-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IXS9zFnZot4CmUdqhAymwA8bFWsP68lEqhYKeSMcKPoRHhq2DkXkKNmTtDLhWDql fbYjrULXB4BGgNZy63v3zw== 0000950132-01-000214.txt : 20010418 0000950132-01-000214.hdr.sgml : 20010418 ACCESSION NUMBER: 0000950132-01-000214 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEGOLD FINANCIAL INC CENTRAL INDEX KEY: 0000277028 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 570513287 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08909 FILM NUMBER: 1603789 BUSINESS ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8642895400 MAIL ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 FORMER COMPANY: FORMER CONFORMED NAME: EMERGENT GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NRUC CORP DATE OF NAME CHANGE: 19911002 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL RAILWAY UTILIZATION CORP DATE OF NAME CHANGE: 19840813 10-K 1 0001.txt HOME GOLD UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 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 No. 000-08909 HOMEGOLD FINANCIAL, INC. (Exact name of registrant as specified in its charter) South Carolina 57-0513287 - ------------------------------------ --------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 3901 Pelham Road, Greenville, South Carolina 29615 - ---------------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 864-289-5000 Securities registered under Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which registered - --------------------------------- --------------------------------------------- None None Securities registered under Section 12(g) of the Act: Title of Each Class - -------------------------------------------------------------------------------- Series A Non-convertible Preferred Stock, par value $1.00 per share Common Stock, par value $.001 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 31, 2001, the aggregate market value of voting stock held by non-affiliates of registrant was approximately $5.8 million. As of March 31, 2001, 16,810,149 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for the Annual Meeting of Shareholders scheduled for July 11, 2001 to be filed not later than 120 days after December 31, 2000 is incorporated by reference into Part III hereof. PART I Item 1. BUSINESS GENERAL HomeGold Financial, Inc. , together with its subsidiaries (collectively, "HGFN" or "the Company"), is a specialty finance company primarily engaged in the business of originating, selling, and servicing sub-prime first and second-lien residential mortgage loan products ("Mortgage Loans"). Prior to November 1998, the Company also engaged in the business of originating, selling, securitizing and servicing small-business loan products partially guaranteed by the United States Small Business Administration ("SBA") and small-business loans collateralized by accounts receivable and inventory and mezzanine loans (collectively, "Small-Business Loans"). Prior to March 1998, the Company also engaged, to a lesser extent, in making auto loans ("Auto Loans"). The Company commenced its lending operations in 1991 with the acquisition of Carolina Investors, Inc. ("CII"), a small South Carolina mortgage lender, which had been in business since 1963. Since such acquisition, the Company has significantly expanded its lending operations. During the years 2000, 1999, and 1998, the Company originated $597.0 million, $234.0 million, and $785.3 million of loans, respectively. HomeGold Financial, Inc.'s major operating subsidiaries are HomeGold, Inc. and Carolina Investors, Inc. 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. The merger was consumated on May 9th 2000, and is described below under the heading "Merger with HomeSense Financial Corp." In August, 2000, the Company closed its wholesale loan origination operations. In the first seven months of 2000 and in the year ended December 31, 1999, loan originations generated by the wholesale brokers represented approximately 33% and 46.9%, respectively, of the Company's total production. However, wholesale loans produced much smaller margins compared to loans originated through the Company's retail origination channels. In addition, the availability of warehouse funding for higher-margin retail production was limited by the volume of wholesale production being funded on the warehouse lines. MERGER with HOMESENSE FINANCIAL CORP. On May 9, 2000, HomeSense Financial Corporation and certain of its affiliated companies ("HomeSense") were merged into HomeGold, Inc., a wholly owned subsidiary of HGFN pursuant to a merger agreement approved by HGFN's shareholders on April 28, 2000. HomeSense was a privately owned specialized mortgage company headquartered in Lexington, South Carolina that originated and sold mortgage loans in the sub-prime mortgage industry. Its principal loan product was a debt consolidation loan, generally collateralized by a first lien on the borrower's home. HomeSense originated its loan volume through a direct retail branch network of eight offices, as well as through centrally-provided telemarketing lead, direct mail, and television advertising. HomeGold, Inc. has continued the business of HomeSense after the merger. In the merger, HGFN issued 6,780,944 shares of its common stock (approximately 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. Most of this merger consideration was issued to HomeSense's primary shareholder Ronald J. Sheppard. Mr. Sheppard is now the chief executive officer and a director of HGFN, and a director of both HomeGold, Inc. and the Company. The merger was accounted for under the purchase method of accounting prescribed by generally accepted accounting principles. The transaction resulted in $19.0 million of goodwill, which is being amortized, on a straight-line basis over 15 years. After the merger was consummated, certain differences arose between the parties to the merger regarding the warranties and representations in the merger agreement. These differences were resolved in February 2001 by an agreement between Mr. Sheppard and HGFN pursuant to which Mr. Sheppard agreed to remain a guarantor with respect to certain indebtedness HomeGold, Inc. assumed from HomeSense in the merger and pursuant to which options for HGFN stock issued to Mr. Sheppard in the merger were cancelled. In addition, a mutual indemnity agreement between HGFN and Mr. Sheppard was cancelled. 2 The following summarized unaudited pro forma financial information for the combined companies assumes the acquisition had occurred on January 1 of each year: For the Years Ended December 31, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 57,477 $ 53,045 Income before extraordinary items (30,585) (29,574) Net income (30,006) 4,320 Earnings per share (1.41) (0.01) The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies that might be achieved from combined operations. The pro forma results do not necessarily represent results that 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. MORTGAGE LOAN PRODUCTS OVERVIEW The Company provides Mortgage Loan products primarily to owners of single family residences who use the loan proceeds for such purposes as refinancing, debt consolidation, home improvements and educational expenditures. The Company believes the sub-prime mortgage market is highly fragmented. Substantially all of the Mortgage Loans are made to sub-prime borrowers. These borrowers generally have limited access to credit, or are considered credit-impaired by conventional lenders such as thrift institutions and commercial banks. These conventional lending sources generally impose stringent and inflexible loan underwriting guidelines, as compared to the Company, to approve and fund loans. Loan applications of sub-prime borrowers are generally characterized by one or more of the following: (1) limited or unfavorable credit history, including bankruptcy, (2) problems with employment history, (3) insufficient debt coverage, (4) self-employment or (5) inadequate collateral. The Company has developed a comprehensive credit analysis system for its loan originations, which is designed to ensure that credit standards are maintained and consistent underwriting procedures are followed. The Company believes that its customers require or seek a high degree of personalized service and swift response to their loan applications. Also, the Company believes that its customers generally focus more on the amount of the monthly payment than the interest rate charged. Furthermore, because the Company's customers are generally credit-impaired for one or more reasons, the customers are typically not in a position to obtain better rates from traditional lending institutions. In 2000, 82% of the Mortgage Loans the Company originated were secured by first-liens. These first-lien Mortgage Loans had an average principal balance of approximately $82,000, a weighted average interest rate of approximately 9.81% and an average loan-to value ("LTV") ratio of 81%. Approximately 18% of the Mortgage Loans originated by the Company in 2000 were secured by a second-lien Mortgage Loan, some of which were to the same borrower as the first-lien mortgage loan. First and second mortgage combinations resulted in combined LTV ratios that averaged 113% on these loans and may be as high as 125% under the Company's guidelines. Such second-lien Mortgage Loans originated during 2000 had an average principal balance of approximately $31,000 and a weighted average interest rate of approximately 12.97%. In order to reduce the Company's credit risk, second-lien Mortgage Loans with a combined LTV ratio greater than 100% are generally pre-approved and pre-underwritten by a third party and generally sold without recourse on a whole loan basis with certain representations and warranties. Second-lien Mortgage Loans with a combined LTV ratio less than 100% are underwritten by the Company. These loans are generally sold on a whole loan basis without recourse. No assurance can be given that any second-lien mortgage loans can be sold. To the extent that the loans are not sold, the Company retains the risk of loss. At December 31, 2000 and 1999, the Company had retained $17.1 million and $9.5 million, respectively, of second-lien mortgage loans on its balance sheet. During 2000, the Company included certain second mortgages in its securitization. The Company may choose to include second mortgage products in future securitizations. 3 The Company has invested significantly in technology and the training of personnel to improve and expand its underwriting, servicing, and collection functions. The Company believes its current operations are capable of supporting increases in both loan origination volume and securitization servicing capacity with only modest increases in fixed expenses. MORTGAGE LOAN ORIGINATION The Company reaches targeted customers for its Mortgage Loan products on a retail basis using a combination of direct mail, telemarketing, and television advertising. Responses are directed through the Company's call centers in Greenville and Lexington, South Carolina and Cincinnati, Ohio. The Company conducts its mortgage lending operations in 46 states. The following table sets forth mortgage loan originations by channel for the period indicated: Loan Originations by Channel
Year Ended December 31, 2000 --------------------------------------------------------- 1ST Mortgage 2ND Mortgage Loans Loans Total ----------------- ----------------- --------------- (Dollars in thousands) Retail Loan originations $ 316,740 $ 82,490 $ 399,230 Average principal balance per loan $ 84 $ 36 $ 66 Weighted average initial LTV ratio 81.93 % 116.6 % 72.22 % Weighted average coupon rate 9.95 % 13.41 % 10.66 % Wholesale Loan originations $ 174,359 $ 23,076 $ 197,435 Average principal balance per loan $ 77 $ 21 $ 56 Weighted average initial LTV ratio 79.35 % 102.47 % 72.95 % Weighted average coupon rate 9.54 % 11.35 % 9.74 % Total Loan originations $ 491,099 $ 105,566 $ 596,665 Average principal balance per loan $ 82 $ 31 $ 63 Weighted average initial LTV ratio 81.01 % 113.21 % 72.5 % Weighted average coupon rate 9.81 % 12.97 % 10.36 %
RETAIL OPERATION. Since 1996, the Company has focused a significant portion of its resources in developing its retail loan products and in developing its related delivery systems. In August 2000 the Company closed its wholesale mortgage origination division, focusing its production efforts on retail originations. Focusing on retail production allows the Company to more efficiently utilize its financing sources for higher-margin Mortgage Loan products. In 2000, retail Mortgage Loan originations represented 67% of the Company's total Mortgage Loan originations compared to 53% and 56% in 1999 and 1998, respectively. Retail Mortgage Loan originations during 2000, 1999, and 1998, totaled $399.2 million, $124.2 million, and $371.1 million, respectively. The Company believes that its retail operation has significant long-term profit potential because it expects that the origination and other fees (typically paid to the broker-originators) will more than offset the infrastructure expenses associated with operating a retail operation once planned efficiency levels are reached. The Company also believes that the retail operation allows more Company control over the underwriting process and its borrower relationship. The retail operation also reduces reliance on wholesale sources, while building brand recognition. Unlike many of its competitors (particularly sub-prime mortgage lenders that began operations as traditional finance companies), the Company markets its retail lending operations in large part using direct mail, telemarketing, and television advertising methods. Compared to a traditional "bricks and mortar" retail approach in which loans are originated out of local, walk-in retail offices, the Company believes that this strategy allows it to target different areas of the country more quickly, depending on the economic, demographic, and other characteristics that may exist at a particular point in time. The Company also believes that this strategy avoids the expense typically associated with multiple physical locations. The Company currently has three central origination production locations in order to take advantage of multiple labor pools and time zones for more efficient telephone marketing. 4 WHOLESALE LENDING OPERATION. As noted above, in August 2000, the Company closed its wholesale mortgage origination division. Although wholesale originations made up a substantial portion of the Company's total origination volume, the margins derived from wholesale production were much smaller than those derived from retail production. Total wholesale originations had decreased in each of the prior two years. The Company attributes this reduction to the high employee turnover rates and tightening of underwriting guidelines. All of the Mortgage Loans originated on a wholesale basis by the Company were originated through mortgage brokers with whom the Company had developed continuing relationships. As a wholesale originator of Mortgage Loans, the Company funded the Mortgage Loans at closing. In the first seven months of 2000, wholesale Mortgage Loan originations represented 33% of the Company's total Mortgage Loan originations, compared to 47% and 44% in 1999 and 1998, respectively. Wholesale Mortgage Loan originations during 2000, 1999, and 1998 totaled $197.4 million, $109.8 million, and $288.3 million, respectively. GEOGRAPHIC DIVERSIFICATION. Since the Company commenced its retail mortgage operations in 1996, it has significantly expanded its geographic presence. During 2000, 1999, and 1998, Mortgage Loan originations by state were as shown below:
(Dollars in thousands) State 2000 % 1999 % 1998 % -------------------- ----------- -------- ----------- -------- ----------- -------- South Carolina $ 74,320 12.5 % $ 25,180 10.8 % $ 87,435 13.3 % North Carolina 46,135 7.7 33,945 14.6 108,714 16.4 Alabama 45,713 7.7 -- -- -- -- Georgia 45,138 7.6 10,751 4.6 34,725 5.3 Virginia 32,193 5.4 13,851 5.9 28,836 4.4 Mississippi 30,684 5.1 5,214 2.2 19,523 3.0 Florida 30,306 5.1 10,487 4.5 43,698 6.6 Tennessee 30,240 5.1 12,163 5.2 30,538 4.6 New Jersey 22,916 3.8 -- -- -- -- Louisiana 20,623 3.5 12,239 5.2 33,238 5.0 Ohio 19,616 3.3 10,960 4.7 19,643 3.0 Michigan 18,593 3.1 10,392 4.4 29,461 4.5 West Virginia 14,771 2.5 -- -- -- -- Pennsylvania 14,380 2.4 13,616 5.8 28,425 4.3 Arizona 13,132 2.2 -- -- -- -- Missouri 12,747 2.1 7,932 3.4 22,864 3.5 Maryland 12,715 2.1 -- -- -- -- Indiana 10,647 1.8 3,465 1.5 20,700 3.1 Washington 10,252 1.7 -- -- -- -- Illinois 9,080 1.5 9,178 3.9 28,479 4.3 Kentucky 8,776 1.5 -- -- -- -- California 8,650 1.4 -- -- -- -- New Mexico 7,701 1.3 -- -- -- -- Maine 6,045 1.0 -- -- -- -- All other states 51,292 8.6 54,632 23.3 123,165 18.7 ----------- -------- ----------- -------- ----------- -------- Total $ 596,665 100.0 % $ 234,005 100.0 % $ 659,444 100.0 % =========== ======== =========== ======== =========== ========
LOAN UNDERWRITING In the application and approval process associated with the Company's retail Mortgage Loan operations, a loan officer finds potential borrowers through leads generated by the Company's marketing efforts. After obtaining an initial loan application, additional information is compiled and gathered and forwarded to the underwriting department for approval. The underwriting department generally completes its review within one business day after procurement of all necessary documentation. Upon approval by the underwriting department, the loan is generally forwarded by the loan closing department to an attorney or title company for closing. 5 Creditworthiness is assessed through a variety of means, including calculating debt to income ratios, examining the applicant's credit history through credit reporting bureaus, verifying an applicant's employment status and income, and checking the applicant's payment history with respect to any first-lien mortgage on the property. The Company uses several procedures to verify information obtained from an applicant. In order to verify an applicant's employment status and income, the Company generally obtains such verification from the applicant's employer. The Company requires self-employed borrowers to provide a copy of their tax return. The Company generally requires an independent appraisal on all loans. Loans in excess of $350,000 generally require two independent appraisals. The Company generally requires title insurance for all real estate loans. The Company also generally requires real estate improvements to be fully insured as to fire and other commonly insurable risks and regularly monitors its loans to ensure that insurance is maintained for the period of the loan. The following table provides a general overview of the Company's principal underwriting criteria for first Mortgage Loans, set forth according to internal product types:
Internal Product Type - First Mortgages -------------- -------------- -------------- -------------- -------------- -------------- AA A A- B C D -------------- -------------- -------------- -------------- -------------- -------------- Existing mortgage No 30 day Maximum of Maximum of Maximum of Maximum of Cannot be in (maximum historical late one 30 day two 30 day three 30 day four 30 day foreclosure delinquencies) payments in late payment late late late the last 24 in last 12 payments in payments in payments in months months; and last 12 the last 12 the last 12 one 60 day months; and months; months; late payment one 60 day maximum of maximum of in the last late payment one 60 day one 60 day 24 months in the last late payment late payment 24 months in the last in the last 24 months 12 months; maximum of one 90 day late payment in the last 24 months Other credit history Maximum of Maximum of Maximum of Maximum of 30, 60, and No criteria (maximum historical two 30 day one 60 day one 60 day one 90 day 90+ day late delinquencies) late late payment late payment late payment payments payments in in the last in the last in the last acceptable, the last 24 24 months, 24 months, 24 months provided months with minimal with minimal that the 30 day late 30 day late borrower has payments in payments in at least the last 24 the last 24 minimal months months favorable credit history Bankruptcy filings None in past None in past None in past None in past None in past No criteria 3 years 3 years 3 years 2 years year Maximum debt service to income ratio (1) 45% 45% 45% 45% 50% 50% Maximum LTV ratio: Owner occupied 100% 100% 90% 85% 80% 70% Non-owner occupied 80% 75% 75% 70% 65% No product
- ---------- (1) Maximum debt service to income ratio may increase by 5% in each category (except AA loans) if disposable income meets certain thresholds. 6 The following table provides a general overview of the Company's principal underwriting criteria for second Mortgage Loans, set forth according to internal product types:
Internal Product Type - Second Mortgages --------------------- -------------------- ------------------------ --------------- Piggyback Less Than Piggyback Greater 125% CLTV Preapproval Personal Home or Equal to $15,000 Than $15,000 Required Loan --------------------- -------------------- ------------------------ --------------- Existing mortgage No 30 day late Maximum of one 30 No 30 day late Maximum of (maximum historical payments in last 12 day late payment payments in last 12 one 30 day delinquencies) months; Maximum of in last 12 months months late payment two 30 day late in last 12 payments in months months 13 through 24 Other credit history Maximum of three 30 Maximum of two 30 N/A Maximum of (maximum historical day late payments day late payments two 30 day delinquencies) in last 12 months; in last 12 months, late payments Maximum of five 30 unless credit in last 12 day late payments score is greater months, in months 13 than 650 unless credit through 24; Maximum score is of one 60 day late greater than payment 650 Bankruptcy filings None None in past three None in past seven None in past years years three years Maximum debt service to income ratio (1) 45% 45% 45% 45% Maximum LTV ratio 100% 100% 125% 100%
- ---------- (1) Maximum debt service to income ratio may increase by 5% on Piggybacks greater than $15,000 and on Personal home loans if disposable income meets certain thresholds. 7 The following tables provide information regarding the Company's first and second-lien Mortgage Loan originations by credit classification for the years ended December 31, 2000 and 1999: Loan Originations by Credit Classification Year Ended December 31, 2000 (Dollars in Thousands)
Internal Loan Classification ------------------------------------------------------------------------------- AAA/AA/A/A- B C D Totals ------------ ------------ ------------ ----------- ------------- First-Lien Mortgage Loans Amount $ 265,070 $ 155,804 $ 52,458 $ 14,693 $ 488,025 Percentage 54.31 % 31.93 % 10.75 % 3.01 % 100.0 % Weighted average coupon 9.56 9.9 10.5 10.11 9.79 Weighted average LTV ratio 82.18 80.17 78.6 77.66 81.03 Second-Lien Mortgage Loans Amount $ 82,364 $ 20,436 $ 3,668 $ 2,172 $ 108,640 Percentage 75.81 % 18.81 % 3.37 % 1.99 % 100.0 % Weighted average coupon 13.06 12.65 11.72 12.01 12.95 Weighted average LTV ratio 116.02 105.6 108.00 106.46 113.04
Loan Originations by Credit Classification Year Ended December 31, 1999 (Dollars in Thousands) Internal Loan Classification ------------------------------------------------------------------------------- AA/A/A- B C D Totals ------------ ------------ ------------ ------------ ------------- First-Lien Mortgage Loans Amount $ 149,516 $ 12,446 $ 10,071 $ 2,898 $ 174,931 Percentage 85.5 % 7.1 % 5.7 % 1.7 % 100.0 % Weighted average coupon 10.1 11.3 12.0 11.9 10.4 Weighted average LTV ratio 85.2 78.8 75.0 74.4 82.3 Second-Lien Mortgage Loans Amount $ 57,079 $ 580 $ 120 $ 159 $ 57,938 Percentage 98.5 % 1.0 % 0.2 % 0.3 % 100.0 % Weighted average coupon 13.9 14.2 14.1 14.8 14.3 Weighted average LTV ratio 110.2 84.8 81.1 90.0 112.2
Loan officers are trained to structure loans that meet the applicant's needs, while satisfying the Company's lending criteria. If an applicant does not meet the lending criteria, the loan officer may offer to make a smaller loan, or request that the borrower obtain a co-borrower or guarantor, in order to bring the application within the Company's lending parameters. The amount the Company will lend to a particular borrower is determined by a number of factors, including the borrower's creditworthiness, the value of the borrower's equity in the real estate, and the ratio of such equity to the home's appraised value. In connection with its Mortgage Loan products, the Company collects nonrefundable loan fees and various other fees, depending on state law, such as fees for credit reports, lien searches, title insurance and recordings, and appraisal fees. In connection with the servicing of the loans, the Company may receive late fees and insufficient funds fees, where permitted by applicable law. SALE AND SECURITIZATION OF MORTGAGE LOANS The Company sells a significant portion of the loans it originates, primarily through two methods, whole loan cash sales and securitization. Whole loan cash sales represent loans generally packaged in pools of $1.0 million to $5.0 million. Historically, the Company has sold its Mortgage Loans "servicing released" (i.e., without retention of the servicing rights and associated revenues) and on a non-recourse basis, with certain representations and warranties. The Company is required to repurchase any loan if it is subsequently determined that any representation and warranty made with respect to such loan was untrue. 8 In 1997, the Company began securitizing mortgage loans. Under this method, the Company sells Mortgage Loans it purchased or originated to a trust for cash. The trust sells asset-backed bonds secured by the loans to investors. The Company records certain assets and income based upon the difference between all principal and interest received from the loans sold and the following factors (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used in past securitizations are appropriate and reasonable. The following table sets forth for the periods indicated, Mortgage Loans securitized and Mortgage Loans sold on a whole loan basis and Mortgage Loans originated:
Year Ended December 31, ---------------------------------------------------------- 2000 1999 1998 ---------------- ---------------- ----------------- (Dollars in thousands) Mortgage loans securitized $ 64,330 $ 59,630 $ 90,352 Mortgage loans sold 517,295 220,382 625,480 ------------ ------------- ------------- Total Mortgage loans sold or securitized $ 581,625 $ 280,012 $ 715,832 ============ ============= ============= Total Mortgage loans originations $ 596,665 $ 234,005 $ 659,444 Mortgage loans sold or securitized as a % of Total Mortgage loan originations 97 % 120 % 108 %
In connection with the sale of Mortgage Loans prior to 1998, the Company received premiums ranging from 2% to 6% of the principal amount of the Mortgage Loans being sold, depending on prevailing interest rates and the terms of the loans. During 2000, 1999, and 1998, the weighted average premiums (discount) on the whole loan sales of mortgage loans were 1.93%, 2.03%, and (.40)%, respectively. For the years ended December 31, 2000, 1999, and 1998, gains recognized by the Company in connection with the whole loan sales of Mortgage Loans were $9.8 million, $6.2 million, and $9.5 million, respectively. In 1999 average premiums were impacted by industry difficulties that occurred in the fourth quarter of 1998. In the fourth quarter of 1998, the industry, which had been securitizing much of its loans during 1997 and most of 1998, began offering most of its loans to investors in the whole loan sale market. This shift occurred because securitization became less attractive as the corporate interest rate spreads required by investors increased. Prior to the fourth quarter of 1998, the Company generally was able to recognize higher premiums from securitizations compared to whole loan sale. However, cash flow is impacted more positively in the short term by whole loan sales, compared to securitizations. 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 mortgage loans, resulting in a lower than average premium. However, the securitization of seasoned loans resulted in additional liquidity of $33.0 million for the Company. 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 two securitizations totaling $64.3 million of loans. These securitizations consisted primarily of first and second mortgages, and resulted in additional liquidity in 2000 of $50.5 million. Both 2000 securitizations 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. During 2000, the Company primarily sold its loans on a whole-loan, servicing released basis, although it did complete two securitization transactions during the year. 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. The Company believes that it will continue to securitize, as well as whole loan sell, in 2001. 9 MORTGAGE LOAN SERVICING, DELINQUENCIES AND COLLECTIONS SERVICING The Company maintains a centralized portfolio management department located in Greenville, South Carolina which services Mortgage Loans. Servicing includes depositing cash received and posting payments to accounts for principal and interest, remitting funds to the Trustee, imaging documents, collection activities on past due accounts, management of loss mitigation activities and foreclosure and sale of properties, ensuring that insurance is in place, monitoring payment of real estate property taxes, customer service and retention activities and warehouse funding management. The Company does not escrow funds for purposes of insurance and taxes. However, it has the right to purchase insurance and pay taxes, which, if paid by the Company, are charged back to the borrower. The Company serves as master servicer for all of the mortgage loan securitizations which it has to date except the 2000 securitizations. In connection with such securitizations, the Company's servicing operation was reviewed by the rating agencies which rated the bonds issued in connection with such securitizations. Because the Company did not retain servicing rights on the 2000 securitizations, completed only one securitization during 1999, and sold the majority of loans originated on a "servicing released" basis, the servicing portfolio has declined from $550.3 million at December 31, 1998, to $283.6 million at December 31, 2000. DELINQUENCIES AND COLLECTIONS Collection efforts generally begin when a Mortgage Loan is over eight days past due, unless the account has previous unpaid late fees, in which case collection efforts generally begin when an account is over one day past due. At that time, the Company generally contacts the borrower by telephone to determine the reason for the delinquency and attempts to bring the account current. Typically, after an account becomes 15 days past due, the Company sends a reminder letter to the borrower, and then sends subsequent letters at 30 days past due, 41 days past due, and 55 days past due. In general, at 41 days past due, the Company sends a right-to-cure letter. After 90 days, the Company sends a five day demand letter and turns the account over to an attorney. In addition to written notices, the Company attempts to maintain telephone contact with the borrower at various times throughout the delinquency period. If the status of the account continues to deteriorate, the Company's loss mitigation unit works on a dual track along with the foreclosure unit to try to save the borrowers from a foreclosure action, while at the same time, trying to keep the foreclosure timelines as short as possible. In limited circumstances, when a borrower is experiencing difficulty in making timely payments, the Mortgage Loan Operations may temporarily adjust the borrower's payment schedule. The determination of how to work out a delinquent loan is based upon a number of factors, including the borrower's payment history and the reason for the current inability to make timely payments. When a loan is 150 days past due, generally, it is placed on non-accrual status and the Company initiates foreclosure proceedings. In connection with such foreclosure, the Company reviews the loan and the facts surrounding its delinquency, and may reappraise the underlying property. Regulations and practices regarding foreclosure and the rights of the mortgagor in default vary greatly from state to state. If deemed appropriate, the Company will bid in its loan amount at the foreclosure sale or accept a deed in lieu of foreclosure. The residential real estate owned portfolio, which is carried at the lower of carrying value or appraised fair market value less estimated cost to sell, totaled $1.3 million, $7.7 million, and $5.9 million at December 31, 2000, 1999, and 1998, respectively. 10 The following table sets forth for the periods indicated information relating to the delinquency and loss experience of the Company with respect to its Securitized Mortgage Loans serviced:
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 ------------- ------------- ------------- (Dollars in Thousands) Total serviced Mortgage Loans (period end) (1) $ 335,881 $ 408,529 $ 550,304 Serviced Mortgage Loans (period end) (2) 335,881 408,529 550,304 Average serviced Mortgage Loans (2) 407,786 488,057 743,362 Delinquency (period end) 30-59 days past due: Principal balance $ 6,622 $ 16,461 $ 28,174 % of serviced Mortgage Loans (2) 2.0 % 4.03 % 5.12 % 60-89 days past due: Principal balance $ 2,647 $ 5,325 $ 8,647 % of serviced Mortgage Loans (2) 0.8 % 1.30 % 1.57 % 90 days or more past due: Principal balance $ 16,014 $ 28,997 $ 38,109 % of serviced Mortgage Loans (2) 4.8 % 7.10 % 6.93 % Total delinquencies: Principal balance $ 25,283 $ 50,783 $ 74,930 % of serviced Mortgage Loans (2) 7.5 % 12.43 % 13.62 % Real estate owned (period end) $ 1,281 $ 7,673 $ 5,881 Net charge-offs 1,990 3,686 6,842 % of net charge-offs to average serviced Mortgage Loans .49 % 0.75 % 0.92 %
(1) Includes loans subserviced for others, where the Company has no credit risk. (2) Does not include loans subserviced for others, where the Company has no credit risk. Since substantially all of the Company's loans are to sub-prime borrowers who have limited access to credit or who may be considered credit- impaired by conventional lending standards, the percentage of the Company's loans past due is expected to be higher than a financial institution that provides loans to prime borrowers. SMALL BUSINESS LOAN PRODUCTS The Company sold substantially all of the assets of the small business loan operations to TransAmerica Small Business Capital, Inc. ("TransAmerica") in the fourth quarter of 1998 and the Company no longer offers the small business loan products. The Small Business Loan Unit realized net income in 1998 of $11.0 million. Included in the 1998 net income was a $19.0 million pre-tax gain on sale of the Small Business Loan Unit's net assets. AUTO LOAN PRODUCTS The Company sold substantially all of the assets of the auto loan unit on March 19, 1998 for $20.4 million, the approximate book value of the assets. The Company no longer offers auto loans as one of its financial products. Prior to the sale of the auto loan assets in 1998, the auto loan unit recorded a net loss of $110,000. COMPETITION The financial services industry, including the markets in which the Company operates, is highly competitive. Competition is based on the type of loan, interest rates, and service. Traditional competitors in the financial services industry include commercial banks, credit unions, thrift institutions, credit card issuers, consumer and commercial finance companies, and leasing companies, many of which have considerably greater financial and marketing resources than the Company. Moreover, major brokerage firms, insurance companies, retailers and bank holding companies have formed substantial national financial services networks. The Company believes that it competes effectively in its markets by providing competitive rates and efficient, complete services. 11 The Company faces significant competition in connection with its Mortgage Loan products, principally from national companies which focus their efforts on making mortgage loans to non-prime borrowers. Many of these companies have considerably greater financial and marketing resources than the Company. Although these large national companies compete in the mortgage loan industry, this industry, as a whole, is highly fragmented and no one company has a significant share of the total mortgage loan market. REGULATION The Company's operations are subject to extensive local, state and federal regulations including, but not limited to, the following federal statutes and regulations promulgated thereunder: Title 1 of the Consumer Credit Protection Act of 1968, as amended (including certain provisions thereof commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), the Home Mortgage Disclosure Act, the Fair Credit Reporting Act of 1970, as amended ("FCRA"), the Fair Debt Collection Practices Act, as amended, the Real Estate Settlement Procedures Act ("RESPA") and the National Housing Act, as amended. In addition, the Company is subject to state laws and regulations, including those with respect to the amount of interest and other charges which lenders can collect on loans (e.g., usury laws). Mortgage lending laws generally require lenders to be licensed, and place limitations on the amount, duration and charges for various categories of loans, require adequate disclosure of certain contract terms and place limitations on certain collection practices and creditor remedies. Many states have usury laws that limit interest rates, although the limits generally are considerably higher than current interest rates charged by the Company. State regulatory authorities may conduct audits of the books, records and practices of the Company's operations. The Company is licensed to do business in each state in which it does business and in which such licensing is required and believes it is in compliance in all material respects with these regulations. The Company's Mortgage Loan origination activities are subject to TILA. TILA contains disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three-day right to cancel certain credit transactions, including any refinanced mortgage or junior mortgage loan on a consumer's primary residence. The Company believes that it is in substantial compliance in all material respects with TILA. The Company is also required to comply with the ECOA, which, in part, prohibits creditors from discriminating against applicants on the basis of race, color, religion, national origin, sex, age or marital status. ECOA restricts creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants who are turned down for credit of the reasons therefor. In instances where a loan applicant is denied credit, or the rate or charge for a loan is increased as a result of information obtained from a consumer credit agency, another statute, the FCRA, requires the lender to supply the applicant with the name, address and phone number of the reporting agency. RESPA was enacted to provide consumers with more effective advance disclosures about the nature and costs of the settlement process, and to eliminate kickbacks or referral fees that raised the costs of settlement services. RESPA applies to virtually all mortgages on residential real property that is designed principally for occupancy of one to four families. Specific disclosures mandated by RESPA include, without limitation, estimates of closing costs, transfers of servicing, affiliated business arrangements and other settlement information. In the opinion of management, existing statutes and regulations have not had a materially adverse effect on the business done by the Company. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon the future business, financial condition or prospects of the Company. The Company believes that it is in substantial compliance with state and federal laws and regulations governing its lending activities. However, there can be no assurance that the Company will not inadvertently violate one or more of such laws and regulations. Such violations may result in actions for damages, claims for refunds of payments made, certain fines and penalties, injunctions against certain practices, and the potential forfeiture of rights to repayment of loans. Further adverse changes in the laws or regulations to which the Company's business is subject, or in the interpretation thereof, could have a material adverse effect on the Company's business. 12 EMPLOYEES At December 31, 2000, the Company employed a total of 693 full-time equivalent employees. Item 2. PROPERTIES The Company's headquarters are located at 3901 Pelham Road, Greenville, South Carolina and are owned by the Company. At December 31, 2000, the Company owned five offices and leased ten offices. None of the leases, considered separately or collectively, are believed to be material to the Company's operations. The Company believes that its leased and owned locations are suitable and adequate for their intended purposes. Item 3. LEGAL PROCEEDINGS 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 $356,000 allegedly due under copier equipment leases. It is not possible to evaluate the likelihood or amount of an unfavorable outcome at this stage. 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. That suit has been transferred to North Carolina Business Court. The suit was filed against the Company's affiliate HomeGold, Inc. and others alleging a variety of statutory and common law claims arising out of mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). On February 22, 2000, Michael and Kimberly Chasten filed a similar action in Duplin County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Eastern District of North Carolina. On March 21, 2000, Rosa and Royal Utley filed a similar suit in New Hanover County, North Carolina Superior Court. On April 13, 2000 Reginald Troy filed a similar action in New Hanover County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Eastern District of North Carolina. The plaintiffs in all of these cases are seeking unspecified monetary damages. As to HomeGold, Inc., the complaints in these four cases allege participation by HomeGold, Inc. 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 certified in any of the cases, and HomeGold Inc. has contested, and will continue to contest each case vigorously. The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the Company's 2000 fiscal year. 13 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock presently is traded on the National Association of Stock Dealers (NASD) Over the Counter Bulletin Board (OTCBB) under the symbol "HGFN". Until April 20, 2000, the common stock was traded on the NASDAQ National Merchant System (NNM). The following table sets forth the high and low bid prices of the common stock for the periods indicated, as reported on the OTCBB, and prior to April 20, 2000, the high and low sales price on the NNM. High Low ------------- ------------- 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 $ 1.75 $ 1.00 Second Quarter $ 1.15 $ 0.25 Third Quarter $ 0.94 $ 0.38 Fourth Quarter $ 0.72 $ 0.22 On March 31, 2001, the closing price for the Company's common stock was $0.344. As of March 31, 2001, the Company had 16,810,149 outstanding shares of common stock held by 392 stockholders of record. No dividends on common stock were paid or declared during 2000 or 1999, 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. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Liquidity and Capital Resources" which discussion is incorporated herein by reference. 14 Item 6. SELECTED FINANCIAL DATA The following table sets forth historical selected financial information of the Company as of the dates and for the periods indicated. The statement of income data, cash flow data, and balance sheet data are derived from the audited financial statements of the Company. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Report.
At and for the Years Ended December 31, 2000 1999 1998 1997 1996 ------------- ------------ ----------- -------------- ------------ (Dollars in thousands) Statement of Income Data: Interest income $ 12,192 $ 8,286 $ 35,075 $ 34,008 $ 17,908 Servicing income 7,397 9,813 12,239 8,514 3,274 Gain on sale of loans: Gross gain on sale of loans 9,801 6,216 9,472 52,828 23,815 Loan fees, net 16,430 3,313 11,745 30,207 4,150 ------------- ------------- ------------- ------------- ------------ Total gain on sale of loans 26,231 9,529 21,217 83,035 27,965 Gain on sale of subsidiaries' net assets (1) -- -- 18,964 -- -- Other revenues 1,735 1,609 4,230 1,399 1,241 ------------- ------------- ------------- ------------- ------------ Total revenues 47,555 29,237 91,725 126,956 50,388 Interest expense 19,448 16,338 35,968 25,133 11,021 Provision for credit losses 3,159 3,339 11,906 10,030 5,416 Costs on real estate owned and defaulted loans 3,451 3,018 2,665 876 380 Fair market value adjustment on residual receivable 2,279 3,327 13,638 -- -- Restructuring charges (2) 1,469 -- 6,838 -- -- General and administrative expenses 57,592 38,286 93,701 83,408 23,110 ------------- ------------- ------------- ------------- ------------ Total expenses 87,398 64,308 164,716 119,447 39,927 ------------- ------------- ------------- ------------- ------------ Income (loss) from operations before Income taxes, minority interest and extraordinary item (39,843) (35,071) (72,991) 7,509 10,461 Provision (benefit) for income taxes (9,456) (7,394) 3,017 (3,900) 718 ------------- ------------- ------------- ------------- ------------ Income (loss) from operations before Minority interest and extraordinary item (30,387) (27,677) (76,008) 11,409 9,743 Minority interest in (earnings) loss of subsidiaries (4) (8) 47 (156) 352 ------------- ------------- ------------- ------------- ------------ Income (loss) from operations before Extraordinary item (30,391) (27,685) (75,961) 11,253 10,095 Extraordinary item-gain on extinguishment of debt, Net of $0 tax (3) 579 29,500 18,216 -- -- ------------- ------------- ------------- ------------- ------------ Net income (loss) $ (29,812) $ 1,815 $ (57,745) $ 11,253 $ 10,095 ============= ============= ============= ============= ============ Diluted Earnings Per Share: Operations (2.10) (2.78) (7.81) 1.17 1.42 Extraordinary item .04 2.96 1.87 -- -- ------------- ------------- ------------- ------------- ------------ Net income (loss) per share $ (2.06) $ 0.18 $ (5.94) $ 1.17 $ 1.42 ============= ============= ============= ============= ============ Cash Flow Data: Cash flow due to operating cash income and expenses (20,873) (18,994) (62,775) (26,652) 14,174 Cash provided by (used in) loans held for sale and other (41,848) 26,210 147,055 (119,637) (92,652) ------------- ------------- ------------- ------------- ------------ Net cash provided by (used in) operating activities $ (62,721) $ 7,216 $ 84,280 $ (146,289) $ (78,478) ============= ============= ============= ============= ============ Balance Sheet Data: Total gross loans receivable $ 58,483 $ 63,242 $ 124,740 $ 297,615 $ 189,532 Total residual assets, net 58,877 47,770 43,857 63,202 13,215 Total assets 202,021 188,737 257,208 416,152 224,149 Total debt 212,845 180,880 239,276 336,920 169,596 Total shareholders' equity (deficit) $ (10,828) $ 7,844 $ 5,801 $ 63,374 $ 46,635
- ---------- (1) See Footnote 12. Sale of Subsidiary and Subsidiary's Assets in Notes to Consolidated Financial Statements. (2) See Footnote 14. Restructuring Charge in Notes to Consolidated Financial Statements. (3) See Footnote 17. Extraordinary Item-Gain on Extinguishment of Debt in Notes to Consolidated Financial Statements. 15 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read in conjunction with the Consolidated Financial Statements and Notes of the Company appearing elsewhere in this report. Forward - Looking Information From time to time, the Company makes oral and written statements that may constitute "forward-looking statements" (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Annual Report on Form 10-K (the "Annual Report"), as well as those made in other filings with the SEC, its Annual Report to Shareholders, and other financial discussion and analysis by management that reflect projections or future financial or economic performance of the Company. Such forward-looking statements are based on management's current plans and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In the preparation of this Annual Report, where such forward-looking statements appear, the Company has sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. Such factors include, but are not limited to: lower origination volume due to market conditions, inability to achieve desired efficiency levels, higher losses due to economic downturn or lower real estate values, loss of key employees, adverse consequences of changes in the 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, selling, and servicing non-conforming mortgage loan products. The Company commenced its lending operations in 1991 through the acquisition of Carolina Investors, Inc., a small mortgage lending company, which had been in operation since 1963. In the three years prior to the acquisition by merger of HomeSense Financial Corp. and certain of its affiliates as described below, the Company had already undergone significant changes. In late 1997, the Company decided to focus primarily on its mortgage operations, resulting in the sales of its auto loan operations in early 1998, its small retail origination subsidiary, Sterling Lending Corp. ("SLC") in August 1998, and substantially all of the assets of its small business loan operations in November 1998. Merger with HomeSense Financial Corp. On May 9, 2000, HomeSense Financial Corporation and certain of its affiliated companies ("HomeSense") were merged into HomeGold, Inc., a wholly owned subsidiary of HGFN pursuant to a merger agreement approved by HGFN's shareholders on April 28, 2000. 16 HomeSense was a privately owned specialized mortgage company headquartered in Lexington, South Carolina that originated and sold mortgage loans in the sub-prime mortgage industry. Its principal loan product was a debt consolidation loan, generally collateralized by a first lien on the borrower's home. HomeSense originated its loan volume through a direct retail branch network of eight offices, as well as through centrally-provided telemarketing lead, direct mail, and television advertising. HomeGold, Inc. has continued the business of HomeSense after the merger. In the merger, HGFN issued 6,780,944 shares of its common stock (approximately 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. Most of this merger consideration was issued to HomeSense's primary shareholder Ronald J. Sheppard. Mr. Sheppard is now the chief executive officer and a director of HGFN, and a director of both HomeGold, Inc. and the Company. The merger was accounted for under the purchase method of accounting prescribed by generally accepted accounting principles. The transaction resulted in $19.0 million of goodwill, which is being amortized, on a straight-line basis over 15 years. After the merger was consummated, certain differences arose between the parties to the merger regarding the warranties and representations in the merger agreement. These differences were resolved in February 2001 by an agreement between Mr. Sheppard and HGFN pursuant to which Mr. Sheppard agreed to remain a guarantor with respect to certain indebtedness HomeGold, Inc. assumed from HomeSense in the merger and pursuant to which options for HGFN stock issued to Mr. Sheppard in the merger were cancelled. In addition, a mutual indemnity agreement between HGFN and Mr. Sheppard was cancelled. The following summarized unaudited pro forma financial information for the combined companies assumes the acquisition had occurred on January 1 of each year: For the Years Ended December 31, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 57,477 $ 53,045 Income before extraordinary items (30,585) (29,574) Net income (30,006) 4,320 Earnings per share (1.41) (0.01) The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies that might be achieved from combined operations. The pro forma results do not necessarily represent results that 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. Discontinuation of Wholesale Mortgage Division In August, 2000, management closed the Company's wholesale mortgage origination divisions. The decision to exit the wholesale business arose primarily from management's desire to narrow its focus to the Company's more profitable retail loan origination efforts. The closure of the wholesale division resulted in a decrease in low-margin origination volume, enabling the Company to terminate its relationship under a particularly burdensome agreement with its primary warehouse lender. Further benefits have been realized through more focused and efficient usage of marketing resources and a sizable reduction in overhead costs related to the closed division. 17
The following table sets forth certain data relating to the Company's various loan products at and for the periods indicated: At and For the Years Ended December 31, ------------------------------------------------------ 2000 1999 1998 ------------ ----------- ------------- (Dollars in thousands) Mortgage Loans: Mortgage loans originated $ 596,665 $ 234,005 $ 659,444 Mortgage loans sold 517,295 220,382 623,675 Mortgage loans securitized 64,330 59,630 92,173 Total mortgage loans owned (period end) 52,225 63,242 117,685 Total serviced mortgage loans (period end) 335,881 408,529 550,304 Total serviced unguaranteed mortgage loans (period end) (1) 335,881 408,529 550,304 Average mortgage loans owned (2) 78,009 72,711 245,915 Average serviced mortgage loans (2) 328,576 478,386 744,221 Average serviced unguaranteed mortgage loans (1) 328,576 478,386 743,362 Average interest earned (2) 10.79 % 8.67 % 10.34 % Small Business Loans: Small business loans originated $ -- $ -- $ 122,902 Small business loans sold -- -- 141,041 Small business loans securitized -- -- 1,827 Total small business loans owned (period end) 9,162 10,388 7,054 Total serviced small business loans (period end) 9,162 10,388 7,054 Total serviced unguaranteed small business loans (period end)(3) 9,162 10,388 7,054 Average small business loans owned (2) 10,557 9,671 59,598 Average serviced small business loans (2) 10,557 9,671 202,446 Average serviced unguaranteed small business loans (2)(3) 10,557 9,671 82,270 Average interest earned (2) 7.68 % 6.37 % 14.28 % Auto Loans: Auto loans originated $ -- $ -- $ 2,982 Auto loans sold -- -- 20,898 Auto loans securitized -- -- -- Total auto loans owned (period end) -- -- -- Total serviced auto loans (period end) -- -- -- Average auto loans owned (2) -- -- 5,340 Average serviced auto loans (2) -- -- 5,340 Average interest earned (2) -- % -- % 21.28 % Total Loans: Total loans originated $ 596,665 $ 234,005 $ 785,328 Total loans sold 517,295 220,382 785,614 Total loans securitized 65,330 59,630 94,000 Total loans receivable (period end) 61,387 73,630 124,739 Total serviced loans (period end) 345,043 418,917 557,358 Total serviced unguaranteed loans (period end) (1)(3) 345,043 418,917 557,358 Average loans owned 88,566 82,382 310,853 Average serviced loans 339,133 488,057 952,007 Average serviced unguaranteed loans 339,133 488,057 830,972 Average interest earned 10.69 % 8.40 % 11.28 %
- -------------------------------------------------------------------------------- (1) Excludes loans serviced for others with no credit risk to the Company. (2) Averages are computed based on the daily averages except for monthly averages for Mortgage Loans in 1998. (3) Excludes guaranteed portion of SBA Loans. 18 Results of Operations For the periods indicated, the following table sets forth certain information derived from the Company's Consolidated Financial Statements expressed as a percentage of total revenues.
For the Years Ended December 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ---------- Interest income 25.6 % 28.3 % 38.2 % Servicing income 15.6 33.6 13.3 Gross gain on sale of loans 20.6 21.3 10.4 Loan fee income, net 34.6 11.3 12.8 Gain on sale of subsidiaries' net asset -- -- 20.7 Other revenues 3.6 5.5 4.6 ----------- ----------- ---------- Total revenues 100.0 % 100.0 % 100.0 % =========== =========== ========== Interest expense 40.9 % 55.9 % 39.2 % Provision for credit losses 6.6 11.4 13.0 Costs on real estate owned and defaulted loans 7.3 10.3 2.9 Fair market value adjustment on residual receivables 4.8 11.4 14.9 Salaries, wages and employee benefits 61.2 69.0 61.7 Business development costs 18.1 16.4 11.8 Restructuring charges 3.1 -- 7.5 Other general and administrative expenses 41.8 45.6 28.7 ----------- ----------- ---------- Income (loss) before income taxes, minority interest and extraordinary item (83.8) (120.0) (79.7) Provision (benefit) for income taxes (19.9) (25.3) 3.3 Minority interest in (earnings) loss of subsidiary -- -- 0.1 Extraordinary item 1.2 100.9 19.9 ----------- ----------- ---------- Net income (loss) (62.7) % 6.2 % (63.0) % =========== =========== ==========
Year Ended December 31, 2000, Compared to Year Ended December 31, 1999 The Company recognized a net loss of $29.8 million for the year ended December 31, 2000 ("2000"), as compared to a net income of $1.8 million for the year ended December 31, 1999 ("1999"). Included in net income for 2000 and 1999 were $579,000 and $29.5 million, respectively, of extraordinary gain on extinguishment of debt. Excluding extraordinary gains, the Company's net losses were $30.4 million and $27.7 million in 2000 and 1999, respectively. Total revenues increased $18.3 million (62.7%), to $47.6 million in 2000 from $29.2 million in 1999. The increase in total revenues is comprised of a $13.1 million (395.9%) increase in loan fee income, a $3.9 million (47.1%) increase in interest income, a $3.6 million (57.7%) increase in gain on sale of loans, and a $126,000 (7.8%) increase in other income, partially offset by a $2.4 million (24.6%) decrease in servicing fee income. The increase in net loan fees is primarily attributable to a $362.7 million increase in mortgage origination production and an increase in average loan origination fees charged, to 2.75% in 2000 from 1.42% in 1999. The overall increase in production is attributable to the merger, combining the production capacity of HomeGold with that of HomeSense. The increase in average origination fees charged occurred because of a shift in the mix of wholesale and retail production, resulting from the Company's decision to end wholesale production operations as of August 1, 2000. During 1999, wholesale production accounted for 46.9% of the Company's total production, and during 2000, wholesale production accounted for only 33.1% of the Company's total production. The increase in interest income resulted primarily from an $5.3 million (8%) increase in average loans receivable outstanding. The increase in average loans receivable outstanding relates primarily to the increase in mortgage loan production mentioned above. In addition, the Company experienced an approximate 212 basis point increase in the average yield on loans receivable outstanding. The decrease in servicing fee income was due in part to the sale on a servicing-released basis of $64.3 million in mortgage loans during 2000. The average serviced mortgage loan portfolio decreased $149.8 million, or 31%, to $328.6 million in 2000 from $479.4 million in 1999. 19 Gross gain on sale of loans increased $3.6 million, or 57.7%, to $9.8 million in 2000, from $6.2 million in 1999 due primarily to an increase in loans sold. Loans sold increased $279.2 million, or 99.7%, to $581.6 million for 2000 from $280.0 million for 1999. The increase in loans sold resulted from higher originations of mortgage loans held for sale and the Company's decision to focus on liquidity and whole-loan sales in late 1999 and 2000. The weighted average gross gain on sale of loans was 1.75% and 2.22% for 2000 and 1999, respectively. In 2000 and 1999, other revenues consist primarily of prepayment penalty income, underwriting fees, and late charges. In 1999, other revenues also included nonrecurring income from rental of the Company's computer systems by a former subsidiary. Total expenses increased $23.1 million, or 35.9%, to $87.4 million in 2000 from $64.3 million in 1999. The increase in total expenses is comprised of an $8.8 million (43.0%) increase in personnel expenses, a $6.7 million (51.3%) increase in other general and administrative expenses, a $3.8 million (79.3%) increase in business development costs, a $3.1 million (19.0%) increase in interest expense, and a $433,000 (14.4%) increase in costs on real estate owned and defaulted loans, partially offset by a $1.0 million (31.5%) decrease in the fair value adjustment of residual receivables and a $180,000 (5.4%) decrease in the provision for credit losses. During 2000, the Company also reported $1.5 million in non-recurring restructuring charges related to the merger and the dissolution of the wholesale division. While total expenses increased substantially as a result of the merger and increased retail production, the Company significantly reduced the combined expenses of the merged companies by taking advantage of economies of scale, eliminating many redundant positions, and closing the wholesale division. The increase in personnel costs resulted primarily from the addition of employees during the merger. The number of employees increased from 387 at December 31, 1999 to 693 at December 31, 2000. Immediately after the merger, the Company employed 790 people. Significant personnel reductions came at the time of the closure of the wholesale division, with additional cuts occurring from the date of the merger through year end. The increase in other general and administrative expenses was comprised primarily of a $2.7 million increase in loan origination costs resulting from increased production volume generated by the merger, an $870,000 increase in amortization expense resulting from the addition of substantial goodwill arising from the merger, and merger-related increases in telephone costs ($671,000), equipment rentals ($227,000), office rent ($499,000), ($906,000) of additional amortization from the write-off of the CIT debt origination, and several other expense categories. The increase in business development costs was necessary to support additional production capacity after the merger. Such costs decreased when measured as a percentage of production, to 1.4% in 2000 from 2.1% in 1999. The increase in interest expense was due principally to higher levels of borrowings associated with the increase in the Company's average mortgage loan portfolio. For 2000 and 1999, the Company incurred interest expense of $6.4 million and $2.0 million, respectively, related to warehouse lines of credit and $11.7 million and $9.9 million, respectively, related to investor notes and subordinated debentures. These increases were partially offset by a decrease related to the reduction in the Company's senior unsecured debt. For 2000 and 1999, such expenses were $1.3 million and $4.4 million, respectively. The increase in costs on real estate and defaulted loans is due to the company aggressively liquidating its real estate acquired through foreclosure in 2000. Changes in valuation assumptions for the Company's residual receivables from securitizations were adjusted in 2000, primarily related to the assumed loss rates in the 1997 pools. The change in assumed loss rates, due to lower than expected actual losses, resulted in an increase in fair value of the residual receivable. However, this increase was offset by actual losses on foreclosed properties in all the securitization pools, causing the write-down of the overall residual receivable. The decrease in the provision for credit losses was associated with lower levels of loans held for investment and a lower loan delinquency rate. The decrease was partially offset by management's decision in early 2000 to record additional reserves against amounts paid on behalf of borrowers for taxes, insurance, and attorney's fees. During 2000, the Company incurred restructuring charges related to the merger and to the decision to close its wholesale loan origination division. These charges included the estimated costs of employee relocation costs and employee severance, and the estimated net lease cost on facilities no longer being used. 20 The Company has recorded current income tax expense of $544,000 for 2000, related to its "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. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other current period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The Company has recorded a deferred tax benefit of $10 million in 2000 related to historical losses based on management's assessment of the realization of the related deferred tax asset. Management has performed an analysis of the recoverability of the asset based on projected conditions, and has determined that it is more likely than not that the Company will be able to realize this benefit prior to the expiration of the net operating loss carryforwards. Year Ended December 31, 1999, Compared to Year Ended December 31, 1998 The Company recognized net income of $1.8 million for the year ended December 31, 1999 as compared to a net loss of $57.7 million for the year ended December 31, 1998. Included in net income for 1999 and 1998 is $29.5 million and $18.2 million, respectively of extraordinary gain on extinguishment of debt. In 1999, the Company realigned its processes and its expense structure to correspond with a lower loan production level. Total revenues decreased $62.5 million, or 68.1%, to $29.2 million for the year ended December 31, 1999 from $91.7 million for the year ended December 31, 1998. 1998 amounts include revenues from small business and auto loan operations that were sold in 1998. 1998 revenue from the mortgage operations, net of a subsidiary also sold in 1998, is a more comparable figure, at $52.6 million for 1998. The lower level of mortgage loan revenues resulted principally from lower mortgage loan production levels and lower gains on sale of loans. The lower gains on sale of loans were a result of a combination of lower volumes of loans sold and lower overall premiums. Interest income decreased $26.8 million, or 76.4%, to $8.3 million for the year ended December 31, 1999 from $35.1 million for the year ended December 31, 1998. The decrease in interest income resulted primarily from a $228.5 million, or 73.5%, decrease in average loan balance to $82.4 million in 1999 from $310.9 million in 1998. The decrease in the average loan balance resulted from a $64.8 million decrease in the Company's mortgage loan portfolio, the sale of the small-business loan portfolio and the sale of the auto loan portfolio. This decrease was compounded by a reduction in the average yield of 290 basis points. The average yield in 1999 was 8.40% compared to 11.28% in 1998 due primarily to loans on non-accrual status. The decrease in the average yield is also due to the changes in the types of loans in the Company's portfolio. Weighted average mortgage rates declined 167 basis points from 10.34% in 1998 to 8.67% in 1999. Servicing income decreased $2.4 million, or 19.8%, to $9.8 million for the year ended December 31, 1999 from $12.2 million for the year ended December 31, 1998. This decrease was due principally to the sale of the assets of the small business loan unit in November 1998. The average serviced mortgage loan portfolio decreased $269.1 million, or 36.1%, to $475.1 million for the year ended December 31, 1999 from $744.2 million for the year ended December 31, 1998. Gross gain on sale of loans declined $3.3 million, or 34.4%, to $6.2 million for the year ended December 31, 1999, from $9.5 million for the year ended December 31, 1998 due to lower gain on sale from securitization transactions. The securitization transaction completed in May 1999 involved older seasoned loans which included some second mortgage loans. As a result, higher estimated losses are anticipated on this pool. Cash gain on sale of loans increased $3.1 million, or 233.2%, to $4.5 million for the year ended December 31, 1999 from $1.3 million for the year ended December 31, 1998. The increase resulted principally from the Company's decision to focus on liquidity and whole-loan sales in late 1998 and in 1999. Loans sold decreased $498.9 million, or 64.1%, to $280.0 million for the year ended December 31, 1999 from $778.9 million for the year ended December 31, 1998. The decrease in loans sold resulted from lower originations of mortgage loans held for sale and from the sale of Sterling Lending and the small business loan units in 1998. The weighted average cash gain on sale of loans was 2.03% and 0.2% for the years ended December 31, 1999 and 1998, respectively. 21 Non-cash gain on sale of loans decreased $6.4 million, or 78.6%, to $1.7 million for the year ended December 31, 1999 from $8.1 million for the year ended December 31, 1998. The decrease in non-cash gain on sale of loans was due principally to the Company's decision to sell most of its 1999 originations servicing-released and to securitize seasoned first and second mortgage loans. The Company securitized $59.6 million in loans for the year ended December 31, 1999 and recognized a weighted average non-cash gain on sale as a percentage of loans securitized of 2.88%, net of expenses. The Company securitized $92.3 million in loans for the year ended December 31, 1998 and recognized a weighted average non-cash gain on sale as a percentage of loans securitized of 8.81%, net of expenses. Loan fees decreased $8.4 million, or 71.8%, to $3.3 million for the year ended December 31, 1999 from $11.7 million for the year ended December 31, 1998. Loan fees received as a percentage of retail production for the year ended December 31, 1999 were 4.01% as compared to 4.65% for the year ended December 31, 1998. Loan fees are deferred and recognized as interest income over the life of the loan. All unamortized loan fees, net of origination costs, are realized as part of the gain on sale of loans when the loans are sold or securitized. In 1998, the Company realized a net $19.0 million gain on sale of subsidiaries' net assets. The Company completed the sale of substantially all of the assets of its auto loan unit for book value on March 19, 1998. No significant gain or loss was recognized on this transaction. On August 21, 1998, the Company completed the sale of its small branch network retail mortgage origination unit, Sterling Lending Corporation. There was no significant gain or loss recorded as a result of this sale. On November 13, 1998, the Company sold the majority of the assets of its small business lending units. The gain realized in 1998 was approximately $19.7 million net of related costs. On December 2, 1998, the Company sold the majority of its asset-based lending unit. This transaction completed the disposition of all non-mortgage-related activities of the Company. The sale resulted in a pre-tax loss of $755,000. Other revenues decreased $2.6 million to $1.6 million for the year ended December 31, 1999 from $4.2 million for the year ended December 31, 1998. In 1998, other revenues were comprised principally of insurance commissions, underwriting fees, late charges, warrant valuations, and management fees received in connection with the mezzanine lending operation. In 1999, other revenues consist primarily of prepayment penalty income, underwriting fees, late charges, and nonrecurring income from rental of the Company's computer systems by a former subsidiary. Total expenses decreased $100.4 million, or 61.0%, to $64.3 million for the year ended December 31, 1999 from $164.7 million for the year ended December 31, 1998. Total expenses are comprised of interest expense, provision for credit losses, costs on real estate owned and defaulted loans, fair value adjustment of residual receivables, salaries, wages and employee benefits, business development costs, and other general and administrative expenses. Certain personnel reductions in the fourth quarter of 1998 and in 1999 have decreased personnel costs from $56.9 million for 1998 to $20.4 million in 1999. Interest expense decreased $19.6 million, or 54.6%, to $16.3 million for the year ended December 31, 1999 from $36.0 million for the year ended December 31, 1998. The decrease in interest expense was due principally to lower levels of borrowings associated with the decrease in the Company's average mortgage loan portfolio, and the retirement of $74.5 million of the Company's Senior Notes due 2004 ("Senior Notes"). For the years ended December 31, 1999 and 1998, the Company incurred interest expense of approximately $4.4 million and $13.5 million, respectively related to the Senior Notes. For the years ended December 31, 1999 and 1998, the Company incurred interest expense of $2.0 million and $12.8 million, respectively, related to warehouse lines of credit. Provision for credit losses decreased $8.6 million, or 72.0%, to $3.3 million for the year ended December 31, 1999 from $11.9 million for the year ended December 31, 1998. The decrease in the provision was associated with lower levels of loans held for investment. However, additional provision was required in 1999 to increase specific reserves for possible losses with regard to particular loans, including delinquent loans relating to the small business loan operations which were not sold. Costs on real estate and defaulted loans increased $353,000, or 13.2%, to $3.0 million for the year ended December 31, 1999 from $2.7 million for 1998. This increase is due to higher levels of real estate acquired through foreclosure in 1999 over 1998. These higher levels of real estate are related to seasoning of the retained portfolio and repurchases from securitized pools. Management feels that loans made in 1997 which were not underwritten in accordance with Company guidelines increased the Company's foreclosures. As these loans are foreclosed or sold, management expects these costs to return to lower levels. 22 In 1998, due to higher than anticipated prepayments, the Company modified the estimated prepayment speeds on all of its mortgage loan securitization transactions to peak at a 30 constant prepayment rate ("CPR") up from the previous prepayment speeds of 20 CPR. This resulted in a write-down of residual receivables of $13.6 million in 1998. No such write-down was necessary in 1999. The peak CPR was adjusted to 28 during 1999 to reflect the recent trend in slower prepayment speeds. (See Loan and Securitizations section) In November 1998, the Company decided to close three retail loan origination centers and to consolidate all operations into one location. This decision resulted in a restructuring charge of $6.8 million. The restructuring charge related to the write-down of fixed assets to net realizable value on assets no longer used by the Company was $3.6 million, the estimated costs of employee relocation costs and employee severance was approximately $1.4 million, and the estimated net lease cost on facilities no longer being used was $1.8 million. No such charge was required in 1999, and management feels that the reserves at December 31, 1999 continue to be adequate. Total general and administrative expense decreased $55.4 million, or 59.1%, to $38.3 million for the year ended December 31, 1999, from $93.7 million for the year ended December 31, 1998. This resulted primarily because salaries, wages and employee benefits decreased $36.4 million, or 64.4%, to $20.2 million in 1999, from $56.6 million in 1998, and business development costs decreased $6.0 million to $4.8 million in 1999 from $10.8 million in 1998. The decreased costs resulted from the closure of retail operations centers outside Greenville in late 1998. The lower business development costs related to changes in the Company's direct mail campaigns in an effort to re-focus mailings to consumers more closely matching the profile of the Company's customer base. The Company has recorded current income tax expense of $455,000 for the year ended December 31, 1999, even though overall the Company generated a pre-tax loss for the year ended December 31, 1999. The current tax is due on income called "excess inclusion income." Excess inclusion income is a result of the Company securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other current period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The Company has recorded a deferred tax benefit in the amount of $7.8 million related to the current loss based on management's assessment of the recoverability of the related deferred tax asset. Management has performed an analysis of the recoverability of the asset based on projected conditions, and determined that it is more likely than not that the Company will be able to realize this benefit prior to the expiration of the net operating loss carryforwards. Financial Condition Net loans receivable decreased $4.9 million to $51.7 million at December 31, 2000 from $56.6 million at December 31, 1999. The reduction in net loans receivable resulted primarily from the Company's decision to increase liquidity and reduce debt by selling and securitizing residential mortgage loans, partially offset by an increase in overall production. The residual receivables were $58.9 million at December 31, 2000, and $47.8 million at December 31, 1999. This increase resulted primarily from net residual assets of $14.2 million retained on the 2000 securitization transactions competed in June and September and an $895,000 increase in value resulting from a change in the assumed loss rates of the 1997 pools, due to lower than expected actual losses. These increases were partially offset by the amortization of the residual assetS. Net property and equipment increased by $4.3 million to $21.4 million at December 31, 2000, from $17.2 million at December 31, 1999, which is attributable to the merger with HomeSense, partially offset by depreciation expense incurred during the year. Real estate and personal property acquired in foreclosure decreased to $1.3 million at December 31, 2000, from $7.7 million at December 31, 1999. This decrease resulted from the sale of foreclosed properties, partially offset by additional foreclosures on mortgage loans within the period. 23 The net deferred income tax asset increased from $12 million at December 31, 1999 to $22 million at December 31, 2000. The increase is the result of the Company's latest assessment of the recoverability of the net operating loss carryforwards based upon recent changes in its management team, business strategy, opportunities in the marketplace, and projected conditions. Total net operating loss carryforwards are now $103.6 million. Approximately $101.7 million does not begin to expire until 2006 and beyond. The primary source of funding the Company's receivables comes from borrowings issued under various credit arrangements (including the Credit Facilities, CII Notes, and the Company's Senior Notes). At December 31, 2000, the Company had debt outstanding under revolving warehouse lines of credit and other obligations to banks of $29.3 million, which compares with $17.8 million at December 31, 1999, for an increase of $11.5 million. At December 31, 2000, the Company had $165.2 million of CII Notes and subordinated debentures outstanding, which compares with $144.8 million at December 31, 1999, for an increase of $20.4 million. The aggregate principal amount of outstanding Senior Notes was $11.2 million at December 31, 2000 compared to $12.1 million on December 31, 1999. In 2000, the Company purchased $920,000 face amount of its Senior Notes for a purchase price of $341,000. 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. The Company showed a deficit in total shareholders' equity at December 31, 2000 of $10.8 million, which compares to positive equity of $7.8 million at December 31, 1999, a decrease of $18.7 million. This decrease resulted principally from the net loss recognized in 2000, partially offset by the issuance of stock in conjunction with the merger. Allowance for Credit Losses and Credit Loss Experience The Company is exposed to the risk of loan delinquencies and defaults with respect to loans retained in its portfolio. With respect to loans to be sold on a non-recourse basis, the Company is at risk for loan delinquencies and defaults on such loans while they are held by the Company pending such sale. To provide for credit losses, the Company charges against current earnings an amount necessary to maintain the allowance for credit losses at levels expected to cover inherent losses in loans receivable. The table below summarizes certain information with respect to the Company's allowance for credit losses on the owned portfolio for each of the periods indicated. Summary of Allowance for Credit Losses on Owned Portfolio
At and For the Year Ended December 31, ------------------------------------------ 2000 1999 1998 ----------- ----------- ------------ (In thousands) Allowance for credit losses at beginning of period $ 6,344 $ 6,659 $ 6,528 Net charge-offs (1,990) (3,654) (8,792) Provision charged to expense 3,159 3,339 11,906 Allowance related to loans sold (2,861) -- (2,983) ----------- ----------- ------------ Allowance for credit losses at the end of the period $ 4,652 $ 6,344 $ 6,659 =========== =========== ============
The Company considers its allowance for credit losses to be adequate in view of the Company's loss experience and the secured nature of most of the Company's outstanding loans. Although management considers the allowance appropriate and adequate to cover inherent losses in the loan portfolio, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for possible credit losses will not be required. 24 The table below summarizes certain information with respect to the Company's allowance for losses on the securitization residual assets for each of the periods indicated. Summary of Embedded Allowance for Losses on Securitization Residual Assets
At and For the Year Ended December 31, ------------------------------------------------- 2000 1999 1998 -------------- ------------- -------------- (In thousands) Residual securities: Allowance for losses at beginning of period $ 7,176 $ 7,165 $ 14,255 Net charge-offs (3,577) (1,661) (147) Anticipated losses net against gain 1,559 1,266 2,242 Mark-to-market adjustment 489 406 (6,228) Sale of small business residual assets -- -- (2,957) ------------- ------------ ------------ Allowance for losses at end of period $ 5,647 $ 7,176 $ 7,165 ============= ============ ============
The value of the residual receivables retained by the Company would be impaired to the extent losses on the securitized loans exceed the amount estimated when determining the residual cash flows. The table below summarizes the Company's allowance for credit losses with respect to the Company's total combined serviced portfolio (including both owned and securitized loan pools) for each of the periods indicated. Summary of Allowance for Credit Losses on Combined Serviced Portfolio
At and For the Year Ended December 31, ------------------------------------------------- 2000 1999 1998 -------------- ------------- -------------- (In thousands) Allowance for credit losses at beginning of period $ 13,520 $ 13,824 $ 20,783 Net charge-offs (5,567) (5,315) (8,938) Provision charged to expense 3,159 3,339 11,905 Provision netted against gain on securitizations 1,559 1,266 2,242 Mark-to-market adjustment 489 406 (6,228) Sale of small business residual assets -- -- (2,957) Allowance related to loans sold (2,861) -- (2,983) -------------- ------------ ------------ Allowance for credit losses at the end of the period $ 10,299 $ 13,520 $ 13,824 ============== ============ ============ The total allowance for credit losses as shown on the balance sheet is as follows: Allowance for credit losses on loans $ 4,652 $ 6,344 $ 6,659 Allowance for credit losses on residual receivables 5,647 7,176 7,165 -------------- ------------ ------------ Total allowance for credit losses $ 10,299 $ 13,520 $ 13,824 ============== ============ ============
25 The following table sets forth the Company's allowance for credit losses on the combined serviced portfolio at the end of the periods indicated, the credit loss experience over the periods indicated, and delinquent loan information at the dates indicated for loans receivable at least 30 days past due.
At and For the Year Ended December 31, -------------------------------------- 2000 1999 1998 -------------------------------------- Allowance for Credit Losses as a % of Combined Serviced Loans (1): Mortgage loans 1.88 % 2.5 % 2.1 % Small business loans 43.5 32.2 32.6 Auto loans -- -- -- Total allowance for credit losses as a % of serviced loans 3.1 3.2 2.5 Net Charge-offs as a % of Average Combined Serviced Loans (2): Mortgage loans 0.6 0.8 0.9 Small business loans -- -- 1.6 Auto loans -- -- 15.0 Total net charge-offs as a % of total serviced loans 0.6 0.8 1.1 Loans Receivable Past Due 30 Days or More as a % of Combined Serviced Loans (1): Mortgage loans 7.5 12.4 13.6 Small business loans 33.4 55.3 -- Auto loans -- -- -- Total loans receivable past due 30 days or more as a % of total serviced loans 7.3 13.5 13.4 Total Allowance for Credit Losses as a % of Combined Serviced Loans Past Due 90 Days or More (1) 29.0 % 23.9 % 35.3 %
- ---------- (1) For purposes of these calculations, combined serviced loans represents all loans for which the Company bears credit risk, and includes all portfolio Mortgage Loans and Auto Loans, all securitized loans, and the Small Business Loans, but excludes the guaranteed portion of the SBA Loans and Mortgage Loans serviced without credit risk. (2) Average serviced loans have been determined by using beginning and ending balances for the period presented. 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 over 150 days past due, when 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. 26 Management monitors securitized pool delinquencies using a static pool analysis by month by pool balance. Current year results are not necessarily indicative of future performance. The following sets forth the static pool analysis for delinquencies by month in the Company's securitized mortgage loan pools.
Current Principal Balance - -------------------------------------------------------------------------------------------------------------------------------- Months from Pool Inception 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 - -------------------------------------------------------------------------------------------------------------------------------- 1 $ 77,435,632 $ 120,860,326 $ 130,917,899 $ 118,585,860 $ 62,726,105 $ 59,219,199 2 $ 77,405,312 $ 120,119,653 $ 169,093,916 $ 118,061,792 $ 62,300,302 $ 57,977,700 3 $ 76,709,417 $ 119,364,510 $ 168,182,957 $ 148,291,454 $ 61,609,815 $ 57,201,142 4 $ 75,889,160 $ 118,965,905 $ 166,783,489 $ 146,880,279 $ 60,768,433 $ 56,168,578 5 $ 75,395,969 $ 117,238,693 $ 165,608,534 $ 145,775,696 $ 59,347,948 $ 55,351,358 6 $ 74,630,019 $ 115,870,168 $ 164,084,260 $ 144,465,651 $ 58,739,309 $ 54,561,477 7 $ 73,149,957 $ 113,537,447 $ 161,880,416 $ 143,048,555 $ 57,829,352 $ 53,610,555 8 $ 72,261,386 $ 112,100,397 $ 158,220,175 $ 140,482,698 $ 56,918,186 $ 52,592,079 9 $ 71,342,842 $ 110,468,401 $ 155,854,981 $ 137,318,432 $ 55,894,240 $ 51,544,836 10 $ 70,195,198 $ 107,887,242 $ 153,193,421 $ 134,991,772 $ 54,887,268 $ 50,557,441 11 $ 68,981,147 $ 105,138,088 $ 148,382,102 $ 131,582,081 $ 53,817,889 $ 49,432,647 12 $ 67,149,553 $ 102,142,062 $ 144,556,568 $ 129,029,429 $ 52,813,707 $ 48,605,367 13 $ 65,705,603 $ 98,876,084 $ 140,265,621 $ 125,457,545 $ 51,834,618 $ 47,558,170 14 $ 63,210,889 $ 95,394,444 $ 136,583,138 $ 121,706,895 $ 50,355,268 $ 46,337,600 15 $ 60,052,314 $ 92,501,939 $ 133,252,925 $ 118,983,067 $ 49,261,441 $ 45,710,455 16 $ 58,133,496 $ 89,402,897 $ 129,792,748 $ 116,012,173 $ 48,013,883 $ 45,288,892 17 $ 56,900,372 $ 83,793,933 $ 127,118,396 $ 112,424,165 $ 46,682,595 $ 44,736,648 18 $ 55,154,969 $ 81,637,626 $ 124,262,781 $ 109,695,150 $ 45,808,180 $ 44,334,435 19 $ 50,852,179 $ 79,392,938 $ 119,512,141 $ 107,288,894 $ 44,422,122 $ 43,964,717 20 $ 49,702,926 $ 77,843,648 $ 116,408,786 $ 104,842,028 $ 43,821,316 $ 43,417,008 21 $ 48,629,373 $ 76,319,392 $ 113,506,699 $ 101,806,498 $ 42,973,221 22 $ 45,780,152 $ 74,512,970 $ 108,064,086 $ 98,013,963 $ 41,901,327 23 $ 44,612,888 $ 71,644,155 $ 104,734,353 $ 95,627,417 $ 41,054,409 24 $ 43,845,616 $ 69,074,182 $ 101,605,131 $ 92,702,818 $ 39,983,743 25 $ 42,879,623 $ 66,456,654 $ 98,057,107 $ 89,450,634 $ 38,501,039 26 $ 40,453,030 $ 63,909,211 $ 94,776,180 $ 87,745,088 $ 37,990,490 27 $ 38,939,475 $ 61,789,775 $ 91,621,984 $ 85,848,197 $ 37,156,755 28 $ 38,094,550 $ 59,776,201 $ 88,960,343 $ 83,961,093 $ 36,185,661 29 $ 37,287,522 $ 56,901,545 $ 87,513,930 $ 81,180,064 $ 35,520,835 30 $ 36,315,115 $ 55,673,168 $ 84,993,550 $ 79,358,028 $ 34,757,751 31 $ 35,921,142 $ 54,358,523 $ 82,761,581 $ 77,639,662 $ 33,935,509 32 $ 34,976,083 $ 53,498,302 $ 81,263,821 $ 76,476,892 $ 33,413,263 33 $ 33,841,626 $ 52,449,253 $ 79,413,800 $ 74,771,334 $ 32,816,210 34 $ 33,114,404 $ 50,659,884 $ 77,515,749 $ 73,827,440 $ 32,271,294 35 $ 32,042,753 $ 49,557,700 $ 75,640,670 $ 71,857,595 36 $ 31,308,902 $ 48,739,883 $ 74,138,736 $ 70,570,042 37 $ 30,544,226 $ 47,409,883 $ 73,172,980 $ 68,966,966 38 $ 30,042,212 $ 46,964,391 $ 72,502,513 39 $ 29,441,691 $ 46,032,969 $ 71,078,320 40 $ 28,874,422 $ 45,160,626 $ 69,847,023 41 $ 28,026,177 $ 44,409,740 42 $ 27,865,131 $ 43,860,257 43 $ 27,319,610 $ 43,340,538 44 $ 26,768,456 45 $ 26,284,168 46 $ 25,754,675
27
Delinquencies > 30 days Past Due - --------------------------------------------------------------------------------------------------------------------------------- Months from Pool Inception 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 - --------------------------------------------------------------------------------------------------------------------------------- 1 $ 0 $ 515,954 $ 609,201 $ 402,972 $ 44,600 $ 1,466,076 2 $ 1,499,056 $ 1,631,017 $ 2,042,757 $ 2,132,028 $ 1,223,964 $ 3,134,425 3 $ 1,931,761 $ 3,930,423 $ 4,498,266 $ 5,049,035 $ 2,013,525 $ 2,438,937 4 $ 3,760,774 $ 5,399,569 $ 8,546,414 $ 7,290,097 $ 3,872,888 $ 2,434,471 5 $ 5,220,385 $ 7,293,856 $ 12,337,604 $ 10,290,987 $ 3,825,651 $ 2,662,519 6 $ 5,849,574 $ 9,790,732 $ 13,432,454 $ 13,459,369 $ 5,199,587 $ 2,804,957 7 $ 6,777,962 $ 11,933,526 $ 15,076,729 $ 12,443,357 $ 6,248,301 $ 3,115,273 8 $ 8,078,783 $ 12,484,893 $ 17,745,496 $ 13,861,088 $ 5,983,226 $ 3,351,500 9 $ 8,528,559 $ 12,471,739 $ 18,099,411 $ 16,777,959 $ 6,591,674 $ 3,512,716 10 $ 10,008,415 $ 11,304,455 $ 16,680,011 $ 19,050,239 $ 6,317,098 $ 3,579,689 11 $ 10,728,125 $ 12,630,402 $ 18,929,917 $ 18,524,292 $ 5,701,474 $ 2,689,907 12 $ 9,257,295 $ 14,540,910 $ 21,295,026 $ 18,470,254 $ 5,950,145 $ 3,084,083 13 $ 9,578,031 $ 12,933,959 $ 22,303,472 $ 18,645,129 $ 5,705,994 $ 3,360,592 14 $ 10,757,672 $ 12,674,148 $ 21,746,520 $ 17,059,730 $ 5,287,678 $ 3,540,638 15 $ 9,401,614 $ 14,212,157 $ 23,240,338 $ 15,698,435 $ 6,297,465 $ 3,390,079 16 $ 8,127,303 $ 14,386,886 $ 22,031,312 $ 16,318,099 $ 6,255,440 $ 4,398,425 17 $ 8,227,263 $ 11,723,546 $ 19,672,481 $ 15,292,242 $ 6,342,927 $ 3,841,679 18 $ 8,708,963 $ 11,171,133 $ 18,472,732 $ 15,132,124 $ 7,150,420 $ 3,757,618 19 $ 7,349,210 $ 12,018,899 $ 18,243,184 $ 15,706,290 $ 6,380,174 $ 4,546,107 20 $ 7,217,783 $ 11,810,332 $ 18,119,731 $ 16,301,760 $ 6,080,991 $ 3.954,210 21 $ 7,120,727 $ 11,040,206 $ 18,038,082 $ 15,464,631 $ 6,103,461 22 $ 6,661,879 $ 10,286,947 $ 16,452,727 $ 14,333,343 $ 6,165,388 23 $ 6,511,325 $ 10,414,360 $ 16,055,129 $ 15,895,532 $ 5,571,022 24 $ 6,250,278 $ 8,906,082 $ 15,924,085 $ 14,232,856 $ 5,290,607 25 $ 6,276,717 $ 9,514,340 $ 15,482,673 $ 13,162,282 $ 4,817,659 26 $ 5,442,995 $ 8,806,693 $ 15,438,560 $ 12,180,657 $ 5,597,356 27 $ 4,900,780 $ 8,262,250 $ 14,301,848 $ 12,737,934 $ 4,386,742 28 $ 6,106,097 $ 8,642,371 $ 13,359,698 $ 11,694,987 $ 4,583,117 29 $ 4,982,511 $ 6,969,409 $ 13,659,548 $ 11,460,244 $ 4,045,655 30 $ 5,346,769 $ 7,939,953 $ 11,918,981 $ 10,909,001 $ 3,980,150 31 $ 5,756,594 $ 7,790,662 $ 10,833,705 $ 9,815,183 $ 4,018,994 32 $ 4,972,092 $ 6,957,167 $ 10,924,836 $ 9,618,960 $ 3,613,024 33 $ 4,995,142 $ 6,445,310 $ 10,766,050 $ 9,552,132 $ 3,496,246 34 $ 4,944,931 $ 6,168,132 $ 8,884,739 $ 9,027,820 $ 3,172,976 35 $ 3,900,531 $ 5,871,698 $ 8,549,661 $ 8,351,543 36 $ 3,884,396 $ 6,401,739 $ 9,144,434 $ 8,958,424 37 $ 3,242,843 $ 5,254,138 $ 8,807,168 $ 8,464,824 38 $ 3,266,679 $ 4,385,425 $ 8,035,129 39 $ 3,322,549 $ 4,646,624 $ 8,446,342 40 $ 2,622,995 $ 3,906,395 $ 8,315,750 41 $ 2,956,319 $ 3,886,438 42 $ 3,227,518 $ 3,885,226 43 $ 3,076,141 $ 3,706,334 44 $ 2,727,918 45 $ 2,644,450 46 $ 2,550,625
The principal balances and delinquency amounts include $4.9 million and $4.7 million of real estate acquired through foreclosure at December 31, 2000 and 1999, respectively. 28
Delinquencies > 30 days Past Due As a Percent of Current Balance - --------------------------------------------------------------------------------------------------------------------- Months from Pool Inception 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 Average - --------------------------------------------------------------------------------------------------------------------- 1 0.00 % 0.43 % 0.47 % 0.34 % 0.07 % 2.48 % 0.63 % 2 1.94 % 1.36 % 1.21 % 1.81 % 1.96 % 5.41 % 2.28 % 3 2.52 % 3.29 % 2.67 % 3.40 % 3.27 % 4.26 % 3.24 % 4 4.96 % 4.54 % 5.12 % 4.96 % 6.37 % 4.33 % 5.05 % 5 6.92 % 6.22 % 7.45 % 7.06 % 6.45 % 4.81 % 6.49 % 6 7.84 % 8.45 % 8.19 % 9.32 % 8.85 % 5.14 % 7.96 % 7 9.27 % 10.51 % 9.31 % 8.70 % 10.80 % 5.81 % 9.07 % 8 11.18 % 11.14 % 11.22 % 9.87 % 10.51 % 6.37 % 10.05 % 9 11.95 % 11.29 % 11.61 % 12.22 % 11.79 % 6.81 % 10.95 % 10 14.26 % 10.48 % 10.89 % 14.11 % 11.51 % 7.08 % 11.39 % 11 15.55 % 12.01 % 12.76 % 14.08 % 10.59 % 5.44 % 11.74 % 12 13.79 % 14.24 % 14.73 % 14.31 % 11.27 % 6.35 % 12.45 % 13 14.58 % 13.08 % 15.90 % 14.86 % 11.01 % 7.07 % 12.75 % 14 17.02 % 13.29 % 15.92 % 14.02 % 10.50 % 7.64 % 13.07 % 15 15.66 % 15.36 % 17.44 % 13.19 % 12.78 % 7.42 % 13.64 % 16 13.98 % 16.09 % 16.97 % 14.07 % 13.03 % 9.71 % 13.98 % 17 14.46 % 13.99 % 15.48 % 13.60 % 13.59 % 8.59 % 13.29 % 18 15.79 % 13.68 % 14.87 % 13.79 % 15.61 % 8.48 % 13.70 % 19 14.45 % 15.14 % 15.26 % 14.64 % 14.36 % 10.34 % 14.03 % 20 14.52 % 15.17 % 15.57 % 15.55 % 13.88 % 9.11 % 13.97 % 21 14.64 % 14.47 % 15.89 % 15.19 % 14.20 % 12.40 % 22 14.55 % 13.81 % 15.22 % 14.62 % 14.71 % 12.15 % 23 14.60 % 14.54 % 15.33 % 16.62 % 13.57 % 12.44 % 24 14.26 % 12.89 % 15.67 % 15.35 % 13.23 % 11.90 % 25 14.64 % 14.32 % 15.79 % 14.71 % 12.51 % 12.00 % 26 13.46 % 13.78 % 16.29 % 13.88 % 14.73 % 12.02 % 27 12.59 % 13.37 % 15.61 % 14.84 % 11.81 % 11.37 % 28 16.03 % 14.46 % 15.02 % 13.93 % 12.67 % 12.02 % 29 13.36 % 12.25 % 15.61 % 14.12 % 11.39 % 11.12 % 30 14.72 % 14.26 % 14.02 % 13.75 % 11.45 % 11.37 % 31 16.03 % 14.33 % 13.09 % 12.64 % 11.84 % 11.32 % 32 14.22 % 13.00 % 13.44 % 12.58 % 10.81 % 10.68 % 33 14.76 % 12.29 % 13.56 % 12.78 % 10.65 % 10.67 % 34 14.93 % 12.18 % 11.46 % 12.23 % 9.83 % 10.11 % 35 12.17 % 11.85 % 11.30 % 11.62 % 7.82 % 36 12.41 % 13.13 % 12.33 % 12.69 % 8.43 % 37 10.62 % 11.08 % 12.04 % 12.27 % 7.67 % 38 10.87 % 9.34 % 11.08 % 5.22 % 39 11.29 % 10.09 % 11.88 % 5.54 % 40 9.08 % 8.65 % 11.91 % 4.94 % 41 10.55 % 8.75 % 3.22 % 42 11.58 % 8.86 % 3.41 % 43 11.26 % 8.55 % 3.30 % 44 10.19 % 1.70 % 45 10.06 % 1.68 % 46 9.90 % 1.65 % Actual Historical Life to Date Prepayment Speed 22.3 % 24.1 % 22.4 % 20.6 % 18.7 % 15.9 % 18.9 % The following presents delinquencies, net credit losses, and securitized financial assets managed by the Company. Total Principal Principal Amount of Loans Amount of Loans 60 Days or More Past Due Net Credit Losses --------------------------------------------------------------------------------- 2000 1999 2000 1999 2000 1999 --------------------------------------------------------------------------------- Residential mortgage loans $ 342,081 $ 423,619 $ 24,964 $ 34,322 $ 5,400 $ 5,421 Less: Loans securitized 283,598 360,377 18,661 29,144 3,410 1,767 --------------------------------------------------------------------------------- Loans held in portfolio $ 58,483 $ 63,242 $ 6,303 $ 5,178 $ 1,990 $ 3,654 ================================================================================= Liquidity and Capital Resources
29 The Company's business requires continued access to short and long-term sources of debt financing and equity capital. Primarily as a result of selling fewer loans in 2000 than were originated in 2000, and as a result of its operating loss, the Company experienced a negative cash flow from operating activities in 2000 of $62.7 million. At December 31, 2000, the Company had deficit shareholders' equity of $10.8 million. 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 and purchase facilities ("Credit Facilities"), (iii) fees, expenses, overcollateralization, servicer advances and tax payments incurred in connection with the securitization program and (iv) ongoing administrative and other operating expenses. The Company's primary operating sources of cash are (i) cash gains from whole-loan mortgage loan sales, (ii) cash payments of contractual and ancillary servicing revenues received by the Company in its capacity as servicer for securitized loans, (iii) interest income on loans receivable and certain cash balances, (iv) fee income received in connection with its retail mortgage loan originations, and (v) excess cash flow received in each period with respect to residual receivables. The Company overcollateralizes loans as a credit enhancement on the mortgage loan securitization transactions. This requirement creates negative cash flows in the year of securitization. The Company decided to securitize only seasoned first and second mortgages in 2000, and conducted whole loan sales for the majority of the mortgages. Currently the Company plans to conduct a combination of securitizations and whole loan sales throughout 2001. This strategy is designed to maximize liquidity and profitability. Cash flow is also enhanced by the generation of loan fees in its retail mortgage loan operation. The table below summarizes cash flows provided by and used in operating activities:
For the Years Ended December 31, --------------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- (In thousands) Operating Cash Income: Servicing fees received and excess cash flow from securitization trusts $ 11,594 $ 15,622 $ 16,548 Interest received 11,799 9,475 36,127 Cash gain on sale of loans 9,801 6,477 1,343 Cash loan origination fees received 19,480 4,841 18,255 Other cash income 1,354 1,609 5,388 ------------- ------------- ------------- Total operating cash income 54,028 38,024 77,661 Operating Cash Expenses: Securitization costs -- (593) (851) Cash operating expenses (56,831) (37,456) (99,551) Interest paid (17,895) (18,691) (37,519) Taxes paid (175) (278) (2,515) ------------- ------------- ------------- Total operating cash expenses (74,901) (57,018) (140,436) Cash flow (deficit) due to operating cash income and expenses (20,873) (18,994) (62,775) Other Cash Flows: Cash used in other payables and receivables (33,671) (7,741) (12,541) Cash provided by (used in) loans held for sale (8,177) 33,951 123,674 Cash provided from sale of residual receivables -- -- 16,958 Cash gain on sale of subsidiary assets -- -- 18,964 ------------- ------------- ------------- Net cash provided by (used in) operating activities $ (62,721) $ 7,216 $ 84,280 ============= ============= =============
Cash and cash equivalents were $3.7 million at December 31, 2000, $26.0 million at December 31, 1999, and $36.9 million at December 31, 1998. Cash used in operating activities was $62.7 million for the year ended December 31, 2000, compared to cash provided by operating activities of $7.2 million for the year ended December 31, 1999. Cash provided by investing activities was $44.8 million for the year ended December 31, 2000, compared to cash provided by investing activities of $16.7 million for the year ended December 31, 1999, and cash used in financing activities was $4.4 million for the year ended December 31, 2000, compared to cash used by financing activities of $34.8 million for the year ended December 31, 1999. The decrease in cash provided by operations was due principally to a lower number of loans sold and securitized than originations in 2000, along with the operating loss. Cash provided by investing activities was primarily from the principal collections on loans not sold and proceeds from the sale of owned real estate. The increase in cash provided by financing activities was due principally to retirement in 1999 of $74.5 million face amount of the Senior Notes for a purchase price of $45.0 million. 30 In connection with the merger with HomeSense, 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 0.25% 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 Company is currently in default with these covenants. Amendments were subsequently executed whereby the lender agreed to forebear from exercising its rights on account of existing events of default, the maturity date was extended to April 30, 2001, and the advance rate was changed to 97% from 100% for all loans made after October 23, 2000. Availability under the credit agreement is determined based on eligible collateral as defined in the agreement, for which the Company has forwarded to the bank the required loan files and documentation. At December 31, 2000, the balance of funded loans on the line was $2.6 million. Prior to the merger, HomeSense had 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 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. The facility bears interest at the prime rate plus 0.75%. Under a termination agreement between RMST and the Company, the maximum commitment at December 31, 2000 was $15 million, and the outstanding balance on that date was $11.4 million. An additional provision of the termination agreement required the Company to assign a $3.5 million certificate of deposit to RMST as security for the outstanding balance on the line. As of March 31, 2001, the agreement with RMST was terminated, and RMST's right to the certificate of deposit was relinquished, and no balance remained outstanding. On November 3, 2000, the Company entered into a $10 million revolving warehouse line of credit with The Provident Bank ("Provident"). Interest on the line varies on a loan by loan basis and ranges from the prime rate plus 1.5% to the prime rate plus 3.5%, depending on the grade and age of the mortgage funded. The agreement allows for a rate reduction from the base rates if certain monthly funded volume targets are met. For the month of December, 2000, the Company achieved the targeted funded volume for the first stage rate reduction of .15% from the initial base rates. The agreement contains no covenants related to the financial condition or results of operations of the Company. The agreement allows Provident to retain the servicing rights to any loans funded on the line of credit. Availability under the credit agreement is determined based on eligible collateral as defined in the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The line of credit matures on October 31, 2001. At December 31, 2000, the balance of funded loans on the line was $6.6 million, and these loans were all sub-serviced by Provident. On December 20, 2000, the Company entered into an oral short term repurchase arrangement with New Freedom Mortgage Corporation ("New Freedom") as an interim funding source while a long-term warehouse agreement was being negotiated. Under the arrangement, New Freedom agreed to fund both new mortgage production and certain mortgages originally funded by the Company. The advance rates on fundings range from 80% to 88% of the principal amount, depending on the type and source of the mortgage. New Freedom receives a fee from 1.5% up to 2.5% of the note amount based on the length of time credit is provided for each loan funded. In addition, New Freedom receives the interest accrued on the loan during the period it remains on the line. At December 31, 2000, the outstanding balance on the line was $6.3 million. The arrangement was terminated in February, 2001, after the execution of a new long-term warehouse agreement with another lender. During December 2000, the Company terminated its revolving warehouse line of credit agreement with CIT Group/Business Credit, Inc. ("CIT"). At December 31, 1999, the Company had $1.1 million of immediate availability under the CIT agreement, based on its borrowing base on that date. Upon termination of the agreement, the company has no further obligations thereunder. At December 31, 2000, the Company believes that no event of default has occurred on its warehouse lines of credit for which it has not obtained a waiver or forbearance. On January 11, 2001, the Company entered into a $15 million master repurchase agreement with Imperial Warehouse Finance, Inc. Advance rates on fundings range from 85% to 88% of the principal amount, depending on the type and source of the mortgage. The facility bears interest at prime rate plus 1.00%. The agreement requires a collateral deposit of $2.5 million be in place for the life of the line. The agreement also requires that the Company have net operating income for any period after January 2001. The Company is currently in default with the agreement. Management is currently negotiating a waiver and/or modification of the terms of the agreement. Management believes they will be successful in obtaining a modified agreement, or waiver at a minimum, although there can be no assurance that a new agreement will be reached. 31 During 1997, the Company sold $125.0 million in aggregate principal amount of 10 3/4% Senior Notes due 2004. The Senior Notes due 2004 constitute unsecured indebtedness of the Company. The Senior Notes due 2004 are redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. This agreement requires, among other matters, restrictions on the payment of dividends. At December 31, 2000, management believes the Company was in compliance with such restrictive covenants. The Senior Notes due 2004 are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). With the exception of the Guarantee by CII, the Subsidiary Guarantees rank on par with the 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 $920,000, $74.5 million, and $38.4 million in face amount of its senior notes in 2000, 1999, and 1998, respectively. At December 31, 2000 and 1999, $11.2 million and $12.1 million, respectively, in aggregate principal amount of Senior Notes were outstanding. CII engages in the sale of CII Notes to investors. The CII Notes are comprised of senior notes and subordinated debentures bearing fixed rates of interest which are sold by CII only to South Carolina residents. The offering of the CII Notes is registered under South Carolina securities law and is believed to be exempt from Federal registration under the Federal intrastate exemption. CII believes it conducts its operations so as to qualify for the safe harbor provisions of Rule 147 promulgated pursuant to the Securities Exchange Act of 1933, as amended (the "Securities Act"). At December 31, 2000, CII had an aggregate of $146.1 million of investor notes outstanding bearing a weighted average interest rate of 7.92%, and an aggregate of $19.1 million of subordinated debentures bearing a weighted average interest rate of 6.00%. The investor notes and subordinated debentures are subordinate in priority to the credit facility. Maturities of the CII Notes and debentures generally range from one to two years. Shareholders' equity decreased in 2000 by $18.7 million to ($10.8 million) at December 31, 2000, from $7.8 million at December 31, 1999. During 1999, stockholders equity increased $2.0 million from $5.8 million at December 31, 1998. The principal reason for the change to shareholders' equity is the net income (loss) recognized in the respective years. HGFN has incurred operating losses of $39.8 million, $35.1 million, and $73.0 million for the years ended December 31, 2000, 1999, and 1998, respectively and has deficit shareholder's equity of $10.8 million at December 31, 2000. The management of HGFN has implemented plans to reverse these negative trends by implementing operating changes which include, but are not limited to, the following: - Continually offering and reviewing loan products to meet customer demands while also meeting the needs of purchasers of loans originated. - Hiring, retaining, and motivating loan officers and employees. - Geographic expansion of loan origination operations. - Maintaining and increasing warehouse lines of credit to fund loan originations. - Reducing non-core operating and general overhead. - Negotiating with potential buyers the sale of non-core lines of business and assets The Company's primary objective in 2001 will be to increase profitability and increase loan originations while insuring adequate levels of liquidity. The Company anticipates incurring operating losses into 2001. The Company continually evaluates the need to establish other sources of capital and will pursue those it considers appropriate based upon its needs and market conditions. The Company currently does not anticipate incurring any significant capital expenditures in 2001. Loan Sales and Securitizations The Company sells or securitizes substantially all of its loans. The Company sells on a whole loan basis a significant amount of its Mortgage Loans (servicing released), including substantially all of its Mortgage Loans secured by second liens, principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the second lien mortgage loans. However, no assurance can be given that the second lien mortgage loans can be sold. To the extent that the loans are not sold, the Company retains the risk of loss. At December 31, 2000 and 1999, the Company had retained $17.1 million and $9.5 million, respectively, of second lien mortgage loans on its balance sheet. During 2000, 1999, and 1998, the Company sold $517.3 million, $220.4 million, and $623.7 million, respectively, of Mortgage Loans. In 1998, the Company sold $141.0 million of the guaranteed portions of SBA Loans. Although securitizations provide liquidity, the Company has utilized securitizations principally to provide a lower cost of funds and reduce interest rate risk, while building servicing revenues by increasing the serviced portfolio. In connection with its securitizations, the Company has retained interest-only residual certificates representing residual interests in the trusts. These subordinate residual securities totaled $47.8 million, net of allowances, at December 31, 1999. 32 The first, second and third securitizations of 1997 and the 1998 securitization are structured as real estate mortgage investment conduits ("REMIC's"). The fourth quarter 1997 securitization utilized a real estate investment trust ("REIT"). This allows sales treatment for financial reporting purposes, but debt treatment for tax purposes. Accordingly, this structure eliminates current taxes payable on the book gain, while maintaining the structural efficiency of tranching, previously only available through a REMIC transaction. Additionally, under this structure, the Company has distributed .46% ownership in the REIT to a certain class of current and former employees, with an initial value of approximately $62,000. The 2000 securitization are "Owners' Trusts", another structure which allows sales treatment for financial reporting purposes, but debt treatment for tax purposes. The Company has been securitizing mortgage loans since 1997. In a securitization transaction, the Company sells Mortgage Loans it purchased or originated to a trust for cash. The trust sells asset-backed bonds secured by the loans to investors. The Company records certain assets and income based upon the difference between all principal and interest received from the loans sold and the following factors (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used in past securitizations are appropriate and reasonable. In connection with its 1999-1 securitization transaction, HomeGold agreed to cross-collateralize its residual interests in that transaction and in its 1997-1, 1997-2, and 1997-3 securitizations for the benefit of Financial Security Assurance, Inc., the bond issuer for all of those transactions. Under the terms of that cross-collateralization agreement, in the event HomeGold is in breach of its obligations under any one or more of those securitization trusts or if certain cumulative loss or delinquency triggers are met, the excess cash flow on all four residual interests will be captured by the Collateral Agent, who will distribute those monies to FSA or as otherwise specified in the agreement. The total amount that may be retained by the Collateral Agent is capped at $15 million. This agreement terminates upon the termination of all of the related securitization trusts. The Company sold its servicing rights under the 2000 securitizations because the price paid by the independent third party servicer resulted in a higher realized gain than if the servicing rights not been sold. Consequently, the residual interests of $14.5 million owned by the Company are not subject to the Company's normal quarterly evaluation of assumptions and estimates as compared to actual performance. These residual interests represent the Company's estimate of market value. Market value determination includes an estimate of credit losses, based on anticipated performance of the securitized loans in the portfolio. The original certificate balances for the 2000 securitizations totaled $64,330,194. The 2000-4 trust had an original certificate balance of $41,473,722 with the Company's share of the original certificate balances being $12,047,487. The 2000-5 trust had an original certificate balance of $22,856,471 with the Company's share of the original certificate balances being $5,142,707. The average stated principal balances are $54,734 and $47,105 for pools 2000-4 and 2000-5, respectively. The annual servicing fees are 0.58% and 0.50% for 2000-4 and 2000-5, respectively, and the trustee fee is .050%. At December 31, 2000, the 2000-4 trust had outstanding principal balances of $37,711,512 with the Company's certificate share being $11,872,993. The 2000-5 trust had outstanding principal balances of $21,809,445 with the Company's certificate share being $5,142,707. Interest income is allocated to the bondholders based on the certificate balances. At December 31, 2000, the weighted average pass through rate to bondholders is 11.74% and 11.89% for 2000-4 and 2000-5, respectively. The Company will not receive its share of principal distribution until three years from the time of the transaction. After three years, principal distribution will be received if the portfolios meet certain performance requirements. Although the Company is a certificate holder, its share of the principal balance is reduced by all losses incurred by the pools. The assumed cumulative losses as a percent of the unpaid principal balance at December 31, 2000 are 4.95% and 3.9% for the 2000-4 and 2000-5 pools. These assumed loss rates are used in estimating the market value of the Company's residual interest. 33 The Company retains the right to service loans it securitizes except for the 2000 securitization. Fees for servicing loans are based on a stipulated percentage (generally 0.50% per annum) of the unpaid principal balance of the associated loans. Other than the 2000 securitization, the Company has recognized a servicing asset in addition to its gain on sale of loans. The servicing asset is calculated as the present value of the expected future net servicing income in excess of adequate compensation for a substitute servicer, based on common industry assumptions and the Company's historical experience. These factors include default and prepayment speeds. For all of the mortgage loan securitizations completed to date, the servicing asset recorded represents a 10 basis point strip of cash flows from the stipulated servicing percentage. The following sets forth facts and assumptions used by the Company in arriving at the valuation of the residual receivables relating to its Mortgage Loan securitization pools it services as of December 31, 2000:
1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 ------------------------------------------------------------------------------------ Outstanding balance of loans securitized $25,754,675 $43,340,538 $69,847,023 $68,966,966 $32,271,294 $43,417,008 Average stated principal balance 55,988 53,179 61,323 60,817 59,984 46,386 Weighted average coupon on loans 10.83% 10.64% 11.03% 10.88% 10.76% 10.91% Weighted average remaining term to stated maturity 164 mths 163 mths 168 mths 171 mths 181 mths 194 mths Weighted average LTV 75% 70% 74% 74% 74% 71% Percentage of first mortgage loans 100% 100% 100% 100% 100% 86.91% Weighted average pass-through rate to 7.66% 7.21% 7.10% 6.86% 6.70% 6.84% bondholders Assumed annual losses 0.18% 0.18% 0.26% 0.36% 0.39% 0.56% Remaining ramp period for losses 0 mths 0 mths 0 mths 0 mths 0 mths 0 mths Assumed cumulative losses as a % of UPB 1.44% 1.78% 2.50% 2.84% 3.25% 1.17% Annual servicing fee 0.50% 0.50% 0.50% 0.50% 0.50% 0.56% Servicing asset 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Discount rate applied to cash flow after collateralization 12% 12% 12% 12% 12% 12% Prepayment speed: Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR 24 HEP Peak CPR (1) 28 CPR 28 CPR 28 CPR 28 CPR 28 CPR 24 HEP Tail CPR (1) 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 24 HEP CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths 24 HEP CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths 24 HEP CPR tail begins (1) 37/49 mths 37/49mths 37/49 mths 37/49 mths 37/49 mths 24 HEP Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.185% 0.185% 0.265% Initial overcollateralization required (2) 3.25% -- -- -- -- 9.5% Final overcollateralization required (2) 6.5% 3.75% 3.75% 3.75% 3.75% 13.5%
(1) CPR represents an industry standard of calculating prepayment speeds and refers to Constant Prepayment Rate. For its first five securitization pools, the Company uses a curve based on various CPR levels throughout the pool's life, based on its estimate of prepayment performance, as outlined in the table above. For the 1999-1 transaction the Company uses a 24 HEP (Home Equity Prepayment) curve. This curve, developed by Prudential Securities, ramps to the terminal CPR (in this case, 24%) over ten months and then remains constant for the life of the pool. (2) Based on percentage of original principal balance, subject to step-down provisions after 30 months. Each of the Company's Mortgage Loan securitizations have been credit-enhanced by an insurance policy provided through a monoline insurance company such that the senior certificates have received ratings of "Aaa" from Moody's Investors Services, Inc. ("Moody's") and "AAA" from Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). The Company 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. 34 The Company assesses the carrying value of its residual receivables and servicing assets for impairment at the end of each month. There can be no assurance that the Company's estimates used to determine the gain on sale of loans, residual receivables, and servicing assets valuations will remain appropriate for the life of each securitization. If actual loan prepayments or defaults exceed the Company's estimates, the carrying value of the Company's residual receivables and/or servicing assets may be decreased through a charge against earnings in the period management recognizes the disparity. Conversely, if actual loan prepayments or defaults are better than the Company's estimates, the carrying value of the Company's residual receivables and/or servicing assets may be increased, with additional earnings recognized in the period management recognizes the disparity. At December 31, 2000 key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 5 percent and 10 percent adverse changes in assumed economics is as follows (dollars in thousands).
Loans (In Thousands) ----------------- Carrying amount/fair value of retained interests $ 58,877 Weighted-average life (in years) 4.24 Prepayment speed assumption (annual rate) 24% - 30% Impact on fair value of 5% adverse change $ 607 Impact on fair value of 10% adverse change $ 1,216 Expected credit losses (annual rate) 0.35 % Impact on fair value of 5% adverse change $ 390 Impact on fair value of 10% adverse change $ 780 Residual cash flows discount rate (annual) 12.0 % Impact on fair value of 5% adverse change $ 638 Impact on fair value of 10% adverse change $ 1,256
These sensitivities are hypothetical and should be viewed with caution. As the figures indicate, any change in fair value based on a 5 percent variation in assumptions cannot be extrapolated because the relationship of the change in assumption to the change in fair value is not linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independent from any change in another assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Tax Considerations As a result of operating losses incurred by the Company, the Company has net operating losses ("NOL") that can be used to offset future earnings. Federal tax laws provide that net operating loss carryforwards are restricted or eliminated upon certain changes of control. Applicable federal tax laws provide that a 50% "change of control," which is calculated over a rolling three-year period, would cause the loss of substantially all of the NOL. The Company believes its maximum cumulative change of control during the relevant three-year period was less than 50%. During 2000 the Company recorded a deferred tax benefit in the amount of $10.0 million, bringing the total deferred tax asset to $22.0 million. The Company adjusted its reserve against the deferred tax asset in the fourth quarter 2000 based on its forecasted results prepared in December 2000 and operational changes implemented by changes made by management in 2000 due to the merger. 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 assets would be realized. The Company had a federal NOL of approximately $103 million at December 31, 2000. 35 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, however, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. The Company's interest rate hedging strategy includes shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements. Since the interest rates on the Company's warehouse line of credit used to fund and acquire loans is variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale could have a material adverse effect on the Company's results of operations and financial condition. The ultimate sale of the Company's loans generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. Without hedging these loans, increases in interest rates prior to sale of the loans may reduce the gain on sale or securitization of loans earned by the Company. Accounting Considerations In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." All derivatives are to be measured at fair market value and recognized in the balance sheet as assets and liabilities. SFAS No. 137, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" was issued in June 2000 and amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The two statements are to be adopted concurrently and are effective for fiscal years and quarters beginning after June 15, 2000. The adoption of SFAS No. 133 and SFAS No. 137 did not have a material impact on the presentation of the Company's financial results or financial position. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB No. 125." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures but carries over most of FASB No. 125's provisions without reconsideration. SFAS No. 140 is effective for all transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. Retroactive and early adoption is prohibited. This statement is effective for disclosures related to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of provisions of SFAS No. 140 is not expected to be material to the Company. In the November 2000 meeting, the Emerging Issues Task Force (EITF) reached a consensus on EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." The issue deals with how interest income and impairment should be recognized for retained interests in securitizations. If upon evaluation, the holder determines that it is probable that there is a change in estimated cash flows (in both timing and estimates of projected cash flows) , the amount of accretable yield should be recalculated and if that change in estimated cash flows is an adverse change, an other-than-temporary impairment should be considered to have occurred. The effective date of this EITF is March 15, 2001. The Company does not know if there is any impact of this EITF on its residual assets or if the impact could be material. The Company anticipates implementing EITF 99-20 in the first quarter of 2001. The FASB reached a tentative decision related to accounting treatment for goodwill in its Business Combinations and Intangible Assets - Accounting for Goodwill project and related exposure draft. In this exposure draft, the FASB has determined that goodwill will no longer be amortized. Goodwill of a reporting unit should be tested for impairment when events or circumstances occur indicating that an impairment might exist. The FASB is expected to issue this accounting standard in 2001. The Company does not know the impact, if any, on its financial statements or its financial position related to this proposed guidance. Impact of Inflation Inflation affects the Company most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates which affect the Company's ability to earn a spread between interest received on its loans and the costs of its borrowings. The profitability of the Company is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the ability of the Company to originate and purchase loans and affect the mix of first and second-lien mortgage loan products. Generally, first-lien mortgage production increases relative to second-lien mortgage production in response to low interest rates and second-lien mortgage production increases relative to first-lien mortgage production during periods of high interest rates. A significant decline in interest rates could decrease the size of the Company's loan servicing portfolio by increasing the level of loan prepayments. Additionally, to the extent servicing rights and residual receivables have been capitalized on the books of the Company, higher than anticipated rates of loan prepayments or losses could require the Company to write down the value of such servicing rights and residual receivables, adversely impacting earnings. Fluctuating interest rates may also affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sales and the interest paid by the Company for funds borrowed under the Company's warehouse line of credit. The Company's Chief Financial Officer, Rhonda Johnson, resigned effective Monday, March 26, 2001 to pursue other opportunities. She will serve as a consultant to the Company. Forrestt E. Ferrell, the Company's President will serve as the Company's interim Chief Financial Officer. 36 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Company's market risk arises primarily from interest rate risk inherent in its lending, its holding of residual receivables and its investor savings activities. The structure of the Company's loan and investor savings portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with senior management. Senior management regularly reviews the Company's interest rate risk position and adopts balance sheet strategies that are intended to optimize operating earnings while maintaining market risk within acceptable guidelines. To estimate the impact that changes in interest rates would have on the Company's earnings, management uses Simulation Analysis. Simulation Analysis is performed using a computer-based asset/liability model which incorporates current portfolio balances and rates, contractual maturities, repricing opportunities and assumptions about prepayments, future interest rates and future volumes. To measure the sensitivity of the Company's earnings, the result of multiple simulations, which assume changes in interest rates, are compared to the "base case" simulation, which assumes no changes in interest rates. The model assumes an immediate parallel shift in interest rates. As a result of the Company's interest rate position, a 100 basis point immediate increase in interest rates would have a negative impact on projected net loss of $3.3 million and $1.4 million, computed as of December 31, 2000 and 1999, respectively. A significant portion of this impact relates to a reduction in the anticipated sale premiums on loans being held for sale as well as higher interest expense on the warehouse line of credit, partially offset by an increase in interest earned on short term investments. An immediate reduction of 100 basis points in market rates would result in a positive impact on projected net loss of $2.1 million and $893,000 as of December 31, 2000 and December 31, 1999, respectively. This impact is related to higher gains from the sale of loans, which is the primary reason for the positive impact on projected earnings at December 31, 1999 under the same interest rate scenario, and a decrease in interest paid on warehouse lines of credit, partially offset by the assumption that prepayment speeds on the securitization pools would increase approximately ten percent if market interest rates declined by 100 basis points.. The Company no longer believes, in the absence of other external factors, that it would experience an increase in prepayment speeds if market rates declined by 100 basis points due to the "burn-out" principal. In other words, since the borrowers have already had several opportunities to refinance because rates have been 100 basis points lower in the last twelve months, but have not, the likelihood of the remaining borrowers prepaying given further interest rate reductions is diminished. The Company assumes that it would not experience a significant benefit from a reduction in the rates paid on investor notes. The rates offered on the investor notes have not historically moved with changes in market rates. While the Company monitors interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. As of December 31, 2000, the Company did not hedge its loans held for whole-loan sales. The Company's strategy during 2000 was to sell a substantial portion of the current month's production that is designated for whole-loan sales in the following month and securitizing a portion of its loan production on a quarterly basis. 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 at year-end. 37 On loans originated for inclusion in securitized pools, the Company may employ a strategy designed to hedge some of the risks associated with changes in interest rates. The Company's interest rate hedging strategy, includes shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements relating to loans pending a securitization transaction. The ultimate sale of the Company's loans included in a securitized transaction generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. However, a significant reduction in market rates could accelerate the prepayment speed on loans held in the various securitized mortgage pools. An acceleration of prepayment on loans held in the securitized pools would have a negative impact on the carrying value of the residual assets. There were no significant open hedging positions at year end. Projected percentage changes in operating results brought about by changes in interest rates could be material relative to the Company's operating results. If simulation results indicate earnings sensitivity in excess of management's acceptable limits, management will seek to identify on-balance sheet and/or off-balance sheet strategies to bring earnings sensitivity within target guidelines. Management will continue to monitor the Company's interest rate risk position to manage the possible adverse impact on earnings caused by changes in interest rates. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data are set forth herein commencing on page F-1 of this Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 38 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. Item 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. 39 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of Report. 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC.: The Financial Statements are listed in the index to Consolidated Financial Statements on page F-1 of this Report. 2. FINANCIAL STATEMENT SCHEDULES: Not applicable. 3. EXHIBITS: The exhibits are listed on the Exhibit Index attached hereto. (b) Reports on Form 8-K. None. 40 SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HOMEGOLD FINANCIAL, INC. ------------------------------------- Registrant April 16, 2001 /s/ John M. Sterling, Jr. - ------------------------------------- ------------------------------------- (Date) John M. Sterling, Jr., Chairman of the Board of Directors Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ J. Robert Philpott, Jr. /s/ Tecumseh Hooper, Jr. - ------------------------------------- ------------------------------------- J. Robert Philpott, Jr. Tecumseh Hooper, Jr. Director Director /s/ Ronald J. Sheppard /s/ Clarence B. Bauknight - ------------------------------------- ------------------------------------- Ronald J. Sheppard Clarence B. Bauknight Chief Executive Officer Director /s/ John M. Sterling, Jr. /s/ Porter B. Rose - ------------------------------------- ------------------------------------- John M. Sterling, Jr., Chairman of Porter B. Rose the Board of Directors Director /s/ Forrestt E. Ferrell /s/ Jan Sirota - ------------------------------------- ------------------------------------- Forrestt E. Ferrell, President and Jan Sirota Director Director April 16, 2001 - ------------------------------------- (Date) 41 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS Contents Independent Auditors' Report ..............................................F-2 Audited Consolidated Financial Statements Consolidated Balance Sheets.......................................F-3 Consolidated Statements of Operations.............................F-5 Consolidated Statements of Shareholders' Equity (Deficit).........F-6 Consolidated Statements of Cash Flows.............................F-7 Notes to Consolidated Financial Statements .......................F-8 F-1 INDEPENDENT AUDITORS' REPORT ---------------------------- Shareholders and Board of Directors HomeGold Financial, Inc. and Subsidiaries Greenville, South Carolina We have audited the accompanying consolidated balance sheets of HomeGold Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HomeGold Financial, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Elliott, Davis & Company, L.L.P. Greenville, South Carolina March 21, 2001 F-2 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------ 2000 1999 -------------- ------------ ASSETS (In thousands, except share data) ------ Cash and cash equivalents $ 3,691 $ 26,009 Restricted cash 5,066 5,314 Loans receivable 58,483 63,242 Less allowance for credit losses (4,652) (6,344) Less deferred loan fees (2,339) (730) Plus deferred loan costs 207 446 -------------- ------------ Net loans receivable 51,699 56,614 Income taxes receivable 318 461 Accrued interest receivable 1,817 1,423 Other receivables 11,497 8,059 Residual receivables, net 58,877 47,770 Property and equipment, net 21,430 17,160 Real estate owned (REO) and personal property acquired through foreclosure 1,281 7,673 Goodwill, net of accumulated amortization of $1,712 in 2000 and $748 in 1999 19,623 1,566 Debt origination costs 221 1,658 Deferred income tax asset, net 22,000 12,000 Servicing asset 703 867 Other assets 3,798 2,163 -------------- ------------ Total assets $ 202,021 $ 188,737 ============== ============
See Notes to Consolidated Financial Statements, which are an integral part of these statements. F-3 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 2000 1999 --------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data) ---------------------------------------------- Liabilities: Revolving warehouse lines of credit $ 26,951 $ 17,808 Notes payable to banks 2,352 -- Investor savings: Notes payable to investors 146,087 127,065 Subordinated debentures 19,117 17,710 --------------- ------------- Total investor savings 165,204 144,775 Senior unsecured debt 11,214 12,134 Accounts payable and accrued liabilities 4,637 4,120 Remittances payable 1,201 1,078 Income taxes payable 347 120 Accrued interest payable 938 845 --------------- ------------- Total other liabilities 7,123 6,163 --------------- ------------- Total liabilities 212,844 180,880 Minority interest 5 13 Commitments and contingencies, Notes 2, 5, 8, 10, 11, 22 and 26 Shareholders' equity (Deficit): Preferred stock , par value $1.00 per share, authorized 20,000,000 shares, issued and outstanding 10,000,000 shares at December 31, 2000 and 0 shares at December 31, 1999 10,000 -- Common stock, par value $.001 per share at December 31, 2000 and $.05 at December 31, 1999, authorized 100,000,000 shares, issued and outstanding 16,810,149 shares at December 31, 2000 and 10,149,629 shares at December 31, 1999 17 507 Capital in excess of par value 46,643 39,028 Note receivable from shareholder (5,985) -- Accumulated deficit (61,503) (31,691) --------------- ------------- Total shareholders' equity (deficit) (10,828) 7,844 --------------- ------------- Total liabilities and shareholders' equity (deficit) $ 202,021 $ 188,737 =============== =============
See Notes to Consolidated Financial Statements, which are an integral part of these statements. F-4 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, -------------------------------------------------------- 2000 1999 1998 ----------------- --------------- --------------- (In thousands, except share data) REVENUES: Interest income $ 12,192 $ 8,286 $ 35,075 Servicing income 7,397 9,813 12,239 Gain on sale of loans: Gross gain on sale of loans 9,801 6,216 9,472 Loan fees, net 16,430 3,313 11,745 ----------------- --------------- --------------- Total gain on sale of loans 26,231 9,529 21,217 Gain on sale of subsidiaries' net assets -- -- 18,964 Other revenues 1,735 1,609 4,230 ----------------- --------------- --------------- Total revenues 47,555 29,237 91,725 ----------------- --------------- --------------- EXPENSES: Interest 19,448 16,338 35,968 Provision for credit losses 3,159 3,339 11,906 Costs on real estate owned and defaulted loans 3,451 3,018 2,665 Fair market value adjustment on residual receivables 2,279 3,327 13,638 Salaries, wages and employee benefits 29,116 20,359 56,925 Business development costs 8,615 4,804 10,818 Restructuring charges 1,469 -- 6,838 Other general and administrative expense 19,861 13,123 25,958 ----------------- --------------- --------------- Total expenses 87,398 64,308 164,716 ----------------- --------------- --------------- Loss before income taxes, minority interest and extraordinary item (39,843) (35,071) (72,991) Provision (benefit) for income taxes (9,456) (7,394) 3,017 ----------------- --------------- --------------- Loss before minority interest and extraordinary item (30,387) (27,677) (76,008) Minority interest in (earnings) loss of subsidiaries (4) (8) 47 ----------------- --------------- --------------- Loss before extraordinary item (30,391) (27,685) (75,961) Extraordinary item--gain on extinguishment of debt, net of $0 tax 579 29,500 18,216 ----------------- --------------- --------------- Net income (loss) $ (29,812) $ 1,815 $ (57,745) ================= =============== =============== Basic earnings (loss) per share of common stock: Loss before extraordinary item $ (2.10) $ (2.78) $ (7.81) Extraordinary item, net of taxes .04 2.96 1.87 ----------------- --------------- --------------- Net income (loss) $ (2.06) $ .18 $ (5.94) ================= =============== =============== Basic weighted average shares outstanding 14,445,238 9,961,077 9,719,262 ================= =============== =============== Diluted earnings (loss) per share of common stock: Loss before extraordinary item $ (2.10) $ (2.78) $ (7.81) Extraordinary item, net of tax .04 2.96 1.87 ----------------- --------------- --------------- Net income (loss) $ (2.06) $ .18 $ (5.94) ================= =============== =============== Diluted weighted average shares outstanding 14,445,238 9,961,077 9,719,262 ================= =============== ===============
See Notes to Consolidated Financial Statements, which are an integral part of these statements. F-5 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For The Years Ended December 31, 2000, 1999, and 1998
Common Stock --------------------------- Note Capital in Receivable Excess of Preferred From Shares Issued Amount Par Value Stock Shareholder --------------- ---------- -------------- ------------ -------------- (In thousands, except share data) Balance at December 31, 1997 9,686,477 $ 484 $ 38,609 $ -- $ -- Shares issued: Exercise of stock options 9,467 -- 21 -- -- Employee Stock Purchase Plan 37,430 2 191 -- -- Dividends paid -- -- -- -- -- Net loss -- -- -- -- -- --------------- ---------- -------------- ------------ -------------- Balance at December 31, 1998 9,733,374 486 38,821 -- -- Shares issued: Exercise of stock options 3,200 -- 3 -- -- Employee Stock Purchase Plan 102,604 5 39 -- -- Officer/Director Compensation 310,783 16 165 -- -- Other (332) -- -- -- -- Net income -- -- -- -- -- --------------- ---------- -------------- ------------ -------------- Balance at December 31, 1999 10,149,629 507 39,028 -- -- Change in par from $0.05 to $0.001 -- (490) 490 Shares issued: Employee Stock Purchase Plan 46,606 1 35 -- -- 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 -- -- -- -- (5,985) Net loss -- -- -- -- -- --------------- ---------- -------------- ------------ -------------- Balance at December 31, 2000 16,810,149 $ 17 $ 46,643 $ 10,000 $ (5,985) =============== ========== ============== ============ ==============
Retained Earnings Total (Accumulated) Shareholders' (Deficit) Equity (Deficit) ------------- ---------------- Balance at December 31, 1997 $ 24,281 $ 63,374 Shares issued: Exercise of stock options -- 21 Employee Stock Purchase Plan -- 193 Dividends Paid (42) (42) Net income (loss) (57,745) (57,745) ----------- ----------- Balance at December 31, 1998 (33,506) 5,801 Shares issued: Exercise of stock options -- 3 Employee Stock Purchase Plan -- 44 Officer/Director Compensation -- 181 Other -- -- Net income 1,815 1,815 ----------- ----------- Balance at December 31, 1999 (31,691) 7,844 Change in par from $.05 to $0.001 Shares issued: Employee Stock Purchase Plan -- 36 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 -- (5,985) Net income (29,812) (29,812) ----------- ----------- Balance at December 31, 2000 $ (61,503) $ (10,828) =========== ===========
See Notes to Consolidated Financial Statements, which are an integral part of these statements. F-6 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ------------------------------------------------------------ 2000 1999 1998 ----------------- ----------------- ---------------- (In thousands) OPERATING ACTIVITIES: Net income (loss) $ (29,812) $ 1,815 $ (57,745) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,714 2,692 3,626 Fair market value adjustment on residual receivables 2,279 3,327 13,638 Benefit for deferred income taxes (10,000) (7,849) -- Provision for credit losses on loans 3,159 3,339 11,906 Provision for losses on real estate owned 952 2,665 696 Gain on retirement of senior unsecured debt (579) (29,500) (18,216) Net decrease in deferred loan costs 239 442 770 Net increase (decrease) in unearned discount and other deferred loan fees 1,609 (1,341) (2,245) Loans originated with intent to sell (567,421) (244,086) (747,442) Proceeds from loans sold 508,690 220,410 778,948 Proceeds from securitization of loans 50,554 59,630 92,316 Restructuring charges -- -- 5,760 Other 652 731 994 Changes in operating assets and liabilities increasing (decreasing) cash (27,757) (5,059) 1,274 ----------------- ----------------- ---------------- Net cash provided by (used in) operating activities (62,721) 7,216 84,280 ----------------- ----------------- ---------------- INVESTING ACTIVITIES: Loans originated (345) (762) (156,617) Principal collections on loans not sold 41,266 19,718 192,176 Loans purchased for investment purposes (3,167) (1,413) -- Purchase of REO and loans from securitization trusts (2,978) (10,476) (9,980) Proceeds from sale of real estate owned and personal property acquired through foreclosure 10,067 9,774 7,593 Proceeds from sale of property and equipment 54 235 2,808 Purchase of property and equipment (164) (532) (11,701) Other 111 167 48 ----------------- ----------------- ---------------- Net cash provided by investing activities 44,844 16,711 24,327 ----------------- ----------------- ---------------- FINANCING ACTIVITIES: Advances on warehouse lines of credit 702,518 292,020 1,416,500 Payments on warehouse lines of credit (722,618) (290,948) (1,477,369) Payments on notes to banks (501) -- -- Net increase in notes payable to investors 19,022 8,479 3,218 Net increase (decrease) in subordinated debentures 1,406 405 (1,643) Retirement of senior unsecured debt (341) (45,016) (20,134) Proceeds from issuance of common stock 73 229 214 Note receivable from shareholder (4,000) -- -- Other -- -- (41) ----------------- ----------------- ---------------- Net cash used in financing activities (4,441) (34,831) (79,255) ----------------- ----------------- ---------------- Net increase (decrease) in cash and cash equivalents (22,318) (10,904) 29,352 CASH AND CASH EQUIVALENTS: Beginning of the year 26,009 36,913 7,561 ----------------- ----------------- ---------------- End of the year $ 3,691 $ 26,009 $ 36,913 ================= ================= ================
See Notes to Consolidated Financial Statements, which are an integral part of these statements. F-7 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities Business HomeGold Financial, Inc. and its subsidiaries ("HGFN" or "the Company") are primarily engaged in the business of originating, selling, securitizing and servicing first and second-lien residential mortgage loan products. The funds for these loans are obtained principally through the utilization of various bank warehouse lines of credit, proceeds from securitization of loans, and the issuance of notes payable and subordinated debentures to investors. Substantially all of the Company's loans are made to sub-prime borrowers. These borrowers generally have limited access to credit or are otherwise considered to be credit impaired by conventional lenders. In August, 2000, management closed the Company's wholesale mortgage origination divisions. The decision to exit the wholesale business arose primarily from management's desire to narrow its focus to the Company's more profitable retail loan origination efforts. The closure of the wholesale division resulted in a decrease in low-margin origination volume, enabling the Company to terminate its relationship under an agreement with its primary warehouse lender. Further benefits have been realized through more focused and efficient usage of marketing resources and a sizable reduction in overhead costs related to the closed division. 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 (approximately 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 $19.0 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. Preferred Stock Rights The following summarized unaudited pro forma financial information assumes the acquisition had occurred on January 1 of each year: For the Years Ended December 31, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 57,477 $ 53,045 Loss before extraordinary items (30,585) (29,574) Net income (loss) (30,006) 4,320 Basic loss per share of common stock (1.41) (0.01) The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies that might be achieved from combined operations. The pro forma results do not necessarily represent results that 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. F-8 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities (Continued) Consolidation and Estimates The consolidated financial statements include the accounts of the Company and its subsidiaries. All subsidiaries at December 31, 2000 were wholly-owned except for one special purpose corporation that is 99.54% owned. Included in the consolidated financial statements of operations in 1998 are the operations of the various subsidiaries that were sold during 1998. All significant intercompany items and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. These estimates include, among other things, valuation of real estate owned, assumptions used to value residual receivables and determination of the allowance for credit losses. Residual Receivables and Sales and Securitization 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. Total mortgage loans securitized in 2000, 1999, and 1998 were $64.3 million, $59.6 million, and $90.4 million, respectively. The Company also sells on a whole loan basis a significant portion of its loans (servicing released), including substantially all of its mortgage loans secured by second mortgage liens principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the second lien mortgage loans. 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. The Company believes that it will continue to securitize, as well as whole loan sell, in 2001. Cash and Cash Equivalents The Company maintains its primary checking accounts with one principal bank and makes overnight investments in reverse repurchase agreements with that bank. The amounts maintained in the checking accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2000, 1999, and 1998, the amounts maintained in the overnight investments in reverse repurchase agreements, which are not insured by the FDIC, totaled $2.4 million, $25.4 million, and $31.6 million, respectively. These investments were collateralized by U. S. Government securities pledged by the banks. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. F-9 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities (Continued) Restricted Cash The Company maintains an investment bank account that it considers the minimum balance requirement as restricted cash. The purpose of this account is overdraft protection and required as part of its primary banking relationship. Also, the Company assigned a $3.5 million certificate of deposit to a warehouse lender to secure the Company's borrowings under a revolving warehouse credit agreement (see Note 8). This certificate of deposit is included as restricted cash in the financial statements. Loans Receivable and Interest Income Loans receivable in 2000 and 1999 consist primarily of first and second lien residential mortgage loans. In prior years, it also included SBA loans, asset- based small-business loans, and automobile loans. During 1998, the Company sold the majority of its small-business and auto loans. The Company presently is not originating these types of loans. Non-refundable loan fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. Interest income on loans receivable is recognized on the accrual basis as earned. Fees received, net of direct costs incurred, for the origination of loans are recognized into income at the time the loan is repaid or sold. Accrual of interest is discontinued and reversed when a loan is either over 150 days past due or the loan is over 90 days past due with a loan to value percentage greater than 90%. Loans receivable held for sale are carried at the lower of aggregate cost or market. There was no allowance for market losses on loans receivable held for sale required at December 31, 2000 or 1999. Allowance for Credit Losses The allowance for credit losses is based on management's ongoing evaluation of the loan portfolio and reflects an amount that, in management's opinion, is adequate to absorb inherent losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors including delinquencies, current economic conditions, prior loan loss experience, the composition of the serviced loan portfolio, and management's estimate of anticipated credit losses. Loans, including those deemed impaired, are charged against the allowance at such time as they are determined to be uncollectible. Subsequent recoveries are credited to the allowance. Management considers the year-end allowance appropriate and adequate to cover inherent losses in the loan portfolio; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable. Actual results could differ from these estimates. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for credit losses will not be required. Accounting for Impaired Loans The Company accounts for impaired loans in accordance with Statement of Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors for Impairment of a Loan". This standard requires that all creditors value loans at the loan's fair market value if it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement. Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to allow a creditor to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how a creditor recognizes interest income on an impaired loan F-10 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities (Continued) Accounting for Impaired Loans (Continued) Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to principal and then to interest income. Once the reported principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amount previously charged off. A loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting. The Company assesses a specific allowance on mortgage loans, by reviewing on a loan-by-loan basis each month, all loans over 150 days past due or any loans that are in bankruptcy. Real Estate Owned and Personal Property Acquired Through Foreclosure Real estate owned and personal property acquired through foreclosure represents properties that have been acquired through actual foreclosures or deeds received in lieu of loan payments. These assets are recorded at the lower of the carrying value of the loans or the estimated fair value of the related real estate, net of estimated selling costs. The excess carrying value, if any, of the loan over the estimated fair value of the asset is charged to the allowance for credit losses upon transfer. Costs relating to the development and improvement of the properties are capitalized whereas those costs relating to holding the property are charged to expense. Property and Equipment Property and equipment are stated at cost. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Estimated lives are 15 to 40 years for buildings and improvements, 3 to 7 years for furniture, fixtures and equipment, and the lease period for leasehold improvements. Additions to property and equipment and major replacements or improvements are capitalized at cost. Maintenance, repairs and minor replacements are expensed when incurred. Impairment of Long-Lived Assets Long-lived assets and identifiable intangibles held and used by the Company are reviewed for impairment whenever management believes events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. No impairment loss was recognized for continuing operations in 2000 or 1999. In November 1998, the Company decided to close three retail loan centers and to consolidate all operations into one location. This decision resulted in a restructuring charge of $6.8 million. The restructuring charge relates to the write-down of fixed assets to net realizable value on assets no longer used by the Company and the estimated net lease cost on facilities no longer being used. F-11 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities (Continued) Goodwill The excess of cost over related net assets of businesses acquired is amortized using the straight-line method principally over 15 years. During 2000, approximately $19.0 million was attributed to goodwill from the purchase of HomeSense. On a periodic basis, the Company reviews goodwill for events or changes in circumstances that may indicate that the carrying amount of goodwill may not be recoverable. The Company utilizes estimated future cash flows of the purchased subsidiary compared to the value of goodwill booked in determining any impairment on the excess of cost over the related net assets. Debt Origination Costs The Company capitalizes costs incurred to obtain warehouse lines of credit and senior unsecured debt. These costs are amortized as an addition to interest expense over the terms in the loan agreements. The Company also reduces the debt origination costs by the unamortized portion of the senior unsecured debt that is purchased on the open market. These amounts have been netted against the gain on extinguishment of debt. Also, during 2000, the Company expensed the remaining debt origination costs that existed from the expired CIT warehouse line of credit agreement (See note 15). Remittances Payable The Company retains the servicing rights on certain of its mortgage securitization transactions. The Company receives the payments from the borrowers and records a liability until the funds are remitted to the Trustee. Investor Savings The Company issues notes payable and subordinated debentures through a subsidiary company, CII. The notes are fixed rate securities registered under the South Carolina Uniform Securities Act ("the Act"), and mature from one to two years from the date of issuance. The Company pays interest on the notes monthly, quarterly, or at maturity at the option of the investor. The Company also issues subordinated debentures under the Act, which mature one year from date of issuance and have an interest rate of 6.0%. See Note 10. Senior Debt The Company sold $125.0 million in aggregate principal amount of senior unsecured notes in 1997. The notes pay interest semi-annually at 10.75%, and mature September 15, 2004. Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return. The Company accounts for income taxes using an asset and liability approach as required by SFAS No. 109 "Accounting for Income Taxes". Under this approach, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income taxes arise principally from depreciation, unrealized gains on loans held for sale, certain securitization transactions, amortization of intangibles, allowances for credit losses, and net operating loss carryforwards. Management establishes on a quarterly basis a valuation allowance for deferred assets. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. F-12 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities (Continued) Advertising Expense Advertising, promotional, and other business development costs are generally expensed as incurred except as noted herein. External costs incurred in producing media advertising are expensed the first time the advertising takes place. In 1997, the Company began using a direct mail marketing approach for its retail mortgage business. External costs related to direct mailings are capitalized in accordance with Statement of Position 93-7 and amortized over a three-month period. Total expenses recognized in 2000, 1999 and 1998 for direct mailings were approximately $8.4 million, $4.4 million and $8.8 million, respectively. The total amounts capitalized into other assets on the balance sheet at December 31, 2000 and 1999 were approximately $1,841,000 and $934,000 respectively. Interest Rate Risk Management The Company's operations may be directly affected by fluctuations in interest rates. While the Company monitors interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. The Company currently does not hedge its loans held for sale. The Company's present strategy is to sell a substantial portion of the current months' production that is designated for whole-loan sales in the following month and the remaining loans in the subsequent month. Because the interest rates on the Company's warehouse lines of credit used to fund and acquire loans are variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale may reduce the gain on loan sales earned by the Company. There were no significant open hedging positions at December 31, 2000 or 1999. Earnings (Loss) Per Share of Common Stock Earnings (loss) per share of common stock ("EPS") is computed in accordance with SFAS No. 128, "Earnings per Share". Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. Common stock equivalents included in the diluted EPS computation consist of stock options, which are computed using the treasury stock method. In 2000 and 1999, due to the Company's net operating loss, the common stock equivalents were not included in the diluted EPS calculation since their inclusion would be antidilutive. Segment Reporting During 1998, the Company adopted the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". This Statement establishes standards for the method that public entities use to report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about product and services, geographical areas, and major customers. The Company believes that it operates as one segment. Reclassifications Certain previously reported amounts have been reclassified to conform to current year presentation. Such reclassifications had no effect on net income or shareholders' equity as previously reported. F-13 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies and Business Activities (Continued) Accounting Considerations In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." All derivatives are to be measured at fair market value and recognized in the balance sheet as assets and liabilities. SFAS No. 137, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" was issued in June 2000 and amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The two statements are to be adopted concurrently and are effective for fiscal years and quarters beginning after June 15, 2000. The adoption of SFAS No. 133 and SFAS No. 137 did not have a material impact on the presentation of the Company's financial results or financial position. Effective January 1, 1999, the Company adopted the provisions of SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". This Statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. The adoption of this Statement did not change total Stockholders' Equity as previously reported. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB No. 125." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures but carries over most of FASB No. 125's provisions without reconsideration. SFAS No. 140 is effective for all transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. Retroactive and early adoption is prohibited. This statement is effective for disclosures related to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of provisions of SFAS No. 140 is not expected to be material to the Company. In the November 2000 meeting, the Emerging Issues Task Force (EITF) reached a consensus on EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." The issue deals with how interest income and impairment should be recognized for retained interests in securitizations. If upon evaluation, the holder determines that it is probable that there is a change in estimated cash flows (in both timing and estimates of projected cash flows) , the amount of accretable yield should be recalculated and if that change in estimated cash flows is an adverse change, an other-than-temporary impairment should be considered to have occurred. The effective date of this EITF is March 15, 2001. The Company does not know if there is any impact of this EITF on its residual assets or if the impact could be material. The Company anticipates implementing EITF 99-20 in the first quarter of 2001. The FASB reached a tentative decision related to accounting treatment for goodwill in its Business Combinations and Intangible Assets -Accounting for Goodwill project and related exposure draft. In this exposure draft, the FASB has determined that goodwill will no longer be amortized. Goodwill of a reporting unit should be tested for impairment when events or circumstances occur indicating that an impairment might exist. The FASB is expected to issue this accounting standard in 2001. The Company does not know the impact, if any, on its financial statements or its financial position related to this proposed guidance. Note 2. Loans Receivable The following is a summary of loans receivable by type of loan:
December 31, ----------------------------------------- 2000 1999 ------------------- ------------------ (In thousands) Mortgage Loans: First mortgage residential property $ 31,918 $ 41,848 Second mortgage residential property 17,117 9,256 Real estate loans on rental property 216 1,121 ----------------- ------------------ Total mortgage loans 49,251 52,225 ----------------- ------------------ Small-business loans 9,162 10,388 Other loans 70 629 ----------------- ------------------ Total loans receivable $ 58,483 $ 63,242 ================= ==================
F-14 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2. Loans Receivable (Continued) Included in loans receivable are $45.3 million and $46.9 million at December 31, 2000 and 1999, respectively that are being held for sale. Included in loans receivable are loans from related parties of $70,000 and $121,000 at December 31, 2000 and 1999, respectively. Notes receivable from related parties included advances of $0 in 2000 and $12,000 in 1999. Repayments from related parties were $5,837 and $13,176 in 2000 and 1999, respectively. In 2000 and 1999, the Company had notes from parties at the beginning of the year who were no longer considered related parties as of December 31 due to termination of employment status. First mortgage residential loans generally have contractual maturities of 12 to 360 months with an average interest rate at December 31, 2000 and 1999 of approximately 10.7% and 10.9%, respectively. Second mortgage residential loans have contractual maturities of 12 to 360 months with an average interest rate at December 31, 2000 and 1999 of approximately 13.3% and 14.3%, respectively. Loans sold and serviced for others at December 31, 2000 and 1999 were approximately $283.6 million and $355.7 million, respectively, and are not included in assets in the accompanying balance sheets. At December 31, 2000, the Company's serviced for others mortgage loan portfolio by type of collateral is summarized as follows (in thousands): First mortgage residential property $ 269,730 95.1% Second mortgage residential property 5,673 2.0 Real estate loans on rental property 8,195 2.9 ---------------- ------------- $ 283,598 100.0% ================ ============= The Company services loans in 46 states. South Carolina, North Carolina, Florida, Georgia and Louisiana serviced loans represent approximately 16.3%, 15.4%, 9.6%, 7.8% and 6.2%, respectively, of the Company's total serviced loan portfolio at December 31, 2000. No other state represents more than 6% of total serviced loans. An analysis of the allowance for credit losses is as follows:
Years Ended December 31, ------------------------------------------------------ 2000 1999 1998 ---------------- -------------- --------------- (In thousands) Balance at beginning of year $ 6,344 $ 6,659 $ 6,528 Provision for credit losses 3,159 3,339 11,906 Net charge offs (1,990) (3,654) (8,792) Allowance related to loans sold (2,861) -- (2,983) -------------- -------------- --------------- Balance at end of year $ 4,652 $ 6,344 $ 6,659 ============== ============== ===============
As of December 31, 2000, 1999, and 1998, loans totaling $9.6 million, $10.8 million, and $7.9 million, respectively, were on non-accrual status. The associated interest income not recognized on these non-accrual loans was approximately $868,000, $825,000, and $2.0 million during the years ended December 31, 2000, 1999 and 1998, respectively. F-15 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2. Loans Receivable (Continued) The following presents delinquencies, net credit losses, and securitized financial assets managed by the Company.
Total Principal Principal Amount of Loans Amount of Loans 60 Days or More Past Due Net Credit Losses --------------------------------------------------------------------------------- 2000 1999 2000 1999 2000 1999 --------------------------------------------------------------------------------- Residential mortgage loans $ 342,081 $ 423,619 $ 24,964 $ 34,322 $ 5,400 $ 5,421 Less: Loans securitized 283,598 360,377 18,661 29,144 3,410 1,767 --------------------------------------------------------------------------------- Loans held in portfolio $ 58,483 $ 63,242 $ 6,303 $ 5,178 $ 1,990 $ 3,654 =================================================================================
Note 3. Other Receivables The following is a summary of other receivables: December 31, ---------------------------------------- 2000 1999 ------------------ ------------------ (In thousands) Fees earned not collected $ 3,503 $ 3,277 Advanced funds to trust (1) 1,894 2,035 Receivable from mortgage trust (2) 1,251 975 Loan sale receivable 4,801 -- Fees receivable reserve (3) (953) -- Note receivable 75 1,006 Other 926 766 ---------------- ----------------- $ 11,497 $ 8,059 ================ ================= - -------------- (1) Trust agreements require the Company to advance interest on delinquent customer accounts. (2) Excess distribution from mortgage trust received in January 2001 and 2000, respectively. (3) Reserve for potential future uncollectable servicing fees F-16 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Residual Receivables In connection with its mortgage loan securitizations and SBA loan securitizations and sales, the Company retained residual interests in the trusts. During 1998, the Company's residual interests relating to its SBA loan securitizations were sold. These subordinate residual assets totaled $58.9 million and $47.8 million, net of allowances, at December 31, 2000 and 1999 respectively. The following summarizes activity in the residual receivables:
Year Ended Year Ended Year Ended December 31, December 31, December 31, 2000 1999 1998 (In Thousands) (In Thousands) (In Thousands) ---------------------------------------------------------------- Gross balance at beginning of year $ 54,946 $ 51,022 $ 77,457 Gain on sale of loans -- 9,641 12,322 Residual from securitization of loans 17,244 -- -- Return of Over collateralization (1,767) -- -- Increase of future discounted cash flows, net -- -- 14,289 Mark to market value adjustment 4,859 19 (19,366) Amortization of original residual asset value (10,758) (5,736) (15,920) Sale of small-business commercial residual receivable -- -- (14,845) Other -- -- (2,915) ---------------------------------------------------------------- Gross balance, end of year 64,524 54,946 51,022 Less allowance for losses on residual receivable (5,647) (7,176) (7,165) ---------------------------------------------------------------- Balance at end of year $ 58,877 $ 47,770 $ 43,857 ================================================================
An analysis of the allowance for losses, which is embedded in the residual receivables, is as follows:
Years Ended December 31, ----------------------------------------------------- 2000 1999 1998 ----------------- --------------- ------------- (In thousands) Balance at beginning of year $ 7,176 $ 7,165 $ 14,255 Anticipated losses netted against gain 1,559 1,267 2,242 Mark to market adjustment 489 405 (5,728) Sale of small-business commercial residual asset -- -- (2,957) Net charge offs (3,577) (1,661) (647) --------------- -------------- ------------- Balance at end of year $ 5,647 $ 7,176 $ 7,165 =============== ============== =============
The table below summarizes certain cash flows received and paid to the securitization trusts (in thousands).
Year Ended December 31 ------------------------------------------------ 2000 1999 1998 ------------------------------------------------ Proceeds from new securitizations $ 50,554 $ $59,630 $ $92,316 Proceeds from loan payment collections 159,780 155,818 168,496 Servicing fees received 1,792 1,882 2,410 Other cash flows received on retained interests 10,969 13,740 14,138 Purchases of delinquent or foreclosed assets 3,200 13,700 10,000 Servicing advances 5,999 9,033 9,693 Repayments of servicing advances 5,735 7,879 7,666
F-17 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Residual Receivables (Continued) The Company expects to begin receiving Excess Cash Flow on its Mortgage Loan securitizations approximately 16 months from the date of securitization, although this time period may be shorter or longer depending upon the securitization structure and performance of the loans securitized. Prior to such time, the monoline insurer requires a reserve provision to be created within the securitization trust which uses Excess Cash Flow to retire the securitization bond debt until the spread between the outstanding principal balance of the loans in the securitization trust and the securitization bond debt equals a specified percentage (depending on the structure of the securitization) of the initial securitization principal balance (the "overcollateralization limit"). Once this overcollateralization limit is met, excess cash flows are distributed to the Company. The following sets forth facts and assumptions used by the Company in arriving at the valuation of the residual receivables relating to its Mortgage Loan securitization pools it services as of December 31, 2000:
1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 ------------------------------------------------------------------------------------ Outstanding balance of loans securitized $25,754,675 $43,340,538 $69,847,023 $68,966,966 $32,271,294 $43,417,008 Average stated principal balance 55,988 53,179 61,323 60,817 59,984 46,386 Weighted average coupon on loans 10.83% 10.64% 11.03% 10.88% 10.76% 10.91% Weighted average remaining term to stated 164 mths 163 mths 168 mths 171 mths 181 mths 194 mths maturity Weighted average LTV 75% 70% 74% 74% 74% 71% Percentage of first mortgage loans 100% 100% 100% 100% 100% 86.91% Weighted average pass-through rate to 7.66% 7.21% 7.10% 6.86% 6.70% 6.84% bondholders Assumed annual losses 0.18% 0.18% 0.26% 0.36% 0.39% 0.56% Remaining ramp period for losses 0 mths 0 mths 0 mths 0 mths 0 mths 0 mths Assumed cumulative losses as a % of UPB 1.44% 1.78% 2.50% 2.84% 3.25% 1.17% Annual servicing fee 0.50% 0.50% 0.50% 0.50% 0.50% 0.56% Servicing asset 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Discount rate applied to cash flow after Overcollateralization 12% 12% 12% 12% 12% 12% Prepayment speed: Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR 24 HEP Peak CPR (1) 28 CPR 28 CPR 28 CPR 28 CPR 28 CPR 24 HEP Tail CPR (1) 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 24 HEP CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths 24 HEP CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths 24 HEP CPR tail begins (1) 37/49 mths 37/49mths 37/49 mths 37/49 mths 37/49 mths 24 HEP Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.185% 0.185% 0.265% Initial overcollateralization required (2) 3.25% -- -- -- -- 9.5% Final overcollateralization required (2) 6.5% 3.75% 3.75% 3.75% 3.75% 13.5%
(1) CPR represents an industry standard of calculating prepayment speeds and refers to Constant Prepayment Rate. For its first five securitization pools, the Company uses a curve based on various CPR levels throughout the pool's life, based on its estimate of prepayment performance, as outlined in the table above. For the 1999-1 transaction the Company uses a 24 HEP (Home Equity Prepayment) curve. This curve, developed by Prudential Securities, ramps to the terminal CPR (in this case, 24%) over ten months and then remains constant for the life of the pool. (2) Based on percentage of original principal balance, subject to step-down provisions after 30 months. Additionally, the Company obtained an independent valuation of the residual receivables it services at December 31, 2000. This independent valuation concurred with the carrying value of the residuals it services as of the valuation date. Each of the Company's Mortgage Loan securitizations have been credit-enhanced by an insurance policy provided through a monoline insurance company such that the senior certificates have received ratings of "Aaa" from Moody's Investors Services, Inc. ("Moody's") and "AAA" from Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). 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. However, the securitization of seasoned loans resulted in additional liquidity of $33.0 million for the Company. Certain loans included in that securitization were ineligible for inclusion in the borrowing base under the Company's warehouse line of credit. F-18 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Residual Receivables (Continued) In connection with its 1999 securitization transaction, HGFN agreed to cross-collateralize its residual interests in that transaction and its first three 1997 securitization transactions. The cross-collateralization is for the benefit of Financial Security Assurance, Inc. ("FSA") the bond insurer for all of the transactions. Under the terms of the cross-collateralization agreement, in the event HGFN is in breach of its obligations under any one or more of the securitization trusts, or if certain cumulative loss or delinquency triggers are met, the excess cash flow on all four residual interests will be captured by the Collateral Agent. The Collateral Agent will distribute these monies to FSA or as otherwise specified in the agreement. The total amount which may be retained by the Collateral Agent is capped at $15.0 million. This agreement terminates upon the termination of all of the related securitization trusts. In August 2000, the Company exceeded the twelve-month rolling loss trigger in the 1998 securitization pool which resulted in the monthly cash flow of this pool (approximately $70,000 per month) being retained by the trustee rather than being paid to the Company. If the Company returns performance of this pool to a point below the required trigger, the return of cash flow back to the Company will continue. The Company sold its servicing rights under the 2000 securitizations because the price paid by the independent third party servicer resulted in a higher realized gain than if the servicing rights not been sold. Consequently, the residual interests of $14.5 million owned by the Company are not subject to the Company's normal quarterly evaluation of assumptions and estimates as compared to actual performance. These residual interests represent the Company's estimate of market value. Market value determination includes an estimate of credit losses, based on anticipated performance of the securitized loans in the portfolio. The original certificate balances for the 2000 securitizations totaled $64,330,194. The 2000-4 trust had an original certificate balance of $41,473,722 with the Company's share of the original certificate balances being $12,047,487. The 2000-5 trust had an original certificate balance of $22,856,471 with the Company's share of the original certificate balances being $5,142,707. The average stated principal balances are $54,734 and $47,105 for pools 2000-4 and 2000-5, respectively. The annual servicing fees are 0.58% and 0.50% for 2000-4 and 2000-5, respectively, and the trustee fee is .050%. At December 31, 2000, the 2000-4 trust had outstanding principal balances of $37,711,512 with the Company's certificate share being $11,872,993. The 2000-5 trust had outstanding principal balances of $21,809,445 with the Company's certificate share being $5,142,707. Interest income is allocated to the bondholders based on the certificate balances. At December 31, 2000, the weighted average pass through rate to bondholders is 11.74% and 11.89% for 2000-4 and 2000-5, respectively. The Company will not receive their share of principal distribution until three years from the time of the transaction. After three years, principal distribution will be received if the portfolios meet certain performance requirements. Although the Company is a certificate holder, its share of the principal balance is reduced by all losses incurred by the pools. The assumed cumulative losses as a percent of the unpaid principal balance at December 31, 2000 are 4.95% and 3.9% for the 2000-4 and 2000-5 pools. These assumed loss rates are used in estimating the market value of the Company's residual interest. F-19 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4. Residual Receivables (Continued) At December 31, 2000 key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 5 percent and 10 percent adverse changes in assumed economics is as follows (dollars in thousands). Loans (In Thousands) ----------------- Carrying amount/fair value of retained interests $ 58,877 Weighted-average life (in years) 4.24 Prepayment speed assumption (annual rate) 24% - 30% Impact on fair value of 5% adverse change $ 607 Impact on fair value of 10% adverse change $ 1,216 Expected credit losses (annual rate) 0.35% Impact on fair value of 5% adverse change $ 390 Impact on fair value of 10% adverse change $ 780 Residual cash flows discount rate (annual) 12.0% Impact on fair value of 5% adverse change $ 638 Impact on fair value of 10% adverse change $ 1,256 These sensitivities are hypothetical and should be viewed with caution. As the figures indicate, any change in fair value based on a 5 percent variation in assumptions cannot be extrapolated because the relationship of the change in assumption to the change in fair value is not linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independent from any change in another assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. Note 5. Property and Equipment The following is a summary of property and equipment: December 31, --------------------------------------- 2000 1999 ------------------ ---------------- (In thousands) Land $ 1,919 $ 948 Buildings and leasehold improvements 13,871 11,545 Equipment and computers 9,431 10,126 Furniture and fixtures 4,304 4,470 Vehicles 542 191 Restructuring reserve -- (4,312) ---------------- ---------------- Total property and equipment 30,067 22,968 Less accumulated depreciation (8,637) (5,808) ---------------- ---------------- Net property and equipment $ 21,430 $ 17,160 ================ ================ The Company leases various property and equipment, office space and automobiles under operating leases. The Company's headquarters building collateralizes the warehouse line of credit. F-20 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5. Property and Equipment (Continued) In 1998, the Company recorded a $1.8 million non-cash restructuring charge related to future minimum rental payments for operating leased assets and facilities that are no longer used in the Company's normal course of business. During 2000 and 1999, rental payments on leased facilities no longer used by the company have been paid from and sublease rent receipts have been deposited into the reserve established in 1998. As of December 31, 2000, management feels that the reserve is adequate to absorb future costs estimated to be associated with the leased space. The following is a schedule of future minimum lease payments by year for all operating leases (in thousands): Future Minimum Lease Payments -------------------- 2001 $ 2,435 2002 1,229 2003 593 2004 176 2005 and thereafter 34 -- ----------------- $ 4,467 ==================== Total rental expense was approximately $2.7 million in 2000, $2.0 million in 1999, and $4.9 million in 1998. Note 6. Real Estate Owned and Personal Property Acquired through Foreclosure An analysis of real estate acquired through foreclosure is as follows:
Years Ended December 31, --------------------------------------------------- 2000 1999 1998 --------------------------------------------------- (In thousands) Balance at beginning of year $ 7,673 $ 5,881 $ 3,295 Loan foreclosures and improvements 5,414 14,827 11,777 Dispositions, net (10,854) (10,370) (8,495) Write-down of real estate acquired through foreclosure (952) (2,665) (696) ------------ ------------ ------------ Balance at end of year $ 1,281 $ 7,673 $ 5,881 ============ ============ ============
Note 7. Goodwill An analysis of goodwill is as follows: Years Ended December 31, ------------------------------------- 2000 1999 ---------------- ---------------- (In thousands) Balance at beginning of year $ 1,566 $ 1,660 HomeSense purchase (See Note 1) 19,021 -- Amortization expense (964) (94) ---------------- ---------------- Balance at end of year $ 19,623 $ 1,566 ================ ================ F-21 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Warehouse Lines of Credit In connection with the merger with HomeSense, 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 0.25% 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 Company is default on these covenants. Amendments were subsequently executed whereby the lender agreed to forebear from exercising its rights on account of existing events of default, the maturity date was extended to April 30, 2001, and the advance rate was changed to 97% from 100% for all loans made after October 23, 2000. Availability under the credit agreement is determined based on eligible collateral as defined in the agreement, for which the Company has forwarded to the bank the required loan files and documentation. At December 31, 2000, the balance of funded loans on the line was $2.6 million. Prior to the merger, HomeSense had 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 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. The facility bears interest at the prime rate plus 0.75%. Under a termination agreement between RMST and the Company, the maximum commitment at December 31, 2000 was $15 million, and the outstanding balance on that date was $11.4 million. An additional provision of the termination agreement required the Company to assign a $3.5 million certificate of deposit to RMST as security for the outstanding balance on the line. As of March 31, 2001, the agreement with RMST was terminated, and RMST's right to the certificate of deposit was relinquished. On November 3, 2000, the Company entered into a $10 million revolving warehouse line of credit with The Provident Bank ("Provident"). Interest on the line varies on a loan by loan basis and ranges from the prime rate plus 1.5% to the prime rate plus 3.5%, depending on the grade and age of the mortgage funded. The agreement allows for a rate reduction from the base rates if certain monthly funded volume targets are met. For the month of December, 2000, the Company achieved the targeted funded volume for the first stage rate reduction of .15% from the initial base rates. The agreement contains no covenants related to the financial condition or results of operations of the Company. The agreement allows Provident to retain the servicing rights to any loans funded on the line of credit. Availability under the credit agreement is determined based on eligible collateral as defined in the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The line of credit matures on October 31, 2001. At December 31, 2000, the balance of funded loans on the line was $6.6 million, and these loans were all sub-serviced by Provident. On December 20, 2000, the Company entered into a short term repurchase arrangement with New Freedom Mortgage Corporation ("New Freedom") as an interim funding source while a long-term warehouse agreement was being negotiated. Under the arrangement, New Freedom agreed to fund both new mortgage production and certain mortgages originally funded by the Company. The advance rates on fundings range from 80% to 88% of the principal amount, depending on the type and source of the mortgage. New Freedom receives a fee from 1.5% up to 2.5% of the note amount based on the length of time credit is provided for each loan funded. In addition, New Freedom receives the interest accrued on the loan during the period it remains on the line. At December 31, 2000, the outstanding balance on the line was $6.3 million. The arrangement was terminated in February 2001, after the execution of a new long-term warehouse agreement with another lender. During December 2000, the Company had terminated its revolving warehouse line of credit agreement with CIT Group/Business Credit, Inc. ("CIT"). At December 31, 1999, the Company had $1.1 million of immediate availability under the CIT agreement, based on its borrowing base on that date. Upon termination of the agreement, the company has no further obligations thereunder. At December 31, 2000, the Company believes that no event of default has occurred on its warehouse lines of credit for which it has not obtained a waiver or forbearance. F-22 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 8. Warehouse Lines of Credit (Continued) Unused Lines of Credit On January 11, 2001, the Company entered into a $15 million master repurchase agreement with Imperial Warehouse Finance, Inc. Advance rates on fundings range from 85% to 88% of the principal amount, depending on the type and source of the mortgage. The facility bears interest at prime rate plus 1.00%. The agreement requires a collateral deposit of $2.5 million be in place for the life of the line. The agreement also requires that the Company have net income for any period after January 2001. The Company is currently in default of the net income covenant. Management is currently negotiating a waiver and/or modification of the terms of the agreement. Management believes they will be successful in obtaining a modified agreement, or waiver at a minimum, although there can be no assurance that a new agreement will be reached. Note 9. Notes Payable to Banks The Company assumed a mortgage note of $1.9 million with Bank of America, N.A. in connection with the merger. The note was scheduled to mature on November 2, 2000. The maturity date was extended to March 2, 2001, at which time it was paid off. The note bore interest at the prime rate plus 1.5%, and was secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a parcel of real estate investment property. The Company also assumed a note payable of $422,000 to Bank of America, N.A. related to the merger. The note bears interest at 8.25% through October 2019, and is collateralized by certain other property and equipment. The maturity schedule for theses notes is: Principal Year Payments ------------------------------------------- 2001 $ 1,946,152 2002 10,438 2003 11,333 2004 12,304 2005 13,358 2006 and beyond 358,539 ---------------- $ 2,352,124 ================ F-23 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10. Investor Savings Investor savings are summarized as follows: December 31, -------------------------------------- 2000 1999 ------------------ ---------------- (In thousands) Notes payable to investors $ 146,087 $ 127,065 Subordinated debentures 19,117 17,710 ---------------- ---------------- $ 4,652 $ 144,775 ================ ================ Notes payable to investors are issued by a subsidiary company, CII, in any denomination greater than $10,000 and are registered under the South Carolina Uniform Securities Act. The notes payable to investors are on par with the rights of the holders of the senior unsecured debt of HGFN. The notes mature from one to two years from date of issuance. Interest is payable monthly, quarterly or at maturity at the option of the investors. Interest rates on the notes are fixed until maturity and range from 5% to 9%. At December 31, 2000, and 1999, the weighted average rate was 7.92%, 7.55%, respectively. At December 31, 2000 and 1999, notes payable to investors include an aggregate of approximately $31.1 million and $26.9 million, respectively, of individual investments exceeding $100,000. The investor savings at December 31, 2000 mature as follows (in thousands): 2001 $ 92,469 2002 53,618 --------------- $ 146,087 =============== There were 5,704 and 4,853 accounts for the notes due to investors at December 31, 2000 and 1999, respectively. Subordinated debentures are issued by CII in any denomination greater than $100 and are registered under the South Carolina Uniform Securities Act. The subordinated debentures mature one year from date of issuance and have interest rates of 6%. The debentures are subordinated to all bank debt, notes due to investors, and the senior unsecured debt. There were 1,409 and 1,312 subordinated debenture accounts at December 31, 2000 and 1999, respectively. These notes and debentures are not secured by a pledge of any specific assets at CII, nor guaranteed by the Company. F-24 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11. Senior Unsecured Debt and Subsidiary Guarantors In September 1997, the Company sold $125.0 million in aggregate principal amount of Senior Notes due 2004 ("Senior Notes"). The Senior Notes constitute unsecured indebtedness of the Company. The Senior Notes mature on September 15, 2004, with interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. In 1998, the Company purchased $38.4 million in aggregate principal amount of its Senior Notes in open market transactions for a combined purchase price of $18.9 million or 49.4% of face value. In 1999, the Company purchased $74.5 million in aggregate principal amount of the Senior Notes for a purchase price of $45.0 million. In 2000, the company purchased $920,000 in aggregate principal amount of the Senior Notes in open market for a purchase price of $341,000, and may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. The indenture pertaining to the Senior Notes contains various restrictive covenants including limitations on, among other things, the incurrence of certain types of additional indebtedness, the payment of dividends and certain other payments, the ability of the Company's subsidiaries to incur further limitations on their ability to pay dividends or make other payments to the Company, liens, asset sales, the issuance of preferred stock by the Company's subsidiaries and transactions with affiliates. At December 31, 2000 and 1999, management believes the Company was in compliance with such restrictive covenants. The Senior Notes are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries listed in Note 26 (the "Subsidiary Guarantors"). With the exception of the Guarantee by the Company's subsidiary CII, the Subsidiary Guarantees rank on par with the right of payment with all existing and future unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of such Guarantors. All existing debt of all subsidiaries other than CII are currently considered to be subordinated to the Senior Notes. The Guarantee by CII is equal in priority to CII's notes payable to investors and is senior to CII's subordinated debentures. The Senior Notes outstanding at December 31, 2000 and 1999 were $11.2 million and $12.1 million, respectively. Included in Note 26 is consolidating condensed financial data of the combined subsidiaries of the Company. The Company believes that providing the condensed consolidating information is of material interest to investors in the Senior Notes and has not presented separate financial statements for each of the wholly-owned Subsidiary Guarantors, because it was deemed that such financial statements would not provide investors with any material additional information. At December 31, 2000 and 1999, all of the subsidiary guarantors were wholly-owned by the Company. Note 12. Sale of Subsidiary and Subsidiary's Assets The Company sold substantially all of the assets of the small business loan operations to TransAmerica Small Business Capital, Inc. ("TransAmerica") in the fourth quarter of 1998. The Company no longer offers the small business loan products. The Small Business Loan Unit realized net income in 1998 of $11.0 million. Included in the 1998 net income was a $19.0 million pre-tax gain on sale of the Small Business Loan Unit's net assets. The Company sold substantially all of the assets of the auto loan unit on March 19, 1998 for $20.4 million, the approximate book value of the assets. The Company no longer offers auto loans as one of its financial products. Prior to the sale of the auto loan assets in 1998, the auto loan unit recorded a net loss of $110,000. On December 2, 1998, the Company sold the majority of its asset-based lending operation to Emergent Asset Based Lending LLC, a Maryland Limited Liability Company. This transaction completed the disposition of all non-mortgage-related activities of the Company. The sale resulted in a pre-tax loss of $755,000. The Company received a note receivable of $2.2 million payable over two years at an interest rate of Prime plus 1%. F-25 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13. Fair Market Value Adjustment on Residual Receivables As a result of higher than anticipated prepayments in 1998, the Company modified the estimated prepayment speeds on all of its mortgage loan securitization transactions to peak at 30 constant prepayment rate ("CPR") up from the previous prepayment speeds of 20 CPR. This resulted in a write-down of residual receivables of $13.6 million in 1998. No such write-down was necessary in 2000 or 1999. The Company refined its estimate and began using CPR's of 28 in 1999 based on a review of a longer period of actual experience. Changes in valuation assumptions made in 2000, primarily related to the assumed loss rates in the pools. The change in assumed loss rates, due to lower than expected actual losses, resulted in an increase in fair value of the residual receivable. However, this increase was offset by actual losses on foreclosed properties in all the securitization pools, causing the write-down of the overall residual receivable. Note 14. Restructuring Charges In November 1998, the Company decided to close three retail loan centers and to consolidate all operations into one location. This decision resulted in a restructuring charge of $6.8 million. The restructuring charge related to the write-down of fixed assets to net realizable value on assets no longer used by the Company was $3.6 million. The estimated net lease cost on facilities no longer being used was $1.8 million, and the estimated costs of employee relocation cost and employee severance was approximately $1.4 million. During 2000, the Company incurred restructuring charges of approximately $1.5 million to the merger, to the decision to close its wholesale loan origination division, and estimated costs of employee relocation and severance in connection with Merger and Subsequent wholesale division closings. Note 15. Other General and Administrative Expenses Other general and administrative expenses for the years ended December 31, 2000, 1999, and 1998 consist of the following:
Years Ended December 31, ------------------------------------------------------------- 2000 1999 1998 ------------------ ------------------ ----------------- (In thousands) Depreciation expense $ 2,732 $ 2,487 $ 3,337 Amortization expense 1,981 206 289 Legal and professional fees 2,369 2,013 3,125 Loan costs 2,879 1,608 3,972 Deferred loan costs (835) (2,251) (5,917) Travel and entertainment 802 729 3,362 Office rent and utilities 821 322 2,827 Telephone 1,599 928 4,228 Office supplies 612 501 2,015 Equipment and miscellaneous rental 2,123 1,896 2,285 Repairs and maintenance 1,264 1,124 966 Postage and handling charges 600 374 1,146 Other 2,914 3,186 4,323 ----------------- ----------------- ---------------- Total other general and administrative expenses $ 19,861 $ 13,123 $ 25,958 ================= ================= ================
F-26 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16. Income Taxes A reconciliation of the provision for Federal and state income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes, minority interest, and extraordinary item are as follows:
Years Ended December 31, ---------------------------------------------------- 2000 1999 1998 ---------------- --------------- ------------- (In thousands) Statutory Federal rate of 34% applied to pre-tax income from continuing operations before minority interest and extraordinary item $ (13,547) $ (11,924) $ (24,817) State income taxes, net of federal income tax benefit (1,593) (511) 279 Change in the valuation allowance for deferred tax assets allocated to income tax expense (10,000) (7,500) 21,672 Nondeductible expenses 19 23 91 Amortization of excess cost over net assets of acquired businesses 112 18 46 Effect of losses on tax provision 14,769 11,800 3,909 Tax on excess inclusion income from REMIC's 632 700 2,284 Other, net 152 -- (447) ------------- -------------- ------------ $ (9,456) $ (7,394) $ 3,017 ============= ============== ============ The extraordinary gain on the extinguishment of debt is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in income tax expense. Provision (benefit) for income taxes from continuing operations is comprised of the following: Years Ended December 31, ---------------------------------------------------- 2000 1999 1998 ---------------- --------------- ------------- (In thousands) Current Federal $ 535 $ 403 $ 2,594 State and local 9 52 423 ------------- -------------- ------------ 544 455 3,017 Deferred Federal (8,942) (7,023) -- State and local (1,058) (826) -- ------------- -------------- ------------ (10,000) (7,849) -- Total Federal (8,407) (6,620) 2,594 State and local (1,049) (774) 423 ------------- -------------- ------------ $ (9,456) $ (7,394) $ 3,017 ============= ============== ============
F-27 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16. Income Taxes (continued) Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and AMT credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset are as follows:
December 31, --------------------------------- 2000 1999 --------------- ------------- (In thousands) Deferred tax liabilities: Differences between book and tax basis of property $ (745) $ (601) Differences between book and tax basis of investment in owner's trust (521) (546) Difference between book and tax basis of the residual receivables associated with the Company's investment in the Real Estate Investment Trust (1,185) (1,096) Deferred loan costs -- (100) Other (41) (9) -------------- ------------ Total gross deferred tax liabilities $ (2,492) $ (2,352) ============== ============ Deferred tax assets: Differences between book and tax basis of deposit base intangibles $ 214 $ 200 Differences between book and tax basis of REMIC residual receivables 1,687 2,303 Allowance for credit losses 3,335 3,501 AMT credit carryforward 19 19 Operating loss carryforward 30,145 21,535 Deferred loan fees -- 270 REO reserve 114 114 Restructuring reserve-leases 377 415 Other 406 167 -------------- ------------ Total gross deferred tax assets 36,297 28,524 Less valuation allowance (11,805) (14,172) Less gross deferred tax liabilities (2,492) (2,352) -------------- ------------ Net deferred tax asset $ 22,000 $ 12,000 ============== ============
The valuation allowance for deferred tax assets at December 31, 2000 was $11.8 million. The increase (decrease) in the valuation allowance for the year ended December 31, 2000 and 31, 1999 was ($10.0) million and $7.5 million, respectively. The valuation allowance at December 31, 2000 relates primarily to net operating loss ("NOL") carryforwards. The decision to decrease the valuation allowance in 2000 was based on 2001 earnings projections, and the operational changes implemented in 2000 as a result of the merger. The Company experienced a taxable loss for 2000. Management believes that it is more likely than not that future operations will generate sufficient taxable income to realize the net deferred tax asset. Management will evaluate this each quarter, and will make additional adjustments to reserves against this asset if deemed appropriate in the future. As of December 31, 2000, the Company has available Federal NOL carryforwards expiring as follows (in thousands): 2001 $ 1,911 2002-2005 -- 2006 and after 101,681 ------------ $ 103,592 ============ There are no known significant pending assessments from taxing authorities regarding taxation issues at the Company or its subsidiaries. F-28 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17. Extraordinary Item - Gain On Extinguishment of Debt The Company purchased $920,000, $74.5 million, and $38.4 million face amount of its Senior Notes in the market for a purchase price of $341,000, $45.0 million, and $18.9 million in 2000, 1999, and 1998, respectively. A proportionate share of the unamortized debt origination costs relating to the issuance of the Senior Notes was charged against this gain, to record a net gain of $579,000, $29.5 million, and $18.2 million in 2000, 1999, and 1998, respectively. The Company may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. Note 18. Statement of Cash Flows The following information relates to the Statement of Cash Flows for the three years ended December 31, 2000, 1999, and 1998:
Years Ended December 31, ----------------------------------------------- 2000 1999 1998 ------------- ------------- ------------ (In thousands) Changes in operating assets and liabilities increasing (decreasing) cash: Restricted cash $ 248 $ (214) $ (5,100) Other receivables (6,300) 3,969 (2,657) Residual receivable (13,386) (7,240) 6,124 Accrued interest receivable (393) 1,189 1,794 Servicing asset 165 73 528 Other assets (1,218) 2,670 6,373 Remittance due to loan participants 122 (793) (2,720) Accrued interest payable 92 (2,354) (1,551) Income taxes payable 369 177 511 Other liabilities (7,456) (2,536) (2,028) ------------- ------------ ----------- $ (27,757) (5,059) $ 1,274 ============= ============ =========== During the year ended December 31, 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 19,020 Revolving warehouse lines of credit 29,244 Notes payable 2,853 Other liabilities 4,915 Preferred stock 10,000 Common stock 7 Capital in excess of par value 7,045
The Company foreclosed on, or repossessed property used to collateralize loans receivable in the amount of $2.4 million, $4.3 million, and $12.1 million, in 2000, 1999, and 1998, respectively. The Company purchased $3.0 and $10.5 million of foreclosed property from the securitization trusts in 2000 and 1999, respectively. The company repurchased loans from the securitization trusts of $9.9 million in 1998. The Company paid income taxes of $175,000, $277,000 and $2.5 million, in 2000, 1999, and 1998, respectively. The Company paid interest of $17.9 million, $18.7 million, and $37.5 million, in 2000, 1999, and 1998, respectively. F-29 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19. Stock Option Plans and Stock Warrants On May 21, 1981, the shareholders approved an employee stock option plan and on May 22, 1984, the shareholders approved an increase in the number of shares of common stock which may be granted from 250,000 to 500,000. Under the terms of the plan, the Company may grant options to key employees and directors to purchase up to a total of 500,000 shares of its $.05 par value common stock. The option price is the fair market value at date of grant. The options expire five years from date of grant, are not transferable other than on death, and are exercisable 20% on the date of grant and 20% per year on a cumulative basis for each year subsequent to the date of grant. No additional shares are available for grant under this stock option plan, and there are 24,000 unexercised options outstanding at December 31, 2000, of which 24,000 are exercisable. On June 9, 1995, the shareholders approved a stock option plan under which the Board of Directors may issue 566,667 shares of common stock. In May 1997, April 1998, March 1999, and in March 2000, the shareholders approved an additional 150,000, 350,000, 400,000 and 500,000 shares of common stock, respectively. Therefore, under the terms of the plan, the Company may grant options to key employees to purchase up to a total of 1,966,667 shares of its $.001 par value common stock. The option price is the fair market value at date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at 110% of market value at date of grant. The options expire ten years from date of grant, are not transferable other than on death, and are exercisable 20% on the date of grant and 20% per year on a cumulative basis for each year subsequent to the date of grant. The remaining options available for grant under the plan consist of 230,207 common stock options at December 31, 2000, and there are 930,800 unexercised options outstanding at December 31, 2000, of which 460,000 are exercisable. Also on June 9, 1995, the shareholders approved a stock option plan under which each non-employee member of the Board of Directors receives options to purchase 666 shares of common stock each December 31 beginning in 1995 through 1999. Under the terms of the plan, the Company may grant options totaling 33,333 shares. The terms of the plan are identical to the employee stock option plan approved on June 9, 1995. The remaining options available for grant under this plan consist of 27,606 common stock options at December 31, 2000 and there are 5,328 unexercised options outstanding at December 31, 2000, of which 5,328 are exercisable. On April 18, 1996, the shareholders approved a restricted stock agreement plan to provide additional incentives to members of the Board of Directors of the Company who are not employees of the Company. Shares that may be issued pursuant to the Restricted Stock Agreements under the Plan shall not exceed 50,000 shares in the aggregate. The Plan provides that, on each grant date, each eligible director will automatically receive from the Company an Agreement to purchase for $.05 per share that number of shares having a fair market value equal to $12,000. For purposes of the Plan, the grant date is January 31 of each calendar year commencing with the 1996 calendar year. At December 31, 2000 and 1999, there were 14,500 agreements granted under this plan with 11,600 unexercised agreements outstanding, all of which are exercisable. Shares subject to a Restricted Stock Agreement are initially non-transferable and subject to forfeiture. Shares granted to a recipient become freely transferable and no longer subject to forfeiture at a rate of 20% of the total number of shares covered by such agreement on each of the five anniversaries of the grant date, beginning with the first anniversary of such grant. On April 28, 2000, the shareholders approved a stock option plan pursuant to the HomeSense merger agreement to compensate Mr. Ronald J. Sheppard, CEO. The agreement authorized 825,423 shares of Common Stock to issued at $1.75 per share to Mr. Sheppard. These options can be exercised, forfeited, and cancelled at a rate of .67 to 1 in direct proportion to any exercised, forfeited, or cancelled options that were in existence at the time of the agreement. The remaining options outstanding under this plan consist of 637,354 common stock options at December 31, 2000. In February 2001, these options were cancelled. 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. F-30 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19. Stock Option Plans and Warrants (continued) Activity in stock options is as follows:
Years Ended December 31, ---------------------------------------------------- 2000 1999 1998 --------------- --------------- -------------- Options outstanding, beginning of year 1,268,160 973,003 483,971 Date of Grant Issued at: - -------------------- ---------------------- 01/16/98 $8.00 per share -- -- 6,000 01/16/98 $9.00 per share -- -- 15,000 03/11/98 $9.75 per share -- -- 205,000 04/22/98 $8.75 per share -- -- 16,900 05/13/98 $6.75 per share -- -- 50,000 09/04/98 $2.44 per share -- -- 7,000 12/02/98 $0.9375 per share -- -- 404,000 02/26/99 $0.9375 per share (non-qualified) -- 25,000 -- 02/26/99 $1.32 per share (non-qualified) -- 1,334 -- 03/10/99 $1.22 per share -- 10,000 -- 07/23/99 $1.3125 per share -- 35,000 -- 08/20/99 $0.9375 per share (non-qualified) -- 10,000 -- 10/06/99 $1.03 per share -- 502,800 -- 02/10/00 $1.06 per share 35,000 -- -- 04/28/00 $4.625 per share (non-qualified) 14,400 -- -- 04/28/00 $12.25 per share (non-qualified) 40,000 -- -- 04/28/00 $9.75 per share (non-qualified) 30,000 -- -- 04/28/00 $0.9375 per share (non-qualified) 40,000 -- -- 04/28/00 $1.03 per share (non-qualified) 50,000 -- -- 05/01/00 $1.3125 per share (non-qualified) 35,000 -- -- 05/01/00 $1.03 per share (non-qualified) 20,000 -- -- 05/02/00 $9.75 per share (non-qualified) 10,000 -- -- 05/02/00 $0.9375 per share (non-qualified) 20,000 -- -- 05/02/00 $1.03 per share (non-qualified) 20,000 -- -- 05/09/00 $1.75 per share (non-qualified) 825,423 -- -- 05/22/00 $13.50 per share (non-qualified) 3,000 -- -- 05/22/00 $9.75 per share (non-qualified) 10,000 -- -- 05/22/00 $0.9375 per share (non-qualified) 35,400 -- -- 05/22/00 $1.03 per share (non-qualified) 22,000 -- -- 05/22/00 $4.625 per share (non-qualified) 6,400 -- -- 07/03/00 $4.625 per share (non-qualified) 12,800 -- -- 07/03/00 $12.25 per share (non-qualified) 25,000 -- -- 07/03/00 $9.75 per share (non-qualified) 5,000 -- -- 07/03/00 $6.75 per share (non-qualified) 50,000 -- -- 07/03/00 $0.9375 per share (non-qualified) 25,000 -- -- 07/03/00 $1.03 per share (non-qualified) 35,000 -- -- 07/03/00 $1.06 per share (non-qualified) 35,000 -- -- 08/15/00 $0.50 per share 535,000 -- -- 10/04/00 $0.50 per share (non-qualified) 20,000 -- -- 10/04/00 $1.03 per share (non-qualified) 15,000 -- -- 10/04/00 $0.9375 per share (non-qualified) 5,000 -- -- 11/28/00 $0.42 per share 30,000 -- -- ------------- --------------- -------------- Total Granted 2,009,423 584,134 37,000 ------------- --------------- --------------
F-31 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19. Stock Option Plans and Warrants (Continued)
Years Ended December 31, ---------------------------------------------------- 2000 1999 1998 --------------- --------------- -------------- Expired, canceled or forfeited: $1.0825 per share (12,002) -- $1.32 per share (1,334) (9,335) (2,668) $4.625 per share (36,800) (34,840) (28,800) $10.38 per share (directors plan) -- (400) $12.25 per share (66,000) (46,000) (86,000) $11.25 per share (directors plan) -- (533) $13.50 per share (9,000) -- (1,000) $13.00 per share (10,000) -- $14.25 per share -- (5,000) $13.50 per share -- (15,000) $8.00 per share -- (6,000) $9.00 per share -- (15,000) $9.75 per share (81,000) (42,000) (45,000) $8.75 per share (16,900) -- $0.9375 per share (245,100) (114,700) -- $0.50 per share (20,000) $1.06 per share (35,000) $1.22 per share (4,000) $1.03 per share (370,800) $1.3125 per share (70,000) $2.44 per share (7,000) $6.75 per share (50,000) $1.75 per share (188,069) ------------- --------------- -------------- (1,184,103) (285,777) (205,401) Exercised: $1.0825 per share -- -- (6,667) $1.32 per share -- -- -- $4.625 per share -- -- (1,600) $5.09 per share -- -- (1,200) $10.380 per share (directors plan) -- -- -- $11.250 per share (directors plan) -- -- -- $0.9375 per share -- (3,200) -- ------------- --------------- -------------- -- (3,200) (9,467) ------------- --------------- -------------- Options outstanding, end of year 2,331,082 1,268,160 973,003 ============= =============== ============== Exercisable, end of year 734,728 525,129 340,818 ============= =============== ============== Available for grant, end of year 1,301,916 257,813 141,173 ============= =============== ==============
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As such, the stock-based compensation utilized by the Company has been accounted for under APB Opinion No. 25. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 2000, 1999, and 1998 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and earnings (loss) per share of common stock would have been reduced to the pro forma amounts indicated below: F-32 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19. Stock Option Plans and Stock Warrants (Continued)
Years ended December 31, ------------------------------------------------------- 2000 1999 1998 ---------------- ------------------ ----------------- (In thousands, except per share data) Net income (loss) - as reported $ (29,812) $ 1,815 $ (57,745) Net income (loss) - pro forma (30,243) 1,160 (58,025) Diluted earnings (loss) per share of common stock - as reported (2.06) 0.18 (5.94) Diluted earnings (loss) per share of common stock - pro forma (2.09) 0.12 (5.97)
The fair value of each option grant is estimated on the date of grant using a Black-Scholes valuation model with the following weighted average assumptions used in 2000: dividend yield of 0%, expected volatility of 120%, risk-free interest rate of approximately 6.00%, and expected lives of 5 years. The weighted average assumptions used in 1999 were dividend yield of 0%, expected volatility of 254%, risk-free interest rate of 6.73% and expected lives of 5 years. The pro forma amounts disclosed above may not be representative of the effects on reported net income for future periods. The Company implemented an Employee Stock Purchase Plan ("ESPP") in 1997. The ESPP allows eligible employees the right to purchase common stock at the end of each of two six-month offering periods (January 1 through June 30 and July 1 through December 31). Eligible employees must work 20 or more hours per week and have been employed for a period of 1 year. The stock is purchased at 85% of the lower of the market price at the beginning or ending of each six-month offering period. A liability is recorded for ESPP withholdings not yet applied towards the purchase of common stock. During 2000, the Company's Board of Directors has authorized an additional 400,000 shares to be issued under the Espp. The total amount of authorized shares is 600,000 at December 31, 2000. Note 20. Transactions with Related Parties The Company engaged in the following related party transactions: The Company obtains legal services from Wyche, Burgess, Freeman & Parham, P.A., certain members of which, when considered in the aggregate, beneficially own 596,351 shares of the Company's capital stock. A partner of the firm also serves as secretary to the Company. Total charges for these services were approximately $276,000 in 2000, $228,000 in 1999, and $659,000 in 1998. Notes payable to investors and subordinated debentures include amounts due to officers, directors and key employees of approximately $690,000, $707,000, and $661,000 at December 31, 2000, 1999 and 1998, respectively. The Company also had notes receivable from related parties at December 31, 2000, 1999 and 1998 of approximately $110,000, $121,000, and $168,000, respectively. Note 21. Employee Retirement Plan The Company has a matched savings plan under Section 401(k) of the Internal Revenue Code covering employees meeting certain eligibility requirements. The plan allows employees who have completed 30 days of service to participate in the plan and provides for Company contributions, subject to certain limitations. Company matching contributions are 50% of employee contributions to a maximum of 6% of compensation for each employee. The Company's contributions under the plan totaled approximately $160,800 in 2000, $320,500 in 1999, and $879,000 in 1998. F-33 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 22. Commitments and Contingencies The Company may from time to time enter into forward commitments to sell residential first mortgage loans to reduce risk associated with originating and holding loans for sale. At December 31, 2000, the Company had no outstanding forward commitment contracts. 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 $356,000 allegedly due under copier equipment leases. It is not possible to evaluate the likelihood or amount of an unfavorable outcome at this stage. 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. That suit has been transferred to North Carolina Business Court. The suit was filed against the Company's affiliate HomeGold, Inc. and others alleging a variety of statutory and common law claims arising out of mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). On February 22, 2000, Michael and Kimberly Chasten filed a similar action in Duplin County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Eastern District of North Carolina. On March 21, 2000, Rosa and Royal Utley filed a similar suit in New Hanover County, North Carolina Superior Court. On April 13, 2000 Reginald Troy filed a similar action in New Hanover County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Eastern District of North Carolina. The plaintiffs in all of these cases are seeking unspecified monetary damages. As to HomeGold, Inc., the complaints in these four cases allege participation by HomeGold, Inc. 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 certified in any of the cases, and HomeGold Inc. has contested, and will continue to contest each case vigorously. 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. In May 2000, HGFN entered into a $40 million revolving warehouse line of credit with Household Commercial Financial Services, Inc. ("Household") which was subsequently increased to $50 million. All of HGFN's subsidiaries, including HGI, are guarantors under the agreement. In an amendment and forbearance agreement with its lender dated October 25, 2000, HomeGold, Inc. acknowledged that it was in default with respect to certain financial covenants under the warehouse line of credit, and the lender agreed to forebear exercising its rights and remedies without waiving any events of default. The lender has subsequently extended its forbearance, and the termination date of the warehouse, through the earlier of April 30, 2001 or the entry of HomeGold, Inc. and the lender into an amended credit agreement. The outstanding balance under this warehouse line as of March 27, 2001 was $23,921,412. HomeGold, Inc. management believes that they will obtain an amended agreement and be able to meet its obligations thereunder on April 30, 2001; however, there can be no assurance this will occur. Were HomeGold, Inc. to default on its obligations, guarantors could be required to perform under their guaranties and fulfill HomeGold, Inc.'s obligations under the warehouse, including the obligation to pay principal and accrued interest. HGI, together with certain other subsidiaries of HGFN (collectively, the "Subsidiary Guarantors"), has guaranteed HGFN's performance of its obligations under its 10-3/4% Senior Notes due 2004 (the "Senior Notes") and the indenture related thereto (the "Indenture"). The original aggregate principal amount of the Senior Notes was $125,000,000; however, as of December 31, 2000, HGFN has repurchased $113,786,000 of the Senior Notes leaving $11,214,000 in aggregate principal amount outstanding. HGFN has incurred operating losses of $39.8 million, $35.1 million, and $73.0 million for the years ended December 31, 2000, 1999, and 1998, respectively and has deficit shareholder's equity of $10.8 million at December 31, 2000. The management of HGFN has implemented plans to reverse these negative trends by implementing operating changes which include, but are not limited to, the following: - Continually offering and reviewing loan products to meet customer demands while also meeting the needs of purchasers of loans originated. - Hiring, retaining, and motivating loan officers and employees. - Geographic expansion of loan origination operations. - Maintaining and increasing warehouse lines of credit to fund loan originations. - Reducing non-core operating and general overhead. - Negotiating with potential buyers the sale of non-core lines of business and assets F-34 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 23. Supplemental Quarterly Results of Operations (Unaudited) The quarterly results of operations for the year ended December 31, 2000, are as follows:
Quarter Ended -------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 --------------- --------------- ---------------- --------------- (in thousands, except share data) Revenues: Interest income $ 1,927 $ 3,679 $ 3,784 $ 2,802 Servicing income 2,004 2,216 1,907 1,270 Gain on sale of loans: Gross gain on sale of loans 1,854 3,090 3,554 1,303 Loan fees, net 432 5,620 6,926 3,452 --------------- --------------- ---------------- --------------- Total gain (loss) on sale 2,286 8,710 10,480 4,755 Other revenues 510 429 573 223 --------------- --------------- ---------------- --------------- Total revenues 6,727 15,034 16,744 9,050 Expenses: Interest 4,003 4,881 5,680 4,884 Provision for credit losses 990 652 650 867 Cost of real estate owned and defaulted loans 1,054 914 1,483 Fair market adjustment on residual receivables 1,080 555 509 135 Salaries, wages and employee benefits 4,912 7,955 8,469 7,780 Business development costs 1,841 1,811 2,136 2,827 Restructuring charges -- 1,369 99 1 Other general and administrative 2,813 6,218 6,429 4,401 --------------- --------------- ---------------- --------------- Total expenses 16,693 23,441 24,886 22,378 --------------- --------------- ---------------- --------------- Loss before income taxes, minority interest and extraordinary item (9,966) (8,407) (8,142) (13,328) Provision (benefit) for income taxes 145 190 (9,820) 29 Minority interest in (earnings) loss of subsidiaries (1) 1 (2) (2) --------------- --------------- ---------------- --------------- Income before extraordinary item (10,112) (8,596) 1,676 (13,359) Extraordinary item-gain on extinguishment of debt, net of $0 tax 226 92 261 0 --------------- --------------- ---------------- --------------- Net income (loss) $ (9,886) $ (8,504) $ 1,937 $ (13,359) =============== =============== ================ =============== Basic earnings (loss) per share of common stock: Loss before extraordinary item $ (0.99) $ (0.62) $ 0.10 $ (0.59) Extraordinary item, net of taxes 0.02 0.01 0.02 (0.01) --------------- --------------- ---------------- --------------- Net income (loss) $ (0.97) $ (0.61) $ 0.12 $ (0.60) =============== =============== ================ =============== Basic weighted average shares outstanding 10,170,698 13,943,164 16,805,023 16,810,149 =============== =============== ================ =============== Diluted earnings (loss) per share of common stock: Loss before extraordinary item $ (0.81) (0.63) (1.07) 0.41 Extraordinary item, net of tax 1.73 0.44 0.81 (2.94) --------------- --------------- ---------------- --------------- 0.92 (0.19) (0.26) (2.53) =============== =============== ================ =============== Diluted weighted average shares outstanding 10,170,698 13,943,164 16,805,023 16,810,149 =============== =============== ================ ===============
F-35 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 23. Supplemental Quarterly Results of Operations (Unaudited) (Continued) The quarterly results of operations for the year ended December 31, 1999, are as follows:
Quarter Ended ------------------------------------------------------------------------ March 31, June 30, September 30, December 31, 1999 1999 1999 1999 --------------- --------------- --------------- --------------- (in thousands, except share data) Revenues: Interest income $ 3,338 $ 1,618 $ 1,771 $ 1,559 Servicing income 2,402 2,608 2,606 2,197 Gain on sale of loans: Gross gain on sale of loans 1,173 3,216 70 1,757 Loan fees, net 957 1,416 716 224 --------------- --------------- ---------------- --------------- Total gain (loss) on sale 2,130 4,632 786 1,981 Other revenues 396 354 409 450 --------------- --------------- ---------------- --------------- Total revenues 8,266 9,212 5,572 6,187 Expenses: Interest 4,798 4,189 3,778 3,573 Provision for credit losses 81 (430) 1,672 2,016 Cost of real estate owned and defaulted loans 823 588 729 878 Fair market adjustment on residual receivables (53) 828 856 1,696 Salaries, wages and employee benefits 5,671 5,232 4,957 4,499 Business development costs 1,190 1,237 1,330 1,047 Other general and administrative 3,258 3,538 2,920 3,407 --------------- --------------- ---------------- --------------- Total expenses 15,768 15,182 16,242 17,116 --------------- --------------- ---------------- --------------- Loss before income taxes, minority interest and extraordinary item (7,502) (5,970) (10,670) (10,929) Provision (benefit) for income taxes 450 170 55 (8,069) Minority interest in (earnings) loss of subsidiaries 3 (7) (3) (1) --------------- --------------- ---------------- --------------- Income before extraordinary item (7,949) (6,147) (10,728) (2,861) Extraordinary item-gain on extinguishment of debt, net of $0 tax 16,946 4,281 8,143 130 --------------- --------------- ---------------- --------------- Net income (loss) $ 8,997 $ (1,866) $ (2,585) $ (2,731) =============== =============== ================ =============== Basic earnings (loss) per share of common stock: Loss before extraordinary item $ (0.81) $ (0.63) $ (1.07) $ (0.28) Extraordinary item, net of taxes 1.73 0.44 0.81 0.01 --------------- --------------- ---------------- --------------- Net income (loss) $ 0.92 $ (0.19) $ (0.26) $ (0.27) =============== =============== ================ =============== Basic weighted average shares outstanding 9,792,174 9,827,228 10,070,150 10,149,629 =============== =============== ================ =============== Diluted earnings (loss) per share of common stock: Loss before extraordinary item $ (0.81) (0.63) (1.07) (0.28) Extraordinary item, net of tax 1.73 0.44 0.81 0.01 --------------- --------------- ---------------- --------------- Net income (loss) 0.92 (0.19) (0.26) (0.27) =============== =============== ================ =============== Diluted weighted average shares outstanding 9,792,174 9,827,228 10,070,150 10,149,629 =============== =============== ================ ===============
F-36 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 24. Earnings (loss) per share of common stock The following table sets forth the computation of basic and fully diluted earnings per share.
For the Year Ended December 31, ----------------------------------------------------------- 2000 1999 1998 ------------------ ---------------- ----------------- (in thousands, except per share data) Numerator Net income (loss)-numerator for basic and fully diluted EPS $ (29,812) $ 1,815 $ (57,745) ================== ================ ================= Denominator Basic weighted average shares o/s-denominator for basic EPS 14,445,283 9,961,077 9,719,262 Effect of dilutive employee stock options -- -- -- ------------------ ---------------- ----------------- Fully diluted weighted average shares o/s-denominator for fully diluted EPS 14,445,283 9,961,077 9,719,262 ================== ================ ================= Basic earnings per common share $ (2.06) $ 0.18 $ (5.94) Fully diluted earnings per common share $ (2.06) $ 0.18 $ (5.94)
The computation of fully diluted EPS in 2000, 1999, and 1998, does not take into account the effect of any outstanding common stock equivalents since their inclusion would be antidilutive. The number of shares related to common stock equivalents that would have been included in 2000 and 1999 were 12,089 and 70,657, respectively. Note 25. Fair Value of Financial Instruments SFAS 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information whether or not recognized in the balance sheet, when it is practicable to estimate the fair value. SFAS 107 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company's common stock, property and equipment and other assets and liabilities. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents and Restricted Cash For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Loans Receivable For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the secondary market prices received on recent sales of these loans in the secondary market. Residual Receivable, Net The fair value of the residual receivable is calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar instruments at the time of sale. Projected performance is monitored on an ongoing basis. Accordingly, carrying value approximates fair value. F-37 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 25. Fair Value of Financial Instruments (Continued) Investor Savings Subordinated Investor Savings were $165.2 million and $144.8 million at December 31, 2000 and 1999, respectively. These instruments bear interest at rates ranging from 5%-9% and mature at various dates throughout 2001 and 2002. There is no active market for these instruments and it is not practicable to estimate fair value. Revolving Warehouse Lines and Notes Payable to Banks and Other The fair value of notes payable to banks and other approximates the carrying amount. Rates with similar terms and maturities currently available to the Company are used to estimate fair value of existing debt. Senior Unsecured Debt The fair value of senior unsecured debt is based on the market value of the publicly traded securities. Commitments to Extend Credit The fair value of commitments to extend credit is determined by using the anticipated market prices that the loans will generate in the secondary market. The estimated fair values of the Company's financial instruments at December 31 were as follows:
2000 1999 --------------------------------- --------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------- -------------- -------------- --------------- (In thousands) Financial Assets: Cash and cash equivalents $ 3,691 $ 3,691 $ 26,009 $ 26,009 Restricted cash 5,066 5,066 5,314 5,314 Loans receivable, net 51,699 52,731 56,614 57,300 Residual receivable 58,877 58,877 47,770 47,770 Financial Liabilities: Revolving warehouse lines and notes payable to banks and other $ 29,304 $ 26,304 $ 17,808 $ 17,808 Senior unsecured debt 11,214 4,300 12,134 5,700 Commitments to extend credit -- -- 4,255 4,307
F-38 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 26. Consolidating Condensed Financial Data of the Combined Subsidiaries That Guaranteed Senior Debt The Subsidiary Guarantors of the Company's Senior Notes at December 31, 2000 consist of the following wholly owned subsidiaries of the Company: HomeGold, Inc. (f/k/a Emergent Mortgage Corp.) Emergent Mortgage Corp. of Tennessee Carolina Investors, Inc. Emergent Insurance Agency Corp. Emergent Business Capital Asset Based Lending, Inc. Investments in subsidiaries are accounted for by the Parent and Subsidiary Guarantors on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the parent's and Subsidiary Guarantor's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Certain sums in the following tables may reflect immaterial rounding differences. As of December 31, 2000, the Subsidiary Guarantors conduct all of the Company's operations, other than the investment of certain residual receivables through its special purpose bankruptcy-remote securitization subsidiaries. Prior to March 1998, The Loan Pro$, Inc. and Premier Financial Services, Inc. (the Company's auto loan units) were guarantors of this indebtedness, but their guarantees terminated when substantially all of the assets of the auto loan units were sold to TranSouth Financial Corporation, a subsidiary of Associates Financial Services Company, Inc., in March 1998. Prior to August 21, 1998, Sterling Lending Corporation (an 80% owned subsidiary of the Company) and Sterling Lending Insurance Agency, Inc. (a 100% owned subsidiary of Sterling Lending Corporation) were also guarantors of this indebtedness, but their guarantees terminated when they were sold to First National Security Corporation of Beaumont, Texas, in August 1998. Therefore the operations of Sterling Lending (a non-wholly-owned guarantor subsidiary) are included in the consolidated statements of operations for the respective periods prior to August 21, 1998. The majority of the assets of Emergent Business Capital, Inc., Emergent Commercial Mortgage, Inc., Emergent Business Capital Equity Group, Inc. and Reedy River Ventures Limited Partnership were sold to Transamerica Business Credit Corporation on November 13, 1998. Accordingly, any guarantees of these companies were terminated upon consummation of that sale. A substantial majority of the assets of Emergent Business Capital Asset Based Lending, Inc. were sold to Emergent Asset-Based Lending LLC, an unaffiliated Maryland Limited Liability Company, on December 2, 1998. Since not all assets of this subsidiary were sold, the guaranty was not released. F-39 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEET
December 31, 2000 (Unaudited) (Dollars in thousands) Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor ASSETS Company Subsidiaries Subsidiaries Eliminations Consolidated ------ ----------- ------------ ------------- ------------ ------------ Cash and cash equivalents $ 100 $ 3,590 $ 1 $ -- $ 3,691 Restricted cash 66 5,000 -- -- 5,066 Loans receivable: Loans receivable 1,087 57,396 -- -- 58,483 Notes receivable from affiliates 7,847 95,448 14,083 (117,378) -- ----------- ------------ ------------ ------------ ----------- Total loans receivable 8,934 152,844 14,083 (117,378) 58,483 Less allowance for credit losses on loans (250) (4,402) -- -- (4,652) Less deferred loan fees -- (2,339) -- -- (2,339) Plus deferred loan costs -- 207 -- -- 207 ----------- ------------ ------------ ------------ ----------- Net loans receivable 8,684 146,310 14,083 (117,378) 51,699 Other Receivables: Income tax -- 318 -- -- 318 Accrued interest receivable 80 1,737 -- -- 1,817 Other receivables -- 11,497 -- -- 11,497 ----------- ------------ ------------ ------------ ----------- Total other receivables 80 13,552 -- -- 13,632 Investment in subsidiaries 89,558 45,147 -- (134,705) -- Residual receivables, net -- 19,123 39,754 -- 58,877 Net property and equipment -- 21,430 -- -- 21,430 Real estate and personal property acquired through foreclosure -- 1,281 -- -- 1,281 Net excess of cost over net assets of acquired businesses 35 19,588 -- -- 19,623 Deferred income tax asset, net 1,810 20,190 -- -- 22,000 Other assets 1,220 3,502 -- -- 4,722 ----------- ------------ ------------ ------------ ----------- Total assets $ 101,554 $ 298,713 $ 53,837 $ (252,083) $ 202,021 =========== ============ ============ ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Revolving warehouse lines of credit and notes payable to banks $ -- $ 29,304 $ -- $ -- $ 29,304 Investor savings: Notes payable to investors -- 146,087 -- -- 146,087 Subordinated debentures -- 19,117 -- -- 19,117 ----------- ------------ ------------ ------------ ----------- Total investor savings -- 165,204 -- -- 165,204 Senior unsecured debt 11,214 -- -- -- 11,214 Accounts payable and accrued liabilities -- 4,637 -- -- 4,637 Remittances payable -- 1,201 -- -- 1,201 Income taxes payable -- 347 -- -- 347 Accrued interest payable 328 610 -- -- 938 Due to (from) affiliates 100,840 7,852 8,686 (117,378) -- ----------- ------------ ------------ ------------ ----------- Total other liabilities 101,168 14,647 8,686 (117,378) 7,123 Subordinated debt to affiliates -- -- -- -- -- ----------- ------------ ------------ ------------ ----------- Total liabilities 112,382 209,155 8,686 (117,378) 212,844 Minority interest -- -- 5 (1) 5 Shareholders' equity: Common stock 17 1,000 2 (1,002) 17 Preferred stock 10,000 10,000 Capital in excess of par value 46,643 203,739 48,807 (252,546) 46,643 Note receivable from shareholder (5,985) (5,985) -- 5,985 (5,985) Retained earnings (deficit) (61,503) (109,196) (3,663) 112,859 (61,503) ----------- ------------ ------------ --------- ----------- Total shareholders' equity (10,828) 89,558 45,146 (134,704) (10,828) ----------- ------------ ------------ ------------ ----------- Total liabilities and shareholders' equity $ 101,554 $ 298,713 $ 53,837 $ (252,083) $ 202,021 =========== ============ ============ ============ ===========
F-40 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING BALANCE SHEETS December 31, 1999 (Unaudited) (Dollars in thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor ASSETS Company Subsidiaries Subsidiaries Eliminations Consolidated ------ ---------- ------------ ------------ ------------ ------------ Cash and cash equivalents $ 202 $ 25,806 $ 1 $ -- $ 26,009 Restricted cash 5,314 -- -- -- 5,314 Loans receivable: Loans receivable -- 63,242 -- -- 63,242 Notes receivable from affiliates 7,097 36,229 4,584 (47,910) -- ---------- ------------ ----------- ------------ ------------ Total loans receivable 7,097 99,471 4,584 (47,910) 63,242 Less allowance for credit losses on loans -- (6,344) -- -- (6,344) Less deferred loan fees -- (730) -- -- (730) Plus deferred loan costs -- 446 -- -- 446 ---------- ------------ ----------- ------------ ------------ 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 ---------- ------------ ----------- ------------ ------------ Total other receivables 1,042 8,901 -- -- 9,943 Investment in subsidiaries 31,487 -- -- (31,487) -- Residual receivables, net -- 4,545 43,225 -- 47,770 Net property and equipment -- 17,160 -- -- 17,160 Real estate and personal property acquired through foreclosure -- 7,673 -- -- 7,673 Net excess of cost over net assets of acquired businesses 38 1,528 -- -- 1,566 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 ========== ============ =========== ============ ============
F-41 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 2000 (Unaudited) (Dollars in thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- REVENUES: Interest income $ 1,081 $ 14,584 $ -- $ (3,473) $ 12,192 Servicing income -- 5,327 2,070 -- 7,397 Gain on sale of loans: Gross gain on sale of loans -- 9,801 -- -- 9,801 Loan fees, net -- 16,430 -- -- 16,430 ------------- ------------- ----------- ------------- ------------- Total gain on sale of loans -- 26,231 -- -- 26,231 Other revenues -- 1,792 -- (57) 1,735 ------------- ------------- ----------- ------------- ------------- Total revenues 1,081 47,934 2,070 (3,530) 47,555 ------------- ------------- ----------- ------------- ------------- EXPENSES: Interest 4,038 18,883 -- (3,473) 19,448 Provision for credit losses 719 2,440 -- -- 3,159 Costs on REO and defaulted loans -- 3,451 -- -- 3,451 Fair value write-down of residual receivables -- 7,850 (5,571) -- 2,279 Salaries, wages and employee benefits -- 29,116 -- -- 29,116 Business development costs -- 8,615 -- -- 8,615 Restructuring charges -- 1,469 -- -- 2,375 Other general and administrative expense 182 19,738 -- (59) 18,955 ------------- ------------- ----------- ------------- ------------- Total expenses 4,939 91,562 (5,571) (3,532) 87,398 ------------- ------------- ----------- ------------- ------------- Income (loss) before income taxes, minority interest, equity in undistributed earnings (loss) of subsidiaries, and extraordinary item (3,858) (43,628) 7,641 2 (39,843) Equity in undistributed earnings (loss) of subsidiaries (24,833) (972) -- 25,805 -- ------------- ------------- ----------- ------------- ------------- Income (loss) before income taxes, minority interest, and extraordinary item (28,691) (44,600) 7,641 25,807 (39,843) Provision (benefit) for income taxes 1,700 (11,156) -- -- (9,456) ------------- ------------- ----------- ------------- ------------- Income (loss) before minority interest and extraordinary item (30,391) (33,444) 7,641 25,807 (30,387) Minority interest in earnings of subsidiaries -- -- (4) -- (4) ------------- ------------- ----------- ------------- ------------- Income (loss) before extraordinary item (30,391) (33,444) 7,637 25,807 (30,391) Extraordinary item-gain on extinguishment of debt, net of $0 tax 579 -- -- -- 579 ------------- ------------- ----------- ------------- ------------- Net income (loss) $ (29,812) $ (33,444) $ 7,637 $ 25,807 $ (29,812) ============= ============= =========== ============= =============
F-42 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 1999 (Unaudited) (Dollars in thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------- ------------- ------------- REVENUES: Interest income $ 3,523 $ 7,996 $ -- $ (3,233) $ 8,286 Servicing income -- 5,883 3,930 -- 9,813 Gain on sale of loans: Gross gain on sale of loans -- 6,216 -- -- 6,216 Loan fees, net -- 3,313 -- -- 3,313 ------------- ------------- ----------- ------------- ------------- Total gain on sale of loans -- 9,529 -- -- 9,529 Other revenues 8 1,774 -- (173) 1,609 ------------- ------------- ----------- ------------- ------------- Total revenues 3,531 25,182 3,930 (3,406) 29,237 ------------- ------------- ----------- ------------- ------------- EXPENSES: Interest 4,376 15,195 -- (3,233) 16,338 Provision for credit losses -- 3,339 -- -- 3,339 Costs on REO and defaulted loans -- 3,018 -- -- 3,018 Fair value write-down of residual receivables -- 2,556 771 -- 3,327 Salaries, wages and employee benefits -- 20,359 -- -- 20,359 Business development costs -- 4,804 -- -- 4,804 Restructuring charges -- -- -- -- -- Other general and administrative expense 377 12,918 1 (173) 13,123 ------------- ------------- ----------- ------------- ------------- Total expenses 4,753 62,189 772 (3,406) 64,308 ------------- ------------- ----------- ------------- ------------- Income (loss) before income taxes, minority interest, equity in undistributed earnings (loss) of subsidiaries, and extraordinary item (1,222) (37,007) 3,158 -- (35,071) Equity in undistributed earnings (loss) of subsidiaries (26,463) -- -- 26,463 -- ------------- ------------- ----------- ------------- ------------- Income (loss) before income taxes, minority interest, and extraordinary item (27,685) (37,007) 3,158 26,463 (35,071) Provision (benefit) for income taxes -- (7,394) -- -- (7,394) ------------- ------------- ----------- ------------- ------------- Income (loss) before minority interest and extraordinary item (27,685) (29,613) 3,158 26,463 (27,677) Minority interest in earnings of subsidiaries -- (8) -- -- (8) ------------- ------------- ----------- ------------- ------------- Income (loss) before extraordinary item (27,685) (29,621) 3,158 26,463 (27,685) Extraordinary item-gain on extinguishment of debt, net of $0 tax 29,500 -- -- -- 29,500 ------------- ------------- ----------- ------------- ------------- Net income (loss) $ 1,815 $ (29,621) $ 3,158 $ 26,463 $ 1,815 ============= ============= =========== ============= =============
F-43 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENTS OF OPERATIONS Year Ended December 31, 1998 (Unaudited) (Dollars in thousands)
Combined Combined Non Wholly-Owned Wholly-Owned Combined Parent Guarantor Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ------------- ------------- ------------ ------------- -------------- --------------- REVENUES: Interest income $ 8,109 $ 34,551 $ 10 $ 1,238 $ (8,833) $ 35,075 Servicing income -- 18,646 -- 2,734 (9,141) 12,239 Gain on sale of loans: Gross gain on sale of loans -- 8,057 1,415 -- -- 9,472 Loan fees, net -- 10,136 1,520 89 -- 11,745 ------------- ------------- ----------- ------------ ------------- --------------- Total gain on sale of loans -- 18,193 2,935 89 -- 21,217 Gain on sale of subsidiaries' net assets -- 18,964 -- -- -- 18,964 Other revenues 927 3,242 217 489 (645) 4,230 ------------- ------------- ----------- ------------ ------------- --------------- Total revenues 9,036 93,596 3,162 4,550 (18,619) 91,725 ------------- ------------- ----------- ------------ ------------- --------------- EXPENSES: Interest 14,479 30,420 125 402 (9,458) 35,968 Provision for credit losses 20 11,886 -- -- -- 11,906 Costs on real estate owned and defaulted loans -- 2,665 -- -- -- 2,665 Fair value write-down of residual receivables -- 9,902 -- 3,736 -- 13,638 Salaries, wages and employee benefits 3,176 49,769 3,639 -- -- 56,584 Business development costs 2 10,547 269 -- -- 10,818 Restructuring charges -- 6,838 -- -- -- 6,838 Other general and administrative expense (2,216) 25,730 2,552 256 (23) 26,299 ------------- ------------- ----------- ------------ ------------- --------------- Total expenses 15,461 147,757 6,585 4,394 (9,481) 164,716 ------------- ------------- ----------- ------------ ------------- --------------- Income (loss) before income taxes, minority interest, equity in undistributed earnings (loss) of subsidiaries, and extraordinary item (6,425) (54,161) (3,423) 156 (9,138) (72,991) Equity in undistributed earnings (loss) of subsidiaries (69,668) (10,138) -- -- 79,806 -- ------------- ------------- ----------- ------------ ------------- --------------- Income (loss) before income taxes, minority interest, and extraordinary item (76,093) (64,299) (3,423) 156 70,668 (72,991) Provision (benefit) for income taxes (132) 3,195 (46) -- -- 3,017 ------------- ------------- ----------- ------------ ------------- --------------- Income (loss) before minority interest and extraordinary item (75,961) (67,494) (3,377) 156 70,668 (76,008) Minority interest in earnings of subsidiaries -- -- -- 47 -- 47 ------------- ------------- ----------- ------------ ------------- --------------- Income (loss) before extraordinary item (75,961) (67,494) (3,377) 203 70,668 (75,961) Extraordinary item-gain on extinguishment of debt, net of $0 tax 18,216 -- -- -- -- 18,216 ------------- ------------- ----------- ------------ ------------- --------------- Net income (loss) $ (57,745) $ (67,494) $ (3,377) $ 203 $ 70,668 $ (57,745) ============= ============= =========== ============ ============= ===============
F-44 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 2000 (Unaudited) (Dollars in thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------- ------------ ------------- OPERATING ACTIVITIES: Net income (loss) $ (29,812) $ (33,444) $ 7,637 $ 25,807 $ (29,812) Extraordinary Gain on retirement of senior unsecured debt -- -- -- -- -- ----------- ------------ ------------ ------------ ------------ Income (loss) from continuing operations -- -- -- -- -- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 24,833 972 -- (25,805) -- Depreciation and amortization 3 4,711 -- -- 4,714 Fair market writedown of residual receivable -- 2,279 -- -- 2,279 Benefit for deferred income taxes (1,700) (8,300) -- -- (10,000) Provision for credit losses 719 2,440 -- -- 3,159 Provision for losses on real estate owned -- 952 -- -- 952 Gain on retirement of senior unsecured debt (579) -- -- -- (579) Net decrease in deferred loan cost -- 239 -- -- 239 Net increase (decrease) in unearned 1,609 1,609 discount and deferred loan fees Loans originated with intent to sell (567,421) (567,421) Principal proceeds from sold loans 508,690 508,690 Proceeds from securitization of loans -- 50,554 -- -- 50,554 Other -- 652 -- -- 652 Changes in operating assets and liabilities increasing (decreasing) cash 5,238 (36,467) 3,472 -- (27,757) ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (1,298) (72,534) 11,109 2 (62,721) INVESTING ACTIVITIES: Loans originated for investment purposes -- (345) -- -- (345) Loans purchased for investment purposes (1,087) (2,080) -- -- (3,167) Principal collections on loans not sold -- 41,266 -- -- 41,266 Purchase of REO and loans from securitization trusts -- (2,978) -- -- (2,978) Proceeds from sale of real estate and personal property acquired through foreclosure -- 10,067 -- -- 10,067 Proceeds from the sale of property and equipment -- 54 -- -- 54 Purchase of property and equipment -- (164) -- -- (164) Note receivable from shareholder (4,000) (4,000) 4,000 (4,000) Other -- 111 -- -- 111 ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) investing activities (7,072) 41,931 -- 4,000 40,844 FINANCING ACTIVITIES: Advances on warehouse lines of credit -- 702,518 -- -- 702,518 Payments on warehouse lines of credit -- (722,618) -- -- (722,618) Retirement of senior unsecured debt (341) -- -- -- (341) Net increase (decrease) in notes payable to banks (501) (501) Net increase (decrease) in notes payable to investors -- 19,022 -- -- 19,022 Net increase (decrease) in subordinated debentures -- 1,406 -- -- 1,406 Advances (to) from subsidiary 8,537 8,546 (11,096) (4,002) -- Proceeds from issuance of additional common stock 73 -- -- -- 73 Other -- 13 (13) -- -- ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 8,269 8,386 (11,109) (4,002) (441) ----------- ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (101) (22,217) -- -- (22,318) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 202 25,806 1 -- 26,009 ----------- ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR 101 3,589 1 -- 3,691 =========== ============ ============ ============ ============
F-45 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 1999 (Unaudited) (Dollars in thousands)
Combined Combined Wholly-Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------ ------------ ------------- OPERATING ACTIVITIES: Net income (loss) $ 1,815 $ (29,621) $ 3,158 $ 26,463 $ 1,815 Extraordinary Gain on retirement of senior unsecured debt (29,500) -- -- -- (29,500) ----------- ------------ ------------ ------------ ------------- Income (loss) from continuing operations (27,685) (29,621) 3,158 26,463 (27,685) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 26,463 -- -- (26,463) -- Depreciation and amortization 2 2,690 -- -- 2,692 Fair market writedown of residual receivable -- 3,327 -- -- 3,327 Benefit for deferred income taxes -- (7,849) -- -- (7,849) Provision for credit losses -- 3,339 -- -- 3,339 Loss (gain) on real estate acquired through foreclosure -- 2,665 -- -- 2,665 Loans originated with intent to sell -- (244,086) -- -- (244,086) Principal proceeds from sold loans -- 220,410 -- -- 220,410 Proceeds from securitization of loans -- 59,630 -- -- 59,630 Other -- (168) -- -- (168) Changes in operating assets and liabilities increasing (decreasing) cash (1,999) 28,060 (31,120) -- (5,059) ----------- ------------ ------------ ------------ ------------- Net cash provided by (used in) operating activities (3,219) 38,397 (27,962) -- 7,216 INVESTING ACTIVITIES: Loans originated for investment purposes -- (762) -- -- (762) Loans purchased for investment purposes -- (1,413) -- -- (1,413) Principal collections on loans not sold -- 19,718 -- -- 19,718 Purchase of REO and loans from securitization trusts -- 21,530 (32,006) -- (10,476) Proceeds from sale of real estate and personal property acquired through foreclosure -- 9,774 -- -- 9,774 Proceeds from the sale of property and equipment -- 235 -- -- 235 Purchase of property and equipment -- (532) -- -- (532) Other -- 167 -- -- 167 ----------- ------------ ------------ ------------ ------------- Net cash provided by (used in) investing activities -- 48,717 (32,006) -- 16,711 FINANCING ACTIVITIES: Advances on warehouse lines of credit -- 292,020 -- -- 292,020 Payments on warehouse lines of credit -- (290,948) -- -- (290,948) Retirement of senior unsecured debt (45,016) -- -- -- (45,016) Net increase (decrease) in notes payable to investors -- 8,479 -- -- 8,479 Net increase (decrease) in subordinated debentures -- 405 -- -- 405 Advances (to) from subsidiary 48,012 (38,006) (10,008) 2 -- Proceeds from issuance of additional common stock 229 -- 2 (2) 229 Other -- (67,473) 67,473 -- -- ----------- ------------ ------------ ------------ ------------- Net cash provided by (used in) financing activities 3,225 (95,523) 57,467 -- (34,831) ----------- ------------ ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents 6 (8,409) (2,501) -- (10,904) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 196 34,215 2,502 -- 36,913 ----------- ------------ ------------ ------------ ------------- CASH AND CASH EQUIVALENTS, END OF YEAR 202 25,806 1 -- 26,009 =========== ============ ============ ============ =============
F-46 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING STATEMENT OF CASH FLOWS Year Ended December 31, 1998 (Unaudited) (Dollars in thousands)
Combined Combined Non Combined Wholly-Owned Wholly-Owned Non- Parent Guarantor Guarantor Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------ ------------ ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ (57,745) $ (67,494) $ (3,377) $ 203 $ 70,668 $ (57,745) Extraordinary Gain on retirement of senior (18,216) unsecured debt (18,216) -- -- -- -- ----------- ------------ ------------ ------------ ------------- ------------- Income (loss) from continuing operations (75,961) (67,494) (3,377) 203 70,668 75,961 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: -- Equity in undistributed earnings of subsidiaries 69,668 10,138 -- -- (79,806) -- Depreciation and amortization 430 2,992 192 12 -- 3,626 Fair market writedown of residual receivable -- 11,144 -- 2,494 -- 13,638 Provision (benefit) for deferred income taxes 692 (371) (321) -- -- -- Provision for credit losses 20 11,886 -- -- -- 11,906 Provision for losses on real estate owned -- 696 -- -- -- 696 Net (increase) decrease in deferred loan costs -- 770 -- -- -- 770 Net increase (decrease) in unearned discount and other deferrals -- (2,245) -- -- -- (2,245) Loans originated with intent to sell -- (708,004) (39,438) -- -- (747,442) Principal proceeds from sold loans 178 718,406 48,764 11,600 -- 778,948 Proceeds from securitization of loans -- 92,316 -- -- -- 92,316 Restructuring charge-fixed assets -- 3,593 -- -- -- 3,593 Other 44 1,142 -- (192) -- Changes in operating 994 assets and liabilities increasing (decreasing) cash 3,419 (5,612) (29) 5,663 -- 3,441 ----------- ------------ ------------ ------------ ------------- ------------- Net cash provided by (used in) operating activities (1,510) 69,357 5,791 19,780 (9,138) 84,280 INVESTING ACTIVITIES: Loans originated for investment purposes (468) (150,549) -- (5,600) -- (156,617) Principal collections on loans not sold 65 190,861 -- 1,250 -- 192,176 Proceeds from sale of real estate and personal property acquired through foreclosure 453 7,140 -- -- -- 7,593 Purchase of REO and loans from securitization trusts -- (9,980) -- -- -- (9,980) Proceeds from the sale of property and equipment (1,262) 4,070 -- -- -- 2,808 Purchase of property and equipment (64) (11,463) (174) -- -- (11,701) Other (748) (514) 1,310 -- -- 48 ----------- ------------ ------------ ------------ ------------- ------------- Net cash provided by (used in) investing activities (2,024) 29,565 1,136 (4,350) -- 24,327 FINANCING ACTIVITIES: Advances on notes payable to banks -- 1,406,847 -- 9,653 -- 1,416,500 Payments on notes payable to banks -- (1,467,716) -- (9,653) -- (1,477,369) Net increase in notes payable to investors -- 3,218 -- -- -- 3,218 Net (decrease) increase in subordinated debentures -- (1,643) -- -- -- (1,643) Retirement of senior unsecured debt (20,134) -- -- -- -- (20,134) Advances (to) from subsidiary 22,978 (11,824) (7,190) (13,102) 9,138 -- Proceeds from issuance of additional common stock 214 -- -- -- -- 214 Other (41) -- -- -- -- (41) ----------- ------------ ------------ ------------ ------------- ------------- Net cash provided by (used in) financing activities 3,017 (71,118) (7,190) (13,102) 9,138 (79,255) ----------- ------------ ------------ ------------ ------------- ------------- Net increase (decrease) in cash and cash equivalents (517) 27,804 (263) 2,328 -- 29,352 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 713 6,411 263 174 -- 7,561 ----------- ------------ ------------ ------------ ------------- ------------- CASH AND CASH EQUIVALENTS, END OF YEAR 196 34,215 -- 2,502 -- 36,913 =========== ============ ============ ============ ============= =============
F-47 EXHIBIT INDEX 2.1.1 Reorganization Agreement dated February 29, 2000 by and between HomeGold Financial, Inc. and HomeSense Financial Corp. and its Affiliated Companies set forth on Schedule 3.5 thereto: Incorporated by Reference to the Company's Definitive Proxy Statement filed on March 21, 2000 for the 2000 Annual Meeting of the Company's shareholders held on April 28, 2000, Commission File No. 000-08909 (Exhibit C). 2.1.2 Amendment No. 1 to Reorganization Agreement dated March 10, 2000: Incorporated by Reference to the Company's Definitive Proxy Statement filed on March 21, 2000 for the 2000 Annual Meeting of the Company's shareholders held on April 28, 2000, Commission File No. 000-08909 (Exhibit C). 2.1.3 Amendment No. 2 to Reorganization Agreement dated May 1, 2000: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 2.1). 2.1.4 Amendment No. 3 to Reorganization Agreement dated May 9, 2000: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 2.2). 3.1.1 Restated Articles of Incorporation as filed with the South Carolina Secretary of State on June 6, 1997: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 1998 for the quarter ended March 31, 1998, Commission File No. 000-08909 (Exhibit 3.1). 3.1.2 Articles of Amendment as filed with the South Carolina Secretary of State on June 24, 1998: Incorporated by Reference to the Company's Current Report on Form 8-K filed on July 7, 1998, Commission File No. 000-08909 (Exhibit 3.1). 3.1.3 Resignation of Registered Agent and Notice of Change of Registered Agent as filed with the South Carolina Secretary of State on July 15, 1998: Incorporated in Reference to the Company's Annual Report on Form 10-K filed on March 2, 2000 for the year ended December 31, 1999, Commission File No. 000-08909 (Exhibit 3.1.3). 3.1.4 Articles of Amendment filed with the South Carolina Secretary of State on May 9, 2000 (i) reducing par value of common stock from $0.05 per share to $0.001 per share, (ii) eliminating cumulative voting with respect to election of directors and (iii) authorizing issuance of up to 20,000,000 shares of "blank check" preferred stock: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 3.1.1). 3.1.5 Articles of Amendment filed with the South Carolina Secretary of State on May 9, 2000 containing Certificate of Designation of Series A Non-convertible Preferred Stock of the Company: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 3.1.2). 3.2 Amended and Restated Bylaws dated March 12, 1997: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 1998 for the quarter ended March 31, 1998, Commission File No. 000-08909 (Exhibit 3.2). 4.1.1 Indenture Dated as of September 23, 1997 among Emergent Group, Inc. (n/k/a HomeGold Financial, Inc., the Company), the Subsidiary Guarantors Named Therein and Bankers Trust Company, as Trustee pertaining to the Company's 10.75% Senior Notes due 2004: Incorporated by Reference to the Company's Registration Statement on Form S-4 filed on November 13, 1997, Commission File No. 333-39339 (Exhibit 4.1). 4.1.2 Supplemental Indenture adding Emergent Insurance Agency, Inc. as Subsidiary Guarantor dated November 3, 1997: Incorporated by reference to the Company's Annual Report on Form 10-K filed on March 2, 2000 for the year ended December 31, 1999, Commission File No. 000-08909 (Exhibit 4.1.2). 4.1.3 Officers' Certificate and Opinion of Counsel dated March 18, 1998, and Notice to Trustee dated March 30, 1998, for release from Guarantees of The Loan Pro$, Inc. and Premier Financial Services, Inc. : Incorporated by reference to the Company's Annual Report on Form 10-K filed on March 2, 2000 for the year ended December 31, 1999, Commission File No. 000-08909 (Exhibit 4.1.3). 4.1.4 Officers' Certificate, Opinion of Counsel dated August 21, 1998, and Notice to Trustee dated September 10, 1998, for release from Guarantees of Sterling Lending Corporation and Sterling Lending Insurance Agency: Incorporated by reference to the Company's Annual Report on Form 10-K filed on March 2, 2000 for the year ended December 31, 1999, Commission File No. 000-08909 (Exhibit 4.1.4). 4.1.5 Supplemental Indenture #1, dated as of August 19, 1998: Incorporated by reference to the Company's Annual Report on Form 10-K filed on March 2, 2000 for the year ended December 31, 1999, Commission File No. 000-08909 (Exhibit 4.1.5). 4.1.6 Officers' Certificate, Opinion of Counsel and Notice to Trustee dated November 13, 1998, for release from Guarantees of Emergent Business Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a/ Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc.: Incorporated by reference to the Company's Annual Report on Form 10-K filed on March 2, 2000 for the year ended December 31, 1999, Commission File No. 000-08909 (Exhibit 4.1.6). 4.2 Registration Rights Agreement dated May 9, 2000 between the Company and the individuals listed on Schedule 1 thereto: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.10). 4.3 Form of Stock Restriction Agreement and schedule of parties thereto: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.11). 4.4 See exhibits 3.1.1 through 3.2 above. 10.1 HomeGold Financial, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1, Commission File No. 333-01393. 10.2 1995 Officer and Employee Stock Option Plan: Incorporated by reference to Exhibit 10.1 of the Company's 1995 Notice of Annual Meeting and Proxy Statement, Commission File No. 000-08909. 10.2.1 Amendment No. 1 to the 1995 Employee and Officer Stock Option Plan, dated May 27, 1997: Incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Commission on July 10, 1998, Commission File No. 333-58861. 10.2.2 Amendment No. 2 to the 1995 Employee and Officer Stock Option Plan, dated June 10, 1998: Incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Commission on July 10, 1998, Commission File No. 333-58861. 10.2.3 Amendment No. 3 to the 1995 Employee and Officer Stock Option Plan, dated June 10, 1999 Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.2.1). 10.2.4 Amendment No. 4 to the 1995 Employee and Officer Stock Option Plan, dated April 28, 2000: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.2.2). 10.3 1995 Director Stock Option Plan: Incorporated by reference to an exhibit filed with the Company's 1995 Notice of Annual Meeting and Proxy Statement. 10.4 1995 Restricted Stock Agreement Plan: Incorporated by reference to Exhibit 10.4 of the Company's Registration Statement on Form S-1, Commission File No. 333-01393. 10.5.1 HomeGold Financial, Inc. Employee Stock Purchase Plan: Incorporated by reference to Exhibit 99.1 of the Company's registration statement on Form S-8, Commission File No. 333-20179. 10.5.2 Amendment No. 1 to the Employee Stock Purchase Plan, dated April 28, 2000: Incorporated by Reference to the Company's Definitive Proxy Statement file on March 21, 2000 for the 2000 Annual Meeting of the Company's shareholders held on April 28, 2000, Commission File No. 000-08909. 10.6.1 $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: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.4.1). 10.6.2 Security Agreement dated May 2, 2000 of HomeGold, Inc., the other entities listed on the signature pages thereto and Household Commercial Financial Services, Inc.: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.4.2). 10.6.3 Guaranty dated May 2, 2000 of HomeGold Financial, Inc. and certain of its subsidiaries: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.4.3). 10.6.4 First Amendment to Credit Agreement, Household Commercial Financial Services, Inc. dated May 30, 2000: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on November 14, 2000 for the quarter ended September 30, 2000, Commission File No. 000-08909 (Exhibit 10.12). 10.6.5 Second Amendment to Credit Agreement, Household Commercial Financial Services, Inc. dated September 20, 2000: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on November 14, 2000 for the quarter ended September 30, 2000, Commission File No. 000-08909 (Exhibit 10.13). 10.6.6 Third Amendment to Credit Agreement and Forbearance Agreement, Household Commercial Financial Services, Inc. dated October 25, 2000: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on November 14, 2000 for the quarter ended September 30, 2000, Commission File No. 000-08909 (Exhibit 10.14). 10.6.7 Extension Re: Forbearance Agreement dated January 25, 2001. 10.6.8 Second Extension Re: Forbearance Agreement dated February 25, 2001. 10.6.9 Third Extension Re: Forbearance Agreement dated March 30, 2001. 10.7.1 Severance Agreement dated April 28, 2000 between the Company and Keith B. Giddens: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.5). 10.7.2 Severance Agreement dated May 12, 2000 between the Company and John W. Crisler: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.6). 10.7.3 Form of Severance Agreement between the Company and employees listed in the schedule therewith: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.7). 10.8 Employment Agreement dated May 9, 2000 between the Company and Ronald J. Sheppard: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.8). 10.9.1 Mutual Indemnity Agreement dated May 9, 2000 between Ronald J. Sheppard and the Company: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 2000 for the quarter ended March 31, 2000, Commission File No. 000-08909 (Exhibit 10.9). 10.9.2 Agreement dated January 30, 2001, by and between HomeGold Financial, Inc. and Ronald J. Sheppard. 10.10.1 Warehouse Loan and Security Agreement between HomeGold, Inc. and The Provident Bank dated November 3, 2000. 10.10.2 Servicing Agreement by and between The Provident Bank and HomeGold Financial, Inc. dated October 25, 2000. 10.11.1 Master Repurchase Agreement between Imperial Warehouse Finance, Inc. and HomeGold Financial, Inc. and HomeGold, Inc. dated January 11, 2001. 10.11.2 Seller's Warranties Agreement between Imperial Warehouse Finance, Inc. and HomeGold Financial, Inc. and HomeGold, Inc. dated January 11, 2001. 10.12 Mortgages Purchase Agreement dated October 13, 1999 by and between HomeSense Financial Corp. and Affiliates and HSA Residential Mortgage Services of Texas, Inc.; Letter dated May 1, 2000 from Residential Mortgage Services of Texas, Inc. to Mr. Ronald J. Sheppard, HomeSense Financial Corp., acknowledged and agreed to by HomeGold, Inc.; Letter dated July 31, 2000 from Residential Mortgage Services of Texas, Inc. to Mr. Ronald Sheppard, HomeGold and Affiliates; Letter dated August 16, 2000 from Residential Mortgage Services of Texas, Inc. to Mr. Ronald J. Sheppard, HomeSense Financial Corp. acknowledged and agreed to by HomeGold, Inc.; Letter dated September 19, 2000 from Residential Mortgage Services of Texas, Inc. to Mr. Ronald J. Sheppard, CEO, HomeGold Financial, Inc.; Letter dated September 29, 2000 from Residential Mortgage Services of Texas, Inc. to Mr. Larry Gosnell, CFO, HomeGold Financial; Assignment of Certificate of Deposit to Residential Mortgage Services of Texas, Inc. by HomeGold, Inc. dated December 14, 2000 10.13 Letter of Agreement between HomeGold, Inc. and New Freedom Mortgage Corporation dated December 20, 2000. 10.14.1 Assumption of Debt and Contribution to Capital Agreement effective December 31, 2000 by and between HomeGold Financial, Inc., HomeGold, Inc. and Carolina Investors, Inc. 10.14.2 Revolving Promissory Note dated December 31, 2000, in principal amount of up to $125,000,000 by HomeGold Financial, Inc. to Carolina Investors, Inc. 10.14.3 Guaranty and Security Agreement effective December 31, 2000 by and between HomeGold, Inc. and Carolina Investors, Inc. 10.14.4 Secured Revolving Promissory Note dated January 2, 2001, in principal amount of up to $75,000,000 by HomeGold, Inc. to Carolina Investors, Inc. 10.15 See exhibits 2.1.1 through 4.3 above. 21.0 Listing of subsidiaries. 23.1 Consent of Elliott, Davis & Company, L.L.P. to include report of Independent Auditors for the three years ended December 31, 2000. EX-10.6.7 2 0002.txt EXTENSION-FORBEARANCE HOMEGOLD, INC. EXTENSION RE: FORBEARANCE AGREEMENT Household Commercial Financial Services, Inc. Woodale, Illinois 60191 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of May 2, 2000 as heretofore amended pursuant to, inter alia, that certain Third Amendment to Credit Agreement and Forbearance Agreement dated as of October 25, 2000 (the "Forbearance Agreement") (such Credit Agreement as so amended being hereinafter referred to as the "Credit Agreement") between the undersigned, Homegold, Inc., a South Carolina corporation (the "Borrower") and you (the "Lender"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Lender extend its agreement to forbear pursuant to the Forbearance Agreement from exercising its rights on account of existing Events of Defaults by an additional month and the Lender is willing to do so under the terms and conditions set forth in this Agreement. 1. Extension of Forbearance. Events of Default have occurred and are continuing under Section 8.1(b) of the Credit Agreement as a result of the Borrower's non-compliance with the covenants contained in Sections 7.14, 7.15 and 7.16 of the Credit Agreement. Pursuant to the Forbearance Agreement, as an accommodation to Borrower while not waiving any such Events of Default, but subject to compliance by Borrower with the terms and conditions set forth in the Forbearance Agreement, Lender agreed to (i) forebear through January 25, 2001 from accelerating the Loans or exercising any rights and remedies to which it is entitled as a result of the occurrence thereof except as provided therein and (ii) continue to extend Loans to the Borrower on the terms and conditions set forth in the Credit Agreement. Lender hereby agrees to extend the forbearance period provided for in the Forbearance Agreement from January 25, 2001 to February 25, 2001 subject to compliance by the Borrower with the terms and conditions of the Credit Agreement and the Forbearance Agreement. This agreement shall not establish a custom or course of dealing and does not waive, limit or postpone any of Borrower's obligations under the Credit Agreement, any of the Loan Documents or otherwise, and any discussions (written or oral) which have occurred or which may hereafter occur are not, and shall not be deemed to be, a waiver, limitation or postponement of any of Lender's rights and remedies under the Credit Agreement, any of the Loan Documents or applicable law, all of which rights and remedies are expressly reserved. This agreement shall not become effective until the conditions precedent set forth in Section 2 hereof have been satisfied. This agreement shall expire on February 25, 2001 at which time all terms and conditions of the Credit Agreement shall apply without giving effect to the forbearance provided for herein and Lender shall be entitled to exercise all rights and remedies available to it on account of any Event of Default, whether existing as of the date hereof, the date of the Forbearance Agreement or otherwise. 2. Conditions Precedent. The effectiveness of this Agreement is subject to the satisfaction of all of the following conditions precedent: 2.1. The Borrower and the Lender shall have executed and delivered this Agreement. 2.2. The Corporate Guarantors and Ronald J. Sheppard shall have consented hereto in the space provided for such purpose below. 2.3. Legal matters incident to the execution and delivery of this Agreement shall be satisfactory to the Lender and its counsel. 2.4. The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Agreement to the extent the Lender or its counsel may reasonably request. 3. Representations. In order to induce the Lender to execute and deliver this Agreement, the Borrower hereby represents to the Lender that as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lender) and except for the Events of Default set forth in Section 1 hereof, the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect hereof. 4. Miscellaneous. 4.1 The Borrower and the Corporate Guarantors have heretofore executed and delivered to the Lender that certain Security Agreement dated as of May 2, 2000 (the "Security Agreement"). The Borrower hereby, and the Corporate Guarantors by their consent hereto in the space provided for that purpose below, each acknowledges and agrees that, notwithstanding the execution and delivery of this Agreement, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Corporate Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Agreement. 4.2. The Credit Agreement shall continue in full force and effect in accordance with its original terms. 4.3. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Agreement, including the fees and expenses of counsel for the Lender. 4.4. This Agreement may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Agreement by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Agreement shall be governed by the internal laws of the State of Illinois. Dated as of January 25, 2001. HOMEGOLD, INC. By:_____________________________________ Name:___________________________________ Its:____________________________________ Accepted and agreed to in Wood Dale, Illinois as of the date and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By:_____________________________________ Name:___________________________________ Its:____________________________________ CONSENT A. CORPORATE GUARANTORS. The undersigned have heretofore executed and delivered to the Lender (i) a Guaranty dated May 2, 2000 (the "Guaranty") and (ii) a Security Agreement dated May 2, 2000 (the "Security Agreement"). Each of the undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty and the Security Agreement remain in full force and effect in accordance with the terms thereof. Each of the undersigned further agrees that the consent of the undersigned to any further modifications to the Forbearance Agreement or to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty or Security Agreement. HOMEGOLD FINANCIAL, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ CAROLINA INVESTORS, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ PREMIER FINANCIAL SERVICES INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ Extension of Forbearance LOAN PRO$, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ REEDY RIVER VENTURES, L.P. By:______________________________________ Name:____________________________________ Its:_____________________________________ EMERGENT SBIC, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ EMERGENT COMMERCIAL MORTGAGE, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ EMERGENT BUSINESS CAPITAL, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ Extension of Forbearance EMERGENT INSURANCE AGENCY CORP. By:______________________________________ Name:____________________________________ Its:_____________________________________ EMERGENT MORTGAGE CORP. OF TENNESSEE By:______________________________________ Name:____________________________________ Its:_____________________________________ HOMEGOLD REALTY, INC. By:______________________________________ Name:____________________________________ Its:_____________________________________ B. INDIVIDUAL GUARANTOR. The undersigned has heretofore executed and delivered to the Lender a Guaranty dated October 25, 2001 (the "Guaranty"). The undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty remains in full force and effect in accordance with the terms thereof. The undersigned further agrees that at the consent of the undersigned to any further modifications to the Forbearance Agreement or to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty. __________________________________________ RONALD J. SHEPPARD Extension of Forbearance EX-10.6.8 3 0003.txt SECOND EXTENSION HOMEGOLD, INC. SECOND EXTENSION RE: FORBEARANCE AGREEMENT Household Commercial Financial Services, Inc. Wood Dale, Illinois 60191 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of May 2, 2000 as heretofore amended pursuant to, inter alia, that certain Third Amendment to Credit Agreement and Forbearance Agreement dated as of October 25, 2000 as heretofore modified pursuant to that certain Extension Re: Forbearance Agreement dated as of January 25, 2001 (the "Forbearance Agreement') (such Credit Agreement as so amended being hereinafter referred to as the "Credit Agreement') between the undersigned, Homegold, Inc., a South Carolina corporation (the "Borrower"), and you (the "Lender'). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Lender extend its agreement to forbear pursuant to the Forbearance Agreement from exercising its rights on account of existing Events of Defaults by an additional month and the Lender is willing to do so under the terms and conditions set forth in this Agreement. 1. EXTENSION OF FORBEARANCE. Events of Default have occurred and are continuing under Section 8.1(b) of the Credit Agreement as a result of the Borrower's non-compliance with the covenants contained in Sections 7.14, 7.15 and 7.16 of the Credit Agreement. Pursuant to the Forbearance Agreement, as an accommodation to Borrower while not waiving any such Events of Default, but subject to compliance by Borrower with the terms and conditions set forth in the Forbearance Agreement, Lender agreed to (i) forebear through January 25, 2001 from accelerating the Loans or exercising any rights and remedies to which it is entitled as a result of the occurrence thereof except as provided therein and (u) continue to extend Loans to the Borrower on the terms and conditions set forth in the Credit Agreement. Lender hereby agrees to extend the forbearance period provided for in the Forbearance Agreement from February 25, 2001 to the earlier of (i) receipt by Borrower from Lender of an amendment or an amended and restated credit agreement setting forth the terms and conditions upon which Lender is willing to continue extending credit to Borrower or (u) March 31, 2001 (the earlier of (i) or (u) being hereinafter referred to as the "Extension Expiration Date') subject to compliance by the Borrower with the terms and conditions of the Credit Agreement and the Forbearance Agreement. This agreement shall not establish a custom or course of dealing and does not waive, limit or postpone any of Borrower's obligations under the Credit Agreement, any of the Loan Documents or otherwise, and any discussions (written or oral) which have occurred or which may hereafter occur are not, and shall not be deemed to be, a waiver, limitation or postponement of any of Lender's rights and remedies under the Credit Agreement, any of the Loan Documents or applicable law, all of which rights and remedies are expressly reserved. This agreement shall not become effective until the conditions precedent set forth in Section 2 hereof have been satisfied. This agreement shall expire on the Extension Expiration Date at which time all terms and conditions of the Credit Agreement shall apply without giving effect to the forbearance provided for herein and Lender shall be entitled to exercise all rights and remedies available to it on account of any Event of Default, whether existing as of the date hereof, the date of the Forbearance Agreement or otherwise. 2. CONDITIONS PRECEDENT. The effectiveness of this Agreement is subject to the satisfaction of all of the following conditions precedent: 2.1 The Borrower and the Lender shall have executed and delivered this Agreement. 2.2 The Corporate Guarantors and Ronald J. Sheppard shall have consented hereto in the space provided for such purpose below. 2.3 Legal matters incident to the execution and delivery of this Agreement shall be satisfactory to the Lender and its counsel. 2.4 2.4 The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Agreement to the extent the Lender or its counsel may reasonably request. 3. REPRESENTATIONS. In order to induce the Lender to execute and deliver this Agreement, the Borrower hereby represents to the Lender that as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lender) and except for the Events of Default set forth in Section 1 hereof, the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect hereof. 4. MISCELLANEOUS. 4.1 The Borrower and the Corporate Guarantors have heretofore executed and delivered to the Lender that certain Security Agreement dated as of May 2, 2000 (the "Security Agreement'). The Borrower hereby, and the Corporate Guarantors by their consent hereto in the space provided for that purpose below, each acknowledges and agrees that, notwithstanding the execution and delivery of this Agreement, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Corporate Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Agreement. 4.2 The Credit Agreement shall continue in full force and effect in accordance with its original terms. 4.3 The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Agreement, including the fees and expenses of counsel for the Lender. 4.4 This Agreement may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Agreement by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Agreement shall be governed by the internal laws of the State of Illinois. execution and delivery of this Agreement, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Corporate Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Agreement. 4.2 The Credit Agreement shall continue in full force and effect in accordance with its original terms. 4.3 The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Agreement, including the fees and expenses of counsel for the Lender. 4.4 This Agreement may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Agreement by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Agreement shall be governed by the internal laws of the State of Illinois. Dated as of February 25, 2001. HOMEGOLD, INC. By: Name: William E. Long Its: Executive Vice President Accepted and agreed to in Wood Dale, Illinois as of the date and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By: Name: Loren J. Morris Its: Vice President CONSENT A. CORPORATE GUARANTORS. The undersigned have heretofore executed and delivered to the Lender (i) a Guaranty dated May 2, 2000 (the "Guaranty') and (ii) a Security Agreement dated May 2, 2000 (the "Security Agreement'). Each of the undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty and the Security Agreement remain in full force and effect in accordance with the terms thereof. Each of the undersigned further agrees that the consent of the undersigned to any further modifications to the Forbearance Agreement or to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty or Security Agreement. HOMEGOLD FINANCIAL, INC. By: Name: William E. Long Its: Executive Vice President CAROLINA INVESTORS, INC. By: Name: William E. Long Its: Executive Vice President PREMIER FINANCIAL SERVICES INC. By: Name: William E. Long Its: Executive Vice President LOAN PROS, INC. By: Name: William E. Long Its: Executive Vice President EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. By: Name: William E. Long Its: Executive Vice President REEDY RIVER VENTURES, LP By: Name: William E. Long Its: Executive Vice President EMERGENT SBI By: Name: William E. Long Its: Executive Vice President EMERGENT COMMERCIAL MORTGAGE, INC. By: Name: William E. Long Its: Executive Vice President EMERGENT BUSINESS CAPITAL, INC. By: Name: William E. Long Its: Executive Vice President EMERGENT INSURANCE AGENCY CORP. By: Name: William E. Long Its: Executive Vice President EMERGENT MORTGAGE CORP. OF TENNESSEE By: Name: William E. Long Its: Executive Vice President HOMEGOLD REALTY, INC. By: Name: William E. Long Its: Executive Vice President B. INDIVIDUAL GUARANTOR. The undersigned has heretofore executed and delivered to the Lender a Guaranty dated October 25, 2001 (the "Guaranty'). The undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty remains in full force and effect in accordance with the terms thereof. The undersigned further agrees that at the consent of the undersigned to any further modifications to the Forbearance Agreement or to the Credit Agreement shall not be required as a result of this con aving been obtained, except to the extent, if any, required by the Guaranty. RONALD J. SHEPPARD EX-10.6.9 4 0004.txt THIRD EXTENSION HOMEGOLD, INC. THIRD EXTENSION RE: FORBEARANCE AGREEMENT Household Commercial Financial Services, Inc. Wood Dale, Illinois 60191 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of May 2, 2000 as heretofore amended pursuant to, inter alia, that certain Third Amendment to Credit Agreement and Forbearance Agreement dated as of October 25, 2000 as heretofore modified pursuant to that certain Extension Re: Forbearance Agreement dated as of January 25, 2001 and as further modified pursuant to that certain Second Extension Re: Forbearance Agreement dated as of February 25, 2001 (the "Forbearance Agreement') (such Credit Agreement as so amended being hereinafter referred to as the "Credit Agreement') between the undersigned, Homegold, Inc., a South Carolina corporation (the "Borrower"), and you (the `Lender'). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Lender extend its agreement to forbear pursuant to the Forbearance Agreement from exercising its rights on account of existing Events of Defaults by an additional month and the Lender is willing to do so under the terms and conditions set forth in this Agreement. I. EXTENSION OF FORBEARANCE. Events of Default have occurred and are continuing under Section 8.1 (b) of the Credit Agreement as a result of the Borrower's non-compliance with the covenants contained in Sections 7.14, 7.15 and 7.16 of the Credit Agreement. Pursuant to the Forbearance Agreement, as an accommodation to Borrower while not waiving any such Events of Default, but subject to compliance by Borrower with the terms and conditions set forth in the Forbearance Agreement, Lender agreed to (i) forebear through January 25, 2001 from accelerating the Loans or exercising any rights and remedies to which it is entitled as a result of the occurrence thereof except as provided therein and (ii) continue to extend Loans to the Borrower on the terms and conditions set forth in the Credit Agreement. Lender hereby agrees to extend the forbearance period provided for in the Forbearance Agreement from March 31, 2001 to the earlier of (i) receipt by Borrower from Lender of an amendment or an amended and restated credit agreement setting forth the terms and conditions upon which Lender is willing to continue extending credit to Borrower or (ii) April 30, 2001 (the earlier of (i) or (ii) being hereinafter referred to as the "Extension Expiration Date') subject to compliance by the Borrower with the terms and conditions of the Credit Agreement and the Forbearance Agreement. This agreement shall not establish a custom or course of dealing and does not waive, limit or postpone any of Borrower's obligations under the Credit Agreement, any of the Loan Documents or otherwise, and any discussions (written or oral) which have occurred or which may hereafter occur are not, and shall not be deemed to be, a waiver, limitation or postponement of any of Lender's rights and remedies under the Credit Agreement, any of the Loan Documents or applicable law, all of which rights and remedies are expressly reserved. This agreement shall not become effective until the conditions precedent set forth in Section 2 hereof have been satisfied. This agreement shall expire on the Extension Expiration Date at which time all terms and conditions of the Credit Agreement shall apply without giving effect to the forbearance provided for herein and Lender shall be entitled to exercise all rights and remedies available to it on account of any Event of Default, whether existing as of the date hereof, the date of the Forbearance Agreement or otherwise. 2. CONDITIONS PRECEDENT. The effectiveness of this Agreement is subject to the satisfaction of all of the following conditions precedent: 2.1 The Borrower and the Lender shall have executed and delivered this Agreement. The Corporate Guarantors and Ronald J. Sheppard shall have consented hereto in the space provided for such purpose below. 2.3 Legal matters incident to the execution and delivery of this Agreement shall be satisfactory to the Lender and its counsel. 2.4 The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Agreement to the extent the Lender or its counsel may reasonably request. 3. REPRESENTATIONS. In order to induce the Lender to execute and deliver this Agreement, the Borrower hereby represents to the Lender that as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lender) and except for the Events of Default set forth in Section 1 hereof, the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect hereof. 4. MISCELLANEOUS. 4.1 The Borrower and the Corporate Guarantors have heretofore executed and delivered to the Lender that certain Security Agreement dated as of May 2, 2000 (the "Security Agreement'. The Borrower hereby, and the Corporate Guarantors by their consent hereto in the space provided for that purpose below, each acknowledges and agrees that, notwithstanding the execution and delivery of this Agreement, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Corporate Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Agreement. 4.2 The Credit Agreement shall continue in full force and effect in accordance with its original terms. 4.3 The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Agreement, including the fees and expenses of counsel for the Lender. 4.4 This Agreement may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Agreement by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Agreement shall be governed by the internal laws of the State of Illinois. Dated as of March 30, 2001. HOMEGOLD, INC. By: Name: William E. Long Its: Executive Vice President Accepted and agreed to in Wood Dale, Illinois as of the date and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By: Name: Loren J. Morris Its: Vice President #45457v1 - Household Finance - Homegold Third Extension re Forbearance Agreement CONSENT A. CORPORATE GUARANTORS. The undersigned have heretofore executed and delivered to the Lender (i) a Guaranty dated May 2, 2000 (the "Guaranty') and (ii) a Security Agreement dated May 2, 2000 (the "Security Agreement'). Each of the undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty and the Security Agreement remain in full force and effect in accordance with the terms thereof. Each of the undersigned further agrees that the consent of the undersigned to any further modifications to the Forbearance Agreement or to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty or Security Agreement. HOMEGOLD FINANCIAL, INC. By: Name: William E. Long Its: Executive Vice President CAROLINA INVESTORS, INC. By: Name: William E. Long Its: Executive Vice President PREMIER FINANCIAL SERVICES INC. By: Name: William E. Long Its: Executive Vice President LOAN PROS, INC. By: Name: William E. Long Its: Executive Vice President EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. By: Name: William E. Long Its: Executive Vice President REEDY RIVER VENTURES, LP By: Name: William E. Long Its: Executive Vice President EMERGENT SBI By: Name: William E. Long Its: Executive Vice President EMERGENT COMMERCIAL MORTGAGE, INC. By: Name: William E. Long Its: Executive Vice President EMERGENT BUSINESS CAPITAL, INC. By: Name: William E. Long Its: Executive Vice President EMERGENT INSURANCE AGENCY CORP. By: Name: William E. Long Its: Executive Vice President EMERGENT MORTGAGE CORP. OF TENNESSEE By: Name: William E. Long Its: Executive Vice President HOMEGOLD REALTY, INC. By: Name: William E. Long Its: Executive Vice President B. INDIVIDUAL GUARANTOR. The undersigned has heretofore executed and delivered to the Lender a Guaranty dated October 25, 2001 (the "Guaranty'). The undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty remains in full force and effect in accordance with the terms thereof. The undersigned further agrees that at the consent of the undersigned to any further modifications to the Forbearance Agreement or to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty. RONALD J. SHEPPARD EX-10.9.2 5 0005.txt AGREEMENT DATED JANUARY 30, 2001 AGREEMENT THIS AGREEMENT is entered into by and between HomeGold Financial, Inc. ("HomeGold") and Ronald J. Sheppard ("Sheppard"). WHEREAS, HomeGold entered into a Reorganization Agreement with HomeSense Financial Corp. and its Affiliated Companies dated February 9, 2000, which Agreement was consummated as of May 9, 2000, and WHEREAS, each of HomeGold and HomeSense made certain warranties and representations in connection with said Reorganization Agreement, and Sheppard, as the principal shareholder of HomeSense also undertook certain obligations pursuant to related agreements, and WHEREAS, in view of the events which have occurred following the consummation of the Reorganization Agreement, all parties agree that it would be in the best interests of the parties, as well as the shareholders of HomeGold, to enter into this Agreement in order to resolve all matters with respect to the Reorganization Agreement with finality and the parties wish to resolve all such matters on the terms set forth herein: NOW, THEREFORE, it is agreed That Sheppard shall continue to be a guarantor with respect to HomeGold's warehouse lines with RMST and Household, amounting to approximately $60 million notwithstanding the obligation undertaken by IlomeGold under the Reorganization Agreement to attempt to relieve him from such guaranties. Sheppard shall not, however, have any obligation to guaranty any renewal or refinancing of any such indebtedness. Notwithstanding the foregoing, Sheppard's voluntary agreement to guarantee the Imperial line ($25 million) is acknowledged. Sheppard does hereby assign to HomeGold for cancellation those certain options for purchase of 825,423 shares of HomeGold stock pursuant to Employment and Noncompetition Agreement dated May 9, 2000. The Mutual Indemnity Agreement dated May 9, 2000 is cancelled and neither party shall have any responsibility or obligation thereunder and each party hereby releases the other from any and all claims and causes of action arising under the Reorganization Agreement or related agreements as of the date hereof. IN WITNESS WHEREOF, the Agreement is executed by and between HomeGold Financial, Inc. and Ronnald J. Sheppard this 30/th/ day of January, 2001. HOMEGOLD FINANCIAL, INC. Forrest E. Ferrell John M. Sterling President Chairman EX-10.10.1 6 0006.txt WAREHOUSE LOAN AND SECURITY WAREHOUSE LOAN AND SECURITY AGREEMENT ------------------------------------- This Warehouse Loan and Security Agreement ("Agreement") is made and entered into on this 3rd day of November, 2000, between HomeGold, Inc., a South Carolina Corporation with its principal place of business located at 3901 Pelham Road., Greenville, SC, 29615 ("Borrower"), and The Provident bank, an Ohio banking corporation with its principal place of business located at One East Fourth Street, Cincinnati, Ohio 45202 ("Provident"). WITNESSETH: ---------- WHEREAS, Borrower is engaged in the business of underwriting, processing, originating, closing, funding, purchasing, servicing and selling mortgage loans secured by first or second liens evidenced by mortgages on real property; and WHEREAS, Borrower has requested and Provident has agreed to finance the funding of mortgage loans by Borrower in connection with its origination thereof subject to the terms, conditions and limitations set forth in this Agreement. NOW, THEREFORE, in consideration of the premises, the extension of credit by Provident to Borrower, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Provident and Borrower agree as follows: 1. DEFINITIONS. (a) When used in this Agreement, the following terms shall ----------- have the following meanings and the terms defined elsewhere in this Agreement shall have the meanings assigned to them (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Advance" shall mean any amount loaned by Provident to Borrower under ------- this Agreement. "Affiliate" shall mean, in relation to any Person (in this definition --------- called "Affiliated Person"), any Person (i) which (directly or indirectly) controls or is controlled by or is under common control with such Affiliated Person; or (ii) which (directly or indirectly) owns or holds five percent (5%) or more of any equity interest in Borrower; or (iii) five percent (5%) or more of whose voting stock or other equity interest is directly or indirectly owned or held by Borrower. For the purposes of this definition, the term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession (directly or indirectly) of the power to direct or to cause the direction of the management or the policies of such Person, whether through the ownership of shares of any class in the capital or any other voting securities of such Person or by contract or otherwise. "Assignment of Mortgage" shall mean, with respect to any Mortgage, an ---------------------- assignment of the Mortgage, notice of transfer or equivalent instrument, in recordable form, sufficient under the laws of the jurisdiction in which the related Mortgaged Property is located to reflect the assignment of the Mortgage. "Business Day" shall mean a day other than Saturdays, Sundays, ------------ holidays or other days on which the main office of Provident is not open for business. "Cash Collateral Account" shall mean the demand deposit account ----------------------- comprising a portion of the Collateral and established and maintained by Borrower with Provident pursuant to Section 5(d). "Change of Control" shall mean the time at which (i) any Person ----------------- (including a Person's Affiliates and associates) or group (as that term is understood under Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations thereunder), other than Management Shareholders and Affiliates thereof (the "Control Group") or a group controlled by the Control Group, has become the beneficial owner of a percentage (based on voting power, in the event different classes of stock shall have different voting powers) of the voting stock of Borrower equal to at least ten percent (10%), (ii) there shall be consummated any consolidation or merger of Borrower pursuant to which Borrower's common stock (or other capital stock) would be converted into cash, securities or other property, other than a merger or consolidation of Borrower in which the holders of such common stock (or such other capital stock) immediately prior to the merger have the same proportionate ownership, directly or indirectly, of common stock of the surviving corporation immediately after the merger as they had of Borrower's common stock immediately prior to such merger, or (iii) all or substantially all of Borrowers assets shall be sold, leased, conveyed or otherwise disposed of as an entirety or substantially as an entirety to any Person (including an Affiliate or associate of Borrower) in one or a series of transactions. "Closing Date" shall mean the date on which Borrower sells, transfers ------------ or otherwise disposes of a Mortgage Loan funded and originated by Borrower with an Advance made by Provident to Borrower under this Agreement. "Collateral" shall have the meaning set forth in Section ---------- 5(a). "Collections" shall mean, collectively, all Sale Proceeds, all Payment ----------- Collections and all other collections and Proceeds on or in respect of the Mortgage Loans. "Cost and Fee Schedule" shall have the meaning set forth in --------------------- Section 2(f). "Credit File" shall mean, as to each Mortgage Loan, a copy of the ----------- Mortgage and copies of all intervening assignments of mortgage, if any, with evidence of recording thereon, showing a complete chain of title from the originator to Borrower; the original attorney's opinion of title or the original policy of title insurance, if not previously delivered to Provident; the originals of all assumption, modification and extension agreements, if any; and all applications, credit reports, salary or employment verifications, appraisals, surveys, other underwriting and work papers, closing statements, HUD-1 settlement statements and any addendums thereto, truth-in-lending disclosures, right of recission notices, payment histories, and all other closing documents and all other agreements, reports, certificates, documents and instruments related thereto or obtained or prepared in connection therewith and included or includable in Borrower's mortgage file relating to such Mortgage Loan. "Default Interest Rate" shall mean an annual rate of interest which --------------------- shall (to the extent permitted by applicable law) at all times be equal to four percent (4%) above the Interest Rate. "Demand For Payment" shall have the meaning set forth in ------------------ Section 4(a). "Document Custodian" shall mean Borrower, as custodian and bailee for ------------------ Provident, or any successor appointed by Provident at any time. "Fees" shall have the meaning set forth in Section 2(f). "Funding Date" shall mean the date on which an Advance is made by ------------ Provident to Borrower under this Agreement. "Initial Collateral Package" shall mean, as to each Mortgage Loan: (i) -------------------------- the original Mortgage Note and the originals of all intervening endorsements, if any, showing a complete chain of title from the originator of the Mortgage Loan to Borrower, endorsed in blank (either on the Mortgage Note or a separate allonge attached thereto); (ii) a certified copy of the original Mortgage and copies of all intervening assignments of the Mortgage, if any; (iii) the original Assignment of Mortgage in favor of Provident in recordable form for the jurisdiction in which the Mortgaged Property is located; and (iv) the original attorney's opinion of title or the original policy of title insurance (or if such original policy of title insurance has not yet been received by Borrower, a copy of such policy or a title insurance binder or commitment for the issuance of such policy). "Interest Rate" shall mean an annual rate of interest which shall (to ------------- the extent permitted by applicable law) at all times be equal to the Prime Rate plus the applicable margin determined by reference to the factors applicable to such determination set forth in the Cost and Fee Schedule in effect on an Interest Payment Date or Closing Date, as the case may be. "Lien" shall mean any lien, mortgage, pledge, security interest, charge or other encumbrance of any kind including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest. "Loan Documents" shall mean this Agreement, the Security Documents, -------------- the Policies and Procedures, the Cost and Fee Schedule and any other instrument, certificate or document executed in connection with or pursuant to this Agreement whether concurrently herewith or subsequent hereto. "Losses" shall have the meaning set forth in Section 1 l ------ (b). "Management Shareholders" shall mean those shareholders of Borrower ----------------------- who are senior executive officers of Borrower on the date of this Agreement. "Maturity Date" shall have the meaning set forth in Section ------------- 4(b). "Mortgage" shall mean the mortgage, deed of trust or other instrument -------- creating a first or second Lien on an estate in fee simple interest in the Mortgaged Property securing a Mortgage Loan. "Mortgage Loan" shall mean any mortgage loan funded and originated by ------------- Borrower with any Advance made by Provident to Borrower under this Agreement. "Mortgage Loan Documents" shall mean, with respect to a Mortgage Loan, ----------------------- the documents comprising the Initial Collateral Package and the Credit File for such Mortgage Loan. "Mortgage Note" shall mean, with respect to a Mortgage Loan, the ------------- original note or other evidence of indebtedness pursuant to which the related Mortgagor agrees to pay the indebtedness evidenced thereby and which is secured by the related Mortgage. "Mortgaged Property" shall mean the underlying real property, ------------------ including all improvements and additions thereon, securing a Mortgage Loan. "Mortgagor" shall mean the obligor or obligors under a --------- Mortgage Note. "Other Obligations Secured Hereby" shall mean all of Borrower's debts, -------------------------------- obligations or liabilities of every kind, nature, class and description to Provident (other than those under this Agreement and the other Loan Documents), now due or to become due, direct or indirect, absolute or contingent, presently existing or hereafter arising, joint or several, secured or unsecured, purchase money or non-purchase money, related or unrelated, similar or dissimilar, whether for payment or performance, regardless of how the same arise or by what instrument, agreement or book account they may be evidenced, or whether evidenced by any instrument, agreement or book account, including, without limitation, all loans (including any loan by renewal or extension), and all overdrafts, all guarantees, all bankers acceptances, all agreements, all letters of credit issued by Provident for Borrower and the applications relating thereto, all indebtedness of Borrower to Provident, all undertakings to take or refrain from taking any action, and all indebtedness, liabilities and obligations owing from Borrower to others which Provident may obtain by purchase, negotiation, discount, assignment or otherwise. "Payment Collections" shall mean, collectively, all collections on the ------------------- Mortgage Loans attributed to the payment of the principal amount thereof, accrued interest thereon or any fees, charges or other amounts payable thereunder or in respect thereof. "Person" shall mean an individual, a company, a limited liability ------ company, a corporation, an association, a partnership, a joint venture, an unincorporated trade or business enterprise, a trust, an estate, or other legal entity or a government (national, regional or local), court, arbitrator or any agency, instrumentality or official of the foregoing. "Prime Rate" shall mean the rate of interest published from time to ---------- time in the "Money Rates" column of The Wall Street Journal (Central Edition) as ------------------------ the "prime rate" or, if such rate ceases to be so published, then such other rate as may be substituted by Provident as the prime rate, which may be the rate of interest announced by Provident from time to time as its prime rate. The Prime Rate shall change on each date the prime rate so published changes. "Policies and Procedures" shall mean Provident's Policies and ----------------------- Procedures for its Warehouse Division as of the date of this Agreement, as amended, modified, restated or supplemented by Provident from time to time. "Sale Proceeds" shall mean (i) any proceeds received or receivable by ------------- Borrower with respect to or in respect of any sale, transfer or other disposition of any Mortgage Loan and (ii) any proceeds received or receivable by Borrower with respect to or in respect of any sale, transfer, disposition, condemnation or casualty event and all other amounts from any disposition, taking, damage or destruction of any Mortgaged Property acquired by Borrower upon foreclosure (or deed in lieu of foreclosure) of any Mortgage Loan. "Security Documents" shall have the meaning set forth in ------------------ Section 5(b). "Third Party Investor" shall mean any Person with whom Borrower has -------------------- contracted to sell any Mortgage Loan that has been funded and originated by Borrower with any Advance made by Provident to Borrower under this Agreement. Provident may itself be a Third Party Investor. "UCC" shall mean the Uniform Commercial Code as the same may, from --- time to time, be in effect in the State of Ohio; provided, however, that in the ------- event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of Provident's security interest in any of the Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Ohio, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, or priority and for purposes of definitions related to such provisions. (b) All terms defined in the UCC and used in Section 5 of this Agreement shall have the meanings assigned to such terms in the UCC. (c) Where appropriate, words importing the singular only shall include the plural and vice versa. 2. ADVANCES. (a) Subject to the terms and conditions hereof and the Policies and Procedures, which are hereby incorporated herein by this reference, Provident may elect, in its sole discretion, to make Advances to Borrower from time to time in such amounts as Borrower may request. Nothing herein shall be deemed or construed as a commitment by Provident to make any Advance hereunder and it is expressly acknowledged and agreed by Borrower that the decision to make any Advance hereunder is, and shall at all times be, wholly discretionary on the part of Provident. (b) In order to obtain Advances, Borrower shall comply with the requirements set forth in this Agreement and the Policies and Procedures and shall furnish Provident with such requests and all other documents Provident may request or require at any time in connection with any Advance. In addition, the following conditions precedent, unless waived in whole or in part by Provident, shall be satisfied before Provident makes any Advance hereunder: (i) Provident, in its sole discretion, shall have approved the underwriting of the Mortgage Loans to be funded with any Advance; (ii) Borrower shall have provided Provident with an insured closing letter, evidence of a current errors and omissions insurance policy with limits of at least $1,000,000, an executed closing agent agreement and wiring instructions for each closing agent used by Borrower to close the Mortgage Loans funded with any Advance, each of which shall be acceptable to Provident in its sole discretion; (iii) Borrower shall have furnished Provident with an executed, recordable Power of Attorney covering the items set forth in Section 5(e) hereof for each state in which Borrower does business; and (iv) Provident, or its agent, bailee or designee, shall have received the Initial Collateral Package for each of the Mortgage Loans funded with any Advance. Each request for an Advance by Borrower shall constitute a certification that each of the representations and warranties made by Borrower to Provident in this Agreement or the other Loan Document shall be true and correct in all material respects on and as of the date when made and shall, for all purposes of this Agreement, be deemed to be repeated on and as of each date an Advance is made by Provident to Borrower hereunder and shall be true and correct in all material respects on and as of each of such date, except as affected by the consummation of the transactions contemplated by this Agreement and the other Loan Documents, and Borrower shall have performed, complied with and observed all of its covenants and agreements contained in this Agreement and the other Loan Documents on and as of each date an Advance is made by Provident to Borrower hereunder. (c) Advances hereunder will be made by Provident on behalf of Borrower to third parties in connection with the funding of the Mortgage Loans originated by Borrower. All matters relating to the funding of any Mortgage Loan hereunder shall be acceptable to Provident in its sole discretion. (d) Borrower represents, warrants and covenants to Provident that all proceeds of all Advances shall be used by it solely to fund Mortgage Loans originated by Borrower in the ordinary course of its business and for no other use or purpose. (e) Advances for the funding of any Mortgage Loan originated by Borrower shall not exceed one hundred percent (100%) of the original principal amount of such Mortgage Loan. (f) In connection with each Advance, Borrower agrees to pay Provident the transaction fees charged by Provident with respect to the Mortgage Loans funded and originated with such Advance ("Fees"). The amounts of Fees payable by Borrower in connection with any Advance shall be determined by reference to the Cost and Fee Schedule in effect on the Funding Date of such Advance (the "Cost and Fee Schedule"). The Cost and Fee Schedule in effect on the date of this Agreement is attached hereto as Schedule A. Any Cost and Fee Schedule shall remain in effect until a new Cost and Fee Schedule is delivered to Borrower in accordance with the requirements of Section I I (f). 3. INTEREST PAYABLE ON ADVANCES. Borrower promises to pay to Provident ---------------------------- interest in arrears on the unpaid amount of each Advance made by Provident to Borrower pursuant to this Agreement and on the unpaid amount of any interest not paid when due at a variable rate of interest per annum equal at all times to the Interest Rate. Interest shall be calculated on the daily unpaid amount of each Advance from its Funding Date. Interest with respect to each Advance hereunder shall be payable: (i) commencing on the date that is sixty-one (61) days after the Funding Date of the Advance and continuing on the same day of each consecutive month thereafter; and (ii) on its Maturity Date. Payments of interest shall be due and payable as set forth above until payment in full of all Advances. All interest under this Agreement shall be calculated on the basis of a year consisting of 360 days (comprised of twelve 30 day months) and paid for actual days elapsed. 4. TERMINATION; MANDATORY REPAYMENTS OF ADVANCES PRIOR TO TERMINATION ------------------------------------------------------------------ (a) Provident may, at any time, for any reason and without prior notice, terminate this Agreement and demand that Borrower pay the aggregate unpaid amount of all Advances made by Provident to Borrower pursuant to this Agreement, all accrued and unpaid interest thereon as well as all Fees, charges and other amounts payable hereunder and under the Loan Documents ("Demand For Payment"). Following a Demand for Payment, the aggregate unpaid amount of all Advances made by Provident to Borrower pursuant to this Agreement, together with all accrued and unpaid interest thereon as well as all Fees, charges and other amounts payable hereunder and under the other Loan Documents shall be immediately due and payable in full and no future or additional Advances will be made by Provident to Borrower hereunder. (b) Prior to termination of this Agreement as provided for above, Borrower shall repay to Provident the unpaid amount of each Advance made by Provident to Borrower hereunder, all accrued and unpaid interest thereon and all Fees, charges and other amounts payable hereunder, on the earlier to occur of: (i) the Closing Date on which Borrower sells or otherwise disposes of the Mortgage Loan(s) funded and originated with the Advance whether by sale to a Third Party Investor or otherwise; or (ii) on or before the applicable number of days after its Funding Date set forth in the Cost and Fee Schedule under the heading entitled "Days Allowed for Purchase by Third Party Investor" (the earlier to occur of (i) or (ii) being referred to herein as the "Maturity Date"). 5. GRANT OF SECURITY INTEREST. (a) To secure the prompt payment of the Advances, interest and all other amounts payable hereunder and under the other Loan Documents and the due and punctual performance and observance by Borrower of all of its other covenants, obligations and liabilities under this Agreement and the other Loan Documents and also to secure all of the Other Obligations Secured Hereby, Borrower hereby grants to Provident a security interest in and to, and hereby pledges and collaterally assigns to Provident, all of its rights, title, interest and claims in, to and under all of the following property, wherever located, whether now or hereafter owned, held or acquired, or hereafter existing or arising (collectively, the "Collateral"): (i) all Mortgage Loans; (ii) all Mortgage Loan Documents including, without limitation, all Mortgage Notes, Mortgages and Assignments of Mortgages relating to the Mortgage Loans; (iii) all rights to service or subservice the Mortgage Loans; (iv) all certificates, notes and other securities of any kind whatsoever, residual or otherwise, issued to Borrower or now or hereafter owned, held or acquired by Borrower in connection with or related to any mortgage loan securitization or any asset-back transaction involving the Mortgage Loans; (v) all of Borrower's rights under contracts or agreements to which Borrower is party (but none of its covenants, obligations or liabilities thereunder) in connection with the Mortgage Loans, including all contracts or agreements with all Third Party Investors and all attorney's opinions of title and title insurance policies; (vi) the Cash Collateral Account and all funds in the Cash Collateral Account; and (vii) all Proceeds of any and all of the foregoing Collateral in whatever form, including but not limited to, all payments made by Mortgagors to Borrower in connection with the Mortgage Loans and all premiums paid to Borrower by Third Party Investors in connection with the sales of the Mortgage Loans. (b) Borrower shall take all actions necessary or appropriate under all applicable laws, or as requested by Provident, to perfect, maintain and preserve, and to continue as perfected, Provident's first lien and security interest in the Collateral. Borrower shall pay all costs of preparing, recording and filing UCC Financing Statements (and any continuation or termination statements with respect thereto) and any other documents, titles, statements, assignments or the like reasonably required to create, maintain, preserve or perfect the liens or security interests granted under the Loan Documents, together with costs and expenses of any lien or UCC searches required by Provident in connection with the making of any Advance. At Provident's request, Borrower shall execute and deliver to Provident at any time and from time to time hereafter, all supplemental documentation that Provident may reasonably request to perfect, maintain, preserve or continue the security interest and liens in the Collateral granted Provident hereby and under any of the other Loan Documents (collectively, the "Security Documents"), in form and substance acceptable to Lender, and pay the costs of preparing and recording or filing of the same. Borrower agrees that a carbon, photographic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. Borrower shall promptly notify Provident concerning any changes in its name, identity or structure, concerning any changes in the address(es) of its chief executive office or other places of business or concerning any changes in its trade name(s) or name(s) under which it does business. (c) The Document Custodian shall maintain possession of each Credit File and the Mortgage Loan Documents comprising each Credit File (other than the Initial Collateral Package) for each Mortgage Loan. Promptly after Provident's request therefor, Borrower, at its expense, shall cause the Credit Files held by the Document Custodian to be delivered to Provident or its agent, bailee or other designee. (d) Borrower shall, at all times, maintain the Cash Collateral Account with Provident. Borrower shall deposit or cause to be deposited all Collections into the Cash Collateral Account when and as Collections are received or receivable by Borrower. Withdrawals may be made from the Cash Collateral Account by Borrower in accordance with the Policies and Procedures. Provident is hereby authorized to withdraw funds from the Cash Collateral Account from time to time, either before or after Provident's Demand for Payment, and to apply such withdrawals to the payment of the Advances, accrued and unpaid interest thereon and Fees, charges and other amounts payable hereunder or under the other Loan Documents. (e) Borrower hereby makes, constitutes and appoints Provident (by any of its officers, employees or agents), its true and lawful agent and attorney- in-fact and hereby gives and grants to Provident full power and authority to do and perform each and every act whatsoever requisite, necessary and proper (i) to endorse the related Mortgage Note to the Third Party Investor that purchases any Mortgage Loan; (ii) to endorse any original Mortgage Note to Provident or the purchaser thereof should Borrower default in its obligations hereunder; (iii) to prepare, execute and record on behalf of Borrower any Assignment of Mortgage; (iv) at the sole option of Provident, to prosecute, in Borrower's or Provident's name, any and all claims or causes of action collaterally assigned to Provident hereunder; and (v) to do and perform every act necessary to place Provident in position to enforce the payment of any Mortgage Loan. 6. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and ----------------------------------------- warrants to Provident as follows as of the date hereof and as of each Funding Date: (a) Borrower is and shall at all times be, duly organized, validly existing and in good standing under the laws of the State set forth in the first paragraph of this Agreement and has, and shall at all times have, full power and authority and legal right to engage in and carry on Borrowers business as now being conducted, to undertake the borrowings contemplated hereby and to execute and deliver each of the Loan Documents. Borrower is qualified and licensed in each jurisdiction wherein the nature or conduct of its business make such qualification necessary or advisable. Borrower is currently qualified and licensed in good standing in each such jurisdiction. Borrower's name as set forth in the caption of this Agreement and as set forth on the signature page of this Agreement is Borrower's correct individual, partnership or corporate name, as the case may be. (b) Borrower has full power and authority and legal right to enter into this Agreement and each of the other Loan Documents, and to perform, observe and comply with all of its agreements and obligations under each of such documents, including without limitation, the making by Borrower of the borrowings contemplated hereby and the granting by Borrower of the security interest in the Collateral pursuant to Section 5. (c) The execution and delivery by Borrower of this Agreement and the other Loan Documents, the performance by Borrower of all of its agreements and obligations hereunder and thereunder and the making by Borrower of the borrowings contemplated by this Agreement have been duly authorized by all necessary corporate action on the part of Borrower and do not and will not constitute a breach, violation or event of default (or an event which would become an event of default with the lapse of time or notice or both) under any judgment, decree, note, agreement, indenture or other instrument to which Borrower is a party or otherwise subject. (d) Borrower owns or possesses all rights, licenses, permits, franchises and the like necessary for the conduct of its business as presently conducted and proposed to be conducted. All of the foregoing rights, licenses, permits and franchises are in full force and effect, and Borrower is in compliance with all of the foregoing. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such right, license, permit or franchise, or affects the rights of Borrower thereunder. (e) The balance sheets, statements of income and other financial statements previously delivered to Provident present fairly the financial condition and results of operations of Borrower as of the dates thereof and for the fiscal periods then ended. There are no material liabilities or obligations, secured and unsecured (whether accrued, absolute or actual, contingent or otherwise), which were not reflected in the balance sheets of Borrower as of the dates thereof. (f) No changes have occurred in the assets, liabilities or financial condition of Borrower from those reflected on the most recent balance sheet delivered to Provident (the "Current Balance Sheet") which, individually or in the aggregate, have been adverse. Since the date of the Current Balance Sheet, there has been no adverse development in the business or in the operations or prospects of Borrower. (g) Borrower is the sole owner of and has good and marketable title to the Collateral, free and clear of all Liens and encumbrances whatsoever, except for the security interest granted by Borrower pursuant to Section 5. All information famished to Provident concerning the Collateral is and will be complete, accurate and correct in all respects when furnished. 7. COVENANTS REGARDING THE BORROWER. Borrower covenants and agrees with -------------------------------- Provident as follows: (a) Borrower shall deliver to Provident as soon as available and, in any event, within thirty (30) days after the end of each calendar quarter, quarterly unaudited financial statements of Borrower and within seventy-five (75) days after the end of each fiscal year of Borrower, annual financial statements of Borrower which, in each case, shall include a balance sheet, statement of income, statement of changes in financial position and notes to financial statements. Provident reserves the right to require Borrower to deliver audited annual financial statements. Such financial statements shall be certified by the chief executive officer of Borrower to the effect that such financial statements reflect, in his opinion and in the opinion of senior management of Borrower, all adjustments necessary to present fairly the financial position of Borrower as at the end of such quarter or year, as the case may be, and the results of its operations for the period then ended. (b) Borrower shall deliver to Provident all information Provident may reasonably request at any time and from time to time concerning its business, financial condition, results of operations, the Mortgage Loans financed hereunder or the other Collateral. (c) Borrower covenants to keep the Credit File for each of the Mortgage Loans financed hereunder at all times at Borrower's business premises or at such other location or locations as Provident may approve in writing. Borrower further covenants to deliver the Credit File(s) to Provident upon demand by Provident, which demand may be made in Provident's sole and absolute discretion. (d) Borrower shall pay or cause to be paid all taxes, assessments and other governmental charges imposed upon its properties or assets or in respect of any of its franchises, business, income or profits before any penalty or interest accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums which have become due and payable and which by law have or might become due and payable and which by law have or might become a lien or charge upon any of its properties or assets, provided that (unless any material item of property would be lost, forfeited or materially damaged as a result thereof) no such charge or claim need be paid if the amount, applicability or validity thereof is currently being contested in good faith and if such reserve or other appropriate provision, if any, as shall be required by generally accepted accounting principles shall have been made therefor. (e) At any time or times during Borrower's usual business hours, Borrower shall permit Provident (by any of its officers, employees or agents) to enter upon Borrower's business premises for any of the following reasons: (i) to inspect the Collateral and any books or records related thereto (including making copies of and extracts therefrom), (ii) to verify the amount, quality, quantity, value or condition of, or any other matter relating to, the Collateral, (iii) to examine all of the other books and records of Borrower (including making copies of and extracts therefrom), including those relating to its tax records, payroll records and insurance records, and (iv) to discuss the business, financial condition or results of operations with any of Borrower's officers, employees, agents or accountants. Borrower covenants to pay Provident a reasonable audit fee and reimburse Provident for its out-of-pocket expenses for all inspections, audits and examinations conducted by Provident other than regular monthly audits. (f) Borrower covenants to comply with all federal, state and local laws, rules, regulations and orders applicable to it and its business. (g) Borrower agrees to notify Provident in writing within fifteen (15) calendar days of any proposed Change of Control or any proposed, or completed, change in the executive management of Borrower, including, but not limited to, any management change in the office of president, or any change in the management of Borrower's underwriting department. Borrower further agrees to notify Provident in writing at least thirty (30) days in advance of any change in the location of its principal place of business or of any proposed change in the name of Borrower or the opening or closing of any office. (h) Borrower shall not at any time create, assume, incur or permit to exist, any Lien or other encumbrance in respect of any of the Collateral. (i) Borrower agrees to give Provident prompt notice of any development, financial or otherwise, which would materially adversely affect its business, properties or affairs or the ability of Borrower to perform its obligations under this Agreement 9. COVENANTS REGARDING THE MORTGAGE LOANS. Borrower further covenants and -------------------------------------- agrees with Provident as follows with respect to each Mortgage Loan to be financed by Provident hereunder. (a) As of its Funding Date, the Initial Collateral Package and Credit File relating to the Mortgage Loan shall contain each of the documents and instruments specified herein to be included therein. (b) The related Mortgage shall be a valid and enforceable first or second Lien of record on the Mortgaged Property subject, in the case of any second Mortgage Loan, only to a first Lien on such Mortgaged Property and subject in all cases to the exceptions to title set forth in the title insurance policy or attorney's opinion of title with respect to the related Mortgage Loan, which exceptions shall be acceptable to Provident. (c) Borrower shall hold good, marketable and indefeasible title to, and be the sole owner and holder of, the Mortgage Loan subject to no Liens or rights of others. (d) The Mortgage Loan shall not be subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor shall the operation of any of the terms of the Mortgage Note or Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense shall have been asserted with respect thereto. (e) The Mortgage Loan shall comply with, and shall at all times be serviced in compliance with, in all material respects, applicable state and federal laws and regulations, including, without limitation, usury, equal credit opportunity, consumer credit, truth-in-lending and disclosure laws. (f) With respect to the Mortgage Loan, either (i) a lender's title insurance policy, issued in standard American Land Title Association or California Land Title Association form, or other form acceptable in the particular jurisdiction, by a title insurance company authorized to transact business in the state in which the related Mortgaged Property is situated, together with a condominium endorsement, if applicable, in an amount at least equal to the original principal balance of such Mortgage Loan insuring the mortgagee's interest under the related Mortgage Loan as the holder of a valid first or second mortgage Lien of record on the Mortgaged Property described in the Mortgage, subject only to the exceptions of the character referred to in subsection (b) above, shall be valid and in full force and effect on the Funding Date of the origination of such Mortgage Loan or (ii) an attorney's opinion of title shall be prepared in connection with the origination of such Mortgage Loan. Such mortgage title insurance policy or attorney's opinion of title shall be issued in favor of Borrower and its successors and assigns. Borrower shall, by act or omission, not have done anything that would impair the coverage of such mortgage title insurance policy or attorney's opinion of title. (g) The Mortgage Note and the related Mortgage shall have been duly and properly executed, constitute the legal, valid and binding obligation of the related Mortgagor and shall be enforceable in accordance with their respective terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in a proceeding or action in equity or at law), and all parties to the Mortgage Loan shall have had full legal capacity to execute all Mortgage Loan Documents and to convey the estate therein purported to be conveyed. (h) The terms of the Mortgage Note and the Mortgage shall not have been or be impaired, altered or modified in any material respect, except by a written instrument which shall have been recorded or is in the process of being recorded, if necessary, to protect the interests of Borrower therein. The original Mortgage shall be recorded, and all subsequent assignments of the original Mortgage shall be recorded in the appropriate jurisdictions wherein such recordation is necessary to perfect the Lien thereof as against creditors of Borrower. (i) No instrument of release or waiver shall have been executed in connection with the Mortgage Loan, and no Mortgagor shall have been released therefrom, in whole or in part. (j) The proceeds of the Mortgage Loan shall have been fully disbursed, and there shall be no obligation on the part of Borrower to make any future advances thereunder. All costs, fees and expenses incurred in making or closing or recording of the Mortgage Loan shall have been paid in full. (k) The Mortgage Note shall not be secured by any collateral, pledged account or other security except the lien of the corresponding Mortgage. (I) There shall be no obligation on the part of Borrower or any other Person to make payments in respect of the Mortgage Loan in addition to those to be made by the Mortgagor. (m) All parties which have had any interest in the Mortgage Loan, whether as originator, mortgagee, assignee, pledgee, servicer or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (2)(A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state so as to require qualification or licensing. (n) The Mortgage shall contain customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial or non judicial foreclosure. (o) To the best of Borrower's knowledge, there shall not exist any circumstances or conditions with respect to the Mortgage Loan, the Mortgaged Property, the Mortgagor or the Mortgagor's credit standing that could be reasonably expected to materially adversely affect the value or marketability of the Mortgage Loan. (p) Each of the documents and instruments included in the Credit File shall have been duly executed and in due and proper form and each such document or instrument shall be in a form generally acceptable to prudent institutional mortgage lenders that regularly originate or purchase mortgage loans. (q) The Borrower shall be in possession of the complete Credit File and there shall be no custodial agreements in effect adversely affecting the right or ability of Borrower to make the document deliveries required hereby. (r) The Mortgage property shall not be damaged by fire, wind or other cause or loss and there shall not be any condemnation proceedings pending. To the best knowledge of Borrower, no improvement on any Mortgage property is in violation of any applicable zoning law or regulation. (s) All signatures, names and addresses, amounts and other statements of fact, including descriptions of the property, appearing on the credit application and other related documents relating to each Mortgage Loan shall be true and correct and the Mortgagors named thereon will be, as of the date of each such document upon which signatures appear, of majority age, and will have the legal capacity to enter into the Mortgage. (t) Borrower will have reviewed all of the Mortgage Loan Documents, and all the related documents thereto, and will make such inquiries as it deems necessary to make and confirm the accuracy of the representations set forth herein and throughout this Agreement. (u) Each Mortgage Loan which Borrower warrants is insured by a private mortgage insurance company shall be so insured. 9. SALES OF MORTGAGE LOANS AND OTHER COLLATERAL. Until Provident shall -------------------------------------------- have made a Demand for Payment, Borrower shall be entitled to sell the Mortgage Loans financed hereunder and the other Collateral in the ordinary course of Borrower's business, but nothing herein shall be deemed to waive or release Provident's security interest in any Proceeds of any Collateral. Upon the sale of any Mortgage Loan financed hereunder, Borrower shall pay to Provident on its Closing Date, the unpaid amount of the Advance with respect to such Mortgage Loan, all accrued and unpaid interest thereon through and including such Closing Date and all Fees, charges and other amounts payable hereunder. The sales of Mortgage Loans to Third Party Investors shall be handled in accordance with the requirements set forth in the Policies and Procedures- In addition, Borrower agrees that Provident shall have the right, in its sole discretion, to (i) impose additional requirements regarding the delivery of Mortgage Loan Documents to any Third Party Investor; and (ii) return wire transfers received in connection with the sale of any Mortgage Loan to the originating bank if such wire transfer does not comply with the Policies and Procedures. 10. REMEDIES. -------- (a) After a Demand for Payment shall have been made by Provident, all amounts owed to Provident hereunder shall thereupon be immediately due and payable and no additional or future Advances will be made by Provident to Borrower hereunder. (b) From and after any Demand For Payment, Provident shall, in addition to its other rights and remedies under applicable law, have the rights and remedies of a secured party under the Uniform Commercial Code with respect to the Collateral and all other security pursuant to any other Security Documents between Provident and Borrower. In addition, Provident or its agents or representatives may take possession of the Collateral and sell the same. For such purpose, Provident may enter upon the premises where the Collateral shall be located and remove the same to such other place as Provident shall determine. Borrower shall immediately, upon Provident's demand, make the Credit Files available to Provident at Provident's place of business. (c) Any such taking of possession by Provident shall not affect Provident's right, which hereby is confirmed, to retain all payments made prior thereto by Borrower, and in the event of such taking of possession, Provident may sell the Collateral at a public or private sale or any other commercially reasonable manner permitted by law. The proceeds of any such sale or other disposition shall be applied first to the actual and reasonable costs of such sale, then to the actual and reasonable costs of retaking possession and storage of such Collateral and then to the satisfaction of the unpaid balance of the Advances. In the event the proceeds of any such sale are not sufficient to pay such expenses and to satisfy all amounts due by acceleration or otherwise with respect to all Advances made pursuant hereto, Borrower shall pay to Provident any deficiency existing. Provident will give Borrower reasonable notice of the time and place of any public sale of the Collateral or of the time after which any private sales or other intended disposition thereof is to be made. Borrower agrees that the requirement of reasonable notice shall be met if such notice is mailed, postage prepaid, to the address of the Borrower listed in Section I 1(f) at least 10 days prior to the time of such sale or disposition. Borrower further agrees and acknowledges that: (i) the Collateral is customarily sold in a recognized market; (ii) Borrower regularly sells and Provident regularly purchases mortgage loans similar to the Collateral; and (iii) Provident may be the purchaser of the Collateral either in a public or private sale. (d) From and after any Demand For Payment, Borrower shall pay, in addition to interest on funds actually advanced, all costs incurred by Provident in enforcing Provident's rights hereunder, including those incurred in bankruptcy proceedings, expenses of locating the Collateral, all costs and expenses actually incurred by Provident in connection with examination, preservation and protection of the Collateral, examination of the Borrower's books and records otherwise in connection with the financing pursuant hereto and reasonable attorney's fees and legal expenses. (e) If any payment of interest under Section 3 or principal or interest under Section 4 is not paid when due whether by demand or otherwise, the unpaid amount of all Advances and all accrued and unpaid interest thereon as well as any other charges and other amounts due Provident hereunder or under any Loan Document shall bear interest, at Provident's option, at the Default Interest Rate from the date on which such late payment shall have first become due and payable to Provident. Interest will continue to accrue until the obligations in respect of the payment are discharged (whether before or after judgment). (f) The rights and remedies of Provident hereunder shall be cumulative and shall be in addition to every other right or remedy available to Provident under applicable law. 11. GENERAL PROVISIONS. ------------------ (a) Borrower absolutely and unconditionally agrees to pay to Provident upon demand by Provident at any time and as often as the occasion therefor may require, whether or not all or any of the transactions contemplated by any of the Loan Documents are ultimately consummated (i) all reasonable out- of-pocket costs and expenses which shall at any time be incurred or sustained by Provident or any of its directors, officers, employees or agents as a consequence of, on account of, in relation to or any way in connection with the preparation, negotiation, execution and delivery of the Loan Documents and the perfection and continuation of the rights of Provident in connection with the Advances, as well as the preparation, negotiation, execution, or delivery or in connection with the amendment or modification of any of the Loan Documents or as a consequence of, on account of, in relation to or any way in connection with the granting by Provident of any consents, approvals or waivers under any of the Loan Documents including, but not limited to, reasonable attorneys' fees and disbursements; and (ii) all reasonable out-ofpocket costs and expenses which shall be incurred or sustained by Provident or any of its directors, officers, employees or agents as a consequence of, on account of, in relation to or any way in connection with the exercise, protection or enforcement (whether or not suit is instituted) of any of its rights, remedies, powers or privileges under any of the Loan Documents or in connection with any litigation, proceeding or dispute in any respect related to any of the Loan Documents (including, but not limited to, all of the reasonable fees and disbursements of consultants, legal advisers, accountants, experts and agents for Provident, the reasonable travel and living expenses away from home of employees, consultants, experts or agents of Provident, and the reasonable fees of agents, consultants and experts not in the full-time employ of Provident for services rendered on behalf of Provident). (b) Borrower shall absolutely and unconditionally indemnify and hold harmless Provident against any and all claims, demands, suits, actions, causes of action, damages, losses, settlement payments, obligations, costs, expenses (including, but not limited to, attorney's fees and other legal costs and expenses) and all other liabilities whatsoever ("Losses") which shall at any time or times be incurred or sustained by Provident or by any of its shareholders, directors, officers, employees, subsidiaries, Affiliates or agents on account of, or in relation to, or in any way in connection with, any of the arrangements or transactions contemplated by, associated with or ancillary to this Agreement or any of the other Loan Documents, whether or not all or any of the transactions contemplated by, associated with or ancillary to this Agreement or any of such Loan Documents are ultimately consummated, including, but not limited to, Losses arising from or in connection with, or related to, any of the Mortgage Loans financed hereunder, whether arising from the underwriting, processing, origination, closing, funding, purchase, servicing or sale of any such Mortgage Loans. (c) No amendment, supplement, modification, termination, waiver, consent to departure or alteration of the terms hereof or any of the other Loan Documents shall be binding or effective unless the same is in writing, dated subsequent to the date hereof, and duly executed by Borrower and Provident, and then such amendment, modification or waiver shall be effective only in the specific instance and for the specific purpose for which given. (d) All agreements, representations, obligations and warranties made herein shall survive the execution and delivery of this Agreement, the making of any Advance hereunder, the execution and delivery of any of the other Loan Documents and payment in full of the Advances. (e) This Agreement (including the Exhibits and Schedules hereto) and the other Loan Documents (including the Security Documents) and any documents, certificates and instruments referred to herein or delivered by the parties in connection herewith constitute the entire agreement between the patties with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and verbal, between the parties with respect to the subject matter of this Agreement and are not intended to confer upon any Person other than the parties any rights or remedies. (f) All notices and other communications pursuant to this Agreement and under any of the other Loan Documents shall be in writing, either delivered in hand or sent by first-class mail, registered or certified, return receipt requested, or sent by telecopier or facsimile transmission, addressed as follows: If to Borrower, at: HomeGold, Inc. 3901 Pelham Rd Greemille, SC 29651 Attn: Forrest E. Ferrell Fax No. (864) 289-6096 If to Provident, at: The Provident Bank One East Fourth Street Cincinnati, Ohio 45202 Attn: Kenneth D. Logan, Senior Vice President Mail Stop: 265D Fax Number: (513) 564-7943 or, as to each party, at such other address as shall be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section 11. Any notice or other communication pursuant to this Agreement or any other Loan Document shall be deemed to have been duly given or made and to have become effective when delivered in hand to the party to which it is directed, or, if sent by first-class mail or by telecopier or facsimile transmission, and properly addressed (i) when received by the addressee; or (ii) if sent by first class mail, on the third (3rd) Business Day following the day of the mailing thereof (unless actually received earlier). (g) No delay or failure of Provident in exercising any right, power, remedy or privilege hereunder or under any of the other Loan Documents on any occasion shall affect such right, power, remedy or privilege or be construed as a waiver or any requirement of this Agreement; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege be prejudicial to any subsequent exercise of such right, power or privilege. Provident's acceptance or approval of any request, payment, document or instrument pertaining to any Advance made pursuant hereto shall not constitute any representation or warranty, express or implied, by Provident as to the validity or sufficiency of any such request, payment, document or instrument. The rights and remedies of Provident hereunder are cumulative and not exclusive. All remedies herein provided shall be in addition to and not in substitution for any remedies otherwise available to Provident. Any waiver, permit, consent or condition hereof, must be in writing and shall be effective only to the extent set forth in such writing. This Agreement shall be binding upon and inure to the benefit of Borrower and Provident and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights or obligations hereunder to any Person or Persons without the express prior written consent of Provident. If more than one Borrower shall sign this Agreement, the liability of each hereunder shall be joint and several. of Ohio. (i) This Agreement shall be governed by and construed in accordance with the laws of the State (j) It is hereby stipulated and agreed that TIME IS OF THE ESSENCE hereon and shall be of the essence as to each of the other Loan Documents. (k) Any provision contained in any document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of such document or affecting the validity or enforceability of such provision in any other jurisdiction. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and deliver shall be deemed to be an original and all of which taken together shall constitute but one and the same Agreement. 12. WAIVER OF .JURY TRIAL; JURISDICTION AND VENUE. --------------------------------------------- (a) AS A SPECIFICALLY BARGAINED INDUCEMENT FOR PROVIDENT TO EXTEND CREDIT TO BORROWER, AND AFTER HAVING THE OPPORTUNITY TO CONSULT COUNSEL, BORROWER AND, IF MORE THAN ONE, EACH OF THEM HEREBY EXPRESSLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LAWSUIT OR PROCEEDING RELATING TO THIS AGREEMENT OR ARISING (N ANY WAY FROM ITS OBLIGATIONS HEREUNDER. (b) BORROWER AND, IF MORE THAN ONE, EACH OF THEM HEREBY DESIGNATES ALL COURTS OF RECORD SITTING IN HAMILTON COUNTY, OHIO AND HAVING JURISDICTION OVER THE SUBJECT MATTER, STATE AND FEDERAL, AS FORUMS WHERE ANY ACTION, SUIT OR PROCEEDING IN RESPECT OF OR ARISING FROM OR OUT OF THIS AGREEMENT, ITS MAKING, VALIDITY, PERFORMANCE, INTERPRETATION OR ENFORCEMENT MAY BE LITIGATED AS TO ALL PARTIES, THEIR SUCCESSORS AND ASSIGNS, AND BY THE FOREGOING DESIGNATION BORROWER AND, IF MORE THAN ONE, EACH OF THEM HEREBY CONSENTS TO THE JURISDICTION AND VENUE OF SUCH COURTS. BORROWER WAIVES ANY AND ALL RIGHTS UNDER THE LAWS OF ANY OTHER STATE TO OBJECT TO JURISDICTION WITHIN THE STATE OF OHIO FOR THE PURPOSES OF LITIGATION TO ENFORCE THE OBLIGATIONS UNDER THIS AGREEMENT. IN WITNESS WHEREOF, the undersigned have caused this Warehouse Loan and Security Agreement to be signed by their duly authorized signatories on and as of the date first above written- HomeGold, Inc BY: William E. Long Executive Vice President THE PROVIDENT BANK BY: Martin J. Weiss Vice President Schedule A to Warehouse Loan and Security Agreement ------------------------------------ Cost and Fee Schedule --------------------- SCHEDULE A COST AND FEE SCHEDULE Homegold, Inc. I. Explanation of Loan Risk Grade: 1 FHA, VA FNMA, FHLMC, Jumbo Conventional to $350,000 2. Non-Agency First Mortgages (A-, B, C), Jumbo Conventional from $350,001. 3. Non-Agency Second Mortgages. 4. Non-Agency second mortgage loans 95 (degrees)/o LTV or Greater up to 100% LTV Loans. Rates below are interest amounts added to Wall Street Journal published Prime Rate:
Grade Level 2 Aged Outstanding Sweep Rate - ------------------------------------------------------------------------------------------------ 1 1.50% 2.50% N/A - ------------------------------------------------------------------------------------------------ 2 1.75% 3.00% 1.50% - ------------------------------------------------------------------------------------------------ 3 2.00% 3.00% 1.50(degrees)/a - ------------------------------------------------------------------------------------------------ 4 2.50% 3.50% N/A - ------------------------------------------------------------------------------------------------
II. Volume Incentive for monthly funded volume in excess of certain thresholds will be applied to loans funded after surpassing the respective thresholds:
Monthly Funded Volume Rate Reduction from Initial Base Rates - --------------------------------------------------------------------------------------- 5,000,001 - 10,000,000 .15(degrees) - --------------------------------------------------------------------------------------- 10,000,001 - 15,000,000 .25% - --------------------------------------------------------------------------------------- 15,000,001 + .30% - ---------------------------------------------------------------------------------------
Volume incentive is not available on any loan that is aged at the time of settlement. The incentive is further suspended for 90 days after the settlement date of any aged loan. III. Days Allowed for Purchase by Third Party Investor: 1. 45 days for FHA, VA FNMA, FHLMC, Jumbo Conventional to $350,000. --------- 2. 45 days for Non-Agency First Mortgages (A-, B, C), Jumbo Conventional from $350,001. --------- 3. 45 days for Non-Agency Second Mortgages and Home Equity Lines or Loans. 4. 45 days for Non-Agency Second Mortgage loans 95% LTV or Greater up to 100 (degrees) io LTV Loans. IV. Transaction Fees:
Standard Fees Aged Fees - ----------------------------------------------------------------------------------------------------- Handling Fee $50 61-90 days $175 - ----------------------------------------------------------------------------------------------------- Wire Fee $20 91-120 days $225 - ----------------------------------------------------------------------------------------------------- Processing Fee $30 121+ days $275 - ----------------------------------------------------------------------------------------------------- Other: - ----------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------
EX-10.10.2 7 0007.txt SERVICING AGREEMENT SERVICING AGREEMENT This Servicing Agreement (the "Agreement") is made as of the 25th day of October, 2000, by and between the Provident Bank, a banking corporation organized and existing under the laws of the State of Ohio, whose address is One East Fourth Street, Cincinnati, Ohio 45202 (the "Servicer"), and HomeGold Financial, Inc.,a corporation whose address is 3901 Pelham Road Greenville, SC 29615 (the"Holder"). WITNESSETH WHEREAS, Servicer and Holder have entered into an Amended And Restated Warehouse Loan And Security Agreement dated (the "Warehouse Agreement"), whereby Servicer funds loans originated by Holder and secured by mortgages, deeds of trust, trust deeds, security deeds, deeds to secure debt and like security instruments on existing single family (I-4 units) residential properties; and WHEREAS, Holder desires to engage Servicer as an independent contractor to perform for a temporary period such servicing functions as are further described herein, and Servicer desires to accept such engagement pursuant to the terms and conditions hereinafler set forth. NOW, THEREFORE, in consideration of the promises, terms, conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: DEFINITIONS The following terms shall have the following meanings: Agreement: This Servicing Agreement. Condemnation Proceeds: All awards of settlement in respect to a Mortgaged Property by exercise of the power of eminent domain or condemnation. Credit Files: All records and documents related to a Mortgage Loan, including, without limitation, promissory notes, mortgages, deeds of trust or other documents evidencing a security interest, assignments, underwriting documents, disclosures required by applicable laws, title insurance commitments and policies and any other documentation reasonably required by Servicer to set up and service the accounts. Deposit Account: The account or accounts maintained pursuant to Section 7. 10 Escrow Account: The separate account or accounts maintained pursuant to Section 9. Escrow Payments: With respect to any Mortgage Loan, the amounts constituting ground rents, mortgage insurance premiums, hazard insurance premiums, taxes, assessments, condominium fees, and any other payments required to be escrowed by the Mortgagor with the Mortgagee pursuant to the Mortgage or other loan documents. FHA: The Federal Housing Administration, an agency within the United States Department of Housing and Urban Development, or any successor thereto. FHLMC: The Federal Home Loan Mortgage Corporation, or any successor thereto. FNMA: The Federal National Mortgage Association or any successor thereto. Holder: HomeGold Financial, Inc.or its successors and assigns. HUD: The Department of Housing and Urban Development. Investor: The purchaser of any Mortgage Loan from HomeGold, "holder" Insurance Proceeds: With respect to each Mortgage Loan, proceeds of insurance policies insuring the Mortgage Loan or the related mortgaged property including FHA insurance proceeds and/or VA guaranty proceeds. Liquidation Proceeds: Cash received in connection with the liquidation of a defaulted Mortgage Loan, whether through the sale or assignment of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise. Monthly Payment: The scheduled monthly payment of principal and interest on a Mortgage Loan. Mortgage: The mortgage, deed of trust or other instrument securing a Mortgage Note, which creates a lien in fee simple in real property securing the Mortgage Note. Mortgage Interest Rate: The annual rate of interest borne on a Mortgage Loan. Mortgage Loan: An individual Mortgage Loan which is subject to this Agreement and which includes, without limitation, the Mortgage Note, Mortgage, the Credit File and all rights, benefits, proceeds and obligations arising from or in connection with such Mortgage Loan. Mortgage Note: The note or other evidence of the indebtedness of a Mortgagor secured by a Mortgage. Mortgage Property: The real property securing repayment of any Mortgage Note. 11 Mortgagee: HomeGold Financial, Inc. , its successors and assigns. Mortgagor: The obligor on a Mortgage Note. Private Mortgage Insurance: A policy of mortgage guaranty insurance issued by a qualified insurer with respect to certain Mortgage Loans. Servicer: The Provident Bank and its successors and assigns. Warehouse Agreement: The Amended and Restated Warehouse Loan and Security Agreement between Provident Bank and HomeGold dated Transfer Date: The Transfer Date with respect to any Mortgage Loan shall be the date upon which the Servicer is entitled to receive the transfer of servicing responsibilities pursuant to the Agreement. VA: The Veterans Administration, an agency of the United States of America, or any successor thereto. 1. Relationship of Parties. Holder and Servicer specifically agree that in the servicing of any loan hereunder, Servicer shall have the status of and act as an independent contractor. Nothing herein shall be construed to create a partnership or joint venture between Holder and Servicer. The representations and warranties of Servicer contained in this Agreement shall in no event be construed as a warranty or guaranty by Servicer as to future payments by any Mortgagor. Further, Servicer shall not be responsible for any representations and warranties which are directly related to the origination process or between Holder and any Investor relating to the origination or servicing of any Mortgage Loan. 2. Types of Loans. All loans submitted to Servicer for servicing hereunder shall be fixed or adjustable rate loans secured generally by first and second liens on existing single family (1-4 units) residential properties. Notwithstanding the foregoing, Servicer reserves the right to require Holder to submit for servicing other types of loans (such as multi-family loans) that Servicer in its sole discretion deems necessary. The documentation for each loan submitted hereunder shall provide for payments of principal, interest and deposits, if any, to be paid once monthly. Servicer retains the right to reject for servicing any loans with other payment frequencies. 3. Compensation. As compensation for rendering the services set forth herein, Servicer shall be entitled to: (i) A set-up fee of fifty ($50.00) dollars per Mortgage Loan payable on or before the earlier of receipt by Servicer of the Mortgagor's first Monthly Payment, or sale of the Mortgage Loan to an Investor. Notwithstanding anything contained in this Agreement or the Warehouse Agreement to the contrary, Holder and Servicer expressly agree that the amount of any compensation owing to Servicer may be 12 withdrawn from either the Deposit Account established hereunder or the Cash Collateral Account established by and pursuant to the Warehouse Agreement. (ii) Beginning with each Transfer Date, Servicer shall retain from each monthly payment with respect to any Mortgage Loan a servicing fee in an amount equal to one twelfth (1/12) of the servicing fee rate. The servicing fee rate for each mortgage loan shall be 0.50% per annum (50 basis points). If the mortgage loan retained for servicing by the Servicer is released prior to the collection of a monthly payment, the service fee will be calculated on a daily rate equivalent to one three-hundred sixty (1/360) of the servicing fee rate. (iii) Servicing-related fees charged to Mortgagors, including, but not limited to, release and satisfaction fees, pay-off statement fees, tax service fees, NSF fees, deferral charges, late charges, subordination fees, modification fees, fees for providing copies of documents from a Credit File to any Mortgagor and other miscellaneous servicing fees that Servicer may lawfully charge a Mortgagor whose loan is being serviced (iv) Investment earnings on the custodial account and escrow account (if allowed by applicable law). 4. Holder Responsibilities. Holder shall be responsible for: (i) Providing Servicer with complete Credit Files for each loan submitted hereunder to enable Servicer to place and service the loan(s) on its system. All such documentation must be received no later than seventy-two hours (72) after the close of any purchase-money transaction, and no later than seventy-two hours (72) after the end of the applicable rescission period for any refinance transaction (the Transfer Date). (ii) Advising Servicer upon delivery of each loan submitted for servicing as to whether the loan is in a warehouse (unsold) status. If a loan which has been delivered to Servicer in a warehouse (unsold) status is subsequently sold, Holder will immediately notify Servicer of the sale by written confirmation and will deliver a copy of the Investor's purchase advice or funding detail report, and Holder shall pay all outstanding interest and fees owed to Servicer pursuant to the Warehouse Agreement and this Agreement prior to any transfer of servicing. Holder shall also provide Servicer with all necessary information regarding the Investor that will enable Servicer to clear the account from its system and transfer the account to the Investor in a timely manner. In the event the Investor charges a penalty for late reporting, remittances, etc., which were caused by Holder's delay in notifying Servicer of the Investor's purchase of the loan, Holder agrees to pay such penalty. (iii) Providing Servicer with Escrow Payments collected at closing, insurance and tax information and any other documentation required by Servicer in the performance of its servicing function pursuant to this agreement. 13 (iv) Providing Servicer with physical evidence that a hazard insurance policy and, if applicable, a Private Mortgage Insurance (PMI) policy (not limited to HUD's Mortgage Insurance Coverage) is in force for each loan delivered to Servicer for servicing and allowing Servicer sufficient time to receive evidence in-house that all notification(s) have been forwarded to Servicer. Further, Holder agrees to indemnify and hold Servicer harmless from any loss, damage, claim or expense caused by insufficient evidence of hazard insurance, or, if applicable, by a lapse in Private Mortgage Insurance coverage or flood insurance coverage prior to delivery of servicing to Servicer. (v) Assuring that improvements on property securing each Mortgage are insured by hazard insurance in an amount at least equal to the unpaid principal balance of the loan or the full insurable value of the improvements, whichever is less, of a type at least as protective as fire and extended coverage, and containing a "standard" or`union" mortgage clause (without contribution) in the form customarily used in the area in which the property is located. In all events, the provisions of the Credit File shall prevail. The mortgagee clause will be reflected as running to the benefit of Lender/Servicer, its successors and assigns. During the course of servicing, the mortgagee clause in the hazard insurance will read as follows: The Provident Bank Its Successors and/or Assigns 309 Vine Street, Mail Stop 172D Cincinnati, OH 45202 (vi) Providing Servicer with all legal records, including court orders, consent decrees, judgments, verdicts, agreed orders, consents, and other agreements or records that govern the servicing of the loans. Holder agrees to indemnify and hold Servicer harmless from any loss caused by Holder's failure to provide the information required under this subparagraph or from the provision by Holder of incomplete, obsolete or inaccurate information required under this subparagraph. (vii) Providing Servicer with such limited powers of attorney and other documents necessary to enable the Servicer to perform its servicing and administrative obligations under this agreement. 5. Servicer Responsibilities. The Servicer, as an independent contractor, shall service and administer the Mortgage Loans from and after the related Transfer Date and shall have full power and authority, acting alone, to do any and all things in connection with such servicing and administration which the Servicer may deem necessary or desirable, consistent with the terms of this Agreement and with accepted mortgage servicing practices, including taking all actions that a mortgagee is permitted or required to take by the FHA or VA, with respect to FHA loans and VA loans, as the case may be. The Servicer shall not waive, modify or vary any term of any mortgage loan or consent to the postponement of strict compliance with any such term or in any manner grant indulgence to a Mortgagor unless Servicer has obtained the prior consent of the Holder. The Servicer is hereby authorized and empowered to execute and deliver on behalf of itself and the 14 Holder all instruments of satisfaction or cancellation, or of partial or full release, discharge and all other comparable instruments with respect to the Mortgage Loans and with respect to the Mortgaged Properties. (i) The Servicer shall, in accordance with the Real Estate Settlement and Procedures Act (RESPA) or other applicable laws, provide notice to the Mortgagors of each mortgage of the change of servicing to the Servicer. No loans shall be service released to any Investor until all fees, charges and interest owed to Servicer have been paid in full and the RESPA notification period has lapsed. (ii) In servicing and administering any FHA loans or VA loans, the Servicer shall comply strictly with the National Housing Act and the FHA regulations; the Serviceman's Readjustment Act, and the VA regulations and administrative guidelines issued thereunder or pursuant thereto. (iii) In servicing and administering the Mortgage Loans, the Servicer shall employ procedures, including collection procedures, and exercise the same degree of care that it customarily employs and exercises in servicing and administering mortgage loans for its own account, giving due consideration to accepted servicing practices where such practices do not conflict with the requirements of this Agreement. (iv) On or before the 5th business day of each month, the Servicer shall report information pertaining to the Mortgage Loans and Escrow Accounts as may reasonably be requested by Holder and consistent with standard servicing practices. In addition, Servicer shall provide information necessary for Holder to complete any report required by any Private Mortgage Insurance (PMI) carrier, HUD, VA, FHLMC, FNMA, if applicable. (v) Notwithstanding any other provision of this Agreement, Servicer shall not be obligated to advance any funds to Holder or on Holder's behalf with respect to any Mortgage Loan subject to this Agreement. However, in the event it is necessary to advance funds for delinquent taxes, insurance, not limited to Private Mortgage Insurance or Mortgage Impairment Coverage, advances will be taken from the funds collected within the Deposit Account to cover funds advanced. (vi) If the Mortgage Loan becomes delinquent while under this agreement, the Servicer shall consult with the Holder to acquire further direction. It is expressly understood that the Servicer will not proceed with further actions, i.e., legal action, until written permission is given from the Holder advising the Servicer of the next step that should be taken. 6. Collection of Mortgage Loan Payments. Continuously from the related Transfer Date until the date each Mortgage Loan ceases to be subject to this Servicing Agreement, the 15 Servicer shall proceed diligently to collect all payments due under each of the Mortgage Loans when the same shall become due and payable and shall take special care in ascertaining and estimating escrow payments (if applicable), and all other charges that will become due and payable with respect to the Mortgage Loans and each related Mortgage Property. In the event that a Mortgage Loan is sold to an Investor net of one or more Monthly Payments (net-funded), Servicer shall continue its effort to collect said Monthly Payments after the date the Mortgage Loan is servicereleased to the investor (or successor servicer), for an additional period of 60 days. Servicer shall be entitled to receive the servicing compensation provided by this Agreement for this additional 60 day servicing period irrespective of whether such Monthly Payments are collected by Servicer, and the duties and obligations imposed upon Servicer under this agreement shall terminate at the end of such 60 day period. 7. Establishment of Deposit Account. The Servicer shall deposit all funds collected and received pursuant to any Mortgage Loan into one or more Deposit Accounts. The Deposit Accounts shall be established and maintained at the Provident Bank, Cincinnati, Ohio. The Servicer, in accordance with the terms of this Agreement, may draw on the funds deposited into the Deposit Account. The Servicer shall deposit into the Deposit Account on a daily basis and retain therein the following collections received by the Servicer after the related Transfer Date: (i) All payments on account of principal on the Mortgage Loans, including all principal prepayments; (ii) All payments on account of interest on the Mortgage Loans: (iii) All REO disposition proceeds in connection with payment on account of principal and interest; (iv) All condemnation proceeds which are applied as a principal prepayment; (v) Any amount required to be deposited into the Deposit Account. Any benefit derived from the Deposit Account shall accrue to the Servicer. 8. Permitted Withdrawals From the Deposit Account. The Servicer shall, from time to time, withdraw funds from the Deposit Account for the following purposes: (i) To make payments to the Holder in the amounts and in the manner provided for by this Agreement: (ii) To reimburse itself for servicing compensation provided for in this Agreement: (iii) To clear and terminate the Deposit Account. 16 (iv) To cure any default by Holder with the terms of this Agreement or the Warehouse Agreement. (v) To reimburse Servicer for any advances for any mortgage loan made pursuant to the Warehouse Agreement. 9. Establishment of and Deposits to Escrow Account. When specifically requested by Holder, Servicer shall segregate and hold all funds collected and received pursuant to a Mortgage Loan constituting Escrow Payments separate and apart from any of its own funds and general assets, and shall establish and maintain one or more Escrow Accounts, in the form of demand accounts. The Escrow Accounts shall be established at The Provident Bank, Cincinnati, Ohio. The Servicer, in accordance with the terms of this Agreement, may draw on funds deposited into the Escrow Account. The Servicer shall deposit into the Escrow Account or Accounts on a daily basis, and retain therein the following: (i) All Escrow Payments collected on account of the Mortgage Loans, for the purpose of affecting timely payment of any such items as required under the terms of this Agreement; (ii) All amounts representing Insurance Proceeds or Condemnation Proceeds which are to be applied to the restoration or repair of any Mortgage Property; (iii) All Liquidation Proceeds in connection with Escrow Payments and property liquidation expenses; and (iv) Any amounts required to be deposited by the Servicer in connection with the deductible clause and blanket hazard insurance policy. The Servicer shall make withdrawals from the Escrow Account only to affect such payments as are required under this Agreement. To the extent required by law, the Servicer shall pay interest on escrow funds to the Mortgagor. 10. Permitted Withdrawals From Escrow Account The Servicer may make withdrawals from the Escrow Account or Accounts only: (i) To affect timely payments of taxes, assessments, mortgage insurance premiums, water rates, condominium charges, fire and hazard insurance premiums, or other items constituting Escrow Payments for the related Mortgage; (ii) To refund to any Mortgagor any funds found to be in excess of the amounts required under the terms of the related Mortgage Loan or applicable federal or state law or judicial or administrative ruling; and (iv) To clear and terminate the Escrow Account upon the termination of this Agreement. 17 11. Notification of Interest Rate Adjustments. With respect to each adjustable rate Mortgage Loan, the Servicer shall adjust the Mortgage Interest Rate on the related interest rate adjustment date and shall adjust the Monthly Payment on the related mortgage payment adjustment date, if applicable, in compliance with the requirements of applicable law and the related Mortgage and Mortgage Note. The Servicer shall execute and deliver any and all necessary notices required under applicable law and the terms of the related Mortgage Note and Mortgage regarding the Mortgage Interest Rate and monthly payment adjustments. The Servicer shall promptly, upon written request therefor, deliver to the owner such notifications and any additional applicable data regarding such adjustments and the methods used to calculate and implement such adjustments. Upon discovery by the Servicer or the receipt of notice from the Holder that the Servicer has failed to adjust the Mortgage Interest Rate or Monthly Payment in accordance with the terms of the related Mortgage Note, the Servicer shall deposit in the Deposit Account from its own funds the amount of any interest loss caused the Holder thereby as such interest loss occurs. 12. Completion and Recordation of Assignment of Mortgage and FHA and VA Change Notices. To the extent permitted by applicable law, each assignment of mortgage is subject to recordation in all appropriate public offices for real property records in all of the counties or other comparable jurisdictions in which any or all of the Mortgage Properties are situated, and in any other appropriate public recording office or elsewhere, such recordation to be affected at the Holder's expense. At the Holder's direction, the Servicer shall cause the endorsement of the Mortgage Note, the assignment of mortgage, the assignment of security agreement, and other necessary and applicable records to be completed. 13. Remittances to Holder. With respect to each Mortgage Loan serviced pursuant to this Agreement, the Servicer shall, after deduction for the servicing fees provided by this agreement, deposit the remainder of each Monthly Payment received from the Mortgagor into the applicable Deposit Account. All Monthly Payments deposited into the Deposit Account shall be applied to reduce the outstanding balance owing to Servicer from Holder relating to the applicable Mortgage Loan funded by Servicer pursuant to the terms of the Warehouse Agreement. Any excess funds remaining after payment of the servicing fees provided by this agreement and application to the outstanding balance owed to Servicer by Holder, shall be held in the Deposit Account until the Mortgage Loan is transferred to an Investor, at which time such excess funds shall be remitted to Holder. In no event shall any funds held in any Mortgagor's Escrow Account be applied to reduce any indebtedness of holder to Servicer. 14. Advances by Servicer. The Servicer shall not be obligated to make any advances as to any Mortgage Loan serviced pursuant to this Agreement; provided, however, Servicer shall be obligated to reimburse Holder from its own funds as a result of any failure by Servicer to adjust a Mortgage Interest Rate or Monthly Payment in accordance with the terms of the related Mortgage Note as provided for by this Agreement. 15. Representations and Warranties of the Holder. The Holder, as a condition to the consummation of the transactions contemplated hereby, makes the following representations and warranties to the Servicer as of each Transfer Date: 18 (i) Due Organization and Authority. The Holder is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has all licenses necessary to carry on its business as now being conducted; the Holder has the full corporate power and authority to execute and deliver this Agreement, and to perform in accordance herewith. The execution, delivery and performance of this Agreement, including all instruments of transfer to be delivered pursuant to this Agreement by the owner, and the consummation of the transactions contemplated hereby, have been duly and validly authorized; this Agreement evidences the valid binding and enforceable obligation of the owner, and all requisite corporate action has been taken by the Holder to make this Agreement valid and binding upon the Servicer in accordance with these terms. (ii) Sole Owner. Holder is the sole and lawful owner and holder of the Mortgage Loans and has full legal right, power and authority to enter into this Agreement and to perform each and all of Holder's obligations under this Agreement. (iii) Compliance with Applicable Law. Holder has complied with: (a) All applicable laws, rules and regulations of the US Government and each applicable state and local government; (b) If applicable, rules, regulations, handbooks and guides of FHLMC, FNMA, other applicable investors, and each applicable private mortgage insurer relating to such mortgage loans, including, but not limited to, the origination of such mortgage loans, and (c) All provisions of each loan and the loan documents. (iv) No Conflicts. Neither the execution and delivery of this Agreement nor the conveyance of the responsibilities to the Servicer or the transactions contemplated hereby, will conflict with or result in a breach of any of the terms, conditions or provisions of the owner's charter or bylaws, or any legal restriction or any agreement or instrument to which the owner is now a party, or by which it is bound, or constitute a default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Holder or its property is subject, or impair the value of this contract consummated hereby. (v) No Litigation Pending. There is no action, suit, proceeding or investigation pending or threatened against the Holder which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties, or assets of the owner, or in any material impairment of the right or ability of the owner to carry on its business substantially as now conducted, or in any material liability on the part of the owner, or which would draw into question the validity of this Agreement, or of any action taken or to be taken in connection with the obligations of the owner contemplated herein, or 19 which would be likely to impair materially the ability of the owner to perform pursuant to the terms of this Agreement. (vi) No Untrue Information. Neither this agreement nor any statement, report or other document furnished or to be furnished pursuant to this Agreement or in connection with the transactions contemplated herein, contains any untrue statement of fact or omits any fact necessary to make the statements contained therein not misleading. 16. Indemnification by Holder. The Holder shall indemnify the Servicer and hold it harmless against any losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments, and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, a breach of the Holder representations and warranties contained in this Agreement. Any cause of action against the Holder relating to or arising out of the breach of any representation and warranty made in this Agreement, shall accrue upon (i) discovery of such breach by the Servicer or notice thereof by the Servicer to the Holder; (ii) failure by the Holder to cure such breach; and (iii) demand upon the Holder by the Servicer for compliance with the terms of this Agreement. 17. Representations Warranties and Agreements of the Servicer. The Servicer, as a condition to the consummation of the transactions contemplated by this Agreement, hereby makes the following representations and warranties to the Holder as of each Transfer Date: (i) Due Organization and Authority. The Servicer is an Ohio corporation organizedand validly existing under the laws of the State of Ohio and has all licenses necessary to carry on its business as now being conducted, and is licensed, qualified and in good standing in each state where a Mortgaged Property is located, if the laws of such state require licensing or qualification in order to conduct business of the type conducted by the Servicer, and in any event, the Servicer is in compliance with the laws of any such state to the extent necessary to insure the enforceability of the terms of this Agreement; the Servicer has the full corporate power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Servicer in the consummation of the transactions contemplated hereby, have been duly and validly authorized; this Agreement evidences the valid binding and enforceable obligation of the Servicer and all requisite corporate action has been taken by the Servicer to make this Agreement valid and binding upon the Servicer in accordance with its terms. (ii) Ability to Perform. The Servicer does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant and undertaking contained in this Agreement. (iii) Ability to Service. The Servicer is an FHA approved mortgagee, a VA approved lender, and an approved seller/servicer of conventional residential mortgage loans for FNMA or FHLMC, with the facilities, procedures and experienced personnel 20 necessary for the sound servicing of mortgage loans of the same type as the Mortgage Loans. The Servicer is in good standing to service mortgage loans for the FHA and the VA, and either FNMA or FHLMC, and no event has occurred, including, but not limited to, a change in insurance coverage, which would make the Servicer unable to comply with FHA and VA, and either FNMA or FHLMC eligibility requirements or which would require notification to any of the FHA, VA, FNMA or FHLMC. (iv) No Litigation Pending. There is no action, suit, proceeding or investigation pending or threatened against the Servicer which, either in any one instance or in the aggregate, may result in any material adverse change in the business operations, financial condition, property or assets of the Servicer, or in any material impairment of the ability of the Servicer to carry on its business substantially as now conducted or in any material liability on the part of the Servicer, or which would draw into question the validity of this Agreement, or of any action taken or to be taken in connection with the obligations of the Servicer contemplated herein, or which would be likely to impair materially the ability of the Servicer to perform under the terms of this Agreement. (v) No Untrue Information. Neither this Agreement nor any statement, report or other document furnished or to be furnished pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statements of fact or omits to state a fact necessary to make the statements contained therein not misleading. (vi) No Conflicts. Neither the execution and delivery of this Agreement, the acquisition of the servicing responsibilities by the Servicer, or the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any of the terms, conditions or provisions of the Servicer's charter or bylaws or any legal restriction or any agreement or instrument to which the Servicer is now a party or by which it is bound, or constitute a default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Servicer or its property is subject, or impair the ability of the Servicer to service the mortgage loans, or impair the value of the mortgage loans. 18. Indemnification of Holder by Servicer. The Servicer shall indemnify the Holder and hold it harmless against any losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments, and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from, breach of the Servicer representations and warranties contained in this Agreement. Any cause of action against the Servicer relating to or arising out of the breach of any representation and warranty made in this Agreement by Servicer shall accrue upon (i) discovery of such breach by the Holder or notice thereof by the Holder to the Servicer, (u) failure by the Servicer to cure such breach, and (iii) demand upon the Servicer by the Holder for compliance with this Agreement. 21 19. Termination. With respect to any Mortgage Loan accepted by Servicer as of the Transfer Date, termination shall occur when Holder has conveyed its interest in the Mortgage Loan to an Investor, and Servicer has received all advances, fees and accrued interest pursuant to the Warehouse Agreement between Holder and Servicer, or when the Warehouse Agreement is terminated according to the terms thereof. If a Mortgage Loan is purchased by an Investor net of one or more Monthly Payments (net-funded), termination with respect to such Mortgage Loan shall occur as provided in Section 6 above. 20. Severability. If any part, provision, representation or warranty of this Agreement is deemed prohibited or is held to be void or unenforceable, such provision, representation or warranty shall be ineffective to the extent that such prohibition or unenforceability without invalidating the remaining provisions hereof. 21. Place of Delivery and Governing Law. This Agreement shall be deemed in effect when fully executed, and a signed counterpart thereof is received by Servicer in the State of Ohio, and shall be deemed to have been made in the State of Ohio. This Agreement shall be construed in accordance with the laws of the State of Ohio and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of Ohio. 22. Binding Agreement. This servicing agreement shall be binding upon and inure to the benefit of the parties hereto, their successors and assigns. This servicing agreement may not be assigned by either party without the prior written consent of the non-assigning party. 23. Notices. All notices or communications required of this Agreement shall be deemed to be property served when personally delivered, or when placed in the US mail, first class, postage prepaid, addressed as set forth here and below. 24. Counterparts. This Agreement may be executed simultaneously in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. 25. Waivers. No term or provision of this Agreement may be waived or modified unless such waiver or modification is in writing and signed by the party against whom such waiver or modification is sought to be enforced. IN WITNESS WHEREOF, the Servicer and Holder have caused their names to be signed and delivered by their duly authorized officers as of the date first above written. 22 PROVIDENT BANK BY: NAME: TITLE: [INSERT HOLDER NAME] BY: NAME: Forrest E Ferrell TITLE: President 23 Customer Management Client Questionnaire To provide you with the superior customer service we've promised as well as manage your borrowers account we have prepared these questions specific to your portfolio. This questionnaire should be returned with your executed servicing agreement. If you have any questions please call: Diane Borman Vice President Operations, PCFS Interim Servicing 1-800-838-9727, ext 18001 Interim Client Name: HomeGold Financial, Inc. Mailing Address: P.O. Box 17526 Greenville, SC 29606 Servicing Contact: Bruce Dodd/Jennifer Miles Phone#: 864-289-5437/864-289-5853 Fax#: 8888-362-3633 E-mail Address: bruce.dodd@homegold.com/jennifer.miles@homegold.com DDA Accounts DDA Account #: Bank Name: 24 Mailing Address: Phone #: Contact Person: Customer Service 1. Who is the contact for approval of a Partial Release and execution of any related loan modification documents? Yvonne Ruby 2. If you have any second mortgages in your portfolio, will you consider a request to subordinate the second when the first mortgage is being refinanced? Yes 3. If yes, who is the contact to review the request and execute the subordination agreement? Jennifer Miles/Bruce Dodd 4. If your loans contain prepayment penalties who is the contact to review/approve a request to waive or modify the penalty? 5. Do you consent to termination of an escrow account when the borrower requests? YES or NO N/A 6. If yes, who is the contact to review the request? N/A 7. If an escrow account WAS NOT established at closing, does the client allow an escrow account to be established upon receipt of a borrower's written request? NO Tax Escrow 25 1. On non-escrowed loans, at what point do you prefer PCFS advance escrow funds to pay delinquent property taxes: At first notice of delinquency or only when the property is in jeopardy of Tax Sale? Tax sale notification 2. Do you prefer to be contacted to approve disbursement of delinquent taxes on non-escrowed loans? YES 3. If yes, who is the contact to approve? Jennifer Miles PAH 1. Do any loans in your portfolio have privat mortgage insurance paid by the lender and not through the borrower's escrow payment? NO 2. Who is your PMI vendor? N/A 3. Where do you maintain your original PMI Certificates? NIA (PCFS must receive a copy if you choose to retain the originals.) VA & FHA Loans 26 1. Where do you maintain your original MIC or MIP Certificates? N/A (PCFS must receive a copy if you choose to retain the originals.) You will have access to investor accounting reports to monitor the status of your accounts: o Daily Freddie Mac Payoff Report Daily Payoff Report o Daily Regular Payment Remit Report o Fanme Mae Loan Activity Report o Freddie Mac Loan Level Report o Investor Collections Report o Investor Curtailments Report o Investor Cutoff Summary Report o Investor Delinquent Report o Investor Interim Remit Sum Report o Investor Loan Sale Report o Investor Payoffs Report o Investor Prepaid Report o Investor Rate and Payment Change Report o Investor Remittances Report o Investor Trial Balance Report o MIDANET Report o P&I Collections To Date Report o Remittance Report o Single Debit Report o MORNET Report o Pending Loan Transfers 27 EX-10.11.1 8 0008.txt MASTER REPURCHASE MASTER REPURCHASE AGREEMENT Between: Dated: January __, 2001 IMPERIAL WAREHOUSE FINANCE, INC. ("Buyer") - -------------------------------- and HOMEGOLD FINANCIAL, INC. and - ---------------------------- HOMEGOLD, INC. (jointly and severally, "Seller") - -------------- 1. Applicability From time to time the parties hereto may enter into transactions in which Seller agrees to transfer to Buyer whole mortgage loans or any interest in any whole mortgage loans secured by mortgages or deeds of trust on residential dwellings ("Loans") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Loans at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement. 2. Definitions (a) "Act of Insolvency," with respect to any party, (i) the commencement -------------------- by such party as debtor of any case or proceeding under any conservatorship or receivership (within the meaning of the Financial Institutions Reform, Recovery and Enforcement Act of 1989), bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or such party seeking the appointment of a conservator, receiver, trustee, custodian or similar official for such party or any substantial part of its property, or (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, or (iii) the making by a party of a general assignment for the benefit of creditors, or (iv) the admission in writing by a party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Loans," Loan(s) provided by Seller to Buyer ----------------------------- pursuant to Paragraph 4(a) hereof; Additional Purchased Securities shall be limited to 1 obligations issued by the United States government or mortgaged-backed securities issued by the Federal National Mortgage Association ("FNMA") or guaranteed by the Government National Mortgage Association ("GNMA") and otherwise acceptable to Buyer in its sole discretion; (c) "Assumed Repurchase Value," as of any date shall be the dollar amount --------------------------- not exceeding the Repurchase Price ascribed to such Loans on that date by Buyer in its reasonable and sole discretion and shall not include any Income on such Loans paid to and held by Seller pursuant to paragraph 5 hereof, and the Assumed Repurchase Value of any Additional Purchased Loans shall be the fair market value thereof as determined by Buyer in its reasonable and sole discretion; (d) "Buyer's Margin Amount," with respect to any Transaction as of any ------------------------ date, the amount obtained by application of a percentage, agreed to by Buyer and Seller prior to entering into the Transaction, to the aggregate principal balances of the Purchased Loans as of such date; (e) "Collateral Deposit Account," a deposit account established in the ----------------------------- name of Buyer at a depository institution designated by Buyer into which Seller shall deposit and maintain a cash collateral balance agreed to by Buyer and Seller prior to entering into the Transaction to secure Seller's obligations hereunder; (f) "Income," with respect to any Loans at any time, the principal --------- thereof then payable and all interest or other distributions thereon; (g) "Margin Deficit," the meaning specified in Paragraph 4(a) hereof; ----------------- (h) "Margin Excess," the meaning specified in Paragraph 4(b) hereof; ---------------- (i) "Mortgage File," the meaning specified in Paragraph 7 hereof; ---------------- (j) "Price Differential," with respect to any Transaction hereunder as of --------------------- any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (k) "Pricing Rate," the per annum percentage rate for determination of the --------------- Price Differential; (l) "Prime Rate," the prime rate or reference rate of U.S. money center ------------- commercial banks as published in The Wall Street Journal; 2 (m) "Purchase Date," the date on which Purchased Loans are transferred by ---------------- Seller to Buyer; (n) "Purchase Price," (i) on the Purchase Date, the price at which ----------------- Purchased Loans are transferred by Seller to Buyer, and (ii) thereafter, such price decreased by the amount of any cash transferred by Seller to Buyer pursuant to the Margin Deficit or applied to reduce Seller's obligations under clause (i) of Paragraph 5 hereof; (o) "Purchase Request," the meaning specified in Paragraph 3(a) hereof; ------------------- (p) "Purchased Loans," the Loans transferred by Seller to Buyer in a ------------------ Transaction hereunder, and any Loans substituted therefor in accordance with Paragraph 9 hereof.; (q) "Repurchase Date," the date on which Seller is to repurchase the ------------------ Purchased Loans from Buyer, including any date determined by application of the provisions of Paragraphs 3 or 11 hereof; (r) "Repurchase Price," the price at which Purchased Loans are to be ------------------- transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination, increased by any amount determined by the application of the provisions of Paragraph 11 hereof (s) "Servicing File," the meaning specified in Paragraph 7 hereof. ----------------- 3. Initiation; Purchase Request; Repurchase (a) All Transactions will be made pursuant to a written Confirmation of Terms of Transactions, certified by Seller and agreed to by Buyer. When Seller initiates a Transaction hereunder, Seller shall deliver to Buyer a written purchase request form for each Transaction (a "Purchase Request"). The Purchase Request shall describe the Loans, identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement as may be required by Buyer. Upon Buyer's approval and funding of the Loan, the Purchase Request, together with this Agreement, the Confirmation of Terms and the Seller's Warranties Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to 3 which the Purchase Request relates, unless with respect to the Purchase Request specific written objection is made by Buyer promptly after receipt thereof. In the event of any conflict between the terms of such Purchase Request and this Agreement, this Agreement shall prevail. (b) Seller shall repurchase each of the Purchased Loans from Buyer, and shall pay to Buyer the Repurchase Price therefore upon demand made by Buyer, pursuant to this Paragraph. In the case of Loans (i) which meet the requirements of the Seller's Warranties Agreement in all material respects, such demand by Buyer may not be made prior to 45 days following the date of the Transaction in which the Loans were originally conveyed to Buyer provided no Event of Default (as defined hereinafter) has occurred; (ii) which do not meet the requirements of the Seller's Warranties Agreement in all material respects, such demand by Buyer may be made at any time; and (iii) Seller may repurchase Loans at any time, irrespective of whether the particular Loan(s) meets the requirements of the Seller's Warranties Agreement. In any case such demand either by Buyer or by Seller shall be for a repurchase of all Purchased Loans subject to the related Transaction and such demand shall be made no later than 5:00 pm Pacific Time on the business day preceding the day on which such repurchase will be effective, which repurchase shall also be on a business day. On the date specified in such demand or on the date fixed for repurchase, the repurchase will be effective by transfer to Seller or its agent of the Purchased Loans and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to a designated account of Buyer. 4. Margin Maintenance (a) If at any time the difference between the aggregate Assumed Repurchase Value of all Purchased Loans held by Buyer, and the aggregate Buyer's Margin Amount for all such Transactions at such time, is less than the balance of the Collateral Deposit Account (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Buyer's option to transfer cash or Purchased Loans to Buyer, so that the balance in the Collateral Deposit Account will thereupon equal or exceed the difference between aggregate Assumed Repurchase Value of the Purchased Loans, and the aggregate Buyer's Margin Amount. (b) The Collateral Deposit Account and all sums held therein, including any amount by which the balance thereof exceeds the difference between the aggregate Assumed Repurchase Value and the aggregate Buyer's Margin Amount (the "Margin Excess") shall constitute collateral security for the full and timely payment and performance by Seller of all indebtedness and obligations to Buyer, whether arising under this Agreement or otherwise, and Seller pledges and grants to Buyer a security interest therein, including the right to withdraw, setoff and apply all sums held therein to any amounts due hereunder. 5. Income Payments 4 Except as provided in paragraph 11 of this Agreement, Seller shall be deemed to hold for the benefit of and in trust for Buyer all Income including without limitation all scheduled and unscheduled principal and interest payments, received by Seller with respect to such Loans. Seller shall service the Loans or supervise the servicing of the Loans for the benefit of Buyer in accordance with the terms of Paragraph 8 hereof and shall provide Buyer with the servicing tape or payment histories for all such serviced Loans not later than the 7/th/ day of each month. Seller will provide Buyer with reports substantially identical in form to FNMA's form 2010 remittance report with respect to all Loans then involved in any Transaction hereunder. Within three business days of its receipt of each such report, Buyer either (i) shall determine that a Margin Deficit has occurred and direct Seller to pay to Buyer all Income received in the period covered by such report to the extent of such Margin Deficit in which case Buyer shall be deemed to have released any excess Income to Seller or (ii) shall determine that a Margin Deficit has not occurred in which case Buyer shall be deemed to have released all such Income to Seller. 6. Security Interest Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Seller's right (including the power to convey title thereto) title and interest in and to the Purchased Loans, the contractual right to receive payments, including the right to payments of principal and interest and the right to enforce such payments arising from or under any of the Purchased Loans, the contractual right to service each Loan, any sub-servicing agreements with respect to each Loan and all documents in each Mortgage File and Servicing File with respect to all Transactions hereunder and all income, payment, product and proceeds thereof (the "Collateral"). In such event, the parties hereto intend to create for the benefit of Buyer, as secured party, a legally valid and enforceable first priority perfected security interest in the collateral. On or prior to each Purchase Date, Seller shall cause to be filed in the appropriate filing offices of the jurisdiction in which Seller maintains its place of business or its Chief Executive Office if Seller has more than one place of business in accordance with applicable law Uniform Commercial Code financing statements naming Seller as debtor, Buyer as secured party and the Collateral as Collateral. 7. Payment and Transfer Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Loans transferred by one party hereto to the other party: (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request; or (ii) shall be transferred by any other method mutually acceptable to Seller and Buyer. 5 The transfer of Loans to Buyer shall include the delivery to the Buyer of the following documents ("the Mortgage File"); (i) the original note or other evidence of indebtedness ("the Mortgage Note") of the obligor thereon (each such obligor, a "Mortgagor"), endorsed to the order of or assigned to Seller by the holder/payee thereof, without recourse, and endorsed by Seller, without recourse, in blank, (ii) the original mortgage deed of trust or other instrument (the "Mortgage") creating a first or second lien on the underlying property securing the Loan (the "Mortgaged Property") naming Seller as the "Mortgagee" or "Beneficiary" thereof, and bearing on the face thereof the address of Seller as provided in Paragraph 13 of this Agreement, or, if the Mortgage does not name Seller as the mortgagee/beneficiary, the Mortgage, together with an instrument of assignment assigning the Mortgage, individually or together with other Mortgages, to Seller and bearing on the face thereof the address of Seller as provided in Paragraph 13 of this Agreement, and, in either case, bearing evidence that such instruments have been recorded in the appropriate jurisdiction where the Mortgaged Property is located (or, in lieu of the original of the Mortgage or the assignment thereof, a duplicate or conformed copy of the Mortgage or instrument of assignment, if any, together with a certificate of either the closing attorney or an officer of the title insurer that issued the related title insurance policy, or a certificate of receipt from the recording office, certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) have been or are currently submitted to be recorded in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located); (iii) an original assignment of Mortgage, in blank, which assignment shall be in form and substance acceptable for recording and, in the event that the Seller acquired the Loan in a merger, the assignment must be by "[Seller], successor by merger to [name of predecessor]"; (iv) any intervening assignment of the Mortgage not included in (ii) above, including any warehousing assignment; (v) any assumption, modification, extension or guaranty agreement; (vi) the Lender's title insurance policy, or, if such policy has not been issued, a written commitment or interim binder issued by the title insurance company evidencing that the required title insurance coverage is in effect and unconditionally guaranteeing the holder of the Loan that the Lender's title insurance policy will be issued; (vii) if applicable, any policy or certificate of primary mortgage guaranty insurance; (viii) if the Mortgage Note or Mortgage or any other material document or instrument relating to the Loan has been signed by a person on behalf of the Mortgagor, the power of attorney or other instrument that authorized and empowered such person to sign with recording information thereon; (ix) with respect to FHA insured Loans, the original FHA Insurance Contract, together with a completed HUD Form 92080 "Mortgagee Record Change" with the Purchasing Mortgagees name left blank; (x) with respect to VA guaranteed Loans, the original VA Loan Guaranty Certificate; (xi) with respect to each Loan which is subject to the provisions of the Homeownership and Equity Protection Act of 1994, a copy of a notice to each entity which was a purchaser or assignee of the Mortgage Loan, satisfying the provisions of such Act and the regulations issued thereunder, to the effect that the Loan is subject to special truth in lending rules; (xii) any certified copies of the hazard insurance policy or flood insurance policy with extended coverage of the hazard insurance policy; (xiii) the Loan closing instruction with specific instructions requiring purchase monies to be returned to Buyer if the Loan is not settled within 48 hours of receipt of purchase monies; and (xiv) any other document as may be requested by Buyer. 6 Notwithstanding the above, Seller shall, at least one business day prior to the related Purchase Date, deliver to or cause to be delivered to Buyer, originals or true copies of such documents contained in the Mortgage File; and within forty-eight (48) hours after such Purchase Date Seller shall deliver or cause to be delivered to Buyer, the originals (to the extent not previously delivered) of all such documents in the Mortgage File. Failure by Seller to deliver or cause to be delivered such documents within such time periods specified in the immediately preceding sentence shall constitute an Event of Default under this Agreement. Seller shall cause each closing agent to hold any originals of such documents in the Mortgage File held by such closing agent prior to delivery thereof to Buyer, in trust and as bailee for Buyer. In addition to the documents contained in the Mortgage File, Seller shall deliver to Buyer on or prior to the Purchase Date for such Transaction a security release certification acceptable to Buyer, certifying the release of any security interest of a third party which may have existed with respect to any of the Loans subject to such Transaction during the 45-day period prior to the related Purchase Date. Seller shall include on each Loan Schedule a code indicating whether the Loan is subject to the Homeownership and Equity Protection Act of 1994. Seller shall cause to be maintained a servicing file ("Servicing File") with respect to each Loan that shall contain the following documents: (a) copies of all the documents contained in the Mortgage File, (b) any instrument necessary to complete identification of any exception set forth in the exception schedule in the title insurance policy (e.g., map or plat, restrictions, easement, sewer agreements, home association declaration, etc.,); (c) a survey of the Mortgaged Property; (d) any hazard insurance policy or flood insurance policy, with extended coverage of the hazard insurance policy; (e) the Loan closing statement (Form HUD-1) and any other truth-in- lending, real estate settlement procedure forms or other disclosure statements required by law; (f) the residential loan application, if applicable; (g) any verification of employment and income; (h) if applicable, any verification of acceptable evidence of source and amount of downpayment; (i) any credit report on the borrower under the Loan; (j) each residential appraisal report with photographs of the Mortgaged Property; (k) any tax receipts, insurance premium, ledger sheets, payment records, insurance claim files and correspondence, current and historical computerized date files, underwriting standards used for origination and all other papers and records developed or originated by the Seller, any servicer or others, required to document the Loan or to service the Loan; and (l) any other document as may be requested by Buyer. 7 Seller shall cause to be delivered to Buyer each Servicing File upon Event of Default by Seller under this Agreement. 8. Segregation of Purchased Loans; Servicing (a) To the extent required by applicable law, all Purchased Loans in the possession of Seller shall be segregated from other Loans in its possession and shall be identified as subject to this Agreement. Upon transfer of the Purchased Loans to Buyer and until Seller's repurchase thereof as provided herein, ownership of each Purchased Loan including each document in the related Mortgage File is vested in Buyer. Upon transfer of the Purchased Loans to Buyer and until Seller's repurchase thereof as provided herein, record title in the name of Seller to each Mortgage may be retained by Seller in trust, for the benefit of Buyer for the sole purpose of facilitating the servicing and the supervision of the servicing of the Purchased Loans, provided that Buyer may elect to cause record title to be transferred to Buyer at any time. Unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transaction(s) with the Purchased Loans or otherwise participating, pledging or hypothecating the Purchased Loans, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Loans (and no substitutes thereof) to Seller. Upon Seller's repurchase of the Purchased Loans, Buyer agrees to promptly execute endorsements of the Mortgage Notes, assignments of the Mortgages and UCC-3 assignments to the extent that such documents are prepared by Seller for Buyer's execution, are delivered to Buyer by Seller and are necessary to reconvey, without recourse, to Seller and perfect title of like tenor to that conveyed to Buyer on the related Loans. Buyer agrees to cooperate with Seller to identify documents that may be required to effect such reconveyance and perfection of title to Seller. (b) Seller shall service and administer each Purchased Loan for the benefit of Buyer prior to the related Repurchase Date; Seller shall have full power and authority, acting alone, to do any and all things in connection with such servicing which Seller or its agents may deem necessary and consistent with the Transactions and agreements contemplated by this Agreement except that Seller may not modify or amend the terms of the Purchased Loans in any material respect. However, the obligations of Seller to service the Purchased Loans on behalf of Buyer shall cease upon the payment to Buyer by Seller of the Repurchase Price. Seller and its agents, in administering and servicing the Purchased Loans, shall employ procedures (including collection procedures) and exercise the same care customarily employed and exercised by Seller or its agents in servicing and administering mortgage loans for Seller's own account, in accordance with accepted mortgage servicing practices of prudent lending institutions with respect to mortgage loans similar to the Purchased Loans and giving due consideration to Buyer's reliance on Seller and its agents. Seller shall be responsible for the actions of its agents relating to its servicing of the Loans as 8 though Seller itself were servicing the Purchased Loans. Seller shall collect all Income on behalf of Buyer, and unless otherwise directed by Buyer, Seller shall retain such Income, in trust, for the benefit of the Buyer; provided, however, upon the request of Buyer, Seller shall remit to Buyer such Income. Buyer shall reduce the Repurchase Price of any Transaction for any Income from the Loans actually received by Buyer pursuant to this Paragraph. Upon the occurrence and continuance of an Event of Default, Buyer may, in its sole discretion, (i) sell its right to the Purchased Loans on a servicing released basis or (ii) terminate the Seller as servicer of the Purchased Loans with or without cause, in each case without payment of any termination fee and such termination shall be effective immediately. Seller further agrees to indemnify and hold Buyer harmless from any claims, losses, liabilities, costs (including attorneys' fees) that arise from Seller's servicing of the Loans. 9. Substitution Seller may not, without the prior written consent of Buyer in Buyer's sole discretion, substitute other mortgage loans for any Purchased Loans. Such substitution, if authorized by Buyer, shall be made by transfer to Buyer of such other Loans and transfer to Seller of such Purchased Loans. After substitution, the substituted Loans shall be deemed to be Purchased Loans. 10. Representations Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected, (vi) Seller and Buyer have entered into the Transaction described in each Purchase Request form contemporaneously with the sale of the Purchased Loan(s) by Seller to Buyer and the transfer of the Purchase Price by Buyer to Seller, or, in the event that the Transaction is deemed to constitute a loan, contemporaneously with the grant of the security interest in the Collateral by Seller to Buyer pursuant to paragraph 6 hereof and the transfer of the consideration therefor, by Buyer to Seller, (vii) the board of directors of Seller has approved this Agreement, and such approval is reflected in the minutes of said board, and (viii) this Agreement shall be continuously, from the time of its execution, a corporate record of Seller. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 9 11. Events of Default In the event that (i) Seller fails to repurchase any Purchased Loans upon the applicable Repurchase Date, (ii) Seller fails to comply with any provision of this Agreement, the Confirmation of Terms, Purchase Request or Seller's Wannanties Agreement, (iii) an Act of Insolvency occurs with respect to Seller, (iv) any representation made by Seller shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, (v) Seller shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder; (vi) Buyer shall have reasonably determined that Seller is or will be unable to meet its commitment under this Agreement and any other related agreement and shall have notified Seller of such determination and Seller shall not have responded with appropriate information to the contrary to the satisfaction of Buyer within 7 days; (vii) this Agreement shall for any reason cease to create a valid, first priority security interest in any of the Collateral ; (viii) a final judgment by any competent court in the United States of America for the payment of money in an amount of at least $50,000 is rendered against Seller, and the same remains undischarged for a period of 30 days during which execution of such judgment is not effectively stayed; (ix) Seller shall fail to observe or perform any of the covenants or agreements under any Loan document, which failure materially and adversely affects the rights of the Buyer; (x) any event of default or any event which with notice, the passage of time or both shall constitute an event of default shall occur and be continuing under any repurchase or other financing agreement for borrowed funds or indenture for borrowed funds by which Seller is bound or affected shall occur and be continuing; (xi) in the good faith judgment of Buyer, a material adverse change shall have occurred in the business operations, properties, prospects or condition (financial or otherwise) of Seller; (xii) Seller shall be in default with respect to any normal and customary covenants under any debt contract or agreement, any servicing agreement or any lease to which it is a party, which default could materially and adversely affect the financial condition of Seller (which covenants include, but are not limited to, an Act of Insolvency of Seller or the failure of Seller to make required payments under such contract or agreement as they become due); (xiii) any representation or warranty made by Seller in any Transaction document shall have been incorrect or untrue in any material respect (to the extent that such representation or warranty does not incorporate a materiality limitation in its terms) when made or repeated or when deemed to have been made or repeated; (xiv) Seller shall fail to promptly notify Buyer of (a) the acceleration of any debt obligation or the termination of any credit facility of Seller, respectively; (b) the amount and maturity of any such debt assumed after the date hereof; (c) any adverse developments with respect to pending or future litigation involving Seller, respectively; and (d) any other developments which might materially and adversely affect the financial condition of Seller; (xv) Seller's audited annual financial statements or the notes thereto or other opinions or conclusions stated therein shall be qualified or limited by reference to Seller's status as a "going concern"; (xvi) Seller shall have reported an operating loss for any period after February 1, 2001; (xvii) Seller shall fail to deliver to Buyer the documents in the Mortgage File within the time period specified in Paragraph 7 of this Agreement (each of (i) - (xvii) an "Event of Default"); then: (a) At the option of Buyer, exercised by written notice to Seller (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the 10 occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur. (b) If Buyer exercises or is deemed to have exercised the option referred to in subparagraph (a) above, (i) Seller's obligations hereunder to repurchase all Purchased Loans in such Transactions shall thereupon become immediately due and payable, (ii) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of (x) the greater of the Pricing Rate for such Transaction or the Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subparagraph (a) of this Paragraph (decreased as of any day by (A) any amounts retained by Buyer with respect to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any proceeds from the sale of Purchased Loans pursuant to subparagraph (c) of this Paragraph, and (C) any amounts credited to the account of Seller pursuant to subparagraph (c) of this Paragraph) on a 360 day per year basis for the actual number of days during the period from and including the date of the Event of Default giving rise to such option to but excluding the date of payment of the Repurchase Price as so increased, (iii) all Income paid to Buyer after such exercise or deemed exercise shall be retained by Buyer and applied to the aggregate unpaid Repurchase Prices owed by Seller, and (iv) Seller shall immediately deliver to Buyer any Purchased Loans subject to such Transactions then in Seller's possession. (c) After one business day's notice to Seller (which notice need not be given if an Act of Insolvency shall have occurred, Buyer may: (A) immediately sell, in a recognized market or in any other commercially reasonable manner at such price or prices as Buyer may reasonably deem satisfactory, any or all Purchased Loans subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder, or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Loans, to give Seller credit for such Purchased Loans in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by Seller hereunder and in either case upon the determination and receipt by Buyer, in a manner deemed final and complete by Buyer in its sole discretion, of the aggregate unpaid Repurchase Prices and any other amounts owing which Buyer is otherwise entitled hereunder, Buyer shall transfer the portion of the Purchased Loans and proceeds thereof, including without limitation, any proceeds of a sale of the servicing rights to the Loans, held by Buyer following such receipt to either (i) Seller, if in Buyer's sole discretion Seller is legally entitled thereto, (ii) such other party or person as is in Buyer's reasonable judgment is legally entitled thereto, or (iii) if Buyer cannot determine in its reasonable judgment the person or party entitled thereto, a court of competent jurisdiction. (d) The defaulting party shall be liable to the nondefaulting party for the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection 11 with or as a consequence of an Event of Default, together with interest thereon at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (e) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. (f) Seller acknowledges that any delay in the ability of Buyer to exercise its remedies pursuant to Paragraph 11 hereof shall result in irreparable injury to Buyer. (g) Limitation of Seller's Liability: As required by the provisions of that certain Indenture dated September 23, 1997, as amended, by and between HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.), the Subsidiary Guarantors named therein (one of which is Seller) and Bankers Trust Company as Trustee, notwithstanding any other provision of this Agreement to the contrary, Buyer(s) shall have no recourse against Seller or any of its affiliates to satisfy claims in respect of this Agreement and the transactions contemplated herein in excess of the realizable value of the Mortgage loans purchased from Seller pursuant hereto and held by such Buyer(s). 12. Single Agreement Buyer and Seller acknowledge that, and have entered hereunto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. Notices and Other Communications Any notice or communication in respect of this Agreement will be sufficiently given to a party if in writing and delivered in person, sent by certified or registered mail, return receipt requested, or by overnight courier or given by facsimile transfer and first class mail at the following address or facsimile number: To Buyer: 12 Imperial Warehouse Finance 23430 Hawthorne Blvd. Bldg. 3, Suite 210 Torrance, CA 90505 Facsimile number: (310) 465-0841 Attention: Zoila Velasco To Seller: HomeGold, Inc. 3901 Pelham Road Greenville, SC 29615 Facsimile Number: (864) 289-6096 Attention: Bruce Dodd A notice or communication will be effective: (i) if delivered by hand or sent by overnight courier, on the day and time it is delivered; (ii) if sent by facsimile transfer, on the day it is sent if confirmation of transmission is received; or (iii) if sent by certified or registered mail, return receipt requested, three days after dispatched. 14. Entire Agreement; Severability This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15. Non-assignability; Termination The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be canceled at any time by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. 16. Governing Law; Jurisdiction This Agreement shall be construed in accordance with and governed by the laws of the State of California without giving effect to the conflict of law principles thereof. 17. No Waivers; Amendments No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder. No modification or 13 waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. 18. Use of Employee Plan Assets (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding transaction involving a Plan Party. 19. Intent (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Loans subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securites contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. (b) It is understood that either party's right to liquidate Loans delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. 20. Disclosure Relating to Certain Federal Protections The parties acknowledge that they have been advised and agree that in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation. 14 21. Further Assurances Seller shall promptly provide such further assurances or agreements as Buyer may request in order to effect the purposes of this Agreement, including without limitation, the delivery of any further documents to ensure that Buyer maintains a first priority perfected security interest in the Collateral pursuant to Paragraph 6 hereof and to carry into effect the purpose of the Transaction documents. 22. Power of Attorney Buyer is hereby appointed the attorney-in-fact of Seller for the purpose of carrying out the provisions of this Agreement and taking any action and executing or endorsing any instruments that Buyer may deem necessary or advisable to accomplish the purpose hereof, including, without limitation, completing or correcting any endorsement of a Mortgage Note, assignment of a Mortgage, or financing statement which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, Buyer shall have the right and power during the occurrence and continuation of any Event of Default to receive, endorse and collect all checks made payable to the order of Seller representing any payment on account of the principal of or interest on any of the Purchased Loans or Collateral and to give full discharge for the same. 23. Costs and Expenses Seller shall promptly pay as and when payment is due all, and Buyer shall not be liable for any, expenses, fees and charges incurred by Buyer or Seller (other than the salaries and overhead of Buyer and its affiliates) arising out of or related in any way, to the administration and enforcement of this Agreement ("Costs"), including, without limitation, legal expenses, servicing costs and expenses, recording and filing fees and any costs associated with reconveyance of the Purchased Loans and, in the even that any Costs are incurred by Buyer, Seller shall reimburse Buyer on demand of Buyer accompanied by a statement describing the circumstances and the nature of the Cost, by wire transfer of immediately available federal funds. 24. Usage Fee Seller and Buyer contemplate that all Loans purchased by Buyer and subject to repurchase pursuant to this Agreement shall have an average daily balance (in principal amount) of $12,500,000 (the "Minimum Usage Amount"). If, within sixty (60) days of the date hereof, Seller shall not have sold any Loans to Buyer pursuant to this Agreement, Seller shall promptly pay Buyer $1,000. If at any time after sixty (60) days after the Seller shall commenced selling Loans to Buyer, pursuant to this Agreement, but the average daily balance (in principal amount) of all Loans held by Buyer is less than the Minimum Usage Amount, Seller shall pay Buyer a fee to be determined by Buyer in its sole discretion, provided, however such fee shall not exceed $1,000 during any thirty (30) day period. 15 25. Fully Negotiated Agreement Neither this Agreement nor any uncertainty or ambiguity herein or of any provision hereof shall be construed or resolved against Buyer or Seller, whether under any rule of construction or otherwise. The terms and conditions contained in this Agreement have been fully negotiated and reviewed by all parties and their respective counsel. 26. Attorneys' Fees If any legal action, arbitration or other proceeding is brought for the enforcement or interpretation of this Agreement, or because of an alleged dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the successful or prevailing party or parties shall be entitled to recover reasonable attorneys' fees and any other relief to which it or they may be entitled. The court or arbitrator before which such action or proceeding is brought shall determine which party is the successful or prevailing party within the meaning of this section, taking into account all bona fide settlement offers of all parties, and such determination shall be binding upon the parties 27. Arbitration Any dispute between the parties arising out of or by reason of this Agreement or regarding its construction shall be submitted for arbitration in Los Angeles, California, and shall be settled in accordance with the rules and regulations then existing of the American Arbitration Association, to which shall be added the provisions of the California Civil Discovery Act. Judgment upon any award rendered in such proceedings may be obtained by either party in any court of competent jurisdiction. 28. Counterparts This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one instrument. It shall not be necessary in making proof of this Agreement or any counterpart thereof to produce or account for any other counterpart. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective duly authorized representatives. (Buyer) (Seller) IMPERIAL WAREHOUSE FINANCE, INC. HOMEGOLD, INC. HOMEGOLD, FINANCIAL, INC. 16 By:_________________________________ By:__________________________ Name: Zoila E. Velasco Name:________________________ ------------------------------ Title: President/CEO Title:_________________________ ----------------------------- Date:_______________________________ Date:_________________________ 17 CONFIRMATION OF TERMS OF TRANSACTIONS (CERTIFICATE OF SELLER) Imperial Warehouse Finances, Inc. 23430 Hawthorne Blvd., Bldg. 3, Suite 210 Torrance, CA 90505 RE: Master Repurchase Agreement Reference is made to the Master Repurchase Agreement (the "Master Repurchase Agreement") dated as of January 11, 2001, between Imperial Warehouse Finance, Inc. (the "Buyer") and HomeGold Financial, Inc. and HomeGold, Inc., (the "Seller"). Capitalized terms used but not defined herein shall have the respective meanings given to such terms in the Master Repurchase Agreement. The Buyer and the Seller hereby confirm the Buyer's purchase from the Seller from tim to time under the Master Repurchase Agreement of Purchased Loans to be listed on Mortgage Loan Schedules which will be transmitted from Seller to Buyer. Seller agrees to provide to Buyer a Purchase Request Form and Mortgage Loan Schedule in the form of "Exhibit A" hereto which must be approved by Buyer before each Transaction is completed. Upon the approval by Buyer of the Purchase Request Form and Mortgage Loan Schedule and Buyer's funding of the Purchase Price. Seller agrees that the sale of the mortgage loans listed thereon shall be effective hereunder pursuant to the terms and conditions of the Master Repurchase Agreement, the Seller's Warranties Agreement and all modifications and addendums thereto. As to each Loan listed on the Purchase Request Forms and Mortgage Loan Schedules submitted hereafter, the following pricing, terms and conditions shall apply: Purchase Price: Net Disbursement Amount to be specified on Purchase Request Form. Buyer's Margin Amount: Equal to 88% of the face amount of the Loan, or if a Second Mortgage, then 85% of such amount. Transaction Fee: $60.00 per Loan. To be paid by Seller to Buyer within 45 days after Purchase Date. Repurchase Date: On demand as set forth in Paragraph 3 of the Master Repurchase Agreement. Pricing Rate: A per annum rate equal to the sum of (i) the rate per annum publicly announced by U.S. Money Center Commercial Banks as its "Prime Rate" as such rate shall change from time to time, plus (ii) 100 basis points. Upon the occurrence of an Event of Default of the Seller, the number of basis points in (ii) shall be increased to 300 but in no event shall the increased Price Differential resulting from an event of default be less $120 per Loan. The Pricing Rate shall be calculated on the basis of a 360-day year for the actual number of days elapsed. Exit Fee: In addition to the Repurchase Price, Seller shall pay to Buyer upon the repurchase of each Loan an Exit Fee equal to 0.25% of the Repurchase Price, which Exit Fee shall be divided equally between Buyer and Impac Mortgage Acceptance Corp. Collateral Deposit Account: $2.5 million to be deposited with Southern Pacific Bank as custodian for Buyer, which account shall be pledged to Buyer as collateral security for all obligations of Seller to Buyer. For auditing or other purposes of the Buyer, the Seller may receive a computer- generated trade confirmation with respect to each Transaction that does not provide for countersignature thereof by the Seller. It is understood and agreed that such confirmation shall be null and void and of no force and effect with respect to this Transaction. Pursuant to the sale of the Loans set forth on each Mortgage Loan Schedule (the "Mortgage Loans") by the Seller to Imperial Warehouse Finance, Inc. ("IWF") pursuant to the Master Repurchase Agreement, the Seller hereby sells, transfers, assigns, sets over and otherwise conveys to Buyer all of its right (including the power to convey title thereto), title and interest in and to each Loan, including, without limitation, those mortgage loans to be listed on the Mortgage Loan Schedules submitted hereafter. Nothing contained in this Certificate or in the Master Repurchase Agreement shall constitute a commitment by Buyer to purchase any particular loan(s). Kindly acknowledge your agreement to the foregoing by signing and returning the enclosed extra copy of this letter. HOMEGOLD FINANCIAL, INC. HOMEGOLD, INC. Sincerely, Sincerely, By: /s/ Forrest Ferrell By: /s/ Forrest Ferrell ------------------- ------------------- Name: Forrest Ferrell Name: Forrest Ferrell Title: President Title: President ACKNOWLEDGED AND AGREED TO: IMPERIAL WAREHOUSE FINANCE, INC. By:/s/ Zoila E. Velasco -------------------- Zoila E. Velasco President CEO EX-10.11.2 9 0009.txt SELLERS WARRANTIES IMPERIAL WAREHOUSE FINANCE, INC. Initial Buyer and HomeGold Financial, Inc. and HomeGold, Inc. Seller SELLER'S WARRANTIES AGREEMENT Dated as of January 11, 2001 Mortgage Loans This Seller's Warranties Agreement, dated and effective as of January __, 2001, is executed between IMPERIAL WAREHOUSE FINANCE, INC., a California corporation, as the initial buyer ("Initial Buyer"), and HomeGold, Inc. as the seller ("Seller"). PRELIMINARY STATEMENTS From time to time, the Initial Buyer will be purchasing from the Seller pursuant to a Master Repurchase Agreement dated as of the Closing Date between the Seller and the Initial Buyer (the "Master Repurchase Agreement") the mortgage loans which are subject to this Agreement, and the Seller has agreed to make certain representations, warranties, and covenants with respect thereto. In consideration of the premises and the mutual agreements hereinafter set forth, the Initial Buyer and the Seller agree as follows: ARTICLE I DEFINITIONS Section 1.01 Defined Terms. ------------- Capitalized terms not defined herein shall have the meanings given to them in the Master Repurchase Agreement. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings specified in this Article: "Agreement": This Seller's Warranties Agreement including all exhibits hereto, amendments hereof and supplements hereto. "Appraised Value": With respect to any Mortgage Loan, the value of the related Mortgaged Property based upon the appraisal made for the originator at the time of origination of the Mortgage Loan or the sales price of the Mortgaged Property at such time of origination, whichever is less, provided, however, that in the case of a Refinanced Mortgage Loan, such value is based solely upon the appraisal made at the time of origination of such Refinanced Mortgage Loan. "Assignment": An individual assignment of the Mortgage, notice of transfer or equivalent instrument, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect of record the sale or transfer of the Mortgage Loan. "Business Day": Any day other than (i) a Saturday or Sunday, or (ii) a legal holiday in the State of California, or (iii) a day on which banking institutions in the State of California are authorized or obligated by law or executive order to be closed. "Buyer": Imperial Warehouse Finance, Inc. as Initial Buyer and holder of the Mortgage Loans and any subsequent holder or holders of the Mortgage Loans. 2 "Closing Date": The date on which the Initial Buyer funds any purchase pursuant to the Master Repurchase Agreement. "Confirmation": The letter agreement titled "Confirmation of Terms of Transactions (Certificate of Seller)" addressed to the Initial Buyer by Seller. "Cut-off Date": The first day of the month in which the related Purchase Date occurs. "Due Date": The date of each month on which each Monthly Payment is due on a Mortgage Loan, exclusive of any days of grace. "Escrow Account": An account maintained by the Seller for the deposit of Escrow Payments received in respect of one or more Mortgage Loans. "Escrow Payments": The amounts constituting ground rents, taxes, assessments, water rates, common charges in condominiums and planned unit developments, mortgage insurance premiums, fire and hazard insurance premiums and other payments which have been escrowed by the Mortgagor with the mortgagee pursuant to any Mortgage Loan. "FHA": The Federal Housing Administration or any successor thereto. "FHLMC": The Federal Home Loan Mortgage Corporation or any successor organization. "FNMA": The Federal National Mortgage Association or any successor organization. " Initial Buyer ": Imperial Warehouse Finance, Inc. "Interim Period": The period of time from the Closing Date to the Servicing Transfer Date, during which period the Seller shall service the Mortgage Loans on behalf of the Buyer. "Loan-to-Value Ratio" or "LTV": With respect to any Mortgage Loan, the original principal balance of such Mortgage Loan divided by the Appraised Value of the related Mortgaged Property. "Master Repurchase Agreement": As defined in the Preliminary Statement hereto. "Monthly Payment": The scheduled monthly payment of principal and interest on a Mortgage Loan which is payable by a Mortgagor under the related Mortgage Note. "Mortgage": The mortgage, deed of trust or other instrument creating a lien on real property securing the Mortgage Note. "Mortgage File": The mortgage documents pertaining to a particular Mortgage Loan which are specified in Exhibit A hereto. 3 "Mortgage Interest Rate": The annual rate at which interest accrues on any Mortgage Loan. "Mortgage Loan": An individual Mortgage Loan, including but not limited to, all documents included in the Mortgage File, the Monthly Payments, principal prepayments, cash liquidations, primary insurance proceeds, other insurance proceeds, condemnation proceeds, liquidation proceeds, and any and all rights, benefits, proceeds and obligations arising therefrom or in connection therewith, which is sold by the Seller to the Initial Buyer and which is the subject of this Agreement. The Mortgage Loans originally subject to this Agreement are identified on the Mortgage Loan Schedule. "Mortgage Loan Schedule": The list of Mortgage Loans subject to this Agreement and identified on the schedule attached to the related Certificate of Seller, which list shall set forth the following information with respect to each Mortgage Loan: (i) the loan number; (ii) the Mortgagor's name; (iii) the street address of the Mortgaged Property, including city, state and zip code; (iv) the Mortgage Interest Rate as of the Cut-off Date; (v) the original term; (vi) the original principal balance; (vii) the first payment date; (viii) the remaining term to amortized maturity and the stated maturity date; (ix) the Monthly Payment as of the Cut-off Date; (x) the outstanding principal balance as of the Cut-off Date, after giving effect to all payments of principal received on or before such date; (xi) the Loan-to-Value Ratio at origination; (xii) a code indicating whether the Mortgaged Property is occupied by owner; (xiii) a code indicating the lien priority of the related Mortgage; (xiv) a code indicating the type of residential dwelling; (xv) a code indicating the credit grade of the related Mortgagor; (xvi) with respect to each adjustable rate Mortgage Loan, the index; (xvii) with respect to each adjustable rate Mortgage Loan, the margin; (xviii) with respect to each adjustable rate Mortgage Loan, the Mortgage Interest Rate at origination; and (xix) with respect to each adjustable rate Mortgage Loan, the Monthly Payment at origination. Such schedule shall also set forth the weighted average of the amounts set forth in (iv) and (viii) above and the total of the amounts described under (x) above for all of the Mortgage Loans. Such list may be in the form of more than one list, collectively setting forth all of the information required. "Mortgage Note": The note of a Mortgagor secured by a Mortgage. 4 "Mortgaged Property": The underlying real property securing repayment of a Mortgage Note. "Mortgagor": The obligor on a Mortgage Note. "Refinanced Mortgage Loan": A Mortgage Loan which was made to a Mortgagor who owned the Mortgaged Property prior to the origination of such Mortgage Loan and the proceeds of which were used in whole or part to satisfy an existing mortgage. "Related Documents": The documents, other than this Agreement, entered into between the Seller and the Initial Buyer with respect to the Mortgage Loans, which documents consist of (a) each Confirmation, (b) the Master Repurchase Agreement, and (c) all other ancillary documents required by this Agreement or the Master Repurchase Agreement. "Seller": HomeGold Financial, Inc. or its successor in interest or any successor under this Agreement appointed as herein provided. "Underwriting Guidelines": The underwriting guidelines used by the Seller in connection with the origination of the Mortgage Loans and, if applicable, which have been submitted to and approved by the Initial Buyer. "VA": The United States Department of Veterans Affairs or any successor thereto. 5 ARTICLE II REPRESENTATIONS, WARRANTIES, AND COVENANTS OF THE SELLER Section 2.01 Representations and Warranties of the Seller. -------------------------------------------- The Seller represents and warrants to the Buyer that as of the Closing Date and as of each date thereafter on which the Master Repurchase Agreement is in effect: (i) The Seller is duly organized, validly existing and in good standing under the laws of South Carolina and is qualified to transact business in and is in good standing under the laws of each state where a Mortgaged Property is located or is otherwise exempt under applicable law from such qualification or is otherwise not required under applicable law to effect such qualification; no demand for such qualification has been made upon the Seller by any state having jurisdiction; and in any event the Seller is or will be in compliance with the laws of any such state to the extent necessary to insure the enforceability of each Mortgage Loan and the servicing of the Mortgage Loans in accordance with the terms of the Master Repurchase Agreement; (ii) The Seller has the full power and authority to hold each Mortgage Loan, to sell each Mortgage Loan and to execute, deliver and perform, and to enter into and consummate, all transactions contemplated by this Agreement and each Related Document. The Seller has duly authorized the execution, delivery and performance of this Agreement and the Related Documents, has duly executed and delivered this Agreement, and this Agreement and the Related Documents, assuming due authorization, execution and delivery by the Initial Buyer each constitutes a legal, valid and binding obligation of the Seller, enforceable against it in accordance with its terms; (iii) Neither the execution and delivery of this Agreement and the Related Documents, the acquisition or origination of the Mortgage Loans by the Seller, the sale of the Mortgage Loans to the Initial Buyer, the consummation of the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement and the Related Documents, will conflict with or result in a breach of any of the terms, conditions or provisions of the Seller's charter or by-laws or any legal restriction or any agreement or instrument to which the Seller is now a party or by which it is bound, or constitute a default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject; (iv) There is no litigation pending or, to the Seller's knowledge, threatened, which if determined adversely to the Seller would adversely affect the sale of the Mortgage Loans to the Initial Buyer, the execution, delivery or enforceability of this Agreement or any Related Document, or the ability of the Seller to service the Mortgage Loans or which would have a 6 material adverse effect on the financial condition of the Seller, except as disclosed in the public filings with the SEC by Seller's parent corporation, HomeGold Financial, Inc. (v) The Financial Statements delivered to Initial Buyer by Seller and the Guarantors are true, correct and complete as of the date of such Financial Statements for the period covered thereby. Since the date of the most recent Financial Statements delivered to Initial Buyer, there has not been any material adverse change in the business, operations, properties or financial position of Seller, and Seller does not know of any fact (other than matters of a general economic or political nature) which materially adversely affects or, so far as the Seller can now reasonably foresee, will materially adversely affect, the qrigination or sale of any Mortgage Loan or the business, operations, properties or financial position of Seller or the performance by Seller of its obligations under this Agreement. (vi) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of or compliance by the Seller with this Agreement and the Related Documents, the delivery of the Mortgage Files to the Buyer for the benefit of the Buyer, the sale of the Mortgage Loans to the Initial Buyer or the consummation of the transactions contemplated by this Agreement and the Related Documents; (vii) The consummation of the transactions contemplated by this Agreement and the Related Documents are in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the Mortgage Notes and the Mortgages by the Seller as contemplated by this Agreement and the Related Documents are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction; (viii) The Seller used no adverse selection procedures in selecting the Mortgage Loans from among the outstanding home mortgage loans in the Seller's portfolio at the Closing Date as to which the representations and warranties set forth in Section 2.02 could be made; (ix) The Seller has good and marketable title to, and is the sole owner of, the Mortgage Loans, free and clear of any lien, charge or encumbrance or any ownership or participation interest in favor of any other person, and the mortgage note has not been assigned, pledged, hypothecated or otherwise transferred to any person; (x) The county and state identified in Section 3.03 is the location of the principal place of business of Seller and, unless otherwise specified therein, that location is the only location in which the Financing Statements must be filed to perfect the security interest granted to Buyer under Paragraph 6 of the Master Repurchase Agreement. Unless otherwise specified in Section 3.03, Seller does not do business under any other names. Upon the filing of the Financing Statement for that location, Buyer will have a valid and perfected first-priority security interest as contemplated by such Paragraph for all the obligations of Seller, free and clear of all liens and encumbrances; and (xii) Neither this Agreement nor any statement, report or other document 7 prepared and furnished by or on behalf of the Seller pursuant to this Agreement or any Related Document or in connection with the transactions contemplated hereby contains any untrue statement of fact or omits to state a fact necessary to make the statements contained therein not misleading. Section 2.02 Representations and Warranties as to Individual Mortgage -------------------------------------------------------- Loans. ----- The Seller hereby represents and warrants to the Buyer that, as to each Mortgage Loan, as of the related Purchase Date and each date thereafter up to the related Repurchase Date: (i) The information set forth in the Mortgage Loan Schedule is complete, true and correct as of the Closing Date; (ii) All payments required to be made for such Mortgage Loan under the terms of the Mortgage have been made; the Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds from a party other than the owner of the Mortgaged Property subject to the Mortgage, directly or indirectly, for the payment of any amount required by the Mortgage Loan, except for interest accruing from the date of the mortgage note or date of disbursement of the Mortgage Loan proceeds, whichever is greater, to the day that precedes by one month the due date of the first installment of principal and interest; and there has been no delinquency of more than thirty days in any payment by the Mortgagor thereunder at any time since the origination of the Mortgage Loan; (iii) There are no delinquent taxes, ground rents, water charges, sewer rents or assessments, including assessments payable in future installments, or other outstanding charges affecting the related Mortgaged Property; (iv) The terms of the Mortgage Note and the Mortgage have not been impaired, waived, altered or modified in any respect, except by written instruments, the substance of which waiver, alteration or modification has been approved by the primary mortgage guaranty insurer, if any, and is reflected on the Mortgage Loan Schedule. No instrument of waiver, alteration or modification has been executed, and no Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the primary mortgage insurer, if any, and which assumption agreement is part of the Mortgage File and the terms of which are reflected in the Mortgage Loan Schedule; (v) The Mortgage Note and the Mortgage are not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Mortgage Note and the Mortgage, or the exercise of any right thereunder, render the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set- off, counterclaim or defense, including the defense of usury and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (vi) All buildings upon the Mortgaged Property are insured by a generally acceptable insurer against loss by fire, hazards of extended coverage and such other hazards as 8 are customary in the area where the Mortgaged Property is located, pursuant to insurance policies conforming to the requirements imposed by FNMA for similar mortgage loans which are serviced under its MBS program in an amount at least equal to the outstanding principal balance of the applicable Mortgage Loan (without coinsurance). If the Mortgaged Property is in an area identified on a Flood Hazard Map or Flood Insurance Rate Map issued by the Federal Emergency Management Agency as having special flood hazards (and such flood insurance has been made available) a flood insurance policy meeting the requirements of the current guidelines of the Federal Insurance Administration is in effect which policy conforms to the requirements of FNMA and FHLMC. All such insurance policies (collectively, the "hazard insurance policy") contain a standard mortgagee clause naming the Seller, its successors and assigns as mortgagee and all premiums thereon have been paid. The Mortgage obligates the Mortgagor thereunder to maintain all such insurance at Mortgagor's cost and expense, and on the Mortgagor's failure to do so, authorizes the holder of the Mortgage to maintain such insurance at Mortgagor's cost and expense and to seek reimbursement therefor from the Mortgagor; (vii) Any and all requirements of any federal, state or local law including, without limitation, usury, truth in lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan have been complied with in all material respects; (viii) The Mortgage has not been satisfied, canceled or subordinated, in whole, or rescinded, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (ix) The Mortgage is a valid, subsisting and enforceable lien on the Mortgaged Property, including all improvements on the Mortgaged Property subject only to (a) the lien of any prior mortgage, (b) the lien of current real property taxes and assessments not yet due and payable, (c) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording being acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and which do not adversely affect the Appraised Value of the Mortgaged Property, and (d) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, subsisting and enforceable first or second lien and first or second priority security interest on the property described therein; (x) The Mortgage Note and the Mortgage are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms. The mortgage note is on a form acceptable to FNMA and FHLMC. The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located; 9 (xi) All parties to the Mortgage Note and the Mortgage had legal capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties. The Mortgagor under the Mortgage Note is a natural person. The debt of the Mortgage Loan is evidenced by one Mortgage Note only; (xii) The proceeds of the Mortgage Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the mortgage were paid, and the mortgagor is not entitled to any refund of any amounts paid or due under the mortgage note or mortgage. Any future advances made prior to the date such Mortgage Loan was delivered have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan. (xiii) The Mortgage Note and the Mortgage have not been assigned or pledged, and the Seller has good and marketable title thereto, and the Seller is the sole owner thereof and has full right to transfer and sell the Mortgage Loan to the Initial Buyer free and clear of any encumbrance, equity, lien, pledge, charge, claim or security interest; (xiv) All parties which have had any interest in the Mortgage, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) in compliance with any and all applicable licensing and "doing business" requirements of the laws of the state wherein the Mortgaged Property is located; (xv) The Mortgage Loan is covered by an ALTA lender's title insurance policy acceptable to FNMA or FHLMC, issued by a title insurer acceptable to FNMA and FHLMC and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring (subject to the exceptions contained in (ix)(a) through (d) above) the Seller, its successors and assigns as to the first priority lien of the Mortgage in the original principal amount of the Mortgage Loan. Additionally, such lender's title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein. The Seller is the sole insured of such lender's title insurance policy, and such lender's title insurance policy is in full force and effect and will be in full force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such lender's title insurance policy, and no prior holder of the related Mortgage, including the Seller, has done, by act or omission, anything which would impair the coverage of such lender's title insurance policy; (xvi) There is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and the Seller has not waived any default, breach, violation or 10 event of acceleration; (xvii) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to such lien) affecting the related Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the related Mortgage; (xviii) All improvements which were considered in determining the Appraised Value of the related Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the mortgaged property is in violation of any applicable zoning law or regulation. The Mortgaged Property is lawfully occupied under applicable law, and all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of such mortgaged property and, with respect to the use and occupancy of the same, including but not limited to, certificates of occupancy, have been made or obtained from the appropriate authorities; (xix) The Mortgage Loan was originated by the Seller or a savings association, a savings bank, a commercial bank or similar banking institution which is supervised and examined by a federal or state authority or by a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Section 203 of the National Housing Act. With respect to adjustable rate Mortgage Loans, the Mortgage Interest Rate is adjusted on each interest rate adjustment date to equal the index plus the gross margin, rounded up or down to the nearest 1/8%, subject to the mortgage interest rate cap. With respect to fixed rate Mortgage Loans, the Mortgage Note is payable in equal monthly installments of principal and interest which are sufficient to amortize the principal balance of the Mortgage Loan over its term and pay interest at the Mortgage Interest Rate. With respect to adjustable rate Mortgage Loans, installments of interest are subject to change due to the adjustments to the Mortgage Interest Rate on each interest rate adjustment date, with interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date, over an original term of not more than thirty years from commencement of amortization. No Mortgage Loan is an interest only mortgage loan. No Mortgage Note provides for negative amortization. No adjustable rate Mortgage Loan is convertible to a fixed interest rate mortgage loan. Interest on each Mortgage Loan is calculated on the basis of a 360-day year consisting of twelve 30-day months; (xx) The Mortgage contains the usual and customary "due-on-sale" clause or other similar provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event the related Mortgaged Property is sold without the prior consent of the mortgagee thereunder; (xxi) The Mortgaged Property is free of damage and waste and there is no proceeding pending for the total or partial condemnation thereof. The Mortgaged Property is in good repair and undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended; 11 (xxii) The Mortgage contains customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (a) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (b) otherwise by judicial foreclosure. There is no other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. The Mortgaged Property or is not currently subject to any bankruptcy proceeding or foreclosure proceeding and the Mortgagor or is not currently seeking protection under applicable bankruptcy laws. There is no homestead or other exemption available to the Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage. No Mortgagor has requested relief under the Soldiers and Sailors Civil Relief Act of 1940; (xxiii) The Mortgage Loan was originated in accordance with the Underwriting Guidelines. The documents, instruments and agreements submitted for loan underwriting were not falsified and contain no untrue statement of fact or omit to state a fact required to be stated therein or necessary to make the information and statements therein not misleading; (xxiv) The Mortgage Note is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in (ix) above; (xxv) The Mortgage File contains an appraisal of the related Mortgaged Property, on a form acceptable to FNMA or FHLMC signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the Seller, who had no interest, direct or indirect, in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Mortgage Loan, and such appraisal met the requirements of applicable laws and regulations governing the originator thereof at the time of origination of the Mortgage Loan, and the appraisal satisfies the requirements of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated thereunder, all as in effect on the date the Mortgage Loan was originated. The determination of the Appraised Value of the Mortgaged Property was based on sales of comparable properties; (xxvi) In the event the Mortgage constitutes a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by the Buyer to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; (xxvii) No Mortgage Loan contains provisions pursuant to which Monthly Payments are (a) paid or partially paid with funds deposited in any separate account established by the Seller, the Mortgagor, or anyone on behalf of the Mortgagor, (b) paid by any source other than the Mortgagor or (c) contains any other similar provisions which may constitute a 12 "buydown" provision. No Mortgage Loan is a graduated payment mortgage loan or growing equity mortgage loan; (xxviii) The Mortgagor has executed a statement to the effect that the Mortgagor has received all disclosure materials required by applicable law with respect thereto. Such statement is included in the Mortgage File; (xxix) No Mortgage Loan was made in connection with (a) the construction or rehabilitation of a Mortgaged Property or (b) facilitating the sale or exchange of a Mortgaged Property by the lender; (xxx) No error, omission, misrepresentation, negligence, fraud or similar occurrence with respect to a Mortgage Loan has taken place on the part of any person, including without limitation the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan or in the application of any insurance in relation to such Mortgage Loan; (xxxi) The Seller has no knowledge of any circumstances or condition with respect to the Mortgage, the Mortgaged Property, the Mortgagor or the Mortgagor's credit standing that can reasonably be expected to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent, or adversely affect the value or marketability of the Mortgage Loan; (xxxii) The Mortgaged Property is located in the state indicated on the Mortgage Loan Schedule, and consists of a single parcel of real property with a detached single family residence erected thereon, or a two to four family dwelling, or an individual condominium unit in a low-rise condominium, or an individual unit in a planned unit development as defined by FNMA, none of which is a mobile home; (xxxiii) The original LTV of the Mortgage Loan was not more than 100%; (xxxiv) With respect to each Mortgage Loan which is subject to the provisions of the Homeownership and Equity Protection Act of 1994: the Mortgage Loan is identified as such on the Mortgage Loan Schedule, the related Mortgage File contains a notice from the originator, and a copy of a notice to each entity which was a buyer or assignee of the Mortgage Loan, satisfying the provisions of such Act and the regulations issued thereunder, to the effect that the Mortgage Loan is subject to special truth-in-lending rules; (xxxv) All Escrow Accounts are maintained with Seller and have been maintained in accordance with applicable law and the terms of the Mortgage Loans. The Escrow Payments required by the Mortgages which have been paid to the Seller for the account of the borrower are on deposit in the appropriate Escrow Account. No escrow deposits or Escrow Payments or other charges or payments due the Seller have been capitalized under any Mortgage or the related Mortgage Note; 13 (xxxvi) Except for such documents that are held by a servicer of the related Mortgage Loan, the Seller is in possession of a complete Mortgage File (including a copy of the survey of the Mortgaged Property, if any; an original hazard insurance policy and, if required by law, flood insurance policy, with extended coverage of the hazard insurance policy; a Mortgage Loan closing statement; a Mortgage Loan application; verification of employment and income, if any; evidence of source and amount of downpayment; credit report on the Mortgagor; an appraisal report; a photograph of the Mortgaged Property; an executed Truth-in-Lending disclosure statement and rescission rights waiver and a copy of all other materials required by law to be delivered to the Mortgagor; a contract of sale, if any, and any other documents customarily collected or created, and retained, in connection with the origination of mortgage loans). Seller has delivered, or caused to be delivered, to the Buyer as directed by Buyer, each document required to be so delivered; (xxxvii) All funds received by the Seller in connection with the Mortgage Loans, including, without limitation, foreclosure proceeds, fire insurance proceeds from fire losses, condemnation proceeds and principal reductions, have been applied to reduce the principal balance of the Mortgage Loans in question or deposited in the Escrow Account, or for reimbursement of repairs to the Mortgaged Property or as otherwise required by applicable law; (xxxiii) The Seller and any current or prior mortgagee or servicer of the Mortgage Loans have complied in all respects material to the value of the Servicing Rights with every applicable federal, state, or local law, statute, and ordinance, and any rule, regulation, or order issued thereunder including, without limitation, the fair housing, anti-redlining, equal credit opportunity, truth-in-lending, real estate settlement procedures, fair credit reporting, and every other prohibition against unlawful discrimination in residential lending or governing consumer credit, and also including, without limitation, the Consumer Credit Reporting Act, Equal Credit Opportunity Act of 1975 and Regulation B, Fair Credit Reporting Act, Truth-in-Lending Law, in particular, Regulation Z as amended, the Flood Disaster Protection Act of 1973, the Real Estate Settlement Procedures Act of 1974 as amended, and state and local consumer credit codes and laws, and the origination, collection and all other practices of the originator, the Seller and all prior servicers in connection with the origination or servicing of each Mortgage and Mortgage Note are and have been in all respects legal, proper, prudent and customary in the mortgage origination and servicing business. All mortgage interest rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited; and (xxxix) Neither the Seller nor any of its agents or affiliates has contacted or shall contact any Mortgagor for the purpose of inducing or encouraging the early prepayment or refinancing of the related Mortgage Loan, nor has the Seller or any of its agents or affiliates utilized, nor shall they utilize, any information held or acquired by the Seller or such agency or affiliates in their capacity as mortgagees or servicers of the Mortgage Loans to derive any other incidental income or benefit from the servicing thereof, nor has the Seller or such agents or affiliates given, nor will they give, a list of Mortgagors to any person for such purpose or to derive any other incidental income or benefit from the servicing thereof; provided, however that the foregoing shall not be 14 construed to limit or impair other activities of the Seller in its capacities other than as servicer of the Mortgage Loans, including, without limitation, the provision of banking and related services to customers (which may include the Mortgagors under the Mortgage Loans other than in their capacity as such) in the ordinary course and any general solicitation or encouragement of such customers to prepay or refinance existing mortgages or to purchase or renew insurance in connection therewith so long as the provisions of such services and any such solicitation or encouragement does not result in the refinancing of a Mortgage Loan by the Seller or any affiliate of the Seller. Section 2.03 Breach of Representation or Warranty. ------------------------------------ It is understood and agreed that the representations and warranties set forth in Sections 2.01 and 2.02 shall survive the sale of the Mortgage Loans to the Buyer and shall inure to the benefit of the Buyer and its successors and assigns, notwithstanding any restrictive or qualified endorsement on any Mortgage Note or Assignment or the examination of any Mortgage File and without regard to any applicable statute of limitations. Upon discovery by Seller of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Mortgage Loans or the interest of the Buyer in any Mortgage Loan, the Seller shall give prompt written notice to the Buyer. The Seller shall indemnify the Buyer and hold it or them harmless against any loss, damages, penalties, fines, forfeitures, legal fees and related costs, judgments, and other costs and expenses resulting from any claim, demand, defense or assertion based on or grounded upon, or resulting from a breach of the Seller's representations and warranties contained in this Agreement. It is understood and agreed that the obligations of the Seller set forth in this Section 2.03 to indemnify the Buyer as provided in this Section 2.03 are in addition to any other remedies of the Buyer respecting a breach of the foregoing representations and warranties. Limitation of Seller's Liability: As required by the provisions of that certain Indenture dated September 23, 1997, as amended, by and between HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.), the Subsidiary Guarantors named therein (one of which is Seller) and Bankers Trust Company as Trustee, not withstanding any other provision of this Agreement to the contrary, Buyer(s) shall have no recourse against Seller or any of its affiliates to satisfy claims in respect of this Agreement and the transactions contemplated herein in excess of the realizable value of the Mortgage Loans purchased from Seller pursuant hereto and held by such Buyer(s). Section 2.04 Covenants of Seller. ------------------- The Seller hereby covenants and agrees that until satisfaction in full of the obligations of the Seller under the Master Repurchase Agreement, unless the Buyer shall otherwise consent in writing, the Seller shall do the following: (i) Use the proceeds of each Transaction only to fund the Mortgage Loans described in the Purchase Request submitted to Buyer for such Transaction; 15 (ii) Furnish to Buyer: (a) Financial Statements of Seller and each Guarantor within ninety (90) days after the end of each year; (b) Not later than thirty (30) days after the end of each quarter, unaudited Financial Statements of Seller for the quarter then ended; and (c) Such other information as is reasonably requested by Buyer to determine the financial condition of Seller, and any Guarantor. (iii) Furnish to Buyer within ten (10) days of any election or appointment of officers or directors, written notice of any change in the persons who from time to time become principals, officers or directors of Seller; (iv) Notify Buyer within ten (10) days of any default under any Purchased Loan; any bankruptcy or insolvency proceeding commenced by or against Seller or any Guarantor; any event or occurrence which would, if not cured within the applicable notice or grace period, constitute an event of default under the Master Repurchase Agreement; and any change in the principal place of business of Seller; (iv) Not change its name, enter into or effect any merger, consolidation, share exchange, division, conversion, reclassification, reorganization or recapitalization, or other transaction of like effect, or dissolve; (v) Not pay to any Guarantor or affiliate of any Guarantor any fees, compensation, or other sums from proceeds of any Transaction or any Mortgage Loan except pursuant to a written agreement approved in writing by Buyer. ARTICLE III MISCELLANEOUS PROVISIONS Section 3.01 Amendment. --------- This Agreement may be amended from time to time by the Buyer and the Seller only by written agreement signed by the Buyer and the Seller. Section 3.02 Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California except to the extent preempted by Federal law. 16 Section 3.03 Notices. ------- Any notices or other communications permitted or required hereunder shall be in writing and shall be deemed conclusively to have been given if personally delivered at or mailed by registered mail, postage prepaid, and return receipt requested or transmitted by telex, telegraph or telecopier and confirmed by a similar mailed writing, if (i) in the case of the Seller to HomeGold, Inc., 3901 Pelham Road, Greenville, SC 29615. Attention: Bruce Dodd or such other address as may hereafter be furnished to the Buyer in writing by the Seller and (ii) in the case of the Buyer, Imperial Warehouse Finance, Inc. 23430 Hawthorne Boulevard, Bldg. 3, Suite 210, Torrance, CA 90505, Attention: Zoila Velasco, or such other address as may be furnished to the Seller in writing by the Buyer. Section 3.04 Severability Provisions. ----------------------- If any one or more of the covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, the invalidity of any such covenant, agreement, provision or term of this Agreement shall in no way affect the validity or enforceability of the other provisions of this Agreement, provided, however, that if the invalidity of any covenant, agreement or provision shall deprive any party of the economic benefit intended to be conferred by this Agreement, the parties shall negotiate in good faith to develop a structure the economic effect of which is as nearly as possible the same as the economic effect of this Agreement. Section 3.05 Exhibits. -------- The exhibits to this Agreement are hereby incorporated and made a part hereof and are an integral part of this Agreement. Section 3.06 General Interpretive Principles. ------------------------------- For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (i) the terms defined in this Agreement have the meanings assigned to them in this Agreement and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (ii) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (iii) references herein to "Articles", "Sections", "Subsections", "Paragraphs", and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, Paragraphs and other subdivisions of this Agreement; (iv) a reference to a Subsection without further reference to a Section is a 17 reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (v) the words "herein", "hereof", "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; and (vi) the term "include" or "including" shall mean without limitation by reason of enumeration. Section 3.07 Reproduction of Documents. ------------------------- This Agreement and all documents relating thereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, (ii) documents received by any party at the closing, and (iii) financial statements, certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, micro- card, miniature photographic or other similar process. The parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. Section 3.08 Counterparts. ------------ This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one instrument. It shall not be necessary in making proof of this Agreement or any counterpart thereof to produce or account for any other counterpart. Section 3.09 Entire Agreement, Successors and Assigns. ---------------------------------------- Except as otherwise provided herein, this Agreement together with the Related Documents constitutes the entire agreement between the parties hereto and supersedes all rights and prior agreements and understandings, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement shall not be assignable in whole or in part by the Seller. The Buyer may assign this Agreement, in whole or in part. The Buyer shall give the Seller prompt written notice of any such assignment, provided, however, that any failure to give such notice shall not be deemed to condition, qualify or affect any obligation of the Seller hereunder. This Agreement and any rights, remedies, obligations or liabilities under or by reason of the Agreement shall inure to the benefit of and be binding on the parties hereto or their respective successors and permitted assigns. IN WITNESS WHEREOF, the Seller and the Initial Buyer have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the day and year first above written. 18 IMPERIAL WAREHOUSE FINANCE, INC. By:__________________________________ Name: Zoila E. Velasco Title: President/CEO HOMEGOLD, INC. By: Name:________________________________ Title: HOMEGOLD, FINANCIAL, INC. By: Name:________________________________ Title: 19 STATE OF CALIFORNIA ) ) SS. COUNTY OF LOS ANGELES ) On the ______ day of _________________, 2000 before me, a Notary Public in and for said State, personally appeared ___________________________ known to me to be _______________________ of Imperial Warehouse Finance Inc., the corporation that executed the within instrument and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand affixed my official seal the day and year in this certificate first above written. ______________________________ Notary Public My Commission expires: 20 STATE OF SOUTH CAROLINA) ) SS. COUNTY OF ) On the ______ day of _________________, 2000 before me, a Notary Public in and for said State, personally appeared ___________________________ known to me to be _______________________ of HomeGold, Inc., the corporation that executed the within instrument and also known to me to be the person who executed it on behalf of said corporation, and acknowledged to me that such corporation executed the within instrument. IN WITNESS WHEREOF, I have hereunto set my hand affixed my official seal the day and year in this certificate first above written. ______________________________ Notary Public My Commission expires: 21 EXHIBIT A CONTENTS OF MORTGAGE FILE With respect to each Mortgage Loan, the Mortgage File shall include each of the following items, which shall be available for inspection by the Buyer. 1 The original note or other evidence of indebtedness (the "Mortgage Note") of the obligor thereon (each such obligor, a "Mortgagor"), endorsed to the order of or assigned to Seller by the holder/payee thereof, without recourse, and endorsed by Seller, without recourse, in blank. 2 The original mortgage, deed of trust or other instrument (the "Mortgage") creating a first lien on the underlying property securing the Mortgage Loan (the "Mortgaged Property"), naming Seller as the "mortgagee" or "beneficiary" thereof, and bearing on the face thereof the address of Seller, or, if the Mortgage does not name Seller as the mortgagee/beneficiary, the Mortgage, together with an instrument of assignment assigning the Mortgage, individually or together with other Mortgages, to Seller and bearing on the face thereof the address of Seller, and, in either case, bearing evidence that such instruments have been recorded in the appropriate jurisdiction where the Mortgaged Property is located (or, in lieu of the original of the Mortgage or the assignment thereof, a duplicate or conformed copy of the Mortgage or the instrument of assignment, if any, together with a certificate of either the closing attorney or an officer of the title insurer that issued the related title insurance policy, or a certificate of receipt from the recording office, certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) have been or are currently submitted to be recorded in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located). 3 An original assignment of Mortgage, in blank, which assignment shall be in form and substance acceptable for recording and, in the event that the Seller acquired the Mortgage Loan in a merger, the assignment must be by "[Seller], successor by merger to [name of predecessor]". 4 Any intervening assignment of the Mortgage not included in (ii) above, including any warehousing assignment. 5 Any assumption, modification, extension or guaranty agreement. 6 The Lender's title insurance policy, or, if such policy has not been 22 issued, a written commitment or interim binder issued by the title insurance company evidencing that the required title insurance coverage is in effect and unconditionally guaranteeing the holder of the Mortgage Loan that the lender's title insurance policy will be issued. 7 Any instrument necessary to complete identification of any exception set forth in the exception schedule in the title insurance policy (e.g., map or plat, restrictions, easements, sewer agreements, home association declarations, etc.). 8 A survey of the Mortgaged Property. 9 Any hazard insurance policy or flood insurance policy, with extended coverage of the hazard insurance policy. 10 The Mortgage Loan closing statement (Form HUD-1) and any other truth-in-lending, real estate settlement procedure forms or other disclosure statements required by law. 11 The residential loan application, if applicable. 12 Any verification of employment and income. 13 Any verification of acceptable evidence of source and amount of downpayment. 14 Any credit report on the borrower under the Mortgage Loan. 15 Each residential appraisal report. 16 A photograph of the Mortgaged Property. 17 If the Mortgage Note or Mortgage or any other material document or instrument relating to the Mortgage Loan has been signed by a person on behalf of the Mortgagor, the power of attorney or other instrument that authorized and empowered such person to sign with recording information thereon. 18 Any policy or certificate of primary mortgage guaranty insurance. 19 Any tax receipts, insurance premiums, ledger sheets, payment records, insurance claim files and correspondence, current and historical computerized data files, underwriting standards used for origination and all other papers and records developed or originated by the Seller, any 23 servicer or others, required to document the Mortgage Loan or to service the Mortgage Loan. 20 With respect to FHA insured Mortgage Loans, the original FHA Insurance Contract, together with a completed HUD Form 92080 "Mortgagee Record Change" with the Buyer's name left blank. 21 With respect to VA guaranteed Mortgage Loans, the original VA Guaranty Certificate. 24 EX-10.12 10 0010.txt MORTGAGE PURCHASE RESIDENTIAL MORTGAGE SERVICES Of Texas October 13, 1999 HomeSense Financial Corp. and Affiliates 113 Reed Avenue Lexington, SC 29072 Attention: Ronald J. Sheppard MORTGAGES PURCHASE AGREEMENT Dear Mr. Sheppard: OVERVIEW Section 1. Warehouse Facility. HSA Residential Mortgage Services of Texas, Inc. ("RMST") has established a mortgage gestation facility with various financial institutions pursuant to which the institutions, at the request of RMST, will purchase certain mortgage loans which are originated to finance the purchase or re-financing of owner-occupied and investor owned, 1-4 family residential dwellings and the land on which they are situated. Section 2. Certain Terms. We are pleased to advise you that RMST has approved the participation by the Company in the Warehouse Facility on the terms set forth in this agreement (as it may from time to time be supplemented, amended or restated, this "Agreement"). The following are certain terms of the Company's participation. (See Section 3 for additional defined terms.) Company HomeSense Financial Corp. and Affiliates Key Principals Ronald J. Sheppard Purchase Limit Twenty-five Million Dollars ($25,000,000) Sub-Prime Sublimit 75% of the Purchase Limit; ($18,750,000) with underwriting approval or forward commitment Second Lien Sublimit 5% of the Purchase Limit; ($1,250,000) with investor commitment; CLTV up to 100% Agency Rate Prime + .25% Non-Agency Rate Prime + .75% Default Rate Prime + 3% Loan Set Up Fee Fifty Dollars ($50.00) per Mortgage Minimum Tangible Net Two Million Six Hundred Thousand Dollars Worth ($2,600,000) Guarantor(s) Ronald J. Sheppard Section 3. Certain Definitions. The following terms shall have the meaning set forth below in this Agreement: (a) Affected Mortgage. The term "Affected Mortgage" is defined in Section 23 and Section 26. MORTGAGES PURCHASE AGREEMENT PAGE 1 (b) Agency Mortgage. An "Agency Mortgage" is a Mortgage that is eligible for purchase by the Federal Home Loan Mortgage Association, the Federal National Mortgage Corporation or the Government National Mortgage Association. (c) Agent. The person acting at the time as administrative agent and collateral agent for the Warehouse Purchasers is referred to as the "Agent." All references to the Agent are to the Agent in its capacity as administrative agent and collateral agent for the Warehouse Purchasers and not in its own capacity or for its own account. The Agent currently is Citibank, N.A. and Citicorp North America, Inc. RMST will promptly advise the Company of any successor Agent. (d) Applicable Repurchase Amount. The term "Applicable Repurchase Amount" means the payment to the Agent in good, collected Bank funds of the sum of (y) an amount equal to the Minimum Net Share which would have been earned in respect of that Mortgage if its purchase by the Investor provided for in the Commitment represented by the Company to have most recently covered it (whether or not it was actually so covered) were completed in strict accordance with its terms and on its stated expiration date plus (z) (without duplication of any payment) an amount equal to any increase in the Minimum Net Share due to the passage of time or to RMST's or the Agent's having provided additional custodial-type services since that expiration date. (e) Bank Prime. The "Bank Prime" is the prime rate as announced by Chase Bank of Texas, National Association from time to time. This rate is a reference rate and does not necessarily represent its best or lowest rate and is not necessarily a favored rate. Bank Prime shall be adjusted as of the effective date of each change in the prime rate announced by Chase Bank of Texas, National Association. (f) Bank. The term "Bank" is defined in Section 19. (g) Banking Business Day. The term "Banking Business Day" is defined in the RMST Procedures. (h) Bulk Mortgage Takeout Protection Account. The term "Bulk Mortgage Takeout Protection Account" is defined in Section 33. (i) Bulk Purchase Mortgage Takeout Date. The term "Bulk Purchase Mortgage Takeout Date" is defined in Section 9. (j) Bulk Purchase Mortgage. A "Bulk Purchase Mortgage" is an Eligible Mortgage that meets RMST's criteria for funding without a Commitment. (k) Closer. The term "Closer" is defined in Section 12. (1) Commitment. A "Commitment" is a written commitment to purchase a Mortgage as a whole loan obtained by the Company and approved in writing by RMST, issued by a reputable investor or securities broker-dealer (the "Investor") acceptable to RMST and the Agent. In addition to any other criteria established by RMST from time to time by notice given to the Company, each Commitment shall be written, describe the types of Mortgages the Investor agrees to purchase, state the settlement date, price (including any applicable servicing release premium) and expiration date for the purchase, be (or be MORTGAGES PURCHASE AGREEMENT PAGE 2 endorsed to be) in favor of RMST and its assigns, be enforceable and be irrevocable until a date shown on the Commitment. (m) Debtor Laws. The term "Debtor Laws" is defined in Section 44. (n) Default. The term "Default" is defined in Section 44. (o) Defective Mortgage. A "Defective Mortgage" is a Mortgage which has been purchased by the Warehouse Purchasers but meets RMST's criteria for Defective Mortgages which are attached as Appendix 7. RMST may change the criteria by notice given to the Company. (p) Document File. The term "Document File" is defined in Section 9. (q) Eligible Mortgage. An "Eligible Mortgage" is Mortgage which meets RMST's criteria for funding under the Warehouse Facility. RMST's current criteria for Eligible Mortgages is attached as Appendix 8. RMST may change the criteria by notice given to the Company. (r) Enclosures. The term "Enclosures" is defined in Section 9. (s) Failure Date. The term "Failure Date" is defined in Section 22. (t) Guide. The term "Guide" is defined in Section 34. (u) Includes. Wherever the words "including," "which includes" or any correlative appears in this Agreement, it shall be read to mean, "including by way of example but not without limiting the generality of the subject or concept referred to." (v) Investor. An "Investor" is a person issuing a Commitment to the Company or otherwise agreeing to purchase a Mortgage from the Warehouse Purchasers. (w) Lost Commitment Mortgages. The term "Lost Commitment Mortgages" is defined in Section 20. (x) Make Whole Payment. The term "Make Whole Payment" is defined in Section 30. (y) Minimum Net Share. The term "Minimum Net Share" is defined in Section 17. (z) Mortgage Default Date. The "Mortgage Default Date" is defined in Section 20, Section 22 and Section 24. (aa) Mortgage Purchase Cost. The term "Mortgage Purchase Cost" is defined in Section 17. (bb) Mortgage. A "Mortgage" is a mortgage loan secured by residential real property. (cc) Offer. The term "Offer" is defined in Section 9. (dd) Period Held. The term "Period Held" is defined in Section 17. (ee) Proceeds Account. The term "Proceeds Account" is defined in Section 19. MORTGAGES PURCHASE AGREEMENT PAGE 3 (ff) Qualified Substitute Takeout. The term "Qualified Substitute Takeout" is defined in Section 20. (gg) RMST Advance. The term "RMST Advance" is defined in Section 13. (hh) RMST Procedures. The "RMST Procedures" are those procedures promulgated by RMST from time to time specifying the times by which certain actions are to be taken in connection with purchases under the Warehouse Facility. The current RMST Procedures are attached as Appendix 2. (ii) Sale Proceeds. The term "Sales Proceeds" is defined in Section 17. (jj) Second Lien Mortgage. A "Second Lien Mortgage" is a Mortgage that is secured by a second priority lien on the real property that secures it. (kk) Settlement Account. The term "Settlement Account" is defined in Section 19. (ll) Shortfall Amount. The term "Shortfall Amount" is defined in Section 25. (mm) Substitute Mortgage. The term "Substitute Mortgage" is defined in Section 24. (nn) Warehouse Facility. The facility described in Section 1 as it may be amended, supplemented, modified or replaced is referred to as the "Warehouse Facility." (oo) Warehouse Purchasers. The institutions purchasing Eligible Mortgages under the Warehouse Facility from time to time are referred to collectively as the "Warehouse Purchasers," and individually as a "Warehouse Purchaser." (pp) Value Replacement Payments. The term "Value Replacement Payments" is defined in Section 32. (qq) Year 2000 Compliant. The term "Year 2000 Compliant" is defined in Section 48(aa). PURCHASE OF ELIGIBLE MORTGAGES Section 4. Revolving Purchase Facility. Although the Company will offer the Mortgages to RMST for purchase under the Warehouse Facility on a case-by-case basis and RMST will evaluate each Mortgage to determine whether it is an Eligible Mortgage, the Company and RMST mutually contemplate that this will be a revolving purchase facility pursuant to which the Company will sell Mortgages to the Warehouse Purchasers. Section 5. No Obligation. This Agreement does not obligate RMST to cause the Warehouse Purchasers to purchase Mortgages from the Company. RMST, in its sole discretion, may elect to cause the Warehouse Purchasers to purchase a Mortgage from the Company or may elect not to cause them to purchase the Mortgage. Section 6. Limits. The outstanding balance of the aggregate purchase prices paid to the Company by the Warehouse Purchasers for Eligible Mortgages (including Second Lien Mortgages and Bulk Purchase Mortgages, if any) which have not yet been sold to an Investor shall not exceed the Purchase Limit at any time. The outstanding balance of the aggregate purchase prices paid to the Company by the Warehouse MORTGAGES PURCHASE AGREEMENT PAGE 4 Purchasers for Second Lien Mortgages which have not yet been sold to an Investor shall not exceed the Second Lien Sub-Limit at any time. The outstanding balance of the aggregate purchase prices paid to the Company by the Warehouse Purchasers for Bulk Purchase Mortgages which have not yet been sold to an Investor shall not exceed the Bulk Purchase Sub-Limit at any time. RMST reserves the right to reduce the Purchase Limit, the Second Lien Sub-Limit or Bulk Purchase Sub-Limit by giving sixty (60) days' written notice to the Company specifying the new limit at any time and for any reason. Section 7. Prior Approval of Investors. Each Investor shall have been approved by RMST and the Agent prior to the Offer of a Mortgage as to which the Commitment applies. To be considered for approval by RMST, the Investor must, at a minimum, meet the criteria set forth on Appendix 9. RMST may change the minimum criteria for approval of an investor by notice given to the Company. The approval of an Investor by RMST or the Agent shall not cause RMST or the Agent to be a guarantor of the Investor's performance. Any dealings by the Company with an Investor (whether or not approved by RMST or the Agent) shall be at the sole risk of the Company. Section 8. Commitment. Each Eligible Mortgage acquired from the Company under the Warehouse Facility except Bulk Purchase Mortgages shall have a Commitment. The Company shall provide RMST a copy of the Commitment at the same time the Company delivers to RMST the Document File. If RMST is dissatisfied, in its sole discretion, with either the form or terms of any Commitment, it shall have no obligation to cause the Warehouse Purchasers to acquire any Mortgage covered by that Commitment. Section 9. Offer. If the Company wishes to sell a Mortgage through RMST to the Warehouse Purchasers under this Agreement, the Company shall submit a written Offer to Sell Mortgages in the form attached as Appendix 1 to this Agreement (the "Offer") with all enclosures required by Appendix 4 to this Agreement (the "Enclosures"), and with all blocks and blanks in the Offer and the Enclosures properly completed (the Offer and Enclosures together are called the "Document File"). Appendix 1 and Appendix 4 are subject to modification by RMST by notice given to the Company. If the Mortgage is requested to be a Bulk Purchase Mortgage, the Offer shall state the date by which an Investor will purchase the Mortgage (the "Bulk Purchase Mortgage Takeout Date"). The purchase price for an Eligible Mortgage shall be the least of (i) the price the Investor has promised to pay for the Mortgage pursuant to the Commitment (this factor is inapplicable to a Bulk Purchase Mortgage); (ii) the face principal amount of the promissory note evidencing the Mortgage; or (iii) the unpaid principal balance of the promissory note. Upon acceptance of the Offer, any Commitment referred to in the Offer shall be deemed assigned and transferred to RMST and its assigns without any further act by the Company. Section 10. Acceptance or Rejection. If RMST elects to accept an Offer, then if the Mortgage is an Eligible Mortgage and the Company is in compliance with all the terms of this Agreement, RMST will cause the Warehouse Purchasers to pay the purchase price for the Eligible Mortgages stated in the Offer and, upon that acceptance, to cause the Warehouse Purchasers to become the owner of the Eligible Mortgages. RMST has no obligation to accept any Offer. Section 11. Endorsement and Closing Instructions. The Company shall endorse in blank the promissory note to evidence each Eligible Mortgage which is the MORTGAGES PURCHASE AGREEMENT PAGE 5 subject of an accepted Offer when, or before, the note is executed by its maker. The Company hereby declares its intent that each such endorsement be effective as to each such note from such note's inception, regardless of when the endorsement is actually made. The Company shall give the Closer of each Eligible Mortgage the written instructions for the closing of the transaction set forth on Appendix 5, and will not give any rescinding, inconsistent or conflicting instructions. Appendix 5 is subject to modification by RMST by notice given to the Company. The Company or the Closer shall deliver to RMST the Eligible Mortgage and all of its related documentation (including for each Eligible Mortgage the documents listed on Appendix 4) to be physically held by the Agent until the Mortgages are either (i) shipped by the Agent to an Investor or its document custodian for purchase or (ii) the Company repurchases the Mortgage in accordance with its obligations stated in Section 20, Section 22 or Section 24. Section 12. Payment by Warehouse Purchasers. The purchase price for Eligible Mortgages shall be paid at the request of RMST by the Agent (i) to the Company, in the case of Eligible Mortgages purchased after the Company has closed them; or (ii) in all other instances, by providing money for the original funding of the Mortgages directly to the title company or other person or entity handling the closing (the "Closer"), net of origination, discount points, and any other fees and other prepaid items the Company may stipulate. The payment will be made at the time and in the manner specified in the RMST Procedures. Section 13. Advances by RMST. In its sole discretion, RMST may advance funds to the Company, in the case of Eligible Mortgages purchased after the Company has closed them, or to the Closer, in all other instances, to pay amounts relating to the origination of a Mortgage. These funds so advanced. (an "RMST Advance") are a loan from RMST to the Company, are secured by the security interest created by Section 39, bear interest at the Default Rate and are due on demand unless earlier repaid in connection with the sale of the Mortgage to which the RMST Advance relates. SALE TO INVESTORS Section 14. Sale to Investors. The Company will take all steps necessary to cause: (a) all Eligible Mortgages and their related mortgage files to be correctly closed, funded, documented and completed; (b) the sale as whole loans of all Eligible Mortgages to be timely completed in accordance with any related Commitment; (c) the entire sale price due from Eligible Mortgages sold to be transferred by Fed funds wire directly to the account of the Agent at Chase Bank of Texas, National Association or at a bank designated by RMST. Section 15. Instruction to Investors. Promptly after any Eligible Mortgages which is subject to a commitment is purchased by the Warehouse Purchasers, the Company shall: (i) direct the Investor which issued the Commitment to pay the entire amount of the purchase consideration for those Eligible Mortgages directly to the Agent and to confirm receipt of that direction directly with the Agent, with a copy to RMST; (ii) not issue any conflicting instructions to the Investors; and (iii) not cause or permit any cash proceeds of any of those Mortgages to be issued to, registered in the name of, or paid to, anyone other than the Agent. MORTGAGES PURCHASE AGREEMENT PAGE 6 Section 16. Shipment to Investors. Mortgages shipped to Investors for purchase shall be shipped under letters substantially in the form of letter attached as Appendix 10, in the case of Mortgages sold by the Agent, or Appendix 11, in the case of Mortgages sold by RMST. The letters may be revised by RMST by notice given to the Company. PAYMENT TO RMST AND DISTRIBUTION TO COMPANY Section 17. Minimum Net Share. The Agent will retain, for the benefit of the Warehouse Purchasers and RMST-or, in the case of Mortgages sold by RMST, RMST will retain for its benefit-from the sale proceeds (the "Sale Proceeds") received for and allocable to each Mortgage sold to an Investor hereunder an amount (the "Minimum Net Share") equal to the sum of: (i) the purchase price paid by the Warehouse Purchasers for the Eligible Mortgage reduced by any amounts paid to the Warehouse Purchasers by the obligor of the Mortgage as principal or interest on the Mortgage and also reduced by any Value Replacement Payments made with respect to the Mortgage (the "Mortgage Purchase Cost"); plus (ii) a return on the daily balance of the Mortgage Purchase Cost which accrues daily during the period (the "Period Held") consisting of the actual number of days from (and including) the date on which the Warehouse Purchasers funded the acquisition of the Mortgage to (but excluding) the date on which the Agent (or RMST) receives the Sale Proceeds for the Mortgage, at a per annum rate equal to the Agency Rateif the Mortgage is an Agency Mortgage or equal to the Non-Agency Rate if the Mortgage is not an Agency Mortgage. After the Mortgage Default Date the per annum rate as to any Affected Mortgage shall be the greater of (y) the Default Rate or (z) the annual interest rate stated on the promissory note related to the Affected Mortgage. After the occurrence of a Default, the per annum rate as to all Mortgages shall be the Default Rate. The calculations based on the per annum rates shall be made on a daily basis during the Period Held and on the basis of a 360-day year; plus (iii) any RMST Advance with respect to that Mortgage together with interest on the RMST Advance at the Default Rate from the date on which the RMST Advance was made to (but excluding) the date on which the Agent (or RMST) receives the Sales Proceeds for the Mortgage; plus (iv) the Loan Set Up Fee for the Mortgage. Section 18. Interest Collected and Remitted. Interest on an Eligible Mortgage collected by the Company and remitted to the Agent shall be treated as part of the proceeds received for the sale of the Mortgage to the Investor for purposes of determining the Minimum Net Share. Section 19. Balance of Sales Proceeds. Provided that the Company is not then in default of any of its obligations under this Agreement, RMST shall deposit the balance of the Sales Proceeds remaining after deducting the Minimum Net Share in a demand deposit account maintained at Chase Bank of Texas, National Association (in its capacity as a depository institution, the "Bank") in the name of RMST for the benefit of the Company (the "Proceeds Account"), but as to which the Company shall have no rights of withdrawal. As long as the Company is not then in default of any of MORTGAGES PURCHASE AGREEMENT PAGE 7 its obligations under this Agreement, RMST shall transfer the collected funds in the Proceeds Account to a demand deposit account (the "Settlement Account") maintained at the Bank in the name of the Company and under the exclusive control of the Company. If, there is a Default, then any amounts then remaining in the Proceeds Account shall be cash collateral securing any rights RMST shall have pursuant to this Agreement and the Company shall not withdraw any funds from the Settlement Account without the prior consent of RMST. FAILURE OF COMMITMENT Section 20. Loss of Commitment. If for any reason, except the willful or grossly negligent act or omission of RMST, the Agent or the Warehouse Purchasers, any Commitment in respect of any Eligible Mortgage is canceled, paired off or revoked by any means, or if the Investor shall at any time have a defense to performance of its obligations under the Commitment either on account of offsetting obligations against the Company or for any other reason, or the Commitment is terminated for any reason (other than expiration by the passage of time) (collectively, these Mortgages are referred to as the "Lost Commitment Mortgages"), then, on or before the date (the "Mortgage Default Date" for that Mortgage) that is ten (10) days after the date on which the Commitment was terminated or cancelled or otherwise lost, the Company shall either (i) obtain and furnish to RMST for the Warehouse Purchasers a replacement Commitment acceptable (and issued by an Investor acceptable) to RMST and the Agent and having characteristics all of which can be satisfied by the Eligible Mortgage and providing for the purchase of the Mortgage for no less than the Minimum Net Share for that Mortgage (a "Qualified Substitute Takeout"), or (ii) repurchase the Lost Commitment Mortgage from the Warehouse Purchasers (or RMST if RMST has purchased the Mortgage) for the Applicable Repurchase Amount. Section 21. Assistance by RMST. RMST will exert reasonable efforts to assist the Company to obtain a Qualified Substitute Takeout, but RMST shall do so only as an accommodation to the Company. RMST shall have no additional obligation to the Company as a result of its efforts and no liability to the Company for the results (or failure) of its efforts. Section 22. Failure to Sell. If for any reason, except the willful or grossly negligent act or omission of RMST, the Agent or the Warehouse Purchasers, the Company has not caused any Eligible Mortgage to be sold to an Investor on or before the date (the "Failure Date") that is the earlier of: (a) sixty (60) days after the Warehouse Purchasers purchased the Eligible Mortgage or (b) (i) in the case of Bulk Purchase Mortgages, the Bulk Mortgage Takeout Date or, (ii) as to all other Eligible Mortgages, the date the Commitment which relates to that Eligible Mortgage expires, then, on or before the date (the "Mortgage Default Date" for that Mortgage) that is three (3) Banking Business Days after the Failure Date, the Company shall repurchase the Eligible Mortgages from the Warehouse Purchasers (or RMST if RMST has purchased the Mortgage) for the Applicable Repurchase Amount. Section 23. Effect of Company's Failure. If by the Mortgage Default Date the Company has not repurchased the Lost Commitment Mortgage or obtained a Qualified Substitute Takeout in the case of a failure under Section 20, or repurchased the MORTGAGES PURCHASE AGREEMENT PAGE 8 Mortgage in the case of a failure under Section 22, then the Company shall be in default of its obligations under this Agreement with regard to that Mortgage (which shall be "Affected Mortgage" after that failure) and shall have committed a breach of this Agreement. DEFECTIVE MORTGAGES Section 24. Defective Mortgages. If RMST determines that any Eligible Mortgage is a Defective Mortgage the Company shall wholly cure (to the satisfaction of RMST and the Agent) such defects in the Mortgage upon notice from RMST. If the Company fails to wholly cure such defects by the day which is three (3) Banking Business Days after the notice to cure from RMST (the "Mortgage Default Date" for that Mortgage), then, by notice given to the Company, RMST may require that by the close of the next Banking Business Day following receipt of RMST's notice, the Company shall either (i) repurchase the Defective Mortgage from the Warehouse Purchasers (or RMST if RMST has purchased the Mortgage) for the Applicable Repurchase Amount, or (u) substitute a new Eligible Mortgage (the "Substitute Mortgage"), which is in all respects acceptable to RMST and the Agent in their reasonable discretion. Section 25. Payment of Shortfall Amount. If the aggregate principal balances of all Substitute Mortgages are less than the aggregate principal balances of all Defective Mortgages being replaced, then the Company shall remit with such Substitute Mortgages an amount equal to the difference (the "Shortfall Amount") between the aggregate principal balance of the Substitute Mortgages and the Defective Mortgages, plus any fees that would have been earned under this Agreement on the aggregate principal balance difference calculated as if, on the date of such remittance, the Company were repurchasing a Mortgage in principal amount equal to the Shortfall Amount and covered by the same Commitment as the Defective Mortgages which were only partially replaced, with the Period Held applicable to such hypothetical Mortgage being repurchased ending on the date of such remittance. Absent manifest error, or if the Company does not object in writing to RMST's calculation of a Shortfall Amount and fees on or before thirty (30) days after RMST gives the Company written notice of RMST's calculated value of that Shortfall Amount and fees, RMST's calculation of the Shortfall Amount and fees shall be conclusive and binding. Section 26. Effect of Company's Failure. If by the close of the next Banking Business Day after notice under Section 24 the Company has not delivered a Substitute Mortgage or repurchased the Defective Mortgage, then the Company shall be in default of its obligations under this Agreement with regard to that Mortgage (which shall be "Affected Mortgage" after that failure) and shall have committed a breach of this Agreement. REMEDIES-AFFECTED MORTGAGES Section 27. Effect of Breach. Upon the occurrence of a breach under Section 23 or Section 26, RMST, in addition to its rights otherwise provided for under this Agreement, may elect then, or at any time thereafter, to: (i) terminate the Company's rights and obligations to service the Affected Mortgage; (ii) obtain a new Commitment from a third party to purchase the Affected Mortgage; (iii) cause the Warehouse Purchasers to sell-or, if RMST has purchased the Affected Mortgage, sell-the Affected Mortgage to a third party; (iv) terminate this Agreement by giving notice to the MORTGAGES PURCHASE AGREEMENT PAGE 9 Company in which event the provisions of Section 45 shall apply; or (v) do any combination of those things. Section 28. Effect on Value Replacement Obligations. The Company's breach of this Agreement under Section 23 or Section 26 shall not terminate or abate the Company's value replacement obligations to RMST with regard to the Affected Mortgage, as provided for in Section 32 of this Agreement, and the value replacement obligations to RMST with regard to the Affected Mortgage shall only terminate upon (i) the sale of the Affected Mortgage to a third party, or (ii) the repurchase by the Company of the Affected Mortgage from the Warehouse Purchasers (or RMST if RMST has purchased the Mortgage) for the Applicable Repurchase Amount. Section 29. Sale to Third Party. If RMST causes the Warehouse Purchasers to sell any Affected Mortgage to a third party as permitted under Section 27, then, in the absence of manifest error, the purchase price obtained by the Warehouse Purchasers shall be conclusively presumed to be the fair market value of that Affected Mortgage (which may or may not be the same as the quoted market value for comparable mortgages as quoted on the quotation system which is used for calculating the value replacement obligations to RMST as provided for in Section 32). Section 30. Make Whole Payment. Upon the sale of any Affected Mortgage to a third party, the Company shall promptly pay to the Agent an amount (the "Make Whole Payment") equal to the Minimum Net Share as of the sale date, less the net proceeds realized by the Warehouse Purchasers upon the sale of the Affected Mortgage. RMST may offset any value replacement previously paid by the Company with respect to the to the Affected Mortgage against the Company's obligation to pay the Make Whole Payment, and if there is any excess of value replacement related to the Affected Mortgage after applying the value replacement to the Make Whole Payment, RMST will refund such excess to the Company, provided that the Company is not then in default in performance of any of its obligations under this Agreement in any other respect. However, application of the value replacement related to the Affected Mortgage to the Make Whole Payment shall in no way limit or waive any rights RMST may possess under or diminish any obligations of the Company with respect to, any provision of the Agreement for any Mortgage, including the Affected Mortgage. VALUE PROTECTION Section 31. Reliance by RMST. The Company acknowledges that when arranging for the purchase of Mortgages, RMST will rely on the Company's representations that: (i) the Commitment obtained by the Company in respect of each Offer (other than an Offer relating to a Bulk Purchase Mortgage) will be the source for RMST and the Warehouse Purchasers to recover the Minimum Net Share in respect of the Mortgage and the Mortgage will be purchased by the Investor no later than the date prescribed in the Commitment; and (ii) each Bulk Purchase Mortgage will be acquired by Investors by its Bulk Purchase Mortgage Takeout Date for an amount at least sufficient to permit RMST and the Warehouse Purchasers to recover the Minimum Net Share with respect to the Mortgage. Section 32. Value Replacement Payment. If the Warehouse Purchasers or RMST hold any Bulk Purchase Mortgages or if there are any Lost Commitment Mortgages which have not been sold to Investors or repurchased by the Company, then RMST may require the Company to make payments to the Warehouse Purchasers-or to RMST if RMST holds the Bulk Purchase Mortgages or Lost MORTGAGES PURCHASE AGREEMENT PAGE 10 Commitment Mortgages-to reduce the purchase price for the Lost Commitment Mortgages and the Bulk Purchase Mortgages ("Value Replacement Payments"). The amount of the Value Replacement Payment on any day for a Bulk Purchase Mortgage or Lost Commitment Mortgage is the amount, if greater than zero, sufficient to cause (i) the Minimum Net Share for that day for that Mortgage based on the purchase price paid by the Warehouse Purchasers for that Mortgage (reduced by this and any prior Value Replacement Payment), to be no greater than (ii) the value on that day of mortgage-backed securities based on and backed by mortgage loans comparable to the Mortgage. In determining the Value Replacement Payment, RMST may use such reasonable averaging, allocation and attribution methods as it shall elect, and absent manifest error, the market value quoted for any such security as quoted on the quotation system to which RMST subscribes (or any comparable system to which RMST may hereafter subscribe and RMST may elect to use for the purposes of determining the market value of mortgage-backed securities) shall be conclusive evidence of the market value of such security. The Company shall pay the Value Replacement Payment to RMST no later than the next Banking Business Day after RMST makes demand by notice to the Company. Section 33. Bulk Mortgage Takeout Protection. The Bank shall maintain the Bulk Mortgage Protection Amount on deposit in an account (the "Bulk Mortgage Takeout Protection Account") in a bank designed by RMST. The Bulk Mortgage Takeout Protection Account shall be an account in the name of RMST for the benefit of the Company but as to which the Company shall have no rights of withdrawal. If there is a Default, any amounts remaining in the Bulk Mortgage Takeout Protection Account shall be cash collateral securing any rights RMST shall have pursuant to this Agreement. SERVICING Section 34. Servicing After Purchase. After the Eligible Mortgages are purchased, the Company agrees to service and administer the Eligible Mortgages for the benefit of the Warehouse Purchasers in accordance with prudent mortgage loan servicing standards and procedures generally accepted in the mortgage banking industry and in accordance with the servicing provisions of the applicable GNMA, FNMA or FHLMC mortgage-backed securities seller/servicer guide ("Guide") for the account, however, of the Warehouse Purchasers instead of GNMA, FNMA or FHLMC, provided that the Company shall at all times comply with applicable law, FHA regulations and VA regulations and the requirements of any private mortgage insurer so that the FHA insurance, VA guarantee or any other applicable insurance or guaranty applicable to any Mortgage is not voided or reduced. Section 35. Remittances. As long as the Warehouse Purchasers own a Mortgage, the Company agrees to remit to the Agent by the fifth (5th) day following the day the Company receives any principal and interest payments and principal prepayments all such sums received for deposit to an account for the benefit of the Warehouse Purchasers. Section 36. Escrow Accounts. All escrow amounts relating to all Eligible Mortgages shall be maintained on deposit in an individual custodial account at a bank designated by RMST until the Eligible Mortgage is sold to an Investor. Section 37. No Charge for Services. The Company's services under Section 34 shall be provided without charge. MORTGAGES PURCHASE AGREEMENT PAGE 11 Section 38. Termination of Servicing. If RMST terminates the Company's rights and obligations to service a Mortgage, the Company shall promptly deliver all files and papers related to that Mortgage to RMST. Any ancillary income received by RMST related to the servicing of the Mortgage shall not be applied to or reduce the Minimum Net Share for the Mortgage. SECURITY Section 39. Security Agreement. To secure performance of all of the Company's obligations under this Agreement and under each Offer, the Company hereby grants to RMST, for itself, the Agent and the Warehouse Purchasers, a security interest in all of the Company's present and future right, title and interest in and to: (i) the Company's share of Sale Proceeds, if any; (ii) each unexpired Commitment; (iii) the Settlement Account; (iv) the Proceeds Account; and (v) the Bulk Mortgage Takeout Protection Account. All such security interests granted hereby shall be first and prior and shall continue in full force and effect, notwithstanding any termination of this Agreement, until all of the Company's obligations to RMST, the Agent and the Warehouse Purchasers under this Agreement and every accepted Offer have been fully performed and satisfied. RMST shall have all of the rights of a secured party under the laws of the state where such collateral is located, and shall have the express right to transfer any collateral into its own name, either before or after default. Section 40. Right of Offset. RMST shall also have a right of offset against the Proceeds Account for, and to secure, any and all sums due RMST, the Agent or the Warehouse Purchasers under this Agreement. Section 41. Subrogation to Rights Under Commitment. The Company recognizes that by virtue of the Warehouse Purchasers' ownership of the Mortgages and RMST's rights under this Agreement, RMST, the Agent and the Warehouse Purchasers have a valuable property right in the Commitment, and to secure that right the Company shall permit RMST to subrogate to all rights the Company may have in the Commitment if the Company fails to perform any of its obligations under this Agreement. Section 42. Construction as Financing. Without limiting any of the foregoing provisions, if for any reason any court of competent jurisdiction shall construe the purchase by the Warehouse Purchasers of any Eligible Mortgages to be a loan or extension of credit rather than the absolute and unconditional sale to the Warehouse Purchasers which the Company and RMST expressly hereby declare that they intend it to be, then the provisions of this Agreement shall be construed and given effect so as to create and perfect in RMST, for itself, the Agent and the Warehouse Purchasers, a first, prior and continuous security interest in all of the Company's interests in each of the affected Eligible Mortgages and all proceeds from (1) the earlier of (a) the date the Warehouse Purchasers give value for the Eligible Mortgage or (b) the date the Company acquires (or reacquires) an interest in the Eligible Mortgage until (2) the earlier of (x) the sale of the Eligible Mortgage to an Investor pursuant to the terms of this Agreement or (y) complete fulfillment of all of the Company's obligations to RMST under this Agreement. The term "proceeds" shall be construed to include each Commitment related to the Mortgage. In the event of such a construction, the amount of all fees and realizations owed to, earned by or payable to RMST or the Warehouse Purchasers for the transaction or transactions so construed shall be absolutely limited to the maximum non-usurious amount of interest allowed by whichever of applicable MORTGAGES PURCHASE AGREEMENT PAGE 12 Texas (or other applicable state law) or federal laws permit the higher amount of interest to be contracted for, reserved, charged or received (as applicable to the circumstance), it being the intention of the parties to comply with, and not to evade, all usury and other applicable laws. INDEMNITY Section 43. Indemnification of RMST and Others. The Company agrees to and does hereby indemnify and hold harmless RMST, the Agent and the Warehouse Purchasers against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, cost, expenses and disbursements of any kind or nature whatsoever, which may be imposed on, incurred by, or assessed against RMST, the Agent or the Warehouse Purchasers in any way related to, or arising out of any of the loan papers or any of the transactions contemplated therein, to the extent that any of the same results directly or indirectly from any claims made or actions, suits or proceedings commenced by or on behalf of any person other than RMST, the Agent or the Warehouse Purchasers, provided that RMST, the Agent and the Warehouse Purchasers shall not have the right to be indemnified hereunder for their own fraud or negligence. The indemnities contained in this section shall survive the termination of this Agreement. DEFAULT Section 44. Default. The following shall be a Default under this Agreement: (a) as to any FNMA, FHLMC, GNMA or HUD programs for which the Company has, at any time, represented to RMST that the Company was eligible to participate, the Company loses its eligibility to participate in that program; (b) the Company's participation in a take out program is suspended by the Investor offering that program for a reason other than termination of the program as a whole by the Investor; (c) any one of the Key Principals ceases to be actively involved in the management of the Company for any reason (including death, disability or retirement) or the ceases to own an equity interest in the Company; (d) any equity interest in the Company is issued to any person who is not a Key Principal; (e) there is, in the reasonable judgement of RMST, a material adverse change in the Company's financial condition, the prospects for the Company's timely and complete performance of its obligations under this Agreement or the prospects for the Company's continuing in business as a going concern; (f) the Agent determines that the Company is no longer eligible to participate in the Warehouse Facility; (g) the fair value of the Company's assets do not exceed its liabilities, or the Company does not have sufficient cash flow to enable it to pay its debts as they mature or the Company has an unreasonably small capital to conduct its business; (h) the Company voluntarily seeks, consents to, or acquiesces in the benefit of any liquidation, conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency, reorganization or similar laws from time to time in MORTGAGES PURCHASE AGREEMENT PAGE 13 effect and affecting creditors' rights generally (collectively "Debtor Laws") or becomes a party to, or is made the subject of, any proceeding provided for by any Debtor Law (other than as a creditor or claimant) that could stay the enforcement of RMST's rights or the rights of the Warehouse Purchasers; (i) the Company is not, in the reasonable judgement of RMST, able to comply with any of the material terms of this Agreement for any reason; (j) the Company is not, in the reasonable judgement of RMST, able to comply with the underwriting, closing, delivery and funding requirements of any of its institutional end-loan investors; or (k) the Company commits a breach of this Agreement which is not cured within five (5) Banking Business Days of the giving of the notice of default by RMST provided there shall be no cure period for a breach under Section 23 or Section 26. Section 45. Remedies. Upon the occurrence of a Default, in addition to its rights under Section 27, RMST may by notice given to the Company(i) terminate the Company's rights and obligations to service any or all Eligible Mortgages purchased by the Warehouse Purchasers; (ii) terminate any obligations RMST has to cause future purchases to be funded under this Agreement; (iii) cause the Warehouse Purchasers to sell-or, if RMST has purchased some or all of the Eligible Mortgages, sell-any or all of the Eligible Mortgages to one or more third parties; (iv) terminate this Agreement by giving notice to the Company; or (v) do any combination of those things. Section 46. Effect of Termination. Upon termination, this Agreement will survive and otherwise remain in full force and effect with respect to all of Company's obligations and responsibilities for Mortgages purchased hereunder except that all monetary obligations of the Company to RMST, the Agent or the Investors shall bear interest at the Default Rate and the determination of Minimum Net Share shall be determined using the Default Rate for all periods after the occurrence of the Default. The Company will, after such termination, reasonably cooperate with RMST, the Agent, the Warehouse Purchasers and the Investors in completing all transactions, documents, reports, payments and acts contemplated or provided hereunder. Section 47. Costs of Collection and Enforcement. The Company shall pay (i) all fees, charges, or taxes for the recording or filing of any document to create or perfect the security interest created by Section 39; (ii) all amounts reasonably expended, advanced or incurred by RMST, the Agent or the Warehouse Purchasers to satisfy any obligation of the Company under this Agreement, to collect the any obligations arising under this Agreement or to enforce the rights of RMST, the Agent or the Warehouse Purchasers under this Agreement, including all court costs, attorneys' fees (whether for trial, appeal, other proceedings or otherwise), fees of auditors and accountants and investigation expenses reasonably incurred by RMST, the Agent or the Warehouse Purchasers in connection with any such matters; and (iii) interest at an annual interest rate equal to the Default Rate on each item specified in clauses (i) and (ii) above from ten (10) days after the date of written demand or request for reimbursement to the date of reimbursement. REPRESENTATIONS AND WARRANTIES; COVENANTS Section 48. Representations and Warranties. The Company represents and warrants (and such representations and warranties shall be deemed remade at the MORTGAGES PURCHASE AGREEMENT PAGE 14 time any Mortgage is sold to the Warehouse Purchasers pursuant to this Agreement) as set forth below. (a) Blank Assignments' Validity. The written assignment of each Mortgage in blank from the Company is valid and effective and RMST or the Agent and each of its successors, substitutes and assigns are each duly authorized to complete the blanks in each such assignment and to take such other steps as are necessary or appropriate, in the judgment of the person acting, to transfer the Mortgage and any related Commitment, as contemplated by the Specific Power of Attorney form attached as Appendix 3 (and the Company hereby agrees to execute one or more originals of such Specific Power of Attorney and any supplement to it which RMST may from time to time request from the Company.) (b) Documents Genuine, Statements True. All documents submitted in connection with each Offer are genuine, the statements contained in the Offer submitted to RMST and all other statements and representations as to any such Mortgages are accurate, true and correct in all material respects and meet each of the requirements and specifications of this Agreement. (c) Delivery Risk and Responsibility. All deliveries of all Mortgage documents shall be at the Company's risk and (except only for deliveries of Mortgages required to be made by the Agent as custodian under the relevant GNMA, FNMA or FHLMC Guide) the Company's responsibility, and the Company agrees to indemnify RMST, the Agent and the Warehouse Purchasers and hold each of them harmless from all bona fide and reasonable claims, loss, cost, damage or expense (including reasonable attorneys' fees) arising out of or incurred in connection therewith, including any resulting in whole or in part from RMST's, the Agent's or the Warehouse Purchaser's own acts except only to the extent that any such loss, cost or expense results solely from their negligent acts or omissions or breach of this Agreement. (d) Each Mortgage Valid. Each Mortgage sold to the Warehouse Purchasers has been duly executed by the mortgagor(s), acknowledged and recorded (or duly sent by the Closer to be recorded) and is valid and binding upon such mortgagor(s) and enforceable in accordance with its terms. (e) Mortgage Guaranty and Insurance. Each Mortgage that the Company represents to be insurable by FHA or by a private mortgage insurer, or sufficient to be guaranteed by the VA, is or will be so insured or guaranteed as represented. (f) Mortgages' Characteristics. The full principal amount of each Mortgage has been (or when funded by the Warehouse Purchasers if so requested, will be) advanced to the mortgagor under the Mortgage, either by payment directly to the mortgagor or by payment made on the mortgagor's request or approval; the unpaid principal balance is as stated in the Offer; all costs, fees and expenses incurred in making, closing and recording the Mortgage have been paid (or will be paid at the closing); no part of the property covered by the Mortgage has been or will be released from its lien; the terms of the Mortgage have in no way been changed or modified and the Mortgage is current and not in default. MORTGAGES PURCHASE AGREEMENT PAGE 15 (g) Mortgages Comply with Law. As to each individual Mortgage offered to or purchased by the Warehouse Purchasers, and all escrow balances related to the Mortgages, all applicable federal, state and local laws, rules and regulations have been complied with, including the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Flood Disaster Protection Act, the Truth-in-Lending Act of 1968, the Depository Institutions Deregulatory and Monetary Control Act of 1980, all as amended, and regulations issued pursuant to them; and all usury laws and limitations, all conditions within the control of the Company as to the validity of the insurance or guaranty required by the National Housing Act of 1934, as amended, and the rules and regulations thereunder, and the Servicemen's Readjustment Act of 1944, as amended, and the rules and regulations thereunder, and all requirements of the mortgage insurance companies or other insurers, have been properly satisfied, and such insurance or guaranty is valid or enforceable. All escrow balances have been calculated in accordance with the contractual provisions of the Mortgage, or, if more restrictive, in accordance with any applicable GNMA, FNMA or FHLMC Guides. (h) Title Insurance. There is in force a paid-up title insurance policy on each Mortgage issued by an accredited title insurer in an amount at least equal to the outstanding principal balance of such Mortgage. The title insurance policy has been, or shall be, issued by a title insurance underwriter duly authorized to issue title insurance in the state where the real property covered by the Mortgage is located. (i) Hazard Insurance. Hazard insurance policies meeting the requirements of each the Mortgage and of the relevant GNMA, FNMA or FHLMC Guide and the Investor's requirements are in force. (j) Servicing Not Otherwise Pledged. If applicable, the Company has not directly or indirectly pledged any servicing rights with respect to any Mortgages offered to or purchased by the Warehouse Purchasers under this Agreement to any person or entity other than the Warehouse Purchasers pursuant to this Agreement, nor will the Company do so without RMST's prior written approval. (k) Commitments. The Company warrants that each Commitment is, and will remain forever, free of any security interest, lien, claim, or encumbrance of any kind and may be assigned by the Company to RMST and its assigns. (1) Appraisals Satisfy Applicable Requirements. A written appraisal of the real property securing each Mortgage has been prepared by a duly-licensed appraiser and satisfies all requirements for any applicable VA guaranty, FHA insurance or private mortgage insurance and all requirements imposed by the Investor which issued the Commitment covering such Mortgage, as well as the requirements of 12 C.F.R., Part 323, as amended or replaced (if the Mortgage is two hundred fifty thousand dollars ($250,000) or more). (m) Quality Control Reports. The Company agrees at its own cost to provide periodic reports to RMST as requested by RMST from time to time, of the Company's Mortgage loan origination, acquisition and servicing operations performed by the quality-control reviewer, which is satisfactory to the applicable governing agency and RMST. MORTGAGES PURCHASE AGREEMENT PAGE 16 (n) Eligibility. The Company will be approved, qualified and in good standing as: (i) an FHA-approved mortgage, eligible to originate, purchase, hold, sell and service FHA loans; (ii) a VA-approved (not VA automatic) mortgagee, eligible to originate, purchase, hold, sell and service VA loans; prior to making an Offer for a FHA or VA loan, as the case may be, and at the time of making that Offer meets all requirements applicable to its status as such. The Company agrees not to take or omit to take any act which would result in its losing its status as an eligible mortgagee, seller and issuer as described above. (o) Organization; Good Standing. The Company (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (ii) has the requisite legal power and authority to own its property and to carry on its business as currently conducted and (iii) is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction in which the transaction of its business makes such qualification necessary, except in jurisdictions, if any, where a failure to be in good standing has no material adverse effect on its financial condition. (p) Licensed. The Company is licensed and qualified to transact the mortgage origination business in, and is in good standing under, the laws of each state in which real estate which secures a Mortgage is located or is otherwise exempt under applicable law from such licensing and qualification. There has been no unsatisfied demand made upon the Company by any state in which real estate which secures a Mortgage is located that the Company be licensed or qualified to transact the mortgage origination business under the laws of that state. The Company is in compliance with the laws of all states necessary to insure the enforceability of each Mortgage. (q) Authorization; No Conflict. The Company has the power and authority to execute, deliver and comply with the terms of this Agreement. The Company's execution, delivery and performance of this Agreement: (i) have been duly and validly authorized by all necessary corporate action on the Company's part (none of which action has been modified or rescinded and all of which is in full force and effect); (ii) do not and will not: (1) conflict with or violate any laws or court orders of which the Company is, or in the normal course of its business should be, aware of, or the Company's articles of incorporation or bylaws; (2) either conflict with, result in a breach of, constitute a default under, require any consent under, or result in the creation of any lien or security interest (other than the security interest created by this Agreement) upon any of the Company's property under any agreement, indenture or other papers to which the Company is party or by which the Company or its property may be bound or affected; and (iii) do not and will not result in, or permit the holder of any such agreement, indenture or other papers to cause, the acceleration of any of the Company's: (1) debt; (2) obligations in respect of letters of credit, acceptances or similar obligations issued or created for the Company's account; (3) direct or indirect guaranties of debt of others; (4) liabilities secured by any lien or security interest existing on property owned by the Company, including MORTGAGES PURCHASE AGREEMENT PAGE 17 secured liabilities which have not been assumed by the Company or with respect to which the Company is not personally liable; or (5) liabilities in respect of unfunded and vested benefits under ERISA plans. (r) Enforceability. This Agreement constitutes the valid and binding obligation of the Company enforceable in accordance with its terms, except as limited by (i) bankruptcy, insolvency or other similar laws now or hereafter in effect affecting the enforcement of creditors' rights and (ii) the application of equitable principles. (s) Approvals. The Company's execution and delivery of this Agreement and the Company's performance of its obligations do not require any license, consent, approval or other action of any court or other governmental authority other than those that the Company is, or in the normal course of its business should be, aware of, other than those which have been obtained and remain in full force and effect. (t) Financial Statements. The Company's annual financial statements for the most recent two fiscal years ending more than ninety (90) days prior to the date of this Agreement have been furnished to RMST. The annual financial statements are audited. (u) Presentation. The financial statements furnished as described in (t) above and any financial statements provided to RMST pursuant to Section 49 fairly present the Company's financial condition and the results of the Company's operations as of and for the fiscal period ended on the respective dates of such financial statements. On the dates of such financial statements, the Company was, and on the date of any sale of any Mortgage hereunder is, solvent (i.e., able to pay its debts as they mature and having assets with value greater than its liabilities). Such financial statements were prepared in accordance with generally-accepted accounting principles. Since the date of such financial statements, nothing has occurred which has had a material adverse effect on the Company's operations or financial condition nor is the Company aware of any state of facts which (with or without notice or lapse of time or both) would or could result in such a material adverse effect, and the Company is solvent as of the date of this Agreement and will maintain its solvency on a continuing basis. Notwithstanding any of the aforementioned the Company further agrees to maintain its tangible net worth at a minimum of Two Million Six Hundred Thousand Dollars ($2,600,000). (v) Litigation. There are no actions, claims, suits or proceedings pending, or to the Company's knowledge, threatened or reasonably anticipated, against or affecting the Company by any person, entity or governmental authority, other than those disclosed in (i) its most recent audited annual financial statements or (ii) as listed on Appendix 6 which, if adversely determined, may reasonably be expected to result in a material adverse effect on the Company's operations or financial condition. (w) Payment of Taxes. The Company has filed or caused to be filed all of the Company's. federal, state and other tax returns required to be filed, all such returns are true and correct and the Company has paid (or caused to be paid) all material taxes that are due and payable as shown on such returns, including all applicable FICA payments and withholding taxes, except taxes MORTGAGES PURCHASE AGREEMENT PAGE 18 being contested in good faith. The amounts reserved as a liability for taxes payable in the financial statements described above are sufficient for payment of all of the Company's unpaid taxes, whether or not disputed, accrued for or applicable to the period and on the dates of such financial statements and all years and periods prior to them and for which the Company may be liable in its own right or as transferee of the assets of, or as successor to, any other person or entity. (x) VA and FHA Loans. The Company has complied, and will continue to comply, with all applicable laws in respect of the FHA insurance or VA guaranty of each Mortgage offered or sold to the Warehouse Purchasers and designated by the Company as an FHA loan or a VA loan, respectively, and such insurance or guaranty is and will continue to be in full force and effect. All such FHA loans or VA loans comply and will continue to comply in all respects with all applicable requirements for purchase under the industry standard forms of selling contracts for FHA loans or VA loans, respectively, and any supplement to them then in effect. All Mortgages offered to the Warehouse Purchasers under this Agreement and represented to be (i) VA loans are currently guaranteed by VA or (ii) FHA loans are currently insured by FHA. With respect to Mortgages not yet endorsed by FHA for insurance and Mortgages for which the Company has not yet obtained evidence of guaranty from VA or insurance from FHA, the Company shall proceed diligently and promptly to comply with the documentation requirements and all other applicable requirements in order to procure the FHA endorsement for insurance or evidence of VA guaranty or FHA insurance, as the case may be and, in the event that the Company ever has reason to believe that any such endorsement or evidence will not be forthcoming, the Company shall promptly so notify RMST and repurchase the related FHA loan or VA loan. (y) Fire and Casualty Policies. All fire and casualty policies covering the premises encumbered by each Mortgage offered to or purchased by the Warehouse Purchasers under this Agreement: (i) presently name and will continue to name the Company "and its successors and/or assigns in interest as they may appear" of each as the insured under a standard mortgage clause or, for newly funded Mortgages, a notice for an endorsement changing the named mortgagee has been submitted to the carrier and will be pursued diligently until issued; (ii) are and will continue to be in full force and effect; and (iii) afford and will continue to afford insurance against fire and such other risks as are usually insured against in the broad form of extended coverage insurance from time-to-time available, as well as insurance against flood hazards if it is required by FHA, VA or any applicable law, court or other governmental authority. (z) Flood Insurance. Mortgages offered to or purchased by the Warehouse Purchasers under this Agreement which are secured by premises located in a special flood hazard are designated as such by the Secretary of HUD which require flood insurance are and shall continue to be covered by special flood insurance under the National Flood Insurance Program. (aa) Year 2000. The Company has undertaken a detailed inventory, review, and assessment of all areas within and affecting the Company's business and operations that could be adversely affected by the failure of the Company to be MORTGAGES PURCHASE AGREEMENT PAGE 19 Year 2000 Compliant on a timely basis; has developed a detailed plan and time line for becoming Year 2000 Compliant on a timely basis; and, to date, has implemented that plan in accordance with the specified timetable in all material respects. The Company has made written inquiry of each of the Company's key suppliers, vendors and ,customers as to whether they will be Year 2000 Compliant in all material respects on a timely basis and on the basis of that inquiry believes that all of them will be so compliant. As used herein, "Year 2000 Compliant" shall mean that all software, embedded microchips and other processing capabilities utilized by the Company or the Company's key suppliers, vendors and customers will correctly process, sequence, and calculate, without interruption, all date and date related data for all dates to, through and after January 1, 2000, including leap year calculations, and recognize, store and transmit date data in a format which clearly indicates the correct century. As used herein, "key suppliers, vendors and customers" means those suppliers, vendors, and customers of the Company whose business failure or material business disruption would, in RMST's judgment, be reasonably likely to result in a material adverse change in the business, properties, condition (financial or otherwise), or prospects of the Company. Section 49. Covenants. (a) Servicing. The Company agrees to service (or cause to be serviced) all Mortgages purchased by the Warehouse Purchasers under this Agreement which the Company has the right to service, in accordance with the servicing standards stated above in this Agreement and all applicable GNMA, FNMA, FHLMC, FHA and VA requirements, including taking all actions necessary to enforce the obligations of the obligors under such Mortgage. (b) Comply with Commitments. The Company agrees to timely comply in all respects with all terms and conditions of all Commitments covering any Eligible Mortgage (and any renewals, extensions, or modifications of them or substitutions for them), and cause the Mortgages covered by and intended to be sold under each Commitment to be so sold before its expiration date and in the manner and order contemplated by the Commitment. (c) Maintain Commitments. The Company agrees to maintain each Commitment and all of the Company's rights and obligations under it in full force and effect, not to pair off or otherwise cause or acquiesce in the effective partial or complete cancellation of any Commitment without RMST's specific written consent, not to suffer or permit any default under any Commitment, and to enforce performance by the issuer of each Commitment. Without limitation, the Company expressly agrees to timely deliver any and all margin required by the terms of each Commitment. (d) Change in Status. The Company agrees to give prompt written notice to RMST of any change in its status as such or in the relationship between the Company and any Investor approved by RMST. (e) Notification of Mortgage Defaults. The Company agrees to immediately notify RMST upon learning of any default under any of the Mortgages purchased (or agreed to be purchased) by the Warehouse Purchasers, or of the institution of any proceeding before any court or other governmental authority in respect of a claimed violation by the Company or any other person of any MORTGAGES PURCHASE AGREEMENT PAGE 20 statute, rule or regulation relating to any the Mortgage or a claimed defense or offset to any Mortgage. (f) Loan Documents. The Company agrees to maintain - at the Company's principal office or in the office of a computer service bureau engaged by the Company - the originals (or copies in any case where the original has been delivered to RMST or the Agent) of all promissory notes and mortgages or deeds of trust for the Mortgages, and all Commitments related to them, and all related papers, as well as files, surveys, certificates, correspondence, appraisals, computer programs, tapes, disks, cards, accounting records and other information and data relating to such Mortgages for a period not to exceed one year. Upon RMST's written request, the Company will promptly make them conveniently available to RMST. (g) Current Financial Information. The Company agrees to furnish RMST, within ninety (90) days after the end of the Company's fiscal year, audited annual financial statements for that year end, reflecting the corresponding figures for the preceding fiscal year in comparative form, accompanied by the related report acceptable to RMST prepared by the Company's independent certified public accountants stating that the statements were prepared according to generally accepted account principles applied on a basis consistent with prior periods except for such changes in generally accepted accounting principles concurred in by the Company's independent public accountants. Promptly when available and least within forty five (45) days after the end of each of the first three fiscal quarters in the Company's fiscal year, the Company shall furnish RMST its financial statements for that quarter and the year to date, each reflecting the corresponding figures for the same quarter in the preceding fiscal year in comparative form. If requested by RMST, the Company will provide RMST monthly financial statements no later than twenty (20) days after the close of each month in its fiscal year. (h) Year 2000. The Company shall deliver to RMST promptly after they become available the Company's Year 2000 plan and time line, all periodic internally and externally prepared evaluations and progress reports concerning the Company's Year 2000 plan and Year 2000 readiness, any management or other letters from the Company's accountants addressing or mentioning the Company's Year 2000 Compliance, and such other information, documentation and materials as RMST may reasonably request from time to time in order to confirm that the Company is Year 2000 Compliant and the methods used by the Company to become Year 2000 Compliant. (i) Other Information. Promptly upon request, the Company agrees to furnish such other information as RMST may request concerning the Company, its business affairs, the Mortgages and its relationship with any Investor. Section 50. Adjustment to Loan Set Up Fee. RMST may elect to increase or decrease the Loan Set Up Fee from time to time by giving the Company written notice of the change specifying a date when the change will become effective which is at least thirty (30) days after the notice. Any change in the Loan Set Up Fee shall be effective only as to Mortgages acquired by the Warehouse Purchasers on or after the effective date of the change. MORTGAGES PURCHASE AGREEMENT PAGE 21 MISCELLANEOUS Section 51. Assignment Prohibited. This Agreement may not be assigned by the Company. Section 52. Notices. All notices, demands, consents, requests and other communications required or permitted to be given or made hereunder shall be in writing and shall be delivered in person or telecopied (with an additional copy to be mailed as provided herein) or mailed, first class, return receipt requested, postage prepaid, addressed to the respective parties hereto at their respective addresses hereinafter set forth or, as to any such party, at such other address as may be designated by it in a notice to the other given in the manner provided in this Section. All notices shall be conclusively deemed to have been properly given or made when duly delivered, in person, to a Vice President or more senior officer of the addressee, or if mailed, on the first Banking Business Day after being deposited in the mails or if telecopied when transmitted, addressed as follows: If to the Company: Ronald J. Sheppard Chairman & CEO HomeSense Financial Corp. and Affiliates 113 Reed Avenue Lexington, SC 29072 Telephone: (803) 996-2000 Telecopy: (800) 277-4026 If to RMST: HSA Residential Mortgage Services of Texas, Inc. 4550 Post Oak Place Drive, Suite 335 Houston, Texas 77027 Attention: Lawrence J. Trevino Telephone: (713) 843-7301 Telecopy: (713) 888-9014 If to Guarantor Ronald J. Sheppard HomeSense Financial Corp. and Affiliates 113 Reed Avenue Lexington, SC 29072 Telephone: (803) 996-2000 Telecopy: (800) 277-4026 No notice to or demand on the Company or any other person shall entitle the Company or any other person to any other or further notice or demand in similar or other circumstances. Section 53. No Financing Intended. This Agreement evidences a facility for the sale of Mortgages to the Warehouse Purchasers, and is not intended by the Company or RMST to evidence a financing arrangement. The Company will report the sale of the Mortgages under generally accepted accounting principles and for federal income tax purposes as a sale of the entire mortgage, subject to a limited right of RMST to require the repurchase of Defective Mortgages, and subject to a Make Whole Payment for breach of the warranties, representations or covenants given by the Company in this Agreement. The consideration received by the Company upon the sale of each Mortgage will constitute reasonably equivalent value and fair consideration for the MORTGAGES PURCHASE AGREEMENT PAGE 22 transfer of ownership of the Mortgages. The Company warrants and covenants that it is solvent at all times relevant to the sale of any Mortgage, and will not be made insolvent by the sale of any Mortgage. The Company will not sell any Mortgage to the Warehouse Purchasers with any intent to hinder, delay or defraud any of the Company's creditors. Section 54. Confidential/ Proprietary Information. This Agreement is considered the confidential and proprietary information of RMST, and the Company may not reveal this Agreement or its contents to any person other than employees of the Company who need to have knowledge of its content to perform their duties, or to the attorneys and auditors of the Company solely in connection with their representation of the Company. This Agreement is subject to the copyright of RMST and may not be reproduced without the express permission of RMST. Section 55. Unilateral Amendment. RMST reserves the right to unilaterally amend this Agreement in its sole discretion to comply (to the sole satisfaction of RMST) with any law, rule or regulation affecting RMST in effect now or hereafter. Any such amendment shall be effective immediately. However, and notwithstanding any other provision of this Agreement, in the event of a unilateral amendment, the Company shall have the right to terminate this Agreement by written notice to RMST within ten (10) days of the Company's receipt of notice of such amendment. Termination shall not affect any obligation of the Company incurred prior to RMST's receipt of notice of termination. Section 56. Binding. This Agreement supersedes and replaces entirely any and all similar agreements and arrangements heretofore existing between the Agent and the Company or between RMST and the Company and shall bind and benefit the Company, RMST and their respective successors, trustees, receivers and permitted assigns. Section 57. Governing Law; Venue. This Agreement shall be governed by applicable United States and Texas law with specific venue in Harris County, Texas. Section 58. Headings. The headings and captions used in this Agreement are for convenience only and shall not be deemed to limit, amplify or modify the terms of this Agreement, nor shall they effect their meaning. Section 59. Number; Gender. Whenever the singular number is used herein, it includes the plural where appropriate, and words of any gender shall include each other gender where appropriate. Section 60. Counterparts. This Agreement may be executed in counterparts each of which shall constitute an original instrument. Section 61. Severability. if any provision of this Agreement is held invalid, illegal or unenforceable, the remaining provisions shall be enforced and shall not be affected or impaired thereby. Section 62. Incorporated Documents. Each reference made in this Agreement to any Appendix, Exhibit, Schedule or Annex shall be read as a reference to that Appendix, Exhibit, Schedule or Annex to this Agreement except where otherwise expressly specified, and each Appendix, Exhibit, Schedule and Annex to this Agreement is hereby incorporated into this Agreement as if set forth verbatim at each place in this Agreement where it is referred to. Each Appendix, Exhibit, Schedule or Annex which is a form to be completed, executed and delivered pursuant to this MORTGAGES PURCHASE AGREEMENT PAGE 23 Agreement may be completed in accordance with this Agreement by either the Company or RMST before, when or after it is executed and delivered. Section 63. Guaranty. The Guarantor unconditionally guarantees the payment when due of any and all indebtedness and the satisfaction and performance when required of all covenants, obligations and liabilities (collectively, the "Obligations and Liabilities") of the Company under this Agreement. If any or all Obligations and Liabilities of the Company hereunder are not timely satisfied by the Company, the Guarantor unconditionally promises to perform or cause to be performed such Obligations and Liabilities to RMST or to pay to RMST, without deduction of any kind, in lawful money of the United States, the amount of the Obligation and Liability if the same shall be monetary in nature. The Guarantor acknowledges that a separate action or actions may be brought and prosecuted against him/her/them whether or not action is brought against the Company and whether or not the Company is joined in any such separate action or actions. The Guarantor authorizes RMST, without notice or demand (except as shall be required by applicable law providing the same cannot be waived), and without affecting or impairing the liability of the Guarantor under this Section, from time to time in accordance with this Agreement or by mutual agreement with the Company, to renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, any indebtedness of the Company or to modify the terms and time for performance of any or all Obligations and Liabilities under this Agreement. The Guarantor waives notice of dishonor, notice of acceptance, any right to require RMST to proceed against the Company, or to pursue any other remedy in RMST's power whatsoever. Until all of the Obligations and Liabilities shall have been fully performed, and until all periods under applicable law to contest preferential or fraudulent payments have expired, Guarantor waives all rights of contribution and subrogation from the Company. MORTGAGES PURCHASE AGREEMENT PAGE 24 Section 64. Entire Agreement. This Agreement represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous, or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. HOMESENSE FINANCIAL CORP. AND HSA RESIDENTIAL MORTGAGE SERVICES AFFILIATES OF TEXAS, INC. By: By: Name: Ronald J. Sheppard Name: Lawrence J. Trevino Title: Chairman & CEO Title: President Date: Date: GUARANTOR By: Name: Ronald J. Sheppard Date: Attached: Appendix 1 Offer to Sell Mortgage Appendix 2 RMST Procedures Appendix 3 Specific Power of Attorney Appendix 4 Collateral/ Credit Documents Appendix 5 Special Closing Instructions Appendix 6 Pending or Threatened Litigation Appendix 7 Defective Mortgage Criteria Appendix 8 Eligible Mortgage Criteria Appendix 9 Minimum Criteria for Investors Appendix 10 Bailee Letter (from Agent) Appendix 11 Bailee Letter (from RMST) MORTGAGES PURCHASE AGREEMENT PAGE 25 APPENDIX 2 RMST PROCEDURES Banking Business Day A "Banking Business Day" is any Monday through Friday when national banks domiciled in Harris County, Texas are open to conduct regular commercial banking business and wire transfers may be made. Mortgage Purchases RMST will accept or reject an Offer on the Banking Business Day on which it is delivered to RMST and, if RMST elects to accept an Offer, cause the Warehouse Purchasers to purchase the related Eligible Mortgage on that Banking Business Day so long as: (i) the Company has given RMST written notice by Noon on that Banking Business Day of the amount which the Company wishes to have wired to the Closer (no prior notice is required if the disbursement is to be by check); and (ii) the Company delivers the Document File to RMST no later than 1:00 p.m. on that Banking Business Day. If the Company fails to give notice or deliver the Document File to RMST by the above times, RMST shall have no obligation to cause the Warehouse Purchasers to purchase the Mortgage on that Banking Business Day, but RMST agrees to use reasonable efforts to cause the Warehouse Purchasers to do so. Funding RMST will cause the Warehouse Purchasers to fund the purchase of an Eligible Mortgage on the Banking Business Day determined as provided under "Mortgage Purchases" either: (i) by a bank wire transmitted on that Banking Business Day if the Company requested that the purchase be by bank wire, or (ii) by a check authorized to be drawn on that Banking Business Day if the Company requested that the purchase be by check. The date on which the wire is transferred or on which the check is authorized to be drawn is the date on which the Warehouse Purchasers are deemed to have funded the acquisition of the Mortgage for the purpose of determining the Period Held even if the actual date of purchase of the Eligible Mortgage is a later date. Mortgage Not Purchased If a bank wire is transmitted or a check is authorized to be drawn and the Mortgage is not purchased for any reason other than the willful or grossly negligent act or omission of RMST, the Agent or the Warehouse Purchasers, then the amount of the bank wire or the check shall be deemed to be an RMST Advance made on the Banking Business Day the wire was transmitted or the check was authorized to be drawn. Time of Payment Any payments made by the Company to RMST shall be deemed received when made in immediately available funds. APPENDIX 2 Page i APPENDIX 3 SPECIFIC POWER OF ATTORNEY HomeSense Financial Corp. and Affiliates (the "Company"), a South Carolina corporation, hereby irrevocably designates and appoints HSA RESIDENTIAL MORTGAGE SERVICES OF TEXAS, INC. ("RMST") and its successors and assigns as the Company's true and lawful agent and attorney-in-fact with full power of substitution and with the power and authority: (i) to endorse and deliver, negotiate or otherwise transfer to itself or any other person any promissory notes; and (ii) to prepare, complete, execute, deliver and record any assignment, transfer or release to itself, to any investor in Mortgages (an "Investor") or any other person of any assignments of mortgages, deeds of trust, deeds to secure debt and other mortgage instruments of all kinds and descriptions ("Mortgages") and any security agreement, collateral assignment or other security instrument of any kind, securing any Mortgage, any insurance contract, claim, right or interest relating to it or any indemnity or suretyship contract relating to it, or any of its documents related to the Mortgage; and (iii) to cancel any endorsement or assignment previously made by or on behalf of the Company to any person or in blank, on or in respect of any Mortgage, any promissory note evidencing it or any of its other documents related to the Mortgage; and to endorse and deliver to any person any order, check, instrument or other document or paper received or obtained by RMST that represents p4yment in respect of any Mortgage, (v) to commence, prosecute, settle, discontinue, defend or otherwise dispose of any claim relating to any Mortgage; and (vi) to execute and deliver any and all other papers as RMST or its substitutes shall deem necessary, appropriate or incidental to the administration and execution of any of the covenants, agreements or transactions provided for in or contemplated by the agreement dated October 13, 1999 between the Company and RMST, as it may have been or may hereafter be supplemented, amended or restated (the "Mortgages Purchase Agreement") to which reference is hereby made; and (vii) to sign the Company's name wherever RMST shall deem it necessary, appropriate or desirable to effect performance of the Mortgages Purchase Agreement, any related documents or any act authorized hereby; for all purposes in the Company's name, place and stead and at any time and from time-to-time, in each instance acting by and through any person who is at the time an officer of RMST or its substitute and any such act by RMST, its successors, substitutes or assigns, shall have the same force and effect as if done by the Company itself pursuant to a duly adopted resolution of its then-incumbent board of directors. (Notwithstanding the reference in the preceding sentence to the Mortgages Purchase Agreement, no Investor or other person or entity dealing with RMST shall be required to look beyond this Specific Power of Attorney itself or shall be charged with knowledge APPENDIX 3 Page i of the provisions of the Mortgages Purchase Agreement or any other instrument, but instead may rely upon, and shall be fully protected by the Company in relying upon, this Specific Power of Attorney and RMST's authority as set forth herein or reasonably inferable wherefrom as incidental to the authority expressly stated herein.) Without limiting its authority to otherwise assign or delegate its powers to others or to substitute others for it hereunder, RMST is expressly authorized to delegate its powers under this Specific Power of Attorney to Citibank, N.A. and Citicorp North America, Inc., the Agent identified in the Mortgages Purchase Agreement. This power is coupled with an interest and shall remain in force for so long as the Company has or may have any unperformed obligation to RMST, its successors or assigns, under or in respect of the Mortgages Purchase Agreement, and shall be irrevocable during that time. This Specific Power of Attorney is expressly limited to the purposes set forth above, shall not be interpreted as a general power of attorney, and shall have no force or effect except as to matters pertaining to the Mortgages Purchase Agreement, although it shall be broadly construed as to those matters. HomeSense Financial Corp and Affiliates By:___________________________ Name: Ronald J. Sheppard Title: Chairman & CEO Date:_________________________ State of South Carolina Ss: County of Lexington This instrument was acknowledged before me on this 14th day of October, 1999 by Ronald J. Sheppard as Chairman & CEO of HomeSense Financial Corp. and Affiliates. Signature of notarial officer ______________________ (Seal, if any) Title______________________ My Commission expires __________ APPENDIX 3 Page ii APPENDIX 4 COLLATERAL/ CREDIT DOCUMENTS 1. Commitment from an RMST-approved Investor 2. Underwriting approval from investor or delegated underwriters from Company 3. Certified copy of the borrower's credit application (FNMA form 1003) or HUD equivalent 4. Credit Report 5. Proof of mortgage insurance or guaranty, or FHA insurance approval if applicable 6. Appraisal - Pages 1 and 2 Only 7. Closing Statement or HUD-1 (1) Required at closing and funding (2) Required as part of Offer to Sell Mortgages 8. Note 9. Certified Copy of the Deed of Trust 10. Truth-In-Lending 11. Hazard Insurance 12. Power of Attorney (if applicable) 13. Flood Insurance (if applicable) 14. Title Commitment APPENDIX 4 Page i APPENDIX 5 (INSTRUCTIONS TO MORTGAGE LOAN CLOSER) SPECIAL CLOSING INSTRUCTIONS FOR LOAN FUNDS WHICH ARE PROVIDED TO ----------------------------- BY CITIBANK, N.A. AND CITICORP NORTH AMERICA, INC., as agent FOR THE ____________________ LOAN GF # _________________________ 1. The money to fund this loan is expected to be provided to you by Citibank, N.A. and Citicorp North America, Inc., (in its capacity as agent for various purchasers (the "Purchasers") under a Master Purchase Agreement between them and HSA Residential Mortgage Services of Texas, Inc.) which will purchase this loan from HomeSense Financial Corp. and Affiliates (the "Company") when it is closed. If for any reason this loan does not close as scheduled, you agree to notify Larry Trevino or Billye J. Scott of HSA Residential Mortgage Services of Texas, Inc. immediately at 713-840-9626 and return the funds by wire transfer to our account within twenty-four (24) hours. 2. Accordingly, this is notice that you will be the "bailee" of the Purchasers under Section 8.305 of the Uniform Commercial Code for the promissory note and all other papers for this loan which come into your possessions, from the instant the promissory note for this loan is executed and delivered until you have delivered them to HSA Residential Mortgages Services of Texas, Inc. for the account of Citibank, N.A. and Citicorp North America, Inc., as agent. 3. FAX to HSA Residential Mortgage Services of Texas, Inc. at (713) [Coordinator Fax], marked to the attention of [Loan Coordinator] (Phone: (713) [Coordinator Phone]) the following items: (1) A certified copy of the HUD-1 or Closing Statement prepared by your company and executed at the closing by the borrower; (2) A certified copy of this bailee letter with the blanks in the block below completed and signed by your company. YOU ARE NOT AUTHORIZED TO FUND THIS LOAN UNTIL YOU HAVE RECEIVED A FUNDING NUMBER FROM HomeSense Financial Corp. and Affiliates AND A CORRESPONDING RMST TRANSACTION NUMBER FROM [LOAN COORDINATOR]. YOU MUST CALL [LOAN COORDINATOR] TO OBTAIN A VERBAL AUTHORIZATION NUMBER. 4. Send by courier within TWENTY-FOUR (24) HOURS after funding, the original note and the other closing papers listed below to HSA Residential Mortgage Services of Texas, Inc. at 4550 Post Oak Place Drive, Suite 335, Houston, Texas 77027, Attention: [Loan Coordinator]. a. Original Promissory Note executed by the borrower(s) and one certified copy. APPENDIX 5 Page i b. One certified copy of the Mortgage or Deed of Trust certified that the original has been sent for recording or registration. c. Copy of any applicable power of attorney for any mortgagor or note maker certified as a true copy of the original and that the original has been sent for recording or registration. d. One certified copy of the Hazard Insurance Policy. e. One certified copy of the Title Commitment. f. One certified copy of the executed Truth-in-Lending. g. One certified copy of the flood insurance (if applicable). h. One certified copy of any power of attorney used by the buyers (if applicable). i. After the original deed of trust and, if applicable, power of attorney have been recorded, they should be sent to HomeSense Financial Corp. and Affiliates or their Investor. The Title Policy, when issued, should also be sent to HomeSense Financial Corp. and Affiliates for delivery to their Investor. j. Special provisions: (i) A funding number must be obtained from HomeSense Financial Corp. and Affiliates and conveyed to HSA Residential Mortgage Services of Texas, Inc. prior to any release of funds. (ii) Please contact Billye J. Scott at (713) 840-9626 regarding any excess monies collected at closing. ______________________________hereby acknowledges receipt of the foregoing notice that it is bailee for the Purchasers in respect of the promissory note, executed by ___________________and payable to the order of (or endorsed by its payee to be payable to the order of) HomeSense Financial Corp. and Affiliates and which has been endorsed by HomeSense Financial Corp. and Affiliates in blank. We are today mailing the original executed and properly endorsed note to HSA Residential Mortgage Services of Texas, Inc. with the other papers listed above. (Title Company) By: Name: Title: Closer Date: APPENDIX 5 Page ii APPENDIX 6 PENDING OR THREATENED LITIGATION APPENDIX 6 Page i APPENDIX 7 DEFECTIVE MORTGAGE CRITERIA Defective Mortgage means any Mortgage: (i) the Enclosures for which are incomplete in any material respect; (ii) for which any required Enclosures are, in the reasonable opinion of RMST or (in the case of a Mortgage covered by a Commitment) the applicable Investor, defective or inaccurate in any material respect considered in light of the requirements of the relevant Commitment or (for any Bulk Purchase Mortgage) secondary market investors' requirements therefor reasonably anticipated by RMST; (iii) for which any material Enclosure is, in the reasonable opinion of RMST or the Investor, not valid and binding; (iv) that is in default as to payment of principal, interest or both and past due more than thirty (30) days as of the day the Warehouse Purchasers (acting through Agent) purchased the Mortgage; (v) as to which any representation of the Company that is specific to that Mortgage (whether by itself or together with others) is false or misleading in any material respect; (vi) with respect to which the Company shall have breached any warranty that is specific to that Mortgage (whether by itself or together with others) in any material respect; (vii) with respect to which any fraud was committed by any mortgagor, guarantor, title or closing agent, any other material party to the origination or funding thereof or any holder or endorser thereof; (viii) which contains documentary exceptions which RMST has declared to be defective; (ix) that does not meet, or for any reason has ceased to meet, the applicable conditions for eligibility as an Eligible Mortgage; (x) as to which seven (7) Banking Business Days have elapsed since its purchase without RMST having received its Enclosures; or (xi) that the Company fails to service in accordance with this Agreement and as to which the Company fails to correct all such servicing errors on or before thirty (30) days after receipt of written notice from RMST setting forth the nature of the servicing errors in reasonable detail. APPENDIX 7 Page 1 APPENDIx H ELIGIBLE MORTGAGE CRITERIA Eligible Mortgage means a Mortgage that, at the time of its purchase, meets the following conditions: 1. It is a conventional Mortgage, FHA Mortgage or VA Mortgage or subprime Mortgage, except that the dollar limitations on the maximum amount of principal to be eligible for participation in a program offered by GNMA, FNMA, VA or FHLMC may be exceeded so long as no Mortgage exceeds Seven Hundred Fifty Thousand Dollars ($750,000) in original principal amount without Agent's prior approval on a case-by-case basis. 2. The promissory note evidencing it (a) is the standard form approved by GNMA, VA, FHA, FNMA or FHLMC or a form otherwise acceptable to RMST, (b) has a maturity within thirty (30) years of its origination, (c) is payable or endorsed by the Company (without restriction or limitation) in blank, (d) is fully funded and (e) is valid and enforceable without offset, counterclaim, defense or right of rescission or avoidance of any kind other than for valid payments made on it and any exceptions to enforceability under Debtor Laws. 3. No default in the payment of principal or interest or any other default on it has continued uncured for thirty (30) calendar days, no foreclosure or other similar proceedings have commenced and no claim for any credit, allowance or adjustment exists. 4. It is secured by a mortgage, deed of trust or trust deed that (a) is the standard form approved by VA, GNMA, FHA, FNMA or FHLMC or a form otherwise acceptable to RMST and (b) grants a first priority lien on residential real property described therein that either has been perfected by recording or will be perfected upon recording; provided that the mortgage, deed of trust or trust deed securing a Second Lien Mortgage may grant a second priority lien on such real estate. 5. It has been fully and finally funded and is not subject to any unexpired right of rescission provided for by any applicable federal or other laws. 6. The underlying residential real property securing it (a) consists of land and (i) a one- to four-family dwelling, (ii) a condominium unit that is ready for occupancy or (iii) a manufactured home unit, but is not a mobile home, a co-op or a multifamily dwelling for more than four (4) families, (b) is, if required by applicable appraisal laws, covered by an appraisal and (c) is insured against loss or damage by fire and all other hazards normally included in standard extended coverage insurance (including flood insurance if the property is in a federally-designated flood hazard area) in accordance with the Enclosures for it and the Company (as servicer) or Agent has the right to be named as the loss payee for that insurance. 7. Unless it is a Bulk Purchase Mortgage, it conforms in all material respects with all of the requirements of a valid and enforceable Commitment issued by an Investor and duly assigned to RMST and its assigns and is covered by the Commitment (including the requirements that such Commitment (i) has not been "paired off' or otherwise presently or prospectively terminated, (ii) has not been reduced by takeout purchases of other mortgage loans so that it is insuffcient to cover the subject Mortgage and each other Mortgage that has been purchased, or is being proposed by the Company for purchase, by Warehouse Purchasers with an express or APPENDIX 8 PAGE i implied representation by the Company that it is covered by the Commitment and (iii) is in full force and effect and enforceable in accordance with its terms); provided that a Mortgage that was covered by a Commitment when sold to the Warehouse Purchasers but thereafter loses such coverage shall not be considered a Lost Commitment Mortgage unless and until ten (10) days shall have elapsed after such coverage is lost within which the Company has not caused the Mortgage to be again covered by a Commitment duly assigned and delivered to RMST and its assigns. For this purpose coverage shall not be deemed lost until the expiration of any grace period to deliver the Mortgage. 8. If it is a Bulk Purchase Mortgage, (i) the Company currently and reasonably believes in good faith that it satisfies all underwriting policies and criteria of a specific secondary mortgage market investor in subprime mortgage loans and, if requested to do so, that investor would in fact purchase it, and (ii) its loan-to-collateral-value ratio does not exceed one hundred percent (100%) and foreclosure proceedings have not been initiated in respect of any property securing it. 9. The Enclosures for it are (a) delivered to RMST as required by the provisions of this Agreement, (b) in compliance with all laws, (c) otherwise in compliance with the requirements of this Agreement and otherwise in form and substance acceptable to RMST and (d) subject to no liens. 10. The Enclosures together with the recorded deed of trust and the policy of title insurance are delivered to RMST as required by the provisions of any applicable commitment and, in any event, within sixty (60) calendar days after the date of the related promissory note. 11. It has been owned by Warehouse Purchasers for no more than sixty (60) calendar days. APPENDIX 8 PAGE II APPENDIX 9 MINIMUM CRITERIA FOR INVESTORS APPENDIX 9 PAGE I APPENDIX 10 FORM OF BAILEE LETTER FOR INVESTORS HSA RESIDENTIAL MORTGAGE SERVICES OF TEXAS, INC. 4550 POST OAK PLACE DRIVE, SUITE 335 HOUSTON, TEXAS 77027 TELECOPY (713) 888-9014 Re: (Mortgagor(s) name(s) and loan no.] originated by (name of originator) (the "Originator'") Beneficial ownership of the mortgage loans (the "Loans") listed on the attached list and the enclosed mortgage notes and other documents (the "Mortgage Documents") for them has been purchased by Citicorp North America, Inc., as Agent (the "Agent") for certain financial institutions and other persons (collectively, such financial institutions and other persons, the "Buyers") under that certain Purchase Agreement dated as of September 30, 1999 (as renewed, extended, amended, or restated, the "Purchase Agreement") among HSA Residential Mortgage Services of Texas, Inc. ("RMST"j, American General Finance, Inc,, Corporate Asset Funding Company, Inc., Citibank, N.A. and the Agent. RMST, in its capacity as Servicer for the Agent (in such capacity, together with any successor in such capacity, the "Servicer"), herewith delivers the Mortgage Documents to you for purchase under the forward purchase agreement or takeout commitment (the "Takeout Commitment") that you issued to the Originator. If you purchase the Loans, (i) your purchase will be without recourse against either the Agent or any of the buyers and without express or implied warranty or representation from any of them, except that (A) the Agent will warrant that the Agent has the power and authority to deliver the Loans to you and that no Buyer affiliated with the Agent or managed by the Agent or any of its affiliates has either conveyed its interest in the Loans to anyone other than you nor encumbered its interest in the Loans and (B) each Bank which is not affiliated with the Agent or managed by the Agent or any of its affiliates Will warrant that such Bank has not conveyed its interest in the Loans to anyone other than your or encumbered its interest in the Loans, and (ii) any claim you may have in respect of the purchase other than for violation of such express special warranty will accordingly be required to be made against the Originator to whom you issued your Takeout commitment. Within twenty-one (21) days after the date of this letter, either (i) the Agent must receive payment in full for the Mortgage Documents or (u) the Servicer must receive the returned Mortgaged Documents themselves. "Payment in full" means payment of the purchase price for the Loans determined in accordance with the terms of your Takeout Commitment plus accrued interest to the date of purchase, BUT IN NO EVENT LESS THAN THE "MINIMUM PRICE" STATED FOR EACH MORTGAGE LOAN ON THE ATTACHED LIST.4 Until the Agent has received payment in full for the Mortgage Documents or the Servicer has received the APPENDIX 10 PAGE I Mortgage Documents, you shall be deemed to be holding the Mortgage Documents in trust for the Agent and the Buyers as their beneficial owners, and as the Agent's and the Buyer's bailee pursuant to - or as otherwise provided in accordance with -applicable provisions of the Uniform Commercial Code. No property interests in the Mortgage Documents are or will be transferred to you until payment in full has been received by the Agent. If you receive conflicting instructions regarding the Mortgage Documents from RMST (as Servicer or otherwise), any Buyer or the Agent, you agree to act in accordance with the Agent's instructions. THE AGENT RESERVES THE RIGHT, AT ANY TIME BEFORE IT RECEIVES FULL PAYMENT, TO REQUIRE BY NOTICE TO YOU FROM THE AGENT OR THE SERVICER THAT YOU RETURN THE MORTGAGE DOCUMENTS, AND IF YOU RECEIVE SUCH NOTICE, YOU AGREE TO IMMEDIATELY RETURN THEM TO THE SERVICER (UNLESS THE AGENT DELIVERS TO YOU SUCH A NOTICE AND SUCH NOTICE HAS CONTRARY INSTRUCTIOINS, IN WHICH CASE THE MORTGAGE DOCUMENTS SHALL BE RETURNED AS INSTRUCTED BY THE AGENT IN SUCH NOTICE) AND TO INDEMNIFY THE AGENT AND THE BUYERS AND HOLD THE AGENT AND THE BUYERS HARMLESS AGAINST ANY LOSS, COST, DAMAGE, CLAIM OR EXPENSE THAT THEY MAY INCUR IF THE LOAN IS NEITHER PURCHASED NOR RETURNED TO THE SERVICER (OR AS OTHERWISE PROVIDED HEREUNDER) AS HEREIN PROVIDED. IF YOU FAIL TO MAKE FULL PAYMENT TO AGENT WITHIN TWENTY-ONE (21) DAYS AFTER THE DATE OF THIS LETTER, YOU ARE INSTRUCTED TO RETURN ALL OF THE MORTGAGE DOCUMENTS TO THE SERVICER (OR AS OTHERWISE INSTRUCTED BY THE AGENT). Unless otherwise instructed in writing by the Agent, payment to the Agent for the Mortgage Documents must be made by wire transfer of immediately available funds to the following account with Chase Bank of Texas, National Association: Chase Bank of Texas, National Association ABA Number 1130-0060-9 Attention: Telephone: Fax: For Credit to HSA RMST, Inc. Settlement Account no. 00103196573 Ref: [Mortgagors' names and loan nos.] BY ACCEPTING THE MORTGAGE DOCUMENTS DELIVERED TO YOU WITH THIS LETTER, YOU CONSENT TO BE THE AGENT'S AND BUYERS' TRUSTEE AND BAILEE ON THE TERMS DESCRIBED IN THIS LETTER. THE AGENT REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED .MORTGAGE DOCUMENTS AND THIS LETTER AND CONFIRM YOUR AGREEMENTS AS SET FORTH IN THIS LETTER BY SIGNING AND RETURNING TO THE SERVICER THE ENCLOSED COPY OF THIS LETTER, ALTHOUGH YOUR FAILURE TO DO SO SHALL NOT DIMINISH, AFFECT OR IMPAIR ANY TERM OR CONDITION OF THIS LETTER, YOUR AGREEMENTS STATED HEREIN (WHICH ARISE AUTOMATICALLY ON YOUR ACCEPTANCE OF THIS LETTER AND THE ENCLOSED APPENDIX 10 PAGE ii MORTGAGE DOCUMENTS) OR THEIR BINDING EFFECTS ON YOU. The preceding provision shall in no way affect or impair any claim or cause of action against you in respect of your Takeout Commitment. This letter shall bind you and your successors, assigns, trustees, and conservators and receivers and shall benefit the Agent and the Buyers and their respective successors and assigns. Very truly yours, HSA RESIDENTIAL MORTGAGE SERVICES OF TEXAS, INC. as Servicer for the Agent By: Name: Title: Accepted and agreed to: By: Name: Title: Date: APPENDIX 10 PAGE iii APPENDIX 11 BAILEE LETTER (FROM RMST) HSA RESIDENTIAL MORTGAGE SERVICES OF TEXAS, INC. 4550 POST OAK PLACE DRIVE SUITE 335 HOUSTON, TEXAS 77027 TELEPHONE (800) 935-9626 TELECOPY (713) 888-9014 Re: Mortgagor(s) names) and loan no.] originated by [name of originator] (the "Originator") Beneficial ownership of the mortgage loans (the "Loans'") listed on the attached list and the enclosed mortgage notes and other documents (the "Mortgage Documents") for them has been purchased by HSA Residential Mortgages Services of Texas, Inc. ("RMST'). RMST herewith delivers the Mortgage Documents to you for purchase [include this text only for Mortgage Loans covered by Commitments: under the forward purchase agreement or takeout commitment (the "Commitment") that you issued to the Originator.] If you purchase the Loans, (i) your purchase will be without recourse against RMST, and without express or implied warranty or representation from it, except that RMST will warrant that RMST has the power and authority to deliver the Loans to you and that the RMST has neither conveyed the Loans to anyone other than you nor encumbered them, and (ii) any claim you may have in respect of the purchase other than for violation of such express special warranty will accordingly be required to be made against the Originator to whom you issued your Commitment. Within twenty-one (21) days after the date of this letter, RMST must receive either (i) payment in full for the Mortgage Documents or (ii) the returned Mortgaged Documents themselves. "Payment in full" means payment of the purchase price for the Loans [ use this text for Mortgage Loans covered by Commitments: determined in accordance with the terms of your Commitment [use this text for Mortgage Loans that are not covered by Commitments: as you have agreed with the Originator] plus accrued interest to the date of purchase, BUT IN NO EVENT LESS THAN THE "MINIMUM PRICE" STATED FOR EACH MORTGAGE LOAN ON THE ATTACHED LIST. Until RMST has received either the Mortgage Documents or payment in full for them, you shall be deemed to be holding the Mortgage Documents in trust for RMST as their beneficial owner, and as RMST's bailee pursuant to - or as otherwise provided in accordance with - applicable provisions of the Uniform Commercial Code. No property interests in the Mortgage Documents are or will be transferred to you until payment in full has been received by RMST. RMST RESERVES THE RIGHT, AT ANY TIME BEFORE IT RECEIVES FULL PAYMENT, TO REQUIRE BY NOTICE TO YOU THAT YOU RETURN THE MORTGAGE DOCUMENTS, AND IF YOU RECEIVE SUCH A NOTICE, YOU AGREE TO IMMEDIATELY RETURN THEM TO RMST AND TO INDEMNIFY RMST AND HOLD RMST HARMLESS AGAINST. APPENDIX 11 PAGE i This letter shall bind you and your successors, assigns, trustees, conservators and receivers and shall benefit RMST and its successors and assigns. Very truly yours, HSA RESIDENTIAL MORTGAGE SERVICES OF TEXAS, INC. By: Name: Title: Accepted and agreed to: By: Name: Title: Date: APPENDIX 11 PAGE iii RESIDENTIAL MORTGAGE SERVICES O F T E X A S September 29, 2000 Mr. Larry Gosnell, CFO HomeGold Financial 3901 Pelham Rd. Greenville, SC 29615 Dear Mr. Gosnell, I am writing this letter as a follow-up to the letter you received earlier this month concerning Residential Mortgage Services of Texas (RMST) decision to terminate its mortgage warehouse relationship with HomeSense/HomeGold Financial, Inc. (the Company). In that letter I cited several reasons for the decision made by RMST which are defined as events of default in the Loan Purchase Agreement between RMST and the Company. However, RMST has not declared an event of default nor suspended use of the facility. In the letter described above I outlined a plan that facilitates the gradual elimination of the facility. That plan allows the company to continue to advance funds and utilize the warehouse facility for on-going business within certain guidelines. Given this reduction plan RMST has waived the events of default now present. However, by this waiver RMST does not relinquish any of its rights or remedies under the Loan Purchase Agreement. Additionally, this waiver is contingent upon the Company's continued compliance with the terms of the reduction plan and compliance with all terms of the Loan Purchase Agreement with the exception of the Net Worth Maintenance requirement. Please feel free to contact me at (713)843-7301 should you have any further questions. Sincerely, Hunter Battle President 4550 Post Oak Place Drive Suite 335 Houston, Texas 77027 Phone (713)843-7300 HSA Residential Mortgage Services of Texas, Inc. - A subsidiary of American General Finance RESIDENTIAL MORTGAGE SERVICES OF TEXAS September 19, 2000 Mr. Ronald J. Sheppard, CEO HomeGold Financial, Inc.. 3901 Pelham Rd. Greenville, SC 29615 Dear Mr. Sheppard, I have received and reviewed the financial statements of HomeGold Financial, Inc. dated July 31,200(1. 1 must now inform you that the financial condition of HomeGold Financial, Inc as described in those financial statements is not in compliance with the requirements to maintain a mortgage loan warehouse facility with RMST. In addition, HomeGold has not satisfactorily maintained the facility in a manner that minimizes the loans aging in the facility beyond acceptable timeframes. Either of these situations individually is sufficient to cause concern and reduction or elimination of the facility. Together, they elevate the risk associated with continuing the HomeGold/HomeSense/RMST relationship to an unacceptable level. Therefore, this letter is sent to you to fulfill the Termination Notification requirements provided in the Loan Purchase Agreement between HomeGold/HomeSense Financial and Residential Mortgage Services of Texas. The Termination is effective immediately upon your receipt of this letter and will follow the schedule described below. Realizing that the RMST mortgage warehouse facility plays an important role in the day to day operation of HomeGold Financial I am providing the following plan for the workout of the facility between now and December 31, 2000. It is our intent to provide an adequate amount of time to allow you to procure a replacement facility if necessary and to sell the loans now in the warehouse through your normal channels. The schedule that follows should satisfy those objectives: Current Facility Commitment: $25,000,000 Current Facility Outstanding: $20,600,000 Phase 1: Immediate reduction in available commitment to $20,000,000. Phase 2: Close of business September 30, 2000 reduce availability to $15,000,000 Phase 3: Close of business November 30, 2000, reduce availability to $10,000,000 Phase 4: December 1, 2000, No further advances allowed. Facility moves into pay out status. Phase 5: December 31, 2000, Full payment of remaining balance required. During the periods described in phases 1 - 3 above the warehouse will be open, to you for continued advances up to the described commitment levels for each phase. I truly hope that your efforts with HomeGold are successful. Please call me should you wish to discuss any of the information provided in this letter. Sincerely, Hunter Battle President Cc: Larry Gosnell, CFO Ronald J. Sheppard as Guarantor 4550 Post Oak Place Drive Suite 335 Houston, Texas 77027 Phone (713)843-7300 HSA Residential Mortgage Services of Texas, Inc. - A subsidiary of American General Finance Residential Mortgage Services of Texas August 16, 2000 Mr. Ronald J. Sheppard HomeSense Financial Corp. 113 Reed Avenue Lexington, SC 29072 Fax # (864) 289-6301 Dear Ronnie: As you are aware, Section 43 of the Mortgages Purchase Agreement ("Agreement") executed between HomeSense Financial Corp. and Affiliates dated October 13, 1999, defines one condition of default where "any equity interest in the Company is issued to any person who is not a Key Principal." Residential Mortgage Services of Texas, Inc. ("RMST") acknowledges that HomeGold Financial, Inc. ("HomeGold") has merged with HomeSense Financial Corp. ("HomeSense") and that HomeSense ceased to exist while HomeGold became the owner of HomeSense and assumed responsibility for all the obligations and liabilities for HomeSense under our Agreement. RMST agrees to continue the waiver of this default condition until August 30, 2000, in order to complete the due diligence necessary to approve the new Key Principal, HomeGold. All other terms and conditions of this Agreement apply. Presently you are the guarantor on the HomeSense Agreement. You will continue to be the guarantor during the interim period. Please execute the acknowledgement of this letter and return to me by fax. My fax number is 713-888-9014. Please overnight the original of both documents to my attention. Your business has been very important to us and we look forward to many more years helping you grow. Much success with your merger, Hunter Battle President Acknowledged and Agreed this ______ day of August 2000. HomeGold, Inc. - --------------------- Ronald J. Sheppard Title: CEO RESIDENTIAL MORTGAGE SERVICES OF TEXAS July 31, 2000 Attn: MR RONALD SHEPPARD HOMEGOLD AND AFFILIATES 3901 PHELHAM ROAD GREENVILLE, SC 29615 Dear RONALD: Residential Mortgage Services of Texas has undergone considerable change since the first of June. Most of this change has been internal and hopefully transparent to you. However RMST has undergone a change in management of which you should be aware. Please accept this letter as my letter of introduction to you as the President of Residential Mortgage Services of Texas. During the past 5 weeks I have reviewed the policy and practice of RMST and am now implementing several changes that will allow us to know you and to serve you better and to prudently continue with and expand our mortgage warehouse relationship. The first of these changes is to request updated interim financial statements for our review. Per our agreements, RMST will now request audited financial statements from you on an annual basis and internal interim statements on a quarterly basis. Specifically, as provided for in your warehouse lending agreement with RMST, you are obligated to periodically provide us with the financial statements of your company as well as of any companies and/or persons that guaranty your line of credit with RMST. Therefore, I am requesting that you provide us with the following financial information within the next fifteen (15) calendar days: 1. Audited financial statements for the most recent fiscal year-end of your company and any other companies guarantying your line of credit. Those full-year (I 2-month) statements should include, at the minimum, balance sheet, income statement, cash flow analysis, reconciliation of equity, auditors' notes, and auditors' opinion(s). This is an annual requirement that must be complied with immediately upon the completion of those statements but, in any case, no later than 90 calendar days after the completion of the fiscal year. If audited statements are not available within 45 days of your year end, interim, quarterly statements showing the final quarter and full fiscal year results must be received within the 45-day period following your year end and the audited statements must be provided as soon as available. 2. The most recent interim financial statements of your company and any other companies guarantying your line of credit. That means statements for the period ending closest to June 30, 2000. These statements should include, at the minimum, balance sheet and income statement, both on a period and fiscal year-to-date basis. 3. The most recent financial statement and 1999 federal income tax returns of any individuals guarantying your line of credit. The personal financial statement must be no less recent than as of December 31, 1999. Please note the 15-day deadline imposed above. That means that this information must be received by RMST on or before August 15, 2000. If you have already provided this information to us, please tell us that, in writing, citing when and to whom the information was provided. Additionally, going forward we will require your fiscal quarterly updated (interim) financial statements to be provided regularly to us no later than 30 calendar days after the close of that fiscal quarter. Those 4550 Post Oak Place Drive Suite 335 Houston, Texas 77027 Phone (713)843-7300 HSA Residential Mortgage Services of Texas, Inc. - A subsidian' of American General Finance RESIDENTIAL MORTGAGE SERVICES OF TEXAS statements must include, at the minimum, balance sheet and income statement in sufficient detail to determine the financial condition of your company and must portray results both for the period and fiscal year-to-date. This request (which is ongoing) for regular quarterly updates also includes statements from any companies guarantying your line of credit with RMST and those statements must follow the same form as for your company. In addition to our effort to maintain updated financial records on all customers there are a couple of other warehouse facility requirements I would like to bring to your attention. These are policy requirements which I'm sure you'll agree should be strictly enforced. First, please remind your processors/c losers that the maximum WET period allowed by the RMST mortgage warehouse facility is 3 business days. That is, original notes must be received by RMST within three (3) business days after loan closing. You can expect that we will be contacting you immediately should any Note funded not be received in the warehouse within three (3) days. Notes outstanding in excess of three days constitute reason for suspension of your warehouse funding availability until such time as all notes are received or the receipt schedule is back on track. Secondly, please inform your secondary area that all notes sent under bailee to an investor must be purchased within 21 days of delivery. If not purchased within this 21 day period the note must be immediately returned to RMST. Again, should purchases not be executed within this time frame you can expect that we will be contacting you for information and help in correcting the problem. You can expect to see several noticeable changes in the near future including prompt reporting of portfolio exceptions such as those noted above. Please receive these reports as we intend them, that is, as tools to be used by you that will allow you to maximize the potential of your warehouse facility. I encourage you to contact me directly at 713-843-7301 should you have any questions or comments concerning the information requested and provided above. I look forward to meeting you soon and to working with you as you strive to meet the mortgage needs of the country in the future. Sincerely, Hunter L Battle President, RMST 4550 Post Oak Place Drive Suite 335Houston, Te.ras 77027 Phone (7131843-7300 HSA Residential Mortgage Services of Texas, Ire. - A subsidiary of American General Finance RESIDENTIAL MORTGAGE SERVICES OF TEXAS May 1, 2000 Mr. Ronald J. Sheppard HomeSense Financial Corp. 113 Reed Avenue Lexington, SC 29072 Fax # (864) 289-6301 Dear Ronnie: As you are aware, Section 43 of the Mortgages Purchase Agreement ("Agreement") defines one condition of default where "any equity interest in the Company is issued to any person who is not a Key Principal". Residential Mortgage Services of Texas, Inc. ("RMST") acknowledges that HomeGold Financial, Inc. ("HomeGold") has merged with HomeSense Financial Corp. ("HomeSense") and that HomeSense shall cease to exist while HomeGold will become the owner of HomeSense and assume responsibility for all the obligations and liabilities for HomeSense under our Agreement. RMST agrees to waive this default condition for one month in order to complete the due diligence necessary to approve the new Key Principal, HomeGold. All other terms and conditions of the Agreement apply. Presently you are the guarantor on the HomeSense Agreement. You will still be the guarantor during the interim period. Please execute the enclosed "Specific Power of Attorney" for use by RMST during the interim. You will need to complete the officer title section. In addition, please execute the acknowledgement of this letter and return to me by fax. My fax number is 713-888-9014. Please overnight the original of both documents to my attention. Your business has been very important to us and we look forward to many more years helping you grow. Much success with your merger, Billye J. Scott Vice President Acknowledged and Agreed this 1st day of May, 2000. HomeGold, Inc. - ----------------------------- Ronald J. Sheppard Title: CEO and President Enclosures 4550 Post Oak Place Drive Suite 335Houston, Te.ras 77027 Phone (7131843-7300 HSA Residential Mortgage Services of Texas, Ire. - A subsidiary of American General Finance ASSIGNMENT OF CERTIFICATE OF DEPOSIT For value received on this the 14th day of December, 2000, the undersigned Assignor hereby assigns and sets over to Residential Mortgage Services of Texas, Inc. and its successors and assigns ("RMST"), all right, claim, title, option and interest of the undersigned in and to the following described Certificate of Deposit, including all renewals, amendments, and proceeds thereof: Account No. 5822426311 at Branch Banking and Trust Company of South Carolina, in the name of HomeGold, Inc., in the amount of Three Million Five Hundred Thousand Dollars ($3,500,000) (the Certificate of Deposit "CD"). The CD is maintained by: Branch Banking and Trust Company of South Carolina, 309 Columbia Avenue, Lexington, SC 29072, (the "Financial Institution"). This assignment of the Account includes all renewals, extensions or modifications thereof and includes the exercise of any right, option, privilege or power of the undersigned arising from the Account. This assignment is given as additional collateral for any amounts owed by HomeGold, Inc. to RMST pursuant to that certain Mortgage Purchase Agreement dated October 13, 1999 by and between RMST and HomeGold, Inc. and any renewals, extensions or modifications thereof, providing for a funding facility in the amount of fifteen million dollars ($15,000,000). The undersigned hereby irrevocably authorizes and empowers RMST at any time in its own name or in the name of the undersigned, to demand, apply for withdrawal, receive and give acquittance for any and all moneys and claims for moneys hereby assigned and to exercise any and all rights and privileges and receive all benefits accorded by the Account and to execute any and all instruments required therefore, and said Financial Institution is hereby specifically authorized and directed, on demand of RMST to pay all moneys hereby assigned in the Account directly to RMST and further not to pay any proceeds of the Account to any entity or person other than RMST without said RMST's consent. The undersigned warrants and represents that the Account is owned solely by the undersigned and is free and clear of all liens and encumbrances, and that the undersigned has full power, right and authority to execute and deliver this assignment. Witness the Hands and Seal of the undersigned, this sealed instrument being executed and delivered on the date first above written. WITNESS: _______________________ ASSIGNOR: HOMEGOLD, INC. BY: _________________________ NAME: RONALD J. SHEPPARD TITLE: CHIEF EXECUTIVE OFFICER ACKNOWLEDGMENT OF NOTICE OF ASSIGNMENT We acknowledge receipt of notice and a copy of the foregoing Assignment as collateral for obligations due RMST. Our records indicate the balance in Certificate of Deposit No. 5822426311 is $ Three Million Five Hundred Thousand Dollars ($3,500,000) as of the date referenced below. Our records do not disclose any liens, claims, or encumbrances against the Accounts except as provided above. We have compared the signature appearing on this Assignment filed by RMST with us with the signature on our records, and the same compares correctly therewith and is sufficient to authorized withdrawal of funds from the CD and for all purposes and we will be guided by the above Assignment until receipt of further contrary written notice or instructions from RMST and HomeGold, Inc. Branch Banking and Trust Company of South Carolina BY: ____________________________________________ TITLE: ____________________________________________ DATE: ____________________________________________ RELEASE OF CERTIFICATE OF DEPOSIT Residential Mortgage Services of Texas, Inc. and its successors and assigns ("RMST"), hereby release all right, claim, title, option and interest it has in and to the following described Certificate of Deposit, including all renewals, amendments, and proceeds thereof: Account No. 5822426311 at Branch Banking and Trust Company of South Carolina, in the name of HomeGold, Inc., in the amount of Three Million Five Hundred Thousand Dollars ($3,500,000) (the "CD"), including, but not limited to, all rights, claims, options and interests it has in and to the CD by virtue of that certain Assignment of Certificate of Deposit dated December 14, 2000. RMST represents by this release that all debts for which the CD served as additional collateral have been paid in full, including, but not limited to all warehouse debt of HomeGold, Inc. to RMST and any renewals, extensions or modifications thereof, providing for a funding facility in the amount of fifteen million dollars ($15,000,000). The undersigned warrants and represents that it has not pledged, encumbered or assigned its interest in the Account and that the undersigned has full power, right and authority to execute and deliver this release. Witness the Hands and Seal of the undersigned, this sealed instrument being executed and delivered on the date first above written. WITNESS: _____________________ Residential Mortgage Services of Texas, Inc. BY: __________________________ NAME: ________________________ TITLE: ________________________ EX-10.13 11 0011.txt LETTER OF AGREEMENT NEW FREEDOM Exhibit 10.13 PURCHASE AGREEMENT PURCHASE AGREEMENT ("Agreement"), dated December 20, 2000 between Home Gold ----------------- Inc. ("Seller"), a corporation organized under the laws of the State of South Carolina, and New Freedom Mortgage Corporation ("Purchaser"), a corporation organized under the laws of the State of Utah. Seller and Purchaser agree as follows: 1. PURCHASE AND SALE OF RECEIVABLES AND RELATED ASSETS: Purchaser purchases from Seller and Seller sells to Purchaser all of Seller's interest in the Receivables identified on Schedule "A." The term "Receivables" means: 1. All debts and obligations, including but not limited to the obligations of any cosigner or guarantor; 2. All security instruments securing the debts and obligations, including but not limited to mortgages, deeds of trust, and deeds to secure debt; 3. All instruments and documents evidencing or related to the debts and obligations, including but not limited to credit reports, lien search reports, files, and ledger cards or their computer equivalent; 4. All policies or certificates of insurance in force on collateral securing any debt or obligation or insuring Seller as the owner or otherwise as a party in interest; 5. All credit insurance related to the debts; and 6. All pending insurance claims and proceeds related to the debts or collateral. 2. DETERMINATION OF PURCHASE PRICE: The purchase price for the receivables is set forth on the Closing Statement attached as Exhibit "A." If after the execution of the Closing Statement, it appears that an error occurred in computation of the purchase price, the party owing the amount that will correct the overpayment or underpayment, as the case may be, must promptly pay such amount to the other party upon submission of reasonable evidence of such error. 3. REPRESENTATIONS AND WARRANTIES OF SELLER; REPURCHASE OBLIGATION: 1. Seller represents and warrants to Purchaser that: 1. Seller is the sole owner of the Receivables, free and clear of any liens or other claims; 2. The Receivables are valid and binding obligations of the obligors, enforceable according to their respective terms, except as may be limited by bankruptcy or receivership; 3. No obligor has a defense, right of set-off, or counterclaim against the Seller; 4. There are no written or oral agreements that vary any of the terms of the Receivables, except as set forth in the documents constituting the Receivables; 5. No Receivable is, on the closing date, sixty days or more contractually past due, in bankruptcy, had any property repossessed, in litigation, a "skip," or a judgment account; 6. All information concerning the Receivables and the obligors thereon is truly and completely described in the books, records, files, cards and other documents of the Receivables. Information supplied by obligors or other third parties is true and complete to Seller's best knowledge; 7. All liens included in the Receivables are valid, perfected first or second liens on the property described; 8. The Receivables comply with all applicable state and federal law, including but not limited to the Federal Consumer Credit Protection Act ("Truth-In-Lending") and Regulation Z, and the Federal Equal Credit Opportunity Act and Regulation B; and 9. All policies or certificates of credit insurance have been issued or are being issued; and all costs or premiums have been paid to the respective insurers, or if unbilled will be paid promptly by Sellers upon billing by the respective insurers, through the entire term of the policies. 2. If any of the foregoing warranties and representations are breached, Seller must, upon demand, immediately repurchase from Purchaser any Receivable with respect to which a warranty or representation was breached. The purchase price for the repurchase is 88% (if blank, 100%) of the unpaid balance owing on the contract at the time of the repurchase (unpaid balance for this purpose means principal plus accrued interest on an interest-bearing account and gross unpaid balance less applicable rebate required by law on a precomputed account). 4. SELLER'S AUTHORITY: Seller represents and warrants to Purchaser that: 1. This Agreement is enforceable against Seller in accordance with its terms; and 2. The signing and delivery by Seller of, and the performance of, this Agreement do not: 1. Violate the articles of incorporation or bylaws of Seller; 2. Breach or result in a default under any existing contractual obligation of Seller; or 3. Violate or breach any statute, judicial or administrative decree, order, or ruling applicable to Seller or to the Receivables. 5. REPRESENTATIONS AND WARRANTIES OF PURCHASER: Purchaser represents and warrants to Seller that: 1. This Agreement is enforceable against Purchaser in accordance with its terms; and 2. The signing and delivery by Purchaser of, and the performance of its agreements in, this Agreement do not: 1. Violate the articles of incorporation or bylaws of Purchaser; 2. Breach or result in a default under any existing contractual obligation of Purchaser; or 3. Violate or breach any statute, judicial or administrative decree, order, or ruling applicable to Purchaser or to the Receivables. 6. DELIVERIES BY SELLER: Seller must deliver to Purchaser at the closing (except as may be specifically waived in writing by the Purchaser): 1. The Receivables listed on Schedule "A;" 2. If Seller is a corporation, a certified copy of a corporate resolution, substantially in the form of Exhibit "B;" 3. An Assignment and Power of Attorney substantially in the form of Exhibit "C;" 4. For Receivables secured by real property, individual assignments of mortgages in a form acceptable to Purchaser; and 5. Any other necessary and proper documents to assign to Purchaser Seller's interest in property securing the Receivables. 7. COVENANTS OF SELLER: Seller covenants as follows: 1. From the date of the closing, Seller will warrant and defend the title of Purchaser to all of the Receivables. Upon request of Purchaser, Seller at its own expense will do, execute, acknowledge and deliver, such instruments and other documents as may be reasonably required to carry out any of the provisions of this Agreement. 2. All sums received by or on behalf of Seller after the date of the closing in payment of the Receivables are received for the account of Purchaser and will be promptly paid over to Purchaser by Seller. 8. PURCHASER'S SUBSIDIARIES: Purchaser may designate one or more of its subsidiaries as the Buyer of any Receivable, and the word "Purchaser" as used in this Agreement, whenever applicable, will include the subsidiary; but, Purchaser is responsible for the performance of this Agreement. 9. NO BROKERS: Seller and Purchaser represent and warrant to each other that their respective employees or attorneys negotiated this transaction; no person is entitled to any brokerage commission, finder's fee, adviser's fee or like payment. 10. NATURE AND SURVIVAL OF REPRESENTATIONS, ETC.: All representations and warranties contained in this Agreement will survive after the date of the closing. 11. COSTS AND EXPENSES: Purchaser and Seller must pay their individual costs and expenses incurred in connection with this transaction, including without limitation, fees and disbursements of their respective professional advisers. Neither party has any recourse, right of offset or other claim against the other for those costs and expenses. 12. INDEMNITY: Seller agrees to defend, indemnify, and hold harmless Purchaser and its respective parents, officers, directors, employees, successors and assigns against any and all losses, damages, claims, suits, proceedings, liabilities, costs and expenses, including reasonable attorneys fees incurred by reason of any representation or warranty made by Seller in or in connection with this Agreement having been untrue or incorrect in any respect when made or deemed made, or the breach by Seller of any covenant or agreement made by it in this Agreement, or by reason of any action or proceeding being instituted by any person based upon an allegation or assertion which, if true, would indicate the existence of any of the above circumstances. 13. CONFIDENTIALITY AND NON-SOLICITATION: Neither Seller nor any of its directors, officers, affiliates, employees, agents or representatives may disclose, directly or indirectly, any information concerning the Receivables, other than information that was previously available to the public, or as required by law or regulation. Further, Seller, its directors, officers, affiliates and employees may not solicit any such obligor for the purpose of making a loan or financing a retail sale or lend any money to or finance any sale to said obligors for a period of twenty four (24) months from the execution of this Agreement. 14. NOTICES: All notices and other communications under this Agreement will be in writing and will be deemed to have been duly given if delivered or mailed first class, postage prepaid: 1. If to Purchaser, to: New Freedom Mortgage Corporation 2363 South Foothill Drive Salt Lake City, Utah 84109 Attention: Terry Turville or to Purchaser at such other address Purchaser will have furnished in writing to Seller; 1. If to Seller, to: Home Gold, Inc. 113 Reed Avenue Lexington, SC 29072 Attention: General Counsel or to Seller at such other address as Seller will have furnished in writing to Purchaser. 15. SPECIFIC PERFORMANCE: Purchaser and Seller recognize that each may be irreparably damaged if this Agreement is not specifically enforced and, therefore, agree that any right or obligation under this Agreement is enforceable in a court of equity by a decree of specific performance. Such remedy, however, is cumulative and not exclusive of any other remedy at law or equity. 16. ENTIRE AGREEMENT: This Agreement and all documents delivered pursuant to this Agreement constitute the entire agreement between the parties. Any amendment of this Agreement is ineffective unless in writing signed by both Purchaser and Seller. 17. WAIVERS: Any waiver of any term of this Agreement is ineffective unless granted in writing signed by the party entitled to the performance of such term. A waiver of any term of this Agreement by any party is not a waiver by such party of any other term under this Agreement nor will a waiver of any breach of a term, condition or obligation constitute a waiver of a subsequent breach of the same term, condition or obligation or of any of its attendant rights. 18. SEVERABILITY: If a court holds that any provision of this Agreement is for any reason invalid, the provision must be enforced to the extent to which it is valid; the parties may enforce the remaining provisions of this Agreement as written, unless enforcement is in manifest violation of the present intention of the parties reflected in this Agreement. 19. COUNTERPARTS: The parties may sign this Agreement in one or more counterparts; each counterpart is an original but all are deemed to be the same instrument. 20. SUCCESSORS: This Agreement is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. 21. ARBITRATION: Any controversy or claim arising out of or relating to this agreement or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. Any arbitration proceeding provided for by this section shall take place in Dallas, Texas. Seller: Home Gold, Inc. Purchaser: New Freedom Mortgage Corporation By: By: (Typed or Printed Name) (Typed or Printed Name) Its: Its: (Title) (Title) EXHIBIT "A" CLOSING STATEMENT Seller: New Freedom Mortgage Corporation Purchaser: Associates Financial Services Company, Inc. Date: December 20, 2000 ----------------- (check one) [ ] Gross [X]Net Balance of Receivables $2,148,001.00 times 15.0875% Purchase Price $1,823,920.57 Less Reserve $19,234.14 Net Payable to Seller $1,843,154.71 Seller: Home Gold, Inc. Purchaser: New Freedom Mortgage Corporation By: By: (Typed or Printed Name) (Typed or Printed Name) Its: (Title) Its: (Title) EXHIBIT "B" CERTIFIED COPY OF CORPORATE RESOLUTION I, ______________________________________________________________________, the duly elected, qualified and acting Secretary of Home Gold, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of SC (the "Corporation"), do hereby certify that the following is a true, correct and complete copy of a resolution of the Board of Directors of this Corporation, duly adopted by unanimous written consent of the Board of Directors without a meeting dated December 20, 2000 and that such resolution is set forth in the ----------------- original minute book of the Corporation and that such resolution has not been rescinded or modified: RESOLVED, that this Corporation enter into an agreement (the "Agreement") New Freedom Mortgage Corporation, for the sale by this Corporation of assets consisting of loan and sales finance receivables under such terms and conditions, and at such price, as will be contained in the Agreement; and RESOLVED, that the President or any Vice President of this Corporation, be, and he is, hereby authorized to execute the Agreement with such terms and conditions as may be contained therein, the execution being conclusive evidence of its authorization; and such officer is hereby authorized to prepare, execute and deliver such other documents and to take all such action as will be necessary or desirable to effectuate the sale of such assets identified in the Agreement in accordance with the terms and conditions of such Agreement. I, _____________________________________________________________________________ _________, further certify that Kevin Gates is the _____________________________ President of this Corporation, and the foregoing resolution has not been amended, repealed or modified and is in full force and legal effect as of the date hereof. Dated: December 20 2000 ---------------- Secretary EXHIBIT "C" POWER OF ATTORNEY (With Limited Power of Substitution) KNOW ALL MEN BY THESE PRESENTS, that the undersigned Home Gold, Inc., a UT corporation, for and in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, the receipt of which is hereby acknowledged, does by these presents, assign to New Freedom Mortgage Corporation, a Utah, all of its interest in the receivables listed on Schedule "A" of a Purchase Agreement dated December 20, 2000, which Schedule is made a part hereof by ----------------- reference. That for the purpose of collecting, receiving, releasing, endorsing, assigning, and otherwise enjoying the full rights, privileges and benefits which the undersigned has heretofore had, hereby names, constitutes and appoints New Freedom Mortgage Corporation, or any of its authorized agents, employees or representatives, its duly authorized attorney and agent solely with respect to such receivables, with full power and authority to endorse or assign notes or security instruments in our name, to receive and collect any and all monies due and payable under said receivables, to enforce performance of all contracts and instruments covered thereby and for such purposes, to institute suit in its own name, to effect repossession of chattels or to use any other methods or means which New Freedom Mortgage Corporation finds necessary to effect collection and performance; to release any and all liens and instruments of record; to amend, supplement or replace such instruments with other like or similar instruments to extend and modify periods and time of payment; and, generally, to do and perform any and all things necessary and incident in the premises, with equal rights, privileges and powers which the undersigned has had or was entitled to exercise as the owner of said receivables. Home Gold, Inc. further gives to New Freedom Mortgage Corporation the limited power of substitution and revocation of another party for the purpose and only for the purpose of endorsing or assigning notes or security instruments in our name, and hereby ratifying and confirming all that the attorney in fact, or a substitute or substitutes, shall lawfully do or cause to be done by virtue of this power of attorney and the rights and powers. Home Gold, Inc (Witness) By: --------------------------------------- (Witness) (Typed or Printed Name) Its: (Title) ACKNOWLEDGEMENT STATE OF ) ) SS.: COUNTY OF ) Personally appeared before me, the undersigned authority in and for the said County and State, December 20, 2000, within my jurisdiction, the within named ----------------- __________ who acknowledged that he is the ___________________________________ _______________ of Home Gold, Inc., a SC corporation, and that for and on behalf of the said corporation, and as its act and deed he executed the above and foregoing instrument, after first having been duly authorized by said corporation so to do. Witness my hand and official seal. ________________________________ ___________________________________ Notary Public My Commission Expires APPOINTMENT OF SUBSTITUTE UNDER POWER OF ATTORNEY To All Whom These Presents Shall Come, Greeting: Whereas, Home Gold, Inc., by a power of attorney under its hand dated December 20,2000, appointed the undersigned, New Freedom Mortgage Corporation - ---------------- its attorney for it and in its name, with limited power of substitute to appoint another to endorse or assign notes or security instruments Home Gold, Inc., in connection with the receivables listed on Schedule "A" of a Purchase Agreement dated December 20, 2000, which Schedule is made a part hereof by reference. ----------------- Now, Therefore, by virtue of such power, New Freedom Mortgage Corporation hereby appoints ________________________ to be the attorney of the said New Freedom Mortgage Corporation for it and in its name, to do and perform only the acts of endorsing or assigning those notes, contracts, and other evidence of debt and the related security instruments listed on Schedule "A" of a Purchase Agreement dated December 20,2000, which Schedule is made a part hereof by reference. ---------------- New Freedom Mortgage Corporation By: (Witness) -------------------------------------- (Witness) (Typed or Printed Name) Its: ---------------------------------- (Title) ACKNOWLEDGEMENT STATE OF ) ) SS.: COUNTY OF ) Personally appeared before me, the undersigned authority in and for the said County and State, December 20, 2000, within my jurisdiction, the within named ----------------- ________________________ who acknowledged that he is the ____________________ of New Freedom Mortgage Corporation., a Utah corporation, and that for and on behalf of the said corporation, and as its act and deed he executed the above and foregoing instrument, after first having been duly authorized by said corporation so to do. Witness my hand and official seal. Notary Public My Commission expires: _______________ ADDENDUM TO PURCHASE AND SALE AGREEMENT DATED DECEMBER 20, 2000 The purchase and sale agreement dated December 20, 2000 may also serve as a warehouse repurchased agreement at the closing of HomeGold, Inc. During the first 15 calendar days after the sale HomeGold may repurchase the loans at 150 basis points plus accrued interest above the schedule purchase price. From day 16 to day 30, HomeGold may repurchase the remaining loans for 250 basis points plus accrued interest above the purchase price amount. On the 31st day if the loans have not been repurchased by HomeGold Inc., the loans become the sole property of New Freedom Mortgage Corporation, as set forth in the Purchase and Sale agreement dated December 20, 2000. During the 30-day period HomeGold will service the loans. Any loan remaining on the 31st day will be transferred within 30 days to New Freedom Mortgage. All original files of loans not repurchased will be shipped to New Freedom from HomeGold within 5 working days. Time is of the essence. EX-10.14.1 12 0012.txt ASSUMPTION OF DEBT ASSUMPTION OF DEBT & CONTRIBUTION TO CAPITAL AGREEMENT This Assumption of Debt and Contribution to Capital Agreement (this "Agreement") is entered into by and between HomeGold Financial, Inc., a South Carolina corporation ("HFI"), HomeGold, Inc., a South Carolina corporation ("HGI"), and Carolina Investors, Inc., a South Carolina corporation ("CII"), to be effective as of December 31, 2000. WHEREAS, HGI is the borrower and CII is the lender under that certain Subordinated Intercompany Promissory Note & Security Agreement dated December 28, 1998 pursuant to which HGI borrowed the principal amount of $10,000,000 from CII (the "Equipment Note") secured by certain of HGI's equipment and proceeds therefrom; and WHEREAS, HGI is the borrower and CII is the lender under that certain Subordinated Warehouse Line of Credit dated December 1, 1998 with a maximum line amount of $100,000,000 (the "Subordinated Warehouse"); and WHEREAS, HGI is the borrower and CII is the lender under that certain Subordinated Intercompany Promissory Note dated June 30, 1998 in a principal amount of up to $200,000,000 (the "HGI Subnote"), and CII is the borrower and HGI is the lender under a similar Subordinated Intercompany Promissory Note dated June 30, 1998 in a principal amount of up to $200,000,000 (the "CII Subnote"), both of which were entered into in connection with the entry of HGI and CII into a warehouse line of credit with The CIT Group/ Business Credit, Inc. as the primary lender and administrative agent; and WHEREAS, as of December 31, 2000, the principal amount of all outstanding indebtedness of HGI to CII and the accrued and unpaid interest thereon is $100,840,449; and WHEREAS, HFI, HGI and CII desire that HFI assume all of HGI's indebtedness to CII as of December 31, 2000 as a contribution by HFI to the capital of HGI; NOW THEREFORE, in consideration of the mutual covenants set forth herein, the parties hereto hereby agree as follows: 1. HFI Assumption of HGI Debt to CII. As a contribution to the capital of HGI, effective December 31, 2000, HFI hereby assumes all obligations, as amended hereby, of HGI to CII under (a) the Equipment Note, (b) the Subordinated Warehouse, (c) the HGI Subnote and (d) any other indebtedness of HGI to CII (whether or not such indebtedness is evidenced by a writing). 2. Documentation and Amendment of Terms of Debt Assumed. HFI, HGI and CII hereby agree that, effective as of December 31, 2000, the terms and provisions of (a) the Equipment Note, (b) the Subordinated Warehouse, (c) the HGI Subnote and (d) any other indebtedness of HGI to CII (whether or not such indebtedness is evidenced by a writing) are all collectively hereby amended, restated and replaced in their entirety as set forth in the revolving promissory note attached hereto as Exhibit A (the "HFI Revolver"). 1 3. HGI Guaranty of HFI Obligations Under the HFI Revolver. As a condition of CII's entry into this Agreement, HGI hereby agrees to guaranty the obligations of HFI to CII under the HFI Revolver by execution of the guaranty attached hereto as Exhibit B and agrees that all of the property of HGI which secures such guaranty as provided therein and which also secures the Equipment Note and the Subordinated Warehouse shall continue to secure HGI's obligations under such guaranty. 4. CII Subnote Terminated. HGI and CII hereby (a) acknowledge that no amounts are outstanding under the CII Subnote as of December 31, 2000, (b) agree that the CII Subnote is hereby terminated as of December 31, 2000 and (c) hereby acknowledge and agree that neither of them has any remaining obligation to the other under the CII Subnote. IN WITNESS WHEREOF, each of the parties hereto has caused this Assumption of Debt and Contribution to Capital Agreement to be executed on its behalf by its duly authorized officer as of the date first set forth above. HOMEGOLD FINANCIAL, INC. By: _________________________ Name: _______________________ Title: ________________________ HOMEGOLD, INC. By: _________________________ Name: _______________________ Title: ________________________ CAROLINA INVESTORS, INC. By: _________________________ Name: _______________________ Title: ________________________ 2 EX-10.14.2 13 0013.txt REVOLVING PROMISSARY Exhibit A REVOLVING PROMISSORY NOTE $125,000,000.00 December 31, 2000 Greenville, South Carolina For value received, the undersigned HOMEGOLD FINANCIAL, INC., a South Carolina corporation (the "Borrower"), hereby promises to pay to the order of CAROLINA INVESTORS, INC., a South Carolina corporation (the "Lender") (i) the principal amount of One Hundred Twenty Five Million Dollars ($125,000,000), or if less, an amount equal to the aggregate unpaid principal amount of loans made from time to time by the Lender to the Borrower, and (ii) interest on the unpaid principal amount of this Note from the date hereof, payable monthly in arrears based on the average principal amount outstanding during such month, no later than the 15th day of the following month until this Note is paid in full at the per annum prime rate announced by the Wall Street Journal on the first day of the month in which interest accrues plus two percent. Notwithstanding any other provision of this Note, interest paid or becoming due hereunder shall in no event exceed the maximum rate permitted by applicable law. Interest will be calculated on a daily basis computed on the actual number of days elapsed over a year of three hundred sixty-five (365) days. This Note shall mature, and all outstanding amounts hereunder shall be due and payable, on December 31, 2005. This Note amends, restates and replaces collectively in their entirety (1) that certain Subordinated Intercompany Promissory Note & Security Agreement dated December 28, 1998 in the original principal amount of $10,000,000 by and between HomeGold, Inc., as borrower, and Lender, (2) that certain Subordinated Warehouse Line of Credit dated December 1, 1998, by and between HomeGold, Inc., as borrower, and Lender, (3) that certain Subordinated Intercompany Promissory Note dated June 30, 1998 in a principal amount of up to $200,000,000 by and between HomeGold, Inc. as borrower, and Lender, and (4) any and all other indebtedness of HomeGold, Inc. to Lender (whether or not such indebtedness is evidenced by a writing). The Borrower may at any time prepay the whole or any part of the unpaid principal amount of this Note, without penalty or premium, with interest accrued to the date fixed for prepayment. The Borrower expressly waives presentment, demand, protest, notice of dishonor, notice of nonpayment and/or protest, and any and all other notices and demands whatsoever, and agrees to remain bound until the principal and interest are paid in full, notwithstanding any extension of time for payment or all or any part of the principal or interest hereof and notwithstanding any inaction by, or failure to assert any legal right available to Lender. In the event that this Note shall at any time after maturity or default be placed with an attorney for collection, Borrower agrees to pay, in addition to the entire remaining principal balance and accrued interest, all costs of collection, including without limitation reasonable 1 attorneys fees, which attorneys fees shall be based upon the usual and customary hourly rates of Lender's counsel and not based upon a percentage of the balance due on this Note. Whenever Lender is referred to in this Note, such reference shall be deemed to include the successors and assigns of Lender, including without limitation subsequent assigns or holders of this Note, and all covenants, provisions and agreements by or on behalf of Borrower which are contained herein shall inure to the benefit of the successors and assigns of Lender. The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by the Lender, and then only to the extent therein set forth. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of the Lender, any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. Any provision of this Note which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Note shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of South Carolina applicable to contracts made and to be performed therein without consideration as to choice of law. In witness whereof, the Borrower has caused this Note to be executed on its behalf by its duly authorized corporate officer, to be effective as of the date first written above. HOMEGOLD FINANCIAL, INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- ACCEPTED AND AGREED: CAROLINA INVESTORS, INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 2 EX-10.14.3 14 0014.txt GUARANTY AND SECURITY AGREEMENT Exhibit B GUARANTY OF HOMEGOLD, INC. AND SECURITY AGREEMENT This Guaranty & Security Agreement (the "Guaranty") is entered into to be effective as of December 31, 2000, by and between HomeGold, Inc., a South Carolina corporation ("HGI"), and Carolina Investors, Inc., a South Carolina corporation ("CII"), in connection with that certain Assumption of Debt and Contribution to Capital Agreement (the "Agreement") effective as of even date herewith by and between HomeGold Financial, Inc., a South Carolina corporation ("HFI"), HGI, and CII as a condition of CII's entry into the Agreement. HGI hereby irrevocably, fully and unconditionally, guarantees to CII, its successors and permitted assigns the full and prompt performance by HFI of all of its obligations under, and the full and prompt payment by HFI of all amounts owed by it under, that certain Revolving Promissory Note dated December 31, 2000 with HFI as borrower and CII as lender (the "Revolving Promissory Note"). This Guaranty is a continuing guaranty and shall remain in full force and effect as long as the Revolving Promissory Note remains outstanding. In order to secure the payment and performance in full of the obligations of HGI to CII under the terms of this Guaranty, HGI hereby grants to CII a security interest in and to (i) all equipment of HGI currently located in the State of South Carolina as of the date hereof, wherever hereafter located, and all equipment hereafter acquired by HGI in the State of South Carolina, whether located elsewhere after such acquisition, (ii) all notes receivable of HGI other than notes receivable now or hereinafter securing any other debts of HGI or subject to any loan purchase facility of HGI and (iii) any and all proceeds from any and all of the foregoing collateral (including without limitation, all payments under insurance, or any indemnity, warranty, guaranty or insured closing letter, payable by reason of the loss or damage to or otherwise with respect to any of the foregoing). The obligations of HGI under this Guaranty are independent of the obligations under the Revolving Promissory Note and any other related documents, and a separate action or actions may be brought and prosecuted against HGI to enforce HGI's obligations under this Guaranty, irrespective of whether any action is brought against HFI or whether HFI is joined in any such action. HGI hereby waives, to the extent permitted by applicable law, (i) the benefits of promptness, diligence, presentment or demand of payment; (ii) notice of acceptance and notice of the incurrence of any liability by HFI; (iii) notice of any actions taken by HFI under the Revolving Promissory Note or any other related agreement or instrument; (iv) all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of the covenants, agreements, or liabilities of HGI hereunder, the omission of or delay in which, but for the provisions of this paragraph, might constitute grounds for relieving HGI of its obligations hereunder; (v) any right to compel or direct CII to seek payment or recovery of any amounts owed under this Guaranty from any one particular fund or source; and (vi) any requirement that CII protect, secure, perfect or insure any security interest or lien or any property 1 subject thereto or exhaust any right or take any action against the HFI or any other Person or any collateral. HGI hereby irrevocably waives and agrees it will not exercise any and all rights which it has or may have at any time or from time to time (whether arising directly or indirectly by operation of law or contract) to assert any claim against HFI on account of any payments made under the Revolving Promissory Note, this Guaranty or otherwise, including, without limitation, any and all existing and future rights of subrogation, reimbursement, exoneration, contribution and/or indemnity to the extent that the exercise of such rights would limit or impair the full performance of any and all obligations of HFI to CII under the Revolving Promissory Note or of HGI to CII under this Guaranty. If any amount shall be paid to HGI on account of such subrogation rights at any time when any obligation or liability owed to CII shall not have been paid in full, such amount shall be held in trust for the benefit of CII, shall be segregated from the other funds of HGI and shall forthwith be paid over to CII to be applied in whole or in part by CII against the liability owed to it, whether matured or unmatured, and all such other expenses in accordance with the terms of the Revolving Promissory Note. All costs and expenses (including reasonable attorneys fees which attorneys fees shall be based upon the usual and customary hourly rates of CII's counsel and not based upon a percentage of the amounts owing under this Guaranty) incurred by CII in exercising any right, power or remedy conferred by this Guaranty or in the enforcement thereof, shall become part of the obligations of HGI secured hereunder and shall be paid by HGI to CII or repaid from the proceeds of the sale of the collateral hereunder. CII shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by CII, and then only to the extent therein set forth. A waiver by CII of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which CII would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of CII, any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Guaranty shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of South Carolina applicable to contracts made and to be performed therein without consideration as to choice of law. * * * * 2 IN WITNESS WHEREOF, each of the parties hereto has caused this Guaranty to be executed on its behalf by its duly authorized officer as of the date first set forth above. HOMEGOLD, INC. CAROLINA INVESTORS, INC. By: By: ------------------------------- ------------------------------ Name: Name: ----------------------------- ---------------------------- Title: Title: ---------------------------- --------------------------- 3 EX-10.14.4 15 0015.txt SECURED REVOLVING SECURED REVOLVING PROMISSORY NOTE $75,000,000.00 January 2, 2001 Greenville, South Carolina For value received, the undersigned HOMEGOLD, INC., a South Carolina corporation (the "Borrower"), hereby promises to pay to the order of CAROLINA INVESTORS, INC., a South Carolina corporation (the "Lender") (i) the principal amount of Seventy Five Million Dollars ($75,000,000), or if less, an amount equal to the aggregate unpaid principal amount of loans made from time to time by the Lender to the Borrower, and (ii) interest on the unpaid principal amount of this Note from the date hereof, payable monthly in arrears based on the average principal amount outstanding during such month, no later than the 15th day of the following month until this Note is paid in full at the per annum prime rate announced by the Wall Street Journal on the first day of the month in which interest accrues plus two percent. Notwithstanding any other provision of this Note, interest paid or becoming due hereunder shall in no event exceed the maximum rate permitted by applicable law. Interest will be calculated on a daily basis computed on the actual number of days elapsed over a year of three hundred sixty-five (365) days. This Note shall mature, and all outstanding amounts hereunder shall be due and payable, on December 31, 2005. In order to secure the payment and performance in full of the obligations of Borrower to Lender under the terms of this Note, Borrower hereby grants to Lender a security interest in and to (1) all property of Borrower currently located in the State of South Carolina as of the date hereof, wherever hereafter located, and all property hereafter acquired by Borrower in the State of South Carolina, whether located elsewhere after such acquisition, in each case other than (a) Borrower's real property and (b) Borrower's property (including without limitation notes receivable and rights, documents and other collateral related thereto) now or hereinafter securing any other debts of Borrower or subject to any loan purchase facility of Borrower and (2) any and all proceeds from any and all of the foregoing collateral (including without limitation, all payments under insurance, or any indemnity, warranty, or insured closing letter, payable by reason of the loss or damage to or otherwise with respect to any of the foregoing) (collectively, the "Collateral"). Borrower and Lender hereby acknowledge and agree that the security interest granted in the Collateral hereby is second in priority to, and subordinate in all respects to, (1) the security interest in any of the same Collateral granted by Borrower to Lender pursuant to that certain Guaranty of HomeGold, Inc. and Security Agreement dated December 31, 2000 by and between Borrower and Lender entered into in connection with the assumption of all of Borrowers debts to Lender as of December 31, 2000 by HomeGold Financial, Inc. and (2) any security interest, lien, set-off right or other encumbrance granted by Borrower to any bank. The Borrower may at any time prepay the whole or any part of the unpaid principal amount of this Note, without penalty or premium, with interest accrued to the date fixed for prepayment. The Borrower expressly waives presentment, demand, protest, notice of dishonor, notice of nonpayment and/or protest, and any and all other notices and demands whatsoever, and agrees to remain bound until the principal and interest are paid in full, notwithstanding any extension of time for payment or all or any part of the principal or interest hereof and notwithstanding any inaction by, or failure to assert any legal right available to Lender. In the event that this Note shall at any time after maturity or default be placed with an attorney for collection, Borrower agrees to pay, in addition to the entire remaining principal balance and accrued interest, all costs of collection, including without limitation reasonable attorneys fees, which attorneys fees shall be based upon the usual and customary hourly rates of Lender's counsel and not based upon a percentage of the balance due on this Note. Whenever Lender is referred to in this Note, such reference shall be deemed to include the successors and assigns of Lender, including without limitation subsequent assigns or holders of this Note, and all covenants, provisions and agreements by or on behalf of Borrower which are contained herein shall inure to the benefit of the successors and assigns of Lender. The Lender shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by the Lender, and then only to the extent therein set forth. A waiver by the Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Lender would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of the Lender, any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights or remedies provided by law. Any provision of this Note which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Note shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of South Carolina applicable to contracts made and to be performed therein without consideration as to choice of law. In witness whereof, the Borrower has caused this Note to be executed on its behalf by its duly authorized corporate officer, to be effective as of the date first written above. HOMEGOLD, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ ACCEPTED AND AGREED: CAROLINA INVESTORS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ EX-21 16 0016.txt SUBSIDIARIES Exhibit 21.0
Subsidiary State of Incorporation ------------------------------------------------------------------ ---------------------------------- HomeGold, Inc. South Carolina Emergent Mortgage Corp. of Tennessee (a subsidiary of HomeGold, Inc.) South Carolina Emergent Mortgage Holdings Corporation (a subsidiary of Carolina Investors, Inc.) Delaware Emergent Mortgage Holdings Corporation II (a subsidiary of Carolina Investors, Inc.) Delaware Emergent Residual Holdings Corporation (a subsidiary of Emergent Mortgage Holdings Corporation II) Delaware Emergent Insurance Agency Corporation South Carolina Carolina Investors, Inc. South Carolina HomeGold Realty, Inc. (a subsidiary of HomeGold, Inc.) South Carolina
EX-23.1 17 0017.txt CONSENT OF ELLIOTT Exhibit 23.1 INDEPENDENT AUDITOR'S CONSENT The Board of Directors HomeGold Financial, Inc. We consent to incorporation by reference in the registration statements on Form S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock Plan, (No. 333-07927) 1995 Restricted Stock Agreement Plan, (No. 333-07923) 1995 Officer and Employee Stock Option Plan and (No. 333-20179) Employee Stock Purchase Plan of HomeGold Financial, Inc. of our report dated March 21, 2001, relating to the consolidated balance sheet of HomeGold Financial, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the years in the three year period ended December 31, 2000, which report appears in the 2000 Annual Report on Form 10-K of the Company. /s/ ELLIOTT, DAVIS & COMPANY, L.L.P. - -------------------------------------- ELLIOTT, DAVIS & COMPANY, L.L.P. Greenville, South Carolina April 13, 2001 -----END PRIVACY-ENHANCED MESSAGE-----