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 SEPTEMBER 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.
<TABLE>
<S> <C>
TITLE OF EACH CLASS: OUTSTANDING AT OCTOBER 31, 1999
- ------------------------------------------------- -----------------------------------
COMMON STOCK, PAR VALUE $0.05 PER SHARE 10,149,629
</TABLE>
1
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements for HomeGold Financial, Inc.
Consolidated Balance Sheets as of
September 30, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the Nine Months Ended
September 30, 1999 and 1998 and for the
Three Months Ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows
for the Nine Months Ended
September 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 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes in Securities 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Submission of Matters to a Vote of Security Holders 46
Item 5. Other Information 46
Item 6. Exhibits and Reports on Form 8-K 47
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- -----------------
(In thousands)
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 13,691 $ 36,913
Restricted cash 5,228 5,100
Loans receivable 63,665 124,740
Less allowance for credit losses on loans (5,737) (6,659)
Less deferred loan fees (852) (2,071)
Plus deferred loan costs 587 888
--------- ---------
Net loans receivable 57,663 116,898
Income taxes receivable 988 900
Accrued interest receivable 1,659 2,613
Other receivables 13,748 12,028
Residual receivable, net 48,666 43,857
Property and equipment, net 18,056 19,665
Real estate acquired through foreclosure 6,998 5,881
Excess of cost over net assets of acquired businesses, net of accumulated 1,590 1,660
amortization of $724,000 in 1999 and $654,000 in 1998
Debt origination costs, net 1,994 4,681
Deferred income tax asset, net 4,151 4,151
Servicing asset 919 940
Other assets 2,009 1,921
--------- ---------
TOTAL ASSETS $ 177,360 $ 257,208
========= =========
</TABLE>
SEE UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
4
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- -----------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) (Audited)
<S> <C> <C>
Liabilities:
Revolving warehouse line of credit $ 3,322 $ 16,736
Investor savings:
Notes payable to investors 124,880 118,586
Subordinated debentures 19,482 17,304
--------- ---------
Total investor savings 144,362 135,890
Senior unsecured debt 12,409 86,650
Other liabilities:
Accounts payable and accrued liabilities 4,655 6,656
Remittances payable 1,533 1,871
Income taxes payable 95 382
Accrued interest payable 442 3,199
--------- ---------
Total other liabilities 6,725 12,108
--------- ---------
Total liabilities 166,818 251,384
Minority interest 16 23
Shareholders' equity:
Common stock, par value $.05 per share - authorized 100,000,000 shares, issued and
outstanding 10,149,629 shares at September 30, 1999 and 9,733,374 shares at December 31, 1998 507 486
Capital in excess of par value 38,979 38,821
Retained earnings (deficit) (28,960) (33,506)
--------- ---------
Total shareholders' equity 10,526 5,801
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 177,360 $ 257,208
========= =========
</TABLE>
SEE UNAUDITED NOTES TO 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 NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ ----------------------------------
1999 1998 1999 1998
--------------- ----------------- ----------------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
REVENUES:
Interest income $ 6,727 $ 29,552 $ 1,771 $ 10,362
Servicing income 7,616 10,198 2,606 2,597
Gain on sale of loans:
Gross gain on sale of loans 4,459 15,821 70 2,529
Loan fees, net 3,089 10,091 716 3,262
------------ -------------- -------------- --------------
Total net gain on sale of loans 7,548 25,912 786 5,791
Other revenues 1,159 3,510 409 1,092
------------ -------------- -------------- --------------
Total revenues 23,050 69,172 5,572 19,842
------------ -------------- -------------- --------------
EXPENSES:
Interest 12,765 28,335 3,778 9,950
Provision for credit losses 1,323 10,579 1,672 3,639
Costs on REO and defaulted loans 2,140 1,697 729 1,300
Fair value write-down of residual receivable 1,631 14,230 856 5,320
General and administrative expenses:
Salaries, wages and employee benefits 15,860 46,864 4,957 12,488
Business development costs 3,757 8,488 1,330 1,953
Other general and administrative expenses 9,716 20,507 2,920 6,371
------------ -------------- -------------- --------------
Total general and administrative expenses 29,333 75,859 9,207 20,812
------------ -------------- -------------- --------------
Total expenses 47,192 130,700 16,242 41,021
------------ -------------- -------------- --------------
Loss before income taxes, minority interest and
extraordinary item (24,142) (61,528) (10,670) (21,179)
Provision for income taxes 675 4,109 55 865
------------ -------------- -------------- --------------
Loss before minority interest and extraordinary (24,817) (65,637) (10,725) (22,044)
item
Minority interest in (income) loss of subsidiaries (7) 13 (3) 11
------------ -------------- -------------- --------------
Loss before extraordinary item (24,824) (65,624) (10,728) (22,033)
Extraordinary item-gain on extinguishment of debt,
net of $0 tax 29,370 7,724 8,143 7,724
------------ -------------- -------------- --------------
NET INCOME (LOSS) $ 4,546 $(57,900) $(2,585) $(14,309)
============ ============== ============== ==============
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Loss before extraordinary item $(2.51) $(6.76) $ (1.07) $(2.26)
Extraordinary item, net of taxes 2.97 .79 .81 .79
------------ -------------- -------------- --------------
Net income (loss) $.46 $(5.97) $(.26) $(1.47)
============ ============== ============== ==============
Basic weighted average shares outstanding 9,897,536 9,714,506 10,070,150 9,733,097
============ ============== ============== ==============
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Loss before extraordinary item $(2.49) $(6.76) $(1.05) $(2.26)
Extraordinary item, net of tax 2.94 .79 .80 .79
------------ -------------- -------------- --------------
Net income (loss) $.45 $(5.97) $ (.25) $(1.47)
============ ============== ============== ==============
Diluted weighted average shares outstanding 9,983,479 9,714,506 10,158,769 9,733,097
============ ============== ============== ==============
</TABLE>
SEE UNAUDITED NOTES TO 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 NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1999 1998
---------------- ----------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,546 $ (57,900)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,065 2,771
Provision for credit losses on loans 1,323 10,579
Gain on retirement of senior unsecured debt (29,370) (7,724)
Loss on real estate acquired through foreclosure 355 --
Fair value write-down of residual receivable 1,631 14,230
Mark to market adjustment on loans held for sale -- 5,300
Loans originated with intent to sell (181,944) (672,604)
Proceeds from loans sold 163,332 548,713
Proceeds from securitization of loans 59,630 92,316
Other 993 2,305
Changes in operating assets and liabilities
decreasing cash (10,267) (7,446)
--------- ---------
Net cash provided by (used in) operating activities $ 12,294 $ (69,460)
--------- ---------
INVESTING ACTIVITIES:
Loans originated or purchased for investment purposes $ (1,815) $(123,748)
Principal collections on loans not sold 16,332 149,492
Proceeds from sale of real estate acquired through foreclosure 6,637 4,325
Proceeds from sale of property and equipment 199 --
Purchase of property and equipment (549) (9,134)
Other (6,686) 1,488
--------- ---------
Net cash provided by investing activities $ 14,118 $ 22,423
--------- ---------
FINANCING ACTIVITIES:
Advances on revolving warehouse lines of credit $ 210,023 $ 333,230
Payments on revolving warehouse lines of credit (223,437) (262,846)
Retirement of senior unsecured debt (44,871) (9,026)
Net increase in notes payable to investors 6,294 4,878
Net increase (decrease) in subordinated debentures 2,178 (1,137)
Proceeds from issuance of common stock 179 215
Other -- (5)
--------- ---------
Net cash provided by (used in) financing activities $ (49,634) $ 65,309
--------- ---------
Net increase (decrease) in cash and cash equivalents $ (23,222) $ 18,272
CASH AND CASH EQUIVALENTS:
Beginning of period 36,913 7,561
--------- ---------
End of period $ 13,691 $ 25,833
========= =========
</TABLE>
SEE UNAUDITED NOTES TO 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.
The consolidated balance sheet as of September 30, 1999, and the
consolidated statements of operations for the nine-month and three-month periods
ended September 30, 1999 and 1998, and the consolidated statements of cash flows
for the nine-month periods ended September 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 audited 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 nine-month periods ended September 30, 1999 and 1998, the
Company paid interest of $15.5 million and $31.3 million, respectively.
For the nine-month periods ended September 30, 1999 and 1998, the
Company paid income taxes of $1.0 million and $2.3 million, respectively.
For the nine-month periods ended September 30, 1999 and 1998, the
Company foreclosed on property in the amount of $3.3 million and $6.7 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 September 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 $12.5 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, which is reflected on the balance sheet as restricted cash.
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 Statement did not change total Stockholders' Equity as
previously reported.
NOTE 5--WAREHOUSE LINE OF CREDIT
The Company had $3.3 million in borrowings outstanding under its
warehouse line of credit at September 30, 1999. At December 31, 1998, the
Company had $16.7 million in outstanding borrowings under its warehouse line 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, and a mortgage on the Company's Pelham Road building. 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 September 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 $25.3 million at September 30, 1999 and $37.7
million at December 31, 1998. Therefore, after considering the outstanding
borrowings under the line of credit, the Company had $22.0 million and $21.0
million, respectively, of additional borrowing availability under this agreement
on September 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.
In the third quarter of 1999, the Company purchased $25.0 million face
amount of its 10 3/4% Senior Notes in the market for a purchase price of $16.1
million or a weighted average of 64.7% of face value. A proportionate share of
the unamortized debt origination costs ($700,000) relating to the issuance of
the Senior Notes was charged against this gain to record a net gain of $8.1
million in the third 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.
9
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 period ended August 21, 1998, SLC recorded a net loss of $3.4
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
nine months ended September 30, 1998, this unit recorded a net loss of $2.8
million.
On December 2, 1998, the Company sold the majority of its asset-based
lending operation to Emergent Asset-Based Lending LLC, an unaffiliated entity.
This transaction substantially 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 nine months ended
September 30, 1998, this unit recorded a net loss of $1.0 million.
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 aggregate principal
amount of its Senior Notes in open market transactions in 1998 for a combined
purchase price of $18.9 million or 49.4% of face value. In the nine months ended
September 30, 1999, the Company purchased $74.2 million in aggregate principal
amount of its Senior Notes in open market transactions for a combined purchase
price of $42.8 million or 57.6% of face value. At September 30, 1999, the
Company had $12.4 million of the Senior Notes outstanding. 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 September 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, with exception to the
warehouse line of credit. 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 September 30, 1999 and December 31,
1998, all of the subsidiary guarantors were wholly-owned by the Company.
10
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Subsidiary Guarantors of the Company's Senior Notes at September
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.
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 September 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, an
unaffiliated entity, on December 2, 1998.
11
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined
Wholly-Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 105 $ 13,585 $ 1 $ -- $ 13,691
Restricted cash 5,228 -- -- -- 5,228
Loans receivable:
Loans receivable -- 63,665 -- -- 63,665
Notes receivable from other affiliates 6,539 24,015 3,020 (33,574) --
--------- --------- --------- --------- ---------
Total loans receivable 6,539 87,680 3,020 (33,574) 63,665
Less allowance for credit losses on loans -- (5,737) -- -- (5,737)
Less deferred loan fees -- (852) -- -- (852)
Plus deferred loan costs -- 587 -- -- 587
--------- --------- --------- --------- ---------
Net loans receivable 6,539 81,678 3,020 (33,574) 57,663
Income tax receivable -- 988 -- -- 988
Accrued interest receivable 42 1,617 -- -- 1,659
Other receivables -- 13,748 -- -- 13,748
Investment in subsidiaries 34,236 -- -- (34,236) --
Residual receivable, net -- 4,621 44,045 -- 48,666
Property and equipment, net -- 18,056 -- -- 18,056
Real estate acquired through foreclosure -- 6,998 -- -- 6,998
Excess of cost over net assets of acquired
businesses, net 39 1,551 -- -- 1,590
Deferred income tax asset, net 3,510 641 -- -- 4,151
Other assets 327 4,595 -- -- 4,922
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 50,026 $ 148,078 $ 47,066 $ (67,810) $ 177,360
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse line of credit $ -- $ 3,322 $ -- $ -- $ 3,322
Investor savings:
Notes payable to investors -- 124,880 -- -- 124,880
Subordinated debentures -- 19,482 -- -- 19,482
--------- --------- --------- --------- ---------
Total investor savings -- 144,362 -- -- 144,362
Senior unsecured debt 12,409 -- -- -- 12,409
Subordinated debt to affiliates -- 6,539 -- (6,539) --
Other liabilities:
Accounts payable and accrued liabilities 1 4,654 -- -- 4,655
Remittances payable -- 1,533 -- -- 1,533
Income taxes payable -- 95 -- -- 95
Accrued interest payable 55 387 -- -- 442
Due to (from) affiliates 27,035 (7,350) 7,350 (27,035) --
--------- --------- --------- --------- ---------
Total other liabilities 27,091 (681) 7,350 (27,035) 6,725
--------- --------- --------- --------- ---------
Total liabilities 39,500 153,542 7,350 (33,574) 166,818
Minority interest -- -- 16 -- 16
Shareholders' equity:
Common stock 507 998 2 (1,000) 507
Capital in excess of par value 38,979 66,041 48,809 (114,850) 38,979
Retained earnings (deficit) 28,960) (72,503) (9,111) 81,614 (28,960)
--------- --------- --------- --------- ---------
Total shareholders' equity 10,526 (5,464) 39,700 (34,236) 10,526
========= ========= ========= ========= =========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,026 148,078 47,066 (67,810) $ 177,360
========= ========= ========= ========= =========
</TABLE>
12
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor 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 acquired through foreclosure -- 5,881 -- -- 5,881
Excess of cost over net assets of acquired 40 1,620 -- -- 1,660
businesses, net
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 line 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
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 3,260 $ 6,519 $ -- $ (3,052) $ 6,727
Servicing income -- 3,794 3,822 -- 7,616
Gain on sale of loans:
Gross gain on sale of loans -- 4,459 -- -- 4,459
Loan fees, net -- 3,089 -- -- 3,089
-------- -------- -------- -------- --------
Total gain on sale of loans -- 7,548 -- -- 7,548
Other revenues 8 1,141 10 -- 1,159
-------- -------- -------- -------- --------
Total revenues 3,268 19,002 3,832 (3,052) 23,050
EXPENSES:
Interest 4,022 11,795 -- (3,052) 12,765
Provision for credit losses -- 1,323 -- -- 1,323
Costs on REO and defaulted loans -- 2,140 -- -- 2,140
Fair market write-down of residual receivable -- 1,362 269 -- 1,631
Salaries, wages and employee benefits -- 15,860 -- -- 15,860
Business development costs -- 3,757 -- -- 3,757
Other general and administrative expenses 356 9,359 1 -- 9,716
-------- -------- -------- -------- --------
Total expenses 4,378 45,596 270 (3,052) 47,192
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings (loss) of subsidiaries (1,110) (26,594) 3,562 -- (24,142)
Earnings (loss) of subsidiaries (23,714) -- -- 23,714 --
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest and extraordinary item (24,824) (26,594) 3,562 23,714 (24,142)
Provision for income taxes -- 675 -- -- 675
-------- -------- -------- -------- --------
Income (loss) before minority interest and
extraordinary item (24,824) (27,269) 3,562 23,714 (24,817)
Minority interest in loss of subsidiaries -- (7) -- -- (7)
Extraordianary item - gain on extinquishment
of debt 29,370 -- -- -- 29,370
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ 4,546 $(27,276) $ 3,562 $ 23,714 $ 4,546
======== ======== ======== ======== ========
</TABLE>
14
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 236 $ 1,711 $ -- $ (176) $ 1,771
Servicing income -- 374 2,232 -- 2,606
Gain on sale of loans:
Gross gain on sale of loans -- 70 -- -- 70
Loan fees, net -- 716 -- -- 716
-------- -------- -------- -------- --------
Total gain on sale of loans -- 786 -- -- 786
Other revenues -- 264 8 137 409
-------- -------- -------- -------- --------
Total revenues 236 3,135 2,240 (39) 5,572
EXPENSES:
Interest 746 3,208 -- (176) 3,778
Provision for credit losses -- 1,672 -- -- 1,672
Costs on REO and defaulted loans -- 729 -- -- 729
Fair market write-down of residual receivable -- 995 (139) -- 856
Salaries, wages and employee benefits -- 4,957 -- -- 4,957
Business development costs -- 1,330 -- -- 1,330
Other general and administrative expenses 57 2,726 -- 137 2,920
-------- -------- -------- -------- --------
Total expenses 803 15,617 (139) (39) 16,242
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest, and equity in undistributed
earnings (loss) of subsidiaries (567) (12,482) 2,379 -- (10,670)
Earnings (loss) of subsidiaries (10,161) 1,178 (1,178) 10,161 --
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest and extraordinary item (10,728) (11,304) 1,201 10,161 (10,670)
Provision for income taxes -- 55 -- -- 55
-------- -------- -------- -------- --------
Income (loss) before minority interest and
extraordinary item (10,728) (11,359) 1,201 10,161 (10,725)
Minority interest in loss of subsidiaries -- (3) -- -- (3)
Extraordinary item - gain on extinquishment of debt 8,143 -- -- -- 8,143
-------- -------- -------- -------- --------
NET INCOME (LOSS) $ (2,585) $(11,362) $ 1,201 $ 10,161 $ (2,585)
======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non Wholly- Combined
Wholly-Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 5,645 $ 29,145 $ 10 $ 1,024 $ (6,272) $ 29,552
Servicing income -- 9,193 -- 2,277 (1,272) 10,198
Gain on sale of loans:
Gross gain on sale of loans -- 14,406 1,415 -- -- 15,821
Loan fee income -- 8,487 1,520 84 -- 10,091
--------- --------- --------- --------- --------- ---------
Total gain on sale of loans -- 22,893 2,935 84 -- 25,912
Other revenues 5 3,284 217 489 (485) 3,510
--------- --------- --------- --------- --------- ---------
Total revenues 5,650 64,515 3,162 3,874 (8,029) 69,172
--------- --------- --------- --------- --------- ---------
EXPENSES:
Interest 11,207 23,412 125 331 (6,740) 28,335
Provision for credit losses 20 10,559 -- -- -- 10,579
Costs on REO and defaulted loans -- 1,698 -- -- -- 1,698
Fair value write-down of residual receivables -- 10,263 -- 3,967 -- 14,230
Salaries, wages and employee benefits 2,635 40,590 3,639 -- -- 46,864
Business development costs 2 8,217 269 -- -- 8,488
Other general and administrative expense (1,911) 19,684 2,552 202 (21) 20,506
--------- --------- --------- --------- --------- ---------
Total expenses 11,953 114,423 6,585 4,500 (6,761) 130,700
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes, minority
interest, equity in undistributed
earnings (loss) of subsidiaries, (6,303) (49,908) (3,423) (626) (1,268) (61,528)
Equity in undistributed earnings of
subsidiaries (57,442) (507) -- -- 57,949 --
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes, minority
interest, and extraordinary item (63,745) (50,415) (3,423) (626) 56,681 (61,528)
Provision (benefit) for income taxes 1,879 2,276 (46) -- -- 4,109
--------- --------- --------- --------- --------- ---------
Income (loss) before minority interest and (65,624) (52,691) (3,377) (626) 56,681 (65,637)
extraordinary item
Minority interest in (earnings) loss of
subsidiaries -- 11 -- 2 -- 13
--------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary iterm (65,624) (52,680) (3,377) (624) 56,681 (65,624)
Extraordinary item-gain on extinguishment of
debt, net of $0 tax 7,724 -- -- -- -- 7,724
--------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (57,900) $ (52,680) $ (3,377) $ (624) $ 56,681 $ (57,900)
========= ========= ========= ========= ========= =========
</TABLE>
16
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Combined Non Wholly- Combined
Wholly-Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Interest income $ 1,815 $ 10,076 $ -- 447 $ (1,976) $ 10,362
Servicing income -- 2,197 -- 400 -- 2,597
Gain on sale of loans:
Gross gain on sale of loans -- 2,469 60 -- -- 2,529
Loan fees, net -- 3,197 46 19 -- 3,262
-------- -------- -------- -------- -------- --------
Total gain on sale of loans -- 5,666 106 19 -- 5,791
Other revenues (2,778) 1,224 24 -- 2,622 1,092
-------- -------- -------- -------- -------- --------
Total revenues (963) 19,163 130 866 646 19,842
-------- -------- -------- -------- -------- --------
EXPENSES:
Interest 3,851 8,100 13 119 (2,133) 9,950
Provision for credit losses (6) 3,645 -- -- -- 3,639
Costs on REO and defaulted loans -- 1,300 -- -- -- 1,300
Fair value write-down of residual receivables -- 4,008 -- 1,312 -- 5,320
Salaries, wages and employee benefits 733 10,874 881 -- -- 12,488
Business development costs -- 1,942 11 -- -- 1,953
Other general and administrative expense (3,840) 6,658 696 78 2,779 6,371
-------- -------- -------- -------- -------- --------
Total expenses 738 36,527 1,601 1,509 646 41,021
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest, equity in undistributed earnings
(loss) of subsidiaries (1,701) (17,364) (1,471) (643) -- (21,179)
Equity in undistributed earnings of
subsidiaries (21,311) -- -- -- 21,311 --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes, minority
interest, and extraordinary item (23,012) (17,364) (1,471) (643) 21,311 (21,179)
Provision (benefit) for income taxes (979) 1,839 5 -- -- 865
-------- -------- -------- -------- -------- --------
Income (loss) before minority interest and
extraordinary item (22,033) (19,203) (1,476) (643) 21,311 (22,044)
Minority interest in (earnings) loss of
subsidiaries -- 11 -- -- -- 11
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item (22,033) (19,192) (1,476) (643) 21,311 (22,033)
Extraordinary item-gain on extinguishment of
debt, net of $0 tax 7,724 -- -- -- -- 7,724
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) $(14,309) $(19,192) $ (1,476) (643) $ 21,311 $(14,309)
========= ======== ======== ======== ======== ========
</TABLE>
17
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,546 (27,276) $ 3,562 $ 23,714 $ 4,546
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Equity in undistributed earnings of
subsidiaries 23,714 -- -- (23,714) --
Depreciation and amortization 1 2,064 -- -- 2,065
Provision for credit losses -- 1,323 -- -- 1,323
Gain on retirement of senior unsecured debt (29,370) -- -- -- (29,370)
Loss on sale of real estate acquired through
foreclosure -- 355 -- -- 355
Fair value write-down of residual receivable -- 1,631 -- -- 1,631
Loans originated with intent to sell -- (181,944) -- -- (181,944)
Proceeds from sold loans -- 163,332 -- -- 163,332
Proceeds from securitization of loans -- 59,630 -- -- 59,630
Other -- 993 -- -- 993
Changes in operating assets and liabilities
increasing (decreasing) cash (1,263) 22,936 (31,940) -- (10,267)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities (2,372) 43,044 (28,378) -- 12,294
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (1,815) -- -- (1,815)
Principal collections on loans not sold -- 16,332 -- -- 16,332
Proceeds from sale of real estate acquired
through foreclosure -- 6,637 -- -- 6,637
Proceeds from sale of property and equipment -- 199 -- -- 199
Purchase of property and equipment -- (549) -- -- (549)
Other -- (6,686) -- -- (6,686)
--------- --------- --------- --------- ---------
Net cash provided by in investing activities -- 14,118 -- -- 14,118
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit -- 210,023 -- -- 210,023
Payments on warehouse lines of credit -- (223,437) -- -- (223,437)
Retirement of senior unsecured debt (44,871) -- -- -- (44,871)
Net increase in notes payable to investors -- 6,294 -- -- 6,294
Net increase in subordinated debentures -- 2,178 -- -- 2,178
Advances (to) from subsidiary 46,973 (76,083) 29,110 -- --
Proceeds from issuance of additional common
stock 179 (2) 2 -- 179
Other -- 3,235 (3,235) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 2,281 (77,792) 26,877 -- (49,634)
--------- --------- --------- --------- ---------
Net decrease in cash and cash equivalents (91) (20,630) (2,501) -- (23,222)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913
--------- --------- --------- --------- ---------
END OF PERIOD $ 105 13,585 $ 1 $ -- $ 13,691
========= ========= ========= ========= =========
</TABLE>
18
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined Combined
Wholly- Non Wholly- Combined
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (57,900) $ (52,678) $ (3,377) $ (624) $ 56,679 $ (57,900)
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Equity in undistributed earnings of
subsidiaries 57,442 507 -- -- (57,949) --
Depreciation and amortization 387 2,181 192 11 -- 2,771
Provision for deferred income taxes 1,968 (1,647) (321) -- -- --
Provision for credit losses 20 10,559 -- -- -- 10,579
Gain on retirement of senior unsecured debt (7,724) -- -- -- -- (7,724)
Fair value write-down of residual receivable -- 11,506 -- 2,724 -- 14,230
Mark to market adjustment on loans held for
sale -- 5,300 -- -- -- 5,300
Loans originated with intent to sell -- (633,166) (39,438) -- -- (672,604)
Principal proceeds from sold loans -- 499,949 48,764 -- -- 548,713
Proceeds from securitization of loans -- 92,316 -- -- -- 92,316
Other -- 2,248 -- 57 -- 2,305
Changes in operating assets and liabilities
increasing (decreasing) cash 5,522 (8,343) (29) (4,596) -- (7,446)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities (285) (71,268) 5,791 (2,428) (1,270) (69,460)
--------- --------- --------- --------- --------- ---------
INVESTING ACTIVITIES:
Loans originated for investment purposes (1,568) (118,180) -- (4,000) -- (123,748)
Principal collections on loans not sold 63 148,179 -- 1,250 -- 149,492
Proceeds from sale of real estate acquired
through foreclosure 418 3,907 -- -- -- 4,325
Purchase of property and equipment (359) (8,601) (174) -- -- (9,134)
Other (233) 411 1,310 -- -- 1,488
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities (1,679) 25,716 1,136 (2,750) -- 22,423
--------- --------- --------- --------- --------- ---------
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 325,427 -- 7,803 -- 333,230
Payments on notes payable to banks -- (262,021) -- (825) -- (262,846)
Retirement of senior unsecured debt (9,026) -- -- -- -- (9,026)
Net increase in notes payable to investors -- 4,878 -- -- -- 4,878
Net (decrease) increase in subordinated
debentures -- (1,137) -- -- -- (1,137)
Advances (to) from subsidiary 10,740 (2,874) (7,190) (676) -- --
Proceeds from issuance of additional common
stock 215 -- -- -- -- 215
Other (5) (19) -- (1,251) 1,270 (5)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 1,924 64,254 (7,190) 5,051 1,270 65,309
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (40) 18,702 (263) (127) -- 18,272
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 713 6,411 263 174 -- 7,561
--------- --------- --------- --------- --------- ---------
END OF PERIOD $ 673 $ 25,113 $ -- $ 47 $ -- $ 25,833
========= ========= ========= ========= ========= =========
</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>
Nine Months Ended Three Months Ended
September 30, September 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 $ (8,208) $(20,920) $ (3,628) $ (7,201)
extraordinary item
State income taxes, net of federal income tax benefit 47 253 4 28
Change in the beginning of period balance of the valuation
allowance for deferred tax assets allocated to income tax expense 121 21,925 2,454 5,514
Nondeductible expenses 16 76 4 21
Amortization of excess cost over net assets of acquired businesses 14 44 5 12
Effect of losses on tax provision 8,010 (1,015) 1,413 2,230
Tax on excess inclusions from REMICS 675 3,641 55 396
Other, net 0 105 (252) (135)
-------- -------- -------- --------
$ 675 $ 4,109 $ 55 $ 865
======== ======== ======== ========
</TABLE>
Provision for income taxes from continuing operations is comprised of
the following:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------ ---------------
1999 1998 1999 1998
-------- ------- ------- -------
(in thousands)
Current
Federal $ 604 $3,725 $ 49 $ 822
State and local 71 384 6 43
------ ------ ------ ------
$ 675 $4,109 $ 55 $ 865
====== ====== ====== ======
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>
September 30, December 31,
1999 1998
-------------- ----------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of property $ (597) $(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 (1,073) (1,513)
Deferred loan costs (203) (333)
Other (11) (11)
------- -------
Total gross deferred tax liabilities $(1,884) $(2,868)
======== ========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
September 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 4,510 5,318
Allowance for credit losses 3,201 3,582
AMT credit carryforward 19 58
Operating loss carryforward 18,991 17,871
Deferred loan fees 321 780
Reserves on real estate owned aquired through foreclosure 114 114
Restructuring reserves for leases 319 640
Other 164 150
--------------- ----------------
Total gross deferred tax assets 27,828 28,691
Less valuation allowance (21,793) (21,672)
Less gross deferred tax liabilities (1,884) (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 in the valuation allowance for the nine months
ended September 30, 1999, and the year ended December 31, 1998, was $0.1 million
and $21.7 million, respectively. The valuation allowance at September 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 $1.8 million in the
nine months ended September 30, 1999 and $5.2 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 make adjustments to these
reserves if deemed necessary in the future.
As of September 30, 1999, the Company has available Federal NOL's
expiring as follows (in thousands):
1999 $ 4,340
2000 3,297
2001 1,911
2002 and after 46,308
---------------
$ 55,856
===============
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 ("Exchange Act"). 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 Exchange Act filing, 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 loan unit in the fourth quarter of 1998. The
$57.9 million loss in the first nine months of 1998 includes both the $110,000
loss from the auto operations and the $2.8 million loss from the small-business
loan unit. The first nine months of 1998 also includes the $3.4 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 75.3%
and general and administrative expenses decreased 61.3%, when comparing the
first nine months of 1999 with the same period for 1998.
22
<PAGE>
During the last three quarters of 1998 and first nine 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. This decision resulted in increasing the Company's liquidity to levels
that allowed the Company both to reduce its revolving warehouse line of credit
substantially from prior year levels as well as to repurchase senior unsecured
debt. 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 resulted in an additional liquidity of $33.0 million
for the Company because a portion of these loans were ineligible for inclusion
in the borrowing base 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 for the remainder of
1999.
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 widened, securitization
as a means of financing became 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 nine months 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, but have increased slightly in the third quarter from the previous
quarter. 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 allowed the Company to weather the market turmoil in late
1998. The premiums investors are willing to pay to purchase the Company's loans
have generally increased slightly, with some fluctuation, during 1999. Premiums
on whole loan sales averaged 1.2% in January 1999 compared to an average of 2.9%
in September 1999, excluding the losses incurred on the sale of some older
seasoned loans. However, there are still significant pressures on margins and
the Company continues to operate in a very competitive environment. The premiums
are down slightly from the second quarter 1999 due to wider spreads in the
capital markets as well as an increased interest rate environment.
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 NINE MONTHS AT AND FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------------- --------------------------------
1999 1998 1998 1997
-------------- -------------- ------------- ---------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
Mortgage loans originated $ 173,485 $ 598,439 $ 659,444 $ 1,176,800
Mortgage loans sold 163,332 485,687 623,675 435,333
Mortgage loans securitized 59,630 90,489 92,173 487,563
Total mortgage loans owned (period end) 53,490 202,201 117,685 231,145
Total serviced mortgage loans (period end) 439,409 673,672 550,304 768,556
Total serviced unguaranteed mortgage loans
(period end) (1) 439,409 673,672 550,304 700,248
Average mortgage loans owned (2) 78,398 268,818 245,915 215,790
Average serviced mortgage loans (2) 495,917 785,824 744,221 443,318
Average serviced unguaranteed mortgage loans (1) 495,917 784,675 743,362 411,549
Average interest earned (2) 8.82 % 10.74 % 10.34 % 10.92 %
SMALL-BUSINESS LOANS:
Small-business loans originated $ -- $ 101,082 $ 122,902 $ 81,018
Small-business loans sold -- 42,935 141,041 41,232
Small-business loans securitized -- 1,827 1,827 24,286
Total small-business loans owned (period end) 10,175 86,975 7,054 45,186
Total serviced small-business loans (period end) 10,175 255,221 7,054 198,876
Total serviced unguaranteed small-business loans
(period end) (3) 10,175 108,636 7,054 78,822
Average small-business loans owned (2) 9,406 63,578 59,598 38,427
Average serviced small-business loans (2) 9,406 227,431 202,446 165,053
Average serviced unguaranteed small-business loans
(2)(3) 9,406 93,729 82,270 61,420
Average interest earned (2) 7.05 % 14.15 % 14.28 % 15.89 %
AUTO LOANS:
Auto loans originated $ -- $ 2,983 $ 2,982 $ 15,703
Auto loans sold -- 20,578 20,898 --
Auto loans securitized -- -- -- --
Total auto loans owned (period end) -- 361 -- 21,284
Total serviced auto loans (period end) -- 361 -- 21,284
Total serviced unguaranteed auto loans (period end) -- 361 -- 21,284
Average auto loans owned (2) -- 6,927 5,340 17,104
Average serviced auto loans (2) -- 6,927 5,340 22,267
Average serviced unguaranteed auto loans (2) -- 6,927 5,340 22,267
Average interest earned (2) -- % 21.22 % 21.28 % 24.05 %
TOTAL LOANS:
Total loans originated $ 173,485 $ 702,504 $ 785,328 $ 1,273,521
Total loans sold 163,332 549,200 785,614 476,565
Total loans securitized 59,630 92,316 94,000 511,849
Total loans receivable (period end) 63,665 289,537 124,739 297,615
Total serviced loans (period end) 449,584 929,254 557,358 988,716
Total serviced unguaranteed loans (period end) 449,584 782,669 557,358 800,354
(1)(3)
Total average loans owned 87,804 339,323 310,853 271,321
Total average serviced loans 505,323 1,020,182 952,007 630,638
Total average serviced unguaranteed loans 505,323 885,331 830,972 495,236
Average interest earned 8.63 % 11.61 % 11.28 % 12.53 %
- ------------------------------
(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, 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 NINE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income 29.2 % 42.7 % 31.8 % 52.2 %
Servicing income 33.1 14.7 46.8 13.1
Gross gain on sale of loans 19.3 22.8 1.3 12.7
Loan fees, net 13.4 14.6 12.8 16.5
Other revenues 5.0 5.2 7.3 5.5
------------- ----------- ----------- -----------
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
============= =========== =========== ===========
Interest expense 55.4 % 41.0 % 67.8 % 50.1 %
Provision for credit losses 5.7 15.3 30.0 18.3
Costs on REO and defaulted loans 9.3 2.4 13.1 6.6
Fair value write-down of residual receivables 7.1 20.6 15.3 26.8
Salaries, wages and employee benefits 68.8 67.8 89.0 62.9
Business development costs 16.3 12.3 23.9 9.9
Other general and administrative expenses 42.1 29.6 52.4 32.1
------------- ----------- ----------- -----------
Total expenses 204.7 189.0 291.5 206.7
Loss before income taxes, minority interest and
extraordinary item (104.7) (89.0) (191.5) (106.7)
Provision for income taxes 2.9 5.9 0.9 4.4
Minority interest in income of subsidiaries (0.1) 0.1 (0.1) 0.1
Extraordinary item-gain on extinguishment of debt, net 127.4 11.1 146.1 38.9
------------- ----------- ----------- -----------
Net income (loss) 19.7 % (83.7) % (46.4) % (72.1) %
============= =========== =========== ===========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
The Company recognized net income of $4.5 million for the nine months
ended September 30, 1999 as compared to a net loss of $57.9 million for the nine
months ended September 30, 1998. Included in the $4.5 million net income for the
first nine months of 1999 is an extraordinary gain of $29.4 million on the
extinguishment of debt. As previously discussed, the operations that were sold
in 1998 are not included in the first nine months of 1999 operating results. The
sale of these operations significantly affects the comparison of the first nine
months of 1999 to the same period in 1998.
Total revenues decreased $46.1 million, or 66.6%, to $23.1 million for
the nine months ended September 30, 1999 from $69.2 million for the nine months
ended September 30, 1998. The reductions in revenues resulted primarily from
$22.9 million less interest income, a decrease of $18.4 million in total net
gain on sale of loans and $2.6 million decline in servicing income.
Interest income decreased $22.9 million, or 77.4%, to $6.7 million for
the nine months ended September 30, 1999 from $29.6 million for the nine months
ended September 30, 1998. The decrease in interest income resulted primarily
from a $251.5 million, or 74.1%, decrease in average loans receivable
outstanding to $87.8 million for the nine months ended September 30, 1999
compared to $339.3 million for the same period in 1998. In addition, the Company
experienced a 298 basis point decline in average yield. The average yield in the
first nine months of 1999 was 8.6% compared to 11.6% in the same period of 1998.
The decrease in average loans receivable outstanding relates in part to the
$54.2 million reduction in average small-business loans outstanding and the $6.9
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 $190.4 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. The reduction in the average yield earned in the nine months ended
September 30, 1999 compared to the first nine months in 1998 resulted in part
from a reduction in the mortgage yield earned due to increased loans on
"non-accrual" status, and in part from a change in the mix of the Company's
total portfolio. In the first nine months of 1999, substantially all of the
Company's loan portfolio was mortgage loans that yielded an average of 8.8%. In
the first nine months of 1998, the Company had a portfolio of small-business
loans that had an average yield of 14.1%, an auto loan portfolio that had an
average yield of 21.2%, and a mortgage loan portfolio that had an average yield
of 10.7%.
25
<PAGE>
Servicing income decreased $2.6 million, or 25.5%, to $7.6 million for
the nine months ended September 30, 1999 from $10.2 million for the same period
in 1998. The reduction was primarily due to a $380.0 million, or 42.9%, decrease
in average serviced loan portfolio. The Company serviced an average of $505.3
million in loans in the first nine months of 1999 compared to an average of
$885.3 million in the first nine months of 1998. The $380.0 million reduction in
average loans serviced resulted largely from a $288.8 million reduction in the
average mortgage loans serviced portfolio, the sale of the small-business loan
portfolio that averaged $93.7 million in the first nine months of 1998, and the
sale of the auto loans that averaged $6.9 million in the first nine months of
1998. The reduction in the average mortgage loans serviced in the first nine
months of 1999 compared to the same period in 1998 resulted from lower loan
origination volume and 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 $11.3 million, or 71.5%, to $4.5
million for the nine months ended September 30, 1999, from $15.8 million for the
nine months ended September 30, 1998. Cash gain on sale of loans decreased $10.3
million, or 79.2%, to $2.7 million for the nine months ended September 30, 1999
from $13.0 million for the nine months ended September 30, 1998, while non-cash
gain decreased $1.1 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 nine months of 1999 compared to the same period in 1998.
In the first nine months of 1999, the Company had mortgage whole loan sales of
$163.3 million and received a net premium of 1.7% compared to small-business and
mortgage loan sales of $528.6 million in the first nine months of 1998 in which
it received a net premium of 2.5%. 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 nine months of 1999
compared to the first nine months of 1998 because of changes in market
conditions. However, premiums received on whole-loan sales have generally been
increasing in 1999, growing from an average of 1.2% in January 1999 to 2.9% in
September 1999, before considering losses incurred on the sale of some older
seasoned loans. The premiums are down slightly from the second quarter 1999 due
to wider spreads in the capital markets as well as an increased interest rate
environment. Loan production has generally been increasing in 1999, growing from
$52.6 million in the first quarter 1999 to $62.5 million in the third quarter
1999.
In March 1998, the Company sold $20.6 million of auto loans at book
value and therefore did not record a gain. In the first nine months of 1998, the
Company securitized $92.3 million of mortgage and small-business loans and
realized $8.1 million of non-cash gains (before considering a mark-to-market
write-down on second mortgage loans), for a gain of 8.8%. The Company also
recorded a non-cash mark-to-market write-down of $5.3 million in the first nine
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 nine months of 1999. The Company realized
$1.7 million of non-cash gains in the nine months ended September 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 nine months of 1999 was
lower than the same period in 1998 due to fewer loans securitized, higher
subordination levels required on the 1999 securitization, and wider spreads to
treasury securities in 1999 on the pass-through rate.
Net loan fees decreased $7.0 million, or 69.3%, to $3.1 million for the
nine months ended September 30, 1999 from $10.1 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 nine months of 1999 compared to the
same period of 1998 as discussed above. The Company charged an average of 4.3%
loan origination fees on its retail loan production in the first nine months of
1999 compared to 4.7% in the comparable period in 1998.
Other revenue decreased $2.3 million, or 65.7%, to $1.2 million for the
nine months ended September 30, 1999 compared to $3.5 million in the first nine
months of 1998. The decrease relates primarily to fewer late charges as a result
of a smaller loan portfolio in the first nine months of 1999 compared to the
first nine months of 1998. Also in the first nine months of 1998, the
small-business unit recorded as other income, an approximately $500,000 increase
in the value of securities owned relating to the commercial mezzanine lending
operation.
Total expenses decreased $83.5 million, or 63.9%, to $47.2 million for
the nine months ended September 30, 1999 from $130.7 million for the same period
in 1998. Total expenses are comprised of interest expenses, provision for credit
losses, costs on real estate owned ("REO") and defaulted loans, 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.
26
<PAGE>
Interest expense decreased $15.5 million, or 54.8%, to $12.8 million
for the nine months ended September 30, 1999 from $28.3 million for the nine
months ended September 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 $74.2 million of
notes in the first nine months of 1999. This decrease was partly offset by the
cost of borrowings that were required to fund the Company's operating losses in
1999 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 credit losses decreased $9.3 million, or 87.7%, to $1.3
million for the nine months ended September 30, 1999 from $10.6 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.
Costs on REO and defaulted loans increased $400,000, or 23.5% to $2.1
million for the nine months ended September 30, 1999 from $1.7 million for the
same period in 1998. This increase is the result of additional forced placed
insurance, attorney fees and taxes paid in 1999 on defaulted loans.
Fair value write-down of residual receivable decreased $12.6 million,
or 88.7%, to $1.6 million for the nine months ended September 30, 1999 from
$14.2 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. Only minimal changes in valuation assumptions were required in the first
nine months of 1999, with the assumed constant prepayment rates ("CPR") changing
from 30% to 28% based on recent trends. The better than anticipated prepayment
speeds in 1999 resulted in an increase in fair value of the residual receivable
of approximately $1.0 million. However, losses on foreclosed properties in the
securitization pools caused the write-down of the residual receivable.
Total general and administrative expense decreased $46.6 million, or
61.4%, to $29.3 million for the nine months ended September 30, 1999, from $75.9
million for the same period in 1998. This resulted primarily because salaries,
wages and employee benefits decreased $31.0 million, or 66.1%, to $15.9 million
for the nine months ended September 30, 1999, from $46.9 million for the same
period in 1998. The Company reduced the number of employees to 385 at September
30, 1999 from 842 at September 30, 1998. In addition, business development costs
declined $4.7 million, or 55.3%, to $3.8 million for the nine month period in
1999 compared to $8.5 million for the same period in 1998. Other general and
administrative expenses also declined $10.8 million, or 52.7%, to $9.7 million
in the nine month period in 1999 compared to $20.5 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. Recent general and administrative
expense reduction initiatives in the third quarter 1999 are expected to result
in lower fourth quarter expenses. Furthermore, the Company is continuing to
evaluate additional cost reductions.
The Company has recorded current tax expense of $700,000 and $4.1
million for the nine months ended September 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 real estate mortgage
investment conduit ("REMIC"), which do not generate excess inclusion income.
In the first nine months of 1999, the Company recorded a $29.4 million
extraordinary gain on the extinguishment of debt related to the purchase of
$74.2 million of its Senior Notes. The purchase price of the Senior Notes was
$42.7 million, or a weighted average of 57.5% of face value. A proportionate
share of the unamortized debt origination cost ($2.1 million) relating to the
issuance of the Senior Notes was charged against this gain. At September 30,
1999 the Company had $12.4 million of Senior Notes outstanding.
27
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
The Company recognized a net loss of $2.6 million for the three months
ended September 30, 1999 as compared to a net loss of $14.3 million for the
three months ended September 30, 1998. Included in the $2.6 million net loss for
the three months ended September 30, 1999 is an extraordinary gain of $8.1
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 $14.2 million, or 71.7%, to $5.6 million for
the three months ended September 30, 1999 from $19.8 million for the three
months ended September 30, 1998. The reductions in revenues resulted primarily
from $8.6 million less interest income, a decrease of $5.0 million in total net
gain on sale of loans and a $700,000 decrease in other revenues.
Interest income decreased $8.6 million, or 82.7%, to $1.8 million for
the three months ended September 30, 1999 from $10.4 million for the three
months ended September 30, 1998. The decrease in interest income resulted
primarily from a $220.1 million, or 76.4%, decrease in average loans receivable
outstanding to $68.0 million for the three months ended September 30, 1999
compared to $288.1 million for the same period in 1998. In addition, the Company
experienced a 385 basis point decline in average yield. The average yield in the
three months ended September 30, 1999 was 10.6% compared to 14.4% in the same
period of 1998. The reduction to yield was due primarily to the impact of
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 $77.6 million reduction in small-business loans that resulted
from the sale of substantially all of the loans in that portfolio. The remaining
$210.5 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 remained flat at $2.6 million for the three months
ended September 30, 1999 compared to the same period in 1998. The Company
serviced an average of $454.6 million in loans in the three months ended
September 30, 1999 compared to an average of $820.8 million in the three months
ended September 30, 1998. The $366.2 million reduction in average loans serviced
resulted from the sale of the small-business loan portfolio that averaged $106.5
million in the three months ended September 30, 1998 and a $268.8 million
reduction in the mortgage loans serviced portfolio. The reduction in the
mortgage loans serviced in the three months ended September 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. While average serviced loans decreased significantly for the three
months ended September 30, 1999 compared to the same period in 1998, servicing
income remained flat due to the excess cash flows received from the
securitization trusts.
Gross gains on sale of loans declined $2.4 million, or 96.0%, to
$70,000 for the three months ended September 30, 1999, from $2.5 million for the
three months ended September 30, 1998. The decrease in cash gains resulted from
a reduction in the amount of loans sold, and lower net premiums received in the
three months ended September 30, 1999 compared to the same period in 1998. In
the three months ended September 30, 1999, the Company had whole loan mortgage
sales of $68.8 million and received a net premium of 1.7%, compared to
small-business and mortgage loan sales of $208.9 million in the three months
ended September 30, 1998 in which it received a net premium of 2.2%. The lower
sales were a result of lower loan production. The lower premiums in the third
quarter 1999 were due to the sale of $4.7 million in older seasoned loans at a
substantial discount. If the loss sales were excluded from the third quarter
1999, average premium earned was 3.0%.
Net loan fees decreased $2.6 million, or 78.8% to $700,000 for the
three months ended September 30, 1999 from $3.3 million for the same period in
1998. The primary reason for lower net loan fees is the reduction in loans that
were sold in the three months ended September 30, 1999 compared to the three
months ended September 30, 1998.
Other revenue decreased $700,000, or 63.6%, to $400,000 for the three
months ended September 30, 1999 compared to $1.1 million in the three months
ended September 30, 1998. The decrease relates partially to fewer late charges
as a result of a smaller loan portfolio in the three months ended September 30,
1999 compared to the three months ended September 30, 1998 and partially to the
sale of the small-business lending operation.
Total expenses decreased $24.8 million, or 60.5%, to $16.2 million for
the three months ended September 30, 1999 from $41.0 million for the same period
in 1998. Total expenses are comprised of interest expenses, provision for credit
losses, costs on REO and defaulted loans, fair value adjustments of residual
receivable, salaries,
28
<PAGE>
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 $6.2 million, or 62.0%, to $3.8 million for
the three months ended September 30, 1999 from $10.0 million for the three
months ended September 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 $25.0 million of
notes in the third quarter of 1999. This decrease was partially offset by the
cost of borrowings that were required to fund the Company's operating losses in
1999.
Provision for credit losses decreased $1.9 million, or 52.8%, to $1.7
million for the three months ended September 30, 1999 from $3.6 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.
Costs on REO and defaulted loans decreased $600,000, or 46.2%, to
$700,000 for the three months ended September 30, 1999 from $1.3 million for the
same period in 1998. The decrease is the result of lower losses on the sale of
REO properties. These decreased losses were partially offset by increases in
attorney fees, force placed insurance and property taxes paid on defaulted
loans.
Fair value write-down of residual receivable decreased $4.4 million, or
83.0%, to $900,000 for the three months ended September 30, 1999 from $5.3
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. Only
minimal changes in valuation assumptions were required for the three months
ended September 30, 1999, with the assumed CPR's changing from 30% to 28% based
on recent trends. The better than anticipated prepayment speeds in 1999 were
offset by write-downs on foreclosed properties in the securitization pools.
Total general and administrative expense decreased $11.6 million, or
55.8%, to $9.2 million for the three months ended September 30, 1999, from $20.8
million for the same period in 1998. This resulted primarily because salaries,
wages and employee benefits decreased $7.5 million, or 60.0%, to $5.0 million
for the three months ended September 30, 1999, from $12.5 million for the same
period in 1998. The Company reduced the number of employees to 385 at September
30, 1999 from 842 at September 30, 1998. In addition, business development costs
decreased $700,000, or 35.0%, to $1.3 million for the three month period ended
September 30, 1999 compared to $2.0 million for the same period in 1998. Other
general and administrative expenses also declined $3.5 million, or 54.7%, to
$2.9 million in the three month period ended September 30, 1999 compared to $6.4
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 $55,000 and $900,000
for the three months ended September 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 September 30, 1999, the Company recorded an
$8.1 million extraordinary gain on the extinguishment of debt related to the
purchase of $25.0 million of its Senior Notes. The purchase price of the Senior
Notes was $16.1 million, or a weighted average of 64.7% of face value. A
proportionate share of the unamortized debt origination cost ($700,000) relating
to the issuance of the Senior Notes was charged against this gain.
29
<PAGE>
FINANCIAL CONDITION
Net loans receivable decreased $59.2 million, or 50.6%, to $57.7
million at September 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 $48.7 million at September 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 $1.6 million to $18.1 million
at September 30, 1999, from $19.7 million at December 31, 1998. This decrease
resulted primarily from depreciation expenses. Real estate acquired in
foreclosure increased $1.1 million to $7.0 million at September 30, 1999, from
$5.9 million at December 31, 1998. This increase resulted primarily from
additional foreclosures on mortgage loans within the period, partially offset by
the sale of foreclosed properties.
The primary sources for funding the Company's receivables comes from
borrowings issued under various credit arrangements (including the warehouse
line of credit, CII notes payable to investors and subordinated debentures, and
the Company's Senior Notes) and the sale or securitization of loans. At
September 30, 1999, the Company had $3.3 million outstanding under its revolving
warehouse line of credit to banks, which compares with $16.7 million at December
31, 1998, for a decrease of $13.4 million. At September 30, 1999, the Company
had $144.4 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 $8.5 million.
The aggregate principal amount of outstanding Senior Notes was $12.4
million at September 30, 1999 compared to $86.6 million on December 31, 1998. In
the nine months ended September 30, 1999, the Company purchased $74.2 million of
its Senior Notes for a purchase price of $42.7 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 September 30, 1999 was $10.5 million,
compared to $5.8 million at December 31, 1998, an increase of $4.7 million. This
increase resulted primarily from net earnings of $4.5 million for the nine
months ended September 30, 1999. The $4.5 million net earnings resulted from the
$29.4 million extraordinary item from the gain on extinguishment of debt,
partially offset by $24.8 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
THE NINE THREE MONTHS AT AND FOR THE YEARS ENDED
MONTHS ENDED ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, -------------------------------
1999 1999 1998 1997
--------------- ---------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for credit losses at beginning of period $ 6,659 $ 4,842 $ 6,528 $ 3,084
Net charge-offs (2,245) (777) (8,791) (5,166)
Provision charged to expense 1,323 1,672 11,905 10,030
Write-down of allowance due to sale of receivables -- -- (2,983) --
Securitization transfers -- -- -- (1,420)
--------------- ---------------- ------------- -------------
Allowance for credit losses at end of the period $ 5,737 $ 5,737 $ 6,659 $ 6,528
=============== ================ ============= =============
</TABLE>
30
<PAGE>
The Company considers its allowance for credit losses at September 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 9.01% at September
30, 1999 and 5.34% at December 31, 1998. The percentage of total serviced
mortgage loans past due 30 days or more declined to 12.54% at September 30, 1999
compared to 13.62% at December 31, 1998. The Company incurred net charge-offs on
retained loans of $2.2 million in the nine months ended September 30, 1999
compared to $6.0 million in net charge-offs on retained loans in the nine months
ended September 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.
31
<PAGE>
The table below summarizes certain information with respect to the
Company's allowance for losses on the securitization residual assets for each of
the periods indicated.
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS
<TABLE>
<CAPTION>
AT AND FOR THE AT AND FOR THE
NINE MONTHS THREE MONTHS AT AND FOR THE YEARS
ENDED ENDED ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1999 1999 1998 1997
----------------- ---------------- ----------- -----------
(IN THOUSANDS)
RESIDUAL RECEIVABLES:
<S> <C> <C> <C> <C>
Allowance for losses at beginning of period $ 7,165 $ 7,313 $ 14,255 $ 1,202
Net charge-offs (33) 106 (147) (1,645)
Provision netted against gain on securitizations 1,267 -- 2,242 13,278
Sale of small-business residual assets -- -- (2,957) --
Mark-to-market adjustment (68) 261 (6,228) --
Loss on sale of securitized REO (924) (273) -- --
Allowance transferred from owned portfolio -- -- -- 1,420
-------- -------- -------- --------
Allowance for losses at the end of the period $ 7,407 $ 7,407 $ 7,165 $ 14,255
======== ======== ======== ========
</TABLE>
The value of the residual receivables retained by the Company would be
impaired to the extent losses on the securitized loans exceed the amount
estimated when determining the residual cash flows.
The table below summarizes the Company's allowance for credit losses
with respect to the Company's total combined serviced portfolio (including both
owned and securitized loan pools) for each of the periods indicated.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON COMBINED SERVICED PORTFOLIO
<TABLE>
<CAPTION>
AT AND FOR AT AND FOR THE
THE NINE THREE MONTHS AT AND FOR THE YEARS ENDED
MONTHS ENDED ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1999 1999 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for credit losses at beginning of period $ 13,824 $ 12,155 $ 20,783 $ 4,286
Write-down of allowance due to sale of loans receivable -- -- (2,983) --
Net charge-offs (2,278) (671) (8,938) (6,811)
Provision charged to expense 1,323 1,672 11,905 10,030
Provision netted against gain on securitizations 1,267 -- 2,242 13,278
Sale of small-business residual asset -- -- (2,957) --
Mark-to-market adjustment (68) 261 (6,228) --
Loss on sale of securitized REO (924) (273) -- --
-------- -------- -------- --------
Allowance for credit losses at the end of the period $ 13,144 $ 13,144 $ 13,824 $ 20,783
======== ======== ======== ========
Allowance as a % of total serviced unguaranteed portfolio 2.92% 2.92% 2.48% 2.60%
Annualized net charge-offs as a % of average serviced
unguaranteed portfolio 0.60% 0.50% 1.08% 1.38%
The total allowance for credit losses as shown on the
balance sheet is as follows:
Allowance for credit losses on loans receivable $ 5,737 $ 5,737 $ 6,659 $ 6,528
Allowance for credit losses on residual receivable 7,407 7,407 7,165 14,255
-------- -------- -------- --------
Total allowance for credit losses $ 13,144 $ 13,144 $ 13,824 $ 20,783
======== ======== ======== ========
</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.
32
<PAGE>
The following sets forth delinquencies as a percentage of the total
serviced mortgage portfolio for the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---------------- ----------------
(Dollars in thousands)
<S> <C> <C>
Loans past due 30-59 days $ 17,574 $ 28,174
As a % of total serviced mortgage portfolio 4.00% 5.12%
Loans past due 60-89 days $ 7,730 $ 8,647
As a % of total serviced mortgage portfolio 1.76% 1.57%
Loans past due 90+ days $ 29,784 $ 38,109
As a % of total serviced mortgage portfolio 6.78% 6.93%
Total loans past due $ 55,088 $ 74,930
As a % of total serviced mortgage portfolio 12.54% 13.62%
</TABLE>
Management monitors securitized pool delinquencies using a static pool analysis
by month by pool balance. 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 $ 57,201,142
4 $ 75,889,160 $ 118,965,905 $ 166,783,489 $ 146,880,279 $ 60,768,433 $ 56,168,578
5 $ 75,395,969 $ 117,238,693 $ 165,608,534 $ 145,775,696 $ 59,347,948 $ 55,351,358
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 $ 46,682,595
18 $ 55,154,969 $ 81,637,626 $ 124,262,781 $ 109,695,150 $ 45,808,180
19 $ 50,852,179 $ 79,392,938 $ 119,512,141 $ 107,288,894 $ 44,422,122
20 $ 49,702,926 $ 77,843,648 $ 116,408,786 $ 104,842,028
21 $ 48,629,373 $ 76,319,392 $ 113,506,699 $ 101,806,498
22 $ 45,780,152 $ 74,512,970 $ 108,064,086 $ 98,013,963
23 $ 44,612,888 $ 71,644,155 $ 104,734,353
24 $ 43,845,616 $ 69,074,182 $ 101,605,131
25 $ 42,879,623 $ 66,456,654 $ 98,057,107
26 $ 40,453,030 $ 63,909,211
27 $ 38,939,475 $ 61,789,775
28 $ 38,094,550 $ 59,776,201
29 $ 37,287,522
30 $ 36,315,115
31 $ 35,921,142
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES > 30 DAYS PAST DUE
- --------------------------------------------------------------------------------------------------------------------------------
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 $ -- $ 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 $ 2,438,937
4 $ 3,760,774 $ 5,399,569 $ 8,546,414 $ 7,290,097 $ 3,872,739 $ 2,434,471
5 $ 5,220,385 $ 7,293,856 $ 12,337,604 $ 10,290,987 $ 3,825,651 $ 2,662,519
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 $ 6,342,927
18 $ 8,708,963 $ 11,171,133 $ 18,472,732 $ 15,132,124 $ 7,150,420
19 $ 7,349,210 $ 12,018,899 $ 18,243,184 $ 15,706,290 $ 6,380,174
20 $ 7,217,783 $ 11,810,332 $ 18,119,731 $ 16,301,760
21 $ 7,120,426 $ 11,040,206 $ 18,038,082 $ 15,464,631
22 $ 6,661,879 $ 10,286,947 $ 16,452,727 $ 14,333,343
23 $ 6,511,325 $ 10,414,360 $ 16,055,129
24 $ 6,250,278 $ 8,906,082 $ 15,924,085
25 $ 6,276,717 $ 9,514,340 $ 15,482,703
26 $ 5,442,995 $ 8,806,693
27 $ 4,900,780 $ 8,262,250
28 $ 6,106,097 $ 8,642,370
29 $ 4,982,511
30 $ 5,346,769
31 $ 5,756,594
</TABLE>
Included in the principal balances and delinquency amounts is $5.6
million of real estate acquired through foreclosure at September 30, 1999.
34
<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% 4.26% 3.24%
4 4.96% 4.54% 5.12% 4.96% 6.37% 4.33% 5.05%
5 6.92% 6.22% 7.45% 7.06% 6.45% 4.81% 6.49%
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% 13.59% 14.22%
18 15.79% 13.68% 14.87% 13.79% 15.61% 14.75%
19 14.45% 15.14% 15.26% 14.64% 14.36% 14.77%
20 14.52% 15.17% 15.57% 15.55% 15.20%
21 14.64% 14.47% 15.89% 15.19% 15.05%
22 14.55% 13.81% 15.22% 14.62% 14.55%
23 14.60% 14.54% 15.33% 14.82%
24 14.26% 12.89% 15.67% 14.27%
25 14.64% 14.32% 15.79% 14.91%
26 13.46% 13.78% 13.62%
27 12.59% 13.37% 12.98%
28 16.03% 14.46% 15.24%
29 13.36% 13.36%
30 14.72% 14.72%
31 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.
35
<PAGE>
The table below sets forth the actual prepayment history experienced by the
Company's mortgage securitization pools since inception.
<TABLE>
<CAPTION>
STATIC POOL ANALYSIS OF PREPAYMENTS
- ------------------------------------------------------------------------------------------------------------------------------
PERIOD 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 AVERAGE (1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0
1 0.0% 1.9% 0.5% 3.6% 3.5% 8.0% 2.5%
2 5.5% 4.7% 2.7% 4.5% 6.9% 20.7% 6.3%
3 3.5% 5.6% 5.2% 5.2% 11.5% 13.3% 6.5%
4 10.8% 3.0% 8.2% 9.3% 13.7% 18.1% 9.3%
5 10.4% 14.4% 5.8% 7.8% 23.8% 14.6% 11.2%
6 10.2% 10.4% 9.2% 9.1% 10.7% 9.7%
7 21.4% 19.1% 12.8% 10.3% 16.0% 15.0%
8 12.5% 12.4% 23.6% 18.7% 16.3% 17.9%
9 12.9% 14.3% 15.6% 23.2% 18.7% 17.3%
10 16.2% 22.9% 17.4% 16.6% 18.7% 18.3%
11 18.2% 24.9% 30.3% 25.7% 19.8% 25.4%
12 26.1% 27.8% 26.1% 20.1% 18.5% 24.2%
13 21.4% 30.7% 28.7% 27.8% 18.0% 26.9%
14 35.9% 33.4% 26.4% 29.6% 27.9% 30.2%
15 44.5% 29.6% 24.8% 22.4% 21.9% 27.9%
16 30.8% 32.1% 26.3% 24.3% 24.1% 27.4%
17 21.1% 53.8% 20.9% 27.1% 27.3% 31.1%
18 29.8% 26.3% 22.2% 24.4% 18.8% 24.3%
19 62.1% 26.8% 35.2% 21.7% 29.6% 34.3%
20 22.4% 19.2% 25.6% 22.3% 22.8%
21 20.0% 19.3% 24.7% 28.5% 24.1%
22 50.4% 23.1% 43.1% 35.3% 37.9%
23 25.1% 36.1% 30.2% 31.2%
24 17.0% 34.0% 28.8% 28.3%
25 21.7% 35.7% 33.4% 31.9%
26 49.2% 35.9% 41.4%
27 36.0% 31.6% 33.3%
28 21.1% 31.3% 27.5%
29 19.7% 19.7%
30 25.5% 25.5%
31 18.7% 18.7%
AVERAGE MONTHLY CPR 23.2% 23.6% 21.1% 19.0% 18.2% 14.9% 22.8%
AVG. CPR AFTER 12 MONTH RAMP 29.9% 31.0% 28.3% 25.8% 23.3% 28.4%
(1) Weighted Average
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and
long-term sources of debt financing and equity capital. As the result of selling
and securitizing more loans than were originated in the first nine months of
1999, the Company experienced a positive cash flow from operating activities of
$12.3 million for the nine months ended September 30, 1999. As a result of
selling fewer loans than originated in the first nine months of 1998, and
incurring operating expenses in excess of operating income, the Company
experienced a negative cash flow from operating activities of $69.5 million in
the nine months ended September 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 nine months of 1999, the Company also
utilized $42.7 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
36
<PAGE>
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 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 because a portion of these loans were ineligible for
inclusion in the borrowing base 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 nine months ended September 30, 1999
and 1998, and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
TOTAL FOR TOTAL FOR
THE NINE THE NINE
MONTHS MONTHS
ENDED ENDED YEARD
3RD QTR 2ND QTR 1ST QTR SEPTEMBER 30, SEPTEMBER 30, ENDED
1999 1999 1999 1999 1998 1998
------------ ----------- ----------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING CASH INCOME:
Servicing fees received and excess
cash flow from securitization
trusts $ 4,044 $ 3,975 $ 4,334 $ 12,353 $ 10,297 $ 16,548
Interest received 1,896 2,214 3,570 7,681 29,603 36,127
Cash gain on sale of loans 1,926 1,500 1,173 4,599 13,035 1,343
Cash loan origination fees received 1,097 1,507 1,418 4,021 17,185 18,255
Other cash income 409 222 528 1,159 3,870 5,388
------------ ------------ ------------ ------------- ------------- ------------
Total operating cash income 9,372 9,418 11,023 29,813 73,990 77,661
OPERATING CASH EXPENSES:
Securitization costs -- (593) -- (593) (851) (851)
Cash operating expenses (8,879) (9,421) (10,545) (28,845) (79,725) (99,551)
Interest paid (4,848) (3,215) (7,459) (15,522) (31,328) (37,519)
Taxes paid (1) (893) (155) (1,049) (2,287) (2,515)
------------ ------------ ------------ ------------- ------------- ------------
Total operating cash expenses (13,728) (14,122) (18,159) (46,009) (114,191) (140,436)
CASH FLOW (DEFICIT) DUE TO OPERATING
CASH INCOME AND EXPENSES (4,356) (4,704) (7,136) (16,196) (40,201) (62,775)
CASH REVENUES TO CASH EXPENSES RATIO 68% 67% 61% 65% 65% 55%
OTHER CASH FLOWS:
Cash provided by (used in) other
payables and receivables (3,603) (11,866) 4,822 (10,647) 2,466 (12,541)
Cash provided by (used in) loans held
for sale (5,703) 44,646 194 39,137 (31,725) 123,674
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 $ (13,662) $ 28,076 $ (2,120) $ 12,294 $ (69,460) $ 84,280
============ ============ ============ ============= ============= ============
</TABLE>
Certain previously reported amounts have been reclassified to conform
to current year presentation.
Cash and cash equivalents were $13.7 million at September 30, 1999, and
$36.9 million at December 31, 1998. Cash provided by operating activities was
$12.3 million for the nine months ended September 30, 1999, compared to cash
used in operating activities of $69.5 million for the nine months ended
September 30, 1998. Cash provided by investing activities was $14.1 million for
the nine months ended September 30, 1999 compared to $22.4 million for the nine
months ended September 30, 1998. Cash used in financing activities was $49.6
million for the nine months ended September 30, 1999 compared to cash provided
by financing activities of $65.3 million for the nine months ended September 30,
1998. The increase in cash provided by operating activities was due principally
to increased sales and securitizations of loans than were originated within the
nine months ended September 30, 1999 compared to higher originations for the
first nine months of 1998 with fewer loan sales during the period. Cash provided
by investing activities in both the nine months ended September 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 nine months ended September 30, 1999, resulted from both the
reduction in the Company's revolving warehouse line 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 nine months of 1999 compared to
1998 resulted
37
<PAGE>
primarily from the net decrease in the Company's outstanding borrowings under
its revolving warehouse line of credit.
At September 30, 1999, the Company had a $100.0 million warehouse line
of credit with CIT Group/Business Credit, Inc. ("CIT") to fund its mortgage loan
originations. Based on the borrowing base limitations contained in the credit
facility at September 30, 1999 and at December 31, 1998, the Company had
aggregate outstanding borrowings of $3.3 million and $16.7 million,
respectively, and aggregate borrowing availability of $22.0 million and $21.0
million, 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 September 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 $74.2 million in the first nine months of 1999. At September 30,
1999 and December 31, 1998, $12.4 million and $86.6 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 September 30, 1999 and at December
31, 1998, CII had an aggregate of $124.9 million and $118.6 million of investor
notes outstanding, respectively, bearing a weighted average interest rate of
approximately 7.6%, and an aggregate of $19.5 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. The CII notes and debentures have original
maturities ranging from one to two years.
Total shareholders' equity at September 30, 1999 was $10.5 million,
compared to $5.8 million at December 31, 1998, an increase of $4.7 million. This
increase resulted principally from net earnings of $4.5 million for the nine
months ended September 30, 1999. The $4.5 million net earnings resulted from the
$29.4 million extraordinary item from the gain on extinguishment of debt,
partially offset by $24.8 million loss from operations.
The Company's primary objective in 1999 and 2000 will continue to be to
ensure adequate levels of liquidity as the Company strives to increase loan
originations, as well as to work towards achieving profitability from
operations. The Company anticipates continuing to incur operating losses
throughout 1999 and into 2000. The Company needs to increase its loan
originations and loan sales substantially without increasing its cost structure
to be able to reduce its operating losses and return to profitability. 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 cash combined with its borrowing availability under the warehouse line of
credit these strategies will provide adequate cash flow to support the 1999 and
2000 operating plan. The Company continually evaluates the need to establish
other sources of capital and will pursue those it considers appropriate based
upon its needs and market conditions. The Company is planning to securitize a
portion of its loan production beginning in the first quarter 2000, and as a
result will increase its borrowings to fund loans during the accumulation period
prior to the completion of the securitization. The Company currently does not
anticipate incurring any significant capital expenditures in 1999 or 2000.
38
<PAGE>
LOAN SALES AND SECURITIZATIONS
The Company sells or securitizes substantially all of its loans. The
Company sells on a whole loan basis a significant amount of its mortgage loans
(servicing released), including substantially all of its mortgage loans secured
by second liens, principally to secure the additional cash flow associated with
the premiums paid in connection with such sales and to eliminate the credit risk
associated with the second lien mortgage loans.
However, no assurance can be given that the second-lien mortgage loans
can be sold. To the extent that the loans are not sold, the Company retains the
risk of loss. At September 30, 1999 and December 31, 1998, the Company had
retained $9.1 million and $19.0 million, respectively, of second mortgage loans
on its balance sheet.
In the first nine months of 1998, the Company securitized $90.5 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 nine
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 $48.7 million and
$43.9 million, net of allowances, at September 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.
39
<PAGE>
The following table sets forth facts and assumptions used by the
Company in arriving at the valuation of the residual receivables relating to its
mortgage loan securitizations at September 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 $35,921,142 $59,776,201 $98,057,107 $98,013,963 $44,422,122 $55,351,358
Average stated principal balance 58,219 56,499 63,140 63,072 62,391 46,319
Weighted average coupon on loans 10.84% 10.67% 11.08% 10.98% 10.82% 11.08%
Weighted average remaining term to stated 176 mths 176 mths 178 mths 184 mths 192 mths 204 mths
maturity
Weighted average LTV 77% 73% 75% 75% 76% 83%
Percentage of first mortgage loans 100% 100% 100% 100% 100% 84.22%
Weighted average pass-through rate to 7.55% 7.12% 7.01% 6.76% 6.58% 6.84%
bondholders
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 8 mths
Assumed cumulative losses as a % of UPB 1.90% 1.87% 1.79% 1.80% 1.79% 2.34%
Annual servicing fee 0.50% 0.50% 0.50% 0.50% 0.50% 0.56%
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 24 HEP
Peak CPR (1) 28 CPR 28 CPR 28 CPR 28 CPR 28 CPR 24 HEP
Tail CPR (1) 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 24 HEP
CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths 24 HEP
CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths 24 HEP
CPR tail begins (1) 37/49 mths 37/49mths 37/49 mths 37/49 mths 37/49 mths 24 HEP
Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185% 0.265%
Initial overcollateralization required (2) 3.25% -- -- -- -- 9.5%
Final overcollateralization required (2) 6.5% 3.75% 3.75% 3.75% 3.75% 13.5%
(1) CPR represents an industry standard of calculating prepayment speeds and
refers to Constant Prepayment Rate. For its first five securitization pools,
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. For the 1999-1 transaction the Company uses a 24 HEP (Home
Equity Prepayment) curve. This curve, developed by Prudential Securities,
ramps to the terminal CPR (in this case, 24%) over ten months and then
remains constant for the life of the pool.
(2) Based on percentage of original principal balance, subject to step-down
provisions after 30 months.
</TABLE>
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.
40
<PAGE>
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 Statement will have no material impact on its financial
statements.
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 Statement did not change total Stockholders' Equity as
previously reported.
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 September 30, 1999, the Company's valuation allowance against its
deferred tax asset increased to $21.8 million from $21.7 million at December 31,
1998. The Company's net deferred tax asset was $4.1 million at September 30,
1999 and December 31, 1998. 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 $55.9 million at September 30, 1999.
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 September 30, 1999 or December 31, 1998.
41
<PAGE>
IMPACT OF INFLATION
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates 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 the three remaining 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 issue presents a material exposure.
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 $130,000 and is being funded through operating cash flows. To date,
the Company has incurred approximately $126,000 ($95,000 expensed and $31,000
capitalized for new systems and equipment), related to all phases of the Year
2000 project. The total remaining project costs of approximately $4,000 is
attributable to the minor additional work.
42
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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 have a material adverse affect on 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 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.
The Company's strategy is to sell or securitize its loans within three
months of production. Because 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 may reduce the gain on loan sales
earned by the Company. There were no significant open hedging positions as of
September 30, 1999.
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.
43
<PAGE>
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 of $1.8 million and $652,000, computed as of September 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 as
well as higher interest expense on the warehouse line of credit. The estimated
impact at September 30, 1999 compared to December 31, 1999 is due partially to
more variable rate debt and less fixed rate debt outstanding, as a result of the
repurchase of Senior Notes in 1999.
An immediate reduction of 100 basis points in market rates would result
in a positive (negative) impact on projected net income of $886,000 and ($2.4)
million as of September 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 September 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 nine months, but have not, the likelihood 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.
44
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PART II. OTHER INFORMATION
45
<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 19, 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. On
October 1, 1999, TransAmerica sent a letter to the Company alleging
additional Indemnifiable Losses of at least $1.0 million relating to
two additional commercial loans the Company sold to TransAmerica in
the sale of the Company's small business unit. As a result of these
claims, TransAmerica has objected to the release of the scheduled
$1.5 million in disbursements of the restricted cash due to 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 these
loans, 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
In connection with the hiring of John Crisler, a new Executive Vice
President, the Company has issued 266,665 shares of restricted stock
at a value of $350,000, based on the closing price of the stock on
July 23, 1999. The stock was issued to the individual, for bonus
incentive opportunities, but the certificates are held by the
Company. The restrictions on the stock will be removed on February
15, following the year of coverage, provided certain performance
goals are met. The Company believes this issuance is exempt from
registration under the Securities Act pursuant to Section 4(2)
thereof.
Each of the four outside directors of the Company (Messrs.
Bauknight, Hooper, Rose and Philpott, collectively, the "Outside
Directors") received a grant dated May 17, 1999 of 7,860 of shares
of the Company's common stock, with a fair market value of $12,000
on the date of grant. The Outside Directors received this grant in
lieu of compensation in the form of options and rights to purchase
restricted shares of the Company's common stock that they normally
receive under the Company's Director Stock Option Plan and the
Company's Restricted Stock Agreement Plan. Under the Director Stock
Option Plan, each Outside Director normally receives on December 15
of each year options covering 666 shares of common stock. Under the
Restricted Stock Agreement Plan, each Outside Director normally
receives an annual grant agreement on or about January 31 of each
year entitling him to purchase common stock with a fair market value
as of grant date of $12,000, at a price of $0.05 per share. The
Company believes these transactions were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Two officers of the Company (Robert S. Davis, Executive Vice
President Administration, and Mark S. Keegan, Executive Vice
President - Quality Management and Group General Counsel) were
terminated in the third quarter 1999 in an effort to reduce overhead
costs of the Company. The responsibilities and duties of these
officers were assigned to other members of management.
46
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.1-- Employment Letter-John Crisler
27.1-- Financial Data Schedule.
b) Reports on Form 8-K
None.
47
<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: November 12, 1999
By: \s\ John M. Sterling, Jr.
-----------------------------------------
John M. Sterling, Jr.
Chief Executive Officer
Date: November 12, 1999
By: \s\ Kevin J. Mast
-----------------------------------------
Kevin J. Mast
Executive Vice President, Chief Financial
Officer, and Treasurer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> HOMEGOLD FINANCIAL, INC.
<MULTIPLIER> 1,000
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