SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 2000.
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
stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title of each Class: Outstanding at July 31, 2000
------------------------------------------------- -----------------------------------
<S> <C>
Series A Non-convertible Preferred Stock, par value $1.00 per share 10,000,000
Common Stock, par value $0.001 per share 16,785,330
</TABLE>
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
Form 10-Q
Quarter Ended JUNE 30, 2000
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
------ --------------------- ----
<S> <C> <C>
Item 1. Financial Statements for HomeGold Financial, Inc.
Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the Six Months Ended June 30, 2000 and 1999
and for the Three Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Shareholders' Equity
for the Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 19
Item 3. Disclosures About Market Risk 29
PART II. OTHER INFORMATION
-------- -----------------
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 32
Item 6. Exhibits and Reports on Form 8-K 34
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
(In thousands)
ASSETS (Unaudited) (Audited)
------
<S> <C> <C>
Cash and cash equivalents $ 11,659 $ 26,009
Restricted cash 6,017 5,314
Loans receivable 128,885 62,958
Less allowance for credit losses on loans (4,275) (6,344)
----------------- -----------------
Net loans receivable 124,610 56,614
Income taxes receivable 353 461
Accrued interest receivable 1,796 1,423
Other receivables 7,419 8,059
Residual receivable, net 56,259 47,770
Property and equipment, net 22,766 17,160
Real estate and personal property acquired through foreclosure 4,334 7,673
Excess of cost over net assets of acquired businesses, net of accumulated
amortization of $1,012 in 2000 and $748 in 1999 20,868 1,566
Debt origination costs, net 343 1,658
Deferred income tax asset, net 12,000 12,000
Servicing asset 763 867
Other assets 2,392 2,163
----------------- -----------------
Total assets $ 271,579 $ 188,737
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Revolving warehouse lines of credit $ 92,925 17,808
Other borrowings 3,795 --
Investor savings:
Notes payable to investors 127,859 127,065
Subordinated debentures 25,960 17,710
----------------- -----------------
Total investor savings 153,819 144,775
Senior unsecured debt 11,579 12,134
Other liabilities:
Accounts payable and accrued liabilities 5,722 4,120
Remittances payable 1,349 1,078
Income taxes payable 278 120
Accrued interest payable 1,343 845
----------------- -----------------
Total other liabilities 8,692 6,163
----------------- -----------------
Total liabilities 270,810 180,880
Minority interest 7 13
Shareholders' equity:
Preferred stock , par value $1.00 per share- authorized 20,000,000 shares, issued
and outstanding 10,000,000 shares at June 30, 2000 and 0 shares at December 31, 1999 10,000 --
Common stock, par value $.001 per share at June 30, 2000 and 0.05 at December 31,
1999 10,149,629 - authorized 100,000,000 shares, issued and oustanding 16,785,330 17 507
shares at June 30, 2000 and shares at December 31, 1999
Capital in excess of par value 46,628 39,028
Note receivable from shareholder (5,801) --
Retained earnings (deficit) (50,082) (31,691)
----------------- -----------------
Total shareholders' equity 762 7,844
Total liabilities and shareholders' equity $ 271,579 188,737
================= =================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements, which are an
integral part of these statements.
3
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, For the Three Months Ended June 30,
------------------------------------ ------------------------------------
2000 1999 2000 1999
--------------- ----------------- ----------------- -----------------
(In thousands, except share data)
REVENUES:
<S> <C> <C> <C> <C>
Interest income $ 5,606 $ 4,956 3,679 1,618
Servicing income 4,220 5,010 2,216 2,608
Gain on sale of loans 4,944 4,389 3,090 3,216
Loan fees, net 6,051 2,373 5,620 1,416
--------------- ----------------- ----------------- -----------------
Total revenue from loans and investments 20,821 16,728 14,605 8,858
Other revenues 939 750 429 354
--------------- ----------------- ----------------- -----------------
Total revenues 21,760 17,478 15,034 9,212
--------------- ----------------- ----------------- -----------------
EXPENSES:
Interest 8,884 8,987 4,881 4,189
Provision for (recapture of) credit losses 1,642 (349) 652 (430)
Fair value write-down of residual receivable 1,634 775 555 828
Salaries, wages and employee benefits 12,868 10,903 7,955 5,232
Business development costs 3,651 2,427 1,811 1,237
Other general and administrative expenses 11,453 8,207 7,587 4,126
--------------- ----------------- ----------------- -----------------
Total expenses 40,132 30,950 23,441 15,182
--------------- ----------------- ----------------- -----------------
Loss before income taxes, minority interest and
extraordinary item (18,372) (13,472) (8,407) (5,970)
Provision for income taxes 335 620 190 170
--------------- ----------------- ----------------- -----------------
Loss before minority interest and extraordinary (18,707) (14,092) (8,597) (6,140)
item
Minority interest in (income) loss of subsidiaries (1) (4) 1 (7)
--------------- ----------------- ----------------- -----------------
Loss before extraordinary item (18,708) (14,096) (8,596) (6,147)
Extraordinary item-gain on extinguishment of debt,
net of $0 tax 318 21,227 92 4,281
--------------- ----------------- ----------------- -----------------
Net income (loss) $ (18,390) $ 7,131 $ (8,504) $ (1,866)
=============== ================= ================= =================
Basic and diluted earnings (loss) per share of common
stock:
Loss before extraordinary item $ (1.55) $ (1.44) $ (0.62) $ (0.63)
Extraordinary item, net of taxes 0.03 2.16 0.01 0.44
--------------- ----------------- ----------------- -----------------
Net income (loss) $ (1.52) $ 0.72 $ (0.61) $ (0.19)
=============== ================= ================= =================
Basic and diluted weighted average shares outstanding 12,056,931 9,809,798 13,943,164 9,827,228
=============== ================= ================= =================
</TABLE>
See Notes to Unaudited Consolidated Financial Statements, which are an
integral part of these statements.
4
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------
2000 1999
---------------- ----------------
(In thousands)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (18,390) $ 7,131
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 1,606 1,386
Provision for (recapture of) credit losses on loans 1,642 (349)
Gain on retirement of senior unsecured debt (318) (21,227)
Loss on real estate acquired through foreclosure 840 1,319
Fair value write-down of residual receivable 1,634 775
Loans originated with intent to sell (286,436) (117,364)
Proceeds from loans sold 203,223 102,573
Proceeds from securitization of loans 21,732 59,630
Other (302) (646)
Net changes in operating assets and liabilities (18,570) (7,272)
---------------- ----------------
Net cash provided by (used in) operating activities $ (93,339) $ 25,956
---------------- ----------------
INVESTING ACTIVITIES:
Loans originated or purchased for investment purposes $ (259) $ (1,608)
Principal collections on loans not sold 22,162 12,486
Proceeds from sale of real estate and personal property
acquired through foreclosure 7,272 4,009
Proceeds from sale of property and equipment 44 141
Purchase of property and equipment (34) (432)
Loan to shareholder (4,000) --
Other (4,671) (2,145)
---------------- ----------------
Net cash provided by investing activities $ 20,514 $ 12,451
---------------- ----------------
FINANCING ACTIVITIES:
Advances on revolving warehouse lines of credit $ 367,968 $ 111,853
Payments on revolving warehouse lines of credit (318,300) (128,590)
Retirement of senior unsecured debt (237) (28,059)
Net increase in notes payable to investors 794 2,800
Net increase (decrease) in subordinated debentures 8,250 2,730
Proceeds from issuance of common stock -- 149
----------------
Net cash provided by (used in) financing activities $ 58,475 $ (39,117)
---------------- ----------------
Net (decrease) in cash and cash equivalents $ (14,350) $ (710)
CASH AND CASH EQUIVALENTS:
Beginning of period 26,009 36,913
---------------- ----------------
End of period $ 11,659 $ 36,203
================ ================
</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 SHAREHOLDERS' EQUITY
For The Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Common Stock
----------------------- Note
Capital in Receivable Retained
Shares Excess of Preferred from Earnings
Issued Amount Par Value Stock Shareholder (Deficit)
------------ --------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 9,733,374 $ 486 $ 38,821 $ -- $ -- $ (33,506)
Shares issued:
Exercise of stock options 2,000 3 -- -- --
Exercise of restricted stock options 65,159 -- -- -- -- --
Employee Stock Purchase Plan -- 3 24 -- -- --
Officer/Director Compensation 44,118 3 116 -- --
Other shares issued (332) -- --
Net income -- -- -- -- -- 7,131
------------ --------- ------------ ---------- ------------ ------------
Balance at June 30, 1999 9,844,319 492 38,964 -- -- (26,375)
Balance at December 31, 1999 10,149,629 507 39,028 -- -- (31,691)
Change in par from $0.05 to $0.001 (490) 490 -- --
Shares issued:
Employee Stock Purchase Plan 21,787 1 20 -- -- --
Officer/Director Compensation 61,540 3 45 -- -- --
Share Cancellation (228,570) (11)
Shares issued in HomeSense Merger 6,780,944 7 7,045 -- --
Shares issued in HomeSense Merger 10,000 --
Note Receivable from Shareholder -- (5,801)
Other -- -- -- -- --
Net income -- -- -- -- -- (18,391)
------------ --------- ------------ ---------- ------------ ------------
Balance at June 30, 2000 16,785,330 $ 17 $ 46,628 $ 10,000 $ (5,801) $ (50,082)
============ ========= ============ ========== ============ ============
<CAPTION>
Total
Shareholders'
Equity
---------------
<S> <C>
Balance at December 31, 1998 $ 5,801
Shares issued:
Exercise of stock options 3
Exercise of restricted stock options --
Employee Stock Purchase Plan 27
Officer/Director Compensation 119
Other shares issued
Net income 7,131
---------------
Balance at June 30, 1999 13,081
Balance at December 31, 1999 7,844
Change in par from $0.05 to $0.001 --
Shares issued:
Employee Stock Purchase Plan 21
Officer/Director Compensation 48
Share Cancellation (11)
Shares issued in HomeSense Merger 7,052
Shares issued in HomeSense Merger 10,000
Note Receivable from Shareholder (5,801)
Other --
Net income (18,391)
---------------
Balance at June 30, 2000 $ 762
===============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements, which are an
integral part of these statements.
6
<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, 1999, including the footnotes thereto. Certain previously
reported amounts have been reclassified to conform to current year presentation.
Such reclassifications had no effect on net operations or shareholders' equity
as reported prior to its adoption.
The consolidated balance sheet as of June 30, 2000, and the
consolidated statements of operations for the six-month and three-month periods
ended June 30, 2000 and 1999, and the consolidated statements of cash flows for
the six-month periods ended June 30, 2000 and 1999, 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--MERGER WITH HOMESENSE FINANCIAL CORP.
On April 28, 2000, the shareholders of HomeGold Financial, Inc.
approved a merger agreement with HomeSense Financial Corp. and affiliated
companies (collectively "HomeSense"), a privately owned business, located in
Lexington, South Carolina. HomeSense is a specialized mortgage company that
originates and sells mortgage loans in the sub-prime mortgage industry, whose
principal loan product is a debt consolidation loan, generally collateralized by
a first lien on the borrower's home. HomeSense originates its loan volume
through a direct retail branch network of eight offices, as well as through
centrally provided telemarketing leads, direct mail, and television advertising.
As of May 9, 2000, the effective date of the merger, HGFN issued
6,780,944 shares of its common stock (40% of post-merger shares outstanding)
valued at $1.04 per share plus an additional 10 million shares of Series A
Non-convertible Preferred Stock (par value $1 per share) for 100% of the
outstanding stock of HomeSense. The merger was accounted for under the purchase
method of accounting prescribed by generally accepted accounting principles. The
transaction resulted in $19.5 million of goodwill, which is being amortized on a
straight line basis over 15 years. The results of operations of HomeSense are
included in the accompanying financial statements from the date of the
acquisition.
The following summarized unaudited pro forma financial information
assumes the acquisition had occurred on January 1 of each year:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------
2000 1999
---------------- ----------------
(In thousands)
<S> <C> <C>
Revenue $ 31,682 $ 28,064
Income before extraordinary items (19,426) (14,571)
Net income (18,584) 6,334
Earnings per share (1.24) 0.38
</TABLE>
The amounts are based upon certain assumptions and estimates, and do not reflect
any benefit from economies which might be achieved from combined operations. The
pro forma results do not necessarily represent results which would have occurred
if the acquisition had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.
7
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--CASH FLOW INFORMATION
For the six-month periods ended June 30, 2000 and 1999, the Company
paid interest of $8.4 million and $10.7 million, respectively.
For the six-month periods ended June 30, 2000 and 1999, the Company
paid income taxes of $177,000 and $1.1 million, respectively.
For the six-month periods ended June 30, 2000 and 1999, the Company
foreclosed on property in the amount of $1.9 million and $2.3 million,
respectively.
During the six months ended June 30, 2000 in connection with the
HomeSense merger the following non cash items were recorded:
(In thousands)
Loans receivable $ 29,244
Property and equipment, net 5,800
Goodwill 19,500
Revolving warehouse lines of credit 29,244
Preferred stock 10,000
Common stock 7
Capital in excess of par value 7,045
NOTE 4--CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company maintains its primary checking accounts with one principal
bank and makes overnight investments in reverse repurchase agreements with that
bank, as well as other short-term investments in a money manager fund of the
bank. The amounts maintained in the checking accounts are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000. At June 30, 2000, the
amounts maintained in overnight investments in reverse repurchase agreements and
other short-term investments, which are not insured by the FDIC, totaled
approximately $12.3 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
loan unit. This account is shown as restricted cash, and is invested in
overnight investments or short-term U.S. Treasury Securities. Additional
restricted cash is maintained as part of the Company's primary checking account
relationship with one principal bank.
NOTE 5--RESIDUAL RECEIVABLES AND SALES AND SECURITIZATIONS OF LOANS
In 1997, the Company began securitizing mortgage loans, whereby it
sells the loans that it originates or purchases to a trust for cash, and records
certain assets and income based upon the difference between all principal and
interest received from the loans sold and (i) all principal and interest
required to be passed through to the asset-backed bond investors, (ii) all
excess contractual servicing fees, (iii) other recurring fees and (iv) an
estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the
time of the securitization, the Company estimates these amounts based upon a
declining principal balance of the underlying loans, adjusted by an estimated
prepayment and loss rate, and capitalizes these amounts using a discount rate
that market participants would use for similar financial instruments. These
capitalized assets are recorded as a residual receivable. The Company believes
the assumptions it has used to value the residual receivable are appropriate and
reasonable. At each reporting period, the Company assesses the fair value of
these residual assets based on the present value of future cash flows expected
under management's current best estimates of the key assumptions-credit losses,
prepayment speed, forward yield curves, and discount rates commensurate with the
risks involved and adjusts the recorded amounts to their estimated fair value.
8
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company makes securitization decisions based on a number of factors
including conditions in the secondary market, the aggregate size and weighted
average coupon of loans available to sell, fixed costs associated with
securitization transactions, and liquidity needs. Total mortgage loans
securitized in 2000 and 1999 were $41.6 million and $59.6 million, respectively.
In 1999, the Company completed a securitization transaction in the
second quarter. The Company securitized $59.6 million of loans for a weighted
average premium of 2.88%. This securitization consisted of seasoned first and
second lien mortgage loans, resulting in a lower than average premium. Certain
loans included in that securitization were ineligible for inclusion in the
borrowing base under the Company's warehouse line of credit.
In 2000, the Company completed a securitization transaction in the
second quarter. The Company securitized $41.6 million of loans substantially at
par value. This securitization consisted primarily of mortgage loans not
eligible for inclusion in the borrowing base under the Company's warehouse lines
of credit and not readily marketable for the secondary market.
NOTE 6--WAREHOUSE LINES OF CREDIT AND OTHER BORROWINGS
Prior to the Company's merger with HomeSense, the Company had a $100
million revolving warehouse line of credit with CIT Group/Business Credit, Inc.
("CIT") to fund its mortgage loan originations. The credit facility bears
interest at prime rate plus 0.75% and matures on June 30, 2001. The credit
facility contains certain covenants, including, but not limited to, covenants
that require a minimum availability of $10.0 million on the line of credit and
covenants that impose limitations on the Company and its subsidiaries with
respect to declaring or paying dividends, minimum CII Notes outstanding, and
loans and advances by HGI and CII to the Company. As of the effective date of
and in connection with the Company's merger with HomeSense, the terms of the CIT
line of credit were modified to reduce the maximum commitment to $50 million.
The agreement stipulates incremental decreases in the maximum commitment, based
on certain criteria, to $25 million at December 31, 2000. At June 30, 2000, the
maximum commitment was $47 million. The maturity date, rates of interest,
advance rates, and collateral requirements remain unchanged. Availability under
the credit agreement is determined based on eligible collateral as defined under
the agreement, for which the Company has forwarded to the bank the required loan
files and documentation. The borrowing base adjusted for the $10.0 million
minimum availability requirements would have allowed a maximum borrowing level
based on eligible collateral of $33.7 million at June 30, 2000 and $18.9 million
at December 31, 1999. Therefore, after considering the outstanding borrowings
under the line of credit of $33.1 million and $17.8 million, respectively, the
Company had $600,000 and $1.1 million, respectively, of immediate availability
under this agreement on June 30, 2000 and December 31, 1999, based on its
existing borrowing base.
In connection with the merger, the Company entered into a new $40
million revolving warehouse line of credit with Household Commercial Financial
Services, Inc. Subsequent to the merger, the maximum commitment was increased to
$50 million. The line bears interest at the Prime rate plus .25% and is
collateralized by mortgage loan receivables. The agreement requires, among other
matters, minimum net worth of the Company of $10,000,000 commencing August 31,
2000, a leverage ratio of less than 35 to 1, and positive consolidated net
income for each quarter beginning on or after July 1, 2000. The revolving credit
agreement matures on April 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 would have allowed a maximum borrowing level
based on eligible collateral of $40.1million at June 30, 2000. Therefore, after
considering the outstanding borrowings under the line of credit of $35.6
million, the Company had $4.5 million of immediate availability under this
agreement at June 30, 2000.
Prior to the merger, HomeSense negotiated a $25 million revolving
purchase facility with Residential Mortgage Services of Texas ("RMST"). This
agreement was amended at the time of the merger to extend to the merged entity.
The facility bears interest at the Prime rate plus .75%. The agreement is
structured as a purchase of the mortgages by RMST, subject to a limited right of
RMST to require the repurchase of defective mortgages by the Company. At June
30, 2000, the Company had outstanding purchased mortgages of $24.2 million.
The Company believes that it is currently in compliance with the loan
covenants included in its warehouse lines of credit and its revolving purchase
facility.
9
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company assumed an operating line of credit of $1,860,000 with
Branch Banking & Trust Company ("BB&T") in connection with the merger. The line
is secured by a $1.0 million certificate of deposit held by the bank. Monthly
principal and interest payments are payable for twenty-four months beginning
July 5, 2000. The line bears interest at LIBOR plus 2.5%.
The Company also assumed a mortgage note of $2.0 million with Bank of
America, N.A. in connection with the merger. The note matures on November 2,
2000, and bears interest at the Prime rate plus .25%. The note is secured by a
mortgage on the Company's building in Lexington, South Carolina, as well as a
piece of investment property.
NOTE 7--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. In the six months ended June 30, 2000 and in fiscal 1999, the
Company purchased $555,000 and $74.5 million, respectively, in aggregate
principal amount of its Senior Notes in open market transactions. As a result of
these repurchases, the Company recorded an extraordinary gain on extinguishment
of debt of $92,000 in the second quarter of 2000, and $4.3 million in the second
quarter of 1999. For the six months ended June 30, 2000 and the year ended
December 31, 1999, the Company recognized $318,000 and $29.5 million,
respectively, of extraordinary gains from extinguishment of debt. Remaining
Senior Notes outstanding as of June 30, 2000 totaled $11.6 million.
The Company may, from time to time, purchase more of its Senior Notes
depending on its cash needs, market conditions, and other factors. The indenture
pertaining to the Senior Notes contains various restrictive covenants including
limitations on, among other things, the incurrence of certain types of
additional indebtedness, the payment of dividends and certain other payments,
the ability of the Company's subsidiaries to incur further limitations on their
ability to pay dividends or make other payments to the Company, liens, asset
sales, the issuance of preferred stock by the Company's subsidiaries and
transactions with affiliates. At June 30, 2000, 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. No existing debt of any of the
existing subsidiaries, other than the CII subordinated debentures, is currently
considered to be subordinated to the Senior Notes. The Guarantee by CII is equal
in priority to CII's notes payable to investors and is senior to CII's
subordinated debentures.
The Company has included consolidating condensed financial data of the
combined subsidiaries of the Company in these financial statements. The Company
believes that providing the condensed consolidating information is of material
interest to investors in the Senior Notes and has not presented separate
financial statements for each of the wholly-owned Subsidiary Guarantors, because
it was deemed that such financial statements would not provide investors with
any material additional information. At both June 30, 2000 and December 31,
1999, all of the Subsidiary Guarantors were wholly-owned by the Company.
The Subsidiary Guarantors of the Company's Senior Notes at June 30,
2000 consist of the following wholly-owned subsidiaries of the Company:
HomeGold, Inc.
Emergent Mortgage Corp. of Tennessee
Carolina Investors, Inc.
Emergent Insurance Agency Corp.
Emergent Business Capital Asset Based Lending, Inc.
10
<PAGE>
Investments in subsidiaries are accounted for by the parent company and
Subsidiary Guarantors on the equity method for the purposes of the consolidating
financial data. Earnings of subsidiaries are therefore reflected in the parent's
and Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions. Certain sums in the following tables may reflect
immaterial rounding differences.
As of June 30, 2000 and December 31, 1999, the Subsidiary Guarantors
conduct all of the Company's operations, other than the investment of certain
residual receivables through its special purpose securitization subsidiaries.
11
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
June 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 209 $ 11,449 $ 1 $ -- $ 11,659
Restricted cash 5,017 1,000 -- -- 6,017
Loans receivable:
Loans receivable -- 128,885 -- -- 128,885
Notes receivable from other affiliates 6,638 40,250 9,049 (55,937) --
---------- ----------- ----------- ------------ ------------
Total loans receivable 6,638 169,135 9,049 (55,937) 128,885
Less allowance for credit losses on loans -- (4,275) -- -- (4,275)
---------- ----------- ----------- ------------ ------------
Net loans receivable 6,638 164,860 9,049 (55,937) 124,610
Income tax receivable -- 353 -- -- 353
Accrued interest receivable 78 1,718 -- -- 1,796
Other receivables -- 7,419 -- -- 7,419
Investment in subsidiaries 36,183 -- -- (36,183) --
Residual receivable, net 1,000 15,441 39,818 -- 56,259
Property and equipment, net -- 22,766 -- -- 22,766
Real estate and personal property acquired -- 4,334 -- -- 4,334
through foreclosure
Excess of cost over net assets of acquired 37 20,831 -- -- 20,868
businesses, net
Deferred income tax asset, net 3,510 8,490 -- -- 12,000
Other assets 259 3,239 -- -- 3,498
---------- ----------- ----------- ------------ ------------
Total assets $ 52,931 $ 261,900 $ 48,868 $ (92,120) $ 271,579
========== =========== =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Revolving warehouse lines of credit and $ -- $ 96,720 $ -- $ -- $ 96,720
other borrowings
Investor savings:
Notes payable to investors -- 127,859 -- -- 127,859
Subordinated debentures -- 25,960 -- -- 25,960
---------- ----------- ----------- ------------ ------------
Total investor savings -- 153,819 -- -- 153,819
Senior unsecured debt 11,579 -- -- -- 11,579
Other liabilities:
Accounts payable and accrued liabilities -- 5,722 -- -- 5,722
Remittances payable -- 1,349 -- -- 1,349
Income taxes payable -- 278 -- -- 278
Accrued interest payable 340 1,003 -- -- 1,343
Due to (from) affiliates -- (8,275) 8,275 -- --
---------- ----------- ----------- ------------ ------------
Total other liabilities 340 77 8,275 -- 8,692
Subordinated debt to affiliates 40,250 15,687 -- (55,937) --
---------- ----------- ----------- ------------ ------------
Total liabilities 52,169 266,303 8,275 (55,937) 270,810
Minority interest -- 1 6 -- 7
Shareholders' equity:
Common stock 17 998 2 (1,000) 17
Preferred stock 10,000 -- -- -- 10,000
Capital in excess of par value 46,628 93,095 48,807 (141,902) 46,628
Note receivable from shareholder (5,801) (5,801) -- 5,801 (5,801)
Retained earnings (deficit) (50,082) (92,696) (8,222) 100,918 (50,082)
---------- ----------- ----------- ------------ ------------
Total shareholders' equity 762 (4,404) 40,587 (36,183) 762
---------- ----------- ----------- ------------ ------------
Total liabilities and shareholders' equity $ 52,931 $ 261,900 $ 48,868 $ (92,120) $ 271,579
========== =========== =========== ============ ============
</TABLE>
12
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING BALANCE SHEETS
December 31, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ------------ ------------
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 202 $ 25,806 $ 1 $ -- $ 26,009
Restricted cash 5,314 -- -- -- 5,314
Loans receivable:
Loans receivable -- 62,958 -- -- 62,958
Notes receivable from affiliates 7,097 36,229 4,584 (47,910) --
---------- ----------- ----------- ------------ ------------
Total loans receivable 7,097 99,187 4,584 (47,910) 62,958
Less allowance for credit losses on loans -- (6,344) -- -- (6,344)
---------- ----------- ----------- ------------ ------------
Net loans receivable 7,097 92,843 4,584 (47,910) 56,614
Other Receivables:
Income tax -- 461 -- -- 461
Accrued interest receivable 36 1,387 -- -- 1,423
Other receivables 1,006 7,053 -- -- 8,059
Investment in subsidiaries 31,487 -- -- (31,487) --
Residual receivable, net -- 4,545 43,225 -- 47,770
Property and equipment, net -- 17,160 -- -- 17,160
Real estate and personal property acquired -- 7,673 -- -- 7,673
through foreclosure
Excess of cost over net assets of acquired 38 1,528 -- -- 1,566
businesses, net
Deferred income tax asset, net 3,510 8,490 -- -- 12,000
Other assets 304 4,384 -- -- 4,688
---------- ----------- ----------- ------------ ------------
Total assets $ 48,994 $ 171,330 $ 47,810 $ (79,397) $ 188,737
========== =========== =========== ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Revolving warehouse lines of credit $ -- $ 17,808 $ -- $ -- $ 17,808
Investor savings:
Notes payable to investors -- 127,065 -- -- 127,065
Subordinated debentures -- 17,710 -- -- 17,710
---------- ----------- ----------- ------------ ------------
Total investor savings -- 144,775 -- -- 144,775
Senior unsecured debt 12,134 -- -- -- 12,134
Accounts payable and accrued liabilities -- 4,120 -- -- 4,120
Remittances payable -- 1,078 -- -- 1,078
Income taxes payable -- 120 -- -- 120
Accrued interest payable 384 461 -- -- 845
Due to (from) affiliates 28,632 -- 7,597 (36,229) --
---------- ----------- ----------- ------------ ------------
Total other liabilities 29,016 5,779 7,597 (36,229) 6,163
Subordinated debt to affiliates -- 11,681 -- (11,681) --
Total liabilities 41,150 180,043 7,597 (47,910) 180,880
Minority interest -- (1) 14 -- 13
Shareholders' equity:
Common stock 507 998 2 (1,000) 507
Capital in excess of par value 39,028 66,043 48,807 (114,850) 39,028
Retained earnings (deficit) (31,691) (75,753) (8,610) 84,363 (31,691)
---------- ----------- ----------- ------------ ------------
Total shareholders' equity 7,844 (8,712) 40,199 (31,487) 7,844
---------- ----------- ----------- ------------ ------------
Total liabilities and shareholders' equity $ 48,994 $ 171,330 $ 47,810 $ (79,397) $ 188,737
========== =========== =========== ============ ============
</TABLE>
13
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2000
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ----------- -----------
REVENUES:
<S> <C> <C> <C> <C> <C>
Interest income $ 600 $ 7,346 $ -- $ (2,340) $ 5,606
Servicing income -- 712 3,508 -- 4,220
Gain on sale of loans -- 4,944 -- -- 4,944
Loan fees, net -- 6,051 -- -- 6,051
----------- ------------- ------------ ----------- -----------
Total revenue from loans and investments 600 19,053 3,508 (2,340) 20,821
Other revenues -- 968 -- (29) 939
----------- ------------- ------------ ----------- -----------
Total revenues 600 20,021 3,508 (2,369) 21,760
EXPENSES:
Interest 2,639 8,585 -- (2,340) 8,884
Recapture of credit losses -- 1,642 -- -- 1,642
Fair market write-down of residual receivable -- 81 1,553 -- 1,634
Salaries, wages and employee benefits -- 12,868 -- -- 12,868
Business development costs -- 3,651 -- -- 3,651
Other general and administrative expenses 116 11,366 -- (29) 11,453
----------- ------------- ------------ ----------- -----------
Total expenses 2,755 38,193 1,553 (2,369) 40,132
----------- ------------- ------------ ----------- -----------
Income (loss) before income taxes, minority interest, and (2,155) (18,172) 1,955 -- (18,372)
equity in undistributed earnings (loss) of subsidiaries
Earnings (loss) of subsidiaries (16,554) -- -- 16,554 --
----------- ------------- ------------ ----------- -----------
Income (loss) before income taxes, minority interest and (18,709) (18,172) 1,955 16,554 (18,372)
extraordinary item
Provision (benefit) for income taxes -- 335 -- -- 335
----------- ------------- ------------ ----------- -----------
Income (loss) before minority interest and (18,709) (18,507) 1,955 16,554 (18,707)
extraordinary item
Minority interest in loss of subsidiaries -- (1) -- -- (1)
----------- ------------- ------------ ----------- -----------
Net income before extraordinary item (18,709) (18,508) 1,955 16,554 (18,708)
Extraordianary item - gain on extinquishment of debt 318 -- -- -- 318
----------- ------------- ------------ ----------- -----------
Net income (loss) $ (18,391) $ (18,508) $ 1,955 $ 16,554 $ (18,390)
=========== ============= ============ =========== ===========
</TABLE>
Six Months Ended June 30, 1999
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ----------- -----------
REVENUES:
<S> <C> <C> <C> <C> <C>
Interest income $ 3,024 $ 4,808 $ -- $ (2,876) $ 4,956
Servicing income -- 3,420 1,590 -- 5,010
Gain on sale of loans -- 4,389 -- -- 4,389
Loan fees, net -- 2,373 -- -- 2,373
----------- ------------- ------------ ----------- -----------
Total revenue from loans and investments 3,024 14,990 1,590 (2,876) 16,728
Other revenues 8 877 2 (137) 750
----------- ------------- ------------ ----------- -----------
Total revenues 3,032 15,867 1,592 (3,013) 17,478
EXPENSES:
Interest 3,276 8,587 -- (2,876) 8,987
Recapture of credit losses -- (349) -- -- (349)
Fair market write-down of residual receivable -- 367 408 -- 775
Salaries, wages and employee benefits -- 10,903 -- -- 10,903
Business development costs -- 2,427 -- -- 2,427
Other general and administrative expenses 299 8,044 1 (137) 8,207
----------- ------------- ------------ ----------- -----------
Total expenses 3,575 29,979 409 (3,013) 30,950
----------- ------------- ------------ ----------- -----------
Income (loss) before income taxes, minority interest, and (543) (14,112) 1,183 -- (13,472)
equity in undistributed earnings (loss) of subsidiaries
Earnings (loss) of subsidiaries (13,553) (1,178) 1,178 13,553 --
----------- ------------- ------------ ----------- -----------
Income (loss) before income taxes, minority interest and (14,096) (15,290) 2,361 13,553 (13,472)
extraordinary item
Provision (benefit) for income taxes -- 620 -- -- 620
----------- ------------- ------------ ----------- -----------
Income (loss) before minority interest and (14,096) (15,910) 2,361 13,553 (14,092)
extraordinary item
Minority interest in loss of subsidiaries -- (4) -- -- (4)
----------- ------------- ------------ ----------- -----------
Net income before extraordinary item (14,096) (15,914) 2,361 13,553 (14,096)
Extraordianary item - gain on extinquishment of debt 21,227 -- -- -- 21,227
----------- ------------- ------------ ----------- -----------
Net income (loss) $ 7,131 $ (15,914) $ 2,361 $ 13,553 $ 7,131
=========== ============= ============ =========== ===========
</TABLE>
14
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended June 30, 2000
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------ ------------
REVENUES:
<S> <C> <C> <C> <C> <C>
Interest income $ 311 $ 4,746 $ -- $ (1,378) $ 3,679
Servicing income -- 321 1,895 -- 2,216
Gain on sale of loans -- 3,090 -- -- 3,090
Loan fees, net -- 5,620 -- -- 5,620
----------- ------------- ------------ ------------ ------------
Total revenue from loans and investments 311 13,777 1,895 (1,378) 14,605
Other revenues -- 443 -- (14) 429
----------- ------------- ------------ ------------ ------------
Total revenues 311 14,220 1,895 (1,392) 15,034
EXPENSES:
Interest 1,515 4,744 -- (1,378) 4,881
Recapture of credit losses -- 652 -- -- 652
Fair market write-down of residual receivable -- (431) 986 -- 555
Salaries, wages and employee benefits -- 7,955 -- -- 7,955
Business development costs -- 1,811 -- -- 1,811
Other general and administrative expenses 83 7,518 -- (14) 7,587
----------- ------------- ------------ ------------ ------------
Total expenses 1,598 22,249 986 (1,392) 23,441
----------- ------------- ------------ ------------ ------------
Income (loss) before income taxes, minority interest, (1,287) (8,029) 909 -- (8,407)
and equity in undistributed earnings (loss) of
subsidiaries
Earnings (loss) of subsidiaries (7,310) -- -- 7,310 --
----------- ------------- ------------ ------------ ------------
Income (loss) before income taxes, minority interest (8,597) (8,029) 909 7,310 (8,407)
and extraordinary item
Provision (benefit) for income taxes -- 190 -- -- 190
----------- ------------- ------------ ------------ ------------
Income (loss) before minority interest and (8,597) (8,219) 909 7,310 (8,597)
extraordinary item
Minority interest in loss of subsidiaries -- 1 -- -- 1
----------- ------------- ------------ ------------ ------------
Income before extraordinary item (8,597) (8,218) 909 7,310 (8,596)
Extraordinary item - gain on extinquishment of debt 92 -- -- -- 92
----------- ------------- ------------ ------------ ------------
Net income (loss) $ (8,505) $ (8,218) $ 909 $ 7,310 $ (8,504)
=========== ============= ============ ============ ============
</TABLE>
Three Months Ended June 30, 1999
(Unaudited) (In thousands)
<TABLE>
<CAPTION>
Combined
Wholly-Owned Combined
Parent Guarantor Non-Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------- ------------ ------------ ------------
REVENUES:
<S> <C> <C> <C> <C> <C>
Interest income $ 837 $ 1,771 $ -- $ (990) $ 1,618
Servicing income -- 303 1,090 1,215 2,608
Gain on sale of loans -- 3,216 -- -- 3,216
Loan fees, net -- 1,416 -- -- 1,416
----------- ------------- ------------ ------------ ------------
Total revenue from loans and investments 837 6,706 1,090 225 8,858
Other revenues 1 407 2 (56) 354
----------- ------------- ------------ ------------ ------------
Total revenues 838 7,113 1,092 169 9,212
EXPENSES:
Interest 1,272 3,907 -- (990) 4,189
Recapture of credit losses -- (430) -- -- (430)
Fair market write-down of residual receivable -- 307 521 -- 828
Salaries, wages and employee benefits -- 5,232 -- -- 5,232
Business development costs -- 1,237 -- -- 1,237
Other general and administrative expenses 122 4,059 1 (56) 4,126
----------- ------------- ------------ ------------ ------------
Total expenses 1,394 14,312 522 (1,046) 15,182
----------- ------------- ------------ ------------ ------------
Income (loss) before income taxes, minority interest, (556) (7,199) 570 1,215 (5,970)
and equity in undistributed earnings (loss) of
subsidiaries
Earnings (loss) of subsidiaries (5,591) (576) 1,178 4,989 --
----------- ------------- ------------ ------------ ------------
Income (loss) before income taxes, minority interest (6,147) (7,775) 1,748 6,204 (5,970)
and extraordinary item
Provision (benefit) for income taxes -- 170 -- -- 170
----------- ------------- ------------ ------------ ------------
Income (loss) before minority interest and (6,147) (7,945) 1,748 6,204 (6,140)
extraordinary item
Minority interest in loss of subsidiaries -- (4) (3) -- (7)
Extraordinary item - gain on extinquishment of debt 4,281 -- -- -- 4,281
----------- ------------- ------------ ------------ ------------
Net income (loss) $ (1,866) $ (7,949) $ 1,745 $ 6,204 $ (1,866)
=========== ============= ============ ============ ============
</TABLE>
15
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ (18,391) $ (18,508) $ 1,955 $ 16,554 $ (18,390)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries 16,554 -- -- (16,554) --
Depreciation and amortization -- 1,606 -- -- 1,606
Provision for credit losses -- 1,642 -- -- 1,642
Gain on retirement of senior unsecured debt (318) -- -- -- (318)
Loss on sale of real estate acquired through
foreclosure -- 840 -- -- 840
Fair value write-down of residual receivable -- 1,634 -- -- 1,634
Loans originated with intent to sell -- (286,436) -- -- (286,436)
Proceeds from sold loans -- 203,223 -- -- 203,223
Proceeds from securitization of loans -- 21,732 -- -- 21,732
Other -- (302) -- -- (302)
Changes in operating assets and liabilities
increasing (decreasing) cash 262 (22,238) 3,406 -- (18,570)
----------- ------------ ----------- ------------ -----------
Net cash provided by (used in) operating activities (1,893) (96,807) 5,361 -- (93,339)
----------- ------------ ----------- ------------ -----------
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (259) -- -- (259)
Principal collections on loans not sold -- 22,162 -- -- 22,162
Proceeds from sale of real estate and personal
property acquired through foreclosure -- 7,272 -- -- 7,272
Proceeds from sale of property and equipment -- 44 -- -- 44
Purchase of property and equipment -- (34) -- -- (34)
Loan to shareholder (4,000) -- -- -- (4,000)
Other -- (4,671) -- -- (4,671)
----------- ------------ ----------- ------------ ------------
Net cash provided by in investing activities (4,000) 24,514 -- -- 20,514
----------- ------------ ----------- ------------ ------------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit -- 367,968 -- -- 367,968
Payments on warehouse lines of credit -- (318,300) -- -- (318,300)
Retirement of senior unsecured debt (237) -- -- -- (237)
Net increase in notes payable to investors -- 794 -- -- 794
Net increase in subordinated debentures -- 8,250 -- -- 8,250
Advances (to) from subsidiary 6,137 (4,008) (2,129) -- --
Other -- 3,232 (3,232) -- --
----------- ------------ ----------- ------------ ------------
Net cash provided by (used in) financing activities 5,900 57,936 (5,361) -- 58,475
----------- ------------ ----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 7 (14,357) -- -- (14,350)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 202 25,806 1 -- 26,009
----------- ------------ ----------- ------------ ------------
END OF PERIOD $ 209 $ 11,449 $ 1 $ -- $ 11,659
=========== ============ =========== ============ ============
</TABLE>
16
<PAGE>
HOMEGOLD FINANCIAL, INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1999
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Combined
Wholly- Combined
Owned Non-
Parent Guarantor Guarantor
Company Subsidiaries Subsidiaries Eliminations Consolidated
---------- ----------- ----------- ------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 7,131 $ (15,914) $ 2,361 $ 13,553 $ 7,131
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Equity in undistributed earnings of subsidiaries 13,553 1,178 (1,178) (13,553) --
Depreciation and amortization 1 1,385 -- -- 1,386
Provision for credit losses -- (349) -- -- (349)
Gain on retirement of senior unsecured debt (21,227) -- -- -- (21,227)
Loss on sale of real estate acquired through foreclosure -- 1,319 -- -- 1,319
Fair value write-down of residual receivable -- 775 -- -- 775
Loans originated with intent to sell -- (117,364) -- -- (117,364)
Proceeds from sold loans -- 102,573 -- -- 102,573
Proceeds from securitization of loans -- 59,630 -- -- 59,630
Other -- (646) -- -- (646)
Changes in operating assets and liabilities
increasing (decreasing) cash (577) 25,614 (32,309) -- (7,272)
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities (1,119) 58,201 (31,126) -- 25,956
----------- ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Loans originated for investment purposes -- (1,608) -- -- (1,608)
Principal collections on loans not sold -- 12,486 -- -- 12,486
Proceeds from sale of real estate and personal property
acquired through foreclosure -- 4,009 -- -- 4,009
Proceeds from sale of property and equipment -- 141 -- -- 141
Purchase of property and equipment -- (432) -- -- (432)
Other -- (2,145) -- -- (2,145)
----------- ------------ ------------ ------------ ------------
Net cash provided by in investing activities -- 12,451 -- -- 12,451
----------- ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Advances on warehouse lines of credit -- 111,853 -- -- 111,853
Payments on warehouse lines of credit -- (128,590) -- -- (128,590)
Retirement of senior unsecured debt (28,059) -- -- -- (28,059)
Net increase in notes payable to investors -- 2,800 -- -- 2,800
Net increase in subordinated debentures -- 2,730 -- -- 2,730
Advances (to) from subsidiary 29,200 (60,084) 30,884 -- --
Proceeds from issuance of additional common stock 149 -- -- -- 149
Other -- 2,260 (2,260) -- --
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 1,290 (69,031) 28,624 -- (39,117)
----------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 171 1,621 (2,502) -- (710)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913
----------- ------------ ------------ ------------ ------------
END OF PERIOD $ 367 $ 35,836 $ -- $ -- $ 36,203
=========== ============ ============ ============ ============
</TABLE>
17
<PAGE>
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--CONTINGENCIES
On February 26, 1999, the Company received notification from
Transamerica Small Business Capital, Inc. ("Transamerica") claiming that a loan
in the original principal amount of $1.1 million sold to it pursuant to an asset
purchase agreement dated October 2, 1998 was not made by the Company in
accordance with stated representations. Transamerica has filed an action in the
Circuit Court of Cook County, Illinois seeking to recover the loan amount from
the Company's $5.3 million that is being maintained by the trustee, which is
reflected as restricted cash on the Company's balance sheet. On June 21, 2000,
Transamerica amended its complaint to add another loan, claiming damage of "not
less than $200,000," and allegations concerning servicing fee income claiming
damage of "not less than $116,000." While management does not believe the
Company has any liability relating to these claims, and the Company intends to
defend itself vigorously, it is not possible to evaluate the likelihood of an
unfavorable outcome at this time.
As a part of the agreement to sell Sterling Lending ("SLC") in 1998,
the Company guaranteed certain leases of office space used by SLC. In 1999, SLC
filed for bankruptcy protection and due to the financial situation of SLC, the
Company has been asked to perform under certain of the guarantees. The Company
is resolving each lease through active negotiations with the landlords, and
management feels that the resolution of these guarantees will not be material to
the financial statements of the Company.
On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins
filed a purported class action lawsuit in New Hanover County, North Carolina
Superior Court. The suit was filed against a subsidiary of the Company and
others alleging a variety of statutory and common law claims arising out of
mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). Since
that time, four additional suits have been filed in New Hanover County by
plaintiffs claiming to be similarly situated to the Tomlins. The plaintiffs in
these cases are seeking unspecified monetary damages. As to the Company's
subsidiary, the complaint alleges participation by the Company's subsidiary in
an arrangement with Chase under which Chase allegedly charged excessive fees and
interest to the consumers, and under which Chase allegedly received undisclosed
premiums. There has been no class certification, and the Company intends to
contest these cases vigorously. Because these matters are in their early stages,
it is not possible to evaluate the likelihood of an unfavorable outcome or
estimate the amount of potential loss.
On April 4, 2000, the Company received notice of a suit filed against
it by Danka Funding Company, LLC ("Danka") in New Jersey Superior Court. In the
suit, Danka seeks recovery of $355,865.80 allegedly due under copier equipment
leases. While management does not believe the Company has any liability relating
to this claim, and while the Company intends to defend itself vigorously, it is
not possible to evaluate the likelihood of an unfavorable outcome at this early
stage.
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.
NOTE 9--SUBSEQUENT EVENTS
At the end of July, 2000, the decision was made by the Company to cease
operations as a wholesale lender. This decision was based on a review of the
wholesale business unit's profitability and company resources. The Company does
not expect to incur significant cost in connection with its discontinuation of
its wholesale operation. Going forward, the Company will redirect its mortgage
lending efforts to focus solely on its higher margin and more profitable retail
originations.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The discussion should be read in conjunction with the HomeGold
Financial, Inc. and Subsidiaries (the "Company") Unaudited Consolidated
Financial Statements and Notes appearing elsewhere in this report.
Forward - Looking Information
From time to time, the Company makes oral and written statements that
may constitute "forward-looking statements" (rather than historical facts) as
defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or
by the SEC in its rules, regulations and releases, including Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The Company desires to take advantage of the "safe
harbor" provisions in the Act for forward-looking statements made from time to
time, including, but not limited to, the forward-looking statements made in this
Form 10-Q, as well as those made in other filings with the SEC, and other
financial discussion and analysis by management that reflect projections or
future financial or economic performance of the Company. Such forward-looking
statements are based on management's current plans and expectations and are
subject to risks and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. Such risks
and uncertainties include, but are not limited to: lower origination volume due
to market conditions, inability to achieve desired efficiency levels, higher
losses due to economic downturn or lower real estate values, loss of key
employees, negative cash flows and capital needs, delinquencies and losses in
securitization trusts, right to terminate mortgage servicing and related
negative impact on cash flow, adverse consequences of changes in interest rate
environment, deterioration of creditworthiness of borrowers and risk of default,
general economic conditions in the Company's markets, including inflation,
recession, interest rates and other economic factors, loss of funding sources,
loss of ability to sell loans, general lending risks, impact of competition,
regulation of lending activities, changes in the regulatory environment, lower
than anticipated premiums on loan sales, lower than anticipated origination
fees, adverse impact of lawsuits, faster than anticipated prepayments on loans,
losses due to breach of representation or warranties under previous agreements
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. 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.
Market Conditions
The financial services industry, including the markets in which the
Company operates, is highly competitive. Competition is based on the type of
loan, interest rates, and service. Traditional competitors in the financial
services industry include commercial banks, credit unions, thrift institutions,
credit card issuers, consumer and commercial finance companies, and leasing
companies. While the Company faces significant competition in connection with
its mortgage loan products, it believes that it competes effectively in its
markets by providing competitive rates and efficient, complete services.
Merger with HomeSense Financial Corp.
On April 28, 2000, the shareholders of HomeGold Financial, Inc.
approved a merger agreement with HomeSense Financial Corp. and affiliated
companies (collectively "HomeSense"), a privately owned business, located in
Lexington, South Carolina. HomeSense is a specialized mortgage company that
originates and sells mortgage loans in the sub-prime mortgage industry, whose
principal loan product is a debt consolidation loan, generally collateralized by
a first lien on the borrower's home. HomeSense originates its loan volume
through a direct retail branch network of eight offices, as well as through
centrally provided telemarketing leads, direct mail, and television advertising.
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<PAGE>
As of May 9, 2000, the effective date of the merger, HGFN issued
6,780,944 shares of its common stock (40% of post-merger shares outstanding)
valued at $1.04 per share plus an additional 10 million shares of Series A
Non-convertible Preferred Stock (par value $1 per share) for 100% of the
outstanding stock of HomeSense. The merger was accounted for under the purchase
method of accounting prescribed by generally accepted accounting principles. The
transaction resulted in $19.5 million of goodwill, which is being amortized on a
straight line basis over 15 years. The results of operations of HomeSense are
included in the accompanying financial statements from the date of the
acquisition.
The following summarized unaudited pro forma financial information
assumes the acquisition had occurred on January 1 of each year:
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------
2000 1999
---------------- ----------------
(In thousands)
<S> <C> <C>
Revenue $ 31,682 $ 28,064
Income before extraordinary items (19,426) (14,571)
Net income (18,584) 6,334
Earnings per share (1.24) 0.38
</TABLE>
The amounts are based upon certain assumptions and estimates, and do not reflect
any benefit from economies which might be achieved from combined operations. The
pro forma results do not necessarily represent results which would have occurred
if the acquisition had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.
Results of Operations
Six months ended June 30, 2000, compared to six months ended June 30, 1999
The Company recognized a net loss of $18.4 million for the six months
ended June 30, 2000 as compared to a net income of $7.1 million for the six
months ended June 30, 1999. Included in the net loss and net income figures for
the 2000 and 1999 periods were extraordinary gains of $0.3 million and $21.2
million on the extinguishment of debt, respectively. Excluding extraordinary
gains, the net losses for the 2000 and 1999 periods were $18.7 million and $14.1
million, respectively.
Total revenues for the six months ended June 30, 2000 increased $4.3
million compared to the six months ended June 30, 1999. The increase in total
revenues resulted primarily from a $3.7 million increase in net loan fees, along
with a $0.7 million increase in interest income and a $0.6 million increase in
gain on sale of loans, and partially offset by a $0.8 million decrease in
servicing income.
The increase in net loan fees is primarily attributable to a $169.1
million increase in production and an increase in average loan origination fees
charged, to 2.1% from 2.0%.
The increase in interest income resulted primarily from a $9.0 million,
increase in average loans receivable outstanding. The increase in average loans
receivable outstanding relates primarily to the increase in productions
mentioned above.
The increase in gains on sale of loans resulted from an increase in the
number of loans sold, partially offset by a reduction in the net premiums
received in the first six months of 2000 compared to the same period in 1999. In
the first six months of 2000, the Company had mortgage whole loan sales of
$203.2 million at a net premium of 2.4% compared to mortgage whole loan sales of
$102.6 million at a net premium of 4.3% in the first six months of 1999. The
higher sales were a result, in part, of greater loan production. The reduction
in premiums received is primarily from changes in market conditions.
The decline in servicing income was primarily due to a decrease in
average serviced loan portfolio. The reduction in the average mortgage loans
serviced in the first six months of 2000 compared to the same period in 1999
resulted from whole loan (servicing released) sales of substantially all
production in 1999 and the first six months of 2000, as well as repayments of
loans in the securitized pools.
Total expenses for the six months ended June 30, 2000 increased $9.2
million compared to the six months ended June 30, 1999. The increase in total
expenses resulted primarily from a $3.2 million increase in other general and
administrative expenses, a $2.0 million increase in provision for credit losses,
a $2.0 million increase in payroll expense, a $1.2 million increase in business
development costs, and a $0.9 million increase in fair value write-down of
residual receivable.
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<PAGE>
The increase in other general and administrative expenses resulted
primarily from non-recurring restructuring charges of $2.3 million. In addition,
amortization expense increased $0.2 million, resulting from amortization of
goodwill arising from the merger with HomeSense.
The increase in the provision for credit losses to $1.6 million from
net recoveries of $0.3 million, resulted from management's decision in early
2000 to record additional reserves against amounts paid on behalf of borrowers
for taxes, insurance, and attorney's fees, combined with a significantly larger
loan portfolio partially offset by a lower loan delinquency rate.
The increase in salaries, wages and employee benefits resulted
primarily from the addition of employees due to the merger. The Company
increased the number of employees to 790 at June 30, 2000 from 408 at June 30,
1999.
The increase in business development costs is primarily related to the
increased retail mortgage production mentioned above. The Company's marketing
efforts are largely commission-based, resulting in a direct correspondence
between production levels and marketing costs.
The increase in the fair value write-down of the residual receivable
was due to faster-than-anticipated prepayments on the Company's securitization
pools. No changes in valuation assumptions were required in the first six months
of 2000.
The Company has recorded current tax expense of $335,000 and $620,000
for the six months ended June 30, 2000 and 1999, respectively, although 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's securitizing loans
in pools to third party investors. These transactions generate income for the
Company that is included in the overall loss from operations. However, according
to IRS regulations, a portion of that income is subject to federal tax in the
current period regardless of other period losses or NOL carryovers otherwise
available to offset regular taxable income. The excess inclusion income
approximates the net interest the Company receives on the loans in the pools
after the bondholders are paid their share of the interest less the sum of the
daily accruals, an amount allowed for tax purposes as a reasonable economic
return on the retained ownership interest. The extraordinary gain on the
extinguishment of debt (discussed below) is net of $0 tax since the gain was
offset against prior NOLs and did not result in any incremental increase in
current income tax expense. The latest two securitizations were structured
utilizing alternatives to a REMIC which does not generate excess inclusion
income.
In the first six months of 1999, the Company recorded a $21.2 million
extraordinary gain on the extinguishment of debt related to the purchase of
$49.3 million of its Senior Notes. The purchase price of the Senior Notes was
$26.6 million, or a weighted average of 54.0% of face value. A proportionate
share of the unamortized debt origination cost ($1.5 million) relating to the
issuance of the Senior Notes was charged against this gain. The extraordinary
gain on the extinguishment of debt for the first six months of 2000 was $0.3
million, resulting from a minor purchase of the Company's Senior Notes.
Three months ended June 30, 2000 compared to three months ended June 30, 1999
The Company recognized a net loss of $8.5 million for the three months
ended June 30, 2000 as compared to net income of $1.9 million for the three
months ended June 30, 1999. Included in the net loss and net income figures for
the 2000 and 1999 periods were extraordinary gains of $0.1 million and $4.3
million on the extinguishment of debt, respectively. Excluding extraordinary
gains, the net losses for the 2000 and 1999 periods were $8.6 million and $6.1
million, respectively.
Total revenues increased $5.8 million, for the three months ended June
30, 2000 compared to the three months ended June 30, 1999. The increase in total
revenues resulted primarily from a $4.2 million increase in net loan fees and a
$2.1 million increase in interest income, partially offset by a $0.4 million
decrease in servicing income.
The increase in net loan fees is primarily attributable to a $139.4
million increase in production and an increase in average loan origination fees
charged, to 2.8% from 2.1% for the three months ended June 30, 2000 and the
three months ended June 30, 1999, respectively.
21
<PAGE>
The increase in interest income resulted primarily from an increase in
average loans receivable outstanding. The increase in average loans receivable
outstanding relates primarily to the increase in production mentioned above.
The decline in servicing income was primarily due to a decrease in
average serviced loan portfolio. The reduction in the average mortgage loans
serviced in the three months ended June 30, 2000 compared to the same period in
1999 resulted from whole loan (servicing released) sales of substantially all
production in 1999 and the first six months of 2000, as well as repayments of
loans in the securitized pools.
Total expenses for the three months ended June 30, 2000 increased $8.3
million compared to the three months ended June 30, 1999. The increase in total
expenses resulted primarily from a $3.5 million increase in other general and
administrative expenses, a $2.7 million increase in payroll expense, a $1.1
million increase in provision for credit losses, a $0.6 million increase in
business development costs, and a $0.7 million increase in interest expense,
partially offset by a $0.3 million decrease in fair value write-down of residual
receivable.
The increase in other general and administrative expenses resulted
primarily from non-recurring restructuring charges of $2.3 million. In addition,
amortization expense increased $0.2 million resulting from amortization of
goodwill arising from the merger with HomeSense.
The increase in salaries, wages and employee benefits resulted
primarily from the addition of employees due to the merger. The Company
increased the number of employees to 790 at June 30, 2000 from 408 at June 30,
1999.
The increase in the provision for credit losses, to $0.7 million from
net recoveries of $0.4 million, resulted from management's decision in early
2000 to have additional reserves against amounts paid on behalf of borrowers for
taxes, insurance, and attorney's fees, combined with a significantly larger loan
portfolio partially offset by a lower loan delinquency rate.
The increase in business development costs is primarily related to the
increased retail mortgage production mentioned above. The Company's marketing
efforts are largely commission-based, resulting in a direct correspondence
between production levels and marketing costs.
The increase in interest expense was due principally to the increase in
borrowings associated with the increase in the Company's average loan portfolio.
The decrease in the fair value write-down of residual receivable was
due to slower-than-anticipated prepayments on the Company's securitization
pools. No changes in valuation assumptions were required in the comparable
period for 2000.
The Company has recorded current tax expense of $190,000 and $170,000
for the three months ended June 30, 2000 and 1999, respectively, although the
Company generated a pre-tax loss before extraordinary item for both periods. The
Company has not recorded a deferred tax benefit related to the current operating
losses due to management's assessment of the recoverability of the related
deferred tax asset. The current tax expense results from "excess inclusion
income." Excess inclusion income is a result of the Company securitizing loans
in pools to third party investors. These transactions generate income for the
Company that is included in the overall loss from operations. However, according
to IRS regulations, a portion of that income is subject to federal tax in the
current period regardless of other period losses or NOL carryovers otherwise
available to offset regular taxable income. The excess inclusion income
approximates the net interest the Company receives on the loans in the pools
after the bondholders are paid their share of the interest less the sum of the
daily accruals, an amount allowed for tax purposes as a reasonable economic
return on the retained ownership interest. The extraordinary gain on the
extinguishment of debt (discussed below) is net of $0 tax since the gain was
offset against prior NOLs and did not result in any incremental increase in
current income tax expense.
In the three months ended June 30, 1999, the Company recorded a $4.3
million extraordinary gain on the extinguishment of debt related to the purchase
of $13.9 million of its Senior Notes. The purchase price of the Senior Notes was
$9.3 million, or a weighted average of 66.9% of face value. A proportionate
share of the unamortized debt origination cost ($300,000) relating to the
issuance of the Senior Notes was charged against this gain. The extraordinary
gain on the extinguishment of debt for the three months ended June 30, 2000 was
$0.1 million, resulting from a minor purchase of the Company's Senior Notes.
22
<PAGE>
Financial Condition
Net loans receivable increased to $124.6 million at June 30, 2000 from
$56.6 million at December 31, 1999. The increase in net loans receivable
resulted primarily from increased production in the HomeGold operation, as well
as in the HomeSense merger. Average monthly loan production in 2000 to date is
$47.7 million compared to average monthly loan production of $19.6 million in
1999.
The residual receivables were $56.3 million at June 30, 2000, compared
to $47.8 million at December 31, 1999. This increase resulted primarily from the
residual retained on the 2000-1 securitization transaction completed in May
2000, partially offset by the amortization of the other residual assets from
prior securitizations.
Net property and equipment increased to $22.8 million at June 30, 2000,
from $17.2 million at December 31, 1999, an increase of $5.6 million, which is
attributable to the merger with HomeSense. Real estate and personal property
acquired in foreclosure decreased to $4.3 million at June 30, 2000, from $7.7
million at December 31, 1999. This decrease resulted primarily from the sale of
foreclosed properties, partially offset by additional foreclosures on mortgage
loans within the period.
As a result of the merger, net Excess of cost over net assets of
acquired businesses increased to $20.9 million at June 30, 2000, from $1.6
million at December 31, 1999.
The primary sources for funding the Company's receivables comes from
borrowings issued under various credit arrangements (including the warehouse
lines of credit, CII notes payable to investors and subordinated debentures, and
the Company's Senior Notes) and the sale or securitization of loans. At June 30,
2000, the Company had $92.9 million outstanding under revolving warehouse lines
of credit to banks, compared with $17.8 million at December 31, 1999. At June
30, 2000, the Company had $153.8 million of CII notes payable to investors and
subordinated debentures outstanding, compared with $144.8 million at December
31, 1999.
The aggregate principal amount of outstanding Senior Notes was $11.6
million at June 30, 2000, compared to $12.1 million on December 31, 1999. In the
six months ended June 30, 2000, the Company purchased $0.5 million of its Senior
Notes for a purchase price of $0.2 million. The Company may, from time to time,
purchase more of its Senior Notes depending on the Company's cash availability,
market conditions, and other factors.
Total shareholders' equity at June 30, 2000 was $0.8 million, compared
to $7.8 million at December 31, 1999. This decrease is attributable to the net
loss of $18.4 million for the six months ended June 30, 2000 and the
classification in shareholders' equity of a $5.8 million note receivable from a
shareholder arising from the merger with HomeSense, partially offset by an
increase in preferred stock and paid-in capital in excess of par value arising
from the merger (see below).
In connection with the merger with HomeSense, which was effective May
9, 2000, the Company issued 6,780,944 shares of its common stock in addition to
10 million shares of Series A Non-convertible Preferred Stock (par value $1 per
share), which increases the Company's shareholders' equity by approximately
$17.1 million.
Allowance for Credit Losses and Credit Loss Experience
The Company is exposed to the risk of loan delinquencies and defaults
with respect to loans retained in its portfolio. With respect to loans to be
sold on a non-recourse basis, the Company is at risk for loan delinquencies and
defaults on such loans while they are held by the Company pending such sale and,
in certain cases, where the terms of sale include a warranty against first
payment defaults. To provide for credit losses, the Company charges against
current earnings an amount necessary to maintain the allowance for credit losses
at levels expected to cover inherent losses in loans receivable.
The percentage of total mortgage loans past due 30 days or more
declined to 7.77% at June 30, 2000 compared to 13.44% at December 31, 1999. The
Company incurred net charge-offs on retained loans of $1.3 million in the six
months ended June 30, 2000 compared to $1.5 million in net charge-offs on
retained loans in the six months ended June 30, 1999. 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.
23
<PAGE>
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 Company considers its allowance for credit losses at June 30, 2000
to be adequate in view of the Company's ability to sell a significant portion of
its loans, 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 3.3% at June 30, 2000 and 10.0% at December 31,
1999.
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 increases
in loan production and incurred operating expenses in excess of operating
income, the Company experienced a $93.3 million net use of cash from operating
activities in the first six months of 2000. Although the Company's goal is to
achieve a positive cash flow each quarter, no assurance can be given that this
objective will be attained due to the higher level of cash required to fund the
loans purchased and originated. 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 proceeds of whole-loan mortgage loan sales, (ii)
cash payments for contractual and ancillary servicing revenues received by the
Company in its capacity as servicer for securitized loans, (iii) interest income
on loans receivable and certain cash balances, (iv) fee income received in
connection with its retail mortgage loan originations, (v) excess cash flow
received in each period with respect to residual receivables and (vi) borrowings
under warehouse lines of credit. The Company believes that additional sources of
funds are needed to meet its future liquidity requirements, and no assurance can
be given that these additional sources of funds can be attained.
Cash and cash equivalents were $11.7 million at June 30, 2000, and
$26.0 million at December 31, 1999. Cash used by operating activities was $93.3
million for the six months ended June 30, 2000, compared to cash provided by
operating activities of $26.0 million for the six months ended June 30, 1999.
Cash provided by investing activities was $20.5 million for the six months ended
June 30, 2000 compared to $12.5 million for the six months ended June 30, 1999.
Cash provided by financing activities was $58.5 million for the six months ended
June 30, 2000 compared to cash used in financing activities of $39.1 million for
the six months ended June 30, 1999. The increase in cash used by operating
activities was principally due to incurred operating expenses in excess of
operating income for the six month period ended June 30, 2000 when compared to
the same period of 1999, coupled with lower loan sales as a percentage of loans
originated. Cash provided by investing activities in both the six months ended
June 30, 2000 and 1999, resulted primarily from principal collections on loans
not sold. The cash provided in financing activities in the six months ended June
30, 2000, resulted primarily from advances on the Company's revolving warehouse
lines of credit.
Prior to the Company's merger with HomeSense, the Company had a $100
million revolving warehouse line of credit with CIT Group/Business Credit, Inc.
("CIT") to fund its mortgage loan originations. The credit facility bears
interest at prime rate plus 0.75% and matures on June 30, 2001. The credit
facility contains certain covenants, including, but not limited to, covenants
that require a minimum availability of $10.0 million on the line of credit and
covenants that impose limitations on the Company and its subsidiaries with
respect to declaring or paying dividends, minimum CII Notes outstanding, and
loans and advances by HGI and CII to the Company. As of the effective date of
and in connection with the Company's merger with HomeSense, the terms of the CIT
line of credit were modified to reduce the maximum commitment to $50 million.
The agreement stipulates incremental decreases in the maximum commitment, based
on certain criteria, to $25 million at December 31, 2000. At June 30, 2000, the
maximum commitment was $47 million. The maturity date, rates of interest,
advance rates, and collateral requirements remain unchanged. Availability under
the credit agreement is determined based on eligible collateral as defined under
the agreement, for which the Company has forwarded to the bank the required loan
files and documentation. The borrowing base adjusted for the $10.0 million
minimum availability requirements would have allowed a maximum borrowing level
based on eligible collateral of $33.7 million at June 30, 2000 and $18.9 million
at December 31, 1999. Therefore, after considering the outstanding borrowings
under the line of credit of $33.1 million and $17.8 million, respectively, the
Company had $600,000 and $1.1 million, respectively, of immediate availability
under this agreement on June 30, 2000 and December 31, 1999, based on its
existing borrowing base.
24
<PAGE>
In connection with the merger, the Company entered into a new $40
million revolving warehouse line of credit with Household Commercial Financial
Services, Inc. Subsequent to the merger, the maximum commitment was increased to
$50 million. The line bears interest at the Prime rate plus .25% and is
collateralized by mortgage loan receivables. The agreement requires, among other
matters, minimum net worth of the Company of $10,000,000 commencing August 31,
2000, a leverage ratio of less than 35 to 1, and positive consolidated net
income for each quarter beginning on or after July 1, 2000. The revolving credit
agreement matures on April 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 would have allowed a maximum borrowing level
based on eligible collateral of $40.1million at June 30, 2000. Therefore, after
considering the outstanding borrowings under the line of credit of $35.6
million, the Company had $4.5 million of immediate availability under this
agreement at June 30, 2000.
Prior to the merger, HomeSense negotiated a $25 million revolving
purchase facility with Residential Mortgage Services of Texas ("RMST"). This
agreement was amended at the time of the merger to extend to the merged entity.
The facility bears interest at the Prime rate plus .75%. The agreement is
structured as a purchase of the mortgages by RMST, subject to a limited right of
RMST to require the repurchase of defective mortgages by the Company. At June
30, 2000, the Company had outstanding purchased mortgages of $24.2 million.
The Company assumed an operating line of credit of $1,860,000 with
Branch Banking & Trust Company ("BB&T") in connection with the merger. The line
is secured by a $1.0 million certificate of deposit held by the bank. A
principal payment of $500,000 is payable on May 15, 2000. Monthly principal and
interest payments are payable for twenty-four months beginning July 5, 2000. The
line bears interest at LIBOR plus 2.5%.
The Company also assumed a mortgage note of $2.0 million with Bank of
America, N.A. in connection with the merger. The note matures on November 2,
2000, and bears interest at the Prime rate plus .25%. The note is secured by a
mortgage on the Company's building in Lexington, South Carolina, as well as a
piece of investment property.
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 June
30, 2000, 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 $74.5
million face amount of its Senior Notes in 1999 and $555,000 in the first six
months of 2000. At June 30, 2000 and December 31, 1999, $11.6 million and $12.1
million in aggregate principal amount of Senior Notes were outstanding,
respectively.
CII engages in the sale of CII notes to investors. The CII notes are
comprised of investor notes and subordinated debentures bearing fixed rates of
interest, which are sold by CII only to South Carolina residents. The offering
of the CII notes is registered under South Carolina securities law and is
believed to be exempt from Federal registration under the Federal intrastate
exemption. CII believes it conducts its operations so as to qualify for the safe
harbor provisions of Rule 147 promulgated pursuant to the Securities Act of
1933, as amended (the "Securities Act"). At June 30, 2000 and at December 31,
1999, CII had an aggregate of $127.9 million and $127.1 million of investor
notes outstanding, respectively, and an aggregate of $26.0 million and $17.7
million, respectively. The investor notes and subordinated debentures are
subordinate in priority to the credit facility. Substantially all of the CII
notes and debentures have original maturities of one or two years.
Total shareholders' equity at June 30, 2000 was $800,000, compared to
$7.8 million at December 31, 1999, a decrease of $7.0 million. This decrease
resulted primarily from net loss of $18.4 million for the six months ended June
30, 2000 and a note receivable from a principal shareholder of $5.8 million
incurred during the merger, classified as contra equity. These decreases were
offset by an increase in capital of $17.1 million as a result of the Company
issuing 6,780,944 shares of its common stock and 10 million shares of Series A
non-convertible preferred stock in connection with the merger with HomeSense.
25
<PAGE>
The Company's primary objective in 2000 is to ensure adequate levels of
liquidity as the Company increases loan originations. The Company plans to
continue to generate cash through whole loan sales. These sales will generate
cash that can be used to fund operating losses, or to fund declines in investor
notes that could occur. 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 merger, additional sources of operating capital will be
needed to support the 2000 operating plan. The Company continually evaluates the
need to establish other sources of capital and will pursue those it considers
appropriate based upon its need and market conditions.
Loan Sales and Securitizations
The Company sells or securitizes substantially all of its loans. The
Company sells its production on a whole loan basis (servicing released),
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 mortgage loans. However, no assurance can be given that the mortgage loans
can be sold. To the extent that the loans are not sold, the Company retains the
risk of loss. For the six months ended June 30, 2000 and 1999, the Company sold
$203.2 million and $102.6 million of mortgage loans, respectively.
Securitization transactions were completed in the second quarter of
both 2000 and 1999 totalling $41.6 million and $59.6 million respectively per
transaction. 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 $56.3 million and $47.8 million, net of allowances, at June
30, 2000 and December 31, 1999, respectively.
In a mortgage loan securitization, the Company sells mortgage loans it
purchased or originated to a trust for cash. The trust sells asset-backed bonds
secured by the loans to investors. The Company records certain assets and income
based upon the difference between all principal and interest received from the
loans sold and the following factors (i) all principal and interest required to
be passed through to the asset-backed bond investors, (ii) all excess
contractual servicing fees, (iii) other recurring fees and (iv) an estimate of
losses on the loans (collectively, the "Excess Cash Flow"). At the time of the
securitization, the Company estimates these amounts based upon a declining
principal balance of the underlying loans, adjusted by estimated prepayment and
loss rates, and capitalizes these amounts using a discount rate that market
participants would use for similar financial instruments. These capitalized
assets are recorded as residual receivables. The Company believes the
assumptions it has used in past securitizations, adjusted to current market
conditions, are appropriate and reasonable.
The Company retains the right to service loans it securitizes. Fees for
servicing loans are based on a stipulated percentage (generally 0.50% per annum)
of the unpaid principal balance of the associated loans. On its mortgage loan
securitizations, the Company has recognized a servicing asset in addition to its
gain on sale of loans. The servicing asset is calculated as the present value of
the expected future net servicing income in excess of adequate compensation for
a substitute servicer, based on common industry assumptions and the Company's
historical experience. These factors include default and prepayment speeds.
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
26
<PAGE>
disparity. Conversely, if actual loan prepayments or defaults are better than
the Company's estimates, the carrying value of the Company's residual
receivables and/or servicing assets may be increased, with additional earnings
recognized in the period management recognizes the disparity.
Accounting Considerations
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000, as amended by SFAS 137. This SFAS
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Since the Company has no
significant hedging positions outstanding, management estimates that the
implementation of this standard will have no material impact on its financial
statements.
Accounting standards that have been issued by the FASB that will not
require adoption until a future date and will impact the preparation of the
financial statements will not have a material effect upon adoption.
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%.
The Company's net deferred tax asset was $12.0 million at both June 30,
2000 and December 31, 1999. The amount of the 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 adjusted to net realizable value. The
Company had a federal NOL of approximately $87.9 million at June 30, 2000.
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.
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. While no hedging strategy is
currently being utilized, the Company's interest rate hedging strategy may
include shorting interest rate futures and treasury forwards, and entering into
interest-rate lock agreements. Since the interest rates on the Company's
warehouse line of credit used to fund and acquire loans is variable and the
rates charged on loans the Company originates are fixed, increases in the
interest rates after loans are originated and prior to their sale could have a
material adverse effect on the Company's results of operations and financial
condition. The ultimate sale of the Company's loans generally will fix the
spread between the interest rates paid by borrowers and the interest rates paid
to investors in securitization transactions with respect to such loans, although
increases in interest rates may narrow the potential spread that existed at the
time the loans were originated by the Company. Without hedging these loans,
increases in interest rates prior to sale of the loans may reduce the gain on
sale or securitization of loans earned by the Company. There were no significant
open hedging positions at either June 30, 2000 or December 31, 1999.
27
<PAGE>
Impact of Inflation
Inflation affects the Company most significantly in the area of loan
originations and can have a substantial effect on interest rates. Interest rates
normally increase during periods of high inflation and decrease during periods
of low inflation. Profitability may be directly affected by the level and
fluctuation in interest rates that affect the Company's ability to earn a spread
between interest received on its loans and the costs of its borrowings. The
profitability of the Company is likely to be adversely affected during any
period of unexpected or rapid changes in interest rates. A substantial and
sustained increase in interest rates could adversely affect the ability of the
Company to originate and purchase loans and affect the mix of first and
second-lien mortgage loan products. Generally, first-lien mortgage production
increases relative to second-lien mortgage production in response to low
interest rates and second-lien mortgage production increases relative to
first-lien mortgage production during periods of high interest rates. A
significant decline in interest rates could decrease the size of the Company's
loan servicing portfolio by increasing the level of loan prepayments.
Additionally, to the extent servicing rights and residual receivables have been
capitalized on the books of the Company, higher than anticipated rates of loan
prepayments or losses could require the Company to write down the value of such
servicing rights and residual receivables, adversely impacting earnings.
Fluctuating interest rates may also affect the net interest income earned by the
Company resulting from the difference between the yield to the Company on loans
held pending sales and the interest paid by the Company for funds borrowed under
the Company's warehouse line of credit.
28
<PAGE>
ITEM 3. 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 for 2000 is to sell its loans within one month
of production. Because the interest rates on the Company's warehouse lines of
credit used to fund and acquire loans are variable and the rates charged on
loans the Company originates are fixed, increases in the interest rates after
loans are originated and prior to their sale may reduce the gain on loan sales
earned by the Company. There were no significant open hedging positions as of
June 30, 2000.
29
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On February 26, 1999, the Company received notification
from Transamerica Small Business Capital, Inc.
("Transamerica") claiming that a loan in the original
principal amount of $1.1 million sold to it pursuant to an
asset purchase agreement dated October 2, 1998 was not
made by the Company in accordance with stated
representations. Transamerica has filed an action in the
Circuit Court of Cook County, Illinois seeking to recover
the loan amount from the Company's $5.3 million that is
being maintained by the trustee, which is reflected as
restricted cash on the Company's balance sheet. On June
21, 2000, Transamerica amended its complaint to add
another loan, claiming damage of "not less than $200,000,"
and allegations concerning servicing fee income claiming
damage of "not less than $116,000." While management does
not believe the Company has any liability relating to
these claims, and the Company intends to defend itself
vigorously, it is not possible to evaluate the likelihood
of an unfavorable outcome at this time.
As a part of the agreement to sell Sterling Lending
("SLC") in 1998, the Company guaranteed certain leases of
office space used by SLC. In 1999, SLC filed for
bankruptcy protection and due to the financial situation
of SLC, the Company has been asked to perform under
certain of the guarantees. The Company is resolving each
lease through active negotiations with the landlords, and
management feels that the resolution of these guarantees
will not be material to the financial statements of the
Company.
On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and
Constance Wiggins filed a purported class action lawsuit
in New Hanover County, North Carolina Superior Court. The
suit was filed against a subsidiary of the Company and
others alleging a variety of statutory and common law
claims arising out of mortgage loans they obtained through
Chase Mortgage Brokers ("Chase"). Since that time, four
additional suits have been filed in New Hanover County by
plaintiffs claiming to be similarly situated to the
Tomlins. The plaintiffs in these cases are seeking
unspecified monetary damages. As to the Company's
subsidiary, the complaint alleges participation by the
Company's subsidiary in an arrangement with Chase under
which Chase allegedly charged excessive fees and interest
to the consumers, and under which Chase allegedly received
undisclosed premiums. There has been no class
certification, and the Company intends to contest these
cases vigorously. Because these matters are in their early
stages, it is not possible to evaluate the likelihood of
an unfavorable outcome or estimate the amount of potential
loss.
On April 4, 2000, the Company received notice of a suit
filed against it by Danka Funding Company, LLC ("Danka")
in New Jersey Superior Court. In the suit, Danka seeks
recovery of $355,865.80 allegedly due under copier
equipment leases. While management does not believe the
Company has any liability relating to this claim, and
while the Company intends to defend itself vigorously, it
is not possible to evaluate the likelihood of an
unfavorable outcome at this early stage.
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
---------------------
On April 28, 2000, the shareholders of the Company
approved amendments to the Company's Articles of
Incorporation (1) reducing the par value of the Company's
common stock from $0.05 to $0.001, (2) providing that no
shareholder shall have a right to cumulate votes with
respect to the election of directors and (3) authorizing
the issuance of up to 20,000,000 shares of "blank check"
preferred stock.
30
<PAGE>
In connection with consummation of the Merger of HomeSense
into HomeGold, Inc. the Company's Board of Directors
designated 15,300,000 shares of the "blank check"
preferred stock as Series A Non-convertible Preferred
Stock with a par value of $1.00 per share. For a
description of the terms of the Series A Non-Convertible
Preferred Stock and the effect of such terms on the
Company's common stock see "Part I, Item 2. Management's
Discussion and Analysis of Financial Condition and Results
of Operations - The Merger - Summary of the Merger -
Principal terms of the Series A Non-convertible Preferred
Stock" which description is incorporated herein by
reference. The Company issued 6,780,944 shares of its
common stock and 10,000,000 shares of its Series A
Non-convertible Preferred Stock to the shareholders of
HomeSense in exchange for all of the outstanding stock of
HomeSense. The Company issued these securities without
registration under Section 4(2) of the Securities Act of
1933, as amended, as a transaction not involving a public
offering.
In connection with the consummation of the Merger on May
9, 2000, the Company issued a warrant to purchase 250,000
shares of its common stock at an exercise price of $1.50
per share to Raymond James and Associates, Inc. in partial
consideration for the delivery to the Company of a
fairness opinion regarding the Merger. The warrant was
exercisable on issuance, expires five years from the date
of issuance and is transferable. The Company issued the
warrant without registration under Section 4(2) of the
Securities Act of 1933, as amended, as a transaction not
involving a public offering.
Also in connection with the Merger on May 9, 2000, the
Company issued a non-transferable option to purchase
825,423 shares of its common stock at $1.75 per share to
Ronald J. Sheppard, the pre-Merger owner of most of the
shares of the stock of HomeSense, in connection with his
entry into employment by the Company as its President and
Chief Executive Officer. The option granted to Mr.
Sheppard is intended to prevent his ownership of the
Company's common stock from being diluted by the exercise
by third parties of certain other outstanding options and
warrants, including the warrant issued to Raymond James
and Associates, Inc. (the "Other Options"). If any Other
Options are exercised, Mr. Sheppard's option vests with
respect to 67 shares of the Company's common stock for
every 100 shares received upon exercise of Other Options,
and Mr. Sheppard has 180 days from the vesting date in
which to exercise his option with respect to those shares.
If any Other Options lapse, Mr. Sheppard's option lapses
with respect to 67 shares for every 100 shares of Other
Options that lapse. The Company issued these securities
without registration under Section 4(2) of the Securities
Act of 1933, as amended, as a transaction not involving a
public offering.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The shareholders of the Company voted on the election of
directors and 6 other proposals at the Annual Meeting of
Shareholders on April 28, 2000.
<TABLE>
<CAPTION>
1. Election of Directors. Approved.
For Withheld
--------- --------
<S> <C> <C>
Tecumseh Hooper, Jr. 9,273,542 156,015
J. Robert Philpott, Jr. 9,263,922 165.635
John M. Sterling, Jr. 9,273,542 156,015
Ronald J. Sheppard 9,269,896 159,661
Jan Sirota 9,277,254 152,303
Clarence Bauknight 9,277,254 152,303
Porter Rose 9,273,542 156,015
</TABLE>
2. Proposal to amend the Company's 1995 Employee and Officer
Stock Option Plan to increase the number of shares
authorized for grant by 500,000. Approved.
For 6,995,698
Against 423,597
Abstained 46,045
Broker non-votes 1,964,217
31
<PAGE>
3. Proposal to approve the Reorganization Agreement Between
HomeGold and HomeSense Financial Corp., and Affiliated
Companies (including the Plan of Merger set forth therein)
and the issuance of 6,780,944 shares of common stock,
11,000,000 shares of Series A non-convertible, preferred
stock, a warrant to purchase 250,000 shares of common
stock of HomeGold, and options to purchase 825,423 shares
of common stock. Approved.
For 7,302,397
Against 144,130
Abstained 18,813
Broker non-votes 1,964,217
4. Proposal to approve an amendment to the Company's Articles
of Incorporation to authorize issuance of 20,000,000
shares of "Blank Check" preferred stock. Approved.
For 6,951,135
Against 473,132
Abstained 41,073
Broker non-votes 1,964,217
5. Proposal to amend the Company's Employee Stock Purchase
Plan to increase by 400,000 shares the number of shares
authorized for issuance under the plan to a total of
600,000 shares. Approved.
For 7,117,625
Against 324,783
Abstained 22,932
Broker non-votes 1,964,217
6. The proposal to amend the Company's Articles of
Incorporation to provide that no shareholder shall have a
right to cumulate votes with respect to the election of
directors (the "Cumulative Vote Amendment"). Approved.
For 6,817,903
Against 586,522
Abstained 60,915
Broker non-votes 1,964,217
7. The proposal to reduce the par value of the common stock
from $0.05 per share to $0.001 per share. Approved.
For 6,994,358
Against 411,697
Abstained 59,285
Broker non-votes 1,964,217
Item 5. Other Information
-----------------
Until April 28, 2000, the Company's common stock was
traded on the NASDAQ National Market under the symbol
"HGFN". On April 28, 2000, the Company's common stock was
delisted from the Nasdaq National Market. See Item 6(b)
Reports on Form 8-K which information is incorporated
herein by reference. The Company's stock is currently
traded on the Over the Counter Bulletin Board under the
same symbol, HGFN.
The Company filed a report on Form 8-K dated April 20,
2000 to disclose Nasdaq's intention to delist the
Company's stock. In connection with the proposed merger
with HomeSense Financial Corp., the Nasdaq staff believes
that the proposed merger will result in a change of
control and change in financial structure. As such, under
Marketplace Rule 4430(f), the surviving company, HomeGold
Financial, Inc. (the "Company" or "HomeGold"), will be
required to submit an initial application and meet all
initial Nasdaq National Market inclusion criteria.
However, based on a review of the Company, the Nasdaq
staff believes that the Company will not meet certain
initial inclusion criteria. Accordingly, the staff has
determined to delist HomeGold's securities from the Nasdaq
National Market effective with the opening of business on
April 28, 2000. Absent the HomeSense merger, HomeGold
could have been delisted from Nasdaq for failure to meet
the maintenance criteria for listing.
32
<PAGE>
The following table sets forth the high and low closing
sale prices of the common stock for the periods indicated,
as reported by NASDAQ.
<TABLE>
<CAPTION>
High Low
------------ ------------
<S> <C> <C>
Year Ended December 31, 1998
First Quarter $ 14.50 $ 7.50
Second Quarter $ 9.50 $ 3.25
Third Quarter $ 5.25 $ 2.00
Fourth Quarter $ 1.81 $ 0.44
Year Ended December 31, 1999
First Quarter $ 2.22 $ 0.34
Second Quarter $ 1.94 $ 1.06
Third Quarter $ 1.50 $ 0.97
Fourth Quarter $ 1.25 $ 0.63
Year Ended December 31, 2000
First Quarter $ 1.38 $ 1.06
</TABLE>
On April 28, 2000, the closing price for the Company's
common stock was $0.88. As of April 30, 2000, the Company
had 10,171,416 outstanding shares of common stock held by
850 stockholders of record.
No dividends on common stock were paid or declared during
1999 or 1998, and no dividends are expected to be paid on
the common stock for the foreseeable future. The Indenture
pertaining to the Company's 10-3/4% Senior Notes places
certain restrictions on the Company's ability to pay
dividends, and the Credit Facility to which the Company's
subsidiaries HomeGold, Inc. and Carolina Investors, Inc.
are parties restricts the ability of these subsidiaries to
pay dividends and make loans and advances to the Company.
See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Liquidity and
Capital Resources" which discussion is incorporated herein
by reference.
In conjunction with the Company's merger with HomeSense,
the Company's President, Keith B. Giddens, the Company's
Chief Operating Officer, John W. Crisler, and the
Company's Executive Vice President- Structured Finance,
Laird Minor, have resigned.
Information Required to be Reported Under Item 2 of Form
8-K
On May 9, 2000, the Company consummated the acquisition of
HomeSense by Merger of HomeSense with and into the
Company's subsidiary HomeGold, Inc. In connection with the
Merger, HomeSense shareholders received 6,780,944 shares
of the Company's common stock (valued at $1.04 per share,
using the average closing price over the 60-day period
preceding the merger date) and 10,000,000 shares of the
Company's Series A Convertible Preferred Stock, par value
$1.00 per share (valued at par value) in exchange for all
of the outstanding stock of HomeSense, and HomeGold, Inc.
succeeded to certain of the debts of HomeSense. Ronald J.
Sheppard, the president and principal shareholder of
HomeSense, was hired as President and Chief Executive
Officer of the Company in connection with which he
received an option to purchase 825,423 shares of the
Company's common stock at $1.75 per share subject to
certain conditions. Prior to the Merger, the Company
loaned HomeSense $4,000,000, which HomeSense in turn
loaned to Mr. Sheppard. Upon consummation of the Merger,
Mr. Sheppard gave HomeGold, Inc. a $5,700,000 note
evidencing this indebtedness and an additional $1,700,000
indebtedness to HomeSense previously incurred. The total
consideration paid in the Merger was the result of
negotiations between the parties as to the value of the
Merger to each party thereto. HomeSense was engaged in
substantially the same business as the Company, and
physical property acquired with HomeSense in the Merger
will continue to be used in such business. For further
information about the Merger see "Part I, Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations - The Merger" which
information is incorporated herein by reference.
33
<PAGE>
The entities comprising HomeSense are as follows:
HomeSense Financial Corp.
EMMCO The Mortgage Service Station Inc.
Doc-Write, Inc.
Columbia Media Corp.
EMC Holding Corp.
EMC Training Corp.
EMC Underwriting Corp.
EMMCO The Mortgage Service Station of Alabama Inc.
EMMCO The Mortgage Service Station of Texas Inc.
Equitable Mortgage Corp. of Charleston
Equitable Mortgage Corp. of Charlotte
Equitable Mortgage Loan Center Corp.
Equitable Mortgage Management Corp.
HomeSense Financial Corp. of Alabama
HomeSense Financial Corp. of Baton Rouge
HomeSense Financial Corp. of Jackson
HomeSense Financial Corp. of Little Rock
HomeSense Financial Corp. of Memphis
HomeSense Financial Corp. of Orlando
HomeSense Financial Corp. of Savannah
Mortgage Avenue, Corp.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
2.1 Amendment #2 to Reorganization Agreement
dated May 1, 2000.
2.2 Amendment #3 to Reorganization Agreement
dated May 9, 2000.
3.1.1 Articles of Amendment to Articles of
Incorporation of the Company filed with
the South Carolina Secretary of State on
May 9, 2000 reducing par value of common
stock from $0.05 per share to $0.001 per
share, eliminating cumulative voting
with respect to election of directors
and authorizing issuance of up to
20,000,000 shares of blank check
preferred stock.
3.1.2 Articles of Amendment to Articles of
Incorporation of the Company filed with
the South Carolina Secretary of State on
May 9, 2000 containing Certificate of
Designation of Series A Non-convertible
Preferred Stock of the Company.
10.1 See exhibits 2.1 and 2.2.
10.2.1 Amendment to the Company's 1995 Employee
and Officer Stock Option Plan increasing
number of shares authorized for grant by
500,000 to a total of 1,466,667 shares.
10.2.2 Amendment to the Company's 1995 Employee
and Officer Stock Option Plan increasing
number of shares authorized for grant by
500,000 to a total of 1,966,667 shares.
10.3.1 Fourth Amendment dated May 2, 2000, to
Mortgage Loan Warehousing Agreement
dated June 30, 1998 as amended, by and
among HomeGold, Inc., Carolina
Investors, Inc., the Financial
Institutions Party thereto, and The CIT
Group/Business Credit, Inc. as
administrative agent.
10.3.2 Amendment No. 1 dated May 2, 2000, to
Security Agreements dated June 30, 1998
of HomeGold, Inc. and Carolina
Investors, Inc.
10.4.1 $40,000,000 Warehousing Line Revolving
Credit Agreement by and between
HomeGold, Inc. and Household Commercial
Financial Services, Inc. dated as of May
2, 2000.
10.4.2 Security Agreement dated May 2, 2000 of
HomeGold, Inc., the other entities
listed on the signature pages thereto
and Household Commercial Financial
Services, Inc.
10.4.3 Guaranty dated May 2, 2000 of HomeGold
Financial, Inc. and certain of its
subsidiaries.
34
<PAGE>
10.5 Severance Agreement dated April 28, 2000
between the Company and Keith B.
Giddens.
10.6 Severance Agreement dated May 12, 2000
between the Company and John W. Crisler.
10.7 Form of Severance Agreement between the
Company and employees listed in the
schedule therewith.
10.8 Employment Agreement dated May 9, 2000
between the Company and Ronald J.
Sheppard.
10.9 Mutual Indemnity Agreement dated May 9,
2000 between Ronald J. Sheppard and the
Company.
10.10 Registration Rights Agreement dated May
9, 2000 between the Company and the
individuals listed on Schedule 1
thereto.
10.11 Form of Stock Restriction Agreement.
27.1 Financial Data Schedule.
b) Reports on Form 8-K
-------------------
NASDAQ delisting on 4/20/00 - The Company filed a
report on Form 8-K dated April 20, 2000 to disclose
Nasdaq's intention to delist the Company's stock.
Other events - The Company filed a report on Form
8-K dated July 13, 2000 to disclose the departure
of the Company's Chief Financial Officer and the
appointment of the interim Chief Financial Officer.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMEGOLD FINANCIAL, INC.
Date: August 22, 2000
By: \s\ Ronald J. Sheppard
---------------------------------------
Ronald J. Sheppard.
Chief Executive Officer
Date: August 22, 2000
By: \s\ William Long
---------------------------------------
William Long
Executive Vice President, Acting Chief
Financial Officer
36
