SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended MARCH 31, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________.
COMMISSION FILE NUMBER 0-8909
-----------------------
HOMEGOLD FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SOUTH CAROLINA 57-0513287
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3901 PELHAM ROAD
GREENVILLE, SOUTH CAROLINA 29615
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
864-289-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
TITLE OF EACH CLASS: OUTSTANDING AT APRIL 30, 1999
- ---------------------------------------- ---------------------------------
COMMON STOCK, PAR VALUE $0.05 PER SHARE 9,812,799
1
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements for HomeGold Financial, Inc.
Consolidated Balance Sheets as of
March 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations
for the three months ended
March 31, 1999 and 1998 6
Consolidated Statements of Cash Flows
for the three months ended
March 31, 1999 and 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Submission of Matters to a Vote of Security Holders 36
Item 5. Other Information 36
Item 6. Exhibits and Reports on Form 8-K 37
</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>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(In thousands)
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Cash and cash equivalents $ 16,753 $ 36,913
Restricted cash 5,112 5,100
Loans receivable 115,969 124,740
Less allowance for credit losses on loans (6,183) (6,659)
Less deferred loan fees (1,882) (2,071)
Plus deferred loan costs 861 888
---------- ----------
Net loans receivable 108,765 116,898
Income taxes receivable 900 900
Accrued interest receivable 2,382 2,613
Other receivables 6,522 12,028
Residual receivable, net 42,237 43,857
Property and equipment, net 19,173 19,665
Real estate and personal property acquired through foreclosure 3,200 5,881
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $678,000 in 1999 and $654,000 in 1998 1,636 1,660
Debt origination costs, net 3,335 4,681
Deferred income tax asset, net 4,151 4,151
Servicing asset 877 940
Other assets 2,326 1,921
----------- -------------
TOTAL ASSETS $ 217,369 $ 257,208
=========== =============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
4
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) (Audited)
Liabilities:
<S> <C> <C>
Revolving warehouse line of credit $ 7,491 $ 16,736
Investor savings:
Notes payable to investors 117,043 118,586
Subordinated debentures 18,425 17,304
------------- -------------
Total investor savings 135,468 135,890
Senior unsecured debt 51,300 86,650
Other liabilities:
Accounts payable and accrued liabilities 5,216 6,656
Remittances payable 1,766 1,871
Income taxes payable 676 382
Accrued interest payable 539 3,199
------------- -------------
Total other liabilities 8,197 12,108
------------- -------------
Total liabilities 202,456 251,384
Minority interest 21 23
Shareholders' equity:
Common stock, par value $.05 per share - authorized 100,000,000
shares issued and outstanding 9,811,599 shares at March 31, 1999
and 9,733,374 shares at December 31, 1998 491 486
Capital in excess of par value 38,916 38,821
Retained earnings (deficit) (24,515) (33,506)
------------- -------------
Total shareholders' equity 14,892 5,801
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 217,369 $ 257,208
============= =============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
5
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
------------- -------------
(In thousands, except share data)
REVENUES:
<S> <C> <C>
Interest income $ 3,338 $ 8,673
Servicing income 2,402 4,222
Gain on sale of loans:
Gross gain on sale of loans 1,173 6,517
Loan fees, net 957 3,602
------------- -------------
Total net gain on sale of loans 2,130 10,119
Other revenues 396 1,540
------------- -------------
Total revenues 8,266 24,554
------------- -------------
EXPENSES:
Interest 4,798 8,432
Provision for credit losses 81 4,829
Fair value write-down (write-up) of residual
receivable (53) 1,580
Salaries, wages and employee benefits 5,671 18,272
Business development costs 1,190 3,479
Other general and administrative expenses 4,081 7,902
------------- -------------
Total expenses 15,768 44,494
------------- -------------
Loss before income taxes, minority interest,
and extraordinary item (7,502) (19,940)
Provision for income taxes 450 679
------------- -------------
Loss before minority interest and
extraordinary item (7,952) (20,619)
Minority interest in loss of subsidiaries 3 4
------------- -------------
Loss before extraordinary item (7,949) (20,615)
Extraordinary item-gain on extinguishment of debt,
net of $0 tax 16,946 --
------------- -------------
NET INCOME (LOSS) $ 8,997 $ (20,615)
============= =============
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Loss before extraordinary item $ (0.81) $ (2.12)
Extraordinary item, net of taxes 1.73 --
------------- -------------
Net income (loss) $ 0.92 $ (2.12)
============= =============
Basic weighted average shares outstanding 9,792,174 9,701,993
============= =============
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Loss before extraordinary item $ (0.81) $ (2.12)
Extraordinary item, net of tax 1.73 --
------------- -------------
Net income (loss) $ 0.92 $ (2.12)
============= =============
Diluted weighted average shares outstanding 9,803,089 9,701,993
============= =============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
6
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
---------------------------------------
1999 1998
---------------- ----------------
(In thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 8,997 $ (20,615)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 693 900
Provision for credit losses on loans 81 4,829
Gain on retirement of senior unsecured debt (16,946) --
Loss on sale of real estate acquired through
foreclosure 289 --
Fair value writedown (write-up) of
residual receivable (53) 1,580
Mark to market adjustment on loans held for sale -- 5,000
Loans originated with intent to sell (56,963) (258,714)
Proceeds from loans sold 57,156 98,864
Proceeds from securitization of loans -- 93,817
Other 127 564
Changes in operating assets and
liabilities increasing (decreasing) cash 4,498 (6,383)
---------------- -------------
Net cash used in operating activities $ (2,121) $ (80,158)
================ =============
INVESTING ACTIVITIES:
Loans originated for investment purposes $ (136) $ (39,809)
Principal collections on loans not sold 7,679 57,979
Proceeds from sale of real estate and personal
property acquired through foreclosure 2,548 1,530
Proceeds from sale of property and equipment 31 16
Purchase of property and equipment (190) (1,344)
Other 7 (91)
---------------- -------------
Net cash provided by investing activities $ 9,939 $ 18,281
================ =============
FINANCING ACTIVITIES:
Advances on revolving warehouse lines of credit $ 67,732 $ 423,172
Payments on revolving warehouse lines of credit (76,977) (371,166)
Retirement of senior unsecured debt (18,404) --
Net increase (decrease) in notes payable to
investors (1,543) 7,444
Net increase in subordinated debentures 1,121 784
Proceeds from issuance of common stock 99 131
Other (6) (6)
---------------- -------------
Net cash provided by (used in) financing
activities $ (27,978) $ 60,359
================ =============
Net decrease in cash and cash equivalents $ (20,160) $ (1,518)
CASH AND CASH EQUIVALENTS:
Beginning of period 36,913 7,561
---------------- -------------
End of period $ 16,753 $ 6,043
================ =============
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL
PART OF THESE STATEMENTS.
7
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PREPARATION
HomeGold Financial, Inc. (referred to herein sometimes as the "Company"
and "HGFN") states that the accompanying consolidated financial statements are
prepared in accordance with the Securities and Exchange Commission's rules
regarding interim financial statements, and therefore do not contain all
disclosures required by generally accepted accounting principles for annual
financial statements. Reference should be made to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, including the footnotes thereto. Certain previously
reported amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on net operations or shareholders' equity
as previously reported.
The consolidated balance sheet as of March 31, 1999, and the
consolidated statements of operations for the three-month periods ended March
31, 1999 and 1998, and the consolidated statements of cash flows for the
three-month periods ended March 31, 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.
NOTE 2--CASH FLOW INFORMATION
For the three-month periods ended March 31, 1999 and 1998, the Company
paid interest of $7.5 million and $11.5 million, respectively.
For the three-month periods ended March 31, 1999 and 1998, the Company
paid income taxes of $155,000 and $187,000, respectively.
For the three-month periods ended March 31, 1999 and 1998, the Company
foreclosed on property in the amount of $1.8 million and $501,000, respectively.
NOTE 3--CASH AND CASH EQUIVALENTS
The Company maintains its primary checking accounts with two principal
banks and makes overnight investments in reverse repurchase agreements with
those banks. The amounts maintained in the checking accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At March 31,
1999, the amounts maintained in overnight investments in reverse repurchase
agreements, which are not insured by the FDIC, totaled approximately $16.2
million. The investments were secured by U.S. Government securities pledged by
the banks.
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. On February 26, 1999, the Company received notification of a claim from
the acquiror, TransAmerica Small Business Capital, Inc. ("TransAmerica") for the
Company to repurchase a $1.1 million loan from TransAmerica pursuant to the
asset purchase agreement dated October 2, 1998. TransAmerica is seeking to
recover the loan amount from the Company's $5.1 million hold back that is being
maintained by the trustee. Based upon the facts presented, the Company does not
believe there is any obligation to repurchase the loan.
8
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1999, the Company adopted the provisions of SFAS
No. 134 "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise". This statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
The adoption of this Standard did not change total Stockholders' Equity as
previously reported.
NOTE 5--WAREHOUSE LINE OF CREDIT
The Company had $7.5 million and $16.7 million in outstanding warehouse
lines of credit at March 31, 1999 and December 31, 1998 respectively.
Under the terms of the revolving credit agreement, HomeGold, Inc.
("HGI") and Carolina Investors, Inc. ("CII"), both wholly-owned subsidiaries of
HGFN, may collectively borrow up to a maximum of $100.0 million with interest at
the prime rate plus 0.75%. This borrowing is collateralized by mortgage loan
receivables. The agreement requires, among other matters, minimum availability
of $20.0 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 March 31, 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 $20.0 million minimum availability requirements would have
allowed a maximum borrowing level based on eligible collateral of $29.0 million
at March 31, 1999 and $37.8 million at December 31, 1998. Therefore, $21.5
million and $21.0 million were available under this agreement on March 31, 1999
and December 31, 1998, respectively.
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 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. 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 these financial products.
The Company completed the sale of substantially all of the assets
related to its auto loan operation for book value on March 19, 1998, to
TranSouth Financial Corporation, a subsidiary of Associates Financial Services
Company, Inc. This sale provided the Company with cash proceeds of approximately
$20.4 million. No significant gain or loss was recognized on this transaction.
The Company no longer originates auto loans. Prior to the asset sale, this
product line recorded a net loss of approximately $110,000 for the period ended
March 19, 1998.
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 three months ended March 31, 1998, SLC recorded a net loss of
$856,000.
9
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 three months
ended March 31, 1998, this unit recorded a net loss of $228,000.
On December 2, 1998, the Company sold the majority of its asset-based
lending operation to Emergent Asset-Based Lending LLC, a Maryland Limited
Liability Company. This transaction completed the disposition of all
non-mortgage-related activities of the Company. The sale resulted in a pre-tax
loss of $755,000. The Company received a note receivable of $2.2 million payable
over two years at an interest rate of prime plus 1%. For the three months ended
March 31, 1998, this unit recorded a net loss of $355,000.
NOTE 8--SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS
In September 1997, the Company sold $125.0 million in aggregate
principal amount of Senior Notes. The Senior Notes constitute unsecured
indebtedness of the Company. The Senior Notes mature on September 15, 2004, with
interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at
the option of the Company, in whole or in part, on or after September 15, 2001,
at predetermined redemption prices plus accrued and unpaid interest to the date
of redemption. The Company purchased $38.4 million in 1998, and in the three
months ended March 31,1999, the Company purchased $35.3 million in aggregate
principal amount of its Senior Notes in open market transactions for a combined
purchase price of $36.2 million or 49% of face value. The Company may, from time
to time, purchase more of its Senior Notes depending on its cash needs, market
conditions, and other factors. The indenture pertaining to the Senior Notes
contains various restrictive covenants including limitations on, among other
things, the incurrence of certain types of additional indebtedness, the payment
of dividends and certain other payments, the ability of the Company's
subsidiaries to incur further limitations on their ability to pay dividends or
make other payments to the Company, liens, asset sales, the issuance of
preferred stock by the Company's subsidiaries and transactions with affiliates.
At March 31, 1999, management believes the Company was in compliance with such
restrictive covenants. The Senior Notes are fully and unconditionally guaranteed
(the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each,
a "Guarantee") by certain of the Company's subsidiaries listed below. With the
exception of the Guarantee by the Company's subsidiary CII, the Subsidiary
Guarantees rank pari passu in right of payment with all existing and future
unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of
payment to all existing and future subordinated indebtedness of such Guarantors.
All existing debt of all subsidiaries other than CII is currently considered to
be subordinated to the Senior Notes. The Guarantee by CII is equal in priority
to CII's notes payable to investors and is senior to CII's subordinated
debentures.
The Company has included consolidating condensed financial data of the
combined subsidiaries of the Company in these financial statements. The Company
believes that providing the condensed consolidating information is of material
interest to investors in the Senior Notes and has not presented separate
financial statements for each of the wholly-owned Subsidiary Guarantors, because
it was deemed that such financial statements would not provide investors with
any material additional information. At both March 31, 1999 and December 31,
1998, all of the subsidiary guarantors were wholly-owned by the Company.
The Subsidiary Guarantors of the Company's Senior Notes at March 31,
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.
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.
10
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 1999 and December 31, 1998, the Subsidiary Guarantors
conduct all of the Company's operations, other than the investment of certain
residual receivables through its special purpose securitization subsidiaries.
Prior to March 1998, The Loan Pro$, Inc. (an 80% owned subsidiary of the
Company) and Premier Financial Services, Inc. (the Company's auto loan units)
were guarantors of this indebtedness, but their guarantees terminated when
substantially all of the assets of the auto loan units were sold to TranSouth
Financial Corporation, a subsidiary of Associates Financial Services Company,
Inc., in March 1998.
Prior to August 21, 1998, SLC (an 80% owned subsidiary of the Company)
and Sterling Lending Insurance Agency, Inc. (a 100% owned subsidiary of SLC)
were also guarantors of this indebtedness, but their guarantees terminated when
they were sold to First National Security Corporation of Beaumont, Texas, in
August 1998. Therefore the operations of SLC (a non-wholly-owned guarantor
subsidiary) are included in the consolidated statements of operations for the
respective periods prior to August 21, 1998.
The majority of the assets of Emergent Business Capital, Inc., Emergent
Commercial Mortgage, Inc., Emergent Business Capital Equity Group, Inc. and
Reedy River Ventures Limited Partnership were sold to Transamerica Business
Credit Corporation on November 13, 1998. Accordingly, the guarantees of the
first three of these companies were terminated upon consummation of that sale.
Reedy River Ventures Limited Partnership was not a Subsidiary Guarantor.
A substantial majority of the assets of Emergent Business Capital Asset
Based Lending, Inc. were sold to Emergent Asset-Based Lending LLC, a Maryland
Limited Liability Company, on December 2, 1998.
11
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
MARCH 31, 1999
(Unaudited)
(In thousands)
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 261 $ 16,491 $ 1 $ -- $ 16,753
Restricted cash 5,112 -- -- -- 5,112
Loans receivable:
Loans receivable -- 115,969 -- -- 115,969
Notes receivable from other affiliates 36,191 100,134 2 (136,327) --
--------- ----------- ---------- ----------- ----------
Total loans receivable 36,191 216,103 2 (136,327) 115,969
Less allowance for credit losses on
loans -- (6,183) -- -- (6,183)
Less deferred loan fees -- (1,882) -- -- (1,882)
Plus deferred loan costs -- 861 -- -- 861
--------- ----------- ---------- ----------- ----------
Net loans receivable 36,191 208,899 2 (136,327) 108,765
Income tax receivable -- 900 -- -- 900
Accrued interest receivable 38 2,344 -- -- 2,382
Other receivables -- 6,521 -- -- 6,521
Investment in subsidiaries 19,983 -- -- (19,983) --
Residual receivable, net -- 30,737 11,500 -- 42,237
Property and equipment, net -- 19,173 -- -- 19,173
Real estate and personal property
acquired through foreclosure -- 3,200 -- -- 3,200
Excess of cost over net assets of
acquired businesses, net 39 1,597 -- -- 1,636
Deferred income tax asset, net 3,510 641 -- -- 4,151
Other assets 1,489 5,050 -- -- 6,539
--------- ----------- ---------- ----------- ----------
TOTAL ASSETS $ 66,623 $ 295,553 $ 11,503 $ (156,310) $ 217,369
========= =========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 7,491 $ -- $ -- $ 7,491
Investor savings:
Notes payable to investors -- 117,043 -- -- 117,043
Subordinated debentures -- 18,425 -- -- 18,425
--------- ----------- ---------- ----------- ----------
Total investor savings -- 135,468 -- -- 135,468
Senior unsecured debt 51,300 -- -- -- 51,300
Subordinated debt to affiliates -- 136,327 -- (136,327) --
Other liabilities:
Accounts payable and accrued
liabilities -- 5,214 2 -- 5,216
Remittances payable -- 1,766 -- -- 1,766
Income taxes payable 201 475 -- -- 676
Accrued interest payable 230 309 -- -- 539
Due to (from) affiliates -- (7,049) 7,049 -- --
--------- ----------- ---------- ----------- ----------
Total other liabilities 431 715 7,051 -- 8,197
--------- ----------- ---------- ----------- ----------
Total liabilities 51,731 280,001 7,051 (136,327) 202,456
Minority interest -- -- 21 -- 21
Shareholders' equity:
Common stock 491 999 1 (1,000) 491
Capital in excess of par value 38,916 69,677 15,173 (84,850) 38,916
Retained earnings (deficit) (24,515) (55,124) (10,743) 65,867 (24,515)
--------- ----------- ---------- ----------- ----------
Total shareholders' equity 14,892 15,552 4,431 (19,983) 14,892
--------- ----------- ---------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 66,623 $ 295,553 $ 11,503 $ (156,310) $ 217,369
========= =========== ========== =========== ==========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
(Unaudited)
(In thousands)
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
--------- ----------- ------------- ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 196 $ 34,215 $ 2,502 $ -- $ 36,913
Restricted cash 5,100 -- -- -- 5,100
Loans receivable:
Loans receivable -- 124,740 -- -- 124,740
Notes receivable from affiliates 48,876 -- 3 (48,879) --
--------- ----------- ---------- ----------- ----------
Total loans receivable 48,876 124,740 3 (48,879) 124,740
Less allowance for credit losses on
loans -- (6,659) -- -- (6,659)
Less deferred loan fees -- (2,071) -- -- (2,071)
Plus deferred loan costs -- 888 -- -- 888
--------- ----------- ---------- ----------- ----------
Net loans receivable 48,876 116,898 3 (48,879) 116,898
Income tax -- 900 -- -- 900
Accrued interest receivable 21 2,592 -- -- 2,613
Other receivables 4 11,126 898 -- 12,028
Investment in subsidiaries 35,550 -- -- (35,550) --
Residual receivable, net -- 31,752 12,105 -- 43,857
Property and equipment, net -- 19,665 -- -- 19,665
Real estate and personal property
acquired through foreclosure -- 5,881 -- -- 5,881
Excess of cost over net assets of
acquired businesses, net 40 1,620 -- -- 1,660
Deferred income tax asset, net 3,510 641 -- -- 4,151
Other assets 2,696 4,846 -- -- 7,542
--------- ----------- ---------- ----------- ----------
TOTAL ASSETS $ 95,993 $ 230,136 $ 15,508 $ (84,429) $ 257,208
========= =========== ========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving warehouse lines of credit $ -- $ 16,736 $ -- $ -- $ 16,736
Investor savings:
Notes payable to investors -- 118,586 -- -- 118,586
Subordinated debentures -- 17,304 -- -- 17,304
--------- ----------- ---------- ----------- ----------
Total investor savings -- 135,890 -- -- 135,890
Senior unsecured debt 86,650 -- -- -- 86,650
Subordinated debt to affiliates -- 48,879 -- (48,879) --
Other liabilities:
Accounts payable and accrued
liabilities 624 6,032 -- -- 6,656
Remittances payable -- 1,871 -- -- 1,871
Income taxes payable 201 181 -- -- 382
Accrued interest payable 2,717 482 -- -- 3,199
Due to (from) affiliates -- (7,947) 7,947 -- --
--------- ----------- ---------- ----------- ----------
Total other liabilities 3,542 619 7,947 -- 12,108
Total liabilities 90,192 202,124 7,947 (48,879) 251,384
Minority interest -- -- 23 -- 23
Shareholders' equity:
Common stock 486 4,091 1 (4,092) 486
Capital in excess of par value 38,821 71,683 17,675 (89,358) 38,821
Retained earnings (deficit) (33,506) (47,762) (10,138) 57,900 (33,506)
------- ----------- -------- --------- --------
Total shareholders' equity 5,801 28,012 7,538 (35,550) 5,801
--------- ----------- ---------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 95,993 $ 230,136 $ 15,508 $ (84,429) $ 257,208
========= =========== ========== =========== ==========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
(In thousands)
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------- ----------- -----------
REVENUES:
<S> <C> <C> <C> <C> <C>
Interest income $ 2,187 $ 5,198 $ -- $ (4,047) $ 3,338
Servicing income -- 1,902 500 -- 2,402
Gain on sale of loans:
Gross gain on sale of loans -- 1,173 -- -- 1,173
Loan fees, net -- 957 -- -- 957
----------- ------------ ---------- ----------- -----------
Total gain on sale of loans -- 2,130 -- -- 2,130
Other revenues 7 470 -- (81) 396
----------- ------------ ---------- ----------- -----------
Total revenues 2,194 9,700 500 (4,128) 8,266
----------- ------------ ---------- ----------- -----------
EXPENSES:
Interest 2,004 6,841 -- (4,047) 4,798
Provision for credit losses -- 81 -- -- 81
Fair value write-down (write-up) of
residual receivable -- 60 (113) -- (53)
Salaries, wages and employee benefits -- 5,671 -- -- 5,671
Business development costs -- 1,190 -- -- 1,190
Other general and administrative
expenses 177 3,985 -- (81) 4,081
-------- ------------ -------- -------- --------
Total expenses 2,181 17,828 (113) (4,128) 15,768
----------- ------------ ---------- ----------- -----------
Income (loss) before income taxes,
minority interest, and equity
in undistributed earnings (loss)
of subsidiaries 13 (8,128) 613 -- (7,502)
Earnings (loss) of subsidiaries (7,962) 613 -- 7,349 --
----------- ------------ ---------- ----------- -----------
Income (loss) before income taxes and
minority interest (7,949) (7,515) 613 7,349 (7,502)
Provision for income taxes -- 450 -- -- 450
-------- --------- -------- -------- --------
Income (loss) before minority interest
and extraordinary item (7,949) (7,965) 613 7,349 (7,952)
Minority interest in loss of
subsidiaries -- -- 3 -- 3
----------- ------------ ---------- ----------- -----------
Income (loss) before extraordinary item (7,949) (7,965) 616 7,349 (7,949)
Extraordinary item-gain on extinguishment
of debt, net of $0 tax 16,946 -- -- -- 16,946
----------- ------------ ---------- ----------- -----------
NET INCOME (LOSS) $ 8,997 $ (7,965) $ 616 $ 7,349 $ 8,997
=========== ============ ========== =========== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
(In thousands)
Combined
Combined Non
Wholly-Owned Wholly-Owned Combined
Parent Guarantor Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------- ------------ ------------
REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 2,061 $ 8,938 $ 10 $ 265 $ (2,601) $ 8,673
Servicing income -- 2,961 -- 1,261 -- 4,222
Gain on sale of loans:
Gross gain on sale of loans -- 5,725 792 -- -- 6,517
Loan fees, net -- 2,974 594 34 -- 3,602
---------- ------------ ---------- ----------- ---------- -----------
Total gain on sale of loans -- 8,699 1,386 34 -- 10,119
Other revenues 4 1,167 127 402 (160) 1,540
---------- ------------ ---------- ----------- ---------- -----------
Total revenues 2,065 21,765 1,523 1,962 (2,761) 24,554
EXPENSES:
Interest 3,659 7,309 80 139 (2,755) 8,432
Provision for credit losses -- 4,829 -- -- -- 4,829
Fair market write-down of residual
receivable -- 773 -- 807 -- 1,580
Salaries, wages and employee
benefits 1,233 15,756 1,283 -- -- 18,272
Business development costs 2 3,378 99 -- -- 3,479
Other general and administrative
expenses 428 6,530 879 72 (7) 7,902
-------- ------------ ---------- -------- -------- --------
Total expenses 5,322 38,575 2,341 1,018 (2,762) 44,494
---------- ------------ ---------- ----------- ---------- -----------
Income (loss) before income taxes,
minority interest, and equity
in undistributed earnings (loss)
of subsidiaries (3,257) (16,810) (818) 944 1 (19,940)
Earnings (loss) of subsidiaries (16,455) 452 -- -- 16,003 --
---------- ------------ ---------- ----------- ---------- -----------
Income (loss) before income taxes
and minority interest (19,712) (16,358) (818) 944 16,004 (19,940)
Provision (benefit) for income taxes 903 (413) 38 151 -- 679
-------- --------- ---------- -------- -------- --------
Income (loss) before minority
interest (20,615) (15,945) (856) 793 16,004 (20,619)
Minority interest in loss of
subsidiaries -- -- -- 4 -- 4
---------- ------------ ---------- ----------- ---------- -----------
NET INCOME (LOSS) $ (20,615) $ (15,945) $ (856) $ 797 $ 16,004 $ (20,615)
========== ============ ========== =========== ========== ===========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999
(Unaudited)
(In thousands)
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------- ------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 8,997 $ (7,965) $ 616 $ 7,349 $ 8,997
Adjustments to reconcile net income
(loss) to net cash provided
by (used in) operating activities:
Equity in undistributed earnings of
subsidiaries 7,962 602 -- (8,564) --
Depreciation and amortization 1 692 -- -- 693
Provision for credit losses -- 81 -- -- 81
Gain on retirement of senior
unsecured debt (16,946) -- -- -- (16,946)
Loss on sale of real estate
acquired through foreclosure -- 289 -- -- 289
Fair value write-up of residual
receivable -- (53) -- -- (53)
Loans originated with intent to sell -- (56,963) -- -- (56,963)
Proceeds from sold loans -- 57,156 -- -- 57,156
Other -- 130 (3) -- 127
Changes in operating assets and
liabilities
Increasing (decreasing) cash (1,924) 4,916 1,506 -- 4,498
---------- ----------- ---------- ---------- -----------
Net cash provided by (used in)
operating activities (1,910) (1,115) 2,119 (1,215) (2,121)
---------- ----------- ---------- ---------- -----------
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (136) -- -- (136)
Principal collections on loans not sold -- 7,679 -- -- 7,679
Proceeds from sale of real estate and
personal property Acquired through
foreclosure -- 2,548 -- -- 2,548
Proceeds from sale of property and
equipment -- 31 -- -- 31
Purchase of property and equipment -- (190) -- -- (190)
Other -- 7 -- -- 7
---------- ----------- ---------- ---------- -----------
Net cash provided by in investing
activities -- 9,939 -- -- 9,939
---------- ----------- ---------- ---------- -----------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit -- 67,732 -- -- 67,732
Payments on warehouse lines of credit -- (76,977) -- -- (76,977)
Retirement of senior unsecured debt (18,404) -- -- -- (18,404)
Net increase in notes payable to
investors -- (1,543) -- -- (1,543)
Net increase in subordinated debentures -- 1,121 -- -- 1,121
Advances (to) from subsidiary 20,286 (15,672) (4,614) -- --
Proceeds from issuance of additional
common stock 99 -- -- -- 99
Other (6) (1,209) (6) 1,215 (6)
---------- ----------- ---------- ---------- -----------
Net cash provided by (used in)
financing activities 1,975 (26,548) (4,620) 1,215 (27,978)
---------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash and
cash equivalents 65 (17,724) (2,501) -- (20,160)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913
---------- ----------- ---------- ---------- -----------
END OF PERIOD $ 261 $ 16,491 $ 1 $ -- $ 16,753
========== =========== ========== ========== ===========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
(In thousands)
Combined Combined
Wholly-Owned Non Combined
Guarantor Wholly-Owned Non-Guarantor
Parent Subsidiaries Guarantor Subsidiaries
Company Subsidiaries Eliminations Consolidated
---------- ----------- ---------- --------- ----------- -----------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (20,615) $ (15,945) $ (856) $ 797 $ 16,004 $ (20,615)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Equity in undistributed earnings
of subsidiaries 16,455 820 -- -- (17,275) --
Depreciation and amortization 114 715 69 3 (1) 900
Provision for deferred income taxes 441 (626) 38 147 -- --
Provision for credit losses -- 4,829 -- -- -- 4,829
Fair value write-down of residual
receivable -- 773 -- 807 -- 1,580
Mark-to-market adjustment on loans
held for sale -- 5,000 -- -- -- 5,000
Loans originated with intent to sell -- (258,714) -- -- -- (258,714)
Proceeds from sold loans -- 89,539 9,325 -- -- 98,864
Proceeds from securitization of loans -- 93,817 -- -- -- 93,817
Other -- 866 (368) 66 -- 564
Changes in operating assets and
liabilities increasing (decreasing)
cash 661 (4,531) 198 (2,711) -- (6,383)
-------- --------- -------- ------- -------- ---------
Net cash provided by (used in)
operating activities (2,944) (83,457) 8,406 (891) (1,272) (80,158)
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (37,459) -- (2,350) -- (39,809)
Principal collections on loans not sold -- 57,979 -- -- -- 57,979
Investment in subsidiary 6,759 (9,366) -- 2,607 -- --
Proceeds from sale of real estate and
personal property acquired through
foreclosure -- 1,530 -- -- -- 1,530
Proceeds from sale of property and
equipment -- 16 -- -- -- 16
Purchase of property and equipment (50) (1,172) (122) -- -- (1,344)
Other -- (91) -- -- -- (91)
---------- ----------- ---------- --------- ----------- -----------
Net cash provided by (used in)
investing activities 6,709 11,437 (122) 257 -- 18,281
FINANCING ACTIVITIES:
Advances on notes payable to banks -- 423,172 -- -- -- 423,172
Payments on notes payable to banks -- (371,166) -- -- -- (371,166)
Net increase in notes payable to
investors -- 7,444 -- -- -- 7,444
Net increase in subordinated
debentures -- 784 -- -- -- 784
Advances (to) from subsidiary (3,461) 9,875 (8,214) 1,800 -- --
Proceeds from issuance of additional
common stock 131 -- -- -- -- 131
Other (6) -- -- (1,272) 1,272 (6)
---------- ----------- ---------- --------- ----------- -----------
Net cash provided by (used in)
financing activities (3,336) 70,109 (8,214) 528 1,272 60,359
---------- ----------- ---------- --------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 429 (1,911) 70 (106) -- (1,518)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 713 6,411 263 174 -- 7,561
---------- ----------- ---------- --------- ----------- -----------
END OF PERIOD $ 1,142 $ 4,500 $ 333 $ 68 $ $ 6,043
========== =========== ========== ========= =========== ===========
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The discussion should be read in conjunction with the HomeGold
Financial, Inc. and Subsidiaries (the "Company") Unaudited Consolidated
Financial Statements and Notes appearing elsewhere in this report.
FORWARD - LOOKING INFORMATION
From time to time, the Company makes oral and written statements that
may constitute "forward-looking statements" (rather than historical facts) as
defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or
by the SEC in its rules, regulations and releases, including Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking statements made in this
Form 10-Q, as well as those made in other filings with the SEC, and other
financial discussion and analysis by management that reflect projections or
future financial or economic performance of the Company. Such forward-looking
statements are based on management's current plans and expectations and are
subject to risks and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. Such risks
and uncertainties include, but are not limited to: lower origination volume due
to market conditions, inability to achieve desired efficiency levels, higher
losses due to economic downturn or lower real estate values, loss of key
employees, 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
Company's ability to complete the implementation of its Year 2000 program on a
timely basis and the ability of the Company's suppliers, vendors, customers, and
other third parties on which the Company relies to be Year 2000 ready, and other
detrimental developments.
The preceding list of risks and uncertainties, however, is not intended
to be exhaustive, and should be read in conjunction with other cautionary
statements made herein, including, but not limited to, risks identified from
time to time in the Company's SEC reports, registration statements and public
announcements.
GENERAL
The Company is headquartered in Greenville, South Carolina, and
primarily engages in the business of originating, purchasing, selling,
securitizing and servicing mortgage loan products to sub-prime customers. Prior
to the sale of the Company's auto loan portfolio in March 1998, the Company also
originated, securitized and serviced auto loans. Prior to the sale of
substantially all of the assets of the small-business loan unit in the fourth
quarter of 1998, the Company made loans to small businesses primarily for the
acquisition or refinancing of real estate or property, plant and equipment,
working capital, and debt consolidation. The Company commenced its lending
operations in 1991 through the acquisition of CII, a small mortgage lending
company, which had been in operation since 1963.
During 1998, the Company decided to focus primarily on the Company's
larger direct mail retail mortgage operation and its mortgage brokerage
business. This decision resulted in the sale of the auto loan portfolio in March
of 1998, and the small-business unit in the fourth quarter of 1998. The $20.6
million loss in the first quarter of 1998 includes both the $110,000 loss from
the auto operations and the $584,000 loss from the small-business loan unit. The
first quarter of 1998 also includes the $856,000 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 in
the first quarter of 1999 is to better match the Company's cost structure to the
Company's loan origination volumes. The Company's production declined 80.4%
while general and administrative expenses decreased 63.1% when comparing first
quarter 1999 with first quarter 1998. The Company believes that even with
reductions in the number of employees and locations, it has excess capacity to
originate loans. The Company's focus for the remainder of 1999 is to increase
loan production to levels that will provide for profitable operations while only
incurring small increases in total origination costs.
18
<PAGE>
During the last three quarters of 1998 and first quarter of 1999, the
Company's primary focus was to increase liquidity and to reduce outstanding
borrowings. This resulted in the decision to significantly reduce the size of
the Company's loan portfolio and to sell the loans for cash with servicing
released. Although this decision resulted in increasing the Company's liquidity
to levels that allowed the Company to reduce both its revolving warehouse line
of credit and to repurchase senior unsecured debt, it also caused the Company to
receive lower premiums on the whole loan sales than it believes would have been
realized had the Company been in the position to securitize the loans. The
decision also resulted in a reduction in the serviced loan portfolio. The
Company believes that its liquidity position is such that it may resume
securitizing loans which in turn, could result in higher premiums.
MARKET CONDITIONS
The Company believes as a result of higher than anticipated prepayments
on securitized loan pools and concerns in the market about the credit worthiness
of several issuers of securitized assets, corporate interest rate spreads within
the industry widened significantly in the third quarter of 1998. These
conditions negatively impacted the securitization and whole loan sale markets.
As spreads widen, securitization as a means of financing has become less
attractive. As a result, more issuers are turning to the whole loan sale market.
As this whole additional loan product flows into the market, whole loan sale
premiums have eroded, which has, in turn, adversely impacted issuers'
profitability and created a liquidity crisis for the industry.
During the first quarter of 1999, the difference in the investor rates
required on loan products sold compared to treasury rates on comparable
maturities has declined from the wide spreads that were experienced in the last
half of 1998. A leading industry publication estimates that the number of
potential customers that the Company is targeting for its various loan products
is continuing to increase. As a result of the market turmoil that was
experienced in 1998, the number of companies that are able to provide the same
or similar products has been reduced. The Company believes that its effort to
closely monitor its liquidity position has allowed the Company to weather the
market turmoil in late 1998. The premiums investors are willing to pay to
purchase the Company's loans are beginning to increase slightly.
19
<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 THREE
MONTHS ENDED MARCH 31, AT AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1999 1998 1998 1997 1996
----------- ------------ ----------- ------------ ------------
(DOLLARS IN THOUSANDS)
MORTGAGE LOANS:
<S> <C> <C> <C> <C> <C>
Mortgage loans originated $ 52,558 $ 230,446 $ 659,444 $ 1,176,800 $ 350,276
Mortgage loans sold 57,156 63,891 623,675 435,333 284,794
Mortgage loans securitized -- 92,173 92,173 487,563 --
Total mortgage loans owned (period end) 105,777 277,219 117,685 231,145 146,231
Total serviced mortgage loans (period
end) 505,232 822,298 550,304 768,556 146,231
Total serviced unguaranteed mortgage
loans (period end) (1) 505,232 822,298 550,304 700,248 146,231
Average mortgage loans owned (2) 108,794 259,453 245,915 215,790 97,281
Average serviced mortgage loans (2) 525,803 778,028 744,221 443,318 97,281
Average serviced unguaranteed mortgage
loans (1) 525,803 774,542 743,362 411,549 97,281
Average interest earned (2) 10.31 % 9.27 % 10.34 % 10.92 % 11.97 %
SMALL-BUSINESS LOANS:
Small-business loans originated $ -- $ 35,456 $ 122,902 $ 81,018 $ 68,210
Small-business loans sold -- 10,538 141,041 41,232 33,060
Small-business loans securitized -- 1,827 1,827 24,286 12,851
Total small-business loans owned
(period end) 10,193 58,168 7,054 45,186 29,385
Total serviced small-business loans
(period end) 10,193 221,015 7,054 198,876 140,809
Total serviced unguaranteed
small-business loans (period end) (3) 10,193 92,262 7,054 78,822 44,017
Average small-business loans owned (2) 9,800 48,162 59,598 38,427 26,700
Average serviced small-business
loans (2) 9,800 207,883 202,446 165,053 125,723
Average serviced unguaranteed
small-business loans (2)(3) 9,800 85,542 82,270 61,420 34,442
Average interest earned (2) 10.17 % 14.58 % 14.28 % 15.89 % 12.61 %
AUTO LOANS:
Auto loans originated $ -- $ 2,983 $ 2,982 $ 15,703 $ 18,287
Auto loans sold -- 20,578 20,898 -- --
Auto loans securitized -- -- -- 16,107
Total auto loans owned (period end) -- 743 -- 21,284 13,916
Total serviced auto loans (period end) -- 743 -- 21,284 22,033
Total serviced unguaranteed auto loans
(period end) -- 743 -- 21,284 22,033
Average auto loans owned (2) -- 21,011 5,340 17,104 11,917
Average serviced auto loans (2) -- 21,011 5,340 22,267 21,277
Average interest earned (2) -- % 20.99 % 21.28 % 24.05 % 23.57 %
TOTAL LOANS:
Total loans receivable (period end) $ 115,970 $ 336,130 $ 124,739 $ 297,615 $ 189,532
Total serviced loans (period end) 515,425 1,044,056 557,358 988,716 309,073
Total serviced unguaranteed loans
(period end) (1)(3) 515,425 915,303 557,358 800,354 212,281
</TABLE>
- ------------------------------
(1) Excludes loans serviced for others with no credit risk to the Company.
(2) Averages are computed based on the daily averages except for monthly
averages for Mortgage Loans in 1997 and 1996.
(3) Excludes guaranteed portion of SBA Loans.
20
<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 THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
----------- ------------
<S> <C> <C>
Interest income 40.4 % 35.3 %
Servicing income 29.0 17.2
Gross gain on sale of loans 14.2 26.5
Loan fees, net 11.6 14.7
Other revenues 4.8 6.3
----------- ------------
Total revenues 100.0 % 100.0 %
========== ============
Interest expense 58.0 % 34.3 %
Provision for credit losses 1.0 19.7
Fair value write-down (write-up) of
residual receivables (.6) 6.4
Salaries, wages and employee
benefits 68.6 74.4
Business development costs 14.4 14.2
Other general and administrative
expenses 49.4 32.2
----------- ------------
Loss before income taxes, minority interest and
extraordinary item (90.8) (81.2)
Provision for income taxes 5.4 2.8
Minority interest in loss of
subsidiaries -- --
Extraordinary item-gain on
extinguishment of debt, net 205.0 --
----------- ------------
Net income (loss) 108.8 % (84.0) %
=========== ============
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
The Company recognized net income of $9.0 million for the three months
ended March 31, 1999 as compared to a net loss of $20.6 million for the three
months ended March 31, 1998. Included in the $9.0 million net income for the
first quarter of 1999 is an extraordinary gain of $16.9 million on the
extinguishment of debt. As previously discussed, the operations that were sold
in 1998 are not included in the first quarter of 1999 operating results. The
sale of these operations significantly affects the comparison of the first
quarter of 1999 to the same period in 1998.
Total revenues decreased $16.3 million, or 66.3%, to $8.3 million for
the three months ended March 31, 1999 from $24.6 million for the three months
ended March 31, 1998. The reductions in revenues resulted primarily from $5.3
million less interest income and a decrease of $8.0 million in gain on sale of
loans and $1.8 million decline in servicing income.
Interest income decreased $5.3 million, or 61.5%, to $3.3 million for
the three months ended March 31, 1999 from $8.7 million for the three months
ended March 31, 1998. The decrease in interest income resulted primarily from a
$210.0 million or 63.9% decrease in average loan balance to $118.6 million for
the three months ended March 31, 1999 compared to $328.6 million for the same
period in 1998. In addition, the Company experienced a 26 basis point decline in
average yield. The average yield in the first three months of 1999 was 10.30%
compared to 10.56% in the same period of 1998. The decrease in average balance
relates primarily to the $38.4 million reduction in small-business loans and the
$21.0 million reduction in auto loans that resulted from the sale of
substantially all of the loans in these two portfolios. The remaining $150.6
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
three months ended March 31, 1999 compared to the first three months in 1998
resulted primarily from a change in the mix of the Company's total portfolio. In
the first three months of 1999, substantially all of the Company's loan
portfolio was mortgage loans that yielded an average of 10.31%. In the first
three months of 1998, the company had a portfolio of small-business loans that
had an average yield of 14.58%, an auto loan portfolio that had an average yield
of 20.99%, and a mortgage loan portfolio that had an average yield of 9.27%. The
higher mortgage loan yield in 1999 compared to 1998's first quarter resulted
from a reduction in the negative impact from loans on non-accrual in the three
months ended March 31, 1999 compared to the same period in 1998.
21
<PAGE>
Servicing income declined $1.8 million, or 43.1%, to $2.4 million for
the three months ended March 31, 1999 from $4.2 million for the same period in
1998. The reduction was primarily due to a $473.3 million or 47.0% decrease in
average serviced loan portfolio. The Company serviced an average of $533.6
million in loans in the first three months of 1999 compared to an average of
$1.0 billion in the first three months of 1998. The $473.3 million reduction in
average loans serviced resulted from the sale of the small-business loan
portfolio that averaged $207.8 million in the first three months of 1998, the
sale of the auto loans that averaged $21.0 million and a $244.4 million
reduction in the mortgage loans serviced portfolio. The reduction in the
mortgage loans serviced in the first three months of 1999 compared to the same
period in 1998, resulted from the Company's decision in the second quarter of
1998 to whole-loan sale the substantial portion of its production and portfolio,
servicing released, versus securitizing and retaining servicing.
Gross gains on sale of loans declined $5.3 million, or 82.0%, to $1.2
million for the three months ended March 31, 1999, from $6.5 million for the
three months ended March 31, 1998. Cash gain on sale of loans decreased $2.3
million, or 66.0%, to $1.2 million for the three months ended March 31, 1999
from $3.4 million for the three months ended March 31, 1998, while non-cash gain
decreased $3.1 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 three months of 1999 compared to the same period in 1998.
In the first quarter of 1999, the Company had mortgage whole loan sales of $57.2
million and received a net premium of 2.05% compared to small-business and
mortgage loan sales of $74.4 million in the first three months of 1998 in which
it received a net premium of 4.63%. 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 quarter of 1999
compared to first quarter of 1998 because of changes in market conditions.
In the first quarter of 1998, the Company sold $20.6 million of auto
loans for book value and therefore did not record a gain. The Company did not
realize any non-cash gains in the three months ended March 31, 1999. In the
first quarter of 1998, the Company securitized $94.0 million of mortgage and
small-business loans and received $8.1 million or a premium of 8.58%. The
Company also recorded a non-cash mark-to-market write-down of $5.0 million in
the first three months of 1998 that related to second mortgage loans.
Net loan fees decreased $2.6 million, or 73.4%, to $957,000 for the
three months ended March 31, 1999 from $3.6 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 quarter of 1999 compared to the first
quarter of 1998.
Other revenue decreased $1.1 million, or 74.3%, to $396,000 for the
three months ended March 31, 1999 compared to $1.5 million in the first three
months of 1998. The decrease relates primarily to fewer late charges as a result
of a smaller loan portfolio in the first quarter of 1999 compared to first
quarter of 1998. Also in the first quarter of 1998, the small-business unit
recorded as other income, a $400,000 increase in the value of securities owned
relating to the commercial mezzanine lending operation.
Total expenses decreased $28.7 million, or 64.6%, to $15.8 million for
the three months ended March 31, 1999 from $44.5 million for the same period in
1998. Total expenses are comprised of interest expenses, provision for credit
losses, fair value adjustments of residual receivable, salaries, wages and
employee benefits, business development costs, and other general and
administrative expenses. The decreased expenses are due largely to the Company's
sale of its auto and small-business lending operations, the sale of its small
retail origination subsidiary, SLC, and consolidation of its mortgage operations
into a single location.
Interest expense decreased $3.6 million, or 43.1%, to $4.8 million for
the three months ended March 31, 1999 from $8.4 million for the three months
ended March 31, 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. This decrease was partly offset by the cost of
borrowings that were required to fund the Company's operating losses in 1998.
Provision for credit losses decreased $4.7 million, or 98.3%, to $81,000
for the three months ended March 31, 1999 from $4.8 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.
22
<PAGE>
Total general and administrative expense decreased $18.7 million, or
63.1%, to $10.9 million for the three months ended March 31, 1999, from $29.7
million for the same period in 1998. This resulted primarily because salaries,
wages and employee benefits decreased $12.6 million, or 69.0%, to $5.7 million
for the three months ended March 31, 1999, from $18.3 million for the same
period in 1998. During the twelve months ended March 31, 1999, the Company
reduced the number of employees to 407 at March 31, 1999 from 1,381 at March 31,
1998. In addition, business development costs declined $2.3 million, or 65.8%,
to $1.2 million for the three month period in 1999 compared to $3.5 million for
the same period in 1998. Other general and administrative expenses also declined
$3.8 million, or 48.3% to $4.1 million in the 1999 period compared to $7.9
million in the 1998 period. 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 $450,000 and $679,000
for the three months ended March 31, 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 income tax expense.
In the first quarter of 1999, the Company recorded a $16.9 million
extraordinary gain on the extinguishment of debt related to the purchase of
$35.3 million of its Senior Notes. The purchase price of the Senior Notes was
$17.3 million, or 49.0% of face value. A proportionate share of the unamortized
debt origination cost ($1.1 million) relating to the issuance of the Senior
Notes was charged against this gain.
FINANCIAL CONDITION
Net loans receivable decreased $8.1 million to $108.8 million at March
31, 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 $42.2 million at March 31, 1999, and $43.9
million at December 31, 1998. This decrease resulted primarily from the
amortization of the residual asset.
Net property and equipment decreased by $492,000 to $19.2 million at
March 31, 1999, from $19.7 million at December 31, 1998. This decrease resulted
primarily from the depreciation expenses. Real estate and personal property
acquired in foreclosure decreased $2.7 million to $3.2 million at March 31,
1999, from $5.9 million at December 31, 1998.
The primary sources for funding the Company's receivables comes from
borrowings issued under various credit arrangements (including the Credit
Facilities, CII Notes, and the Company's Senior Notes) and the sale of loans. At
March 31, 1999, the Company had debt outstanding under revolving warehouse lines
of credit to banks of $7.5 million, which compares with $16.7 million at
December 31, 1998, for a decrease of $9.2 million. At March 31, 1999, the
Company had $135.5 million of CII Notes and subordinated debentures outstanding,
which compares with $135.9 million at December 31, 1998, for a decrease of
$422,000.
The aggregate principal amount of outstanding Senior Notes was $51.3
million at March 31, 1999 compared to $86.6 million on December 31, 1998. In the
three months ended March 31, 1999, the Company purchased $35.3 million of its
Senior Notes for a purchase price of $17.3 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 March 31, 1999 was $14.9 million, compared
to $5.8 million at December 31, 1998, an increase of $9.1 million. This increase
resulted principally from net earnings of $9.0 million for the three months
ended March 31, 1999. The $9.0 million net earnings resulted from the $16.8
million extraordinary item from the gain on extinguishment of debt, partly
offset by $7.9 million loss from operations.
23
<PAGE>
ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE
The Company is exposed to the risk of loan delinquencies and defaults
with respect to loans retained in its portfolio. With respect to loans to be
sold on a non-recourse basis, the Company is at risk for loan delinquencies and
defaults on such loans while they are held by the Company pending such sale. To
provide for credit losses, the Company charges against current earnings an
amount necessary to maintain the allowance for credit losses at levels expected
to cover inherent losses in loans 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 THE
THREE
MONTHS
ENDED AT AND FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
1999 -----------------------------------
1998 1997 1996
---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for credit losses at beginning
of period $ 6,659 $ 6,528 $ 3,084 $ 1,874
Net charge-offs (557) (8,791) (5,166) (2,494)
Provision charged to expense 81 11,905 10,030 5,416
Write-down of allowance due to sale of
receivables -- (2,983) -- --
Securitization transfers -- -- (1,420) (1,712)
---------- --------- --------- ---------
Allowance for credit losses at end of the
period $ 6,183 $ 6,659 $ 6,528 $ 3,084
========== ========= ========= =========
</TABLE>
The Company considers its allowance for credit losses at March 31, 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 5.3% at both March
31, 1999 and December 31, 1998. The percentage of loans past due 30 days or more
declined to 11.8% at March 31, 1999 compared to 13.4% at December 31, 1998. The
Company incurred net charge-offs of $589,000 in the first quarter of 1999
compared to $2.4 million in net charge-offs in the first quarter of 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.
The table below summarizes certain information with respect to the
Company's allowance for losses on the securitization residual assets for each of
the periods indicated.
<TABLE>
<CAPTION>
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS
AT AND
FOR THE
THREE
MONTHS
ENDED AT AND FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------------------------
1999 1998 1997 1996
----------- --------- --------- --------
(IN THOUSANDS)
RESIDUAL RECEIVABLES:
<S> <C> <C> <C> <C>
Allowance for losses at beginning of
period $ 7,165 $ 14,255 $ 1,202 $ 773
Net charge-offs (32) (147) (1,645) (1,283)
Provision netted against gain on
securitizations -- 2,242 13,278 --
Sale of small-business residual assets -- (2,957) -- --
Mark-to-market adjustment (204) (6,228) -- --
Gain (loss) on sale of securitized REO (167) -- -- --
Allowance transferred from owned portfolio -- -- 1,420 1,712
----------- --------- --------- --------
Allowance for losses at the end of the
period $ 6,762 $ 7,165 $ 14,255 $ 1,202
=========== ========= ========= ========
</TABLE>
The value of the residual receivables retained by the Company would be
impaired to the extent losses on the securitized loans exceed the amount
estimated when determining the residual cash flows.
24
<PAGE>
The table below summarizes the Company's allowance for credit losses
with respect to the Company's total combined serviced portfolio (including both
owned and securitized loan pools) for each of the periods indicated.
<TABLE>
<CAPTION>
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON COMBINED SERVICED PORTFOLIO
AT AND
FOR THE
THREE
MONTHS
ENDED AT AND FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
----------------------------------
1999 1998 1997 1996
---------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance for credit losses at beginning of
period $ 13,824 $ 20,783 $ 4,286 $ 2,647
Write-down of allowance due to sale of loans
receivable -- (2,983) -- --
Net charge-offs (589) (8,938) (6,811) (3,777)
Provision charged to expense 81 11,905 10,030 5,416
Provision netted against gain on securitizations -- 2,242 13,278 --
Sale of small-business residual asset -- (2,957) -- --
Mark-to-market adjustment (204) (6,228) -- --
Gain (loss) on sale of securitized REO (167) -- -- --
========== ========= ========= =========
Allowance for credit losses at the end of the
period $ 12,945 $ 13,824 $ 20,783 $ 4,286
========== ========= ========= =========
Allowance as a % of total serviced portfolio 2.51% 2.48% 2.60% 2.02%
Annualized net charge-offs as a % of average
serviced portfolio 0.44% 1.08% 1.38% 2.47%
The total allowance for credit losses as shown
on the balance Sheet is as follows:
Allowance for credit losses on loans receivable $ 6,183 $ 6,659 $ 6,528 $ 3,084
Allowance for credit losses on residual
receivable 6,762 7,165 14,255 1,202
--------- --------- --------- --------
Total allowance for credit losses $ 12,945 $ 13,824 $ 20,783 $ 4,286
========= ========= ========= =========
</TABLE>
Management closely monitors delinquencies to measure the quality of its
loan portfolio and securitized loans and the potential for credit losses.
Accrual of interest is discontinued and reversed when a loan is either over 90
days past due, or the collateral is determined to be inadequate, or when
foreclosure proceedings begin. Collection efforts on charged-off loans continue
until the obligation is satisfied or until it is determined that such obligation
is not collectible or the cost of continued collection efforts would exceed the
potential recovery. Recoveries of previously charged-off loans are credited to
the allowance for credit losses.
The following sets forth delinquencies as a percentage of the total
serviced portfolio for the periods indicated.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996
------------ ----------- ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans past due 30-59 days $ 21,513 $ 28,174 $ 29,174 $ 8,412
As a % of total serviced
portfolio 4.17 % 5.05 % 3.65 % 3.96 %
Loans past due 60-89 days $ 6,317 $ 8,647 $ 10,009 $ 2,789
As a % of total serviced
portfolio 1.23 % 1.55 % 1.25 % 1.31 %
Loans past due 90+ days $ 32,892 $ 38,109 $ 22,147 $ 6,662
As a % of total serviced
portfolio 6.38 % 6.84 % 2.76 % 3.14 %
Total loans past due $ 60,722 $ 74,930 $ 61,330 $ 17,863
As a % of total serviced
portfolio 11.78 % 13.44 % 7.66 % 8.41 %
</TABLE>
25
<PAGE>
Management monitors securitized pool delinquencies using a static pool
analysis by month by pool balance. Since these pools are new, it is anticipated
that the delinquencies will ramp up during the first one to two years. Current
year results are not necessarily indicative of future performance. The following
sets forth the static pool analysis for delinquencies by month in the Company's
securitized mortgage loan pools.
<TABLE>
<CAPTION>
CURRENT PRINCIPAL BALANCE
- -------------------------------------------------------------------------------------------
MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1
INCEPTION
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $ 77,435,632 $ 120,860,326 $ 130,917,899 $ 118,585,860 $ 62,726,105
2 $ 77,405,312 $ 120,119,653 $ 169,093,916 $ 118,061,792 $ 62,300,302
3 $ 76,709,417 $ 119,364,510 $ 168,182,957 $ 148,291,454 $ 61,609,815
4 $ 75,889,160 $ 118,965,905 $ 166,783,489 $ 146,880,279 $ 60,768,433
5 $ 75,395,969 $ 117,238,693 $ 165,608,534 $ 145,775,696 $ 59,347,948
6 $ 74,630,019 $ 115,870,168 $ 164,084,260 $ 144,465,651 $ 58,739,309
7 $ 73,149,957 $ 113,537,447 $ 161,880,416 $ 143,048,555 $ 57,829,352
8 $ 72,261,386 $ 112,100,397 $ 158,220,175 $ 140,482,698 $ 56,918,186
9 $ 71,342,842 $ 110,468,401 $ 155,854,981 $ 137,318,432 $ 55,894,240
10 $ 70,195,198 $ 107,887,242 $ 153,193,421 $ 134,991,772 $ 54,887,268
11 $ 68,981,147 $ 105,138,088 $ 148,382,102 $ 131,582,081 $ 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
15 $ 60,052,314 $ 92,501,939 $ 133,252,925 $ 118,983,067
16 $ 58,133,496 $ 89,402,897 $ 129,792,748 $ 116,012,173
17 $ 56,900,372 $ 83,793,933 $ 127,118,396
18 $ 55,154,969 $ 81,637,626 $ 124,262,781
19 $ 50,852,179 $ 79,392,938 $ 119,512,141
20 $ 49,702,926 $ 77,843,648
21 $ 48,629,373 $ 76,319,392
22 $ 45,780,152 $ 74,512,970
23 $ 44,612,888
24 $ 43,845,616
25 $ 42,879,623
DELINQUENCIES > 30 DAYS PAST DUE
- -------------------------------------------------------------------------------------------
MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1
INCEPTION
- -------------------------------------------------------------------------------------------
1 $ 0 $ 515,954 $ 609,201 $ 402,972 $ 44,600
2 $ 1,499,056 $ 1,631,017 $ 2,042,757 $ 2,132,028 $ 1,223,964
3 $ 1,931,761 $ 3,930,423 $ 4,498,266 $ 5,049,035 $ 2,013,525
4 $ 3,760,774 $ 5,399,569 $ 8,546,414 $ 7,290,097 $ 3,872,888
5 $ 5,220,385 $ 7,293,856 $ 12,337,604 $ 10,290,987 $ 3,825,651
6 $ 5,849,574 $ 9,790,732 $ 13,432,454 $ 13,459,369 $ 5,199,587
7 $ 6,777,962 $ 11,933,526 $ 15,076,729 $ 12,443,357 $ 6,248,301
8 $ 8,078,783 $ 12,484,893 $ 17,745,496 $ 13,861,088 $ 5,983,226
9 $ 8,528,559 $ 12,471,739 $ 18,099,411 $ 16,777,959 $ 6,591,674
10 $ 10,008,415 $ 11,304,455 $ 16,680,011 $ 19,050,239 $ 6,317,098
11 $ 10,728,125 $ 12,630,402 $ 18,929,917 $ 18,524,292 $ 5,588,611
12 $ 9,257,295 $ 14,540,910 $ 21,295,026 $ 18,470,254 $ 5,837,283
13 $ 9,578,031 $ 12,933,959 $ 22,303,472 $ 18,645,129 $ 5,404,122
14 $ 10,757,672 $ 12,674,148 $ 21,746,520 $ 15,158,165
15 $ 9,401,614 $ 14,212,157 $ 23,240,338 $ 13,674,836
16 $ 8,127,303 $ 14,386,886 $ 22,031,312 $ 14,459,206
17 $ 8,227,263 $ 11,723,546 $ 17,679,438
18 $ 8,708,963 $ 11,171,133 $ 16,607,006
19 $ 7,349,210 $ 12,018,899 $ 16,083,674
20 $ 7,217,783 $ 11,515,086
21 $ 7,120,727 $ 10,777,503
22 $ 6,661,879 $ 9,606,052
23 $ 6,419,725
24 $ 6,158,687
25 $ 6,097,786
</TABLE>
Included in the principal balances and delinquency amounts is $5.2
million of real estate acquired through foreclosure.
26
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE
- ---------------------------------------------------------------------------------------
MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1 AVERAGE
INCEPTION
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 0.00 % 0.43 % 0.47 % 0.34 % 0.07 % 0.26 %
2 1.94 % 1.36 % 1.21 % 1.81 % 1.96 % 1.65 %
3 2.52 % 3.29 % 2.67 % 3.40 % 3.27 % 3.03 %
4 4.96 % 4.54 % 5.12 % 4.96 % 6.37 % 5.19 %
5 6.92 % 6.22 % 7.45 % 7.06 % 6.45 % 6.82 %
6 7.84 % 8.45 % 8.19 % 9.32 % 8.85 % 8.53 %
7 9.27 % 10.51 % 9.31 % 8.70 % 10.80 % 9.72 %
8 11.18 % 11.14 % 11.22 % 9.87 % 10.51 % 10.78 %
9 11.95 % 11.29 % 11.61 % 12.22 % 11.79 % 11.77 %
10 14.26 % 10.48 % 10.89 % 14.11 % 11.51 % 12.25 %
11 15.55 % 12.01 % 12.76 % 14.08 % 10.38 % 12.96 %
12 13.79 % 14.24 % 14.73 % 14.31 % 11.05 % 13.62 %
13 14.58 % 13.08 % 15.90 % 14.86 % 10.43 % 13.77 %
14 17.02 % 13.29 % 15.92 % 12.45 % 14.67 %
15 15.66 % 15.36 % 17.44 % 11.49 % 14.99 %
16 13.98 % 16.09 % 16.97 % 12.46 % 14.88 %
17 14.46 % 13.99 % 13.91 % 14.12 %
18 15.79 % 13.68 % 13.36 % 14.28 %
19 14.45 % 15.14 % 13.46 % 14.35 %
20 14.52 % 14.79 % 14.66 %
21 14.64 % 14.12 % 14.38 %
22 14.55 % 12.89 % 13.72 %
23 14.39 % 14.39 %
24 14.05 % 14.05 %
25 14.22 % 14.22 %
Actual Historical Life to
Date Prepayment Speed 21.99 % 20.52 % 18.15 % 16.47 % 15.04 %
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and long-term
sources of debt financing and equity capital. As a result of incurred operating
expenses in excess of operating income, the Company experienced a $1.9 million
net use of cash from operating activities in the first quarter of 1999. In 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 from operating activities in 1998. Although the
Company's goal is to achieve a positive cash flow each quarter, no assurance can
be given that this objective will be obtained due to the higher level of cash
required to fund the loans purchased and originated. Currently, the Company's
primary operating cash uses include the funding of (i) loan originations and
purchases pending their securitization or sale, (ii) interest expense on CII
investor savings notes, 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. The Company's
primary operating sources of cash are (i) cash gains from whole-loan mortgage
loan sales, (ii) cash payments of contractual and ancillary servicing revenues
received by the Company in its capacity as servicer for securitized loans, (iii)
interest income on loans receivable and certain cash balances, (iv) fee income
received in connection with its retail mortgage loan originations, and (v)
excess cash flow received in each period with respect to residual receivables.
While the Company believes that such sources of funds will be adequate to meet
its liquidity requirements, no assurance of such fact may be given.
The Company overcollateralizes loans as a 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, nor in the first quarter of 1999.
Since the Company has reduced borrowing levels and improved its liquidity
position, the Company anticipates completing a securitization in the second
quarter of 1999. Cash flow is also enhanced by the generation of loan fees in
its retail mortgage loan operation and the utilization of a wholesale loan
origination strategy whereby loans are generally funded at par, rather than at
the significant premiums typically associated with a correspondent-based
strategy. However, in 1999, the Company began paying, on a limited basis, some
yield spread premiums as a way to increase its wholesale production.
27
<PAGE>
The table below summarizes cash flows provided by and used in operating
activities by quarter in 1999, 1998 and for the years ended December 31, 1998
and 1997:
<TABLE>
<CAPTION>
YEAR YEAR
1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR ENDED ENDED
1999 1998 1998 1998 1998 1998 1997
-------- -------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
OPERATING CASH INCOME:
<S> <C> <C> <C> <C> <C> <C> <C>
Servicing fees received and
excess cash flow from
securitization trusts $ 4,334 $ 6,251 $ 5,426 $ 2,143 $ 2,728 $ 16,548 $ 3,687
Interest received 3,570 6,524 9,369 10,867 9,367 36,127 31,716
Cash gain on sale of loans 1,173 (11,692) 5,056 4,530 3,449 1,343 14,153
Cash loan origination fees
received 1,418 1,070 7,343 5,959 3,883 18,255 31,843
Other cash income 528 1,518 1,267 1,016 1,587 5,388 1,875
--------- --------- --------- --------- --------- --------- ---------
Total operating cash income 11,023 3,671 28,461 24,515 21,014 77,661 83,274
OPERATING CASH EXPENSES:
Securitization costs -- -- -- -- (851) (851) (3,646)
Securitization hedge losses -- -- -- -- -- -- (2,125)
Cash operating expenses (10,545) (19,826) (26,090) (24,882) (28,753) (99,551) (81,594)
Interest paid (7,459) (6,191) (12,559) (7,230) (11,539) (37,519) (20,980)
Taxes paid (155) (228) (820) (1,280) (187) (2,515) (1,581)
--------- --------- --------- --------- --------- --------- ---------
Total operating cash expenses (18,159) (26,245) (39,469) (33,392) (41,330) (140,436) (109,926)
CASH FLOW (DEFICIT) DUE TO
OPERATING CASH INCOME AND
EXPENSES (7,136) (22,574) (11,008) (8,877) (20,316) (62,775) (26,652)
CASH REVENUES TO CASH EXPENSES
RATIO 61% 14% 72% 73% 51% 55% 76%
OTHER CASH FLOWS:
Cash provided by (used in) other
payables and receivables 4,822 (15,007) 1,827 (5,559) 6,198 (12,541) (5,355)
Cash provided by (used in)
loans held for sale 193 155,399 19,333 14,982 (66,040) 123,674 (114,282)
Cash provided from
sale of residual
receivables -- 16,958 -- -- -- 16,958 --
Cash gain on sale of subsidiary
assets -- 18,964 -- -- -- 18,964 --
--------- --------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (2,121) $ 153,740 $ 10,152 $ 546 $ (80,158) $ 84,280 $(146,289)
========= ========= ========= ========= ========= ========= =========
</TABLE>
Certain previously reported amounts have been reclassified to conform to
current year presentation.
Cash and cash equivalents were $16.8 million at March 31, 1999, and
$36.9 million at December 31, 1998. Cash used in operating activities was $2.1
million for the three months ended March 31, 1999, compared to $80.2 million for
the three months ended March 31, 1998; cash provided by investing activities was
$9.9 million for the three months ended March 31, 1999 compared to $18.3 million
for the three months ended March 31, 1998; and cash used in financing activities
was $28.0 million for the three months ended March 31, 1999 compared to cash
provided by financing activities of $60.4 million for the three months ended
March 31, 1998. The decrease in cash used in operations was due principally to
less cash required to fund lower loan originations in the first quarter of 1999
compared to the first quarter of 1998. Cash provided by investing activities in
both the first quarter of 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 first quarter of 1999,
resulted from both the reduction in the Company's revolving warehouse lines of
credit and from the cash used to retire senior unsecured debt. The increase in
the amount of cash provided by financing activities in the first quarter of 1998
resulted primarily from the net increase in the Company's revolving warehouse
lines of credit.
At March 31, 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 March 31, 1999 and at December 31, 1998, the Company had aggregate
outstanding borrowings of $7.5 million and $16.7 million, respectively, and
aggregate borrowing availability of $21.5 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 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.
28
<PAGE>
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. This agreement
contains, among other matters, restrictions on the payment of dividends. At
March 31, 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 $35.9 million in the first
three months of 1999. At March 31, 1999 and December 31, 1998, $51.3 million and
$86.4 million in aggregate principal amount of Senior Notes were outstanding,
respectively.
CII engages in the sale of CII Notes to investors. The CII Notes are
comprised of Investor Notes and subordinated debentures bearing fixed rates of
interest, which are sold by CII only to South Carolina residents. The offering
of the CII Notes is registered under South Carolina securities law and is
believed to be exempt from Federal registration under the Federal intrastate
exemption. CII believes it conducts its operations so as to qualify for the safe
harbor provisions of Rule 147 promulgated pursuant to the Securities Act of
1933, as amended (the "Securities Act"). At March 31, 1999 and at December 31,
1998, CII had an aggregate of $117.0 million and $118.6 million of investor
notes outstanding, respectively, bearing a weighted average interest rate of
approximately 7.4%, and an aggregate of $18.4 million and $17.3 million of
subordinated debentures, respectively, bearing a weighted average interest rate
of 5.0%. The investor notes and subordinated debentures are subordinate in
priority to the credit facility. Substantially all of the CII Notes and
debentures have one-year maturities.
Total shareholders' equity at March 31, 1999 was $14.9 million, compared
to $5.8 million at December 31, 1998, an increase of $9.1 million. This increase
resulted principally from net earnings of $9.0 million for the three months
ended March 31, 1999. The $9.0 million net earnings resulted from the $16.8
million extraordinary item from the gain on extinguishment of debt, partly
offset by $7.9 million loss from operations.
The Company's primary objective in 1999 will be to ensure adequate
levels of liquidity as the Company strives to increase loan originations. The
Company anticipates incurring operating losses in 1999. The Company plans to
continue to reduce the loan portfolio through either whole loan sales or through
securitizations. These sales will generate additional cash that can be used to
fund operating losses, to fund declines in investor notes that could occur, or
to purchase additional subordinated debt, reducing interest expense. The Company
plans to operate more like a mortgage banker that originates and either sells or
securitizes loans, retaining only a small portfolio of loans. Management
believes that, based on its present level of liquidity combined with its
borrowing availability under the warehouse line of credit and the Company's
plans to further reduce both the senior subordinated debt and loan portfolio,
these strategies will provide adequate cash flow to support the 1999 operating
plan. The Company continually evaluates the need to establish other sources of
capital and will pursue those it considers appropriate based upon its need and
market conditions. The Company currently does not anticipate incurring any
significant capital expenditures in 1999.
LOAN SALES AND SECURITIZATIONS
The Company sells or securitizes substantially all of its loans. The
Company sells on a whole loan basis a significant amount of its Mortgage Loans
(servicing released), including substantially all of its Mortgage Loans secured
by second liens, principally to secure the additional cash flow associated with
the premiums paid in connection with such sales and to eliminate the credit risk
associated with the second lien mortgage loans. However, no assurance can be
given that the second mortgage loans can be sold. To the extent that the loans
are not sold, the Company retains the risk of loss. At March 31, 1999 and
December 31, 1998, the Company had retained $14.5 million and $19.0 million,
respectively, of second mortgage loans on its balance sheet. For the three
months ended March 31, 1999 and 1998, the Company sold $57.2 million and $63.9
million of mortgage loans. In addition, for the three months ended March 31,
1998, the Company sold $10.5 million of small-business loans and $20.6 million
of auto loans. During 1998, 1997, and 1996, the Company sold $623.7 million,
$435.3 million, and $284.8 million, respectively, of Mortgage Loans and $141.0
million, $41.2 million, and $33.1 million, respectively, of the guaranteed
portions of SBA Loans. During 1998, the Company sold $20.9 million of auto
loans. No auto loans were sold in 1997 or 1996.
29
<PAGE>
In the first quarter of 1998, the Company securitized $92.2 million of
Mortgage Loans and $1.8 million of small-business loans. No loans were
securitized in the first quarter of 1999. Although securitizations provide
liquidity, the Company has utilized securitizations principally to provide a
lower cost of funds and reduce interest rate risk, while building servicing
revenues by increasing the serviced portfolio. In connection with its
securitizations, the Company has retained interest-only residual certificates
representing residual interests in the trusts created by the securitization
transactions. These subordinate residual securities totaled $42.2 million and
$43.9 million, net of allowances, at March 31, 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 an estimated prepayment
and loss rate, and capitalizes these amounts using a discount rate that market
participants would use for similar financial instruments. These capitalized
assets are recorded as a residual receivable. The Company believes the
assumptions it has used in past securitizations, 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 five mortgage securitizations completed to date, the servicing asset
recorded represents a 10 basis point strip of cash flows from the stipulated
servicing percentage.
The following sets forth facts and assumptions used by the Company in
arriving at the valuation of the residual receivables relating to its Mortgage
Loan securitizations at December 31, 1998:
<TABLE>
<CAPTION>
1997-1 1997-2 1997-3 1997-4 1998-1
---------- ---------- ----------- ----------- - ----------
<S> <C> <C> <C> <C> <C>
Outstanding balance of loans
securitized $42,879,623 $74,512,970 $119,512,141 $116,012,173 $51,834,618
Average stated principal balance 59,144 58,442 64,566 64,130 63,059
Weighted average coupon on loans 10.82% 10.73% 11.08% 10.98% 10.88%
Weighted average remaining term to
stated maturity 179 mths 180 mths 183 mths 188 mths 196 mths
Weighted average LTV 78% 73% 76% 76% 76%
% of first mortgage loans 100% 100% 100% 100% 100%
Weighted average pass-through rate to
bondholders 7.43% 7.04% 6.94% 6.71% 6.34%
Assumed annual losses 0.60 0.60 0.60 0.60 0.60
Ramp period for losses 0 mths 0 mths 0 mths 0 mths 3 mths
Assumed cumulative losses as a % of UPB 1.72% 1.70% 1.64% 1.65% 1.53%
Annual servicing fee 0.50 0.50 0.50 0.50 0.50
Servicing asset 0.10 0.10 0.10 0.10 0.10
Discount rate applied to cash flow
after overcollateralization 12.00 12.00 12.00 12.00 12.00
Prepayment speed:
Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR
Peak CPR (1) 30 CPR 30 CPR 30 CPR 30 CPR 30 CPR
Tail CPR (1) 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR
CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths
CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths
CPR tail begins (1) 37/49 mths 37/49 mths 37/49 mths 37/49 mths 37/49 mths
Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185%
Initial overcollateralization required (2) 3.25 -- -- -- --
Final overcollateralization required (2) 6.50 3.75 3.75 3.75 3.75
</TABLE>
(1) CPR represents an industry standard of calculating prepayment speeds and
refers to Constant Prepayment Rate. The Company uses a curve based on
various CPR levels throughout the pool's life, based on its estimate of
prepayment performance, as outlined in the table above.
(2) Based on percentage of original principal balance, subject to step-down
provisions after 30 months.
Each of the Company's Mortgage Loan securitizations have been
credit-enhanced by an insurance policy provided through a monoline insurance
company such that the senior certificates have received ratings of "Aaa" from
Moody's Investors Services, Inc. ("Moody's") and "AAA" from Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's").
30
<PAGE>
The Company generally expects to begin receiving excess cash flow on its
Mortgage Loan securitizations approximately 16 months from the date of
securitization, although this time period may be shorter or longer depending
upon the securitization structure and performance of the loans securitized.
Prior to such time, the monoline insurer requires a reserve provision to be
created within the securitization trust which uses Excess Cash Flow to retire
the securitization bond debt until the spread between the outstanding principal
balance of the loans in the securitization trust and the securitization bond
debt equals a specified percentage (depending on the structure of the
securitization) of the initial securitization principal balance (the
"overcollateralization limit"). Once this overcollateralization limit is met,
excess cash flows are distributed to the Company. The Company begins to receive
regular monthly servicing fees in the month following securitization.
The gains recognized into income resulting from securitization
transactions vary depending on the assumptions used, the specific
characteristics of the underlying loan pools, and the structure of the
transaction. The Company believes the assumptions it has used are appropriate
and reasonable.
The Company assesses the carrying value of its residual receivables and
servicing assets for impairment. There can be no assurance that the Company's
estimates used to determine the gain on sale of loans, residual receivables, and
servicing assets valuations will remain appropriate for the life of each
securitization. If actual loan prepayments or defaults exceed the Company's
estimates, the carrying value of the Company's residual receivables and/or
servicing assets may be decreased through a charge against earnings in the
period management recognizes the disparity. Conversely, if actual loan
prepayments or defaults are better than the Company's estimates, the carrying
value of the Company's residual receivables and/or servicing assets may be
increased, with additional earnings recognized in the period management
recognizes the disparity.
ACCOUNTING CONSIDERATIONS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. 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. The Company has not assessed the impact of this
standard.
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 March 31, 1999, the Company's valuation allowance against its
deferred tax asset dropped to $19.4 million from $21.7 million at December 31,
1998. The Company's net deferred tax asset was $4.2 million at both March 31,
1999 and December 31, 1998. The Company has decided not to increase the net
deferred tax asset for anticipated benefits from prior NOLs until operating
earnings are reestablished. The amount of the remaining deferred tax asset is
deemed appropriate by management based on its belief that it is more likely than
not that it will realize the benefit of this deferred tax asset, given the
levels of historical taxable income and current projections for future taxable
income over the periods in which the deferred tax asset would be realized.
Should the Company deem that the realization of the benefit of the deferred tax
asset is unlikely, then, the asset would need to be written off. The Company had
a federal NOL of approximately $43.1 million at March 31, 1999.
31
<PAGE>
HEDGING ACTIVITIES
The Company's profitability may be directly affected by fluctuations in
interest rates. While the Company monitors interest rates it may, from time to
time, employ a strategy designed to hedge some of the risks associated with
changes in interest rates, no assurance can be given that the Company's results
of operations and financial condition will not be adversely affected during
periods of fluctuations in interest rates. The Company's interest rate hedging
strategy includes shorting interest rate futures and treasury forwards, and
entering into interest-rate lock agreements. Since the interest rates on the
Company's warehouse line of credit used to fund and acquire loans is variable
and the rates charged on loans the Company originates are fixed, increases in
the interest rates after loans are originated and prior to their sale could have
a material adverse effect on the Company's results of operations and financial
condition. The ultimate sale of the Company's loans generally will fix the
spread between the interest rates paid by borrowers and the interest rates paid
to investors in securitization transactions with respect to such loans, although
increases in interest rates may narrow the potential spread that existed at the
time the loans were originated by the Company. Without hedging these loans,
increases in interest rates prior to sale of the loans may reduce the gain on
sale or securitization of loans earned by the Company. There were no significant
open hedging positions at either March 31, 1999 or December 31, 1998.
IMPACT OF INFLATION
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates that affect the Company's ability to earn a spread
between interest received on its loans and the costs of its borrowings. The
profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and
second-lien mortgage loan products. Generally, first-lien mortgage production
increases relative to second-lien mortgage production in response to low
interest rates and second-lien mortgage production increases relative to
first-lien mortgage production during periods of high interest rates. A
significant decline in interest rates could decrease the size of the Company's
loan servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent servicing rights and residual receivables have been
capitalized on the books of the Company, higher than anticipated rates of loan
prepayments or losses could require the Company to write down the value of such
servicing rights and residual receivables, adversely impacting earnings.
Fluctuating interest rates may also affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sales and the interest paid by the Company for funds borrowed under
the Company's warehouse line of credit.
YEAR 2000
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs or hardware that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send statements, or engage in similar normal business
activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace portions of its software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be mitigated. However, if
such modifications and replacements are not made, or are not completed timely,
the Year 2000 Issue could have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems (both IT and non-IT)
that could be significantly affected by the Year 2000. The completed assessment
indicated that most of the Company's significant information technology systems
were year 2000 compliant, but this assessment identified some portions that
require remediation or upgrades. The Company has substantially completed all
four phases of its Year 2000 plan for its systems. Accordingly, the Company does
not believe that the Year 2000 presents a material exposure. In addition, the
Company has gathered information about the Year 2000 compliance status of its
significant suppliers and subcontractors and continues to monitor their
compliance.
<PAGE>
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company has queried its significant suppliers and subcontractors in
writing and received written representation of their Year 2000 compliance. 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 $100,000 and is being funded through operating cash flows. To date,
the Company has incurred approximately $81,000 ($66,000 expensed and $15,000
capitalized for new systems and equipment), related to all phases of the Year
2000 project. Of the total remaining project costs, approximately $19,000 is
attributable to the purchase of software and upgrades, which will be expensed as
incurred.
RISKS
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the Company
has not yet completed all necessary phases of the Year 2000 program. In the
event that the Company does not complete any additional phases, the Company
would temporarily be unable to engage in normal business activities on and after
January 1, 2000. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems product failure, for
example, equipment shutdown or failure to properly date business records. The
amount of potential liability and lost revenue cannot be reasonably estimated at
this time.
CONTINGENCY PLAN
The Company has contingency plans for certain critical applications and
is working on such plans for other non-critical applications. These contingency
plans involve, among other actions, manual processes and alternative methods of
processing information using personal computers versus main frame applications,
etc., and adjusting staffing assignments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse
changes in market price and interest rates. This risk of loss can be reflected
in diminished current market values and/or reduced potential net interest income
in future periods.
The Company's market risk arises primarily from interest rate risk
inherent in its lending, its holding of residual receivables and its investor
savings activities. The structure of the Company's loan and investor savings
portfolios is such that a significant rise or decline in interest rates may
adversely impact net market values and net interest income. The Company does not
maintain a trading account nor is the Company subject to currency exchange risk
or commodity price risk. Responsibility for monitoring interest rate risk rests
with senior management. Senior management regularly reviews the Company's
interest rate risk position and adopts balance sheet strategies that are
intended to optimize operating earnings while maintaining market risk within
acceptable limits. To estimate the impact that changes in interest rates would
have on the Company's earnings, management uses simulation analysis.
While the Company monitors interest rates and may, from time to time,
employ a strategy designed to hedge some of the risks associated with changes in
interest rates, no assurance can be given that the Company's results of
operations and financial condition will not be adversely affected during periods
of fluctuations in interest rates.
The Company's strategy is to sell or securitize its loans within three
months of production. Because the interest rates on the Company's warehouse
lines of credit used to fund and acquire loans are variable and the rates
charged on loans the Company originates are fixed, increases in the interest
rates after loans are originated and prior to their sale may reduce the gain on
loan sales earned by the Company. There were no significant open hedging
positions as of March 31, 1999.
33
<PAGE>
On loans originated for inclusion in securitized pools, the Company,
from time to time, employs a strategy designed to hedge some of the risks
associated with changes in interest rates. However, there were no significant
open hedging positions at March 31, 1999. The Company's interest rate hedging
strategy includes shorting interest rate futures and treasury forwards, and
entering into interest-rate lock agreements relating to loans pending a
securitization transaction. The ultimate sale of the Company's loans included in
a securitized 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 securitized mortgage pools. An acceleration of
prepayment on loans held in the securitized pools would have a negative impact
on the carry value of the residual assets.
Simulation analysis is performed using a computer-based asset/liability
model which incorporates current portfolio balances and rates, contractual
maturities, repricing opportunities and assumptions about prepayments, future
interest rates and future volumes. To measure the sensitivity of the Company's
earnings, the results of multiple simulations, which assume changes in interest
rates, are compared to the "base case" simulation, which assumes no changes in
interest rates. The sensitivity of earnings is expressed as the annual dollar
change in comparison to the "base case" simulation. The model assumes an
immediate parallel shift in interest rates.
As a result of the Company's interest rate position, a 100 basis
immediate increase in interest rates would result in a negative impact on
projected earning of $537,000 and $652,000 computed as of March 31, 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. The
Company's earnings projection as of March 31, 1999 and December 31, 1998
assuming an immediate reduction of 100 basis points in market rates would result
in a negative impact on projected earnings of $2.2 million and $2.4 million,
respectively. A significant portion of the negative 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
point reduction on investor notes assuming a 100 basis point reduction in market
rates. The rates offered on the investor notes have not historically moved with
changes in market rates.
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.
34
<PAGE>
PART II. OTHER INFORMATION
35
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are, from time to time,
parties to various legal actions arising in the normal course
of business. Management believes that there is no proceeding
threatened or pending against the Company or any of its
subsidiaries that, if determined adversely, would have a
materially adverse effect on the operations, profitability or
financial condition of the Company or any of its subsidiaries.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The Company's common stock presently is traded on the NASDAQ
National Market under the symbol "HGFN". In the first quarter
of 1999, the Company received notice from NASDAQ of its
intention to delist its stock. The Company appealed NASDAQ's
notice and received an exception and a modification of the
exception. The terms of the modified exception are as follows:
on or before May 14, 1999, the Company must make a public
filing with the SEC and NASDAQ, evidencing a minimum of $13.2
million in net tangible assets. The filing must contain a
March 31, 1999 balance sheet, with pro forma adjustments for
any significant events or transactions occurring on or before
the filing date. In addition, on or before June 30, 1999, the
Company must make a filing with NASDAQ containing a May 31,
1999 balance sheet, evidencing a minimum of $11.0 million in
net tangible assets, with pro forma adjustments for any
significant events or transactions occurring on or before the
filing date. Finally, on or before August 16, 1999, the
Company must make a public filing with the SEC and NASDAQ,
evidencing a minimum of $11.0 in net tangible assets as of
June 30, 1999.
In order to fully comply with the terms of this exception, the
Company must be able to demonstrate compliance with all
requirements for continued listing on the NASDAQ National
market. In the event the Company fails to comply with any of
the terms of this modified exception, its securities may be
listed on "The NASDAQ SmallCap Market" pursuant to the
maintenance criteria. Based on the Company's current financial
conditions and its forecasted operations, the Company
anticipates being able to meet the financial conditions that
are outlined in the modified exception. However, no assurance
can be given that the Company's actual operating results will
meet the criteria for continued listing on the NASDAQ National
Market.
As of March 31, 1999 the Company's net tangible assets
exceeded the $13.2 million criteria established by NASDAQ.
<TABLE>
<CAPTION>
<S> <C>
Total shareholders' equity (per consolidated balance sheets) $14,892,000
Excess of cost over net assets of acquired businesses, net (1,636,000)
-----------
Net tangible assets $13,256,000
===========
</TABLE>
As of the date of this filing, there were no significant
events or transactions that would adversely affect the above
calculation.
36
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
27.1-- Financial Data Schedule.
b) Reports on Form 8-K
-------------------
None
37
<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: May 7, 1999
By: \s\ Kevin J. Mast
-----------------------------------------
Kevin J. Mast,
Executive Vice President, Chief Financial
Officer, and Treasurer
38
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000277028
<NAME> HOMEGOLD FINANCIAL, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 16753
<SECURITIES> 0
<RECEIVABLES> 114948
<ALLOWANCES> 6183
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 23601
<DEPRECIATION> 4428
<TOTAL-ASSETS> 217369
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
491
0
<COMMON> 0
<OTHER-SE> 14401
<TOTAL-LIABILITY-AND-EQUITY> 217369
<SALES> 0
<TOTAL-REVENUES> 8266
<CGS> 0
<TOTAL-COSTS> 10889
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 4798
<INCOME-PRETAX> (7502)
<INCOME-TAX> 450
<INCOME-CONTINUING> (7949)
<DISCONTINUED> 0
<EXTRAORDINARY> 16946
<CHANGES> 0
<NET-INCOME> 8997
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
<FN>
<F1>
FOOTNOTE (1) Unclassified Balance Sheet
</FN>
</TABLE>
