051 1,643
Corporation (1)
------- -------- ------- ------- ------- ------- -------- -------
Total Retail Mortgage Loan
Originations $ 32,028 $100,580 $113,762 $124,764 $159,317 $163,798 $148,534 $ 91,060
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- --------------------
(1) Sterling Lending Corporation was sold in August of 1998.
5
<PAGE>
In January 1998, the Company reorganized its Mortgage Loan
delivery system to provide improved segregation between its originations/sales
function and its underwriting function. The separation of the underwriting and
sales functions has resulted in an improvement in the quality of loans
originated. However, in connection with this reorganization, several managers of
the Company's retail operations left the Company. This reorganization resulted
in a significant reduction in loan volume levels during 1998. The consolidation
of all the retail operations into the Greenville location resulted in further
reductions in loan origination volumes. These reductions had a significant
negative impact on the operating results of 1998. However, the Company believes
that the personnel reduction and consolidation of operations are in the best
long-term interest of the Company, because it believes it can originate loans
more cost effectively from one location.
WHOLESALE LENDING OPERATION. All of the Mortgage Loans originated
on a wholesale basis by the Company are originated through Mortgage Bankers with
whom the Company seeks to develop and maintain continuing relationships. As a
wholesale originator of Mortgage Loans, the Company funds the Mortgage Loans at
closing. However, the Mortgage Loans may be closed in either the Company's name
or in the name of the Mortgage Banker with the Company taking an assignment of
the Mortgage Banker's interest. During 1998, 1997, and 1996, the Company
conducted its wholesale loan operations through approximately 700, 1,000, and
330 Mortgage Bankers, respectively. Wholesale Mortgage Loan originations during
1998, 1997, and 1996, totaled $288.3 million, $520.1 million, and $259.8
million, respectively.
The Company believes that its wholesale lending operation will
continue to constitute an important part of its business strategy and that the
wholesale operation, when coupled with retail origination channels, will
maximize the Company's potential growth and penetration of the non-prime
mortgage loan market. This is because there are a large number of independent
mortgage brokers who require outside funding of their loans. The wholesale
strategy of funding individual loans from brokers at par, rather than at the
premiums typically associated with bulk purchases, provides more favorable cash
flow for the Company.
WHOLESALE MORTGAGE LOAN ORIGINATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
4th 3rd 2nd 1st 4th 3rd 2nd 1st
QTR QTR QTR QTR QTR QTR QTR QTR
1998 1998 1998 1998 1997 1997 1997 1997
-------- ------- -------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale Originations $30,078 $59,452 $93,097 $105,683 $149,043 $136,397 $134,513 $100,154
</TABLE>
Efficiency levels within the wholesale lending operation have
deteriorated due to employee turnover, tightening of underwriting guidelines,
and industry difficulties. The Company is seeking to improve the efficiency of
its wholesale loan originations in 1999 by trying to improve average origination
volume per person.
6
<PAGE>
GEOGRAPHIC DIVERSIFICATION. Since the Company commenced its
retail mortgage operations in 1996, it has significantly expanded its geographic
presence. During 1998, 1997, and 1996, Mortgage Loan originations by state were
as shown below:
<TABLE>
<CAPTION>
State 1998 % 1997 % 1996 %
----------------- -------- ------ --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
North Carolina $ 108,714 16.4% $ 198,485 18.4% $ 89,976 27.4%
South Carolina 87,435 13.3 147,663 13.6 90,411 27.5
Florida 43,698 6.6 101,612 9.4 39,589 12.0
Georgia 34,725 5.3 80,012 7.4 13,381 4.1
Louisiana 33,238 5.0 53,917 5.0 5,080 1.6
Tennessee 30,538 4.6 55,872 5.2 15,239 4.6
Michigan 29,461 4.5 61,836 5.7 10,959 3.3
Virginia 28,836 4.4 50,556 4.7 13,666 4.2
Illinois 28,479 4.3 1,466 0.1 -- --
Pennsylvania 28,425 4.3 275 -- -- --
Missouri 22,864 3.5 2,594 0.2 2,168 0.7
Indiana 20,700 3.1 51,046 4.7 16,373 5.0
Ohio 19,643 3.0 328 -- 199 --
Mississippi 19,523 3.0 13,579 1.3 2,731 0.8
All other states 123,165 18.7 263,575 24.3 28,877 8.8
---------- ----- ----------- ----- ---------- -----
Total $ 659,444 100.0% $ 1,082,816 100.0% $ 328,649 100.0%
========== ===== =========== ===== ========== =====
</TABLE>
LOAN UNDERWRITING
In the application and approval process associated with the
Company's retail Mortgage Loan operations, a Company loan officer finds
potential borrowers through leads generated by direct mail marketing techniques
and calling campaigns. After obtaining an initial loan application, additional
information is compiled and gathered by loan processors, who then forward the
file to the underwriting department for approval. The underwriting department
generally completes its review within one business day after procurement of all
necessary documentation. Upon approval by the underwriting department, the loan
is generally forwarded by the loan closing department to an attorney or title
company for closing.
For loans originated through Mortgage Bankers, the application
and necessary underwriting information is generally gathered by the Mortgage
Banker and forwarded to the Company's underwriting department for approval
before the loan is closed and funded.
Creditworthiness is assessed through a variety of means,
including calculating debt to income ratios, examining the applicant's credit
history through credit reporting bureaus, verifying an applicant's employment
status and income, and checking the applicant's payment history with respect to
any first-lien mortgage on the property. The Company uses several procedures to
verify information obtained from an applicant. In order to verify an applicant's
employment status and income, the Company generally obtains such verification
from the applicant's employer. The Company requires self-employed borrowers to
provide a copy of their tax return.
7
<PAGE>
The Company generally requires an independent appraisal on all
loans. Loans in excess of $350,000 generally require two independent appraisals.
The Company generally requires title insurance for all real estate loans. The
Company also generally requires real estate improvements to be fully insured as
to fire and other commonly insurable risks and regularly monitors its loans to
ensure that insurance is maintained for the period of the loan.
The following table provides a general overview of the Company's
principal underwriting criteria for first Mortgage Loans, set forth according to
internal product types:
INTERNAL PRODUCT TYPE - FIRST MORTGAGES
<TABLE>
<CAPTION>
------------ ----------- ------------ ----------- ----------- ------------
AA A A- B C D
------------ ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Existing mortgage No 30 day Maximum Maximum of Maximum Maximum Cannot be
(maximum historical late of one 30 two 30 day of three of four in
delinquencies) payments day late late 30 day 30 day foreclosure
in the payment payments late late
last 24 in last in last 12 payments payments
months 12 months; in the in the
months; and one 60 last 12 last 12
and one day late months; months;
60 day payment in maximum maximum
late the last of one 60 of one 60
payment 24 months day late day late
in the payment payment
last 24 in the in the
months last 24 last 12
months months;
maximum
of one 90
day late
payment
in the
last 24
months
Other credit Maximum of Maximum Maximum of Maximum 30, 60, No criteria
history (maximum two 30 day of one 60 one 60 day of one 90 and 90+
historical late day late late day late day late
delinquencies) payments payment payment in payment payments
in the in the the last in the acceptable,
last 24 last 24 24 months, last 24 provided
months months, with months that the
with minimal 30 borrower
minimal day late has at
30 day payments least
late in the minimal
payments last 24 favorable
in the months credit
last 24 history
months
Bankruptcy filings None in None in None in None in None in No criteria
past 3 past 3 past 3 past 2 past year
years years years years
Maximum debt
service to income 45% 45% 45% 45% 50% 50%
ratio (1)
Maximum LTV ratio:
Owner occupied 100% 100% 90% 85% 80% 70%
Non-owner occupied 80% 75% 75% 70% 65% No product
</TABLE>
- ------------
(1) Maximum debt service to income ratio may increase by 5% in each category
(except AA loans) if disposable income meets certain thresholds.
8
<PAGE>
The following table provides a general overview of the Company's
principal underwriting criteria for second Mortgage Loans, set forth according
to internal product types:
INTERNAL PRODUCT TYPE - SECOND MORTGAGES
<TABLE>
<CAPTION>
----------------- ---------------- ------------------- ------------
PIGGYBACK LESS PIGGYBACK 125% CLTV PERSONAL
THAN OR EQUAL GREATER THAN PREAPPROVAL HOME LOAN
TO $15,000 $15,000 REQUIRED
----------------- ---------------- ------------------- ------------
<S> <C> <C> <C> <C>
Existing mortgage No 30 day late Maximum of one No 30 day late Maximum of
(maximum historical payments in 30 day late payments in last one 30 day
delinquencies) last 12 months; payment in 12 months late
Maximum of two last 12 months payment in
30 day late last 12
payments in months
months 13
through 24
Other credit history Maximum of Maximum of two N/A Maximum of
(maximum historical three 30 day 30 day late two 30 day
delinquencies) late payments payments in late
in last 12 last 12 payments
months; Maximum months, unless in last 12
of five 30 day credit score months,
late payments is greater unless
in months 13 than 650 credit
through 24; score is
Maximum of one greater
60 day late than 650
payment
Bankruptcy filings None None in past None in past None in
three years seven years past three
years
Maximum debt service
to income ratio (1) 45% 45% 45% 45%
Maximum LTV ratio 100% 100% 125% 100%
</TABLE>
- ------------
(1) Maximum debt service to income ratio may increase by 5% on Piggybacks
greater than $15,000 and on Personal home loans if disposable income meets
certain thresholds.
9
<PAGE>
The following tables provide information regarding the Company's
first and second-lien Mortgage Loan originations by credit classification for
the years ended December 31, 1998 and 1997:
LOAN ORIGINATIONS BY CREDIT CLASSIFICATION
YEAR ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INTERNAL LOAN CLASSIFICATION
-----------------------------------------------------------
AA/A/A- B C D TOTALS
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FIRST-LIEN MORTGAGE LOANS
Amount $ 369,153 $ 76,776 $ 44,226 $ 12,298 $ 502,453
Percentage 73.5% 15.3% 8.8% 2.4% 100.0%
Weighted average coupon 10.0 11.1 12.0 13.8 10.4
Weighted average LTV ratio 83.7 79.9 76.0 68.5 82.1
SECOND-LIEN MORTGAGE LOANS
Amount $ 138,166 $ 14,102 $ 4,321 $ 402 $ 156,991
Percentage 88.0% 9.0% 2.7% .3% 100.0%
Weighted average coupon 14.2 14.3 14.2 14.6 14.2
Weighted average LTV ratio 102.6 92.0 84.5 80.8 101.1
</TABLE>
<TABLE>
<CAPTION>
LOAN ORIGINATIONS BY CREDIT CLASSIFICATION
YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
INTERNAL LOAN CLASSIFICATION
-----------------------------------------------------------
AA/A/A- B C D TOTALS
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FIRST-LIEN MORTGAGE LOANS
Amount $ 584,991 $ 162,279 $ 56,097 $ 17,820 $ 821,187
Percentage 71.2% 19.8% 6.8% 2.2% 100.0%
Weighted average coupon 10.7 11.7 12.9 14.0 11.1
Weighted average LTV ratio 78.9 78.0 74.3 68.4 78.2
SECOND-LIEN MORTGAGE LOANS
Amount $ 224,547 $ 28,447 $ 7,234 $ 1,401 $ 261,629
Percentage 85.8% 10.9% 2.8% 0.5% 100.0%
Weighted average coupon 14.6 15.0 14.8 14.7 14.7
Weighted average LTV ratio 102.2 92.3 85.9 79.4 100.5
</TABLE>
Loan officers are trained to structure loans that meet the
applicant's needs, while satisfying the Company's lending criteria. If an
applicant does not meet the lending criteria, the loan officer may offer to make
a smaller loan, or request that the borrower obtain a co-borrower or guarantor,
in order to bring the application within the Company's lending parameters. The
amount the Company will lend to a particular borrower is determined by a number
of factors, including the borrower's creditworthiness, the value of the
borrower's equity in the real estate, and the ratio of such equity to the home's
appraised value.
In connection with its Mortgage Loan products, the Company
collects nonrefundable loan fees and various other fees, depending on state law,
such as fees for credit reports, lien searches, title insurance and recordings,
and appraisal fees. In connection with the servicing of the loans, the Company
may receive late fees and insufficient funds fees, where permitted by applicable
law.
SALE AND SECURITIZATION OF MORTGAGE LOANS
The Company sells a significant portion of the loans it
originates, primarily through two methods, whole loan cash sales and
securitization.
10
<PAGE>
Whole loan cash sales are where loans are generally packaged in
pools of approximately $5.0 million. Historically, the Company has sold its
Mortgage Loans "servicing released" (i.e., without retention of the servicing
rights and associated revenues) and on a non-recourse basis, with certain
representations and warranties. The Company is required to repurchase any loan
if it is subsequently determined that any representation and warranty made with
respect to such loan was untrue.
In 1997, the Company began securitizing mortgage loans. Under
this method, the Company sells Mortgage Loans it purchased or originated to a
trust for cash. The trust sells asset-backed bonds secured by the loans to
investors. The Company records certain assets and income based upon the
difference between all principal and interest received from the loans sold and
the following factors (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 as
a residual receivable. The Company believes the assumptions it has used in past
securitizations are appropriate and reasonable.
The following table sets forth for the periods indicated,
Mortgage Loans securitized and Mortgage Loans sold on a whole loan basis and
Mortgage Loans originated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Mortgage loans securitized $ 90,352 487,563 $ --
Mortgage loans sold 625,480 435,333 284,794
---------- ----------- ----------
Total Mortgage loans sold or securitized $ 715,832 922,896 $ 284,794
========== =========== ==========
Total Mortgage loans originations $ 659,444 1,082,816 $ 328,649
% of Mortgage loan originations sold or 108% 85% 87%
securitized
</TABLE>
Historically, in connection with the cash sale of Mortgage Loans
prior to 1998, the Company received premiums ranging from 2% to 6% of the
principal amount of the Mortgage Loans being sold, depending on prevailing
interest rates and the terms of the loans. However, during 1998, 1997, and 1996,
the weighted average premiums (discount) on the whole loan cash sales were
(.40)%, 2.75%, and 5.86%, respectively. For the years ended December 31, 1998,
1997, and 1996, gains (losses) recognized by the Company in connection with the
whole loan cash sales of Mortgage Loans were $(2.5) million, $11.1 million, and
$18.3 million, respectively.
11
<PAGE>
The Company believes the significant change in the premiums
(discounts) received in 1998 resulted primarily from two factors. First, the
Company sold at a discount substantially all of the second lien mortgage loans
it held, that were not underwritten in accordance with Company guidelines. In an
effort to increase loan production, former employees approved loans that did not
meet Company guidelines. Second, the Company received significantly lower
premiums on loan sales in the third and fourth quarters of 1998 because of a
market surplus in the supply of loans in the resale market. The Company believes
this surplus, in turn, resulted from the decision of issuers of securitized loan
pools to sell their loan products in the whole loan cash market when
securitization, as a means of financing, became less attractive. Securitization
became less attractive as the corporate interest rate spreads required by
investors increased in the latter half of 1998. Investors required higher
spreads because of concerns related to higher than anticipated prepayments on
securitized loan pools and concerns about the credit worthiness of several
issuers.
During the first quarter of 1999, the market premiums paid on
whole loan cash sale of mortgage loans improved compared to the last half of
1998. The Company anticipates that premiums on loans sold in 1999 will range
from 1% to 4%. However, no assurance can be given that the Company will actually
realize these levels. The Company is currently receiving an average of
approximately 2.5%. Typically, purchasers of Mortgage Loan pools are large
financial institutions, many of which purchase the Mortgage Loans for inclusion
in larger pools of loans which, in turn, are sold to institutional investors.
During 1997, the Company securitized a substantial portion of its
Mortgage Loans. The Company completed one securitization in the first quarter of
1998. The Company decided to sell most of the loans originated in the remaining
three quarters of 1998 through whole loan sales to maximize cash flow and
liquidity. Historically, the Company generally has been able to recognize higher
premiums from securitizations compared to whole loan sale. However, cash flow is
impacted more positively in the short term by whole loan sales, compared to
securitizations. The Company is planning to securitize a portion of its existing
portfolio in 1999. However, no assurance can be given that this anticipated
securitization will be completed.
During 1998, the weighted average premium on the securitized
Mortgage Loans was 8.75%. For the year ended December 31, 1998, gains recognized
into income by the Company in connection with the securitization of Mortgage
Loans were $7.3 million. The gains recognized into income, resulting from
securitization transactions, can vary depending on the assumptions used, the
specific characteristics of the underlying loan pools, and the structure of the
transaction. The Company believes the assumptions it has used are appropriate
and reasonable. See " Loan Sales and Securitizations" under Management's
Discussion and Analysis of Financial Condition and Results of Operations.
12
<PAGE>
MORTGAGE LOAN SERVICING, DELINQUENCIES AND COLLECTIONS
SERVICING
The Company maintains a centralized portfolio management
department located in Greenville, South Carolina which services Mortgage Loans.
Prior to 1997, the Company did not retain the servicing on Mortgage Loans sold.
Beginning in March 1997, the Company began retaining servicing for Mortgage
Loans it securitized. Servicing includes depositing cash received and posting
payments to account for principal and interest, remitting funds to the Trustee,
imaging documents, collection activities on past due accounts, management of
loss mitigation activities and foreclosure and sale of properties, ensuring that
insurance is in place, monitoring payment of real estate property taxes,
customer service and retention activities and warehouse funding management. The
Company does not escrow funds for purposes of insurance and taxes. However, it
has the right to purchase insurance and pay taxes, which, if paid by the
Company, are charged back to the borrower.
The Company serves as master servicer for the five Mortgage Loan
securitizations which it has effected to date. In connection with such
securitizations, the Company's servicing operation was reviewed by the rating
agencies which rated the bonds issued in connection with such securitizations.
The Company increased its servicing capabilities and staffing
significantly during 1997 and 1996 in anticipation of increased origination
growth and increased servicing responsibilities resulting from future loan
securitizations. A centralized quality control department reviews a substantial
portion of the Mortgage Loans subsequent to funding to maintain consistency and
compliance with the Company's documentation and underwriting standards. Because
the Company completed only one securitization in 1998, and sold the majority of
loans originated on a "servicing released" basis, the servicing portfolio has
declined from $768.6 million at December 31, 1997, to $550.3 million at December
31, 1998. Consistent with the Company's strategy to match staffing levels with
servicing volume, staffing levels declined in 1998.
13
<PAGE>
DELINQUENCIES AND COLLECTIONS
Collection efforts generally begin when a Mortgage Loan is over
eight days past due, unless the account has previous unpaid late fees, in which
case collection efforts generally begin when an account is over one day past
due. At that time, the Company generally contacts the borrower by telephone to
determine the reason for the delinquency and attempts to bring the account
current. Typically, after an account becomes 15 days past due, the Company sends
a reminder letter to the borrower, and then sends subsequent letters at 30 days
past due, 41 days past due, and 55 days past due. In general, at 41 days past
due, the Company sends a right-to-cure letter. After 90 days, the Company sends
a five day demand letter and turns the account over to an attorney. In addition
to written notices, the Company attempts to maintain telephone contact with the
borrower at various times throughout the delinquency period. If the status of
the account continues to deteriorate, the Company's loss mitigation unit works
on a dual track along with the foreclosure unit to try to save the borrowers
from a foreclosure action, while at the same time, trying to keep the
foreclosure timelines as short as possible. In limited circumstances, when a
borrower is experiencing difficulty in making timely payments, the Mortgage Loan
Operations may temporarily adjust the borrower's payment schedule. The
determination of how to work out a delinquent loan is based upon a number of
factors, including the borrower's payment history and the reason for the current
inability to make timely payments.
The Company utilizes a proprietary Real Rewards program designed
to counsel its borrowers on budgeting concepts, to assist them in their personal
financial planning, to help them avoid costly foreclosure action and to educate
them on the advantages and the importance of maintaining good credit. The
Company stresses to the borrowers the importance of their home, and why they
should make the mortgage payment ahead of other creditors in the event of tight
cash flow.
When a loan is 90 days past due, generally, it is placed on
non-accrual status and the Company initiates foreclosure proceedings. In
connection with such foreclosure, the Company reviews the loan and the facts
surrounding its delinquency, and may reappraise the underlying property.
Regulations and practices regarding foreclosure and the rights of the mortgagor
in default vary greatly from state to state. If deemed appropriate, the Company
will bid in its loan amount at the foreclosure sale or accept a deed in lieu of
foreclosure. The residential real estate owned portfolio, which is carried at
the lower of carrying value or appraised fair market value less estimated cost
to sell, totaled $5.9 million, $2.5 million and $3.0 million at December 31,
1998, 1997 and 1996, respectively.
14
<PAGE>
The following table sets forth for the periods indicated
information relating to the delinquency and loss experience of the Company with
respect to its Mortgage Loans serviced:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Total serviced Mortgage Loans (period end) (1) $ 550,304 $ 768,556 $ 146,231
Serviced Mortgage Loans (period end) (2) 550,304
700,248 146,231
Average serviced Mortgage Loans (2) 743,362 411,549 97,281
Delinquency (period end) (3) 30-59 days past due:
Principal balance $ 28,174 $ 25,424 $ 4,450
% of serviced Mortgage Loans (2) 5.12% 3.63% 3.04%
60-89 days past due:
Principal balance $ 8,647 $ 9,383 $ 1,530
% of serviced Mortgage Loans (2) 1.57% 1.34% 1.05%
90 days or more past due:
Principal balance $ 38,109 $ 21,233 $ 4,633
% of serviced Mortgage Loans (2) 6.93% 3.03% 3.17%
Total delinquencies:
Principal balance $ 74,930 $ 56,040 $ 10,613
% of serviced Mortgage Loans (2) 13.62% 8.00% 7.26%
Real estate owned (period end) $ 5,881 $ 2,522 $ 2,959
Net charge-offs 6,842 1,305 792
% of net charge-offs to average serviced 0.92% 0.32% 0.81%
Mortgage Loans
</TABLE>
(1) Includes loans subserviced for others, where the Company has no credit
risk.
(2) Does not include loans subserviced for others, where the Company has no
credit risk.
(3) For 1998 and 1997, the Company is calculating delinquencies based on
number of payments past due, in accordance with industry standards,
compared with number of days past due used in 1996.
Since substantially all of the Company's loans are to non-prime
borrowers who have limited access to credit or who may be considered
credit-impaired by conventional lending standards, the percentage of the
Company's loans past due is expected to be higher than a financial institution
that provides loans to prime borrowers. The Company also expected that the
delinquency percentages would increase during 1998 and 1997 as the mortgage loan
portfolios began to mature. During 1996 and 1997 the Company increased
significantly the size of the Mortgage Loan portfolio. During 1998 the Company
began to reduce the size of the portfolio. This resulted in the current
production being sold, leaving a significantly higher percentage of matured
loans in the portfolio. Therefore, the Company would expect a higher percentage
of loans to become past due.
15
<PAGE>
SMALL BUSINESS LOAN PRODUCTS
OVERVIEW
The Company sold substantially all of the assets of the small
business loan operations in the fourth quarter of 1998. The Company maintains a
$5.1 million investment account with a trustee relating to representations and
warranties in connection with the sale of the small business loan unit. On
February 26, 1999, the Company received notification from TransAmerica Small
Business Capital, Inc. ("TransAmerica") that pursuant to the asset purchase
agreement dated October 2, 1998, that a loan for approximately $1.1 million was
allegedly not made by the Company in accordance with stated representations.
TransAmerica is seeking to recover the loan amount from the Company's $5.1
million that is being maintained by the trustee. The Company is currently
reviewing the facts to determine this claim's validity. Prior to the sale, the
Company's small business loan unit provided loan products to small businesses,
primarily for the acquisition or refinancing of property, plant and equipment,
working capital and debt consolidation. The Company's principal strategy related
to the small business loan products was to market the Company's SBA loans,
asset-based small business loans and mezzanine loans as products of a single
commercial loan company capable of meeting the range of commercial credit needs
of small businesses in various stages of development. The Company no longer
offers the small business loan products.
The Small Business Loan Unit originations during 1998, 1997, and
1996 totaled $122.9 million, $81.0 million, and $68.2 million, respectively.
This unit sold $141.0 million, $41.2 million, and $33.1 million of loans during
1998, 1997, and 1996, respectively. This unit also securitized $1.8 million,
$24.3 million, and $12.9 million of loans in 1998, 1997, and 1996, respectively.
The Small Business Loan Unit realized net income in 1998, 1997, and 1996 of
$11.0 million, $5.0 million, and $2.2 million, respectively. Included in the
1998 net income was a $19.0 million pre-tax gain on sale of the Small Business
Loan Unit's net assets.
AUTO LOAN PRODUCTS
The Company sold substantially all of the assets of the auto loan
unit on March 19, 1998 for $20.4 million, the approximate book value of the
assets. The Company no longer offers auto loans as one of its financial
products.
Prior to the sale of the auto loan assets, this unit recorded a net loss
of approximately $110,000 for the period that began January 1, 1998 and ended
March 19, 1998. This product line also recorded losses of $1.9 million and $1.1
million for the years ended December 31, 1997 and 1996, respectively.
COMPETITION
The financial services industry, including the markets in which
the Company operates, is highly competitive. Competition is based on the type of
loan, interest rates, and service. Traditional competitors in the financial
services industry include commercial banks, credit unions, thrift institutions,
credit card issuers, consumer and commercial finance companies, and leasing
companies, many of which have considerably greater financial and marketing
resources than the Company. Moreover, major brokerage firms, insurance
companies,
16
<PAGE>
retailers and bank holding companies have formed substantial national financial
services networks. The Company believes that it competes effectively in its
markets by providing competitive rates and efficient, complete services.
The Company faces significant competition in connection with its
Mortgage Loan products, principally from national companies which focus their
efforts on making mortgage loans to non-prime borrowers. Many of these companies
have considerably greater financial and marketing resources than the Company.
Although these large national companies compete in the mortgage loan industry,
this industry, as a whole, is highly fragmented and no one company has a
significant share of the total mortgage loan market. The Company attempts to
maintain its competitiveness by servicing its retail mortgage loans and by
maintaining and developing its strong relationships with Mortgage Bankers. If
the Company is not successful in these regards, the Company's operations could
be materially and adversely affected. See "Mortgage Loan Products -- Mortgage
Loan Origination."
REGULATION
GENERAL
The Company's operations are subject to extensive local, state
and federal regulations including, but not limited to, the following federal
statutes and regulations promulgated thereunder: Title 1 of the Consumer Credit
Protection Act of 1968, as amended (including certain provisions thereof
commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal Credit
Opportunity Act of 1974, as amended ("ECOA"), the Home Mortgage Disclosure Act,
the Fair Credit Reporting Act of 1970, as amended ("FCRA"), the Fair Debt
Collection Practices Act, as amended, the Real Estate Settlement Procedures Act
("RESPA") and the National Housing Act, as amended. In addition, the Company is
subject to state laws and regulations, including those with respect to the
amount of interest and other charges which lenders can collect on loans (e.g.,
usury laws).
In the opinion of management, existing statutes and regulations
have not had a materially adverse effect on the business done by the Company.
However, it is not possible to forecast the nature of future legislation,
regulations, judicial decisions, orders or interpretations, nor their impact
upon the future business, financial condition or prospects of the Company.
The Company believes that it is in substantial compliance with
state and federal laws and regulations governing its lending activities.
However, there can be no assurance that the Company will not inadvertently
violate one or more of such laws and regulations. Such violations may result in
actions for damages, claims for refunds of payments made, certain fines and
penalties, injunctions against certain practices, and the potential forfeiture
of rights to repayment of loans. Further adverse changes in the laws or
regulations to which the Company's business is subject, or in the interpretation
thereof, could have a material adverse effect on the Company's business.
17
<PAGE>
MORTGAGE LOANS
Mortgage lending laws generally require lenders to be licensed,
and place limitations on the amount, duration and charges for various categories
of loans, require adequate disclosure of certain contract terms and place
limitations on certain collection practices and creditor remedies. Many states
have usury laws which limit interest rates, although the limits generally are
considerably higher than current interest rates charged by the Company. State
regulatory authorities may conduct audits of the books, records and practices of
the Company's operations. The Company is licensed to do business in each state
in which it does business and in which such licensing is required and believes
it is in compliance in all material respects with these regulations.
The Company's Mortgage Loan origination activities are subject to
TILA. TILA contains disclosure requirements designed to provide consumers with
uniform, understandable information with respect to the terms and conditions of
loans and credit transactions in order to give them the ability to compare
credit terms. TILA also guarantees consumers a three-day right to cancel certain
credit transactions, including any refinanced mortgage or junior mortgage loan
on a consumer's primary residence. The Company believes that it is in
substantial compliance in all material respects with TILA.
The Company is also required to comply with the ECOA, which, in
part, prohibits creditors from discriminating against applicants on the basis of
race, color, religion, national origin, sex, age or marital status. ECOA
restricts creditors from obtaining certain types of information from loan
applicants. It also requires certain disclosures by the lender regarding
consumer rights and requires lenders to advise applicants who are turned down
for credit of the reasons therefor. In instances where a loan applicant is
denied credit or the rate or charge for a loan is increased as a result of
information obtained from a consumer credit agency, another statute, the FCRA,
requires the lender to supply the applicant with the name, address and phone
number of the reporting agency. RESPA was enacted to provide consumers with more
effective advance disclosures about the nature and costs of the settlement
process, and to eliminate kickbacks or referral fees that raised the costs of
settlement services. RESPA applies to virtually all mortgages on residential
real property that is designed principally for occupancy of one to four
families. Specific disclosures mandated by RESPA include, without limitation,
estimates of closing costs, transfers of servicing, affiliated business
arrangements and other settlement information.
EMPLOYEES
At December 31, 1998, the Company employed a total of 468
full-time equivalent employees. Although the Company has experienced several
layoffs during 1998, it believes that relations with the remaining employees are
good.
ITEM 2. PROPERTIES
The Company's headquarters are located at 3901 Pelham Road,
Greenville, South Carolina and are owned by the Company. At December 31, 1998,
the Company owned one office and leased twenty offices. None of the leases,
considered separately or collectively, are believed to be material to the
Company's operations. The Company believes that its leased and owned locations
are suitable and adequate for their intended purposes.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed, on April 27, 1998, Capital City
Acceptance, Inc. filed an arbitration demand against the Company, its directors
and selected officers with the American Arbitration Association in Charlotte,
NC. The plaintiff demands were dismissed by an arbitration decision delivered on
January 13, 1999.
On February 26, 1999, the Company received notification from
TransAmerica Small Business Capital, Inc. ("TransAmerica") that pursuant to the
asset purchase agreement dated October 2, 1998, that a loan for approximately
$1.1 million was allegedly not made by the Company in accordance with stated
representations. TransAmerica is seeking to recover the loan amount from the
Company's $5.1 million that is being maintained by the trustee. The Company is
currently reviewing the facts to determine this claim's validity.
The Company and its subsidiaries are, from time to time, parties
to various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or any of its subsidiaries that, if determined adversely, would have a
materially adverse effect on the operations, profitability or financial
condition of the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fourth quarter of the Company's 1998 fiscal year.
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock presently is traded on the NASDAQ
National Market under the symbol "HGFN". In the first quarter of 1999, the
Company received notice from NASDAQ that its stock would be delisted. The
Company has appealed NASDAQ's notice to "delist" the Company's stock. The
Company believes that it has presented evidence to NASDAQ to support the
decision that the Company's stock activity should continue to be listed.
However, no assurance can be given that the Company will prevail in the appeal.
As of February 28, 1999, the Company was in compliance with the current
requirements for continued listing on NASDAQ. The Company expects a decision to
be reached in April 1999.
The following table sets forth the high and low bid prices of the
common stock for the periods indicated, as reported by NASDAQ.
High Bid Low Bid
-------- -------
YEAR ENDED DECEMBER 31, 1997
First Quarter $ 16.25 $ 10.50
Second Quarter $ 12.25 $ 8.75
Third Quarter $ 18.63 $ 10.75
Fourth Quarter $ 20.00 $ 10.50
YEAR ENDED DECEMBER 31, 1998
First Quarter $ 14.75 $ 7.25
Second Quarter $ 9.69 $ 3.25
Third Quarter $ 5.50 $ 1.75
Fourth Quarter $ 2.00 $ .34
The bid quotes above reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
On March 22, 1999, the closing price for the Company's common
stock was $1.31. As of March 22, 1999, the Company had 9,811,599 outstanding
shares of common stock held by 823 stockholders of record.
No dividends on common stock were paid or declared during 1998 or
1997, and no dividends are expected to be paid on the common stock for the
foreseeable future. The Indenture pertaining to the Company's 10-3/4% Senior
Notes places certain restrictions on the Company's ability to pay dividends, and
the Credit Facility to which the Company's subsidiaries HomeGold, Inc. and
Carolina Investors, Inc. are parties restricts the ability of these subsidiaries
to pay dividends and make loans and advances to the Company. See "Management's
Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources" which discussion is incorporated
herein by reference.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth historical selected financial information
of the Company as of the dates and for the periods indicated. The statement of
income data, cash flow data, and balance sheet data are derived from the audited
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
----------- ---------- --------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest Income $ 35,075 $ 34,008 $ 17,908 $ 15,193 $ 10,691
Servicing income 12,239 8,514 3,274 446 212
Gain on sale of loans:
Gross gain on sale of loans 9,472 52,828 23,815 9,169 6,450
Loan fees, net 11,745 30,207 4,150 586 276
----------- ---------- ---------- --------- ---------
Total gain on sale of loans 21,217 83,035 27,965 9,755
Gain on sale of subsidiaries' net assets (1) 18,964 -- -- -- --
Other revenues 4,230 1,399 1,241 884 566
----------- ---------- ---------- --------- ----------
Total revenues 91,725 126,956 50,388 26,278 18,195
Interest expense 35,968 25,133 11,021 8,527 5,879
Provision for credit losses 11,906 10,030 5,416 2,480 2,510
Unrealized loss on residual receivable 13,638 -- -- -- --
Restructuring charges (2) 6,838 -- -- -- --
General and administrative expenses 96,366 84,284 23,490 10,419 7,359
-
----------- ---------- ---------- --------- ----------
Total expenses 164,716 119,447 39,927 21,426 15,748
----------- ---------- ---------- --------- ----------
Income (loss) from continuing
operations before income taxes, (72,991) 7,509 10,461 4,852 2,447
minority interest and extraordinary
item
Provision (benefit) for income taxes 3,017 (3,900) 718 190 609
----------- ---------- ---------- --------- ----------
Income (loss) from continuing operations
before minority interest and
extraordinary item (76,008) 11,409 9,743 4,662 1,838
Minority interest in (earnings) loss of 47 (156) 352 (81) (46)
subsidiaries
----------- ---------- ---------- --------- ----------
Income (loss) from continuing operations
before extraordinary item (75,961) 11,253 10,095 4,581 1,792
Income (loss) from discontinued operations -- -- -- (3,924) 546
(3)
Extraordinary item-gain on extinguishment of
debt, net of $0 tax (4) 18,216 -- -- -- --
----------- ---------- ---------- --------- ----------
Net income (loss) $ (57,745) $ 11,253 $ 10,095 $ 657 $ 2,338
=========== ========== ========== ========= ==========
DILUTED EARNINGS PER SHARE:
Continuing operations (7.81) 1.17 1.42 0.69 0.27
Discontinued operations -- -- -- (0.59) 0.08
Extraordinary item 1.87 -- -- -- --
----------- ---------- ---------- --------- ----------
Net income (loss) per share $ (5.94) $ 1.17 $ 1.42 $ 0.10 $ 0.35
=========== ========== ========== ========= ==========
CASH FLOW DATA:
Cash flow due to operating cash income and (62,775) (26,652) 14,174 6,849 4,909
expenses
Cash provided by (used in) loans held for 147,055 (119,637) (92,652) (17,025) 11,811
sale and other
----------- ---------- ---------- --------- ----------
Net cash provided by (used in)
operating activities $ 84,280 $ (146,289) $ (78,478) $ (10,176) $ 16,720
== ======== = ======== = ======== = ======= = ========
BALANCE SHEET DATA:
Total gross loans receivable $ 124,739 $ 297,615 $ 189,532 $ 126,458 $ 95,398
Total residual assets 43,857 63,202 13,215 3,831 1,872
Total assets 257,209 416,152 224,149 144,931 109,448
Total debt 239,276 336,920 169,596 129,950 95,015
Total shareholders' equity $ 5,801 $ 63,374 $ 46,635 $ 9,885 $ 9,700
</TABLE>
- -----------------------------------
(1) See Footnote 12. Sale of Subsidiary and Subsidiary's Assets in Notes to
Consolidated Financial Statements.
(2) See Footnote 14. Restructuring Charge in Notes to Consolidated Financial
Statements.
(3) The Company discontinued its apparel segment in 1995 and its
transportation segment in 1994
(4) See Footnote 17. Extraordinary Item-Gain on Extinguishment of Debt in
Notes to Consolidated Financial Statements.
(5) The Company did not pay any cash dividends on its common stock in the
five years ended December 31, 1998.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion should be read in conjunction with the
Consolidated Financial Statements and notes of the Company appearing elsewhere
in this report.
FORWARD - LOOKING INFORMATION
From time to time, the Company makes oral and written statements
that may constitute "forward-looking statements" (rather than historical facts)
as defined in the Private Securities Litigation Reform Act of 1995 (the "Act")
or by the SEC in its rules, regulations and releases, including Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company desires to take advantage of the
"safe harbor" provisions in the Act for forward-looking statements made from
time to time, including, but not limited to, the forward-looking statements made
in this Annual Report on Form 10-K (the "Annual Report"), as well as those made
in other filings with the SEC, its letter to Shareholders, and other financial
discussion and analysis by management that reflect projections or future
financial or economic performance of the Company. Such forward-looking
statements are based on management's current plans and expectations and are
subject to risks and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. In the
preparation of this Annual Report, where such forward-looking statements appear,
the Company has sought to accompany such statements with meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those described in the forward-looking statements. Such
factors include, but are not limited to: lower origination volume due to market
conditions, inability to achieve desired efficiency levels, 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, changes in the regulatory environment, lower
than anticipated premiums on loan sales, lower than anticipated origination
fees, adverse impact of lawsuits, faster than anticipated prepayments on loans,
losses due to breach of representation or warranties under previous agreements,
the Company's ability to complete the implementation of its Year 2000 program on
a timely basis and the ability of the Company's suppliers, vendors, customers,
and other third parties on which the Company relies to be Year 2000 ready, and
other detrimental developments.
The preceding list of risks and uncertainties, however, is not
intended to be exhaustive, and should be read in conjunction with other
cautionary statements made herein, including, but not limited to, risks
identified from time to time in the Company's SEC reports, registration
statements and public announcements.
The Company does not have, and expressly disclaims, any
obligation to release publicly any updates or any changes in the Company's
expectations or any changes in events, conditions or circumstances on which any
forward-looking statement is based.
22
<PAGE>
GENERAL
The Company is headquartered in Greenville, South Carolina, and
primarily engages in the business of originating, purchasing, selling,
securitizing and servicing mortgage loan products to sub-prime customers. Prior
to the sale of the Company's auto loan portfolio in March 1998, the Company also
originated, securitized and serviced auto loans. Prior to the sale of
substantially all of the assets of the small business loan unit in the fourth
quarter of 1998, the Company made loans to small businesses primarily for the
acquisition or refinancing of real estate or property, plant and equipment,
working capital, and debt consolidation. 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. From
the date of this acquisition through December 31, 1997, the Company has
experienced a compounded annual growth rate of 84% in loan originations. In
1998, loan originations declined 33% from the prior year.
There were two primary factors that resulted in lower production
in 1998 compared to 1997. First was a decision at the beginning of 1998 to
segregate the origination and the underwriting processes. In connection with
this reorganization, several managers of the HomeGold retail operations left the
Company. Second was a decision by the Company to "tighten" underwriting
guidelines in response to investor concerns related to the quality of loans that
the Company and its competitors were originating.
In 1997, the Company decided to focus primarily on the Company's
larger direct mail retail mortgage operation and its mortgage brokerage
business. This resulted in the sale of the small retail origination subsidiary,
Sterling Lending Corp. ("SLC") in August 1998. In the fourth quarter of 1997,
the Company began restructuring its Mortgage Loan retail product line
distribution channel. As a result of the restructuring and other factors,
mortgage loan origination volumes declined each quarter in 1998. Having assessed
market conditions, management made strategic decisions to streamline retail
mortgage lending operations. Retail lending operations located in Indianapolis,
Indiana, Phoenix, Arizona, and Houston, Texas were consolidated in November 1998
into the Greenville retail operating center located at the Company headquarters
in Greenville, South Carolina.
The impact of the above restructuring resulted in the elimination
of 204 positions or approximately 28% of the Company's work force. The Company
incurred a $6.8 million restructuring charge in the fourth quarter as a result
of this decision. Management feels these charges will be beneficial by creating
efficiencies through consolidation of operations and implementation of future
strategic directives, and better aligning expenses with current levels of
production.
The Company believes as a result of higher than anticipated
prepayments on securitized loan pools and concerns in the market about the
credit worthiness of several issuers of securitized assets, corporate interest
rates spreads within the industry have widened significantly in the last half of
the third quarter of 1998. These conditions have negatively impacted the
securitization and whole loan sale markets. As spreads widened, securitization
as a means of financing has become less attractive. As a result, more issuers
are turning to the whole loan sale market. As this whole loan product flows into
the market, whole loan sale premiums have eroded, which has, in turn, adversely
impacted issuer's profitability and created a liquidity crisis for the industry.
23
<PAGE>
The Company responded to the higher than anticipated prepayments
on securitized loan pools by increasing the prepayment assumptions from 20 CPR
("constant prepayment rate") to 30 CPR. This decision resulted in a fair market
value write-down of $13.6 million during 1998. The Company also responded to the
market liquidity concerns by making liquidity the Company's primary objective in
1998. This decision resulted in a strategy in the last nine months in 1998 of
selling all loans on a whole loan cash basis and not participating in any
securitizations. This decision also resulted in reducing the size of the loan
portfolio. The loan portfolio declined $171.5 million or 59.5%. A part of the
loan portfolio reduction resulted from the sale of the auto loan portfolio and
the sale of the small business loan portfolio. The sale of the auto loan
portfolio resulted in the company receiving $20.4 million while the sale of the
small business loan portfolio resulted in the company receiving net cash
proceeds of approximately $49.3 million after repayment of warehouse lines of
credit, required escrow funding, and payment of transaction costs.
The Company's decision to reduce the loan portfolio size also
allowed the Company to use excess liquidity to repurchase $38.4 million of its
senior unsecured debt, and realize an extraordinary gain of $18.2 million on the
extinguishment of this debt. The Company may, from time to time, continue to
acquire its senior debt. In the first two months of 1999, the Company
repurchased an additional $35.4 million of senior debt, for a net gain of $16.9
million.
As a result of higher customer loan prepayments than anticipated
on both the portfolio and the securitized loan pools and the decision to reduce
the loan portfolio by whole loan selling loans, the Company's serviced mortgage
loan portfolio declined from $768.6 million at the end of 1997 to $550.3 million
at the end of 1998.
The combination of the above factors resulted in the Company
having $36.9 million of cash and overnight investments on hand at December 31,
1998. The Company also had additional availability under its warehouse line of
credit at the end of 1998 of $21.0 million. The Company believes that its effort
to closely monitor its liquidity position has allowed the Company to weather the
market turmoil in late 1998 while several competitors in the sub-prime mortgage
industry were forced out of business.
24
<PAGE>
The following table sets forth certain data relating to the
Company's various loan products at and for the periods indicated:
<TABLE>
<CAPTION>
AT AND FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
--------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MORTGAGE LOANS:
Mortgage loans originated $ 659,444 $ 1,176,800 $ 350,276
Mortgage loans sold 623,675 435,333 284,794
Mortgage loans securitized 92,173 487,563 --
Total mortgage loans owned (period end) 117,685 231,145 146,231
Total serviced mortgage loans (period end) 550,304 768,556 146,231
Total serviced unguaranteed mortgage loans 550,304 700,248 146,231
(period end) (1)
Average mortgage loans owned (2) 245,915 215,790 97,281
Average serviced mortgage loans (2) 744,221 443,318 97,281
Average serviced unguaranteed mortgage loans (1) 743,362 411,549 97,281
Average interest earned (2) 10.34% 10.92% 11.97%
SMALL BUSINESS LOANS:
Small business loans originated $ 122,902 $ 81,018 $ 68,210
Small business loans sold 141,041 41,232 33,060
Small business loans securitized 1,827 24,286 12,851
Total small business loans owned (period end) 7,054 45,186 29,385
Total serviced small business loans (period end) 7,054 198,876 140,809
Total serviced unguaranteed small business
loans 7,054 78,822 44,017
(period end) (3)
Average small business loans owned (2) 59,598 38,427 26,700
Average serviced small business loans (2) 202,446 165,053 125,723
Average serviced unguaranteed small business 82,270 61,420 34,442
loans (2) (3)
Average interest earned (2) 14.28% 15.89% 12.61%
AUTO LOANS:
Auto loans originated $ 2,982 $ 15,703 $ 18,287
Auto loans sold 20,898 -- --
Auto loans securitized -- 16,107
Total auto loans owned (period end) -- 21,284 13,916
Total serviced auto loans (period end) -- 21,284 22,033
Average auto loans owned (2) 5,340 17,104 11,917
Average serviced auto loans (2) 5,340 22,267 21,277
Average interest earned (2) 21.28% 24.05% 23.57%
TOTAL LOANS:
Total loans receivable (period end) $ 124,739 $ 297,615 $ 189,532
Total serviced loans (period end) 557,358 988,716 309,073
Total serviced unguaranteed loans (period end) 557,358 800,354 212,281
(1)(3)
</TABLE>
- --------------------------------------------------------------------------------
(1) Excludes loans serviced for others with no credit risk to the Company.
(2) Averages are computed based on the daily averages except for monthly
averages for Mortgage Loans in 1997 and 1996.
(3) Excludes guaranteed portion of SBA Loans.
25
<PAGE>
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth certain
information derived from the Company's Consolidated Financial Statements
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
Interest income 38.2 % 26.8 % 35.5 %
Servicing income 13.3 6.7 6.5
Gross gain on sale of loans 10.4 41.6 47.3
Loan fee, net 12.8 23.8 8.2
Gain on sale of subsidiaries' net asset 20.7 -- --
Other revenues 4.6 1.1 2.5
======== ======== =========
Total revenues 100.0 % 100.0 % 100.0 %
======== ======== =========
Interest expense 39.2 % 19.8 % 21.9 %
Provision for credit losses 13.0 7.9 10.7
Fair market writedown on residual receivables 14.9 -- --
Salaries, wages and employee benefits 61.7 37.8 27.1
Business development costs 11.8 5.9 3.2
Restructuring charges 7.5 -- --
Other general and administrative expenses 31.5 22.7 16.3
Income from income taxes, minority interest (79.6) 5.9 20.8
and extraordinary item
Provision (benefit) for income taxes 3.3 (3.1) 1.4
Minority interest in (earnings) loss of -- (0.1) 0.7
subsidiary
Extraordinary item 19.9 -- --
-------- -------- ---------
Net income (loss) (63.0) % 8.9 % 20.1 %
======== ======== =========
</TABLE>
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company recognized a net loss of $57.7 million for the year
ended December 31, 1998 as compared to net income of $11.3 million for the year
ended December 31, 1997. This net loss was mainly due to the Company's loan
production volume being below capacity levels in relation to the general and
administrative expense structure. Included in the $57.7 million net loss are
several unusual items that included a $13.6 million write-down in the value of
its residual receivables due to faster than anticipated prepayment speeds on its
securitization pools, a $6.8 million restructuring charge, a gain on sale of
subsidiaries' net assets of $19.0 million, and an $18.2 million gain on
extinguishment of debt.
Total revenues decreased $35.2 million, or 27.8%, to $91.7
million for the year ended December 31, 1998 from $127.0 million for the year
ended December 31, 1997. The lower level of revenues resulted principally from
lower than anticipated mortgage loan originations and decreases in gain on sale
of loans. The decrease in gain on sale of loans was partly offset by higher
interest income and servicing income, and gain on sale of subsidiaries' net
assets.
26
<PAGE>
Interest income increased $1.1 million, or 3.1%, to $35.1 million
for the year ended December 31, 1998 from $34.0 million for the year ended
December 31, 1997. The increase in interest income resulted primarily from a
$39.5 million or 14.6% increase in average loan balance to $310.9 million in
1998 from $271.4 million in 1997. This increase was partly offset by a reduction
in the average yield of 125 basis points. The yield in 1998 was 11.28% compared
to 12.53% in 1997. The increase in the average loan balance resulted from a
$30.2 million increase in the Company's mortgage loan portfolio, a $21.2 million
increase in the small-business loan portfolio and a $11.9 million reduction in
the auto loan portfolio. The increase in the average mortgage portfolio related
primarily to growth in the portfolio in the first six months of 1998. In the
third quarter of 1998, the Company began reducing the amount of mortgage loans
held in its portfolio. The reduction in the yield earned resulted from both a
change in the mix of the Company's total portfolio, more mortgage and small
business and less auto, combined with lower mortgage and commercial rates.
Weighted average mortgage rates declined 58 basis points from 10.92% in 1997 to
10.34% in 1998. Weighted average commercial rates declined 161 basis points from
15.89% in 1998 to 14.28 % in 1999.
Servicing income increased $3.7 million, or 43.8%, to $12.2
million for the year ended December 31, 1998 from $8.5 million for the year
ended December 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. Prior to 1997, all mortgage loans sold
were sold servicing released, therefore the mortgage serviced portfolio was just
beginning to grow during 1997. The average serviced mortgage loan portfolio
increased $300.9 million, or 40.4%, to $744.2 million for the year ended
December 31, 1998 from $443.3 million for the year ended December 31, 1997.
Gross gain on sale of loans declined $43.4 million, or 82.1%, to
$9.5 million for this year ended December 31, 1998, from $53.9 million for the
year ended December 31, 1997. Cash gain on sale of loans decreased $12.8
million, or 90.5%, to $1.3 million for the year ended December 31, 1998 from
$14.2 million for the year ended December 31, 1997. The decrease resulted
principally from lower premiums and discounts on sales of mortgage loans.
The Company believes the significant change in the premiums
(discounts) received in 1998 resulted primarily from two factors. First, the
Company sold at a discount substantially all of the second lien mortgage loans
it held, that were not underwritten in accordance with Company guidelines. In an
effort to increase loan production, former employees approved loans that did not
meet Company guidelines. Second, the Company received significantly lower
premiums on loan sales in the third and fourth quarters of 1998 because of a
market surplus in the supply of loans in the resale market. The Company believes
this surplus, in turn, resulted from the decision of issuers of securitized loan
pools to sell their loan products in the whole loan cash market when
securitization, as a means of financing, became less attractive. Securitization
became less attractive as the corporate interest rate spreads required by
investors increased in the latter half of 1998. Investors required higher
spreads because of concerns related to higher than anticipated prepayments on
securitized loan pools and concerns about the credit worthiness of several
issuers.
Loans sold increased $261.1 million, or 50.4%, to $778.9 million
for the year ended December 31, 1998 from $517.8 million for the year ended
December 31, 1997. The increase in loans sold resulted from the Company's
decision to increase its liquidity by reducing its loan portfolio. The weighted
average cash gain on sale of Loans was 0.2% and 2.7% for the years ended
December 31, 1998 and 1997, respectively.
27
<PAGE>
Non-cash gain on sale of loans decreased $30.5 million, or 79.0%,
to $8.1 million for the year ended December 31, 1998 from $38.7 million for the
year ended December 31, 1997. The decrease in non-cash gain on sale of loans was
due principally to the Company's decision not to do a mortgage securitization in
the last three quarters of 1998. The Company securitized $92.3 million in loans
for the year ended December 31, 1998 and recognized a weighted average non-cash
gain on sale as a percentage of loans securitized of 8.81%, net of expenses. The
Company securitized $509.8 million in loans for the year ended December 31, 1997
and recognized a weighted average non-cash gain on sale as a percentage of loans
securitized of 7.59%, net of expenses.
Loan fees decreased $18.5 million, or 61.1%, to $11.7 million for
the year ended December 31, 1998 from $30.2 million for the year ended December
31, 1997. Loan fees received as a percentage of retail production for the year
ended December 31, 1998 were 4.65% as compared to 4.82% for the year ended
December 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.
In 1998, the Company realized a net $19.0 million gain on sale of
subsidiaries' net assets. The Company completed the sale of substantially all of
the assets of its auto loan unit for book value on March 19, 1998. No
significant gain or loss was recognized on this transaction. On August 21, 1998,
the Company completed the sale of its small branch network retail mortgage
origination unit, Sterling Lending Corporation. There was no significant gain or
loss recorded as a result of this sale. On November 13, 1998, the Company sold
the majority of the assets of its small business lending units. The gain
realized in 1998 was approximately $19.7 million net of related costs. On
December 2, 1998, the Company sold the majority of its asset-based lending unit.
This transaction completed the disposition of all non-mortgage-related
activities of the Company. The sale resulted in a pre-tax loss of $755,000.
Other revenues increased $2.8 million to $4.2 million for the
year ended December 31, 1998 from $1.4 million for the year ended December 31,
1997. Other revenues are comprised principally of insurance commissions,
underwriting fees, late charges, warrant valuations, and management fees
received in connection with the mezzanine lending operation. The increase of
other revenues resulted principally from the increased value of securities owned
relating to the commercial mezzanine lending operation in the amount of
approximately $500,000 and higher underwriting fees and late charge fees
received in 1998.
28
<PAGE>
Total expenses increased $45.3 million, or 37.9%, to $164.7
million for the year ended December 31, 1998 from $119.4 million for the year
ended December 31, 1997. Total expenses are comprised of interest expense,
provision for credit losses, fair value write-down of residual receivables,
salaries, wages and employee benefits, business development costs, and other
general and administrative expenses. The increased expenses are due largely to
the Company's increased Mortgage Loan retail origination operations during 1997
with the opening of the Greenville office in the first quarter and the opening
of the Houston office in the fourth quarter. However, management has reduced
general and administrative expenses during 1998 from an average of $9.9 million
per month in the first quarter of 1998, to $8.6 million per month in the second
quarter of 1998, to $7.4 in the third quarter of 1998, and to $6.3 in the fourth
quarter of 1998 (excluding $6.8 million restructuring charge). Management
anticipates that in the first quarter of 1999 general and administrative
expenses will be lower than the fourth quarter 1998, mainly as a result of
personnel reductions and the restructuring initiated in November 1998. First
quarter 1999 general and administrative expenses are anticipated to average
approximately $3.6 million per month.
Interest expense increased $10.8 million, or 43.1%, to $36.0
million for the year ended December 31, 1998 from $25.1 million for the year
ended December 31, 1997. The increase in interest expense was due principally to
additional borrowings associated with the increase in the Company's average
mortgage and small-business loan portfolio, the offering of the Company's Senior
Notes due 2004 ("Senior Notes") in September 1997, and the higher borrowing
levels that were required to fund the Company's operating loss in 1998. For the
year ended December 31, 1998 and 1997, the Company incurred interest expense of
approximately $13.5 million and $5.1 million, respectively related to the Senior
Notes.
Provision for credit losses increased $1.9 million, or 18.7%, to
$11.9 million for the year ended December 31, 1998 from $10.0 million for the
year ended December 31, 1997. The increase in the provision was made to maintain
the general reserves for credit losses associated with loans held for
investment, as well as to increase specific reserves for possible losses with
regard to particular loans, including delinquent loans purchased out of the
mortgage securitizations, which totaled $10.0 million for the year ended
December 31, 1998.
As the result of higher than anticipated prepayments in 1998, the
Company modified the estimated prepayment speeds on all of its mortgage loan
securitization transactions to peak at 30 constant prepayment rate ("CPR") up
from the previous prepayment speeds of 20 CPR. This resulted in a write-down of
residual receivables of $13.6 million in 1998. No such write-down was necessary
in 1997.
In November 1998, the Company decided to close three retail loan
origination centers and to consolidate all operations into one location. This
decision resulted in a restructuring charge of $6.8 million. The restructuring
charge related to the write-down of fixed assets to net realizable value on
assets no longer used by the Company was $3.6 million, the estimated costs of
employee relocation costs and employee severance was approximately $1.4 million,
and the estimated net lease cost on facilities no longer being used was $1.8
million.
29
<PAGE>
Total general and administrative expense increased $12.1 million,
or 14.3%, to $96.4 million for the year ended December 31, 1998, from $84.3
million for the year ended December 31, 1997. This resulted primarily because
salaries, wages and employee benefits increased $8.5 million, or 17.8%, to $56.6
million in 1998, from $48.0 million in 1997, and business development costs
increased $3.3 million to $10.8 million in 1998 from $7.5 million in 1997. The
increased personnel costs resulted from the expansion of the mortgage retail
product distribution channels in 1997 and early 1998 in the portfolio
management, underwriting, processing, and closing departments, and the increased
expenses associated with the opening of retail regional operating centers in
Greenville (first quarter of 1997) and Houston (fourth quarter of 1997). The
higher business development costs also related to the retail lending expansion.
The higher general and administrative expenses were also the result of
expenditures associated with an anticipated higher level of production volume
planned for in 1998, which did not occur.
The Company has recorded current income tax expense of $3.0
million for the year ended December 31, 1998, even though overall the Company
generated a pre-tax loss for the year ended December 31, 1998. The Company has
not recorded a deferred tax benefit related to the current loss due to
management's assessment of the recoverability of the related deferred tax asset.
The current tax is due on income called "excess inclusion income." Excess
inclusion income is a result of the Company securitizing loans in pools to third
party investors. These transactions generate income for the Company that is
included in the overall loss. However, according to IRS regulations, a portion
of that income is subject to federal tax in the current period regardless of
other current period losses or NOL carryovers otherwise available to offset
regular taxable income. The excess inclusion income approximates the net
interest the Company receives on the loans in the pools after the bondholders
are paid their share of the interest less the sum of the daily accruals, an
amount allowed for tax purposes as a reasonable economic return on the retained
ownership interest.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues increased $76.6 million, or 152%, to $127.0
million in 1997 from $50.4 million in 1996. The higher level of revenues
resulted principally from increases in interest income, servicing income, and
gain on sale of loans.
Interest income increased $16.1 million, or 90%, to $34.0 million
in 1997 from $17.9 million in 1996. This growth resulted primarily from the
growth in the mortgage loan portfolio. Interest income earned by the mortgage
loan portfolio increased $12.6 million, or 92%, to $26.3 million in 1997 from
$13.7 million in 1996. This increase was due principally to the growth in the
average outstanding mortgage loan portfolio, which increased $143.0 million, or
147%, to $240.3 million in 1997 from $97.3 million in 1996, reflecting the
increased loan origination levels generated by the Company's additional mortgage
loan originators.
Servicing income increased $5.2 million, or 158%, to $8.5 million
in 1997 from $3.3 million in 1996. This increase was due principally to the
securitization of Mortgage Loans in 1997, for which the Company retained
servicing rights. Prior to 1997, the Company sold its mortgage loans without
retaining servicing rights. The Company securitized $487.6 million in mortgage
loans in 1997. The average serviced mortgage loan portfolio increased $343.5
million, or 353%, to $440.8 million from $97.3 million.
30
<PAGE>
Gross gain on sale of loans increased $29.0 million or 121.8%, to
$52.8 million for the year ended December 31, 1997, from $23.8 million for the
year ended December 31, 1996. Cash gain on sale of loans decreased $6.7 million,
or 32%, to $14.2 million in 1997 from $20.9 million in 1996. The decrease
resulted principally from decreased premiums on sales of Mortgage Loans. The
weighted average gain on sale of Mortgage Loans decreased 3.3%, or 54%, to 2.8%
in 1997 from 6.1% in 1996. This decrease in premiums is due primarily to the
product sold in 1997 compared to 1996. In 1996, the majority of loans sold was
first mortgage loans. In 1997, most first mortgage loans originated were
securitized, while second mortgage loans were whole-loan sold. Mortgage Loans
sold increased $150.5 million, or 53%, to $435.3 million in 1997 from $284.8
million in 1996.
Non-cash gain on sale of loans increased $35.7 million to $38.7
million in 1997 from $3.0 million in 1996. The increase in non-cash gain on sale
of loans was due principally to the securitization of mortgage loans in 1997,
which was not done prior to 1997. The Company securitized $487.6 million in
mortgage loans in 1997 and recognized a weighted average non-cash gain on sale
as a percentage of loans securitized of 7.4%, net of expenses. All non-cash gain
on sale of loans in 1996 related to the small business loan portfolio.
Loan fees increased $26.0 million to $30.2 million in 1997 from
$4.2 million in 1996. The higher loan fees were due principally to the increase
in retail mortgage loan originations. The Company receives substantially higher
fees on loans it originates through its retail operations than it receives on
loans purchased. Retail loan originations increased $493.9 million, or 718%, to
$562.7 million in 1997 from $68.8 million in 1996. Loan fees are deferred and
recognized as interest income over the life of the loan. All unamortized loan
fees, net of origination costs, are realized as part of the gain on sale of
loans when the loans are sold or securitized.
Other revenues increased $158,000, or 13%, to $1.4 million in
1997 from $1.2 million in 1996. Other revenues are comprised principally of
insurance commissions and management fees. The increase of other revenues
resulted principally from the increase in the Company's loan originations.
Total expenses increased $79.5 million, or 199%, to $119.4
million in 1997 from $39.9 million in 1996. Total expenses are comprised of
interest expense, provision for credit losses, salaries, wages and employee
benefits, business development, and other general and administrative expenses.
Interest expense increased $14.1 million, or 128%, to $25.1
million in 1997 from $11.0 million in 1996. The increase in interest expense was
due principally to increased borrowings by the Company associated with increased
mortgage loan originations and the offering of the Company's Senior Notes.
Interest expense related to the Mortgage Loan Portfolio increased $10.1 million
in 1997 from 1996. Average borrowings attributable to the Mortgage Loan
portfolio, both under its warehouse credit facilities and in connection with the
sales of notes payable to investors and subordinated debentures, increased
$134.6 million, or 105%, to $262.3 million at December 31, 1997 from $127.7
million at December 31, 1996. In September 1997, the Company also completed the
$125.0 million offering of the Company's Senior Notes with interest payable at
10.75%.
31
<PAGE>
Provision for credit losses increased $4.6 million, or 85%, to
$10.0 million in 1997 from $5.4 million in 1996. The provision was made to
maintain the general reserves for credit losses associated with loans held for
investment, as well as to increase specific reserves for possible losses with
regard to particular loans.
General and administrative expense increased $60.8 million, or
259%, to $84.3 million in 1997 from $23.5 million in 1996. This is a result
primarily from increased personnel costs due to the continued expansion of the
mortgage retail product distribution channels in 1997 in the portfolio
management, underwriting, processing, and closing departments, and the increased
expenses associated with the opening of retail lending offices in Greenville and
Houston in 1997. General and administrative expenses increased to 13.4% of
average serviced loans in 1997 from 9.6% in 1996, principally as a result of the
higher costs associated with the retail mortgage origination facilities. Retail
production increased 717% in 1997.
Net income increased $1.2 million, or 12%, to $11.3 million in
1997 from $10.1 million in 1996. The improvement in income was due principally
to the increased growth and profitability of the small business loan operations.
The Company also recorded a $3.9 million tax benefit in 1997 due to the
recognition of the deferred tax benefit associated with the net operating loss
carryforward.
FINANCIAL CONDITION
Net loans receivable decreased $171.5 million to $116.9 million
at December 31, 1998 from $288.4 million at December 31, 1997. The reduction in
net loans receivable resulted primarily from two company decisions: (1) to sell
the auto and the small business loan portfolios with outstanding loan balances
at December 31, 1997, of $21.3 million and $45.2 million, respectively; and (2)
to increase liquidity and reduce debt by selling residential mortgage loans.
The residual receivables were $43.9 million at December 31, 1998,
and $63.2 million at December 31, 1997. This decrease resulted primarily from
the amortization of the residual asset, the write-downs as a result of higher
than anticipated prepayments, the sale of the small business loan residual
receivables, partially offset by the amount of retention of the residual
interest certificates in the Company's Mortgage Loan securitization completed in
the first quarter of 1998.
Net property and equipment increased by $1.6 million to $19.7
million at December 31, 1998, from $18.1 million at December 31, 1997. This
increase resulted primarily from the $4.8 million renovation of the new
corporate office building in Greenville, South Carolina, and approximately $1.6
million of computer software cost that was classified as other assets at
December 31, 1997 since the software had not been implemented in 1997. These
amounts were partly offset by a $3.6 million restructuring charge related to the
write-offs of equipment that resulted from the closing of three retail loan
origination offices. Also included in other assets at December 31, 1997 was $1.1
million of pre-funded payroll expense. Due to the holidays, the cash required
for the first payroll in 1998 was pre-funded.
Real estate and personal property acquired in foreclosure
increased $2.6 million to $5.9 million at December 31, 1998, from $3.3 million
at December 31, 1997.
32
<PAGE>
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). At December 31, 1998,
the Company had debt outstanding under revolving warehouse lines of credit to
banks of $16.7 million, which compares with $77.6 million at December 31, 1997,
for a decrease of $60.9 million. During the second quarter of 1998, the Company
obtained a three-year $200 million revolving warehouse line of credit that was
used to replace a warehouse line of credit with another financial institution
that matured on June 30, 1998. This line of credit was subsequently reduced to
$100.0 million to reflect the Company's reduced loan volume levels. At December
31, 1998, the Company had $135.9 million of CII Notes and subordinated
debentures outstanding, which compares with $134.3 million at December 31, 1997,
for an increase of $1.6 million.
The aggregate principal amount of outstanding Senior Notes was
$86.6 million at December 31, 1998 compared to $125.0 million on December 31,
1997. In 1998, the Company purchased $38.4 million face amount of its Senior
Notes for a purchase price of $18.9 million. The Company may, from time to time,
purchase more of its Senior Notes depending on the Company's cash availability,
market conditions, and other factors.
Total shareholders' equity at December 31, 1998 was $5.8 million,
which compares to $63.4 million at December 31, 1997, a decrease of $57.6
million. This decrease resulted principally from a net loss of $57.7 million for
the year ended December 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 receivable.
The table below summarizes certain information with respect to
the Company's allowance for credit losses on the owned portfolio for each of the
periods indicated.
<TABLE>
<CAPTION>
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON OWNED PORTFOLIO
AT AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses at beginning of $ 6,528 $ 3,084 $ 1,874
period
Net charge-offs (8,791) (5,166) (2,494)
Provision charged to expense 11,905 10,030 5,416
Write-down of allowance due to sale of
receivables (2,983) (1,420) (1,712)
--------- --------- ---------
Allowance for credit losses at the end of the
period $ 6,659 $ 6,528 $ 3,084
========= ========= =========
</TABLE>
33
<PAGE>
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.
The table below summarizes certain information with respect to
the Company's allowance for losses on the securitization residual assets for
each of the periods indicated.
<TABLE>
<CAPTION>
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS
AT AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
RESIDUAL SECURITIES:
Allowance for losses at beginning of $ 14,255 $ 1,202 $ 773
period
Net charge-offs (147) (1,645) (1,283)
Anticipated losses net against gain 2,242 13,278 --
Allowance transferred from (to) owned -- 1,420 1,712
portfolio
Mark-to-market adjustment (6,228) -- --
Sale of small business residual assets (2,957) -- --
----------- ----------- -----------
Allowance for losses at end of period $ 7,165 $ 14,255 $ 1,202
=========== =========== ===========
</TABLE>
The value of the residual receivables retained by the Company
would be impaired to the extent losses on the securitized loans exceed the
amount estimated when determining the residual cash flows.
The table below summarizes the Company's allowance for credit
losses with respect to the Company's total combined serviced portfolio
(including both owned and securitized loan pools) for each of the periods
indicated.
<TABLE>
<CAPTION>
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON COMBINED SERVICED PORTFOLIO
AT AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for credit losses at beginning $ 20,783 $ 4,286 $ 2,647
of period
Net charge-offs (8,938) (6,811) (3,777)
Provision charged to expense 11,905 10,030 5,416
Provision netted against gain on 2,242 13,278 --
securitizations
Mark-to-market adjustment (6,228) -- --
Sale of small business residual assets (2,957) -- --
Write-down of allowance due to sale of (2,983) -- --
receivables
--------- -------- --------
Allowance for credit losses at the end of
the period $ 13,824 $ 20,783 $ 4,286
========= ======== ========
The total allowance for credit losses as shown on the balance sheet is
as follows:
Allowance for credit losses on loans $ 6,659 $ 6,528 $ 3,084
Allowance for credit losses on residual 7,165 14,255 1,202
receivables
--------- -------- --------
Total allowance for credit losses $ 13,824 $ 20,783 $ 4,286
========= ======== ========
</TABLE>
34
<PAGE>
The following table sets forth the Company's allowance for credit
losses on the combined 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 YEAR ENDED
DECEMBER 31,
--------------------------------
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES AS A % OF COMBINED SERVICED LOANS (1):
Mortgage loans 2.09% 1.98% 0.80%
Small business loans 32.61 6.76 3.84
Auto loans -- 7.58 6.45
Total allowance for credit losses as a % of serviced loans 2.48 2.60 2.02
NET CHARGE-OFFS AS A % OF AVERAGE COMBINED SERVICED LOANS (2):
Mortgage loans 0.92 0.32 0.81
Small business loans 1.58 2.74 2.71
Auto loans 14.95 17.17 9.65
Total net charge-offs as a % of total serviced loans 1.08 1.38 2.47
LOANS RECEIVABLE PAST DUE 30 DAYS OR MORE AS A % OF COMBINED SERVICED LOANS (1):
Mortgage loans 13.62 8.00 7.26
Small business loans -- 4.17 7.92
Auto loans -- 9.41 17.09
Total loans receivable past due 30 days or more as a % of total 13.44 7.66 8.41
serviced loans
TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF COMBINED SERVICED LOANS PAST 35.27% 94.33% 88.71%
DUE 90 DAYS OR MORE (1)
</TABLE>
------------------
(1) For purposes of these calculations, combined serviced loans represents
all loans for which the Company bears credit risk, and includes all
portfolio Mortgage Loans and Auto Loans, all securitized loans, and
the Small Business Loans, but excludes the guaranteed portion of the
SBA Loans and Mortgage Loans serviced without credit risk.
(2) Average serviced loans have been determined by using beginning and
ending balances for the period presented except that the 1996 and 1997
averages are calculated based on the daily averages for small business
loans and auto loans and monthly averages for the Mortgage Loans
(rather than the beginning and ending balances).
Management closely monitors delinquencies to measure the quality
of its loan portfolio and securitized loans and the potential for credit losses.
Accrual of interest is discontinued and reversed when a loan is either over 90
days past due, the collateral is determined to be inadequate, or when
foreclosure proceedings begin. Collection efforts on charged-off loans continue
until the obligation is satisfied or until it is determined that such obligation
is not collectible or the cost of continued collection efforts would exceed the
potential recovery. Recoveries of previously charged-off loans are credited to
the allowance for credit losses.
35
<PAGE>
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 Company's securitized mortgage loan pools.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BALANCE
- --------------------------------------------------------------------------------------------------
MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1
INCEPTION
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 77,435,632 $ 120,860,326 $ 130,917,899 $ 118,585,860 $ 62,726,105
2 $ 77,405,312 $ 120,119,653 $ 169,093,916 $ 118,061,792 $ 62,300,302
3 $ 76,709,417 $ 119,364,510 $ 168,182,957 $ 148,291,454 $ 61,609,815
4 $ 75,889,160 $ 118,965,905 $ 166,783,489 $ 146,880,279 $ 60,768,433
5 $ 75,395,969 $ 117,238,693 $ 165,608,534 $ 145,775,696 $ 59,347,948
6 $ 74,630,019 $ 115,870,168 $ 164,084,260 $ 144,465,651 $ 58,739,309
7 $ 73,149,957 $ 113,537,447 $ 161,880,416 $ 143,048,555 $ 57,829,352
8 $ 72,261,386 $ 112,100,397 $ 158,220,175 $ 140,482,698 $ 56,918,186
9 $ 71,342,842 $ 110,468,401 $ 155,854,981 $ 137,318,432 $ 55,894,240
10 $ 70,195,198 $ 107,887,242 $ 153,193,421 $ 134,991,772 $ 54,887,268
11 $ 68,981,147 $ 105,138,088 $ 148,382,102 $ 131,582,081
12 $ 67,149,553 $ 102,142,062 $ 144,556,568 $ 129,029,429
13 $ 65,705,603 $ 98,876,084 $ 140,265,621 $ 125,457,545
14 $ 63,210,889 $ 95,394,444 $ 136,583,138
15 $ 60,052,314 $ 92,501,939 $ 133,252,925
16 $ 58,133,496 $ 89,402,897 $ 129,792,748
17 $ 56,900,372 $ 83,793,933
18 $ 55,154,969 $ 81,637,626
19 $ 50,852,179 $ 79,392,938
20 $ 49,702,926
21 $ 48,629,373
22 $ 45,780,152
<CAPTION>
DELINQUENCIES > 30 DAYS PAST DUE
- --------------------------------------------------------------------------------------------------
MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1
INCEPTION
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 $ 0 $ 515,954 $ 609,201 $ 402,972 $ 44,600
2 $ 1,499,056 $ 1,631,017 $ 2,042,757 $ 2,132,028 $ 1,223,964
3 $ 1,931,761 $ 3,930,423 $ 4,498,266 $ 5,049,035 $ 2,013,525
4 $ 3,760,774 $ 5,399,569 $ 8,546,414 $ 7,290,097 $ 3,872,888
5 $ 5,220,385 $ 7,293,856 $ 12,337,604 $ 10,290,987 $ 3,825,651
6 $ 5,849,574 $ 9,790,732 $ 13,432,454 $ 13,459,369 $ 5,199,587
7 $ 6,777,962 $ 11,933,526 $ 15,076,729 $ 12,443,357 $ 6,248,301
8 $ 8,078,783 $ 12,484,893 $ 17,745,496 $ 13,861,088 $ 5,983,226
9 $ 8,528,559 $ 12,471,739 $ 18,099,411 $ 16,777,959 $ 6,591,674
10 $ 10,008,415 $ 11,304,455 $ 16,680,011 $ 19,050,239 $ 6,317,098
11 $ 10,728,125 $ 12,630,402 $ 18,929,917 $ 18,524,292
12 $ 9,257,295 $ 14,540,910 $ 21,295,026 $ 18,470,254
13 $ 9,578,031 $ 12,933,959 $ 22,303,472 $ 18,645,129
14 $ 10,757,672 $ 12,674,148 $ 21,746,520
15 $ 9,401,614 $ 14,212,157 $ 23,240,338
16 $ 8,127,303 $ 14,386,886 $ 22,031,312
17 $ 8,227,263 $ 11,723,546
18 $ 8,708,963 $ 11,171,133
19 $ 7,349,210 $ 12,018,899
20 $ 7,217,783
21 $ 7,120,727
22 $ 6,661,879
</TABLE>
Included in the principal balances and delinquency amounts is
$2.7 million of real estate acquired through foreclosure.
36
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE
- ---------------------------------------------------------------------------------------
MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1 AVERAGE
INCEPTION
- ---------------------------------------------------------------------------------------
<S> <C> <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 % 1.96 % 1.65 %
3 2.52 % 3.29 % 2.67 % 3.40 % 3.27 % 3.03 %
4 4.96 % 4.54 % 5.12 % 4.96 % 6.37 % 5.19 %
5 6.92 % 6.22 % 7.45 % 7.06 % 6.45 % 6.82 %
6 7.84 % 8.45 % 8.19 % 9.32 % 8.85 % 8.53 %
7 9.27 % 10.51 % 9.31 % 8.70 % 10.80 % 9.72 %
8 11.18 % 11.14 % 11.22 % 9.87 % 10.51 % 10.78 %
9 11.95 % 11.29 % 11.61 % 12.22 % 11.79 % 11.77 %
10 14.26 % 10.48 % 10.89 % 14.11 % 11.51 % 12.25 %
11 15.55 % 12.01 % 12.76 % 14.08 % 13.60 %
12 13.79 % 14.24 % 14.73 % 14.31 % 14.27 %
13 14.58 % 13.08 % 15.90 % 14.86 % 14.61 %
14 17.02 % 13.29 % 15.92 % 15.41 %
15 15.66 % 15.36 % 17.44 % 16.15 %
16 13.98 % 16.09 % 16.97 % 15.68 %
17 14.46 % 13.99 % 14.22 %
18 15.79 % 13.68 % 14.74 %
19 14.45 % 15.14 % 14.80 %
20 14.52 % 14.5 %
21 14.64 % 14.64 %
22 14.55 % 14.55 %
ACTUAL HISTORICAL LIFE TO
DATE PREPAYMENT SPEED 22.05 % 20.51 % 16.80 % 14.47 % 14.00 %
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and
long-term sources of debt financing and equity capital. As a result of selling
its loans for cash in the whole loan market and as a result of selling more
loans in 1998 than were originated in 1998, the Company experienced a positive
cash flow from operating activities in 1998. Although the Company's goal is to
achieve a positive cash flow each quarter, no assurance can be given that this
objective will be obtained due to the higher level of cash required to fund the
loans purchased and originated. Currently, the Company's primary operating cash
uses include the funding of (i) loan originations and purchases pending their
securitization or sale, (ii) interest expense on CII investor savings notes
("CII Notes"), senior unsecured debt and its revolving warehouse credit
facilities ("Credit Facilities"), (iii) fees, expenses, overcollateralization
and tax payments incurred in connection with the securitization program and (iv)
ongoing administrative and other operating expenses. The Company's primary
operating sources of cash are (i) cash gains from 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 loans, (iii)
interest income on loans receivable and certain cash balances, (iv) fee income
received in connection with its retail mortgage loan originations, and (v)
excess cash flow received in each period with respect to residual receivables.
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.
37
<PAGE>
The Company overcollateralizes loans as a credit enhancement on
the mortgage securitization transactions. This requirement creates negative cash
flows in the year of securitization. The Company determined in the second
quarter of 1998 to conduct whole loan sales for the remainder of the year so as
to improve liquidity. Accordingly, the Company did not securitize any mortgage
loans in the last three quarters of 1998. 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. However, in 1999, the Company began paying, on a
limited basis, some yield spread premiums as a way to increase its wholesale
production.
The table below summarizes cash flows provided by and used in
operating activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING CASH INCOME:
Servicing fees received and excess cash flow from $ 16,548 $ 3,687 $ 3,782
securitization trusts
Interest received 36,127 31,716 17,392
Cash gain on sale of loans 1,343 14,153 20,862
Cash loan origination fees received 18,255 31,843 4,714
Other cash income 5,388 1,875 1,266
-------- --------- --------
Total operating cash income 77,661 83,274 48,016
OPERATING CASH EXPENSES:
Securitization costs (851) (3,646) (849)
Securitization hedge losses -- (2,125) --
Cash operating expenses (99,551) (81,594) (21,625)
Interest paid (37,519) (20,980) (11,046)
Taxes paid (2,515) (1,581) (322)
-------- --------- --------
Total operating cash expenses (140,436) (109,926) (33,842)
CASH FLOW (DEFICIT) DUE TO OPERATING CASH INCOME (62,775) (26,652) 14,174
AND EXPENSES
OTHER CASH FLOWS:
Cash used in other payables and receivables (12,541) (5,355) (4,949)
Cash provided (used) in loans held for sale 123,674 (114,282) (86,770)
Cash provided from sale of residual receivables 16,958 -- --
Cash gain on sale of subsidiary assets 18,964 -- --
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 84,280 $ (146,289) $ (77,545)
=========== ============ ===========
</TABLE>
Although the Company's 1998 operating activities resulted in
providing $84.3 million in net cash, $123.7 million, $17.0 million and $19.0
million resulted from cash provided from loans sold, sale of residual
receivables and gain on sale of subsidiaries' assets, respectively. Cash flow
(deficit) due to operating cash income and expense was ($62.8) million, ($26.7)
million and $14.2 million in 1998, 1997 and 1996, respectively.
38
<PAGE>
Cash and cash equivalents were $36.9 million at December 31,
1998, $7.6 million at December 31, 1997, and $1.3 million at December 31, 1996.
Cash provided by operating activities was $84.3 million for the year ended
December 31, 1998, compared to a usage of $146.3 million for the year ended
December 31, 1997; cash provided by investing activities was $24.3 million for
the year ended December 31, 1998, compared to cash used in investing activities
of $11.6 million for the year ended December 31, 1997; and cash used in
financing activities was $79.3 million for the year ended December 31, 1998,
compared to cash provided by financing activities of $164.2 million for the year
ended December 31, 1997. The increase in cash provided by operations was due
principally to the increase in loan sales in relation to loan origination volume
during 1998. Cash provided by investing activities was principally from the
principal on loans not sold. The decrease in cash provided by financing
activities was due principally to a $60.9 million net reduction on warehouse
lines of credit.
At December 31, 1998, the Company had a $100.0 million warehouse
line of credit with CIT Group/Business Credit, Inc. ("CIT") to fund its Mortgage
Loan originations. Based on the borrowing base limitations contained in the
credit facility, at December 31, 1998, the Company had aggregate outstanding
borrowings of $16.7 million and aggregate borrowing availability of $21.0
million. The credit facility bears interest at Prime + 0.75%. The credit
facility matures on June 30, 2002. The credit facility contains certain
covenants, including, but not limited to, covenants that impose limitations on
the Company and its subsidiaries with respect to declaring or paying dividends
and minimum CII Notes outstanding and loans and advances by HGI and CII to the
Company. The Company believes that it is currently in compliance with the loan
covenants.
During 1997, the Company sold $125.0 million aggregate principal
amount of Senior Notes due 2004. The Senior Notes due 2004 constitute unsecured
indebtedness of the Company. The Senior Notes due 2004 are redeemable at the
option of the Company, in whole or in part, on or after September 15, 2001, at
predetermined redemption prices plus accrued and unpaid interest to the date of
redemption. This agreement requires, among other matters, restrictions on the
payment of dividends. At December 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. The Company purchased $38.4 million face amount of its senior notes
in 1998 and $35.9 million in the first two months of 1999. At December 31, 1998,
$86.4 million in aggregate principal amount of Senior Notes were outstanding. At
February 28, 1999, $51.3 million was outstanding.
39
<PAGE>
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 believed
to be exempt from Federal registration under the Federal intrastate exemption.
CII believes it conducts its operations so as to qualify for the safe harbor
provisions of Rule 147 promulgated pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). At December 31, 1998, CII had an aggregate of
$118.6 million of investor notes outstanding bearing a weighted average interest
rate of 7.4%, and an aggregate of $17.3 million of subordinated debentures
bearing a weighted average interest rate of 5.0%. The investor notes and
subordinated debentures are subordinate in priority to the credit facility.
Substantially all of the CII Notes and debentures have one-year maturities.
Shareholders' equity decreased in 1998 by $57.6 million to $5.8
million at December 31, 1998, from $63.4 million at December 31, 1997. During
1997, stockholders equity increased $16.7 million to $63.4 million at December
31, 1997, from $46.6 million at December 31, 1996. The decrease in 1998 relates
primarily to the losses incurred for the year, while the increase in 1997
resulted principally from the retention of income by the Company and the
issuance of 494,000 additional shares of common stock at a value of $5.2 million
related to the acquisition of the remaining 87% of Reedy River Ventures L.P.
that the Company did not already own.
The Company's primary objective in 1999 will be to insure
adequate levels of liquidity as the Company strives to increase loan
originations. The Company anticipates incurring operating losses in 1999. The
Company plans to continue to reduce the loan portfolio through either whole loan
sale or through securitizations. These sales will generate additional cash that
can be used to fund operating losses, to fund declines in investor notes that
could occur, or purchase additional subordinated debt, reducing interest
expense. The Company plans to operate more like a mortgage banker that
originates and sells loans, retaining only a small portfolio of loans until such
time that the Company's operations support the levels of cash flow to justify
rebuilding a portfolio of loans. Combining the Company's present level of
liquidity, with its borrowing availability under the warehouse line of credit,
and the Company's plans to further reduce both the senior subordinated debt and
loan portfolio, Management believes these strategies will provide adequate cash
flow to support the 1999 operating plan. The Company continually evaluates the
need to establish other sources of capital and will pursue those it considers
appropriate based upon its need and market conditions. The Company currently
does not anticipate incurring any significant capital expenditures in 1999.
40
<PAGE>
LOAN SALES AND SECURITIZATIONS
The Company sells or securitizes substantially all of its loans.
The Company sells on a whole loan basis a significant amount of its Mortgage
Loans (servicing released), including substantially all of its Mortgage Loans
secured by second liens, principally to secure the additional cash flow
associated with the premiums paid in connection with such sales and to eliminate
the credit risk associated with the second lien mortgage loans. However, no
assurance can be given that the second mortgage loans can be sold. To the extent
that the loans are not sold, the Company retains the risk of loss. At December
31, 1998 and 1997, the Company had retained $19.0 and $69.8 million,
respectively, of second mortgage loans on its balance sheet. During 1998, 1997,
and 1996, the Company sold $623.7 million, $435.3 million, and $284.8 million,
respectively, of Mortgage Loans and $141.0, $41.2 million, and $33.1 million,
respectively, of the guaranteed portions of SBA Loans.
On a quarterly basis in 1997, the Company securitized substantial
amounts of its Mortgage Loans, totaling $487.6 million. In the first quarter of
1998, the Company securitized $92.2 million of Mortgage 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 securitizations, the Company has retained interest-only
residual certificates representing residual interests in the trusts. These
subordinate residual securities totaled $43.9 million, net of allowances, at
December 31, 1998.
A new securitization structure was completed for the fourth
quarter 1997 Mortgage Loan securitization. This structure utilizes a real estate
investment trust ("REIT") and allows sales treatment for financial reporting
purposes, but debt treatment for tax purposes. Accordingly, this structure
eliminates current taxes payable on the book gain, while maintaining the
structural efficiency of tranching, previously only available through a real
estate mortgage investment conduit ("REMIC") transaction. Additionally, under
this structure, the Company has distributed .46% ownership in the REIT to a
certain class of employees, with an initial value of approximately $62,000.
In 1997, the Company began securitizing mortgage loans. Under
this method, the Company sells Mortgage Loans it purchased or originated to a
trust for cash. The trust sells asset-backed bonds secured by the loans to
investors. The Company records certain assets and income based upon the
difference between all principal and interest received from the loans sold and
the following factors (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 as
a residual receivable. The Company believes the assumptions it has used in past
securitizations are appropriate and reasonable.
41
<PAGE>
The Company retains the right to service loans it securitizes.
Fees for servicing loans are based on a stipulated percentage (generally 0.50%
per annum) 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. For the five mortgage securitizations completed to date, the
servicing asset recorded represents a 10 basis point strip of cash flows from
the stipulated servicing percentage.
The following sets forth facts and assumptions used by the
Company in arriving at the valuation of the residual receivables relating to its
Mortgage Loan securitizations at December 31, 1998:
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4 1998-1
---------- ---------- ----------- ----------- - ----------
<S> <C> <C> <C> <C> <C>
Outstanding balance of loans $45,780,152 $79,392,938 $129,792,748 $125,457,545 $54,887,268
securitized
Average stated principal balance 59,610 58,679 65,321 65,038 63,527
Weighted average coupon on loans 10.83% 10.73% 11.10% 11.01% 10.90%
Weighted average remaining term to 182 mths 182 mths 185 mths 191 mths 198 mths
stated maturity
Weighted average LTV 78% 74% 76% 76% 76%
% of first mortgage loans 100% 100% 100% 100% 100%
Weighted average pass-through rate to 7.36% 7.01% 6.90% 6.64% 5.49%
bondholders
Assumed annual losses 0.60 0.60 0.60 0.60 0.60
Ramp period for losses 0 mths 0 mths 0 mths 0 mths 3 mths
Assumed cumulative losses as a % of UPB 1.72% 1.70% 1.64% 1.65% 1.53%
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 applied to cash flow
after overcollateralization 12.00 12.00 12.00 12.00 12.00
Prepayment speed:
Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR (1) 30 CPR 30 CPR 30 CPR 30 CPR 30 CPR
Tail CPR (1) 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR
CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths
CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths
CPR tail begins (1) 37/49 mths 37/49 mths 37/49 mths 37/49 mths 37/49 mths
Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185%
Initial overcollateralization required (2) 3.25 -- -- -- --
Final overcollateralization required (2) 6.50 3.75 3.75 3.75 3.75
</TABLE>
(1) CPR represents an industry standard of calculating prepayment
speeds and refers to Constant Prepayment Rate. The Company uses a
curve based on various CPR levels throughout the pool's life, based
on its estimate of prepayment performance, as outlined in the table
above.
(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 such that the senior certificates have received 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").
42
<PAGE>
The Company expects to begin receiving Excess Cash Flow on its
Mortgage Loan securitizations approximately 16 months from the date of
securitization, although this time period may be shorter or longer depending
upon the securitization structure and performance of the loans securitized.
Prior to such time, the monoline insurer requires a reserve provision to be
created within the securitization trust which uses Excess Cash Flow to retire
the securitization bond debt until the spread between the outstanding principal
balance of the loans in the securitization trust and the securitization bond
debt equals a specified percentage (depending on the structure of the
securitization) of the initial securitization principal balance (the
"overcollateralization limit"). Once this overcollateralization limit is met,
excess cash flows are distributed to the Company. The Company begins to receive
regular monthly servicing fees in the month following securitization.
The 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 residual
receivables and servicing assets for impairment. There can be no assurance that
the Company's estimates used to determine the gain on sale of loans, residual
receivables, and servicing assets valuations will remain appropriate for the
life of each securitization. If actual loan prepayments or defaults exceed the
Company's estimates, the carrying value of the Company's residual receivables
and/or servicing assets may be decreased through a charge against earnings in
the period management recognizes the disparity. Conversely, if actual loan
prepayments or defaults are better than the Company's estimates, the carrying
value of the Company's residual receivables and/or servicing assets may be
increased, with additional earnings recognized in the period management
recognizes the disparity.
At December 31, 1998 key economic assumptions and the sensitivity
of the current fair value of residual cash flows to immediate 5 percent and 10
percent adverse changes in assumed economics is as follows (dollars in
thousands).
Loans
--------------
Carrying amount/fair value of retained interests $ 43,857
Weighted-average life (in years) 2.67
Prepayment speed assumption (annual rate) 30 %
Impact on fair value of 5% adverse change $ 806
Impact on fair value of 10% adverse change $ 1,567
Expected credit losses (annual rate) 0.60 %
Impact on fair value of 5% adverse change $ 284
Impact on fair value of 10% adverse change $ 567
Residual cash flows discount rate (annual) 12.0 %
Impact on fair value of 5% adverse change $ 643
Impact on fair value of 10% adverse change $ 1,268
43
<PAGE>
These sensitivities are hypothetical and should be viewed with
caution. As the figures indicate, any change in fair value based on a 5 percent
variation in assumptions cannot be extrapolated because the relationship of the
change in assumption to the change in fair value is not linear. Also, in this
table, the effect of a variation in a particular assumption on the fair value of
the retained interest is calculated independent from any change in another
assumption; in reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
TAX CONSIDERATIONS
As a result of operating losses incurred by the Company, the
Company has net operating losses ("NOL") that can be used to offset future
earnings. 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. The
Company believes its maximum cumulative change of control during the relevant
three-year period was less than 50%.
During 1998, the Company established a valuation allowance of
$21.7 million against its deferred tax asset, resulting in a net deferred tax
asset of $4.2 million at December 31, 1998. Management based the decision to
record the valuation allowance based on the significant operating losses
incurred during 1998. The amount of the reserves was established such that the
amount of deferred tax assets on the books remained constant to the level at
December 31, 1997. The amount of the remaining deferred tax asset is deemed
appropriate by management based on its belief that it is more likely than not
that it will realize the benefit of this deferred tax asset, given the levels of
historical taxable income and current projections for future taxable income over
the periods in which the deferred tax assets would be realized. The Company had
a federal NOL of approximately $58.0 million at December 31, 1998.
HEDGING ACTIVITIES
The Company's profitability may be directly affected by
fluctuations in interest rates. While the Company monitors interest rates it
may, from time to time, employ 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 includes shorting interest rate futures and
treasury forwards, and entering into interest-rate lock agreements. Since the
interest rates on the Company's warehouse line of credit used to fund and
acquire loans is 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 sale or securitization of loans earned by the
Company.
44
<PAGE>
ACCOUNTING CONSIDERATIONS
In June 1998, Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This Statement
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company has not assessed the impact of this
standard.
In October 1998, FASB issued SFAS No. 134 "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" which is effective for the first
fiscal quarter beginning after December 31, 1998. This statement conforms the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
nonmortgage banking enterprise. The adoption of this standard is not expected to
have a material effect on the Company's financial statements.
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-lien mortgage loan products. Generally, first-lien mortgage production
increases relative to second-lien mortgage production in response to low
interest rates and second-lien mortgage production increases relative to
first-lien 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 and residual receivables have been
capitalized on the books of the Company, higher than anticipated rates of loan
prepayments or losses could require the Company to write down the value of such
servicing rights and residual receivables, adversely impacting earnings.
Fluctuating interest rates may also affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sales and the interest paid by the Company for funds borrowed under
the Company's warehouse line of credit.
45
<PAGE>
YEAR 2000
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will
be required to modify or replace portions of its software and certain hardware
so that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be mitigated. However, if
such modifications and replacements are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and implementation. To
date, the Company has fully completed its assessment of all systems that could
be significantly affected by the Year 2000. The completed assessment indicated
that most of the Company's significant information technology systems were year
2000 compliant, but this assessment has identified some portions which require
remediation or upgrades. For its information technology exposures, to date the
company is 95% complete on the remediation phase and 80% complete on the testing
and implementation phases. The Company expects to complete these phases no later
than April 30, 1999. Accordingly, the Company does not believe that the Year
2000 presents a material exposure. In addition, the Company has gathered
information about the Year 2000 compliance status of its significant suppliers
and subcontractors and continues to monitor their compliance.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company has queried its significant suppliers and
subcontractors in writing. To date, the Company is not aware of any external
agent with a Year 2000 issue that would materially impact the Company's results
of operations, liquidity, or capital resources. However, the Company has no
means of ensuring that external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
46
<PAGE>
COSTS
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $100,000 and is being funded through operating cash flows. To date,
the Company has incurred approximately $81,000 ($66,000 expensed and $15,000
capitalized for new systems and equipment), related to all phases of the Year
2000 project. Of the total remaining project costs, approximately $19,000 is
attributable to the purchase of software and upgrades, which will be expensed as
incurred.
RISKS
Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program. In
the event that the Company does not complete any additional phases, the Company
would temporarily be unable to engage in normal business activities on and after
January 1, 2000. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
CONTINGENCY PLAN
The Company has contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, manual workarounds, and adjusting staffing
strategies.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Resolution Phases Assessment Remediation Testing Implementation
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information 100% Complete 95% Complete, 80% Complete, 80% Complete.
Technology Expected Expected Expected completion
E completion completion date, April, 1999
X date, April, date, April,
P 1999 1999
O ----------------------------------------------------------------------------------------
S ----------------------------------------------------------------------------------------
U Operating 100% Complete 95% Complete 95% Complete 95% Complete
R Equipment with Expected Expected Expected completion
E Embedded Chips completion completion date, March, 1999
or Software date, March, date, March,
1999 1999
T ----------------------------------------------------------------------------------------
Y ----------------------------------------------------------------------------------------
P 3rd Party 100% Complete N/A N/A N/A
E for contract _______________ _____________ _____________________
reviews. 95% complete 80% complete 80% complete for
______________ for system for system system interfaces.
100% Complete interfaces. interfaces. Expected completion
for surveying Expected Expected date, April, 1999
all critical completion completion _____________________
3rd parties date, April, date, April, Implement
1999 1999 contingency plans or
_______________ other alternatives
Develop as necessary.
contingency Expected completion
plans as date, April, 1999
appropriate.
Expected
completion
date, March,
1999
----------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from
adverse changes in market price and interest rates. This risk of loss can be
reflected in diminished current market values and/or reduced potential net
interest income in future periods.
The Company's market risk arises primarily from interest rate
risk inherent in its lending, its holding of residual receivables and its
investor savings activities. The structure of the Company's loan and investor
savings portfolios is such that a significant rise or decline in interest rates
may adversely impact net market values and net interest income. The Company does
not maintain a trading account nor is the Company subject to currency exchange
risk or commodity price risk. Responsibility for monitoring interest rate risk
rests with senior management. Senior management regularly reviews the Company's
interest rate risk position and adopts balance sheet strategies that are
intended to optimize operating earnings while maintaining market risk within
acceptable guidelines. To estimate the impact that changes in interest rates
would have on the Company's earnings, management uses Simulation Analysis.
Simulation Analysis is performed using a computer-based
asset/liability model which incorporates current portfolio balances and rates,
contractual maturities, repricing opportunities and assumptions about
prepayments, future interest rates and future volumes. To measure the
sensitivity of the Company's earnings, the result of multiple simulations, which
assume changes in interest rates, are compared to the "base case" simulation,
which assumes no changes in interest rates. The sensitivity of earnings is
expressed as a percentage change in comparison to the "base case" simulation.
The model assumes an immediate parallel shift in interest rates. The Company's
interest rate risk position based on simulation results as of December 31, 1998
is as follows:
Basis point change in interest rates (100) 100
Projected percentage change in net income (22.3)% (5.9)%
While the Company monitors interest rates and may, from time to
time, employ 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.
As of December 31, 1998, the Company did not hedge its loans held
for whole-loan sales. The Company's present strategy is to sell the substantial
portion of the current month's production that is designated for whole-loan
sales in the following month and the remaining loans in the subsequent month.
Because the interest rates on the Company's warehouse lines of credit used to
fund and acquire loans are variable and the rates charged on loans the Company
originates are fixed, increases in the interest rates after loans are originated
and prior to their sale may reduce the gain on loan sales earned by the Company.
There were no open hedging positions at year-end.
48
<PAGE>
On loans originated for inclusion in securitized pools, the
Company generally employs a strategy designed to hedge some of the risks
associated with changes in interest rates. The Company's interest rate hedging
strategy, includes shorting interest rate futures and treasury forwards, and
entering into interest-rate lock agreements relating to loans pending a
securitization transaction. The ultimate sale of the Company's loans included in
a securitized transaction 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. However, a significant reduction in market
rates could accelerate the prepayment speed on loans held in the various
securitized mortgage pools. An acceleration of prepayment on loans held in the
securitized pools would have a negative impact on the carry value of the
residual assets. There were no open hedging positions at year end.
Projected percentage changes in operating results brought about
by changes in interest rates could be material relative to the Company's
operating results. If simulation results indicate earnings sensitivity in excess
of Management's acceptable limits, Management will seek to identify on-balance
sheet and/or off-balance sheet strategies to bring earnings sensitivity within
target guidelines. Management will continue to monitor the Company's interest
rate risk position to manage the possible adverse impact on earnings caused by
changes in interest rates.
These analyses do not consider the effects of the reduced level
of overall economic activity that could exist in such an environment. Further,
in the event of a change of such magnitude, management would likely take actions
to further mitigate its exposure to the change. However, due to the uncertainty
of the specific actions that would be taken and their possible effects, the
sensitivity analysis assumes no changes in the Company's financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data are set forth
herein commencing on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On September 21, 1998, the Company changed principal accounting
firms from KPMG Peat Marwick LLP to Elliott, Davis & Company, LLP. The
discussion of this change in the Company's certifying accountant is incorporated
by reference to the Company's current report on Form 8-K dated September 25,
1998 and filed with the Commission on September 25, 1998 (Commission file no.
000-8909).
49
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the Company's proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, not later than 120 days after
the end of the fiscal year covered by this report.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of Report.
1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC.:
The Financial Statements are listed in the index to Consolidated
Financial Statements on page F-1 of this Report.
2. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
3. EXHIBITS:
The exhibits are listed on the Exhibit Index attached hereto.
51
<PAGE>
EXHIBIT INDEX
3.1.1 Restated Articles of Incorporation as filed with the South Carolina
Secretary of State on June 6, 1997: Incorporated by Reference to the
Company's Quarterly Report on Form 10-Q filed on May 15, 1998 for the
quarter ended March 31, 1998, Commission File No. 000-08909 (Exhibit
3.1).
3.1.2 Articles of Amendment as filed with the South Carolina Secretary of
State on June 24, 1998: Incorporated by Reference to the Company's
Current Report on Form 8-K filed on July 7, 1998, Commission File No.
000-08909 (Exhibit 3.1).
3.1.3 Resignation of Registered Agent and Notice of Change of Registered Agent
as filed with the South Carolina Secretary of State on July 15, 1998.
3.2 Amended and Restated Bylaws dated March 12, 1997: Incorporated by
Reference to the Company's Quarterly Report on Form 10-Q filed on May
15, 1998 for the quarter ended March 31, 1998, Commission File No.
000-08909 (Exhibit 3.2).
4.1.1 Indenture Dated as of September 23, 1997 among Emergent Group, Inc.
(n/k/a HomeGold Financial, Inc., the Company), the Subsidiary Guarantors
Named Therein and Bankers Trust Company, as Trustee pertaining to the
Company's 10.75% Senior Notes due 2004: Incorporated by Reference to the
Company's Registration Statement on Form S-4 filed on November 13, 1997,
Commission File No. 333-39339 (Exhibit 4.1).
4.1.2 Supplemental Indenture adding Emergent Insurance Agency, Inc. as
Subsidiary Guarantor dated November 3, 1997.
4.1.3 Officers' Certificate and Opinion of Counsel dated March 18, 1998, and
Notice to Trustee dated March 30, 1998, for release from Guarantees of
The Loan Pro$, Inc. and Premier Financial Services, Inc.
4.1.4 Officers' Certificate, Opinion of Counsel dated August 21, 1998, and
Notice to Trustee dated September 10, 1998, for release from Guarantees
of Sterling Lending Corporation and Sterling Lending Insurance Agency.
4.1.5 Supplemental Indenture #1, dated as of August 19, 1998.
4.1.6 Officers' Certificate, Opinion of Counsel and Notice to Trustee dated
November 13, 1999, for release from Guarantees of Emergent Business
Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a/
Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc.
4.2 See Exhibits listed under 3 above.
10.1 HomeGold Financial, Inc. Stock Option Plan: Incorporated by reference to
Exhibit 10.1 of the Company's Registration Statement on Form S-1,
Commission File No. 333-01393.
10.2.1 1995 Officer and Employee Stock Option Plan: Incorporated by reference
to Exhibit 10.1 of the Company's 1995 Notice of Annual Meeting and Proxy
Statement, Commission File No. 000-08909.
10.2.2 Amendment No. 1 to the 1995 Employee and Officer Stock Option Plan,
dated May 27, 1997: Incorporated by reference to the Company's
Registration Statement on Form S-8 filed with the Commission on July 10,
1998, Commission File No. 333-58861.
10.2.3 Amendment No. 2 to the 1995 Employee and Officer Stock Option Plan,
dated June 10, 1998: Incorporated by reference to the Company's
Registration Statement on Form S-8 filed with the Commission on July 10,
1998, Commission File No. 333-58861.
10.3 1995 Director Stock Option Plan: Incorporated by reference to an exhibit
filed with the Company's 1995 Notice of Annual Meeting and Proxy
Statement.
10.4 1995 Restricted Stock Agreement Plan: Incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1,
Commission File No. 333-01393.
10.5 HomeGold Financial, Inc. Employee Stock Purchase Plan: Incorporated by
reference to Exhibit 99.1 of the Company's registration statement on
Form S-8, Commission File No.
333-20179.
10.6.1 Mortgage Loan Warehousing Agreement dated June 30, 1998, by and among
HomeGold, Inc. and Carolina Investors, Inc., as Borrowers, the Financial
Institutions Party Thereto, as Lenders, and The CIT Group/Business
Credit, Inc. as Administrative Agent: Incorporated by Reference to the
Company's 8-K filed on July 7, 1998, Commission File No. 000-08909
(Exhibit 10.1).
52
<PAGE>
10.6.2 First Amendment to Mortgage Loan Warehousing Agreement dated August 24,
1998.
10.6.3 Second Amendment to Mortgage Loan Warehousing Agreement dated December
24, 1998.
10.7.1 Asset Purchase Agreement dated October 2, 1998, by and among
TransAmerica Business Credit Corporation and Certain Subsidiaries
thereof, the Sellers named therein HomeGold Financial, Inc. Incorporated
by reference to the Company's current report on Form 8-K dated October
2, 1998, Commission File No. 000-08909.
10.7.2 Amendment dated November 12, 1998, by and among TBCC, TransAmerica
Growth Capital, Inc., TransAmerica Small Business Services, Inc., the
Sellers named therein and HomeGold Financial, Inc. to the Asset Purchase
Agreement dated October 7, 1998.
16.1 Letter of KPMG Peat Marwick dated September 25, 1998. Incorporated by
reference to Exhibit 16.1 to the Company's Current Report on Form 8-K
dated September 25, 1998, Commission File No. 000-08909.
21.0 Listing of subsidiaries.
23.1 Consent of Elliott, Davis & Company, L.L.P. to include report of
Independent Auditors for the year ended December 31, 1998.
23.2 Consent of KPMG Peat Marwick, LLP to include report of independent
auditors for the two years ended December 31, 1997.
27.1 Financial Data Schedule (For SEC Use Only).
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
(1) On October 2, 1998, the Company filed a Form 8-K
with respect to the execution of Definitive
Purchase Agreement for the Sale of the SBA
Portfolio to TransAmerica Credit Corporation.
(2) On November 13, 1998, the Company filed a Form 8-K
with respect to historical and pro forma financial
statements related to the sale of the SBA portfolio
to TransAmerica Credit Corporation.
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C> <C>
HOMEGOLD FINANCIAL, INC.
---------------------------------------------
Registrant
March 4, 1999 \s\ John M. Sterling, Jr.
- --------------------------------------------- ----------------------------------------------
(Date) John M. Sterling, Jr., Chairman of the Board
of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
\s\ J. Robert Philpott, Jr. \s\ Tecumseh Hooper, Jr.
- --------------------------------------------- ----------------------------------------------
J. Robert Philpott, Jr. Tecumseh Hooper, Jr.
Director Director
\s\ John M. Sterling, Jr. \s\ Clarence B. Bauknight
- --------------------------------------------- ----------------------------------------------
John M. Sterling, Jr., Chairman of the Clarence B. Bauknight
Board of Directors and Chief Executive Director
Officer
\s\ Larry G. Blackwell \s\ Porter B. Rose
- --------------------------------------------- ----------------------------------------------
Larry G. Blackwell Porter B. Rose
Director Director
\s\ Keith B. Giddens \s\ Kevin J. Mast
- --------------------------------------------- ---------------------------------------------
Keith B. Giddens, President, Chief Kevin J. Mast, Executive Vice President,
Operating Officer and Director Chief Financial Officer and Treasurer
March 4, 1999
- ---------------------------------------------
(Date)
</TABLE>
54
<PAGE>
HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.)
AND SUBSIDIARIES
1998 REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.)
AND SUBSIDIARIES
1998 REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Independent Auditors' Report ..................................................2
Audited Consolidated Financial Statements
Consolidated Balance Sheets............................................3
Consolidated Statements of Operations..................................5
Consolidated Statements of Shareholders' Equity........................6
Consolidated Statements of Cash Flows..................................7
Notes to Consolidated Financial Statements ............................8
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
Shareholders and Board of Directors
HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.)
AND SUBSIDIARIES
Greenville, South Carolina
We have audited the accompanying consolidated balance sheet of
HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES as of
December 31, 1998 and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of HOMEGOLD
FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES as of December 31,
1997, and for each of the two years in the period then ended, were audited by
other auditors whose report dated February 27, 1998, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of HOMEGOLD
FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES as of December 31,
1998 and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
February 19, 1999, except for Note 2 and Note 27, as to which the date is
February 24, 1999.
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1998 1997
----------- ----------
ASSETS (In thousands)
------
<S> <C> <C>
Cash and cash equivalents $ 36,913 $ 7,561
Restricted cash 5,100 --
Loans receivable 124,740 297,615
Less allowance for credit losses on loans (6,659) (6,528)
Less deferred loan fees (2,071) (4,316)
Plus deferred loan costs 888 1,658
----------- ----------
Net loans receivable 116,898 288,429
Income taxes receivable 900 1,029
Accrued interest receivable 2,613 4,407
Other receivables 12,028 9,651
Residual receivable, net 43,857 63,202
Property and equipment, net 19,665 18,080
Real estate and personal property acquired through foreclosure 5,881 3,295
Excess of cost over net assets of acquired businesses, net of accumulated 1,660 2,874
amortization of $654,000 in 1998 and $978,000 in 1997
Debt origination costs 4,681 4,767
Deferred income tax asset, net 4,151 4,151
Servicing asset 940 1,468
Other assets 1,921 7,238
----------- ----------
TOTAL ASSETS $ 257,208 $ 416,152
=========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1998 1997
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
------------------------------------
Liabilities:
<S> <C> <C>
Revolving warehouse lines of credit $ 16,736 $ 77,605
Investor savings:
Notes payable to investors 118,586 115,368
Subordinated debentures 17,304 18,947
------------ ----------
Total investor savings 135,890 134,315
Senior unsecured debt 86,650 125,000
Accounts payable and accrued liabilities 6,656 6,517
Remittances payable 1,871 4,591
Income taxes payable 382 --
Accrued interest payable 3,199 4,750
------------ ----------
Total other liabilities 12,108 15,858
------------ ----------
Total liabilities 251,384 352,778
Minority interest 23 --
Shareholders' equity:
Common stock, par value $.05 per share - authorized 100,000,000
shares issued and outstanding 9,733,374 shares in 1998 and
9,686,477 shares in 1997 486 484
Capital in excess of par value 38,821 38,609
Retained earnings (deficit) (33,506) 24,281
------------ ----------
Total shareholders' equity 5,801 63,374
------------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 257,208 $ 416,152
============ ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------ -------------
(In thousands, except share data)
<S> <C> <C> <C>
REVENUES:
Interest income $ 35,075 $ 34,008 $ 17,908
Servicing income 12,239 8,514 3,274
Gain on sale of loans:
Gross gain on sale of loans 9,472 52,828 23,815
Loan fee, net 11,745 30,207 4,150
------------ ------------ -------------
Total gain on sale of loans 21,217 83,035 27,965
Gain on sale of subsidiaries' net assets 18,964 -- --
Other revenues 4,230 1,399 1,241
------------ ------------ -------------
Total revenues 91,725 126,956 50,388
------------ ------------ -------------
EXPENSES:
Interest 35,968 25,133 11,021
Provision for credit losses 11,906 10,030 5,416
Fair market value writedown on residual receivables 13,638 -- --
Salaries, wages and employee benefits 56,584 48,044 13,663
Business development costs 10,818 7,486 1,603
Restructuring charges 6,838 -- --
Other general and administrative expense 28,964 28,754 8,224
------------ ------------ -------------
Total expenses 164,716 119,447 39,927
------------ ------------ -------------
Income (loss) before income taxes, minority interest
and (72,991) 7,509 10,461
extraordinary item
Provision (benefit) for income taxes 3,017 (3,900) 718
------------ ------------ -------------
Income (loss) before minority interest and (76,008) 11,409 9,743
extraordinary item
Minority interest in (earnings) loss of subsidiaries 47 (156) 352
------------ ------------ -------------
Income (loss) before extraordinary item (75,961) 11,253 10,095
Extraordinary item--gain on extinguishment of debt, net of $0 18,216 -- --
tax
============ ============ =============
NET INCOME (LOSS) $ (57,745) $ 11,253 $ 10,095
============ ============ =============
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Income (loss) before extraordinary item $ (7.81) $ 1.20 $ 1.47
Extraordinary item, net of taxes 1.87 -- --
============ ============ =============
Net income (loss) (5.94) 1.20 1.47
============ ============ =============
Basic weighted average shares outstanding 9,719,262 9,406,221 6,852,420
============ ============ =============
DILUTED EARNING (LOSS) PER SHARE OF COMMON STOCK:
Income (loss) before extraordinary item $ (7.81) $ 1.17 $ 1.42
Extraordinary item, net of tax 1.87 -- --
============ ============ =============
Net income (loss) (5.94) 1.17 1.42
============ ============ =============
Diluted weighted average shares outstanding 9,719,262 9,598,811 7,099,874
============ ============ =============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Class A
Common Stock Common Stock
-------------------- ------------------------
Capital
in
Excess Retained
Shares Shares of Par Earnings
Issued Amount Issued Amount Value (Deficit) Total
----------- -------- ------------ ---------- ---------- ---------- ----------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 121,000 $ 6 6,276,474 $ 314 $ 6,632 $ 2,933 $ 9,885
Shares issued:
Exercise of stock options 2,026 -- 110,668 5 156 -- 161
Conversion of Class A Common
Stock to Common Stock 6,387,142 319 (6,387,142) (319) -- -- --
Exercise of stock warrants 111,932 6 -- -- 288 -- 294
Issuance of Common Stock 2,519,031 126 -- -- 26,074 -- 26,200
Net income -- -- -- -- -- 10,095 10,095
----------- -------- ------------ ---------- ---------- ---------- ----------
Balance at December 31, 1996 9,141,131 457 -- -- 33,150 13,028 46,635
Shares issued:
Exercise of stock options 40,667 2 -- -- 227 -- 229
Exercise of restricted stock 2,900 -- -- -- -- -- --
options
Employee Stock Purchase Plan 7,534 -- -- -- 67 -- 67
Purchase of Reedy River 494,195 25 -- -- 5,164 -- 5,189
Ventures LP
Other shares issued 50 -- -- -- 1 -- 1
Net income -- -- -- -- -- 11,253 11,253
----------- -------- ------------ ---------- ---------- ---------- ----------
Balance at December 31, 1997 9,686,477 484 -- -- 38,609 24,281 63,374
Shares issued:
Exercise of stock options 9,467 -- -- -- 21 -- 21
Employee Stock Purchase Plan 37,430 2 -- -- 191 -- 193
Dividends Paid -- -- -- -- -- (42) (42)
Net loss -- -- -- -- -- (57,745) (57,745)
----------- -------- ------------ ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 9,733,374 $ 486 -- $ -- $ 38,821 $ (33,506) $ 5,801
=========== ======== ============ ========== ========== ========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- ------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (57,745) $ 11,253 $ 10,095
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,626 2,691 1,334
Fair value writedown on residual receivables 13,638
Benefit for deferred income taxes -- (3,813) (141)
Provision for credit losses on loans 11,906 10,030 5,416
Provision for losses on real estate owned 696 -- --
Gain on retirement of senior unsecured debt (18,216) -- --
Net (increase) decrease in deferred loan 770 (1,573) 145
costs
Net increase (decrease) in unearned
discount and other deferrals (2,245) 2,812 665
Loans originated with intent to sell (747,442) (1,140,333) (387,600)
Proceeds from loans sold 778,948 517,803 271,858
Proceeds from securitization of loans 92,316 509,781 30,128
Restructuring charge 5,760 -- --
Other 994 (902) (1,481)
Changes in operating assets and liabilities
increasing (decreasing) cash 1,274 (54,038) (7,964)
-------------- -------------- -------------
Net cash provided by (used in)
operating activities $ 84,280 $ (146,289) $ (77,545)
-------------- -------------- ------------
INVESTING ACTIVITIES:
Loans originated $ (156,617) $ (133,188) $ (49,173)
Principal collections on loans not sold 182,196 128,552 61,868
Proceeds from sale of real estate and personal property
acquired through foreclosure 7,593 6,652 3,383
Proceeds from sale of property and equipment 2,808 29 160
Purchase of property and equipment (11,701) (13,222) (4,894)
Other 48 (411) (84)
--------------- -------------- ------------
Net cash provided by (used in) investing activities 24,327 (11,588) 11,260
--------------- -------------- ------------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit 1,416,500 1,139,815 509,118
Payments on warehouse lines of credit (1,477,369) (1,117,704) (485,257)
Net increase in notes payable to investors 3,218 17,381 15,855
Net increase (decrease) in subordinated debentures (1,643) 2,832 (70)
Net proceeds from issuance of senior unsecured debt -- 120,578 --
Retirement of senior unsecured debt (20,134) -- --
Proceeds from issuance of common stock 214 1,260 26,655
Other (41) -- --
--------------- -------------- ------------
Net cash provided by (used in) financing activities (79,255) 164,162 66,301
--------------- -------------- ------------
Net increase in cash and cash equivalents 29,352 6,285 16
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR 7,561 1,276 1,260
--------------- -------------- ------------
END OF YEAR $ 36,913 $ 7,561 $ 1,276
=============== ============== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF
THESE STATEMENTS.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and its subsidiaries
("HGFN" or "the Company") are primarily engaged in the business of originating,
selling, securitizing and servicing first and second-lien residential mortgage
loan products. Prior to November 1998, the Company also engaged in the business
of originating, selling, securitizing and servicing commercial loan products
partially guaranteed by the United States Small Business Administration ("SBA")
and commercial loans collateralized by accounts receivable and inventory and
mezzanine loans.
The funds for these loans are obtained principally through the utilization of
various bank warehouse lines of credit, proceeds from securitization of loans,
and the issuance of senior unsecured debt, notes payable and subordinated
debentures to investors. Substantially all of the Company's loans are made to
non-prime borrowers. These borrowers generally have limited access to credit or
are otherwise considered to be credit impaired by conventional lenders.
CONSOLIDATION AND ESTIMATES
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All subsidiaries at December 31, 1998 were wholly-owned except
for one special purpose corporation that is 99.54% owned. Included in the
consolidated financial statements of operations are the operations of the
various subsidiaries that were sold during 1998. All significant intercompany
items and transactions have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates. These estimates include, among other things,
valuation of real estate owned, assumptions used to value residual receivables
and determination of the allowance for credit losses.
ADOPTION OF NEW ACCOUNTING POLICIES
Effective January 1, 1998, the Company adopted the provisions of Statements of
Financial Accounting Standards ("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. Net income and comprehensive income are the
same for the years ended December 31, 1998, 1997 and 1996.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADOPTION OF NEW ACCOUNTING POLICIES (CONTINUED)
Effective December 15, 1998, the Company adopted the provisions of SFAS No. 131
"DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". This
Statement establishes standards for the method that public entities report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about product and services, geographical areas, and
major customers. The Company believes that it operates as one segment.
SALES AND SECURITIZATION OF LOANS
In 1996, the Company began securitizing loans, whereby it 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 as
residual receivable. The Company believes the assumptions it has used are
appropriate and reasonable. At each reporting period, the Company assesses the
fair value of these residual assets based on the present value of future cash
flows expected under management's current best estimates of the key
assumptions-credit losses, prepayment speed, forward yield curves, and discount
rates commensurate with the risks involved and adjusts the recorded amounts to
their estimated fair value.
In 1997, the Company began securitizing mortgage loans. Total mortgage loans
securitized in 1998 and 1997 was $92.2 million and $487.6 million, respectively.
Since 1996, the Company has securitized $39.0 million of small business loans,
with $1.8 million in small business loan securitizations in 1998. The small
business loans represent the unguaranteed portion of SBA loans originated or
purchased by the Company. The securitization transactions in 1996 were accounted
for under SFAS No. 77 and were reflected as sales under this pronouncement.
The Company also sells on a whole loan basis a significant portion of its loans
(servicing released), including substantially all of its mortgage loans secured
by second liens and loans originated by strategic alliance mortgage brokers, and
all of its SBA guaranteed loan participations (servicing retained), principally
to secure the additional cash flow associated with the premiums paid in
connection with such sales and to eliminate the credit risk associated with the
second lien mortgage loans.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SALES AND SECURITIZATION OF LOANS (CONTINUED)
All securitizations in 1998 were completed prior to March 31, 1998. The
Company's strategy for the remainder of 1998 was to sell loans on a whole loan
basis. The Company may return to securitization transactions in 1999 if various
conditions, including market conditions warrant.
The Company's has entered into strategic alliance mortgage banker agreements
whereby the Company provides funding and secondary marketing activities for its
strategic alliance mortgage bankers ("Strategic Alliance Mortgage Banker"). In
exchange, the Strategic Alliance Mortgage Bankers agree to provide the Company
with all of their mortgage loan production that meets the Company's underwriting
criteria. The premiums earned on the secondary market are then split between the
Company and its Strategic Alliance Mortgage Banker. The terms of these
agreements range from 2 to 5 years. In the event the Strategic Alliance Mortgage
Banker terminates the agreement early, the contract generally provides for a
termination fee equal to, at a minimum, all of the premium income received by
the Strategic Alliance Mortgage Banker over the last twelve months. This
termination fee is considered to be a recoupment of previously shared premiums,
and accordingly is included in gain on sale of loans in the Statements of
Income. No gain was recognized in 1998 or 1997 related to terminations. For the
year ended December 31, 1996, two Strategic Alliance Mortgage Bankers terminated
their agreements early. Accordingly, the Company has recognized $7.3 million in
gain on sale of loans in 1996 relating to these terminations.
CASH AND CASH EQUIVALENTS
The Company maintains its primary checking accounts with three principal banks
and maintains overnight investments in reverse repurchase agreements with those
same banks. The amounts maintained in the checking accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31,
1998, 1997 and 1996, the amounts maintained in the overnight investments in
reverse repurchase agreements, which are not insured by the FDIC, totaled $31.6
million, $5.3 million and $282,000, respectively. These investments were
collateralized by U. S. Government securities pledged by the banks.
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
RESTRICTED CASH
The Company maintains an investment account with a trustee relating to
representations and warranties in connection with the sale of the small-business
loan unit. This account is shown as restricted cash, and is invested in
overnight investments or short-term U.S. Treasury securities.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS RECEIVABLE AND INTEREST INCOME
Loans receivable in 1998 consist primarily of first and second residential
mortgage loans, and asset-based small-business loans. In prior years, it also
included SBA loans and automobile loans. During 1998, the Company sold the
majority of its small-business and auto loans. The Company presently is not
originating these types of loans. Non-refundable loan fees and direct costs
associated with the origination or purchase of loans are deferred and netted
against outstanding loan balances.
Collateral is often taken to provide an additional measure of security.
Generally, the cash flow or earning power of the borrower represents the primary
source of repayment and collateral liquidation a secondary source of repayment.
The Company determines the need for collateral on a case-by- case or
product-by-product basis. Factors considered include the current and prospective
creditworthiness of the customer, terms of the instrument and economic
conditions.
Interest income on loans receivable is recognized on the accrual basis as
earned. Fees received, net of direct costs incurred, for the origination of
loans and insurance commissions, are deferred and amortized into interest income
over the contractual life of the loan using the interest method. Any unamortized
amounts are recognized into income at the time the loan is repaid or sold.
Accrual of interest is discontinued and reversed when a loan is either over 90
days past due, the collateral is determined to be inadequate or when foreclosure
proceedings begin.
Loans receivable held for sale are carried at the lower of aggregate cost or
market. There was no allowance for market losses on loans receivable held for
sale at December 31, 1998 and 1997.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on management's ongoing evaluation of
the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb inherent losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors including
delinquencies, current economic conditions, prior loan loss experience, the
composition of the serviced loan portfolio, and management's estimate of
anticipated credit losses. Loans, including those deemed impaired, are charged
against the allowance at such time as they are determined to be uncollectible.
Subsequent recoveries are credited to the allowance. Management considers the
year-end allowance appropriate and adequate to cover inherent losses in the loan
portfolio; however, management's judgment is based upon a number of assumptions
about future events, which are believed to be reasonable. Actual results could
differ from these estimates. Thus, there can be no assurance that charge-offs in
future periods will not exceed the allowance for credit losses or that
additional increases in the allowance for credit losses will not be required.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR IMPAIRED LOANS
The Company assesses a specific allowance on mortgage loans, by reviewing on a
loan-by-loan basis each month, all loans over 90 days past due or any loans that
are in bankruptcy.
A loan's impairment is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company's policy is to
evaluate impaired loans based on the fair value of the collateral, since the
majority of loans originated by the Company are collateral dependent. Interest
income from impaired loans is recorded using the cash collection method.
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure represents properties that have been
acquired through actual foreclosures or deeds received in lieu of loan payments.
These assets are recorded at the lower of the carrying value of the loans or the
estimated fair value of the related real estate, net of estimated selling costs.
The excess carrying value, if any, of the loan over the estimated fair value of
the asset is charged to the allowance for credit losses upon transfer. Costs
relating to the development and improvement of the properties are capitalized
whereas those costs relating to holding the property are charged to expense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed principally
using the straight-line method over the estimated useful lives of the assets.
Estimated lives are 15 to 40 years for buildings and improvements, 3 to 7 years
for furniture, fixtures and equipment, and the lease period for leasehold
improvements. Additions to property and equipment and major replacements or
improvements are capitalized at cost. Maintenance, repairs and minor
replacements are expensed when incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles held and used by the Company are
reviewed for impairment whenever management believes events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. No impairment loss was recognized for continuing operations in the
two years ended December 31, 1997.
In November 1998, the Company decided to close three retail loan centers and to
consolidate all operations into one location. This decision resulted in a
restructuring charge of $6.8 million. The restructuring charge relates to the
write-down of fixed assets to net realizable value on assets no longer used by
the Company and the estimated net lease cost on facilities no longer being used.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AMORTIZATION
The excess of cost over related net assets of businesses acquired is amortized
using the straight-line method principally over 25 years. On a periodic basis,
the Company reviews goodwill for events or changes in circumstances that may
indicate that the carrying amount of goodwill may not be recoverable. The
Company utilizes estimated future cash flows of the purchased subsidiary in
determining any impairment on the excess of cost over the related net assets.
DEBT ORIGINATION COSTS
The Company capitalizes costs incurred to obtain warehouse lines of credit and
senior unsecured debt. These costs are amortized as an addition to interest
expense over the terms in the loan agreements. The Company also reduces the debt
origination costs by the unamortized portion of the senior unsecured debt that
is purchased. These amounts have been netted against the gain on extinguishment
of debt.
REMITTANCES PAYABLE
The Company retains the servicing rights on its mortgage securitization
transactions. The Company receives the payments from the borrowers and records a
liability until the funds are remitted to the Trustee.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred income
taxes arise principally from depreciation, unrealized gains on loans held for
sale, certain securitization transactions, amortization of intangibles,
allowances for credit losses, and net operating loss carryforwards. Management
establishes on a quarterly basis a valuation allowance for deferred assets.
Management believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize net deferred tax
assets.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING EXPENSE
Advertising, promotional, and other business development costs are generally
expensed as incurred except as noted herein. External costs incurred in
producing media advertising are expensed the first time the advertising takes
place. In 1997, the Company began using a direct mail marketing approach for its
retail mortgage business. External costs related to direct mailings are
capitalized in accordance with Statement of Position 93-7 and amortized over a
three-month period. Total expenses recognized in 1998 and 1997 for direct
mailings were approximately $8.8 million and $5.9 million, respectively. The
total amounts capitalized into other assets on the balance sheet at December 31,
1998 and 1997 were approximately $842,000 and $1.9 million.
INTEREST RATE RISK MANAGEMENT
The Company's operations may be directly affected by fluctuations in interest
rates. While the Company monitors interest rates and may, from time to time,
employ 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 currently does not hedge its
loans held for whole-loan sales. The Company's present strategy is to sell a
substantial portion of the current months' production that is designated for
whole-loan sales in the following month and the remaining loans in the
subsequent month. Because the interest rates on the Company's warehouse lines of
credit used to fund and acquire loans are variable and the rates charged on
loans the Company originates are fixed, increases in the interest rates after
loans are originated and prior to their sale may reduce the gain on loan sales
earned by the Company. There were no open hedging positions at year-end. On
loans originated for inclusion in securitized pools, the Company generally
employs a strategy designed to hedge some of the risks associated with changes
in interest rates. The Company's interest rate hedging strategy, includes
shorting interest rate futures and treasury forwards, and entering into
interest-rate lock agreements relating to loans pending a securitization
transaction. The ultimate sale of the Company's loans included in a securitized
transaction 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.
EARNINGS PER SHARE
Earnings per share ("EPS") are computed in accordance with SFAS No. 128,
"EARNINGS PER Share". Basic EPS includes no dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution of securities that could
share in the earnings of the Company. Common stock equivalents included in the
diluted EPS computation consist of stock options, which are computed using the
treasury stock method. In 1998, due to the Company's net loss, the common stock
equivalents were not included in the diluted EPS calculation since their
inclusion would be antidilutive.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to current
year presentation. Such reclassifications had no effect on net income or
shareholders' equity as previously reported.
ACCOUNTING CONSIDERATIONS
In June 1998, Financial Accounting Standards Board ("FASB") issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This Statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company has not
assessed the impact of this standard.
In October 1998, FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" which is effective for the first fiscal quarter
beginning after December 31, 1998. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans by
a mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non-mortgage
banking enterprise. The adoption of this standard is not expected to have a
material effect on the Company's financial statements.
NOTE 2. SIGNIFICANT TRANSACTIONS AND EVENTS
The year 1998 was marked by many significant events that were a direct result of
redefined corporate objectives in response to changes in the industry and the
Company's 1998 loss. In 1998, the Company recognized a loss of $57.7 million as
compared to net income of $11.3 million in 1997. The 1998 net loss was primarily
due to the Company's loan production volume being below capacity in relation to
the general and administrative expense structure and lower premiums and
discounts on sales of mortgage loans.
Loan production declined to $904.1 million in 1998 from $1.3 billion in 1997.
Gross gain on sale of loans declined $43.4 million or 82.1% during 1998.
There were two primary reasons for lower production in 1998 compared to 1997.
First was a decision at the beginning of 1998 to segregate the origination and
the underwriting processes. In connection with this reorganization, several
managers of the HomeGold retail operations left the Company. Second was a
decision by the Company to "tighten" underwriting guidelines in response to
investor concerns related to the quality of loans that the Company and its
competitors were originating. These decisions improved the quality of loans
originated, but had a significant negative impact on the volume of loans
originated.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT TRANSACTIONS AND EVENTS (CONTINUED)
The significant change in the premiums (discounts) received in 1998 resulted
primarily from two factors. First, the Company sold at a discount substantially
all of the second lien mortgage loans it held, that were not underwritten in
accordance with Company guidelines. In an effort to increase loan production,
former employees approved loans that did not meet Company guidelines. Second,
the Company received significantly lower premiums on loan sales in the third and
fourth quarters of 1998 because of a market surplus in the supply of loans in
the resale market. The Company believes this surplus, in turn, resulted from the
decision of issuers of securitized loan pools to sell their loan products in the
whole loan cash market when securitization, as a means of financing, became less
attractive. Securitization became less attractive as the corporate interest rate
spreads required by investors increased in the latter half of 1998. Investors
required higher spreads because of concerns related to higher than anticipated
prepayments on securitized loan pools and concerns about the credit worthiness
of several issuers.
Specific management decisions made during the fourth quarter of 1997 and
throughout 1998 significantly impacted the Company's financial statements. This
footnote provides a summary of the more significant transactions and the
subsequent footnotes reflect the significant changes that occurred during 1998.
The following information is only for the purpose of providing a brief overview
and is qualified in its entirety by the additional information that is enclosed
in the following notes.
The company's primary objectives in 1998 were to insure adequate levels of
liquidity, to match operating expenses with loan origination volumes, and to
focus management's attention on the Company's larger residential mortgage loan
operations.
o To ensure adequate liquidity, the company secured a $100 million dollar line
of credit in June 1998 to replace an existing maturing line of credit.
o The Company decided to reduce the loan portfolio size and to use excess
liquidity to repurchase $38.4 million of its senior unsecured debt. The
reduction in senior debt resulted in an extraordinary gain of $18.2 million
on the extinguishment of this debt.
o The sales of the Company's auto loan portfolio and related assets in March
1998, the sale of the small retail residential mortgage loan origination
company in August 1998, and the sale of the small-business loan portfolio
and related assets in fourth quarter of 1998, resulted in a gain on the sale
of net assets of $19.0 million. These transactions required a significant
amount of management time and attention in 1998. As a result of the sales in
1998, management is now able to focus on the Company's larger retail
mortgage loan products and its mortgage brokerage products. These
transactions provided the company with approximately $70.1 million of cash
proceeds after reducing bank lines of credit.
o The Company completed one small mortgage loan securitization in 1998
compared to four securitizations in 1997. The decision in April to sell the
mortgage loans on a servicing released basis for cash resulted in lower
premiums on sales, reduced the company's serviced portfolio from $768.6
million at the end of 1997 to $550.3 million at the end of 1998 and
positively impacted the Company's operating cash flow.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT TRANSACTIONS AND EVENTS (CONTINUED)
o The Company responded to higher than anticipated prepayments on securitized
loan pools by increasing the prepayment assumptions used in valuing the
Company's residual assets. This resulted in a $13.6 million fair market
value write-down on residual assets during 1998.
o The Company reduced the number of employees from a high of 1,300 employees
at the beginning of the year to 450 employees at the end of 1998 in an
effort to bring loan production costs and overall general and administrative
expenses more in line with the lower loan volume levels. A significant
portion of the staff reductions resulted from the Company's decision to
consolidate the retail centers outside of Greenville, South Carolina into
the Greenville corporate headquarters building. This decision resulted in
the company recording a $6.8 million restructuring charge. Management
believes these charges will be beneficial by creating efficiencies through
consolidation of operations and implementation of future strategic
directives, and better aligning expenses with current levels of production.
o The Company's 1998 decisions resulted in a liquidity position of $57.9
million at December 31, 1998, representing $36.9 million of cash and cash
equivalents and $21.0 million of availability under the credit agreement.
The Company believes that its liquidity position will provide the funds
necessary for the Company to complete its plan of increasing loan production
and loan sales to a level that will result in an operating profit on a
monthly basis in the fourth quarter of 1999.
o The Company's primary objective for 1999 is to increase loan originations.
The Company believes that the current staffing level is more than adequate
to support substantially higher levels of production.
o The Company also anticipates continuing to repurchase senior subordinated
debt. The Company realized a $16.9 million extraordinary gain in the first
two months of 1999 on the repurchase of $35.3 million of senior debt.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LOANS RECEIVABLE
The following is a summary of loans receivable by type of loan:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
----------------- ---------------
(In thousands)
<S> <C> <C>
Mortgage Loans:
First mortgage residential property $ 92,696 $ 152,371
Second mortgage residential property 18,992 69,836
Real estate loans on rental property 1,285 2,609
Construction loans 2,932 6,329
--------------- ---------------
Total mortgage loans 115,905 231,145
--------------- ---------------
Small-Business Loans:
Guaranteed portion of SBA loans -- 10,732
Unguaranteed portion of SBA loans -- 6,619
Small-business loans secured by real estate -- 1,787
Asset-based small-business loans 7,054 18,798
Mezzanine loans -- 7,250
--------------- ---------------
Total small-business loans 7,054 45,186
--------------- ---------------
Auto loans -- 21,284
Other loans 1,781 --
--------------- ---------------
Total loans receivable $ 124,740 $ 297,615
=============== ===============
</TABLE>
Included in loans receivable are $74.1 million and $156.8 million at December
31, 1998 and 1997, respectively that are being held for sale.
Included in loans receivable are loans from related parties of $640,000 and
$509,000 at December 31, 1998 and 1997, respectively. Notes receivable from
related parties included advances of $100,000 in 1998 and $736,000 in 1996. No
advances were made in 1997. Repayments from related parties were $28,000,
$560,000 and $30,000 in 1998, 1997 and 1996, respectively.
First mortgage residential loans generally have contractual maturities of 12 to
360 months with an average interest rate at both December 31, 1998 and 1997 of
approximately 11%.
Second mortgage residential loans have contractual maturities of 12 to 360
months with an average interest rate at December 31, 1998 and 1997 of
approximately 14% and 15%, respectively. Construction loans generally have
contractual maturities of 12 months with an average interest rate at both
December 31, 1998 and 1997 of approximately 11%. Asset-based loans generally are
due on demand and had average interest rates at December 31, 1998 and 1997 of
approximately 19% and 21%, respectively.
Loans sold and serviced for others at December 31, 1998 and 1997 were
approximately $432.6 million and $691.1 million, respectively, and are not
included in assets in the accompanying balance sheets.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LOANS RECEIVABLE (CONTINUED)
At December 31, 1998, the Company's serviced for others mortgage loan portfolio
by type of collateral is summarized as follows (in thousands):
First mortgage residential property $ 422,723 $ 97.7 %
Real estate loans on rental property 9,896 2.3
------------- ----------
$ 432,619 $ 100.0 %
============== ==========
The Company services loans in 50 states. South Carolina, North Carolina, Florida
and Georgia serviced loans represent approximately 16%, 15%, 9% and 8%,
respectively, of the Company's total serviced loan portfolio at December 31,
1998. No other state represents more than 6% of total serviced loans.
An analysis of the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
-------------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 6,528 $ 3,084 1,874
Provision for credit losses 11,906 10,030 5,416
Net charge offs (8,792) (5,166) (2,494)
Allowance related to loans sold (2,983) -- --
Securitization transfers -- (1,420) (1,712)
============ ============ ===========
Balance at end of year $ 6,659 $ 6,528 3,084
============ ============ ===========
</TABLE>
As of December 31, 1998, 1997, and 1996, loans totaling $7.9 million, $8.9
million, and $4.9 million, respectively, were on non-accrual status. The
associated interest income not recognized on these non-accrual loans was
approximately $2.0 million, $809,000, and $593,000 during the years ended
December 31, 1998, 1997 and 1996, respectively.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments expose the Company to credit risk in excess of the amount
recognized in the balance sheet. The Company's exposure to credit loss in the
event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. Total
credit exposure at December 31, 1998 related to these items is summarized below:
Contract Amount
------------------
(In thousands)
Loan commitments:
Approved loan commitments $ 4,587
Unadvanced portion of loans 1,032
------------------
Total loan commitments $ 5,619
==================
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LOANS RECEIVABLE (CONTINUED)
Loan commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the customer.
Collateral held is primarily residential property. Interest rates on loan
commitments are generally fixed rates.
NOTE 4. OTHER RECEIVABLES
The following is a summary of other receivables:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
---------------- ---------------
(In thousands)
<S> <C> <C> <C>
Note receivable from sale of asset-based lending unit(1) $ 2,200 $ --
Final purchase price adjustment on sale of assets to 4,339 --
TransAmerica(2)
Advanced funds to trust(3) 2,514 329
Receivable from mortgage trust(4) 1,394 530
Receivable from auto trust(5) -- 3,000
Advances to strategic partners -- 2,074
Other 1,581 3,718
------------- --------------
$ 12,028 $ 9,651
============= ==============
</TABLE>
- --------------
(1) Note receivable from Emergent Asset-Based Lending, LLC, a Maryland Limited
Liability Company that is payable over two years, bearing interest at Prime
plus 1%.
(2) Received in January 1999.
(3) Trust agreements require the Company to advance interest on delinquent
customer accounts.
(4) Excess distribution from mortgage trust received in January 1999.
(5) Receivable received in January 1998 related to "unwinding" the auto
securitization that was
NOTE 5. RESIDUAL RECEIVABLE
In connection with its mortgage loan securitizations and SBA loan
securitizations and sales, the Company has retained residual interests in the
trusts. During 1998, the Company's residual interests relating to its SBA loan
securitizations were sold.
The $43.9 million residual asset at December 31, 1998 resulted from mortgage
loan securitizations. At December 31, 1997, the $63.2 million residual asset
resulted from the Company's interest in $46.7 million of mortgage loan
securitizations and $16.5 million of SBA loan securitizations.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. RESIDUAL RECEIVABLE (CONTINUED)
The following summarizes activity in the residual receivable:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
--------------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
Gross balance, beginning of year $ 77,457 $ 14,417 $ 5,377
Gain on sale of loans 12,322 57,516 4,770
Increase in the discounted value of future cash flows, 14,289 10,311 --
net
Mark to market value adjustment (19,366) -- --
Amortization of original residual asset value (15,920) (3,984) (1,661)
Sale of small-business commercial residual receivable (14,845) -- --
Other (2,915) (803) 5,931
------------- ------------ -----------
Gross balance, end of year 51,022 77,457 14,417
Less allowance for losses on residual receivable (7,165) (14,255) (1,202)
------------- ------------ -----------
Balance at end of year $ 43,857 $ 63,202 $ 13,215
============= ============ ===========
</TABLE>
An analysis of the allowance for losses, which is embedded in the interest-only
strip security, is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
--------------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 14,255 $ 1,202 $ 773
Anticipated losses netted against gain 2,242 13,278 --
Mark to market adjustment (5,728) -- --
Sale of small-business commercial residual asset (2,957) -- --
Net charge offs (647) (1,645) (1,283)
Transfer from allowance for loan loss -- 1,420 1,712
------------- ----------- ------------
Balance at end of year $ 7,165 $ 14,255 $ 1,202
============= =========== ===========
</TABLE>
The allowance represents management's estimate of losses to be incurred over the
life of the securitized pool.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. RESIDUAL RECEIVABLE (CONTINUED)
The Company sold $90.5 million of mortgage loans in one securitization
transaction in 1998, $487.6 million of mortgage loans in four securitization
transactions in 1997 and none in 1996. The company also sold $1.8 million small
business loans in one securitization transaction in 1998, $24.3 million in two
securitization transactions in 1997 and $12.9 million in one securitization
transaction in 1996. In 1996, the company sold $16.1 million of automobile loans
in a single securitization transaction. No automobile loans were securitized in
1998 or 1997.
The Company received net cash proceeds from the securitizations of $92.3
million, $509.8 million, and $30.1 million in 1998, 1997, and 1996,
respectively. The Company recorded a gain on sale of these loans of $10.1
million, $44.2 million and $4.8 million in 1998, 1997, and 1996, respectively.
In all securitizations entered into the three years ended December 31, 1998, the
Company retained servicing responsibilities and subordinated interests. The
Company receives annual servicing fees approximating 40 basis points of the
outstanding balance, and rights to future cash flows arising after the investors
in the securitization trust received the return for which they are contracted.
As a result of the sale of the assets in both the auto and small business loan
units, the Company has no future rights related to the auto or small business
loan securitizations. The investors and their securitization trusts have no
recourse to the Company's other assets for failure of debtors to pay when due.
Most of the Company's retained interests are generally restricted, however,
until investors have been fully paid and subordinate to investor's interests.
The value of the Company's portion of the securitization is subject to
substantial credit, prepayment, and interest rate risk on the transferred
financial assets.
The Company received cash proceeds from servicing fees and excess cash flow on
Company's retained interest in securitized loans of $16.5 million, $3.7 million,
and $3.8 million in 1998, 1997, and 1996, respectively.
The various securitized loan trusts have delinquency percentage and loan
charge-off percentage covenants that if exceeded would significantly delay the
timing of when the Company receives the excess cash generated by the trust. The
excess cash results from the customer loan rates exceeding the rates paid to the
investors. The securitization agreements allow the Company to repurchase
delinquent or foreclosed assets. The Company purchased from the securitized loan
trusts approximately $10.0 million and $694,000 of delinquent or foreclosed
assets in 1998 and 1997, respectively. None were purchased in 1996. As of
December 31, 1998, the Company was in compliance with the securitization
agreement covenants.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- --------------
(In thousands)
<S> <C> <C>
Land $ 948 $ 1,247
Buildings and leasehold improvements 10,880 6,106
Equipment and computers 8,772 8,792
Furniture and fixtures 2,702 5,318
Vehicles 190 404
------------- --------------
Total property and equipment 23,492 21,867
Less accumulated depreciation (3,827) (3,787)
------------- --------------
Net property and equipment $ 19,665 $ 18,080
============= ==============
</TABLE>
Depreciation expense was $3.3 million, $2.2 million, and $901,000 in 1998, 1997,
and 1996, respectively.
The Company leases various property and equipment, office space and automobiles
under operating leases.
In 1998, the Company recorded a $1.8 million non-cash restructuring charge
related to future minimum rental expense for operating leased assets and
facilities that are no longer used in the Company's normal course of business.
The following is a schedule of future minimum cash rental payments and future
minimum operating lease expense by year for all operating leases that have
initial or remaining noncancelable terms in excess of one year (in thousands):
Future
Future Cash Lease
Payment Expense
------------- -------------
1999 $ 3,241 $ 2,150
2000 2,833 2,423
2001 1,392 1,190
2002 733 641
2003 264 259
------------- -------------
$ 8,463 $ 6,663
============= =============
Total rental expense was approximately $4.9 million in 1998, $2.8 million in
1997, and $843,000 in 1996.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
An analysis of real estate and personal property acquired through foreclosure is
as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- --------------
(In thousands)
<S> <C> <C>
Balance at beginning of year $ 3,295 $ 4,720
Loan foreclosures and improvements 11,777 5,888
Dispositions, net (8,495) (7,313)
------------- --------------
6,577 3,295
Provision for allowance for real estate and
personal property acquired through foreclosure (696) --
------------- --------------
Balance at end of year $ 5,881 $ 3,295
============= ==============
</TABLE>
NOTE 8. EXCESS OF COST OVER NET ASSETS OF ACQUIRED BUSINESSES
An analysis of excess of cost over net assets of acquired business is as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- --------------
(In thousands)
<S> <C> <C>
Balance at beginning of year $ 2,874 $ 2,722
Additions from purchase of Reedy River Ventures, LP -- 349
Amortization expense (172) (197)
Sale of intangible asset (1,042) --
------------- --------------
Balance at end of year $ 1,660 $ 2,874
============= ==============
</TABLE>
NOTE 9. WAREHOUSE LINES OF CREDIT
Warehouse lines of credit are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997
--------------- ---------------
(In thousands)
<S> <C> <C>
Warehouse lines of credit to mortgage
Subsidiaries $ 16,736 $ 63,141
Warehouse lines of credit to small business
Lending subsidiaries -- 14,464
------------- --------------
$ 16,736 $ 77,605
============= ==============
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. WAREHOUSE LINES OF CREDIT (CONTINUED)
Under the terms of the revolving credit agreement, HomeGold, Inc. ("HGI"), a
wholly-owned subsidiary of HGFN, or Carolina Investors, Inc. ("CII"), a
wholly-owned subsidiary of HGFN, may borrow up to a maximum of $100,000,000 with
interest at the Prime Rate plus 0.75%. The note is collateralized by mortgage
loan receivables. The agreement requires, among other matters, minimum
availability of $20,000,000 on the line of credit, and a requirement that CII
maintain a minimum of $100,000,000 in aggregate outstanding principal amount of
notes due to investors. It also restricts the ability of HGI and, in certain
circumstances, Carolina Investors, Inc., to pay dividends or make loans or
advances to HGFN. Management believes the Company is in compliance with such
restrictive covenants at December 31, 1998. The revolving credit agreement
matures on June 30, 2001. Availability under the credit agreement is determined
based on eligible collateral as defined under the agreement, for which the
Company has forwarded to the bank the required loan files and documentation. The
borrowing base adjusted for the $20,000,000 minimum availability requirements
would have allowed a maximum borrowing level based on eligible collateral of
$37,751,598 at December 31, 1998. HGI had outstanding borrowings of $16,735,702,
and CII had no outstanding borrowings at December 31, 1998. Therefore,
$21,015,896 was available under this agreement on December 31, 1998.
The warehouse lines of credit to the small business lending subsidiaries were
paid off and terminated at the time that the majority of their respective assets
and liabilities were sold.
NOTE 10. INVESTOR SAVINGS
Investor savings are summarized as follows:
December 31,
--------------------------------
1998 1997
---------------- -------------
(In thousands)
Notes payable to investors $ 118,586 $ 115,368
Subordinated debentures 17,304 18,947
-------------- -------------
$ 135,890 $ 134,315
============== =============
Notes payable to investors are issued by a subsidiary company, CII, in any
denomination greater than $10,000 and are registered under the South Carolina
Uniform Securities Act. The notes payable to investors are PARI PASSU with the
senior unsecured debt of HGFN. The notes mature from one to three years from
date of issuance. Interest is payable monthly, quarterly or at maturity at the
option of the investors. Interest rates on the notes are fixed until maturity
and range from 5% to 9%. At December 31, 1998, 1997 and 1996, the weighted
average rate was 7.38%, 7.69% and 8.08%, respectively.
Subordinated debentures are issued by CII in any denomination greater than $100
and are registered under the South Carolina Uniform Securities Act. The
subordinated debentures mature one year from date of issuance and have interest
rates of 5%.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. INVESTOR SAVINGS (CONTINUED)
The notes and debentures are subordinated to all bank debt, notes payable to
investors, and senior unsecured debt. These notes and debentures are not secured
by a pledge of any specific assets at CII, nor guaranteed by the Company.
At December 31, 1998, 1997 and 1996, notes payable to investors include an
aggregate of approximately $27.4 million, $26.3 million and $21.0 million,
respectively, of individual investments exceeding $100,000.
The investor savings at December 31, 1998 mature as follows (in thousands):
1999 $ 97,764
2000 38,126
=============
$ 135,890
=============
NOTE 11. SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS
In September 1997, the Company sold $125.0 million in aggregate principal amount
of Senior Notes due 2004 ("Senior Notes"). The Senior Notes constitute unsecured
indebtedness of the Company. The Senior Notes mature on September 15, 2004, with
interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at
the option of the Company, in whole or in part, on or after September 15, 2001,
at predetermined redemption prices plus accrued and unpaid interest to the date
of redemption. In 1998, the Company purchased $38.4 million in aggregate
principal amount of its Senior Notes in open market transactions for a combined
purchase price of $18.9 million or 49.4% of face value. The Company has
purchased additional Senior Notes in 1999, (see Note 27-Subsequent Event) and
may, from time to time, purchase more of its Senior Notes depending on its cash
needs, market conditions, and other factors. 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 December 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 listed in Note 26 (the "Subsidiary Guarantors"). With the exception
of the Guarantee by the Company's subsidiary 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. All existing
debt of all subsidiaries other than CII are currently considered to be
subordinated to the Senior Notes. The Guarantee by CII is equal in priority to
CII's notes payable to investors and is senior to CII's subordinated debentures.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS (CONTINUED)
Included in Note 26 are consolidating condensed financial data of the combined
subsidiaries of the Company. The Company believes that providing the condensed
consolidating information is of material interest to investors in the Senior
Notes and has not presented separate financial statements for each of the
wholly-owned Subsidiary Guarantors, because it was deemed that such financial
statements would not provide investors with any material additional information.
At December 31, 1998, all of the subsidiary guarantors were wholly-owned by the
Company.
NOTE 12. SALE OF SUBSIDIARY AND SUBSIDIARY'S ASSETS
As part of the Company's effort to focus on its larger retail lending operation
that operates primarily through direct mail and telemarketing methods, the
Company chose to sell its small branch network retail origination company. This
company historically had originated its mortgage loan products through a
traditional "brick and mortar" retail approach. The Company also chose to sell
substantially all of the assets related to the auto and small-business units.
The Company also decided to no longer offer these financial products.
The Company completed the sale of substantially all of the assets related to its
auto loan operation for book value on March 19, 1998, to TranSouth Financial
Corporation, a subsidiary of Associates Financial Services Company, Inc. This
sale provided the Company with cash proceeds of approximately $20.4 million. No
significant gain or loss was recognized on this transaction. The Company no
longer originates auto loans. Prior to the asset sale, this product line
recorded a net loss of approximately $110,000 for the period ended March 19,
1998. The auto loan operations also recorded losses of $1.9 million and $1.1
million for the years ended December 31, 1997 and 1996, respectively.
On August 21, 1998, the Company completed the sale of its small branch network
retail mortgage origination company, Sterling Lending Corporation, to First
National Security Corporation of Beaumont, Texas. The sale resulted in cash
proceeds of $400,000 to HomeGold Financial, Inc. and a note receivable for $1.1
million, payable over 5 years at 7% interest. There was no significant gain or
loss recorded as a result of this sale. For the period in 1998 prior to the sale
of Sterling Lending, and for the years ended December 31, 1997 and 1996,
Sterling Lending recorded losses of $3.4 million, $3.8 million, and $864,000,
respectively.
On November 13, 1998, the Company sold the majority of the assets of its small
business lending units, including the 7(a) SBA lending unit, its 504 SBA lending
unit, and its SBIC mezzanine lending unit, to Transamerica Business Credit
Corporation. Total sales proceeds from this sale were $100.3 million. After
repayment of the related warehouse lines of credit, escrowing $5 million
holdback in the purchase price, and paying transaction costs, the Company
received net cash proceeds of approximately $49.3 million. The gain realized in
1998 was approximately $19.7 million net of related costs. The Company recorded
in 1998, income (including the pre-tax $19.0 million gain on sale of net assets)
of $14.4 million on these operating units that were sold. For the years ended
December 31, 1997 and 1996, income from the operations of these sold units were
$6.7 million and $2.3 million, respectively.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. SALE OF SUBSIDIARY AND SUBSIDIARY'S ASSETS (CONTINUED)
On December 2, 1998, the Company sold the majority of its asset-based lending
operation to Emergent Asset Based Lending LLC, a Maryland Limited Liability
Company. This transaction completed the disposition of all non-mortgage-related
activities of the Company. The sale resulted in a pre-tax loss of $755,000. The
Company received a note receivable of $2.2 million payable over two years at an
interest rate of Prime plus 1%. The Company recorded in 1998 a net loss
(including the pre-tax $755,000 loss on the sale of assets) of $3.4 million on
this operating unit that was sold. For the years ended December 31, 1997 and
1996, losses from operations from this unit were $1.7 million and $49,000,
respectively.
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(In thousands)
Sold Sold Small
Retained Mortgage Auto Business Consolidated
Operations Operations Operations Operations Total
(1) (2) Sold (3)
------------ ------------ -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 25,450 $ 10 $ 1,102 $ 8,513 $ 35,075
Servicing income 9,417 -- -- 2,822 12,239
Gain on sale of loans:
Gross gain on sale of loans 3,966 1,415 -- 4,091 9,472
Loan fees, net 9,489 1,520 7 729 11,745
------------ ------------ -------------- ------------- ------------
Total gain on sale of
loans 13,455 2,935 7 4,820 21,217
Gain on sale of -- -- -- 18,964 18,964
subsidiaries' net assets
Other revenues 2,874 217 58 1,081 4,230
------------ ------------ -------------- ------------- ------------
Total revenues 51,196 3,162 1,167 36,200 91,725
EXPENSES:
Interest 30,786 125 287 4,770 35,968
Provision for credit losses 8,231 -- 554 3,121 11,906
Fair value write-down of
residual receivables 11,682 -- -- 1,956 13,638
Restructuring charges 6,838 -- -- -- 6,838
General and administrative
expense 75,625 6,460 440 13,841 96,366
------------ ------------ -------------- ------------- ------------
Total expenses 133,162 6,585 1,281 23,688 164,716
------------ ------------ -------------- ------------- ------------
Gain (loss) before income
taxes, minority interest, and
Extraordinary item (81,966) (3,423) (114) 12,512 (72,991)
Provision (benefit) for
income taxes 1,532 (46) (4) 1,535 3,017
------------ ------------ -------------- ------------- -------------
Gain (loss) before minority interest
and Extraordinary item (83,498) (3,377) (110) 10,977 (76,008)
Minority interest in loss of
subsidiaries 47 -- -- -- 47
------------ ------------ -------------- ------------- ------------
Gain (loss) before
extraordinary item (83,451) (3,377) (110) 10,977 (75,961)
Extraordinary item - gain on
extinguishment of debt,
net of $0 tax 18,216 -- -- -- 18,216
------------ ------------ -------------- ------------- ------------
NET GAIN (LOSS) $ (65,235) $ (3,377) $ (110) $ 10,977 (4) $ (57,745)
============ ============ ============== ============= ============
</TABLE>
(1) Represents Sterling Lending Corporation, a retail mortgage lending
subsidiary which was sold in August 1998.
(2) Substantially all of the assets of the Company's auto loan unit were
sold in March 1998. The Company operated its auto loan unit through two
subsidiaries - The Loan Pro$, Inc. and Premier Financial Services, Inc.
(3) Represents the Company's small-business loan unit, including its 7(a)
SBA lending unit, its 504 SBA lending unit, its SBIC mezzanine lending
unit and its asset-based lending unit.
(4) Includes $19.0 million in gain on sale of subsidiaries' net assets.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. FAIR MARKET VALUE WRITE-DOWN ON RESIDUAL RECEIVABLE
As the result of higher than anticipated prepayments in 1998, the Company
modified the estimated prepayment speeds on all of its mortgage loan
securitization transactions to peak at 30 constant prepayment rate ("CPR") up
from the previous prepayment speeds of 20 CPR. This resulted in a write-down of
residual receivables of $13.6 million in 1998. No such write-down was necessary
in 1997.
NOTE 14. RESTRUCTURING CHARGES
In November 1998, the Company decided to close three retail loan centers and to
consolidate all operations into one location. This decision resulted in a
restructuring charge of $6.8 million. The restructuring charge related to the
write-down of fixed assets to net realizable value on assets no longer used by
the Company was $3.6 million. The estimated net lease cost on facilities no
longer being used was $1.8 million, and the estimated costs of employee
relocation cost and employee severance was approximately $1.4 million
NOTE 15. OTHER GENERAL AND ADMINISTRATIVE EXPENSES
Other general and administrative expenses for the years ended December 31, 1998,
1997, and 1996 consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Depreciation expense $ 3,337 $ 2,220 $ 901
Amortization expense 289 471 433
Legal and professional fees 3,125 6,749 1,026
Loan costs 4,318 2,657 130
Deferred loan costs (5,917) (1,658) --
Travel and entertainment 3,362 3,493 1,116
Office rent and utilities 2,827 2,206 750
Telephone 4,228 3,411 697
Office supplies 2,015 2,322 590
Foreclosed property costs 2,319 876 380
Equipment and miscellaneous rental 2,285 611 93
Repairs and maintenance 966 413 198
Postage and handling charges 1,146 1,136 368
Other 4,664 3,847 1,542
-------------- -------------- -------------
TOTAL OTHER GENERAL AND ADMINISTRATIVE $ 28,964 $ 28,754 $ 8,224
============== ============== =============
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. INCOME TAXES
A reconciliation of the provision for Federal and state income taxes and the
amount computed by applying the statutory Federal income tax rate to income
before income taxes, minority interest, and extraordinary item are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
-------------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Statutory Federal rate of 34% applied to pre-tax income
From continuing operations before minority interest
and extraordinary item $ (24,817) $ 2,553 $ 3,557
Gain on repurchase of bonds 6,193 -- --
State income taxes, net of federal income tax benefit 279 (16) 350
Change in the valuation allowance for deferred
tax assets allocated to income tax expense 21,672 (7,508) (3,229)
Nondeductible expenses 91 107 17
Amortization of excess cost over net assets of acquired
Businesses 46 66 64
Other, net (447) 898 (41)
------------ ----------- -----------
$ 3,017 $ (3,900) $ 718
============ =========== ===========
</TABLE>
The extraordinary gain on the extinguishment of debt is net of $0 tax since the
gain was offset against prior NOLs and did not result in any incremental
increase in income tax expense.
Provision (benefit) for income taxes from continuing operations is comprised of
the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
-------------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Current
Federal $ 2,594 $ 289 $ 199
State and local 423 (376) 660
------------ ----------- -----------
3,017 (87) 859
Deferred
Federal -- (4,165) (11)
State and local -- 352 (130)
------------ ----------- -----------
-- (3,813) (141)
Total
Federal 2,594 (3,876) 188
State and local 423 (24) 530
------------- ----------- -----------
$ 3,017 $ (3,900) $ 718
============ =========== ===========
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of (a) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (b) operating loss
and AMT credit carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ----------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ (1,011) $ (796)
Difference between book and tax basis of the residual receivables
associated with the Company's investment in the Real Estate
Investment Trust (1,513) (3,849)
Deferred loan costs (333) (608)
Other (11) (90)
=========== ==========
Total gross deferred tax liabilities $ (2,868) $ (5,343)
=========== ==========
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles $ 178 $ 216
Differences between book and tax basis of REMIC residual receivables 5,318 --
Allowance for credit losses 3,582 3,525
AMT credit carryforward 58 608
Operating loss carryforward 17,871 4,171
Deferred loan fees 780 --
REO reserve 114 --
Restructuring reserve-leases 640 --
Unrealized gain on loans to be sold -- 909
Other 150 65
----------- ----------
Total gross deferred tax assets 28,691 9,494
Less valuation allowance (21,672) --
Less gross deferred tax liabilities (2,868) (5,343)
----------- ----------
Net deferred tax asset $ 4,151 $ 4,151
=========== ==========
</TABLE>
The valuation allowance for deferred tax assets at December 31, 1998 was $21.7
million. The increase (decrease) in the valuation allowance for the year ended
December 31, 1998 and the year ended December 31, 1997 was $21.7 million and
($7.5) million, respectively. The valuation allowance at December 31, 1998
relates primarily to net operating losses ("NOL") carryforwards. The decision to
record the valuation allowance in 1998 was based on changes in 1998 earnings
(loss) projections. The Company experienced a taxable loss for 1998. The ability
to fully utilize all of the NOL's expiring in 1999 is reduced by the Company's
current year loss and the inability to use current period earnings classified as
"excess inclusion" to offset prior NOL's. Earnings of approximately $6.0 million
for the year ended December 31, 1998 and $4.0 million in 1997 were classified as
excess inclusion and were not able to be offset with prior year NOL's.
Management believes that it is more likely than not that the results of future
operations and tax planning strategies available to the Company will generate
sufficient taxable income to realize the net deferred tax asset. Management
continues to evaluate this each quarter, and may take additional reserves
against this asset if deemed necessary in the future.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. INCOME TAXES (CONTINUED)
As of December 31, 1998, the Company has available Federal NOL carryforwards
expiring as follows (in thousands):
1999 $ 5,456
2000 3,297
2001 1,911
2002 and after 41,896
-------------
$ 52,560
=============
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Company or its subsidiaries.
NOTE 17. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In 1998, the Company purchased $38.4 million face amount of its Senior Notes in
the market for a purchase price of $18.9 million or 49.4% of face value. A
proportionate share of the unamortized debt origination costs ($1.2 million)
relating to the issuance of the Senior Notes was charged against this gain, to
record a net gain of $18.2 million. The Company may, from time to time, purchase
more of its Senior Notes depending on its cash needs, market conditions, and
other factors. See "Note 27. Subsequent Event."
NOTE 18. STATEMENT OF CASH FLOWS
The following information relates to the Statement of Cash Flows for the three
years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
---------- ----------- ---------
<S> <C> <C> <C>
Changes in operating assets and liabilities increasing
(decreasing) cash:
Restricted cash $ (5,100) $ -- $ --
Other receivables (2,657) (5,223) (2,984)
Residual receivable 6,124 (46,318) (6,583)
Accrued interest receivable 1,794 (2,292) (516)
Servicing asset 528 (1,468) --
Other assets 6,373 (5,378) (1,052)
Remittance due to loan participants (2,720) 1,072 2,331
Accrued interest payable (1,551) 4,153 (24)
Income taxes payable 511 (1,666) 637
Other liabilities (2,028) 3,082 227
---------- ----------- ---------
$ 1,274 $ (54,038) $(7,964)
========== =========== =========
</TABLE>
The Company foreclosed on, or repossessed property used to collateralize loans
receivable in the amount of $12.1 million, $5.4 million, and $4.5 million, in
1998, 1997, and 1996, respectively.
The Company sold real estate held for sale by issuing loans to the buyers in the
amount of $66,000, $74,000 and $40,000 in 1998, 1997 and 1996, respectively.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18. STATEMENT OF CASH FLOWS (CONTINUED)
During 1997, the Company transferred approximately $30.0 million of loans
receivable held for investment to loans receivable held for sale primarily in
connection with the sale of the auto loan assets.
The Company paid income taxes of $2.5 million, $1.6 million, and $322,000 in
1998, 1997, and 1996, respectively. The Company paid interest of $37.5 million,
$21.0 million, and $11.0 million in 1998, 1997, and 1996, respectively.
NOTE 19. STOCK OPTION PLANS
On May 21, 1981, the shareholders approved an employee stock option plan and on
May 22, 1984, the shareholders approved an increase in the number of shares of
common stock, which may be granted from 250,000 to 500,000. Under the terms of
the plan, the Company may grant options to key employees and directors to
purchase up to a total of 500,000 shares of its $.05 par value common stock. The
option price is the fair market value at date of grant. The options expire five
years from date of grant, are not transferable other than on death, and are
exercisable 20% on the date of grant and 20% per year on a cumulative basis for
each year subsequent to the date of grant. No additional shares are available
for grant under this stock option plan, and there are 12,000 unexercised options
outstanding at December 31, 1998, of which 12,000 are exercisable.
On June 9, 1995, the shareholders approved a stock option plan under which the
Board of Directors may issue 566,667 shares of common stock. In May 1997 and in
June of 1998, the shareholders approved an additional 150,000 and 350,000 shares
of common stock, respectively. Therefore, under the terms of the plan, the
Company may grant options to key employees to purchase up to a total of
1,066,667 shares of its $.05 par value common stock. The option price is the
fair market value at date of grant. Prices for incentive stock options granted
to employees who own 10% or more of the Company's stock are at 110% of market
value at date of grant. The options expire ten years from date of grant, are not
transferable other than on death, and are exercisable 20% on the date of grant
and 20% per year on a cumulative basis for each year subsequent to the date of
grant. The remaining options available for grant under the plan consist of
46,230 common stock options at December 31, 1998, and there are 945,675
unexercised options outstanding at December 31, 1998, of which 325,088 are
exercisable.
Also on June 9, 1995, the shareholders approved a stock option plan under which
each non-employee member of the Board of Directors receives options to purchase
666 shares of common stock each December 31 beginning in 1995 through 1999.
Under the terms of the plan, the Company may grant options totaling 33,333. The
terms of the plan are identical to the employee stock option plan approved on
June 9, 1995. The remaining options available for grant under this plan consist
of 27,606 common stock options at December 31, 1998, and there are 5,328
unexercised options outstanding at December 31, 1998, of which 3,730 are
exercisable.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. STOCK OPTION PLANS (CONTINUED)
On April 18, 1996, the shareholders approved a restricted stock agreement plan
to provide additional incentives to members of the Board of Directors of the
Company who are not employees of the Company. Shares that may be issued pursuant
to the Restricted Stock Agreements under the Plan shall not exceed 50,000 shares
in the aggregate. The Plan provides that, on each grant date, each eligible
director will automatically receive from the Company an Agreement to purchase
for $.05 per share that number of shares having a fair market value equal to
$12,000. For purposes of the Plan, the grant date is January 31 of each calendar
year commencing with the 1996 calendar year. At December 31, 1998, there were
14,500 agreements granted under this plan with 11,600 unexercised agreements
outstanding, all of which are exercisable. Shares subject to a Restricted Stock
Agreement are initially non-transferable and subject to forfeiture. Shares
granted to a recipient become freely transferable and no longer subject to
forfeiture at a rate of 20% of the total number of shares covered by such
agreement on each of the five anniversaries of the grant date, beginning with
the first anniversary of such grant.
The Articles of Incorporation of the Company were amended by vote of the
shareholders at the Annual Meeting of Shareholders on April 18, 1996. The Class
A Common Stock, $0.05 par value, was converted to common stock on a one-for-one
basis effective April 19, 1996. All authorized but unissued shares of Class A
Common Stock were canceled. The number of authorized shares of common stock was
increased from 4,000,000 to 30,000,000. By vote of the shareholders at the
Annual Meeting of Shareholders on May 27, 1997, the number of authorized shares
of common stock was increased from 30,000,000 to 100,000,000.
The Company filed a registration statement with the Securities and Exchange
Commission on September 20, 1996, for the issuance of 3,000,000 shares of common
stock of which 2,119,031 shares were offered by the Company, and 880,969 shares
were offered by certain selling shareholders. No officers or directors of the
Company sold any shares in connection with the offering. The offering was
effective on November 8, 1996. On December 11, 1996, the underwriters of the
public offering exercised the option to purchase an additional 400,000 shares of
common stock in accordance with the terms of the registration statements. Total
gross proceeds of approximately $28,969,000 were raised as a result of the
issuance of stock, which was offset by approximately $2,769,000 in costs and
expenses relating to the transaction.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. STOCK OPTION PLANS (CONTINUED)
Activity in stock options is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 483,971 487,638 339,000
Date of Grant Issued at:
- ----------------- -----------------
11-11-96 $12.25 per share -- -- 258,000
12-15-96 $11.25 per share -- -- 3,330
02-11-97 $13.50 per share -- 1,000 --
05-02-97 $13.00 per share -- 10,000 --
08-06-97 $14.25 per share -- 5,000 --
09-26-97 $13.50 per share -- 21,000 --
01-16-98 $8.00 per share 6,000 -- --
01-16-98 $9.00 per share 15,000 -- --
03-12-98 $9.75 per share 205,000 -- --
04-14-98 $8.75 per share 16,900 -- --
05-26-98 $6.75 per share 50,000 -- --
09-04-98 $2.440 per share 7,000 -- --
12-02-98 $0.9375 per 400,000 -- --
share
---------- ----------- -----------
Total Granted 699,900 37,000 261,330
---------- ----------- -----------
<CAPTION>
Expired, canceled or forfeited:
$1.32 per share (2,668) -- --
$2.440 per share 0 -- --
$4.625 per share (28,800) -- --
$8.00 per share (6,000) -- --
$8.75 per share 0 -- --
$9.00 per share (15,000) -- --
$9.75 per share (50,000) -- --
$10.38 per share (directors plan) (400) -- --
$11.25 per share (directors plan) (533) -- --
$12.25 per share (87,000) -- --
$13.50 per share (1,000) -- --
$13.50 per share (15,000) -- --
$14.25 per share (5,000) -- --
---------- ----------- -----------
(211,401) -- --
Exercised:
$1.0825 per share (6,667) (17,336) (74,197)
$1.32 per share -- (13,332) (29,335)
$4.625 per share (1,600) (9,600) (9,160)
$5.09 per share (1,200) -- --
$10.380 per share -- (266) --
$11.250 per share -- (133) --
---------- ----------- -- -----------
Total exercised, canceled, expired, or (220,868) (40,667) (112,692)
forfeited
---------- ----------- -----------
Options end of year 963,003 483,971 487,638
outstanding,
========== =========== ===========
Exercisable, end of year 340,818 193,839 98,973
========== =========== ===========
Available for grant, end of year 73,836 292,340 179,340
========== =========== ===========
</TABLE>
The above table does not include the 14,500 restricted stock agreements issued
in 1996 of which 11,600 are unexercised.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19. STOCK OPTION PLANS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION." As such, the stock-based compensation
utilized by the Company has been accounted for under APB Opinion No. 25.
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards in 1998, 1997, and 1996
consistent with the provisions of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income - as reported $ (57,745) $ 11,253 $ 10,095
Net income - pro forma (58,025) 10,969 9,875
Diluted earnings per share - as reported (5.94) 1.17 1.42
Diluted earnings per share - pro forma (5.97) 1.14 1.39
</TABLE>
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes valuation model with the following weighted average assumptions
used in 1997 and 1996: dividend yield of 0%, expected volatility of 64.0%,
risk-free interest rate of approximately 5.7%, and expected lives of 3 years.
The weighted average assumption used in 1998 were dividend yield of 0%, expected
volatility of 142%, risk-free interest rate of 4.64% and expected lives of 5
years. The pro forma amounts disclosed above may not be representative of the
effects on reported net income for future periods.
The Company implemented an Employee Stock Purchase Plan ("ESPP") in 1997. The
ESPP allows eligible employees the right to purchase common stock at the end of
each of two six-month offering periods (January 1 through June 30 and July 1
through December 31). Eligible employees must work 20 or more hours per week and
have been employed for a period of 1 year. The stock is purchased at 85% of the
lower of the market price at the beginning or ending of each six-month offering
period. A liability is recorded for ESPP withholdings not yet applied towards
the purchase of common stock. The Company's Board of Directors has authorized
200,000 shares to be issued under the Espp.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20. TRANSACTIONS WITH RELATED PARTIES
The Company engaged in the following related party transactions:
The Company obtains legal services from Wyche, Burgess, Freeman & Parham, P.A.,
certain members of which, when considered in the aggregate, beneficially own
596,351 shares of the Company's capital stock. A partner of the firm also serves
as secretary to the Company. Total charges for these services were approximately
$659,000 in 1998, $308,000 in 1997, and $756,000 in 1996.
Notes payable to investors and subordinated debentures include amounts due to
officers, directors and key employees of approximately $661,000, $660,000 and
$694,000 at December 31, 1998, 1997 and 1996, respectively. The Company also had
notes receivable from related parties at December 31, 1998, 1997 and 1996 of
approximately $168,000, $509,000 and $1.1 million, respectively.
NOTE 21. EMPLOYEE RETIREMENT PLAN
The Company has a matched savings plan under Section 401(k) of the Internal
Revenue Code covering employees meeting certain eligibility requirements. The
plan allows employees who have completed 30 days of service to participate in
the plan and provides for Company contributions, subject to certain limitations.
Company matching contributions are 50% of employee contributions to a maximum of
6% of compensation for each employee. The Company's contributions under the plan
totaled approximately $879,000 in 1998, $761,000 in 1997, and $60,000 in 1996.
NOTE 22. COMMITMENTS AND CONTINGENCIES
The Company may from time to time enter into forward commitments to sell
residential first mortgage loans to reduce risk associated with originating and
holding loans for sale. At December 31, 1998, the Company had no outstanding
forward commitment contracts.
From time to time, the Company or its subsidiaries are defendants in legal
actions involving claims arising in the normal course of its business. The
Company believes that, as a result of its legal defenses and insurance
arrangements, none of these actions, if decided adversely, would have a material
effect on the business, financial condition, results of operations or cash flows
of the Company taken as a whole.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the year ended December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
March 31, June 30, September December
30, 31,
1998 1998 1998 1998
-------------- ------------ ------------ ------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 8,673 $ 10,516 10,364 $ 5,522
Servicing income 4,222 3,379 2,597 2,041
Gain on sale of loans:
Gross gain (loss) on sale of loans 6,517 6,775 2,529 (6,349)
Loan fees, net 3,602 3,228 3,261 1,654
------------- ------------- ------------ ------------
Total gain (loss) on sale 10,119 10,003 5,790 (4,695)
Gain on sale of subsidiaries-net assets -- -- -- 18,964
Other revenues 1,540 879 1,092 719
------------- ------------- ----------- ------------
Total revenues 24,554 24,777 19,843 22,551
EXPENSES:
Interest 8,432 9,953 9,950 7,633
Provision for credit losses 4,829 2,111 3,639 1,327
Fair market writedown (writeup) on 1,580 7,330 5,320 (592)
residual receivables
Salaries, wages and employee benefits 18,272 16,105 12,487 9,720
Business development costs 3,479 3,055 1,954 2,330
Restructuring charges -- -- -- 6,838
Other general and administrative 7,902 6,631 7,671 6,760
------------- ------------- ----------- ------------
Total expenses 44,494 45,185 41,021 34,016
------------- ------------- ----------- ------------
Loss before income taxes, minority
interest and (19,940) (20,408) (21,178) (11,465)
extraordinary item
Provision (benefit) for income taxes 679 2,565 866 (1,093)
Minority interest in (earnings) loss of 4 (2) 11 34
subsidiaries
------------- ------------- ----------- ------------
Income before extraordinary item (20,615) (22,975) (22,033) (10,338)
Extraordinary item-gain on extinguishment
of debt, net -- -- 7,724 10,492
of $0 tax
------------- ------------- ----------- ------------
Net income (loss) $ (20,615) $ (22,975) (14,309) $ 154
============= ============= =========== ============
Basic earnings (loss) per share of common stock:
Loss before extraordinary item $ (2.12) $ (2.37) (2.26) $ (1.06)
Extraordinary item, net of taxes -- -- .79 1.08
------------- ------------- ----------- ------------
Net income (loss) $ (2.12) $ (2.37) (1.47) $ .02
============= ============= =========== ============
Basic weighted average shares outstanding 9,701,993 9,708,083 9,733,099 9,733,374
============= ============= =========== ============
Diluted earnings (loss) per share of common stock:
Loss before extraordinary item $ (2.12) (2.37) (2.26) (1.06)
Extraordinary item, net of tax -- -- .79 1.08
============= ============= =========== ============
Net income (loss) (2.12) (2.37) (1.47) .02
============= ============= =========== ============
Diluted weighted average shares outstanding 9,701,993 9,708,083 9,733,099 9,733,374
============= ============= =========== ============
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
The quarterly results of operations for the year ended December 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
March 31, June 30, September December 31,
30,
1997 1997 1997 1997
-------------- ------------ ------------- -------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 6,207 $ 8,817 $ 10,842 $ 8,142
Servicing income 1,145 1,940 2,920 2,509
Gain on sale of loans:
Gross gain on sale of loans 6,218 11,889 14,674 20,047
Loan fees, net 5,878 7,337 8,852 8,140
------------ ------------ ------------- -------------
Total gain on sale 12,096 19,226 23,526 28,187
Other revenues 237 196 328 638
------------ ------------ ------------- -------------
Total revenues 19,685 30,179 37,616 39,476
------------ ------------ ------------- -------------
EXPENSES:
Interest 3,727 6,055 6,953 8,398
Provision for credit losses 2,073 2,599 2,415 2,943
Salaries, wages and employee benefits 8,045 10,715 13,825 15,459
Business development costs 1,213 1,806 1,980 2,487
Other general and administrative 4,027 5,908 8,173 10,646
------------ ------------ ------------- -------------
Total expenses 19,085 27,083 33,346 39,933
------------ ------------ ------------- -------------
Income before income taxes and
minority interest 600 3,096 4,270 (457)
Provision (benefit) for income taxes 42 (1,667) (350) (1,925)
Minority interest in earnings of (156) -- -- --
subsidiaries
------------ ------------ ------------- -------------
Net income $ 402 $ 4,763 $ 4,620 $ 1,468
============ ============ ============= =============
Basic earnings per share of common
stock $ 0.04 $ 0.52 $ 0.48 $ 0.15
============ ============ ============= =============
Basic weighted average shares
outstanding 9,143,176 9,147,570 9,651,566 9,674,044
============ ============ ============= =============
Diluted earnings per share of common
stock $ 0.04 $ 0.51 $ 0.47 $ 0.15
============ ============ ============= =============
Diluted weighted average
shares outstanding 9,351,103 9,310,153 9,861,750 9,885,032
============ ============ ============= =============
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24. EARNINGS PER SHARE
Effective January 29, 1996, the Company declared a two-for-one stock split
effected in the form of a 100% stock dividend. The weighted average number of
shares of Common Stock have been restated for all periods presented to reflect
this stock split.
The following table sets forth the computation of basic and fully diluted
earnings per share.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C>
Numerator
Net income (loss)-numerator for basic and fully diluted $ (57,745) $ 11,253 $ 10,095
EPS
Denominator
Basic weighted average shares o/s-denominator for basic 9,719,262 9,406,221 6,852,420
EPS
Effect of dilutive employee stock options -- 192,590 247,454
------------- ------------- --------------
Fully diluted weighted average shares o/s-denominator
for fully 9,719,262 9,598,811 7,099,874
diluted EPS
Basic earnings per common share $ (5.94) $ 1.20 $ 1.47
Fully diluted earnings per common share $ (5.94) $ 1.17 $ 1.42
</TABLE>
The computation of fully diluted EPS in 1998 does not take into account the
effect of any outstanding common stock equivalents since their inclusion would
be antidilutive.
NOTE 25. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information whether or not recognized in the balance
sheet, when it is practicable to estimate the fair value. SFAS 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity or
contractual obligations which require the exchange of cash or financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock, property and equipment and
other assets and liabilities.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
LOANS RECEIVABLE
For residential mortgage loans, small business loans and auto loans fair value
is estimated using the market prices received on recent sales or securitizations
of these loans in the secondary market.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
RESIDUAL RECEIVABLE, NET
The fair value of the residual receivable is calculated using prepayment,
default and interest rate assumptions that the Company believes market
participants would use for similar instruments at the time of sale. Projected
performance is monitored on an ongoing basis.
INVESTOR SAVINGS
Due to their short-term maturity, usually one year, the fair value of the notes
due investors and subordinated debentures is the current carrying amount.
NOTES PAYABLE TO BANKS AND OTHER
The fair value of notes payable to banks and other approximates the carrying
amount. Rates with similar terms and maturities currently available to the
Company are used to estimate fair value of existing debt.
SENIOR UNSECURED DEBT
The fair value of senior unsecured debt is based on the market value of the
publicly traded securities.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is determined by using the
anticipated market prices that the loans will generate in the secondary market.
The estimated fair values of the Company's financial instruments at December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 36,913 $ 36,913 7,561 $ 7,561
Restricted cash 5,100 5,100 -- --
Loans receivable 116,898 120,000 288,429 296,000
Residual receivable 43,857 43,857 63,202 63,202
Financial Liabilities:
Notes payable to banks and other $ 16,736 $ 16,736 77,605 $ 77,605
Investor savings:
Notes due to investors 118,586 118,586 115,368 115,368
Subordinated debentures 17,304 17,304 18,947 18,947
Senior unsecured debt 86,650 43,000 125,000 125,000
Commitments to extend credit 5,619 5,800 100,293 105,308
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 26. CONSOLIDATING CONDENSED FINANCIAL DATA OF THE COMBINED SUBSIDIARIES
THAT GUARANTEED SENIOR DEBT
The Subsidiary Guarantors of the Company's Senior Notes at December 31, 1998
consist of the following wholly owned subsidiaries of the Company:
HomeGold, Inc. (f/k/a Emergent Mortgage Corp.)
Emergent Mortgage Corp. of Tennessee
Carolina Investors, Inc.
Emergent Insurance Agency Corp.
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 may reflect
immaterial rounding differences.
As of December 31, 1998, the Subsidiary Guarantors conduct all of the Company's
operations, other than the investment of certain residual receivables through
its special purpose bankruptcy-remote securitization subsidiaries. Prior to
March 1998, The Loan Pro$, Inc. and Premier Financial Services, Inc. (the
Company's auto loan units) were guarantors of this indebtedness, but their
guarantees terminated when substantially all of the assets of the auto loan
units were sold to TranSouth Financial Corporation, a subsidiary of Associates
Financial Services Company, Inc., in March 1998.
Prior to August 21, 1998, Sterling Lending Corporation (an 80% owned subsidiary
of the Company) and Sterling Lending Insurance Agency, Inc. (a 100% owned
subsidiary of Sterling Lending Corporation) were also guarantors of this
indebtedness, but their guarantees terminated when they were sold to First
National Security Corporation of Beaumont, Texas, in August 1998. Therefore the
operations of Sterling Lending (a non-wholly-owned guarantor subsidiary) are
included in the consolidated statements of operations for the respective periods
prior to August 21, 1998.
The majority of the assets of Emergent Business Capital, Inc., Emergent
Commercial Mortgage, Inc., Emergent Business Capital Equity Group, Inc. and
Reedy River Ventures Limited Partnership were sold to Transamerica Business
Credit Corporation on November 13, 1998. Accordingly, any guarantees of these
companies were terminated upon consummation of that sale.
A substantial majority of the assets of Emergent Business Capital Asset Based
Lending, Inc. were sold to Emergent Asset-Based Lending LLC, a Maryland Limited
Liability Company, on December 2, 1998.
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly-Owned Non Combined
Guarantor Wholly-OwnedNon-Guarantor
Parent Subsidiaries Guarantor Subsidiaries
Company Subsidiaries EliminationsConsolidated
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 196 $ 34,215 $ -- $ 2,502 $ -- $ 36,913
Restricted cash 5,100 -- -- -- -- 5,100
Loans receivable:
Loans receivable -- 124,740 -- -- -- 124,740
Notes receivable from affiliates 48,876 -- -- 3 (48,879) --
--------- ----------- ---------- ---------- ---------- -----------
Total loans receivable 48,876 124,740 -- 3 (48,879) 124,740
Less allowance for credit losses on -- (6,659) -- -- -- (6,659)
loans
Less deferred loan fees -- (2,071) -- -- -- (2,071)
Plus deferred loan costs -- 888 -- -- -- 888
--------- ----------- ---------- ---------- ---------- -----------
Net loans receivable 48,876 116,898 -- 3 (48,879) 116,898
Other Receivables:
Income tax -- 900 -- -- -- 900
Accrued interest receivable 21 2,592 -- -- -- 2,613
Other receivables 4 11,126 -- 898 -- 12,028
--------- ----------- ---------- ---------- ---------- -----------
Total other receivables 25 14,618 -- 898 -- 15,541
Investment in subsidiaries 35,550 -- -- -- (35,550) --
Residual receivables, net -- 31,752 -- 12,105 -- 43,857
Net property and equipment -- 19,665 -- -- -- 19,665
Real estate and personal property -- 5,881 -- -- -- 5,881
acquired through foreclosure
Net excess of cost over net assets of 40 1,620 -- -- -- 1,660
acquired businesses
Deferred tax 3,510 641 -- -- -- 4,151
Other assets 2,696 4,846 -- -- -- 7,542
--------- ----------- ---------- ---------- ---------- -----------
TOTAL ASSETS $ 95,993 $ 230,136 $ -- $ 15,508 $ (84,429) $ 257,208
========= =========== ========== ========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 16,736 $ -- $ -- $ -- $ 16,736
Investor savings:
Notes payable to investors -- 118,586 -- -- -- 118,586
Subordinated debentures -- 17,304 -- -- -- 17,304
--------- ----------- ---------- ---------- ---------- -----------
Total investor savings -- 135,890 -- -- -- 135,890
Senior unsecured debt 86,650 -- -- -- -- 86,650
Accounts payable and accrued
liabilities 624 6,032 -- -- -- 6,656
Remittances payable -- 1,871 -- -- -- 1,871
Income taxes payable 201 181 -- -- -- 382
Accrued interest payable 2,717 482 -- -- -- 3,199
Due to (from) affiliates -- (7,947) -- 7,947 -- --
--------- ----------- ---------- ---------- ---------- -----------
Total other liabilities 3,542 619 -- 7,947 -- 12,108
Subordinated debt to affiliates -- 48,879 -- -- (48,879) --
--------- ----------- ---------- ---------- ---------- -----------
Total liabilities 90,192 202,124 -- 7,947 (48,879) 251,384
Minority interest -- -- -- 23 -- 23
Shareholders' equity:
Common stock 486 4,091 -- 1 (4,092) 486
Preferred stock -- -- -- -- -- --
Capital in excess of par value 38,821 71,683 -- 17,675 (89,358) 38,821
Retained earnings (deficit) (33,506) (47,762) -- (10,138) 57,900 (33,506)
------- ----------- ------- -------- --------
Total shareholders' equity 5,801 28,012 -- 7,538 (35,550) 5,801
--------- ----------- ---------- ---------- ---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 95,993 $ 230,136 $ -- $ 15,508 $ (84,429) $ 257,208
======= ========= ========== ======= ======== ========
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly-Owned Non Combined
Guarantor Wholly-OwnedNon-Guarantor
Parent Subsidiaries Guarantor Subsidiaries
Company Subsidiaries EliminationsConsolidated
--------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 713 $ 6,411 $ 263 $ 174 $ -- $ 7,561
Loans receivable:
Loans receivable -- 281,040 9,325 7,250 -- 297,615
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 -- (6,528) -- -- -- (6,528)
loans
Less deferred loan fees -- (3,556) (568) (192) -- (4,316)
Plus deferred loan costs -- 1,458 200 -- -- 1,658
--------- ----------- ---------- ---------- ---------- -----------
Net loans receivable 71,854 304,265 8,957 7,083 (103,730) 288,429
Other Receivables:
Income tax 1,029 -- -- -- -- 1,029
Accrued interest receivable -- 4,250 63 94 -- 4,407
Other receivables 2,649 6,802 496 -- (296) 9,651
--------- ----------- ---------- ---------- ---------- -----------
Total other receivables 3,678 11,052 559 94 (296) 15,087
Investment in subsidiaries 107,989 -- -- -- (107,989) --
Residual receivables, net -- 43,579 -- 19,623 -- 63,202
Net property and equipment 1,666 15,086 1,328 -- -- 18,080
Real estate and personal property -- 3,295 -- -- -- 3,295
acquired through foreclosure
Net excess of cost over net assets of 42 3,426 -- 342 (936) 2,874
acquired businesses
Deferred tax 4,588 2,117 -- -- (2,554) 4,151
Other assets 4,822 8,207 207 237 -- 13,473
--------- ----------- ---------- ---------- ---------- -----------
TOTAL ASSETS $ 195,352 $ 397,438 $ 11,314 $ 27,553 $ (215,505) $ 416,152
========= =========== ========== ========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving 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 125,000 -- -- -- -- 125,000
Accounts payable and accrued
liabilities 312 7,408 760 22 (1,985) 6,517
Remittances payable -- 4,591 -- -- -- 4,591
Accrued interest payable 3,645 1,105 -- -- -- 4,750
Due to affiliates 3,021 -- -- 7,057 (10,078) --
--------- ----------- ---------- ---------- ---------- -----------
Total other liabilities 6,978 13,104 760 7,079 (12,063) 15,858
Subordinated debt to affiliates -- 63,969 9,544 16,829 (90,342) --
--------- ----------- ---------- ---------- ---------- -----------
Total liabilities 131,978 288,993 10,304 23,908 (102,405) 352,778
Shareholders' equity:
Common stock 484 4,259 -- 10 (4,269) 484
Preferred stock -- 4,621 5,700 -- (10,321) --
Capital in excess of par value 38,609 64,570 -- 3,102 (67,672) 38,609
Retained earnings (deficit) 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>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
(Dollars in thousands)
Combined
Combined Non Combined
Wholly-Owned Wholly-OwnedNon-Guarantor
Parent Guarantor Guarantor Subsidiaries
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 8,109 $ 34,551 $ 10 $ 1,238 $ (8,833) $ 35,075
Servicing income -- 18,646 -- 2,734 (9,141) 12,239
Gain on sale of loans:
Gross gain on sale of loans -- 8,057 1,415 -- -- 9,472
Loan fees, net -- 10,136 1,520 89 -- 11,745
----------- ------------ ---------- ----------- ----------- -------------
Total gain on sale of
loans -- 18,193 2,935 89 -- 21,217
Gain on sale of subsidiaries'
net assets -- 18,964 -- -- -- 18,964
Other revenues 927 3,242 217 489 (645) 4,230
----------- ------------ ---------- ----------- ----------- -------------
Total revenues 9,036 93,596 3,162 4,550 (18,619) 91,725
----------- ------------ ---------- ----------- ----------- -------------
EXPENSES:
Interest 14,479 30,420 125 402 (9,458) 35,968
Provision for credit losses 20 11,886 -- -- -- 11,906
Fair value write-down of
residual receivables -- 9,902 -- 3,736 -- 13,638
Salaries, wages and employee 3,176 49,769 3,639 -- -- 56,584
benefits
Business development costs 2 10,547 269 -- -- 10,818
Restructuring charges -- 6,838 -- -- -- 6,838
Other general and administrative (2,216) 28,395 2,552 256 (23) 28,964
expense
----------- --------- ---------- ----------- ----------- -------------
Total expenses 15,461 147,757 6,585 4,394 (9,481) 164,716
----------- ------------ ---------- ----------- ----------- -------------
Income (loss) before income
taxes, minority interest,
equity in undistributed earnings
of subsidiaries, and
extraordinary item (6,425) (54,161) (3,423) 156 (9,138) (72,991)
Equity in undistributed earnings
(loss) of subsidiaries (69,668) (10,138) -- -- 79,806 --
----------- ------------ ---------- ----------- ----------- -------------
Income (loss) before income
taxes, minority interest,
and extraordinary item (76,093) (64,299) (3,423) 156 70,668 (72,991)
Provision (benefit) for income
taxes (132) 3,195 (46) -- -- 3,017
-------- --------- -------- --------- -----------
Income (loss) before minority
interest and extraordinary
item (75,961) (67,494) (3,377) 156 70,668 (76,008)
Minority interest in (earnings)
loss of subsidiaries -- -- -- 47 -- 47
----------- ------------ ---------- ----------- ----------- -------------
Income (loss) before
extraordinary iterm (75,961) (67,494) (3,377) 203 70,668 (75,961)
Extraordinary item-gain on
extinguishment of
debt, net of $0 tax 18,216 -- -- -- -- 18,216
----------- ------------ ---------- ----------- ----------- -------------
NET INCOME (LOSS) $ (57,745) $ (67,494) $ (3,377) $ 203 $ 70,668 $ (57,745)
=========== ============ ========== =========== =========== =============
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly-Owned Non Combined
Guarantor Wholly-OwnedNon-Guarantor
Parent Subsidiaries Guarantor Subsidiaries
Company Subsidiaries Eliminations Consolidated
--------- ----------- ---------- ----------- ---------- ----------
REVENUES:
Interest income $ 2,620 $ 33,753 $ 50 $ 423 $ (2,838) $ 34,008
Servicing income -- 8,514 -- -- -- 8,514
Gain on sale of loans:
Gross gain on sale of loans -- 51,409 1,419 -- -- 52,828
Loan fees, net -- 28,024 2,137 46 -- 30,207
--------- ----------- ---------- ----------- ---------- -----------
Total gain on sale of loans -- 79,433 3,556 46 -- 83,035
Other revenues 253 923 11 405 (193) 1,399
--------- ----------- ---------- ----------- ---------- -----------
Total revenues 2,873 122,623 3,617 874 (3,031) 126,956
EXPENSES:
Interest 4,436 23,308 193 203 (3,007) 25,133
Provision for credit losses -- 10,030 -- -- -- 10,030
Salaries, wages and employee benefits 4,421 40,032 3,591 -- -- 48,044
Business development costs 25 7,206 255 -- -- 7,486
Other general and administrative (5,026) 30,390 3,302 116 (28) 28,754
expense
--------- --------- ---------- ----------- ---------- -----------
Total expenses 3,856 110,966 7,341 319 (3,035) 119,447
--------- ----------- ---------- ----------- ---------- -----------
Income before income taxes, minority
interest, and equity in undistributed
earnings of subsidiaries (983) 11,657 (3,724) 555 4 7,509
Equity in undistributed earnings of 8,302 -- -- -- (8,302) --
subsidiaries
--------- ----------- ---------- ----------- ---------- -----------
Income before income taxes and 7,319 11,657 (3,724) 555 (8,298) 7,509
minority interest
Provision (benefit) for income taxes (3,917) (106) 101 22 -- (3,900)
------- --------- ---------- -------- -------- --------
Income before minority interest 11,236 11,763 (3,825) 533 (8,298) 11,409
Minority interest in (earnings) loss 17 (173) -- -- -- (156)
of subsidiaries
--------- ----------- ---------- ----------- ---------- -----------
NET INCOME $ 11,253 $ 11,590 $ (3,825) $ 533 $ (8,298) $ 11,253
========= =========== ========== =========== ========== ===========
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly- Non Wholly- Combined
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
--------- ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 88 $ 18,277 $ 19 $ -- $ (476) $ 17,908
Servicing income -- 3,274 -- -- -- 3,274
Gain on sale of loans:
Gross gain on sale of loans -- 23,799 16 -- -- 23,815
Loan fees, net -- 4,078 72 -- -- 4,150
--------- ---------- ----------- ---------- ---------- -----------
Total gain on sale of loans -- 27,877 88 -- -- 27,965
Other revenues 406 835 -- -- -- 1,241
--------- ---------- ----------- ---------- ---------- -----------
Total revenues 494 50,263 107 -- (476) 50,388
EXPENSES:
Interest 457 11,019 21 -- (476) 11,021
Provision for credit losses -- 5,416 -- -- -- 5,416
Salaries, wages and employee benefits 1,931 11,221 511 -- -- 13,663
Business development costs 17 1,557 29 -- -- 1,603
Other general and administrative (1,717) 9,469 472 -- -- 8,224
expense
--------- -------- ----------- ---------- ---------- --------
Total expenses 688 38,682 1,033 -- (476) 39,927
--------- ---------- ----------- ---------- ---------- -----------
Income before income taxes, minority
interest, and equity in
undistributed earnings
of subsidiaries (194) 11,581 (926) -- -- 10,461
Equity in undistributed
earnings of subsidiaries 10,116 -- -- -- (10,116) --
--------- ---------- ----------- ---------- ---------- -----------
Income before income taxes and
minority interest 9,922 11,581 (926) -- (10,116) 10,461
Provision (benefit) for income taxes 6 774 (62) -- -- 718
------- -------- ----------- ----------- -------- --------
Income before minority interest 9,916 10,807 (864) -- (10,116) 9,743
Minority interest in loss of
subsidiaries 179 173 -- -- -- 352
--------- ---------- ----------- ---------- ---------- -----------
NET INCOME $ 10,095 $ 10,980 $ (864) $ -- $ (10,116) $ 10,095
========= ========== =========== ========== ========== ===========
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly- Non Wholly- Combined
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
--------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (57,745) $ (67,494) $ (3,377) $ 203 $ 70,668 $ (57,745)
Adjustments to reconcile net income to
net cash provided
by (used in) operating activities:
Equity in undistributed earnings of
subsidiaries 69,668 10,138 -- -- (79,806) --
Depreciation and amortization 430 2,992 192 12 -- 3,626
Fair market writedown of residual
receivable -- 11,144 -- 2,494 -- 13,638
Provision (benefit) for deferred
income taxes 692 (371) (321) -- -- --
Provision for credit losses 20 11,886 -- -- -- 11,906
Provision for losses on real estate
owned -- 696 -- -- -- 696
Gain on retirement of senior
unsecured debt (18,216) -- -- -- -- (18,216)
Net (increase) decrease in deferred
loan costs -- 770 -- -- -- 770
Net increase (decrease) in unearned
discount and other deferrals -- (2,245) -- -- -- (2,245)
Loans originated with intent to sell -- (708,004) (39,438) -- -- (747,442)
Principal proceeds from sold loans 178 718,406 48,764 11,600 -- 778,948
Proceeds from securitization of
loans -- 92,316 -- -- -- 92,316
Restructuring charge-fixed assets -- 3,593 -- -- -- 3,593
Other 44 1,142 -- (192) -- 994
Changes in operating assets and
liabilities increasing (decreasing)
cash 3,419 (5,612) (29) 5,663 -- 3,441
--------- ----------- ---------- ---------- ---------- -----------
Net cash provided by (used
in) operating activities (1,510) 69,357 5,791 19,780 (9,138) 84,280
INVESTING ACTIVITIES:
Loans originated for investment
purposes (468) (150,549) -- (5,600) -- (156,617)
Principal collections on loans not sold 65 180,881 -- 1,250 -- 182,196
Proceeds from sale of real estate and
personal property acquired through
foreclosure 453 7,140 -- -- -- 7,593
Proceeds from the sale of property and
equipment (1,262) 4,070 -- -- -- 2,808
Purchase of property and equipment (64) (11,463) (174) -- -- (11,701)
Other (748) (514) 1,310 -- -- 48
--------- ----------- ---------- ---------- ---------- -----------
Net cash provided by (used in)
investing activities (2,024) 29,565 1,136 (4,350) -- 24,327
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 324,400 -- 9,653 -- 334,053
Payments on notes payable to banks -- (385,269) -- (9,653) -- (394,922)
Net increase in notes payable to
investors -- 3,218 -- -- -- 3,218
Net (decrease) increase in
subordinated debentures -- (1,643) -- -- -- (1,643)
Retirement of senior unsecured debt (20,134) -- -- -- -- (20,134)
Advances (to) from subsidiary 22,978 (11,824) (7,190) (13,102) 9,138 --
Proceeds from issuance of additional
common stock 214 -- -- -- -- 214
Other (41) -- -- -- -- (41)
--------- --------- --------- ---------- -------- -----------
Net cash provided by (used in)
financing activities 3,017 (71,118) (7,190) (13,102) 9,138 (79,255)
--------- ----------- ---------- ---------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents (517) 27,804 (263) 2,328 -- 29,352
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 713 6,411 263 174 -- 7,561
------- --------- ---------- ---------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR 196 34,215 -- 2,502 -- 36,913
========= =========== ========== ========== ========== ===========
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly- Non Wholly- Combined
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,253 $ 11,590 $ (3,825) $ 533 $ (8,298) $ 11,253
Adjustments to reconcile net income to
net cash provided
by (used in) operating activities:
Equity in undistributed earnings of
subsidiaries (8,302) -- -- -- 8,302 --
Depreciation and amortization 304 2,009 375 7 (4) 2,691
Provision for deferred income taxes (3,291) (853) 331 -- -- (3,813)
Provision for credit losses -- 10,030 -- -- -- 10,030
Net (increase) decrease in deferred
costs (1,573) -- -- -- (1,573)
Net increase (decrease) in unearned
discount and deferrals 2,252 368 192 2,812
Loans originated with intent to sell -- (1,098,826) (41,507) -- -- (1,140,333)
Principal proceeds from sold loans -- 485,622 32,181 -- -- 517,803
Proceeds from securitization of
loans -- 509,781 -- -- -- 509,781
Other 15 (917) -- -- -- (902)
Changes in operating assets and
liabilities increasing (decreasing)
cash 3,375 (46,295) (202) (10,916) -- (54,038)
---------- ----------- ---------- ---------- ----------- -----------
Net cash provided by (used
in) operating activities 3,354 (127,180) (12,279) (10,184) -- (146,289)
INVESTING ACTIVITIES:
Loans originated for investment
purposes -- (124,938) -- (8,250) -- (133,188)
Principal collections on loans not sold -- 127,552 -- 1,000 -- 128,552
Principal collections on asset-backed
securities -- -- -- -- -- --
Additional investment in subsidiary (54,168) 53,389 -- 779 -- --
Proceeds from sale of real estate and
personal property acquired through
foreclosure -- 6,652 -- -- -- 6,652
Proceeds from sale of property and
equipment 29 -- -- -- -- 29
Purchase of property and equipment (1,438) (10,591) (1,193) -- -- (13,222)
Other (40) (371) -- -- -- (411)
---------- ----------- ---------- ---------- ----------- -----------
Net cash provided by (used in)
investing activities (55,617) 51,693 (1,193) (6,471) -- (11,588)
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 1,139,815 -- -- -- 1,139,815
Payments on notes payable to banks -- (1,117,704) -- -- -- (1,117,704)
Net increase in notes payable to
investors -- 17,381 -- -- -- 17,381
Net (decrease) increase in
subordinated debentures -- 2,832 -- -- -- 2,832
Advances (to) from subsidiary (69,054) 38,616 13,609 16,829 -- --
Proceeds from issuance of senior
unsecured debt 120,578 -- -- -- -- 120,578
Proceeds from issuance of additional
common stock 1,260 -- -- -- -- 1,260
---------- ----------- ---------- ----------- -----------
----------
Net cash provided by financing
activities 52,784 80,940 13,609 16,829 -- 164,162
---------- ----------- ---------- ---------- ----------- -----------
Net increase in cash and cash
equivalents 521 5,453 137 174 -- 6,285
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 192 958 126 -- -- 1,276
======== ========= ========== ======== ========= =========
CASH AND CASH EQUIVALENTS, END OF YEAR $ 713 $ 6,411 $ 263 $ 174 $ $ 7,561
========== =========== ========== ========== =========== ===========
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands)
Combined Combined
Wholly- Non Wholly- Combined
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
--------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 10,095 $ 10,980 $ (864) $ -- $ (10,116) $ 10,095
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Equity in undistributed earnings of
subsidiaries (10,120) -- -- -- 10,120 --
Depreciation and amortization 72 1,162 104 -- (4) 1,334
Provision for deferred income taxes 76 (218) 1 -- -- (141)
Provision for credit losses -- 5,416 -- -- -- 5,416
Net (increase) decrease in deferred
costs -- 145 -- -- -- 145
Net increase (decrease) in unearned
discount and deferrals -- 665 -- -- -- 665
Loans originated with intent to sell -- (386,405) (1,195) -- -- (387,600)
Principal proceeds from sold loans -- 270,663 1,195 -- -- 271,858
Proceeds from securitization of
loans -- 30,128 -- -- -- 30,128
Other -- (1,481) -- -- -- (1,481)
Changes in operating assets and
liabilities Increasing
(decreasing) cash (568) (7,023) (373) -- -- (7,964)
--------- ---------- ---------- ----------- ---------- -----------
Net cash provided by (used
in) operating activities (445) (75,968) (1,132) -- -- (77,545)
INVESTING ACTIVITIES:
Loans originated for investment
purposes (513) (48,660) -- -- -- (49,173)
Principal collections on loans not sold -- 61,868 -- -- -- 61,868
Additional investment in subsidiary (18,825) 18,825 -- -- -- --
Proceeds from sale of real estate and
personal property acquired through
foreclosure -- 3,383 -- -- -- 3,383
Proceeds from sale of property and
equipment -- 160 -- -- -- 160
Purchase of property and equipment (532) (3,985) (377) -- -- (4,894)
Other -- (84) -- -- -- (84)
--------- ---------- ---------- ----------- ---------- -----------
Net cash provided by (used in)
investing activities (19,870) 31,507 (377) -- -- 11,260
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 509,118 -- -- -- 509,118
Payments on notes payable to banks -- (485,257) -- -- -- (485,257)
Net increase in notes payable to
investors -- 15,855 -- -- -- 15,855
Net (decrease) increase in
subordinated debentures -- (70) -- -- -- (70)
Advances (to) from subsidiary (6,511) 4,876 1,635 -- -- --
Proceeds from issuance of additional
common stock 26,655 -- -- -- -- 26,655
------- -------- ---------- -------- -------- -----------
Net cash provided by (used in)
financing activities 20,144 44,522 1,635 -- -- 66,301
--------- ---------- ---------- ----------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents (171) 61 126 -- -- 16
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 363 897 -- -- -- 1,260
--------- ---------- ---------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 192 $ 958 $ 126 $ -- $ -- $ 1,276
========= ========== ========== =========== ========== ===========
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27. SUBSEQUENT EVENTS
In the first two months of 1999, the Company purchased $35.3 million in
aggregate principal amount of its Senior Notes due 2004 in the market for a
purchase price of $17.3 million or 49% of face value. A proportionate share of
the unamortized debt origination costs ($1.6 million) relating to the issuance
of the Senior Notes was charged against this gain, to record a net gain of $16.9
million. The Company may, from time to time, purchase more of its Senior Notes
depending on its cash needs, market conditions, and other factors.
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
RESIGNATION OF REGISTERED AGENT
OF A SOUTH CAROLINA CORPORATION
Pursuant to Sections 33-5-103 and 33-15-109 of the 1976 South Carolina Code, as
amended, the undersigned hereby submits the following:
1. The name of the corporation that is affected by this document is HomeGold
Financial, Inc., (f/k/a) Emergent Group, Inc.;
2. Wade M. Hall hereby resigns as the registered agent of the above-named
corporation effective upon acceptance for filing by the Office of the
Secretary of State.
Date: 7/6/98 /s/ Wade M. Hall
----------------------- -------------------------------------
Wade M. Hall, Registered Agent
<PAGE>
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
NOTICE OF CHANGE OF REGISTERED OFFICE
OR REGISTERED AGENT OR BOTH OF A SOUTH CAROLINA
OR FOREIGN CORPORATION
Pursuant to Sections 33-5-102 and 33-15-108 of the 1976 South Carolina Code, as
amended, the undersigned corporation submits the following information.
1. Name of the corporaiton is HomeGold Financial, Inc. (f/k/a) Emergent Group,
Inc.
2. The corporation is (complete either a or b, whichever is applicable):
a. [x] a domestic corporation incorporated in South Carolina on
6/19/68 CON 8/23/91; or
-------------------
b. [ ] a foreign corporation incorporated in _______________ (state)
on _____________________ (date), and
authorized to do business in South Carolina on ____________
(date).
3. The street address of the current registered office in South Carolina is 15
--
S. Main Street, Suite 750 in the city of Greenville, South Carolina 29601.
------------------------- ---------- -----
4. If the current registered office is to be changed, the street address to
which its registered office is to be changed is
-------------------------
(street & number) in the city of , Carolina (ZIP code).
----------- ---------
5. The name of the present registered agent is Wade M. Hall.
------------
6. If the current agent is to be changed, the name of the successor registered
agent is Mark S. Keegan.
--------------
*I hereby consent to the appointment as registered agent of the
corporation.
/s/ Mark S. Keegan
-----------------------------------
(Signature of New Registered Agent)
7. The address of the registered office and the address of the business office
of the registered agent, as changed, will be identical.
<PAGE>
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
NOTICE OF CHANGE OF REGISTERED OFFICE
OR REGISTERED AGENT OR BOTH OF A SOUTH CAROLINA
OR FOREIGN CORPORATION
Pursuant to Sections 33-5-102 and 33-15-108 of the 1976 South Carolina Code, as
amended, the undersigned corporation submits the following information.
1. Name of the corporaiton is HomeGold Financial, Inc. (f/k/a) Emergent Group,
Inc.
2. The corporation is (complete either a or b, whichever is applicable):
a. [x] a domestic corporation incorporated in South Carolina on
6/19/68 CON 8/23/91; or
-------------------
b. [ ] a foreign corporation incorporated in _______________ (state)
on _____________________ (date), and
authorized to do business in South Carolina on ____________
(date).
3. The street address of the current registered office in South Carolina is 15
--
S. Main Street, Suite 750 in the city of Greenville, South Carolina 29601.
------------------------- ---------- -----
4. If the current registered office is to be changed, the street address to
which its registered office is to be changed is
-------------------------
(street & number) in the city of , Carolina (ZIP code).
----------- ---------
5. The name of the present registered agent is Wade M. Hall.
------------
6. If the current agent is to be changed, the name of the successor registered
agent is Mark S. Keegan.
--------------
*I hereby consent to the appointment as registered agent of the
corporation.
/s/ Mark S. Keegan
-----------------------------------
(Signature of New Registered Agent)
7. The address of the registered office and the address of the business office
of the registered agent, as changed, will be identical.
SUPPLEMENTAL INDENTURE
This Supplemental Indenture is executed to be effective as of this third
day of November, 1997 by the undersigned Emergent Insurance Agency Corp. (the
"Company").
RECITALS
The Company is a wholly-owned subsidiary of Emergent Group, Inc.
("EGI"), a South Carolina corporation, which on September 23, 1997 issued
$125,000,000 of 10-3/4% Senior Notes Due 2004, Series A (the "Senior Notes").
EGI expects to issue up to $125,000,000 of 10-3/4% Senior Notes Due 2004, Series
B (the "Exchange Notes") to be exchanged for an equal aggregate principal amount
of Senior Notes tendered in an exchange offer registered with the U.S.
Securities and Exchange Commission. The Senior Notes are, and the Exchange Notes
will be, subject to an indenture dated September 23, 1997 (the "Indenture")
between EGI, the Subsidiary Guarantors named therein and Bankers Trust Company,
as Trustee (the "Trustee").
Substantially all of EGI's subsidiaries executed that certain Subsidiary
Guarantee dated as of September 23, 1997 pursuant to which they guaranteed EGI's
repayment of the Senior Notes as set forth therein (the "Subsidiary Guarantee").
The Company will derive indirect economic benefit from the issuance of
both the Senior Notes and the Exchange Notes and has determined to be subject to
the provisions of the Indenture as a Subsidiary Guarantor (as defined in the
Indenture) and guarantee the Senior Notes in the manner contemplated by the
Subsidiary Guarantee.
ADHERENCE
By execution hereof, the Company agrees to become subject to the
provisions of the Indenture as a Subsidiary Guarantor and to become a party to
the Subsidiary Guarantee and to have all of the rights and obligations of a
Subsidiary Guarantor thereunder.
IN WITNESS WHEREOF, this Supplemental Indenture is executed to be
effective as of the date first written above.
Witness: EMERGENT INSURANCE AGENCY CORP.
/s/ Kevin J. Mast By: /s/ Keith B. Giddens
----------------- --------------------
(signature)
- -------------------------------------------------
Keith B. Giddens, Chief Executive Officer
-----------------------------------------
(print name and title)
[Wyche, Burgess, Freeman & Parham, P.A. letterhead]
(864) 242-8290
March 30, 1998
BY FEDERAL EXPRESS
Bankers Trust Company
Four Albany Street
New York, NY 10015
Attn: Ms. Sandra Shaffer
Corporate Trust & Agency Group
RE: Release of The Loan Pro$, Inc. and Premier Financial Services,
Inc. (the "Guarantors") from their guarantee (the "Guarantee") of
Emergent Group, Inc.'s (the "Company") 10-3/4% Senior Notes, due
2004, Series A and B (the "Notes")
Sandra:
On March 18, 1998, the Company sold substantially all of the assets of
the Guarantors (the "Sale"). Pursuant to the terms of the indenture, dated
September 23, 1997 (the "Indenture"), between the Company, the Subsidiary
Guarantors (as defined in the Indenture and including the Guarantors) and
Bankers Trust Company as trustee (the "Trustee"), the Company and the Guarantors
hereby notify the Trustee of the release of the Guarantors from their Guarantees
pursuant to the terms of Sections 1013 and 1203 of the Indenture. Please find
enclosed the following documents required by Sections 1013 and 1203 of the
Indenture:
(1) an Officers' Certificate (as defined in the Indenture);
(2) board resolutions of the Company and the Guarantors pertaining to
the adequacy of consideration received in the asset sale; and
(3) an Opinion of Counsel (as defined in the Indenture).
The board resolution of Emergent Group, Inc. is dated January 28, 1998,
which was the day the Sale was originally expected to close, and described the
Sale as a stock sale to Capital City Acceptance, Inc. rather than an asset sale
to TranSouth Financial Corporation. The Company and the Guarantors believe that
the Sale as it finally occurred on March 18, 1998 is materially the same as the
transaction approved in the January 28, 1998 board resolution of the Company and
so has not provided a new board resolution.
Pursuant to the terms of Section 1203 of the Indenture, please send us
an acknowledgment of your receipt of the enclosed documents and an
acknowledgment of the release of the Guarantors from their Guarantees.
<PAGE>
If I can be of any assistance to you, please do not hesitate to call me.
It has been a pleasure working with you in this matter. With best regards, I
remain
Very truly yours,
/s/ Eric K. Graben
Eric K. Graben
Enclosures
cc: Don Lancaster, Esq.
Seward & Kissell
One Battery Park Plaza
New York, NY 10004
[Wyche, Burgess, Freeman & Parham, P.A. letterhead]
(864)242-8200
March 18, 1998
Bankers Trust Company
Four Albany Street
New York, NY 10015
Attn: Ms. Sandra Shaffer
Corporate Trust & Agency Group
RE: Release of The Loan Pro$, Inc. and Premier Financial Services, Inc.
(the "Guarantors") from their guarantee (the "Guarantee(s)") of
Emergent Group, Inc.'s (the "Company") 10-3/4% Senior Notes, due 2004,
Series A and Series B (the "Notes")
Dear Ladies & Gentlemen:
We have acted as counsel to the Company, a South Carolina Corporation, and
the Guarantors, also South Carolina Corporations, for the issuance of the
Company's Notes and the Guarantees thereof and for the Sale described below. The
Notes and Guarantees were issued pursuant to an indenture dated September 23,
1997 (the "Indenture") between the Company, the Subsidiary Guarantors (as
defined therein and two of which are the Guarantors discussed herein) and you,
Bankers Trust Company, as trustee (the "Trustee"). Substantially all of the
assets of the Guarantors have been sold to TranSouth Financial Services for cash
(the "Sale"). The Sale closed on the date hereof.
In this connection, we have examined the Notes, the Guarantees and the
Indenture, in particular, but not limited to, Article 12 of the Indenture titled
"Subsidiary Guarantee," Section 1203 thereof titled "Release of Subsidiary
Guarantors," Article 10 thereof titled "Covenants," Section 1013 thereof titled
"Limitation on Sales of Assets" and the definitional provisions of the
Indenture relating thereto. We have also examined in this connection, originals
or copies of such corporate documents and records of the Company and the
Guarantors, including but not limited to documents pertaining to the Sale,
certificates of public officials, certificates of the Company, the Guarantor or
any officer thereof and such other documents as we have deemed relevant and
necessary as the basis for this opinion and statement.
With respect to matters of fact, we have relied upon certificates of public
officials, certificates of the Company, the Guarantors or any officer thereof
and oral statements of the officers of the Company and the Guarantors and have
assumed, without independent investigation, the accuracy of the factual
statements made and the information contained in such certificates or
statements.
<PAGE>
We have assumed, without investigation, the genuiness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to authentic original documents of all documents submitted to us as copies, and
the accuracy and completeness of all documents made available to us by the
Company or the Guarantors. We have assumed, without investigation, the legal
capacity of all persons. We have assumed, without investigation, that there has
not been any mutual mistake of fact or misunderstanding. With respect to
agreements, instruments and other documents executed by entities or individuals
other than or in addition to the Company or the Guarantors, we have assumed,
without investigation, the power and authority of any such other entity or
individual to enter into and perform all of its, her or his obligations under
such agreements, instruments and other documents, the due execution and delivery
by each such entity or individual of such agreements, instruments and other
documents and that such agreements, instruments and other documents are the
valid, binding and enforceable obligations of each other such entity or
individual.
In our opinion, we have made such examination or investigation as is
necessary to enable us to express an informed opinion as set forth below.
Based on and subject to the foregoing, and subject to the comments,
limitations and qualifications set forth below, it is our opinion that the
Company and the Guarantors have complied with all covenants and conditions of
the Indenture, particularly Articles 10 and 12 thereof, necessary for the
Guarantors to be released form their Guarantees as of the date hereof pursuant
to the terms of the Indenture.
We do not herein intend to express any opinion, statement or belief as to
any matter governed by (or that purports to be governed by) any law other than,
and our opinions, statements and beliefs are limited solely to, the existing
laws of the State of South Carolina and the existing Federal laws of the United
States of America. We express no opinion with regard to any matter that is or
may be (or that purports to be) governed by the law of any other state or
jurisdiction. The law covered by the opinions expressed herein does not include
any statute, ordinance, decision, rule or regulation of any political
subdivision of any State. We note that the Indenture, the Notes and the
Guarantees by their terms are to be governed by the laws of the State of New
York, and for purposes hereof, we have assumed that the laws of the State of New
York (and the interpretation of such laws) are identical to South Carolina law.
We further express no opinion as to any matter governed by or arising under the
South Carolina Uniform Securities Act, the securities laws of any other State,
any environmental law, the Investment Company Act of 1940, as amended, the
Public Utility Holding Company Act, as amended, the Federal Power Act, as
amended, or any rule or regulation promulgated under any of the foregoing laws.
No opinion is given as to any choice-of-law provision contained in the
Indenture, the Notes, the Guarantees or any other document.
This letter is rendered as of the date hereof and applies only to matters
specifically covered by this letter, and we disclaim any continuing
responsibility for matters occurring after the date of this letter or any
obligation to update this letter. This opinion
<PAGE>
is limited to the matters expressly set forth herein, and no opinion is implied
or may be inferred beyond the matters expressly stated herein.
This opinion letter is being provided to you in connection with the release
of the Guarantors from their Guarantees and is not to be used, circulated,
quoted or otherwise relied upon by any other person or entity, or for any other
purpose, without our express written consent.
Very truly yours,
/s/ Wyche, Burgess, Freeman & Parham, P.A.
WYCHE, BURGESS, FREEMAN & PARHAM, P.A.
cc: Kevin J. Mast
Wade Hall
EMERGENT GROUP, INC.
THE LOAN PRO$, INC.
PREMIER FINANCIAL SERVICES, INC.
CERTIFICATE OF COMPLIANCE
WITH THE INDENTURE DATED SEPTEMBER 23, 1997
The undersigned companies, Emergent Group, Inc., a South Carolina
corporation (the "Company"), and The Loan Pro$, Inc. and Premier Financial
Services, Inc., both South Carolina corporations (the "Guarantors"), hereby
certify to Bankers Trust Company (the "Trustee"), as of the date hereof, that:
(1) Purpose. This Certificate is being issued to the Trustee as required by
Sections 102 and 1203 of the indenture dated September 23, 1997 (the
"Indenture") between the Company, the Subsidiary Guarantors (as defined
in the Indenture and two of which are the Guarantors) and the Trustee
pertaining to the Company's 10-3/4% Senior Notes, due 2004, Series A and
Series B, as guaranteed by the Guarantors (collectively, the "Notes") in
connection with the release of the Guarantors from their guarantees of
the Notes (the "Subsidiary Guarantees") by reason of the sale of
substantially all of the assets of the Guarantors to TranSouth Financial
Corporation for cash (together, the "Sale"), which transaction closed as
of the date hereof. The representations, warranties and certifications
set forth herein shall survive the delivery of the Opinion.
(2) Knowledge of Conditions and Covenants in the Indenture. The officers
signing on behalf of the undersigned companies have read the Notes and
the Indenture, particularly Article 12 thereof titled "Subsidiary
Guarantee" and Section 1203 thereof titled "Release of Subsidiary
Guarantors," Article 10 thereof titled "Covenants" and Section 1013
thereof titled "Limitation on Sales of Assets" and all definitions in
the Indenture relating thereto.
(3) Nature and Scope of Examination or Investigation. In addition to the
examination and investigation described in paragraph (2) above, the
officers signing on behalf of the undersigned companies have examined
originals or copies of such corporate documents and records of the
Company and the Guarantors, including but not limited to documents
pertaining to the Sale, and such other documents as the officers signing
on behalf of the undersigned companies have deemed relevant and
necessary as the basis for this opinion and statement.
(4) Belief that Examination or Investigation is Adequate to Certify
Compliance. In the opinion of the officers signing on behalf of the
undersigned companies, such officers have made such examination or
investigation as is necessary to enable them, on behalf of the
undersigned companies, to express an informed opinion as
<PAGE>
to whether or not the relevant conditions and covenants of the Indenture
have been complied with by the Company and the Guarantors in order for
the Guarantors to be released from their Subsidiary Guarantees as
provided in the terms of the Indenture.
(5) Opinion of Compliance with the Indenture. In the opinion of the officers
signing on behalf of the undersigned companies, the Company and the
Guarantors have complied with the conditions and covenants provided in
the Indenture, particularly Articles 10 and 12 thereof, necessary for
the Guarantors to be released from their Subsidiary Guarantees as of the
date hereof as provided in the terms of the Indenture.
The Boards of Directors of the Company and the Guarantors have
determined in good faith that the Company and the Guarantors have
received in the Sale cash consideration for the Guarantors' assets at
least equal to fair market value of such assets as evidenced by the
Board Resolutions attached hereto, which Resolutions were duly entered
into in compliance with the requirements of the Certificate of
Incorporation and Bylaws of the Company and the Guarantors and which
remain in full force and effect without amendment or modification.
IN WITNESS WHEREOF, the undersigned corporations have executed this Certificate
as of March 18, 1998.
EMERGENT GROUP, INC.
By: /s/ Robert S. Davis
----------------------------------------
Name: Robert S. Davis
-----------------------------------
Its: Chairman of the Board, President,
VICE PRESIDENT (circle one)
--------------
By: /s/ Kevin J. Mast
-----------------------------------
Name: Kevin J. Mast
-----------------------------------
Its: TREASURER, Assistant Treasurer,
Secretary, Assistant Secretary
(circle one)
SIGNATURES CONTINUED ON FOLLOWING PAGE
THE LOAN PRO$, INC.
By: /s/ Keith B. Giddens
------------------------------------
<PAGE>
Name:
---------------------------------
Its: CHAIRMAN OF THE BOARD, President,
---------------------------------
Vice President (circle one)
By: /s/ Kevin J. Mast
------------------------------------
Name: Kevin J. Mast
-----------------------------------
Its: TREASURER, Assistant Treasurer,
Secretary, Assistant Secretary
(circle one)
PREMIER FINANCIAL SERVICES, INC.
By: /s/ Kevin J. Mast
------------------------------------
Name: Kevin J. Mast
-----------------------------------
Its: Chairman of the Board, President,
VICE PRESIDENT (circle one)
By: /s/ Wade M. Hall
------------------------------------
Name: Wade M. Hall
-----------------------------------
Its: Treasurer, Assistant Treasurer,
SECRETARY, Assistant Secretary
(circle one)
RESOLUTION OF THE BOARD OF DIRECTORS OF
EMERGENT GROUP, INC.
REGARDING CONSIDERATION RECEIVED
IN THE SALE OF
PREMIER FINANCIAL SERVICES, INC. & THE LOAN PRO$, INC.
The members of the Board of Directors (the "Board") of Emergent Group,
Inc., a South Carolina corporation (the "Company"), do hereby adopt the
following resolution of the Board by unanimous written consent, waiving any and
all requirements of meeting or notice with respect thereto.
WHEREAS, the Board has previously caused the Company to contract with
Capital City Acceptance, Inc. to sell (the "Sale") all of the Company's capital
stock in the Company's subsidiaries Premier Financial Services, Inc. and the
Loan Pro$, Inc. (together, the "Guarantors") for cash consideration
substantially equal to $20.8 million (the "Consideration"), and
<PAGE>
WHEREAS, the Board expects the Sale to close on or about January 29,
1998, and
WHEREAS, the Board has conducted such investigation as it deems
reasonably necessary in order to determine the fairness of the Consideration in
relation to the value of the Guarantors;
NOW THEREFORE, be it resolved as follows:
RESOLVED, that, in the good faith opinion of the Board, the
Consideration represents, and will represent at the closing of the Sale, an
amount at least equal to the fair market value of all of the Company's capital
stock in the Guarantors.
Dated January 29, 1998.
/s/ John S. Sterling, Jr. /s/ Keith B. Giddens
- --------------------------------------------------------------------------------
John M. Sterling, Jr. Keith B. Giddens
/s/ Clarence B. Bauknight /s/ Tecumseh Hooper, Jr.
- --------------------------------------------------------------------------------
Clarence B. Bauknight Tecumseh Hooper, Jr.
/s/ Buck Mickel /s/ Porter B. Rose
- --------------------------------------------------------------------------------
Buck Mickel Porter B. Rose
/s/ J. Robert Philpott, Jr. /s/ Larry G. Blackwell
- --------------------------------------------------------------------------------
J. Robert Philpott, Jr. Larry G. Blackwell
RESOLUTION OF THE BOARD OF DIRECTORS OF
PREMIER FINANCIAL SERVICES, INC.
REGARDING CONSIDERATION RECEIVED
IN THE SALE OF
PREMIER FINANCIAL SERVICES, INC. & THE LOAN PRO$, INC.
The members of the Board of Directors (the "Board") of Premier Financial
Services Inc., a South Carolina corporation (the "Company"), do hereby adopt the
following resolution of the Board by unanimous written consent, waiving any and
all requirements of meeting or notice with respect thereto.
WHEREAS, the Company expects to sell substantially all of its assets to
TranSouth Financial Corporation ("TranSouth") pursuant to the terms of a
contract between Emergent Group, Inc., Capital City Acceptance, Inc. and
TranSouth whereby substantially all of the combined assets of the Company and
the Loan Pro$, Inc. (together, the "Guarantors") will be sold (the "Sale") to
TranSouth for cash consideration substantially equal to approximately $20.5
million (the "Consideration"), and
<PAGE>
WHEREAS, the Board expects the Sale to be consummated by or about March
18, 1998, and
WHEREAS, the Board has conducted such investigation as it deems
reasonably necessary in order to determine the fairness of the Consideration in
relation to the combined value of the Guarantors;
NOW THEREFORE, be it resolved as follows:
RESOLVED, that, in the good faith opinion of the Board, the
Consideration represents, and will represent at the closing of the Sale, an
amount at least substantially equal to the fair market value of the combined
assets of the Guarantors being sold in the Sale.
Dated March 17, 1998.
/s/ Kevin J. Mast /s/ Keith B. Giddens
- --------------------------------------------------------------------------------
Kevin J. Mast Keith B. Giddens
/s/ Kimberley Bullard /s/ Kenneth Bentley
- --------------------------------------------------------------------------------
Kimberley Bullard Kenneth Bentley
/s/ J. Phil Cox
- -------------------
J. Phil Cox
RESOLUTION OF THE BOARD OF DIRECTORS OF
THE LOAN PRO$, INC.
REGARDING CONSIDERATION RECEIVED
IN THE SALE OF
PREMIER FINANCIAL SERVICES, INC. & THE LOAN PRO$, INC.
The members of the Board of Directors (the "Board") of The Loan Pro$,
Inc., a South Carolina corporation (the "Company"), do hereby adopt the
following resolution of the Board by unanimous written consent, waiving any and
all requirements of meeting or notice with respect thereto.
WHEREAS, the Company expects to sell substantially all of its assets to
TranSouth Financial Corporation ("TranSouth") pursuant to the terms of a
contract between Emergent Group, Inc., Capital City Acceptance, Inc. and
TranSouth whereby substantially all of the combined assets of the Company and
Premier Financial Services, Inc. (together, the "Guarantors") will be sold (the
"Sale") to TranSouth for cash consideration substantially equal to approximately
$20.5 million (the "Consideration"), and
<PAGE>
WHEREAS, the Board expects the Sale to be consummated by or about March
18, 1998, and
WHEREAS, the Board has conducted such investigation as it deems
reasonably necessary in order to determine the fairness of the Consideration in
relation to the value of the Guarantors;
NOW THEREFORE, be it resolved as follows:
RESOLVED, that, in the good faith opinion of the Board, the
Consideration represents, and will represent at the closing of the Sale, an
amount at least substantially equal to the fair market value of the combined
assets of the Guarantors being sold in the Sale.
Dated March 17, 1998.
/s/ Kevin J. Mast /s/ Keith B. Giddens
- --------------------------------------------------------------------------------
Kevin J. Mast Keith B. Giddens
/s/ Ron Long /s/ Chris Long
- --------------------------------------------------------------------------------
Ron Long Chris Long
/s/ J. Phil Cox
- --------------------------------------
J. Phil Cox
[HomeGold Financial, Inc. Letterhead]
September 10, 1998
Bankers Trust Company
Four Albany Street
New York, NY 10015
Attn: Ms. Ednora Lenares
Corporate Trust and Agency Group
RE: Release of Sterling Lending Corporation ("Sterling") and its
wholly-owned subsidiary Sterling Lending Insurance Agency, Inc.
("Sterling Insurance") from their guarantees (the "Guarantees")
of HomeGold Financial, Inc.'s 10-3/4% Senior Notes, due 2004 (the
"Notes")
Dear Ladies & Gentlemen:
As of August 21, 1998, HomeGold Financial, Inc. (f/k/a Emergent Group,
Inc., hereinafter, the "Company") sold all of its capital stock of Sterling to
FNSC Mortgage Corporation, a subsidiary of First National Security Corp., for
cash in an amount of less than $2 million (the "Sale"). Sterling and Sterling
Insurance are Subsidiary Guarantors as defined in the indenture for the Notes
and the Subsidiary Guarantees thereof dated September 23, 1997 (the
"Indenture"), between the Company, the Subsidiary Guarantors (as defined in the
Indenture) and Bankers Trust Company, as trustee (the "Trustee"). Section 1013
of the Indenture has recently been amended by Amendment No.1 thereto by
replacing the words "$1 million" contained therein with the words "$2 million."
The purpose of this letter is to inform you that as of August 21, 1998,
Sterling and Sterling Insurance are released from their Guarantees (which are
Subsidiary Guarantees as defined in the Indenture) as provided in Section 1203
of the Indenture as a result of the Sale. As required by such Section 1203,
please find enclosed an Officers' Certificate and an Opinion of Counsel (both as
defined in the Indenture) pertaining to the Sale. Please sign below one copy of
this letter and return it to us to indicate your acknowledgment of the release
of Sterling and Sterling Insurance from their Guarantees.
With best regards, I am
<PAGE>
Very truly yours,
/s/ Ashley Steele Nutley
Ashley Steele Nutley
Bankers Trust Company hereby acknowledges receipt of this letter and the
Officers' Certificate and Opinion of Counsel mentioned herein and acknowledges
that Sterling Lending Corporation and Sterling Lending Insurance Agency are
released thereby from their Guarantees (which are Subsidiary Guarantees as
defined in the Indenture) of the Notes.
BANKERS TRUST COMPANY Date: 9/28/98
-------
By: /s/ Ednora G. Linares
------------------------------------
Name: Ednora G. Linares
------------------------------------
Title: Assistant Vice President
------------------------------------
[Homegold Financial, Inc. Letterhead]
August 21, 1998
Bankers Trust Company
Four Albany Street
New York, NY 10015
Attn: Ms. Ednora Lenares
Corporate Trust & Agency Group
RE: Release of Sterling Lending Corporation and Sterling Lending
Insurance Agency, Inc. (the "Guarantors") from their guarantees
(the "Guarantee(s)") of HomeGold Financial, Inc.'s (f/k/a
Emergent Group, Inc., hereinafter, the "Company") 10-3/4% Senior
Notes, due 2004, Series A and Series B (the "Notes")
Dear Ladies & Gentlemen:
I am General Counsel to the Company, a South Carolina Corporation,
Sterling Lending Corporation, a South Carolina Corporation and a subsidiary of
the Company, and Sterling Lending Insurance Agency, Inc., a Louisiana
corporation and a subsidiary of Sterling Lending Corporation, for the issuance
of the Company's Notes and the Guarantees thereof and for the Sale described
below. The Notes and Guarantees were issued pursuant to an indenture dated
September 23, 1997, as amended by Amendment No. 1 thereto amending Section 1013
thereof (the "Indenture"), between the Company, the Subsidiary Guarantors (as
defined therein and two of which are the Guarantors discussed herein) and you,
Bankers Trust Company, as trustee (the "Trustee"). The Company sold all of its
capital stock in Sterling Lending Corporation to FNSC Mortgage Corporation, a
subsidiary of First National Security Corp. on the date of this opinion for cash
in an amount of less than two million dollars ($2,000,000) (the "Sale").
In this connection, I have examined the Notes, the Guarantees and the
Indenture, in particular, but not limited to, Article 12 of the Indenture titled
"Subsidiary Guarantee," Section 1203 thereof titled "Release of Subsidiary
Guarantors," Article 10 thereof titled "Covenants," Section 1013 thereof, as
amended, titled "Limitation on Sales of Assets" and the definitional provisions
of the Indenture relating thereto. I have also examined in this connection,
originals or copies of such corporate documents and records of the Company and
the Guarantors and such other documents as I have deemed relevant and necessary
as the basis for this opinion and statement.
With respect to matters of fact, I have relied upon information provided
to me by officers and employees of the Company and the Guarantors and have
assumed, without independent investigation, the accuracy of the information
provided to me.
<PAGE>
I have assumed, without investigation, the genuiness of all signatures,
the authenticity of all documents submitted to me as originals, the conformity
to authentic original documents of all documents submitted to me as copies, and
the accuracy and completeness of all documents made available to me by the
Company or the Guarantors. I have assumed, without investigation, the legal
capacity of all persons. I have assumed, without investigation, that there has
not been any mutual mistake of fact or misunderstanding. With respect to
agreements, instruments and other documents executed by entities or individuals
other than or in addition to the Company or the Guarantors, I have assumed,
without investigation, the power and authority of any such other entity or
individual to enter into and perform all of its, her or his obligations under
such agreements, instruments and other documents, the due execution and delivery
by each such entity or individual of such agreements, instruments and other
documents and that such agreements, instruments and other documents are the
valid, binding and enforceable obligations of each other such entity or
individual.
In my opinion, I have made such examination or investigation as is
necessary to enable me to express an informed opinion as set forth below.
Based on and subject to the foregoing, and subject to the comments,
limitations and qualifications set forth below, it is my opinion that the
Company has complied with all covenants and conditions of the Indenture,
particularly Articles 10 and 12 thereof, necessary for the Guarantors to be
released from their Guarantees as of the date hereof pursuant to the terms of
the Indenture.
I do not herein intend to express any opinion, statement or belief as to
any matter governed by (or that purports to be governed by) any law other than,
and my opinions, statements and beliefs are limited solely to, the existing laws
of the State of South Carolina and the existing Federal laws of the United
States of America. I express no opinion with regard to any matter that is or may
be (or that purports to be) governed by the law of any other state or
jurisdiction. The law covered by the opinions expressed herein does not include
any statute, ordinance, decision, rule or regulation of any political
subdivision of any State. I note that the Indenture, the Notes and the
Guarantees by their terms are to be governed by the laws of the State of New
York, and for purposes hereof, I have assumed that the laws of the State of New
York (and the interpretation of such laws) are identical to South Carolina law.
I further express no opinion as to any matter governed by or arising under the
South Carolina Uniform Securities Act, the securities laws of any other State,
any environmental law, the Investment Company Act of 1940, as amended, the
Public Utility Holding Company Act, as amended, the Federal Power Act, as
amended, or any rule or regulation promulgated under any of the foregoing laws.
No opinion is given as to any choice-of-law provision contained in the
Indenture, the Notes, the Guarantees or any other document.
This letter is rendered as of the date hereof and applies only to
matters specifically covered by this letter, and we disclaim any continuing
responsibility for matters occurring after the date of this letter or any
obligation to update this letter. This opinion is limited to the matters
expressly set forth herein, and no opinion is implied or may be inferred beyond
the matters expressly stated herein.
<PAGE>
This opinion letter is being provided to you in connection with the
release of the Guarantors from their Guarantees and is not to be used,
circulated, quoted or otherwise relied upon by any other person or entity, or
for any other purpose, without my express written consent.
Very truly yours,
/s/ Ashley Steele Nutley
Ashley Steele Nutley
General Counsel
HOMEGOLD FINANCIAL, INC.
(F/K/A EMERGENT GROUP, INC.)
CERTIFICATE OF COMPLIANCE
WITH THE INDENTURE DATED SEPTEMBER 23, 1997
The undersigned company, HomeGold Financial, Inc. (f/k/a/ Emergent
Group, Inc.), a South Carolina corporation (the "Company") hereby certifies to
Bankers Trust Company (the "Trustee") that:
(1) Purpose. This Certificate is being issued to the Trustee as required by
Sections 102 and 1203 of the indenture dated September 23, 1997, as
amended by Amendment No. 1 thereto amending Section 1013 thereof (the
"Indenture"), between the Company, the Subsidiary Guarantors (as defined
in the Indenture) and the Trustee pertaining to the Company's 10-3/4%
Senior Notes, due 2004, Series A and Series B, as guaranteed by the
Guarantors (collectively, the "Notes") in connection with the release of
Sterling Lending Corporation, a South Carolina corporation and
subsidiary of the Company, and Sterling Lending Insurance Agency, a
Louisiana corporation and a subsidiary of Sterling Lending Corporation
(each a "Guarantor" and together, the "Guarantors") from their
guarantees of the Notes (the "Subsidiary Guarantees") by reason of the
sale of all of the Company's capital stock of Sterling Lending
Corporation to First National Security Corp. for cash in an amount of
less than two million dollars ($2,000,000)( the "Sale"), which
transaction closed on August 21, 1998. The representations, warranties
and certifications set forth herein shall survive the delivery of this
Certificate.
(2) Knowledge of Conditions and Covenants in the Indenture. The officers
signing on behalf of the Company have read the Notes and the Indenture,
particularly Article 12 thereof titled "Subsidiary Guarantee" and
Section 1203 thereof titled "Release of Subsidiary Guarantors," Article
10 thereof titled "Covenants" and Section 1013 thereof titled
"Limitation on Sales of Assets" and all definitions in the Indenture
relating thereto.
(3) Nature and Scope of Examination or Investigation. In addition to the
examination and investigation described in paragraph (2) above, the
officers signing on behalf of the Company have examined originals or
copies of such corporate documents and records of the Company and the
Guarantors, including but not limited to documents pertaining to the
Sale, and such other documents as the officers signing on behalf of the
Company have deemed relevant and necessary as the basis for this opinion
and statement.
(4) Belief that Examination or Investigation is Adequate to Certify
Compliance. In the opinion of the officers signing on behalf of the
Company, such officers have made such examination or investigation as is
necessary to enable them, on behalf of the undersigned companies, to
express an informed opinion as to whether or not the relevant conditions
and covenants of the Indenture have been complied with by the Company in
order for the Guarantors to be released from their Subsidiary Guarantees
as provided in the terms of the Indenture.
<PAGE>
(5) Opinion of Compliance with the Indenture. In the opinion of the officers
signing on behalf of the Company, the Company has complied with the
conditions and covenants provided in the Indenture, particularly
Articles 10 and 12 thereof, necessary for the Guarantors to be released
from their Subsidiary Guarantees as of the date hereof as provided in
the terms of the Indenture.
IN WITNESS WHEREOF, the undersigned corporations have executed this Certificate
to be effective as of August 21, 1998.
HOMEGOLD FINANCIAL, INC.
By: /s/ Kevin J. Mast
------------------------------------
Name: Kevin J. Mast
----------------------------------
Its: Chairman of the Board, President,
VICE PRESIDENT (circle one)
By: /s/ Keith B. Giddens
------------------------------------
Name: Keith B. Giddens, President
----------------------------------
Its:
[Wyche, Burgess, Freeman &Parham letterhead]
(864) 242-8200
November 13, 1998
Bankers Trust Company
Four Albany Street
New York, NY 10015
Attn: Ms. Sandra Shaffer
Corporate Trust & Agency Group
RE: Release of Emergent Business Capital, Inc., Emergent Business
Capital Equity Group, Inc. (f/k/a Emergent Equity Advisors, Inc.)
and Emergent Commercial Mortgage, Inc. (each a "Guarantor" and
collectively, the "Guarantors") from their guarantees (each a
"Guarantee" and collectively, the "Guarantees") of the 10-3/4%
Senior Notes, due 2004, Series A and Series B (the "Notes") of
HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.,
hereinafter, the "Company")
Dear Ladies & Gentlemen:
We have acted as counsel to the Company, a South Carolina corporation,
and each of the Guarantors, also South Carolina corporations, for the issuance
of the Company's Notes and the Guarantees thereof and for the Sale described
below. The Notes and Guarantees were issued pursuant to an indenture dated
September 23, 1997 (the "Indenture") between the Company, the Subsidiary
Guarantors (as defined therein and three of which are the Guarantors discussed
herein) and you, Bankers Trust Company, as trustee (the "Trustee").
Substantially all of the assets of the Guarantors have been sold to TransAmerica
Business Credit Corporation ("TransAmerica") and certain subsidiaries thereof
(collectively, the "Buyers") for cash (the "Sale") pursuant to the terms of an
Asset Purchase Agreement dated October 2, 1998 by and among TransAmerica and
certain subsidiaries thereof, the Guarantors, Reedy River Ventures Limited
Partnership and the Company (the "Asset Purchase Agreement"). The Sale closed on
the date hereof.
In this connection, we have examined the Notes, the Guarantees and the
Indenture, in particular, but not limited to, Article 12 of the Indenture titled
"Subsidiary Guarantee," Section 1203 thereof titled "Release of Subsidiary
Guarantors," Article 10 thereof titled "Covenants," Section 1013 thereof titled
"Limitation on Sales of Assets" and the definitional provisions of the Indenture
relating thereto. We have also examined in this connection, the Asset Purchase
Agreement and originals or copies of such corporate documents and records of the
Company and the Guarantors, including but not
<PAGE>
limited to documents pertaining to the Sale, certificates of public officials,
certificates of the Company, the Guarantors or any officer thereof and such
other documents as we have deemed relevant and necessary as the basis for this
opinion and statement.
With respect to matters of fact, we have relied upon certificates of
public officials, certificates of the Company, the Guarantors or any officer
thereof and oral statements of the officers of the Company and the Guarantors
and have assumed, without independent investigation, the accuracy of the factual
statements made and the information contained in such certificates or
statements.
We have assumed, without investigation, the genuiness of all signatures,
the authenticity of all documents submitted to us as originals, the conformity
to authentic original documents of all documents submitted to us as copies, and
the accuracy and completeness of all documents made available to us by the
Company or the Guarantors. We have assumed, without investigation, the legal
capacity of all persons. We have assumed, without investigation, that there has
not been any mutual mistake of fact or misunderstanding. With respect to
agreements, instruments and other documents executed by entities or individuals
other than or in addition to the Company or the Guarantors, we have assumed,
without investigation, the power and authority of any such other entity or
individual to enter into and perform all of its, her or his obligations under
such agreements, instruments and other documents, the due execution and delivery
by each such entity or individual of such agreements, instruments and other
documents and that such agreements, instruments and other documents are the
valid, binding and enforceable obligations of each other such entity or
individual.
In our opinion, we have made such examination or investigation as is
necessary to enable us to express an informed opinion as set forth below.
Based on and subject to the foregoing, and subject to the comments,
limitations and qualifications set forth below, it is our opinion that the
Company and the Guarantors have complied with all covenants and conditions of
the Indenture, particularly Articles 10 and 12 thereof, necessary for the
Guarantors to be released from their Guarantees as of the date hereof pursuant
to the terms of the Indenture.
We do not herein intend to express any opinion, statement or belief as
to any matter governed by (or that purports to be governed by) any law other
than, and our opinions, statements and beliefs are limited solely to, the
existing laws of the State of South Carolina and the existing Federal laws of
the United States of America. We express no opinion with regard to any matter
that is or may be (or that purports to be) governed by the law of any other
state or jurisdiction. The law covered by the opinions expressed herein does not
include any statute, ordinance, decision, rule or regulation of any political
subdivision of any State. We note that the Indenture, the Notes and the
Guarantees by their terms are to be governed by the laws of the State of New
York, and for purposes hereof, we have assumed that the laws of the State of New
York (and the interpretation of such laws) are identical to South Carolina law.
We further express no opinion as to any matter governed by or arising under the
South Carolina Uniform
<PAGE>
Securities Act, the securities laws of any other State, any environmental law,
the Investment Company Act of 1940, as amended, the Public Utility Holding
Company Act, as amended, the Federal Power Act, as amended, or any rule or
regulation promulgated under any of the foregoing laws. No opinion is given as
to any choice-of-law provision contained in the Indenture, the Notes, the
Guarantees or any other document.
This letter is rendered as of the date hereof and applies only to
matters specifically covered by this letter, and we disclaim any continuing
responsibility for matters occurring after the date of this letter or any
obligation to update this letter. This opinion is limited to the matters
expressly set forth herein, and no opinion is implied or may be inferred beyond
the matters expressly stated herein.
This opinion letter is being provided to you in connection with the
release of the Guarantors from their Guarantees and is not to be used,
circulated, quoted or otherwise relied upon by any other person or entity, or
for any other purpose, without our express written consent.
Very truly yours,
WYCHE, BURGESS, FREEMAN & PARHAM, P.A.
/s/ Wyche, Burgess, Freeman & Parham, P.A.
cc: Kevin J. Mast
Mark Keegan, Esq.
RESOLUTIONS BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
EMERGENT BUSINESS CAPITAL, INC.
PERTAINING TO SALE OF ASSETS TO
TRANSAMERICA BUSINESS CREDIT CORPORATION
The board of directors (the "Board") of Emergent Business Capital, Inc.
(the "Company") hereby adopts the following resolutions by unanimous written
consent, waiving any requirement of notice and a meeting, to be effective as of
October 2, 1998:
WHEREAS, the Board has examined preliminary drafts and an execution copy
of that certain asset purchase agreement by and among TransAmerica Business
Credit Corporation ("TransAmerica") and certain subsidiaries thereof, the
sellers named therein and HomeGold Financial, Inc. (the "Agreement"); and
WHEREAS, the Board believes that it is in the best interest of the
Company and its shareholder to sell substantially all of its assets (including
all of its ownership interest in Emergent Business Capital Holdings Corporation)
to TransAmerica or certain of its subsidiaries pursuant to the terms of the
Agreement; and
WHEREAS, the Board has made such investigation as it believes necessary
to determine the fairness of the consideration to be received by the Company in
exchange for the assets to be sold pursuant to the Agreement;
NOW THEREFORE, be it resolved as follows:
RESOLVED, that the Company is hereby authorized to enter into and
perform its obligations under the Agreement;
RESOLVED, that the Board believes that the consideration to be received
by the Company in exchange for the assets to be sold pursuant to the Agreement
is at least equal to the fair market value of such assets;
RESOLVED, that the President, any Vice President, Secretary, any
Assistant Secretary, Treasurer and any Assistant Treasurer (collectively, the
"Officers"), and each of the foregoing persons, are hereby authorized to execute
and deliver the Agreement on behalf of the Company and to take or cause to be
taken such other actions and execute or cause to be executed such other
documents as may be necessary, in such Officer's reasonable discretion, to
effectuate the purposes of these resolutions and the transactions contemplated
in the Agreement;
<PAGE>
RESOLVED, that these resolutions may be executed in multiple
counterparts which taken together shall constitute a single document.
IN WITNESS WHEREOF, the members of the Board have set their signatures
below:
THE BOARD OF DIRECTORS OF
EMERGENT BUSINESS CAPITAL, INC.
/s/ Keith B. Giddens /s/ Kevin J. Mast
- --------------------------------------------------------------------------------
Keith B. Giddens Kevin J. Mast
/s/ John M. Sterling, Jr.
- -------------------------
John M. Sterling, Jr.
CONSENT OF SOLE SHAREHOLDER
The undersigned, being the sole shareholder of Emergent Business
Capital, Inc., hereby consents to the foregoing resolutions waiving any
requirement of notice and a meeting, to be effective as of October 2, 1998.
HOMEGOLD FINANCIAL, INC.
By: /s/ John M. Sterling, Jr.
--------------------------------
John M. Sterling, Jr.
Chairman of the Board
Chief Executive Officer
RESOLUTIONS BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
EMERGENT BUSINESS CAPITAL EQUITY GROUP, INC.
PERTAINING TO SALE OF ASSETS TO
TRANSAMERICA BUSINESS CREDIT CORPORATION
The board of directors (the "Board") of Emergent Business Capital Equity
Group, Inc. (the "Company") hereby adopts the following resolutions by unanimous
written consent, waiving any requirement of notice and a meeting, to be
effective as of October 2, 1998:
WHEREAS, the Board has examined preliminary drafts and an execution copy
of that certain asset purchase agreement by and among TransAmerica Business
Credit Corporation ("TransAmerica") and certain subsidiaries thereof, the
sellers named therein and HomeGold Financial, Inc. (the "Agreement"); and
WHEREAS, the Board believes that it is in the best interest of the
Company and its shareholder to sell substantially all of its assets to
TransAmerica or certain of its subsidiaries pursuant to the terms of the
Agreement; and
WHEREAS, the Board has made such investigation as it believes necessary
to determine the fairness of the consideration to be received by the Company in
exchange for the assets to be sold pursuant to the Agreement;
NOW THEREFORE, be it resolved as follows:
RESOLVED, that the Company is hereby authorized to enter into and
perform its obligations under the Agreement;
RESOLVED, that the Board believes that the consideration to be received
by the Company in exchange for the assets to be sold pursuant to the Agreement
is at least equal to the fair market value of such assets;
RESOLVED, that the President, any Vice President, Secretary, any
Assistant Secretary, Treasurer and any Assistant Treasurer (collectively, the
"Officers"), and each of the foregoing persons, are hereby authorized to execute
and deliver the Agreement on behalf of the Company and to take or cause to be
taken such other actions and execute or cause to be executed such other
documents as may be necessary, in such Officer's reasonable discretion, to
effectuate the purposes of these resolutions and the transactions contemplated
in the Agreement;
<PAGE>
RESOLVED, that these resolutions may be executed in multiple
counterparts which taken together shall constitute a single document.
IN WITNESS WHEREOF, the members of the Board have set their signatures
below:
THE BOARD OF DIRECTORS OF
EMERGENT BUSINESS CAPITAL EQUITY GROUP, INC.
/s/ Keith B. Giddens /s/ Kevin J. Mast
- --------------------------------------------------------------------------------
Keith B. Giddens Kevin J. Mast
/s/ John M. Sterling, Jr.
- -----------------------------
John M. Sterling, Jr.
CONSENT OF SOLE SHAREHOLDER
The undersigned, being the sole shareholder of Emergent Business Capital
Equity Group, Inc., hereby consents to the foregoing resolutions waiving any
requirement of notice and a meeting, to be effective as of October 2, 1998.
HOMEGOLD FINANCIAL, INC.
By: /s/ John M. Sterling, Jr.
--------------------------------
John M. Sterling, Jr.
Chairman of the Board
Chief Executive Officer
[HomeGold Financial, Inc. letterhead]
November 13, 1998
Bankers Trust Company
Four Albany Street
New York, NY 10015
Attn: Ms. Ednora Lenares
Corporate Trust and Agency Group
RE: Release of Emergent Business Capital, Inc., Emergent Business
Capital Equity Group, Inc. (f/k/a/ Emergent Equity Advisors,
Inc.) and Emergent Commercial Mortgage, Inc. (each a "Guarantor"
and collectively, the "Guarantors") from their guarantees (the
"Guarantees") of HomeGold Financial, Inc.'s 10-3/4% Senior Notes,
due 2004 (the "Notes")
Dear Ladies & Gentlemen:
As of the date hereof, substantially all of the assets of the Guarantors
were sold for cash (the "Sale") to TransAmerica Business Credit Corporation
("TransAmerica") and certain of its subsidiaries (collectively, the "Buyers") as
part of the closing of the transactions contemplated in that certain Asset
Purchase Agreement dated October 2, 1998 (the "Asset Purchase Agreement") by and
among TransAmerica and certain subsidiaries thereof, the Sellers named therein
and HomeGold Financial, Inc. (f/k/a Emergent Group, Inc., hereinafter, the
"Company"). All of the cash proceeds from the sale of the Guarantors' assets
were used, as of the date hereof, to reduce the outstanding balance and the
total commitment under that certain Mortgage Loan Warehousing Agreement dated
June 30, 1998, by and among HomeGold, Inc. and Carolina Investors, Inc. as
Borrowers, the Financial Institutions Party Thereto as Lenders and The CIT
Group/Business Credit, Inc. as Administrative Agent. The Guarantors, HomeGold,
Inc. and Carolina Investors, Inc. are South Carolina corporations, wholly-owned
subsidiaries of the Company and "Subsidiary Guarantors" as defined in the
indenture for the Notes and the Subsidiary Guarantees thereof dated September
23, 1997 (the "Indenture"), between the Company, the Subsidiary Guarantors (as
defined in the Indenture) and Bankers Trust Company, as trustee (the "Trustee").
The purpose of this letter is to inform you that as of the date hereof,
the Guarantors are released from their Guarantees (which are Subsidiary
Guarantees as defined in the Indenture) as provided in Section 1203 of the
Indenture as a result of the
<PAGE>
Sale. As required by such Section 1203, please find enclosed an Officers'
Certificate (as defined in the Indenture), an Opinion of Counsel (as defined in
the Indenture) and Board Resolutions (as defined in the Indenture) of the
Guarantors pertaining to the Sale. Please sign below one copy of this letter and
return it to us to indicate your acknowledgment of the release of the Guarantors
from their Guarantees.
With best regards, I am
Very truly yours,
/s/ Kevin J. Mast
--------------------------------
Kevin J. Mast Vice President
HomeGold Financial, Inc.
Bankers Trust Company hereby acknowledges receipt of this letter and the
Officers' Certificate, Opinion of Counsel and Board Resolutions mentioned herein
and acknowledges that Emergent Business Capital, Inc., Emergent Business Capital
Equity Group, Inc. (f/k/a Emergent Equity Advisors, Inc.) and Emergent
Commercial Mortgage, Inc. are released thereby from their Guarantees (which are
Subsidiary Guarantees as defined in the Indenture) of the Notes.
BANKERS TRUST COMPANY Date: 11/16/98
--------
By: /s/ Ednora G. Linares
-----------------------
Name: Ednora G. Linares
---------------------
Title: Assistant Vice President
------------------------
RESOLUTIONS BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS OF
EMERGENT COMMERCIAL MORTGAGE, INC.
PERTAINING TO SALE OF ASSETS TO
TRANSAMERICA BUSINESS CREDIT CORPORATION
The board of directors (the "Board") of Emergent Commercial Mortgage, Inc.
(the "Company") hereby adopts the following resolutions by unanimous written
consent, waiving any requirement of notice and a meeting, to be effective as of
October 2, 1998:
WHEREAS, the Board has examined preliminary drafts and an execution copy of
that certain asset purchase agreement by and among TransAmerica Business Credit
Corporation ("TransAmerica") and certain subsidiaries thereof, the sellers named
therein and HomeGold Financial, Inc. (the "Agreement"); and
WHEREAS, the Board believes that it is in the best interest of the Company
and its shareholder to sell substantially all of its assets to TransAmerica or
certain of its subsidiaries pursuant to the terms of the Agreement; and
WHEREAS, the Board has made such investigation as it believes necessary to
determine the fairness of the consideration to be received by the Company in
exchange for the assets to be sold pursuant to the Agreement;
NOW, THEREFORE, be it resolved as follows:
RESOLVED, that the Company is hereby authorized to enter into and perform
its obligations under the Agreement;
RESOLVED, that the Board believes that the consideration to be received by
the Company in exchange for the assets to be sold pursuant to the Agreement is
at least equal to the fair market value of such assets;
RESOLVED, that the President, any Vice President, Secretary, any Assistant
Secretary, Treasurer and any Assistant Treasurer (collectively, the "Officers"),
and each of the foregoing persons, are hereby authorized to execute and deliver
the Agreement on behalf of the Company and to take or cause to be taken such
other actions and execute or cause to be executed such other documents as may be
necessary, in such Officer's reasonable discretion, to effectuate the purposes
of these resolutions and the transactions contemplated in the Agreement;
<PAGE>
RESOLVED, that these resolutions may be executed in multiple counterparts
which taken together shall constitute a single document.
IN WITNESS WHEREOF, the members of the Board have set their signatures
below:
THE BOARD OF DIRECTORS OF
EMERGENT COMMERCIAL MORTGAGE, INC.
/s/ Keith B. Giddens /s/ Kevin J. Mast
- -----------------------------------------------------
Keith B. Giddens Kevin J. Mast
/s/ John M. Sterling, Jr.
- -------------------------
John M. Sterling, Jr.
CONSENT OF SOLE SHAREHOLDER
The undersigned, being the sole shareholder of Emergent Commercial
Mortgage, Inc., hereby consents to the foregoing resolutions waiving any
requirement of notice and a meeting, to be effective as of October 2, 1998.
HOMEGOLD FINANCIAL, INC.
By: /s/ John M. Sterling, Jr.
--------------------------
John M. Sterling, Jr.
Chairman of the Board
Chief Executive Officer
HOMEGOLD FINANCIAL, INC.
EMERGENT BUSINESS CAPITAL, INC.
EMERGENT BUSINESS CAPITAL MORTGAGE, INC.
CERTIFICATE OF COMPLIANCE
WITH THE INDENTURE DATED SEPTEMBER 23, 1997
The undersigned companies, HomeGold Financial, Inc. (f/k/a Emergent Group,
Inc.), a South Carolina corporation (the "Company"), and Emergent Business
Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a Emergent
Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc., all three being
South Carolina corporations (each a "Guarantor" and collectively, the
"Guarantors"), hereby certify to Bankers Trust Company (the "Trustee"), as of
the date hereof, that:
(1) Purpose. This Certificate is being issued to the Trustee as required by
Sections 102 and 1203 of the indenture dated September 23, 1997 (the
"Indenture") between the Company, the Subsidiary Guarantors (as defined in
the Indenture and three of which are the Guarantors and the Trustee
pertaining to the Company's 10-3/4% Senior Notes, due 2004, Series A and
Series B, as guaranteed by the Subsidiary Guarantors (collectively, the
"Notes") in connection with the release of the Guarantors from their
guarantees of the Notes (the "Subsidiary Guarantees") by reason of the sale
of the sale of substantially all of the assets of the Guarantors to
TransAmerica Business Credit Corporation ("TransAmerica") and certain
subsidiaries thereof (collectively, the "Buyers") for cash (the "Sale")
pursuant to that certain Asset Purchase Agreement dated October 2, 1998, by
and among TransAmerica and certain subsidiaries thereof, the Guarantors,
Reedy River Ventures Limited Partnership and the Company (the "Asset
Purchase Agreement"), which transaction closed as of the date hereof. The
representations, warranties and certifications set forth herein shall
survive the delivery of this Certificate.
(2) Knowledge of Conditions and Covenants in the Indenture. The officers
signing on behalf of the undersigned companies have read the Notes and the
Indenture, particularly Article 12 thereof titled "Subsidiary Guarantee"
and Section 1203 thereof titled "Release of Subsidiary Guarantors," Article
10 thereof titled "Covenants" and Section 1013 thereof titled "Limitation
on Sales of Assets" and all definitions in the Indenture relating thereto.
(3) Nature and Scope of Examination or Investigation. In addition to the
examination and investigation described in paragraph (2) above, the
officers signing on behalf of the undersigned companies have examined
original or copies of the Asset Purchase Agreement and such corporate
documents and records of the Company
<PAGE>
and the Guarantors, including but not limited to documents pertaining to
the Sale, and such other documents as the officers signing on behalf of the
undersigned companies have deemed relevant and necessary as the basis for
this opinion and statement.
(4) Belief that Examination or Investigation is Adequate to Certify
Compliance. In the opinion of the officers signing on behalf of the
undersigned companies, such officers have made such examination or
investigation as is necessary to enable them, on behalf of the undersigned
companies, to express an informed opinion as to whether or not the relevant
conditions and covenants of the Indenture have been complied with by the
Company and the Guarantors in order for the Guarantors to be released from
their Subsidiary Guarantees as provided in the terms of the Indenture.
(5) Opinion of Compliance with Indenture. In the opinion of the officers
signing on behalf of the undersigned companies, the Company and the
Guarantors have complied with the conditions and covenants provided in the
Indenture, particularly Articles 10 and 12 thereof, necessary for the
Guarnators to be released from their Subsidiary Guarantees as of the date
hereof as provided in the terms of the Indenture.
The Board of Directors of each of the Guarantors has determined in good
faith that each Guarantor has received in the Sale cash consideration for
the assets sold at least equal to fair market value of such assets as
evidenced by the Board Resolutions attached hereto, which Resolutions were
duly entered into in compliance with the requirements of the Certificate of
Incorporation and Bylaws of each Guarantor as applicable and which remain
in full force and effect without amendment or modification.
IN WITNESS WHEREOF, the undersigned corporations have executed this
Certificate as of November 13, 1998.
HOMEGOLD FINANCIAL, INC.
By:/s/ Keith B. Giddens
----------------------
Name: Keith B. Giddens
------------------
Its: Chairman of the Board, President,
-----------------------------------
Vice President (circle one)
-----------------------------------
By:/s/ Kevin J. Mast
-------------------
Name: Kevin J. Mast
-------------------
Its: Treasurer, Assistant Treasurer,
----------------------------------
Secretary, Assistant Secretary
(circle one)
SIGNATURES CONTINUED ON FOLLOWING PAGE
<PAGE>
EMERGENT BUSINESS CAPITAL, INC.
By:/s/ Keith B. Giddens
----------------------
Name: Keith B. Giddens
------------------
Its: Chairman of the Board, President,
-----------------------------------
Vice President (circle one)
-----------------------------------
By:/s/ Kevin J. Mast
-------------------
Name: Kevin J. Mast
-------------------
Its: Treasurer, Assistant Treasurer,
----------------------------------
Secretary, Assistant Secretary
(circle one)
By:/s/Keith B. Giddens
----------------------
Name: Keith B. Giddens
------------------
Its: Chairman of the Board, President,
-----------------------------------
Vice President (circle one)
------------------------------------
By:/s/Kevin J. Mast
-------------------
Name: Kevin J. Mast
-------------------
Its: Treasurer, Assistant Treasurer,
----------------------------------
Secretary, Assistant Secretary
(circle one)
EMERGENT COMMERCIAL MORTGAGE, INC.
By:/s/ Keith B. Giddens
----------------------
Name: Keith B. Giddens
------------------
Its: Chairman of the Board, President,
-----------------------------------
Vice President (circle one)
-----------------------------------
<PAGE>
By:/s/ Kevin J. Mast
-------------------
Name: Kevin J. Mast
-------------------
Its: Treasurer, Assistant Treasurer,
----------------------------------
Secretary, Assistant Secretary
(circle one)
FIRST AMENDMENT
TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
First Amendment, dated as of August 24, 1998 to the Mortgage Loan
Warehousing Agreement, dated as of June 30, 1998 (the "Loan Agreement"), by and
among HomeGold, Inc., a South Carolina corporation (the "HomeGold"), Carolina
Investors, Inc., a South Carolina corporation ("Carolina" and together with
HomeGold, each a "Borrower" and collectively, the "Borrowers"), the lenders
listed on Schedule I hereto under the captions "Continuing Lenders" (the
"Continuing Lenders") and "Additional Lenders" (the "Additional Lenders" and
together with the Continuing Lenders, each a "Lender" and collectively the
"Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for
the Lenders (in such capacity, the "Agent").
The Borrowers, the Lenders and the Agent desire to (i) add the
Additional Lenders as parties to the Loan Agreement and (ii) amend certain other
terms and conditions hereafter set forth. In addition, the Continuing Lenders
wish to assign a portion of their interests in the Total Commitment and the
Loans outstanding under the Loan Agreement to the Additional Lenders and the
Additional Lenders wish to accept such assignments.
Accordingly, the Borrowers, the Agent and the Lenders hereby
agree as follows:
1. Definitions. All capitalized terms used herein and not
otherwise defined herein are used herein as defined in the Loan Agreement.
2. Wet Mortgage Loan Sublimit. Article XI to the Loan Agreement
is hereby amended to include a defined term of "Wet Mortgage Loan Sublimit"
therein to read as follows:
"'Wet Mortgage Loan Sublimit' shall mean, at the time of
determination, the maximum amount of Wet Mortgage Loans that qualify for
inclusion in the Borrowing Base, as determined in accordance with the
proviso to subparagraph (n) of the definition of 'Eligible Mortgage
Loan'."
3. Majority Lenders. The definition of the term "Majority
Lenders" set forth in Article XI to the Loan Agreement is hereby amended in its
entirety to read as follows:
"'Majority Lenders' shall mean (i) prior to the occurrence
of an Event of Default, those Lenders holding sixty-six and two-thirds
percent (66-2/3%) of the Total Commitment, and (ii) after the occurrence
and during the continuance of an Event of Default, those Lenders holding
sixty-six and two-thirds percent (66-
<PAGE>
2/3%) of the Loans outstanding under the Agreement, provided that, with
respect to (i) and (ii) above, until such time as the Pro Rata Share of
CIT is less than sixty-six and two-thirds percent (66-2/3%), CIT shall
not constitute the Majority Lender without being joined by one
additional Lender.
4. Amendments and Waivers. Section 10.03 of the Loan Agreement is
hereby amended by deleting the reference to "Section 10.08" set forth in clause
(v) of Section 10.03 and substituting in its place a reference to "Section
9.08".
5. Confidentiality. Section 10.15 of the Loan Agreement is hereby
amended by deleting the third sentence thereof and substituting in its place the
following:
"Subject to the other provisions of this Section 10.15,
each Lender and the Administrative Agent may disclose confidential
information to its Affiliates or any of its officers, directors,
employees, attorneys, accountants or other professionals engaged by any
Lender, its Affiliates or the Administrative Agent only after
determining that such third party has been instructed to hold such
information in confidence to the same extent as if it were a Lender."
6. Assignments. (a) On and as of the Amendment Effective Date (as
hereinafter defined), each of the Continuing Lenders shall assign and each of
the Additional Lenders shall purchase, at the principal amount thereof, such
interests in the Loans outstanding on such date as shall be necessary in order
that, after giving effect to all such assignments and purchases, the Loans
outstanding will be held by the Lenders ratably in accordance with their Pro
Rata Shares in the Total Commitment, as set forth in Annex I to this Amendment.
Such assignments and purchases shall be without recourse, representation or
warranty, except that (i) each Continuing Lender represents that it is the legal
and beneficial owner of the interests assigned by it free and clear of any Lien
and (ii) paragraphs 2 (other than clauses (i) and (v) of the first paragraph
thereof), 4 and 5 of Exhibit F to the Loan Agreement are hereby incorporated by
reference as if set forth herein and each Continuing Lender shall be deemed to
have made the representations, warranties and statements of Assignor in such
paragraphs and each Additional Lender shall be deemed to have made the
representations, warranties and statements of Assignee in such paragraphs.
(b) On the Amendment Effective Date (i) the Additional
Lenders shall pay the purchase price for the Loans purchased by it pursuant to
paragraph (a) of this Section 6 by wire transfer of immediately available funds
to the Agent in New York, New York, not later than 12:00 noon, New York City
time, and (ii) the Agent shall promptly pay to each Continuing Lender, out of
the amounts received by it pursuant to clause (i) of this paragraph (b), the
purchase price for the interests assigned by it pursuant to such paragraph (a)
by wire transfer of immediately available funds to an account designated by such
Lender.
(c) The Borrowers hereby consent to the assignments and
purchases provided for in paragraphs (a) and (b) of this Section 6 and agree
that each Additional Lender shall have all of the rights of a Lender under the
Loan Agreement with respect to the interests purchased by it pursuant to such
paragraphs. Commencing on the Amendment Effective Date, each Additional Lender
will be a party to the Loan Agreement, agrees to be bound by the terms
-2-
<PAGE>
and conditions of the Loan Agreement and the Loan Documents and will have all of
the rights and obligations of a Lender under the Loan Agreement and the Loan
Documents.
6. Delivery of Notes. The Continuing Lenders shall deliver to the
Agent, for delivery to and cancellation by the Borrowers, all Notes issued by
the Borrowers and held by the Continuing Lenders under the Loan Agreement
(collectively, the "Old Notes"), which Old Notes are hereby deemed cancelled
effective from delivery of the New Notes to the Agent. The Borrowers shall
execute and deliver to the Agent for the account of each Lender the Notes which
such Lender is entitled to receive pursuant to Section 2.02 of the Loan
Agreement, in the form of Exhibit A thereto and in the principal amount for each
Lender equal to its Pro Rata Share of the Total Commitment, as set forth in
Annex I to this Amendment (the "New Notes"). The Agent shall release and deliver
the Old Notes to the Borrowers for cancellation and deliver the New Notes to the
Lenders.
7. Accrued Interest and Fees. At the times and pursuant to the
terms contained in the Loan Agreement, the Agent will pay all accrued interest
and all fees payable pursuant to Section 2.07(e) of the Loan Agreement to the
Lenders entitled thereto after giving effect to the assignments and purchases
made pursuant to Section 6 above.
8. Schedule. Schedule I to the Loan Agreement is hereby amended
in its entirety to read as set forth in Annex I to this Amendment.
9. Conditions to Effectiveness. This Amendment shall become
effective only upon satisfaction in full of the following conditions precedent
(the first date upon which all such conditions shall have been satisfied being
herein called the "Amendment Effective Date"):
(i) The representations and warranties contained in
this Amendment and in Article V of the Loan Agreement shall be true and
correct on and as of the Amendment Effective Date as though made on and
as of such date (except where such representations and warranties relate
to an earlier date in which case such representations and warranties
shall be true and correct as of such earlier date); no Event of Default
or Default shall have occurred and be continuing on the Amendment
Effective Date, or result from this Amendment becoming effective in
accordance with its terms.
(ii) The Agent shall have received counterparts of
this Amendment which bear the signatures of the Borrowers and each of
the Lenders.
(iii) The Agent shall have received the New Notes,
duly executed by each of the Borrowers.
(iv) The Agent shall have received an
acknowledgment and consent to this Amendment, substantially in the form
of Annex II attached hereto, duly executed by EGI and EMC-TN.
(v) All legal matters incident to this Amendment
shall be satisfactory to the Agent and its counsel.
-3-
<PAGE>
10. Representations and Warranties. Each of the Borrowers
represents and warrants to the Lenders as follows:
(a) Each Borrower (i) is duly organized, validly existing
and in good standing under the laws of the state of its organization and (ii)
has all requisite power, authority and legal right to execute, deliver and
perform this Amendment, the New Notes, all other documents executed by it in
connection with this Amendment, and to perform the Loan Agreement, as amended
hereby.
(b) The execution, delivery and performance by the
Borrowers of this Amendment and all other documents executed by it in connection
with this Amendment, the execution, delivery and performance by each Borrower of
the New Notes and the performance by the Borrowers of the Loan Agreement as
amended hereby (i) have been duly authorized by all necessary action, (ii) do
not and will not violate or create a default under any Borrower's organizational
documents, any applicable law or any contractual restriction binding on or
otherwise affecting any Borrower or any of such Borrower's properties, and (iii)
except as provided in the Loan Documents, do not and will not result in or
require the creation of any Lien, upon or with respect to any Borrower's
property.
(c) No authorization or approval or other action by, and
no notice to or filing with, any Governmental Authority or other regulatory body
is required in connection with the due execution, delivery and performance by
any of the Borrowers of this Amendment and all other documents executed by it in
connection with this Amendment, the execution, delivery and performance by each
Borrower of the New Notes and the performance by the Borrowers of the Loan
Agreement as amended hereby.
(d) This Amendment and the Loan Agreement, as amended
hereby, and all other documents executed in connection with this Amendment
constitute the legal, valid and binding obligations of the Borrowers party
thereto, enforceable against such Persons in accordance with their terms except
to the extent the enforceability thereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting generally the enforcement of creditors' rights and
remedies and by general principles of equity.
(e) The representations and warranties contained in
Article V of the Loan Agreement are correct on and as of the Amendment Effective
Date as though made on and as of the Amendment Effective Date (except to the
extent such representations and warranties expressly relate to an earlier date),
and no Event of Default or Default, has occurred and is continuing on and as of
the Amendment Effective Date.
11. Continued Effectiveness of Loan Agreement. Each of the
Borrowers hereby (i) confirms and agrees that each Loan Document to which it is
a party is, and shall continue to be, in full force and effect and is hereby
ratified and confirmed in all respects except that on and after the Amendment
Effective Date of this Amendment all references in any such Loan Document to
"the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import
referring to the Loan Agreement shall mean the Loan Agreement as amended by this
-4-
<PAGE>
Amendment, and (ii) confirms and agrees that to the extent that any such Loan
Document purports to assign or pledge to the Agent, or to grant to the Agent a
Lien on any collateral as security for the Obligations of the Borrowers from
time to time existing in respect of the Loan Agreement and the Loan Documents,
such pledge, assignment and/or grant of a Lien is hereby ratified and confirmed
in all respects.
12. Miscellaneous.
a. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement.
b. Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
c. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
d. The Borrowers will pay on demand all reasonable
out-of-pocket costs and expenses of the Agent in connection with the
preparation, execution and delivery of this Amendment, including, without
limitation, the reasonable fees, disbursements and other charges of Schulte Roth
& Zabel LLP, counsel to the Agent.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized as of the
day and year first above written.
HOMEGOLD, INC.
By:
--------------------------------
Name:
------------------------------
Title:
------------------------------
CAROLINA INVESTORS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
------------------------------
AGENT AND LENDER
----------------
THE CIT GROUP/BUSINESS CREDIT, INC.,
as Agent
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
-6-
<PAGE>
LENDERS
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:
--------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
Address:
3225 Cumberland Boulevard, Suite 700
Atlanta, GA 30339
Attn: William D. Kearney
Senior Vice President
Telephone: (770) 933-8824
Telecopier: (770) 933-2993
Wiring Instructions:
SunTrust Bank, N.A. (Atlanta, GA)
ABA #: 061-000-104
AC#: 8801873384
REF: HomeGold
-7-
<PAGE>
BNY FINANCIAL CORPORATION
By:
--------------------------------------
Name:
-------------------------------------
Title:
-----------------------------------
Address:
1290 Avenue of the Americas
New York, New York 10104
Attn: Frank Imperato
Vice President
Telephone: (212) 408-7026
Telecopier: (212) 408-7162
Wiring Instructions:
The Bank of New York
101 Barclay Street, New York, NY
ABA #: 021-000-018
AC#: 8090653114
REF: HomeGold, Inc.
ATTN: Frank Imperato
Vice President
-8-
<PAGE>
SCHEDULE I
CONTINUING LENDERS:
- -------------------
The CIT Group/Business Credit, Inc.
ADDITIONAL LENDERS:
- -------------------
Deutsche Financial Services Corporation
BNY Financial Corporation
<PAGE>
ANNEX I
SCHEDULE I
TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
DATED AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
Commitment Schedule
-------------------
Lender Maximum Commitment Percentage Share
------ ------------------ ----------------
<S> <C> <C>
The CIT Group/Business Credit, $150,000,000.00 75.00%
Inc.
Deutsche Financial Services 25,000,000.00 12.50%
Corporation
BNY Financial Corporation 25,000,000.00 12.50%
============= ======
TOTAL COMMITMENT $200,000,000.00 100.00%
</TABLE>
<PAGE>
ANNEX II
ACKNOWLEDGMENT AND CONSENT
--------------------------
The undersigned (each a "Loan Party"), each as a party to one or
more Loan Documents, as defined in the Mortgage Loan Warehousing Agreement dated
as of June 30, 1998 (the "Loan Agreement"), by and among HomeGold, Inc.,
Carolina Investors, Inc., the lenders parties thereto (the "Lenders"), and The
CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in
such capacity, the "Agent"), each hereby (i) acknowledges and consents to the
First Amendment dated the date hereof (the "Amendment", all terms defined
therein being used herein as defined therein) to the Loan Agreement; (ii)
confirms and agrees that each Loan Document to which it is a party is, and shall
continue to be, in full force and effect and is hereby ratified and confirmed in
all respects except that on and after the Amendment Effective Date all
references in any such Loan Documents to "the Loan Agreement", "thereto",
"thereof", "thereunder" or words of like import referring to the Loan Agreement
shall mean the Loan Agreement as amended by the Amendment; and (iii) confirms
and agrees that to the extent that any such Loan Document purports to assign or
pledge to the Agent, or to grant to the Agent a security interest in or lien on,
any collateral as security for the obligations of the Loan Party from time to
time existing in respect of the Loan Documents, such pledge, assignment and/or
grant of a security interest or lien is hereby ratified and confirmed in all
respects as security for, in addition to the other obligations secured thereby,
all obligations of such Loan Party outstanding upon the taking effect of the
Amendment.
Dated: August __, 1998
HOMEGOLD FINANCIAL, INC.
(f/k/a Emergent Group, Inc.)
By: ________________________
Title: _______________________
EMERGENT MORTGAGE CORPORATION
OF TENNESSEE
By: ________________________
Title: _______________________
SECOND AMENDMENT
TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
Second Amendment, dated as of December 24, 1998 to the Mortgage
Loan Warehousing Agreement, dated as of June 30, 1998, as amended by the First
Amendment, dated as of August 24, 1998 (as so amended, the "Loan Agreement"), by
and among HomeGold, Inc., a South Carolina corporation (the "HomeGold"),
Carolina Investors, Inc., a South Carolina corporation ("Carolina" and together
with HomeGold, each a "Borrower" and collectively, the "Borrowers"), the
financial institutions party thereto (each a "Lender" and collectively the
"Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for
the Lenders (in such capacity, the "Administrative Agent").
The Borrowers, the Lenders and the Administrative Agent desire to
amend certain terms, covenants and conditions set forth in the Loan Agreement.
In addition, the Borrowers have requested the Lenders to consent to certain
actions taken by Borrowers.
Accordingly, the Borrowers, the Administrative Agent and the
Lenders hereby agree as follows:
1. Definitions. All capitalized terms used herein and not
otherwise defined herein are used herein as defined in the Loan Agreement.
2. Commitments. (a) The maximum aggregate principal amount of the
revolving credit facility set forth in the STATEMENT OF PURPOSE of the Loan
Agreement is hereby amended by deleting the two references to "$200,000,000"
contained therein and substituting in lieu thereof a reference to
"$100,000,000".
(b) Paragraph (d) of Section 10.13 to the Loan Agreement is
hereby amended by deleting each reference to "Schedule I" contained therein and
substituting in lieu thereof "Schedule IA".
(c) The definition of the terms "Commitment" and "Total
Commitment" in Article XI of the Loan Agreement are hereby amended by deleting
the words "Schedule I to this Agreement" and substituting in lieu thereof
"Schedule IA to this Agreement".
3. Indebtedness. The definition of the terms "Permitted Other
Debt" and "Permitted Secured Debt" in Article XI of the Loan Agreement are
hereby amended by deleting the words "Exhibit N attached hereto" and
substituting in lieu thereof "Exhibit N-A attached hereto".
4. Interest Rates. (a) The definition of the term "Applicable
Eurodollar Rate Margin" set forth in Article XI to the Loan Agreement is hereby
deleted in its entirety.
<PAGE>
(b) The definition of the term "Applicable Prime Rate Margin" set
forth in Article XI to the Loan Agreement is hereby amended in its entirety to
read as follows:
"'Applicable Prime Rate Margin' shall mean, with respect
to a Prime Loan, 0.75%."
(c) The definitions of the terms "Pricing Grid" and "Pricing Grid
Effective Date" set forth in Article XI to the Loan Agreement are hereby deleted
in their entirety.
(d) Paragraph (a) of Section 2.05 to the Loan Agreement is hereby
amended in its entirety to read as follows:
"(a) Interest Rate. Each Loan which is a Prime Loan shall
bear interest on the principal amount thereof from time to time
outstanding from the date of such Loan, until such principal amount
becomes due, at a rate per annum equal to the Prime Rate plus the
Applicable Prime Rate Margin."
5. EGI. The definition of the term "EGI" set forth in Article XI
to the Loan Agreement is hereby amended in its entirety to read as follows:
"'EGI' shall mean HomeGold Financial, Inc., formerly known
as Emergent Group, Inc., a South Carolina corporation."
6. Prepayment of Loans. (a) Section 2.06(d) of the Loan Agreement
is hereby amended by deleting the first sentence thereof and substituting in its
place the following:
"The Companies shall have the right to sell Collateral for
the fair market value thereof (or, with respect to Mortgage Loans, the
Fair Market Value thereof), provided that (i) any such sale shall only
be made with the prior written consent of the Administrative Agent after
the occurrence and during the continuance of an Event of Default, and
(ii) the Collateral Sale Proceeds (including, without limitation,
proceeds from the sale of real estate acquired by any Company or any
Subsidiary thereof by foreclosure, deed in lieu of foreclosure or by
similar means) shall promptly and in any event within two (2) Business
Days of the receipt thereof be paid to the Administrative Agent and
applied to the repayment of the Obligations."
(b) Section 2.06 of the Loan Agreement is hereby further amended
by inserting paragraph (f) at the end thereof to read as follows:
"(f) Except as otherwise expressly provided in this
Section 2.06, payments with respect to any paragraph of this Section
2.06 are in addition to payments made or required to be made under any
other paragraph of this Section 2.06. Prepayments of the Loans pursuant
to this Section 2.06 shall be applied to the "A" Loans or the "B" Loans
by the Administrative Agent, first, based upon the Company making such
prepayment and, second, based upon such factors as the Administrative
Agent deem
-2-
<PAGE>
appropriate in the exercise of its reasonable business judgment (which
factors may include the minimization or reduction of the payments
required by Section 2.12 hereof)."
7. Chief Executive Office. Section 5.17 of the Loan Agreement is
hereby amended by deleting the reference to "15 South Main Street, Suite 750,
Greenville, South Carolina 29601" therein and substituting in lieu thereof "3901
Pelham Road, Greenville, South Carolina 29615".
8. License to Issue CII Debentures and Notes. Section 6.04 of the
Loan Agreement is hereby amended by inserting a "(1)" before the word "Maintain"
therein, and by inserting a new paragraph (2) after paragraph (1) to read as
follows:
"(2) Obtain and maintain all rights, privileges, licenses,
approvals, franchises, properties and assets necessary to permit CII to
issue its subordinated debentures and floating rate senior notes (as
described in the definition of "CII Investor Obligations") or any
similar debt securities, including, without limitation, all approvals
with respect to the Securities and Exchange Commission or the Securities
Commission of the State of South Carolina."
9. Agent's Accountants. (a) Section 6.05 of the Loan Agreement is
hereby amended by deleting clause (ii) of paragraph (2) thereof (excluding,
however, the proviso set forth in such paragraph (2)) and substituting in lieu
thereof the following:
"(ii) representatives of the Administrative Agent or any
Lender (including, without limitation, Ernst & Young LLP or any other
independent accountants retained by the Administrative Agent) to (x)
conduct periodic operational audits of the business and operations of
any Company, and (y) at such times as determined by Administrative
Agent, review and analyze the Companies' business plan and make
recommendations with respect to such plan and the implementation
thereof, in the case of the Administrative Agent and Ernst & Young LLP
or such other independent accountants retained by the Administrative
Agent, at the Companies' expense; provided, that the terms of engagement
of Ernst & Young LLP or such other independent accountants retained by
the Administrative Agent for the purposes set forth in clause (y) above
shall be mutually agreed upon by the Administrative Agent, the Companies
and such independent accountants;"
(b) Paragraph (2) of Section 6.05 of the Loan Agreement is hereby
further amended by inserting the word "further," after the word "provided,"
following clause (ii) therein.
10. Subsidiaries. Section 7.06 of the Loan Agreement is hereby
amended by inserting the phrase "HomeGold Realty, Inc.," between the phrases
"EMC-TN," and "State Mortgage Originators" set forth therein.
11. Investments; Advances. (a) Section 7.07 of the Loan Agreement
is hereby amended by inserting a new clause (D) after clause (C) therein and
before the phrase "provided further," therein to read as follows:
-3-
<PAGE>
"and (D) if the Companies receive cash net proceeds of $20,000,000 or
more from the sale or other disposition of Mortgage Loans not included
and not eligible for inclusion in the Borrowing Base, the Companies may,
within 120 days of the receipt of such proceeds, make advances or loans
to EGI in an aggregate amount not to exceed $10,000,000, the proceeds of
which shall be used to effect a repurchase or redemption of EGI Notes,
provided that, if the Companies receive less than $20,000,000 cash net
proceeds from any such sale, no more than fifty percent (50%) of such
cash net proceeds received by the Companies may be advanced or loaned to
EGI to effect a repurchase or redemption of EGI Notes;"
(b) Clause (C) of Section 7.07 of the Loan Agreement is hereby
amended in its entirety to read as follows:
"(C) each Company shall be permitted to make loans or advances to any
other Company, provided that (i) the repayment of all such loans and
advances is subordinated to the payment of the Obligations pursuant to
the terms of and evidenced by one or more promissory notes substantially
in the form of Exhibit O hereto, (ii) such notes shall be pledged to the
Administrative Agent for the benefit of the Lenders, and (iii) HomeGold
shall not make loans or advances to CII to the extent all or any portion
of the proceeds of such loans or advances are to be distributed by CII,
directly or indirectly, to EGI (the "Designated Loan") if the Designated
Loan could not be made directly by HomeGold to EGI pursuant to the
provisions of clause (D) of this Section;"
12. Dividends. Section 7.09 of the Loan Agreement is hereby
amended by deleting the first proviso set forth therein and substituting in lieu
thereof the following:
"provided, however, that (A) no Company shall make any dividend or
distribution under this Section 7.09 if, at the time of or after giving
effect to such dividend or distribution, an Event of Default shall have
occurred and be continuing, and (B) if the Companies receive cash net
proceeds of $20,000,000 or more from the sale or other disposition of
Mortgage Loans not included and not eligible for inclusion in the
Borrowing Base, the Companies may, within 120 days of the receipt of
such proceeds, make a dividend or other distribution to EGI in an
aggregate amount not to exceed $10,000,000, the proceeds of which shall
be used to effect a repurchase or redemption of EGI Notes, provided
that, if the Companies receive less than $20,000,000 cash net proceeds
from any such sale, no more than fifty percent (50%) of such cash net
proceeds received by the Companies may be distributed to EGI to effect a
repurchase or redemption of EGI Notes;"
13. Minimum Availability. Section 7.17 of the Loan Agreement is
hereby amended by deleting the reference to "$10,000,000" set forth therein and
substituting in lieu thereof a reference to "$20,000,000".
-4-
<PAGE>
14. CII Investor Obligations. Section 7.18 of the Loan Agreement
is hereby amended in its entirety to read as follows:
"Permit the aggregate outstanding principal amount of the
CII Investor Obligations to be less than $100,000,000 at all times."
15. Events of Default. Paragraph (D) of Section 8.01 of the Loan
Agreement is hereby amended by deleting the phrase ", or (iv)" contained therein
and substituting in lieu thereof ", or (v)", and by inserting a new clause (iv)
after clause (iii) therein and before the phrase ", or (v)", which new clause
(iv) shall read as follows:
", (iv) the covenant contained in Section 6.04(2) of this
Agreement and such default shall continue unremedied for a period of 60
days"
16. Exhibits. Exhibit N to the Loan Agreement is hereby amended
in its entirety to read as set forth in Annex II to this Amendment, for the
purpose of listing the indebtedness of the Borrowers to EGI as Permitted Other
Debt.
17. Schedules. Schedule I to the Loan Agreement is hereby amended
in its entirety to read as set forth in Annex I to this Amendment. Schedule III
to the Loan Agreement is hereby deleted in its entirety.
18. Acknowledgement Regarding Elimination of LIBOR Option. The
parties hereto acknowledge and agree that, from and after the Amendment
Effective Date, the Borrowers shall not be entitled to borrow an Eurodollar Loan
under the Loan Agreement or to request the Administrative Agent to convert any
Prime Loan or any portion thereof to an Eurodollar Loan or to continue any
existing Eurodollar Loan or any portion thereof into a subsequent Interest
Period, notwithstanding any provisions set forth in the Loan Agreement to the
contrary. From and after the Amendment Effective Date, the Borrowers shall only
have the right to borrow Prime Loans under the Loan Agreement.
19. Conditions to Effectiveness. This Amendment shall become
effective only upon satisfaction in full of the following conditions precedent
(the first date upon which all such conditions shall have been satisfied being
herein called the "Amendment Effective Date"):
(i) The representations and warranties contained in
this Amendment and in Article V of the Loan Agreement shall be true and
correct on and as of the Amendment Effective Date as though made on and
as of such date (except (i) with respect to the general financial
condition of the Borrowers, the Guarantors or any of their Subsidiaries
and (ii) where such representations and warranties relate to an earlier
date in which case such representations and warranties shall be true and
correct as of such earlier date); no Event of Default or Default shall
have occurred and be continuing on the Amendment Effective Date, or
result from this Amendment becoming effective in accordance with its
terms.
-5-
<PAGE>
(ii) The Administrative Agent shall have received
counterparts of this Amendment which bear the signatures of the
Borrowers and each of the Lenders.
(iii) The Administrative Agent shall have received
a pledge amendment to the Pledge Agreement, duly executed by HomeGold,
together with the stock certificates representing all of the common
stock of Realty (as defined below), accompanied by an undated stock
power executed in blank.
(iv) The Administrative Agent shall have received a
guaranty substantially in the form attached as Exhibit J to the Loan
Agreement, duly executed by Realty in favor of the Administrative Agent.
(v) The Administrative Agent shall have received an
acknowledgment and consent to this Amendment, substantially in the form
of Annex III attached hereto, duly executed by EGI and EMC-TN.
(vi) All legal matters incident to this Amendment
shall be satisfactory to the Administrative Agent and its counsel.
20. Waiver and Consent. (a) Pursuant to the request of the
Borrowers, the Lenders hereby consent to and waive any Event of Default that
would arise from (i) the Borrowers' retention of the accounting firm of Elliot,
Davis & Company LLP as its independent public accountants for the period through
December 31, 1999, and (ii) the establishment of HomeGold Realty, Inc.
("Realty"), as a direct, wholly-owned subsidiary of HomeGold, provided that the
sole function of Realty will be to hold and sell real estate acquired by
HomeGold through foreclosure, deed in lieu of foreclosure or similar means.
(b) The Lenders' consent and waiver of any Event of Default
relating to the actions set forth in paragraph (a) above (i) shall become
effective as of the date set forth above when signed by the Lenders, (ii) shall
be effective only in this specific instance and for the specific purposes set
forth herein, and (iii) does not allow for any other or further departure from
the terms and conditions of the Loan Agreement or any other Credit Documents,
which terms and conditions shall continue in full force and effect.
21. Representations and Warranties. Each of the Borrowers
represents and warrants to the Lenders as follows:
(a) Each Borrower (i) is duly organized, validly existing
and in good standing under the laws of the state of its organization and (ii)
has all requisite power, authority and legal right to execute, deliver and
perform this Amendment, the New Notes, all other documents executed by it in
connection with this Amendment, and to perform the Loan Agreement, as amended
hereby.
(b) The execution, delivery and performance by the
Borrowers of this Amendment and all other documents executed by it in connection
with this Amendment, the execution, delivery and performance by each Borrower of
the New Notes and the performance by
-6-
<PAGE>
the Borrowers of the Loan Agreement as amended hereby (i) have been duly
authorized by all necessary action, (ii) do not and will not violate or create a
default under any Borrower's organizational documents, any applicable law or any
contractual restriction binding on or otherwise affecting any Borrower or any of
such Borrower's properties, and (iii) except as provided in the Credit
Documents, do not and will not result in or require the creation of any Lien,
upon or with respect to any Borrower's property.
(c) No authorization or approval or other action by, and
no notice to or filing with, any Governmental Authority or other regulatory body
is required in connection with the due execution, delivery and performance by
any of the Borrowers of this Amendment and all other documents executed by it in
connection with this Amendment, the execution, delivery and performance by each
Borrower of the New Notes and the performance by the Borrowers of the Loan
Agreement as amended hereby.
(d) This Amendment and the Loan Agreement, as amended
hereby, and all other documents executed in connection with this Amendment
constitute the legal, valid and binding obligations of the Borrowers party
thereto, enforceable against such Persons in accordance with their terms except
to the extent the enforceability thereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting generally the enforcement of creditors' rights and
remedies and by general principles of equity.
(e) The representations and warranties contained in
Article V of the Loan Agreement are correct on and as of the Amendment Effective
Date as though made on and as of the Amendment Effective Date (except to the
extent such representations and warranties expressly relate (i) to an earlier
date and (ii) to the general financial condition of the Borrowers, the
Guarantors or any of their Subsidiaries), and no Event of Default or Default,
has occurred and is continuing on and as of the Amendment Effective Date.
22. Continued Effectiveness of Loan Agreement. Each of the
Borrowers hereby (i) confirms and agrees that each Credit Document to which it
is a party is, and shall continue to be, in full force and effect and is hereby
ratified and confirmed in all respects except that on and after the Amendment
Effective Date of this Amendment all references in any such Credit Document to
"the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import
referring to the Loan Agreement shall mean the Loan Agreement as amended by this
Amendment, and (ii) confirms and agrees that to the extent that any such Credit
Document purports to assign or pledge to the Administrative Agent, or to grant
to the Administrative Agent a Lien on any collateral as security for the
Obligations of the Borrowers from time to time existing in respect of the Loan
Agreement and the Credit Documents, such pledge, assignment and/or grant of a
Lien is hereby ratified and confirmed in all respects.
23. Miscellaneous.
a. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement.
-7-
<PAGE>
b. Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
c. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
d. The Borrowers will pay on demand all reasonable
out-of-pocket costs and expenses of the Administrative Agent in connection with
the preparation, execution and delivery of this Amendment, including, without
limitation, the reasonable fees, disbursements and other charges of Schulte Roth
& Zabel LLP, counsel to the Administrative Agent.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized as of the
day and year first above written.
HOMEGOLD, INC.
By:
--------------------------------
Name:
------------------------------
Title:
------------------------------
CAROLINA INVESTORS, INC.
By:
--------------------------------
Name:
------------------------------
Title:
------------------------------
AGENT AND LENDER
THE CIT GROUP/BUSINESS CREDIT, INC.,
as Administrative Agent & Lender
By:
---------------------------------
Name:
------------------------------
Title:
------------------------------
-9-
<PAGE>
LENDERS
DEUTSCHE FINANCIAL SERVICES CORPORATION
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
BNY FINANCIAL CORPORATION
By:
-----------------------------------
Name:
----------------------------------
Title:
---------------------------------
-10-
<PAGE>
ANNEX I
SCHEDULE IA
TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
DATED AS OF JUNE 30, 1998, AS AMENDED
Commitment Schedule
-------------------
<TABLE>
<CAPTION>
Lender Maximum Commitment Percentage Share
------ ------------------ ----------------
<S> <C> <C>
The CIT Group/Business Credit, $75,000,000.00 75.00%
Inc.
Deutsche Financial Services 12,500,000.00 12.50%
Corporation
BNY Financial Corporation 12,500,000.00 12.50%
============= ======
TOTAL COMMITMENT $100,000,000.00 100.00%
</TABLE>
<PAGE>
ANNEX II
EXHIBIT N-A
TO
MORTGAGE LOAN WAREHOUSING AGREEMENT
DATED AS OF JUNE 30, 1998, AS AMENDED
SCHEDULE OF PERMITTED SECURED DEBT AND PERMITTED OTHER DEBT
PERMITTED SECURED DEBT OF HOMEGOLD & CII:
1. "Repo" facilities on customary terms and conditions, provided
that no such mortgage warehousing facility or "Repo" facilities may provide for
"wet" fundings.
2. Credit facilities to finance the acquisition or maintenance of
property, plant and equipment, provided that such facilities may only be secured
by such property, plant or equipment.
3. Mortgage Loan from Wachovia Bank, N.A. to HOMEGOLD, INC.
secured by building on Pelham Road in Greenville, South Carolina.
PERMITTED OTHER DEBT OF HOMEGOLD & CII:
1. Trade debt incurred in the ordinary course of business, paid
within thirty (30) days after the same has become due and payable or which is
being contested in good faith, provided provision is made to the satisfaction of
the Administrative Agent for the eventual payment thereof in the event it is
found that such contested trade debt is payable by HOMEGOLD, Inc. or CII.
2. Guaranties by HOMEGOLD, INC. & CII of $125,000,000 in
aggregate principal amount of EGI's 10-3/4% Senior Notes due 2004, Series A and
Series B.
3. CII's Subordinated Debentures (Series B, Series C and Series
D) and CII's Floating Rate Senior Notes (Series 93, Series 94, Series 95, Series
96, Series 97, and Series 99) each as listed on page 3 of that certain
Prospectus of CII dated April 1, 1998 describing the Series D Subordinated
Debentures and Series 99 Floating Rate Senior Notes and any future issuances of
substantially similar securities of CII.
4. Indebtedness of HomeGold and CII to EGI existing as of
November 30, 1998; provided that, after the occurrence and during the
continuance of an Event of Default, neither HomeGold or CII shall be permitted
to make any payments to EGI in respect of such Indebtedness without the prior
written consent of the Majority Lenders.
<PAGE>
ANNEX III
ACKNOWLEDGMENT AND CONSENT
The undersigned (each a "Loan Party"), each as a party to one or
more Credit Documents, as defined in the Mortgage Loan Warehousing Agreement
dated as of June 30, 1998 (the "Loan Agreement"), by and among HomeGold, Inc.,
Carolina Investors, Inc., the lenders parties thereto (the "Lenders"), and The
CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in
such capacity, the "Agent"), each hereby (i) acknowledges and consents to the
Second Amendment dated the date hereof (the "Amendment", all terms defined
therein being used herein as defined therein) to the Loan Agreement; (ii)
confirms and agrees that each Credit Document to which it is a party is, and
shall continue to be, in full force and effect and is hereby ratified and
confirmed in all respects except that on and after the Amendment Effective Date
all references in any such Credit Documents to "the Loan Agreement", "thereto",
"thereof", "thereunder" or words of like import referring to the Loan Agreement
shall mean the Loan Agreement as amended by the Amendment; and (iii) confirms
and agrees that to the extent that any such Credit Document purports to assign
or pledge to the Agent, or to grant to the Agent a security interest in or lien
on, any collateral as security for the obligations of the Loan Party from time
to time existing in respect of the Credit Documents, such pledge, assignment
and/or grant of a security interest or lien is hereby ratified and confirmed in
all respects as security for, in addition to the other obligations secured
thereby, all obligations of such Loan Party outstanding upon the taking effect
of the Amendment.
Dated: December __, 1998
HOMEGOLD FINANCIAL, INC.
(f/k/a Emergent Group, Inc.)
By: ________________________
Title: _______________________
EMERGENT MORTGAGE CORPORATION
OF TENNESSEE
By: ________________________
Title: _______________________
AMENDMENT TO
ASSET PURCHASE AGREEMENT
This AMENDMENT TO ASSET PURCHASE AGREEMENT (THIS "AMENDMENT"), dated as
of November 12, 1998, is entered into by and among TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation ("TBCC"). TRANSAMERICA GROWTH CAPITAL, INC.,
a Delaware corporation (the "SB1C SUBSIDIARY"), TRANSAMERICA SMALL BUSINESS
SERVICES, INC., a Delaware corporation (the "SECTION 7(A) SUBSIDIARY," and
collectively with TBCC and the SBIC Subsidiary, the "BUYERS"), each of the
SELLERS named on the signature pages hereof (individually a "SELLER" and
collectively, the "SELLERS") and HOMEGOLD FINANCIAL, INC., a South Carolina
corporation (the "PARENT").
W I T N E S S E T H:
WHEREAS, TBCC, the SBIC Subsidiary, the Section 7(a) Subsidiary, the
Sellers and HomeGold Financial, Inc. are parties to an Asset Purchase Agreement
dated as of October 2, 1998 (the "AGREEMENT");
WHEREAS, the parties hereto desire to amend the Agreement in
certain respects as provided forherein;
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINED TERMS. Terms used in this Amendment which are defined
in the Agreement shall have the meaning assigned to such terms in the Agreement
unless otherwise defined herein.
SECTION 2. AMENDMENTS TO AGREEMENT.
2.1 RECITAL. The first Recital to the Agreement is amended in its
entirety to read as follows:
"WHEREAS, the Sellers are engaged in the businesses of making
mezzanine loans, loans pursuant to Section 7(a) of the Small Business
Act, and first mortgage commercial loans that are senior to loans made
pursuant to Section 504 of the Small Business Investment Act;"
<PAGE>
2.2 DEFINITIONS. (a) The definitions of "BUSINESSES," "CLOSING PAYMENT,"
"ESTIMATED CLOSING PAYMENT" AND "RECEIVABLE" in the Agreement are amended in
their entirety to read as follows:
"BUSINESSES" means all activities currently conducted by the
Sellers or EBCH relating to (i) the making of mezzanine loans (including
the purchase of warrants and other equity investments in connection
therewith); (ii) the making of investments and loans as a Small Business
Investment Company (as defined in the Small Business Investment Act);
(iii) the making of loans pursuant to Section 7(a) of the Small Business
Act, (iv) the making of first mortgage commercial loans that are senior
to loans made pursuant to Section 504 of the Small Business Investment
Act, and (v) servicing, liquidation, collection and funding activities
(including asset-backed securities transactions) in connection with any
of the foregoing, but excluding the activities relating to the Retained
Assets and Retained Liabilities.
"CLOSING PAYMENT" means the Purchase Price as determined under
SECTION 3.2(C) LESS $5,000,000.
"ESTIMATED CLOSING Payment" means the Estimated Purchase Price
less $5,000,000.
"RECEIVABLE" means an account receivable, trade receivable, loan
receivable, note receivable or other account or right to payment
generated through the extension of credit or purchased or acquired in
the operation of the Businesses."
(b) The first sentence of the definition of "HOLDBACK AMOUNT" in the
Agreement is amended in its entirety to read as follows:
""HOLDBACK AMOUNT" means, subject to disbursement as specified in
Section 12.5 and in the Escrow Agreement, (i) $5,000,000 from the
Closing Date to but not including the date that is six months after the
Closing Date, (ii) $4,000,000 from and including the date that is six
months after the Closing Date to but not including the first anniversary
of the Closing Date, (iii) $3,500,000 from and including the first
anniversary of the Closing Date to but not including the date that is
eighteen months after the Closing Date, and (iv) $3,000,000 from and
including the date that is eighteen months after the Closing Date;
provided, however, that each of the amounts specified in clauses (i),
(ii), (iii) and (iv) shall be increased by the amount of interest earned
thereon under the Escrow Agreement from the Closing Date to the date of
such determination, which accumulated interest shall be fully available
to satisfy payment of Indemnifiable Losses from the Holdback Amount
pursuant to Section 12.5."
(c) The following definitions are added to Article I in appropriate
alphabetical sequence:
"NON-SBA RELATED CONTRACTS" means all Contracts other than SBA
Related Contracts.
"NON-SBA RELATED RECEIVABLES" means all Receivables other than
SBA Related Receivables.
"NON-SBA RELATED RECEIVABLE COLLATERAL DOCUMENTS" means all
Receivable Collateral Documents other than SBA Related Receivable
Collateral Documents.
"NON-SBA RELATED RECEIVABLE CREDIT SUPPORT DOCUMENTS" means all
Receivable Credit Support Documents other than SBA Related Receivable
Credit Support Documents.
"NON-SBA RELATED RECEIVABLE DOCUMENTS" means all Receivable
Documents other than SBA Related Receivable Documents.
"SBA RELATED CONTRACTS" means all Contracts arising in connection
with the Businesses under which Emergent Business Capital, Inc. or Reedy
River Ventures Limited Partnership has any rights or obligations.
"SBA RELATED RECEIVABLES" means all Receivables arising in
connection with the Businesses of Emergent Business Capital, Inc. or
Reedy River Ventures Limited Partnership and all Receivables arising in
connection with the Businesses in which Emergent Business Capital, Inc.
or Reedy River Ventures Limited Partnership has any right, title or
interest.
"SBA RELATED RECEIVABLE COLLATERAL DOCUMENTS" means all
Receivable Collateral Documents related to SBA Related Receivables.
"SBA RELATED RECEIVABLE CREDIT SUPPORT DOCUMENTS" means all
Receivable Credit Support Documents related to SBA Related Receivables.
"SBA RELATED RECEIVABLE DOCUMENTS" means all Receivable Documents
related to SBA Related Receivables.
"SMALL BUSINESS INVESTMENT ACT" means the Small Business
Investment Act, as amended."
2.3 PURCHASE AND SALE. The proviso appearing at the end of Section 2.1
of the Agreement is amended in its entirety to read as follows:
"provided, however, that (i) Emergent Business Capital, Inc. shall sell,
assign, transfer, convey and deliver to the Section 7(a) Subsidiary, and
the Section 7(a) Subsidiary agrees to purchase from Emergent Business
Capital, Inc., the Section 7(a) Permits, the Shares and the Transferred
Assets and Assumed Liabilities of Emergent Business Capital, Inc.
relating to the making of loans pursuant to Section 7(a) of the Small
Business Act, as more fully set forth in the Transfer Instruments; and
(ii) Reedy River Ventures Limited Partnership shall sell, assign,
transfer, convey and deliver to the SBIC Subsidiary, and the SBIC
Subsidiary agrees to purchase from Reedy River Ventures Limited
Partnership, the SBIC Permits and the Transferred Assets and Assumed
Liabilities of Reedy River Ventures Limited Partnership, as more fully
set forth in the Transfer Instruments."
<PAGE>
2.4 ASSUMED LIABILITIES. (a) Section 2.4(a)(i) of the Agreement
is amended in its entirety to read as follows:
"(i)(A) all obligations and liabilities of the Sellers arising
under any SBA Related Receivables, SBA Related Receivable Documents, SBA
Related Receivable Collateral Documents or SBA Related Receivable Credit
Support Documents or SBA Related Contracts acquired pursuant to Section
2.2(a), but exclusive of any obligations and liabilities of the Sellers
set forth on Schedule 2.4; and (B) all obligations and liabilities of
the Sellers, which are required to be performed, and which accrue, after
the Closing Date, arising under the Non-SBA Related Receivables, Non-SBA
Related Receivable Documents, Non-SBA Related Receivable Collateral
Documents and Non-SBA Related Receivable Credit Support Documents and
the Non-SBA Related Contracts acquired pursuant to Section 2.2(a) (but
not any liabilities of the Sellers in respect of a breach of or default
under such Non-SBA Related Receivables, Non-SBA Related Receivable
Documents, Non-SBA Related Receivable Collateral Documents, Non-SBA
Related Receivable Credit Support Documents or Non-SBA Related Contracts
arising prior to the Closing for which claims are brought prior to the
sixth anniversary of the Closing Date);"
(b) Section 2.4(a) of the Agreement is further amended by deleting the
word "and" appearing at the end of clause (iii) thereof, deleting the period at
the end of clause (iv) thereof and replacing it with a semi-colon and the word
"and" and inserting the following:
"(v) all liabilities and obligations arising from any legal,
administrative or arbitration proceeding, suit or action of any nature
against Emergent Business Capital, Inc. or Reedy River Ventures Limited
Partnership arising in connection with the conduct of such entities'
Businesses prior to the Closing, but exclusive of any liabilities and
obligations set forth on Schedule 2.4."
2.5 RETAINED LIABILITIES. Section 2.5(d) of the Agreement is
amended in its entirety to read as follows:
"(d) any liability or obligation arising from any legal, administrative
or arbitration proceeding, suit or action of any nature against Emergent
Commercial Mortgage, Inc. or Emergent Business Capital Equity Group,
Inc. arising in connection with the conduct of such entities' Businesses
prior to the Closing, and any liability or obligation to the extent set
forth on Schedule 2.4 arising from any legal, administrative or
arbitration proceeding, suit or action of any nature against Emergent
Business Capital, Inc. or Reedy River Ventures Limited Partnership
arising in connection with the conduct of such entities' Businesses
prior to the Closing;"
2.6 CONTRACT AND RECEIVABLES. The second sentence of Section 4.7(b) of
the Agreement is amended in its entirety to read as follows:
"The Sellers have made available, and at Closing shall deliver, to the
Buyers originals (or complete and correct copies followed by the
originals, if available, within 30 days of Closing) of all Receivable
Documents, Receivable Credit Support Documents and Receivable Collateral
Documents evidencing or otherwise relating to the Receivables."
<PAGE>
2.7 REPRESENTATIONS AND WARRANTIES OF THE SELLERS. The following new
Sections 4.27 and 4.28 are hereby added to the Agreement:
"4.27 CERTAIN AGREEMENTS. There are no oral agreements or contracts
pursuant to which any Seller or EBCH (a) provides, or has provided to
it, services, (b) purchases or leases from any third party, any
products, goods or services, or (c) maintains any confidentiality or
non-competition covenants with a third party.
4.28 CERTAIN CLAIMS. There are no claims, howsoever arising, asserted by
any Person or Governmental Authority against any Seller or EBCH, nor has
any Seller or EBCH engaged in any activity or other conduct which would
give rise to any claim, for negligence, gross negligence, fraud,
malfeasance, willful misconduct or otherwise in connection with the
making, monitoring, funding, liquidation, enforcement, servicing or
collection of any loan or in connection with any extension of credit
(including, without limitation, in connection with any Receivable), or
any similar claims and matters."
2.8 CONDITIONS TO THE OBLIGATIONS OF THE BUYERS. Section 8.2(m) of the
Agreement is amended in its entirety to read as follows:
"(m) SHARES OF EBCH. The Section 7(a) Subsidiary shall have received
the Shares duly assigned to it by Emergent Business Capital, Inc."
2.9 NONCOMPETITION AND NONSOLICITATION COVENANT. Clause (a) of Section
9.1 of the Agreement is amended in its entirety to read as follows:
"(a) engaging in any activity that is the same as or substantially
similar to providing mezzanine loans (including the purchase of warrants
and other equity investments in connection therewith), providing loans
pursuant to Section 7(a) of the Small Business Act, or providing first
mortgage commercial loans that are senior to loans made pursuant to
Section 504 of the Small Business Investment Act;"
2.10 INDEMNIFICATION BY THE SELLERS. Section 12.2(a) of the Agreement is
amended by deleting the word "or" appearing at the end of clause (v) thereof,
deleting the period at the end of clause (vi) thereof and replacing it with a
semi-colon and the word "or" and inserting the following:
"(vii) notwithstanding the assumption by the Buyers pursuant to Sections
2.4(a)(i)(A) and 2.4(a)(v) of the obligations and liabilities described
therein, all such obligations and liabilities of the Sellers which have
been so assumed pursuant to such Sections 2.4(a)(i)(A) and 2.4(a)(v)."
2.11 GROUNDS FOR TERMINATION. Section 11.1(b) of the Agreement is
amended by deleting the date "October 31, 1998" appearing in the third line
thereof and inserting the date "November 15, 1998" in lieu thereof.
2.12 HOLDBACK AMOUNT. Section 12.5 of the Agreement is amended by
deleting the phrase "plus all accrued and unpaid interest thereon" appearing in
the third sentence.
<PAGE>
2.13 SCHEDULES. The Agreement is amended by adding Schedule 2.4 to the
Agreement in the form attached hereto.
2.14 ESCROW AGREEMENT. (a) Section 1 of Exhibit C to the Agreement is
amended by deleting the dollar amount "$4,000,000" appearing in the second line
thereof and inserting the dollar amount "$5,000,000" in lieu thereof.
(b) Section 2 of Exhibit C to the Agreement is amended by deleting the
second sentence thereof and inserting the following in lieu thereof:
"Interest earned on the Escrow Amount (to the extent not previously
released pursuant to Section 3(a) shall be distributed to the Parent for
the benefit of the Sellers on the date of termination of the escrow
pursuant to Section 5. The Sellers shall be responsible for the payment
of any taxes on the interest earned on the Escrow Amount."
SECTION 3. MISCELLANEOUS.
3.1 GOVERNING LAW; SEVERABILITY. THIS AMENDMENT IS TO BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, APPLICABLE TO
CONTRACTS MADE AND TO BE ENTIRELY PERFORMED IN SAID STATE. If any provision of
this Amendment shall be held invalid, illegal or unenforceable, the validity,
legality or enforceability of the other provisions hereof shall not be affected
thereby, and there shall be deemed substituted for the provision at issue a
valid and enforceable provision as similar as possible to the provision at
issue.
3.2 INTERPRETATION. The headings preceding the text of Sections and
subsections included in this Amendment are for convenience only and shall not be
deemed part of this Amendment or be given any effect in interpreting this
Amendment. The use of the terms "including" or "include" shall, in all cases,
mean "including, without limitation," and "include, without limitation,"
respectively. The use of the masculine, feminine or neuter gender herein shall,
as applicable, also refer to the other genders. Except as the context otherwise
requires, the use of the singular form of any term shall also refer to the
plural, and vice versa. Unless the context otherwise requires, whenever the
terms "hereto", "hereunder", "herein" or "hereof" are used in this Amendment,
such terms shall be construed as referring to this entire Amendment. This
Amendment is the result of negotiations among, and has been reviewed by, counsel
to the other parties thereto and is the product of all parties. Accordingly, any
rule of law or any legal decision that would require interpretation of any
claimed ambiguities in this Amendment against the party that drafted it has no
application and is expressly waived.
3.3 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, all of which shall together constitute one and the same
instrument, and shall become effective when one or more counterparts hereof have
been signed by the Buyers and delivered to the Sellers and one or more
counterparts hereof have been signed by the Sellers and delivered to the Buyers.
<PAGE>
3.4 REFERENCES TO AGREEMENT. Except as herein amended, the Agreement
shall remain in full force and effect and is hereby ratified in all respects. On
and after the effectiveness of the amendments to the Agreement accomplished
hereby, (i) each reference in the Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall be a reference to the Agreement
as amended hereby, (ii) and each reference to the Agreement in any agreement,
document or other instrument executed and delivered prior hereto shall be a
reference to the Agreement as amended by this Amendment.
3.5 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
shall inure to the benefit of the parties and their respective successors and
assigns.
Exhibit 21.0
<TABLE>
<CAPTION>
Subsidiary State of Incorporation
------------------------------------------------------ ------------------------------
<S> <C>
HomeGold, Inc. South Carolina
HomeGold, Inc. of Tennessee (a subsidiary of
HomeGold, Inc.) South Carolina
Emergent Mortgage Holdings Corporation (a subsidiary of
HomeGold, Inc.) Delaware
Emergent Mortgage Holdings Corporation II (a subsidiary of
HomeGold, Inc.) Delaware
Emergent Residual Holdings Corporation (a subsidiary of
Emergent Mortgage Holdings Corporation II) Delaware
Emergent Insurance Agency Corporation South Carolina
Carolina Investors, Inc. South Carolina
HomeGold Realty, Inc. (a subsidiary of HomeGold, Inc.) South Carolina
</TABLE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
HomeGold Financial, Inc.
We consent to incorporation by reference in the registration
statements on Form S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock
Plan, (No. 333-07927) 1995 Restricted Stock Agreement Plan, (No. 333-07923)
1995 Officer and Employee Stock Option Plan and (No. 333-20179) Employee
Stock Purchase Plan of HomeGold Financial, Inc. of our report dated February
19 and February 24, 1999, relating to the consolidated balance sheet of
HomeGold Financial, Inc. and subsidiaries (the "Company") as of December 31,
1998 and the related consolidated statements of income, shareholders'
equity, and cash flows for the year then ended, which report appears in the
1998 Annual Report on Form 10-K of the Company.
/s/ ELLIOTT, DAVIS & COMPANY, L.L.P.
------------------------------------
ELLIOTT, DAVIS & COMPANY, L.L.P.
Greenville, South Carolina
March 29, 1999
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.)
and Subsidiaries
Greenville, South Carolina
We Consent to incorporation by reference in the registration statements on Form
S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock Plan, (No. 333-07927)
1995 Restricted Stock Agreement Plan, (No. 333-07923) 1995 Officer and Employee
Stock Option Plan and (No. 333-20179) Employee Stock Purchase of HomeGold
Financial, Inc. of our report dated February 27, 1998, relating to the
consolidated balance sheets of HomeGold Financial, Inc. and subsidiaries (the
"Company") as of December 31, 1997 and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended, which
report appears in the 1998 Annual Report on Form 10-K of the Company.
/s/ KPMG Peat Marwick, L.L.P.
--------------------------
KPMG Peat Marwick, L.L.P.
Greenville, South Carolina
March 30, 1999
<PAGE>
Shareholders and Board of Directors
HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.)
and Subsidiaries
Greenville, South Carolina
We have audited the accompanying consolidated balance sheet of HomeGold
Financial, Inc.(f/k/a Emergent Group, Inc.) and subsidiaries as of December 31,
1997 and the related consolidated statements of operations, shareholder's
equity, and cash flows for the two years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts of disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and subsidiaries as of
December 31, 1997 and the results of their operations and their cash flows for
the two years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK, L.L.P.
-------------------------------
KPMG PEAT MARWICK, L.L.P.
Greenville, South Carolina
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000277028
<NAME> HOMEGOLD FINANCIAL, INC
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 36,913
<SECURITIES> 43,857
<RECEIVABLES> 124,740
<ALLOWANCES> 6,659
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 23,492
<DEPRECIATION> 3,827
<TOTAL-ASSETS> 257,208
<CURRENT-LIABILITIES> 0
<BONDS> 86,650
0
0
<COMMON> 486
<OTHER-SE> 5,315
<TOTAL-LIABILITY-AND-EQUITY> 257,208
<SALES> 0
<TOTAL-REVENUES> 91,725
<CGS> 0
<TOTAL-COSTS> 116,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,906
<INTEREST-EXPENSE> 35,968
<INCOME-PRETAX> (72,991)
<INCOME-TAX> 3,017
<INCOME-CONTINUING> (75,961)
<DISCONTINUED> 0
<EXTRAORDINARY> 18,216
<CHANGES> 0
<NET-INCOME> (57,745)
<EPS-PRIMARY> (5.94)
<EPS-DILUTED> (5.94)
</TABLE>
