SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________.
COMMISSION FILE NUMBER 0-8909
-----------------------
HOMEGOLD FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0513287
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3901 PELHAM ROAD
GREENVILLE, SOUTH CAROLINA 29615
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
864-289-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF EACH CLASS: OUTSTANDING AT JULY 15, 1999
- ---------------------------------- -----------------------------
COMMON STOCK, PAR VALUE $0.05 PER SHARE 9,881,764
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION Page
- ------- --------------------- ----
Item 1. Financial Statements for HomeGold Financial, Inc.
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the Six Months Ended
June 30, 1999 and 1998 and for the
Three Months Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows
for the Six Months Ended
June 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 2. Changes in Securities 43
Item 3. Defaults Upon Senior Securities 43
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 5. Other Information 43
Item 6. Exhibits and Reports on Form 8-K 44
2
<PAGE>
PART I. FINANCIAL INFORMATION
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(In thousands)
ASSETS (Unaudited) (Audited)
------
Cash and cash equivalents $ 36,203 $ 36,913
Restricted cash 5,169 5,100
Loans receivable 65,303 124,740
Less allowance for credit losses on loans (4,842) (6,659)
Less deferred loan fees (1,166) (2,071)
Plus deferred loan costs 640 888
------------ ------------
Net loans receivable 59,935 116,898
Income taxes receivable 1,188 900
Accrued interest receivable 1,785 2,613
Other receivables 11,521 12,028
Residual receivable, net 49,120 43,857
Property and equipment, net 18,656 19,665
Real estate and personal property acquired
through foreclosure 4,949 5,881
Excess of cost over net assets of acquired
businesses, net of accumulated
amortization of $701,000 in 1999 and
$654,000 in 1998 1,613 1,660
Debt origination costs, net 2,676 4,681
Deferred income tax asset, net 4,151 4,151
Servicing asset 945 940
Other assets 2,823 1,921
------------ ------------
TOTAL ASSETS $ 200,734 $ 257,208
============ ============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
4
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(In thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) (Audited)
Liabilities:
Revolving warehouse line of credit $ -- $ 16,736
Investor savings:
Notes payable to investors 121,386 118,586
Subordinated debentures 20,034 17,304
------------ ------------
Total investor savings 141,420 135,890
Senior unsecured debt 37,364 86,650
Other liabilities:
Accounts payable and accrued liabilities 5,112 6,656
Remittances payable 1,985 1,871
Income taxes payable 241 382
Accrued interest payable 1,513 3,199
------------ ------------
Total other liabilities 8,851 12,108
------------ ------------
Total liabilities 187,635 251,384
Minority interest 17 23
Shareholders' equity:
Common stock, par value $.05 per share - authorized
100,000,000 shares, issued and outstanding 9,844,319
shares at June 30, 1999 and 9,733,374 shares at
December 31, 1998 492 486
Capital in excess of par value 38,965 38,821
Retained earnings (deficit) (26,375) (33,506)
------------ ------------
Total shareholders' equity 13,082 5,801
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 200,734 $ 257,208
============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
5
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- --------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 4,956 $ 19,190 $ 1,618 $ 10,516
Servicing income 5,010 7,601 2,608 3,379
Gain on sale of loans:
Gross gain on sale of loans 4,389 13,291 3,216 6,773
Loan fees, net 2,373 6,830 1,416 3,228
----------- ------------ ------------ ------------
Total net gain on sale of loans 6,762 20,121 4,632 10,001
Other revenues 750 2,418 354 880
----------- ------------ ------------ ------------
Total revenues 17,478 49,330 9,212 24,776
----------- ------------ ------------ ------------
EXPENSES:
Interest 8,987 18,385 4,189 9,952
Provision for (recapture of) credit
losses (349) 6,940 (430) 2,111
Fair value write-down of residual
receivable 775 8,910 828 7,330
Salaries, wages and employee
benefits 10,903 34,376 5,232 16,104
Business development costs 2,427 6,535 1,237 3,055
Other general and administrative
expenses 8,207 14,533 4,126 6,632
----------- ------------ ------------ ------------
Total expenses 30,950 89,679 15,182 45,184
----------- ------------ ------------ ------------
Loss before income taxes,
minority interest and
extraordinary item (13,472) (40,349) (5,970) (20,408)
Provision for income taxes 620 3,244 170 2,566
----------- ------------ ------------ ------------
Loss before minority interest
and extraordinary item (14,092) (43,593) (6,140) (22,974)
Minority interest in (income) loss of
subsidiaries (4) 2 (7) (2)
----------- ------------ ------------ ------------
Loss before extraordinary
item (14,096) (43,591) (6,147) (22,976)
Extraordinary item-gain on
extinguishment of debt,
net of $0 tax 21,227 -- 4,281 --
=========== ============ ============ ============
NET INCOME (LOSS) $ 7,131 $ (43,591) $ (1,866) $ (22,976)
=========== ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Loss before
extraordinary item $ (1.44) $ (4.49) $ (0.63) $ (2.37)
Extraordinary item, net
of taxes 2.16 -- 0.44 --
----------- ------------ ------------ ------------
Net income (loss) $ 0.72 $ (4.49) $ (0.19) $ (2.37)
=========== ============ ============ ============
Basic weighted average shares
outstanding 9,809,798 9,705,055 9,827,228 9,708,083
=========== ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Loss before
extraordinary item $ (1.42) $ (4.49) $ (0.62) $ (2.37)
Extraordinary item, net
of tax 2.14 -- 0.43 -
=========== ============ ============ ============
Net income (loss) $ 0.72 $ (4.49) $ (0.19) $ (2.37)
=========== ============ ============ ============
Diluted weighted average shares
outstanding 9,899,649 9,705,055 9,989,977 9,708,083
=========== ============ ============ ============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
6
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------
1999 1998
---------------- ----------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 7,131 $ (43,591)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,386 1,809
Provision for (recapture of) credit losses on
loans (349) 6,940
Gain on retirement of senior unsecured debt (21,227) --
Loss on real estate acquired through
foreclosure 1,319 --
Fair value write-down of residual receivable 775 8,910
Mark to market adjustment on loans held for
sale -- 5,000
Loans originated with intent to sell (117,364) (484,107)
Proceeds from loans sold 102,573 340,747
Proceeds from securitization of loans 59,630 92,316
Other (646) 1,923
Changes in operating assets and liabilities
decreasing cash (7,272) (9,559)
--------------- ---------------
Net cash provided by (used in) operating activities $ 25,956 $ (79,612)
--------------- ---------------
INVESTING ACTIVITIES:
Loans originated or purchased for investment purposes $ (1,608) $ (80,774)
Principal collections on loans not sold 12,486 101,986
Proceeds from sale of real estate and personal property
Acquired through foreclosure 4,009 2,143
Proceeds from sale of property and equipment 141 --
Purchase of property and equipment (432) (5,198)
Other (2,145) 17
--------------- ---------------
Net cash provided by investing activities $ 12,451 $ 18,174
--------------- ---------------
FINANCING ACTIVITIES:
Advances on revolving warehouse lines of credit $ 111,853 $ 263,275
Payments on revolving warehouse lines of credit (128,590) (169,671)
Retirement of senior unsecured debt (28,059) --
Net increase in notes payable to investors 2,800 3,951
Net increase (decrease) in subordinated debentures 2,730 (175)
Proceeds from issuance of common stock 149 132
Other -- (7)
--------------- ----------------
Net cash provided by (used in) financing activities $ (39,117) $ 97,505
--------------- ----------------
Net increase (decrease) in cash and cash equivalents $ (710) $ 36,067
CASH AND CASH EQUIVALENTS:
Beginning of period 36,913 7,561
=============== ===============
End of period $ 36,203 $ 43,628
=============== ===============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
7
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PREPARATION
HomeGold Financial, Inc. (referred to herein sometimes as the "Company"
and "HGFN") states that the accompanying consolidated financial statements are
prepared in accordance with the Securities and Exchange Commission's rules
regarding interim financial statements, and therefore do not contain all
disclosures required by generally accepted accounting principles for annual
financial statements. Reference should be made to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, including the footnotes thereto. Certain previously
reported amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on net operations or shareholders' equity
as reported prior to its adoption.
The consolidated balance sheet as of June 30, 1999, and the
consolidated statements of operations for the six-month and three-month periods
ended June 30, 1999 and 1998, and the consolidated statements of cash flows for
the six-month periods ended June 30, 1999 and 1998, are unaudited and in the
opinion of management contain all known adjustments, which consist of only
normal recurring adjustments necessary to present fairly the financial position,
results of operations, and cash flows of the Company. 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.
Elliott, Davis & Company, L.L.P. previously examined and reported on
the Company's financial statements for the year ended December 31, 1998, from
which the consolidated balance sheet as of that date is derived.
NOTE 2--CASH FLOW INFORMATION
For the six-month periods ended June 30, 1999 and 1998, the Company
paid interest of $10.7 million and $18.8 million, respectively.
For the six-month periods ended June 30, 1999 and 1998, the Company
paid income taxes of $1.1 million and $1.5 million, respectively.
For the six-month periods ended June 30, 1999 and 1998, the Company
foreclosed on property in the amount of $2.3 million and $3.2 million,
respectively.
NOTE 3--CASH AND CASH EQUIVALENTS
The Company maintains its primary checking accounts with one principal
bank and makes overnight investments in reverse repurchase agreements with that
bank, as well as other short-term investments in a money manager fund of the
bank. The amounts maintained in the checking accounts are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000. At June 30, 1999, the
amounts maintained in overnight investments in reverse repurchase agreements and
other short-term investments, which are not insured by the FDIC, totaled
approximately $35.5 million. The investment objective of the money manager fund
is to achieve as high a level of current income as is consistent with preserving
capital and providing liquidity. Permitted investments of the fund include
obligations guaranteed by the U.S. Government, commercial paper and corporate
debt securities that are rated in one of the two highest short-term rating
categories, and repurchase agreements involving these securities. The fund may
invest up to 30% of its total assets in bank certificates of deposit and
bankers' acceptances.
The Company considers all highly liquid investments readily convertible
to cash or having an original maturity of three months or less to be cash
equivalents.
The Company maintains an investment account with a trustee relating to
representations and warranties in connection with the sale of the small-business
unit.
8
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted the provisions of SFAS
No. 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". 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 did not change total Stockholders' Equity as
previously reported.
NOTE 5--WAREHOUSE LINE OF CREDIT
The Company had no borrowings outstanding under its warehouse lines of
credit at June 30, 1999. At December 31, 1998, the Company had $16.7 million in
outstanding borrowings under its warehouse lines of credit.
Under the terms of the revolving credit agreement, HomeGold, Inc.
("HGI") and Carolina Investors, Inc. ("CII"), both wholly-owned subsidiaries of
HGFN, may collectively borrow up to a maximum of $100.0 million with interest at
the prime rate plus 0.75%. This borrowing is collateralized by mortgage loan
receivables. The agreement requires, among other matters, minimum availability
of $10.0 million on the line of credit, and a requirement that CII maintain a
minimum of $100.0 million in aggregate outstanding principal amount of notes due
to investors. It also restricts the ability of HGI and, in certain
circumstances, CII, to pay dividends or make loans or advances to HGFN.
Management believes the Company is in compliance with such restrictive covenants
at June 30, 1999. 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 $10.0 million minimum availability requirements would have
allowed a maximum borrowing level based on eligible collateral of $18.5 million
at June 30, 1999 and $37.7 million at December 31, 1998. Therefore, after
considering the outstanding borrowings under the line of credit, the Company had
$18.5 million and $21.0 million, respectively, of additional borrowing
availability under this agreement on June 30, 1999 and December 31, 1998 based
on its existing borrowing base.
NOTE 6--EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT
In the first quarter of 1999, the Company purchased $35.3 million face
amount of its 10 3/4% Senior Notes due 2004 ("the Senior Notes") in the market
for a purchase price of $17.3 million or a weighted average of 49.0% of face
value. A proportionate share of the unamortized debt origination costs ($1.1
million) relating to the issuance of the Senior Notes was charged against this
gain, to record a net gain of $16.9 million in the first quarter of 1999.
In the second quarter of 1999, the Company purchased $13.9 million face
amount of its 10 3/4% Senior Notes in the market for a purchase price of $9.3
million or a weighted average of 66.9% of face value. A proportionate share of
the unamortized debt origination costs ($300,000) relating to the issuance of
the Senior Notes was charged against this gain, to record a net gain of $4.3
million in the second quarter of 1999.
The Company may, from time to time, purchase more of its Senior Notes
depending on its cash needs, market conditions, and other factors.
NOTE 7--SALES OF SUBSIDIARIES
In 1998, as part of the Company's effort to focus on its larger retail
mortgage lending operation that operates primarily through direct mail and
telemarketing methods, the Company chose to sell Sterling Lending Corporation
("SLC"), its small branch network retail origination company. SLC 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 loan and small-business loan units and to no longer
offer those 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.
9
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 21, 1998, the Company completed the sale of its small branch
network retail mortgage origination company, SLC, to First National Security
Corporation of Beaumont, Texas. The sale resulted in cash proceeds of $400,000
to the Company 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 six months ended June 30, 1998, SLC recorded a net loss of $1.9
million.
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 a $5.1
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. For the
six months ended June 30, 1998, this unit recorded a net loss of $805,000.
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%. For the six months ended
June 30, 1998, this unit recorded a net loss of $920,000.
NOTE 8--SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS
In September 1997, the Company sold $125.0 million in aggregate
principal amount of 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 3/4%. The Senior Notes will be redeemable
at the option of the Company, in whole or in part, on or after September 15,
2001, at predetermined redemption prices plus accrued and unpaid interest to the
date of redemption. The Company purchased $38.4 million in 1998, and in the six
months ended June 30, 1999, the Company purchased $49.2 million in aggregate
principal amount of its Senior Notes in open market transactions for a combined
purchase price of $26.6 million or 54.1% of face value. The Company 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 June 30, 1999, 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 below. 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 is 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.
The Company has included consolidating condensed financial data of the
combined subsidiaries of the Company in these financial statements. 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 both June 30, 1999 and December 31,
1998, all of the subsidiary guarantors were wholly-owned by the Company.
The Subsidiary Guarantors of the Company's Senior Notes at June 30,
1999 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.
Emergent Business Capital Asset Based Lending, Inc.
10
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments in subsidiaries are accounted for by the parent company 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 June 30, 1999 and December 31, 1998, the Subsidiary Guarantors
conduct all of the Company's operations, other than the investment in certain
residual receivables which is conducted through its special purpose
securitization subsidiaries. Prior to March 1998, The Loan Pro$, Inc. (an 80%
owned subsidiary of the Company) and Premier Financial Services, Inc.
(collectively, 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, SLC (an 80% owned subsidiary of the Company)
and Sterling Lending Insurance Agency, Inc. (a 100% owned subsidiary of SLC)
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 SLC (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, the guarantees of the
first three of these companies were terminated upon consummation of that sale.
Reedy River Ventures Limited Partnership was not a Subsidiary Guarantor.
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.
11
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
JUNE 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash and cash equivalents $ 367 $ 35,836 $ -- $ -- $ 36,203
Restricted cash 5,169 -- -- -- 5,169
Loans receivable:
Loans receivable -- 65,303 -- -- 65,303
Notes receivable from other affiliates 7,277 (4) 1,132 (8,405) --
--------- ---------- ---------- ----------- -----------
Total loans receivable 7,277 65,299 1,132 (8,405) 65,303
Less allowance for credit losses on loans -- (4,842) -- -- (4,842)
Less deferred loan fees -- (1,166) -- -- (1,166)
Plus deferred loan costs -- 640 -- -- 640
--------- ---------- ---------- ----------- -----------
Net loans receivable 7,277 59,931 1,132 (8,405) 59,935
Income tax receivable -- 1,188 -- -- 1,188
Accrued interest receivable 38 1,747 -- -- 1,785
Other receivables -- 11,521 -- -- 11,521
Investment in subsidiaries 34,398 -- -- (34,398) --
Residual receivable, net -- 4,706 44,414 -- 49,120
Property and equipment, net -- 18,656 -- -- 18,656
Real estate and personal property acquired
through foreclosure -- 4,949 -- -- 4,949
Excess of cost over net assets of acquired
businesses, net 39 1,574 -- -- 1,613
Deferred income tax asset, net 3,510 641 -- -- 4,151
Other assets 1,035 5,409 -- -- 6,444
--------- ---------- ---------- ----------- -----------
TOTAL ASSETS $ 51,833 $ 146,158 $ 45,546 $ (42,803) $ 200,734
========= ========== ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Revolving warehouse lines of credit $ -- $ -- $ -- $ -- $ --
Investor savings:
Notes payable to investors -- 121,386 -- -- 121,386
Subordinated debentures -- 20,034 -- -- 20,034
--------- ---------- ---------- ----------- -----------
Total investor savings -- 141,420 -- -- 141,420
Senior unsecured debt 37,364 -- -- -- 37,364
Subordinated debt to affiliates -- 8,134 -- (8,134) --
Other liabilities:
Accounts payable and accrued liabilities -- 5,112 -- -- 5,112
Remittances payable -- 1,985 -- -- 1,985
Income taxes payable 201 40 -- -- 241
Accrued interest payable 1,186 327 -- -- 1,513
Due to (from) affiliates -- (6,963) 7,234 (271) --
--------- ---------- ---------- ----------- -----------
Total other liabilities 1,387 501 7,234 (271) 8,851
--------- ---------- ---------- ----------- -----------
Total liabilities 38,751 150,055 7,234 (8,405) 187,635
Minority interest -- -- 17 -- 17
Shareholders' equity:
Common stock 492 999 1 (1,000) 492
Capital in excess of par value 38,965 56,042 48,809 (104,851) 38,965
Retained earnings (deficit) (26,375) (60,938) (10,515) 71,453 (26,375)
---------- ---------- --------- ---------- ---------
- - - --
Total shareholders' equity 13,082 (3,897) 38,295 (34,398) 13,082
=========== ========== ========= ========== =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,833 $ 146,158 $ 45,546 $ (42,803) $ 200,734
=========== ========== ========= =========== ===========
</TABLE>
12
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ------------ ------------
<S> <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 loans -- (6,659) -- -- (6,659)
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
Income tax -- 900 -- -- 900
Accrued interest receivable 21 2,592 -- -- 2,613
Other receivables 4 11,126 898 -- 12,028
Investment in subsidiaries 35,550 -- -- (35,550) --
Residual receivable, net -- 31,752 12,105 -- 43,857
Property and equipment, net -- 19,665 -- -- 19,665
Real estate and personal property acquired
through foreclosure -- 5,881 -- -- 5,881
Excess of cost over net assets of acquired
businesses, net 40 1,620 -- -- 1,660
Deferred income tax asset, net 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
Subordinated debt to affiliates -- 48,879 -- (48,879) --
Other liabilities:
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
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
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>
13
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------- ------------ -----------
REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 3,024 $ 4,808 $ -- $ -- $ (2,876) $ 4,956
Servicing income -- 3,420 -- 1,590 -- 5,010
Gain on sale of loans:
Gross gain on sale of loans -- 4,389 -- -- -- 4,389
Loan fees, net
-- 2,373 -- -- -- 2,373
---------- ------------ ------------- ----------- ---------- --------
Total gain on sale of loans -- 6,762 -- -- -- 6,762
Other revenues 8 877 -- 2 (137) 750
---------- ------------ ------------ ----------- ---------- --------
Total revenues 3,032 15,867 -- 1,592 (3,013) 17,478
EXPENSES:
Interest 3,276 8,587 -- -- (2,876) 8,987
Recapture of credit losses -- (349) -- -- -- (349)
Fair market write-down of residual receivable -- 367 -- 408 -- 775
Salaries, wages and employee benefits -- 10,903 -- -- -- 10,903
Business development costs -- 2,427 -- -- -- 2,427
Other general and administrative expenses 299 8,044 -- 1 (137) 8,207
--------- ------------ ----------- ----------- -------- -------
Total expenses 3,575 29,979 -- 409 (3,013) 30,950
---------- ------------ ----------- ----------- -------- -------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings (loss) of subsidiaries (543) (14,112) -- 1,183 -- (13,472)
Earnings (loss) of subsidiaries (13,553) (1,178) -- 1,178 13,553
---------- -- ---------- -- --------- ----------- -------- ---------
Income (loss) before income taxes, minority
interest and extraordinary item (14,096) (15,290) -- 2,361 13,553 (13,472)
Provision (benefit) for income taxes -- 620 -- -- -- 620
--------- ---------- --------- -------- ---------
Income (loss) before minority interest and
extraordinary item (14,096) (15,910) -- 2,361 13,553 (14,092)
Minority interest in loss of subsidiaries -- (4) -- -- -- (4)
Extraordianary item - gain on extinquishment
of debt 21,227 -- -- -- -- 21,227
---------- ------------ ------------- ----------- ---------- ----------
NET INCOME (LOSS) $ 7,131 $ (15,914) $ -- $ 2,361 $ 13,553 $ 7,131
========== ============ ============= =========== ========== =========
</TABLE>
14
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------ ----------- ------------
<S> <C> C> <C> <C> <C> <C>
REVENUES:
Interest income $ 837 $ 1,771 $ -- $ -- $ (990) $ 1,618
Servicing income -- 303 -- 1,090 1,215 2,608
Gain on sale of loans:
Gross gain on sale of loans -- 3,216 -- -- -- 3,216
Loan fees, net -- 1,416 -- -- -- 1,416
---------- ------------ -------- ---------- ---------- ---------
Total gain on sale of loans -- 4,632 -- -- -- 4,632
Other revenues 1 407 -- 2 (56) 354
---------- ------------ -------- ---------- ---------- ---------
Total revenues 838 7,113 -- 1,092 169 9,212
EXPENSES:
Interest 1,272 3,907 -- -- (990) 4,189
Recapture of credit losses -- (430) -- -- -- (430)
Fair market write-down of residual receivable -- 307 -- 521 -- 828
Salaries, wages and employee benefits -- 5,232 -- -- -- 5,232
Business development costs -- 1,237 -- -- -- 1,237
Other general and administrative expenses 122 4,059 -- 1 (56) 4,126
----------- ------------- -------- ---------- ---------- --------
Total expenses 1,394 14,312 -- 522 (1,046) 15,182
----------- ------------- -------- ---------- ---------- --------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings (loss) of subsidiaries (556) (7,199) -- 570 1,215 (5,970)
Earnings (loss) of subsidiaries (5,591) (576) -- 1,178 4,989 --
---------- ---------- -------- -------- ---------- ---------
Income (loss) before income taxes, minority
interest and extraordinary item (6,147) (7,775) -- 1,748 6,204 (5,970)
Provision (benefit) for income taxes -- 170 -- -- -- 170
--------- ---------- --------- ---------- ----------- ---------
Income (loss) before minority interest and
extraordinary item (6,147) (7,945) -- 1,748 6,204 (6,140)
Minority interest in loss of subsidiaries -- (4) -- (3) -- (7)
Extraordinary item - gain on extinquishment
of debt 4,281 -- -- -- -- 4,281
---------- ------------ -------- ---------- ---------- --------
NET INCOME (LOSS) $ (1,866) $ (7,949) $ -- $ 1,745 $ 6,204 $ (1,866)
========== ============ ========= ========== ========== ========
</TABLE>
15
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------- ------------ ------------ ------------ -----------
<S> <C> <C> C> <C> <C> <C>
REVENUES:
Interest income $ 3,830 $ 19,069 $ 10 $ 577 $ (4,296) $ 19,190
Servicing income -- 8,104 -- 769 (1,272) 7,601
Gain on sale of loans:
Gross gain on sale of loans -- 11,936 1,355 -- -- 13,291
Loan fees, net -- 5,291 1,474 65 -- 6,830
---------- ------------ --------- --------- ---------- -----------
Total gain on sale of loans -- 17,227 2,829 65 -- 20,121
Other revenues 2,783 2,060 193 489 (3,107) 2,418
---------- ------------ --------- --------- ---------- -----------
Total revenues 6,613 46,460 3,032 1,900 (8,675) 49,330
EXPENSES:
Interest 7,356 15,312 112 212 (4,607) 18,385
Provision for credit losses 26 6,914 -- -- -- 6,940
Fair market write-down of residual receivable -- 8,910 -- -- -- 8,910
Salaries, wages and employee benefits 1,902 29,716 2,758 -- -- 34,376
Business development costs 2 6,275 258 -- -- 6,535
Other general and administrative expenses 1,927 13,424 1,856 124 (2,798) 14,533
--------- ------------ --------- ------- -------- ---------
Total expenses 11,213 80,551 4,984 336 (7,405) 89,679
--------- ------------ --------- ------- -------- ---------
Income (loss) before income taxes, minority
interest, and equity in undistributed earnings
(loss) of subsidiaries (4,600) (34,091) (1,952) 1,564 (1,270) (40,349)
Earnings (loss) of subsidiaries (36,131) (507) -- -- 36,638 --
---------- ------------ --------- -------- ---------- ----------
Income (loss) before income taxes and
minority interest (40,731) (34,598) (1,952) 1,564 35,368 (40,349)
Provision (benefit) for income taxes 2,860 435 (51) -- -- 3,244
--------- ---------- ---------- -------- -------- ---------
Income (loss) before minority interest (43,591) (35,033) (1,901) 1,564 35,368 (43,593)
Minority interest in loss of subsidiaries -- -- -- 2 -- 2
--------- ------------ --------- -------- ---------- -----------
NET INCOME (LOSS) $ (43,591) $ (35,033) $ (1,901) $ 1,566 $ 35,368 $ (43,591)
========== ============ ========= ========= ========== ===========
</TABLE>
16
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 1,769 $ 10,130 $ -- $ 312 $ (1,695) $ 10,516
Servicing income -- 2,064 -- 315 -- 3,379
Gain on sale of loans:
Gross gain on sale of loans -- 6,210 563 -- -- 6,773
Loan fees, net -- 2,317 880 31 -- 3,228
---------- --------- --------- -------- ---------- -----------
Total gain on sale of loans -- 8,527 1,443 31 -- 10,001
Other revenues 1,451 895 66 87 (1,619) 880
---------- ---------- --------- -------- ---------- -----------
Total revenues 3,220 22,616 1,509 745 (3,314) 24,776
EXPENSES:
Interest 3,697 8,002 32 73 (1,852) 9,952
Provision for credit losses 26 2,085 -- -- -- 2,111
Fair market write-down of residual receivable -- 7,330 -- -- -- 7,330
Salaries, wages and employee benefits 669 13,960 1,475 -- -- 16,104
Business development costs -- 2,896 159 -- -- 3,055
Other general and administrative expenses 171 6,895 977 52 (1,463) 6,632
--------- --------- --------- -------- ----------- ---------
Total expenses 4,563 41,168 2,643 125 (3,315) 45,184
--------- ---------- --------- -------- ----------- ---------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings (loss) of subsidiaries (1,343) (18,552) (1,134) 620 1 (20,408)
Earnings (loss) of subsidiaries (19,676) 313 -- -- 19,363 --
---------- ---------- --------- -------- ---------- ---------
Income (loss) before income taxes and
minority interest (21,019) (18,239) (1,134) 620 19,364 (20,408)
Provision (benefit) for income taxes 1,957 849 (89) (151) -- 2,566
--------- --------- --------- -------- ---------- ---------
Income (loss) before minority interest (22,976) (19,088) (1,045) 771 19,364 (22,974)
Minority interest in loss of subsidiaries -- -- -- (2) -- (2)
---------- --------- --------- -------- ---------- ----------
NET INCOME (LOSS) $ (22,976) $ (19,088) $ (1,045) $ 769 $ 19,364 $ (22,976)
========== ========= ========= ======== ========== ==========
</TABLE>
17
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 7,131 $ (15,914) $ 2,361 $ 13,553 $ 7,131
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Equity in undistributed earnings of
subsidiaries 13,553 1,178 (1,178) (13,553) --
Depreciation and amortization 1 1,385 -- -- 1,386
Provision for credit losses -- (349) -- -- (349)
Gain on retirement of senior unsecured debt (21,227) -- -- -- (21,227)
Loss on sale of real estate acquired through
foreclosure -- 1,319 -- -- 1,319
Fair value write-down of residual receivable -- 775 -- -- 775
Loans originated with intent to sell -- (117,364) -- -- (117,364)
Proceeds from sold loans -- 102,573 -- -- 102,573
Proceeds from securitization of loans -- 59,630 -- -- 59,630
Other -- (646) -- -- (646)
Changes in operating assets and liabilities
increasing (decreasing) cash (577) 25,614 (32,309) -- (7,272)
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (1,119) 58,201 (31,126) -- 25,956
---------- ---------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (1,608) -- -- (1,608)
Principal collections on loans not sold -- 12,486 -- -- 12,486
Proceeds from sale of real estate and personal
property acquired through foreclosure -- 4,009 -- -- 4,009
Proceeds from sale of property and equipment -- 141 -- -- 141
Purchase of property and equipment -- (432) -- -- (432)
Other -- (2,145) -- -- (2,145)
---------- ---------- ----------- ----------- -----------
Net cash provided by in investing activities -- 12,451 -- -- 12,451
---------- ---------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit -- 111,853 -- -- 111,853
Payments on warehouse lines of credit -- (128,590) -- -- (128,590)
Retirement of senior unsecured debt (28,059) -- -- -- (28,059)
Net increase in notes payable to investors -- 2,800 -- -- 2,800
Net increase in subordinated debentures -- 2,730 -- -- 2,730
Advances (to) from subsidiary 29,200 (60,084) 30,884 -- --
Proceeds from issuance of additional common
stock 149 -- -- -- 149
Other -- 2,260 (2,260) -- --
---------- ---------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 1,290 (69,031) 28,624 -- (39,117)
---------- ---------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 171 1,621 (2,502) -- (710)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913
- - - -- -
========= ========= ======== ========= ==========
END OF PERIOD $ 367 $ 35,836 $ -- $ -- $ 36,203
========= ========= ======== ========= ==========
</TABLE>
18
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (43,591) $ (35,033) $ (1,901) $ 1,566 $ 35,368 (43,591)
Adjustments to reconcile net income
(loss) to net cash
provided by (used in) operating
activities:
Equity in undistributed earnings of
subsidiaries 35,368 -- -- -- (35,368) --
Depreciation and amortization 251 1,417 141 -- -- 1,809
Provision for deferred income taxes -- 326 (326) -- -- --
Provision for credit losses 26 6,914 -- -- -- 6,940
Fair value write-down of residual
receivable -- 8,910 -- -- -- 8,910
Mark-to-market adjustment on loans
held for sale -- 5,000 -- -- -- 5,000
Loans originated with intent to sell -- (451,586) (32,521) -- -- (484,107)
Proceeds from sold loans -- 298,900 41,847 -- -- 340,747
Proceeds from securitization of loans -- 92,316 -- -- -- 92,316
Other -- 1,855 -- 68 -- 1,923
Changes in operating assets and
liabilities increasing (decreasing)
cash 2,567 (8,126) 220 (4,220) -- (9,559)
--------- ---------- --------- -------- --------- ---------
Net cash provided by (used in) operating
activities (5,379) (79,107) 7,460 (2,586) -- (79,612)
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (80,024) -- (750) -- (80,774)
Principal collections on loans not sold -- 101,986 -- -- -- 101,986
Investment in subsidiary (18,272) (3,657) -- 21,929 -- --
Proceeds from sale of real estate and
personal property acquired through
foreclosure -- 2,143 -- -- -- 2,143
Proceeds from sale of property and
equipment -- -- -- -- -- --
Purchase of property and equipment (313) (4,719) (166) -- -- (5,198)
Other -- 17 -- -- -- 17
--------- ---------- --------- -------- --------- ---------
Net cash provided by (used in) investing
activities (18,585) 15,746 (166) 21,179 -- 18,174
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 260,453 -- 2,822 -- 263,275
Payments on notes payable to banks -- (169,671) -- -- -- (169,671)
Net increase in notes payable to
investors -- 3,951 -- -- -- 3,951
Net increase in subordinated debentures -- (175) -- -- -- (175)
Advances (to) from subsidiary 23,538 5,541 (7,557) (21,522) -- --
Proceeds from issuance of additional
common stock 132 -- -- -- -- 132
Other -- (7) -- -- -- (7)
--------- ---------- --------- -------- --------- ---------
Net cash provided by (used in) financing
activities 23,670 100,092 (7,557) (18,700) -- 97,505
--------- ---------- --------- -------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (294) 36,731 (263) (107) -- 36,067
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 713 6,411 263 174 -- 7,561
----------- ------------- ------------ ----------- ------------ -----------
END OF PERIOD $ 419 $ 43,142 $ -- $ 67 $ -- 43,628
=========== ============= ============ =========== ============ ===========
</TABLE>
19
<PAGE>
NOTE 9--INCOME TAXES
A reconciliation of the provision for Federal and State income taxes
and the amount computed by applying the statutory Federal income tax rate to
income before income taxes and minority interest are as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Statutory federal rate of 34% applied to pre-tax income from
continuing operations before minority interest and
extraordinary item $ (4,580) $ (13,719) $ (2,030) $ (6,939)
Extraordinary gain on extinquishment of debt 7,217 -- 1,455 --
State income taxes, net of federal income tax benefit 43 225 20 178
Change in the beginning of period balance of the valuation
allowance for deferred tax assets allocated to income tax
expense (2,333) 16,411 15 9,265
Nondeductible expenses 12 55 9 22
Amortization of excess cost over net assets of acquired
businesses 9 32 4 15
Other, net 252 240 697 25
------------- ------------ ----------- -----------
$ 620 $ 3,244 $ 170 $ 2,566
============= ============ =========== ===========
</TABLE>
Provision for income taxes from continuing operations is comprised of
the following:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------ ----------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Current
Federal $ 555 $ 2,903 $ 140 $ 2,296
State and local 65 341 30 270
------------- ------------ ----------- -----------
$ 620 $ 3,244 $ 170 $ 2,566
============= ============ =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b)
operating loss carryforwards. The tax effects of significant items comprising
the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ (566) $ (1,011)
Difference between book and tax basis of the residual receivables associated
with the Company's investment in its affiliated real estate investment trust (1,128) (1,513)
Deferred loan costs (235) (333)
Other (11) (11)
------------ ---------------
Total gross deferred tax liabilities $ (1,940) $ (2,868)
============ ===============
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles 189 178
Differences between book and tax basis of REMIC residual receivables 5,496 5,318
Allowance for credit losses 2,750 3,582
AMT credit carryforward 58 58
Operating loss carryforward 15,742 17,871
Deferred loan fees 433 780
Reserves on real estate owned aquired through foreclosure 114 114
Restructuring reserves for leases 455 640
Unrealized gain on loans to be sold -- --
Other 193 150
------------ ---------------
Total gross deferred tax assets 25,430 28,691
Less valuation allowance (19,339) (21,672)
Less gross deferred tax liabilities (1,940) (2,868)
============ ===============
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
six months ended June 30, 1999 and the year ended December 31, 1998 was $(2.4)
million and $21.7 million, respectively. The valuation allowance at June 30,
1999 relates primarily to net operating loss ("NOL") carryforwards. The ability
to fully utilize all of the NOL's is reduced by the Company's anticipated
current year loss and the inability to use current period earnings classified as
"excess inclusion" to offset prior NOL's. Earnings of approximately $1.6 million
in the six months ended June 30, 1999 and $6.0 million in 1998 were classified
as excess inclusion and were not able to be offset with prior year NOL's.
Management believes that it is more likely than not that the results of future
operations and tax planning strategies available to the Company will generate
sufficient taxable income to realize the net deferred tax asset. Management
continues to evaluate this each quarter, and may take additional reserves
against this asset if deemed necessary in the future.
As of June 30, 1999, the Company has available Federal NOL's expiring
as follows (in thousands):
2000 $ 1,763
2001 1,911
2002 and after 42,627
----------------
$ 46,301
================
There are no known significant pending assessments from taxing
authorities regarding taxation issues at the Company or its subsidiaries.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The discussion should be read in conjunction with the HomeGold
Financial, Inc. and Subsidiaries (the "Company") Unaudited Consolidated
Financial Statements and Notes 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
Form 10-Q, as well as those made in other filings with the SEC, 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. Such risks
and uncertainties 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, negative cash flows and capital needs, delinquencies and losses in
securitization trusts, right to terminate mortgage servicing and related
negative impact on cash flow, 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, 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 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.
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 CII, a small mortgage lending
company, which had been in operation since 1963.
During 1998, the Company decided to focus primarily on the Company's
larger direct mail retail mortgage operation and its mortgage brokerage
business. This decision resulted in the sale of the auto loan portfolio in March
of 1998, and the small-business unit in the fourth quarter of 1998. The $43.6
million loss in the first six months of 1998 includes both the $110,000 loss
from the auto operations and the $1.7 million loss from the small-business loan
unit. The first six months of 1998 also includes the $1.9 million loss related
to the small retail origination subsidiary, SLC, that was sold in August of
1998. The Company has significantly reduced the general and administrative
expenses associated with originating retail mortgage loans as a result of
consolidating the three retail lending operations located in Indianapolis,
Indiana, Phoenix, Arizona and Houston, Texas into one retail operating center
located at the Company's headquarters in Greenville, South Carolina in 1998. A
major focus in 1998 and 1999 is to better match the Company's cost structure to
the Company's loan origination volumes. The Company's production declined 78%
while general and administrative expenses decreased 61% when comparing the first
six months of 1999 with the same period for 1998. The Company believes that even
with reductions in the number of employees and locations, it has excess capacity
to originate loans. The Company's focus for the remainder of 1999 is to increase
loan production to levels that will provide for profitable operations while only
incurring small increases in total origination costs.
22
<PAGE>
During the last three quarters of 1998 and first six months of 1999,
the Company's primary focus was to increase liquidity and to reduce outstanding
borrowings. This resulted in the decision to significantly reduce the size of
the Company's loan portfolio and to sell the loans for cash with servicing
released. Although this decision resulted in increasing the Company's liquidity
to levels that allowed the Company both to reduce its revolving warehouse line
of credit to zero as well as to repurchase senior unsecured debt, it also caused
the Company to receive lower premiums on the whole loan sales than it believes
would have been realized had the Company been in the position to securitize the
loans. The decision also resulted in a reduction in the serviced loan portfolio.
The Company completed a securitization of seasoned first and second mortgage
loans in May 1999 which generated additional liquidity of $33.0 million. This
additional liquidity was generated as the result of a portion of these loans
being ineligible under the Company's warehouse line of credit. Due to the nature
of these seasoned higher LTV loans that were securitized in May 1999 and the
resulting high overcollateralization requirements, the Company only recognized a
gain of 2.9% on its securitization transaction in the second quarter of 1999.
The Company may securitize loans in future quarters depending upon liquidity
needs and market conditions. However, it currently plans to sell its loans,
servicing released, on the secondary market until its monthly volume grows to
sufficient levels to be able to complete a securitization transaction
efficiently.
MARKET CONDITIONS
The Company believes as a result of higher than anticipated prepayments
on securitized loan pools and concerns in the market about the creditworthiness
of several issuers of securitized assets as well as global economic concerns,
corporate interest rate spreads within the industry widened significantly in the
third and fourth quarters of 1998. These conditions negatively impacted the
securitization and whole loan sale markets. As spreads have widened,
securitization as a means of financing has become less attractive. As a result,
more issuers turned to the whole loan sale market during this period of time. As
this additional whole loan product flowed into the market, whole loan sale
premiums eroded, which, in turn, adversely impacted issuers' profitability and
created a liquidity crisis for the industry.
During the first and second quarters of 1999, the difference in the
investor rates required on loan products sold compared to treasury rates on
comparable maturities has declined from the wide spreads that were experienced
in the last half of 1998. A leading industry publication estimates that the
number of potential customers that the Company is targeting for its various loan
products is continuing to increase. As a result of the market turmoil that was
experienced in 1998, the number of companies that are able to provide the same
or similar products has been reduced. The Company believes that its effort to
closely monitor its liquidity position has allowed the Company to weather the
market turmoil in late 1998. The premiums investors are willing to pay to
purchase the Company's loans are beginning to increase slightly. Premiums on
whole loan sales averaged 1.2% in January 1999 compared to an average of 3.7% in
June 1999.
23
<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 SIX MONTHS
ENDED JUNE 30, AT AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------- -------------------------------------------------
1999 1998 1998 1997 1996
-------------- -------------- ------------- --------------- -------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Mortgage loans originated $ 110,994 $ 437,306 $ 659,444 $ 1,176,800 $ 350,276
Mortgage loans sold 102,573 293,515 623,675 435,333 284,794
Mortgage loans securitized 59,630 92,173 92,173 487,563 --
Total mortgage loans owned (period end) 54,777 238,846 117,685 231,145 146,231
Total serviced mortgage loans (period end) 474,087 752,866 550,304 768,556 146,231
Total serviced unguaranteed mortgage loans
(period end) (1) 474,087 752,866 550,304 700,248 146,231
Average mortgage loans owned (2) 88,724 281,646 245,915 215,790 97,281
Average serviced mortgage loans (2) 513,513 808,610 744,221 443,318 97,281
Average serviced unguaranteed mortgage
loans (1) 513,513 806,876 743,362 411,549 97,281
Average interest earned (2) 9.13 % 10.01 % 10.34 % 10.92 % 11.97 %
SMALL-BUSINESS LOANS:
Small-business loans originated $ -- $ 65,863 $ 122,902 $ 81,018 $ 68,210
Small-business loans sold -- 26,192 141,041 41,232 33,060
Small-business loans securitized -- 1,827 1,827 24,286 12,851
Total small-business loans owned
(period end) 10,526 74,790 7,054 45,186 29,385
Total serviced small-business loans
(period end) 10,526 239,505 7,054 198,876 140,809
Total serviced unguaranteed small-business
loans (period end) (3) 10,526 99,825 7,054 78,822 44,017
Average small-business loans owned (2) 8,975 55,439 59,598 38,427 26,700
Average serviced small-business loans (2) 8,975 217,141 202,446 165,053 125,723
Average serviced unguaranteed small-
business loans (2)(3) 8,975 89,324 82,270 61,420 34,442
Average interest earned (2) 8.70 % 14.36 % 14.28 % 15.89 % 12.61 %
AUTO LOANS:
Auto loans originated $ -- $ 2,983 $ 2,982 $ 15,703 $ 18,287
Auto loans sold -- 20,578 20,898 -- --
Auto loans securitized -- -- -- -- 16,107
Total auto loans owned (period end) -- 578 -- 21,284 13,916
Total serviced auto loans (period end) -- 578 -- 21,284 22,033
Total serviced unguaranteed auto loans
(period end) -- 578 -- 21,284 22,033
Average auto loans owned (2) -- 10,801 5,340 17,104 11,917
Average serviced auto loans (2) -- 10,801 5,340 22,267 21,277
Average serviced unguaranteed auto
loans (2) -- 10,801 5,340 22,267 21,277
Average interest earned (2) -- % 20.60 % 21.28 % 24.05 % 23.57 %
TOTAL LOANS:
Total loans originated $ 110,994 $ 506,152 $ 785,328 $ 1,273,521 $ 436,773
Total loans sold 102,573 340,285 785,614 476,565 317,854
Total loans securitized 59,630 94,000 94,000 511,849 28,958
Total loans receivable (period end) 65,303 314,214 124,739 297,615 189,532
Total serviced loans (period end) 484,613 992,949 557,358 988,716 309,073
Total serviced unguaranteed loans
(period end) (1)(3) 484,613 853,269 557,358 800,354 212,281
Total average loans owned 97,699 347,886 310,853 271,321 135,898
Total average serviced loans 522,488 1,036,552 952,007 630,638 244,281
Total average serviced unguaranteed
loans 522,488 907,001 830,972 495,236 153,000
Average interest earned 9.09 % 11.03 % 11.28 % 12.53 % 13.18 %
- ------------------------------
(1) Excludes loans serviced for others with no credit risk to the Company.
(2) Averages are computed based on the daily balances outstanding except in 1997 and 1996, in which monthly
balances outstanding were used to compute averages for Mortgage Loans.
(3) Excludes guaranteed portion of SBA Loans.
</TABLE>
24
<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 SIX MONTHS FOR THE THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income 28.4 % 38.9 % 17.6 % 42.4 %
Servicing income 28.7 15.4 28.3 13.6
Gross gain on sale of loans 25.1 26.9 34.9 27.3
Loan fees, net 13.5 13.9 15.4 13.1
Other revenues 4.3 4.9 3.8 3.6
============= =========== =========== ==========
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
============= =========== =========== ==========
Interest expense 51.4 % 37.3 % 45.5 % 40.2 %
Provision for (recapture of) credit losses (2.0) 14.1 (4.7) 8.5
Fair value write-down of residual receivables 4.4 18.1 9.0 29.6
Salaries, wages and employee benefits 62.4 69.7 56.8 65.0
Business development costs 13.9 13.2 13.4 12.3
Other general and administrative expenses 47.0 29.5 44.8 26.8
------------- ----------- ----------- -----------
Total expenses 177.1 181.9 164.8 182.4
Loss before income taxes, minority interest and
extraordinary item (77.1) (81.9) (64.8) (82.4)
Provision for income taxes 3.5 6.5 1.8 10.3
Minority interest in income of subsidiaries -- -- (0.1) --
Extraordinary item-gain on extinguishment of debt, net 121.4 -- 46.4 --
============= =========== =========== ===========
Net income (loss) 40.8 % (88.4) % (20.3) % (92.7) %
============= =========== =========== ===========
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
The Company recognized net income of $7.1 million for the six months
ended June 30, 1999 as compared to a net loss of $43.6 million for the six
months ended June 30, 1998. Included in the $7.1 million net income for the
first six months of 1999 is an extraordinary gain of $21.2 million on the
extinguishment of debt. As previously discussed, the operations that were sold
in 1998 are not included in the first six months of 1999 operating results. The
sale of these operations significantly affects the comparison of the first six
months of 1999 to the same period in 1998.
Total revenues decreased $31.9 million, or 64.7%, to $17.5 million for
the six months ended June 30, 1999 from $49.3 million for the six months ended
June 30, 1998. The reductions in revenues resulted primarily from $14.2 million
less interest income, a decrease of $13.4 million in total net gain on sale of
loans and $2.6 million decline in servicing income.
Interest income decreased $14.2 million, or 74.0%, to $5.0 million for
the six months ended June 30, 1999 from $19.2 million for the six months ended
June 30, 1998. The decrease in interest income resulted primarily from a $250.2
million, or 71.9%, decrease in average loans receivable outstanding to $97.7
million for the six months ended June 30, 1999 compared to $347.9 million for
the same period in 1998. In addition, the Company experienced a 194 basis point
decline in average yield. The average yield in the first six months of 1999 was
9.09% compared to 11.0% in the same period of 1998. The decrease in average
loans receivable outstanding relates in part to the $46.4 million reduction in
average small-business loans outstanding and the $10.8 million reduction in
average auto loans outstanding. These reductions resulted from the sale of
substantially all of the loans in these two portfolios in 1998 as previously
discussed. The remaining $193.0 million reduction relates to management's
decision to reduce the balance in the mortgage loan portfolio through whole loan
sales (as well as the securitization completed in the second quarter 1999) and
to use the proceeds to reduce outstanding borrowings. The reduction in the
average yield earned in the six months ended June 30, 1999 compared to the first
six months in 1998 resulted primarily from a change in the mix of the Company's
total portfolio. In the first six months of 1999, substantially all of the
Company's loan portfolio was mortgage loans that yielded an average of 9.1%. In
the first six months of 1998, the company had a portfolio of small-business
loans that had an average yield of 14.4%, an auto loan portfolio that had an
average yield of 20.6%, and a mortgage loan portfolio that had an average yield
of 10.0%.
25
<PAGE>
Servicing income declined $2.6 million, or 34.2%, to $5.0 million for
the six months ended June 30, 1999 from $7.6 million for the same period in
1998. The reduction was primarily due to a $514.1 million, or 49.6%, decrease in
average serviced loan portfolio. The Company serviced an average of $522.5
million in loans in the first six months of 1999 compared to an average of $1.0
billion in the first six months of 1998. The $514.1 million reduction in average
loans serviced resulted, in part, from the sale of the small-business loan
portfolio that averaged $217.1 million in the first six months of 1998. Also
contributing to the reduced average loans serviced in 1999 was the sale of the
auto loans that averaged $10.8 million in the first six months of 1998, and a
$295.1 million reduction in the average mortgage loans serviced portfolio. The
reduction in the average mortgage loans serviced in the first six months of 1999
compared to the same period in 1998 resulted from the Company's decision,
beginning in the second quarter of 1998, to sell, on a servicing released basis,
a substantial portion of its production and portfolio, versus securitizing those
loans and retaining servicing. However, the Company completed a securitization
of approximately $59.6 million of mortgage loans in the second quarter of 1999
with servicing retained.
Gross gains on sale of loans declined $8.9 million, or 66.9%, to $4.4
million for the six months ended June 30, 1999, from $13.3 million for the six
months ended June 30, 1998. Cash gain on sale of loans decreased $7.4 million,
or 73.3%, to $2.7 million for the six months ended June 30, 1999 from $10.1
million for the six months ended June 30, 1998, while non-cash gain decreased
$1.5 million. The decrease in cash gains resulted from both a reduction in the
amount of loans sold and a reduction in the net premiums received in the first
six months of 1999 compared to the same period in 1998. In the first six months
of 1999, the Company had mortgage whole loan sales of $102.6 million and
received a net premium of 2.6% compared to small-business and mortgage loan
sales of $319.7 million in the first six months of 1998 in which it received a
net premium of 3.2%. The lower sales were a result of lower loan production. The
Company believes the reduction in premiums received is primarily from lower
premiums being paid by investors in the first six months of 1999 compared to the
first six months of 1998 because of changes in market conditions. However,
premiums received on whole-loan sales have been increasing in 1999, growing from
an average of 1.2% in January 1999 to 3.7% in June 1999. Loan production has
also been increasing in 1999, growing from $16.8 million in January 1999 to
$25.3 million in June 1999.
In March 1998, the Company sold $20.6 million of auto loans at its
book value and therefore did not record a gain. In the first six months of 1998,
the Company securitized $94.0 million of mortgage and small-business loans and
realized $8.2 million of non-cash gains (before considering a mark-to-market
write-down on second mortgage loans), for a gain of 8.7%. The Company also
recorded a non-cash mark-to-market write-down of $5.0 million in the first six
months of 1998 that related to second mortgage loans. This was recorded as a
reduction to the non-cash gains recognized in 1998. No such mark-to-market
write-down was required in the first six months of 1999. The Company realized
$1.7 million of non-cash gains in the six months ended June 30, 1999 resulting
from the securitization of $59.6 million of loans in May 1999, for a gain of
2.9%. The non-cash gain recorded for the first six months of 1999 was lower than
the same period in 1998 due to fewer loans securitized and higher subordination
levels required on the 1999 securitization.
Net loan fees decreased $4.4 million, or 64.7%, to $2.4 million for the
six months ended June 30, 1999 from $6.8 million for the same period in 1998.
The primary reason for lower net loan fees is the reduction in loans that were
either sold or securitized in the first six months of 1999 compared to the same
period of 1998 as discussed above. The Company charged an average of 4.6% loan
origination fees on its retail loan production in the first six months of 1999
compared to 4.7% in the comparable period in 1998.
Other revenue decreased $1.7 million, or 70.8%, to $750,000 for the six
months ended June 30, 1999 compared to $2.4 million in the first six months of
1998. The decrease relates primarily to fewer late charges as a result of a
smaller loan portfolio in the first six months of 1999 compared to the first six
months of 1998. Also in the first six months of 1998, the small-business unit
recorded as other income, a $500,000 increase in the value of securities owned
relating to the commercial mezzanine lending operation.
Total expenses decreased $58.8 million, or 65.6%, to $30.9 million for
the six months ended June 30, 1999 from $89.7 million for the same period in
1998. Total expenses are comprised of interest expenses, provision for credit
losses, fair value adjustments of residual receivable, salaries, wages and
employee benefits, business development costs, and other general and
administrative expenses. The decreased expenses are due largely to the Company's
sale of its auto and small-business lending operations, the sale of its small
retail origination subsidiary, SLC, and consolidation of its mortgage operations
into a single location.
Interest expense decreased $9.4 million, or 51.1%, to $9.0 million for
the six months ended June 30, 1999 from $18.4 million for the six months ended
June 30, 1998. The decrease in interest expense was due principally to the
reduction in borrowings associated with the decrease in the Company's average
loan portfolio, and from the reduction of outstanding senior unsecured notes
resulting from the Company's repurchase of $49.3 million of notes in the first
six months of 1999. This decrease was partly offset by the cost of borrowings
that were required to fund the
26
<PAGE>
Company's operating losses in 1998 as well as a higher interest rate on the
existing warehouse line of credit as compared to the previous warehouse lines of
credit in place prior to June 30, 1998.
Provision for (recapture of) credit losses decreased $7.3 million, or
105.8%, to a credit of $349,000 for the six months ended June 30, 1999 from $6.9
million for the same period in 1998. The decrease in the required provision was
the result of lower loan delinquency and a significantly smaller loan portfolio.
Fair value write-down of residual receivable decreased $8.1 million, or
91.0%, to $775,000 for the six months ended June 30, 1999 from $8.9 million for
the same period in 1998. The write-down required for 1998 was due to faster than
anticipated prepayments on the Company's securitization pools. No changes in
valuation assumptions were required in the first six months of 1999.
Total general and administrative expense decreased $33.9 million, or
61.2%, to $21.5 million for the six months ended June 30, 1999, from $55.4
million for the same period in 1998. This resulted primarily because salaries,
wages and employee benefits decreased $23.5 million, or 68.3%, to $10.9 million
for the six months ended June 30, 1999, from $34.4 million for the same period
in 1998. The Company reduced the number of employees to 408 at June 30, 1999
from 1,070 at June 30, 1998. In addition, business development costs declined
$4.1 million, or 63.1%, to $2.4 million for the six month period in 1999
compared to $6.5 million for the same period in 1998. Other general and
administrative expenses also declined $6.3 million, or 43.4%, to $8.2 million in
the six month period in 1999 compared to $14.5 million in the same period for
1998. The primary reasons for the significant reductions are the sale of various
business units in 1998 and the cost reductions from the retail center
consolidations that were previously discussed.
The Company has recorded current tax expense of $620,000 and $3.2
million for the six months ended June 30, 1999 and 1998, respectively, even
though the Company generated a pre-tax loss before extraordinary item for both
periods. The Company has not recorded a deferred tax benefit related to the
current operating losses due to management's assessment of the recoverability of
the related deferred tax asset. The current tax expense results from "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 from
operations. However, according to IRS regulations, a portion of that income is
subject to federal tax in the current period regardless of other 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. The
extraordinary gain on the extinguishment of debt (discussed below) is net of
$0 tax since the gain was offset against prior NOLs and did not result in any
incremental increase in current income tax expense. The latest two
securitizations were structured utilizing alternatives to a REMIC which does not
generate excess inclusion income.
In the first six months of 1999, the Company recorded a $21.2 million
extraordinary gain on the extinguishment of debt related to the purchase of
$49.3 million of its Senior Notes. The purchase price of the Senior Notes was
$26.6 million, or a weighted average of 54.0% of face value. A proportionate
share of the unamortized debt origination cost ($1.5 million) relating to the
issuance of the Senior Notes was charged against this gain.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
The Company recognized a net loss of $1.9 million for the three months
ended June 30, 1999 as compared to a net loss of $23.0 million for the three
months ended June 30, 1998. Included in the $1.9 million net loss for the three
months ended June 30, 1999 is an extraordinary gain of $4.3 million on the
extinguishment of debt. As previously discussed, the operations that were sold
in 1998 are not included in the 1999 operating results. The sale of these
operations significantly affects the comparison of 1999 to the same period in
1998.
Total revenues decreased $15.6 million, or 62.9%, to $9.2 million for
the three months ended June 30, 1999 from $24.8 million for the three months
ended June 30, 1998. The reductions in revenues resulted primarily from $8.9
million less interest income, a decrease of $5.4 million in total net gain on
sale of loans and $800,000 decline in servicing income.
Interest income decreased $8.9 million, or 84.8%, to $1.6 million for
the three months ended June 30, 1999 from $10.5 million for the three months
ended June 30, 1998. The decrease in interest income resulted primarily from a
$290.3 million, or 79.1%, decrease in average loans receivable outstanding to
$76.8 million for the three months ended June 30, 1999 compared to $367.1
million for the same period in 1998. In addition, the Company experienced a 410
basis point decline in average yield. The average yield in the three months
ended June 30, 1999 was 7.3% compared to 11.4% in the same period of 1998. The
reduction to yield was due primarily to the impact of
27
<PAGE>
non-accrual loans relative to total outstanding loans and the sale of higher
yielding second mortgages and small business loans, thereby changing the mix of
the Company's retained loans receivable. The decrease in average balance relates
partially to the $54.6 million reduction in small-business loans that resulted
from the sale of substantially all of the loans in that portfolio. The remaining
$235.7 million reduction relates to management's decision to reduce the balance
in the mortgage loan portfolio through whole loan sales and to use the proceeds
to reduce outstanding borrowings.
Servicing income declined $800,000, or 23.5%, to $2.6 million for the
three months ended June 30, 1999 from $3.4 million for the same period in 1998.
The reduction was primarily due to a $556.8 million, or 52.2%, decrease in
average serviced loan portfolio. The Company serviced an average of $509.4
million in loans in the three months ended June 30, 1999 compared to an average
of $1.1 billion in the three months ended June 30, 1998. The $556.8 million
reduction in average loans serviced resulted from the sale of the small-business
loan portfolio that averaged $226.4 million in the three months ended June 30,
1998 and a $338.0 million reduction in the mortgage loans serviced portfolio.
The reduction in the mortgage loans serviced in the three months ended June 30,
1999 compared to the same period in 1998, resulted from the Company's decision
in the second quarter of 1998 to sell, on a servicing released basis, a
substantial portion of its production and portfolio versus securitizing those
loans and retaining servicing. However, the Company completed a securitization
of approximately $59.6 million of mortgage loans in the second quarter of 1999
with servicing retained.
Gross gains on sale of loans declined $3.6 million, or 52.9%, to $3.2
million for the three months ended June 30, 1999, from $6.8 million for the
three months ended June 30, 1998. Cash gain on sale of loans decreased $5.2
million, or 77.6%, to $1.5 million for the three months ended June 30, 1999 from
$6.7 million for the three months ended June 30, 1998, while non-cash gain
increased $1.6 million. The decrease in cash gains resulted from a reduction in
the amount of loans sold, partially offset with higher net premiums received in
the three months ended June 30, 1999 compared to the same period in 1998. In the
three months ended June 30, 1999, the Company had whole loan mortgage sales of
$45.4 million and received a net premium of 3.3%, compared to small-business and
mortgage loan sales of $245.3 million in the three months ended June 30, 1998 in
which it received a net premium of 2.7%. The lower sales were a result of lower
loan production.
The Company realized $1.7 million non-cash gains in the three months
ended June 30, 1999 resulting from the securitization of $59.6 million in loans
for a premium of 2.9%. In the three months ended June 30, 1998, the Company did
not securitize any loans and recognized $113,000 of non-cash gain relating to
the sale of the guaranteed portion of small business loans.
Net loan fees decreased $1.8 million, or 56.3% to $1.4 million for the
three months ended June 30, 1999 from $3.2 million for the same period in 1998.
The primary reason for lower net loan fees is the reduction in loans that were
either sold or securitized in the three months ended June 30, 1999 compared to
the three months ended June 30, 1998.
Other revenue decreased $526,000, or 59.8%, to $354,000 for the three
months ended June 30, 1999 compared to $880,000 in the three months ended June
30, 1998. The decrease relates partially to fewer late charges as a result of a
smaller loan portfolio in the three months ended June 30, 1999 compared to the
three months ended June 30, 1998 and partially to the sale of the small-business
lending operation.
Total expenses decreased $30.0 million, or 66.4%, to $15.2 million for
the three months ended June 30, 1999 from $45.2 million for the same period in
1998. Total expenses are comprised of interest expenses, provision for credit
losses, fair value adjustments of residual receivable, salaries, wages and
employee benefits, business development costs, and other general and
administrative expenses. The decreased expenses are due largely to the Company's
sale of its auto and small-business lending operations, the sale of its small
retail origination subsidiary, SLC, and consolidation of its mortgage operations
into a single location.
Interest expense decreased $5.8 million, or 58.0%, to $4.2 million for
the three months ended June 30, 1999 from $10.0 million for the three months
ended June 30, 1998. The decrease in interest expense was due principally to the
reduction in borrowings associated with the decrease in the Company's average
loan portfolio, and to the reduction of outstanding senior unsecured notes
resulting from the Company's repurchase of $13.9 million of notes in the second
quarter of 1999. This decrease was partially offset by the cost of borrowings
that were required to fund the Company's operating losses in 1998 as well as a
higher interest rate on the existing warehouse line of credit as compared to the
previous warehouse lines of credit in place prior to June 30, 1998.
Provision for (recapture of) credit losses decreased $2.5 million, or
119.0%, to a credit of $430,000 for the three months ended June 30, 1999 from
$2.1 million for the same period in 1998. The decrease in the provision was the
result of lower loan delinquency and a significantly smaller loan portfolio.
28
<PAGE>
Fair value write-down of residual receivable decreased $6.5 million, or
89.0%, to $828,000 for the three months ended June 30, 1999 from $7.3 million
for the same period in 1998. The write-down required for 1998 was due to faster
than anticipated prepayments on the Company's securitization pools. No changes
in valuation assumptions were required in the comparable period for 1999.
Total general and administrative expense decreased $15.2 million, or
58.9%, to $10.6 million for the three months ended June 30, 1999, from $25.8
million for the same period in 1998. This resulted primarily because salaries,
wages and employee benefits decreased $10.9 million, or 67.7%, to $5.2 million
for the three months ended June 30, 1999, from $16.1 million for the same period
in 1998. The Company reduced the number of employees to 408 at June 30, 1999
from 1,070 at June 30, 1998. In addition, business development costs decreased
$1.9 million, or 61.3%, to $1.2 million for the three month period ended June
30, 1999 compared to $3.1 million for the same period in 1998. Other general and
administrative expenses also declined $2.5 million, or 37.9%, to $4.1 million in
the three month period ended June 30, 1999 compared to $6.6 million in the same
period for 1998. The primary reasons for the significant reductions are the sale
of various business units in 1998 and the cost reductions from the retail center
consolidations that were previously discussed.
The Company has recorded current tax expense of $170,000 and $2.6
million for the three months ended June 30, 1999 and 1998, respectively, even
though the Company generated a pre-tax loss before extraordinary item for both
periods. The Company has not recorded a deferred tax benefit related to the
current operating losses due to management's assessment of the recoverability of
the related deferred tax asset. The current tax expense results from "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 from
operations. However, according to IRS regulations, a portion of that income is
subject to federal tax in the current period regardless of other 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. The
extraordinary gain on the extinguishment of debt (discussed below) is net of
$0 tax since the gain was offset against prior NOLs and did not result in any
incremental increase in current income tax expense.
In the three months ended June 30, 1999, the Company recorded a $4.3
million extraordinary gain on the extinguishment of debt related to the purchase
of $13.9 million of its Senior Notes. The purchase price of the Senior Notes was
$9.3 million, or a weighted average of 66.9% of face value. A proportionate
share of the unamortized debt origination cost ($300,000) relating to the
issuance of the Senior Notes was charged against this gain.
FINANCIAL CONDITION
Net loans receivable decreased $57.0 million to $59.9 million at June
30, 1999 from $116.9 million at December 31, 1998. The reduction in net loans
receivable resulted primarily from the decision to sell residential mortgage
loans and to use the proceeds to reduce debt.
The residual receivable was $49.1 million at June 30, 1999, and $43.9
million at December 31, 1998. This increase resulted primarily from the residual
retained on the 1999-1 securitization transaction completed in May 1999,
partially offset by the amortization of the other residual assets from prior
securitizations.
Net property and equipment decreased by $1.0 million to $18.7 million
at June 30, 1999, from $19.7 million at December 31, 1998. This decrease
resulted primarily from depreciation expenses. Real estate and personal property
acquired in foreclosure decreased $1.0 million to $4.9 million at June 30, 1999,
from $5.9 million at December 31, 1998. This decrease resulted primarily from
the sale of foreclosed properties, partially offset by additional foreclosures
on mortgage loans within the period.
The primary sources for funding the Company's receivables comes from
borrowings issued under various credit arrangements (including the warehouse
lines of credit, CII notes payable to investors and subordinated debentures, and
the Company's Senior Notes) and the sale or securitization of loans. At June 30,
1999, the Company had no debt outstanding under revolving warehouse lines of
credit to banks, which compares with $16.7 million at December 31, 1998, for a
decrease of $16.7 million. At June 30, 1999, the Company had $141.4 million of
CII notes payable to investors and subordinated debentures outstanding, which
compares with $135.9 million at December 31, 1998, for an increase of $5.5
million.
The aggregate principal amount of outstanding Senior Notes was $37.4
million at June 30, 1999 compared to $86.7 million on December 31, 1998. In the
six months ended June 30, 1999, the Company purchased $49.3
29
<PAGE>
million of its Senior Notes for a purchase price of $26.6 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 June 30, 1999 was $13.1 million, compared
to $5.8 million at December 31, 1998, an increase of $7.3 million. This increase
resulted primarily from net earnings of $7.1 million for the six months ended
June 30, 1999. The $7.1 million net earnings resulted from the $21.2 million
extraordinary item from the gain on extinguishment of debt, partially offset by
$14.1 million loss from operations.
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 and,
in certain cases, where the terms of sale include a warranty against first
payment defaults. 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.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON OWNED PORTFOLIO
<TABLE>
<CAPTION>
AT AND FOR AT AND FOR
THE SIX THE THREE
MONTHS MONTHS
ENDED JUNE ENDED JUNE AT AND FOR THE YEARS ENDED DECEMBER 31,
30, 30, -------------------------------------------
1999 1999 1998 1997 1996
------------ ------------ ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at beginning of
period $ 6,659 $ 6,183 $ 6,528 $ 3,084 $ 1,874
Net charge-offs (1,468) (911) (8,791) (5,166) (2,494)
Provision (recapture) charged to expense (349) (430) 11,905 10,030 5,416
Write-down of allowance due to sale of
receivables -- -- (2,983) -- --
Securitization transfers -- -- -- (1,420) (1,712)
------------ ------------ ----------- ----------- ------------
Allowance for credit losses at end of the period $ 4,842 $ 4,842 $ 6,659 $ 6,528 $ 3,084
============ ============ =========== =========== ============
</TABLE>
The Company considers its allowance for credit losses at June 30, 1999
to be adequate in view of the Company's improving loss experience and the
secured nature of most of the Company's outstanding loans. The Company's
allowance for loan loss as a percentage of gross loans was 7.41% at June 30,
1999 and 5.34% at December 31, 1998. The percentage of total serviced
unguaranteed loans past due 30 days or more declined to 12.19% at June 30, 1999
compared to 13.44% at December 31, 1998. The Company incurred net charge-offs on
retained loans of $1.5 million in the six months ended June 30, 1999 compared to
$3.8 million in net charge-offs on retained loans in the six months ended June
30, 1998. 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.
30
<PAGE>
The table below summarizes certain information with respect to the
Company's allowance for losses on the securitization residual assets for each of
the periods indicated.
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS
<TABLE>
<CAPTION>
AT AND FOR AT AND FOR
THE SIX THE THREE
MONTHS MONTHS
ENDED JUNE ENDED JUNE AT AND FOR THE YEARS ENDED DECEMBER 31,
30, 30, -------------------------------------------
1999 1999 1998 1997 1996
------------ ------------ ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESIDUAL RECEIVABLES:
Allowance for losses at beginning of period $ 7,165 $ 6,762 $ 14,255 $ 1,202 $ 773
Net charge-offs (139) (107) (147) (1,645) (1,283)
Provision netted against gain on securitizations 1,267 1,267 2,242 13,278 --
Sale of small-business residual assets -- -- (2,957) -- --
Mark-to-market adjustment (329) (125) (6,228) -- --
Loss on sale of securitized REO (651) (484) -- -- --
Allowance transferred from owned portfolio -- -- -- 1,420 1,712
------------ ------------ ----------- ----------- ------------
Allowance for losses at the end of the period $ 7,313 $ 7,313 $ 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.
31
<PAGE>
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.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON COMBINED SERVICED PORTFOLIO
<TABLE>
<CAPTION>
AT AND FOR
THE SIX AT AND FOR
MONTHS THE THREE
ENDED MONTHS ENDED AT AND FOR THE YEARS ENDED DECEMBER 31,
JUNE 30, JUNE 30, ------------------------------------------
1999 1999 1998 1997 1996
------------ ------------- ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for credit losses at beginning of period $ 13,824 $ 12,945 $ 20,783 $ 4,286 $ 2,647
Write-down of allowance due to sale of loans
receivable -- -- (2,983) -- --
Net charge-offs (1,607) (1,018) (8,938) (6,811) (3,777)
Provision (recapture) charged to expense (349) (430) 11,905 10,030 5,416
Provision netted against gain on securitizations 1,267 1,267 2,242 13,278 --
Sale of small-business residual asset -- -- (2,957) -- --
Mark-to-market adjustment (329) (125) (6,228) -- --
Loss on sale of securitized REO (651) (484) -- -- --
============ ============= ============ =========== ===========
Allowance for credit losses at the end of the period $ 12,155 $ 12,155 $ 13,824 $ 20,783 $ 4,286
============ ============= ============ =========== ===========
Allowance as a % of total serviced unguaranteed
portfolio 2.51% 2.51% 2.48% 2.60% 2.02%
Annualized net charge-offs as a % of average serviced
unguaranteed portfolio 0.62% 0.80% 1.08% 1.38% 2.47%
The total allowance for credit losses as shown on the
balance sheet is as follows:
Allowance for credit losses on loans receivable $ 4,842 $ 4,842 $ 6,659 $ 6,528 $ 3,084
Allowance for credit losses on residual receivable 7,313 7,313 7,165 14,255 1,202
------------ ------------- ------------ ----------- -----------
Total allowance for credit losses $ 12,155 $ 12,155 $ 13,824 $ 20,783 $ 4,286
============ ============= ============ =========== ===========
</TABLE>
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, or 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.
The following sets forth delinquencies as a percentage of the total
serviced unguaranteed portfolio for the periods indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996
---------------- -------------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 30-59 days $ 20,160 $ 28,174 $ 29,174 $ 8,412
As a % of total serviced unguaranteed
portfolio 4.16 % 5.05 % 3.65 % 3.96 %
Loans past due 60-89 days $ 7,216 $ 8,647 $ 10,009 $ 2,789
As a % of total serviced unguaranteed
portfolio 1.49 % 1.55 % 1.25 % 1.31 %
Loans past due 90+ days $ 31,678 $ 38,109 $ 22,147 $ 6,662
As a % of total serviced unguaranteed
portfolio 6.54 % 6.84 % 2.76 % 3.14 %
Total loans past due $ 59,054 $ 74,930 $ 61,330 $ 17,863
As a % of total serviced unguaranteed
portfolio 12.19 % 13.44 % 7.66 % 8.41 %
</TABLE>
32
<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 INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ 77,435,632 $ 120,860,326 $ 130,917,899 $ 118,585,860 $ 62,726,105 $ 59,219,199
2 $ 77,405,312 $ 120,119,653 $ 169,093,916 $ 118,061,792 $ 62,300,302 $ 57,977,700
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 $ 53,817,889
12 $ 67,149,553 $ 102,142,062 $ 144,556,568 $ 129,029,429 $ 52,813,707
13 $ 65,705,603 $ 98,876,084 $ 140,265,621 $ 125,457,545 $ 51,834,618
14 $ 63,210,889 $ 95,394,444 $ 136,583,138 $ 121,706,895 $ 50,355,268
15 $ 60,052,314 $ 92,501,939 $ 133,252,925 $ 118,983,067 $ 49,261,441
16 $ 58,133,496 $ 89,402,897 $ 129,792,748 $ 116,012,173 $ 48,013,883
17 $ 56,900,372 $ 83,793,933 $ 127,118,396 $ 112,424,165
18 $ 55,154,969 $ 81,637,626 $ 124,262,781 $ 109,695,150
19 $ 50,852,179 $ 79,392,938 $ 119,512,141 $ 107,288,894
20 $ 49,702,926 $ 77,843,648 $ 116,408,786
21 $ 48,629,373 $ 76,319,392 $ 113,506,699
22 $ 45,780,152 $ 74,512,970 $ 108,064,086
23 $ 44,612,888 $ 71,644,155
24 $ 43,845,616 $ 69,074,182
25 $ 42,879,623 $ 66,456,654
26 $ 40,453,030
27 $ 38,939,475
28 $ 38,094,550
Actual Historical Life to
Date Prepayment Speed 23.14% 21.91% 19.73% 17.62% 16.73% 14.55%
DELINQUENCIES >30 DAYS PAST DUE
- --------------------------------------------------------------------------------------------------------------------------------
MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1
- --------------------------------------------------------------------------------------------------------------------------------
1 $ -- $ 515,954 $ 609,201 $ 402,972 $ 44,600 $ 1,466,076
2 $ 1,499,056 $ 1,631,017 $ 2,042,757 $ 2,132,028 $ 1,223,964 $ 3,134,425
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 $ 3,872,739
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 $ 5,701,474
12 $ 9,257,295 $ 14,540,910 $ 21,295,026 $ 18,470,254 $ 5,950,145
13 $ 9,578,031 $ 12,933,959 $ 22,303,472 $ 18,645,129 $ 5,705,994
14 $ 10,757,672 $ 12,674,148 $ 21,746,520 $ 17,059,730 $ 5,287,678
15 $ 9,401,614 $ 14,212,157 $ 23,240,338 $ 15,698,435 $ 6,297,465
16 $ 8,127,303 $ 14,386,886 $ 22,031,312 $ 16,318,099 $ 6,255,440
17 $ 8,227,263 $ 11,723,546 $ 19,672,481 $ 15,292,242
18 $ 8,708,963 $ 11,171,133 $ 18,472,732 $ 15,132,124
19 $ 7,349,210 $ 12,018,899 $ 18,243,184 $ 15,706,290
20 $ 7,217,783 $ 11,810,332 $ 18,119,731
21 $ 7,120,426 $ 11,040,206 $ 18,038,082
22 $ 6,661,879 $ 10,286,947 $ 16,452,727
23 $ 6,511,325 $ 10,414,360
24 $ 6,250,278 $ 8,906,082
25 $ 6,276,717 $ 9,514,340
26 $ 5,442,995
27 $ 4,900,780
28 $ 6,106,097
</TABLE>
Included in the principal balances and delinquency amounts is $6.7
million of real estate acquired through foreclosure at June 30, 1999.
33
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE
- ---------------------------------------------------------------------------------------------------------------------
MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 AVERAGE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 0.00% 0.43% 0.47% 0.34% 0.07% 2.48% 0.63%
2 1.94% 1.36% 1.21% 1.81% 1.96% 5.41% 2.28%
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% 10.59% 13.00%
12 13.79% 14.24% 14.73% 14.31% 11.27% 13.67%
13 14.58% 13.08% 15.90% 14.86% 11.01% 13.89%
14 17.02% 13.29% 15.92% 14.02% 10.50% 14.15%
15 15.66% 15.36% 17.44% 13.19% 12.78% 14.89%
16 13.98% 16.09% 16.97% 14.07% 13.03% 14.83%
17 14.46% 13.99% 15.48% 13.60% 14.38%
18 15.79% 13.68% 14.87% 13.79% 14.53%
19 14.45% 15.14% 15.26% 14.64% 14.87%
20 14.52% 15.17% 15.57% 15.09%
21 14.64% 14.47% 15.89% 15.00%
22 14.55% 13.81% 15.22% 14.53%
23 14.60% 14.54% 14.57%
24 14.26% 12.89% 13.58%
25 14.64% 14.32% 14.48%
26 13.46% 13.46%
27 12.59% 12.59%
28 16.03% 16.03%
</TABLE>
Delinquencies for the 1999-1 securitization are expected to run higher than the
other securitizations due to the nature of the loans securitized in that
transaction. This transaction includes higher-risk loans, including second-lien
loans and loans with higher loan-to-value ratios compared to the company's
previous securitizations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and
long-term sources of debt financing and equity capital. As the result of selling
and securitizing more loans than were originated in the first six months of
1999, the Company experienced a positive cash flow from operating activities of
$26.0 million for the six months ended June 30, 1999. As a result of selling
fewer loans than originated in the first six months of 1998, and incurring
operating expenses in excess of operating income, the Company experienced a
negative cash flow from operating activities of $79.6 million in the six months
ended June 30, 1998. For the year ended December 31, 1998, as a result of
selling its loans for cash in the whole loan market and as a result of selling
more loans than were originated in 1998, the Company experienced a positive cash
flow of $84.3 million 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 attained due to the higher level of cash required to
fund the loans purchased and originated as volume increases. 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, 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 general and administrative and other
operating expenses. In the first six months of 1999, the Company also utilized
$28.1 million of cash to retire a portion of its Senior Notes outstanding, and
may from time to time utilize additional cash for this purpose. The Company's
primary operating sources of cash are (i) cash proceeds of whole-loan mortgage
loan sales and securitizations, (ii) cash payments for 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.
The Company overcollateralizes loans to provide credit enhancement on
the mortgage securitization transactions. The Company determined in the second
quarter of 1998 to conduct whole loan sales for the remainder of 1998 so as to
improve liquidity. Accordingly, the Company did not securitize any mortgage
loans in the last three
34
<PAGE>
quarters of 1998, or in the first quarter of 1999. However, the Company
completed a securitization of seasoned first and second mortgage loans in May
1999, which resulted in an additional liquidity of $33.0 million for the Company
as the result of a portion of these loans being ineligible under the Company's
warehouse line of credit. 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 to increase its wholesale loan production.
The table below summarizes cash flows provided by and used in operating
activities by quarter in 1999 and for the six months ended June 30, 1999 and
1998, and for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
TOTAL FOR TOTAL FOR
THE SIX THE SIX
MONTHS MONTHS
ENDED ENDED YEAR YEAR
2ND QTR 1ST QTR JUNE 30, JUNE 30, ENDED ENDED
1999 1999 1999 1998 1998 1997
--------- -------- ----------- ----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING CASH INCOME:
Servicing fees received and excess
cash flow from securitization trusts $ 3,975 $ 4,334 $ 8,309 $ 4,871 $ 16,548 $ 3,687
Interest received 2,214 3,570 5,784 20,234 36,127 31,716
Cash gain on sale of loans 1,500 1,173 2,673 7,979 1,343 14,153
Cash loan origination fees received 1,507 1,418 2,925 9,842 18,255 31,843
Other cash income 222 528 750 2,603 5,388 1,875
----------- ----------- ----------- ----------- ----------- -----------
Total operating cash income 9,418 11,023 20,441 45,529 77,661 83,274
OPERATING CASH EXPENSES:
Securitization costs (593) -- (593) (851) (851) (3,646)
Securitization hedge losses -- -- -- -- -- (2,125)
Cash operating expenses (9,421) (10,545) (19,966) (53,635) (99,551) (81,594)
Interest paid (3,215) (7,459) (10,674) (18,769) (37,519) (20,980)
Taxes paid (893) (155) (1,048) (1,467) (2,515) (1,581)
----------- ----------- ----------- ----------- ----------- -----------
Total operating cash expenses (14,122) (18,159) (32,281) (74,722) (140,436) (109,926)
CASH FLOW (DEFICIT) DUE TO OPERATING
CASH INCOME AND EXPENSES (4,704) (7,136) (11,840) (29,193) (62,775) (26,652)
CASH REVENUES TO CASH EXPENSES RATIO 67% 61% 63% 61% 55% 76%
OTHER CASH FLOWS:
Cash provided by (used in) other
payables and receivables (11,866) 4,822 (7,044) 639 (12,541) (5,355)
Cash provided by (used in) loans held
for sale 44,646 193 44,839 (51,058) 123,674 (114,282)
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 $ 28,076 $ (2,121) $ 25,955 $ (79,612) $ 84,280 $ (146,289)
=========== =========== =========== =========== =========== ===========
</TABLE>
Certain previously reported amounts have been reclassified to conform
to current year presentation.
Cash and cash equivalents were $36.2 million at June 30, 1999, and
$36.9 million at December 31, 1998. Cash provided by operating activities was
$26.0 million for the six months ended June 30, 1999, compared to cash used in
operating activities of $79.6 million for the six months ended June 30, 1998.
Cash provided by investing activities was $12.5 million for the six months ended
June 30, 1999 compared to $18.2 million for the six months ended June 30, 1998.
Cash used in financing activities was $39.1 million for the six months ended
June 30, 1999 compared to cash provided by financing activities of $97.5 million
for the six months ended June 30, 1998. The increase in cash provided by
operating activities was due principally to more sales and securitizations of
loans than were originated within the six months ended June 30, 1999 compared to
higher originations for the first six months of 1998 with fewer loan sales
during the period. Cash provided by investing activities in both the six months
ended June 30, 1999 and 1998, resulted primarily from principal collections on
loans not sold exceeding the loans originated for investment purposes. The cash
used in financing activities in the six months ended June 30, 1999, resulted
from both the reduction in the Company's revolving warehouse lines of credit and
from the cash used to retire senior unsecured debt. The decrease in the amount
of cash provided by financing activities in the first six months of 1999
compared to 1998 resulted primarily from the net decrease in the Company's
outstanding borrowings under its revolving warehouse lines of credit.
At June 30, 1999, the Company had a $100 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 June 30, 1999 and at December 31, 1998, the Company had aggregate
outstanding borrowings of $0 and $16.7 million, respectively, and aggregate
borrowing availability of $18.5 million and $21.0 million,
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<PAGE>
respectively. The credit facility bears interest at prime rate plus 0.75%. The
credit facility matures on June 30, 2001. 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 payable to investors 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. The Senior Notes constitute unsecured indebtedness of the
Company. The Senior Notes are redeemable at the option of the Company, in whole
or in part, on or after September 15, 2001, at predetermined redemption prices
plus accrued and unpaid interest to the date of redemption. The indenture
pertaining to the Senior Notes contains various restrictive covenants including
limitations on, among other matters, the incurrence of certain types of
additional indebtedness, the payment of dividends and certain other payments,
the ability of the Company's subsidiaries to incur further limitations on their
ability to pay dividends or make other payments to the Company, liens, asset
sales, the issuance of preferred stock by the Company's subsidiaries and
transactions with affiliates. At June 30, 1999, management believes the Company
was in compliance with such restrictive covenants. The Senior Notes are fully
and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and
severally on an unsecured basis (each, a "Guarantee") by certain of the
Company's subsidiaries (the "Subsidiary Guarantors"). With the exception of the
Guarantee by 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 $49.2 million in the first six months of 1999. At June 30, 1999 and
December 31, 1998, $37.4 million and $86.4 million in aggregate principal amount
of Senior Notes were outstanding, respectively.
CII engages in the sale of CII notes to investors. The CII notes are
comprised of investor 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 June 30, 1999 and at December 31,
1998, CII had an aggregate of $121.4 million and $118.6 million of investor
notes outstanding, respectively, bearing a weighted average interest rate of
approximately 7.4%, and an aggregate of $20.0 million and $17.3 million,
respectively, 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.
Total shareholders' equity at June 30, 1999 was $13.1 million, compared
to $5.8 million at December 31, 1998, an increase of $7.3 million. This increase
resulted principally from net earnings of $7.1 million for the six months ended
June 30, 1999. The $7.1 million net earnings resulted from the $21.2 million
extraordinary item from the gain on extinguishment of debt, partially offset by
$14.1 million loss from operations.
The Company's primary objective in 1999 will be to ensure adequate
levels of liquidity as the Company strives to increase loan originations. The
Company anticipates incurring operating losses in 1999. The Company plans to
either sell or securitize loans it originates, retaining only a small portfolio
of loans. Management believes that, based on its present level of liquidity
combined with its borrowing availability under the warehouse line of credit
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.
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 June 30, 1999 and
December 31, 1998, the Company had retained $10.0 million and $19.0 million,
respectively, of second mortgage loans on its balance sheet. For the six months
ended June 30, 1999 and 1998, the Company sold $102.6 million and $293.5 million
of mortgage loans. In addition, for the six months ended June 30, 1998, the
Company sold $26.2 million of small-business loans and $20.6 million of auto
loans. 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 million,
$41.2 million, and $33.1 million, respectively, of the guaranteed
36
<PAGE>
portions of SBA loans. During 1998, the Company sold $20.9 million of auto
loans. No auto loans were sold in 1997 or 1996.
In the first six months of 1998, the Company securitized $92.2 million
of mortgage loans and $1.8 million of small-business loans. In May of 1999, the
Company securitized $59.6 million of seasoned first- and second-lien mortgage
loans. No other securitization transactions were completed in the first six
months of 1999. The Company has utilized securitizations principally to provide
a lower cost of funds, reduce interest rate risk, provide liquidity, and build
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 created by the securitization
transactions. These subordinate residual securities totaled $49.1 million and
$43.9 million, net of allowances, at June 30, 1999 and December 31, 1998,
respectively.
In a mortgage loan securitization, 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 estimated prepayment and
loss rates, and capitalizes these amounts using a discount rate that market
participants would use for similar financial instruments. These capitalized
assets are recorded as residual receivables. The Company believes the
assumptions it has used in past securitizations, adjusted to current market
conditions, are appropriate and reasonable.
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 six 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 table sets forth facts and assumptions used by the
Company in arriving at the valuation of the residual receivables relating to its
mortgage loan securitizations at June 30, 1999:
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4 1998-1 1999-1
------------ ------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding balance of loans securitized $38,094,550 $66,456,654 $108,064,086 $107,288,894 $48,013,883 $57,977,700
Average stated principal balance 58,338 56,947 63,868 63,749 62,681 46,494
Weighted average coupon on loans 10.84% 10.71% 11.08% 10.98% 10.83% 11.09%
Weighted average remaining term to stated
maturity 178 mths 178 mths 181 mths 186 mths 193 mths 206 Mths
Weighted average LTV 77% 73% 75% 75% 76% 83%
Percentage of first mortgage loans 100% 100% 100% 100% 100% 84%
Weighted average pass-through rate to
bondholders 7.51% 7.08% 6.98% 6.73% 6.45% 6.84%
Assumed annual losses 0.60% 0.60% 0.60% 0.60% 0.60% 0.87%
Remaining ramp period for losses 0 mths 0 mths 0 mths 0 mths 0 mths 11 Mths
Assumed cumulative losses as a % of UPB 1.74% 1.72% 1.66% 1.66% 1.65% 2.43%
Annual servicing fee 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Servicing asset 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%
Discount rate applied to cash flow after
Overcollateralization 12% 12% 12% 12% 12% 12%
Prepayment speed:
Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR (1) 30 CPR 30 CPR 30 CPR 30 CPR 30 CPR 24 CPR
Tail CPR (1) 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR 24 CPR
CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths 10 Mths
CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths 11 Mths
CPR tail begins (1) 37/49 mths 37/49 mths 37/49 mths 37/49 mths 37/49 mths 11 Mths
Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185% 0.265%
Initial overcollateralization required (2) 3.25% -- -- -- -- 9.50%
Final overcollateralization required (2) 6.50% 3.75% 3.75% 3.75% 3.75% 13.50%
</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.
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<PAGE>
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").
The Company generally 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.
ACCOUNTING CONSIDERATIONS
In June 1998, the Financial Accounting Standards Board 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, 2000, as amended by SFAS 137. This SFAS
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. Since the Company has no
significant hedging positions outstanding, management estimates that the
implementation of this standard will have no material impact on its financial
statements.
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%.
At June 30, 1999, the Company's valuation allowance against its
deferred tax asset dropped to $19.3 million from $21.7 million at December 31,
1998. The Company's net deferred tax asset was $4.1 million at June 30, 1999 and
December 31, 1998. The Company has decided not to increase the net deferred tax
asset for anticipated benefits from prior NOLs until operating earnings are
reestablished. 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 asset would be realized. Should the
Company deem that the realization of the benefit of the deferred tax asset is
unlikely, then, the asset would need to be written off. The Company had a
federal NOL of approximately $46.3 million at June 30, 1999.
38
<PAGE>
HEDGING ACTIVITIES
The Company's profitability may be directly affected by fluctuations in
interest rates. The Company monitors interest rates, and it may, from time to
time, employ a strategy designed to hedge some of the risks associated with
changes in interest rates; however, 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 despite its hedging activities.
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. There were no significant open hedging positions
at either June 30, 1999 or December 31, 1998.
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 that 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.
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 (both IT and
non-IT) 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 identified some
portions that require remediation or upgrades. The Company has substantially
completed all four phases of its Year 2000 plan for its systems, although some
minor additional work is still on-going. Accordingly, the Company does not
believe that the Year 2000 presents a material exposure.
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<PAGE>
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 and received written representation of their Year 2000 compliance and
continues to monitor their compliance. 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 at this time.
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 $110,000 and is being funded through operating cash flows. To date,
the Company has incurred approximately $97,000 ($82,000 expensed and $15,000
capitalized for new systems and equipment), related to all phases of the Year
2000 project. The total remaining project costs of approximately $13,000 is
attributable to a software upgrade.
RISKS
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner and has substantially
completed all four phases of its Year 2000 plan for its systems, although some
minor additional work is still on-going. Disruptions in the economy generally
resulting from Year 2000 issues could 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 other non-critical applications. These contingency
plans involve, among other actions, manual processes and alternative methods of
processing information using personal computers versus main frame applications,
etc., and adjusting staffing assignments.
ITEM 3. 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 limits. To estimate the impact that changes in interest rates would
have on the Company's earnings, management uses simulation analysis.
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's strategy is to sell or securitize its loans within six
months of production. 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 significant open hedging
positions as of June 30, 1999.
40
<PAGE>
On loans originated for inclusion in securitized pools, the Company,
from time to time, employs a strategy designed to hedge some of the risks
associated with changes in interest rates. However, there were no significant
open hedging positions at June 30, 1999. 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 securitization transaction generally will fix the spread between the interest
rates paid by borrowers and the interest rates paid to investors 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 securitization mortgage pools. An acceleration of
prepayments on loans held in the securitized pools would have a negative impact
on the carrying value of the residual assets. The Company believes there is no
economical way to hedge against this prepayment risk.
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 results 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 the annual dollar
change in comparison to the "base case" simulation. The model assumes an
immediate parallel shift in interest rates.
As a result of the Company's interest rate position, a 100 basis point
immediate increase in interest rates would have a negative impact on projected
net income (loss) of $1.0 million and $652,000, computed as of June 30, 1999 and
December 31, 1998, respectively. A significant portion of this impact relates to
a reduction in the anticipated sale premiums on loans being held for sale. An
immediate reduction of 100 basis points in market rates would result in a
positive (negative) impact on projected net income (loss) of $1.7 million and
($2.4) million as of June 30, 1999 and December 31, 1998, respectively. The most
significant reason for the negative impact of an interest rate drop estimated at
December 31, 1998 is the assumption that prepayment speeds on the securitization
pools would increase from a constant prepayment rate ("CPR") of 30 to a CPR of
35 if market interest rates declined by 100 basis points. This impact would be
partially offset by higher gains from the sale of loans, which is the primary
reason for the positive impact on projected earnings at June 30, 1999 under the
same interest rate scenario. The Company no longer believes, in the absence of
other external factors, that it would experience an increase in prepayment
speeds if market rates declined by 100 basis points due to the "burn-out"
principal. In other words, since the borrowers have already had several
opportunities to refinance because rates have been 100 basis points lower in the
last six months, but have not, the liklihood of the remaining borrowers
prepaying given further interest rate reductions is diminished. A portion of the
impact results from the Company's assumption that it would not experience a
significant benefit from a reduction in the rates paid on investor notes. The
model assumes only a 25 basis points reduction on investor notes assuming a 100
basis points reduction in market rates. The rates offered on the investor notes
have not historically moved with changes in market rates.
The projected dollar impact on 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.
41
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is presently a party to litigation with
TransAmerica Small Business Capital, Inc.
("TransAmerica"), filed in the circuit court of Cook
County, Illinois on May 18, 1999, in which TransAmerica
demands repurchase of, or unspecified money damages
relating to, a $1.1 million commercial loan the Company
sold to TransAmerica in the sale of the Company's small
business unit. As a result of this claim, TransAmerica has
also objected to the release of the scheduled $1.0 million
disbursement due the Company under its asset purchase
agreement dated October 2, 1998 with TransAmerica. Based
on the facts presented, the Company does not believe there
is any obligation on its part to repurchase the loan, nor
is there any liability to TransAmerica for money damages.
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 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The shareholders of the Company voted on the election of
directors and two other proposals at the Annual Meeting of
Shareholders held on May 12, 1999.
<TABLE>
<CAPTION>
1. Election of Directors. Approved.
For Withheld
--- --------
<S> <C> <C>
Clarence B. Bauknight 8,601,997 61,465
Keith B. Giddens 8,600,333 63,129
Tecumseh Hooper, Jr. 8,599,327 64,135
J. Robert Philpott, Jr. 8,600,629 62,833
Porter B. Rose 8,601,997 61,465
John M. Sterling, Jr. 8,601,333 62,129
2. Proposal to amend the Company's 1995 Employee and
Officer Stock Option Plan to increase by 400,000
shares the number of shares authorized for grant to a
total of 1,466,667 shares.
Approved.
For 8,409,445
Against 233,609
Abstained 20,408
3. Proposal to amend the Company's Articles of
Incorporation to effect up to a one-for-four reverse
stock split, providing the Board of Directors
determines to do so. Approved.
For 8,542,183
Against 98,210
Abstained 23,069
</TABLE>
Item 5. Other Information
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 of its intention to delist its stock. The Company
appealed NASDAQ's notice and received an exception and a
modification of the exception. The Company believes it has
42
<PAGE>
met all previous conditions related to the modification of
the exception. The remaining terms of the modified
exception are as follows: on or before August 16, 1999,
the Company must make a public filing with the SEC and
NASDAQ, evidencing a minimum of $11.0 million in net
tangible assets as of June 30, 1999. The filing of this
10-Q completes the remaining terms of the modified
exception.
The Company must continue to demonstrate compliance with
all standard requirements for continued listing on the
NASDAQ National market. No assurance can be given that the
Company will continue to meet the criteria for continued
listing on the NASDAQ National Market.
As of June 30, 1999 the Company's net tangible assets
exceeded the $11.0 million criteria established by NASDAQ.
<TABLE>
<CAPTION>
(In thousands)
---------------
<S> <C>
Total shareholders' equity (per consolidated balance sheets) $ 13,082
Excess of cost over net assets of acquired businesses, net (1,613)
------------
Net tangible assets $ 11,469
============
</TABLE>
As of the date of this filing, there were no significant
events or transactions that would adversely affect the
above calculation.
On July 26, 1999, the Company hired Jonh Crisler as its
new Executive Vice President to oversee its production and
marketing operations. Mr. Crisler has been active in
management positions in the financial services industry
for approximately 19 years. Most recently, Mr. Crisler was
with Advanta Corporation where he served as the Senior
Vice President of Direct Originations and Vice President
of Marketing.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1-- Financial Data Schedule.
b) Reports on Form 8-K
On June 23, 1999, the Company filed a Form 8-K with
respect to the disclosure of its net tangible
assets at May 31, 1999 to comply with the
requirements of NASDAQ.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEGOLD FINANCIAL, INC.
Date: August 9, 1999
By: \s\ John M. Sterling, Jr.
-----------------------------------------
John M. Sterling, Jr.
Chief Executive Officer
Date: August 9, 1999
By: \s\ Kevin J. Mast
-----------------------------------------
Kevin J. Mast
Executive Vice President, Chief Financial
Officer, and Treasurer
44
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000277028
<NAME> HOMEGOLD FINANCIAL, INC.
<MULTIPLIER> 1000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 36,203
<SECURITIES> 0
<RECEIVABLES> 65,303
<ALLOWANCES> 4,842
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 23,674
<DEPRECIATION> 5,018
<TOTAL-ASSETS> 200,734
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 492
<OTHER-SE> 12,590
<TOTAL-LIABILITY-AND-EQUITY> 200,734
<SALES> 0
<TOTAL-REVENUES> 17,478
<CGS> 0
<TOTAL-COSTS> 22,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (349)
<INTEREST-EXPENSE> 8,987
<INCOME-PRETAX> (13,472)
<INCOME-TAX> 620
<INCOME-CONTINUING> (14,096)
<DISCONTINUED> 0
<EXTRAORDINARY> 21,227
<CHANGES> 0
<NET-INCOME> 7,131
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.72
<FN>
<F1>
Unclassified Balance Sheet
</FN>
</TABLE>
