-----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, CQ62uQ7YFT0rHqQHOCTl5k0zOTXS2KeXe2F2nY4zvLtpiAVJxHgGv6J2bKqrCMzY q2ieRqfaomV7FFQ+Ftj8qA== 0000950144-96-006476.txt : 19960923 0000950144-96-006476.hdr.sgml : 19960923 ACCESSION NUMBER: 0000950144-96-006476 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960920 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERGENT GROUP 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: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-12371 FILM NUMBER: 96632604 BUSINESS ADDRESS: STREET 1: 15 SOUTH MAIN ST STE 750 CITY: GREENVILLE STATE: SC ZIP: 29601 BUSINESS PHONE: 8642358056 MAIL ADDRESS: STREET 1: 15 SOUTH MAIN ST STE 750 CITY: GREENVILLE STATE: SC ZIP: 29601 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 S-1 1 EMERGENT GROUP, INC. FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 20, 1996. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- EMERGENT GROUP, INC. (Exact name of registrant as specified in its charter) SOUTH CAROLINA 6162 57-0513287 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
15 SOUTH MAIN STREET, SUITE 750 GREENVILLE, SOUTH CAROLINA 29601 (864) 235-8056 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JOHN M. STERLING, JR., CHIEF EXECUTIVE OFFICER EMERGENT GROUP, INC. 15 SOUTH MAIN STREET, SUITE 750 GREENVILLE, SOUTH CAROLINA 29601 (864) 235-8056 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: JAMES M. SHOEMAKER, JR., ESQ. GLENN W. STURM, ESQ. WILLIAM P. CRAWFORD, JR., ESQ. ROBERT D. PANNELL, ESQ. WYCHE, BURGESS, FREEMAN & PARHAM, P.A. NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. POST OFFICE BOX 728 1201 PEACHTREE STREET, SUITE 2200 GREENVILLE, SOUTH CAROLINA 29602-0728 ATLANTA, GEORGIA 30361 (864) 242-8200 (TELEPHONE) (404) 817-6106 (TELEPHONE) (864) 235-8900 (FACSIMILE) (404) 817-6050 (FACSIMILE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION OF SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT PRICE(1) FEE(2) - ---------------------------------------------------------------------------------------------------------- Common Stock............................ 3,450,000 $13.00 $44,850,000 $15,465.52 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Includes 450,000 shares subject to the Underwriters' over-allotment option. (2) Determined pursuant to Rule 457(a) under the Securities Act of 1933, as amended, solely for the purpose of calculating the registration fee. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EMERGENT GROUP, INC. CROSS REFERENCE SHEET (PURSUANT TO ITEM 501(B) OF REGULATION S-K)
ITEM NUMBER CAPTION LOCATION IN PROSPECTUS - ------ ----------------------------------------- ----------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................. Outside Front Cover Page; Inside Front and Outside Back Cover Pages; Cross Reference Sheet 2. Inside Front and Outside Back Cover Pages of Prospectus.......................... Available Information; Inside Front and Outside Back Cover Pages; Additional Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors; Selected Consolidated Financial and Operating Data 4. Use of Proceeds.......................... Use of Proceeds 5. Determination of Offering Price.......... Underwriting 6. Dilution................................. Dilution 7. Selling Security Holders................. Principal and Selling Shareholders 8. Plan of Distribution..................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered............................. Description of Securities 10. Interests of Named Experts and Counsel... Experts; Legal Matters 11. Information With Respect to the Registrant............................. Prospectus Summary; Price Range of Common Stock; Dividend Policy; Capitalization; Selected Consolidated Financial and Operating Data; The Company; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................ Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 20, 1996 3,000,000 SHARES (LOGO) Emergent Group Inc. COMMON STOCK Of the 3,000,000 shares of common stock, $0.05 par value per share (the "Common Stock"), offered hereby (the "Offering"), 2,000,000 shares are being sold by Emergent Group, Inc. (the "Company") and 1,000,000 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Company will not receive any of the proceeds from the sale of the shares by the Selling Shareholders. Prior to this Offering, there has been limited trading of the Common Stock on the over-the-counter Bulletin Board under the market symbol "EMGG." Bid and ask quotations are obtained from the National Daily Quotation Service. It is currently anticipated that the public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the public offering price. In connection with this Offering, the Company has received preliminary approval for the quotation of the Common Stock on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the trading symbol "EMER." SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS ---------------- ---------------- ---------------- ---------------- Per Share.............. $ $ $ $ Total(3)............... $ $ $ $
- --------------- (1) The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $500,000. (3) The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 450,000 additional shares of Common Stock on the same terms and conditions as set forth above. If all such shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discount will be $ , the total Proceeds to Company will be $ and the total Proceeds to Selling Stockholders will remain unchanged. See "Underwriting." ------------------------ The shares of Common Stock are offered subject to receipt and acceptance by the several Underwriters, to prior sale, and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that certificates for the shares will be available for delivery on or about , 1996. WHEAT FIRST BUTCHER SINGER RAYMOND JAMES & ASSOCIATES, INC. , 1996 4 A map of the United States showing the locations of the Company's offices. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company with the Commission may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048 and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon the payment of fees at prescribed rates. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere herein. Unless otherwise indicated, all information in this Prospectus has been adjusted to reflect a one-for-three reverse stock split of the Common Stock effective June 9, 1995 and a two-for-one stock split effected in the form of a 100% stock dividend on the Common Stock effective March 1, 1996. Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option is not exercised. Unless the context requires otherwise, all references to the Company shall include the Company and all of its subsidiaries. Prospective investors should carefully consider the information set forth under the heading "Risk Factors." THE COMPANY Emergent Group, Inc. is a diversified financial services company headquartered in Greenville, South Carolina which originates, services and sells residential mortgage loans ("Mortgage Loans"), small business loans ("Small Business Loans") and used automobile loans ("Auto Loans"). The Company makes substantially all of its loans to borrowers who have limited access to credit or who may be considered credit-impaired by conventional lending standards ("non-prime borrowers"). The Company commenced its lending operations in 1991 and has experienced significant loan growth over the past several years. During the years 1993, 1994 and 1995, the Company originated $63.6 million, $150.0 million and $249.5 million, respectively. During the six months ended June 30, 1996, the Company originated $194.4 million in loans. Of the Company's loan originations in the first six months of 1996, $153.8 million were Mortgage Loans, $30.6 million were Small Business Loans and $10.0 million were Auto Loans. For the years ended December 31, 1993, 1994 and 1995, the Company's pre-tax income from continuing operations was $663,000, $2.4 million and $4.9 million, respectively. For the six months ended June 30, 1996, the Company's pre-tax income from continuing operations was $3.6 million. MORTGAGE LOAN DIVISION The Company's Mortgage Loan operation (the "Mortgage Loan Division") makes Mortgage Loans primarily to owners of single family residences who use the loan proceeds for such purposes as debt consolidation, home improvements and educational expenditures. Approximately 93% of the Company's Mortgage Loans are secured by first mortgages, with the balance being secured by second mortgages. The Mortgage Loans generally have initial principal balances ranging from $25,000 to $100,000 (with an average initial principal balance in the first six months of 1996 of approximately $41,500) and fixed rates of interest ranging from 9% to 16% per annum (with an average interest rate earned in the first six months of 1996 of 12.2%). The Mortgage Loan Division has experienced significant growth over the past several years. During 1993, 1994 and 1995, Mortgage Loan originations totaled $20.5 million, $99.4 million and $192.8 million, respectively. During the six months ended June 30, 1996, Mortgage Loan originations totaled $153.8 million. A majority of the Mortgage Loans are sold on a non-recourse basis to institutional investors. The Mortgage Loan Division originates Mortgage Loans on both a retail basis through regional offices and a wholesale basis through independent mortgage brokers and mortgage bankers (collectively, the "Mortgage Bankers"). The Company's retail lending operations were established in the second quarter of 1996, and currently originate retail loans through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and five new retail lending offices during the first quarter of 1997. Through these offices, the Company expects to target Mortgage Loan borrowers through a variety of marketing methods. During August 1996, retail originations totaled $5.0 million. The Company also originates Mortgage Loans on a wholesale basis through approximately 225 Mortgage Bankers. The Company has established strategic alliance agreements with certain Mortgage Bankers (the "Strategic Alliance Mortgage Bankers"), which require the Strategic Alliance Mortgage Bankers to refer to the Company all of their loans up to specified levels which meet the Company's underwriting criteria, in exchange for delegated underwriting, administrative support and expedited funding. The Company has a minority equity interest in certain of the Strategic Alliance Mortgage Bankers. 3 6 In the first six months of 1996, approximately 53% (or approximately $15 million per month) of the Company's Mortgage Loans by principal amount were originated through one Strategic Alliance Mortgage Banker, First Greensboro Home Equity, Inc. ("First Greensboro"). On June 1, 1996, First Greensboro terminated its agreement with the Company in connection with its sale to a third party. As a result of such termination, First Greensboro paid the Company $7.25 million in September 1996. Although First Greensboro generated a large percentage of the Company's Mortgage Loan originations, the Company believes that it will be able to replace such originations through its additional Strategic Alliance Mortgage Bankers, three of which entered into strategic alliance agreements with the Company in the second quarter of 1996, and its retail lending operation. During August 1996, Mortgage Loan originations through the three new Strategic Alliance Mortgage Bankers and the Company's retail lending operations totaled $6.2 million. SMALL BUSINESS LOAN DIVISION The Company's Small Business Loan operation (the "Small Business Loan Division") makes loans to small businesses primarily for the acquisition or refinancing of property, plant and equipment and working capital. A substantial portion of the Company's Small Business Loans are loans ("SBA Loans") which are guaranteed by the U.S. Small Business Administration (the "SBA"). The SBA Loans are secured by real or personal property and have initial principal balances ranging from $250,000 to $1.5 million (with an average initial principal balance in the first six months of 1996 of $650,000) and variable interest rates limited to a maximum of 2.75% over the prime rate. The SBA guarantees approximately 75% of the original principal amount of the SBA Loans, up to a maximum guarantee amount of $750,000. The Company sells participations representing the SBA-guaranteed portion of its SBA Loans (the "SBA Loan Participations") in the secondary market. In connection with such sales, the Company receives, in addition to excess servicing revenue, cash premiums of approximately 10% of the guaranteed portion being sold. SBA Loans are originated directly by the Company's loan officers in its seven branch offices and are primarily generated through referral sources such as commercial loan and real estate brokers ("Commercial Loan Brokers") located in its market areas. Approximately 75% of the SBA Loans originated in the first six months of 1996 were originated through Commercial Loan Brokers. The Company believes that it was among the ten largest SBA Loan lenders in the United States, by principal amount of SBA Loans approved, for the SBA's fiscal year ended September 30, 1995. The Small Business Loan Division also provides working capital loans secured by accounts receivable, inventory and equipment to small- to medium-sized businesses in the southeastern United States ("Asset-based Small Business Loans"). The Company began its asset-based lending operation in April 1996 in Atlanta, GA. For the six months ended June 30, 1996, Asset-based Small Business Loans originated by the Small Business Loan Division totaled approximately $4.6 million. During 1993, 1994 and 1995, Small Business Loan originations totaled $37.9 million, $43.1 million and $39.6 million, respectively. During the six months ended June 30, 1996, Small Business Loan originations totaled $30.6 million. In June 1995, the Company securitized $17.1 million of the unguaranteed portion of SBA Loans. AUTO LOAN DIVISION The Company's Auto Loan operation (the "Auto Loan Division") makes loans to non-prime borrowers for the purchase of used automobiles. Substantially all of the Auto Loans are made directly by the Company to purchasers of automobiles who are referred to the Company by automobile dealers ("Dealers"). Less than 20% of the Auto Loans made in the first six months of 1996 were indirect loans purchased from Dealers. The Auto Loans generally have initial principal balances ranging from $3,000 to $10,000 (with an average initial principal balance in the first six months of 1996 of approximately $5,000), terms ranging from 24 to 48 months, and fixed interest rates ranging from 18% to 46% per annum (with an average yield in the first six months of 1996 of 27.4%). The Auto Loan Division operates through eight locations and originates Auto Loans in connection with approximately 200 Dealers. During 1993, 1994 and 1995, Auto Loan originations totaled $5.2 million, $7.5 million and $17.1 million, respectively. During the six months ended June 30, 1996, Auto Loan originations totaled $10.0 million. In March 1996, the Company securitized $16.1 million in Auto Loans. 4 7 BUSINESS AND GROWTH STRATEGY The Company's business strategy is to be a diversified financial services company that meets the credit needs of borrowers in what the Company believes to be under-served credit markets. Key elements of the Company's business strategy are to: -- Maintain a "high velocity" capital strategy whereby loans are generally sold within 10 to 40 days of origination, thereby enabling the Company to recognize cash gain on the sale of its loans and quickly redeploy its capital, as well as reduce its interest rate risk, default risk and borrowing costs. In addition, the Company plans to continue to pursue securitization transactions for all of its loan divisions in the future. -- Respond quickly to customer credit requests by utilizing a decentralized loan approval process, while ensuring consistent credit quality through uniform underwriting guidelines and procedures. -- Utilize a proactive underwriting process whereby the Company may restructure credit requests in order to cause them to meet the Company's underwriting criteria. -- Achieve profitability goals by maximizing interest margins and emphasizing effective monitoring and collection of loans. The Company's growth strategy is to continue to expand all areas of its lending operations, emphasizing profitability and economic value added, rather than asset growth. Key elements of the Company's growth strategy are to: -- Increase Mortgage Loan originations by expanding its retail lending operations where the Company lends directly to the customer without using a Mortgage Banker. -- Increase wholesale loan originations from the Strategic Alliance Mortgage Bankers and enter into additional strategic alliances with other Mortgage Bankers, as well as increase the number of relationships with other referral sources such as Commercial Loan Brokers and Dealers. -- Expand its Small Business Loan operations by utilizing its "Preferred Lender" status with the SBA to minimize response time and maximize Small Business Loan production. -- Increase its penetration in existing markets and expand geographically by opening additional offices. -- Pursue the acquisition of businesses in the financial services industry (although no agreements or understandings relating to any acquisitions are presently pending). The Company was incorporated in 1968 and until 1990 engaged principally in railroad-related operations. Prior to 1990, the Company incurred significant losses which resulted in net operating losses. In December 1990, current management acquired control of the Company and implemented a strategic plan to acquire profitable businesses which could utilize such net operating losses. Pursuant to such strategy, the Company acquired certain financial services companies in 1991 and an apparel manufacturer in 1993. In 1994, the Company made a strategic decision to divest all non-financial operations and to focus exclusively on the financial services industry. In accordance with such strategy, the Company has completed its divestiture of its apparel-related and transportation-related operations. THE OFFERING Common Stock offered by the Company.......... 2,000,000 shares Common Stock offered by the Selling Shareholders....................... 1,000,000 shares Common Stock to be outstanding after the Offering............................... 8,622,100 shares(1) Use of proceeds.............................. To repay indebtedness. See "Use of Proceeds." Proposed Nasdaq National Market symbol....... EMER
- --------------- (1) Excludes (i) 222,976 shares of Common Stock issuable upon the exercise of options granted pursuant to the Company's existing stock option plans, (ii) 102,167 shares of Common Stock issuable upon the exercise of outstanding warrants and (iii) 10,500 shares of Common Stock issuable pursuant to stock grants made pursuant to the Company's Restricted Stock Agreement Plan. See "Management." 5 8 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
FOR THE SIX MONTHS FOR THE FISCAL YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------------------------------------------- ------------------------ 1991 1992 1993 1994 1995 1995 1996 -------- -------- --------- --------- --------- --------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues: Interest and servicing revenue...... $ 4,064 $ 6,980 $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937 Gain on sale of loans(1)............ -- 1,686 3,605 6,450 9,169 4,355 7,468 Other revenues...................... 96 342 458 842 1,470 692 904 -------- -------- --------- --------- --------- --------- ----------- Total revenues.................. 4,160 9,008 12,046 18,195 26,278 12,354 18,309 Expenses: Interest expense.................... 2,399 4,315 5,073 5,879 8,527 3,780 5,576 Provision for credit losses(2)...... 83 349 686 2,510 2,480 1,240 1,532 General and administrative expenses.......................... 2,265 4,698 5,624 7,359 10,419 4,514 7,622 -------- -------- --------- --------- --------- --------- ----------- Total expenses.................. 4,747 9,362 11,383 15,748 21,426 9,534 14,730 Income (loss) from continuing operations(3)(4).................... (595) (249) 937 1,792 4,581 2,696 3,436 Income (loss) from discontinued operations(3)....................... 344 685 260 546 (3,924) (751) -- -------- -------- --------- --------- --------- --------- ----------- Net income (loss)(3).................. $ (251) $ 436 $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436 ========== ========== =========== =========== =========== =========== ============== Income (loss) per share from continuing operations(3)(4)......... $ (0.11) $ (0.04) $ 0.14 $ 0.27 $ 0.69 $ 0.40 $ 0.51 Income (loss) per share from discontinued operations(3).......... 0.06 0.12 0.04 0.08 (0.59) (0.11) -- -------- -------- --------- --------- --------- --------- ----------- Net income (loss) per share(3)........ $ (0.05) $ 0.08 $ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51 ========== ========== =========== =========== =========== =========== ============== Weighted average outstanding equivalent shares (in thousands).... 5,660 5,639 6,552 6,689 6,668 6,691 6,728 Supplemental net income per share:(3)(5) Income per share from continuing operations........................ $ 0.53 $ 0.39 Income (loss) from discontinued operations........................ (0.45) -- --------- ----------- Net income per share................ $ 0.08 $ 0.39 =========== ============== OPERATING DATA: Total loans originated or purchased... $ 18,361 $ 57,282 $ 63,633 $ 150,044 $ 249,507 $ 104,977 $ 194,437 Total loans sold...................... -- 10,827 31,052 85,772 153,055 58,494 159,886 Total loans securitized............... -- -- -- -- 17,063 17,063 16,107 Total loans serviced (period end)(6)............................. 41,250 68,489 106,898 156,524 213,851 184,274 217,982 Total loans receivable (period end)... 39,870 56,785 66,279 94,479 125,775 98,125 103,265 Weighted average interest rate earned.............................. 14.23% 14.19% 12.83% 13.51% 14.04% 14.06% 15.76% Weighted average interest rate paid... 7.69 7.74 7.24 6.94 7.57 7.40 8.64 Allowance for credit losses as a % of serviced loans (period end)(6)...... 2.35 1.92 1.60 2.00 2.04 1.82 2.83 Net charge-offs as a % of average serviced loans(2)(6)................ 0.83 0.68 1.29 2.37 1.44 0.87 0.88 General and administrative expenses as a % of average serviced loans(6).... 8.24 8.56 6.41 5.59 5.63 5.30 6.66
AT JUNE 30, 1996 ------------------------ AS ACTUAL ADJUSTED(7) --------- ----------- BALANCE SHEET DATA: Loans receivable................................................................................. $ 87,835 $ 87,835 Mortgage loans held for sale..................................................................... 15,430 15,430 Total assets..................................................................................... 146,657 148,458 Total indebtedness............................................................................... 128,334 108,073 Total shareholders' equity....................................................................... 13,535 35,597
- --------------- (1) These amounts represent gains recorded on the sale of Mortgage Loans and SBA Loan Participations. (2) Approximately 90% of the amount in 1994 relates to the writedown to market of certain foreclosed properties associated with speculative construction loans made by the Mortgage Loan Division prior to its acquisition by the Company. Speculative construction loans are no longer being made by the Company. (3) Includes the impact of the utilization of the Company's net operating loss carryforward, which totaled approximately $23 million and $18 million at December 31, 1995 and June 30, 1996, respectively. (4) The amount set forth with respect to the year ended December 31, 1993 includes $113,000 ($0.01 per share) which reflects the cumulative effect of a change in the method of accounting for income taxes. (5) Supplemental net income per share (as adjusted) reflects the issuance of the 2,000,000 shares of Common Stock offered by the Company hereby, the proceeds of which are to be used to repay approximately $22 million in Company debt. These amounts were calculated based on total weighted average shares of 8,668,192 at December 31, 1995 and 8,727,674 shares at June 30, 1996. (6) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all securitized loans, and the unguaranteed portion of SBA Loans, but excludes the guaranteed portion of the SBA Loans for purposes of calculating the allowance ratio and net charge-off ratio. Operating data stated as a percentage of serviced loans (except period end data) for the six month periods ended June 30, 1995 and 1996 have been annualized. (7) Adjusted to reflect the sale by the Company of 2,000,000 shares at an assumed public offering price of $12.00, the receipt by the Company of $242,000 in connection with the exercise of warrants by certain Selling Shareholders and the application of the estimated net proceeds thereof as described under "Use of Proceeds." 6 9 RISK FACTORS Prospective investors should consider carefully, in addition to the other information contained in this Prospectus, the following risk factors in evaluating an investment in the Common Stock offered hereby. CREDITWORTHINESS OF NON-PRIME BORROWERS AND RISK OF DEFAULT Substantially all of the Company's loans are made in the non-prime credit market, which consists of borrowers who are deemed to be credit-impaired due to various factors. These factors include, among others, the manner in which they have managed previous credit, the absence or limited extent of their prior credit history or their limited financial resources. Consequently, the Company's loans, relative to consumer, commercial and mortgage loans to prime borrowers, involve a significantly higher probability of default and greater servicing and collection costs. The Company's profitability depends upon its ability to properly evaluate the creditworthiness of non-prime borrowers and to efficiently and effectively service and collect its loan portfolio. There can be no assurance that the performance of the Company's loan portfolio will be maintained, that the Company's systems and controls will continue to be adequate or that the rate of future defaults and/or losses will be consistent with prior experience or at levels that will maintain the Company's profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Allowance for Credit Losses and Credit Loss Experience." The Company is exposed to the risk of loan delinquencies and defaults, particularly 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. Following the sale of such loans, the Company's loan delinquency and default risk with respect to such loans is limited to those circumstances in which it is required to repurchase such loans due to a breach of a representation or warranty in connection with the whole loan sale. This risk with respect to breaches of representations or warranties also exists for loans sold through securitization. In addition, in securitization transactions, the subordinate and/or residual certificates bear the risk of default for the entire pool of securitized loans to the extent of such certificates' value. Accordingly, the value of the subordinate and/or residual certificates retained by the Company would be impaired to the extent of losses on the securitized loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Allowance for Credit Losses and Credit Loss Experience." LOAN ORIGINATION BY THE RETAIL LENDING OPERATIONS In April 1996, the Company established its retail mortgage lending operations, and currently originates retail loans through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and five new offices in the first quarter of 1997. Through these offices, the Company expects to target Mortgage Loan borrowers throughout their respective regions. The Company's strategic plan is to continue to increase its retail operations at a rapid pace. However, because the retail mortgage lending operations were only recently established and have a limited operating history, there is no assurance that the Company will be able to achieve this growth. In the event that the Company's retail lending operations do not perform as expected, the Company's operations, profitability or financial condition could be materially and adversely affected. TERMINATION OF FIRST GREENSBORO AGREEMENT On June 1, 1996, First Greensboro terminated its strategic alliance agreement (the "Agreement") with the Company. Until the loan volume associated with First Greensboro is replaced, this termination is expected to have a material adverse effect on the Company's loan originations. During 1995 and the first six months of 1996, approximately 44.5% and 41.6%, respectively, of the Company's total loans were originated through First Greensboro. No assurance may be given that the Company will be able to replace the monthly loan volume associated with First Greensboro, and in the event that such loan volume is not replaced, the Company's operations, profitability or financial condition could be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." 7 10 TERMINATION OF MORTGAGE BANKER RELATIONSHIPS The Company's business of originating Mortgage Loans on a wholesale basis depends, in large part, upon its ability to establish and maintain relationships with Mortgage Bankers. For the year ended December 31, 1995 and the first six months of 1996, 98% of the Company's Mortgage Loans were originated in connection with Mortgage Bankers. Of the approximately 225 Mortgage Bankers that were responsible for the origination of Mortgage Loans during the first six months of 1996, First Greensboro, AmeriFund Group, Inc. and Prime Investors, Inc. accounted for approximately 53%, 20% and 9%, respectively, of the Mortgage Loans originated. In June 1996, First Greensboro terminated its strategic alliance agreement with the Company. In the second quarter of 1996, the Company entered into strategic alliance agreements with three additional Mortgage Bankers and will pursue strategic alliance agreements with other Mortgage Bankers in the future. The Company's volume of Mortgage Loans is expected to be significantly influenced by its ability to secure and maintain strategic alliance agreements. The existing strategic alliance agreements provide that the Strategic Alliance Mortgage Bankers must first offer to the Company the right to fund all of their loans up to specified levels which meet the Company's underwriting criteria before offering such loans to other parties. These agreements have terms ranging from three to five years and are scheduled to terminate beginning in August 1999. Furthermore, each agreement provides for certain minimum termination fees upon wrongful termination. Although the Company will seek to renew these agreements at the end of their terms, there can be no assurance that such agreements will be renewed or that loan volumes will be maintained. In the event of the wrongful termination of the Company's relationship with one or more Mortgage Bankers associated with a material amount of the Company's Mortgage Loans, the Company's operations, profitability or financial condition could be materially and adversely affected. See "Business -- Mortgage Loan Division -- Mortgage Loan Origination." NO AGREEMENTS WITH CERTAIN MORTGAGE BANKERS Except for the agreements with the Strategic Alliance Mortgage Bankers, there are no contractual arrangements between the Company and its Mortgage Bankers with respect to the Mortgage Bankers' referrals of Mortgage Loans to the Company. Accordingly, any such Mortgage Banker could decline to utilize the Company to originate and fund its loans. In the event that a large number of Mortgage Bankers representing a material amount of Mortgage Loans were to determine not to utilize the Company, the Company's operations, profitability or financial condition could be materially and adversely affected. ECONOMIC CONDITIONS The Company's business may be adversely affected by periods of economic slowdown or recession which may be accompanied by decreased demand for consumer credit and declining collateral values. Any material decline in real estate values reduces the ability of borrowers to use home equity to support borrowings and increases the loan-to-value ratios of Mortgage Loans previously made by the Company, thereby weakening collateral coverage and increasing the possibility of a loss in the event of default. Furthermore, delinquencies, foreclosures and losses generally increase during economic slowdowns or recessions. Because of the Company's focus on borrowers who are unable or unwilling to obtain financing from conventional lending sources, the actual rates of delinquencies, foreclosures and losses on such loans could be higher under adverse economic conditions than those experienced in the lending industry in general. In addition, any sustained period of such increased delinquencies, foreclosures or losses could adversely affect the pricing of the Company's loan sales, whether through whole loan sales or securitizations. In the event that pools of loans sold and serviced by the Company experience higher delinquencies, foreclosures or losses than anticipated, the Company's operations, profitability or financial condition could be materially and adversely affected. GEOGRAPHIC CONCENTRATION Approximately 70% and 57% of the Mortgage Loans in 1995 and the first six months of 1996, respectively, were made to borrowers in North Carolina and South Carolina, and substantially all of the Auto Loans are made to borrowers in South Carolina. In the event of an economic slowdown in either or both of 8 11 these states, the Company's operations, profitability or financial condition could be materially and adversely affected. See "Business -- Mortgage Loan Division -- Mortgage Loan Origination." ADEQUACY OF ALLOWANCE FOR CREDIT LOSSES There are certain risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and, in the case of a collateralized loan, risks resulting from uncertainties as to the future value of the collateral. The Company maintains an allowance for credit losses based on, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Although management considers the allowance appropriate and adequate to cover possible 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 credit losses will not be required. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Allowance for Credit Losses and Credit Loss Experience." AVAILABILITY OF FUNDING SOURCES The Company, like most financial service companies, has a constant need for capital to finance its lending activities. Historically, the Company has funded the majority of its lending activities from the cash flow generated from operations and through borrowings pursuant to its existing credit facilities (the "Credit Facilities"), by selling senior notes and subordinated debentures bearing fixed rates of interest ("Debentures"), and by selling a substantial portion of the loans it originates. In the event that the Company were unable to sell its loans in the secondary markets, its Credit Facilities were terminated, the Company were unable to sell Debentures, or holders of Debentures were unwilling to renew their Debentures, the Company's operations, profitability or financial condition could be materially and adversely affected. In particular, the Credit Facilities contain a number of financial covenants, including, but not limited to, covenants with respect to debt to net worth ratios, borrowing base calculations and minimum adjusted tangible net worth. In the event that the Company's financial performance were to deteriorate materially, the Company's ability to borrow under the Credit Facilities or renew the Credit Facilities could be impaired. Furthermore, there can be no assurance that the Company's existing lenders will agree to refinance such debt, that other lenders will be willing to extend lines of credit to the Company or that funds otherwise generated from operations will be sufficient to satisfy such obligations. Future financing may involve the issuance of additional Common Stock or other securities, including securities convertible into or exercisable for Common Stock, and any such issuance may dilute the equity interest of purchasers of the Common Stock offered hereby. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." As of August 31, 1996, the Company had aggregate unused borrowing availability under the Credit Facilities of approximately $31.6 million. The Company may increase borrowings under the lines up to a maximum of $151 million, depending upon the total amount of loans outstanding. In the event that the Company is unable to sell or securitize loans or increase its borrowing capacity, its operations, profitability or financial condition could be materially and adversely affected. LOSS OF ABILITY TO SELL LOANS A significant portion of the Company's profits are generated through the sale of loans. To the extent that the Company is unable to sell its loans on terms acceptable to the Company, the Company's operations, profitability or financial condition could be materially and adversely affected. GENERAL LENDING RISKS The lending business is subject to various business risks, including, but not limited to, the following: (i) the risk that borrowers will not satisfy their debt service payments, including interest charges and principal 9 12 amortization obligations; (ii) the risk that appraisals of properties securing loans originated or purchased by the Company will not reflect the property's actual value, either due to valuation errors or fluctuations in the value of real estate and that, upon liquidation of real estate owned or other collateral securing loans, the Company may suffer a loss; and (iii) the risk that environmentally hazardous substances could be discovered on real properties acquired by the Company in foreclosure and that the Company might be required to remove such substances from the affected properties at its sole cost or that the value of the properties would otherwise be impaired. Also, general increases in interest rates after the origination of fixed rate loans and prior to the sale of such loans may cause such loans to decrease in value. A general decrease in interest rates also could cause an increase in the rate at which outstanding fixed rate loans are prepaid, reducing the period of time during which the Company receives its net interest margin and servicing revenue with respect to such prepaid loans. With respect to SBA Loans, unanticipated prepayments and/or defaults also have the effect of reducing servicing revenue associated with the excess servicing receivables created at the time the SBA Loan Participations are sold. DEPENDENCE ON FEDERAL PROGRAMS AND RELATED AGREEMENTS A portion of the Company's business is dependent upon the continuation of various federally funded programs, such as the SBA loan program. Of the total loans originated by the Company during the year ended December 31, 1995 and the first six months of 1996, approximately 16% and 12%, respectively, by principal amount were SBA Loans. The discontinuation, elimination or significant reduction of guarantee levels or any modification of the qualification criteria or the permissible loan purposes under any of these federal programs could have a material adverse effect on the Company's operations or financial condition. In addition, in the event that the Company were to lose its status as a "Preferred Lender," the Small Business Loan Division could be materially and adversely affected. See "Business -- Small Business Loan Division." During 1995, the SBA reviewed the funding available for the guarantee of SBA Loans under the government's SBA lending program and in connection with such review instituted a number of changes, which included the implementation of $500,000 as the maximum loan amount that could be made under the SBA program, and the preclusion of the use of SBA Loans for purposes of refinancing most forms of existing debt. These two major changes were ultimately rescinded in connection with certain other changes in the SBA program instituted in October 1995. However, these temporary changes had a material adverse effect on the Small Business Loan Division's loan volume for 1995. Although the permanent changes instituted with respect to SBA Loans in October 1995 are not expected to have a material adverse effect on the Small Business Loan Division in the future, the SBA's actions in 1995 illustrate the potential for governmental regulation having a material effect on the Company's operations. The agreement pursuant to which the SBA has agreed to guarantee SBA loans made by the Company may be terminated by either the Company or the SBA on 10 days prior written notice to the other party. The termination or non-renewal of this agreement or any change in the SBA program could have a material adverse effect on the Company's operations, profitability or financial condition. See "Business -- Small Business Loan Division" and "Business -- Regulation." LOSS OF NET OPERATING LOSS CARRYFORWARD As a result of operating losses incurred by the Company under prior management, the Company generated significant net operating loss carryforwards (the "NOL"). At June 30, 1996, the amount of the NOL remaining and available to the Company was approximately $18 million. The NOL expires, to the extent that it is not utilized to offset income, in varying amounts annually through 2001. Federal tax laws provide that net operating loss carryforwards are restricted or eliminated upon certain changes of control. In the future, it is possible that a change of control could occur and that the Company could lose the benefits of the NOL. In the event that the Company lost the NOL, the Company's earnings would be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Tax Considerations -- The NOL." 10 13 INTEREST RATE SENSITIVITY The Company is subject to certain interest rate risks, particularly with respect to its Mortgage Loans and Auto Loans, which bear fixed rates of interest and are principally funded with variable rate debt. In the event that interest rates change dramatically in a relatively short period of time, the Company's interest spread and certain premiums received upon the sale of loans would decrease, which could materially and adversely affect the Company's operations, profitability or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The non-prime financial market is very fragmented and highly competitive. The Company believes that there are numerous traditional sources of credit providing, or capable of providing, financing which are not currently serving the Company's market segment. Historically, commercial banks, savings and loans, credit unions, financing subsidiaries of automobile manufacturers and other lenders providing traditional financing (many of which are larger, have significantly greater financial resources and have relationships with established captive transaction networks) have not consistently served the Company's market segment. If one or more of such traditional sources of credit were to enter the Company's market segment, the Company's operations, profitability or financial condition could be materially and adversely affected. In addition, if the Company were to experience increased competition from other traditional or non-traditional sources of credit, such increased competition may result in a reduction in the interest rates charged borrowers or a reduction in the volume of originated loans. A reduction in such interest rates or loan volume could materially adversely affect the Company's operations, profitability or financial condition. See "Business -- Competition." REGULATION OF LENDING ACTIVITIES AND CHANGING REGULATORY ENVIRONMENT The operations of the Company are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, including among other things, regulating credit granting activities, establishing maximum interest rates, insurance coverages and charges, requiring disclosures to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. Furthermore, there can be no assurance that more restrictive laws, rules and regulations will not be adopted in the future which could make compliance much more difficult or expensive, restrict the Company's ability to originate or purchase loans, or otherwise adversely affect the operations, profitability or financial condition of the Company. See "Business -- Regulation." CONCENTRATION OF VOTING CONTROL IN MANAGEMENT The Company's Board of Directors and executive officers ("Company Management") currently beneficially own approximately 26% of the outstanding Common Stock. After completion of the Offering, Company Management will beneficially own an aggregate of approximately 19% of the outstanding Common Stock (approximately 18% if the Underwriters' over-allotment option is exercised in full). Therefore, Company Management, if they were to act in concert, would be able to exercise significant influence with respect to the election of the Board of Directors of the Company and all matters submitted to shareholders. See "Principal and Selling Shareholders." DEPENDENCE UPON KEY EXECUTIVES The Company's growth and development to date have been dependent upon the services of certain members of its senior management. The loss of the services of one or more of such members of senior management could have a material adverse effect on the Company. See "Management." ABSENCE OF PRIOR MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Although the Company's Common Stock has been traded on the over-the-counter Bulletin Board under the market symbol "EMGG," there has generally been no liquid public market for the Common Stock in the 11 14 several years prior to the Offering. The Company has filed an application seeking to have the Common Stock listed for quotation on the Nasdaq National Market and has received preliminary approval of such application, subject to compliance with further conditions. However, there can be no assurance that an active trading market will develop or, if developed, will be sustained following the Offering. Because of the relatively illiquid market for the Common Stock prior to the Offering, the price of the Common Stock offered hereby will be determined solely by negotiations among the Company, the Selling Shareholders, and Wheat, First Securities, Inc. and Raymond James & Associates, Inc., as representatives (the "Representatives") of the several underwriters named in this prospectus (the "Underwriters") and may bear no relationship to the market price of the Common Stock after the Offering. See "Underwriting." From time to time after this Offering, there may be significant volatility in the market price for the Common Stock. Quarterly operating results of the Company or of other similar companies, changes in general conditions in the economy, consumer delinquency and default rates generally, the financial markets or the industry in which the Company operates, natural disasters, litigation developments or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. SHARES AVAILABLE FOR FUTURE SALE Upon the closing of the Offering, the Company will have 8,622,100 shares of Common Stock outstanding, of which the 3,000,000 shares offered hereby will be freely tradeable. In addition, 2,967,448 shares of Common Stock not subject to the lock-up described below are freely tradeable. Directors and executive officers of the Company and certain shareholders of the Company's Common Stock holding an aggregate of 2,654,642 shares have agreed not to sell or otherwise dispose of their Common Stock for a period of 180 days following the closing date of this Offering without the prior written consent of the Representatives of the Underwriters and the Company. When such lock-up restrictions lapse, such shares of Common Stock may be sold in the public market or otherwise disposed of, subject to compliance with applicable securities laws. Sales of a substantial number of shares of Common Stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. At this time, the Company is unaware of any party who expects to seek a waiver of such 180-day lock-up agreement. DILUTION Investors in the Offering will experience immediate and substantial dilution of $8.26 per share (based on an assumed public offering price of $12.00 per share), and current shareholders will receive a material increase in the net tangible book value of their shares of Common Stock. See "Dilution." ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS Statements in this Prospectus that reflect projections or expectations of future financial or economic performance of the Company, and statements of the Company's plans and objectives for future operations are "forward looking" statements. No assurance can be given that actual results or events will not differ materially from those projected, estimated, assumed or anticipated in any such forward looking statements. Important factors that could result in such differences, in addition to the risk factors identified above, include: general economic conditions in the Company's markets, including inflation, recession, interest rates and other economic factors. 12 15 THE COMPANY The Company is a diversified financial services company headquartered in Greenville, South Carolina which originates, services and sells Mortgage Loans, Small Business Loans, and Auto Loans. The Company makes substantially all of its loans to non-prime borrowers. The Company also serves as investment manager for Reedy River Ventures Limited Partnership and Palmetto Seed Capital Fund, L.P. (collectively, the "Venture Funds"). The Company was incorporated in South Carolina in 1968 under the name Golden Tye Corporation and conducted operations related to the railroad transportation industry (the "Transportation Segment"). During the period from 1980 through 1990, the Company's business suffered significant operating losses. In December 1990, approximately 40% of the Company's equity was acquired by a small group of investors, including the Company's current Chairman and Chief Executive Officer. In connection with such acquisition, a substantially new Board of Directors was elected and new executive officers were appointed. In 1991, the Company changed its name to Emergent Group, Inc. and began operating its financial services business (the "Financial Services Segment"). The Company began its transformation to a financial services company with its acquisition of Carolina Investors, Inc. ("CII") in May 1991. At the time of acquisition, CII had approximately $32 million in Mortgage Loans, and did not sell any loans in the secondary market. Since the Company acquired CII, it has expanded its Mortgage Loan Division significantly. In particular, the Mortgage Loan Division has significantly increased its loan originations, principally through establishing relationships with Mortgage Bankers. During 1993, 1994 and 1995, Mortgage Loan originations totaled $20.5 million, $99.4 million and $192.8 million, respectively. During the six months ended June 30, 1996, Mortgage Loan originations totaled $153.8 million. Furthermore, in 1994 the Mortgage Loan Division began selling a majority of its loans originated in connection with Mortgage Bankers. During 1994 and 1995, the Mortgage Loan Division sold $54.6 million and $127.6 million, respectively, in Mortgage Loans. During the six months ended June 30, 1996, the Mortgage Loan Division sold $143.9 million in Mortgage Loans. During the second quarter of 1996, the Mortgage Loan Division established a retail lending operation. This retail lending operation currently operates through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans, LA under the trade names "HomeGold" and Sterling Lending Corporation. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and five new offices in the first quarter of 1997. The retail operation originates Mortgage Loans directly to borrowers, as opposed to the wholesale operation, which originates loans principally through Mortgage Bankers. A majority of the Mortgage Loans originated through the retail operations are sold on a non-recourse basis to institutional investors. The Company formed Emergent Business Capital, Inc. ("EBC") in December 1991 for the purpose of acquiring substantially all of the assets, including the SBA license, of an inactive SBA lender. Immediately following this acquisition, EBC operated through one location and had $1.6 million in serviced loans receivable of which $1.4 million had been sold in the secondary markets. Since the Company's acquisition of EBC in 1991, its Small Business Loan Division has expanded its operations such that EBC now operates through seven locations. In addition to selling the SBA Loan Participations, in June 1995 the Small Business Loan Division securitized $17.1 million in loans receivable consisting of the unguaranteed portions of SBA Loans. Emergent Financial Corp. ("EFC") was formed by the Company in April 1996 to originate Asset-based Small Business Loans. Through June 30, 1996, it has originated $4.6 million in Asset-based Small Business Loans. During 1994 and 1995, the Small Business Loan Division originated $43.1 million and $39.6 million, respectively, in Small Business Loans. During the six months ended June 30, 1996, the Small Business Loan Division originated $30.6 million in Small Business Loans. At December 31, 1994 and 1995 and June 30, 1996, the Small Business Loan Division serviced $87.9 million, $108.0 million and $124.5 million, respectively, in Small Business Loans. The Company acquired Premier Financial Services, Inc. ("Premier") in May 1991 and an 80% interest in The Loan Pro$, Inc. ("Loan Pro$") in July 1991. At the time of acquisition, Loan Pro$ had $1.8 million in loans receivable and operated through one location, and Premier had approximately $3 million in loans receivable and operated through three locations. Since the Company acquired Premier and Loan Pro$, it has 13 16 expanded its Auto Loan Division significantly. During 1994 and 1995, the Auto Loan Division originated $7.5 million and $17.1 million, respectively, in Auto Loans. During the six months ended June 30, 1996, the Auto Loan Division originated $10.0 million in Auto Loans. The Auto Loan Division currently operates through a total of eight locations. In January 1993, as part of the Company's strategy of acquiring businesses to utilize the NOL, the Company acquired Young Generations, Inc., a North Carolina corporation ("YGI"), which was engaged in the design, manufacture and marketing of children's apparel (the "Apparel Segment"). Subsequent to 1993, the Company decided to focus the Company's resources and attention solely on its core financial services operations. In accordance with such strategy, the Company discontinued its Transportation Segment and Apparel Segment operations in 1995 through the sale of the Transportation Segment assets and the sale of YGI to YGI's management team. The Company does not anticipate making any acquisitions not related to the financial services industry. The Company's principal executive offices are located at 15 South Main Street, Suite 750, Greenville, South Carolina 29601, and its telephone number is (864) 235-8056. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered by the Company are estimated to be approximately $21.8 million (2,450,000 shares and $26.8 million if the Underwriters' over-allotment option is exercised in full), after deducting the underwriting discount and estimated Offering expenses, based upon an assumed public offering price of $12.00 a share. The Company will also receive $242,000 of proceeds from certain of the Selling Shareholders upon the exercise of their warrants. All of the net proceeds of this Offering will be used to repay outstanding indebtedness under the Credit Facilities. The indebtedness expected to be repaid with the proceeds of this Offering had a weighted average interest rate at June 30, 1996 of 8.41% and maturity dates ranging from April 1997 to December 1998. As part of its growth strategy, the Company may use a portion of the net proceeds for acquisitions of businesses in the financial services industry. Although the Company is engaged from time to time in discussions relating to possible acquisitions, no agreements or understandings relating to any acquisitions are presently pending. In connection with the repayment of indebtedness referenced above, the Company is not terminating the relevant Credit Facilities and, accordingly, would expect, in the future, to borrow under such Credit Facilities in order to fund additional loan demand. The amount of such additional borrowing will depend, among other things, upon the Company's loan demand and profitability. The Company will receive no proceeds from the sale of the shares sold by the Selling Shareholders. DIVIDEND POLICY The Company has not paid cash dividends on any shares of capital stock since 1990, and after the Offering intends to retain its earnings to support the growth and development of its business. Accordingly, it does not anticipate paying any cash dividends in the foreseeable future. Any future dividend payments would also depend upon the financial condition, funding requirements and earnings of the Company, as well as other factors that the Board of Directors may deem relevant. In addition, the ability of the Company to pay dividends depends substantially upon its ability to receive dividends from its subsidiaries. The Credit Facilities prohibit the Company's subsidiaries from paying dividends to the Company (although management fees may be paid). Accordingly, the Company's access to funds for the purpose of paying dividends may be limited. 14 17 PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the over-the-counter Bulletin Board under the market symbol "EMGG." However, for significant periods of time over the past several years, there has been no established public trading market for the Common Stock. As a result, prices reported for the Common Stock reflect the relative lack of liquidity and may not be reliable indicators of market value. The following table sets forth, for the periods indicated, the high and low bid prices for the Company's Common Stock as reported by National Daily Quotation Service. The prices given may represent quotations between dealers which do not include retail mark-ups, mark-downs or commissions and do not necessarily represent actual transactions.
COMMON STOCK --------------- CALENDAR YEAR HIGH LOW - ----------------------------------------------------------------------------- ------ ------ 1994 First Quarter.............................................................. $ 0.75 $ 0.75 Second Quarter............................................................. 0.75 0.63 Third Quarter.............................................................. 0.75 0.63 Fourth Quarter............................................................. 1.13 0.63 1995 First Quarter.............................................................. $ 1.13 $ 0.56 Second Quarter............................................................. 1.88 0.75 Third Quarter.............................................................. 5.50 1.75 Fourth Quarter............................................................. 6.50 2.00 1996 First Quarter.............................................................. $ 9.00 $ 4.00 Second Quarter............................................................. 12.50 9.00 Third Quarter (through September 18, 1996)................................. $14.00 $ 7.50
Bid and ask quotations with respect to the Common Stock may be obtained from the National Daily Quotation Service. On September 18, 1996, the last reported sales price of the Common Stock, as obtained from the Bloomberg quotation service, was $14.00. On September 18, 1996, there were 545 holders of record of Common Stock and 6,529,745 shares of Common Stock outstanding. In connection with this Offering, the Company has received preliminary approval for the Common Stock to be quoted on the Nasdaq National Market under the trading symbol "EMER." 15 18 DILUTION The net tangible book value of the Company at June 30, 1996 was $10.2 million, or $1.56 per share of Common Stock. Net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offering. After giving effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $12.00 per share), and after deducting the underwriting discount and other estimated expenses to be paid by the Company in connection with this Offering, and after the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company as of June 30, 1996 would have been $32.3 million, or $3.74 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.18 per share to existing shareholders and an immediate dilution in net tangible book value of $8.26 per share to purchasers of Common Stock in this Offering. The following table illustrates this per share dilution: Assumed public offering price per share............................... $12.00 Net tangible book value per share before the Offering............... $1.56 Increase in net tangible book value per share attributable to new investors........................................................ 2.18 Pro forma net tangible book value per share after the Offering........ 3.74 ------ Dilution per share to new investors................................... $ 8.26 ======
Assuming the Underwriters' over-allotment option is exercised in full, pro forma net tangible book value per share after the Offering would be $4.11 per share, the increase in pro forma net tangible book value of shares owned by existing shareholders would be $2.55 per share, and the dilution per share to new investors after the Offering would be $7.89 per share. The foregoing assumes no exercise of outstanding stock options or warrants except for the exercise of 92,355 warrants by certain of the Selling Shareholders. At June 30, 1996, a total of 699,664 shares are authorized for issuance under the Company's stock option plans. At June 30, 1996, options to purchase an aggregate of 14,834 shares with a weighted average exercise price of $3.88 were outstanding and exercisable under such stock option plans. At June 30, 1996, options to purchase an additional 214,672 shares were outstanding but were not exercisable. At June 30, 1996, the Company also had warrants outstanding which entitled the holders thereof to purchase an aggregate of 121,742 shares. On January 29, 1996, the Company adopted the Restricted Stock Agreement Plan which provides for the grant of up to 100,000 shares of restricted stock to non-employee directors. To the extent outstanding options and warrants are exercised, or shares reserved for future issuance are issued, there will be further dilution to new investors. See "Management." 16 19 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1996 (i) on a historical basis and (ii) as adjusted to reflect the sale by the Company of the 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $12.00 per share and the application of the estimated net proceeds therefrom as described in "Use of Proceeds." This table 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 the Notes thereto included elsewhere in this Prospectus.
AT JUNE 30, 1996 ------------------- AS ACTUAL ADJUSTED -------- -------- (DOLLARS IN THOUSANDS) Indebtedness: Debentures(1).......................................................... $108,073 $108,073 Notes payable to banks, including under the Credit Facilities(2)(3).... 20,261 -- -------- -------- Total indebtedness............................................. 128,334 108,073 -------- -------- Shareholders' equity: Common Stock, $0.05 par value; 30,000,000 authorized shares; 6,529,745 shares issued and outstanding; 8,622,100 shares issued and outstanding as adjusted............................................. 327 431 Additional paid-in capital............................................. 6,839 28,797 Retained earnings...................................................... 6,369 6,369 -------- -------- Total shareholders' equity..................................... 13,535 35,597 -------- -------- Total capitalization........................................... $141,869 $143,670 ======== ========
- --------------- (1) The Debentures are comprised of senior notes and subordinated debentures bearing fixed rates of interest which are sold by CII only to South Carolina residents. At June 30, 1996, there were $91.4 million of senior notes and $16.7 million of subordinated debentures outstanding bearing aggregate weighted average interest rates of 8% and 5%, respectively. Both senior notes and subordinated debentures are subordinate in priority to the Mortgage Loan Division Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (2) The Company's Credit Facilities provide for aggregate borrowing availability of up to $151.0 million, subject to certain borrowing base limitations which at June 30, 1996, would have allowed additional borrowing of $22.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (3) The Company anticipates that upon the consummation of the Offering, Notes payable to banks, including under the Credit Facilities will be in excess of $22 million, thereby allowing the Company to utilize the net proceeds of this Offering to pay down such indebtedness. 17 20 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following unaudited selected consolidated financial and operating data at and for the five years ended December 31, 1995 are derived from the audited financial statements of the Company. The data for the six months ended June 30, 1995 and 1996 are unaudited. The data set forth below is qualified by reference to, and 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 herein.
AT AND FOR THE SIX MONTHS ENDED AT AND FOR THE YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------------------ -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Interest and servicing revenue.................. $ 4,064 $ 6,980 $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937 Gain on sale of loans (1)....................... -- 1,686 3,605 6,450 9,169 4,355 7,468 Other revenues.................................. 96 342 458 842 1,470 692 904 ------- ------- -------- -------- -------- -------- -------- Total revenues........................... 4,160 9,008 12,046 18,195 26,278 12,354 18,309 Interest on notes payable....................... 41 218 419 848 2,303 2,774 3,878 Interest on Debentures.......................... 2,358 4,097 4,654 5,031 6,224 1,006 1,698 Provision for credit losses(2).................. 83 349 686 2,510 2,480 1,240 1,532 General and administrative expenses............. 2,265 4,698 5,624 7,359 10,419 4,514 7,622 ------- ------- -------- -------- -------- -------- -------- Total expenses........................... 4,747 9,362 11,383 15,748 21,426 9,534 14,730 ------- ------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before minority interest, income taxes and cumulative effect of change in accounting principle....... (587) (354) 663 2,447 4,852 2,820 3,579 Income taxes.................................... (2) (130) (186) 609 190 93 121 ------- ------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before minority interest and cumulative effect of change in accounting principle(3).............. (585) (224) 849 1,838 4,662 2,727 3,458 Minority interest............................... (10) (25) (25) (46) (81) (31) (22) ------- ------- -------- -------- -------- -------- -------- Income from continuing operations before cumulative effect of change in accounting principle(3)................................... (595) (249) 824 1,792 4,581 2,696 3,436 Income (loss) from discontinued operations...... 344 685 260 546 (3,924) (751) -- Cumulative effect of change in accounting principle...................................... -- -- 113 -- -- -- -- ------- ------- -------- -------- -------- -------- -------- Net income (loss)........................ $ (251) $ 436 $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436 ======= ======= ======== ======== ======== ======== ======== Income per share from continuing operations..... $ (0.11) $ (0.04) $ 0.13 $ 0.27 $ 0.69 $ 0.40 $ 0.51 Income per share from discontinued operations... 0.06 0.12 0.04 0.08 (0.59) (0.11) -- Cumulative effect per share of change in accounting principle........................... -- -- 0.01 -- -- -- -- ------- ------- -------- -------- -------- -------- -------- Net income (loss) per share(4)........... $ (0.05) $ 0.08 $ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51 ======= ======= ======== ======== ======== ======== ======== Weighted average outstanding equivalent shares (in thousands)................................. 5,660 5,639 6,552 6,689 6,668 6,691 6,728 OPERATING DATA: Total loans originated or purchased............ $18,361 $57,282 $ 63,633 $150,044 $249,507 $104,977 $194,437 Total loans sold............................... -- 10,827 31,052 85,772 153,055 58,494 159,886 Total loans securitized........................ -- -- -- -- 17,063 17,063 16,107 Total loans serviced (period end)(5)........... 41,250 68,489 106,898 156,524 213,851 184,274 217,982 Total loans receivable (period end)............ 39,870 56,785 66,279 94,479 125,775 98,125 103,265 Weighted average interest rate earned.......... 14.23% 14.19% 12.83% 13.51% 14.04% 14.06% 15.76% Weighted average interest rate paid............ 7.69 7.74 7.24 6.94 7.57 7.40 8.64 Allowance for credit losses as a % of serviced loans(period end)(5)......................... 2.35 1.92 1.60 2.00 2.04 1.82 2.83 Net charge-offs as a % of average serviced loans(2)(5).................................. 0.83 0.68 1.29 2.37 1.44 0.87 0.88 General and administrative expenses as a % of average serviced loans(5).................... 8.24 8.56 6.41 5.59 5.63 5.30 6.66 BALANCE SHEET DATA: Loans receivable................................ $39,870 $56,785 $ 66,279 $ 91,736 $103,865 $ 87,998 $ 87,835 Mortgage loans held for sale.................... -- -- -- 3,662 22,593 10,127 15,430 Total assets.................................... 53,562 70,359 84,279 109,448 144,931 123,531 146,657 Total indebtedness.............................. 48,492 64,840 76,195 95,015 129,950 105,884 128,334 Total shareholders' equity...................... 4,635 5,057 7,362 9,700 9,885 11,102 13,535
- --------------- (1) These amounts represent gains on the sale of Mortgage Loans and SBA Loan Participations. (2) Approximately 90% of the amount in 1994 relates to the writedown to market of certain foreclosed properties associated with speculative construction loans made by the Mortgage Loan Division prior to its acquisition by the Company. Speculative construction loans are no longer being made by the Company. (3) The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," effective January 1, 1993. The adoption of SFAS No. 109 had the cumulative effect of (i) increasing the Company's net income in 1993 by $113,000 and (ii) reducing the Company's effective tax rate from approximately 45% to approximately 22%. The Company recognized no deferred tax benefits of operating loss carryforwards as a result of the adoption of SFAS No. 109. (4) See "Supplemental Earnings Per Share" in the Summary Consolidated Financial and Operating Data on page 6. (5) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all securitized loans, and the unguaranteed portion of SBA Loans, but excludes the guaranteed portion of the SBA Loans for purposes of calculating the allowance ratio and the net charge-off ratio. Operating Data stated as a percentage of serviced loans (except period end data) for the six month periods ended June 30, 1995 and 1996 have been annualized. 18 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the preceding "Selected Consolidated Financial and Operating Data" and the other historical and pro forma financial statements of the Company, including the notes thereto, appearing elsewhere herein. As used herein, "Discontinued Operations" refers to the Company's Transportation Segment and Apparel Segment. Unless otherwise noted, the discussion contained herein relates to the continuing operations of the Company, which consist of its Financial Services Segment operations. GENERAL The Company is a diversified financial services company headquartered in Greenville, South Carolina which makes Mortgage Loans, Small Business Loans and Auto Loans. Prior to current management's acquisition of control of the Company in December 1990, the Company was primarily engaged in its Transportation Segment operations. Under previous management, the Company incurred significant losses which resulted in the NOL. In 1991, current management implemented a strategic plan to acquire profitable businesses which could utilize the NOL. Pursuant to such strategy, the Company acquired CII, Premier, EBC and Loan Pro$ in 1991 and YGI in 1993. In 1994, the Company made a strategic decision to divest all nonfinancial operations and to focus exclusively on the financial services industry. In accordance with such strategy, the Company completed its divestiture of its Apparel Segment and Transportation Segment operations in 1995. The Company's total serviced loans receivable increased from $106.9 million at December 31, 1993 to $156.5 million at December 31, 1994 to $213.9 million at December 31, 1995 and to $218.0 million at June 30, 1996. Mortgage Loans increased during all such periods principally as a result of an increase in the number of Mortgage Bankers originating loans through the Mortgage Loan Division, as well as increased loan volume from existing Mortgage Bankers. Small Business Loans increased during 1994 due to the opening of additional offices, as well as a result of an increase in the number of Commercial Loan Brokers which refer SBA Loans to the Small Business Loan Division. In 1995, the SBA adopted certain policies, such as the temporary implementation of a maximum SBA Loan amount of $500,000 and the temporary prohibition of the use of SBA Loan proceeds for certain refinancings (which temporary limitations were removed in October 1995). Consequently, Small Business Loan volume in 1995 was relatively unchanged from the 1994 level. Auto Loans increased during all such periods principally as a result of an increase in number of loan production offices and successful efforts at establishing additional dealer relationships. Approximately $125.3 million, or approximately 68% of the Company's Mortgage Loans in 1995, were originated through First Greensboro. Furthermore, for the six months ended June 30, 1996, First Greensboro originated approximately $80.9 million or 53% of the Company's Mortgage Loans. On June 1, 1996, First Greensboro terminated its strategic alliance agreement with the Company. Consequently, the Company's future Mortgage Loan originations will be less than if First Greensboro had not terminated this agreement (which was scheduled to expire December 31, 1997). Although First Greensboro generated a large percentage of the Company's Mortgage Loan originations, the Company believes that it will be able to replace such loan originations through (i) its other Strategic Alliance Mortgage Bankers, three of which entered into strategic alliance agreements with the Company in the second quarter of 1996 and (ii) its direct retail lending operation, the planned implementation of which was accelerated as a result of the termination of the First Greensboro agreement. The Company's retail lending operations were established in the second quarter of 1996, and currently originate retail loans through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and to open five new offices in the first quarter of 1997. Through these offices, the Company expects to target Mortgage Loan borrowers through a variety of marketing methods. During August 1996, retail originations totaled $5.0 million. The Company expects continued growth in its retail Mortgage Loan originations. 19 22 The following table sets forth certain data relating to the Company's loans at and for the periods indicated:
AT AND FOR THE SIX MONTHS AT AND FOR THE YEAR ENDED ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) MORTGAGE LOANS: Mortgage Loans originated.............. $ 20,536 $ 99,373 $192,800 $ 76,966 $153,802 Total Mortgage Loans (period end)...... 42,335 60,151 88,165 72,200 70,430 Total serviced Mortgage Loans (period end)................................ 42,335 60,151 88,165 72,200 70,430 Average Mortgage Loans(1).............. 42,397 51,243 74,158 65,493 92,188 Average serviced Mortgage Loans(1)..... 42,397 51,243 74,158 65,493 92,188 Average rate earned(1)................. 11.96% 12.37% 12.10% 11.92% 12.24% SMALL BUSINESS LOANS: Small Business Loans originated........ $ 37,867 $ 43,123 $ 39,560 $ 18,915 $ 30,583 Total Small Business Loans (period end)................................ 17,933 25,845 19,937 11,577 22,866 Total serviced Small Business Loans (period end)........................ 58,552 87,890 108,013 97,726 124,541 Average Small Business Loans(1)........ 13,956 21,889 22,891 24,422 20,839 Average serviced Small Business Loans(1)............................ 40,117 73,221 97,952 92,808 116,038 Average rate earned(1)................. 9.73% 11.29% 13.22% 14.31% 17.92% AUTO LOANS: Auto Loans originated.................. $ 5,230 $ 7,547 $ 17,148 $ 9,097 $ 10,052 Total Auto Loans (period end).......... 6,011 8,483 17,673 14,348 8,822 Total serviced Auto Loans (period end)................................ 6,011 8,483 17,673 14,348 21,865 Average Auto Loans(1).................. 5,179 7,247 13,078 10,811 12,138 Average serviced Auto Loans(1)......... 5,179 7,247 13,078 10,811 19,883 Average rate earned(1)................. 28.33% 28.28% 27.40% 26.50% 38.26% TOTAL LOANS: Total loans receivable (period end).... $ 66,279 $ 94,479 $125,775 $ 98,125 $103,265 Total serviced loans receivable (period end)................................ 106,898 156,524 213,851 184,274 217,982
- --------------- (1) Averages are computed using beginning and ending balances for the period presented, except that the 1996 averages are calculated based on the daily averages (rather than the beginning and ending balances). Average rate earned is calculated using both interest and servicing revenues. The average rates earned in 1996 for Small Business Loans and Auto Loans were higher than in prior years principally as a result of the servicing revenues received in connection with the securitization transactions. PROFITABILITY The principal components of the Company's profitability are (i) net interest and servicing revenues associated with the Company's loans receivable and serviced loans, which is the excess of interest and fees earned on its serviced loans receivable over interest expense paid on borrowed funds associated with such serviced loans receivable, (ii) gains resulting from the sale of its Mortgage Loans, and (iii) gains resulting from the sale of the SBA Loan Participations and the related servicing revenue. 20 23 The following table sets forth, for the periods indicated, certain information derived from the Company's Consolidated Financial Statements expressed as a percentage of total revenues.
FOR THE SIX MONTHS FOR THE YEAR ENDED ENDED DECEMBER 31, JUNE 30, ------------------------- ----------------- 1993 1994 1995 1995 1996 ----- ----- ----- ------ ------ Interest and servicing revenue................... 66.3% 59.9% 59.5% 59.2% 54.3% Gain on sale of loans............................ 30.0 35.4 34.9 35.2 40.8 Other revenues................................... 3.7 4.7 5.6 5.6 4.9 ----- ----- ----- ------ ------ Total revenues......................... 100.0% 100.0% 100.0% 100.00% 100.00% ===== ===== ===== ====== ====== Interest expense................................. 42.1% 32.3% 32.5% 30.6% 30.5% General and administrative expenses.............. 46.7 40.4 39.6 36.6 41.6 Provision for credit losses...................... 5.7 13.8 9.4 10.0 8.4 ----- ----- ----- ------ ------ Income from continuing operations before income taxes.......................................... 5.5 13.5 18.5 22.8 19.5 Income tax expense (benefit)..................... (1.6) 2.9 0.8 0.8 0.6 Minority interest................................ (0.2) (0.3) (0.3) (0.3) (0.1) Income (loss) from discontinued operations....... 2.1 2.6 (14.9) (6.0) -- Cumulative effect of change in accounting principle...................................... 0.9 -- -- -- -- ----- ----- ----- ------ ------ Net income............................. 9.9% 12.9% 2.5% 15.7% 18.8% ===== ===== ===== ====== ======
RESULTS OF OPERATIONS Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 Total revenues increased $5.9 million, or 48%, from $12.4 million for the six month period ended June 30, 1995, to $18.3 million for the six month period ended June 30, 1996. The increase in revenues resulted principally from increases in interest and servicing revenue and gain on sale of loans. Interest and servicing revenue increased $2.6 million, or 36%, from $7.3 million for the six month period ended June 30, 1995, to $9.9 million for the six month period ended June 30, 1996. This increase was due principally to the growth in the serviced loan portfolio of the Mortgage and Auto Loan Divisions. Interest and servicing revenue earned by the Mortgage Loan Division increased $1.8 million, or 37%, from $4.7 million for the six month period ended June 30, 1995, to $6.5 million for the six month period ended June 30, 1996. Interest and servicing revenue earned by the Auto Loan Division increased $700,000, or 44%, from $1.6 million for the six month period ended June 30, 1995, to $2.3 million for the six month period ended June 30, 1996. Gain on sale of loans increased $3.0 million, or 71%, from $4.5 million for the six month period ended June 30, 1995, to $7.5 million for the six month period ended June 30, 1996. The increase resulted principally from increased sales of Mortgage Loans associated with the increased loan originations of the Mortgage Loan Division. Other revenues increased $212,000, or 31%, from $692,000 for the six month period ended June 30, 1995, to $904,000 for the six month period ended June 30, 1996. Other revenues are comprised principally of origination and processing fees, insurance commissions and management fees paid in connection with the management of two venture capital funds by the Company. The increase in other revenues resulted principally from the increase in the Company's loan originations, as well as from increased management fees paid by the two venture capital funds managed by the Company. Total expenses increased $5.2 million, or 53%, from $9.5 million for the six month period ended June 30, 1995, to $14.7 million for the six month period ended June 30, 1996. Total expenses are comprised of interest expense, provision for credit losses, and general and administrative expenses. 21 24 Interest expense increased $1.8 million, or 47%, from $3.8 million for the six month period ended June 30, 1995, to $5.6 million for the six month period ended June 30, 1996. The increase was due principally to increased borrowings by the Mortgage and Auto Loan Divisions associated with increased loan originations. Borrowings attributable to the Mortgage Loan Division, both under the Credit Facilities and in connection with the sales of Debentures, totaled $108.1 million as of June 30, 1996, which represented an increase of 25%, compared to $86.8 million as of June 30, 1995. Borrowings attributable to the Small Business Loan Division totaled $16.0 million as of June 30, 1996, which represented an increase of 90%, compared to $8.4 million as of June 30, 1995. This increase in debt resulted principally from the loan origination activity for the six month period ended June 30, 1996, as compared to the same period in 1995. This increase in loan originations was due principally to the elimination in October 1995 of the SBA's $500,000 loan limitation and prohibition against refinancing existing loans. Borrowings attributable to the Auto Loan Division at June 30, 1996 totaled $4.2 million, which represented a decrease of 56%, compared to $9.5 million at June 30, 1995. This decrease was due to the repayment of bank debt with proceeds of the securitization of $16.1 million of Auto Loans in March 1996. Provision for credit losses increased $300,000, or 25%, from $1.2 million for the six month period ended June 30, 1995, to $1.5 million for the six month period ended June 30, 1996. The provision was made to maintain the general reserves for credit losses associated with loan growth, as well as to fund specific reserves for possible losses associated with particular loans. General and administrative expense increased $3.1 million, or 69%, from $4.5 million for the six month period ended June 30, 1995, to $7.6 million for the six month period ended June 30, 1996. This is a result of increased personnel costs in the Mortgage Loan Division due to the continued expansion in the servicing and underwriting areas, and increased expenses associated with the opening of three new loan production offices by the Auto Loan Division. General and administrative expense increased from 5.90% of average serviced loans at June 30, 1995, to 6.66% at June 30, 1996, principally as a result of the costs associated with the expansion of the Mortgage Loan Division's servicing operations in anticipation of increased originations of Mortgage Loans, including Mortgage Loans which may be sold servicing retained. Income from continuing operations increased $700,000, or 26%, from $2.7 million for the six month period ended June 30, 1995, to $3.4 million for the six month period ended June 30, 1996. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Total revenues increased $8.1 million, or 44%, from $18.2 million in 1994 to $26.3 million in 1995. The increase in revenues resulted principally from increases in interest and servicing revenue and gain on sale of loans. Interest and servicing revenue increased $4.7 million, or 43%, from $10.9 million in 1994 to $15.6 million in 1995. This increase was due principally to the growth in the serviced loan portfolio of the Mortgage Loan Division. Interest and servicing revenue earned by the Mortgage Loan Division increased $2.4 million, or 38%, from $6.3 million in 1994 to $8.7 million in 1995. Interest and servicing revenue earned by the Small Business Loan Division increased $382,000, or 15%, from $2.5 million in 1994 to $2.9 million in 1995. This increase resulted from continued growth in serviced SBA Loans, despite the temporary changes in the SBA policies which negatively impacted the Company's SBA Loan originations. Interest and servicing revenue earned by the Auto Loan Division increased $1.5 million, or 71%, from $2.1 million in 1994 to $3.6 million in 1995. The increase in interest and servicing revenue for the Auto Loan Division was due to the growth of its loan portfolio. Gain on sale of loans increased $2.7 million, or 42%, from $6.5 million in 1994 to $9.2 million in 1995. Gain on sale of loans was generated by the sale of Mortgage Loans and SBA Loan Participations. The increase resulted principally from increased sales of Mortgage Loans associated with the increased loan originations of the Mortgage Loan Division. Other revenues increased $627,000, or 74%, from $842,000 in 1994 to $1.5 million in 1995. Other revenues is comprised principally of origination and processing fees, insurance commissions and management 22 25 fees paid in connection with the management of the Venture Funds. The increase in other revenues resulted principally from the increase in the Company's loan originations, as well as from increased management fees paid by the Venture Funds. Total expenses increased $5.6 million, or 36%, from $15.8 million in 1994 to $21.4 million in 1995. Total expenses are comprised of interest expense, provision for credit losses and general and administrative expenses. Interest expense increased $2.6 million, or 44%, from $5.9 million in 1994 to $8.5 million in 1995. The increase was due principally to increased borrowings by the Mortgage and Auto Loan Divisions associated with increased loan originations. Total borrowings attributable to the Mortgage Loan Division, both under the Credit Facilities and in connection with the sale of Debentures, increased $27.7 million, or 36%, from $77.5 million at December 31, 1994 to $105.2 million at December 31, 1995. Interest expense in the Mortgage Loan Division increased $1.6 million, or 31% from $5.1 million in 1994 to $6.7 million in 1995. Total borrowings attributable to the Small Business Loan Division increased $456,000, or 3%, from $14.4 million at December 31, 1994 to $14.8 million at December 31, 1995. This increase in debt resulted principally from current year loan origination activity, partially offset by a reduction to outstanding debt due to the securitization transaction completed in June 1995. Interest expense in the Small Business Loan Division increased $553,000, or 117% from $471,000 in 1994 to $1.0 million in 1995. Total borrowings attributable to the Auto Loan Division increased $7.0 million, or 241%, from $2.9 million at December 31, 1994 to $9.9 million at December 31, 1995. Interest expense in the Auto Loan Division increased $500,000, or 189%, from $264,000 in 1994 to $764,000 in 1995. Provision for credit losses remained stable at $2.5 million in 1994 and in 1995. The provision was made to maintain the general reserves for credit losses associated with loan growth, as well as to fund specific reserves for possible losses associated with particular loans. In 1994, the majority of the provision resulted from the writedown to market value of certain foreclosed properties in the amount of $1.7 million. These foreclosed properties related principally to speculative construction loans made by CII prior to its acquisition by the Company. Speculative construction loans are no longer being made by the Company. General and administrative expense increased $3.0 million, or 40%, from $7.4 million in 1994 to $10.4 million in 1995 principally as a result of increased personnel costs of $1.7 million due primarily to the continued expansion in the servicing and underwriting areas, increased legal, audit and professional fees of $504,000 associated with the Company's stock tender offer in February 1995 and other corporate transactions, and increased expenses of $477,000 associated with the opening of three new loan production offices by the Auto Loan Division. General and administrative expense increased from 5.59% of average serviced loans in 1994 to 5.63% in 1995, principally as a result of the increase in the Mortgage Loan Division's servicing operations in anticipation of increased originations of Mortgage Loans, including Mortgage Loans which may be sold servicing retained. Income from continuing operations increased $2.8 million, or 155%, from $1.8 million in 1994 to $4.6 million in 1995. The improvement in income was due principally to increased growth and profitability of the Mortgage Loan Division. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Total revenues increased $6.2 million, or 52%, from $12.0 million in 1993 to $18.2 million in 1994. The increase in revenues resulted principally from increases in interest and servicing revenue and gain on sale of loans. Interest and servicing revenue increased $2.9 million, or 36%, from $8.0 million in 1993 to $10.9 million in 1994. This increase was due principally to growth in serviced loans receivable in the Mortgage and Small Business Loan Divisions. Interest and servicing revenue earned by the Mortgage Loan Division increased $1.2 million, or 24%, from $5.1 million in 1993 to $6.3 million in 1994. Interest and servicing revenue earned by the Small Business Loan Division increased $1.1 million, or 79%, from $1.4 million in 1993 to $2.5 million in 1994. 23 26 Gain on sale of loans increased $2.9 million, or 81%, from $3.6 million in 1993 to $6.5 million in 1994. Gain on sale of loans resulted from the sale of Mortgage Loans and SBA Loan Participations. The increase resulted principally from increased sales associated with the increased loan originations of the Mortgage and Small Business Loan Divisions. Other revenues increased $384,000, or 84%, from $458,000 in 1993 to $842,000 in 1994. Other revenues were comprised principally of management fees paid in connection with origination and processing fees, insurance commissions and the management of the Venture Funds. The increase in other revenues resulted principally from the increase in the Company's loan originations. Total expenses increased $4.3 million, or 38%, from $11.4 million in 1993 to $15.7 million in 1994. Total expenses are comprised of interest expense, provision for credit losses, and general and administrative expenses. This increase was due in part to the increase in interest expense as a result of increased borrowing to fund increases in loan volume at the Mortgage and Small Business Loan Divisions. The increase in total expenses also resulted from an increase in the provision for credit losses, which was associated with the writedown to market value of certain foreclosed properties. Interest expense increased $806,000, or 16%, from $5.1 million in 1993 to $5.9 million in 1994. The increase was due principally to increased borrowings by the Mortgage Loan Division and the Small Business Loan Division which were associated with increased loan originations. Total borrowings attributable to the Mortgage Loan Division, both under the Credit Facilities and in connection with the sale of Debentures, increased $7.6 million, or 11%, from $69.9 million at December 31, 1993 to $77.5 million at December 31, 1994. Interest expense in the Mortgage Loan Division increased $456,000, or 10% from $4.7 million in 1993 to $5.1 million in 1994. Total borrowings attributable to the Small Business Loan Division increased $12.7 million, or 747%, from $1.7 million at December 31, 1993 to $14.4 million at December 31, 1994. Interest expense in the Small Business Loan Division increased $359,000, or 321%, from $112,000 in 1993 to $471,000 in 1994. Provision for credit losses increased $1.8 million, or 262%, from $686,000 in 1993 to $2.5 million in 1994. This increase resulted from growth in the Company's loan portfolio and the $1.7 million writedown to market of certain foreclosed properties included in the Company's real estate held for sale. This unusually high writedown related principally to speculative construction loans made by CII prior to its acquisition by the Company. Speculative construction loans are no longer being made by the Company. General and administrative expense increased $1.7 million, or 30%, from $5.7 million in 1993 to $7.4 million in 1994, principally as a result of increased expenses of $251,000 associated with the opening of a new loan production office by the Auto Loan Division and $800,000 associated with the general expansion of the Mortgage and Small Business Loan Divisions' operations. General and administrative expense decreased from 6.41% of average serviced loans in 1993 to 5.59% in 1994, principally as a result of the increase in the volume of loan originations, principally in the Mortgage Loan and Small Business Loan Divisions. Income from continuing operations increased $968,000, or 117%, from $824,000 in 1993 to $1.8 million in 1994. The improvement in income was due principally to increased growth and profitability of the Mortgage Loan Division. DISCONTINUED OPERATIONS Transportation Segment In connection with the Company's strategic plan to focus its business efforts on the Financial Services Segment, the Company divested its Transportation Segment operations during 1994 and 1995. As a result, the Transportation Segment has been classified as discontinued operations, and, accordingly, the Company's Consolidated Financial Statements and the Notes related thereto segregate continuing and discontinued operations. The Transportation Segment had pre-tax income of $422,000 in 1993 and $2.8 million in 1994, and a loss of $333,000 in 1995. The profits in 1993 and 1994 resulted principally from gains on the sale of boxcars and other assets. Operating revenues for the Transportation Segment were $1.7 million in 1993, $1.4 million in 1994, and $390,000 in 1995. These decreases in revenues were due principally to the progressive sale of assets 24 27 associated with the Transportation Segment. The Company does not believe that there are material liabilities, contingent or otherwise, with respect to its Transportation Segment. Apparel Segment In connection with the Company's strategic plan to focus its business efforts on the Financial Services Segment, the Company sold all of the outstanding stock of YGI in exchange for a non-recourse note in September 1995, thereby divesting its Apparel Segment operations. In connection with the sale of YGI, the Company wrote off all amounts due the Company from YGI as intercompany debt and amounts due to the Company from the purchasers of the YGI stock, which amounts totaled $3.9 million, net of income taxes of $156,000. The Company wrote off these amounts due to its concern over a decline in YGI's operating profits and the related impact on YGI's and the purchasers' ability to repay these obligations. As a result of the sale of YGI, the operating results of the Apparel Segment have been classified as discontinued operations. The Company remains contingently liable for its guaranty of certain bank loans and certain trade accounts payable which at August 31, 1996 totaled $495,000 and were secured by substantially all of YGI's assets. Management does not anticipate any significant charges to future earnings as a result of these guarantees. The Apparel Segment had net losses of $163,000 in 1993, $31,000 in 1994 and $1.3 million in 1995. The net loss in 1994 was decreased by the receipt of $1.25 million in life insurance proceeds due to the death of YGI's President. The Apparel Segment had revenues of $11.5 million in 1993, $12.2 million in 1994, and $7.3 million in 1995. ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE 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 future losses of principal. At June 30, 1996, the total allowance for credit losses for the Company was $3.6 million, including $1.3 million reserved for potential losses relating to the Company's securitized SBA and Auto Loans. This compares to an allowance for credit losses at December 31, 1995 of $2.6 million, which included $773,000 reserved for potential losses relating to the Company's securitized SBA Loans. The increase in the allowance resulted from increases in the general allowance due to corresponding growth in the Company's serviced loans receivable, rather than in connection with specific loans or circumstances. The allowance for credit losses is a composite of the allowance for credit losses of the Mortgage Loan Division, the Small Business Loan Division and the Auto Loan Division as of June 30, 1996. The Mortgage Loan Division maintains an allowance for credit losses equal to approximately 1% of its loan portfolio, the Small Business Loan Division currently maintains an allowance for credit losses equal to approximately 3% of the unguaranteed portion of its loan portfolio, and the Auto Loan Division currently maintains an allowance for credit losses equal to approximately 5% of its loan portfolio. In addition, each subsidiary may establish a specific reserve for a particular loan that is deemed by management to be a potential problem loan where full recovery is questionable. 25 28 The table below summarizes certain information with respect to the Company's allowance for credit losses and the composition of charge-offs and recoveries for each of the periods indicated. SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
AT AND FOR THE AT AND FOR THE YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, ----------------------------- -------------- 1993 1994 1995 1996 ----- ------- ------- -------------- (DOLLARS IN THOUSANDS) Allowance for credit losses at beginning of period......................................... $ 976 $ 952 $ 1,730 $ 1,874 Total loans charged-off.......................... (787) (1,808) (1,718) (721) Total loans recovered............................ 77 76 155 103 ----- ------- ------- -------------- Net charge-offs........................ (710) (1,732) (1,563) (618) Provision charged to expense..................... 686 2,510 2,480 1,532 ----- ------- ------- -------------- Allowance for credit losses at end of period..... 952 1,730 2,647 2,788 Allowance for losses on asset-backed securities..................................... -- -- (773) (574) ----- ------- ------- -------------- Allowance for credit losses at end of period, net of allowance for losses on asset-backed securities..................................... $ 952 $ 1,730 $ 1,874 $ 2,214 ===== ======= ======= ===========
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 possible 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 possible credit losses or that additional increases in the allowance for possible credit losses will not be required. Management closely monitors portfolio delinquency to measure the quality of its loan portfolio and the potential for credit losses. The Company's policy is to place a loan on non-accrual status after it becomes 90 days past due, or sooner if the interest is deemed uncollectible. Collection efforts on charged-off loans continue until the obligation is satisfied or until it is determined such obligation is not collectible or the cost of continued collection efforts will exceed the potential recovery. Recoveries of previously charged-off loans are credited to the allowance for credit losses. 26 29 The following table sets forth the Company's allowance for credit losses 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 90 days past due.
AT AND FOR THE AT AND FOR THE YEAR SIX MONTHS ENDED DECEMBER 31, ENDED JUNE 30, ----------------------- -------------- 1993 1994 1995 1996 ----- ----- ----- -------------- ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS: Mortgage Loan Division.................................. 0.70% 1.23% 0.93% 1.38% Small Business Loan Division(1)......................... 4.26 4.11 4.62 4.90 Auto Loan Division(2)................................... 2.92 3.00 4.03 4.60 Total allowance for credit losses as a % of serviced loans................................ 1.60 2.00 2.04 2.83 NET CHARGE-OFFS AS A % OF AVERAGE SERVICED LOANS(3): Mortgage Loan Division(4)............................... 1.05% 2.96% 1.04% 0.03% Small Business Loan Division(1)......................... 0.05 0.21 1.48 0.39 Auto Loan Division(2)................................... 5.03 2.53 3.68 5.51 Total net charge-offs as a % of total serviced loans......................................... 1.29 1.37 1.44 0.88 LOANS RECEIVABLE PAST DUE 90 DAYS OR MORE AS A % OF SERVICED LOANS: Mortgage Loan Division.................................. 7.08% 2.96% 3.67% 3.93% Small Business Loan Division(1)......................... 0.09 -- 0.99 2.54 Auto Loan Division(2)(5)................................ 5.69 0.64 0.77 1.70 Total loans receivable past due 90 days or more as a % of total serviced loans................ 5.62 2.12 2.78 3.15 TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS PAST DUE 90 DAYS OR MORE:(6)............................ 28.44% 94.20% 73.21% 89.96%
- --------------- (1) The percentage is based on the total serviced unguaranteed Small Business Loans outstanding. (2) The percentage is based on the total serviced Auto Loans outstanding. (3) Average loans receivable have been determined by using beginning and ending balances for the period presented except that the 1996 averages are calculated based on the daily averages (rather than the beginning and ending balances). Net charge-offs as a % of Average Loans Receivable for the six month period ended June 30, 1996 have been annualized. (4) Approximately 90% of the amount in 1994 relates to the writedown to market of certain foreclosed properties associated with speculative construction loans made by the Mortgage Loan Division prior to its acquisition by the Company. (5) The amount in 1993 relates primarily to consumer loans on personal property made prior to the Company's acquisition of Premier. (6) The guaranteed portion of SBA Loans is excluded from the calculation. 27 30 The following table illustrates the Company's delinquency and charge-off experience with respect to Mortgage Loans, Small Business Loans and Auto Loans: MORTGAGE LOAN DELINQUENCIES AND CHARGE-OFFS
AT AND FOR THE SIX MONTHS AT AND FOR THE YEAR ENDED ENDED DECEMBER 31, JUNE 30, --------------------------- -------------- 1993 1994 1995 1996 ------- ------- ------- -------------- (DOLLARS IN THOUSANDS) Serviced Mortgage Loan delinquencies: 30-59 days past due.......................................... 8.09% 7.96% 7.75% 5.51% 60-89 days past due.......................................... 2.05 2.87 1.80 1.83 Over 90 days past due........................................ 7.08 2.96 3.67 3.93 In-substance foreclosure....................................... 6.32 3.87 1.26 2.43 Mortgage Loans charged-off, net, as a % of average Mortgage Loans........................................................ 1.05% 2.96% 1.04% 0.03%(1) Mortgage Loans charged-off, net................................ $ 446 $ 1,518 $ 771 $ 15 Mortgage Loans (period end).................................... 42,335 60,151 88,165 70,430 Average Mortgage Loans......................................... 42,397 51,243 74,158 92,188
SMALL BUSINESS LOAN DELINQUENCIES AND CHARGE-OFFS
AT AND FOR THE SIX MONTHS AT AND FOR THE YEAR ENDED ENDED DECEMBER 31, JUNE 30, --------------------------- -------------- 1993 1994 1995 1996 ------- ------- ------- -------------- (DOLLARS IN THOUSANDS) Serviced unguaranteed Small Business Loan delinquencies: 30-59 days past due.......................................... 1.10% 1.17% 2.97% 3.39% 60-89 days past due.......................................... -- -- 4.47 3.67 Over 90 days past due........................................ 0.09 -- 0.99 2.54 In-substance foreclosure....................................... -- -- 1.54 0.92 Serviced unguaranteed Small Business Loans charged-off, net, as a % of average serviced unguaranteed Small Business Loans.... 0.05% 0.21% 1.48% 0.39%(1) Serviced unguaranteed Small Business Loans charged-off, net.... $ 4 $ 31 $ 311 $ 56 Serviced unguaranteed Small Business Loans (period end)........ 11,238 17,852 24,184 32,219 Average serviced unguaranteed Small Business Loans............. 7,635 14,545 21,018 28,201 Serviced Small Business Loans (period end)..................... 58,552 87,890 108,013 124,541
AUTO LOAN DELINQUENCIES AND CHARGE-OFFS
AT AND FOR THE SIX MONTHS AT AND FOR THE YEAR ENDED ENDED DECEMBER 31, JUNE 30, --------------------------- -------------- 1993 1994 1995(3) 1996 ------ ------ ------- -------------- (DOLLARS IN THOUSANDS) Serviced Auto Loan delinquencies: 30-59 days past due......................................... 2.80% 2.29% 9.39% 9.55% 60-89 days past due......................................... 1.02 0.79 2.68 3.15 Over 90 days past due....................................... 5.69(2) 0.64 0.77 1.70 Serviced Auto Loans charged-off, net, as a % of average serviced Auto Loans......................................... 5.03% 2.53% 3.68% 5.51%(1) Serviced Auto Loans charged-off, net.......................... $ 260 $ 183 $ 481 $ 548 Serviced Auto Loans (period end).............................. 6,011 8,483 17,673 21,865 Average serviced Auto Loans................................... 5,179 7,247 13,078 19,883 Auto Loans (period end)....................................... 6,011 8,483 17,673 8,822
- --------------- (1) Net charge-offs for the six month period ended June 30, 1996 have been annualized. (2) Relates primarily to consumer loans on personal property made prior to the Company's acquisition of Premier. (3) In September 1995, the Company modified its financial reporting software package for the Auto Loan Division. Prior to that time, the Company's software did not report a loan as past due until the first day of the month after the loan became 30 days past due. The modified software package records loans past due during the month the loan becomes past due. Therefore, after modification of its software, the Company's loans that were past due shifted one past-due category (e.g., from current to 30 days past due, or from 60 to 90 days past due.) 28 31 LIQUIDITY AND CAPITAL RESOURCES The Company's business requires continued access to short- and long-term sources of debt financing and equity capital. The Company's cash requirements arise from loan originations and purchases, repayments of debt upon maturity, payments of operating and interest expenses, expansion activities and capital expenditures. The Company's primary sources of liquidity are cash flow from operations, sales of the loans it originates and purchases, proceeds from the sale of Debentures, borrowings under the Credit Facilities and proceeds from securitizations of loans. While the Company believes that such sources of funds will be adequate to meet its liquidity requirements, no assurance of such fact may be given. Shareholders' equity increased from $7.4 million at December 31, 1993, to $9.7 million at December 31, 1994, to $9.9 million at December 31, 1995, to $13.5 million at June 30, 1996. Each of these increases resulted principally from the retention of income by the Company. Cash and cash equivalents increased from $778,000 at December 31, 1994, to $1.3 million at December 31, 1995, to $22.7 million at June 30, 1996. Cash provided by operating activities increased from $7.7 million for the six month period ended June 30, 1995, to $53.0 million for the six month period ended June 30, 1996; cash used in investing activities increased from $14.7 million for the six month period ended June 30, 1995, to $30.0 million for the six month period ended June 30, 1996; and cash provided by (used in) financing activities decreased from $9.4 million for the six month period ended June 30, 1995, to $(1.4) million for the six month period ended June 30, 1996. The increase in cash provided by operations was due principally to the increase in loans sold during the first six month period of 1996 and the increase in net income. Cash used in investing activities was principally for the net increase in loans originated with the expectation of holding the loans until maturity. Cash used in financing activities was due principally to the repayment of the Credit Facilities, principally from the proceeds of the securitization of $16.1 million in Auto Loans in March 1996, partially offset by the cash provided by the sale of Debentures by the Mortgage Loan Division. At June 30, 1996, the Company's Credit Facilities were comprised of credit facilities of $90 million for the Mortgage Loan Division (the "Mortgage Loan Division Facility"), credit facilities of $35 million for the Small Business Loan Division (the "Small Business Loan Division Facility"), and credit facilities of $26 million for the Auto Loan Division (the "Auto Loan Division Facility"). Based on the advance rates contained in the Credit Facilities, at June 30, 1996, the Company had aggregate borrowing availability of $28.2 million under the Mortgage Loan Division Facility (none of which was outstanding), $16.2 million under the Small Business Loan Division Facility ($16.0 million of which was outstanding), and $6.7 million of aggregate borrowing availability under the Auto Loan Division Facility ($4.2 million of which was outstanding). The Mortgage Loan Division Facility and the Small Business Loan Division Facility both bear interest at the lender's prime rate, while the Auto Loan Division Facility bears interest at 0.75% over the lender's prime rate. The Credit Facilities have terms ranging from one to three years and are renewable upon the mutual agreement of the Company and the respective lender. The Credit Facilities contain a number of financial covenants, including, but not limited to, covenants with respect to certain debt to equity ratios, borrowing base calculations and minimum adjusted tangible net worth. The Credit Facilities also contain certain other covenants, including, but not limited to, covenants that impose limitations on the Company with respect to declaring or paying dividends, making payments with respect to certain subordinated debt, and making certain changes to its equity capital structure. The Company believes that it is currently in material compliance with these covenants. The Company sells substantially all of its Mortgage Loans originated through the Strategic Alliance Mortgage Bankers and the SBA Loan Participations. During 1994 and 1995, the Company sold $54.6 million and $127.6 million, respectively, of Mortgage Loans and $31.2 million and $25.4 million, respectively, of SBA Loan Participations. During the six months ended June 30, 1996, the Company sold $143.9 million of Mortgage Loans and $16.0 million of SBA Loan Participations. In June 1995, the Company securitized approximately $17 million of loans representing the unguaranteed portions of the SBA Loans and in March 1996, the Company securitized approximately $16 million of Auto Loans. Although securitizations provide liquidity, the Company has utilized securitizations principally to provide a lower cost of funds and reduce interest rate risk. Additional liquidity is not a material factor in the Company's determination to pursue securitizations. In connection with its SBA Loan and Auto Loan 29 32 securitizations, the Company has retained subordinated certificates representing approximately 10% of the transferred loans. The retained subordinated certificates totaled approximately $2.2 million, net of allowances, at June 30, 1996. See "Business -- Small Business Loan Division -- Securitization of SBA Loans." CII engages in the sale of Debentures to investors. The Debentures 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 Debentures is registered under South Carolina securities law and is exempt from Federal registration under the Federal intrastate exemption. CII conducts its operations so as to qualify for the safe harbor provisions of Rule 147 promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act"). At June 30, 1996, CII had an aggregate of $91.4 million of senior notes outstanding bearing a weighted average interest rate of 8.2%, and an aggregate of $16.7 million of subordinated debentures bearing a weighted average interest rate of 5.5%. Both senior notes and subordinated debentures are subordinate in priority to the Mortgage Loan Division Credit Facility. Substantially all of the Debentures have one year maturities. The Company expects that after the Offering, it will continue the offering of the Debentures. TAX CONSIDERATIONS -- THE NOL As a result of the operating losses incurred by the Company under prior management, the Company generated the NOL. At June 30, 1996, the amount of the NOL remaining and available to the Company was approximately $18 million. The NOL expires, to the extent that it is not utilized to offset income, in varying amounts annually through 2001. 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. Although the calculation of the "change of control" is factually difficult to determine, upon the consummation of this Offering, the Company believes that it will have had a maximum cumulative change of control of 33% during the relevant three-year period. No net deferred tax asset was recognized with respect to the NOL for the years ended December 31, 1993, 1994 and 1995 or for the six months ended June 30, 1996. A valuation allowance equal to the NOL was applied to the NOL in each of the years ended December 31, 1993, 1994 and 1995 and for the six months ended June 30, 1996. A valuation allowance of approximately $7.7 million was applied to the tax effect of the NOL for the year ended December 31, 1995. ACCOUNTING CONSIDERATIONS In connection with the Company's sale of SBA Loan Participations, the Company accounts for the servicing revenue in excess of that defined as "normal" servicing revenue in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 65 as excess servicing receivable. This asset is amortized against servicing revenue over the life of the loan to which it relates. In the event that the related loan is prepaid or the related borrower defaults on such loan, the balance of the excess servicing receivable is charged against servicing revenue in the period in which the prepayment or default occurs. The Company has engaged in securitizations of loans. The net interest rate spread received by the Company is recorded as excess servicing fees when received over the life of the transaction. The Company complies with the provisions of Emerging Issues Task Force ("EITF") 88-11 dealing with income recognition on the sales of loans. EITF 88-11 requires that the amount of gain or loss recognized on the sale of a portion of a loan be based on the relative fair values of the loan portion sold and the loan portion retained. For the Company, EITF 88-11 primarily impacts the amount of gain recognized by the Company on the sale of the SBA Loan Participations. As a result of the Company's accounting treatment described above, a portion of the cash premiums received are deferred and recognized as income over the remaining term of the retained unguaranteed portion of the loan. 30 33 IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS AND REGULATORY POLICIES In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The statement requires that long-lived assets and certain identified intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement is effective for the Company for the fiscal year ending December 31, 1996 and does not have a significant impact on the Company's financial statements. In May 1995, the FASB issued SFAS 122, "Accounting For Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting For Mortgage Banking Activities." This statement allows the capitalization of servicing-related costs associated with mortgage loans that are originated for sale, and to create servicing assets for such loans. Prior to this statement, originated mortgage servicing rights were generally accorded off-balance sheet treatment. The statement is effective for the Company for the fiscal year ending December 31, 1996. The adoption does not have a material effect on the Company's financial condition or results of operations. The FASB issued SFAS No. 123, "Accounting For Stock-based Compensation," in October 1995. This statement supersedes APB Opinion No. 25, "Accounting For Stock Issued To Employees" and establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. The statement also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. A new method of accounting for stock-based compensation arrangements with employees is established by SFAS 123. The new method is a fair value based method rather than the intrinsic value based method that is contained in APB Opinion 25. However, SFAS 123 does not require an entity to adopt the new fair value based method for purposes of preparing its basic financial statements. Entities are allowed (1) to continue to use the APB Opinion 25 method or (2) to adopt the SFAS 123 fair value based method. The selected method would apply to all of the entity's compensation plans and transactions. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The accounting requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995, though they may be adopted at issuance. The disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which this statement is initially adopted for recognizing compensation cost. The Company has elected to continue use of the method prescribed by APB 25 for recording stock-based compensation and will provide pro forma disclosures in its annual financial statements as prescribed by SFAS 123. In June 1996, the FASB issued SFAS 125 "Accounting For Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." FASB's objective is to develop consistent accounting standards for such transactions, including determining when financial assets should be considered sold and removed from the statement of financial position and when related revenues and expenses should be recognized. This approach focuses on analyzing the components of financial asset transfers and requires each party to a transfer to recognize the financial assets it controls and liabilities it has incurred and remove such assets from the statement of financial position when control over them has been relinquished. The statement is not expected to have a significant impact on the accounting practices of the Company and is generally effective for transactions entered into after December 31, 1996. INFLATION Unlike most industrial companies, the assets and liabilities of financial services companies such as the Company are primarily monetary in nature. Therefore, interest rates have a more significant effect on the Company's performance than do the general levels of inflation in the price of goods and services. While the 31 34 Company's noninterest income and expense and the interest rates earned and paid are affected by the rate of inflation, the Company believes that the effects of inflation are generally manageable through asset/liability management. See "-- Liquidity and Capital Resources" and "-- Interest Rate Sensitivity." INTEREST RATE SENSITIVITY Asset/liability management is the process by which the Company monitors and controls the mix and maturities of its assets and liabilities. The essential purpose of asset/liability management is to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities. The Company's asset/liability management varies by division. In general, with respect to the Mortgage Division, the Company sells substantially all of its Mortgage Loans on a monthly basis. Furthermore, commitments to a prospective borrower for a Mortgage Loan do not extend beyond 45 days. In the event that economic conditions necessitate a change in rate, such rate change is communicated to potential borrowers and the Company's published rates are adjusted. In addition, 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. With respect to the Small Business Loans, the Company only originates variable rate loans, which generally adjust on the first day of each calendar quarter. Therefore, interest rate risk exists for a maximum period of 60 days, due to the Small Business Loan Division Facility having a variable rate which adjusts monthly. With respect to the Auto Loans, the Company's rate spread is in excess of 15% and is fixed. The Company believes that this interest rate spread provides adequate margin to allow for any potential increase in interest rates. The Company's average interest rates earned for the year ended December 31, 1995 and for the six months ended June 30, 1996 were 14.04% and 15.76%, respectively, computed on a simple average monthly basis. The Company's average interest rates paid for the year ended December 31, 1995 and for the six months ended June 30, 1996 were 7.57% and 8.64%, respectively, which resulted in an average interest rate spread of 6.43% and 7.12%, respectively. 32 35 BUSINESS GENERAL Emergent Group, Inc. is a diversified financial services company headquartered in Greenville, South Carolina which originates, services and sells Mortgage Loans, Small Business Loans and Auto Loans. The Company also serves as investment manager for the Venture Funds. Substantially all of the Company's loans are made to non-prime borrowers. The Company commenced its lending operations in 1991 and has experienced significant loan growth over the past several years. During 1993, 1994 and 1995, the Company originated $63.6 million, $150.0 million and $249.5 million in loans, respectively. During the first six months of 1996, the Company originated $194.4 million in loans. Of the Company's loan originations in the first six months of 1996, $153.8 million were Mortgage Loans, $30.6 million were Small Business Loans and $10.0 million were Auto Loans. For the years ended December 31, 1993, 1994 and 1995, the Company's pre- tax income from continuing operations was $663,000, $2.4 million and $4.9 million, respectively. For the six months ended June 30, 1996, the Company's pre-tax income from continuing operations was $3.6 million. BUSINESS STRATEGY The Company's business strategy is to be a diversified financial services company that meets the credit needs of borrowers in what the Company believes to be under-served credit markets. The key elements of the Company's business strategy are as follows: -- Emphasis on Profitability Rather than Asset Growth. The Company will continue to focus on increasing earnings and return on equity, rather than asset growth. The Company believes that it can maximize its profitability by maintaining a "high velocity" capital strategy, whereby loans are made and sold within 10 to 40 days of origination. Recycling its capital in this manner enables the Company to recognize gains on the sale of its loans and quickly redeploy its capital, as well as reduce its interest rate risk, default risk and borrowing costs. In addition, the Company plans to continue to focus on high-margin loan products, while maintaining a low-cost operation. -- Decentralized Loan Approval. The Company believes that one of the most important factors to customers is the length of time between the lender's initial contact with the customer and the disbursement of loan proceeds. Accordingly, the Company emphasizes minimizing the length of time involved in the lending process, without sacrificing credit quality. It attempts to accomplish this goal, in part, by fostering an entrepreneurial, decentralized management culture and by maintaining up-to-date MIS systems for loan production, asset quality management and servicing. In the Mortgage Loan Division, the Company has an expedited review process with respect to loans submitted by the Strategic Alliance Mortgage Bankers, which results in a final credit determination generally within two business days. The Company also utilizes a decentralized approval process with respect to its retail Mortgage Loan operations which generally results in the lending decision being made within one business day. Also, with respect to SBA Loans, the Company uses its "Preferred Lender" status, as well as specially-trained officers who handle only SBA Loans, to shorten the loan approval process. Furthermore, the Small Business Loan Division maintains relatively autonomous regional offices which have significant underwriting capabilities and credit authority. -- Proactive Underwriting Process. The Company takes a proactive approach to its loan underwriting process. Because the Company's borrowers are generally non-prime borrowers, standardized credit scoring and underwriting criteria are not always meaningful in assessing a particular credit. Consequently, the Company attempts to employ experienced, trained underwriters who analyze each application independently and have the ability to craft a loan package which, where possible, meets the needs of the borrower but provides the Company with adequate security. Underwriting adjustments often suggested by Company underwriters include requiring a guarantor or co-borrower with better credit history and/or additional disposable income, lowering the loan-to-value ratio, increasing the interest rate, securing additional collateral and lowering the loan amount. -- Uniform Credit Guidelines and Procedures. The Company attempts to mitigate the risks associated with non-prime borrowers by utilizing uniform guidelines and procedures for evaluating credit applications in connection with its loan originations. This is designed to complement the Company's 33 36 decentralized management strategy by ensuring consistent credit quality. The Company's guidelines and procedures relate to such matters as the borrower's stability of residence, employment history, credit history, capacity to pay, total income, discretionary income and debt ratios, as well as the value of the collateral. With respect to its Small Business Loans, the Company's guidelines and procedures also emphasize factors pertaining to the business of the borrower, such as business plans, historical and projected financial statements and strength of management. -- Corporate Monitoring and Supervision of Operations. The Company has in place corporate policies designed to monitor and ensure continued quality of credit underwriting and servicing and to evaluate management in each of the Mortgage, Small Business and Auto Loan Divisions. Such policies include on-site audits of loan files and underwriting and servicing procedures at each branch office as well as continuous evaluation of general portfolio credit and performance quality, the effectiveness of business development efforts and branch office profitability. The Company's MIS systems provide management with reports on a continuous basis which contain operational information from each of the Mortgage, Small Business and Auto Loan Divisions, including the volume of loan originations, delinquency experience and foreclosure and repossession activities. GROWTH STRATEGY The Company's growth strategy is to continue to expand all areas of its lending operations, while emphasizing profitability and return on equity, rather than asset growth. The key elements in the Company's growth strategy are as follows: -- Retail Mortgage Lending. The Company expects to increase its Mortgage Loan originations through the expansion of its retail lending operations. The Company began its retail mortgage lending operations with the opening of an office in Indianapolis, IN in April 1996, and currently operates through this Indianapolis office, as well as offices in Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and to open five offices in the first quarter of 1997. The Indianapolis office generates loans in Indiana, Illinois, Michigan, Ohio and Kentucky and is responsible for its own loan processing, underwriting, origination, closing and loan documentation. The Company's Baton Rouge office is a loan processing and underwriting center for the loans originated through New Orleans office. However, in the future, the Company expects to open additional retail loan production offices which will have their loan processing, underwriting, closing and loan documentation performed through the Baton Rouge office. The Company expects that Mortgage Loan volume associated with its retail lending operation will continue to experience significant growth in the future. In addition, the Company's retail originations are generally more profitable than originations through Mortgage Bankers. The Company believes that the combination of its retail and wholesale strategies will increase the Company's penetration of the non-prime market. -- New Strategic Alliances in the Mortgage Loan Division. The Company will attempt to continue to increase the number of Mortgage Bankers with whom it has a business relationship and to identify and establish additional strategic alliances with Mortgage Bankers. The Company offers additional services to these Strategic Alliance Mortgage Bankers, such as providing capital through arrangements similar to warehouse lending and additional MIS and accounting services, which are designed to increase their loan originations. The Company expects to establish two to three additional strategic alliances per year over the next three years. The Company does not expect to have contractual arrangements regarding future loan originations with any Mortgage Bankers except for the Mortgage Bankers with whom the Company has strategic alliance agreements. The Company has a minority equity interest, generally ranging from 5% to 10%, in certain of the Strategic Alliance Mortgage Bankers, which enhances the Company's growth potential. -- Increase in Small Business Lending. The Company plans to expand its Small Business Loan operations by utilizing its Preferred Lender status to minimize its response time and maximize its SBA Loan production. The Company has been designated as a Preferred Lender by the SBA, which gives the Company the authority to approve a loan and to obligate the SBA to guarantee the loan without 34 37 submitting an application to the SBA for credit review. Preferred Lender status will enable the Company to enter more easily additional SBA districts in 1996 and future years. The Company also expects to increase its Small Business Loan originations through expansion of its asset-based lending operation, which was begun in April 1996. This asset-based lending operation currently operates through an Atlanta office. However, the Company expects to open additional offices during 1996 and 1997. -- Additional Offices. The Company plans to increase its penetration of existing markets and expand geographically by opening additional offices. To date in 1996, the Company has opened three Mortgage Loan offices, one Small Business Loan office, and one Auto Loan office. The Company expects that these additional offices will begin to produce significant loan volume in the fourth quarter of 1996. In the future, the Company will continue to target for expansion areas which have favorable demographics or where the Company has identified qualified individuals who are available to effectively manage additional locations. -- Selected Acquisitions. The Company intends to pursue the acquisition of businesses in the financial services industry. The Company believes that each of the non-prime Mortgage Loan, Small Business Loan and Auto Loan markets will present significant opportunities for growth and expansion through acquisitions. Although the Company is engaged from time to time in discussions relating to possible acquisitions, no agreements or understandings relating to any acquisitions are presently pending. MORTGAGE LOAN DIVISION Overview The Company's mortgage lending activities consist primarily of originating, selling and servicing Mortgage Loans which are secured by owner-occupied, single-family residential properties. Substantially all of the Company's Mortgage Loans are made to refinance existing mortgages and for debt consolidation, home improvements, educational expenses and a variety of other purposes. The Mortgage Loans generally are secured by a first lien, have principal balances ranging from $25,000 to $100,000, and bear fixed interest rates ranging in 1995 and the first six months of 1996 from 9% to 16% per annum. Most Mortgage Loans provide for equal monthly payments over their terms, which generally range from 15 to 30 years. Substantially all of the Mortgage Loans are made to non-prime borrowers. These borrowers generally have limited access to credit or are considered to be credit-impaired by conventional lenders such as thrift institutions and commercial banks. These conventional lending sources generally impose stringent and inflexible loan underwriting guidelines and generally require a longer period of time, as compared to the Company, to approve and fund loans. The Company believes that its customers require or seek a high degree of personalized service and swift response to their loan applications. Furthermore, the Company believes that its customers generally focus more on the amount of the monthly payment, rather than the interest rate charged. Consequently, the Company's customers many times are willing to pay higher interest rates, assuming the amount of the monthly payment is otherwise acceptable. Furthermore, because the Company's customers are generally credit-impaired for one or more reasons, the customers are not in a position to obtain better rates from traditional lending institutions. The Mortgage Loan Division has experienced significant growth over the past several years. For the years ended December 31, 1993, 1994 and 1995, Mortgage Loan originations totaled $20.5 million, $99.4 million and $192.8 million, respectively. For the six months ended June 30, 1996, Mortgage Loan originations totaled $153.8 million. In 1995, the Company diversified its Mortgage Loan products to include second mortgage primary-financing-only loans made to finance closing costs associated with first Mortgage Loans made by the Company ("PFO Loans"). PFO Loans have principal amounts ranging from $5,000 to $15,000 and, in the first six months of 1996, had a weighted average interest rate of approximately 16% per annum. All of the Company's PFO Loans are sold on a nonrecourse basis in the secondary market. During 1995 and the first six months of 1996, the Company originated $9.0 million and $8.1 million, respectively, of PFO Loans. 35 38 The Company originates Mortgage Loans through Mortgage Bankers primarily located in South Carolina, North Carolina and Florida and through retail offices which make Mortgage Loans directly to borrowers. Officers in the Mortgage Loan Division headquarters in Pickens, SC are responsible for maintaining relationships with the Mortgage Bankers. The Mortgage Loan Division is managed by a Chief Operating Officer who oversees other senior division officers who are responsible for the various aspects of the operations of the Mortgage Loan Division such as underwriting, servicing, loan origination and sale of Debentures. Each loan production area, which includes retail production, wholesale production through Strategic Alliance Mortgage Bankers, and wholesale production through other Mortgage Bankers, is managed by a separate senior Mortgage Loan Division officer. Industry Although no official estimates exist regarding the size of the non-prime mortgage industry, the Company believes that the non-prime mortgage market is approximately $240 billion. The Company believes that the non-prime mortgage industry is highly fragmented, with no single lender having a significant portion of the market. However, many of the providers of financing to the non-prime mortgage industry are publicly-traded specialty financial companies. Non-prime borrowers may be generally considered "credit-impaired" because their loan application is characterized by one or more of the following: (1) inadequate collateral, (2) insufficient debt coverage, (3) problems with employment history, (4) limited or unfavorable credit history or (5) self-employment. Certain lenders in the non-prime market may internally classify borrowers (generally with letters from A to D) according to the perceived credit quality of the loan. However, the Company does not believe that there are uniform guidelines among various non-prime lenders with respect to the classification of borrowers. See "Business -- Mortgage Loan Division -- Underwriting Classifications." Under the Company's underwriting guidelines, Mortgage Loans are generally classified into four categories: A, B, C and D. These categories are further divided into subcategories, depending on various underwriting criteria. These underwriting standards are under continual review and are subject to revision by Company management. The majority of the Company's borrowers do not fit into one category. Rather, such borrowers generally have some characteristics of one or more classifications. Accordingly, there is a significant degree of subjectivity in determining which rates and other loan terms will be offered. The following is a general description of the basic categories in the Company's Mortgage Loan underwriting process as currently in effect. Under the Company's "A" category for owner-occupied Mortgage Loans, the prospective borrower generally can have no more than two payments on mortgage debt paid 30 days late during the preceding 12 month period, a debt-to-income ratio of no more than 50% and no bankruptcy, judgment or liens within the preceding 2 years. The maximum loan amount is $350,000. Loan-to-value ratios range from 65% to 90%, are determined by the loan amount and credit history which, in turn, determines the interest rate charged on the loan. In the case of no income-qualifier loans, the loan-to-value ratio is 70% and the potential borrower must be able to provide proof of a minimum two years of self-employment. Loan applicants with less favorable credit ratings generally are offered loans with higher interest rates and lower loan-to-value ratios than applicants with more favorable credit ratings. Under the Company's "B" category for owner-occupied Mortgage Loans, the prospective borrower can have no more than three payments on mortgage debt paid 30 days late during the preceding 12 month period, a debt-to-income ratio of no more than 50% and no bankruptcy within the preceding 24 month period with a reestablished credit history. The maximum loan amount is $350,000. Loan-to-value ratios range from 65% to 85%, are determined by the loan amount and credit history which, in turn, determines the interest rate charged on the loan. In the case of no income-qualifier loans, the loan-to-value ratio cannot exceed 70% and the potential borrower must be able to provide proof of self-employment for a minimum of two years. No income-qualifier loan applicants must also have had no bankruptcy within the past 24 month period and have reestablished their credit history. 36 39 Under the Company's "C" category for owner-occupied Mortgage Loans, the prospective borrower can have no more than four payments on mortgage debt paid 30 days late during the preceding 12 month period or no more than one payment on mortgage debt paid 60 days late during the preceding 12 month period, a debt- to-income ratio of no more than 55% and no bankruptcy within the preceding 24 month period with a reestablished credit history. The maximum loan amount is $250,000. Loan-to-value ratios range from 70% to 80%, are determined by the loan amount and credit history which, in turn, determines the interest rate charged on the loan. The potential borrower may have had some payments 30 days or 60 days late on revolving or installment debt, but must bring such debt current prior to the loan being made or with the proceeds of the Mortgage Loan. Under the Company's "D" category for owner-occupied Mortgage Loans, the prospective borrower can have no payments on mortgage debt more than four months past due, a debt-to-income ratio of no more than 55% and no active bankruptcy. The potential borrower can have no foreclosures in their credit history. The maximum loan amount is $250,000. The loan-to-value ratio ranges from 65% to 70%, is determined by the loan amount and credit history which, in turn, determines the interest rate charged on the loan. The borrower must bring any delinquent installment or revolving debt current prior to the loan being made or with the proceeds of the loan, except that the borrower cannot use in excess of 10% of the proceeds or $10,000, whichever is smaller, to bring the delinquent debt current. During 1995, approximately 37% of the Company's Mortgage Loans were classified as "A" loans, 37% were "B" loans, 20% were "C" loans and 6% were "D" loans. During the first six months of 1996, approximately 45% of the Company's Mortgage Loans were classified as "A" loans, 37% were "B" loans, 15% were "C" loans and 3% were "D" loans. Mortgage Loan Origination The Company originates Mortgage Loans both on a retail and wholesale basis. Retail Mortgage Loans are originated by persons employed by the Company, while wholesale Mortgage Loans are generally originated through Mortgage Bankers. The Company currently originates Mortgage Loans on a retail basis through offices in Indianapolis, IN, Baton Rouge, LA and New Orleans, LA. The Company expects to open retail lending operations in Greenville, SC and Phoenix, AZ during the fourth quarter of 1996 and offices in Portland, OR, Atlanta, GA, Nashville, TN, Columbia, SC and Charlotte, NC in the first quarter of 1997. The Company began its retail Mortgage Loan operation in April 1996 in connection with the establishment of its Indianapolis office, which operates under the tradename "HomeGold." This office originates loans in Indiana, Illinois, Michigan, Ohio and Kentucky and is responsible for its own loan processing, underwriting, origination, closing and loan documentation. The Company's Baton Rouge office is a loan processing and underwriting center for the loans originated through the New Orleans office. In the future, the Company expects to open additional retail loan production offices which will have their loan processing, underwriting, closing and loan documentation performed through the Baton Rouge office. The Company utilizes telemarketing and direct mail services in connection with its retail origination activities. The Company also plans to use television advertising in connection with future retail loan origination efforts. The Company expects that Mortgage Loan volume associated with its retail lending operation will continue to experience significant growth in the future. To date, substantially all of the Mortgage Loans have been originated on a wholesale basis by the Company through Mortgage Bankers with whom the Company has a relationship (although the Company does not have contractual arrangements regarding future loan origination with any Mortgage Bankers except for the Strategic Alliance Mortgage Bankers). As a wholesale originator of Mortgage Loans, the Company funds the Mortgage Loans at closing, although the Mortgage Loans may be closed in either the Company's name or in the name of the Mortgage Banker with the Company taking an assignment of the Mortgage Banker's interest. During 1994 and 1995 and the first six months of 1996, the Company originated loans through approximately 65, 120 and 225 Mortgage Bankers, respectively, which are located principally in North Carolina, South Carolina and Florida. Of the approximately 120 and 225 Mortgage Bankers who were responsible for origination of Mortgage Loans in 1995 and the first six months of 1996, the Strategic Alliance 37 40 Mortgage Bankers accounted for approximately $145 million, or 75%, of the Company's Mortgage Loans originated in 1995 and approximately $126.1 million, or 62%, of the Company's Mortgage Loans originated in the first six months of 1996. In 1994, the Company began seeking to enter into strategic alliance agreements with Mortgage Bankers that were believed by the Company to be able to consistently generate large volumes of quality mortgage loans. These strategic alliance agreements require that the Strategic Alliance Mortgage Bankers must first offer to the Company the right to fund all of their loans which meet the Company's underwriting criteria before offering such loans to other parties. The Strategic Alliance Mortgage Bankers are accorded additional services, information and authority by the Company, including the provision of capital through arrangements similar to warehouse lending and the provision of additional MIS and accounting services. These strategic alliance agreements have terms ranging from three to five years and are scheduled to terminate beginning in August 1999. The Company believes that these strategic alliances are an important factor in providing a higher level of customer service. The Company currently has five Strategic Alliance Mortgage Bankers. The Company has a minority equity interest in certain of the Strategic Alliance Mortgage Bankers, which enhances the Company's growth potential. On June 1, 1996, First Greensboro terminated its strategic alliance agreement with the Company in connection with the pending purchase of First Greensboro by a third party financial institution. As a result of the termination of this strategic alliance contract, the Company's Mortgage Loan originations will be materially less than would otherwise have been the case. See "Risk Factors -- Termination of First Greensboro Agreement." The Company plans to increase the number of Mortgage Bankers with which it is affiliated. The Company also seeks to identify specific Mortgage Bankers either from its group of affiliated Mortgage Bankers or from unaffiliated Mortgage Bankers and enter into strategic alliance agreements with these parties. During 1994, 1995 and the first six months of 1996, Mortgage Loan originations by state were as follows:
FOR THE SIX MONTH PERIOD ENDED JUNE FOR THE YEAR ENDED DECEMBER 31, 30, ---------------------------------------- ------------------ STATE 1994 % 1995 % 1996 % - ----------------------------------- ------- ----- -------- ----- -------- ----- (DOLLARS IN THOUSANDS) North Carolina..................... $49,100 49.4% $ 97,400 50.5% $ 54,600 35.5% South Carolina..................... 42,600 42.9 37,600 19.5 33,700 21.9 Florida............................ -- -- 16,200 8.4 26,000 16.9 Arkansas........................... 3,600 3.6 9,700 5.0 5,200 3.4 Virginia........................... 400 0.4 9,600 5.0 12,600 8.2 Tennessee.......................... 1,900 1.9 8,800 4.6 6,200 4.1 All other states (13 states)....... 1,800 1.8 13,500 7.0 15,500 10.0 ------- ----- -------- ----- -------- ----- Total.................... $99,400 100.0% $192,800 100.0% $153,800 100.0% ======= ===== ======== ===== ======== =====
Application and Approval Process In the application and approval process associated with the Company's retail Mortgage Loan operations, a Company loan officer in a retail loan origination office obtains an initial loan application, which is processed through the underwriting department associated with the particular loan origination office. The Company loan officer is responsible for securing all necessary underwriting information associated with such application. 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 forwarded to an attorney or title company for closing. The application and approval process for wholesale Mortgage Loans depends upon the specific Mortgage Bankers involved in the origination process. Loans originated through the Strategic Alliance Mortgage Bankers are initially evaluated and underwritten by the officers of the Strategic Alliance Mortgage Bankers, who are required to follow the Company's underwriting procedures. After the Strategic Alliance Mortgage Bankers have gathered the necessary underwriting information and evaluated and approved the application, 38 41 summary loan information and a funding request is forwarded to the Company for review on an expedited basis, which review is generally completed within two business days. After approval by the Company, the loan package is forwarded to an attorney or title company for closing. In the origination process, the Strategic Alliance Mortgage Banker makes standard representations and warranties with respect to the Mortgage Loan, as well as a representation that the Mortgage Loan meets the Company's underwriting criteria. With respect to loans originated through Mortgage Bankers other than the Strategic Alliance Mortgage Bankers, the necessary underwriting information is gathered by both the Mortgage Banker and the Mortgage Loan Division's credit department. After review and evaluation, an officer in the credit department makes the final credit decision. The Company attempts to grant approvals of loans quickly to borrowers meeting the Company's underwriting criteria. 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, request additional collateral, or request that the borrower obtain a co-borrower or guarantor. Mortgage Loans are generally made in amounts ranging from $25,000 to $100,000, with the maximum amount generally being $200,000. In limited instances, Mortgage Loans are made in excess of this limit. However, such loans must be approved by a senior officer and have two independent appraisals. The maximum amount that the Company will lend to a particular borrower is determined by a number of factors including the applicant'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. Creditworthiness is assessed through a variety of means, including calculating standard debt to income ratios, examining the applicant's credit history through standard credit reporting bureaus, verifying an applicant's employment status and income, and checking the applicant's payment history with respect to the first mortgage, if any, on the property. The Company uses several procedures to verify information obtained from an applicant. The applicant's outstanding balance and payment history on any senior mortgage is verified by calling the senior mortgage lender. In order to verify an applicant's employment status and income, the Company generally obtains a written statement from the applicant's employer. In the case of owner-occupied property, the loan amount generally may not exceed 80% of the appraised value of the property, less any balance outstanding on any existing mortgages. In non-owner-occupied properties, the loan amount generally may not exceed 75% of the appraised value of the property, less any balance outstanding on any existing mortgages. In limited instances, the Company makes loans which have loan-to-value ratios greater than 80%. However, such loans are generally made only to borrowers deemed by the Company to have a higher degree of creditworthiness (i.e., superior credit history, stable, high-income employment and low gross debt ratios), when compared to its typical borrowers. It is the Company's current policy that such loans do not exceed $250,000. Approximately 90% of the Company's Mortgage Loans are secured by owner-occupied property. The Company generally requires a physical inspection of collateral by a Company officer if the loan is under $15,000 or an independent appraisal if the loan is greater than $15,000. Loans in excess of $200,000 require two independent appraisals. The Company generally requires title insurance for real estate loans in excess of $15,000. For real estate loans less than $15,000, the Company generally requires an insured certificate of title from a title abstract company. The Company generally requires real estate improvements to be fully insured as to fire and other commonly insured-against risks and regularly monitors its loans to ensure that insurance is maintained for the period of the loan. In connection with Mortgage Loans, the Company collects nonrefundable underwriting fees, late charges and various other fees, depending on state law. Other fees charged, where allowable, include those related to credit reports, lien searches, title insurance and recordings, prepayment fees and appraisal fees. Sale of Mortgage Loans The Company began selling Mortgage Loans in 1994 and for the years ended December 31, 1994 and 1995, the Company sold $54.6 million and $127.6 million, respectively, of Mortgage Loans. For the first six 39 42 months of 1996, the Company sold $143.9 million of Mortgage Loans. The Mortgage Loans to be sold are generally packaged in pools of approximately $10 million and offered to several potential purchasers for the purpose of obtaining bids. After obtaining bids, the pool is generally sold to the highest bidder. Historically, the Mortgage Loans have been sold servicing released (i.e., without retention of the servicing rights and associated revenues) and on a non-recourse basis, with customary representations and warranties. In connection with the sale of Mortgage Loans, the Mortgage Loan Division receives premiums generally ranging from 4% to 8% of the principal amount of the Mortgage Loan being sold, depending on prevailing interest rates and the term of the loan. During 1994 and 1995, the weighted average premiums on the Mortgage Loans sold were 5.9% and 7.0%, respectively. For the years ended December 31, 1994 and 1995, gains recognized by the Company in connection with the sale of Mortgage Loans were $2.4 million and $6.0 million, respectively. For the six months ended June 30, 1996, gains recognized by the Company in connection with the sale of Mortgage Loans were $5.8 million. Purchasers of Mortgage Loan pools are typically large financial institutions, many of which purchase the Mortgage Loans for inclusion in larger pools of loans which, in turn, are sold to institutional investors. Mortgage Loan Servicing The Company services the Mortgage Loans that are not sold, but historically has not retained the servicing on Mortgage Loans sold. However, in the future, the Company may retain servicing on Mortgage Loans sold. Servicing includes collecting payments from borrowers, accounting for principal and interest, contacting delinquent borrowers, ensuring that insurance is in place, monitoring payment of real estate property taxes, and supervising foreclosures and bankruptcies in the event of unremedied defaults. Delinquencies and Collections Collection efforts generally begin when an account is over seven days past due. At that time, the Company attempts to contact the borrower to determine the reason for the delinquency and cause the account to become current. After an account becomes 15 days past due, weekly letters are sent to the borrower. In general, at 30 days past due, a right to cure letter is sent; at 61 days a five-day demand letter is sent; and at 68 days, the account is turned over to an attorney. If the status of the account continues to deteriorate, the Company undertakes an analysis to determine the appropriate action. In limited circumstances, when a borrower is experiencing difficulty in making timely payments, the Company may temporarily adjust the borrower's payment schedule without changing the loan's delinquency status. 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 90 days past due in accordance with its original terms, it is placed on non-accrual status and foreclosure proceedings are generally initiated. In connection with such foreclosure, the loan and the facts surrounding its delinquency are reviewed, and the underlying property may be reappraised. 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 real estate owned portfolio, which is carried at the lower of carrying value or appraised fair market value less estimated cost to sell, totaled $3.1 million at June 30, 1996. SMALL BUSINESS LOAN DIVISION Overview The Company formed EBC in December 1991 for the purpose of acquiring substantially all of the assets, including the SBA license, of an inactive SBA lender. EBC is one of approximately 12 non-bank entities in the United States possessing a license to make SBA Loans. Substantially all of the Company's SBA Loans are made under Section 7(a) ("Section 7(a) Loans") of the Small Business Act of 1953, as amended (the "Small Business Act"). However, the Company, through a subsidiary, began making loans in 1995 pursuant to Section 504 ("Section 504 Loans") of the Small Business Act (the "Section 504 Loan Program"). 40 43 During 1993, 1994 and 1995, the Company originated $37.9 million, $43.1 million and $39.6 million, respectively, in Section 7(a) Loans. During the first six months of 1996, the Company originated $23.9 million in Section 7(a) Loans. Management believes that during the SBA's fiscal year ended September 30, 1995, the Company was among the ten largest SBA Loan lenders in the nation based on principal amount of Section 7(a) Loans approved by the SBA. During 1995 the Company originated approximately $3 million in Section 504 Loans and approximately $2 million in the six month period ended June 30, 1996. The Company expects that it will continue to focus its SBA lending efforts on Section 7(a) Loans, although future regulatory changes could alter such decision. The Small Business Loan Division's SBA lending operation originates loans through a total of seven offices, five of which are staffed by Company employees and two of which are staffed by independent loan correspondents. The Company's SBA lending operations are divided into four regions: (1) the Southeastern Region, which is headquartered in Greenville, SC, (2) the Gulf Coast Region, which is headquartered in Panama City, FL, (3) the Central States Region, which is headquartered in Wichita, KS, and (4) the Rocky Mountain Region, which is headquartered in Denver, CO. The Small Business Loan Division also makes Asset-based Small Business Loans to small- to medium-sized businesses in the southeastern United States. These Asset-based Small Business Loans are structured as revolving credit lines for working capital purposes and are generally secured by a first lien in accounts receivable, inventory and equipment. This asset-based lending operation was begun by the Company in April 1996 in Atlanta, GA and it currently originates loans through this Atlanta office. However, the Company expects to open additional offices in Denver, CO and Philadelphia, PA during the fourth quarter of 1996 and the first quarter of 1997. For the six months ended June 30, 1996, loans originated by this asset-based lending operation totaled approximately $4.6 million. The Small Business Loan Division is managed by three Presidents who are responsible for the three separate small business lending areas: SBA lending, asset-based lending and the Venture Funds. The President of the SBA lending operation oversees four regional vice presidents who are responsible for the day-to-day operations within their respective regions. The President is also responsible for the servicing operations of the SBA lending operation. Small Business Loan Customers The Company's Small Business Loan customers are commercial businesses which are generally considered to be non-prime borrowers insofar as they generally do not have access to traditional bank financing. Such financing may be unavailable because of a variety of factors, including inadequate collateral, insufficient debt coverage, lack of management experience or an unfavorable credit history. The Company's SBA Loans are made only to potential borrowers who meet defined criteria of the SBA as to the definition of a "small business." These criteria differ based upon the industry in which the potential borrower operates. The portion of the loan guaranteed by the SBA, the term of the loan and the range of interest rates charged are also defined by the SBA. The Company underwrites SBA loans on these SBA criteria, as well as by assessing the available collateral, personal guarantees, and projected earnings and cash flow of the small business on a case by case basis. SBA Loan Program Participation Section 7(a) Loan Program. Section 7(a) Loans are term loans made to commercial businesses which qualify under SBA regulations as "small businesses." These loans are primarily for the acquisition or refinancing of property, plant and equipment, working capital or debt consolidation. The SBA administers three levels of lender participation in its Section 7(a) Loan program. Under the first level of lender participation, known as the Guaranteed Participant Program, the lender gathers and processes data from applicants and forwards it, along with its request for the SBA's guaranty, to the local SBA office. The SBA then completes an independent analysis and makes its decision on the loan application. SBA turnaround time on such applications can vary greatly, depending on its backlog of loan applications. Under 41 44 the second level of lender participation, known as the Certified Lender Program, the lender (the "Certified Lender") gathers and processes the application and makes its request to the SBA, as in the Guaranteed Participant Program procedure. The SBA then performs a review of the lender's credit analysis on an expedited basis, which review is generally completed within three working days. The SBA requires that lenders originate loans meeting certain portfolio quality and volume criteria before authorizing lenders to participate as Certified Lenders. Authorization is granted by the SBA on a district-by-district basis. Under the third level of lender participation, known as the Preferred Lender Program, the lender has the authority to approve a loan and to obligate the SBA to guarantee the loan without submitting an application to the SBA for credit review. However, the lender (the "Preferred Lender") is required to secure confirmation from the SBA that the applicant qualifies as a small business. Such confirmation generally takes less than 24 hours. The standards established for participants in the Preferred Lender Program, the SBA's highest designation, are more stringent than those for participants in the Certified Lender Program and involve meeting additional portfolio quality and volume requirements. The Company has been designated a Preferred Lender by the SBA in 27 of the 65 SBA districts. These districts are all of the SBA districts in which the Company is deemed to be an "active" lender by the SBA. Virtually all of the Company's SBA Loans are made in these districts. The determination of whether a lender attains Preferred Lender status is determined by the Associate Administrator for Financial Assistance (the "AA/FA"). In making its decision, the SBA considers whether the lender (1) has the required ability to process, close, service and liquidate loans; (2) has the ability to develop and analyze complete loan packages; and (3) has a satisfactory performance history with the SBA. The AA/FA may suspend or revoke Preferred Lender status for reasons such as loan performance unacceptable to the SBA, failure to make the required number of loans under the expedited procedures, or violations of applicable statutes, regulations or published SBA policies and procedures. Section 504 Program. The Section 504 Program differs from the Section 7(a) Loan program in both structure and size of loans. Section 504 loans generally range in principal amount from $1.0 million to $2.5 million and are made in connection with a state chartered certified development corporation. Section 504 Loans are generally commercial development-related loans which, in the case of construction loans, are initially funded entirely by the SBA-licensed lender (such as the Company). Upon completion of the construction phase of the project, a significant portion of the total loan (generally approximately 55%) is repaid by the certified development corporation. This repayment is funded by the SBA through the purchase of a fixed rate debenture issued by the certified development corporation. This purchased portion of the loan is subordinated to the first mortgage loan (held by the SBA-licensed lender). Consequently, the SBA-licensed lender has a loan which has a very favorable loan-to-value ratio. The acquisition of existing properties is generally funded 50% by the SBA-licensed lender (in a first mortgage position), 40% by the certified development corporation (in a subordinate lien position), with the remaining 10% provided by the borrower. The approval process for Section 504 Loans is similar to the first level of lender participation with respect to Section 7(a) Loan program except that the certified development company presents the loan to the SBA (after it has been approved by the SBA-licensed lender and the certified development company). Upon presentation, the SBA completes its independent analysis of the loan and makes its credit decision. SBA turnaround time on such applications can vary greatly, depending on its backlog of loan applications. SBA Guarantees Under the Preferred Lender Program, the SBA guarantees up to 80% on loans of $100,000 or less, and up to 75% on loans in excess of $100,000. However, the SBA's maximum guaranty per borrower under any SBA Loan is $750,000. In the event of a default by a borrower on an SBA Loan, if the SBA establishes that any resulting loss is attributable to a failure by the Company to comply with SBA policies and procedures in connection with the origination, documentation or funding of the loan, the SBA may seek recovery of funds from the Company. With respect to SBA Loan Participations which have been sold, the SBA first will honor its guarantee and then seek compensation from the Company in the event that a loss is deemed to be attributable to such failure to comply with SBA policies and procedures. To date, the SBA has not sought recovery from the Company on 42 45 any of its SBA Loans. However, the SBA has notified the Company as to the potential for impairment of guarantee on two of its loans. The Company believes it is adequately reserved in relation to these potential impairments. Loan Origination and Approval In the past five years, the Company's Small Business Loan origination offices have made loans in 23 states and the District of Columbia. The Company's Small Business Loans generally range in size from $250,000 to $1.5 million. Average loan size for originations during 1995 and the first six months of 1996 was $332,000 and $651,000, respectively. The SBA Loans generally have a variable rate of interest which is limited to a maximum of 275 basis points over the prime rate adjusted on the first day of each calendar quarter. The Company's Asset-based Small Business Loans have variable rates of interest which range generally from 2.0% to 3.0% above the prime lending rate. However, these Asset-based Small Business Loans also provide for servicing and other processing fees, which cause the effective rate associated with such loans to be approximately 26% for the loans originated to date. Although the Company originates Small Business Loans through direct contact between its loan officers and potential borrowers, a substantial portion of the Company's Small Business Loans are generated by Commercial Loan Brokers who generally are paid referral fees. The Company does not have any contractual agreements with any of these brokers obligating them to refer loans to the Company. In 1995, the Company originated Small Business Loans in connection with approximately 35 Commercial Loan Brokers, and no Commercial Loan Broker accounted for more than 15% of the Company's Small Business Loans. The Company also attempts to maintain strong relationships with commercial banks, attorneys, accountants and other potential loan referral sources. The majority of the Company's Small Business Loan originations have been for the acquisition or refinance of property, plant and equipment, working capital or debt consolidation. A number of SBA Loans were made to business franchisees in connection with the acquisition of national franchises. All SBA Loans are secured, generally by all assets of the borrower, including any real property. The Asset-based Small Business Loans are generally secured by a first lien in accounts receivable, inventory and equipment. In connection with the Small Business Loans, the Company generally obtains the guarantee of the principals involved in the business, which is often secured by real property. All SBA Loans originated by the Company are evidenced by variable rate notes which adjust quarterly, require monthly payments and are scheduled to amortize fully over their stated term. SBA Loans originated by the Company have terms ranging from seven to 25 years depending upon the use of proceeds, with a weighted average term of approximately 16 years. Generally, seven-year loans are made for working capital, 10-year loans for equipment and 25-year loans for real estate. Applicants for SBA Loans are generally required to provide historical financial statements for three years and/or projected statements of operations for two years. They are also generally required to provide proof of equity, personal guarantees and assignments of affiliated leases and life insurance. Credit reports are generally obtained from independent credit reporting agencies for all applicants. These reports are reviewed by the SBA lending operation's credit officers. Independent appraisals are generally required on real estate pledged as collateral. Asset-based Small Business Loans are evidenced by variable-rate, revolving credit notes, which are payable upon demand. However, the Company generally commits to make the credit facility available for a period of one to two years, provided that certain covenants and conditions are met. Applicants for Asset-based Small Business Loans are generally required to provide cash flow projections, and inventory and accounts receivable aging and turn-over information. Such aging and turnover information is provided to the Company on a daily basis. All loans made by the Small Business Loan Division generally must be approved by a designated executive officer and one other loan officer. All SBA Loans in excess of $1.0 million must also be approved by either the President or Executive Vice President of the SBA lending operation. After approval by such officers, 43 46 the loan application is produced and forwarded to the SBA office servicing the location of the applicant. If an SBA Loan is being made in a district where the Small Business Loan Division is certified as a Preferred Lender, no prior credit approval of the SBA is required before the loan transaction can be consummated. However, if the SBA Loan is being made in a district where the Small Business Loan Division is not certified as a Preferred Lender, the loan cannot be made until the SBA office approves the loan, issues an authorization letter and assigns a loan number. Multiple Disbursements of SBA Loans The Company funds certain of its SBA Loans on a multiple disbursement basis. In particular, when part of the use of proceeds of a loan is for the construction or improvement of real property, the loan may require multiple disbursements over a lengthy period of time. At June 30, 1996, the Company had $14.3 million of outstanding SBA Loans in various stages of multiple disbursements, of which $6.0 million had been disbursed. The length of time necessary to complete the disbursement process for multiple disbursement loans is generally six to twelve months. SBA Loan Sales Upon final disbursement of the proceeds of each SBA Loan, the Company obtains bids in the secondary market for the SBA Loan Participation associated with that SBA Loan. The SBA Loan Participation is generally sold to the highest bidder. The Company retains the unguaranteed portion of the loan and the servicing rights to the entire loan. The Small Business Loan Division sells the SBA Loan Participations generally to financial institutions or other institutional investors. Purchasers of the SBA Loan Participations share ratably with the Small Business Loan Division (holding the unguaranteed portion) with respect to all principal collected from the borrowers with respect to the SBA Loans. SBA lenders are required to pay a fee of 50 basis points per annum to the SBA on the outstanding balance of the guaranteed portion of all loans. In connection with the sale of SBA Loan Participations, the Small Business Loan Division receives, in addition to additional servicing revenue, cash premiums of approximately 10% of the guaranteed portion being sold. During 1993, 1994 and 1995 and the first six months of 1996, the weighted average premiums on the SBA Loan Participations sold, together with the additional servicing revenue, aggregated 13.75%, 11.79%, 13.75% and 14.46%, respectively, of the SBA Loan Participations sold. For the years ended December 31, 1993, 1994 and 1995, premiums recognized by the Company in connection with the sale of SBA Loan Participations were $3.6 million, $4.0 million and $3.9 million, respectively. For the first six months of 1996, premiums recognized by the Company in connection with the sale of SBA Loan Participations were $1.7 million. The SBA has contracted with Colson Services Corp. ("Colson Services") to serve as the exclusive fiscal and transfer agent for the SBA Loan Participations sold in the secondary market. The Company collects payments from borrowers and remits to Colson Services amounts due to investors. Colson Services then remits such amounts to the investors and administers the transfer of SBA Loan Participations from one investor to another. Securitization of SBA Loans In 1995, the Company securitized approximately $17.1 million of the unguaranteed portions of its SBA Loans. The securitization was effected through a grantor trust (the "Trust"), the ownership of which was represented by Class A and Class B certificates. The Class A certificates were purchased by investors, while the Company retained the Class B certificates. These certificates give the holders thereof the right to receive payments and other recoveries attributable to unguaranteed portion of the SBA Loans held by the Trust. The Class B Certificates represent approximately 10% of the principal amount of the SBA Loans transferred in the securitization and are subordinate in payment and all other respects to the Class A Certificates. Accordingly, in the event that payments received by the Trust are not sufficient to pay certain expenses of the Trust and the required principal and interest payments due on the Class A Certificates, the Company, as holder of the Class B Certificates, would not be entitled to receive principal or interest payments due thereon. 44 47 The Company serves as master servicer for the Trust and, accordingly, forwards payments received on account of the SBA Loans held by the Trust to the trustee of the Trust, which, in turn, pays the holders of the certificates in accordance with the terms of and priorities set forth in the securitization documents. Because the transfer of the SBA Loans to the Trust constitutes a sale of the underlying SBA loans, no liability is created on the Company's Consolidated Financial Statements. However, the Company has the obligation to repurchase the SBA Loans from the Trust in the event that certain representations made with respect to the transferred SBA Loans are breached or in the event of certain defaults by the Company, as master servicer. The Class A certificates received a rating of Aaa from Moody's Investors Service, Inc. The Class B Certificates were not rated. In connection with the securitization, the Small Business Loan Division received funds substantially equal to the Class A certificates' percentage of the total principal amount of the SBA Loans transferred to the Trust. If available, the Company intends to continue to pursue securitization transactions in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Loan Servicing The Company services substantially all the Small Business Loans it originates. Servicing includes collecting payments from borrowers and remitting payments with respect to the SBA Loan Participations to Colson Services, accounting for principal and interest, contacting delinquent borrowers and supervising foreclosures. The Company initially reviews loan files to confirm that the loans were originated in accordance with SBA regulations and Company policies. Thereafter, the Company conducts periodic reviews of the borrower's financial condition and typically conducts field visits to the borrower's place of business at least once a year. Delinquency and Collection When an SBA Loan becomes delinquent, the Company contacts the borrower to determine the circumstances of the delinquency and attempts to maintain close contact with the borrower until the loan is brought current or is liquidated. When an SBA Loan becomes 60 days past due, the Company is required to notify the SBA of such delinquency. Generally, after a loan becomes 90 days delinquent, the Company places the loan on non-accrual status, delivers a default notice and begins the legal process of foreclosure and liquidation, upon notification to and approval by the SBA. Foreclosure proceedings are generally conducted by the lender, although where the SBA Loan was not made by a Preferred Lender, the SBA has the right to conduct the foreclosure. Any loss after foreclosure and liquidation is allocated pro rata between the guaranteed and the unguaranteed portions of the SBA Loan. Generally, after an SBA Loan becomes 60 to 90 days past due, the SBA, upon the request of the servicer of the SBA Loan, repurchases the guaranteed portion of the principal balance of the SBA Loan from the holder, together with accrued interest covering a period of up to 120 days. The asset-based lending operation monitors its borrowers daily for availability under the lines of credit. Loans are placed on watch if the borrower is experiencing tight cash flow and poor profitability. Loans are placed on non-accrual status if collection of the interest is deemed to be doubtful. In the event of a default, the Company makes an assessment of the borrower's financial condition and nature of the default to determine further action. If repayment of the loan is considered doubtful, a demand letter is sent and the Company begins the process to take control of the collateral. AUTO LOAN DIVISION Overview The Company's Auto Loan Division makes loans directly to non-prime borrowers for the purchase of used automobiles. Substantially all of the Auto Loans are made directly by the Company through referrals from Dealers located in South Carolina. Less than 20% of the Auto Loans originated in the first six months of 1996 were "indirect" loans purchased from Dealers, all of which were located in South Carolina. Of the 45 48 Dealers which referred loans to the Company in 1995 and the first six months of 1996, the Company estimates that half of such Dealers were franchised Dealers and half were independent Dealers. The non-prime consumer automobile market is comprised of borrowers who generally do not have access to other conventional sources of automobile credit because they do not meet the credit standards imposed by other lenders. As a result of its borrowers' credit status, the Company charges relatively high rates of interest to such consumers, which, in the first six months of 1996, ranged from 18% to 46% (with an average yield of 27.4%). By contrast, banks, thrift institutions, and financing subsidiaries of manufacturers and retailers generally impose more stringent, objective credit requirements and generally charge lower interest rates based on the prevailing interest rate environments at the time of origination. The Company began making Auto Loans with its acquisition of 80% of the common stock of Loan Pro$ in 1991. At the time of acquisition, Loan Pro$ had $1.8 million in loans and operated through one location. The Company also acquired Premier in 1991. At the time of acquisition, Premier had approximately $3 million in loans, which were principally personal property loans, and operated through three locations. During 1993, the Company decided to terminate Premier's unsecured personal property loan operation and focus its lending efforts on secured automobile lending. The Company currently operates its Auto Loan Division through eight locations, and at December 31, 1995, had a total of $18 million of serviced Auto Loans, substantially all of which were made in connection with the purchase of automobiles. During 1993, 1994 and 1995, Auto Loan originations totaled $5.2 million, $7.5 million and $17.1 million, respectively. During the first six months of 1996, Auto Loan originations totaled $10.1 million. The Auto Loan Division is managed by the presidents of Loan Pro$ and Premier. These individuals oversee the branch managers of each loan production office and are generally responsible for the performance of their respective companies. These individuals report to the Chief Executive Officer of the Auto Loan Division, who is also the President and Chief Operating Officer of the Company. Although Premier and Loan Pro$ have substantially similar operations, the Company has maintained their separate existence because Loan Pro$ is not a wholly-owned subsidiary. The president of Loan Pro$ retained a 20% equity interest in Loan Pro$ at the time of its acquisition by the Company. Industry The automobile finance industry is the second largest consumer finance market in the United States, estimated by the Federal Reserve Board to have been a $325 billion market in terms of outstanding automobile installment credit at the end of 1994. The non-prime portion of the automobile finance market is estimated to be between $30 billion and $50 billion and is highly fragmented. Many large financial service entities, such as commercial banks, savings and loans, credit unions and captive finance companies do not consistently provide financing to the non-prime market. In many cases, those organizations electing to remain in the automobile finance business have migrated toward higher credit quality customers in order to reduce collection and processing costs and to maintain higher levels of credit quality. Many of the largest providers of financing to the non-prime automobile finance market are the publicly-traded specialty automobile finance companies. The Company estimates that these companies collectively have less than a 15% market share. The remainder is primarily comprised of privately-held finance companies and Dealers who provide financing programs directly to the consumer. Non-prime borrowers in the automobile finance market may be generally considered "credit-impaired" because their loan application is characterized by one or more of the following: (1) inadequate collateral, (2) insufficient debt coverage, (3) problems with employment history, (4) limited or unfavorable credit history or (5) self-employment. Certain lenders in the non-prime market may internally classify borrowers (generally with letters from A to D) according to the perceived credit quality of the loan. However, the Company does not believe that there are uniform guidelines among various non-prime lenders with respect to the classification of auto loan borrowers. The Company does not utilize a category rating system with respect to its Auto Loans. Rather, such loans are underwritten independently based on criteria such as the age and wholesale value of the automobile, the 46 49 borrower's past credit history and the availability of cosigners and/or guarantors for the loan. The interest rates charged on Auto Loans are determined by the loan officer after reviewing the potential borrower's credit history. Direct Auto Loans and Related Products Substantially all of the Company's Auto Loans are made directly by the Company to consumers in connection with purchases of used automobiles. This is in contrast to "indirect lending," where lenders purchase loans from Dealers that have already been originated by such Dealers. The Auto Loans are generally fixed rate loans, with interest rates ranging from 18% to 46% per annum, depending on the model year of the automobile being financed and the creditworthiness of the borrower. At June 30, 1996, the Auto Loans had a weighted average interest rate earned of 27.4%. The amount financed on Auto Loans generally ranges from $3,000 to $10,000 (with an average initial principal balance in the first six months of 1996 of approximately $5,000), and the repayment terms generally range from 24 to 48 months, depending upon the amount financed. The interest rate which may be charged by the Company is regulated by state law. See "-- Regulation." The age of the vehicles financed generally ranges from four to six years. The Company's underwriting guidelines generally provide that the amount of the Auto Loan may not exceed 105% of National Auto Dealers Association wholesale value of the vehicle being financed. In connection with its Auto Loans, the Company offers credit life and accident and health insurance products for which it receives commissions. These insurance products are sold by branch managers who are licensed representatives of an unaffiliated insurance company. During 1995, insurance was sold in connection with approximately 50% of the total number of Auto Loans originated. During 1995 and the first six months of 1996, the Company recognized $140,000 and $89,000, respectively, in commissions in connection with the sale of insurance products. Relationships with Dealers Substantially all of the Company's Auto Loans are originated by referrals from Dealers located in or around the localities served by the Company. In a typical situation, the dealer will bring a customer who wishes to purchase an automobile, along with the automobile, to an Auto Loan Division branch location. At the branch location, the branch manager (or a person designated by the branch manager) will examine the automobile and make a final credit determination with respect to the customer. In dealing with the Company, Dealers become familiar with the Company's lending policies and procedures and develop the ability to screen potential applicants for credit who are unlikely to be approved by the Company. The Company attempts to establish and maintain its relationships with Dealers by making prompt credit determinations and by offering quality, consistent and dependable service. New dealer relationships are secured principally through personal contact by branch managers. During 1995 and the first six months of 1996, the Company originated Auto Loans in connection with approximately 200 Dealers. In 1995 and the first six months of 1996, no single dealer accounted for a material portion of the Company's Auto Loans. The Company has no formal agreements with any Dealers under its direct lending program. Direct Auto Lending Procedures The initial credit screening on potential Auto Loan customers is performed by the Dealers based on the Company's lending policies and procedures. Final credit decisions involving less than $10,000 are made by the branch managers, who interview borrowers in person, examine the automobile and perform other verification procedures. Auto Loans in amounts greater than $10,000 require the approval of the branch manager and one other member of the Auto Loan Division's senior management. The Company's credit review process requires the completion of a standardized credit application with information on the applicant's background, employment and credit history. The Company obtains a credit report on the applicant from an independent reporting service and obtains verification of the applicant's 47 50 employment and wages from his or her employer. Branch managers are encouraged to apply their knowledge of local conditions and collateral values and their personal experience in making credit decisions. The Company does not use a "scoring" system or other inflexible, standardized credit criteria. Nevertheless, the Company estimates that approximately 50% of all applicants are denied credit by the Company, generally because of their credit histories or because their income levels will not, in the Company's judgment, support the amount of credit sought. If the credit is approved, standardized financing documents are executed between the customer and the Company. In connection with all Auto Loans, the automobile is pledged as collateral and the Company obtains the certificate of title to the automobile, on which its lien is recorded. The Company generally retains keys on the financed automobiles. The customer receives a payment coupon book and instructions on remitting monthly payments to the Company. The Company considers refinancing of its existing loans on a case-by-case basis. The Company generally does not refinance delinquent loans unless it determines that refinancing is not likely to increase the credit risk. Indirect Lending Operations In 1995, the Company began an indirect automobile lending program. Under this program, certain approved dealerships are provided underwriting criteria and guidelines by the Company. The dealerships close and fund the loans to the borrowers. The manager of the Company's local office is then given an opportunity to purchase the loan from the dealer based on the office managers' credit decision and verification procedures. Loans are purchased from the Dealer at a discount from the principal amount of the loan. This discount, which is not refundable to the Dealer, averaged approximately 5% in the first six months of 1996. Less than 20% of the Auto Loans originated in the first six months of 1996 were generated under this indirect lending program. Servicing, Collection and Delinquencies The Company's borrowers are expected to remit their monthly payments using the payment coupon book provided to them at the time the credit is extended. Consequently, the Company does not issue monthly statements to borrowers. If a payment is not received within five days after its due date, the Company telephones the borrower, and attempts to maintain weekly contact thereafter until the loan is brought current. If a payment is not received within 11 days after its due date, the borrower is sent a right to cure letter. In certain instances, the automobile is picked up and stored by the Company after the right to cure letter has been received. After 30 days, the branch manager contacts the borrower. After 45 to 60 days, at the discretion of the branch manager, the Company generally repossesses the automobile. In certain instances, borrowers are permitted to recover their repossessed vehicles if they cure defaults under their loan. Repossessed automobiles are usually offered for sale by the Company through independent Dealers. If such efforts are unsuccessful, the automobiles are sold at public auction. The time between repossession and public sale generally ranges from one to three months. 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, substantial national financial services networks have been formed by major brokerage firms, insurance companies, retailers and bank holding companies. The Company believes that it competes effectively by providing competitive rates, and efficient, complete services. The Company faces significant competition in connection with its Mortgage Loan operations, principally from national companies which focus their efforts on making mortgage loans to non-prime borrowers. These competitors include The Money Store, Ford Consumer Finance Company, Associates First Capital Corporation, and ContiFinancial Corporation. Each of these companies has considerably greater financial and 48 51 marketing resources than the Company. Although these large national companies compete in the mortgage loan industry, the industry, as a whole, is highly fragmented and no one company has a large percentage of the total mortgage loan market. The Company attempts to maintain its competitiveness by establishing strong relationships with Mortgage Bankers. Although the Company believes that it has been successful in this regard, in the event that the Company's competitors are able to weaken the relationships between the Company and its Mortgage Bankers, including the Strategic Alliance Mortgage Bankers, the Company's operations would be materially and adversely affected. Conventional lenders, such as banks and thrifts, are not believed to be significant competitors of the Company because they are generally reluctant to make loans to non-prime borrowers. See "Business -- Mortgage Loans -- Mortgage Loan Origination." The Company faces significant competition in all markets in which it makes Small Business Loans. The Company's major competitors vary from region to region. However, its primary competitors are small independent banks and large companies such as The Money Store, AT&T Capital Corp. and Heller First Capital. Because SBA Loan interest rates and terms offered by lenders are relatively uniform, the Company believes that the principal source of competition in making SBA Loans relates to the quality of service provided by the lender and the relationships established with the borrower. Competition with respect to Asset- based Small Business Loans is also principally based upon the quality of the service provided by the lender and the relationships established with the borrower, and secondarily upon the interest rate and other terms of such loans. In addition, the Company believes that it is important that it maintain good relations with the Commercial Loan Brokers, accountants and attorneys, which are a significant source of Small Business Loan originations. The consumer finance business, and the Auto Loan business in particular, is highly competitive. Because the Company's Auto Loan business is limited to a particular area of the consumer finance industry and because the Company's customer base consists of individuals who generally do not have access to other traditional sources of consumer credit, the Company usually does not compete directly with banks, savings and loans, financing subsidiaries of manufacturers and retailers of automobiles, and other traditional consumer financing sources with respect to Auto Loans. However, in each market where the Company operates, there are generally a number of other non-prime lenders that compete for the Auto Loans, including local finance companies. Certain of these non-prime lenders are larger and have greater resources than the Company. These companies include Mercury Finance Company, First Merchants Acceptance Corporation and Regional Acceptance Corporation. Furthermore, the Company believes that conventional lenders are increasingly seeking to operate in the non-prime consumer market. Such additional competition could have a material adverse effect on the Company and its ability to attract customers. The Company believes that the principal bases for competition in the Auto Loan business are the monthly payment amount, the speed of the credit determination process and the general level of service provided to the Dealers. Accordingly, the Company believes that it is important that it maintain good relationships with its associated Dealers. REGULATION General 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: the Small Business Act, the Small Business Investment Act of 1958, as amended (the "SBIA"), 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 (the "ECOA"), the Fair Credit Reporting Act of 1970, as amended (the "FCRA"), the Fair Debt Collection Practices Act, as amended, the Real Estate Settlement Procedures Act (the "RESPA") and the National Housing Act, as amended. In addition, the Company is subject to state laws and regulations with respect to the amount of interest and other charges which lenders can collect on loans (e.g., usury laws). Although most states do not regulate commercial loans, a few states do require licensing of lenders, limitations on interest rates and other charges, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. Authorities in those states that regulate the Company's 49 52 SBA Loan activities may conduct audits of the books, records and practices of the Company. 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 is also required to comply with certain portions of the ECOA which are applicable to commercial loans, including SBA Loans. The Company must comply with ECOA's prohibition against discrimination on the basis of race, color, sex, age or marital status and with the portion of Regulation B under the ECOA that requires lenders to advise loan applicants of the reasons their credit request was declined or subject to other adverse action. The Company believes that it is in substantial compliance in all material respects with ECOA. 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. Mortgage Loans Mortgage lending laws generally require licensing of the lender, limitations on the amount, duration and charges for various categories of loans, adequate disclosure of certain contract terms and limitations on certain collection practices and creditor remedies. Many states have usury laws which limit interest rates, although the limits generally are considerably higher than current interest rates. 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, 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 and address of the reporting agency. Under RESPA, disclosures to certain borrowers are required to be made within prescribed time frames. Good faith estimates of applicable closing costs are also required. The Company believes that it is in substantial compliance in all material respects with ECOA. Small Business Loans The SBA Loans made by the Small Business Loan Division are governed by federal statutes (the Small Business Act and SBIA) and may be subject to regulation by certain states. These federal statutes and regulations specify the types of loans and loan amounts which are eligible for the SBA's guaranty as well as the servicing requirements imposed on the lender to maintain SBA guarantees. 50 53 The Company's Asset-based Small Business Loans are generally not regulated except to the extent set forth above in "-- Regulation -- General." Auto Loans The Company's Auto Loan business is subject to extensive supervision and regulation under state and federal laws and regulations, which, among other things, require that the Company obtain and maintain certain licenses and qualifications, regulate the interest rates, fees and other charges the Company is allowed to charge, limit or prescribe certain other terms of the Company's loans, require specified disclosures to consumers, govern the sale and terms of insurance products offered by the Company and the insurers for which it acts as agent, and define the Company's rights to repossess and sell collateral. The Company's Auto Loan business is currently limited to South Carolina and is therefore subject to certain South Carolina laws and regulations, including the South Carolina Consumer Protection Code (the "SC Code"). With respect to their direct lending activities, Premier and Loan Pro$ are each licensed under the SC Code as a "supervised lender" (a lender making consumer loans at interest rates in excess of 12% per annum), and are subject to regulation by the Consumer Finance Division of the State Board of Financial Institutions and by the South Carolina Department of Consumer Affairs. These state regulatory agencies audit the Company's local offices from time to time, and each state agency performs an annual compliance audit of the Company's operations. The SC Code and the regulations thereunder generally do not limit the finance charges that may be contracted for with respect to loans having a cash advance exceeding $600, but require supervised lenders to file schedules showing maximum finance charges for each category and amount of supervised loans. Such schedules must express finance charges in terms of annual percentage rates determined in accordance with TILA, and must be conspicuously posted in each location where loans are originated in the format and with certain notices set forth in regulations promulgated under the SC Code. The SC Code and regulations thereunder also, among other things, limit or regulate closing costs, insurance premiums, delinquency, deferral, refinancing, consolidation and conversion fees and other additional charges which may be assessed in connection with consumer loans, prescribe certain disclosures and notices to borrowers and cosigners, prescribe maximum repayment terms for loans of $1,000 or less, define and limit creditors' remedies on default, and prescribe certain record-keeping and reporting procedures and requirements, and regulate other aspects of consumer finance transactions, including permitted collateral, application of payments, limits on scheduled balloon payments, rebates on prepayments, certain terms, disclosures and formalities in the loan contract, and other matters. The SC Code contains provisions similar to the foregoing which are applicable to consumer credit sale transactions in which a consumer's purchase of goods or services is financed by the seller or by the seller's assignment of the retail installment sale contract to another lender. These provisions are applicable to the Company's indirect financing of automobile purchases. The SC Code provides that the seller effecting the credit sale is responsible for licensing and compliance with respect to loans originated in connection with credit sales, and does not impose on the assignee any obligation of the seller with respect to events occurring before the assignment. However, upon the assignment, the Company is subject to the provisions governing credit sales. The Company believes that it and the dealers from which it accepts assignment of consumer loans are in substantial compliance with the provisions of the SC Code governing credit sales. The Company's Auto Loan business is also subject to extensive federal regulation in connection with its consumer loans, including TILA, ECOA and FCRA and the regulations thereunder, and certain rules of the Federal Trade Commission. These laws and regulations are referenced above under "--Regulation -- Mortgage Loans." The Company's Auto Loan business is also subject to the rules of the Federal Trade Commission, which limit the types of property a creditor may accept as collateral to secure a consumer loan and provide for the preservation of the consumer's claims and defenses when a consumer obligation is assigned to a subsequent holder. The Company believes that it is in substantial compliance in all material respects with TILA, ECOA, FCRA and the Federal Trade Commission rules. 51 54 EMPLOYEES At June 30, 1996, the Company employed a total of 243 full-time equivalent employees. The Company believes that its relations with its employees are good. PROPERTIES The Company's headquarters are located at 15 South Main Street, Suite 750, Greenville, South Carolina and are leased. The Company owns three locations and leases 19 locations. None of the leases or properties owned is 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. The Company would expect to lease or purchase any properties necessary for any expansion. LEGAL PROCEEDINGS The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. 52 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the names and ages of the Company's executive officers and directors, the positions and offices with the Company held by each such person, and the period that each such person has served as an executive officer or director of the Company.
DIRECTOR OR NAME AGE POSITION OFFICER SINCE - ----------------------------------------- --- ----------------------------------- ------------- John M. Sterling, Jr. ................... 58 Chief Executive Officer and 1991 Chairman of the Board Keith B. Giddens......................... 41 President, Chief Operating Officer 1992 and Director Kevin J. Mast............................ 36 Vice President, Chief Financial 1995 Officer and Treasurer Robert S. Davis.......................... 50 Vice President -- Administration 1990 and Director Clarence B. Bauknight(1)(2).............. 60 Director 1995 Tecumseh Hooper, Jr.(2).................. 49 Director 1991 Jacob H. Martin(1)....................... 78 Director 1991 Buck Mickel(1)........................... 70 Director 1991 Porter B. Rose(2)........................ 54 Director 1991
- --------------- (1) Members of the Compensation Committee. (2) Members of the Audit Committee. John M. Sterling, Jr. has served as Chief Executive Officer and Chairman of the Board of the Company since January 1991. In addition, Mr. Sterling also served as President of the Company from January 1991 to August 1996. Mr. Sterling was Chairman of the Board and Chief Executive Officer of Modern Office Machines, Inc. ("MOM") from 1981 through August 1992. Since November 1993, Mr. Sterling has served as President of the corporate general partner of Palmetto Seed Capital Fund, L.P. ("PSC"), which invests primarily in early stage South Carolina companies. Mr. Sterling has served as General Partner and Manager of Reedy River Ventures, L.P. ("RRV"), which is a SBIC licensed by the SBA. PSC and RRV are currently managed by the Company. Mr. Sterling also serves on the Board of Directors of Datastream Systems, Inc. and several private companies. Keith B. Giddens has served as President and Chief Operating Officer since August 1996, and as Executive Vice President and Chief Operating Officer of the Company from November 1995 to August 1996 and Chief Executive Officer of CII, Premier, Loan Pro$ and EBC since the date of their respective acquisitions by the Company in 1991. Mr. Giddens was a partner in the public accounting firm of Ernst & Young from October 1988 through April 1991 and a Senior Manager at such firm from October 1984 through September 1988. Kevin J. Mast has served as Vice President and Chief Financial Officer of the Company since August 1996 and as Treasurer of the Company since November 1995, Executive Vice President and Chief Financial Officer and Treasurer of EBC since April 1992, Chief Financial Officer and Treasurer of Loan Pro$ and Premier since April 1995 and Treasurer of CII since April 1995. From June 1991 to October 1992, Mr. Mast served as Executive Vice President and Chief Financial Officer of Citizens Bank & Trust Co. and its parent company Business Banc of America. Prior to that time, Mr. Mast was an audit Senior Manager at Ernst & Young where he specialized in the audits of financial institutions. Robert S. Davis has served as Vice President -- Administration since August 1996 and as Chief Financial Officer of the Company from January 1991 to August 1996, as Treasurer from 1992 to 1995, as Vice President of Finance from November 1989 through June 1990, as President and Treasurer from June through December 1990, and as Corporate Controller from 1986 through November 1989. Prior to 1986, Mr. Davis was Chief Financial Officer of Alexander's Wholesale Distributors, Inc., a catalog retailer of consumer goods. 53 56 Clarence B. Bauknight has been Chairman of the Board and Chief Executive Officer of Builderway, Inc. since 1976. Builderway, Inc. is engaged in the business of distribution and retail sale of building supplies and appliances. Mr. Bauknight has also served since 1978 as Chairman of the Board and Chief Executive Officer of Enterprise Computer Systems, Inc. which is engaged in the development of computer software for the building supply industry. Mr. Bauknight also serves on the Board of Directors of Builder Marts of America, Inc., a building supply company. Mr. Bauknight was a founder of all three of these companies. Tecumseh Hooper, Jr. served as Treasurer of the Company from January 1991 through 1992. Mr. Hooper has served as President of MOM, which is engaged in the sale of office equipment and supplies, since 1982. Since October 1994, Mr. Hooper has also been the Southeast Regional Director for Alco Office Products, MOM's parent company. Jacob H. Martin was Chairman of Standard Car Truck Company from January 1989 until May 1, 1995, when he retired from this position. Standard Car Truck Company is engaged in the business of designing, manufacturing and selling railroad equipment. Mr. Martin also served as Chairman of the Board of Enterprise Finance Company ("EFC") and as Chairman of the Board of Freight Car Building and Supply Company ("FCBSC") until May 1995, when he retired from these positions. EFC and FCBSC are engaged in the finance business and railway equipment accessories business, respectively. Prior to 1989, Mr. Martin was a partner of the law firm of Martin, Craig, Chester & Sonnenschein in Chicago, Illinois. Mr. Martin is presently of counsel to that firm. Buck Mickel has served since 1989 as Chairman of the Board and Chief Executive Officer of RSI Holdings, Inc., which, since 1989 has engaged in the distribution of outdoor power and turf care equipment and in the office supply business. Mr. Mickel has served in various executive positions, including Vice Chairman of the Board of Fluor Corporation, a construction firm, from which he resigned in 1987, and Chairman of the Board of Daniel International Corporation, a construction firm and a subsidiary of Fluor Corporation, from which he resigned in 1987. Mr. Mickel also serves on the Board of Directors of Fluor Corporation, Monsanto Company, NationsBank Corporation, Liberty Corporation, Duke Power Company, Delta Woodside Industries, Inc. and Insignia Financial Group, Inc. Porter B. Rose has been President of Liberty Insurance Services, Inc. since January 1995, President of Liberty Investment Group, Inc. ("Liberty Group") since April 1992, and Chairman of Liberty Capital Advisors, Inc. ("Liberty Capital") and Liberty Properties Group, Inc. since January 1987 (collectively, the "Liberty Subsidiaries"). Mr. Rose served as President of Liberty Capital from January 1987 to April 1992 and as Executive Vice President of Investments for Liberty Life Insurance Company from 1983 through 1987. The Liberty Subsidiaries are engaged in property development and the management of investment portfolios for Liberty Corporation, its subsidiaries and other clients. All directors of the Company serve one year terms and until the election and qualification of their respective successors. The Company's executive officers are appointed by the Board of Directors and serve at the discretion of the Board. Meetings, Committees and Compensation of the Board of Directors During fiscal 1995, the Company's Board of Directors met four times. Each director attended more than 75% of the total number of meetings of the Board of Directors and all committees on which he served. The Board of Directors has an Executive Committee, the function of which is to make decisions between meetings of the Board of Directors pursuant to authority delegated by the Board of Directors. The current members of the Executive Committee are Messrs. Sterling, Rose and Mickel. The Executive Committee met twice during 1995. The Board of Directors also has an Audit Committee, which is responsible for reviewing and making recommendations regarding the Company's engagement of independent auditors, the annual audit of the Company's financial statements and the Company's internal accounting practices and policies. The current members of the Audit Committee are Messrs. Hooper, Bauknight and Rose. The Audit Committee met once during 1995. 54 57 The Board of Directors also has a Compensation Committee, the function of which is to make recommendations to the Board of Directors as to the salaries and bonuses of the officers of the Company. The current members of the Compensation Committee are Messrs. Bauknight, Mickel and Martin. The Compensation Committee met once during 1995. The Board of Directors has a Risk Oversight Committee, the function of which is to review the operations of the Company with a view toward assessing various Company risks, including asset/liability risk, interest rate risk, credit risk and liquidity risk. The current members of the Risk Oversight Committee are Messrs. Bauknight, Rose and Hooper. This Committee, which was formed in November 1995, has met once since inception. The Board of Directors does not have a Nominating Committee. The functions of a nominating committee are performed by the Board of Directors as a whole. Non-management Board members receive a director's fee of $24,000 per year, half of which is payable in cash and half of which is payable in restricted stock. The directors also automatically receive annual grants of options to purchase 666 shares of Common Stock under the Company's 1995 Director Stock Option Plan. EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation The following table shows the cash compensation paid by the Company, as well as certain other compensation paid or accrued, to the Company's Chief Executive Officer and to the executive officers of the Company who earned in excess of $100,000 per year in compensation (in all capacities) for the years ending December 31, 1995, 1994 and 1993 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION --------------------------------- AWARDS ANNUAL COMPENSATION ----------------------- ------------------------------------- SECURITIES PAYOUTS OTHER RESTRICTED UNDERLYING ------- ALL OTHER NAME AND SALARY BONUS ANNUAL STOCK OPTIONS/ LTIP COMPENSATION PRINCIPAL POSITION YEAR (1)($) ($) COMPENSATION(2) AWARDS SARS(#) PAYOUTS (3)($) - ------------------------ ---- --------- ------- --------------- ---------- ---------- ------- --------------- John M. Sterling, Jr.... 1995 186,992 110,000 -- -- 30,000 -- 3,234 Chairman and CEO 1994 178,437 70,000 -- -- -- -- 3,234 1993 170,303 50,000 -- -- 33,334 -- 3,148 Keith B. Giddens........ 1995 173,923 100,000 -- -- 74,000 -- 2,835 President and COO 1994 165,900 65,000 -- -- 20,000 -- 2,572 1993 157,698 45,000 -- -- 33,334 -- 1,470 Kevin J. Mast........... 1995 93,461 25,000 -- -- 22,668 -- 2,698 Vice President, Chief 1994 82,978 10,000 -- -- -- -- 2,005 Financial Officer and 1993 75,972 12,513 -- -- -- -- 808 Treasurer Robert S. Davis......... 1995 93,796 43,000 -- -- 33,334 -- 2,663 Vice President -- 1994 88,137 33,000 -- -- 20,000 -- 2,168 Administration 1993 83,793 25,000 -- -- 33,334 -- 2,285
- --------------- (1) A portion of total salary may have been deferred, at the option of the employee, pursuant to the Company's 401(k) plan. (2) Certain amounts may have been expended by the Company which may have had value as a personal benefit to the Named Executive Officer. However, the total value of such benefits did not exceed the lesser of $50,000 or 10% of the annual salary and bonus of such Named Executive Officer. (3) Amounts shown under "All Other Compensation" consist of contributions during fiscal year 1995, 1994, and 1993 to the Company's 401(k) plan in the amount shown to match pre-tax elective deferral contributions (included under salary) made by the executive officers pursuant to the plan. 55 58 Restricted Stock Agreement and Stock Option Plans The Company has in place the Emergent Group, Inc. Stock Option Plan, the 1995 Officer and Employee Stock Option Plan, the 1995 Director Stock Option Plan and the Restricted Stock Agreement Plan. At December 31, 1995, a total of 699,664 shares were authorized for issuance under these stock plans. At December 31, 1995, options to purchase an aggregate of 83,532 shares with a weighted average exercise price of $4.26 were outstanding and exercisable under such stock option plans. At December 31, 1995, options to purchase an additional 255,468 shares were outstanding but were not exercisable. The Restricted Stock Agreement Plan was adopted in January 1996 and provides for the grant of up to 100,000 shares of restricted stock to non-employee directors. Since its adoption, restricted stock agreements with respect to a total of 10,500 shares have been granted. Option Grants in Last Fiscal Year The following table sets forth certain information with respect to options to purchase Common Stock granted to the Named Executive Officers during fiscal 1995. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED -------------------------------------------------------------- ANNUAL RATES PERCENT OF OF STOCK PRICE NUMBER OF TOTAL OPTIONS APPRECIATION FOR SECURITIES GRANTED TO OPTION TERM UNDERLYING EMPLOYEES EXERCISE PRICE EXPIRATION ---------------- NAME OPTIONS GRANTED IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($) - ----------------------------- --------------- -------------- -------------- ---------- ------ ------- John M. Sterling, Jr......... 30,000 12.7% 5.09 10-31-05 73,309 207,181 Keith B. Giddens............. 50,000 21.2 1.32 1-13-05 41,507 105,187 24,000 10.2 4.63 10-31-05 69,807 176,905 Kevin J. Mast................ 6,668 2.8 1.32 1-13-05 5,535 14,028 16,000 6.8 4.63 10-31-05 46,538 117,937 Robert S. Davis.............. 13,334 5.6 1.32 1-13-05 11,069 28,051 20,000 8.5 4.63 10-31-05 58,173 147,421
56 59 Fiscal Year End Option Values The following table sets forth certain information with respect to options to purchase Common Stock held by the Named Executive Officers as to the number of shares covered by both exercisable and unexercisable stock options and options exercised in 1995. Also reported are the values for the "in-the-money" options which represent the positive spread between the exercise price of any such existing stock option and the year-end fair market value of the Common Stock. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL YEAR- FISCAL END (#) YEAR-END ($) ------------ ------------ SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE - -------------------------------------------- --------------- ------------ ------------ ------------ John M. Sterling, Jr........................ 26,000 167,670 -- / -- / 37,334 $ 177,567(1) Keith B. Giddens............................ 5,400 39,812 37,400 / 256,427 / 84,534 546,007(1) Kevin J. Mast............................... 4,536 21,811 -- / -- / 18,132 87,158(1) Robert S. Davis............................. 4,400 32,439 30,266 / 208,381 / 52,002 324,290(1)
- --------------- (1) The indicated value is based on exercise prices ranging from $1.09 to $5.09 per share and a per share value at December 31, 1995 of $8.46. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Over the past several years, the Company has provided management services to RRV. Certain of the Company's officers and directors, namely John M. Sterling, Jr., Buck Mickel, Tecumseh Hooper, Jr. and Clarence B. Bauknight, are partners of RRV. During 1994 and 1995, RRV paid the Company $35,000 and $250,000, respectively, in management fees. The Company expects that fees paid by RRV to the Company in 1996 will be approximately $175,000. In October 1995, the Company became an investor in RRV, with an investment of $1 million, and became its general partner. Certain officers, directors and employees of the Company held Debentures which at December 31, 1995 aggregated approximately $1.1 million. These Debentures were purchased on terms which were the same as those available to purchasers not affiliated with the Company. 57 60 PRINCIPAL AND SELLING SHAREHOLDERS The information set forth below is furnished as of September 13, 1996, with respect to Common Stock owned beneficially or of record by (i) persons known to the Company to be the beneficial owner of more than 5% of the Common Stock as of that date, (ii) each of the directors individually, (iii) each of the Named Executive Officers, (iv) the Selling Shareholders and (v) all directors and executive officers as a group. Unless otherwise noted, each person has sole voting and investment power with respect to such person's shares owned. All share amounts in the table include shares which are not outstanding but which are the subject of options exercisable in the 60 days following the date hereof. All percentages are calculated based on the total number of outstanding shares, plus the number of shares for the particular person or group which are not outstanding but which are the subject of options or other convertible securities exercisable or convertible in the 60 days following the date hereof.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING SHARES AFTER OFFERING ------------------- BEING ------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT - ---------------------------------------------------- --------- ------- ------- --------- ------- John M. Sterling, Jr.(1)............................ 900,622 13.8% 79,330 821,292 9.3% C. Thomas Wyche (2)................................. 210,531 3.2 8,700 201,832 2.4 John Hancock Mutual Life Ins. Co.(3)................ 550,970 8.3 550,970 -- -- Enterprise Finance Company(4)....................... 327,996 5.0 250,000 77,996 0.9 Charles C. Mickel................................... 300,510 4.6 40,000 260,510 3.1 Minor M. Shaw....................................... 265,086 4.1 20,000 245,086 2.9 Buck Mickel(5)...................................... 248,358 3.8 20,000 228,358 2.7 Buck A. Mickel...................................... 248,490 3.8 20,000 228,490 2.7 Keith B. Giddens(6)................................. 171,368 2.6 -- 171,368 2.0 Tecumseh Hooper, Jr.(7)............................. 171,562 2.6 11,000 160,562 1.9 Clarence B. Bauknight(8)............................ 167,548 2.4 -- 167,548 2.0 Robert S. Davis(9).................................. 64,666 1.0 -- 64,666 0.8 Porter B. Rose(7)................................... 17,332 0.3 -- 17,332 0.2 Kevin J. Mast....................................... 10,032 0.2 -- 10,032 0.1 Jacob H. Martin(7).................................. 2,666 -- -- 2,666 -- Sterling Family Limited Partnership(10)............. 797,168 12.2 66,330 730,838 8.6 All directors and executive officers as a group (9 persons).......................................... 1,754,154 26.3 110,330 1,643,824 19.0
- --------------- (1) The address of John M. Sterling, Jr. is P.O. Box 17526, Greenville, SC 29606. Includes 32,688 shares owned by Mr. Sterling directly. Also includes 797,168 shares owned by a partnership whose partners are Mr. Sterling, his spouse and his three adult children. Includes 70,786 shares of Common Stock owned by a trust of which Mr. Sterling is the sole trustee, as to which Mr. Sterling disclaims beneficial ownership. (2) The address of C. Thomas Wyche is P.O. Box 728, Greenville, SC 29602. Includes 85,042 shares owned by Mr. Wyche directly, and 125,489 shares owned by Mr. Wyche's spouse. Also includes the right to acquire 400 shares at $5.09 pursuant to currently exercisable stock options. (3) The address of John Hancock Mutual Life Insurance Co. is P.O. Box 111, Boston, MA 02118. Includes the right to acquire 92,354 shares of Common at $2.63 per share pursuant to currently exercisable stock purchase warrants. (4) The address of Enterprise Finance Company is 865 Busse Highway, Park Ridge, IL 60068. (5) Includes 11,998 shares owned by Mr. Mickel directly. Also includes 236,360 shares owned by Mr. Mickel's spouse, as to which shares he disclaims beneficial ownership. Also includes the right to acquire 666 shares at $10.38 per share pursuant to currently exercisable stock options. (6) Includes 99,368 shares owned by Mr. Giddens directly. Also includes 21,004 shares owned by Mr. Giddens' spouse, as to which shares he disclaims beneficial ownership. Also includes 15,996 shares owned by a trust administered by Mr. Giddens' spouse for his three children. Includes 35,000 shares owned by a limited partnership which is owned by Mr. Giddens, his wife and his children. (7) Includes the right to acquire 666 shares at $9.43 per share pursuant to currently exercisable stock options. (8) Includes 166,882 shares owned by a partnership whose partners are Mr. Bauknight, his spouse and his two adult children. Also includes the right to acquire 666 shares at $9.43 pursuant to currently exercisable stock options. (9) Includes the right to acquire 2,842 shares at $4.82 per share pursuant to currently exercisable stock options. (10) The address of the Sterling Family Limited Partnership is P.O. Box 17526, Greenville, SC 29606. 58 61 DESCRIPTION OF SECURITIES COMMON STOCK The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, of which 6,529,745 were issued and outstanding as of the date hereof. All shares of Common Stock currently outstanding are fully paid and nonassessable, not subject to redemption and without preemptive or other rights to subscribe for or purchase any proportionate part of any new or additional issues of any class or of securities convertible into stock of any class. Holders of Common Stock are entitled to one vote per share in all matters to be voted on by shareholders and have cumulative voting rights. The holders of Common Stock are entitled to receive cash dividends equally on a per share basis if and when such dividends are declared from time to time by the Board of Directors of the Company in its discretion from funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share with each other on a ratable basis as a single class in the net assets of the Company available for distribution after payment of liabilities and satisfaction of any preferential rights of holders of preferred stock and have no rights to convert their Common Stock into any other securities. The Company's Articles of Incorporation provide that shareholders may cumulate votes for the election of directors. CERTAIN PROVISIONS OF BYLAWS AND ARTICLES OF INCORPORATION The Company's Bylaws provide that the Board of Directors shall be at least three and not more than nine persons. The Board of Directors is currently comprised of eight persons. The Company's Board of Directors are exempt under the Company's Articles of Incorporation from personal monetary liability to the extent permitted by Section 33-2-102(e) of the South Carolina Business Corporation Act of 1988, as amended (the "South Carolina Corporation Act"). This statutory provision provides that a director of the corporation shall not be personally liable to the corporation or any of its shareholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not be deemed to eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involved gross negligence, intentional misconduct, or a knowing violation of law, (iii) imposed under Section 33-8-330 of the South Carolina Corporation Act (improper distribution to shareholder), or (iv) for any transaction from which the director derived an improper personal benefit. As noted above, the Company's Articles of Incorporation provide that shareholders may cumulate votes for the election of directors. SOUTH CAROLINA ANTITAKEOVER STATUTES Business Combinations Act. Generally, the South Carolina Corporation Act prohibits certain South Carolina corporations, including those whose securities are listed on the Nasdaq system, from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless (i) prior to the date of the business combination, the transaction is approved by the board of directors of the corporation, (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock, or (iii) on or after such date the business combination is approved by the board and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years did own) 15% or more of the corporation's voting stock. A South Carolina corporation may "opt out" from the application of these 59 62 South Carolina Corporation Act provisions through a provision in its articles of incorporation or by-laws. The Company has not "opted out" from the application of these provisions. Control Share Acquisition Act. The South Carolina Control Share Acquisition Act provides that upon the acquisition by a person of certain threshold percentages of stock (20%, 33% and 50%), a shareholders' meeting must be held in order to determine whether or not to confer voting rights upon such acquiring person's shares. An affirmative vote of holders of a majority of all outstanding company's stock (excluding shares held by the acquiring person, company officers and company employees who are also directors of the company) is required to confer voting rights upon such acquiring person's shares. TRANSFER AGENT The transfer agent for the Common Stock is First Union National Bank. 60 63 UNDERWRITING Pursuant to the Underwriting Agreement and subject to the terms and conditions thereof, the Underwriters named below, acting through the Representatives, have agreed, severally, to purchase from the Company and the Selling Shareholders the number of shares of Common Stock set forth below opposite their respective names.
NAME OF UNDERWRITER NUMBER OF SHARES - ----------------------------------------------------------------------------- ---------------- Wheat, First Securities, Inc................................................. Raymond James & Associates, Inc.............................................. ---------------- Total.............................................................. 3,000,000 =============
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all the shares of Common Stock offered hereby (other than those subject to the over-allotment option described below) if any of such shares are purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, if the number of shares of Common Stock any defaulting Underwriter agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of shares of Common Stock offered hereby, the purchase commitments of the non-defaulting Underwriters may be increased. If the non-defaulting Underwriters do not agree to purchase the shares allocated to such defaulting Underwriter, the Underwriting Agreement may be terminated. The Representatives have advised the Company and the Selling Shareholders that the several Underwriters propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the Offering, the public offering price and such concessions may be changed. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Offering of the Common Stock is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any order for the purchase of shares. The Company has granted the Underwriters an option, exercisable not later than 30 days from the date of the effectiveness of the Offering, to purchase up to an aggregate of 450,000 additional shares of Common Stock to cover over-allotments, if any. To the extent that the Underwriters exercise such option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the table above bears to the total number of shares in such table and the Company will be obligated, pursuant to the 61 64 option, to sell such shares to the Underwriters. If purchased, the Underwriters will sell these additional shares on the same terms as those on which the 3,000,000 shares are being offered. Although traded on the over-the-counter Bulletin Board, the market for the Common Stock prior to the Offering has not been liquid. Consequently, the public offering price will be determined by negotiation among the Company, the Selling Shareholders and the Representatives. In determining such price, consideration will be given to, among other things, the trading prices for the Common Stock on the Bulletin Board, the financial and operating history and trends of the Company, the experience of its management, the position of the Company in its industry, the Company's prospects and the Company's financial results. In addition, consideration will be given to the status of the securities markets, market conditions for new offerings of securities and the prices of similar securities of comparable companies. The Company, its directors and executive officers and certain shareholders of the Company have each agreed with the Underwriters that they will not offer, sell or contract to sell, or otherwise dispose of directly or indirectly, or announce the offering of, or exercise any registration rights with respect to, or register, cause to be registered or announce the registration or intended registration of, any shares of Common Stock, or any stock option or other security or agreement convertible with or exchangeable for, any shares of Common Stock for a period of 180 days from the date of this Prospectus, without the prior written consent of the Representatives, except for (a) the Common Stock offered hereby; (b) in the case of the Company, (i) Common Stock issued pursuant to any employee or director benefit plan or (ii) issuances of Common Stock upon the conversion of securities or the exercise of warrants outstanding on the date the Underwriting Agreement is executed; (c) in the case of directors, executive officers and certain shareholders of the Company, the exercise of stock options pursuant to benefit plans described herein and shares of Common Stock disposed of as bona fide gifts, and (d) in the case of certain shareholders, registered shares of Common Stock acquired in the public market after the Offering. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the Underwriters and controlling persons, if any, against certain civil liabilities, including liabilities under the Securities Act, or will contribute to payments the Underwriters or any such controlling persons may be required to make in respect thereof. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company and the Selling Shareholders by Wyche, Burgess, Freeman & Parham, P.A., Greenville, South Carolina. At September 13, 1996, members of Wyche, Burgess, Freeman & Parham, P.A. beneficially owned an aggregate of 404,115 shares of Common Stock. Counsel for the Underwriters is Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia. EXPERTS The Consolidated Financial Statements of the Company as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Prospectus and elsewhere in the Registration Statement, have been audited by Elliott, Davis & Company, L.L.P., independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement (which term shall encompass any amendments thereto) on Form S-1 through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system under the Securities Act (the "Registration Statement") with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, to which 62 65 reference is hereby made. Certain items were omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to herein are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, its New York Regional Office, 7 World Trade Center, New York, New York 10048 and its Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained by mail at prescribed rates. Requests should be directed to the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549. Electronic registration statements, reports, proxy and information statements filed through EDGAR are publicly available through the Commission's Web Site (http://www.sec.gov). 63 66 INDEX TO FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS:
PAGE ---- Report of Independent Certified Public Accountants.................................... F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996 (unaudited)......................................................................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)......................... F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 (unaudited).................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)................ F-6 Notes To Consolidated Financial Statements............................................ F-8
F-1 67 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shareholders and Board of Directors EMERGENT GROUP, INC. AND SUBSIDIARIES Greenville, South Carolina We have audited the accompanying consolidated balance sheets of EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1994 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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 generally accepted auditing standards. 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 consolidated financial position of EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. ELLIOTT, DAVIS AND COMPANY, L.L.P. Greenville, South Carolina January 31, 1996 F-2 68 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- JUNE 30, 1994 1995 1996 -------- -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Cash and cash equivalents................................................ $ 278 $ 1,260 $ 22,731 Short-term investments................................................... 597 -- -- Restricted cash.......................................................... -- 912 3,230 Receivables Loans receivable....................................................... 91,736 103,865 87,835 Mortgage loans held for sale........................................... 3,662 22,593 15,430 Excess servicing receivable............................................ 1,872 2,054 2,526 Accrued interest receivable............................................ 927 1,571 1,468 Other receivables...................................................... 701 1,626 715 -------- -------- -------- 98,898 131,709 107,974 Less allowance for credit losses....................................... (1,730) (1,874) (2,214) Less unearned discount................................................. (1,359) (610) (1,646) -------- -------- -------- 95,809 129,225 104,114 Investment in asset-backed securities, net of allowance for loss of $773 (1995)................................................................. -- 865 2,158 Property and equipment................................................... 2,670 4,327 5,592 Less accumulated depreciation.......................................... (608) (957) (1,285) -------- -------- -------- 2,062 3,370 4,307 Excess of cost over net assets of acquired businesses, net of accumulated amortization of $419 (1994) and $597 (1995)............................ 2,991 2,865 2,773 Real estate and personal property acquired through foreclosure........... 3,603 3,742 3,937 Deposit base intangibles, net of accumulated amortization of $412 (1994) and $525 (1995)........................................................ 712 600 544 Net assets of discontinued operations.................................... 2,505 77 -- Other assets............................................................. 891 2,015 2,863 -------- -------- -------- Total assets.................................................... $109,448 $144,931 $146,657 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Notes payable to banks and other, including $100 (1994) to related parties.............................................................. $ 17,520 $ 31,633 $ 20,261 Investor Savings: Notes payable to investors, including $722 (1994) and $820 (1995) to related parties..................................................... 56,497 82,132 91,362 Subordinated debentures, including $69 (1994) and $53 (1995) to related parties..................................................... 20,998 16,185 16,711 -------- -------- -------- Total investor savings.......................................... 77,495 98,317 108,073 Accrued liabilities.................................................... 2,843 3,090 2,052 Remittance due to loan participants.................................... 683 1,188 1,827 Accrued interest payable............................................... 471 622 691 -------- -------- -------- 3,997 4,900 4,570 -------- -------- -------- Total liabilities............................................... 99,012 134,850 132,904 Minority interest........................................................ 736 196 218 Commitments and contingencies Shareholders' equity Common stock, par value $.05 a share -- authorized 400,000 shares (1994) and 4,000,000 shares (1995) and 30,000,000 shares (1996), issued 200,575 (1994) and 121,000 (1995) and 6,529,745 (1996)........ 10 6 327 Class A common stock, par value $.05 a share -- authorized 20,000,000 shares (1994) and 6,666,667 shares (1995) and -0- (1996); issued 9,803,438 shares (1994) and 6,276,474 shares (1995) and -0- (1996)... 490 314 Capital in excess of par value......................................... 6,924 6,632 6,839 Retained earnings...................................................... 2,276 2,933 6,369 -------- -------- -------- Total shareholders' equity...................................... 9,700 9,885 13,535 -------- -------- -------- Total liabilities and shareholders' equity...................... $109,448 $144,931 $146,657 ========= ========= =========
See Notes to Consolidated Financial Statements which are an integral part of these statements. F-3 69 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SIX MONTHS DECEMBER 31, ENDED JUNE 30, --------------------------------- --------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) REVENUES Interest, servicing and finance charges........... $ 7,983 $ 10,903 $ 15,639 $ 7,307 $ 9,937 Gain on sale of loans............................. 3,605 6,450 9,169 4,355 7,468 Management fees................................... 81 320 570 410 257 Other revenues.................................... 377 522 900 282 647 --------- --------- --------- --------- --------- Total revenues............................. 12,046 18,195 26,278 12,354 18,309 --------- --------- --------- --------- --------- EXPENSES Interest.......................................... 5,073 5,879 8,527 3,780 5,576 Provision for credit losses....................... 686 2,510 2,480 1,240 1,532 Salaries, wages and employee benefits............. 3,106 4,001 5,691 2,047 4,321 Business development.............................. 515 626 653 320 332 General and administrative expense................ 2,003 2,732 4,075 2,147 2,969 --------- --------- --------- --------- --------- Total expenses............................. 11,383 15,748 21,426 9,534 14,730 --------- --------- --------- --------- --------- Income from continuing operations before income taxes, minority interest and cumulative effect of change in accounting principle............. 663 2,447 4,852 2,820 3,579 Provision (benefit) for income taxes Current........................................... 59 266 149 73 154 Deferred.......................................... (245) 343 41 20 (33) --------- --------- --------- --------- --------- (186) 609 190 93 121 --------- --------- --------- --------- --------- Income from continuing operations before minority interest and cumulative effect of change in accounting principle................ 849 1,838 4,662 2,727 3,458 Minority interest in earnings of subsidiary......... (25) (46) (81) (31) (22) --------- --------- --------- --------- --------- Income from continuing operations before cumulative effect of change in accounting principle..................................... 824 1,792 4,581 2,696 3,436 Discontinued transportation and apparel manufacturing segments Gain (loss) from operations, net of income tax.... 257 (2,022) (1,573) (751) -- Gain (loss) on disposal of segments, net of income tax............................................. 3 2,568 (2,351) -- -- --------- --------- --------- --------- --------- 260 546 (3,924) (751) -- --------- --------- --------- --------- --------- Cumulative effect of change in method of accounting for income taxes.................................. 113 -- -- -- -- --------- --------- --------- --------- --------- Net income...................................... $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436 ========= ========= ========= ========= ========= Income (loss) per share of common stock Continuing operations............................. $ 0.13 $ 0.27 $ 0.69 $ 0.40 $ 0.51 Discontinued operations........................... 0.04 0.08 (0.59) (0.11) -- Cumulative effect of change in accounting method.......................................... 0.01 -- -- -- -- --------- --------- --------- --------- --------- $ 0.18 $ 0.35 $ 0.10 $ 0.29 $ 0.51 ========= ========= ========= ========= ========= Computed on the weighted average number of shares, options and warrants outstanding.................. 6,551,508 6,688,734 6,668,192 6,690,608 6,727,674 ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements which are an integral part of these statements. F-4 70 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SIX MONTHS ENDED JUNE 30, 1996
CLASS A COMMON STOCK COMMON STOCK CAPITAL ------------------ ------------------- IN SHARES SHARES EXCESS OF RETAINED ISSUED AMOUNT ISSUED AMOUNT PAR VALUE EARNINGS --------- ------ ---------- ------ --------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1992........... 169,664 $ 8 8,288,814 $ 415 $ 5,893 $ (1,259) Issuance of shares in exchange for minority interest in subsidiaries...................... 4,218 1 206,667 10 133 -- Redemption of stock purchase warrants.......................... -- -- -- -- (3) -- Issuance of shares as payment for purchase of a subsidiary.......... 26,693 1 1,307,957 65 901 -- Net income............................. -- -- -- -- -- 1,197 --------- ------ ---------- ------ --------- -------- Balance at December 31, 1993........... 200,575 10 9,803,438 490 6,924 (62) Net income............................. -- -- -- -- -- 2,338 --------- ------ ---------- ------ --------- -------- Balance at December 31, 1994........... 200,575 10 9,803,438 490 6,924 2,276 Shares issued, formerly held by subsidiary........................ -- -- 24,700 1 15 -- Shares purchased through Tender Offer............................. (19,377) (1) (467,288) (23 ) (535) -- Shares retired through reverse stock split............................. (121,204) (6) (6,242,275) (312 ) 309 -- Shares issued on exercise of stock options........................... 506 -- 19,662 1 79 -- Two for one stock split in the form of a stock dividend............... 60,500 3 3,138,237 157 (160) -- Net income............................. -- -- -- -- -- 657 --------- ------ ---------- ------ --------- -------- Balance at December 31, 1995........... 121,000 6 6,276,474 314 6,632 2,933 Shares issued on exercise of stock options (unaudited).................. 2,026 -- 110,668 5 156 -- Conversion of Class A Common Stock to Common Stock (unaudited)............. 6,387,142 319 (6,387,142) (319 ) -- -- Shares issued on exercise of stock warrants (unaudited)................. 19,577 2 -- -- 51 -- Net income for six months ended June 30, 1996 (unaudited)................. -- -- -- -- -- 3,436 --------- ------ ---------- ------ --------- -------- Balance at June 30, 1996 (unaudited)... 6,529,745 $327 -- $ -- $ 6,839 $ 6,369 ======== ====== ========= ====== ======= =======
See Notes to Consolidated Financial Statements which are an integral part of these statements. F-5 71 EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- --------- -------- -------- (IN THOUSANDS) (UNAUDITED) OPERATING ACTIVITIES Net income............................... $ 1,197 $ 2,338 $ 657 $ 1,945 $ 3,436 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization......... 558 783 938 318 496 Provision for deferred income taxes... -- -- -- -- (33) Provision for credit losses........... 686 2,510 2,480 1,238 1,532 Loss on sale of investments........... -- 66 -- -- -- Loss on disposal of property and equipment........................... 4 5 44 5 -- Net increase in deferred loan costs... -- -- (171) -- 202 Net increase (decrease) in unearned discount and other deferrals........ 744 453 (853) (1,140) 835 Loans originated -- held for sale..... (31,882) (73,709) (173,985) (66,120) (137,940) Principal proceeds from loans sold.... 31,052 85,693 144,861 57,906 173,343 Proceeds from securitization of loans............................... -- -- 15,357 15,357 14,102 Minority interest in earnings of subsidiary.......................... 19 7 81 31 22 Changes in operating assets and liabilities increasing(decreasing) cash Restricted cash..................... -- -- (912) (341) (2,318) Excess servicing receivable......... (411) (1,460) (183) (102) (472) Remittance due loan participants.... 304 295 505 1,307 639 Accrued interest payable............ 35 30 103 93 70 Accrued liabilities................. (58) 913 877 (1,176) (1,039) Accrued interest receivable......... 23 (193) (644) (475) 104 Other assets........................ (577) 242 (923) (338) (86) Net cash provided by (used in) operating activities of discontinued operations.......... (100) (1,253) 1,592 (784) 77 -------- -------- --------- -------- -------- Net cash provided by (used in) operating activities............. 1,594 16,720 (10,176) 7,724 52,970 -------- -------- --------- -------- -------- INVESTING ACTIVITIES Loans originated -- held for investment.......................... (36,460) (74,937) (74,363) (38,529) (54,289) Principal collections on loans not sold................................ 26,094 31,786 50,329 22,289 23,373 Principal payments received on asset-backed securities............. -- -- 177 -- 421 Additional investment in subsidiary... -- -- (359) (106) -- Purchase of investment in partnership......................... -- -- (1,000) -- -- Increase in note receivable from former subsidiary................... -- -- (200) -- -- Cash paid for acquisition, net of cash purchased........................... (830) -- -- -- -- Reduction in goodwill of subsidiary... -- 85 -- -- -- Purchase of short-term investments.... (947) -- -- -- (115) Proceeds from sale of short-term investments......................... 1,000 581 614 417 -- Proceeds from sale of real estate and personal property acquired through foreclosure......................... 557 1,128 3,401 1,414 1,898
F-6 72
FOR THE YEARS ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- --------- -------- -------- (IN THOUSANDS) (UNAUDITED) Proceeds from sale of property and equipment........................... 8 -- -- -- -- Purchase of property and equipment.... (227) (479) (1,732) (377) (1,271) Rent received on real estate acquired through foreclosure................. 36 87 85 59 76 Improvements and related costs incurred on real estate acquired through foreclosure................. (286) (477) (205) (112) (189) Net cash provided by (used in) investing activities of discontinued operations.......................... (743) 806 31 207 -- -------- -------- --------- -------- -------- Net cash used in investing activities.......................... (11,798) (41,420) (23,222) (14,738) (30,096) -------- -------- --------- -------- -------- FINANCING ACTIVITIES Advances under bank lines of credit... 19,583 104,622 179,381 83,311 209,636 Payments on bank lines of credit...... (23,869) (91,839) (164,989) (80,314) (221,008) Net increase in notes payable to investors........................... 10,971 13,496 25,635 14,854 9,230 Net (decrease) increase in subordinated debentures............. 3,637 (5,826) (4,812) (7,894) 526 Payments on long-term debt and capital leases.............................. -- (280) (279) -- -- Payments for stock purchased in tender offer............................... -- -- (568) (560) -- Proceeds from exercise of stock options and warrants................ -- -- 52 -- 213 Payment for redemption of stock purchase warrant.................... (3) -- -- -- -- Increase (decrease) in note payable to minority shareholder................ 2 (50) -- -- -- Payments on mortgage payable.......... -- (80) -- -- -- Net cash provided by (used in) financing activities of discontinued operations.......................... 610 (25) (40) (7) -- -------- -------- --------- -------- -------- Net cash provided by (used in) financing activities................ 10,931 20,018 34,380 9,390 (1,403) -------- -------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents.................... 727 (4,682) 982 2,376 21,471 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..................................... 4,233 4,960 278 384 1,260 -------- -------- --------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR..... $ 4,960 $ 278 $ 1,260 $ 2,760 $ 22,731 ======== ======== ========= ======== ========
See Notes to Consolidated Financial Statements which are an integral part of these statements. F-7 73 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PREPARATION The consolidated financial statements as of June 30, 1996 and for the six-month periods ended June 30, 1995 and 1996 are unaudited. These financial statements are prepared in accordance with the SEC's rules regarding interim financial statements and therefore do not contain all disclosures required by generally accepted accounting principles for annual financial statements. These financial statements as of June 30, 1996 and for the six-month periods ended June 30, 1995 and 1996, in management's opinion, contain all known adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly-owned except The Loan Pro$, Inc. ("Loan Pro$") which is 80% owned. All significant intercompany items and transactions have been eliminated in consolidation. The Company and its subsidiaries are primarily engaged in the business of originating, selling and servicing first and second residential mortgage loans, commercial loans partially guaranteed by the United States Small Business Administration ("SBA") and loans collateralized by pre-owned automobiles. The funds for these loans are obtained principally through the issuance of notes payable and subordinated debentures to investors, and utilization of various lines of credit with banks. Substantially all of the Company's mortgage and automobile loans are made to non-prime borrowers. These borrowers generally have limited access to credit or are otherwise considered to be credit impaired by conventional lenders. 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, anticipated prepayments on loans sold with servicing retained, valuation of real estate owned, and determination of the allowance for credit losses. Minority interest represents minority shareholders' proportionate share of the equity and earnings of Loan Pro$. 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 and 3 to 7 years for furniture, fixtures and equipment. Additions to property and equipment and major replacements or improvements are capitalized at cost. Maintenance, repairs and minor replacements are expensed when incurred. AMORTIZATION The excess of cost over related net assets of businesses acquired is amortized using the straight-line method principally over 25 years. 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 discounted estimated future cash flows of the purchased subsidiary in determining any impairment on the excess of cost over the related net assets. Deposit base intangibles associated with the acquisition of certain subsidiaries are amortized using the straight-line method over 10 years, based on the estimated remaining life of the existing deposit base assumed, as calculated from a core deposit base study performed by a third party at the time of acquisition of the F-8 74 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subsidiary. On a periodic basis, management assesses the recoverability of the deposit base intangible. Such assessments encompass a projection of future earnings from the deposit base as compared to original expectations and the actual nonrenewal of investor savings upon maturity, based upon a discounted cash flow analysis. If an assessment of the deposit base intangible indicates that its recoverability is impaired, a charge to the statement of income for the most recent period is recorded for the amount of such impairment. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income taxes arise principally from depreciation, unrealized gains on loans held for sale, amortization of deposit base intangibles and allowances for credit losses. STATEMENT OF CASH FLOWS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company foreclosed on or repossessed property used to collateralize loans receivable in the amount of $5,345,000 in 1993, $3,362,000 in 1994 and $3,955,000 in 1995. The Company sold real estate held for sale by issuing loans to the buyers in the amount of $1,050,000 in 1993, $611,000 in 1994 and $689,000 in 1995. The Company paid income taxes of $60,000 in 1993, $214,000 in 1994 and $267,000 in 1995. The Company paid interest of $5,271,000 in 1993, $5,967,000 in 1994 and $8,397,000 in 1995. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is based on management's ongoing evaluation of the serviced loan portfolio and reflects an amount that, in management's opinion, is adequate to absorb losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors, including current economic conditions, prior loan loss experience, the composition of the serviced loan portfolio, and management's estimate of anticipated credit losses. Loans are charged against the allowance at such time as they are determined to be losses. Subsequent recoveries are credited to the allowance. Management considers the year-end allowance appropriate and adequate to cover possible losses in the serviced loan portfolio; however, 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 to be 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 credit losses will not be required. ACCOUNTING FOR IMPAIRED LOANS The allowance for credit losses is a composite of the allowance for credit losses of the Mortgage Loan Division, the Small Business Division and the Auto Loan Division. The Company currently maintains an allowance for credit losses on its mortgage loans equal to approximately 0.75%, approximately 3% on the unguaranteed portion of its SBA loans and approximately 4.0% of its auto loans. In addition, each subsidiary may establish a specific reserve for a particular loan that is deemed by management to be a potential problem loan where full recovery is questionable. When an impaired loan is identified by the portfolio management department of the Company to have risk characteristics that are unique to an individual borrower, the Company assesses a specific allowance on a loan-by-loan basis each month. The general allowance is calculated on a monthly basis using historical statistics. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards ("SFAS") 114 (Accounting by Creditors for Impairment of a Loan). SFAS 114 requires that the allowance for credit losses for impaired loans (as defined) be measured based on the present value of expected future F-9 75 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. SFAS 114 also changed the treatment of "in-substance foreclosed" properties to require that properties should be included as other real estate owned when legal possession of the property has been obtained. Accordingly, the Company transferred $2,674,000 and $2,327,000 (net of allowance of $297,000) of in-substance foreclosed properties from other real estate owned to loans receivable at December 31, 1993 and 1994, respectively. The adoption of SFAS 114 had no effect on net income or shareholders' equity. The Company's policy is to evaluate impaired loans based on the fair value of the collateral. Interest income from impaired loans is recorded using the cash method. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE Real estate and personal property acquired through foreclosure represent properties foreclosed upon or repossessed in the normal course of business and is valued at the lower of cost or net realizable value. Costs related to the development and improvement of the properties are capitalized whereas those costs relating to holding the properties are charged to expense. INTEREST INCOME Interest income on loans receivable is recognized using the interest method. Accrual of interest is discontinued when a loan is over 90 days past due and the collateral is determined to be inadequate or when foreclosure proceedings begin. Loan fees and issuance commissions are amortized into income over the life of the loan, using the interest method. GAIN ON SALE OF LOANS The Company sells participations representing the SBA-guaranteed portion of all of its SBA Loans (the "SBA Loan Participations") in the secondary market. In connection with such sales, the Company receives excess servicing revenue and typically receives a cash premium of approximately 10% related to the guaranteed portion being sold. In accordance with Emerging Issues Task Forces ("EITF") 88-11 a portion of the cash premium received from the sale of the guaranteed portion of the SBA loan is deferred as an unearned discount against the remaining unguaranteed portion of the loan based on the relative fair values of those portions to the total loan and the remainder is recognized as income at the time of the sale. The resulting unearned discount is accreted into interest income over the life of the loan using the interest method. The weighted average interest rate inherent in the carrying value of the excess servicing receivable is 10% at December 31, 1995. Mortgage loans consist principally of first and second residential mortgages originated principally throughout North Carolina, South Carolina and the remaining southeastern United States, and are stated at the principal amount outstanding if held for investment purposes. Non-refundable loan fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. Mortgage loans held for sale are carried at the lower of aggregate cost or market. Origination fees on mortgage loans held for sale are deferred until the time of sale and are included in the computation of the gain on, or loss from, the sale of the related loans. The cost of mortgage loans held for sale is the face value of the mortgage notes adjusted for the net deferred fees and costs that are recognized upon sale. Mortgage loans are sold servicing released and on a nonrecourse basis, with customary representations and warranties. In connection with the sale of mortgage loans, the Company receives cash premiums generally ranging from 4% to 8% of the principal amount of the mortgage loan being sold. Loans sold through securitizations with servicing retained are sold at or near par with the Company retaining a participation in the cash flows. Excess servicing receivable is calculated using prepayments, default, and interest rate assumptions that market participants would use for similar instruments. The excess servicing receivable recognized at the time of sale does not exceed that amount which would be received if it were sold F-10 76 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in the marketplace. The excess servicing receivable is written down to the present value of the remaining estimated future cash flows exceeding normal servicing fees at each balance sheet date using the same discount rate used in the original calculation. The Company's excess servicing fees from its securitization transactions are recognized over the life of the related transaction. REMITTANCE DUE LOAN PARTICIPANTS AND SERVICING FEE INCOME The Company retains the servicing rights on SBA guaranteed loan participations sold on the secondary market, for which it receives monthly a minimum of 1% of the outstanding principal balance. The Company receives the payments from the borrowers and records the portion relating to the sold participation as a liability. The participation portion is remitted to Colson Services Corp., the exclusive Fiscal and Transfer Agent for the guaranteed portion of SBA loans sold in the secondary market, by the 3rd business day of the following month. MANAGEMENT FEES The Company serves as investment manager for two Venture Funds for which it receives management fees. The Company recognizes the management fees on the accrual basis. EXCESS SERVICING RECEIVABLE An excess servicing receivable is recognized on SBA guaranteed loan participation sales in which a servicing fee in excess of the normal servicing fee is retained. The amount is determined based on the difference between the actual sales price and the estimated sales price that would have been obtained if a normal servicing fee rate had been specified. The excess servicing receivable is amortized on a loan by loan basis against servicing income over the life of the loan using the interest method. The Company monthly assesses its excess servicing receivable for any impairment on a disaggregated basis based on predominate risk factors such as prepayment, default and the discount rate. (Note 4) BORROWER COMMITMENT DEPOSITS The Company generally receives a commitment deposit from its applicants for SBA loans prior to closing. The commitment deposits are recorded as a liability when received, and are reduced for any direct expenses paid to a third party incurred in making the loan. Any deposit in excess of these direct expenses is refunded to the borrower at the time of, or subsequent to, the loan closing. Borrower commitment deposits are included in accrued liabilities. NET INCOME PER SHARE OF COMMON STOCK The Company's shareholders approved a one-for-three reverse split of the Company's Common and Class A Common Stock in June 1995. Effective January 29, 1996, the Company declared a two for one stock split effected in the form of a 100% stock dividend on the Common Stock and Class A Common Stock. The weighted average number of shares of Common and Class A Common Stock have been restated for all periods presented to reflect these stock splits. Net income per share is computed on the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during each year, 6,551,508 shares (1993), 6,688,734 shares (1994), 6,668,192 shares (1995), consisting of Common and Class A Common shares. 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. F-11 77 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company maintains its primary checking accounts with three principal banks and maintains overnight investments in reverse repurchase agreements with those same banks. The amounts maintained in the checking accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 1995, the amounts maintained in the overnight investments in reverse repurchase agreements, which are not insured by the FDIC, totaled $791,000. These investments were collateralized by U.S. Government securities held by the banks. At December 31, 1994, the amount maintained in the overnight investments in reverse repurchase agreements totaled $378,000. These investments were also collateralized by U. S. Government securities held by the banks. 3. LOANS RECEIVABLE The following is a summary of loans receivable by type of loan:
DECEMBER 31, ------------------ 1994 1995 ------- -------- (IN THOUSANDS) Mortgage Loans: Real estate loans on personal residences...................... $46,961 $ 56,722 Real estate loans on rental property.......................... 2,415 3,867 Construction loans............................................ 5,639 2,934 Notes receivable from related parties......................... 169 363 ------- -------- 55,184 63,886 SBA loans....................................................... 25,845 19,937 Automobile loans................................................ 8,483 17,673 Other loans..................................................... 2,224 2,369 ------- -------- $91,736 $103,865 ======= ========
Notes receivable from related parties included advances of $54,000 (1994) and $261,000 (1995) and repayments of $8,000 (1994) and $67,000 (1995). Real estate loans generally have contractual maturities of 12 to 360 months with an average interest rate at December 31, 1994 and 1995 of approximately 12%. Construction loans generally have contractual maturities of 12 months with an average interest rate at December 31, 1994 and 1995 of approximately 12%. SBA loans range in maturity from 7 years to 25 years depending on the use of proceeds. Interest rates on SBA loans are variable, adjusted on the first day of each calendar quarter and are generally prime plus 2.75%. The average interest rate at December 31, 1994 and 1995 for SBA loans was 11.5% and 10%, respectively. Automobile loans have maturities generally not exceeding 60 months with fixed interest rates averaging 28% in 1994 and 1995. At December 31, 1994 and 1995, approximately $3,145,000 (net of an allowance for impaired loans of $297,000) and $3,950,000 (net of an allowance for impaired loans of $73,000), respectively, of loans receivable were impaired. Loans sold and serviced for others at December 31, 1994 and 1995 were approximately $62,046,000 and $88,077,000, respectively, and are not included in assets in the accompanying balance sheets. The Company's portfolio of SBA loans receivable is diversified by industry type. At December 31, 1995, the largest concentration of SBA loans was to servicing and manufacturing companies, which comprised approximately 23% and 17%, respectively, of the SBA serviced portfolio. Approximately 23%, 16%, 16% and 13% of the serviced SBA loan portfolio at December 31, 1995 consisted of loans to borrowers located in Florida, Kansas, South Carolina and Colorado, respectively. The majority of the Company's other types of loans were to borrowers located in South Carolina. In addition, during 1995 the Company originated mortgage F-12 78 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) loans principally in the southeastern United States, with 51% of originations in South Carolina, 20% in North Carolina and the remainder distributed through the remaining southeastern states. An analysis of the allowance for credit losses is as follows:
YEARS ENDED DECEMBER 31, --------------------------- 1993 1994 1995 ----- ------- ------- (IN THOUSANDS) Balance at beginning of year.............................. $ 976 $ 952 $ 1,730 Provision for credit losses............................... 686 2,510 2,480 Net charge offs........................................... (710) (1,732) (1,563) ----- ------- ------- Balance at end of year.................................... 952 1,730 2,647 Less allowance for loss on asset-backed securities........ -- -- (773) ----- ------- ------- Balance at end of year.................................... $ 952 $ 1,730 $ 1,874 ===== ======= =======
As of December 31, loans totaling $2,110,000 (1993), $1,433,000 (1994) and $5,145,000 (1995) were on non-accrual status. The associated interest income not recognized on these non-accrual loans was approximately $146,000 during 1993, $45,000 during 1994 and $164,000 during 1995. 4. EXCESS SERVICING RECEIVABLE The activity in the excess servicing receivable is summarized as follows:
YEARS ENDED DECEMBER 31, ------------------- 1994 1995 ------ ------ (IN THOUSANDS) Balance, beginning of year....................................... $ 412 $1,872 Additional gain on sale of loans................................. 1,942 1,095 Amortization against servicing revenues.......................... (482) (913) ------ ------ Balance, end of year............................................. $1,872 $2,054 ====== ======
The weighted average interest rate inherent in the carrying value of the excess servicing receivable is 10% at December 31, 1995. During 1994, the Company changed its estimated normal servicing rate to more closely reflect the industry standard in accordance with Emerging Issues Task Force Consensus 94-9. The effect of this change was to increase 1994 income by approximately $490,000. The carrying value of the excess servicing receivable approximates fair value. 5. INVESTMENT IN ASSET-BACKED SECURITIES In 1995, the Company securitized $17,063,000 of the unguaranteed portions of its SBA loans. The securitization was effected through a grantor trust (the "Trust"), the ownership of which was represented by Class A and Class B certificates. The Class A certificates were purchased by investors, while the Company retained the Class B certificates. The Company classifies its Class B certificates as trading securities under SFAS 115, and they are carried at fair market value. These certificates are carried on the balance sheet as asset-backed securities in the net amount of $865,000. This amount is net of $773,000 allowance for loss. These certificates give the holders thereof the right to receive payments and other recoveries attributable to the unguaranteed portion of SBA loans held by the Trust. The Class B certificates represent approximately 10% of the principal amount of the SBA loans transferred in the securitization and are subordinate in payment and all other respects to the Class A certificates. Accordingly, in the event that payments received by the Trust are not sufficient to pay certain expenses of the Trust and the required principal and interest payments due on F-13 79 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Class A certificates, the Company, as holder of the Class B certificates, would not be entitled to receive principal or interest payments due thereon. The Company is required to establish and maintain cash reserve and collection accounts with a trustee in connection with the securitization. These accounts are shown as restricted cash of $912,000 on the Company's consolidated balance sheets. Although securitizations provide liquidity, the Company has utilized securitizations principally to provide a lower cost of funds and to reduce interest rate risk. The Company's excess servicing fees from the transaction are recognized over the life of the transaction. The Company serves as master servicer for the Trust and, accordingly, forwards payments received on account of the SBA loans held by the Trust to the trustee, which, in turn, pays the holders of the certificates in accordance with the terms of and priorities set forth in the securitization documents. Because the transfer of the SBA loans to the Trust constitutes a sale of the underlying SBA loans, no liability is created on the Company's Consolidated Financial Statements. However, the Company has the obligation to repurchase the SBA Loans from the Trust in the event that certain representations made with respect to the transferred SBA loans are breached or in the event of certain defaults by the Company, as master servicer. The Class A certificates received a rating of Aaa from Moody's Investors Service, Inc. The Class B certificates were not rated. In connection with the securitization, the Company received a cash payment of $15,357,000. 6. PROPERTY AND EQUIPMENT The following is a summary of property and equipment:
DECEMBER 31, ------------------- 1994 1995 ------ ------ (IN THOUSANDS) Land............................................................. $ 228 $ 228 Buildings and leasehold improvements............................. 1,063 1,162 Equipment........................................................ 105 264 Furniture and fixtures........................................... 1,274 2,673 ------ ------ $2,670 $4,327 ====== ======
Depreciation expense was $678,000, $694,000, and $769,000 in 1993, 1994 and 1995, respectively. 7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE An analysis of real estate and personal property acquired through foreclosure is as follows:
DECEMBER 31, ------------------- 1994 1995 ------ ------ (IN THOUSANDS) Balance at beginning of year..................................... $2,848 $3,603 Loan foreclosures and improvements............................... 3,889 4,160 Dispositions, net................................................ (3,134) (4,021) ------ ------ Balance at end of year........................................... $3,603 $3,742 ====== ======
F-14 80 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. NOTES PAYABLE Notes payable are summarized as follows:
DECEMBER 31, ------------------- 1994 1995 ------- ------- (IN THOUSANDS) A. Notes payable under revolving credit agreements, with interest at the bank's prime rate (8.5% at December 31, 1995) maturing March 31, 1996.............................. $ 2,865 $ 6,892 B. Notes payable under lines of credit, with interest at the bank's prime rate plus 3/4% (9.25)% at December 31, 1995) maturing in December 1997.................................. -- 9,911 C. Notes payable under lines of credit, with interest at the bank's prime rate (8.5% at December 31, 1995) maturing December 29, 1998.......................................... 14,376 14,830 Note payable in equal annual principal installments plus 8% interest................................................... 279 -- ------- ------- $17,520 $31,633 ======= ======= - ---- A. Under the terms of revolving credit agreements, the mortgage lending subsidiaries of the Company may borrow up to a maximum of $20,000,000 with interest at the bank's prime rate payable monthly. The note is collateralized by loans receivable. The agreements, among other matters, require the total unpaid balance of such pledged loans receivable to be a maximum of $25,000,000, a specified debt to net worth ratio, minimum tangible net worth and restrictions on the payment of dividends. The Company is in compliance with such restrictive covenants. The revolving credit agreements mature on March 31, 1996. At December 31, 1995, $8,958,000 was available under these lines of credit. B. Under the terms of the lines of credit, the automobile lending subsidiaries of the Company may borrow up to a maximum of $26,000,000 with interest at the bank's prime rate plus three-quarters of one percent payable monthly. The notes are collateralized by loans receivable. The terms of the agreements state that advances under the lines of credit cannot exceed 85% of the aggregate unpaid principal balance of outstanding notes receivable which are no more than sixty days past due. The agreements, among other matters, require minimum debt to tangible net worth ratios, minimum interest coverage ratios, minimum loss reserves, maximum debt to borrowing base restrictions, and restrictions on the payment of dividends. At December 31, 1995, the automobile lending subsidiaries were in compliance with such restrictive covenants and $4,308,000 was available under these lines of credit. These agreements mature in December, 1997. C. Under the terms of the lines of credit, the commercial lending subsidiaries of the Company may borrow up to a maximum of $32,000,000 with interest at the bank's prime rate. The lines are limited to 100% of the outstanding balance of the guaranteed portion of SBA 7(a) loans, 80% of the outstanding balance of the unguaranteed portion of SBA 7(a) loans, and 50% of SBA 504 loans as defined in the loan agreements. The agreements, among other matters, require minimum tangible net worth ratios, maximum ratios of total liabilities to tangible net worth, minimum interest coverage ratios, limitations on the amount of capital expenditures in any fiscal year, and restrictions on the payment of dividends. At December 31, 1995, these subsidiaries were in compliance with such restrictive covenants and $933,000 was available under these lines of credit. These agreements mature in December, 1998.
F-15 81 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Annual aggregate maturities of notes payable at December 31, 1995 are as follows (in thousands): 1996......................................... $ 6,892 1997......................................... 9,911 1998......................................... 14,830 ------- $31,633 =======
The Company currently has a commitment from a lender with respect to a new credit facility in the amount of $70,000,000. It is expected that this facility will be in place by the end of February, 1996. 9. INVESTOR SAVINGS Investor savings are summarized as follows:
DECEMBER 31, ------------------- 1994 1995 ------- ------- (IN THOUSANDS) A. Notes payable to investors.................................. $56,497 $82,132 B. Subordinated debentures..................................... 20,998 16,185 ------- ------- $77,495 $98,317 ======= ======= - --------------- A. Notes payable to investors are issued in any denomination greater than $10,000 and are registered under the South Carolina Uniform Securities Act. The notes mature from three months to three 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 6% to 10% at December 31, 1994 and 7% to 9% at December 31, 1995. The notes are subordinated to all bank debt, and are senior to subordinated debentures. B. Subordinated debentures are issued in any denomination greater than $100 and are registered under the South Carolina Uniform Securities Act. The subordinated debentures normally mature in one year from date of issuance and have an interest rate ranging from 5% to 6% quarterly. The debentures are subordinated to all bank debt and notes payable to investors.
At December 31, 1994 and 1995, notes payable to investors and subordinated debentures include an aggregate of approximately $11,043,000 and $17,080,000, respectively, of individual investments exceeding $100,000. The investor savings at December 31, 1995 mature as follows (in thousands): 1996............................................... $ 91,833 1997............................................... 2,993 1998............................................... 3,491 -------------- $ 98,317 ===========
10. LEASES The Company leases various property and equipment, office space and automobiles under operating leases. F-16 82 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following is a schedule by year of future minimum rental payments for all operating leases that have initial or remaining noncancellable terms in excess of one year (in thousands): 1996............................................... $ 427 1997............................................... 350 1998............................................... 264 1999............................................... 222 2000............................................... 73 -------------- $ 1,336 ===========
Total rental expense was approximately $974,000 in 1994 and $901,000 in 1995, 11. MANAGEMENT AGREEMENTS The Company manages two Venture Funds. The Company receives management fees equal to two and one-half percent of the total assets under management in each Venture Fund with an aggregate minimum management fee of $445,000 annually. The Company received management fees of $570,000 from the Venture Funds during 1995. The Company may also receive incentive management fees of 15% and 20%, respectively, from the two Venture Funds, of the net portfolio profits of each Venture Fund, as defined. The Company is a General Partner of one of the Venture Funds and, during 1995, made a $1,000,000 investment into the partnership. This partnership has significant common principals with the Company. 12. OTHER ASSETS AND ACCRUED LIABILITIES Other assets include the following:
DECEMBER 31, ------------- 1994 1995 ---- ------ (IN THOUSANDS) Debt issuance costs, net.............................................. $ 68 $ 666 Investments, at cost.................................................. 12 1,012 Deferred tax benefits................................................. 172 196 Other................................................................. 639 141 ---- ------ $891 $2,015 ==== ======
Accumulated amortization for other assets was approximately $1,083,000 in 1994 and $1,253,000 in 1995. Accrued liabilities include the following:
DECEMBER 31, --------------- 1994 1995 ------ ------ (IN THOUSANDS) Taxes accrued and withheld........................................... $ 177 $ -- Income taxes......................................................... 159 302 Deferred fees income................................................. 483 13 Accrued professional fees............................................ 20 141 Accounts payable..................................................... 278 208 Borrower commitment deposits......................................... 402 356 Accrued salaries and wages........................................... 186 289 Other................................................................ 1,138 1,781 ------ ------ $2,843 $3,090 ====== ======
F-17 83 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. SHAREHOLDERS' EQUITY The Company has two classes of capital stock, Common Stock and Class A Common Stock. The two classes have identical rights except for certain restrictions on the transferability of the Class A Common Stock to holders of 4.5% or more of the Company's outstanding capital stock (Common and Class A Common Stock). On May 21, 1981, the shareholders approved a 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 shares are available for grant under this stock option plan. On June 9, 1995, the shareholders approved a stock option plan under which the Board of Directors may issue 11,334 shares of Common Stock and 555,354 shares of Class A Common Stock. Under the terms of the plan, the Company may grant options to key employees to purchase up to a total of 566,668 shares of its $.05 par value Common and Class A 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. The options available for grant under the plan consist of 6,612 Common Stock options and 324,048 Class A Common Stock options at December 31, 1995. Also on June 9, 1995, the shareholders approved a stock option plan under which each nonemployee member of the Board of Directors receives options to purchase 14 shares of Common Stock and 652 shares of Class A Common Stock each December 31 beginning in 1995 through 1999. The terms of the plan are identical to the employee stock option plan approved on June 9, 1995. The options available for grant under this plan consist of 597 Common Stock options and 29,407 Class A Common Stock options at December 31, 1995. On June 9, 1995 the shareholders of the Company approved a one-for-three reverse split of the Common and Class A Common Stock. The certificates for previously issued Common and Class A Common Stock were canceled and were forfeited by the holder in order for the holder to receive replacement certificates for the after reverse split shares. The shareholders also authorized the increase of post reverse split authorized shares of Common Stock to 4,000,000 shares. The Company issued to all shareholders certificates for one-third of their Common and Class A Common shares as of June 9, 1995 upon the shareholder presenting their existing shares. No fractional shares were issued as a result of the one-for-three reverse stock split. All fractional shares were redeemed at an equivalent price of $1.25 per share. The Company offered to buy from the shareholders up to 20,000 shares of Common Stock and up to 980,000 shares of Class A Common Stock for the period March 31, through May 8, 1995 at a price of $1.15 per share. As a result of this offer, the Company purchased 19,377.38 shares of Common Stock and 467,287.96 shares of Class A Common Stock at an aggregate cost of approximately $560,000. F-18 84 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Activity in stock options is as follows:
YEARS ENDED DECEMBER 31, --------------------- 1994 1995 ------- ------- Options outstanding, beginning of year $1.09 per share)........ 133,333 140,000 Issued at: $1.09 per share.............................................. 40,000 -- $1.32 per share.............................................. -- 80,006 $4.625 per share............................................. -- 124,000 $5.09 per share.............................................. -- 32,000 $9.44 per share.............................................. -- 2,664 $10.39 per share............................................. -- 666 Expired or canceled.......................................... (33,333) -- Exercised: $1.09 per share.............................................. -- (29,800) $1.32 per share.............................................. -- (1,336) $4.625 per share............................................. -- (3,200) $5.09 per share.............................................. -- (6,000) ------- ------- Options outstanding, end of year............................. 140,000 339,000 ======= ======= Exercisable, end of year....................................... 56,000 83,532 ======= ======= Available for grant, end of year............................... 82,667 330,660 ======= =======
Warrants have been issued and are outstanding at December 31 as follows:
1994 1995 ---------------- ---------------- COMMON CLASS A COMMON CLASS A ------ ------- ------ ------- $2.625 per share................................ 4,870 238,618 2,434 119,308 ====== ======= ====== =======
These warrants are 100% exercisable at December 31, 1995. Fifty percent of the 1994 warrants outstanding expired on December 31, 1995. The 1995 outstanding warrants expire on December 31, 1996. No warrants were exercised or issued in 1994 or 1995. 14. SALE OF SUBSIDIARY In connection with the Company's strategic plan to focus its business efforts on financial services, the Company divested its apparel segment operations, which was comprised solely of the operations of Young Generations, Inc. ("YGI"). On September 30, 1995, the Company sold all of the outstanding stock (the "stock sale") of YGI to fifteen individuals (the "Buyers"), who were members of YGI's management team. As a result, the loss on the sale of the stock and operating results of the apparel segment have been classified as discontinued operations. The results of operations have been restated to exclude the Apparel Manufacturing segment from continuing operations. The Company sold the stock for $600,000 under a non-recourse promissory note from the buyers. As a result of the sale, the Company wrote-off all amounts due from YGI resulting in a charge of $3,580,300, net of income taxes of $67,700, reported as a loss from discontinued operations and have valued the note receivable at $1 due to concern over a decline in operating profits and the related impact on the buyers' source of cash to pay the note. The Company remains contingently liable for the guaranty of certain bank loans and trade accounts payable which existed prior to the stock sale which do not exceed $715,000. Management does not anticipate any significant charges to future earnings as a result of these guarantees. F-19 85 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The apparel segment, which consists solely of the operations of YGI, had net losses of $163,000 in 1993, $31,000 in 1994 and $1.3 million for the nine months ended September 30, 1995. The net loss in 1994 was decreased by the receipt of $1.25 million in life insurance proceeds due to the death of YGI's president. YGI had revenues of $11.5 million in 1993, $12.2 million in 1994 and $7.3 million for the nine months ended September 30, 1995. 15. DISCONTINUED OPERATIONS The Company's operations in the Apparel and Transportation segments were discontinued during 1995. The sale of the apparel segment is discussed further in Note 14. In July 1994 the Company sold an operating railroad for $940,000. In connection with this sale, the Company received $20,000 cash, and a note receivable of $920,000, payable in semi-annual payments over five years, with an interest rate of 10%. In November 1994, the Company assigned the rights to boxcars in a lease with a Class I railroad for $1,174,000 cash. The Company sold additional railcars in June 1995 for $111,000 cash. At December 31, 1995, the Company had remaining net assets in the transportation segment of $77,000, which the Company anticipates will be sold during 1996 at or above their carrying value. The results of operations have been restated to exclude these segments from continuing operations. Revenues applicable to the discontinued operations were:
YEARS ENDED DECEMBER 31, -------------------------- 1993 1994 1995 ------- ------- ------ (IN THOUSANDS) Apparel manufacturing...................................... $11,456 $12,140 $7,263 Transportation............................................. 1,712 1,407 390
Income from operations and gain (loss) on disposal attributable to the discontinued segments is reported net of income tax expense of:
YEARS ENDED DECEMBER 31, -------------------------- 1993 1994 1995 ------- ------- ------ (IN THOUSANDS) Apparel manufacturing...................................... $18 $(158) $(22) Transportation............................................. 23 306 (53)
F-20 86 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net assets of discontinued operations were comprised of the following:
DECEMBER 31, ----------------- 1994 1995 ------ ------ (IN THOUSANDS) ASSETS Cash and cash equivalents........................................ $ 106 $ -- Accounts receivable, net......................................... 196 -- Inventories, net................................................. 2,738 -- Property and equipment, net...................................... 1,332 153 Other assets..................................................... 398 80 ------ ------ 4,770 233 LIABILITIES Notes payable.................................................... 918 -- Other liabilities................................................ 1,347 156 ------ ------ 2,265 156 ------ ------ Net assets of discontinued operations............................ $2,505 $ 77 ====== ======
Gain (loss) from operations, net of income tax, consists of the following:
YEARS ENDED DECEMBER 31, ------------------------- 1993 1994 1995 ----- ------- ------- (IN THOUSANDS) Apparel manufacturing segment............................... $(163) $(1,949) $(1,253) Transportation segment...................................... 420 (73) (320) ----- ------- ------- $ 257 $(2,022) $(1,573) ===== ======= =======
Gain (loss) on disposal of segments, net of income taxes, consists of the following:
YEARS ENDED DECEMBER 31, ------------------------- 1993 1994 1995 ----- ------- ------- (IN THOUSANDS) Apparel manufacturing segment............................... $ -- $ -- $(2,324) Transportation segment...................................... 3 2,568 (27) ----- ------- ------- $ 3 $ 2,568 $(2,351) ===== ======= =======
F-21 87 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 cumulative effect of change in accounting principal is as follows:
YEARS ENDED DECEMBER 31, ---------------------- 1993 1994 1995 ----- ----- ------ (IN THOUSANDS) Statutory Federal rate applied to pre-tax income from continuing operations...................................... $ 225 $ 832 $1,650 State income taxes, net...................................... 51 311 3 Alternative Minimum Tax on proceeds from life insurance...... -- 25 -- Nondeductible expenses....................................... -- 3 5 Benefit of operating loss carryforward....................... (453) (630) (1,566) Amortization of excess cost over net assets of acquired businesses................................................. 63 69 62 Other........................................................ (72) (1) 36 ----- ----- ------ $(186) $ 609 $ 190 ===== ===== ======
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", effective January 1, 1993. This statement supersedes Accounting Principles Board Statement No. 11, under which the Company has previously been recognizing income tax expense. The cumulative effect of adopting SFAS No. 109 had the effect of increasing the Company's 1993 net income by approximately $113,000. The Company's effective tax rate was reduced from approximately 45% to approximately 22% as a result of the adoption of SFAS No. 109. The Company recognized no deferred tax benefits of operating loss carryforwards as a result of the adoption of SFAS No. 109. Provision (benefit) for income taxes is comprised of the following:
YEARS ENDED DECEMBER 31, ---------------------- 1993 1994 1995 ----- ----- ------ (IN THOUSANDS) Current Federal.................................................... $ 46 $ 117 $ 100 State...................................................... 13 149 49 ----- ----- ------ 59 266 149 Deferred Federal.................................................... (191) 242 27 State...................................................... (54) 101 14 ----- ----- ------ Total........................................................ (245) 343 41 Federal.................................................... (145) 359 127 State...................................................... (41) 250 63 ----- ----- ------ $(186) $ 609 $ 190 ===== ===== ======
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 F-22 88 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) purposes, and (b) operating loss carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset are as follows:
DECEMBER 31, ----------------- 1994 1995 ------- ------- (IN THOUSANDS) Deferred tax liabilities: Differences between book and tax basis of property............. $ (108) $ (269) Other.......................................................... (3) -- Deferred tax assets: Differences between book and tax basis of deposit base intangibles................................................. 130 165 Allowance for credit losses.................................... 737 1,202 Write-off of notes receivable.................................. -- 1,386 Unrealized gain on loans to be sold............................ 152 382 Deferred tax asset related to discontinued operations.......... 707 -- Operating loss carryforward (net of valuation allowance)....... (1,443) (2,670) ------- ------- Net deferred tax asset......................................... $ 172 $ 196 ======= =======
No net deferred tax asset was recognized as to the capital loss carryforwards for the years ended December 31, 1994 and 1995. A valuation allowance equal to these loss carryforwards was applied to each such carryforward as of December 31, 1994 and 1995. A valuation allowance of approximately $7,700,000 was applied to the tax effect of the net operating loss carryforward for the year ended December 31, 1995. As of December 31, 1995, the Company has available Federal net operating loss carryforwards of approximately $23,000,000 expiring in 1996 through 2001. 17. OPERATIONS AND INDUSTRY SEGMENTS The Financial Services segment was active in 1993, 1994 and 1995 in making first and second mortgage loans, small business loans, construction loans and pre-owned automobile loans. The Apparel Manufacturing segment was active in 1993 and 1994 in the design, manufacture and marketing of dresses for children. The Company sold YGI, the sole component of the segment as of September 30, 1995 and as a result, the Apparel Manufacturing segment is shown on the statements of income as discontinued operations. The Transportation segment was active in 1993 and 1994 in boxcar leasing, short-line railroad operations and railcar repair shop operations. The Company sold Peninsula Terminal Company in July 1994 and assigned the rights to boxcars in the lease with a Class I railroad in November 1994. The Company sold additional railcars in 1995 and as a result, the Transportation segment is shown on the statements of income as discontinued operations. The Company's customers include investors within the State of South Carolina, first and second residential mortgage borrowers principally in South Carolina and North Carolina, commercial borrowers throughout the United States and pre-owned automobile borrowers principally in South Carolina. 18. TRANSACTIONS WITH RELATED PARTIES The Company engaged in the following related party transactions: The Company obtains legal services from a firm, certain members of which, when considered in the aggregate, own 824,928 shares of the Company's capital stock. One member of the firm may be deemed to share investment and voting power with respect to 501,960 shares of the Company's capital stock owned by a F-23 89 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) South Carolina partnership, of which his spouse and three adult children are partners and 70,788 shares of the Company's capital stock owned by a Trust, of which he is the Grantor. Total charges for these services were $82,000 (1993), $118,000 (1994), and $234,000 (1995). Approximately $17,000 (1994) and $0 (1995) of accounts payable are payable to this law firm. The Company provided management services to a company with significant common shareholders for which it received fees of $35,000 in 1993 and 1994 and $250,000 in 1995. Notes payable to investors and subordinated debentures include amounts due to officers, directors and key employees of approximately $1,124,000, $791,000 and $873,000 at December 31, 1993, 1994 and 1995, respectively. The Company also has notes receivable from related parties. (Note 3) 19. 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 provides for employee and Company contributions, subject to certain limitations. Company matching contributions are 35% of employee contributions to a maximum of 6% of compensation for each employee. The Company's contributions under the plan totaled approximately $52,000 in 1993, $95,000 in 1994 and $76,000 in 1995. 20. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement is effective for the Company for the fiscal year ending December 31, 1996 and does not have a significant impact on the Company's financial statements. In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting for Mortgage Banking Activities. This statement allows the capitalization of servicing-related costs associated with mortgage loans that are originated for sale, and to create servicing assets for such loans. Prior to this statement, originated mortgage servicing rights were generally accorded off-balance sheet treatment. The statement is effective for the company for the fiscal year ending December 31, 1996. The adoption does not have a material effect on the company's financial condition or results of operations. The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," in October 1995. This statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The accounting requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. Though they may be adopted at issuance, the disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which this statement is initially adopted for recognizing compensation cost. The Company has elected to continue use of the method prescribed by APB 25 for recording stock-based compensation and will provide pro forma disclosures in its annual financial statements as prescribed by SFAS 123. In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." FASB's objective is to develop consistent accounting standards for those transactions, including determining when financial assets should be considered sold and derecognized from the statement of financial position and when related revenues and expenses should be recognized. The approach F-24 90 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) focuses on analyzing the components of financial asset transfers and requires each party to a transfer to recognize the financial assets it controls and liabilities it has incurred and derecognize assets when control over them has been relinquished. The statement is not expected to have a significant impact on the accounting practices of the Company and is generally effective for transactions entered into after December 31, 1996. 21. CONTINGENCIES AND LOAN COMMITMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These instruments expose the Company to credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at December 31, 1995 related to these items is summarized below:
CONTRACT AMOUNT -------------- (IN THOUSANDS) Loan commitments: Approved loan commitments.............................................. $ 79,906 Unadvanced portion of loans............................................ 4,251 -------------- Total loan commitments....................................... $ 84,157 ===========
Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held is primarily residential property. Interest rates on loan commitments are a combination of fixed and variable. Commitments outstanding at December 31, 1995 consist of adjustable and fixed rate loans of $38,866,000 and $45,291,000, respectively, at rates ranging from 10% to 13%. Commitments to originate loans generally expire within 30 days to 60 days. There is also a contingent purchase price agreement in place amounting to 2 1/2% of net income of a subsidiary not to exceed $125,000 through 1996. Any payments of the contingent purchase price will increase the excess of cost over net assets of acquired businesses. The amount paid or accrued under this arrangement was $23,000, $47,000 and $9,000 in 1993, 1994 and 1995, respectively. From time to time, the Company or its subsidiaries are defendants in legal actions involving claims arising in the normal course of its business. The Company believes that, as a result of its legal defenses and insurance arrangements, none of these actions, if decided adversely, would have a material effect on the business, financial condition, results of operations or cash flows of the Company taken as a whole. 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, 1995, the Company had no outstanding forward commitment contracts. The Company has accrued $164,000 for two former operating locations to record the potential liability for environmental contamination at these two sites. The Company believes that the total cost for this environmental liability will not exceed the amount accrued. F-25 91 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 22. 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 Short-Term Investments For these short-term instruments, the carrying amount is a reasonable estimate of fair value. Receivables For residential mortgage loans, SBA loans and automobile loans fair value is estimated using the market prices received on recent sales or securitizations of these loans in the secondary market. Mortgage Loans Held for Sale Fair value for mortgage loans held for sale is determined using the anticipated premium to be derived from the sale of the mortgage loans in the secondary market. Excess Servicing Receivable Fair value of the excess servicing receivable is determined based on the discounted present value of the remaining excess estimated future cash flows using estimated prepayment and default rates and discount rates anticipated in similar instruments. Investment in Asset-Backed Securities Fair value of the investment in asset-backed securities approximates the carrying amount. Fair value is determined based on the discounted present value of the remaining estimated future cash flows attributable to the related investment in asset-backed securities using estimated prepayment and default rates and discount rates anticipated in similar instruments. Investor Savings Due to their short-term maturity, usually one year, the fair value of the notes due investors and subordinated debentures is the current carrying amount. 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. F-26 92 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
1995 ------------------- CARRYING FAIR AMOUNT VALUE -------- -------- (IN THOUSANDS) Financial Assets: Cash and cash equivalents...................................... $ 1,560 $ 1,560 Loans receivable -- net........................................ 103,865 107,520 Mortgage loans held for sale................................... 22,593 23,526 Excess servicing receivable.................................... 2,054 2,054 Investment in asset-backed securities.......................... 1,477 1,477 Financial Liabilities Investor savings: Notes due to investors...................................... $ 82,132 $ 82,132 Subordinated debentures..................................... 16,185 16,185 Notes payable to banks and other............................... 31,633 31,633 Commitments to extend credit................................... 84,157 89,711
23. PARENT COMPANY FINANCIAL INFORMATION The following is condensed financial information of Emergent Group, Inc. (parent company only): CONDENSED BALANCE SHEETS
DECEMBER 31, ----------------- 1994 1995 ------- ------- (IN THOUSANDS) ASSETS Cash and cash equivalents.................................................. $ 110 $ 363 Short-term investments..................................................... 597 -- Receivable from subsidiaries............................................... 4,016 -- Property and equipment, net................................................ 180 139 Investment in subsidiaries, net of allowance of $2,100 in 1994............. 5,215 9,195 Notes receivable, net...................................................... 920 683 Other investments.......................................................... -- 1,000 Other assets............................................................... 255 234 ------- ------- $11,293 $11,614 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Accrued expenses and other liabilities..................................... $ 1,593 $ 1,729 Shareholders' equity....................................................... 9,700 9,885 ------- ------- $11,293 $11,614 ======= =======
F-27 93 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 ------ ------ ------ (IN THOUSANDS) REVENUES Interest......................................................... $ 103 $ 158 $ 313 Gain on disposal of assets....................................... 4 -- 66 Management fees.................................................. 216 455 570 Other............................................................ 22 6 42 ------ ------ ------ 345 619 991 EXPENSES Interest......................................................... 369 255 152 General and administrative....................................... 801 1,537 862 Other............................................................ 40 231 -- ------ ------ ------ 1,210 2,023 1,014 ------ ------ ------ Loss from continuing operations before income taxes.............. (865) (1,404) (23) Income tax expense (benefit)..................................... (556) 468 (23) Discontinued operations Income from operations, net of income tax...................... 625 467 12 Gain (loss) on disposal........................................ -- 672 (2,391) ------ ------ ------ 625 1,139 (2,379) Equity in income of subsidiaries................................. 768 3,071 3,036 Cumulative effect of change in method of accounting for income taxes.......................................................... 113 -- -- ------ ------ ------ Net income....................................................... $1,197 $2,338 $ 657 ====== ====== ======
F-28 94 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1993 1994 1995 ------ ------- ------- (IN THOUSANDS) OPERATING ACTIVITIES Net income..................................................... $1,197 $ 2,338 $ 657 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization................................ 358 367 26 Gain on sale of property and equipment....................... (4) (2,187) (66) Reserve for devaluation of subsidiary........................ -- 2,100 -- Gain on sale of subsidiary................................... -- (585) (1,257) Decrease (increase) in due from subsidiaries................. (97) (813) 306 Increase in investment in subsidiaries....................... (904) (2,358) (3,323) Write-off of notes receivable from discontinued operations... -- -- 3,648 Revenues recorded under an assigned operating lease.......... (789) (657) -- Interest expense from assignment of an operating lease....... 297 207 -- Decrease (increase) in other assets.......................... 435 (83) 59 (Decrease) increase in other liabilities..................... (311) 1,186 (272) ------ ------- ------- Cash provided by (used in) operating activities................ 182 (485) (222) ------ ------- ------- INVESTING ACTIVITIES Cash received in advances from subsidiaries.................... 700 250 3,891 Loans advanced to subsidiary................................... (400) (907) (2,041) Payments to subsidiary on loans................................ -- -- (300) Payments received from subsidiaries............................ 100 -- -- Proceeds from sale of short-term investments................... 1,000 350 597 Purchase of short-term investments............................. (947) -- -- Cash paid for purchase of subsidiary........................... (836) -- -- Purchase of property and equipment............................. (8) (21) (25) Proceeds from sale of property and equipment................... 4 1,201 112 Proceeds from sale of subsidiary............................... -- 20 -- Loan advance to former subsidiary.............................. -- -- (200) Payments received on notes receivable.......................... -- -- 236 Purchase of investment in partnership.......................... -- -- (1,000) ------ ------- ------- Cash provided by (used in) investing activities................ (387) 893 1,270 ------ ------- ------- FINANCING ACTIVITIES Payments made on notes payable................................. (279) (279) (279) Purchase of stock purchase warrants............................ (3) -- -- Purchase of stock under Tender Offer........................... -- -- (568) Proceeds from exercise of stock options........................ -- -- 52 ------ ------- ------- Cash used in financing activities.............................. (282) (279) (795) ------ ------- ------- Net increase (decrease) in cash and cash equivalents........... (487) 129 253 Cash at the beginning of the year.............................. 468 (19) 110 ------ ------- ------- Cash at the end of the year.................................... $ (19) $ 110 $ 363 ====== ======= =======
F-29 95 EMERGENT GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 24. SUBSEQUENT EVENT (UNAUDITED) In March of 1996, the Company securitized $16,107,000 of auto loans. The securitization was effected through a grantor trust (the "Trust"), the ownership of which was represented by Class A and Class B certificates. The Class A certificate was purchased by an investor, while the Company retained the Class B certificate. The Company has classified its Class B certificates as trading securities under SFAS 115 and such certificates are carried at fair value. These certificates, in addition to the Class B certificates held by the Company pursuant to the securitization of the unguaranteed portions of its SBA loans in 1995, are carried on the balance sheet as asset-backed securities in the amount of $2,185,000 which is net of $1,382,000 allowance for losses. These certificates give the holders thereof the right to receive payments and other recoveries attributable to the loans held by the Trust. The Class B certificates represent approximately 10% of the principal amount of the loans transferred in the securitization and are subordinate in payment and all other aspects to the Class A certificates. Accordingly, in the event that payments received by the Trust are not sufficient to pay certain expenses of the Trust and the required principal and interest payments due on the Class A certificates, the Company, as holder of the Class B certificates, would not be entitled to receive principal or interest payments due thereon. The Class A certificates for the Auto securitization received a rating of Aaa from Moody's Investors Service, Inc. In addition, the Class A certificates for the Auto securitization received a rating of AAA from Standards and Poors ratings group, and were guaranteed by Financial Security Assurance, Inc. The Class B certificates were not rated. In connection with the Auto securitization, the Company received cash proceeds, net of securitization costs, of $14,195,000. F-30 96 NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. --------------------- TABLE OF CONTENTS
PAGE ---- Available Information................. 2 Prospectus Summary.................... 3 Risk Factors.......................... 7 The Company........................... 13 Use of Proceeds....................... 14 Dividend Policy....................... 14 Price Range of Common Stock........... 15 Dilution.............................. 16 Capitalization........................ 17 Selected Consolidated Financial and Operating Data...................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Business.............................. 33 Management............................ 53 Principal and Selling Shareholders.... 58 Description of Securities............. 59 Underwriting.......................... 61 Legal Matters......................... 62 Experts............................... 62 Additional Information................ 62 Index to Financial Statements......... F-1
3,000,000 SHARES EMERGENT LOGO COMMON STOCK ----------------------- PROSPECTUS ----------------------- WHEAT FIRST BUTCHER SINGER RAYMOND JAMES & ASSOCIATES, INC. , 1996 97 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table itemizes the expenses incurred by the Company in connection with the registration, issuance and distribution of the Common Stock offered hereby, other than the underwriting discount. All the amounts shown are estimates except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. fee and the Nasdaq listing fee. Securities and Exchange Commission registration fee............................... $ 32,448 National Association of Securities Dealers, Inc. filing fee....................... 9,927 Nasdaq listing fee................................................................ 17,500 Printing and engraving............................................................ 110,000 Legal fees and expenses........................................................... 145,000 Accounting fees and expenses...................................................... 60,000 Blue Sky qualifications, related legal fees and expenses.......................... 33,350 Transfer Agent and Registrar's fees............................................... 20,000 Miscellaneous expenses............................................................ 71,625 -------- Total................................................................... $500,000 ========
ITEM 14: INDEMNIFICATION OF DIRECTORS AND OFFICERS Reference is made to other sections in Chapter 8, Article 5 of Title 33 of the 1976 Code of Laws of South Carolina, as amended (the "South Carolina Code"), which provides as follows: Section 33-8-510. Authority to Indemnify. (a) Except as provided in subsection (d), a corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if: (1) he conducted himself in good faith; and (2) he reasonably believed: (i) in the case of conduct in his official capacity with the corporation, that his conduct was in its best interest; and (ii) in all other cases, that his conduct was at least not opposed to its best interest; and (3) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful. (b) A director's conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection (a)(2)(ii). (c) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section. (d) A corporation may not indemnify a director under this section: (1) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (2) in connection with any other proceeding charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him. (e) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding. Section 33-8-520. Mandatory Indemnification. Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding. II-1 98 Section 33-8-530. Advance for Expenses. (a) A corporation may pay for or reimburse the reasonable expenses incurred by a director who is a party to a proceeding in advance of final disposition of the proceeding if: (1) the director furnishes the corporation a written affirmation of his good faith belief that he has met the standard of conduct described in Section 33-8-510; (2) the director furnishes the corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet the standard of conduct; and (3) a determination is made that the facts then known to those making the determination would not preclude indemnification under this subchapter. (b) The undertaking required by subsection (a)(2) must be an unlimited general obligation of the director but need not be secured and may be accepted without reference to financial ability to make repayment. (c) Determinations and authorizations of payments under this section must be made in the manner specified in Section 33-8-550. Section 33-8-540. Court-Ordered Indemnification. Unless a corporation's articles of incorporation provide otherwise, a director of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court after giving any notice the court considers necessary may order indemnification if it determines: (1) the director is entitled to mandatory indemnification under Section 33-8-520, in which case the court also shall order the corporation to pay the director's reasonable expenses incurred to obtain court-ordered indemnification; or (2) the director is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he met the standard of conduct set forth in Section 33-8-510 or was adjudged liable as described in Section 33-8-510(d), but if he was adjudged so liable his indemnification is limited to reasonable expenses incurred. Section 33-8-550. Determination and Authorization of Indemnification. (a) A corporation may not indemnify a director under Section 33-8-510 unless authorized in the specific case after a determination has been made that indemnification of the director is permissible in the circumstances because he has met the standard of conduct set forth in Section 33-8-510. (b) The determination must be made: (1) by the board of directors by majority vote of a quorum consisting of directors not at the time parties to the proceeding; (2) if a quorum cannot be obtained under subdivision (1), by majority vote of a committee duly designated by the board of directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding; (3) by special legal counsel: (i) selected by the board of directors or its committee in the manner prescribed in item (1) or (2); or (ii) if a quorum of the board of directors cannot be obtained under subdivision (1) and a committee cannot be designated under subdivision (2), selected by majority vote of the full board of directors (in which selection directors who are parties may participate); or (4) by the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. (c) Authorization of indemnification and evaluation as to reasonableness of expenses must be made in the same manner as the determination that indemnification is permissible, except that, if the determination is made by special legal counsel, authorization of indemnification and evaluation as to the reasonableness of expenses must be made by those entitled under subsection (b)(3) to select counsel. Section 33-8-560. Indemnification of officers, employees, and agents. Unless a corporation's articles of incorporation provide otherwise: (1) an officer of the corporation who is not a director is entitled to mandatory indemnification under Section 33-8-520, and is entitled to apply for court-ordered indemnification under Section 33-8-540, in each case to the same extent as a director; (2) the corporation may indemnify and advance expenses under this subchapter to an officer, employee, or agent of the corporation who is not a director to the same extent as to a director; and (3) a corporation also may indemnify and advance expenses to an officer, employee, or agent who is not a director to the extent, II-2 99 consistent with public policy that may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract. Section 33-8-570. Insurance. A corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the corporation, or who while a director, officer, employee, or agent of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by him in that capacity or arising from his status as a director, officer, employee, or agent, whether or not the corporation would have power to indemnify him against the same liability under Section 33-8-510 or 33-8-520. Chapter 8, Article 5 of the South Carolina Code also permits a corporation to purchase and maintain insurance on behalf of a person who is or was an officer or director. The Company maintains directors' and officers' liability insurance. The Company's Bylaws provide that the Company shall, to the fullest extent permitted by Section 33-13-180 of the South Carolina Code from time to time, indemnify all persons whom it may indemnify pursuant thereto. The Company's Bylaws further provide that the Company may purchase insurance to effect such indemnification. Reference is made to Chapter 2 of Title 33 of the 1976 Code of Laws of South Carolina, as amended, respecting the limitation in a corporation's articles of incorporation of the personal liability of a director for breach of the director's fiduciary duty. Reference is made to the Company's Articles of Amendment filed with the South Carolina Secretary of State on May 26, 1989 which state: A director of the corporation shall not be personally liable to the corporation or any of its shareholders for monetary damages for breach of fiduciary duty as a director, provided that this provision shall not be deemed to eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involved gross negligence, intentional misconduct, or a knowing violation of law, (iii) imposed under Section 33-8-330 of the South Carolina Business Corporation Act of 1988 (improper distribution to shareholder), or (iv) for any transaction from which the director derived an improper personal benefit. ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES For the three years immediately preceding the date hereof, Emergent Group, Inc. has not sold any securities that were not registered under the Securities Act of 1933, as amended, except as follows: In the past three years, the Company has issued options to purchase an aggregate of 378,536 shares of Common Stock to a total of 16 Company officers and, upon exercise of certain of these options, issued Common Stock and Class A Common Stock in accordance with the terms thereof. These options were issued pursuant to Company stock option plans. These securities were exempt from federal registration under Section 4(2) of the Securities Act. In 1996, the Company issued 10,500 shares of restricted stock to certain of its directors under the Company's Restricted Stock Agreement Plan. These securities were exempt from federal registration under Section 4(2) of the Securities Act. ITEM 16: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) Exhibits
EXHIBIT NO. - ----------- 1.1 -- Form of Underwriting Agreement. To be filed by amendment. 3.1 -- Amended and Restated Articles of Incorporation dated September 20, 1978: Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, Commission File No. 2-62723 (the "1978 Registration Statement").
II-3 100
EXHIBIT NO. - ----------- 3.2 -- Articles of Amendment as filed with the Secretary of State of South Carolina on June 5, 1984: Incorporated by reference to Item 6(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1984, Commission File No. 0-8909. 3.3 -- Articles of Amendment as filed with the Secretary of State of South Carolina on December 27, 1985: Incorporated by reference to Current Report on Form 8-K dated January 2, 1986, Commission File No. 0-8909. 3.4 -- Articles of Amendment as filed with the Secretary of State of South Carolina on August 23, 1991: Incorporated herein by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File No. 0-8909. 3.5 -- Restated By-Laws: Incorporated by reference to Exhibit 3.2 of the 1978 Registration Statement. 3.6 -- Amendment to Bylaws: Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File No. 0-8909. 3.7 -- Form of Warrant: Incorporated herein by reference to the Company's Report on Form 10-K for the year ended December 31, 1985, File No. 0-8909. 3.8 -- Articles of Amendment as filed with the Secretary of State of South Carolina on April 19, 1996: Incorporated by reference to Exhibit 3.1 in the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 0-8909. 3.9 -- Articles of Amendment as filed with the Secretary of State of South Carolina on May 26, 1989: Incorporated by reference to Exhibit 4.8 of the Company's registration statement on Form S-8, Commission File No. 333-07923. 3.10 -- Articles of Amendment as filed with the Secretary of State of South Carolina on June 14, 1995: Incorporated by reference to Exhibit 4.9 of the Company's registration statement on Form S-8, Commission File No. 333-07923. 4.1 -- See Exhibits 3.1 through 3.10. 5.1 -- Opinion of Wyche, Burgess, Freeman & Parham, P.A. regarding legality of shares of the Company. 10.1 -- Emergent Group, Inc. Stock Option Plan. 10.2 -- 1995 Officer and Employee Stock Option Plan: Incorporated by reference to an exhibit filed with the Company's 1995 Notice of Annual Meeting and Proxy Statement, Commission File No. 0-8909. 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. 10.5 -- Loan and Security Agreement dated December 19, 1995 between BankAmerica Business Credit, Inc. and The Loan Pro$, Inc. 10.6 -- Loan and Security Agreement as amended by Amendment No. 1, dated April 10, 1995 between BankAmerica Business Credit, Inc. and Premier Financial Services, Inc. 10.7 -- Loan and Security Agreement as amended by Amendment Nos. 1, 2 and 3 dated December 29, 1993 between NationsBank of Georgia, N.A. and Emergent Business Capital, as amended. 10.8 -- Loan and Security Agreement dated October 10, 1995 between NationsBank of Georgia, N.A. and Emergent Commercial Mortgage. 10.9 -- Mortgage Loan Warehousing Agreement dated November 22, 1994 between First Union National Bank of North Carolina and Carolina Investors, Inc., as amended by Amendments Nos. 1, 2, 3 and 4. 10.10 -- Mortgage Loan Warehousing Agreement dated March 6, 1996 between First Union National Bank of North Carolina and Emergent Mortgage Corporation, as amended. Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Commission File No. 0-8909.
II-4 101
EXHIBIT NO. - ----------- 10.11 -- The Pooling and Servicing Agreement dated as of June 29, 1995 between Emergent Business Capital, Inc., as Seller and Servicer, and First Union National Bank of North Carolina, as Trustee: Incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K dated June 29, 1995, Commission File No. 0-8909. 10.12 -- Certificate Purchase Agreement between the Placement Agent, as initial purchaser, and the Company: Incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K dated June 29, 1995, Commission File No. 0-8909. 10.13 -- Loan and Security Agreement dated May 31, 1996, between NationsBank, N.A. (South) and Emergent Financial Corporation. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.14 -- Amendment No. 1 to Loan and Security Agreement dated October 10, 1995, between NationsBank of Georgia, N.A. and Emergent Commercial Mortgage, Inc. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.15 -- Amendment Number 4 to Loan and Security Agreement dated December 29, 1993, between NationsBank of Georgia and Emergent Business Capital, Inc. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 21.1 -- Listing of subsidiaries. 23.1 -- Consent of Wyche, Burgess, Freeman & Parham, P.A.: Contained in Exhibit 5.1. 23.2 -- Consent of Elliott, Davis & Company, L.L.P. 24.1 -- Power of Attorney: Set forth on the Signature Page hereof.
(B) Financial Statement Schedules. Not applicable ITEM 17: UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 102 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Greenville, State of South Carolina, on September 20, 1996. EMERGENT GROUP, INC. By: /s/ JOHN M. STERLING, JR. --------------------------- John M. Sterling, Jr. Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John W. Sterling, Jr. and Robert S. Davis, and each of them, as true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all which said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do, or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and as of the dates indicated:
SIGNATURE TITLE DATE - --------------------------------------------- --------------------------- -------------------- /s/ JOHN M. STERLING, JR. Chairman of the Board of September 20, 1996 - --------------------------------------------- Directors, CEO (principal John M. Sterling, Jr. executive officer) /s/ KEITH B. GIDDENS Director, President and September 20, 1996 - --------------------------------------------- Chief Operating Officer Keith B. Giddens /s/ KEVIN J. MAST Vice President, Chief September 20, 1996 - --------------------------------------------- Financial Officer and Kevin J. Mast Treasurer (principal financial and accounting officer) /s/ ROBERT S. DAVIS Director, Vice President -- September 20, 1996 - --------------------------------------------- Administration Robert S. Davis /s/ CLARENCE B. BAUKNIGHT Director September 20, 1996 - --------------------------------------------- Clarence B. Bauknight /s/ JACOB H. MARTIN Director September 20, 1996 - --------------------------------------------- Jacob H. Martin /s/ PORTER B. ROSE Director September 20, 1996 - --------------------------------------------- Porter B. Rose /s/ BUCK MICKEL Director September 20, 1996 - --------------------------------------------- Buck Mickel /s/ TECUMSEH HOOPER, JR. Director September 20, 1996 - --------------------------------------------- Tecumseh Hooper, Jr.
II-6 103 EXHIBIT INDEX
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------ ---------- 1.1 -- Form of Underwriting Agreement. To be filed by amendment. 3.1 -- Amended and Restated Articles of Incorporation dated September 20, 1978: Incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form S-1, Commission File No. 2-62723 (the "1978 Registration Statement"). 3.2 -- Articles of Amendment as filed with the Secretary of State of South Carolina on June 5, 1984: Incorporated by reference to Item 6(a) of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1984, Commission File No. 0-8909. 3.3 -- Articles of Amendment as filed with the Secretary of State of South Carolina on December 27, 1985: Incorporated by reference to Current Report on Form 8-K dated January 2, 1986, Commission File No. 0-8909. 3.4 -- Articles of Amendment as filed with the Secretary of State of South Carolina on August 23, 1991: Incorporated herein by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File No. 0-8909. 3.5 -- Restated By-Laws: Incorporated by reference to Exhibit 3.2 of the 1978 Registration Statement. 3.6 -- Amendment to Bylaws: Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, Commission File No. 0-8909. 3.7 -- Form of Warrant: Incorporated herein by reference to the Company's Report on Form 10-K for the year ended December 31, 1985, File No. 0-8909. 3.8 -- Articles of Amendment as filed with the Secretary of State of South Carolina on April 19, 1996: Incorporated by reference to Exhibit 3.1 in the Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, Commission File No. 0-8909. 3.9 -- Articles of Amendment as filed with the Secretary of State of South Carolina on May 26, 1989: Incorporated by reference to Exhibit 4.8 of the Company's registration statement on Form S-8, Commission File No. 333-07923. 3.10 -- Articles of Amendment as filed with the Secretary of State of South Carolina on June 14, 1995: Incorporated by reference to Exhibit 4.9 of the Company's registration statement on Form S-8, Commission File No. 333-07923. 4.1 -- See Exhibits 3.1 through 3.10. 5.1 -- Opinion of Wyche, Burgess, Freeman & Parham, P.A. regarding legality of shares of the Company. 10.1 -- Emergent Group, Inc. Stock Option Plan. 10.2 -- 1995 Officer and Employee Stock Option Plan: Incorporated by reference to an exhibit filed with the Company's 1995 Notice of Annual Meeting and Proxy Statement, Commission File No. 0-8909. 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. 10.5 -- Loan and Security Agreement dated December 19, 1995 between BankAmerica Business Credit, Inc. and The Loan Pro$, Inc. 10.6 -- Loan and Security Agreement as amended by Amendment No. 1, dated April 10, 1995 between BankAmerica Business Credit, Inc. and Premier Financial Services, Inc. 10.7 -- Loan and Security Agreement as amended by Amendment Nos. 1, 2 and 3 dated December 29, 1993 between NationsBank of Georgia, N.A. and Emergent Business Capital, as amended.
104
SEQUENTIAL EXHIBIT NO. DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------ ---------- 10.8 -- Loan and Security Agreement dated October 10, 1995 between NationsBank of Georgia, N.A. and Emergent Commercial Mortgage. 10.9 -- Mortgage Loan Warehousing Agreement dated November 22, 1994 between First Union National Bank of North Carolina and Carolina Investors, Inc., as amended by Amendments Nos. 1, 2, 3 and 4. 10.10 -- Mortgage Loan Warehousing Agreement dated March 6, 1996 between First Union National Bank of North Carolina and Emergent Mortgage Corporation, as amended. Incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Commission File No. 0-8909. 10.11 -- The Pooling and Servicing Agreement dated as of June 29, 1995 between Emergent Business Capital, Inc., as Seller and Servicer, and First Union National Bank of North Carolina, as Trustee: Incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K dated June 29, 1995, Commission File No. 0-8909. 10.12 -- Certificate Purchase Agreement between the Placement Agent, as initial purchaser, and the Company: Incorporated by reference to Exhibit 28.1 to the Company's Current Report on Form 8-K dated June 29, 1995, Commission File No. 0-8909. 10.13 -- Loan and Security Agreement dated May 31, 1996, between NationsBank, N.A. (South) and Emergent Financial Corporation. Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.14 -- Amendment No. 1 to Loan and Security Agreement dated October 10, 1995, between NationsBank of Georgia, N.A. and Emergent Commercial Mortgage, Inc. Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 10.15 -- Amendment Number 4 to Loan and Security Agreement dated December 29, 1993, between NationsBank of Georgia and Emergent Business Capital, Inc. Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 21.1 -- Listing of subsidiaries. 23.1 -- Consent of Wyche, Burgess, Freeman & Parham, P.A.: Contained in Exhibit 5.1. 23.2 -- Consent of Elliott, Davis & Company, L.L.P. 24.1 -- Power of Attorney: Set forth on the Signature Page hereof.
EX-5.1 2 OPINION OF WYCHE BURGESS 1 Exhibit 5.1 September 20, 1996 Emergent Group, Inc. 15 South Main Street, Suite 750 Greenville, South Carolina 29601 RE: Registration Statement on Form S-1 with respect to 3,000,000 shares of Emergent Group, Inc. Common Stock Gentlemen/Ladies: The opinions set forth herein are rendered with respect to the 3,000,000 shares of Common Stock, par value $0.05 per share, (the "Shares") of Emergent Group, Inc., a South Carolina corporation (the "Company"), which may be issued by the Company or sold by certain selling shareholders in connection with an underwritten public offering (the "Offering") registered with the Securities and Exchange Commission (the "Commission") by the Company's Registration Statement on Form S-1, as amended, (the "Registration Statement") filed on September 20, 1996, pursuant to the Securities Act of 1933, as amended (the "Securities Act"). We have examined the Company's Articles of Incorporation, as amended, and the Company's Bylaws, as amended, and reviewed the records of the Company's corporate proceedings. We have made such investigation of law as we have deemed necessary in order to enable us to render this opinion. With respect to matters of fact, we have relied upon information provided to us by the Company and have made no further investigation. With respect to all examined documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to authentic originals of all documents submitted to us as certified, conformed or photostatic copies and the accuracy and completeness of the information contained therein. Based on and subject to the foregoing and subject to the comments, limitations and qualifications set forth below, we are of the opinion that the Shares will, when sold pursuant to the terms of an underwriting or purchase agreement to be entered into in connection with the Offering, 2 be legally and validly issued and fully paid and non-assessable. This opinion is subject to the condition that, prior to the issuance of the Shares in the Offering, the Company's Board of Directors will be required to make a further authorization of the price at which the Shares will be sold. The foregoing opinion is limited to matters governed by the laws of the State of South Carolina in force on the date of this letter. We express no opinion with regard to any matter which may be (or purports to be) governed by the laws of any other state or jurisdiction. In addition, we express no opinion with respect to any matter arising under or governed by the South Carolina Uniform Securities Act, as amended, or any law respecting disclosure. This opinion is rendered as of the date of this letter and applies only to the matters specifically covered by this opinion, and we disclaim any continuing responsibility for matters occurring after the date of this letter. We consent to the use of this opinion as an exhibit to the Registration Statement. Yours truly, Wyche, Burgess, Freeman & Parham, P.A. By: ---------------------------------------- William P. Crawford, Jr. 2 EX-10.1 3 STOCK OPTION PLAN 1 EXHIBIT 10.1 STOCK OPTION PLAN OF NATIONAL RAILWAY UTILIZATION CORPORATION 1. PURPOSE. The purpose of this Stock Option Plan is to further the best interests of the Corporation by encouraging its directors and key employees to continue association with the Corporation, to induce prospective key employees and directors to accept employment or association with the Corporation and to provide additional incentive for unusual industry and efficiency through offering an opportunity to acquire a proprietary interest in the Corporation. 2. ADMINISTRATION. The plan shall be administered by the Board of Directors who may from time to time issue orders or adopt resolutions, not inconsistent with the provisions of this Plan, to interpret the provisions and supervise the administration of the Plan. The Board of Directors may designate a committee to administer the Plan and may authorize such committee to exercise any and all of the powers and functions of the Board of Directors pursuant to the Plan. All determinations shall be by the affirmative vote of a majority of the members of the Committee or of the Board of Directors who are not option holders or proposed option holders. 3. ELIGIBILITY. Options shall be granted only to directors or key employees who hold executive or other responsible positions in the management of the affairs of the Corporation. The terms "employees" and "directors" mean employees and directors of the Corporation or any subsidiary. 4. SHARES SUBJECT TO THE PLAN. The Board of Directors, or its Committee, may from time to time provide for the option and sale in the aggregate of up to Two Hundred Fifty Thousand (250,000) shares of the Corporation's Common Stock, par value $.05 (subject to adjustments required by Section 10 of this Plan). If an option ceases to be exercisable, in whole or in part, the shares representing such option shall continue to be available under the Plan and may be optioned to other persons. Shares may be authorized, unissued or reacquired Common Stock. 5. PRICE. The purchase price of the shares under each option granted pursuant to the Plan shall be not less than the fair market value of the stock at the time such option is granted. For purposes of this Plan, fair market value shall be the closing bid price on the date of the grant of such option. The purchase price of each share on the exercise of any option shall be paid in full in cash at the time of exercise, and a certificate representing shares so purchased shall be delivered to the person entitled thereto. 6. DURATION OF THE OPTION. Each option granted hereunder shall continue for a period of five years from the date of its grant, unless sooner terminated under the provisions of Sections 11 and 12 of this Plan. 7. EXERCISE OF THE OPTION. Each optionee must have been an employee or 2 director of the Corporation or of any one or more of its subsidiaries for one year before he can exercise any part thereof and must have been an employee or director at all times during the period, beginning on the date of the grant of the option and ending on a date three months prior to the date of exercise. However, an optionee's right to exercise shall not be lost because he is subsequently transferred to the employ of a subsidiary or affiliate of the Corporation, acquired by it after the grant of his option. Options granted under this Plan shall be exercisable, on a cumulative basis, twenty percent per year during each year since the grant of the option. 8. NON-TRANSFERABILITY OF OPTION. Each option granted under this Plan shall by its terms be non-transferable by the optionee other than by will or the laws of descent and distribution and shall be exercisable during his lifetime only by him. 9. OTHER TERMS AND CONDITIONS. The Board of Directors shall have power, subject to the limitations contained herein, to fix any terms and conditions for the grant or exercise of any option under this Plan. Nothing contained in this Plan, nor in any option granted pursuant to this Plan, shall confer upon any optionee any right to continued employment by the Corporation, nor limit in any way the right of the Corporation to terminate his employment at any time. 10. ADJUSTMENT OF SHARES SUBJECT TO OPTION. In the event there is any change in the Common Stock of the Corporation through the declaration of stock dividends, or through recapitalization resulting in stock splitups, or combinations or exchanges of shares, or otherwise, the number of shares available for option and the shares subject to any option shall be appropriately adjusted by the Board of Directors or its Committee. The Corporation shall give notice of such adjustment to each holder of an option under this Plan, and such adjustment shall be effective and binding on the optionee. 11. DEATH OF OPTIONEE. If an optionee dies while he is an employee or director of the Corporation or of any subsidiary of the Corporation, or within 90 days after the termination of such employment, the option may be exercised within 12 months after his death by the person or persons to whom his rights under the option shall pass by his will or by the applicable laws of descent and distribution; provided, however, that no such option may be exercised after the expiration date specified therein. 12. TERMINATION OF EMPLOYMENT, RETIREMENT, AND DISABILITY. If an optionee shall cease to be an employee or director of the Corporation for any reason (including retirement and disability), other than death, after he shall have continuously been so employed for one year from the date of granting of his option, he may, but only within the three month period immediately following such termination of employment, and in no event later than the expiration date specified in the option, exercise his option to the extent he was entitled to exercise it at the date of such termination. 2 3 13. PURCHASE OF SHARES FOR INVESTMENT. Each optionee and each other person who shall exercise an option shall represent and agree that all shares purchased pursuant to such option will be purchased for investment and not with a view to the distribution or resale thereof. 14. REGISTRATION, QUALIFICATION OR APPROVAL OF SHARES. Each option shall be subject to the condition that, if at any time the Board of Directors shall determine in its discretion that the registration or qualification of the shares of common stock subject to the option upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of the option or the issue or purchase of shares under the option, the option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors of the Corporation. 15. SUSPENSION, AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Corporation shall have the right, at any time, to suspend, amend or terminate the Plan; provided, however, that unless duly approved by the holders of a majority of the common stock of the Corporation, no amendment shall increase the total number of shares that shall be the subject of the Plan or change the purchase price for the optioned shares, and provided further that no termination of the Plan or action by the Board of Directors in amending or suspending the Plan shall affect or impair the rights of an optionee under any option previously granted under the Plan. No option may be granted under the Plan during any suspension thereof or after the termination thereof. 16. EFFECTIVE DATE OF PLAN. This Plan shall be submitted to the shareholders of the Corporation at the annual meeting to be held on May 21, 1981, and shall become operative and effective on its adoption by the shareholders of the Corporation at such meeting, but not before. 3 EX-10.4 4 STOCK AGREEMENT PLAN 1 Exhibit 10.4 EMERGENT GROUP, INC. RESTRICTED STOCK AGREEMENT PLAN 1. Purpose. The purpose of the Emergent Group, Inc. Restricted Stock Agreement Plan (the "Plan") is to provide additional incentives to members of the Board of Directors of Emergent Group, Inc. (the "Company"), who are not employees of the Company, to advance the interests of the Company and to enable it to attract and retain highly competent non-employee directors. 2. Stock Subject to Plan. The stock subject to the Plan shall be shares of the Company's Common Stock, par value $.05 per share ("Shares") authorized for issuance by the Company but not issued at the time of the grant, Shares which shall have been reacquired by the Company, or any combination thereof. Subject to adjustment in accordance with the provisions of Section 8 hereof, the total amount of Shares which may be issued pursuant to Restricted Stock Agreements under the Plan shall not exceed in the aggregate 50,000 Shares. This limitation of 50,000 Shares shall be calculated as of the date hereof. Any Shares subject to a Restricted Stock Agreement under the Plan, which Agreement for any reason expires or is terminated as to such Shares, may again be subjected to a Restricted Stock Agreement under the Plan. 3. Administration of Plan. The Plan shall be administered by the Company's Board of Directors (the "Board"). The Board shall have complete authority, consistent with and subject to the terms of this Plan, to: (i) interpret all terms and provisions of the Plan consistent with law; (ii) prescribe the form of instrument(s) evidencing Restricted Stock Agreements granted under this Plan; (iii) adopt, amend and rescind general and special rules and regulations for the Plan's administration; and (iv) make all other determinations necessary or advisable for the administration of the Plan. Any action which the Board is authorized to take may be taken without a meeting if all the members of the Board sign a written document authorizing such action to be taken, unless different provision is made by the By-Laws of the Company or by resolution of the Board. The Board may designate selected Board members or certain employees of the Company as a committee (the "Committee") to assist the Board in the administration of the Plan and may grant authority to such persons to execute documents, including Restricted Stock Agreements, on behalf of the Board; subject in each such case to the requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and any successor rule ("Rule 16b-3"). No member of the Board or employee of the Company assisting the Board pursuant to the preceding paragraph shall be liable for any action taken or determination made in good faith. 4. Eligibility and Grant. Restricted Stock Agreements of the Company hereunder may be granted only to those directors of the Company who, on the date of the grant, are not employees of the Company (each an "Eligible Director"). On each Grant Date (as hereinafter defined), each Eligible Director shall automatically receive from the Company a Restricted Stock Agreement to purchase for $.05 per Share that number of Shares 2 having a fair market value, as hereinafter defined, equal to Twelve Thousand Dollars ($12,000). The Fair Market Value on the Grant Date for each Share shall be the price per share equal to the bid price obtained from the National Daily Quotation Service until such time as the Shares are listed for quotation on the Nasdaq National Market, and thereafter the Fair Market Value per Share shall be equal to the average of the high and low sales prices per Share reported on Nasdaq. For purposes of this Plan, the Grant Date shall be January 31 of each calendar year commencing with the 1996 calendar year (or, if January 31 is not a business day, the immediately preceding business day). Shares subject to a Restricted Stock Agreement may be purchased immediately commencing on the Grant Date and at any time and from time to time thereafter until and including the date which is the business day immediately preceding the tenth anniversary of the Grant Date. Notice of each Restricted Stock Agreement granted on a Grant Date shall be given to each Eligible Director within a reasonable time after the Grant Date. For purposes of this Plan, "business day" shall mean each day other than Saturday, Sunday and any day on which commercial banks are authorized or required by law to close in New York City. This Section 4 and Section 5 hereof and any other provision of this Plan which is subject to paragraph (c)(2)(ii)(B) of Rule 16b-3 (or any successor provision), shall not be amended more frequently than once every six months, other than to comport with changes in the Internal Revenue Code (the "Code"), the Employee Retirement Income Security Act, or the rules thereunder. 5. Terms and Conditions of Restricted Stock Agreement. Each Restricted Stock Agreement which may be awarded to an Eligible Director shall be subject to the following terms and conditions: (a) Acquisition of Shares. Each Restricted Stock Agreement shall provide for the acquisition of the Shares upon the satisfaction of the terms and conditions set forth in such Agreement and in this Plan. (b) Price. The price of the Shares which may be purchased by the Eligible Director pursuant to a Restricted Stock Agreement shall be five cents ($.05) per Share. (c) Transferability. Shares subject to a Restricted Stock Agreement shall initially be non-transferable and subject to forfeiture as provided herein. The Restricted Stock Agreement shall set forth the schedule pursuant to which the Shares shall become freely transferable and not subject to the risk of forfeiture. Shares granted to a recipient shall become freely transferable and shall no longer be subject to forfeiture at a rate of twenty percent (20%) of the total number of the Shares covered by such Agreement on each of the five anniversaries of the Grant Date, beginning with the first anniversary of such grant; provided, forfeiture provisions and transfer restrictions shall terminate in the case of participants who cease to serve on the Board of Directors of the Company after attaining 70 years of age. (d) Forfeiture of Right to Purchase Shares. If an Eligible Director's service on the Board of Directors of the Company is terminated for any reason other than death, "total and permanent disability", or otherwise terminated after attaining 70 years of age, prior to the scheduled termination of transferability restrictions as provided herein on all Shares subject thereto, Shares subject to a Restricted 2 3 Stock Agreement which are not yet freely transferable shall be canceled and returned to the Company. Total and permanent disability means a physical or mental condition of a participant resulting from bodily injury, disease, or mental disorder which renders him or her incapable of continuing his or her usual and customary duties of service on the Board of Directors of the Company. Disability shall be determined by a licensed physician selected by the Board or Committee. (e) Death or Total and Permanent Disability. If an Eligible Director's service on the Board of Directors of the Company is terminated as a result of his death or total and permanent disability, (i) the risk of forfeiture of the right to purchase Shares under any Restricted Stock Agreement of such person shall terminate, (ii) all Shares represented by such Restricted Stock Agreement shall immediately become freely transferable, and (iii) such person, or such person's personal representative, shall have the right to purchase the Shares covered by such Agreement upon the terms set forth in such Agreement, without regard to the provisions for forfeiture set forth therein, at any time within six months after such person's death or total and permanent disability. Such Restricted Stock Agreement shall be canceled and of no further force or effect upon the expiration of six months after such person's death or total and permanent disability. (f) Non-Assignable. No rights under a Restricted Stock Agreement shall be assignable except as specifically provided herein. Notwithstanding anything to the contrary herein, no such Agreement be sold, assigned or transferred except: (i) by will; (ii) by the laws of descent and distribution; or (iii) pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or in Title I of the Employee Retirement Income Security Act, or the rules thereunder. (g) Change of Control. Unless specifically stated otherwise in the Restricted Stock Agreement, the risk of forfeiture applicable to the right to purchase Shares under such Agreement shall lapse upon a Change of Control of the Company. For purposes of this Plan, a "Change of Control" means a change of control required to be reported in response to Item 6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as amended, or any merger, tender offer, consolidation or sale of substantially all of the assets of the Company or related series of such events, as a result of which (i) the Shareholders of the Company immediately prior to such event hold less than 50% of the outstanding voting securities of the Company or its survivor or successor after such event; (ii) persons holding less than 20% of the Company's outstanding voting securities immediately prior to such event own more than 50% of the outstanding voting securities of the Company or its survivor or successor after such event; or (iii) persons constituting a majority of the Board were not directors for at least the 24 preceding months. 6. No Right to Vote or Receive Dividends. No person shall have rights with respect to any Shares which he has a right to purchase under a Restricted Stock Agreement unless and until he acquires such Shares under the terms of such Agreement and certificates representing such Shares are duly issued to him; provided, however, that such person shall have the right to vote such Shares and receive any dividends (cash or otherwise) paid thereon regardless of whether or not such Shares are freely transferable unless and until such Shares have been canceled as provided under Section 5 hereof. 7. No Right to Continue as Director. Neither the adoption of the Plan nor its operation, nor any document describing or referring to the Plan, or any part thereof, shall confer upon any director participant 3 4 under the Plan any right to continue as a director of the Company, or shall in any way affect the right and power of the Company to terminate the position with the Company of any participant under this Plan at any time with or without assigning a reason therefor to the same extent as the Company might have done if this Plan had not been adopted. 8. Arbitration. Any dispute between the Company and a holder of a Restricted Stock Agreement arising out of this Plan or any Restricted Stock Agreement shall be submitted to arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Such arbitration award shall be binding upon the parties. 9. Recapitalization; Stock Dividends; Etc. The aggregate number of Shares as to which purchase rights may be granted from time to time hereunder shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of shares or other capital adjustment; or the payment of a stock dividend or other increase or decrease in such Shares, effected without receipt of consideration by the Company. In the event of a change in the shares of Common Stock which is limited to a change in the par value thereof, or from par value to no par value, without increase in the number of issued shares of Common Stock, the Shares resulting from any such change shall be deemed to be Shares within the meaning of the Plan. 10. Termination and Amendment. This Plan may be terminated by the Board at any time; provided, however, that no termination shall affect existing Restricted Stock Agreements. Subject to the provisions of Section 3 hereof, the Board or Committee may at any time and from time to time modify and amend the Plan in any respect consistent with applicable law; provided, however, that no such amendment shall, without the consent of an participant, affect his or her rights under an existing Restricted Stock Agreement; and provided further that the Plan shall not be amended more than once every six months, other than to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. 11. Effective Date. This Plan shall be effective on date of its adoption by the Board. 4 5 SAMPLE RESTRICTED STOCK AGREEMENT Emergent Group, Inc. (the "Company") hereby grants to ________________________ (the "Holder"), in accordance with the terms and provisions of the Emergent Group, Inc. Restricted Stock Agreement Plan (the "Plan"), the right to purchase ________ shares of the common stock of the Company (the "Shares") for total consideration of $.05 per share upon the terms and conditions set forth below: 1. Right to Purchase Shares. The Holder shall be entitled to purchase the Shares immediately for the price of $0.05 per share. The Shares shall initially be non-transferable; provided that twenty percent (20%) of such Shares shall become freely transferable on each of the five anniversaries of the date of this Agreement. 2. Forfeiture of Right to Purchase Shares. The right to purchase Shares hereunder shall be forfeited, all Shares purchased hereunder which are not freely transferable shall be canceled, and this Agreement shall terminate and be of no further force or effect if the Holder's service on the Board of Directors of the Company is terminated for any reason, except in certain cases of the Holder's death, disability, or retirement from service on the Board of Directors after attaining 70 years of age of as set forth in the Plan. 3. Nontransferability of this Agreement. Neither this Agreement nor any right to purchase Shares hereunder may be sold, assigned, or transferred, either voluntarily by the Holder or by operation of law, except: (i) by will; (ii) by the laws of descent and distribution; or (iii) pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or in Title I of the Employee Retirement Income Security Act, or the rules thereunder. 4. Income Tax Withholding. The Company shall be entitled to withhold from any payments due to the Holder and/or to require Holder to pay over to the Company such amounts as the Company may be required to pay over to the Internal Revenue Service, or any state income tax authority, with respect to the Holder's income tax liabilities arising out of his purchase of the Shares and/or lapse of restrictions with respect to the right to purchase the Shares. 5. Emergent Group, Inc. Restricted Stock Agreement Plan. The terms and provisions of the Plan are hereby incorporated into and made a part of this Agreement by reference. IN WITNESS WHEREOF, the Agreement is executed this ____ day of _____________, 19__. EMERGENT GROUP, INC. By: -------------------------------- I hereby accept this Restricted Stock Agreement and acknowledge receipt of a signed copy of this Agreement and the Company's Restricted Stock Agreement Plan. EX-10.5 5 LOAN & SECURITY AGREEMENT (LOAN PRO$) 1 EXHIBIT 10.5 LOAN AND SECURITY AGREEMENT dated December 19, 1995 between BANKAMERICA BUSINESS CREDIT, INC. and THE LOAN PRO$, INC. 2 TABLE OF CONTENTS ARTICLE ONE - DEFINITIONS 1.1 Terms Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Actual Loss Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Adjusted Net Earnings from Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Adjusted Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Adjusted Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Advance Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Applicable Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Attorney Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Bank of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Base Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Bulk Purchase Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Capital Adequacy Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Certificate of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Charge Off Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Collection Account Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Contract Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Dealer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Dealer Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Delinquency/Repossession Adjustment Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Delinquency/Repossession Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Eligible Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Emergent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Excess Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Federal Reserve Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Funding Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 General Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(1) 3 Governmental Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Guide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Intercompany Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Loss Reserve Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Modified Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Net Charge Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Net Contract Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Repossession Inventory Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Repossession Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Requirement of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Solvent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Stated Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Termination Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Total Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Vehicle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Vehicle Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Vehicle Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Vehicle Reserve Percentage ("VRP") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE TWO - LOAN 2.1 Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.2 Borrowing Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 ARTICLE THREE - INTEREST AND OTHER CHARGES 3.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.2 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(2) 4 3.3 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.4 Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE FOUR - PAYMENTS AND PREPAYMENTS 4.1 Payment of Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.2 Termination of Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.3 Payments by the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.4 Payments as Revolving Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.5 Apportionment, Application and Reversal of Payments . . . . . . . . . . . . . . . . . . . . . . . 16 4.6 Indemnity for Returned Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.7 Lender's and Lenders' Books and Records; Monthly Statements . . . . . . . . . . . . . . . . . . . 17 ARTICLE FIVE - YIELD PROTECTION 5.1 Reduction of Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.2 Certificates of Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.3 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE SIX - COLLATERAL 6.1 Grant of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.2 Perfection and Protection of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.3 Location of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.4 Title to, Liens on, and Sale of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.5 Access and Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.6 Collateral Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.7 Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.8 Collection of Contracts; Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.9 Right to Cure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.10 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.11 Lender' Rights, Duties and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.12 Protection of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.13 Servicing of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.14 Borrower's Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.15 Verification of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE SEVEN - BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES 7.1 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.2 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.3 Notices to the Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 ARTICLE EIGHT - GENERAL WARRANTIES AND REPRESENTATIONS 8.1 Authorization, Validity, and Enforceability of this Agreement and the Loan Documents . . . . . . . 26
(3) 5 8.2 Validity and Priority of Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.3 Organization and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.4 Corporate Name; Prior Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.5 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 8.6 Contract Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.7 Credit Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.8 Financial Statements and Projections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.9 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.10 Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.11 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.12 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.13 Trade Names and Terms of Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.14 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.15 No Violation of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.16 No Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.17 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.18 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.19 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.20 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.21 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 8.22 Offices; FTC; Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 8.23 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE NINE - AFFIRMATIVE AND NEGATIVE COVENANTS 9.1 Taxes and Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.2 Corporate Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.3 Compliance with Law and Agreements; Maintenance of Licenses . . . . . . . . . . . . . . . . . . . 31 9.4 Mergers, Consolidations or Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.5 Distributions; Capital Change; Restricted Investments . . . . . . . . . . . . . . . . . . . . . . 32 9.6 Transactions Affecting Collateral or Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.7 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.8 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.9 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.10 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.11 Business Conducted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.12 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.13 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.14 Limitations on Bulk Purchase Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.15 Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.16 Interest Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.17 Loss Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.18 Unsubordinated Debt to Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.19 Charge-Off Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.20 Subordinated Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.21 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE TEN - CONDITIONS TO BORROWINGS
(4) 6 10.1 Conditions Precedent to Making of Revolving Loans on the Closing Date . . . . . . . . . . . . . . 34 10.2 Conditions Precedent to Each Revolving Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ARTICLE ELEVEN - DEFAULT; REMEDIES 11.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 11.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 11.3 Cumulative Remedies; No Prior Recourse to Collateral . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE TWELVE - TERM AND TERMINATION 12.1 Term and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE THIRTEEN - AMENDMENTS; WAIVER; SUCCESSORS 13.1 No Waivers Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 13.2 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE FOURTEEN - MISCELLANEOUS 14.1 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 14.2 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver . . . . . . . . . . . . . . 41 14.3 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 14.4 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 14.5 Other Security and Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 14.6 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 14.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 14.8 Waiver of Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.9 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.10 Indemnity of the Lender by the Borrower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 14.11 Final Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.13 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.14 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.15 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
(5) 7 LOAN AND SECURITY AGREEMENT This Loan and Security Agreement ("Agreement") is made and entered into as of December 19, 1995, between BankAmerica Business Credit, Inc., a Delaware corporation (the "Lender"), having an address at 200 Lake Drive East, Suite 201, Cherry Hill, New Jersey 08002, and The Loan Pro$, Inc. (the "Borrower"), a South Carolina corporation, whose chief executive office is located at 15 South Main Street, Suite 750, Greenville, South Carolina 29601. In consideration of the mutual covenants contained herein, the parties agree as follows. ARTICLE ONE - DEFINITIONS 2 Terms Defined. As used in this Agreement, the listed terms are defined as follows: "Actual Loss Percent" means, as of any date of calculation, the percent (rounded to the nearest whole percent) resulting from dividing (a) the aggregate amount of all of the Borrower's Net Charge Off's during each of the twelve (12) months immediately preceding the date of calculation, by (b) the average monthly amount of the Borrower's Net Contracts Payments outstanding as of the last day of each of those twelve (12) months. "Adjusted Net Earnings from Operations" means, with respect to any fiscal period of the Borrower, the Borrower's net income after provision for income taxes for such fiscal period, as determined in accordance with GAAP and reported on the financial statements for such period, less any and all of the following included in such net income: (a) gain arising from the sale of capital assets; (b) gain arising from any write-up in the book value of any asset; (c) earnings of any corporation, substantially all the assets of which have been acquired by the Borrower in any manner, to the extent realized by such other corporation prior to the date of acquisition; (d) earnings of any business entity in which the Borrower has an ownership interest unless (and only to the extent) such earnings shall actually have been received by the Borrower in the form of cash distributions; (e) earnings of any person to which assets of the Borrower shall have been sold, transferred or disposed of, or into which the Borrower shall have been merged or which has been a party with the Borrower to any consolidation or other form of reorganization, prior to the date of such transaction; (f) gain arising from the acquisition of any debt or equity security of the Borrower or from cancellation or forgiveness of Debt; and (g) gain arising from extraordinary items, as determined in accordance with GAAP, or from any other nonrecurring transaction. "Adjusted Tangible Assets" means all assets except: (a) deferred assets, other than prepaid insurance and prepaid taxes, (b) trademarks, trade names, franchises, goodwill, and other similar intangibles; (c) unamortized debt discount and expense; (d) assets of the Borrower constituting Intercompany Accounts; (e) assets located and notes and receivables due from obligors domiciled outside the United States of America, Puerto Rico, or Canada; (f) accounts, notes, and other receivables due from Affiliates; and (g) fixed assets to the extent of any write-up in the book value thereof resulting from a revaluation effective after the first Closing Date. 1 8 "Adjusted Tangible Net Worth" means, at any date, the remainder of (a) net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves as determined in accordance with GAAP) at which the Adjusted Tangible Assets of the Borrower would be shown on a balance sheet of the Borrower at such date prepared in accordance with GAAP, minus (b) the amount at which its liabilities (other than capital stock, surplus, and retained earnings) would be shown on such balance sheet and the Repossession Inventory Adjustment, and including as liabilities all reserves for contingencies and other potential liabilities which would be shown on such balance sheet or disclosed in the footnotes thereto. "Advance Rate" means (a) eighty-five percent (85%) minus (b) the sum of the Charge Off Adjustment Percent plus the Delinquency/Repossession Adjustment Percent. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract, or otherwise. "Applicable Margin" means three-quarters of one percent (0.75%). "Attorney Costs" means and includes all fees, expenses and disbursements of any law firm or other external counsel engaged by the Lender, the allocated cost of internal legal services of the Lender and all expenses and disbursements of internal counsel of the Lender. "Availability" means, as of any date of calculation, (a) the Advance Rate multiplied by all Net Contract Payments to be made under all of the Borrower's Eligible Contracts, minus (b) the Vehicle Reserve. "Bank of America" means Bank of America National Trust and Savings Association, a national banking association, or any successor entity thereto. "Base Rate" means, for any day, the rate of interest in effect for such day as publicly announced from time to time by Bank of America, in San Francisco, California, as its "reference rate" (the "reference rate" being a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate). Each Interest Rate based upon the Base Rate shall be adjusted simultaneously with any change in the Base Rate. "Borrowing" means a borrowing hereunder consisting of Revolving Loans made by the Lender to the Borrower. "Borrowing Base" means the sum of the Adjusted Tangible Net Worth of the Borrower, plus all Subordinated Debt of the Borrower. "Bulk Purchase Transaction" means the purchase by the Borrower of Contracts in a single transaction for an aggregate purchase price in excess of $500,000. 2 9 "Business Day" means any day that is not a Saturday, Sunday, or a day on which banks in San Francisco, California, are required or permitted to be closed. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Certificate of Title" means the certificate of title or other evidence of ownership of any Vehicle issued by the Division of Motor Vehicles or its counterpart in other jurisdictions in which the Contract Debtor resides. "Charge Off Adjustment" means the excess, calculated as of the first day of each month, of the Actual Loss Percent over four percent (4%). "Closing Date" shall mean the date of the execution of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute, and regulations promulgated thereunder. "Collateral" has the meaning specified in Section 6.1 hereof. "Collection Account Agreement" means that certain Collection Account Agreement substantially in the form attached hereto as Exhibit A and incorporated herein. "Contract" means a loan account, account, installment sale contract, contract right, Instrument, note, document, chattel paper, general intangible, and all other forms of obligations owing to the Borrower, all rights of the Borrower thereunder, and any collateral therefor, including all rights under any and all Security Documents related to the Contract. "Contract Debtor" means each Person who is obligated to the Borrower to perform any duty under or to make any payment pursuant to the terms of a Contract. "Dealer" means a dealer that has sold a Vehicle to a Contract Debtor pursuant to a Contract. "Dealer Agreement" means an agreement between the Borrower and a Dealer that governs the sale or assignment of Contracts from such Dealer to the Borrower, including any provisions for assignment (whether with or without recourse, a repurchase obligation by the Dealer or a guaranty by such Dealer) contained in such agreement with respect to assignments. "Debt" means all liabilities, obligations, and indebtedness of the Borrower to any Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired, or owing, whether primary, secondary, direct or indirect, contingent, fixed, or otherwise, and including, without in any way limiting, the generality of the foregoing: (a) the Borrower's liabilities and obligations to trade creditors; (b) all Obligations; (c) all obligations and liabilities to any Person secured by a Lien on the Borrower's Property, even though the Borrower shall not have assumed 3 10 or become liable for the payment thereof; provided, however, that all such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the book value of such property as would be shown on a balance sheet of the Borrower prepared in accordance with GAAP; (d) all obligations and liabilities created or arising under any lease or conditional sale or other title retention agreement with respect to Property used or acquired by the Borrower, even if the rights and remedies of the lessor, seller, or lender thereunder are limited to repossession of such Property; provided, however, that all such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the book value of such property as would be shown a balance sheet of the Borrower prepared in accordance with GAAP: (e) all accrued pension fund and other employee benefit plan obligations and liabilities; (f) all obligations and liabilities under Guaranties; (g) Subordinated Debt; and (h) deferred taxes. "Default" means an event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Default Rate" means a fluctuating per annum interest rate at all times equal to the sum of the applicable Reference Rate, plus the Applicable Margin, plus five percent (5%). The Default Rate shall be adjusted simultaneously with any change in the applicable Reference Rate. "Delinquency/Repossession Adjustment Percent" means, as of any date of calculation, (a) one percent (1%) when the average Delinquency/Repossession Percent for the two months immediately preceding such date is greater than eight percent (8%), but less than nine percent (9%), and (b) two percent (2%) when the average Delinquency/Repossession Percent for the two months immediately preceding such date is equal to or greater than nine percent (9%). "Delinquency/Repossession Percent" means the percent (rounded to the nearest whole percent), calculated as of the first day of each month, by dividing (a) the aggregate amount of the Net Contract Payments owing under all of the Borrower's Contracts with respect to which any payment due thereunder is more than sixty (60) days past due, as determined on a contractual basis, as of the last day of each of the three (3) months immediately preceding the date of calculation, plus the Repossession Value of all Vehicles which the Borrower has repossessed but has not sold as of the date of calculation, by (b) the average monthly amount of the Borrower's Net Contracts Payments outstanding as of the last day of each of those three (3) months. "Distribution" means, in respect to the Borrower: (a) the payment or making of any dividend or other distribution of Property in respect to the capital stock (or any options or warrants for such stock) of such corporation, other than distributions in capital stock (or any options or warrants for such stock) of the same class; or (b) the redemption or other acquisition of any capital stock (or options or warrants for such stock) of such corporation. "Eligible Contract" means only such Contracts of the Borrower which the Lender, in its sole discretion deems eligible, and without limiting the Lender's discretionary rights, satisfy at all times all of the following requirements as determined by the Lender, in its sole and absolute discretion: (a) the Contract strictly complies with all of the Borrower's warranties and representations contained herein; 4 11 (b) the Contract Debtor is not more than sixty (60) days contractually delinquent in making a payment scheduled thereunder; (c) except as provided in clause (b) of this Section, neither the Borrower nor the Contract Debtor is in default under the terms of the Contract (e.g., the Property securing repayment thereof is subject to repossession or has been repossessed and sold and the proceeds thereof applied to the Contract balance (the latter sometimes being referred to as a "deficiency balance" Contract)); (d) the Borrower has not within any 12-month period granted to the Contract Debtor more than two extensions of time (each not longer than one month) for the payment of any sum due under the Contract; (e) the Contract is not subject to any defense, counterclaim, offset, discount, or allowance; (f) the terms of the Contract and all related documents and instruments comply in all respects with all Requirements of Law; (g) the Contract Debtor is not an employee or other Affiliate of the Borrower; (h) the creditworthiness of the Contract Debtor is acceptable to the Lender and, without limiting the generality of the foregoing, the Contract Debtor's creditworthiness and the terms of the Contract shall conform to the Borrower's credit guidelines; (i) the Contract Debtor thereunder is not subject to a bankruptcy proceeding under Federal law or any similar proceeding under state law; (j) the Contract Debtor thereunder is a resident of the continental United States; (k) under the terms of the Contract, the first scheduled payment thereunder is due within forty-five (45) days following the date the Contract Debtor first entered into the Contract and all other payments are scheduled to be made on the same date of each month thereafter; (l) with respect to which the Contract Debtor is located in any state requiring the filing of a Business Activity Report or similar document in order to permit the Borrower to seek judicial enforcement in such state of payment of such Contract, unless the Borrower has qualified to do business in such state, or has filed a Notice of Business Activities Report or the equivalent thereof for the then-current year, or is exempt from such filing requirement; (m) the terms of the Contract require that the unpaid principal balance thereof shall be payable in equal monthly payments which will amortize the full principal amount thereof over its scheduled term; (n) if the Contract is a Vehicle Contract, then repayment of the Vehicle Contract is secured by a first priority, perfected interest in the subject Vehicle, and the Borrower has obtained a Certificate of Title reflecting the Borrower as the lien holder at the time the Contract is 5 12 pledged to the Lender or the Borrower has obtained such a Certificate of Title within one hundred-twenty (120) days following the earlier of the date such Contract was first entered into by the Borrower or the date the Contract was first acquired by the Lender; (o) if the Contract is a Vehicle Contract, then to the extent that the Contract balance includes sums representing the financing of so-called "extended warranty plans," such plans are (i) in substantial compliance with all applicable consumer credit laws, including any and all special insurance laws relating thereto, and (ii) underwritten by (x) a major automobile manufacturer, or an Affiliate thereof, or (y) an independent reputable and financially sound insurance company; (p) no portion of the loan proceeds advanced by the Lender to the Contract Debtor were used to finance the acquisition of real property or refinance existing indebtedness secured by real property; and (q) the Contract was not a Modified Contract. "Emergent" means Emergent Financial Corporation, a South Carolina corporation. "Event of Default" has the meaning specified in Section 11.1 hereof. "Excess Availability" means, as of the date of determination, Availability, minus the aggregate amount of the Revolving Loans outstanding. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System or any successor thereto. "Financial Statements" means, according to the context in which it is used, the financial statements attached hereto, or any financial statements required to be given to the Lender pursuant to this Agreement. "Fiscal Year" means the Borrower's fiscal year for accounting purposes. The current fiscal year of the Borrower will end on December 31, 1995. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "General Intangibles" means all of the Borrower's now owned or hereafter acquired general intangibles, choses in action and causes of action and all other intangible personal property of the Borrower of every kind and nature (other than Contracts), including, without limitation, all contract rights, proprietary rights, corporate or other business records, trade names, trade secrets, goodwill, copyrights, customer lists, registrations, licenses, franchises, tax refund claims, rights to indemnification, business interruption insurance and proceeds thereof, property, casualty or any similar type of insurance 6 13 and any proceeds thereof, and any letter of credit, guarantee, claim, security interest or other security held by or granted to the Borrower to secure payment by a Contract Debtor of any of the Contracts. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Gross Contract Payments" means all presently due and future, unpaid, noncancelable installment payments scheduled to be made under a Contract owned by the Borrower, regardless of the method of interest calculation (i.e., interest bearing or pre-computed). "Guaranty" means, with respect to any Person, all obligations of such Person which in any manner directly or indirectly guarantee or assure, or in effect guarantee or assure, the payment or performance of any indebtedness, dividend or other obligation of any other Person (the "guaranteed obligations"), or assure or in effect assure the holder of the guaranteed obligations against loss in respect thereof, including, without limitation, any such obligations incurred through an agreement, contingent or otherwise: (a) to purchase the guaranteed obligations or any property constituting security therefor; (b) to advance or supply funds for the purchase or payment of the guaranteed obligations or to maintain a working capital or other balance sheet condition; or (c) to lease property or to purchase any debt or equity securities or other property or services. "Guide" and "Black Book" means, respectively, the National Automobile Dealers Association Official Used Car Guide and the National Auto Research Black Book. In the event that either of those publications shall, at any time, cease to be published, then the Lender shall, in its sold discretion, select a comparable publication. "Intercompany Accounts" means all assets and liabilities, however arising, which are due to the Borrower from, which are due from the Borrower to, or which otherwise arise from any transaction by the Borrower with, any Affiliate. "Interest Coverage Ratio" means, for any period, the ratio of (a) Adjusted Net Earnings from Operations for such period plus the sum of the following to the extent deducted in computing Adjusted Net Earnings from Operations: (i) tax expense and (ii) total interest expense over (b) total interest expense during such period. "Instruments" shall have the same meaning as given to that term in the UCC, and shall include all negotiable instruments, notes secured by mortgages or trust deeds, and any other writing which evidences a right to the payment of money and is not itself a security agreement or lease, and is of a type which is, in the ordinary course of business, transferred by delivery with any necessary endorsement or assignment. "IRS" means the Internal Revenue Service and any other Governmental Authority succeeding to any of its principal functions under the Code. 7 14 "Lien" means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute, or contract, and including without limitation, a security interest, charge, claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, agreement, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. "Loan Account" means the loan account of the Borrower, which account shall be maintained by the Lender. "Loan Documents" means this Agreement and all other agreements, instruments, and documents heretofore, now or hereafter evidencing, securing, guaranteeing or otherwise relating to the Obligations, the Collateral, the Lender's Liens in the Collateral, or any other aspect of the transactions contemplated by this Agreement. "Loss Reserve Percentage" means, as of any date of determination, the greater of (a) three and one- half percent (3.5%) or (b) the Actual Loss Percent. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Borrower or the Collateral; (b) a material impairment of the ability of the Borrower to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Borrower of any Loan Document. "Modified Contract" means a Contract which, at any time, either (a) was in default for failure to pay for more than 60 days after its original contractual due date any payment due thereunder and such payment default was cured by adjusting or amending the Contract terms, or accepting a reduced payment or otherwise, or (b) is a refinance or renewal of a prior Contract with the Contract Debtor to accomplish any of the foregoing. "Net Charge Offs" means for any period the aggregate amount of all unpaid payments scheduled to be made under the Borrower's Contracts which have been charged off by the Borrower during such period, as reduced by the amount of cash actually received by the Borrower during the such period on Contracts which have been charged off during previous periods or such period. "Net Contract Payments" means, as of the date of determination, the remainder of (a) the aggregate amount of all Gross Contract Payments, minus (b) the aggregate amount of all unearned finance charges, unearned discounts, unearned fees, and unearned insurance premiums applicable thereto or included therein, as appropriate. "Notice of Borrowing" has the meaning specified in Section 2.2(b). "Obligations" means all present and future loans, advances, liabilities, obligations, covenants, duties, and debts owing by the Borrower to the Lender, arising under or pursuant to this Agreement or any of the other Loan Documents, whether or not evidenced by any note, or other instrument or document, whether arising from an extension of credit, opening of a letter of credit, acceptance, loan, guaranty, indemnification or otherwise, whether direct or indirect (including, without 8 15 limitation, those acquired by assignment from others, and any participation by the Lender in the Borrower's debts owing to others), absolute or contingent, due or to become due, primary or secondary, as principal or guarantor, and including, without limitation, all principal, interest, charges, expenses, fees, attorneys' fees, filing fees and any other sums chargeable to the Borrower hereunder or under any of the other Loan Documents. "Person" means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, Governmental Authority, or any other entity. "Property" means any interest in any kind of property or asset, whether personal or real property, or mixed, or tangible or intangible. "Repossession Inventory Adjustment" means, as of any date of calculation, the Repossession Value of all Vehicles with respect to which more than ninety (90) days have elapsed since the date such Vehicles were repossessed by the Borrower without having been sold during such ninety- (90) day period. "Repossession Value" means, as of any date of determination, the lesser of (a) the Net Contract Payments then owing under a Vehicle Contract with respect to which the subject Vehicle has been repossessed by the Borrower, or (b) the value of such Vehicle, as determined by the then most recently published edition of the Guide and Black Book, as appropriate. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its Property or to which the Person or any of its Property is subject. "Responsible Officer" means the chief executive officer or the president of the Borrower, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief financial officer or the treasurer of the Borrower, or any other officer having substantially the same authority and responsibility. "Revolving Loans" means, collectively, all Borrowings provided for under Article Two hereof. "Security Documents" means all security agreements, chattel mortgages, deeds of trust, mortgages, or other security instruments, guaranties, sureties, and agreements of every type and nature (including a Certificate of Title) securing the obligations of a Contract Debtor under a Contract. "Solvent" means when used with respect to any Person that (a) the fair value of all its assets is in excess of the total amount of its debts (including contingent liabilities); (b) it is able to pay its debts as they mature; (c) it does not have unreasonably small capital for the business in which it is engaged or for any business or transaction in which it is about to engage; and (d) it is not "insolvent" as such term is defined in Section 101(32) of the Bankruptcy Code. "Stated Termination Date" means the second anniversary following the Closing Date. 9 16 "Subordinated Debt" means all debt of the Borrower acceptable to Lender which at all times during the term of this Agreement is subordinated to the Borrower's Obligations hereunder pursuant to a written subordination agreement, the terms of which are satisfactory to the Lender in its sole and absolute discretion. "Subsidiary" means any corporation of which more than fifty percent (50%) of the outstanding securities of any class or classes, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions), is at the time, directly or indirectly through one or more intermediaries, owned by the Borrower and/or one or more of its Subsidiaries. "Termination Date" means the earliest to occur of (a) the Stated Termination Date, (b) the date the Total Facility is terminated either by the Borrower pursuant to Section 4.2 or by the Lender pursuant to Section 11.2, and (c) the date this Agreement is otherwise terminated for any reason whatsoever. "Total Facility" means Twenty Million Dollars ($20,000,000). "UCC" means the Uniform Commercial Code (or any successor statute) of the state of New Jersey or of any other state the laws of which are required by Section 12:A9-103 thereof to be applied in connection with the issue of perfection of security interests. "Unused Line Fee" shall have the meaning given to that term in Section 3.3. "Vehicle" means a new or used, two-axeled, automobile or light-duty truck, together with all equipment sold or financed in connection therewith. "Vehicle Contract" means a Contract which is a motor vehicle retail installment Contract and a Contract arising from a loan made by the Borrower to a Contract Debtor and secured by a Lien on a Vehicle. "Vehicle Reserve" means, as of any date of calculation, an amount equal to (a) the Gross Contract Payments then owing under all Vehicle Contracts acquired and originated by the Borrower during the twelve (12) calendar months immediately preceding the date of calculation, multiplied by (b) the Vehicle Reserve Percentage for such period. "Vehicle Reserve Percentage ("VRP")" means, for any period, the excess of the percent determined in accordance with the following formula exceeds one hundred percent (100%): VRP = [The aggregate amount paid by the Borrower to third parties or lent in connection with Vehicle Contracts acquired or originated during the applicable period (excluding amounts attributable to license fees, title fees, taxes, credit insurance, extended warranty insurance, and license plate fees included in the unpaid balance of such Vehicle Contracts); DIVIDED BY 10 17 The sum of (a) in the case of new Vehicles, the aggregate dealer cost of new Vehicles which are the subject of such Contracts, plus (b) in the case of used Vehicles, the aggregate value for all Vehicles which are the subject of such Contracts, as established by Guide or the Black Book. (The Guide and Black Book used shall be the most recently published edition thereof at the time Borrower purchased the subject Contract.)] 2.1 Accounting Terms. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP as consistently applied and using the same method for inventory valuation as used in the preparation of the Financial Statements. ARTICLE TWO - LOAN 2.1 Revolving Loans. Subject to satisfaction of the terms and conditions of this Agreement, including the conditions precedent set forth in Article Ten, the Lender agrees, upon the request of the Borrower, made from time to time during the period of the Closing Date to the Termination Date, to make revolving loans ("Revolving Loans") to the Borrower in an amount not to exceed the lesser of the Total Facility or the Availability; provided, however, no Borrowings will be made to the Borrower if a Default or an Event of Default exists. All such Borrowings shall be added to the Revolving Loans when made. The Lender, in its sole and absolute discretion, may elect to make Borrowings in excess of the Availability on one or more occasions, but if it does so, the Lender shall not be deemed thereby to have changed the limits of the Total Facility or the Availability. Immediately upon demand by the Lender for repayment of such excess, the Borrower shall make such payment, without penalty or fee. Such excess shall constitute part of the Revolving Loans hereunder and shall be subject to all of the terms and conditions of this Agreement. If the sum of the outstanding Revolving Loans exceeds the Availability, the Lender may refuse to make or otherwise restrict the making of Revolving Loans as the Lender determines until such excess has been eliminated. 2.2 Borrowing Procedure. (a) Each Borrowing shall be made upon the Borrower's irrevocable written notice delivered to the Lender in the form of a Notice of Borrowing (which notice must be received by the Lender no later than 11:00 a.m. (Cherry Hill, New Jersey time) on the requested Funding Date (which shall be a Business Day), specifying the amount of the Borrowing. In lieu of delivering the above-described Notice of Borrowing, the Borrower may give the Lender telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within twenty (24) hours of the giving of such notice but Lender shall be entitled to rely on the telephonic notice in making such Revolving Loans. (b) On or prior to the Closing Date and thereafter prior to any change with respect to any of the information contained in the following clauses (i) and (ii), the Borrower shall deliver to the Lender a writing setting forth (i) the account of the Borrower to which the Lender is authorized to transfer the proceeds of the Revolving Loans requested pursuant to this Section 2.2, and (ii) the names of the officers authorized to request Revolving Loans on behalf of the Borrower, and shall provide the Lender with a specimen signature of each such officer. The Lender shall be entitled to rely conclusively on such officer's authority to request Revolving Loans on behalf of the Borrower, the proceeds of which 11 18 are to be transferred to any of the accounts specified by the Borrower pursuant to the immediately preceding sentence, until the Lender receives written notice to the contrary. The Lender shall have no duty to verify the identity of any individual representing himself as one of the officers authorized by the Borrower to make such requests on its behalf. (c) No Liability. The Lender shall not incur any liability to the Borrower as a result of acting upon any notice referred to in Sections 2.2(a) and (b), which notice the Lender believes in good faith to have been given by an officer duly authorized by the Borrower to request Revolving Loans on its behalf or for otherwise acting in good faith under this Section 2.2, and the crediting of Revolving Loans to the Borrower's deposit account, or transmittal to such Person as the Borrower shall direct, shall conclusively establish the obligation of the Borrower to repay such Revolving Loans as provided herein. (d) Notice Irrevocable. Any Notice of Borrowing (or telephonic notice in lieu thereof) made pursuant to Section 2.2(a) shall be irrevocable and the Borrower shall be bound to borrow the funds requested therein in accordance therewith. ARTICLE THREE - INTEREST AND OTHER CHARGES 3.1 Interest. (a) Interest Rates. All Revolving Loans and other outstanding Obligations shall bear interest on the unpaid principal amount thereof (including, to the extent permitted by law, on interest thereon not paid when due) from the date made until paid in full in cash at a fluctuating per annum rate equal to the Base Rate plus the Applicable Margin, but not to exceed the Maximum Rate described in Section 3.2. Each change in the Base Rate shall be reflected in the interest rate described above as of the effective date of such change. All interest charges shall be computed on the basis of a year of 360 days and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest accrued on all Revolving Loans accrued during a month will be payable in arrears on the fifteenth day of the immediately following month. (b) Default Rate. If any Default or Event of Default occurs and is continuing and the Lender in its discretion so elects, then, while any such Default or Event of Default is continuing, all of the Obligations shall bear interest at the Default Rate applicable thereto. 3.2 Maximum Interest Rate. In no event shall any interest rate provided for hereunder exceed the maximum rate permissible for corporate borrowers under applicable law for loans of the type provided for hereunder (the "Maximum Rate"). If, in any month, any interest rate, absent such limitation, would have exceeded the Maximum Rate, then the interest rate for that month shall be the Maximum Rate, and, if in future months, that interest rate would otherwise be less than the Maximum Rate, then that interest rate shall remain at the Maximum Rate until such time as the amount of interest paid hereunder equals the amount of interest which would have been paid if the same had not been limited by the Maximum Rate. In the event that, upon payment in full of the Obligations under this Agreement, the total amount of interest paid or accrued under the terms of this Agreement is less than the total amount of interest which would, but for this Section 3.2, have been paid or accrued if the interest rates otherwise set forth in this Agreement had at all times been in effect, then the Borrower shall, to the extent permitted by applicable law, pay the Lender an amount equal to the difference between (a) the lesser of (i) the amount of interest which would have been charged if the Maximum Rate had, at all times, been in effect or (ii) the amount of interest which would have accrued had the interest rates otherwise set forth 12 19 in this Agreement, at all times, been in effect and (b) the amount of interest actually paid or accrued under this Agreement. In the event that a court determines that the Lender has received interest and other charges hereunder in excess of the Maximum Rate, such excess shall be deemed received on account of, and shall automatically be applied to reduce, the Obligations other than interest, in the inverse order of maturity, and if there are no Obligations outstanding, the Lender shall refund to the Borrower such excess. 3.3 Unused Line Fee. The Borrower agrees to pay, on the fifteenth day of each month and on the Termination Date an unused line fee equal to one eighth of one percent (0.125%) per annum on the average daily amount by which the Total Facility exceeded the sum of the average daily outstanding amount of Revolving Loans during the immediately preceding month or shorter period if calculated on the Termination Date. The unused line fee shall be computed on the basis of a 360-day year for the actual number of days elapsed. 3.4 Audit Fees. The Borrower agrees to pay to the Lender on the fifteenth day of each month, a monthly audit fee equal to the greater of (a) $625 or (b) one-twelfth of five-one hundredths of one percent (0.004166%) of the aggregate amount of the Gross Contract Payments under all of the Borrower's Contracts, calculated as of the last day of the month immediately preceding the date such fee is due. The Borrower agrees to pay such fees in order to reimburse all costs and fees incurred by the Lender's internal auditors in connection with audits of the Borrower performed by such auditors during the term of this Agreement. Such fee payments shall commence with the month immediately following the date appearing on page one of this Agreement. Notwithstanding the foregoing, upon the occurrence of any Event of Default, the Borrower shall pay, on demand, all of the Lender's costs incurred in connection with the verification, audit, and inspection of the Collateral without regard to the foregoing limitations. ARTICLE FOUR - PAYMENTS AND PREPAYMENTS 4.1 Payment of Revolving Loans. The Borrower shall repay the outstanding principal balance of the Revolving Loans, plus all accrued but unpaid interest thereon, on the Termination Date. The Borrower may prepay Revolving Loans at any time, and reborrow subject to the terms of this Agreement. In addition, and without limiting the generality of the foregoing, the Borrower shall pay to the Lender the amount by which the sum of the outstanding Revolving Loans exceed the Borrower's Availability and/or the Total Facility. 4.2 Termination of Facility. The Borrower may terminate this Agreement upon at least ten (10) Business Days' notice to the Lender upon (a) the payment in full of all outstanding Revolving Loans, together with accrued interest thereon, (b) the payment of the early termination fee set forth in the next sentence, and (c) the payment in full in cash of all other Obligations together with accrued interest thereon. If this Agreement is terminated at any time prior to the Stated Termination Date for any reason whatsoever other than as a result of acceleration by the Lender, the Borrower shall pay to the Lender an early termination fee determined in accordance with the following table: 13 20 PERIOD DURING WHICH EARLY TERMINATION OCCURS EARLY TERMINATION FEES ------------------------- ---------------------- On or prior to December , 1996 One percent (1%) of the Total Facility After December , 1996, but on or prior to the One-half of one percent (.50%) second anniversary of the of the Total Facility Closing Date 4.3 Payments by the Borrower. (a) All payments to be made by the Borrower shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Borrower shall be made to the Lender at the Lender's address set forth in Section 14.7, and shall be made in immediately available funds, no later than 2:00 p.m. (Cherry Hill, New Jersey time) on the date specified herein. Any payment received by the Lender later than 2:00 p.m. (Cherry Hill, New Jersey time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (b) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the Business Day immediately preceding such day. 4.4 Payments as Revolving Loans. All payments of principal, interest, fees, premiums and other sums payable hereunder, including all reimbursement for expenses pursuant to Section 14.6, may, at the option of the Lender, in its sole discretion, subject only to the terms of this Section 4.4, be paid from the proceeds of Revolving Loans made hereunder, whether made following a request by the Borrower pursuant to Section 2.2 or a deemed request as provided in this Section 4.4. The Borrower hereby irrevocably authorizes the Lender to charge the Loan Account for the purpose of paying principal, interest, fees, premiums and other sums payable hereunder, including reimbursing expenses pursuant to Section 14.6, and agrees that all such amounts charged shall constitute Revolving Loans and that all such Revolving Loans so made shall be deemed to have been requested by the Borrower pursuant to Section 2.2. 4.5 Apportionment, Application and Reversal of Payments. All payments shall be remitted to the Lender and all such payments not relating to principal or interest of specific Revolving Loans, or not constituting payment of specific fees, and all proceeds of Contracts or other Collateral received by the Lender, shall be applied subject to the provisions of this Agreement, first, to pay any fees, or expense reimbursements then due to the Lender from the Borrower; second, to pay interest due in respect of all Revolving Loans; third, to pay or prepay principal of the Revolving Loans; and fourth, to the payment of any other Obligation due to the Lender by the Borrower. The Lender shall have the continuing and exclusive right to apply and reverse and reapply any and all such proceeds and payments to any portion of the Obligations. 4.6 Indemnity for Returned Payments. If, after receipt of any payment of, or proceeds applied to the payment of, all or any part of the Obligations, the Lender is for any reason compelled to surrender such payment or proceeds to any Person, because such payment or application of proceeds is invalidated, declared fraudulent, set aside, determined to be void or voidable as a preference, impermissible setoff, or a diversion of trust funds, or for any other reason, then the Obligations or part thereof intended to be satisfied shall be revived and continue and this Agreement shall continue in full force as if such payment or proceeds had not been received by the Lender, and the Borrower shall be liable to pay to the Lender, and hereby does indemnify the Lender and hold the Lender harmless for, the 14 21 amount of such payment or proceeds surrendered. The provisions of this Section 4.6 shall be and remain effective notwithstanding any contrary action which may have been taken by the Lender in reliance upon such payment or application of proceeds, and any such contrary action so taken shall be without prejudice to the Lenders' rights under this Agreement and shall be deemed to have been conditioned upon such payment or application of proceeds having become final and irrevocable. The provisions of this Section 4.6 shall survive the termination of this Agreement. 4.7 Lender's and Lenders' Books and Records; Monthly Statements. The Borrower agrees that the Lender's books and records showing the Obligations and the transactions pursuant to this Agreement and the other Loan Documents shall be admissible in any action or proceeding arising therefrom, and shall constitute rebuttably presumptive proof thereof, irrespective of whether any Obligation is also evidenced by a promissory note or other instrument. The Lender will provide to the Borrower a monthly statement of the Revolving Loans, payments, and other transactions pursuant to this Agreement. Such statement shall be deemed correct, accurate, and binding on the Borrower and an account stated (except for reversals and reapplications of payments made as provided in Section 4.5 and corrections of errors discovered by the Lender), unless the Borrower notifies the Lender in writing to the contrary within thirty (30) days after such statement is rendered. In the event a timely written notice of objections is given by the Borrower, only the items to which exception is expressly made will be considered to be disputed by the Borrower. ARTICLE FIVE - YIELD PROTECTION 5.1 Reduction of Return. If the Lender shall have determined that (a) the introduction of any Capital Adequacy Regulation, (b) any change in any Capital Adequacy Regulation, (c) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (d) compliance by the Lender or any corporation controlling the Lender with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and (taking into consideration the Lender's or such corporation's policies with respect to capital adequacy and the Lender's desired return on capital) determines that the amount of such capital is increased as a consequence of the Total Facility, loans, credits or obligations under this Agreement, then, upon demand of the Lender, the Borrower shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for such increase. 5.2 Certificates of Lender. The Lender claiming reimbursement or compensation under this Article Five shall deliver to the Borrower a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Borrower in the absence of manifest error. 5.3 Survival. The agreements and obligations of the Borrower in this Article Five shall survive the payment of all other Obligations. 15 22 ARTICLE SIX - COLLATERAL 6.1 Grant of Security Interest. As security for all Obligations, the Borrower hereby grants to the Lender a continuing security interest in, lien on, and right of setoff against, all of the following Property of the Borrower, whether now owned or existing or hereafter acquired or arising, regardless of where located: (a) all Contracts, and any returned or repossessed property relating thereto; (b) all General Intangibles; (c) all money, securities and other property of any kind of the Borrower in the possession or under the control of the Lender, or a bailee of any such party or such party's Affiliates; (d) all Vehicles; (e) all deposit accounts, credits and balances with and other claims against the Lender or any of its Affiliates or any other financial institution in which the Borrower maintains deposits; (f) all books, records and other Property related to or referring to any of the foregoing, including, without limitation, books, records, account ledgers, data processing records, computer software and other Property and General Intangibles at any time evidencing or relating to any of the foregoing; (g) all accessions to, substitutions for and replacements, products and proceeds of any of the foregoing, including, but not limited to, proceeds of any insurance policies, claims against third parties, and condemnation or requisition payments with respect to all or any of the foregoing; (h) all of the Borrower's rights, but not its obligations, under all Dealer Agreements, including all rights to require a Dealer to repurchase a Contract acquired from such Dealer; and (i) proceeds of proceeds, Property, Property rights, privileges and benefits arising out of, from the enforcement of, or in connection with the Contracts, the Property rights and the policies of insurance referred to above, and all credit balances in favor of the Borrower on the Lender's books. All of the foregoing and all other Property of the Borrower in which the Lender may at any time be granted a Lien, is herein collectively referred to as the "Collateral." All of the Obligations shall be secured by all of the Collateral. 6.2 Perfection and Protection of Security Interest. (a) The Borrower shall, at its expense, perform all steps requested by the Lender at any time to perfect, maintain, protect, and enforce the Lender's Liens in the Collateral, including, without limitation: (i) executing and filing financing or continuation statements, and amendments thereof, in form and substance satisfactory to the Lender; (ii) delivering to the Lender the originals of all Instruments, documents, and chattel paper, and all other Collateral of which the Lender determines it should have physical possession in order to perfect and protect the Lender's security interest therein, duly pledged, endorsed or assigned to the Lender without restriction; (iii) placing notations on the Borrower's books of account to disclose the Lender's security interest; and (iv) taking such other steps as are deemed necessary or desirable by the Lender to maintain and protect the Lender's Liens in the Collateral. To the extent permitted by applicable law, the Lender may file, without the Borrower's signature, one or more financing statements disclosing the Lender's Liens in the Collateral. The Borrower agrees that a carbon, photographic, photostatic, or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. (b) Except with respect to Collateral delivered to the Lender pursuant to this Section 6.2, the Borrower shall immediately following the execution or receipt of a Contract, stamp on the Contract the following words: "This document is subject to a security interest in favor of BankAmerica Business Credit, Inc." (c) If any Collateral is at any time in the possession or control of any bailee or any of the Borrower's agents, then the Borrower shall notify the Lender thereof and shall notify such Person of the Lender's security interest in such Collateral and, upon the Lender's request, instruct such Person to hold all such Collateral for the Lender's account subject to the Lender's instructions. If at any time 16 23 any Collateral is located on any operating facility of the Borrower which is not owned by the Borrower, then the Borrower shall, at the request of the Lender, obtain written waivers, in form and substance satisfactory to the Lender, of all present and future Liens to which the owner or lessor of such premises may be entitled to assert against the Collateral. (d) From time to time, the Borrower shall, upon the Lender's request, execute and deliver confirmatory written instruments pledging to the Lender the Collateral with respect to the Borrower, but the Borrower's failure to do so shall not affect or limit the Lender's security interest or the Lender's other rights in and to the Collateral with respect to the Borrower. So long as this Agreement is in effect and until all Obligations have been fully satisfied, the Lender's Liens in the Collateral shall continue in full force and effect in all Collateral (whether or not deemed eligible for the purpose of calculating the Availability or as the basis for any advance, loan, extension of credit, or other financial accommodation). (e) The Borrower shall immediately deliver to the Lender the Certificates of Title, applications for title, and such other documents as the Lender may request for all of the Vehicles at any time owned or repossessed by the Borrower sufficient for the Lender to become the lien holder of record for such Vehicles under the law of the state in which such Vehicle has been registered. The Lender may, at any time and at the Borrower's expense, submit such documents to the appropriate Governmental Authority, including the South Carolina Division of Motor Vehicles, and have the Lender become the Lien holder of record on the Certificate of Title or other appropriate document for such Vehicles. Upon the Borrower's request, the Lender agrees to release its Lien in such Vehicles provided (a) the Vehicle has been sold in an arm's length sale to a party, other than an Affiliate of the Borrower, and (b) all cash proceeds of the sale are paid directly to the Lender for application to the Revolving Loans. 6.3 Location of Collateral. The Borrower represents and warrants to the Lender that Schedule 6.3 is a correct and complete list of the Borrower's chief executive office, the location of its books and records, the locations of the Collateral with respect to the Borrower (except for Collateral in the possession of the Lender), and the locations of all of its other places of business. The Borrower covenants and agrees that it will not (a) maintain any Collateral with respect to the Borrower at any location other than those locations listed for the Borrower on Schedule 6.3, (b) otherwise change or add to any of such locations, or (c) change the location of its chief executive office from the location identified in Schedule 6.3, unless it gives the Lender at least thirty (30) days' prior written notice thereof and executes any and all financing statements and other documents that the Lender requests in connection therewith. 6.4 Title to, Liens on, and Sale of Collateral. The Borrower represents and warrants to the Lender and agrees with the Lender that: (a) all of the Collateral is and will continue to be owned solely by the Borrower free and clear of all Liens whatsoever; (b) the Lender's Liens in the Collateral will not be subject to any prior Lien; (c) the Borrower will use, store, and maintain the Collateral with all reasonable care; and (d) the Borrower will not, without the Lender's prior written approval, sell, or dispose of or permit the sale or disposition of any of the Collateral, except for the sale of repossessed Vehicles in the normal course of business. The inclusion of proceeds in the Collateral shall not be deemed to constitute the Lender's consent to any sale or other disposition of the Collateral except as expressly permitted herein. 17 24 6.5 Access and Examination. The Lender may at all reasonable times (and at any time when a Default or Event of Default exists) have access to, examine, audit, make extracts from or copies of and inspect any or all of the Borrower's records, files, and books of account and the Collateral, and discuss the Borrower's affairs with the Borrower's officers and management and independent public accountants after notice to Borrower (and by this provision the Borrower hereby authorizes said accountants to discuss with the Lender the finances and affairs of the Borrower and each of its subsidiaries). The Borrower will deliver to the Lender any instrument necessary for the Lender to obtain records from any service bureau maintaining records for the Borrower. The Lender may, at any time and at the Borrower's expense, make copies of all of the Borrower's books and records, or require the Borrower to deliver such copies to the Lender. The Lender may, without expense to the Lender, use such of the Borrower's respective personnel, supplies, and premises as may be reasonably necessary for maintaining or enforcing the Lender's Liens in the Collateral. The Lender shall have the right, at any time, in the Lender's name or in the name of a nominee of the Lender, to verify the validity, amount or any other matter relating to the Contracts, or other Collateral, by mail, telephone, or otherwise. In the event of any litigation between the Borrower and the Lender, any right of civil discovery shall be in addition to, but not in lieu of, the Lender's rights under this Section 6.5. 6.6 Collateral Reporting. The Borrower shall provide the Lender, by the fifteenth day of each month, with the following documents at the following times in form satisfactory to the Lender: (a) a collateral and loan status report on forms provided by the Lender (or such other form approved by Lender), (b) an aging of the Borrower's Contracts, listing each Contract under which any payment due thereunder is sixty (60) or more days past due, as determined on a contractual basis, together with a reconciliation to the previous month's aging of the Borrower's Contracts and to the Borrower's general ledger; and (c) such other reports as to the Collateral as the Lender shall reasonably request from time to time; and (d) with the delivery of each of the foregoing, a certificate of an officer of the Borrower certifying as to the accuracy and completeness of the foregoing. If any of the Borrower's records or reports of the Collateral are prepared by an accounting service or other agent, the Borrower hereby authorizes such service or agent to deliver such records, reports, and related documents to the Lender. 6.7 Contracts. (a) The Borrower hereby represents and warrants to the Lender with respect to the Borrower's Contracts, that: (i) each existing Contract represents, and each future Contract will represent, a bona fide obligation of the Contract Debtor, enforceable in accordance with its terms, and the Borrower does not know of any fact which impairs or will impair the validity of any such Contract; (ii) each existing Contract is, and each future Contract will be, for a liquidated amount payable by the Contract Debtor thereon on the terms set forth in the Contract therefor or in the schedule thereof delivered to the Lender, without any offset, deduction, defense (including the defense of usury), or counterclaim except those known to the Borrower and disclosed to the Lender pursuant to this Agreement; (iii) there is only one original counterpart of the Contract executed by the Contract Debtor (with the possible exception of one duplicate original counterpart which, if in existence, is in the Contract Debtor's sole possession); (iv) no payment will be received with respect to any Contract, and no credit, discount, or extension, or agreement therefor will be granted on any Contract, except expressly permitted under the terms of this Agreement and as reported to the Lender in accordance with this Agreement; (v) each Contract correctly sets forth the terms thereof between the Borrower and the Contract Debtor, including the interest rate applicable thereto and correctly reasonably describes the subject personal Property collateral; (vi) the signatures of all Contract Debtors are genuine and, to the knowledge of the Borrower, each Contract Debtor had the legal capacity to enter into and execute such documents on the date thereof; (vii) Any Requirement of Law, the noncompliance with which may have an adverse impact on the value, 18 25 enforceability or collectability of the Contracts has been complied with by the Borrower; and (viii) the Borrower has not used illegal, improper, fraudulent or deceptive marketing techniques or unfair business practices with respect to the Contracts. (b) The Borrower shall not accept any note or other Instrument (except a check or other Instrument for the immediate payment of money) with respect to any Contract without the Lender's written consent. If the Lender consents to the acceptance of any such Instrument, it shall be considered as evidence of the Contract and not payment thereof and the Borrower will promptly deliver such Instrument to the Lender, endorsed by the Borrower to the Lender in a manner satisfactory in form and substance to the Lender. Regardless of the form of presentment, demand, notice of protest with respect thereto, the Contract Debtor shall remain liable thereon until such instrument is paid in full. (c) No discount, credit or allowance shall be granted to any such Contract Debtor without the Lender's prior written consent, except for discounts, credits and allowances made or given in the ordinary course of the Borrower's business when no Event of Default exists hereunder. The Lender may, at all times when an Event of Default exists hereunder, settle or adjust disputes and claims directly with Contract Debtors for amounts and upon terms which the Lender shall consider advisable and, in all cases, the Lender will credit the Borrower's Loan Account with only the net amounts received by the Lender in payment of any Contracts. 6.8 Collection of Contracts; Payments. (a) Prior to the Closing Date, the Borrower shall establish a Collection Account, in accordance with the Collection Account Agreement, for collections of the Contracts at a bank acceptable to the Lender. Subject to the Lender's rights under Section 11.2 below, while any portion of the Revolving Loans are unpaid, the Borrower shall immediately, upon receipt thereof, deposit all cash proceeds of the Collateral (including, for example, all regular monthly payments received in connection with the Contracts) into the Collection Account. If, at any time, either (i) the Borrower's Excess Availability is equal to or less than five percent (5%); or (ii) an Event of Default occurs, then at all times thereafter, the Borrower's right to withdraw any funds from the Collection Account shall immediately terminate and only the Lender shall have a right to withdraw any funds from the Collection Account. The Lender shall reinstate the Borrower's right to withdraw funds from the Collection Account in the event (i) the Borrower's Excess Availability is, at all times, equal to or greater than five percent (5%) of the Revolving Loan balance during any ninety (90) consecutive-day period following the date of termination of the Borrower's Collection Account withdrawal rights and no Default or Event of Default occurs during that period, where the Borrower's withdrawal rights were terminated because of inadequate Excess Availability, or (ii) the Lender, in its sole discretion, waives or allows to be cured (if curable) the Event of Default which resulted in the termination of the Borrower's withdrawal rights and no additional grounds for terminating the Borrower's withdrawal rights (e.g., a new Default or Event of Default) occurs during any ninety (90) consecutive-day period following the date of termination of the Borrower's Collection Account withdrawal rights, where the Borrower's withdrawal rights were terminated because of the occurrence of an Event of Default. (b) During the period that the Borrower's withdrawal rights with respect to the Collection Account have been terminated, all payments, including immediately available funds received by the Lender at a bank designated in the Collection Agreement on account of Contracts or as proceeds of other Collateral will be the Lender's sole Property for the benefit of the Lender and will be credited to the Borrower's Loan Account (conditional upon final collection). 19 26 6.9 Right to Cure. The Lender may, in its discretion, pay any amount or do any act required of the Borrower hereunder or under any other Loan Document in order to preserve, protect, maintain or enforce the Obligations, the Collateral or the Lender's Liens therein, and which the Borrower fails to pay or do, including, without limitation, payment of any judgment against the Borrower, any insurance premium, any landlord's claim, and any other Lien upon or with respect to the Collateral. All payments that the Lender makes under this Section 6.9 and all out-of-pocket costs and expenses that the Lender pays or incurs in connection with any action taken by it hereunder shall be charged to the Borrower's Loan Account as a Revolving Loan. Any payment made or other action taken by the Lender under this Section 6.9 shall be without prejudice to any right to assert an Event of Default hereunder and to proceed thereafter as herein provided. 6.10 Power of Attorney. The Borrower hereby appoints the Lender and the Lender's designee as the Borrower's attorney, with power to, when an Event of Default exists and is continuing: (a) endorse the Borrower's name on any checks, notes, acceptances, money orders, or other forms of payment or security that come into the Lender's possession; (b) sign the Borrower's name on any Certificate of Title relating to any Collateral, including a release and/or transfer of the Lien on the Vehicle evidenced thereby, on notices of assignment, financing statements and on other public records; (c) notify the post office authorities to change the address for delivery of the Borrower's mail to an address designated by the Lender and to receive, open and dispose of all mail addressed to the Borrower; (d) send requests for verification of Contracts to customers or Contract Debtors; and (e) do all things necessary to carry out this Agreement. The Borrower ratifies and approves all acts of such attorney. Neither the Lender nor its attorneys will be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable until this Agreement has been terminated and the Obligations have been fully satisfied. 6.11 Lender' Rights, Duties and Liabilities. The Borrower assumes all responsibility and liability arising from or relating to the use, sale or other disposition of the Collateral. Neither the Lender, nor any of its respective officers, directors, employees or agents shall be liable or responsible in any way for the safekeeping of any of the Collateral, or for any loss or damage thereto, or for any diminution in the value thereof, or for any act of default of any warehouseman, carrier, forwarding agency or other person whomsoever, all of which shall be at the Borrower's sole risk. The Obligations shall not be affected by any failure of the Lender to take any steps to perfect the Lender's Liens in the Collateral or to collect or realize upon the Collateral, nor shall loss of or damage to the Collateral release the Borrower from any of the Obligations. The Lender may (but shall not be required to), without notice to or consent from the Borrower, sue upon or otherwise collect, extend the time for payment of, modify or amend the terms of, compromise or settle for cash, credit, or otherwise upon any terms, grant other indulgences, extensions, renewals, compositions, or releases, and take or omit to take any other action with respect to the Collateral, any security therefor, any agreement relating thereto, any insurance applicable thereto, or any Person liable directly or indirectly in connection with any of the foregoing, without discharging or otherwise affecting the liability of the Borrower for the Obligations or under this Agreement or any other agreement now or hereafter existing between the Lender and the Borrower. 6.12 Protection of Collateral. The Borrower shall pay all expenses of protecting, storing, insuring, handling, maintaining, and shipping the Collateral and any and all excise, property, sales, and use taxes levied by any state, federal or local authority on any of the Collateral or in respect of the sale thereof. 20 27 6.13 Servicing of Contracts. The Borrower shall collect all payments and other proceeds of the Contracts and other Collateral and deposit the proceeds into the Collection Account and perform customary insurance follow-up with respect to each policy of insurance covering the Property which is the subject of the Contracts. 6.14 Borrower's Office. The Borrower's chief executive office is located at the address stated on page one of this Agreement, and the Borrower covenants and agrees that it will not, without prior written notification to the Lender, relocate said chief executive office. 6.15 Verification of Contracts. The Lender may from time to time in its own name or that of a nominee contact customers and Contract Debtors to verify Contracts. ARTICLE SEVEN - BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES 7.1 Books and Records. The Borrower shall maintain, at all times, correct and complete books, records and accounts in which complete, correct and timely entries are made of its transactions in accordance with GAAP applied consistently with the audited Financial Statements required to be delivered pursuant to Section 7.2(a). The Borrower shall, by means of appropriate entries, reflect in such accounts and in all Financial Statements proper liabilities and reserves for all taxes and proper provision for depreciation and amortization of property and bad debts, all in accordance with GAAP. The Borrower shall maintain at all times books and records pertaining to the Collateral in such detail, form and scope as the Lender shall reasonably require, including, but not limited to, records of (a) all payments received and all credits and extensions granted with respect to the Contracts; and (b) all other dealings affecting the Collateral. The Borrower shall maintain a system, satisfactory to the Lender, for duplicating and storing, at a secure location, a duplicate set of books and records concerning the Collateral. In addition, the Borrower shall maintain a credit file for each Contract Debtor, containing financial information reflecting the creditworthiness of each Contract Debtor. 7.2 Financial Information. The Borrower shall promptly furnish to the Lender, all such financial information as the Lender shall reasonably request, and notify its auditors and accountants that the Lender is authorized to obtain such information directly from them. Without limiting the foregoing, the Borrower will furnish to the Lender, in such detail as the Lender shall request, the following: (a) As soon as available, but in any event not later than ninety (90) days after the close of each Fiscal Year, consolidated and consolidating audited balance sheet, statements of income and expense, cash flow and of stockholders' equity for the Borrower and Emergent for such Fiscal Year, and the accompanying notes thereto, setting forth in each case in comparative form figures for the previous Fiscal Year, all in reasonable detail, fairly presenting the financial position and the results of operations of the Borrower and Emergent as at the date thereof and for the Fiscal Year then ended, and prepared in accordance with GAAP. Such statements shall be examined in accordance with generally accepted auditing standards by and, in the case of such statements performed on a consolidated basis, accompanied by a report thereon unqualified as to scope of independent certified public accountants selected by the Borrower and reasonably satisfactory to the Lender. The Borrower, simultaneously with retaining such independent public accountants to conduct such annual audit, shall send a letter to such accountants, with a copy to the Lender, notifying such accountants that one of the primary purposes for retaining such accountants' services and having audited financial statements prepared by them is for use by the Lender. 21 28 (b) As soon as available, but in any event not later than forty-five (45) days after the end of each month, unaudited balance sheets of the Borrower as at the end of such month, and unaudited statements of income and expense and cash flow for the Borrower for such month and for the period from the beginning of the Fiscal Year to the end of such month, all in reasonable detail, fairly presenting the financial position and results of operations of the Borrower as at the date thereof and for such periods, and prepared in accordance with GAAP applied consistently with the audited Financial Statements required to be delivered pursuant to Section 7.2(a). The Borrower shall certify by a certificate signed by its the chief financial officer that all such statements have been prepared in accordance with GAAP and present fairly, subject to normal year-end adjustments, the Borrower's financial position as at the dates thereof and its results of operations for the periods then ended. (c) With each of the audited Financial Statements delivered pursuant to Section 7.2(a), a certificate of the independent certified public accountants that examined such statement to the effect that they have reviewed and are familiar with this Agreement and that, in examining such Financial Statements, they did not become aware of any fact or condition which then constituted a Default or Event of Default, except for those, if any, described in reasonable detail in such certificate. (d) With each of the annual audited Financial Statements delivered pursuant to Section 7.2(a), a certificate of the chief financial officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish that the Borrower was in compliance with the covenants set forth in Sections 9.16 through and including Section 9.19 during the period covered in such Financial Statements and as at the end thereof, and (ii) stating that, except as explained in reasonable detail in such certificate, (1) all of the representations and warranties of the Borrower contained in this Agreement and the other Loan Documents are correct and complete in all material respects as at the date of such certificate as if made at such time, (2) the Borrower is, at the date of such certificate, in compliance in all material respects with all of their respective covenants and agreements in this Agreement and the other Loan Documents, (3) no Default or Event of Default then exists or existed during the period covered by such Financial Statements, (4) describing and analyzing in reasonable detail all material trends, changes, and developments in each and all Financial Statements; and (5) explaining the variances of the figures in the corresponding budgets and prior Fiscal Year financial statements. If such certificate discloses that a representation or warranty is not correct or complete, or that a covenant has not been complied with, or that a Default or Event of Default existed or exists, such certificate shall set forth what action the Borrower has taken or proposes to take with respect thereto. (e) No sooner than sixty (60) days and not less than thirty (30) days prior to the beginning of each Fiscal Year, annual forecasts (to include forecasted balance sheets, statements of income and expenses and statements of cash flow) for the Borrower as at the end of and for each month of such Fiscal Year. (f) As soon as available, but in any event not later than fifteen (15) days after the Borrower's receipt thereof, a copy of all management reports and management letters prepared for the Borrower by Elliot, Davis & Company or any other independent certified public accountants of the Borrower. (g) Promptly after their preparation, copies of any and all proxy statements, financial statements, and reports which the Borrower makes available to its stockholders. 22 29 (h) Promptly after the Lender's request, a copy of any tax return filed by the Borrower or by any of its Affiliates with the IRS. (i) Such additional information as the Lender may from time to time reasonably request regarding the financial and business affairs of the Borrower. 7.3 Notices to the Lender. The Borrower shall notify the Lender, in writing of the following matters at the following times: (a) Immediately after becoming aware of any Default or Event of Default. (b) Immediately after becoming aware of the assertion by the holder of any capital stock of the Borrower or of any Debt in an outstanding principal amount in excess of $10,000 that a default exists with respect thereto or that the Borrower is not in compliance with the terms thereof, or the threat or commencement by such holder of any enforcement action because of such asserted default or non-compliance. (c) Immediately after becoming aware of any Material Adverse Effect. (d) Immediately after becoming aware of any pending or threatened action, suit, proceeding, or counterclaim by any Person, or any pending or threatened investigation by a Governmental Authority, which action, suit, proceeding, counterclaim or investigation seeks damages in excess of $10,000 (which amount shall not be fully covered by insurance), or which may otherwise have a Material Adverse Effect. (e) Immediately after becoming aware of any violation of any law, statute, regulation, or ordinance of a Governmental Authority affecting the Borrower which could reasonably be expected to have a Material Adverse Effect. (f) Any change in the Borrower's name, state of incorporation, or form of organization, trade names or styles under which the Borrower will create or acquire Contracts, or to which instruments in payment of Contracts may be made payable, in each case at least thirty (30) days prior thereto. Each notice given under this Section shall describe the subject matter thereof in reasonable detail, and shall set forth the action that the Borrower has taken or proposes to take with respect thereto. ARTICLE EIGHT - GENERAL WARRANTIES AND REPRESENTATIONS The Borrower warrants and represents to the Lender that except as hereafter disclosed to and accepted by the Lender in writing: 8.1 Authorization, Validity, and Enforceability of this Agreement and the Loan Documents. The Borrower has the corporate power and authority to execute, deliver and perform this Agreement and the other Loan Documents, to incur the Obligations, and to grant to the Lender Liens upon and security interests in the Collateral. The Borrower has taken all necessary corporate action (including without 23 30 limitation, obtaining approval of its stockholders if necessary) to authorize its execution, delivery, and performance of this Agreement and the other Loan Documents. No consent, approval, or authorization of, or declaration or filing with, any Governmental Authority, and no consent of any other Person, is required in connection with the Borrower's execution, delivery and performance of this Agreement and the other Loan Documents, except for those already duly obtained. This Agreement and the other Loan Documents have been duly executed and delivered by the Borrower, and constitute the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms without defense, setoff or counterclaim. Borrower's execution, delivery, and performance of this Agreement and the other Loan Documents do not and will not conflict with, or constitute a violation or breach of, or constitute a default under, or result in the creation or imposition of any Lien upon the Property of the Borrower by reason of the terms of (a) any contract, mortgage, Lien, lease, agreement, indenture, or instrument to which the Borrower is a party or which is binding upon it, (b) any Requirement of Law applicable to the Borrower, or (c) the certificate or articles of incorporation or bylaws of the Borrower. 8.2 Validity and Priority of Security Interest. The provisions of this Agreement and the other Loan Documents create legal and valid Liens on all the Collateral in favor of the Lender and such Liens constitute perfected and continuing Liens on all the Collateral, having priority over all other Liens on the Collateral securing all the Obligations, and enforceable against the Borrower and all third parties. 8.3 Organization and Qualification. The Borrower (a) is duly incorporated and organized and validly existing in good standing under the laws of the state of its incorporation, (b) is qualified to do business as a foreign corporation and is in good standing in the jurisdictions set forth on Schedule 8.3 which are the only jurisdictions in which qualification is necessary in order for it to own or lease its Property and conduct its business and (c) has all requisite power and authority to conduct its business and to own its Property. 8.4 Corporate Name; Prior Transactions. The Borrower has not, during the past five (5) years, been known by or used any other corporate or fictitious name, or been a party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any of its Property outside of the ordinary course of business. 8.5 Affiliates. Schedule 8.5 is a correct and complete list of the name and relationship to the Borrower of each and all of the Borrower's Affiliates. Each Affiliate which is a corporation is (a) duly incorporated and organized and validly existing in good standing under the laws of its state of incorporation set forth on Schedule 8.5, and (b) qualified to do business as a foreign corporation and in good standing in each jurisdiction in which the failure to so qualify or be in good standing could reasonably be expected to have a Material Adverse Effect on any such Affiliate and (c) has all requisite power and authority to conduct its business and own its Property. 8.6 Contract Forms. The Borrower covenants that only Contracts on a printed form(s) previously approved in writing by the Lender shall be used by the Borrower for all Contracts which may now exist and which may exist in the future. The Borrower shall not change or vary the printed terms of such Contracts without the Lender's prior written consent, unless such change or variation is expressly required by any Requirement of Law. The Lender may reasonably withhold its consent until the Lender receives a satisfactory opinion of the Borrower's counsel regarding compliance of the revised form of Contract with any Requirement of Law. 24 31 8.7 Credit Guidelines. The Borrower represents and warrants that it shall not make any changes in its credit guidelines (a copy of which has been previously furnished by the Borrower to the Lender) without the Lender's prior written consent which the Lender may withhold in its sole and absolute discretion. The Borrower's credit guidelines shall state in detail the credit criteria used by the Borrower in determining the creditworthiness of Contract Debtors with regard to the Contracts originated by the Borrower and/or originated by third parties and acquired by the Borrower. 8.8 Financial Statements and Projections. (a) The Borrower has delivered to the Lender the consolidated audited balance sheet and related statements of income, retained earnings, changes in financial position, and changes in stockholders equity for the Borrower as of December 31, 1994, accompanied by the report thereon of the Borrower's independent certified public accountants. The Borrower has also delivered to the Lender the unaudited balance sheet and related statements of income and changes in financial position for the Borrower as of October 31, 1995. Such financial statements are attached hereto as Exhibit 8.8. All such financial statements have been prepared in accordance with GAAP and present accurately and fairly the financial position of the Borrower as at the dates thereof and their results of operations for the periods then ended. (b) The latest projections when submitted to the Lender as required herein represent the Borrower's best estimate of the future financial performance of the Borrower for the periods set forth therein. The latest projections have been prepared on the basis of the assumptions set forth therein, which the Borrower believes are fair and reasonable in light of current and reasonably foreseeable business conditions at the time submitted to the Lender. 8.9 Capitalization. The Borrower's authorized capital stock consists of 2,000 shares of voting common stock, par value $100 per share and 250,000 shares of non-voting preferred stock. Seven hundred fifty (750) shares of the Borrower's common stock are validly issued and outstanding and 100 shares of preferred stock are validly issued and outstanding. Six hundred (600) of the common shares are owned beneficially and of record by Emergent, one hundred fifty (150) of the common shares are owned beneficially and of record by Ronald I. Long, and 100 of the preferred shares are owned beneficially and of record by Emergent. 8.10 Solvency. The Borrower is Solvent prior to and after giving effect to the making of the Revolving Loans to be made on the Closing Date and shall remain Solvent during the term of this Agreement. 8.11 Debt. After giving effect to the making of the Revolving Loans to be made on the Closing Date, the Borrower has no Debt, except (a) the Obligations, (b) Debt described on Exhibit 8.8, and (c) trade payables and other contractual obligations arising in the ordinary course of business. 8.12 Title to Property. The Borrower has good, indefeasible, and merchantable title to all of its Property (including, without limitation, the assets reflected on the 11-30-95 Financial Statements delivered to the Lender, except as disposed of in the ordinary course of business since the date thereof), free of all Liens except for those disclosed in such Financial Statements. 8.13 Trade Names and Terms of Sale. All trade names or styles under which the Borrower creates or acquires Contracts, or to which instruments in payment of Contracts may be made payable, are listed on Schedule 8.13. 25 32 8.14 Litigation. Except as set forth on Schedule 8.14, there is no pending or (to the best of the Borrower's knowledge) threatened, action, suit, proceeding, or counterclaim by any Person, or investigation by any Governmental Authority, or any basis for any of the foregoing, which could reasonably be expected to cause a Material Adverse Effect. 8.15 No Violation of Law. The Borrower is not in violation of any Requirement of Law, judgment, order, or decree applicable to it which violation could reasonably be expected to have a Material Adverse Effect. 8.16 No Default. The Borrower is not in default with respect to any note, indenture, loan agreement, mortgage, lease, deed, or other agreement to which the Borrower or such Subsidiary is a party or by which it is bound, which default could reasonably be expected to have a Material Adverse Effect. 8.17 Taxes. The Borrower and its Affiliates have filed all Federal and other tax returns and reports required to be filed, and have paid all Federal and other taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable. 8.18 Use of Proceeds. The proceeds of the Revolving Loans are to be used solely for working capital purposes. 8.19 No Material Adverse Change. No Material Adverse Effect has occurred since the date of the Financial Statements delivered to the Lender. 8.20 Full Disclosure. None of the representations or warranties made by the Borrower in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Borrower in connection with the Loan Documents (including the offering and disclosure materials delivered by or on behalf of the Borrower to the Lender prior to the Closing Date), contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered. 8.21 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower of the Agreement or any other Loan Document. 8.22 Offices; FTC; Warranties. (a) The Borrower agrees that it will operate at a licensed location in the jurisdiction requiring such license in conformity with all such licensing and other laws applicable to the purchase of Contracts, including Motor Vehicle Retail Installment Sales Acts, Sales Finance Agency Acts or any other law regulating the business of acquiring the Contracts from Dealers. To the extent the Borrower does not have a license for each location, it will immediately procure a license or advise the Lender of the reason that it is exempt from such licensing requirement or that no such licensing requirement exists in the jurisdiction of such location. 26 33 (b) The Borrower is familiar with the Federal Trade Commission's used car rule and is in compliance therewith to the extent the Borrower is legally obligated for such compliance. (c) Each Vehicle Contract which has been originated by a Dealer pursuant to a Dealer Agreement that is enforceable in accordance with its terms against such Dealer. To the extent that the Borrower allows Dealers to finance so-called "extended warranty plans," the Borrower will (i) ensure that the cost of such plans are disclosed and will be in substantial compliance with all applicable consumer credit laws, including any and all special insurance laws relating thereto to the extent the Borrower is legally obligated for such compliance, and (ii) ensure that such plans are underwritten by (x) a major automobile manufacturer, or an Affiliate thereof, or (y) a reputable insurance company. 8.23 Insurance. (a) The Borrower shall maintain with respect to the Borrower's Vehicles (including all repossessed Vehicles), with financially sound and reputable insurers having a rating of at least A-VII or better by Best Rating Guide, insurance against loss or damage by fire with extended coverage; theft, and burglary; public liability, and third party property damage; and such other hazards or of such other types as is customary for Persons engaged in the same or similar business, as the Lender, in its discretion shall specify, in amounts and under policies acceptable to the Lender. (b) The Borrower shall cause the Lender to be named in each such policy as secured party and sole loss payee or additional insured, in a manner acceptable to the Lender. Each policy of insurance shall contain a clause or indorsement requiring the insurer to give not less than thirty (30) days prior notice to the Lender in the event of cancellation of the policy for any reason whatsoever and a clause or indorsement stating that the interest of the Lender shall not be impaired or invalidated by any act or neglect of the Borrower. All premiums for such insurance shall be paid by the Borrower when due, and certificates of insurance and, if requested by the Lender, photocopies of the policies, shall be delivered to the Lender. If the Borrower fails to procures such insurance or to pay the premiums therefor when due, the Lender may do so from the proceeds of the Revolving Loans. (c) The Borrower shall promptly notify the Lender of any loss or damage or destruction to the Borrower's Vehicles, whether or not covered by insurance. The Lender is hereby authorized to collect all insurance proceeds directly and to apply them to fees, expenses, the Revolving Loans, and to other Obligations in the order provided in Section 4.5. ARTICLE NINE - AFFIRMATIVE AND NEGATIVE COVENANTS The Borrower covenants to the Lender that, so long as any of the Obligations remain outstanding or this Agreement is in effect: 9.1 Taxes and Other Obligations. The Borrower shall (a) file when due all tax returns and other reports which it is required to file; (b) pay, or provide for the payment, when due, of all taxes, fees, assessments and other governmental charges against it or upon its Property, income and franchises, make all required withholding and other tax deposits, and establish adequate reserves for the payment of all such items, and provide to the Lender, upon request, satisfactory evidence of its timely compliance with the foregoing; and (c) pay when due all Debt owed by it and all claims of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons, and all other indebtedness owed by it and perform and discharge in a timely manner all other obligations undertaken by it; provided, however, so 27 34 long as Borrower has notified the Lender in writing, the Borrower need not pay any tax, fee, assessment, or governmental charge, that (i) it is contesting in good faith by appropriate proceedings diligently pursued, (ii) the Borrower has established proper reserves for as provided in GAAP, and (iii) no Lien on the Collateral results from such non-payment. 9.2 Corporate Existence and Good Standing. The Borrower shall maintain its corporate existence and its qualification and good standing in all jurisdictions in which the failure to maintain such qualification or good standing could reasonably be expected to have a material adverse effect on the Borrower's Property, business, operations, prospects, or condition (financial or otherwise). 9.3 Compliance with Law and Agreements; Maintenance of Licenses. The Borrower shall comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the State Board of Financial Institutions of the state of South Carolina). The Borrower shall obtain and maintain all licenses, permits, franchises, and governmental authorizations necessary to own its Property and to conduct its business as conducted on the Closing Date. 9.4 Mergers, Consolidations or Sales. The Borrower shall not enter into any transaction of merger, reorganization, or consolidation, or transfer, sell, assign, lease, or otherwise dispose of all or any part of or any interest in the Collateral, or wind up, liquidate or dissolve, or agree to do any of the foregoing, without the prior written consent of Lender. 9.5 Distributions; Capital Change; Restricted Investments. The Borrower shall not (i) directly or indirectly declare or make, or incur any liability to make, any Distribution, or (ii) make any change in its capital structure which could have a Material Adverse Effect. 9.6 Transactions Affecting Collateral or Obligations. The Borrower shall not enter into any transaction which could have a Material Adverse Effect. 9.7 Guaranties. The Borrower shall not make, issue, or become liable on any Guaranty, except Guaranties in favor of the Lender. 9.8 Debt. The Borrower shall not incur or maintain any Debt, other than: (a) the Obligations; (b) trade payables and contractual obligations to suppliers and customers incurred in the ordinary course of business; and (c) other Debt existing on the Closing Date and reflected in the Financial Statements attached hereto as Exhibit 8.8. 9.9 Prepayment. The Borrower shall not voluntarily prepay any Debt, except the Obligations and any Subordinated Debt in accordance with the terms of this Agreement. 9.10 Transactions with Affiliates. Except as set forth below, the Borrower shall not sell, transfer, distribute, or pay any money or Property, including, but not limited to, any fees or expenses of any nature (including, but not limited to, any fees or expenses for management services), to any Affiliate, or lend or advance money or Property to any Affiliate, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or indebtedness, or any Property, of any Affiliate, or become liable on any Guaranty of the indebtedness, dividends, or other obligations of any Affiliate. Notwithstanding the foregoing, the Borrower may pay Emergent Group, Inc. a management fee to pay administrative and overhead expenses (including taxes) as are, from time to time, reasonably allocated 28 35 to Borrower by Emergent provided: (a) the amount paid to Emergent as a management fee in any Fiscal Year does not exceed the greater of sixty thousand dollars ($60,000) or thirty-four percent (34%) of the Borrower's Adjusted Net Earnings from Operations for such Fiscal Year, before provision for income taxes for such period (with the provision for income taxes being calculated for the Borrower without reference to the taxable income of any other Person); and (b) no Default or Event of Default exists at the time of such payment. 9.11 Business Conducted. The Borrower shall not engage directly or indirectly, in any line of business other than the businesses in which the Borrower is engaged on the Closing Date. 9.12 Liens. The Borrower shall not create, incur, assume, or permit to exist any Lien on any Collateral, except for the Lien in favor of the Lender. 9.13 Fiscal Year. The Borrower shall not change its Fiscal Year. 9.14 Limitations on Bulk Purchase Transactions. The Borrower shall not enter into any Bulk Purchase Transaction without the Lender's prior written consent which shall not be unreasonably withheld or delayed. 9.15 Debt Ratio. The Borrower shall not permit the ratio, calculated as of the last day of each month, of Debt to Adjusted Tangible Net Worth, to exceed: (a) 15 to 1 prior to December 1, 1996, and (b) 10 to 1 thereafter. 9.16 Interest Coverage Ratio. Commencing with the quarter ending March 31, 1996, and on the first day of each fiscal quarter thereafter, the Borrower will maintain an Interest Coverage Ratio of not less than (a) 1.2 to 1 prior to October 1, 1996, and (b) 1.25 to 1 thereafter. The ratio shall be calculated for the period commencing on the first day of the then current Fiscal Year to the date of calculation. 9.17 Loss Reserves. The Borrower shall maintain loss reserves, calculated as of the last day of each month, in an aggregate amount which shall not be less than the Loss Reserve Percentage, multiplied by the Net Contract Payments as of such date. 9.18 Unsubordinated Debt to Borrowing Base. The Borrower shall not permit the ratio, calculated as of the last day of each month, of (a) the remainder of all Debt minus all Subordinated Debt, to (b) Borrowing Base, to be more than 3 to 1. 9.19 Charge-Off Policy. The Borrower shall establish and implement, in a manner satisfactory to the Lender, a policy for charging off the unpaid balance of its delinquent Contracts. Without limiting the generality of the foregoing, the Borrower's policy shall provide that as of the last day of each quarter in each Fiscal Year, the Borrower shall charge off the unpaid balance of all Contracts with respect to which any payment due thereunder is one hundred eighty (180) or more days delinquent, as determined on a contractual basis. 9.20 Subordinated Obligations. Except as previously and expressly consented to in writing by the Lender, the Borrower shall not directly or indirectly permit (a) any payment to be made in respect of any Subordinated Debt; (b) the amendment, rescission, or other modification of the provisions of any 29 36 of the Borrower's Subordinated Debt in such a manner as to affect adversely the Lender's Liens in the Collateral or the prior position of such Liens; or (c) the prepayment or redemption of all or any part of any Subordinated Debt of the Borrower. 9.21 Further Assurances. The Borrower shall execute and deliver, or cause to be executed and delivered, to the Lender such documents and agreements, and shall take or cause to be taken such actions, as the Lender may, from time to time, request to carry out the terms and conditions of this Agreement and the other Loan Documents. ARTICLE TEN - CONDITIONS TO BORROWINGS 10.1 Conditions Precedent to Making of Revolving Loans on the Closing Date. The obligation of the Lender to make the initial Revolving Loans on the Closing Date are subject to the following conditions precedent having been satisfied in a manner satisfactory to the Lender: (a) This Agreement, the documents listed in Schedule 10.1, and the other Loan Documents are in form and substance satisfactory to the Lender and its counsel, and have been executed and delivered by each party thereto and the Borrower shall have performed and complied with all covenants, agreements and conditions contained herein and the other Loan Documents which are required to be performed or complied with by the Borrower before or on such Closing Date. (b) After making the Revolving Loans on the Closing Date (including such Revolving Loans made to pursuant to Section 4.7 as reimbursement for fees, costs and expenses then payable under this Agreement) and with all its obligations current, the Borrower would have Excess Availability greater than five (5%) of the Revolving Loans. (c) All representations and warranties made hereunder and in the other Loan Documents shall be true and correct as of the Closing Date as if made on such date. (d) No Default or Event of Default shall exist on the Closing Date, or would exist after giving effect to the Revolving Loans to be made on such date. (e) The Lender shall have received such opinions of counsel for the Borrower as the Lender shall request, each such opinion to be in a form, scope, and substance satisfactory to the Lender. (f) The Lender shall have received: (i) acknowledgment copies of proper financing statements, duly filed on or before the Closing Date under the UCC of all jurisdictions that the Lender may deem necessary or desirable in order to perfect the Lender's Lien; and (ii) duly executed such UCC-3 Termination Statements and other instruments, in form and substance satisfactory to the Lender, as shall be necessary to terminate and satisfy all Liens on the Collateral. 30 37 (g) The Borrower shall have paid all fees and expenses of the Lender and the Attorney costs incurred in connection with any of the Loan Documents and the transactions contemplated thereby. (h) The Lender shall have had an opportunity, if they so choose, to examine the books of account and other records and files of the Borrower and to make copies thereof, and to conduct a pre-closing audit which shall include, without limitation, verification of Contracts and Availability, and the results of such examination and audit shall have been satisfactory to the Lender in all respects. (i) All proceedings taken in connection with the execution of this Agreement, all other Loan Documents and all documents and papers relating thereto shall be satisfactory in form, scope, and substance to the Lender. The acceptance by the Borrower of any Revolving Loans made on the Closing Date shall be deemed to be a representation and warranty made by the Borrower to the effect that all of the conditions precedent to the making of such Revolving Loans have been satisfied, with the same effect as delivery to the Lender of a certificate signed by the a Responsible Officer of the Borrower, dated the Closing Date, to such effect. 10.2 Conditions Precedent to Each Revolving Loan. The obligation of the Lender to make each Revolving Loan, including the initial Revolving Loans on the Closing Date, shall be subject to the further conditions precedent that on and as of the date of any such extension of credit the following statements shall be true, and the acceptance by the Borrower of any extension of credit shall be deemed to be a statement to the effect set forth in clauses (a) and (b), with the same effect as the delivery to the Lender of a certificate signed by a Responsible Officer, dated the date of such extension of credit, stating that: (a) The representations and warranties contained in this Agreement and the other Loan Documents are correct in all material respects on and as of the date of such extension of credit as though made on and as of such date, except to the extent the Lender has been notified by the Borrower that any representation or warranty is not correct and the Lender have explicitly waived in writing compliance with such representation or warranty; and (b) No event has occurred and is continuing, or would result from such extension of credit, which constitutes a Default or an Event of Default. ARTICLE ELEVEN - DEFAULT; REMEDIES 11.1 Events of Default. It shall constitute an event of default ("Event of Default") if any one or more of the following shall occur for any reason: (a) any failure to pay the principal of or interest or premium on any of the Obligations when due, whether upon demand or otherwise; (b) any representation or warranty made by the Borrower in this Agreement or by the Borrower in any of the other Loan Documents, any Financial Statement, or any certificate furnished by 31 38 the Borrower at any time to the Lender shall prove to be untrue in any material respect as of the date on which made or furnished; (c) any default shall occur in the observance or performance of any of the covenants and agreements contained in this Agreement, any other Loan Documents, or any other agreement entered into at any time to which the Borrower and the Lender are party, or if any such agreement or document shall terminate (other than in accordance with its terms or the terms hereof or with the written consent of the Lender) or become void or unenforceable, without the written consent of the Lender; (d) default shall occur with respect to any Debt for borrowed money (other than the Obligations) in an outstanding principal amount which exceeds, in the aggregate for all such Debt with respect to which default shall have occurred, $10,000, or under any agreement or instrument under or pursuant to which any such Debt or indebtedness may have been issued, created, assumed, or guaranteed by the Borrower and such default shall continue for more than the period of grace, if any, therein specified, if the effect thereof (with or without the giving of notice or further lapse of time or both) is to accelerate, or to permit the holders of any such Debt or indebtedness to accelerate, the maturity of any such Debt; or any such Debt or indebtedness shall be declared due and payable or be required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; (e) the Borrower shall (i) file a voluntary petition in bankruptcy or file a voluntary petition or an answer or otherwise commence any action or proceeding seeking reorganization, arrangement or readjustment of its debts or for any other relief under the federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing, or consent to, approve of, or acquiesce in, any such petition, action or proceeding; (ii) apply for or acquiesce in the appointment of a receiver, assignee, liquidator, sequestrator, custodian, trustee or similar officer for it or for all or any part of its Property; (iii) make an assignment for the benefit of creditors; or (iv) be unable generally to pay its Debts as they become due; (f) an involuntary petition shall be filed or an action or proceeding otherwise commenced against the Borrower seeking reorganization, arrangement or readjustment of the debts of the Borrower or for any other relief under the federal Bankruptcy Code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing and either (i) such petition, action or proceeding shall not have been dismissed within a period of sixty (60) days after its commencement or (ii) an order for relief against the Borrower shall have been entered in such proceeding; (g) a receiver, assignee, liquidator, sequestrator, custodian, trustee or similar officer for the Borrower or for all or any part of its Property shall be appointed or a warrant of attachment, execution or similar process shall be issued against any part of the Property of the Borrower; (h) the Borrower shall file a certificate of dissolution under applicable state law or shall be liquidated, dissolved or wound-up or shall commence or have commenced against it any action or proceeding for dissolution, winding-up or liquidation, or shall take any corporate action in furtherance thereof; (i) all or any material part of the Property of the Borrower shall be nationalized, expropriated or condemned, seized or otherwise appropriated, or custody or control of such Property or 32 39 of the Borrower shall be assumed by any Governmental Authority or any court of competent jurisdiction at the instance of any Governmental Authority, except where contested in good faith by proper proceedings diligently pursued where a stay of enforcement is in effect; (j) any guaranty of the Obligations shall be terminated, revoked or declared void or invalid; (k) one or more judgments or orders for the payment of money aggregating in excess of $10,000, which amount shall not be fully covered by insurance, shall be rendered against the Borrower; (l) any loss, theft, damage or destruction of any item or items of Collateral or other Property of the Borrower occurs which (i) materially and adversely affects the Property, business, operation, prospects, or condition of the Borrower; or (ii) is material in amount and is not adequately covered by insurance; (m) there occurs a Material Adverse Effect and such Effect shall continue for thirty (30) days after notice from the Lender to the Borrower; (n) there is filed against the Borrower any civil or criminal action, suit or proceeding under any federal or state racketeering statute (including, without limitation, the Racketeer Influenced and Corrupt Organization Act of 1970), which action, suit or proceeding (1) is not dismissed within one hundred twenty (120) days, and (2) could result in the confiscation or forfeiture of any material portion of the Collateral; (o) for any reason other than the failure of the Lender to take any action available to it to maintain perfection of the Lender's Liens in the Collateral, pursuant to the Loan Documents, any Loan Document ceases to be in full force and effect or any Lien with respect to any material portion of the Collateral intended to be secured thereby ceases to be, or is not, valid, perfected and prior to all other Liens or is terminated, revoked or declared void; (p) Emergent shall, at any time, cease to directly own at least fifty-one percent (51%) of the legal and beneficial interest in the issued and outstanding voting stock of the Borrower or Emergent shall convey, pledge, or transfer any interest in such stock to any Person; or (q) the Delinquency/Repossession Percent for two consecutive months is at any time equal to or greater than ten (10%) percent and such Percent shall continue for thirty (30) days after notice from the Lender to the Borrower. 11.2 Remedies. (a) If a Default or an Event of Default exists, the Lender may, in its discretion, do one or more of the following at any time or times and in any order, without notice to or demand on the Borrower: (i) reduce the amount of the Total Facility, or the advance rates against Eligible Contracts used in computing the Availability, or reduce one or more of the other elements used in computing the Availability; and (ii) restrict the amount of or refuse to make Revolving Loans. If an Event of Default exists, the Lender may do one or more of the following, in addition to the actions described in the preceding sentence, at any time or times and in any order, without notice to or demand on the Borrower: (i) terminate any obligation to make any further Revolving Loans and this Agreement; 33 40 (ii) declare any or all Obligations to be immediately due and payable; provided, however, that upon the occurrence of any Event of Default described in Sections 11.1(e), 11.1(g), or 11.1(h), the Total Facility shall automatically and immediately expire and all Obligations shall automatically become immediately due and payable without notice or demand of any kind; and (iii) pursue its other rights and remedies under the Loan Documents and applicable law. (b) If an Event of Default exists, all rights of the Borrower to collect any payments due under the Collateral and all rights of the Borrower to exercise the consensual rights which it would otherwise be entitled to exercise with respect thereto, shall, at the option of the Lender and upon written notice from the Lender to the Borrower, immediately terminate. The Borrower acknowledges and agrees that following an Event of Default the Lender shall be entitled to receive all of the Contract payments, without deduction, even though this may render the Borrower insolvent and leave the Borrower without any funds to pay its operating expenses. The Borrower, at the Lender's request, shall immediately provide the Lender with a current list of the names, addresses, and Contract numbers for all Contract Debtors and shall, at the Lender's request following an Event of Default, immediately direct all Contract Debtors (pursuant to a form of notice prepared by the Lender) to make all payments due under the Contracts and the other Collateral directly to the Lender or to a bank account designated by the Lender, and the Borrower shall otherwise cooperate with the Lender in that regard. (c) If an Event of Default exists: (i) the Lender shall have, in addition to all other rights, the rights and remedies of a secured party under the UCC; (ii) the Lender may, at any time, take possession of the Collateral and keep it on the Borrower's premises, at no cost to the Lender or remove any part of it to such other place or places as the Lender may desire, or the Borrower shall, upon the Lender's demand, at the Borrower's cost, assemble the Collateral and make it available to the Lender at a place reasonably convenient to the Lender; (iii) the Lender may exchange, waive, or release any of the Collateral, apply Collateral and direct the order or manner of sale thereof as the Lender may determine, and settle, compromise, collect, or otherwise liquidate any Collateral in any manner, all without affecting the Obligations or the Lender's right to take any action with respect to any other Collateral; and (iv) the Lender may sell and deliver any Collateral at public or private sales, for cash, upon credit or otherwise, at such prices and upon such terms as the Lender deems advisable, in its sole discretion, and may, if the Lender deems it reasonable, postpone or adjourn any sale of the Collateral by an announcement at the time and place of sale or of such postponed or adjourned sale without giving a new notice of sale. Without in any way requiring notice to be given in the following manner, the Borrower agrees that any notice by the Lender of sale, disposition or other intended action hereunder or in connection herewith, whether required by the UCC or otherwise, shall constitute reasonable notice to the Borrower if such notice is mailed by registered or certified mail, return receipt requested, postage prepaid, or is delivered personally against receipt, at least five (5) Business Days prior to such action to the Borrower's address specified in or pursuant to Section 14.7. If any Collateral is sold on terms other than payment in full at the time of sale, no credit shall be given against the Obligations until the Lender receives payment, and if the buyer defaults in payment, the Lender may resell the Collateral without further notice to the Borrower. In the event the Lender seeks to take possession of all or any portion of the Collateral by judicial process, the Borrower irrevocably waives: (a) the posting of any bond, surety or security with respect thereto which might otherwise be required; (b) any demand for possession prior to the commencement of any suit or action to recover the Collateral; and (c) any requirement that the Lender retain possession and not dispose of any Collateral until after trial or final judgment. The Borrower agrees that the Lender has no obligation to preserve rights to the Collateral or marshal any Collateral for the benefit of any Person. The Lender is hereby granted a license or other right to use, without charge, 34 41 the Borrower's labels, patents, copyrights, name, trade secrets, trade names, trademarks, and advertising matter, or any similar Property, in advertising or selling any Collateral, and the Borrower's rights under all licenses and all franchise agreements shall inure to the Lender's benefit. The proceeds of sale shall be applied first to all expenses of sale, including attorneys' fees, and then to the Obligations in whatever order the Lender elects. The Lender will return any excess to the Borrower and the Borrower shall remain liable for any deficiency. (d) If an Event of Default occurs, the Borrower hereby waives all rights to notice and hearing prior to the exercise by the Lender of the Lender's rights to repossess the Collateral without judicial process or to replevy, attach or levy upon the Collateral without notice or hearing. (e) If the Lender terminates this Agreement upon an Event of Default, the Borrower shall pay the Lender, immediately upon termination, an early termination fee equal to the early termination fee that would have been payable under Article Four if this Agreement had been terminated on that date pursuant to the Borrower's election. 11.3 Cumulative Remedies; No Prior Recourse to Collateral. The enumeration herein of the Lender's rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies that the Lender may have under the UCC or other applicable law. The Lender shall have the right, in its sole discretion, to determine which rights and remedies are to be exercised and in which order. The exercise of one right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. The Lender may, without limitation, proceed directly against the Borrower to collect the Obligations without any prior recourse to the Collateral. No failure to exercise and no delay in exercising, on the part of the Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. ARTICLE TWELVE - TERM AND TERMINATION 12.1 Term and Termination. The term of this Agreement shall end on the Stated Termination Date. The Lender may terminate this Agreement without notice upon the occurrence of an Event of Default. Upon the effective date of termination of this Agreement for any reason whatsoever, all Obligations (including, without limitation, all unpaid principal of, accrued interest on and prepayment penalties, if any) shall become immediately due and payable. Notwithstanding the termination of this Agreement, until all Obligations are indefeasibly paid and performed in full in cash, the Borrower shall remain bound by the terms of this Agreement and shall not be relieved of any of its Obligations hereunder, and the Lender shall retain all of its rights and remedies hereunder (including, without limitation, the security interest of the Lender in and all rights and remedies with respect to all then existing and after-arising Collateral). ARTICLE THIRTEEN - AMENDMENTS; WAIVER; SUCCESSORS 13.1 No Waivers Cumulative Remedies. No failure by the Lender to exercise any right, remedy, or option under this Agreement or any present or future supplement thereto, or in any other 35 42 agreement between or among the Borrower and the Lender, or delay by the Lender in exercising the same, will operate as a waiver thereof. No waiver by the Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by the Lender on any occasion shall affect or diminish the Lender's rights thereafter to require strict performance by the Borrower of any provision of this Agreement. The Lender's rights under this Agreement will be cumulative and not exclusive of any other right or remedy which the Lender may have. 13.2 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Lender and the Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. ARTICLE FOURTEEN - MISCELLANEOUS 14.1 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. 14.2 Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver. (a) THIS AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS PROVIDED THAT PERFECTION ISSUES WITH RESPECT TO ARTICLE 9 OF THE UCC MAY GIVE EFFECT TO APPLICABLE CHOICE OR CONFLICT OF LAW RULES SET FORTH IN ARTICLE 9 OF THE UCC) OF THE STATE OF NEW JERSEY; PROVIDED THAT THE LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW JERSEY OR OF THE UNITED STATES LOCATED IN THE STATE OF NEW JERSEY, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER AND THE LENDER CONSENT, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE BORROWER AND THE LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. NOTWITHSTANDING THE FOREGOING: (1) THE LENDER SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION THE LENDER DEEM NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR OTHER SECURITY FOR THE OBLIGATIONS AND (2) EACH OF THE PARTIES HERETO ACKNOWLEDGES THAT ANY APPEALS FROM THE COURTS DESCRIBED IN THE 36 43 IMMEDIATELY PRECEDING SENTENCE MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE THOSE JURISDICTIONS. (c) THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO The BORROWER AT ITS ADDRESS SET FORTH IN SECTION 14.7 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5) DAYS AFTER THE SAME SHALL HAVE BEEN SO DEPOSITED IN THE U.S. MAILS. NOTHING CONTAINED HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO SERVE LEGAL PROCESS BY ANY OTHER MANNER PERMITTED BY LAW. 14.3 Waiver of Jury Trial. (a) THE BORROWER AND THE LENDER EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY, RELATED PERSON, PARTICIPANT, OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE LENDER EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. (b) THE BORROWER AGREES THAT IT WILL NOT ASSERT AGAINST THE LENDER ANY CLAIM FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. 14.4 Survival of Representations and Warranties. All of the Borrower's representations and warranties contained in this Agreement shall survive the execution, delivery, and acceptance thereof by the parties, notwithstanding any investigation by the Lender or its agents. 14.5 Other Security and Guaranties. The Lender, may, without notice or demand and without affecting the Borrower's obligations hereunder, from time to time: (a) take from any Person and hold collateral (other than the Collateral) for the payment of all or any part of the Obligations and exchange, enforce or release such collateral or any part thereof; and (b) accept and hold any endorsement or guaranty of payment of all or any part of the Obligations and release or substitute any such endorser or guarantor, or any Person who has given any Lien in any other collateral as security for the payment of all or any part of the Obligations, or any other Person in any way obligated to pay all or any part of the Obligations. 37 44 14.6 Fees and Expenses. The Borrower agrees to pay to the Lender, on demand, all costs and expenses that Lender pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Agreement, including, without limitation: (a) Attorney Costs; (b) costs and expenses (including attorneys' and paralegals' fees and disbursements which shall include the allocated costs of Lender's in-house counsel fees and disbursements) for any amendment, supplement, waiver, consent, or subsequent closing in connection with the Loan Documents and the transactions contemplated thereby; (c) costs and expenses of lien and title searches and title insurance; (d) taxes, fees and other charges for filing financing statements and continuations, and other actions to perfect, protect, and continue the Lender's Liens in the Collateral (including costs and expenses paid or incurred by the Lender in connection with the consummation of Agreement); (e) sums paid or incurred to pay any amount or take any action required of the Borrower under the Loan Documents that the Borrower fails to pay or take; (f) costs of appraisals, inspections, and verifications of the Collateral, including, without limitation, travel, lodging, and meals for inspections of the Collateral and the Borrower's operations by the Lender's personnel, plus the Lender's then customary charge for field examinations and audits and the preparation of reports thereof, as more particularly described in Section 3.4; (g) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Collection Account; (h) costs and expenses of preserving and protecting the Collateral; and (i) costs and expenses (including attorneys' and paralegals' fees and disbursements which shall include the allocated cost of the Lender's in-house counsel fees and disbursements) paid or incurred to obtain payment of the Obligations, enforce the Lender's Liens in the Collateral, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents, or to defend any claims made or threatened against the Lender arising out of the transactions contemplated hereby (including without limitation, preparations for and consultations concerning any such matters). The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by the Borrower. All of the foregoing costs and expenses may be charged by the Lender to the Borrower's Loan Account as Revolving Loans as described in Section 4.4. 14.7 Notices. Except as otherwise provided herein, all notices, demands and requests that any party is required or elects to give to any other shall be in writing, or by a telecommunications device capable of creating a written record, and any such notice shall become effective (a) upon personal delivery thereof, including, but not limited to, delivery by overnight mail and courier service, (b) four (4) days after it shall have been mailed by United States mail, first class, certified or registered, with postage prepaid, or (c) in the case of notice by such a telecommunications device, when properly transmitted, in each case addressed to the party to be notified as follows: If to the Lender or to BABC: BankAmerica Business Credit, Inc. 200 Lake Drive East, Suite 201 Cherry Hill, NJ 08002 Attention: Portfolio Administration Telecopy No. (609) 321-2200 with copies to: Bank of America NT&SA 10124 Old Grove Road San Diego, CA 92131 Attention: Legal Department Telecopy No. (619) 549-7518 38 45 If to the Borrower: The Loan Pro$, Inc. 15 South Main Street, Suite 750 Greenville, SC 29601 Attention: Keith B. Giddens Telecopy No. (803) 235-8065 or to such other address as each party may designate for itself by like notice. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the persons designated above to receive copies shall not adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication. 14.8 Waiver of Notices. Unless otherwise expressly provided herein, the Borrower waives presentment, protest and notice of demand or dishonor and protest as to any instrument, notice of intent to accelerate the Obligations and notice of acceleration of the Obligations, as well as any and all other notices to which it might otherwise be entitled. No notice to or demand on the Borrower which the Lender may elect to give shall entitle the Borrower to any or further notice or demand in the same, similar or other circumstances. 14.9 Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective representatives, successors, and assigns of the parties hereto; provided, however, that no interest herein may be assigned by the Borrower without prior written consent of the Lender. The rights and benefits of the Lender hereunder shall, if such Persons so agree, inure to any successor or assignee. 14.10 Indemnity of the Lender by the Borrower. The Borrower agrees to indemnify and hold the Lender and its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Revolving Loans) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to or arising out of this Agreement or the Revolving Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Borrower shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. 14.11 Final Agreement. This Agreement and the other Loan Documents are intended by the Borrower and the Lender to be the final, complete, and exclusive expression of the agreement between them. This Agreement supersedes any and all prior oral or written agreements relating to the subject matter hereof. No modification, rescission, waiver, release, or amendment of any provision of this Agreement or any other Loan Document shall be made, except by a written agreement signed by the Borrower and a duly authorized officer of the Lender. 39 46 14.12 Counterparts. This Agreement may be executed in any number of counterparts, and by the Lender and the Borrower in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. 14.13 Captions. The captions contained in this Agreement are for convenience of reference only, are without substantive meaning and should not be construed to modify, enlarge, or restrict any provision. 14.14 Right of Setoff. In addition to any rights and remedies of the Lender provided by law, if an Event of Default exists, the Lender is authorized at any time and from time to time, without prior notice to the Borrower, any such notice being waived by the Borrower to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Lender to or for the credit or the account of the Borrower against any and all Obligations owing to the Lender, now or hereafter existing, irrespective of whether or not the Lender shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. The Lender agrees promptly to notify the Borrower and the Lender after any such set-off and application made by the Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 14.15 Time of the Essence. the Borrower acknowledges and agrees that time is of the essence with respect to all of its obligations hereunder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. "LENDER" "BORROWER" BankAmerica Business Credit, Inc., The Loan Pro$, Inc., a Delaware corporation a South Carolina corporation by: /s/ Joseph F. Pignotti by: /s/ Kevin J. Mast, ------------------------ --------------------------- Joseph F. Pignotti, Kevin J. Mast, Executive Vice President Chief Financial Officer by: /s/ J. Phil Cox, Secretary --------------------------- J. Phil Cox, Secretary 40 47 EXHIBIT "A" TO LOAN AND SECURITY AGREEMENT COLLECTION ACCOUNT AGREEMENT This Collection Account Agreement ("Agreement") is made as of December , 1995, by and between BankAmerica Business Credit, Inc. ("the Lender"), a Delaware corporation, doing business as BA Business Credit, Inc., located at 200 Lake Drive East, Suite 201, Cherry Hill, New Jersey 08002; Carolina First Bank ("Bank") located at 102 South Main Street, Greenville, South Carolina 29601; and The Loan Pro$, Inc. ("Company"), a South Carolina corporation, located at 15 South Main Street, Suite 750, Greenville, South Carolina 29601. WITNESSETH Whereas, Company authorizes and/or has established with Bank, at its office specified above Special Depository Account No. 1040337300 with the title Loan Pro$, Inc. ("Collection Account"); and Whereas, Company has, pursuant to a financing agreement, pledged, assigned, and granted to the Lender a continuing security interest in certain property described therein, including, without limitation, all present and future accounts, contract rights, instruments, documents, chattel paper and general intangibles of Company, and all proceeds thereof, which may from time to time be deposited in the Collection Account. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties agree as follows. AGREEMENT 1. Deposits into Collection Account. Company agrees that all payments, whether in cash, by check or other instrument, or otherwise, received by Company from its customers as proceed of the Collateral shall be deposited by Company in the Collection Account. Company shall furnish to the Lender each day a collection report setting forth, in such reasonable detail as the Lender may request, the deposits made during each day in the Collection Account, together with a copy of each deposit slip issued in connection with such deposits. 2. Collection Account Drawing Rights. Company authorizes and directs that the sole signatories authorized to withdraw amounts from, to draw upon, or to otherwise exercise any powers with respect to, the Collection Account and the funds deposited therein, are and shall be the employees of Company identified on Exhibit "A" attached hereto and made a part hereof, and the officers or agents of the Lender identified on Exhibit "B" attached hereto and made a part hereof or such other persons as the Lender may from time to time designate in writing to Bank. Funds deposited into the Collection Account may be withdrawn subject to the Bank's funds availability schedule applied to corporate (wholesale or non-retail) accounts, at any time or from time to time. Until such time as the Lender gives Bank Notice described in paragraph 6 hereof, the parties agree that all funds deposited in the Collection Account from time to time shall be held by Bank for Company, shall be the property of Company, and all collected funds may be withdrawn, at any time or from time to time, by check, draft, wire transfer, 1 48 or otherwise as Company shall determine. After receipt of Notice from the Lender in accordance with paragraph 6, below, all funds deposited in the Collection Account shall be held by Bank for the Lender, shall be the property of the Lender, and may be withdrawn from time to time by the Lender, and Company shall have no further authority to withdraw any amount from, to draw upon, or to otherwise exercise any powers as a depositor or owner with respect to the Collection Account and the funds deposited therein. Company shall not give, and Bank shall not honor, any instructions to change the authorized signatories on the Collection Account unless such instructions are given, or approved, in writing by the Lender. 3. Security Interest in Items to be Deposited. the Lender and Company agree that all checks, money orders, and other evidences of payment deposited in the Collection Account, which checks will be made payable to Company without Company's endorsement, from time to time shall be held by Bank for Company or the Lender, as appropriate, and subject to the security interest of the Lender. 4. Charges to Collection Account. Bank will not charge or debit, or exercise any right of offset or banker's Lien against, the Collection Account except as provided below. Bank may charge the Collection Account for any items deposited in the Collection Account which are returned for any reason or otherwise not collected and may charge the Collection Account for all service charges, commissions, expenses, and other items ordinarily chargeable to the Collection Account. If there are not sufficient funds in the Collection Account to pay such amounts, then Company agrees to pay Bank within ten business days of written demand all such amounts, regardless of any other collection efforts Bank may have expended. If Company does not pay Bank such amounts within ten business days, then the Lender agrees to pay Bank within ten business days of written demand (i) all service charges, commissions, and expenses ordinarily chargeable to the Collection Account, and (ii) after delivery of the Notice from the Lender in accordance with paragraph 6, items deposited in the Collection Account which are returned for any reason or not collected otherwise. Company and the Lender acknowledge Company is obligated to pay all customary and reasonable Bank charges resulting from the Collection Account. Company agrees to reimburse the Lender for any monies that the Lender forwards to Bank in settlement of any charges as detailed above. In the absence of willful misconduct on the part of Bank, Company agrees to bear all risk of loss associated with the Collection Account. Bank hereby agrees to accept cash payment in lieu of balances as compensation for service charges incurred on, or normally charged to, the Collection Account. 5. Collection Account Records. Company hereby instructs Bank and Bank agrees to furnish to the Lender, with a copy to Company, bank statements with respect to the Collection Account which are customarily provided to customers of Bank at the times such statements are normally provided to customers of Bank, through the normal method of transmission, U.S. Mail. Additionally, Company hereby instructs Bank and Bank agrees to make available to the Lender and Company, upon request, copies of all daily debit and credit advices of the Collection Account. 6. Bank's Notice. Bank will take the following actions upon receipt of written notice ("Notice") from the Lender: a. Bank shall (and in the event of such a Notice, Company hereby irrevocably authorizes and instructs Bank to) cease honoring all drafts, demands, withdrawal requests, or remittance instructions by Company made after receipt of Notice. 2 49 b. Following the receipt of the Notice and at all times thereafter, Bank shall hold solely for the account of the Lender all funds which may be on deposit in the Collection Account at the time the Notice is received by Bank and all funds thereafter deposited into the Collection Account, and Bank will remit all such collected funds (subject to paragraph 4., above) directly to the Lender, in accordance with Bank's procedures then in effect as the funds are collected, by electronic transfers to the account indicated below. After receipt of the Notice, Bank hereby agrees and acknowledges that all collected funds in the Collection Account shall be forwarded by wire transfer to BA Business Credit, Inc., account number 910-2-693307 ("Concentration Account"), at Chase Manhattan Bank, New York, New York, ABA No. 021000021, or such other bank as the Lender may from time to time designate in writing and, on a daily basis, Bank will initiate an automated clearing house transfer to move collected funds from Bank to the Concentration Account and the Lender shall have sole control over the Collection Account and the sole right to exercise and enforce all rights and remedies with respect thereof. The Notice shall be effective when it is received by Bank in writing at the address set forth in paragraph 9, below (or at such other address as Bank may specify by written notice received by the Lender) and when Bank has had a reasonable time, based upon the same standards as those applicable to payment and stop payment instructions generally, to act thereon. 7. Termination. Upon receipt of the Lender's prior written consent, this Agreement may be terminated by Bank or Company at any time by giving thirty (30) days' prior written notice to the other party. 8. Modification of Agreement. This Agreement cannot be changed, modified or terminated without the written consent of the Lender. 9. Notices. All notices or demands by any party on the other relating to this Agreement shall, except as otherwise provided herein, be in writing. Notices shall be deemed received within five business days after being deposited in a United States post office box, postage prepaid, properly addressed to Company, the Lender, or to Bank at the addresses stated below, subject to the earlier receipt thereof as described in paragraph 6(b). Notices may also effectively be given by transmittal over electronic transmitting devices such as NBI, TWIX, Telex or telecopy machine, if the party to whom the notice is being sent has such a device in its office, provided a complete copy of any notice so transmitted shall also be mailed in the same manner as required for a mailed notice. Notices given by electronic transmitting devices shall be deemed effective on the day of transmission. All notices, including telephone notices, daily debit and credit advices, monthly statements of account, photocopies, returned items and general correspondence shall be sent to the following addresses and, where applicable given at the following telephone numbers or to such other person or address as any party shall designate to the others from time to time in writing: A. BankAmerica Business Credit, Inc. 200 Lake Drive East, Suite 201 Cherry Hill, New Jersey 08002 Attention: Cindy Contini Telephone: (609) 321-2211 Facsimile: (609) 321-2299 3 50 B. The Loan Pro$, Inc. 15 South Main St., Ste. 750 Greenville, SC 29601 Attention: Keith B. Giddens Telephone: (803) 232-6197 Facsimile: (803) 271-8374 C. Carolina First Bank P.O. Box 1029 Greenville, SC 29602 Attention: Robert H. Mitchell Telephone: (803) 239-6443 Facsimile: (803) 239-6401 10. Notice of Legal Process. If Bank receives any notice of legal process of any kind relating to Company, Bank shall use its best efforts to give reasonable oral notice to the Lender of such legal process. 11. Indemnification. Company hereby agrees to indemnify and hold Bank harmless from and against any and all liabilities, losses, costs, and expenses incurred directly or indirectly by Bank as a consequence of Bank executing this Agreement and performing its obligations hereunder, including reasonable attorney's fees. Under no circumstances will Bank be liable for any consequential or special damages to Company, the Lender or any third party, as a result of this Agreement. 12. Successors and Assigns; Governing Law. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties and shall be governed by and construed in accordance with the laws of the state of New Jersey. 13. Counterparts. 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 delivered shall be deemed an original but all such counterparts together shall constitute one and the same instrument. 14. Agreement Duly Authorized. All parties hereto represent and warrant that they have taken all actions and obtained all authorizations, consents and approvals as are conditions precedent to their authority to execute this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date shown above. "LENDER" BankAmerica Business Credit, Inc., a Delaware corporation By: ------------------------ Joseph F. Pignotti, Executive Vice President 4 51 "COMPANY" The Loan Pro$, Inc., a South Carolina corporation By: ---------------------------------- Kevin J. Mast, Chief Financial Officer "BANK" Carolina First Bank By: ---------------------------------- Robert H. Mitchell, Vice President Accepted this day of December 1995. ----- 5 52 EXHIBIT "A" TO COLLECTION ACCOUNT AGREEMENT Authorized Persons - Company
Name Signature Exemplar ---- ------------------ 1. Kevin J. Mast ---------------------------------- 2. Scott A. Lining ---------------------------------- 3. Keith B. Giddens ---------------------------------- 4. --------------------------------- ---------------------------------- 5. --------------------------------- ---------------------------------- 6. --------------------------------- ----------------------------------
1 53 EXHIBIT "B" TO COLLECTION ACCOUNT AGREEMENT Authorized Persons - the Lender
Name Signature Exemplar ---- ------------------ 1. ------------------- -------------------------- 2. ------------------- -------------------------- 3. ------------------- ---------------------------
[To be completed by BankAmerica Business Credit, Inc.] 1 54 SCHEDULE 6.3 TO LOAN AND SECURITY AGREEMENT (LOCATION OF THE BORROWER'S BOOKS AND RECORDS AND COLLATERAL) 15 South Main Street, Suite 750 Greenville, South Carolina 29601 6432 Two Notch Road, Suite J Columbia, South Carolina 29223 Aviation Square 6185H Rivers Avenue North Charleston, South Carolina 29418 West View Plaza 8039 Greenville Highway Spartanburg, South Carolina 29301 Palmetto Plaza 1557 West Palmetto Street Florence, South Carolina 29501 1 55 SCHEDULE 8.3 TO LOAN AND SECURITY AGREEMENT [LIST OF JURISDICTIONS IN WHICH QUALIFIED AND IN GOOD STANDING] South Carolina 1 56 SCHEDULE 8.5 TO LOAN AND SECURITY AGREEMENT [LIST OF AFFILIATES] Keith Giddens Ronald I. Long Emergent Group, Inc. Emergent Financial Corporation Pickens Railroad Company Carolina Investors, Inc. Emergent Business Capital, Inc. Premier Financial Services, Inc. Emergent Equity Advisors Emergent Mortgage Corporation Emergent Commercial Mortgage Emergent Business Capital Holdings Corporatino Cambridge Banc 1 57 EXHIBIT 8.8 TO LOAN AND SECURITY AGREEMENT [BORROWER'S FINANCIAL STATEMENTS] 1 58 SCHEDULE 8.13 TO LOAN AND SECURITY AGREEMENT [LIST OF BORROWER'S TRADE NAMES] NONE 1 59 SCHEDULE 8.14 TO LOAN AND SECURITY AGREEMENT [LIST OF BORROWER'S PENDING LITIGATION] NONE 1 60 SCHEDULE 10.1 TO LOAN AND SECURITY AGREEMENT [LIST OF REQUIRED CLOSING DOCUMENTS] The Lender shall have received on or before the first Closing Date all of the following documents which shall be satisfactory to the Lender in form and content: 1. Certificate of Secretary (the Borrower). 2. UCC-1 financing statements (South Carolina). 3. Certificate of good standing for the Borrower (South Carolina Secretary of State). 4. Opinion of the Borrower's and Emergent's counsel. 5. Certificate of the Borrower's chief financial officer. 6. Carolina First Bank's Payoff letter. 7. The Borrower's authorization letter. 8. Carolina First Bank's UCC termination statements. 9. Certificate of Secretary (Emergent). 10. Certificate of good standing for Emergent (South Carolina Secretary of State). 11. Continuing Guaranty (Emergent). 1 EX-10.6 6 LOAN & SECURITY AGREEMENT (PREMIER) 1 Exhibit 10.6 LOAN AND SECURITY AGREEMENT dated April 10, 1995 between BANKAMERICA BUSINESS CREDIT, INC. and PREMIER FINANCIAL SERVICES, INC. 2 ARTICLE ONE - DEFINITIONS Terms Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Adjusted Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Adjusted Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Auto Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Auto Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Auto Reserve Percentage ("ARP") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Bulk Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Collection Account Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Contract Debtor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Dealer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Dealer Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Eligible Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Emergent Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Excess Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Interest Payment Due Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Lender's Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Loan Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Loss Reserve Percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Modified Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Net Charge Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Net Contract Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 PBGC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(2) 3 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Reference Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Reportable Event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Security Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Total Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE TWO - LOAN Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Monthly Statements Conclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE THREE - INTEREST AND OTHER CHARGES Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Interest Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Payment of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Unused Line Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Default Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE FOUR - TERM Term of Agreement and Loan Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Application of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Termination of Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE FIVE - SECURITY INTEREST IN COLLATERAL Creation of Security Interest in Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Financing Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Location of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Delivery and Marking of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Protection of Collateral; Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Release of Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Monthly Reports Re Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE SIX - RECORDS AND SERVICING OF CONTRACTS Records of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Servicing of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Termination of Collection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
(3) 4 Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE SEVEN - REPRESENTATIONS, WARRANTIES AND COVENANTS Representations and Warranties Reaffirmed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Warranties and Representations Re Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Warranties and Representations Re Collateral Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Contract and Security Document Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Solvent Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Credit Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Organization, Authority, and Capital Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Pending Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Transaction is Legal and Authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Borrower's Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Name Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Offices; FTC; Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE EIGHT - FINANCIAL AND OTHER COVENANTS Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Uniform Commercial Code Financing Statements and Assignments of Contracts . . . . . . . . . . . . . . . . . 26 Maintenance of Properties and Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Unsubordinated Debt to Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Total Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Minimum Adjusted Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Minimum Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Loss Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Minimum Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Charge-Off Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Limitation on Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Limitation on Bulk Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Prohibition on Distributions; Structural Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Subordinated Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Merger; Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Lender's Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
(4) 5 ARTICLE NINE - INFORMATION AS TO BORROWER Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE TEN - CLOSING CONDITIONS Representations and Warranties; Covenants; Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Termination of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Payment of Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Required Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 ARTICLE ELEVEN - EVENTS OF DEFAULT: REMEDIES Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Interest or Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Payment of Other Sums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Warranties or Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Breach of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Voluntary Bankruptcy, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Involuntary Bankruptcy, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Receiver, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Attachment, Judgment, Tax Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Default in Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Loss of License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Assignment of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Payment of Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Breach of Collection Account Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Change of Stock Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 ermination Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Default Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Waiver of Right of Offset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE TWELVE - GENERAL Invalidated Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Application of Code to Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Parties, Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Accounting Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Total Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
(5) 6 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Time of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Participating Lender's Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Jury Trial Waiver, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(6) 7 LOAN AND SECURITY AGREEMENT This Loan and Security Agreement ("Agreement") is made and entered into as of April 10, 1995, between BankAmerica Business Credit, Inc., a Delaware corporation ("Lender"), doing business as "BA Business Credit, Inc.," having an address at 200 Lake Drive East, Suite 201, Cherry Hill, New Jersey 08002, and Premier Financial Services, Inc. ("Borrower"), a South Carolina corporation, whose chief executive office is located at 415 A Farrs Bridge Road, Greenville, South Carolina 29610. In consideration of the mutual covenants contained herein, the parties agree as follows. ARTICLE ONE - DEFINITIONS 1. Terms Defined. As used in this Agreement, the listed terms are defined as follows: 1.1 Adjusted Tangible Assets shall mean all assets except: (a) trademarks, trade names, franchises, goodwill, and other similar intangibles; (b) assets located and notes and receivables due from obligors domiciled outside the United States of America, Puerto Rico, or Canada; and (c) accounts, notes, and other receivables due from affiliates or employees. 1.2 Adjusted Tangible Net Worth shall mean the remainder of (a) net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves) at which the Adjusted Tangible Assets of Borrower would be shown on a balance sheet at any date, but excluding any amounts arising from write-ups of assets, minus (b) the amount at which its liabilities (other than capital stock, surplus, and retained earnings) would be shown on such balance sheet, and including as liabilities all reserves for contingencies and other potential liabilities. 1.3 Advance shall mean the proceeds of the Loan advanced from time to time by Lender to Borrower in accordance with the terms of this Agreement. 1.4 Affiliate shall mean (a) any Person which, directly or indirectly, controls, is controlled by or is under common control with, Borrower; (b) any Person which beneficially owns or holds, directly or indirectly, five percent or more of any class of voting stock of Borrower; or (c) any Person, five percent or more of any class of the voting stock (or if such Person is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by Borrower. The term control (including the terms "controlled by" and "under common control with"), means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the Person in question. 1.5 Auto Contract shall mean a Contract arising from a purchase money sale and financing of Goods. 1.6 Auto Reserve shall mean, as of any date of calculation, an amount equal to (a) the Gross Contract Payments due under all Auto Contracts acquired during the Fiscal Year in which the calculation is made to and including the date of calculation, multiplied by (b) the Auto Reserve Percentage calculated for such Contracts. 1 8 1.7 Auto Reserve Percentage ("ARP") for any period, shall mean the positive percentage determined in accordance with the following formula: ARP = [The aggregate amount paid by Borrower to third parties for Auto Contracts acquired during the applicable period (excluding amounts attributable to license fees, taxes, and license plate fees included in the unpaid balance of such Auto Contracts); DIVIDED BY The sum of (a) the aggregate dealer cost of new automobiles which are the subject of such Contracts, plus (b) in the case of used automobiles, (i) the average trade-in value for all automobiles which are the subject of such Contracts, as established by the National Automobile Dealers Association Official Used Car Guide (the "Guide"), or (ii) the wholesale clean value of such automobiles, as established by the National Auto Research Black Book ("Black Book");] MINUS one hundred percent (100%). The Guide and Black Book used shall be those in effect at the time Borrower purchased the subject Contract. In the event that the Guide or Black Book shall, at any time, cease to be published, then Lender shall thereafter select a comparable publication, as determined by Lender in its sole discretion, for determining the foregoing calculation. 1.8 Availability shall mean, as of any date of calculation, eighty-five percent (85%) of the aggregate amount of all Net Contract Payments to be made under all of Borrower's Eligible Contracts. 1.9 Borrowing Base shall mean the sum of the Adjusted Tangible Net Worth of Borrower, plus all Subordinated Debt of Borrower. 1.10 Bulk Purchase shall mean the purchase of Contracts from a seller or sellers which are affiliates of one another in a single transaction or a series of integrated transactions, as determined by Lender in its sole discretion (e.g. a series of Contract purchases pursuant to a purchase agreement) with an aggregate purchase price $200,000 or more. 1.11 Business Day shall mean any day that is not a Sunday or Saturday or any day on which banks in California are required or permitted to close. 1.12 Carolina Investors shall mean Carolina Investors, Inc., a South Carolina corporation. 1.13 Closing Date shall mean the date of the execution of this Agreement and the date of each Advance made hereunder. 1.14 Code shall mean the Uniform Commercial Code as adopted and in force in the state of New Jersey as from time to time in effect and the Uniform Commercial Code of any other jurisdiction as required under New Jersey Statues Annotated, Section 12A:9-103. 1.15 Collateral shall mean all of the following Property of Borrower, now owned and hereafter acquired: 2 9 a. all Contracts, including all returned or repossessed Goods relating to such Contracts, and all of Borrower's rights in the Property covered thereby; b. all of Borrower's books and records relating to the Contracts (including, without limitation, all computer records, computer programs, and computer source codes); c. all of Borrower's rights, but not its obligations, under all Dealer Agreements, including all rights to require a dealer to repurchase a Contract acquired from the Dealer; d. all proceeds of insurance including, without limitation, property and casualty insurance, affecting the Contracts and the Property subject thereto; and e. all proceeds, proceeds of proceeds, Property, Property rights, privileges and benefits arising out of, from the enforcement of, or in connection with the Contracts and the property rights and the policies of insurance referred to above, all credit balances in favor of Borrower on Lender's books, and all other general intangibles relating to or arising out of the Contracts; f. all deposit accounts into which proceeds of the Contracts are deposited; and g. any assets of Borrower in which Lender receives a security interest or which thereafter come into Lender's possession, custody, or control. 1.16 Collection Account Agreement shall mean that certain Collection Account Agreement substantially in the form attached hereto as Exhibit 1.16 and incorporated herein. 1.17 Contract Debtor shall mean each Person who is obligated to Borrower to perform any duty under or to make any payment pursuant to the terms of a Contract. 1.18 Contract shall mean a loan account, account, installment sale contract, contract right, Instrument, note, document, chattel paper, general intangible, and all other forms of obligations owing to Borrower, all rights of Borrower to receive payment thereunder, together with all other rights of Borrower obtained in connection therewith, and any collateral therefor, including all related Security Documents and all rights and security interests under the Security Documents. 1.19 Dealer shall mean a dealer that has sold Goods to a Contract Debtor pursuant to a Contract. 1.20 Dealer Agreement shall mean an agreement between Borrower and a Dealer that governs the sale or assignment of Contracts from such Dealer to Borrower, including any provisions relating to such sale or assignment (whether with or without recourse, a repurchase obligation by the Dealer or a guaranty by such Dealer) contained in such agreement. 1.21 Debt shall mean all liabilities, obligations, and indebtedness of Borrower to any Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired, or owing, whether primary, secondary, direct or indirect, contingent, fixed, or otherwise, and including, without in any way limiting, the generality of the foregoing: (i) Borrower's liabilities and obligations to trade creditors; (ii) all Obligations; (iii) all obligations and liabilities to any 3 10 Person secured by a Lien on Borrower's Property, even though Borrower shall not have assumed or become liable for the payment thereof; provided, however, that all such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the book value of such property as would be shown on a balance sheet of Borrower prepared in accordance with GAAP; (iv) all obligations and liabilities created or arising under any lease or conditional sale or other title retention agreement with respect to Property used or acquired by Borrower, even if the rights and remedies of the lessor, seller, or lender thereunder are limited to repossession of such Property; provided, however, that all such obligations and liabilities which are limited in recourse to such Property shall be included in Debt only to the extent of the book value of such property as would be shown a balance sheet of Borrower prepared in accordance with GAAP: (v) all accrued pension fund and other employee benefit plan obligations and liabilities; (vi) all obligations and liabilities under Guaranties; (vii) Subordinated Debt; and (viii) deferred taxes. 1.22 Default shall mean an event or condition the occurrence of which would, with a lapse of time or the giving of notice or both, become an Event of Default. 1.23 Distribution shall mean, in respect of any corporation: (a) payment or making of any dividend or other distribution of Property in respect to the capital stock of such corporation, other than distributions in capital stock of the same class; or (b) the redemption or other acquisition of any capital stock of such corporation. 1.24 Eligible Contract shall mean only such Auto Contracts which Lender, in its sole discretion deems eligible, and without limiting Lender's discretionary rights, satisfy at all times all of the following requirements as determined by Lender, in its sole and absolute discretion: a. strictly comply with all of Borrower's warranties and representations contained herein; b. with respect to which the Contract Debtor is not more than sixty (60) days contractually delinquent in making a payment scheduled thereunder; c. except as provided in subparagraph 1.24.b., neither Borrower nor the Contract Debtor is in default under the terms of the Contract (e.g., the Goods subject thereto are subject to repossession or have been sold and the proceeds thereof applied to the Contract balance (the latter sometimes being referred to as a "deficiency balance" Contract)); d. Borrower has not within any 12-month period granted to the Contract Debtor more than two extensions of time (each not longer than one month) for the payment of any sum due under the Contract; e. are not subject to any defense, counterclaim, offset, discount, or allowance, credit, deduction, allowance, defense (including the defense of usury), or dispute; f. are secured by a first priority, perfected security interest in Goods, and not any real estate; g. the terms of the Contract and all related documents and instruments comply in all respects with all applicable laws; 4 11 h. all documents relating to the Contract, including those between Borrower and the Contract Debtor, have been executed, are satisfactory to Lender, and have been delivered to Lender or originals are readily available to Lender in the files of Borrower, all as required under the terms of this Agreement; i. the Contract Debtor is not an Affiliate of Borrower; j. the creditworthiness of the Contract Debtor is acceptable to Lender. Without limiting the generality of the foregoing, the Contract Debtor's creditworthiness and the terms of the Contract shall conform to Borrower's credit guidelines; k. the Contract Debtor is not subject to a bankruptcy proceeding except a Chapter 13 bankruptcy proceeding under which the Contract Debtor has entered into a confirmed payment plan in which the Contract Debtor has agreed to pay all sums owing under the Contract and the Contract Debtor is strictly and timely paying all sums as and when due under the plan; l. with respect to Contracts acquired after the initial Closing Date, the term of the Contract, including all extensions thereof, shall not exceed the number of months indicated opposite the model year of the Goods at the inception of the Contract:
Model Years Old Maximum Term (Months) --------------- --------------------- New and Current Year 60 1 and 2 48 3 and 4 42 5 and 6 30 7 and 8 18;
m. with respect to Contracts acquired after the initial Closing Date, the Goods which are the subject of the Contract are not more than eight model years old at the inception of the Contract; n. with respect to Contracts acquired after the initial Closing Date, the milage of the Goods is no more than 100,000 miles at the inception of the Contract; o. (i) at the time the Contract is pledged to Lender, Borrower has obtained a certificate of title reflecting Borrower as the lien holder in the Goods which are the subject of the Contract, or (ii) within one hundred-twenty (120) days following the earlier of the date such Contract was first entered into by Borrower and the Contract Debtor or the date the Contract was first acquired by Lender, Borrower has obtained such a certificate of title; p. to the extent that the Contract balance includes sums representing the financing of so-called "extended warranty plans," such plans are (i) in substantial compliance with all applicable consumer credit laws, including any and all special insurance laws relating thereto, and (ii) underwritten by (x) a major automobile manufacturer, or an affiliate thereof, or (y) an independent reputable and financially sound insurance company; 5 12 q. under the terms of the Contract, the first scheduled payment due thereunder is due within forty-five days following the date the Contract Debtor first entered into the Contract and all other payments are scheduled to be made on the same date of each month thereafter; r. the Contract provides that the unpaid principal balance thereof shall be payable in equal monthly payments which will amortize the full principal amount of the Contract over its scheduled term; s. no portion of the proceeds of the Contract are used to acquire real property; and t. the Contract is not a Modified Contract. 1.25 Emergent Financial shall mean Emergent Financial Corporation, a South Carolina corporation. 1.26 Emergent Group shall mean Emergent Group, Inc., a South Carolina corporation. 1.27 ERISA shall mean the Employee Retirement Income Security Act of 1974, as amended. 1.28 Excess Availability shall mean, as of the date of determination, the remainder of (a) Availability, minus (a) the unpaid balance of the Loan. 1.29 Fiscal Year shall mean Borrower's and Emergent Financial's fiscal year for accounting purposes. The current fiscal year of Borrower and Emergent Financial will end on December 31, 1995. 1.30 GAAP shall mean at any particular time, with respect to Borrower, generally accepted accounting principles as in effect at such time, consistently applied; provided, however, that if employment of more than one principle shall be permissible at such time in respect of a particular accounting matter, "GAAP" shall refer to the principle which is then employed by Borrower with the concurrence of its independent certified public accountants, who are acceptable to Lender. 1.31 Goods shall mean any new or used two-axled passenger vehicles sold under a Contract, including equipment sold or financed in connection therewith, each being intended principally for personal or family use by the Contract Debtor. 1.32 Guaranty shall mean the Continuing Guaranty of the Obligations made by Carolina Investors and Emergent Financial in favor of and delivered to Lender pursuant to Section 10.2 hereof. 1.33 Instruments shall have the same meaning as given to that term in the Code, and shall include all negotiable instruments, notes secured by mortgages or trust deeds, and any other writing which evidences a right to the payment of money and is not itself a security agreement or lease, and is of a type which is, in the ordinary course of business, transferred by delivery with any necessary endorsement or assignment. 1.34 Interest Payment Due Date shall have the meaning given to that term in section 3.3. 1.35 Lender's Expenses shall mean: 6 13 a. Expenses incurred by Lender in the preparation of this Agreement (and Borrower shall not be liable for any such costs in excess of $5,000) and any and all amendments thereto, including its outside attorney's fees and internally allocated costs of in-house counsel, if any; b. Except as otherwise expressly provided herein, all expenses incurred by Lender in the administration of this Agreement and the Loan, including but not limited to mailing costs and accounting fees; c. All taxes levied against or paid by Lender (other than taxes on, or measured by, the income of Lender) and all filing and recording fees, costs and expenses which may be incurred by Lender in respect to the filing and/or recording of any document or instrument relating to the transactions described in this Agreement; d. All costs and expenses (including all allocated costs of staff counsel) incurred by Lender to collect the Collateral (with or without suit), correct any Default or Event of Default, enforce any provision of this Agreement, or gain possession of, maintain, handle, preserve, store, ship, prepare for sale, and/or advertise to sell the Collateral, whether or not the sale is consummated and collecting the Collateral with or without suit; and e. All costs, attorney's fees, and expenses of any kind (including all allocated costs of staff counsel) incurred in the enforcement of this Agreement or the defense of legal proceedings involving any claim made against Lender arising out of this Agreement or the protection of the Collateral. 1.36 Lien shall mean: (a) any interest in Property securing an obligation owed to, or a claim of a Person other than the owner of the Property, whether such interest is based on common law, statue, or contract, and including without limitation, a security interest, charge, claim, or lien arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, agreement, security agreement, conditional sale contract, trust receipt, or lease, consignment or bailment for security purposes; and (b) to the extent not included under clause "(a)," any reservation, exception, encroachment, easement, right-of-way, covenant, condition, restrictment, lease, or other title exception or encumbrance affecting Property. 1.37 Loan shall mean, collectively, all loans and Advances provided for under Article Two hereof. 1.38 Loan Documents shall mean this Agreement and all other agreements, instruments, and documents heretofore, now or hereafter evidencing, securing, guaranteeing or otherwise relating to the Obligations, the Collateral, Lender's Liens, or any other aspect of the transactions contemplated by this Agreement. 1.39 Loss Reserve Percentage shall mean, as of the date of determination, the greater of (a) three percent (3%), or (b) the percentage calculated by dividing (i) the aggregate amount of all Net Charge-Offs during each of the twelve (12) calendar months immediately preceding the date of calculation (numerator), by (ii) the average monthly amount of Net Contracts Payments outstanding as of the last day of each of those twelve (12) months (denominator). 1.40 Modified Contract shall mean a Contract which, at any time, either (a) was in default for failure to pay for more than sixty (60) days after its original contractual due date any payment due 7 14 thereunder and such payment default was cured by adjusting or amending the Contract terms, or accepting a reduced payment or otherwise, or (b) is a refinance or renewal of a prior Contract with the Contract Debtor to accomplish any of the foregoing. 1.41 Net Charge Offs for any period shall mean the aggregate amount of all payments due under Contracts which have been charged off during such period, as reduced by the amount of cash actually received by Borrower during the such period with respect to Contracts which have been charged off during previous periods or such period. 1.42 Net Contract Payments shall mean, as of the date of calculation, the remainder of (a) the aggregate amount of all presently due and future, unpaid, noncancelable installment payments to be made under a Contract, regardless of the method of interest calculation (i.e., interest bearing or pre-computed), minus (b) the aggregate amount of all unearned finance charges, unearned discounts, unearned fees, the Auto Reserve, and unearned insurance premium income applicable thereto or included therein, as appropriate. (In the event that the Contracts are acquired from third parties for a price which is less than the amount of the payments due thereunder, then such lesser sum shall be used in the foregoing calculation.) 1.43 Obligations shall mean all present and future loans, advances, liabilities, covenants, duties, and Debts owing by Borrower to Lender under the terms of this Agreement, whether or not evidenced by any note, or other instrument or document, whether arising from an extension of credit, indemnification or otherwise, whether direct or indirect, absolute or contingent, due or to become due, primary or secondary, as principal or guarantor, and including without limitation, all interest, charges, expenses, fees, Lender's Expenses, attorneys fees, filing, and any other sums chargeable to Borrower hereunder or under another Loan Document. 1.44 Participant shall mean any financial institution which has been or will be granted the right by Lender to participate in the Loan and who shall have entered into a participation agreement in form and substance satisfactory to Lender. 1.45 Person shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, or any other entity. 1.46 PBGC shall mean the Pension Benefit Guaranty Corporation or any person succeeding to the functions thereof. 1.47 Plan shall mean any pension or other employee benefit plan which is subject to Title IV of ERISA, and which is: (a) a plan maintained by Borrower; (b) a plan to which Borrower contributes or is required to contribute; (c) a plan to which Borrower was required to make contributions at any time during the five calendar years preceding the date of this Agreement; or (d) any other plan with respect to which Borrower has incurred or may incur liability, including contingent liability, under Title IV of ERISA, either to such plan or to the PBGC. 1.48 Property shall mean any interest in any kind of property or asset, whether personal or real property, or mixed, or tangible or intangible. 1.49 Reference Rate shall mean the rate established from time to time by Bank of America, N.T. & S.A., San Francisco, California ("Bank"), in its sole discretion as its reference rate. The 8 15 Reference Rate is not the lowest interest rate available from Bank. The Bank's Reference Rate is based upon various factors, including Bank's costs and desired return, general economic conditions, and other factors. Loans may be priced at, above, or below the Reference Rate. The Reference Rate is merely a reference rate with respect to which effective rates of interest are calculated. In the event Bank shall abolish or abandon the practice of establishing its Reference Rate, Lender shall designate a comparable reference rate which shall be deemed to be the Reference Rate hereunder. 1.50 Reportable Event shall have the meaning assigned to that term in Title IV of ERISA, including, without limitation, a reportable event described in Section 4043 of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. 1.51 Rules shall mean any law, regulation, or rule of practice whether or not having the force of law, by which Lender, Borrower, or any Participant is bound or to which it adheres. 1.52 Security Documents shall mean all security agreements, chattel mortgages, deeds of trust, mortgages, or other security instruments, guaranties, sureties, and agreements of every type and nature (including a certificate of title) securing the obligations of a Contract Debtor under a Contract. 1.53 Subordinated Debt shall mean all Debt of Borrower which at all times during the term of this Agreement is (a) subordinated to Borrower's Obligations hereunder pursuant to a written subordination agreement, the terms of which are satisfactory to Lender in its sole and absolute discretion; and (b) has a then-remaining term to maturity in excess of twelve (12) months. 1.54 Total Credit Facility shall mean $3,000,000. 1.55 Unused Line Fee shall have the meaning given to that term in section 3.4. ARTICLE TWO - LOAN 2. Loan. a. Upon the request of Borrower, made from time to time during the term hereof, Lender agrees to lend Borrower an aggregate principal amount not to exceed the lesser of (i) the Total Credit Facility or (ii) Borrower's Availability; provided, however, no Advances will be made to Borrower if a Default or an Event of Default exists. All such Advances shall be added to the Loan when made. Subject to the other terms and conditions of this Agreement, funds paid by Borrower to Lender in full or partial repayment of the Loan, during the term of this Agreement, may be re-borrowed by Borrower. b. Lender, in its sole and absolute discretion, may elect to make Advances in excess of Borrower's Availability on one or more occasions (such financial accommodations are hereinafter referred to as "Over Advances"), but if it does so, Lender shall not be deemed thereby to have changed the limits of the Total Credit Facility or Availability. Immediately upon demand by Lender for repayment of the Over Advance, Borrower shall make such payment, without penalty or fee. All Over Advances shall constitute part of the Loan hereunder and shall be subject to all of the terms and conditions of this Agreement. 9 16 c. Upon Lender's request, each time Borrower requests an Advance, Borrower shall deliver to Lender a Collateral and Loan Status Report and Monthly Report of Delinquent Accounts on forms provided by Lender (or on such other form approved by Lender), in which Borrower has computed its Availability, the amount of the requested Advance, and has provided the other information requested therein. d. Each Advance request shall be conclusively presumed to be made by a person authorized by Borrower to do so and the transmittal by Lender to Borrower of the requested Advance to Borrower's bank account shall conclusively establish the obligation of Borrower to repay such Advance as provided herein. All Lender's Expenses and other charges due from Borrower to Lender pursuant to this Agreement, may, at Lender's option, be charged as Advances to the Loan as of the date due from Borrower or the date paid or incurred by Lender, as the case may be. 2.1 Monthly Statements Conclusive. Lender shall render monthly statements reflecting the amount of the Obligations owing by Borrower to Lender, including statements of all principal, interest, and Lender's Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and shall constitute an account stated (except for reversals and re-applications of payments made to Lender as permitted under this Agreement and correction of errors discovered by Lender) between Borrower and Lender unless, within thirty (30) days after receipt thereof by Borrower, Borrower shall deliver to Lender written objection thereto specifying the errors, if any, contained in any such statement. ARTICLE THREE - INTEREST AND OTHER CHARGES 3.1 Interest Rate. The Loan, until paid in full, shall bear interest on the unpaid principal balance thereof from the initial funding date of each Advance, at the Reference Rate plus one and one-half percent (1.5%) per annum. The interest rate shall be adjusted as, when, and effective as of the date any change in the Reference Rate occurs. Changes in the Reference Rate shall occur without notice or demand of any kind. 3.2 Interest Calculation. All interest shall be computed at the close of each day by multiplying the outstanding Loan balance hereunder at the close of business on that day by a daily interest factor, which daily interest factor shall be calculated by dividing the aforesaid interest rate in effect on that day by 360 (which results in more interest being charged than if 365 were used). All Interest so computed shall accrue for each and every day (365 days per year, 366 days per leap year) on which any part of the Loan remains outstanding hereunder, including the day on which any Advance is made regardless of the time of day the Advance is made, and including the day on which funds are repaid unless repayment is credited by Lender to the Loan prior to the close of Lender's business on the day of receipt. 3.3 Payment of Interest. Until all Obligations have been paid in full, interest for each month shall be due and payable on the fifteenth day of each month ("Interest Payment Due Date"), beginning with the fifteen day of the month immediately following the Closing Date. The monthly interest charge shall be due and payable in full either by wire transfer of immediately available funds or by such other means as is satisfactory to Lender. In the event the fifteenth day of a particular month is not a Business Day, then the Interest Payment Due Date shall be the first Business Day immediately preceding the fifteenth day of a month which is a Business Day. 10 17 3.4 Unused Line Fee. For every month during the term of this Agreement, Borrower shall pay to Lender a fee ("Unused Line Fee") in an amount equal to one quarter of one percent (.25%) per annum, multiplied by the amount by which (a) the Total Credit Facility exceeds (b) the average closing daily unpaid balance of the Loan during such month. Such fee, if any, shall be calculated on the basis of a year of 360 days, actual days elapsed, and shall be payable to Lender on the Interest Payment Due Date with respect to the prior month. 3.5 Default Interest Rate. Should an Event of Default occur under this Agreement then effective as of the date of the Event of Default, interest shall accrue on the entire Loan balance at the interest rate specified herein, and in addition thereto a default charge shall accrue at a rate ("Default Rate") of five percent (5%) per annum on the closing daily balance of the Loan outstanding, such default charge being due and payable together with and in the same manner as interest as hereinabove provided, except that, if not sooner due and payable, all such interest and default charges shall be paid at the time of and as a condition precedent to the curing of any such Event of Default should Lender, at its sole option, allow such Event of Default to be cured. 3.6 Maximum Interest Rate. In no event shall the interest rate and other charges exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event a court determines that Lender has received interest and other charges in excess of the highest rate applicable hereto, Lender shall apply such excess to the principal balance of the Obligations as of the date of such determination. If no Obligations are then outstanding, then Lender shall refund to Borrower such excess. 3.7 Capital Adequacy. If any existing or future law, regulation, or guideline, or the interpretation thereof by any court or administrative or governmental authority charged with the administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, shall either (i) impose, modify, or deem applicable or result in the application of, any reserve, special deposit, capital maintenance, capital ratio, or similar requirements against loans or loan commitments made by Lender or against any other extensions of credit or commitments to extend credit or other assets of or any deposits or other liabilities taken or entered into by Lender, or (ii) cause Lender, in anticipation of the effectiveness of any capital maintenance, capital ratio, or similar requirement, to take reasonable action to enable itself to comply therewith, or (iii) impose on Lender any other condition regarding this Agreement or the Total Credit Facility, and the result of any event referred to in clause (i), (ii), or (iii) above shall be to increase the cost to Lender of making or maintaining, or to impose upon Lender, or increase, any capital requirement applicable as a result of the making or maintenance of, the Total Credit Facility or the Obligations of Borrower or to reduce the amounts receivable by Lender hereunder (which increase in cost or increase in (or imposition of) capital requirements or reduction in amounts receivable may be determined by Lender's reasonable allocation of the aggregate of such cost increases, capital increases, or impositions or reductions in amount receivable resulting from such events), then, upon demand by Lender, Borrower shall, at Borrower's option, either (a) pay to Lender all outstanding Obligations without payment of the early termination and prepayment premiums, described in Section 4.1 hereof and terminate this Agreement, or (b) immediately pay to Lender sufficient to compensate Lender for such increased cost or increase in (or imposition of) capital requirements or reduction in amounts receivable by Lender from the date of such change to the extent such costs, capital requirements and reductions are not reflected in increases in the Reference Rate, together with interest on each such amount from the date demanded until payment in full thereof at the Default Rate of interest specified in Section 3.6 hereof. Upon the occurrence of any event referred to in clause (i), (ii), or (iii) above, a certificate setting forth in reasonable detail the 11 18 increased cost, reduction in amounts receivable, or amounts necessary to compensate Lender as a result of an increase in (or imposition of) capital requirements submitted by Lender to Borrower, shall be conclusive, absent manifest error, for all purposes. ARTICLE FOUR - TERM 4.1 Term of Agreement and Loan Repayment. This Agreement shall have a term commencing on the date appearing on the first page hereof and terminating on April , 1997 ("Maturity Date"). The Loan shall be due and payable in full on the Maturity Date without notice or demand and shall be repaid to Lender by a wire transfer of immediately available funds. Borrower may terminate this Agreement prior to the Maturity Date by: (a) giving Lender at least sixty (60) days prior notice of intention to terminate this Agreement; (b) paying and performing, as appropriate, all Obligations on or prior to the effective date of termination; and (c) paying to Lender an early termination fee equal to (i) one percent (1%) of the Total Credit Facility in the event the effective date of termination is before the first anniversary date of this Agreement; and (ii) one-half of one percent (.5%) of the Total Credit Facility in the event the effective date of termination occurs on or after the first anniversary date of this Agreement, but before the second anniversary date of this Agreement. No early termination fee shall apply thereafter. Notwithstanding the foregoing, upon the occurrence of an Event of Default, Lender may immediately terminate further performance under this Agreement without notice or demand. 4.2 Application of Payments. All payments made by Borrower shall be applied (i) first to the payment of fees, interest, expenses, and all other Obligations due and payable except unpaid principal, as determined by Lender, and (ii) second, to the payment of unpaid principal that is due and payable; provided, however, that during the continuance of an Event of Default, Lender may apply all such payments to the Obligations of Borrower in any amounts and in any priority as Lender shall determine in its sole discretion. 4.3 Termination of Security Interests. Notwithstanding termination, until the Loan and all other Obligations have been fully repaid (which shall be deemed to occur only when Lender has received good funds), Lender shall retain a security interest in all Collateral existing and thereafter arising and Borrower shall continue to observe each and every covenant contained herein. Without limiting the generality of the foregoing, Borrower shall continue to assign to Lender all Contracts and security therefor and shall, upon Lender's request, immediately turn over to Lender, in kind, all proceeds received respecting the Collateral. Only after termination and when Lender has received payment in full of the Loan and all other Obligations, shall Lender execute a termination of all security agreements and security interests given by Borrower to Lender hereunder. ARTICLE FIVE - SECURITY INTEREST IN COLLATERAL 5.1 Creation of Security Interest in Collateral. Borrower hereby irrevocably and unconditionally grants, transfers, and assigns to Lender a security interest in all the Collateral and in all of Borrower's rights therein, whether presently existing or hereafter acquired or arising, in order to secure prompt payment of the Loan and payment and the performance by Borrower of all its other Obligations under this Agreement. Lender's security interest in the Collateral shall attach to all the Collateral without further act by Lender or Borrower. In the event any Collateral is evidenced by or consists of 12 19 Instruments, Borrower shall immediately, upon receipt thereof, endorse or assign (as appropriate), and deliver to Lender such Instruments. 5.2 Financing Statements. Borrower agrees, at its own expense, to execute financing statements, continuation statements, and assignments of financing statements provided for by the Code, together with any and all other instruments or documents and to take such other action, including delivery, as may be required to perfect or maintain Lender's security interest in the Collateral, and to execute and record an assignment of any deed of trust or mortgage naming Borrower as the beneficiary and a Contract Debtor as trustor. Unless prohibited by law, Borrower hereby appoints Lender and Lender's designee as Borrower's attorney-in-fact (such appointment being coupled with an interest and is, therefor, irrevocable) to sign Borrower's name and file or record, as the case may be, at any time any such financing statements on Borrower's behalf. 5.3 Location of Collateral. Borrower represents and warrants that except for Collateral which has been delivered to Lender under the terms hereof: (a) Schedule 5.3 is a correct and complete list of the location of all books and records concerning the Collateral, the locations of the Collateral, and location of all of Borrower's places of business; and (b) the Collateral shall remain at all times in the possession of Borrower. Borrower covenants and agrees that, except for Collateral in the possession of Lender, it will not maintain the Collateral at any location other than those listed in Schedule 5.3, and will not otherwise change or add to those locations, unless it gives Lender at least 30 days prior notice thereof and executes and delivers to Lender any and all financing statements and other documents that Lender requests in connection therewith. Notwithstanding any provision of this Agreement to the contrary, upon the occurrence of a Default, Borrower shall upon Lender's request immediately deliver to Lender, all Contracts and related Security Documents then existing and thereafter arising. 5.4 Delivery and Marking of Collateral. a. In the event that any of the Collateral is evidenced by Instruments, then prior to any Advance with respect thereto, Borrower shall endorse to Lender's order and deliver to Lender the original of such Instruments to Lender. b. Except with respect to Instruments delivered to Lender pursuant to section 5.4(a) above, Borrower shall immediately following the execution or receipt of a Contract, stamp on the Contracts, the following words: "This document is subject to a security interest in favor of BankAmerica Business Credit, Inc." 5.5 Protection of Collateral; Reimbursement. a. Borrower shall pay all expenses of protecting, storing, insuring, handling, maintaining, and shipping the Collateral and any and all excise, Property, sales, and use taxes levied by any state, federal or local authority on any of the Collateral or in respect of the sale thereof. b. If Borrower fails promptly to pay any portion of the expenses specified in subsection 5.5 (a) when due, Lender may, at its option (but shall not be required to) pay the same and charge such amount to the Loan balance, and Borrower agrees promptly to reimburse Lender therefor with interest accruing thereon daily at the rate of interest from time to time in effect. All sums so paid or incurred by Lender for any of the foregoing and any and all sums for which Borrower may become liable under this Agreement and all costs and expenses (including Lender's Expenses) which Lender may incur in enforcing or protecting its Lien or rights and interest in the Collateral or any of its rights or remedies under this Agreement or any other agreement between the parties hereto or in respect of any 13 20 of the transactions occurring under the Contracts until paid by Borrower to Lender with interest at the rate of interest from time to time in effect, shall be considered as part of the Obligations and, as such, shall be secured by all the Collateral. Lender shall not be liable or responsible in any way for the safekeeping of any of the Collateral or for any loss or damage thereto or for any diminution in the value thereof, or for any act or default of any carrier, forwarding agency, or other person whatsoever, but the same shall be at Borrower's sole risk. 5.6 Release of Collateral. Borrower shall not sell any of the Collateral or any interest therein without Lender's prior written consent which shall not be unreasonably withheld or delayed. 5.7 Monthly Reports Re Collateral. Borrower shall deliver to Lender, within fifteen (15) days after the end of each calendar month during the term of this Agreement, and at any other time specified by Lender, all of the following documents (which shall be satisfactory to Lender, in a form and content): a. A Collateral and Loan Status Report and Monthly Report of Delinquent Accounts and Repossessed Collateral on forms provided by Lender (or on such other form approved by Lender), containing the information requested therein; b. A report listing each Contract under which any scheduled payment thereunder is sixty (60) days or more past due, as determined on a contractual basis; and c. A certificate executed by the chief financial officer of Borrower, certifying, inter alia, that Borrower is in compliance with all terms, covenants, and conditions contained in this Agreement and no Default or Event of Default then exists. 5.8 Inspection. Borrower shall permit Lender and its representatives to make such verification and inspection of the Collateral and to make audits and inspections, at any time and as frequently as Lender desires of Borrower's books, accounts, records, correspondence and such other papers as it may desire. Borrower shall pay to Lender an annual audit fee ("Audit Fee") in order to reimburse Lender for the costs of such verifications, audits, and inspections, equal to the sum of (a) $2,500, plus (b) $1,500 for each additional office of Borrower opened after the date appearing on page one of this Agreement. The Audit Fee shall be payable in equal monthly installments, each of which is due on each Interest Payment Due Date, commencing with the month immediately following the date appearing on page one of this Agreement. Notwithstanding the foregoing, upon the occurrence of any Event of Default, Borrower shall pay all of Lender's costs incurred in connection with the verification, audit, and inspection of the Collateral without regard to the foregoing limitations. Borrower shall supply copies of and permit Lender to copy such records and papers as Lender may request, and shall permit Lender to discuss Borrower's affairs, finances, and accounts with Borrower's employees, partners and independent public accountants (and by this provision Borrower hereby authorizes said accountants to discuss with Lender the finances and affairs of Borrower and each of its subsidiaries) all at such reasonable times and as often as may be reasonably requested. Borrower further agrees to supply Lender with such reasonable information relating to Borrower and the Collateral as Lender shall request. In the event of any litigation between Borrower and Lender, any right of civil discovery shall be in addition to, but not in lieu of, Lender's rights under this section. 5.9 Verification. Lender may, from time to time, verify directly with Contract Debtors the validity, amount, and any other matters relating to the Collateral by means of mail, telephone, or otherwise, either in the name of Borrower or Lender or such other name as Lender may choose. 14 21 ARTICLE SIX - RECORDS AND SERVICING OF CONTRACTS 6.1 Records of Contracts. Borrower shall keep or will cause to be kept in a safe place, at its chief executive office and other locations specified in Schedule 5.3, proper and accurate books and records pertaining to the Collateral. Borrower shall maintain a system, satisfactory to Lender, for duplicating and storing, at a secure location, a duplicate set of books and records concerning the Collateral. In addition, Borrower shall maintain a credit file for each Contract Debtor, containing financial information reflecting the creditworthiness of each Contract Debtor. 6.2 Servicing of Contracts. At no expense to Lender, Borrower shall diligently and faithfully perform the following services relating to the Contracts until (a) the occurrence of an Event of Default or a Default (all as hereinafter defined) which Default could have a material adverse effect on Borrower (as determined by Lender in its sole and absolute discretion), and (b) Lender has notified Borrower in writing that Borrower shall cease providing such services: a. Borrower shall collect all payments and other proceeds of the Contracts and other Collateral; and b. Borrower shall perform customary insurance follow-up with respect to each policy of insurance covering the Property which is the subject of the Contracts. 6.3 Termination of Collection Rights. Following the occurrence of either an Event of Default or a Default which Default could have a material adverse effect on Borrower (as determined by Lender in its sole and absolute discretion), all rights of Borrower to collect any payments due under the Collateral and all rights of Borrower to exercise the consensual rights which it would otherwise be entitled to exercise with respect thereto, shall, at the option of Lender and upon written notice from Lender to Borrower, immediately terminate. Borrower acknowledges and agrees that following an Event of Default Lender shall be entitled to receive all of the Contract payments, without deduction, even though this may render Borrower insolvent and leave Borrower without any funds to pay its operating expenses. Borrower, at Lender's request, shall immediately provide Lender with a current list of the names, addresses, and Contract account numbers for all Contract Debtors and shall, at Lender's request following an Event of Default, immediately direct all Contract Debtors (pursuant to a form of notice prepared by Lender) to make all payments due under the Contracts and the Collateral directly to Lender or to a bank account designated by Lender, and Borrower shall otherwise cooperate with Lender in that regard. 6.4 Collection Account. While any portion of the Loan is unpaid, Borrower shall immediately, upon receipt thereof, deposit all cash proceeds of the Collateral (including, for example, all regular monthly payments received in connection with the Contracts) into a Collection Account, established by Borrower and Lender under a Collection Account Agreement between Borrower, Lender, and the bank identified therein. If, at any time, either (i) Borrower's then-existing Excess Availability is equal to or less than seven and one-half percent (7.5%) of the then-outstanding Loan amount; or (ii) upon the occurrence of an Event of Default under this Agreement, then at all times thereafter, Borrower's right to withdraw any funds from the Collection Account shall immediately terminate and only Lender shall thereafter have a right to withdraw any funds from the Collection Account. Lender shall reinstate Borrower's right to withdraw funds from the Collection Account in the event (a) Borrower's Excess Availability is, at all times, equal to or greater than seven and one-half percent (7.5%) of the Loan balance during any 90-day period following the date of termination of Borrower's Collection Account 15 22 withdrawal rights and no Default or Event of Default occurs during that period, where Borrower's withdrawal rights were terminated because of inadequate Excess Availability or (b) Lender, in its sole discretion, waives or allows to be cured (if curable) the Event of Default which resulted in the termination of the Borrower's withdrawal rights and no additional grounds for terminating Borrower' withdrawal rights (e.g., a new Default or Event of Default) occurs during any 90-day period following the date of termination of Borrower's Collection Account withdrawal rights, where Borrower's withdrawal rights were terminated because of the occurrence of an Event of Default. ARTICLE SEVEN - REPRESENTATIONS, WARRANTIES AND COVENANTS 7.1 Representations and Warranties Reaffirmed. Borrower represents and warrants by its execution of this Agreement, by each report delivered to Lender concerning the Collateral and with each Advance request, the following matters as of each Closing Date. Each warranty and representation shall be deemed to be material and to be automatically repeated with each Advance and shall be conclusively presumed to have been relied upon by Lender regardless of any information possessed or any investigation made by Lender. The warranties and representations shall be cumulative and in addition to all other warranties, representations, and agreements which Borrower shall give or cause to be given to Lender, either now or hereafter. 7.2 Warranties and Representations Re Contracts. With respect to the Contracts, Borrower represents and warrants that: a. Each Contract is a bona fide, valid, and binding obligation of the Contract Debtor, enforceable in accordance with its terms, and Borrower does not know of any fact which impairs or will impair the validity of any such Contract. b. Each Contract is free of any prior assignment, security interest, Lien, claim, or encumbrance in favor of any Person other than Lender. c. Each Contract correctly sets forth the terms thereof between Borrower and the Contract Debtor, including the interest rate applicable thereto and the subject personal property collateral therefor. d. The signatures of all Contract Debtors are genuine and, to the knowledge of Borrower, each Contract Debtor had the legal capacity to enter into and execute such documents on the date thereof. e. There is only one original counterpart of the Contract executed by the Contract Debtor which is in the possession of Borrower (with the possible exception of one duplicate original counterpart which, if in existence, is in the Contract Debtor's sole possession). 7.3 Warranties and Representations Re Collateral Generally. With respect to all Collateral, including the Contracts, Borrower represents, warrants, and covenant, that: a. All state and federal laws have been complied with in conjunction with the Collateral, the noncompliance with which would have an adverse impact on the value, enforceability or collectability of the Collateral. 16 23 b. At the time of the pledge to Lender of any Collateral by Borrower, Borrower has good and valid title to, and full right and authority to pledge, the same to Lender. c. Lender has at all times a first priority, perfected, Lien in all of the Collateral. d. the Collateral (i) is owned solely by Borrower, and no other person, other than Lender, has or will have any right, title, interest, claim or Lien therein and in any money resulting from the lease, rental, sale or other disposition thereof, and (ii) shall remain free and clear of any Liens, excepting for Liens hereby granted to Lender. e. Except as is otherwise consistent with prudent collection practices for companies in Borrower's line of business, Borrower shall not compromise for less than the full face value, or release in whole or in part any person liable for the payment of, or allow any credit whatsoever against, any portion of the Collateral, except for the amount of cash to be paid upon any such Collateral or any Instrument or document representing such Collateral; and f. Borrower shall pay and discharge, when due, all taxes, levies, assessments and other charges upon the Collateral. Other than as expressly specified herein, Lender shall not be required to take any steps to perfect its security interest in the Collateral or to collect or realize upon the Collateral. Any distribution of interest or principal, or loss of the Collateral or any of the Property secured thereby, shall not release Borrower from any of the Obligations. 7.4 Contract and Security Document Forms. Borrower covenants that only Contracts in a printed form(s) previously approved in writing by Lender shall be used by Borrower for all transactions which may now exist and which may exist in the future. Borrower shall not change or vary the printed terms of such Contracts without Lender's prior written consent, unless such change or variation is expressly required by applicable state and federal laws. Lender may reasonably withhold its consent until Lender receives a satisfactory opinion of Borrower's counsel regarding compliance of the revised form of Contract with all applicable federal and state statutes. 7.5 Solvent Financial Condition. Immediately prior to each Closing Date, the present fair salable value of the assets of Borrower is greater than the amount required to pay its liabilities, and Borrower is able to pay its debts as they mature. 7.6 Credit Guidelines. Borrower shall not make any changes in its credit guidelines (a copy of which has been previously furnished by Borrower to Lender) without Lender's prior written consent which Lender may withhold in its sole and absolute discretion. Borrower's credit guidelines shall state in detail the credit criteria used by Borrower in determining the creditworthiness of Contract Debtors with regard to the Contracts originated by Borrower and/or originated by third parties and acquired by Borrower, as appropriate. 7.7 Organization, Authority, and Capital Structure. Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; (ii) has all requisite power and authority and necessary licenses, permits, and franchises to carry on its business as now conducted and as proposed to be conducted; and (iii) has duly qualified and is authorized to do business and is in good standing as an entity in each jurisdiction where such qualification is necessary. Borrower has authorized capital of 100,000 shares of voting common stock, and 100,000 shares of non-voting cumulative preferred stock. One thousand (1,000) of the voting common stock are issued and outstanding and all legal and beneficial interests in such stock are owned by Carolina Inventors, Inc., a 17 24 South Carolina corporation. As of the date of this Agreement, all of the issued and outstanding stock of Carolina Investors, Inc. is owned legally and beneficially by Emergent Financial. 7.8 Financial Statements. The financial statements of Borrower for the period ending November 30, 1994, are true and correct and have been prepared in accordance with generally accepted accounting principles, practices and procedures, consistently applied (except for changes in application in which Borrower's accountants concur) and present fairly the financial position of Borrower as of such dates and the results of its operations for such periods. Since November 30, 1994, there has been no adverse change in the condition, financial or otherwise, of Borrower as of such date. 7.9 Full Disclosure. The financial statements, referred to in section 7.8 above, this Agreement, and all written statements furnished by Borrower to Lender in connection with this Agreement do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein or herein not misleading. 7.10 Pending Litigation. There are no proceedings pending, or to the knowledge of Borrower threatened, against or affecting Borrower, any guarantor of the Obligations, or Emergent Group, in any court or before any governmental authority or arbitration board or tribunal which involve the possibility of materially and adversely affecting the business, profits or condition (financial or otherwise) of any of them or the ability of Borrower to repay or otherwise perform any of its Obligations to Lender. Neither Borrower, any guarantor of the Obligations, nor Emergent Group, is in default with respect to any order of any court, governmental authority or arbitration board or tribunal. 7.11 Title to Properties. Borrower has good and marketable title to the Property (including all of the Collateral) it purports to own, free from Liens except as set forth in Borrower's financial statements. 7.12 Licenses. Borrower has all licenses, permits, and franchises necessary for the conduct of its business which violation or failure to obtain would materially and adversely affect its business or condition (financially or otherwise). 7.13 Transaction is Legal and Authorized. The execution and delivery of this Agreement and related documents by Borrower, the grant of the Liens to Lender in respect to the Collateral by Borrower, and compliance by Borrower with all of the provisions of this Agreement are valid, legal, binding, and enforceable in accordance with their terms and will not conflict with or result in any breach of any of the provisions of any agreement, bylaws, charter or instrument to which Borrower is a party. 7.14 Taxes. All tax returns required to be filed by Borrower in any jurisdiction have been filed, and all taxes, assessments, and other governmental charges upon Borrower, or upon any of its properties, income or franchises, which are due and payable, have been paid. The provisions for reserves for taxes on the books of Borrower are adequate for all unaudited Fiscal Years, and for its current fiscal period. 7.15 Compliance with Law. Borrower: (a) is not in violation of any laws, ordinances, or Rules to which it or its business is subject, and (b) has not used illegal, improper, fraudulent or deceptive marketing techniques or unfair business practices with respect to the Contracts. Borrower has fully complied with all applicable federal statutes and all rules and regulations promulgated thereunder and with all provisions of law of each state whose laws, rules, and regulations relate to the Contracts. 18 25 7.16 Borrower's Office. Borrower's chief executive office is located at the address stated on page one of this Agreement, and Borrower covenants and agrees that it will not, without prior written notification to Lender, relocate said chief executive office. 7.17 ERISA. (a) Borrower has no Plan other than those listed in Exhibit 7.17 attached hereto. (b) No Plan has been terminated or partially terminated or is insolvent or in reorganization, nor has any proceedings been instituted to terminate or reorganize any Plan. (c) Borrower has not withdrawn from any Plan in a complete or partial withdrawal, nor has a condition occurred which if continued would result in a complete or partial withdrawal. (d) Borrower has no withdrawal liability, including contingent withdrawal liability, to any Plan pursuant to Title IV of ERISA. (e) Borrower has no liability to the PBGC other than for required insurance premiums which have been paid when due. (f) No Reportable Event has occurred with respect to a Plan. (g) No Plan has an "accumulated funding deficiency" (whether or not waived) as defined in Section 302 of ERISA or in Section 412 of the Internal Revenue Code. (h) Each Plan is in substantial compliance with ERISA, and Borrower has not received any notice asserting that a Plan is not in compliance with ERISA. Neither Borrower nor any other "party-in-interest" or "disqualified person" has engaged in a "prohibited transaction" as such terms are defined in Section 4975 of the Internal Revenue Code and Title I of ERISA, in connection with any Plan which would subject a party-in-interest or disqualified person (after giving effect to any exemption) to the tax on prohibited transactions imposed by Section 4975 of the Code or any other liability. 7.18 Name Changes. Except as disclosed in writing by Borrower prior to the date hereof, such Borrower has not, within the six-year period immediately preceding the date hereof, changed its name, been the surviving entity of a merger or consolidation, or acquired all or substantially all of the assets of any person. 7.19 Offices; FTC; Warranties. a. Borrower agrees that it will operate at a licensed location in the jurisdiction requiring such license in conformity with all such licensing and other laws applicable to the purchase of Contracts, including Motor Vehicle Retail Installment Sales Acts, Sales Finance Agency Acts or any other law regulating the business of acquiring Contracts from Dealers. To the extent Borrower does not have a license for each location, it will immediately procure a license or advise Lender of the reason that it is exempt from such licensing requirement or that no such licensing requirement exists in the jurisdiction of such location. b. Borrower is familiar with the Federal Trade Commission's used car rule and is in compliance therewith to the extent Borrower is legally obligated for such compliance. c. In the event Borrower acquires an Auto Contract originated by a Dealer, Borrower will do so only from a Dealer with whom Borrower has entered into and pursuant to the terms of a Dealer Agreement that is enforceable in accordance with its terms against such Dealer. To the extent that Borrower allows Dealers to finance so-called "extended warranty plans," Borrower will (i) ensure that the cost of such plans are disclosed and will be in substantial compliance with all applicable consumer credit laws, including any and all special insurance laws relating thereto to the extent Borrower is legally obligated for such compliance, and (ii) ensure that such plans are underwritten by (x) a major automobile manufacturer, or an affiliate thereof, or (y) a reputable insurance company. ARTICLE EIGHT - FINANCIAL AND OTHER COVENANTS 19 26 Borrower covenants that so long as any portion of the Loan remains unpaid or any Obligation of Borrower to Lender is to be performed or paid, Borrower shall observe all of the covenants and promises contained in this Article Eight. 8.1 Payment of Taxes and Claims. Borrower shall pay, before they become delinquent, all taxes, assessments, and other governmental charges imposed upon it or its Property or the Collateral and all claims or demands which, if unpaid, might result in the creation of a Lien upon its Property or the Collateral. 8.2 Uniform Commercial Code Financing Statements and Assignments of Contracts. Prior to any Advance hereunder and at all times all filings of Code financing statements, assignments of the Contracts and all other filings, recordings and action necessary to perfect Lender's Liens granted under this Agreement shall have been filed or recorded and are in effect. 8.3 Maintenance of Properties and Existence. Borrower shall: a. maintain insurance with respect to its properties and business against such casualties and contingencies of such types and in such amounts as is customary in such business; b. keep true books, records, and accounts of all its business transactions; c. keep in full force and effect its corporate existence, rights, and franchises, as the case may be; and d. Not violate any laws, ordinances, or governmental rules or regulations to which it is subject which violation might materially and adversely affect the business, profits, the Collateral, Properties, or condition (financial or otherwise) of Borrower so that all Contracts will be valid, binding and legally enforceable in accordance with their terms, subsequent to the assignment thereof to Lender. 8.4 Opinions of Counsel. Lender shall have the right to receive, upon request made at any time, such opinions of Borrower's outside counsel as Lender shall request, all in scope and substance satisfactory to Lender. Lender may, without liability to Borrower, cease making Advances until such opinions are received. 8.5 Guaranties. Borrower shall not become or be liable in respect of any guaranty except by endorsement, in the ordinary course of business, of negotiable instruments for deposit or collection issued in the ordinary course of Borrower's business. 8.6 Unsubordinated Debt to Borrowing Base. Borrower shall not permit the ratio, calculated as of the last day of each month, of (a) the remainder of (i) aggregate amount of all Debt minus (ii) all Subordinated Debt (numerator), to (b) Borrowing Base (denominator), to be more than: (a) 3:1 prior to December 1, 1995; and (b) 2.5:1, on and after December 1, 1995. 8.7 Total Debt Ratio. Borrower shall not permit the ratio, calculated as of the last day of each month, of (a) the aggregate amount of all Debt (numerator) to (b) Adjusted Tangible Net Worth (denominator), to be more than the amount indicated opposite the specified time period: 20 27
Period Amount ------ ------ Prior to 12/1/95 14:1 12/1/95 - 11/30/96 12:1 12/1/96 and each month thereafter 10:1
8.8 Minimum Adjusted Tangible Net Worth. Borrower shall not permit its Adjusted Tangible Net Worth, calculated as of the last day of each month, to be less than the amount indicated opposite the specified time period:
Period Amount ------ ------ Prior to 12/1/95 $200,000 12/1/95 - 11/30/96 $275,000 12/1/96 and each month thereafter $400,000
8.9 Minimum Borrowing Base. Borrower shall not permit its Borrowing Base, calculated as of the last day of each month, to be less than the amount indicated opposite the specified time period:
Period Amount ------ ------ Prior to 12/1/95 $ 725,000 12/1/95 - 11/30/96 $1,000,000 12/1/96 and each month thereafter $1,250,000
8.10 Loss Reserves. Borrower shall maintain loss reserves in an aggregate amount which, as of the end of each quarter in each Fiscal Year of Borrower, shall not be less than an amount equal to the Loss Reserve Percentage, multiplied by the Net Contract Payments outstanding as of the date of determination. 8.11 Minimum Availability. Borrower shall not permit its Excess Availability to be less than, at any time, five percent (5%) of the unpaid balance of the Loan. 8.12 Charge-Off Policy. Borrower shall establish and implement, in a manner satisfactory to Lender, a policy for charging off the unpaid balance of its delinquent Contracts. Without limiting the generality of the foregoing, Borrower's policy shall provide that on the last day of each quarter in each Fiscal Year, Borrower shall charge off the unpaid balance of all Contracts with respect to which (a) any payment due thereunder is one hundred eighty (180) or more days delinquent, as determined on a contractual basis, or (b) the Goods which are the subject thereof have been repossessed and sold for an amount which is less than the Contract balance then owing and after application of the sale proceeds to such Contract balance, a deficiency remains. 8.13 Limitation on Offices. Notwithstanding the provision of this Agreement to the contrary, including Section 5.3, Borrower shall not operate at any branches, offices, or other business locations after the date Borrower enters into this Agreement, other than the locations specified in Section 5.3, without Lender's prior written consent which shall not be unreasonably withheld or delayed. 21 28 8.14 Limitation on Bulk Purchases. Borrower shall not enter into or acquire Contracts as part of or in connection with a Bulk Purchase without Lender's prior written consent which shall not be unreasonably withheld or delayed. 8.15 Prohibition on Distributions; Structural Changes. Borrower shall not directly or indirectly (a) declare, make, or incur any liability to make any Distribution; or (b) make any change in its organizational structure which could adversely affect repayment of the Loan or other Obligations. Notwithstanding the foregoing, so long as no Event of Default then exists, Borrower may make Distributions to Emergent Financial with respect to the net taxable income earned in any Fiscal Year in an aggregate amount which shall not exceed the product of (a) the highest marginal corporate federal and state income tax rates applicable to Emergent Financial taxable net income, multiplied by (b) Borrower's taxable net income for such Fiscal Year. 8.16 Intercompany Management Fees. Borrower shall not, directly or indirectly pay in any form (including without limitation salary, bonuses, commissions, fees, and incentive compensation) any fees or other Debt due from Borrower to any Affiliate for services rendered or facilities provided to Borrower by such Affiliate. Notwithstanding the foregoing provisions of this Section 8.16, Borrower may pay such administrative and overhead expenses (including taxes) as are, from time to time, reasonably allocated to Borrower by Emergent Group, Inc., provided shall allocated expenses to not exceed $30,000 for any Fiscal Year. 8.17 Transactions with Affiliates. Except as expressly permitted in Section 8.15 and in Section 8.16 above, Borrower shall not sell, transfer, distribute, or pay any money or Property to any Affiliate, or lend or advance money or Property to any Affiliate, or invest in (by capital contribution or otherwise) or purchase or repurchase any stock or indebtedness, or any Property, of any Affiliate, or become liable on any guaranty of the indebtedness, dividends, or other obligations of any Affiliate. Notwithstanding the foregoing, Borrower may pay compensation reasonable to employees who are Affiliates. 8.18 Subordinated Obligations. Except as previously and expressly consented to in writing by Lender or permitted by the terms of the applicable subordination agreement, Borrower shall not directly or indirectly permit (a) any payment to be made in respect of any Subordinated Debt; (b) the amendment, rescission, or other modification of the provisions of any of Borrower's Subordinated Debt in such a manner as to affect adversely Lender's Liens or the prior position of such Liens; or (c) the prepayment or redemption of all or any part of any Subordinated Debt of Borrower. 8.19 Further Assurances. Borrower shall from time to time execute and deliver to Lender such other documents and shall take such other action as may be requested by Lender in order to implement or effectuate the provisions of, or more fully perfect the rights granted or intended to be granted by Borrower to Lender pursuant to the terms, of this Agreement or any other agreement executed and delivered to Lender by Borrower. 8.20 Merger; Liquidation. Borrower shall not enter into any transaction of merger, reorganization, or consolidation, or transfer, sell, assign, lease, or otherwise dispose of all or any material portion of its Property, or wind up, liquidate, or dissolve, or agree to do any of the foregoing. 8.21 Change in Business. Borrower shall not make any material change in its financial structure or in any of its business objectives, purposes, or operations, or in the types of loans or Contracts extended by Borrower or the collateral taken or payment provisions pertaining thereto. 22 29 8.22 Lender's Expenses. Upon demand by Lender, Borrower shall immediately reimburse Lender for all sums expended by Lender which constitute Lender's Expenses, and Borrower hereby authorizes and approves all Advances and payments by Lender on items constituting Lender's Expenses. 8.23 ERISA. Borrower shall cause each Plan to be qualified within the meaning of Section 401(a) of the Internal Revenue Code and to be administered in all respects in compliance with ERISA and Section 401(a) of the Internal Revenue Code. ARTICLE NINE - INFORMATION AS TO BORROWER 9.1 Financial Statements. Subject to the requirements of section 12.5, below, Borrower shall submit to Lender the following: a. Within forty-five (45) days after the end of each month in each Fiscal Year, copies of the monthly financial statements of Borrower specified below for such month, and within ninety (90) days after the end of each Fiscal Year, copies of the annual financial statements of Emergent Financial, prepared on a consolidating basis (which must include Borrower and Carolina Investors), specified below for such Fiscal Year: (i) balance sheet; (ii) statement of income; (iii) statement of cash flow; (iv) statements of changes in stockholders equity (annual financial statements only); (v) statements of material changes of accounting policies, presentations, or principles (annual financial statements only); (vi) upon Lender's request, Borrower's or Emergent Group, Inc.'s corporate tax return prepared by an independent certified public accountant; and (vii) notes to such annual financial statements (annual financial statements only). b. Monthly statements and annual statements shall all be in reasonable detail and, upon Lender's request, shall be certified as complete and correct, subject to change as resulting from year-end adjustments, by the treasurer or chief financial officer of Borrower or Emergent Financial, as applicable. Annual statements shall be accompanied by a report thereon unqualified as to scope by an independent certified public accounting firm selected by Emergent Financial and satisfactory to Lender. c. Within thirty (30) days of the end of the Fiscal Year of Borrower, financial projections for the two following years prepared on a monthly basis. d. Promptly upon receipt thereof, one copy of each audit report, if any, submitted to Borrower or Emergent Financial by independent public accountants in connection with any annual, interim, or special audit or examination made by them of the books of Borrower or Emergent Financial. e. With reasonable promptness, such other information as, from time to time, may be reasonably requested by Lender concerning Borrower or Emergent Financial, including the names and addresses of all Contract Debtors, current Contract balances, a payment history for all Contracts, ageings, insurance claims reports, and charge off and reserve reconciliations. 9.2 Notices. Borrower shall notify Lender in writing of the following matters at the following times (with each notice describing the subject matter thereof in reasonable detail, and setting forth the action Borrower has taken or proposes to take with respect thereto): 23 30 a. Immediately upon becoming aware of the existence of any condition or event which constitutes a Default or Event of Default; b. Immediately upon becoming aware of: (i) the assertion by the holder of any capital stock of Borrower or Emergent Financial or Carolina Investors or of any Debt of any of them in an outstanding principal amount in excess of $50,000 that a default exits with respect thereto or that Borrower or Emergent Financial or Carolina Investors is not in compliance with the terms thereof; or (ii) the threat or commencement by such holder of any enforcement action because of such asserted default or non-compliance. c. Immediately upon becoming aware of any material adverse change in Borrower's or Emergent Financial's or Carolina Investor's Property, business, operations, or condition (financial or otherwise). d. Immediately becoming aware of any pending or threatened action, suit, proceeding, or counterclaim by any Person, or any pending or threatened investigation by any public authority, which may materially and adversely affect the Collateral, repayment of the Obligations, Lender's rights under this Agreement, or Borrower's or Emergent Financial's or Carolina Investor's or Emergent Group's business, Property, operations, or condition (financial or otherwise). e. Immediately becoming aware of any violation of any law, statute, regulation, or ordinance of a public authority applicable to Borrower, or Emergent Financial, or Carolina Investors, or their respective Properties which may materially and adversely affect the Collateral, repayment of the Obligations, Lender's rights under this Agreement, or Borrower's or Emergent Financial's or Carolina Investor's business, Property, operations, or condition (financial or otherwise). f. Any change in Borrower's name, state of incorporation, or form of organization, at least thirty (30) days prior thereto. ARTICLE TEN - CLOSING CONDITIONS Lender shall not be obligated to make any Advances to Borrower, unless the following conditions precedent have been satisfied as of each Closing Date, as determined by Lender. 10.1 Representations and Warranties; Covenants; Defaults. Borrower's representations and warranties contained in this Agreement and the other Loan Documents shall be correct and complete; Borrower shall have performed and complied with all covenants, agreements, and conditions contained herein and in the other Loan Documents which are required to have been performed or complied with; and there shall exist no Default or Event of Default. 10.2 Delivery of Documents. Prior to the first Closing Date, Borrower shall have delivered, or caused to be delivered, to the Lender the documents listed on Schedule 10.2 hereto and such other documents, instruments and agreements as the Lender shall request in connection herewith, duly executed by all parties thereto other than Lender, and in form and substance satisfactory to the Lender and its counsel. 24 31 10.3 Termination of Liens. Prior to the first Closing Date, Lender shall have received duly executed UCC-3 Termination Statements and other instruments, in form and substance satisfactory to Lender, as shall be necessary to terminate and satisfy all Liens on the Collateral of Borrower. 10.4 Payment of Fees and Expenses. Borrower shall have paid all reasonable fees and expenses of Lender's internal staff counsel, and all special local counsel retained, and all other fees and expenses of Lender incurred in connection with any of the Loan Documents and the transactions contemplated thereby. 10.5 Required Approvals. Lender shall have received certified copies of all consents or approvals of any public authority or other person which Lender determines is required in connection with the transactions contemplated by this Agreement. 10.6 No Material Adverse Change. There shall have occurred no material adverse change in Borrower's business or financial condition or in the Collateral since November 30, 1994, and Lender shall have received a certificate of Borrower's chief executive officer to such effect. 10.7 Proceedings. All proceedings to be taken in connection with the transactions contemplated by this Agreement, and all documents, instruments, guaranties and other assignments incident hereto or contemplated in connection herewith (whether or not forms thereof are annexed hereto as Exhibits), shall be satisfactory in form and substance to Lender and its counsel. ARTICLE ELEVEN - EVENTS OF DEFAULT: REMEDIES 11.1 Events of Default. An "Event of Default" shall exist under this Agreement upon the occurrence of any of the following events or conditions (all of which shall conclusively be deemed to be material): a. Interest or Principal. Failure to pay when due or when declared due and payable, the principal of or interest due on the Obligations. b. Payment of Other Sums. Failure to make payment, when required, of any other sums owing by Borrower to Lender (other than principal or interest), pursuant to the terms of this Agreement after ten (10) days written notice from Lender is received by Borrower to pay such sum. c. Warranties or Representations. Any warranty, representation, or other statement made or furnished to Lender by Borrower under this Agreement or in any instrument furnished in compliance with this Agreement shall have been false or misleading in any respect when made or furnished. d. Breach of Covenants. Failure by Borrower to comply with any covenant set forth in this Agreement or any in agreement executed in connection therewith within ten (10) days after notice from Lender to cure. e. Material Adverse Change. Any material adverse change in the business or financial condition of Borrower, or Emergent Financial, Carolina Investors, or Emergent Group. 25 32 f. Voluntary Bankruptcy, Etc. Borrower shall: (a) file a voluntary petition in bankruptcy or file a voluntary petition or answer or otherwise commence any action or proceeding seeking reorganization, arrangement or readjustment of its debt or for any other relief under the Federal bankruptcy code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing, or consent to, approve of, or acquiesce in, any such petition, action, or proceeding; (b) apply for or acquiesce in the appointment of a receiver, assignee, liquidator, sequestrator, custodian, trustee or similar officer, for it or for all or a part of its Property; (e) make an assignment for the benefit of creditors; or (f) be unable generally to pay its debts as they become due. g. Involuntary Bankruptcy, Etc. An involuntary petition shall be filed or an action or proceeding otherwise commenced seeking reorganization, arrangement, or readjustment of Borrower's debts or for any other relief under the federal bankruptcy code, as amended, or under any other bankruptcy or insolvency act or law, state or federal, now or hereafter existing and either (i) such petition, action, or proceeding shall not have been dismissed within a period of sixty (60) days after its commencement, or (ii) an order for relief shall have been entered in such proceeding. h. Receiver, Etc. A receiver, assignee, liquidator, sequestrator, custodian, trustee, or similar officer for Borrower or any part of the Property shall be appointed involuntarily; or a warrant of attachment, execution, or similar process shall be issued against any part of the Property of Borrower and Borrower fails to have such appointment vacated within sixty (60) days after such appointment, and/or Borrower fails to have such process removed within forty-five (45) days after its issuance. i. Attachment, Judgment, Tax Liens. The issuance or filing against Borrower of any Lien, attachment, injunction, execution, Lien, or judgment for the payment of money in excess of $50,000 which is not discharged in full or stayed within 30 days after issuance or filing. j. Default in Other Agreements. Default in the payment of any sum due under any instrument of indebtedness for borrowed money owed by Borrower to any person or any other default under such instrument of indebtedness which permits such indebtedness to become due prior to its stated maturity or permits the holders of such indebtedness to elect a majority of the board of directors or manage the business of Borrower. k. Loss of License. The loss, revocation, or failure to renew any license, permit, and/or franchise now held or hereafter acquired by Borrower, which is necessary for the continued operation of Borrower's business. l. Liens. If Borrower shall pledge, hypothecate or otherwise give a Lien on any of the Collateral to, or if such Lien shall be obtained by, any person other than Lender. m. Assignment of Agreement. The assignment by Borrower of its rights hereunder. n. Payment of Subordinated Debt. If Borrower makes any payment on account of any Subordinated Debt which is not expressly permitted by the terms of the applicable subordination agreement. o. Breach of Collection Account Agreement. A breach by Borrower of any covenant contained in the Collection Account Agreement. 26 33 p. Change of Stock Ownership. Emergent Financial shall cease to own, either directly or indirectly, all legal and beneficial title to one hundred percent (100%) of the voting common stock of Borrower, or Emergent Financial or any other affiliate of Emergent Financial shall convey, pledge, or transfer any interest in such stock to any Person. q. Termination Guaranties. Any guaranty of the Obligations, including the Guaranties, shall be terminated, revoked, or declared void or invalid. 11.2 Default Remedies. Upon the occurrence of an Event of Default, Lender may, at its election, without notice of its election and without demand, do any one or more of the of the following, all of which are unconditionally and irrevocably authorized by Borrower: a. Accelerate and declare immediately due and payable all Obligations, including all principal and interest. b. Reduce the Advance rate, reduce the Availability, and restrict the amount of any further Advances. c. Cease making any Advances to or for the benefit of Borrower under this Agreement, and terminate further performance under this Agreement and any other agreement between Borrower and Lender. d. In its sole discretion, without liability to any other person, make such payments and do such acts as Lender considers necessary or reasonable: (i) to protect the Collateral and/or its security interest therein; (ii) to prevent any of Borrower's warranties or representations hereunder from being or becoming incorrect, incomplete, or misleading; or (iii) to cause the payment of any sum or performance of any duty of Borrower hereunder. e. Send notice to all Contract Debtors directing them to make full payment of their Contract payments directly to Lender, instead of Borrower. All payments received by Borrower contrary to this subsection 11.1.e. shall be received in trust for the exclusive right of Lender, shall be segregated from other funds of Borrower, and shall forthwith be delivered to Lender. f. Enter any and all premises where the Collateral is located and take possession of the Collateral and/or require Borrower, at Borrower's expense, to assemble the Collateral and either immediately deliver all of the Collateral to Lender or make it available for delivery to Lender at a place or places designated by Lender. Should Lender exercise its right to possession of the Collateral hereunder, Borrower waives its right, if any, that Lender post a bond or any other type of security. g. Require Borrower to deliver to Lender all of the Contracts, and other documents representing the Collateral and to exercise, in Borrower's name, all of Borrower's rights thereunder. h. Sell all or any part of the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as is commercially reasonable. Any deficiency in the Obligations which exists after disposition of the Collateral, as provided above, will be immediately paid by Borrower. Any 27 34 excess will be returned to Borrower by Lender, subject, however, to the rights of the holders of other Liens on the Collateral. Unless a longer period is required by the Code, five days notice to Borrower of any public or private sale or other disposition of Collateral shall be reasonable notice thereof and such sale shall be at such location(s) as Lender shall designate in said notice. Lender shall have the right to bid at such sale on its own behalf. Out of proceeds arising from any such sale, Lender shall retain all costs and charges, including attorneys' fees for pursuing, reclaiming, taking, keeping, storing, and advertising such Collateral for sale, selling and any and all other charges and expenses in connection therewith. Any balance shall be applied upon the Obligations of Borrower to Lender; and in the event of deficiency, Borrower shall remain liable to Lender. Lender may, from time to time, attempt to sell all or any part of the Collateral by a private placement restricting the bidders and prospective purchasers. In so doing, Lender may solicit offers to buy the Collateral, or any part of it, for cash, from a limited number of purchasers deemed by Lender, in its reasonable judgment, to be responsible parties who might be interested in purchasing the Collateral, and if Lender solicits such offers from not less than three such purchasers then the acceptance by Lender of the highest offer obtained therefrom shall be deemed to be a commercially reasonable method of disposition of such Collateral. i. Terminate this Agreement as to any future obligation of Lender, but without affecting Lender's rights or remedies, or Borrower's Obligations, under this Agreement. Neither such termination, nor the termination of this Agreement by lapse of time, the giving of notice, or otherwise shall absolve, release, or otherwise affect the liability of Borrower in respect of transactions had prior to such termination, nor affect any of the Liens, security interests, rights, powers and remedies of Lender, but they shall, in all events, continue until all Obligations of Borrower to Lender are satisfied. j. Exercise any and all other rights and remedies available under the Code, this Agreement, any other agreement with Borrower, or available at law or in equity, to enforce Lender's rights in the Collateral and obtain payment and performance of the Obligations. k. Appropriate and apply to any of the Obligations, any and all balances, credits, deposits, accounts, reserves, indebtedness, or other monies, whether accrued or not, due or owing to Borrower or held by Lender hereunder, or under any other agreement. 11.3 Remedies Cumulative. Borrower waives the right to require the filing of an undertaking or a bond by Lender in connection with its exercise of any of the rights and remedies specified in section 11.2, above. All undertakings of Borrower and the remedies of Lender contained in this Agreement, or in any documents referred to herein concurrently or hereafter entered into, shall be deemed cumulative. The failure or delay of Lender to exercise or enforce any rights or remedies under this Agreement or under any of the aforesaid agreements or with respect to the Collateral shall not operate as a waiver of such rights and remedies, but all such rights and remedies shall continue in full force and effect until payment of all Loans and other Obligations shall have been fully satisfied, and all rights and remedies herein provided for are cumulative and none are exclusive. 11.4 Waiver of Right of Offset. No portion of the Loan or other Obligations secured by this Agreement shall be or deemed to be offset or compensated by all or any part of any claims, causes of action, counterclaims or counterclaim, whether liquidated or unliquidated, which Borrower may have against Lender. ARTICLE TWELVE - GENERAL 28 35 12.1 Invalidated Payments. To the extent Borrower makes a payment to Lender, which payment or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside, or is required to be repaid to a trustee, receiver, custodian, or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or repayment, the Obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made. 12.2 Application of Code to Agreement. Any additional remedies available to Lender under the applicable provisions of the Code not specifically included herein shall be deemed a part of this Agreement and Lender shall have the benefit of any such additional remedies. 12.3 Parties, Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of Borrower and Lender, and their respective successors and assigns. 12.4 Notices. All notices, demands, or consents by any party on the other relating to this Agreement shall, except as otherwise provided herein, be in writing and sent by certified mail, return receipt requested. Notices shall be deemed received on the third Business Day after being deposited in a United States post office box, postage prepaid, properly addressed to Borrower or to Lender at the mailing address stated on page one of this Agreement or to such other addresses as Borrower or Lender may from time to time specify in writing. Notices may also effectively be given by confirmed transmittal over electronic transmitting devices such as NBI, TWIX, Telex or telecopy machine, if the party to whom the notice is being sent has such a device in its office, provided a complete copy of any notice so transmitted shall also be mailed in the same manner as required for a mailed notice. Notices sent by electronic transmitting device shall be deemed received on the date of confirmed transmittal. 12.5 Accounting Principles. All accounting computations required to be made for the purposes of this Agreement and all financial statements required under this Agreement shall be done or prepared in accordance with GAAP, except where such principles are inconsistent with the express requirements of this Agreement. 12.6 Total Agreement. This Agreement and all other agreements referred to herein or delivered in connection herewith shall constitute the entire agreement between the parties relating to the subject matter hereof, shall rescind all prior agreements and understandings between the parties hereto relating to the subject matter hereof, and shall not be changed or terminated orally. 12.7 Governing Law. This Agreement and all transactions hereunder, and all the rights and obligations of the parties hereto, shall be governed by the laws of the state of New Jersey, without reference to its conflict of law rules. /s/ KBG -------- INITIALS 12.8 Survival. All warranties, representations, and covenants made by Borrower under this Agreement shall be considered to have been relied upon by Lender and shall survive the delivery to Lender of the Note regardless of any investigation made by Lender or on its behalf. 12.9 Time of the Essence. Borrower acknowledges and agrees that time is of the essence with respect to all of its obligations hereunder. 29 36 12.10 Power of Attorney. Borrower hereby appoints Lender, and its agents and designees, the true and lawful agents and attorneys-in-fact of Borrower, with full power of substitution, to do any of the following upon the occurrence and continuation of an Event of Default: (a) receive, open, and dispose of all mail addressed to Borrower relating to the Collateral; (b) notify and direct the United States Postal Service authorities by notice given in the name of Borrower and signed on its behalf, to change the address for delivery of all mail addressed to Borrower relating to the Collateral to an address to be designated by Lender, and to cause such mail to be delivered to such designated address where Lender may open all such mail and remove therefrom any notes, checks, acceptances, drafts, money orders or other instruments in payment of the Collateral in which Lender has a security interest hereunder and any documents relative thereto, with full power to endorse the name of Borrower upon any such notes, checks, acceptances, drafts, money order or other form of payment or on Collateral or security of any kind and to effect the deposit and collection thereof, and Lender shall have the further right and power to endorse the name of Borrower on any documents otherwise relating to such Collateral; (c) sign the name of Borrower to drafts against Contract Debtors or other account debtors, to send notices to such Contract Debtors or account debtors, to execute on behalf of Borrower assignments, notices of assignments, financing statements and other public records and notices on all other instruments or documents; and (d) do any and all other things necessary or proper to carry out the intent of this Agreement and to perfect and protect the Liens and rights of Lender created under this Agreement. Borrower agrees that neither Lender nor any of its agents, designees or attorneys-in-fact will be liable for any acts of commission or omission, or for any error of judgment or mistake of fact or law. The powers granted hereunder are coupled with an interest and shall be irrevocable until the Loan and all other Obligations are paid in full. Lender shall have the right to apply all money or security otherwise due to Borrower to the payment of any of the Advances or other sums payable pursuant to this Agreement at such time and in such order of application as Lender may determine. 12.11 Arbitration. (a) Any controversy or claim between or among the parties arising out of or relating to this Agreement or any agreements or instruments relating hereto or delivered in connection herewith and any claim based upon or arising from an alleged tort, shall at the request of any party be determined by arbitration. The arbitration shall be conducted in accordance with the United States Arbitration Act (Title 9, U.S. Code), notwith-standing any choice of law provision in this Agreement, and under the Commercial Rules of the American Arbitration Association ("AAA"). The arbitration shall be conducted within Camden County, New Jersey, or such other county as Borrower and Lender may agree. The arbitrator(s) shall give effect to statutes of limitation in determining any claim. Any controversy concerning whether an issue is arbitrable shall be determined by the arbitrator(s). Judgment upon the arbitration award may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (b) No provision of this section shall limit the right of any party to this Agreement to exercise self-help remedies such as setoff, to foreclose against or sell any real or personal property collateral or security, or to obtain provisional or ancillary remedies from a court of competent jurisdiction before, after, or during the pendency of any arbitration or other proceeding. The exercise of a remedy does not waive the right of either party to resort to arbitration. 30 37 12.12 Litigation. Subject to the provisions of section 12.11, state and federal courts located in the state of New Jersey shall have jurisdiction (but not exclusive jurisdiction) to hear and determine any claims or disputes between Borrower and Lender, pertaining to this Agreement. Borrower waives any right it may have to assert the doctrine of forum non conveniens or object to such venue. Borrower expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in such courts. /s/ KBG -------- INITIALS 12.13 Severability. To the extent any provision of this Agreement is not enforceable under applicable law, such provision shall be deemed null and void and shall have no effect on the remaining portions of the Agreement. 12.14 Participating Lender's Security Interests. If a Participant shall at any time, with Borrower's knowledge, participate with Lender in the Loan, Borrower grants to each such Participant and Lender and each such Participant shall have and are hereby given, a continuing security interest and Lien on any money, securities, and other Property of Borrower in the custody of the Participants, including the right of setoff, to the extent of the Participant's participation in the Obligations, and such participant shall be deemed to have the same right of setoff to the extent of Participant's participation in the Obligations under this Agreement as it would have if it were the direct lender. 12.15 Jury Trial Waiver, Etc. SUBJECT TO THE ARBITRATION PROVISION OF SECTION 12.11, BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY (WHICH LENDER ALSO WAIVES) AND THE RIGHT TO IMPOSE ANY NON-COMPULSORY COUNTERCLAIM IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND (REGARDLESS OF THE THEORY OF LIABILITY SUCH AS TORT AND NON-TORT THEORIES) ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OBLIGATIONS, OR THE COLLATERAL. BORROWER EXPRESSLY ACKNOWLEDGES THE INCLUSION OF THIS JURY TRIAL WAIVER THROUGH THE INITIALS OF ITS DULY AUTHORIZED REPRESENTATIVE. /s/ KBG -------- INITIALS IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. LENDER AND SECURED PARTY BORROWER Agreed to, accepted, and signed at Premier Financial Services, Inc., Cherry Hill, New Jersey a South Carolina corporation BankAmerica Business Credit, Inc., a Delaware corporation by -------------------------------- Keith B. Giddens, Chief Executive Officer by by ---------------------------- -------------------------------- Joseph F. Pignotti, H. Kim Bullard, Secretary Executive Vice President 31 38 EXHIBIT 1.16 TO LOAN AND SECURITY AGREEMENT COLLECTION ACCOUNT AGREEMENT This Collection Account Agreement ("Agreement") is made as of April , 1995, by and between BankAmerica Business Credit, Inc. ("Lender"), a Delaware corporation, doing business as BA Business Credit, Inc., located at 200 Lake Drive East, Suite 201, Cherry Hill, New Jersey 08002; ________________ ("Bank") located at ______________________; and Premier Financial Services, Inc. ("Company"), a South Carolina corporation, located at 415 A Farrs Bridge Road, Greenville, South Carolina 29610. WITNESSETH Whereas, Company authorizes and/or has established with Bank, at its office specified above Special Depository Account No. _________________ with the title _______________________ ("Collection Account"); and Whereas, Company has, pursuant to a financing agreement, pledged, assigned, and granted to Lender a continuing security interest in certain property described therein, including, without limitation, all present and future accounts, contract rights, instruments, documents, chattel paper and general intangibles of Company, and all proceeds thereof, which may from time to time be deposited in the Collection Account. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties agree as follows. AGREEMENT 1. Deposits into Collection Account. Company agrees that all payments, whether in cash, by check or other instrument, or otherwise, received by Company from its customers shall be deposited by Company in the Collection Account. Company shall furnish to Lender each day a collection report setting forth, in such reasonable detail as Lender may request, the deposits made during each day in the Collection Account, together with a copy of each deposit slip issued in connection with such deposits. 2. Collection Account Drawing Rights. Company authorizes and directs that the sole signatories authorized to withdraw amounts from, to draw upon, or to otherwise exercise any powers with respect to, the Collection Account and the funds deposited therein, are and shall be the employees of Company identified on Exhibit "A" attached hereto and made a part hereof, and the officers or agents of Lender identified on Exhibit "B" attached hereto and made a part hereof or such other persons as Lender may from time to time designate in writing to Bank. Funds deposited into the Collection Account may be withdrawn subject to the Bank's funds availability schedule applied to corporate (wholesale or non-retail) accounts, at any time or from time to time. Until such time as Lender gives Bank Notice described in paragraph 6. hereof, the parties agree that all funds deposited in the Collection Account from time to time shall be held by Bank for Company, shall be the property of Company, and all collected funds may be withdrawn, at any time or from time to time, by check, draft, wire transfer, or otherwise as Company shall determine. After receipt of Notice from Lender in accordance with paragraph 6., below, all funds deposited in the Collection Account shall be held by Bank for Lender, shall be the 1 39 property of Lender, and may be withdrawn from time to time by Lender, and Company shall have no further authority to withdraw any amount from, to draw upon, or to otherwise exercise any powers as a depositor or owner with respect to the Collection Account and the funds deposited therein. Company shall not give, and Bank shall not honor, any instructions to change the authorized signatories on the Collection Account unless such instructions are given, or approved, in writing by Lender. 3. Security Interest in Items to be Deposited. Lender and Company agree that all checks, money orders, and other evidences of payment deposited in the Collection Account, which checks will be made payable to Company without Company's endorsement, from time to time shall be held by Bank for Company or Lender, as appropriate, and subject to the security interest of Lender. 4. Charges to Collection Account. Bank will not charge or debit, or exercise any right of offset or banker's Lien against, the Collection Account except as provided below. Bank may charge the Collection Account for any items deposited in the Collection Account which are returned for any reason or otherwise not collected and may charge the Collection Account for all service charges, commissions, expenses, and other items ordinarily chargeable to the Collection Account. If there are not sufficient funds in the Collection Account to pay such amounts, then Company agrees to pay Bank within ten business days of written demand all such amounts, regardless of any other collection efforts Bank may have expended. If Company does not pay Bank such amounts within ten business days, then Lender agrees to pay Bank within ten business days of written demand (i) all service charges, commissions, and expenses ordinarily chargeable to the Collection Account, and (ii) after delivery of the Notice from Lender in accordance with paragraph 6., items deposited in the Collection Account which are returned for any reason or not collected otherwise. Company and Lender acknowledge Company is obligated to pay all customary and reasonable Bank charges resulting from the Collection Account. Company agrees to reimburse Lender for any monies that Lender forwards to Bank in settlement of any charges as detailed above. In the absence of willful misconduct on the part of Bank, Company agrees to bear all risk of loss associated with the Collection Account. Bank hereby agrees to accept cash payment in lieu of balances as compensation for service charges incurred on, or normally charged to, the Collection Account. 5. Collection Account Records. Company hereby instructs Bank and Bank agrees to furnish to Lender, with a copy to Company, bank statements with respect to the Collection Account which are customarily provided to customers of Bank at the times such statements are normally provided to customers of Bank, through the normal method of transmission, U.S. Mail. Additionally, Company hereby instructs Bank and Bank agrees to make available to Lender and Company, upon request, copies of all daily debit and credit advices of the Collection Account. 6. Bank's Notice. Bank will take the following actions upon receipt of written notice ("Notice") from Lender: a. Bank shall (and in the event of such a Notice, Company hereby irrevocably authorizes and instructs Bank to) cease honoring all drafts, demands, withdrawal requests, or remittance instructions by Company made after receipt of Notice. b. Following the receipt of the Notice and at all times thereafter, Bank shall hold solely for the account of Lender all funds which may be on deposit in the Collection Account at the time the Notice is received by Bank and all funds thereafter deposited into the Collection Account, and Bank will remit all such collected funds (subject to paragraph 4., above) directly to Lender, in accordance with 2 40 Bank's procedures then in effect as the funds are collected, by electronic transfers to the account indicated below. After receipt of the Notice, Bank hereby agrees and acknowledges that all collected funds in the Collection Account shall be forwarded by wire transfer to BA Business Credit, Inc., account number 910-2-693307 ("Concentration Account"), at Chase Manhattan Bank, New York, New York, ABA No. 021000021, or such other bank as Lender may from time to time designate in writing and, on a daily basis, Bank will initiate an automated clearing house transfer to move collected funds from Bank to the Concentration Account and Lender shall have sole control over the Collection Account and the sole right to exercise and enforce all rights and remedies with respect thereof. The Notice shall be effective when it is received by Bank in writing at the address set forth in paragraph 9., below (or at such other address as Bank may specify by written notice received by Lender) and when Bank has had a reasonable time, based upon the same standards as those applicable to payment and stop payment instructions generally, to act thereon. 7. Termination. Upon receipt of Lender's prior written consent, this Agreement may be terminated by Bank or Company at any time by giving 30 days prior written notice to the other party. 8. Modification of Agreement. This Agreement cannot be changed, modified or terminated without the written consent of Lender. 9. Notices. All notices or demands by any party on the other relating to this Agreement shall, except as otherwise provided herein, be in writing. Notices shall be deemed received within five business days after being deposited in a United States post office box, postage prepaid, properly addressed to Company, Lender, or to Bank at the addresses stated below, subject to the earlier receipt thereof as described in paragraph 6.(b). Notices may also effectively be given by transmittal over electronic transmitting devices such as NBI, TWIX, Telex or telecopy machine, if the party to whom the notice is being sent has such a device in its office, provided a complete copy of any notice so transmitted shall also be mailed in the same manner as required for a mailed notice. Notices given by electronic transmitting devices shall be deemed effective on the day of transmission. All notices, including telephone notices, daily debit and credit advices, monthly statements of account, photocopies, returned items and general correspondence shall be sent to the following addresses and, where applicable given at the following telephone numbers or to such other person or address as any party shall designate to the others from time to time in writing: A. BankAmerica Business Credit, Inc. 200 Lake Drive East, Suite 201 Cherry Hill, NJ 08002 Attention: Cindy Contini Telephone: 609-482-9500 Facsimile: 609-482-7075 B. Premier Financial Services, Inc. 415 A Farrs Bridge Road Greenville, SC 29610 Attention: Kim Bullard Telephone: 803-246-6159 Facsimile: 803-246-2327 3 41 C. Attention: Telephone: Facsimile: 10. Notice of Legal Process. If Bank receives any notice of legal process of any kind relating to Company, Bank shall use its best efforts to give reasonable oral notice to Lender of such legal process. 11. Indemnification. Company hereby agrees to indemnify and hold Bank harmless from and against any and all liabilities, losses, costs, and expenses incurred directly or indirectly by Bank as a consequence of Bank executing this Agreement and performing its obligations hereunder, including reasonable attorney's fees. Under no circumstances will Bank be liable for any consequential or special damages to Company, Lender or any third party, as a result of this Agreement. 12. Successors and Assigns; Governing Law. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the parties and shall be governed by and construed in accordance with the laws of the state of New Jersey. 13. Counterparts. 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 delivered shall be deemed an original but all such counterparts together shall constitute one and the same instrument. 14. Agreement Duly Authorized. All parties hereto represent and warrant that they have taken all actions and obtained all authorizations, consents and approvals as are conditions precedent to their authority to execute this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date shown above. "LENDER" BankAmerica Business Credit, Inc., a Delaware corporation By: ------------------------------------------- Joseph F. Pignotti, Executive Vice President "COMPANY" Premier Financial Services, Inc., a South Carolina corporation By: ------------------------------------------- 4 42 Keith B. Giddens, Chief Executive Officer "BANK" -------------------------------------------- By ------------------------------------- --------------------------------------- Name and Title Accepted this ___day of April___, 1995. 5 43 EXHIBIT "A" TO COLLECTION ACCOUNT AGREEMENT Authorized Persons - Company
Name Signature Exemplar ---- ------------------ 1. --------------- ----------------- 2. --------------- ----------------- 3. --------------- -----------------
1 44 EXHIBIT "B" TO COLLECTION ACCOUNT AGREEMENT Authorized Persons - Lender
Name Signature Exemplar ---- ------------------ 1. --------------- ----------------- 2. --------------- ----------------- 3. --------------- -----------------
1 45 SCHEDULE 5.3 TO LOAN AND SECURITY AGREEMENT [LOCATION OF BORROWER'S BOOKS AND RECORDS AND COLLATERAL] 415 A Farrs Bridge Road Greenville, SC 29610 4126 Clemson Boulevard Suite 2C Anderson, SC 29621 1 46 EXHIBIT 7.17 TO LOAN AND SECURITY AGREEMENT [LIST OF PLANS] NONE 1 47 SCHEDULE 10.2 TO LOAN AND SECURITY AGREEMENT [LIST OF REQUIRED CLOSING DOCUMENTS] Lender shall have received on or before the first Closing Date all of the following documents which shall be satisfactory to Lender in form and content: 1. Certificate of Secretary 2. UCC-1 financing statements 3. Certificate of good standing 4. Opinion of Borrower's counsel 5. Certificate of Borrower's chief financial officer 6. Continuing Guaranty of Carolina Investors and Emergent Financial 7. Certificate of Secretary of Carolina Investors and Emergent Financial 8. Opinion of Carolina Investor's Counsel Re Haskett Realty Corp. lawsuit 9. Collection Account Agreement 1 48 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT This Amendment No. 1 to Loan and Security Agreement ("Amendment") is entered into as of January 16, 1996, by and between BankAmerica Business Credit, Inc., a Delaware corporation ("Lender"), and Premier Financial Services, Inc. ("Borrower"), a South Carolina corporation. RECITALS This Amendment is entered into in reference to the following facts: (a) Borrower and Lender entered into a certain Loan and Security Agreement, dated as of April 10, 1995 (the Loan and Security Agreement, as amended, modified, and supplemented prior to the date hereof being hereinafter referred to as the "Loan Agreement"). The Loan Agreement and all other documents evidencing the loan documented thereby and the security therefore are hereinafter collectively referred to as the "Loan Documents." All capitalized terms, not expressly defined herein, shall have the meanings ascribed thereto in the Loan Documents. (b) Borrower's Obligations under the Loan Documents have been guaranteed by Carolina Investors, Inc., a South Carolina corporation, and Emergent Financial Corporation, a South Carolina corporation (individually, "Guarantor" and collectively, "Guarantors"), under Continuing Guaranties, dated April 10, 1995. (c) Borrower desires to amend the Loan Agreement. Lender is willing to amend the Loan Agreement subject to the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto hereby agree as follows. ARTICLE ONE - AMENDMENTS TO LOAN AGREEMENT 2 Amendment of Section 1.2. Section 1.2 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "1.2 Adjusted Tangible Net Worth means, at any date, the remainder of (a) net book value (after deducting related depreciation, obsolescence, amortization, valuation, and other proper reserves as determined in accordance with GAAP) at which the Adjusted Tangible Assets of Borrower would be shown on a balance sheet of Borrower at such date prepared in accordance with GAAP, minus (b) the amount at which its liabilities (other than capital stock, surplus, and retained earnings) would be shown on such balance sheet and the Repossession Inventory Adjustment, and including as liabilities all reserves for contingencies and other potential liabilities which would be shown on such balance sheet or disclosed in the footnotes thereto." 2.1 Amendment of Section 1.8. Section 1.8 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "1.8 Availability shall mean, as of any date of calculation, the Advance Rate multiplied by the aggregate amount of all Net Contract Payments to be made under all of Borrower's Eligible Contracts." 2.2 Deletion of Subsections 1.24 l and n. Subsections 1.24 l and 1.24 n of the Loan Agreement are hereby deleted from the Loan Agreement in their entirety and shall be of no further force or effect. 49 2.3 Amendment of Section 1.54. Section 1.54 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "1.54 Total Credit Facility shall mean $6,000,000." 2.4 Amendment of Article One. Article One of the Loan Agreement is hereby amended by the addition of 11 new sections, numbered 1.56, through and including 1.66, which shall read in their entirety as follows: "1.56 Adjusted Net Earnings from Operations means, with respect to any fiscal period of Borrower, Borrower's net income after provision for income taxes for such fiscal period, as determined in accordance with GAAP and reported on the financial statements for such period, less any and all of the following included in such net income: (a) gain arising from the sale of capital assets; (b) gain arising from any write-up in the book value of any asset; (c) earnings of any corporation, substantially all the assets of which have been acquired by Borrower in any manner, to the extent realized by such other corporation prior to the date of acquisition; (d) earnings of any business entity in which Borrower has an ownership interest unless (and only to the extent) such earnings shall actually have been received by Borrower in the form of cash distributions; (e) earnings of any person to which assets of Borrower shall have been sold, transferred or disposed of, or into which Borrower shall have been merged or which has been a party with Borrower to any consolidation or other form of reorganization, prior to the date of such transaction; (f) gain arising from the acquisition of any debt or equity security of Borrower or from cancellation or forgiveness of Debt; and (g) gain arising from extraordinary items, as determined in accordance with GAAP, or from any other nonrecurring transaction. 1.57 "Interest Coverage Ratio" means, for any period, the ratio of (a) Adjusted Net Earnings from Operations for such period plus the sum of the following to the extent deducted in computing Adjusted Net Earnings from Operations: (i) tax expense and (ii) total interest expense over (b) total interest expense during such period. 1.58 Actual Charge Off Percent means, as of any date of calculation, the percent (rounded to the nearest whole percent) resulting from dividing (a) the aggregate amount of all of Borrower's Net Charge Off's during each of the twelve (12) months immediately preceding the date of calculation, by (b) the average monthly amount of Borrower's Net Contracts Payments outstanding as of the last day of each of those twelve (12) months. 1.59 Advance Rate means (a) eighty-five percent (85%) minus (b) the sum of the Charge Off Adjustment Percent plus the Delinquency/Repossession Adjustment Percent. 1.60 Charge Off Adjustment Percent means the excess, calculated as of the first day of each month, of the Actual Charge Off Percent over three percent (3%). 1.61 Delinquency/Repossession Adjustment Percent means, as of any date of calculation, (a) one percent (1%) when the average Delinquency/Repossession Percent for the two months immediately preceding such date is greater than six percent (6%), but less than seven percent (7%), and (b) two percent (2%) when the average Delinquency/Repossession Percent for the two months immediately preceding such date is equal to or greater than seven percent (7%). 1.62 Delinquency/Repossession Percent means the percent (rounded to the nearest whole percent), calculated as of the first day of each month, by dividing (a) the aggregate -2- 50 amount of the Net Contract Payments owing under all of Borrower's Contracts with respect to which any payment due thereunder is more than sixty (60) days past due, as determined on a contractual basis, as of the last day of each of the three (3) months immediately preceding the date of calculation, plus the Repossession Value of all Vehicles which Borrower has repossessed but has not sold as of the date of calculation, by (b) the average monthly amount of Borrower's Net Contracts Payments outstanding as of the last day of each of those three (3) months. 1.63 Repossession Value means, as of any date of determination, the lesser of (a) the Net Contract Payments then owing under a Vehicle Contract with respect to which the subject Vehicle has been repossessed by Borrower, or (b) the value of such Vehicle, as determined by the then most recently published edition of the Guide and Black Book, as appropriate. 1.64 Vehicle Contract means a Contract which is a motor vehicle retail installment Contract and a Contract arising from a loan made by Borrower to a Contract Debtor and secured by a Lien on a Vehicle. 1.65 Guide and Black Book means, respectively, the National Automobile Dealers Association Official Used Car Guide and the National Auto Research Black Book. In the event that either of those publications shall, at any time, cease to be published, then Lender shall, in its sold discretion, select a comparable publication. 1.66 Repossession Inventory Adjustment means, as of any date of calculation, the Repossession Value of all Vehicles with respect to which more than ninety (90) days have elapsed since the date such Vehicles were repossessed by Borrower without having been sold during such ninety (90)-day period." 2.5 Amendment of Section 3.1. Section 3.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "3.1 Interest Rate. The Loan, until paid in full, shall bear interest on the unpaid principal balance thereof from the initial funding date of each Advance, at the Reference Rate plus three-quarters of one percent (0.75%) per annum. The interest rate shall be adjusted as, when, and effective as of the date any change in the Reference Rate occurs. Changes in the Reference Rate shall occur without notice or demand of any kind." 2.6 Amendment of Section 4.1. Section 4.1 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "4.1 Term of Agreement and Loan Repayment. This Agreement shall have a term commencing on April 10, 1995, and terminating on December 31, 1997 ('Maturity Date'). The Loan shall be due and payable in full on the Maturity Date without notice or demand and shall be repaid to Lender by a wire transfer of immediately available funds. Borrower may terminate this Agreement prior to the Maturity Date by: (a) giving Lender at least sixty (60) days prior notice of intention to terminate this Agreement; (b) paying and performing, as appropriate, all Obligations on or prior to the effective date of termination; and (c) paying to Lender an early termination fee equal to (i) one percent (1%) of the Total Credit Facility in the event the effective date of termination is before December 20, 1996; and (ii) one-half of one percent (.5%) of the Total Credit Facility in the event the effective date of termination occurs on or after December 20, 1996, but before December 31, 1997. No early termination fee shall apply thereafter. Notwithstanding the foregoing, upon the occurrence of an Event of Default, Lender -3- 51 may immediately terminate further performance under this Agreement without notice or demand." 2.7 Amendment of Section 6.4. The phrase "seven and one-half percent (7.5%)," appearing in Section 6.4 of the Loan Agreement, is hereby amended to be "five (5.0%) percent." 2.8 Amendment of Section 8.7. Section 8.7 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "8.7 Total Debt Ratio. Borrower shall not permit the ratio, calculated as of the last day of each month, of (a) the aggregate amount of all Debt to (b) Adjusted Tangible Net Worth, to be more than: (a) 15 to 1 prior to December 1, 1996, and (b) 10 to 1 thereafter." 2.9 Deletion of Section 8.8. Section 8.8 of the Loan Agreement is hereby deleted from the Loan Agreement in its entirety and shall be of no further force or effect. 2.10 Deletion of Section 8.9. Section 8.9 of the Loan Agreement is hereby deleted from the Loan Agreement in its entirety and shall be of no further force or effect. 2.11 Amendment of Section 8.16. Section 8.16 of the Loan Agreement is hereby amended and restated to read in its entirety as follows: "8.16 Intercompany Management Fees. Borrower shall not, directly or indirectly pay in any form (including without limitation salary, bonuses, commissions, fees, and incentive compensation) any fees or other Debt due from Borrower to any Affiliate for services rendered or facilities provided to Borrower by such Affiliate. Notwithstanding the foregoing provisions of this Section 8.16, Borrower may pay such administrative and overhead expenses (including taxes) as are, from time to time, reasonably allocated to Borrower by Emergent Group, Inc., provided: (a) the amount paid to Emergent Group, Inc. as a management fee in any Fiscal Year does not exceed the greater of thirty thousand dollars ($30,000) or thirty-four percent (34%) of the Borrower's Adjusted Net Earnings from Operations for such Fiscal Year, before provision for income taxes for such period (with the provision for income taxes being calculated for Borrower without reference to the taxable income of any other Person); and (b) no Default or Event of Default exists at the time of such payment." 2.12 Amendment of Article Eight. Article Eight of the Loan Agreement is hereby amended by the addition of a new section, numbered 8.24, which shall read in its entirety as follows: "8.24 Interest Coverage Ratio. Commencing with the quarter ending March 31, 1996, Borrower will maintain an Interest Coverage Ratio, calculated as of the last day of each quarter in each Fiscal Year for the period commencing on the first day of such Fiscal Year to the date of calculation, of not less than 1.15 to 1." 2.13 Amendment of Section 11.1. Section 11.1 of the Loan Agreement is hereby amended by the addition of a new subsection "r," which shall read in its entirety as follows: "r. the Delinquency/Repossession Percent is at any time greater than eight percent (8%)." ARTICLE TWO - REPRESENTATIONS AND WARRANTIES -4- 52 2.1 Borrower's Representations, Warranties, and Covenants. Borrower hereby represents and warrants that (a) the execution and delivery of this Amendment and compliance by Borrower with all of the provisions of this Amendment (i) are within the powers and purposes of Borrower; (ii) have been duly authorized or approved by Borrower; and (iii) when executed and delivered by or on behalf of Borrower, will constitute valid and binding obligations of Borrower, enforceable in accordance with its terms; (b) Borrower has no offsets or counterclaims against Lender or defenses to the payments due under the Loan Documents; (c) Lender has a first perfected security interest in the Collateral for the Loan; and (d) the recitals in this Amendment are true. Borrower reaffirms its obligation to pay all amounts due Lender under the Loan Documents in accordance with the terms thereof, as modified hereby. ARTICLE THREE - GENERAL PROVISIONS 3.1 Loan Documents Unmodified. Except as otherwise specifically modified by this Amendment, all terms and provisions of the Loan Documents and all liens and security interests created thereby shall remain unmodified and in full force and effect. Nothing contained in this Amendment shall in any way impair the validity or enforceability of the Loan Documents, as modified hereby, or alter, waive, annul, vary, affect, or impair any provision, condition, or covenant contained therein or any rights, power, or remedy granted therein. 3.2 Construction of Amendment. Each party hereto has cooperated in the drafting and preparation of this Amendment and, as a result, this Amendment shall not be construed against any party. This Amendment may be amended or modified only by a written agreement signed by the parties hereto. This Amendment may be executed in counterparts. 3.3 Parties, Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 3.4 Total Agreement. This Amendment, and all other agreements referred to herein or delivered in connection herewith, shall constitute the entire agreement between the parties relating to the subject matter hereof and shall not be changed or terminated orally. 3.5 Severability. To the extent any provision of this Amendment is not enforceable under applicable law, such provision shall be deemed null and void and shall have no effect on the remaining portions of the Amendment. IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and year first above written. "BORROWER" Premier Financial Services, Inc., a South Carolina corporation Dated: January 16, 1996 By: /s/ ------------------------------- Keith B. Giddens, Chief Executive Officer Dated: January 16, 1996 By: /s/ ------------------------------- H. Kim Bullard, Secretary -5- 53 "LENDER" BankAmerica Business Credit, Inc., a Delaware corporation Dated: January __, 1996 By: /s/ ------------------------------ Joseph F. Pignotti, Executive Vice President GUARANTY REAFFIRMATION In consideration of the agreements and amendments made by the Lender in this Amendment and to induce the Lender to take such action (acknowledging that the Lender would not do so without this reaffirmation and consent), each Guarantor hereby ratifies, reaffirms, and continues in full force and effect the Guaranties. The Guaranties shall each continue for all purposes notwithstanding the amendments, modifications, and other actions embodied in this Amendment. Each Guarantor represents, acknowledges, and agrees that each Guaranty constitutes the valid, legally binding, joint and several obligations of the each Guarantor, enforceable against him/her/it in accordance with its terms and that the liability of Guarantors under the Guaranties shall not be affected in any way by the execution and delivery of this Amendment or by the consummation of the transactions contemplated thereby. "GUARANTORS" Carolina Investors, Inc., a South Carolina corporation Dated: January 14, 1996 By: /s/ --------------------------------- Keith B. Giddens, Chief Executive Officer Emergent Financial Corporation, a South Carolina corporation Dated: January 14, 1996 By: /s/ --------------------------------- Keith B. Giddens, Chief Executive Officer -6- EX-10.7 7 LOAN & SECURITY AGREEMENT ($32,000,000) 1 Exhibit 10.7 ------------------------------ LOAN AND SECURITY AGREEMENT dated as of December 29, 1993 between NationsBank of Georgia, N.A., Lender, and Emergent Business Capital, Inc., Borrower. $32,000,000 ------------------------------ i 2 TABLE OF CONTENTS
Section Page ------- ---- 1. DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3 USE OF DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.4 SECTION AND EXHIBIT REFERENCES, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. AMOUNT AND TERMS OF THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1 THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.4 CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.5 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.6 PAYMENT ON NON-BANKING DAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.7 EFFECTIVE DATE AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.8 STATEMENTS OF ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3. SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. CONDITIONS PRECEDENT TO ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.2 OTHER CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5. CLOSING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.1 TRANSFERS OF SBA LOAN DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.2 RELEASE OF SECURITY INTEREST IN SBA COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6. GENERAL REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.1 ORGANIZATION, STANDING, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.2 ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.3 QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC . . . . . . . . . . . 14 6.5 SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.7 CHANGES IN FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.8 TAX RETURNS AND PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.11 LITIGATION, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.12 ADVERSE DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.13 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.14 MARGIN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.15 INVESTMENT COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
-i- 3 6.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.17 LOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.18 SOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.19 NAME CHANGE; MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.1 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.2 TAXES AND LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.4 INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . 19 7.6 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.7 NOTICE OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.8 MAINTENANCE OF PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.9 NOTICE OF ERISA DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.11 PAYMENT OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION . . . . . . . . . . . . . . . . . . . . . . . . 21 7.13 TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.15 SUBORDINATED DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.16 INTEREST COVERAGE RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.1 DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.2 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.3 GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.4 PLAN LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.5 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.6 OTHER TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.7 MERGER; SUBSIDIARY; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.8 SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.9 CHANGES IN BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.10 DIVIDENDS AND REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.11 LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.12 PLEDGE OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.13 INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 8.14 CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9. POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 10. REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11.1 NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11.2 AMENDMENTS, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11.3 ADDRESSES FOR NOTICES, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
-ii- 4 11.4 COSTS, EXPENSES, AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 11.5 COMMERCIAL TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 11.6 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 11.8 TIME IS OF THE ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.9 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.10 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.11 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.12 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.13 GOVERNING LAW; CONSENT TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 11.14 WAIVER OF TRIAL BY JURY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Exhibits: Exhibit A - - Form of Borrower's Secretary's Certificate (Section 1.1) Exhibit B - - Form of Borrower's CEO's Certificate (Section 1.1) Exhibit C - - Form of Opinion (Section 1.1) Exhibit D - - Form of Escrow Agreement (Section 1.1) Schedules: Schedule 1 - - Liens (Section 8.2) Schedule 2 - - Trademarks, Trade Names, Name Changes, etc. (Sections 6.10 and 6.19) Schedule 3 - - Litigation (Section 6.11)
-iii- 5 LOAN AND SECURITY AGREEMENT This Agreement is made as of the 29th day of December, 1993, between NationsBank of Georgia, N.A. (the "Lender") and Emergent Business Capital, Inc. (the "Borrower"), a South Carolina corporation. The Borrower wants the Lender to finance the Borrower's SBA loan portfolio, and the Lender is willing to make such financing available upon the conditions and terms set forth in this Agreement. The Borrower and the Lender therefore agree as follows: 1. DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. The following terms, when capitalized as in this Section 1.1, shall have the following meanings: "Advance": the proceeds of a Loan. "Affiliate" of any designated Person: another Person controlling, controlled by, or under common control with such designated Person (but not including the Lender), and shall include (x) the spouse, parents, brothers, sisters, children, and grandchildren of such designated Person, (y) any association, partnership, trust, entity, or enterprise in which such designated Person is a director, officer, or general partner or in which such designated Person together with Affiliates of such designated Person own in the aggregate at least a 10% beneficial interest in assets, profits, or losses, and (z) any Subsidiary of such designated Person. "Banking Day": a day for dealings by and between banks, excluding Saturday, Sunday, any legal holiday in Atlanta, Georgia, and any other day on which banking institutions in Atlanta, Georgia are generally closed. "Borrower's CEO's Certificate": the Certificate of the Borrower's Chief Executive Officer, substantially in the form of Exhibit B. "Borrower's Secretary's Certificate": the Certificate of the Borrower's Secretary, substantially in the form of Exhibit A. "Borrowing Base": defined in Section 2.1(a). "Capital Expenditures": the dollar amount of gross expenditures (including obligations under leases which are required under GAAP to be capitalized for financial reporting purposes) made or incurred for fixed assets, real property, and plant and equipment which are required to be capitalized for financial reporting purposes in accordance with GAAP. "Code": the Internal Revenue Code of 1986, as amended. 1 6 "Collateral": all property described in Section 3 hereof, and all the Borrower's other property in which the Lender at any time has a security interest or which at any time are in the Lender's possession or control. "Default": (x) an event, act, or condition that would be an Event of Default but for the requirement(s) that notice be given or time elapse, or (y) an Event of Default. "EBIT": the Borrower's total earnings from all sources, excluding extraordinary items, before deducting interest or income tax expense, but after deducting depreciation and amortization expense. "Eligible SBA Loan: an SBA Loan which is closed pursuant to an issued SBA Authorization and Loan Agreement and which meets the Lender's funding requirements. "Eligible Stub Loan": the Non-Guaranteed Portion of an Eligible SBA Loan that (1) is not 60 days or more past due, (2) is owned by the Borrower, (3) is assignable to the Lender, (4) is collateralized and guaranteed in a manner satisfactory to the Lender, (5) is not subject to any offset, recoupment, counterclaim, or defense in favor of the borrower thereunder, and (6) is otherwise satisfactory to the Lender. "Eligible Warehoused Loan": the Guaranteed Portion of an Eligible SBA Loan that is not more than 90 days old (measured from the final funding date), that is owned by the Borrower and has not been sold on the secondary market, that is assignable to the Lender, and for which the Borrower has provided the Lender with a copy of the related SBA approval and the form of the related SBA Note, a copy of the related form 1050 settlement sheet in the case of any multiple-disbursement SBA Loan, and such other documentation as the Lender reasonably requests, by fax or otherwise. "Escrow Agent": any escrow agent selected by the Borrower and the Lender from time to time to maintain possession of certain documents pursuant to Section 5 hereof, and pursuant to an Escrow Agreement to be executed by the Borrower, the Lender, and such escrow agent. "Escrow Agreement": any escrow agreement executed by the Borrower, the Lender, and an Escrow Agent, the approved form of which is attached as Exhibit D. "ERISA": the Employee Retirement Income Security Act of 1974, as amended. "Event of Default": any of the following: (1) non-payment, within seven days after the due date, of any amount payable on any of the Obligations; (2) failure to perform any material agreement or meet any obligation of the Borrower contained herein or in the Subordination Agreement; (3) nonpayment when due of any premium on any insurance policy required to be maintained under Section 7.1 hereof; (4) the existence of a default under any other agreement between the Borrower and the Lender or any affiliate of the Lender's; (5) any statement, representation, or warranty of the Borrower made in writing herein or in any other writing at any time furnished or made by the Borrower to the Lender is untrue in any material respect as of the date furnished or made; (6) suspension of the operation of the Borrower's present business; (7) any Obligor becomes insolvent or unable to pay debts as they mature, admits in writing that it is so, makes a conveyance fraudulent as to creditors under any state or federal law, or makes an assignment for the benefit of creditors, or a proceeding is instituted by or against any Obligor alleging that such Obligor is insolvent or unable to pay debts as they mature, or a petition under any provision of Title 11 of the United States Code (entitled "Bankruptcy"), as amended, is brought by or -2- 7 against any Obligor; (8) entry of any judgment for more than $50,000 against any Obligor; (9) creation, assertion, or filing of any Lien (other than a Permitted Lien) against any of the property of any Obligor; (10) dissolution, merger, or consolidation of any Obligor (other than a merger or consolidation of Borrower or a Guarantor with or into Borrower or a Guarantor); (11) termination or withdrawal of any guarantee for any of the Obligations, or of the Subordination Agreement, or the failure for any other reason of any such guarantee or agreement to be enforceable by the Lender in accordance with its terms; (12) transfer of a substantial part of the property of any Obligor; (13) sale, transfer, or exchange, either directly or indirectly, of a controlling stock interest of the Borrower; (14) appointment of a receiver for the Collateral or for any property in which the Borrower has an interest; (15) seizure of the Collateral by any third party; (16) at least 5% (face value) of the Borrower's loan portfolio (excluding loans that the Borrower acquired in connection with its acquisition of its SBA license, and (for avoidance of doubt) excluding the portion of any loan not owned by the Borrower) are at least 90 days past due, and have remained at least 90 days past due for at least 30 days; or (17) the Lender in good faith believes that the prospect of payment or performance of the Obligations has been impaired. "Four-Party Agreement": the Four-Party Agreement (Relating to SBA Loan Documentation and Administration), dated as of the date of this Agreement, among the Borrower, the Lender, the Lender's Agent, and the SBA. "GAAP": generally accepted accounting principles applied in a manner consistent with the financial statements described in Section 6.6. "Guarantee": a Guarantee, dated the date of this Agreement, of a Guarantor, in favor of the Lender. "Guaranteed Portion": the portion of an Eligible SBA Loan which is guaranteed by the SBA. "Guarantors": Emergent Group, Inc., Emergent Financial Corporation, and Carolina Investors, Inc. "herein", "hereof", "hereunder", etc.: in, of, under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "Insurance": the policy or policies of insurance described in Section 7.1, including all required endorsements thereto. "Interest on NationsBank Debt": the interest on the Obligations during the period for which computation is being made. "Lender's Agent": Carolina First Bank (Greenville, SC), or its successor under the Four-Party Agreement. "Lien": any mortgage, pledge, deed of trust, assignment, security interest, encumbrance, hypothecation, lien, or charge of any kind, including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing -3- 8 of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "Loans": the loan(s) under Section 2.1(a) in the principal amount of up to $32,000,000, plus any Overadvances, made by the Lender to the Borrower under this Agreement. "Non-Guaranteed Portion": the portion of an Eligible SBA Loan which is not guaranteed by the SBA. "Obligations": all present and future (a) duties, obligations, and liabilities of the Borrower to the Lender under this Agreement, or under any document or agreement executed and delivered pursuant to or in connection with this Agreement, (b) sums owing to the Lender for goods or services purchased by the Borrower from any other firm financed by the Lender, (c) obligations under all notes and contracts of suretyship, guarantee, or accommodation made by the Borrower in favor of the Lender, and (d) all other obligations of the Borrower to the Lender, however and whenever created, arising, or evidenced, whether direct or indirect, through assignment from third parties, absolute, contingent, or otherwise, primary or secondary, now or hereafter existing, or due or to become due. "Obligor": the Borrower, any guarantor, or any other party at any time primarily or secondarily, directly or indirectly liable on any of the Obligations. "Opinion": the legal opinion, of counsel to the Borrower satisfactory to the Lender, substantially in the form of Exhibit C. "or": at least one, but not necessarily only one, of the alternatives enumerated. "Overadvances": loans by the Lender to the Borrower in excess of those described in Section 2.1(a). "Permitted Lien": a Lien permitted by Section 8.2. "Person": any individual, joint venture, partnership, firm, corporation, trust, unincorporated organization, or other organization or entity, or a governmental body or any department or agency thereof. "Plan": any present or future employee benefit plan (as defined in Section 3 of ERISA) and any trust created thereunder, covered by Title I or Title IV of ERISA, established or maintained for employees of the Borrower. "Prime Rate": the rate of interest announced by NationsBank of Georgia, N.A. from time to time as its "Prime Rate". "Projections": the Borrower's forecasted consolidated and consolidating balance sheets, profit-and-loss statements, and cash-flow statements, all prepared on a basis consistent with the Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Reportable Event": as defined in Title IV of ERISA. -4- 9 "SBA": the United States Small Business Administration, an agency of the United States government. "SBA Loan": a loan by the Borrower to a small business concern, approved and guaranteed by the SBA pursuant to the Loan Guaranty Agreement (Deferred Participation) between the Borrower and the SBA, dated April 17, 1992. "SBA Note": the promissory note evidencing an SBA Loan. "Securities": any share(s) of beneficial or equity interest or capital stock or any other instrument commonly understood to be a "security", excluding promissory notes issued for money borrowed in commercial transactions. "Solvent": has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage, is able to pay its debts as they mature, and owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its debts. "Stub Loans": Loans made under Section 2.1(a)(ii). "Subordinated Debt": the Borrower's debt that is subordinated (as to right and time of payment) to the Obligations under the Subordination Agreement. "Subordination Agreement": the Agreement of Subordination and Assignment, dated the date of this Agreement, of Carolina Investors, Inc. and the Borrower, in favor of the Lender. "Subsidiary" of any designated corporation: any other corporation more than 20% of the shares of voting stock of which is owned, directly or indirectly, by such designated corporation, including subsidiary of a subsidiary. "Tangible Net Worth": the Borrower's total assets, plus Subordinated Debt, minus Total Liabilities (excluding from the definition of total assets the amount of (a) any write-up in the book value of any asset resulting from a revaluation thereof after December 31, 1992, (b) treasury stock, (c) Receivables and other amounts due from the Borrower's stockholders and other Affiliates, (d) unamortized debt discount and expense and (e) patents, trademarks, trade names, goodwill, deferred charges, organizational expenses and other intangible assets, all determined in accordance with GAAP). "Total Liabilities": all obligations of the Borrower to pay money, excluding Subordinated Debt. "Warehouse Loans": Loans made under Section 2.1(a)(i). 1.2 ACCOUNTING TERMS. All accounting terms used herein shall be construed in accordance with GAAP applied consistently with those principles applied in the preparation of the financial statements referred to in Section 6.6, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP. In the event of ambiguities in GAAP, the more conservative principle or interpretation shall be used. -5- 10 1.3 USE OF DEFINED TERMS. Any defined term used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in Section 1.1, or the term "Agreement", means such agreement or instrument as from time to time supplemented and amended. A definition in singular form applies to the plural form of the term, and vice versa. 1.4 SECTION AND EXHIBIT REFERENCES, ETC. References to sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. 2. AMOUNT AND TERMS OF THE LOANS 2.1 THE LOANS. (a) Revolving Loans. The Lender agrees to make loans to the Borrower, and the Borrower agrees to borrow from the Lender, upon request of the Borrower from time to time, up to (i) 100% of the face value of the Borrower's Eligible Warehoused Loans, and (ii) 65% of the Borrower's Eligible Stub Loans (the sum of clauses (i) and (ii) being the "Borrowing Base"); provided, that the total amount of all Loans outstanding at any time under clause (i) shall not exceed $8,000,000, and the total amount of all Loans outstanding at any time under clause (ii) shall not exceed $13,000,000 on or before the first anniversary of this Agreement and thereafter shall not exceed $24,000,000; provided, further, that the total amount of all Loans outstanding at any time under this Section 2.1(a) shall not exceed the Borrowing Base minus $1,500,000 on the date of this Agreement and minus $1,000,000 thereafter. The amounts of such Loans shall be determined in the sole discretion of the Lender to be consistent with the value of the Eligible Warehoused Loans and the Eligible Stub Loans, taking into account all fluctuations of the value thereof in light of the Lender's experience and sound business principles. Such determinations shall be subject to the requirements of good faith on the Lender's part, the Borrower's undertakings hereunder, and especially the Borrower's grant to the Lender of a security interest in the Collateral as security for the Loans and all other Obligations of the Borrower to the Lender, which will, of necessity, fluctuate in amount, and to the condition that the Lender at all times be fully secured. To the extent necessary to reduce the total amount of all Loans outstanding to the maximum amount then available under clauses (i) and (ii) of this Section 2.1, the Borrower shall pay to the Lender, on demand, the amount of outstanding Loans in excess of that maximum amount. The Guaranteed Portion of an Eligible SBA Loan shall be included in the Borrowing Base when the Borrower has provided the Lender with a copy of the related SBA approval and the form of the related SBA Note (to be signed at the closing of such Loan), a copy of the related form 1050 settlement sheet in the case of a multiple-disbursement SBA Loan, and such other documentation as the Lender reasonably requests, by fax or otherwise. The Non-Guaranteed Portion of an Eligible SBA Loan shall be included in the Borrowing Base (to the extent of 65%, as provided above) at such time as the original, executed SBA Note is delivered to the Lender's Agent (provided that, if such Loan is to be closed by an Escrow Agent, then 65% of the Non-Guaranteed Portion of such Eligible SBA Loan shall be included in the Borrowing Base at the same time that the Guaranteed Portion of such Loan is included in the Borrowing Base). (b) Overadvances. The Lender may make Overadvances as, in its sole and absolute discretion, it determines to lend. Any such Overadvances may be evidenced by a written agreement between the Lender and the Borrower, which agreement may provide, at the Lender's option, for interest and fees on such Overadvances in addition to those specified hereunder. Except to the extent otherwise provided -6- 11 in any such agreement, any such Overadvances shall be "Loans", shall be repayable upon demand, and shall in all other respects be subject to the terms and conditions of this Agreement. 2.2 INTEREST AND OTHER CHARGES. The Loans shall bear interest on the average daily net balance thereof, calculated monthly, at a fluctuating rate of interest equal to the Prime Rate for Warehouse Loans, and to 1.5% per annum above the Prime Rate for Stub Loans. Changes in the rate of interest shall be effected monthly to reflect changes in the Prime Rate, as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Interest shall be due and payable monthly, on the first day of each month, for the preceding month. The final payment of all accrued and unpaid interest shall be due and payable on the date that the outstanding principal amount of the Loans is paid or due and payable in full. After an Event of Default, interest shall also be due and payable upon the Lender's demand from time to time. The Lender shall inform the Borrower of the amount of interest due and payable as of each payment date set forth in the preceding paragraph, and the Borrower shall pay the interest when due or the Lender may, in its discretion, charge such amount to the Borrower's account under this Agreement. As additional consideration for the credit facility established in Section 2.1, the Borrower agrees to pay to the Lender a fee, payable on the first day of each month for the preceding month, equal to the average unused principal portion of the stub loans facility (i.e., $13,000,000 through the first anniversary of this Agreement, and $24,000,000 thereafter, minus the average daily principal amount of Stub Loans outstanding) times 0.125% per annum. For interest computation purposes, Borrower's account will be credited for each remittance received on the day that the underlying funds are collected; the day of receipt of funds shall be deemed to be the following Banking Day if the receipt is after the Lender's cutoff time for receipt of funds or if such day is not a Banking Day. If the outstanding principal amount of the Loans becomes due and payable or if any payment of principal or interest is not timely made, or (at the Lender's option) if any Event of Default exists, interest shall accrue on the unpaid principal balance of the Loans or on such defaulted principal payment, from the date that the Loans became so due and payable or that the defaulted payment was not timely made, at a rate of 4% per annum above the Prime Rate. Changes in the rate shall be effected monthly to reflect changes in the Prime Rate as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Such interest shall continue to accrue until the date of payment of all principal and accrued but unpaid interest or such defaulted payment, as applicable, and shall be due and payable upon demand from time to time by the Lender. 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES. Interest on the Loans, and other periodic charges hereunder, shall be computed on the basis of a 360-day year and actual days lapsed. 2.4 CHARGES. The Borrower and the Lender hereby agree that the only charges imposed by the Lender upon the Borrower for the use of money in connection herewith are and shall be the interest described in Section 2.2. All other charges imposed by the Lender upon the Borrower in connection with the Loans, any commitment fees, collection fees, letter of credit fees, facility fees, -7- 12 origination fees, prepayment charges or early termination fees, default charges, late charges, attorneys' fees, and reimbursement for costs and expenses paid by the Lender to third parties, or for damages incurred by Lender, are and shall be deemed to be charges made to compensate the Lender for underwriting or administrative services and costs and other services or costs performed and incurred, and to be performed and incurred, by the Lender in connection with the Loans, and shall under no circumstances be deemed to be charges for the use of money. In no event shall the amount of interest due or payable hereunder exceed the maximum rate of interest allowed by applicable law, and if any such payment is made by the Borrower or received by the Lender, then such excess sum shall be credited as a payment of principal, unless the Borrower notifies the Lender, in writing, that the Borrower elects to have such excess sum returned to it forthwith. It is the express intent hereof that the Borrower not pay and the Lender not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Borrower under applicable law. 2.5 PAYMENT. All payments by the Borrower shall be made to the Lender at its address referred to in Section 11.3 hereof in lawful money of the United States of America and in immediately available funds. The Borrower shall establish a special collections account, at a bank satisfactory to the Lender (which may be an Affiliate of the Lender's), to collect payments on SBA Loans and pay them to the Lender. Payments on the Non-Guaranteed Portion of an SBA Loan shall be applied to repay the related Stub Loan, then to the other Obligations, and payments relating to the Guaranteed Portion of an SBA Loan shall be applied to repay the related Warehouse Loan, then to the other Obligations, effective when the underlying funds are actually collected. The Borrower shall notify the Lender promptly of the identity of each amount collected, and of how it should be allocated based on the preceding sentence. 2.6 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the following Banking Day, and such extension of time shall be included in the computation of interest. 2.7 EFFECTIVE DATE AND TERMINATION. This Agreement shall be effective on the date set forth in the first paragraph of this Agreement, and shall continue in full force and effect until the third anniversary of such effective date and from year to year thereafter unless terminated on any such anniversary date by either party's giving to the other not less than 60 days' prior written notice. If the Borrower terminates this Agreement other than on the third or any subsequent anniversary of this Agreement, the Borrower shall pay to the Lender an early termination fee equal to $150,000 for any termination during the first year of this Agreement, $100,000 for any termination during the second year, and $50,000 for any termination during the third or any subsequent year. Upon the occurrence of an Event of Default, the Lender shall have the right to terminate this Agreement at any time without notice. Notwithstanding any termination of this Agreement, the Lender shall retain all of its rights and remedies hereunder (including its security interest in the Collateral), and the Borrower shall continue to be bound by all the terms, conditions, and provisions hereof until all of the Obligations of every nature have been fully disposed of, concluded, finally paid, satisfied, and liquidated. 2.8 STATEMENTS OF ACCOUNT. The Lender shall render a statement of account monthly, and, absent manifest error, such statement rendered by the Lender shall bind the Borrower and the Lender (unless the Borrower or the Lender notifies the other in writing to the contrary within 30 days after the date of each statement rendered; and any such notice shall be deemed an objection only to those items specifically objected to therein). -8- 13 3. SECURITY INTERESTS As security for the full payment and performance of the Obligations, the Borrower hereby grants to the Lender a security interest in all of the following property and interests in property of the Borrower, whether now owned or existing or acquired or arising in the future or in which the Borrower now has or in the future acquires any rights, and wherever located: (a) all SBA Loans and SBA Notes, including the Guaranteed Portion and Non-Guaranteed Portion of each, and all guarantees, collateral, and other security therefor, (b) all of the Borrower's accounts, inventory, general intangibles, instruments, chattel paper, documents, equipment, and other goods, (c) all accessions to, substitutions for, and replacements, products, and proceeds of any of the foregoing, including insurance proceeds and rental payments, and (d) all books and records (including customer lists, credit files, computer programs, print-outs, and other computer materials and records) pertaining to any of the foregoing. The Borrower shall execute and deliver all supplemental documentation that the Lender from time to time requests to perfect or maintain the perfection of the security interest granted in this Section, and shall pay (or reimburse the Lender for) the cost of filing or recording any such documentation, on demand. 4. CONDITIONS PRECEDENT TO ADVANCES 4.1 DOCUMENTS. The determination by the Lender to make Advances is subject to the Lender's having received the following, in form and substance satisfactory to the Lender: (a) the Guarantees, (b) the Subordination Agreement, (c) the Four-Party Agreement, (d) the Borrower's Secretary's Certificate, (e) the Borrower's CEO's Certificate, (f) certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, (g) the Opinion, (h) appropriate UCC-1 financing statements, and (i) such other documentation as the Lender reasonably requests. -9- 14 4.2 OTHER CONDITIONS PRECEDENT. In addition to the foregoing, any obligation of the Lender to make each Advance is subject to the following conditions precedent: (a) the representations and warranties contained in Section 6 (except 6.13, 6.17, and 6.19) hereof shall be correct on and as of the date of the Advances with the same effect as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; (b) since the date of the statements referred to in Section 6.6 hereof, no materially adverse change shall have occurred in the Borrower's business, prospects, condition, affairs, operations, or assets, nor in its right or ability to carry on its operations; (c) no Default shall exist or would result from the Advance; (d) the Lender in its sole discretion determines that such Advance will be fully secured, as provided for in Section 2.1, and will not cause the outstanding balance of the Loans to exceed the limits described in Section 2.1, and (e) in the case of the first Advance, the Lender shall have received from the Borrower a non-refundable $75,000 closing fee (which shall be paid by the Lender's retention of the Borrower's $75,000 good faith deposit previously paid). 5. CLOSING PROCEDURES. 5.1 TRANSFERS OF SBA LOAN DOCUMENTS. Before the Lender funds an Advance for a Warehouse Loan for an SBA Loan, the Borrower shall provide the Lender with a copy of the related SBA approval and the form of the related SBA Note, a copy of the related form 1050 settlement sheet in the case of any multiple-disbursement SBA Loan, and such other documentation as Lender reasonably requests, by fax or otherwise. The Borrower shall deliver the original of each such SBA Note, any written assignment thereof, and any related Escrow Agreement to the Lender's Agent by the third Banking Day following the closing for the related SBA Loan. In addition, if the Borrower requests a Stub Loan for which the Borrowing Base would be insufficient without the Lender's having a perfected security interest in the related SBA Note, then if and to the extent that the Lender so requests, the Borrower shall execute and deliver to the Lender's Agent, or to an Escrow Agent to hold pursuant to an Escrow Agreement, the SBA Note and all other documents relating to that SBA Loan, and properly executed assignments of each such document, in recordable form acceptable to the Lender in its sole discretion. The originals of all such collateral, loan, and other documents shall be held by the Borrower unless specifically requested by the Lender. The Lender's Agent may hold any such specifically-requested documents until the Lender releases its security interest in such Collateral pursuant to Section 5.2 (unless an Event of Default exists, in which case the Lender shall have its right to pursue the rights and remedies), subject to the SBA's rights to such documents. Neither the Lender's execution of this Agreement nor its taking of any action contemplated or permitted hereunder shall constitute or be deemed to be an assumption of any of the Borrower's liabilities or obligations, and the Lender shall not thereby be deemed to have consented to any reporting requirements of, or other regulations by, the SBA, except to the extent provided in the Four-Party Agreement. 5.2 RELEASE OF SECURITY INTEREST IN SBA COLLATERAL. Upon receipt of payment in full of an amount not less than the Guaranteed Portion of each SBA Loan, the Lender shall release its security interest in the Guaranteed Portion of such SBA Loan, but the Lender shall not release its security interest in the Non-Guaranteed Portion of such SBA Loan. Upon due payment of all amounts payable under an SBA Loan, the Lender's Agent shall return any related SBA Note that it holds. -10- 15 6. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement and to make Advances hereunder, the Borrower represents and warrants the following: 6.1 ORGANIZATION, STANDING, ETC. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of South Carolina, and has all requisite power and authority (corporate and otherwise) to own and operate its properties and to carry on its business as now conducted and proposed to be conducted; and the Borrower has all requisite power and authority (corporate and otherwise) to execute, deliver, and perform its obligations under this Agreement and all other documents executed in connection therewith. 6.2 ENFORCEABILITY. This Agreement, and all other documents executed in connection with the Loans, when delivered for value received, shall constitute valid and binding obligations of the Borrower enforceable in accordance with their terms. 6.3 QUALIFICATION. The Borrower is duly qualified, licensed, or domesticated, and in good standing as a foreign corporation duly authorized to do business, in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary, as follows: Arkansas, Colorado, District of Columbia, Florida, Georgia, Kansas, Louisiana, Maryland, Missouri, North Carolina, Texas, Virginia, and Wisconsin. 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC. (a) The Borrower is not in violation of any material term of its articles of incorporation or by-laws, and no event, status, or condition has occurred or exists which upon notice or lapse of time, or both, would constitute a violation thereof; (b) to the best of its knowledge, the Borrower is not in violation of any material term of any mortgage, indenture, or agreement relating to outstanding borrowings to which it is a party, or of any judgment, decree, or order to which it is subject, or of any other instrument, lease, contract, or agreement to which it is a party, or of any statute, or governmental rule or regulation applicable to it, and no event, status, or condition has occurred or exists which upon the giving of notice or lapse of time, or both, would constitute a material violation of any such term; (c) the Borrower's execution, delivery, and performance of this Agreement and the other instruments and agreements provided for by this Agreement to which the Borrower is, or is to be, a party, and the carrying out of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of the Borrower (corporate and otherwise) and will not result in any violation of the articles of incorporation or by-laws of the Borrower, or violate or constitute a default under any term of anything described in clause (b) above, or result in the creation of any mortgage, lien, encumbrance or charge upon any of the properties or assets of the Borrower pursuant to any term of anything described in clause (b) above; and (d) there is no term of anything described in clause (b) above which materially adversely affects or in the future may (so far as the Borrower can now foresee) materially adversely affect the Borrower's business, prospects, condition, affairs, operations, properties, or assets. 6.5 SUBSIDIARIES. The Borrower has no Subsidiary. 6.6 FINANCIAL STATEMENTS. The Borrower has furnished the Lender with copies of the fiscal year-end consolidated and consolidating balance sheet of Carolina Investors, Inc. and its consolidated subsidiaries (including the Borrower) as at December 31, 1992, and the consolidated and -11- 16 consolidating statements of income and of cash flows of such corporations for such fiscal year, which annual financial statements have been examined by Ernst & Young, independent certified public accountants; and copies of such financial statements for each month thereafter through July 31, 1993, duly certified by the chief financial officer of Carolina Investors, Inc. Such financial statements are complete and have been prepared in accordance with GAAP applied on a basis consistent with the accounting principles applied in the preceding fiscal period, and present fairly the financial condition of the Borrower as at the dates indicated and the results of the operations of the Borrower for such periods. Such financial statements show all liabilities (direct, indirect, and contingent, including guarantee and surety obligations) of the Borrower as of the respective dates thereof, except those arising in the ordinary course of business since the date of the last of such financial statements. 6.7 CHANGES IN FINANCIAL CONDITION. Since the date of the annual financial statements referenced in Section 6.6, there has been no change in the assets, liabilities, or financial condition of the Borrower from that set forth or reflected in the fiscal year-end balance sheet referred to in Section 6.6, other than changes in the ordinary course of business, none of which has been, either in any case or in the aggregate, materially adverse. 6.8 TAX RETURNS AND PAYMENTS. All federal, state, and local tax returns and reports of the Borrower required to be filed have been filed, and all taxes, assessments, fees, and other governmental charges upon the Borrower, or upon any of its properties, assets, incomes, or franchises, which are due and payable in accordance with such returns and reports, have been paid, other than those presently (a) payable without penalty or interest, or (b) contested in good faith and by appropriate and lawful proceedings prosecuted diligently. The aggregate amount of the taxes, assessments, charges, and levies so contested is not material to the condition (financial or otherwise) and operations of the Borrower. The charges, accruals, and reserves on the books of the Borrower in respect of federal, state, and local taxes for all fiscal periods to date are adequate, and the Borrower knows of no unpaid assessment for additional federal, state, or local taxes for any such fiscal period or of any basis therefor. 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC. The Borrower has (a) good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the fiscal year-end balance sheet referred to in Section 6.6, except properties and assets disposed of since the date of such balance sheet in the ordinary course of business, and (b) good and marketable title to its leasehold estates and such properties, assets, and leasehold interests are subject to no covenant, restriction, easement, right, lease, or Lien, other than Permitted Liens. 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC. The Borrower owns or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, and licenses, and rights with respect thereto, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others, and, in each case, subject to no Lien, lease, license, or option, except as specified on Schedule 2. Each such asset or agreement is in full force and effect, and the holder thereof has fulfilled and performed all of its obligations with respect thereto. No event has occurred or exists which permits, or after notice or lapse of time or both would permit, revocation or termination, or which materially adversely affects or in the future may materially adversely affect, the rights of such holder thereof with respect thereto. No other license or franchise is necessary to the operations of the business of the Borrower as now conducted or proposed to be conducted. The Borrower does not do business (and has not done business during the last five years) under any trade names or tradestyles other than those listed on Schedule 2. -12- 17 6.11 LITIGATION, ETC. Except as specified on Schedule 3, there are no actions, proceedings, or investigations, however described or denominated, pending or (to the knowledge of the Borrower) threatened (or any basis therefor known to the Borrower) which, either in any case or in the aggregate, might result in any materially adverse change in the Borrower's business, prospects, condition, affairs, operations, properties, or assets, or in its right or ability to carry on its operations as now conducted or proposed to be conducted, or might result in any material liability on the part of the Borrower, and none which questions the validity of this Agreement or any of the other instruments or agreements provided for by this Agreement or of any action taken or to be taken in connection with the transactions contemplated hereby or thereby. 6.12 ADVERSE DEVELOPMENTS. Since the date of the latest financial statements referred to in Section 6.6, neither the financial condition, business operations, affairs, or prospects of the Borrower, nor its properties or assets, have been materially adversely affected in any way as the result of any legislative or regulatory change, or any revocation, amendment, or termination, or any pending or threatened such action, or any franchise or license or right to do business, or any fire, explosion, flood, drought, windstorm, earthquake, accident, casualty, labor trouble, riot, condemnation, requisition, embargo or Act of God or the public enemy or of armed forces, or otherwise, whether or not insured against. 6.13 DISCLOSURE. To the best of the Borrower's knowledge, neither this Agreement nor the financial statements referred to in Section 6.6 nor any other document, certificate or statement furnished to Lender by or on behalf of the Borrower in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading. 6.14 MARGIN SECURITIES. The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of the Loans has been or will be used, directly or indirectly, to purchase or carry any margin securities within the meaning of Regulation U. 6.15 INVESTMENT COMPANY. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.16 ERISA. The Borrower and each Plan is in compliance with those portions of ERISA and the Code pertaining to each Plan. No Plan that is subject to the minimum funding standards of ERISA or the Code has incurred any accumulated funding deficiency within the meaning of ERISA or the Code. The Borrower has not incurred, and no facts lead the Borrower to believe it will incur, any liability to the Pension Benefit Guaranty Corporation in connection with any Plan. The assets of each Plan that is subject to Title IV of ERISA are sufficient to provide the benefits under such Plan which the Pension Benefit Guaranty Corporation would guarantee the payment thereof if such Plan terminated, and are also sufficient to provide all other benefits due under the Plan. No Reportable Event has occurred and is continuing with respect to any Plan. No Plan nor any trust created under a Plan, nor any trustee or administrator thereof, has engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) which would subject any Plan, any trust created thereunder, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust, to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code. -13- 18 The Borrower is not required to contribute to and is not contributing to a "multiemployer pension plan" (as defined in the Multiemployer Pension Plan Amendments Act of 1980), and the Borrower has no "withdrawal liability" (as defined in such Act) to any multiemployer pension plan. 6.17 LOCATIONS. The Borrower's principal place of business and chief executive office is located at its address specified in Section 11.3. 6.18 SOLVENCY. The Borrower is Solvent. 6.19 NAME CHANGE; MERGER. During the past five years, the Borrower has not changed its corporate name or been party to a merger or consolidation, except as specified in Schedule 2. 7. AFFIRMATIVE COVENANTS. The Borrower covenants, for so long as any Loan is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 7.1 INSURANCE. The Borrower shall insure its property against all risks to which it is exposed, including loss, damage, fire, theft, and all other such risks, and in such amounts, as would be prudent for similar businesses similarly situated, including loss, damage, fire, theft, and all other such risks, and in such amounts, with such companies, under such policies, and in such form as shall be satisfactory to the Lender. In addition, the Borrower will maintain comprehensive public liability and worker's compensation insurance and such other insurance against loss or damage as are customarily carried by corporations similarly situated, with reputable insurers, in such amounts, with such deductibles, and by such methods as shall be adequate and in any event in amounts of not less than the amounts generally maintained by other companies engaged in similar businesses. 7.2 TAXES AND LIABILITIES. The Borrower shall pay and discharge, when due, all taxes, assessments, and governmental charges or levies imposed upon it or its income or profits, or against its properties, and all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; provided, that the Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim so long as it is being contested in good faith and by appropriate and lawful proceedings diligently pursued and with respect to which adequate reserves have been set aside on its books. 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC. The Borrower will deliver to Lender: (a) within 30 days after the end of each of the first 11 months in each fiscal year of the Borrower a consolidating balance sheet of Carolina Investors, Inc. and its consolidated subsidiaries (including the Borrower), as at the end of such period and statements of income and of cash flows of such corporations for such period and for the year-to-date period then ended, setting forth in each case in comparative form the figures for the corresponding period of the previous fiscal year, in form and detail as reasonably required by the Lender, and certified as complete and correct by the chief financial officer of Carolina Investors, Inc. or of the Borrower, together with a certificate by such officer stating that, as of the date of such certification, no Default exists (or, if any Default exists, specifying the nature thereof and what action the Borrower has taken, is taking or proposes to take with respect thereto); -14- 19 (b) within 90 days after the end of each fiscal year, a consolidated balance sheet of Emergent Group, Inc. and a consolidating balance sheet of Carolina Investors, Inc. and its consolidated subsidiaries (including the Borrower) as at the end of such fiscal year, and statements of profit and loss, shareholders' equity, and changes in cash flows of such corporations for such year, setting forth in each case in comparative form the figures for the previous fiscal year in form and detail as reasonably required by the Lender, and accompanied by an unqualified report and opinion on such financial statements (including on the supplemental schedules) from Elliot Davis & Company (or other certified public accountants satisfactory to the Lender), which report and opinion shall be prepared in accordance with GAAP, together with a certificate by the chief financial officer of Carolina Investors, Inc. or of the Borrower of the character specified in Section 7.3(a), and a certificate by such accountants stating whether or not their examination has disclosed the occurrence or existence of any Default, and, if their examination has disclosed a Default, specifying the nature and period of existence thereof, and demonstrating as at the end of such accounting period in reasonable detail compliance during such accounting period with Sections 6.18, 7.6, 7.13, 7.14, 7.15, 7.16, 8.10, 8.11, and 8.12; (c) copies of all other statements or reports prepared by or supplied to the Borrower by its accountants or auditors reflecting the financial position of the Borrower; (d) within 30 days after the end of each fiscal year, Projections for the next three years, year- by-year; (e) within 90 days after the end of each fiscal year, financial statements, of the type described in Section 7.3(b), for each Guarantor (excluding Emergent Financial Corporation, so long as it does not produce such financial statements); and (f) with reasonable promptness, such other data and information as the Lender from time to time reasonably requests. 7.4 INSPECTION. The Borrower will permit authorized representatives designated by the Lender to visit and inspect any of the properties of the Borrower, including its books and records (and to make extracts therefrom), and to discuss its affairs, finances, and accounts with its officers, directors, employees, and accountants, all at such reasonable times and as often as the Lender reasonably requests. The Borrower will at all times keep accurate and complete records with respect to the Collateral. The Borrower will pay $2,500 to the Lender as compensation for each field examination performed (currently anticipated to total four per year absent a Default). 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS. The Borrower shall at all times preserve and maintain in full force and effect its corporate existence, powers, rights, licenses, permits, and franchises in the jurisdiction of its incorporation, and shall operate in full compliance with all applicable laws, statutes, regulations, certificates of authority, and orders in respect of the conduct of its business, and shall qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or appropriate in view of its business and operations. 7.6 USE OF PROCEEDS. The proceeds of the Loans will be used solely for repaying existing debt, and for general corporate purposes. No part of the proceeds will be used to cause a violation of Section 6.14. -15- 20 7.7 NOTICE OF DEFAULT. The Borrower shall promptly notify the Lender and the SBA in writing upon the occurrence or existence of any known Default, and shall provide to the Lender and the SBA with such written notice a detailed statement by a responsible officer of the Borrower of all relevant facts and the action being taken or proposed to be taken by the Borrower with respect thereto. 7.8 MAINTENANCE OF PROPERTIES. The Borrower shall maintain or cause to be maintained in good repair, working order, and condition all properties used or useful in its business, and from time to time will make or cause to be made all appropriate repairs, renewals, and replacement thereof. The Borrower will not do or permit any act or thing which might impair the value or commit or permit any waste of its properties or any part thereof or permit any unlawful occupation, business, or trade to be conducted on or from any of its properties. 7.9 NOTICE OF ERISA DEVELOPMENTS. As soon as possible and in any event within 30 days after the Borrower knows or has reason to know of any Reportable Event or "prohibited transaction" (as defined in Section 6.16) with respect to any Plan or that the Pension Benefit Guaranty Corporation or the Borrower has instituted or will institute proceedings under ERISA to terminate a Plan subject to Title IV of ERISA, or a partial termination of a Plan has or is alleged to have occurred, or any litigation regarding a Plan or naming the trustee of a Plan or the Borrower with respect to a Plan is threatened or instituted, the Borrower shall provide to the Lender the written statement of the chief financial officer of the Borrower setting forth details of such Reportable Event, prohibited transaction, termination proceeding, partial termination, or litigation and the action being or proposed to be taken with respect thereto, together with copies of the notice of such Reportable Event or any other notices, applications, or forms submitted to the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any notices or correspondence received from the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any pleadings, notices, or other documents relating to such litigation. 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE. The Borrower shall promptly give to the Lender written notice (a) of all threatened or actual actions, suits, investigations, or proceedings by or before any court, arbitrator, or governmental department, commission, board, bureau, agency or other instrumentality (state, federal, or foreign), affecting the Borrower or the rights or other properties of the Borrower, except any litigation or proceedings which is not likely to affect the financial condition of the Borrower or to impair the right or ability of the Borrower to discharge the Obligations; (b) of any materially adverse change in the condition (financial or otherwise) of the Borrower; and (c) of any seizure or levy upon any part of any of the Borrower's properties under any process or by a receiver. 7.11 PAYMENT OF LOANS. The Borrower shall punctually pay the principal and interest on the Loans, and all other sums falling due hereunder or under any other documents executed in connection with the Loans, in accordance with the terms hereof and thereof. 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION. The Borrower shall notify the Lender immediately of each change in the Borrower's corporate name and trade names, in the location of the Borrower's principal place of business, in each location where any of the Collateral is kept, and the office where the Borrower's books and records are kept. -16- 21 7.13 TANGIBLE NET WORTH. The Borrower shall maintain at all times a Tangible Net Worth of not less than $9,000,000 during 1993, $9,500,000 during 1994, $10,000,000 during 1995, and $10,500,000 during 1996, and continuing to increase by $500,000 each fiscal year thereafter. 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. The Borrower shall maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 3 to 1. 7.15 SUBORDINATED DEBT. The Borrower shall at all times maintain a principal amount of Subordinated Debt of at least $8,500,000. 7.16 INTEREST COVERAGE RATIO. The Borrower shall maintain during each consecutive four-quarter period (or such lesser number of quarters for which this Agreement has been in effect) a ratio of EBIT to Interest on NationsBank Debt of at least 1.5 to 1. 8. NEGATIVE COVENANTS. The Borrower covenants, for so long as any of the Loans is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 8.1 DEBT. The Borrower will not obtain or attempt to obtain from any party (other than for the purpose of repaying the Obligations in full) any loans, advances, or other financial accommodations or arrangements other than (a) the Obligations, (b) the Subordinated Debt, (c) debt underlying any purchase money security interest permitted by Section 8.2 not to exceed, in aggregated principal amount, $100,000 at any one time outstanding, (d) unsecured borrowings not to exceed in the aggregate $500,000 at any one time outstanding, and (e) unsecured trade credit, incurred in the ordinary course of business, having commercially customary terms. 8.2 LIENS. The Borrower shall not create, incur, assume, or suffer to exist any Lien of any kind upon any of its property or assets (including the Collateral), whether now owned or hereafter acquired, except (a) Liens in favor of the Lender; (b) Liens existing on the date hereof and specified on Schedule 1; (c) Liens on property securing all or part of the purchase price of such property if (1) such Lien is created contemporaneously with the acquisition of such property, (2) such Lien attaches only to the specific item(s) of property so acquired, (3) such Lien secures only the debt incurred to acquire such property, and (4) the debt secured by such Lien is permitted by Section 8.1; and (d) Liens for taxes, or for other claims, that are not then due. 8.3 GUARANTEES. The Borrower shall not guarantee, endorse, become surety with respect to, or otherwise become directly or contingently liable for or in connection with the obligations of any other Person, except by endorsement of negotiable instruments for deposit or collection and similar transactions in the ordinary course of business. 8.4 PLAN LIABILITIES. The Borrower shall not permit the aggregate present value of accrued benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis, or permit the aggregate present value of vested benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform -17- 22 and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis. 8.5 FISCAL YEAR. The Borrower will not change its fiscal year from a year ending on December 31 without prior written notice to the Lender. 8.6 OTHER TRANSACTIONS. The Borrower will not engage in any transaction with any of its officers, directors, employees, or Affiliates, except for an "arms-length" transaction on terms no more favorable to the other party than would be granted to an unaffiliated Person, which transaction shall be approved by its disinterested directors and shall be disclosed in a timely manner to the Lender before being consummated. 8.7 MERGER; SUBSIDIARY; ETC. The Borrower will not merge or consolidate with any other corporation, form or acquire any Subsidiary, or issue any share of capital stock. 8.8 SALE OF ASSETS. The Borrower will not sell, lease or otherwise transfer all or any substantial part of its assets material to its operations, except in the ordinary course of its business; provided, that it may in any calendar year dispose of items of equipment having an aggregate market value of not more than $50,000 if it uses the proceeds of such disposition to acquire property of a similar nature. 8.9 CHANGES IN BUSINESS. The Borrower will not engage in any business other than the business presently conducted by it on the date of this Agreement and business of substantially the same type or directly related thereto. 8.10 DIVIDENDS AND REDEMPTIONS. The Borrower will not declare or pay any dividend (other than a dividend payable solely in common stock of the Borrower) on any share of any class of its capital stock, or apply any of its property or assets to the purchase, redemption, or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Borrower. 8.11 LOANS. The Borrower will not make any loans or advances to or extend any credit to any Person except (a) the extension of trade credit in the ordinary course of business, and (b) advances to employees not to exceed to any one employee a total of $5,000 outstanding. 8.12 PLEDGE OF CREDIT. The Borrower will not pledge the Lender's credit for any purpose whatsoever. 8.13 INVESTMENTS. The Borrower shall not purchase, acquire, or otherwise invest in any Person except: (a) Eligible SBA Loans, (b) direct obligations of the United States of America maturing within one year from the acquisition thereof, (c) certificates of deposit issued by, or investment accounts in, banks or financial institutions having a net worth of not less than $50,000,000, (d) commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (e) overnight repurchase agreements issued by the Lender or any corporate Affiliate of the Lender's, or (f) assets received from foreclosing on an SBA Loan. -18- 23 8.14 CAPITAL EXPENDITURES. The Borrower shall not make or incur Capital Expenditures in excess of $100,000 during any fiscal year of the Borrower, unless the Lender gives its prior written consent (which shall not be unreasonably withheld). 9. POWER OF ATTORNEY. Subject to the terms of the Four-Party Agreement, the Borrower hereby appoints and constitutes the Lender as its attorney-in-fact to do any of the following if an Event of Default exists: to receive, open, and dispose of all mail addressed to the Borrower pertaining to Collateral (or appearing to the Lender possibly to pertain to Collateral); to notify the postal authorities to change the address and delivery of mail addressed to the Borrower to such address as the Lender shall designate; to endorse the Borrower's name upon any notes, acceptances, checks, drafts, money orders, and other forms of payment that come into the Lender's possession, and to deposit or otherwise collect the same; to sign the Borrower's name on any document relating to any Collateral; to execute in the name of the Borrower any affidavits and notices with regard to any and all lien rights; and to do all other acts and things necessary to carry out this Agreement. The Borrower hereby waives notice of presentment, protest, and dishonor of any instrument so endorsed by the Lender. All the Lender's acts as attorney-in-fact are hereby authorized, ratified, and approved by the Borrower, and the Borrower agrees that, as attorney-in-fact, the Lender shall not be liable for any acts of omission or commission, nor for any error of judgment or mistake of fact or law, except to the extent of loss or damage caused directly and primarily by the Lender's gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable so long as this Agreement remains in effect or any of the Obligations remains outstanding. 10. REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, the entire outstanding principal amount of the Loans, together with all accrued but unpaid interest thereon, and all other of the Obligations shall, at the option of the Lender, immediately become absolute and due and payable, without presentation, demand of payment, protest, notice for demand of payment, protest and notice of nonpayment, or any other notice of any kind with respect thereto, all of which are hereby expressly waived by the Borrower to the full extent permitted by law. Subject to the terms of the Four-Party Agreement, the Lender may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and other applicable law in Georgia or any other applicable jurisdiction. The Borrower agrees, after the occurrence of any Event of Default, immediately to assemble at the Borrower's expense all the Collateral at a convenient place acceptable to the Lender, and to surrender such property to the Lender. The Borrower agrees to pay all costs that the Lender pays or incurs to collect the Obligations or enforce its rights hereunder. The Borrower agrees that the Lender may charge the Borrower's account for, and that the Borrower will pay on demand, all costs and expenses, including 15% of the total amount involved as attorneys' fees (not to exceed the amount of attorneys' fees actually incurred), incurred: (i) to liquidate any Collateral, (ii) to obtain or enforce payment of any Obligations, or (iii) to prosecute or defend any action or proceeding either against the Lender or against the Borrower concerning any matter growing out of or connected with this Agreement or any Receivable or any Obligation. The Borrower agrees that the Lender may apply any proceeds from disposing of the Collateral first to any security interest(s), lien(s), or encumbrance(s) prior to the Lender's security interest. -19- 24 The Lender shall be entitled to hold or set off any sums and all other property of the Borrower's, at any time to the credit of the Borrower or in the possession of the Lender, whether by pledge or otherwise, or upon or in which the Lender may have a lien or security interest. Recourse to security shall not at any time be required, and the Borrower shall at all times remain liable for the repayment to the Lender of all Obligations in accordance with their terms, regardless of the existence or non- existence of any Event of Default. Notwithstanding the foregoing, the Lender shall refrain from any action with respect to the Collateral under this Section 10 until it has given the SBA written notice of the occurrence of an Event of Default, and the Lender agrees that its right to take action with respect to the Collateral shall in all events be subject to the SBA's rights under the Four-Party Agreement, particularly Section 6 thereof. 11. MISCELLANEOUS. 11.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Lender in exercising any right, power, or remedy hereunder, or under any other document or agreement given by the Borrower or received by the Lender in connection herewith, shall operate as a waiver thereof, and no waiver shall be valid unless in writing signed by the Lender (and then only to the extent therein stated); nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy hereunder or thereunder. The remedies herein and therein provided are cumulative and not exclusive of any remedies provided by law or in equity. 11.2 AMENDMENTS, ETC. No amendment, modification, termination, or waiver of any provision of this Agreement or of any other document or agreement given by the Lender or received by the Borrower in connection herewith, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless it is in writing and signed by the Lender (and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given). No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 11.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands, and other communications provided for hereunder, other than routine communications in the ordinary course of business, shall be in writing (including telecopies) and mailed, telecopied, or delivered as follows: if to the Borrower: Emergent Business Capital, Inc. P.O. Box 17526 Greenville, South Carolina 29606 Attention: Keith B. Giddens Fax: (803) 271-8374 with a copy to: Cary H. Hall, Jr. Wyche, Burgess, Freeman & Parham -20- 25 44 East Camperdown Way Greenville, South Carolina 29601 Fax: (803) 235-8900 if to the Lender: NationsBank of Georgia, N.A. Business Credit Division P. O. Box 3406 Atlanta, Georgia 30302-3406 Attention: Mark Amoroso Fax: (404) 607-6439 if to the SBA: U.S. Small Business Administration 409 3rd Street Washington, D.C. 20416 Attention: Office of Financial Institutions Fax: (202) 205-6490 or, as to each party, at such other address as it designates in a written notice to the other party complying as to the delivery with the terms of this Section. Except as otherwise expressly provided in this Agreement, all such notices, requests, demands, and other communications shall, when mailed or telecopied, be effective two Banking Days after being deposited in the mails (postage paid) or when sent over a telecopier owned or operated by a party hereto with an answerback response set forth on the sender's copy of the document, addressed as aforesaid, and otherwise shall be effective upon receipt. 11.4 COSTS, EXPENSES, AND TAXES. The Borrower shall pay to the Lender, on demand, all costs and expenses paid or incurred by the Lender in connection with the preparation, reproduction, execution, delivery, administration, or enforcement of this Agreement and other instruments and documents from time to time delivered in connection with this Agreement, including the fees and expenses of counsel for the Lender, and in connection with the Lender's initial evaluation of the line of credit contemplated by this Agreement (including travel and field exam expenses). In addition, the Borrower shall pay any and all stamp and other taxes and recording and filing fees payable or determined to be payable in connection with the execution and delivery of this Agreement and all other instruments and documents from time to time delivered in connection with this Agreement, and shall save and hold harmless the Lender from and against any and all liabilities with respect to or resulting from any delay in paying or failure to pay such taxes or fees. 11.5 COMMERCIAL TRANSACTION. THE BORROWER HEREBY ACKNOWLEDGES THAT THE OBLIGATIONS AROSE OUT OF A "COMMERCIAL TRANSACTION" (AS DEFINED IN O.C.G.A. Section 44-14-260(1), CONCERNING FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY), AND AGREES THAT AFTER ANY EVENT OF DEFAULT (AS "Event of Default" IS DEFINED IN SECTION 1.1), THE LENDER SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT NOTICE OR HEARING. THE BORROWER KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO ANY NOTICE OR POSTING OF A BOND BY THE LENDER PRIOR TO SEIZURE BY THE LENDER (OR THE -21- 26 LENDER'S TRANSFEREES, ASSIGNS, OR SUCCESSORS IN INTEREST) OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE BORROWER AS A "WAIVER" AS DEFINED IN O.C.G.A. Section 44-14-260(3) (RELATING TO FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY). 11.6 SUCCESSORS AND ASSIGNS. All of the terms of this Agreement, and each of the documents and agreements executed and delivered pursuant to this Agreement, shall bind, benefit, and be enforceable by the successors and assignees of the parties hereto, whether so expressed or not. The Borrower shall not assign or transfer this Agreement, or any of its rights hereunder, without the prior written consent of the Lender. 11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, covenants, and agreements contained herein or made in writing by the Borrower in connection herewith shall survive the execution and delivery of this Agreement and any and all other documents and instruments relating to or arising out of any of the foregoing. 11.8 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 11.9 HEADINGS. The headings in this Agreement are for convenience of reference only, and are not a substantive part of the agreement. 11.10 ENTIRE AGREEMENT. This Agreement and the Four-Party Agreement embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 11.11 SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. In case any one or more of the provisions in this Agreement shall for any reason be held to be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.12 COUNTERPARTS. This Agreement may be executed in separate counterparts. 11.13 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH (UNLESS SPECIFICALLY STIPULATED TO THE CONTRARY IN SUCH DOCUMENT OR AGREEMENT), AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF GEORGIA (DISREGARDING ANY CONFLICTS-OF-LAWS RULE THAT WOULD APPLY THE LAW OF ANY OTHER JURISDICTION). THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN ATLANTA, GEORGIA, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS OR AGREEMENTS DESCRIBED OR CONTEMPLATED HEREIN, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH UNITED STATES FEDERAL OR STATE COURT. SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED ON THE BORROWER IN ANY SUCH ACTION OR -22- 27 PROCEEDING MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO THE BORROWER IN ACCORDANCE WITH SECTION 11.3 HEREOF. 11.14 WAIVER OF TRIAL BY JURY. THE BORROWER AND THE LENDER EACH WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO TRANSACTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS DESCRIBED OR CONTEMPLATED HEREIN. -23- 28 In witness whereof, the Borrower and the Lender have executed this Loan and Security Agreement. Emergent Business Capital, Inc. [Seal] By:/s/ ----------------------------------- Title: Attest: By:/s/ ----------------------------------- Secretary Accepted this ___ day of December, 1993, in Atlanta, Georgia. NationsBank of Georgia, N.A. By:/s/ ----------------------------------- Title: 24 29 EXHIBIT A Borrower's Secretary's Certificate for the Benefit of NationsBank of Georgia, N.A. I, Kevin Mast, Secretary of Emergent Business Capital, Inc. (the "Borrower"), a South Carolina corporation, hereby certify that: 1. Attached hereto as Exhibit 1 is a certified copy of the articles of incorporation of the Borrower as originally filed, together with all amendments thereto. 2. Attached hereto as Exhibit 2 is a true and correct copy of the by-laws of the Borrower. Those by-laws have not been amended, modified, or revoked, and are in full force and effect as of the date hereof. 3. Attached hereto as Exhibit 3 is a good standing certificate for the Borrower issued by the South Carolina Secretary of State on August 11, 1993. 4. The Borrower has since the date of the certificate referred to in para. 3 above through the date hereof remained in good standing under the laws of the state of South Carolina. 5. No suit or proceeding for the dissolution or liquidation of the Borrower has been instituted or is now threatened. 6. Attached hereto as Exhibit 4 is a true and complete copy of resolutions of the Board of Directors of the Borrower, adopted at a meeting duly called and held on December 29, 1993, at which meeting a quorum for the transaction of business was present and acting throughout. The corporate action in adopting those resolutions was duly taken at that meeting in accordance with the provisions of law and of the Borrower's articles of incorporation and by-laws, and those resolutions are now in full force and effect and have not been modified in any respect. 7. The resolutions referred to in para. 6 authorized the Borrower and its officers referred to therein to execute and deliver, and to do all things necessary or appropriate for the payment and performance of all the Borrower's obligations under, the Loan and Security Agreement (the "Agreement") dated as of December 29, 1993, between NationsBank of Georgia, N.A. (the "Lender") and the Borrower, and all certificates, agreements and other documents to be executed and delivered to the Lender by the Borrower pursuant to the Agreement, and pursuant to the specific resolutions referred to in para. 6. 8. The following persons have been duly elected, have duly qualified, as of the date of the execution of the Agreement were, and on the date hereof are, officers of the Borrower, holding the offices set opposite their names below, and the signatures set opposite their names below are their genuine signatures: 1 30
Name Title Signature ---- ----- --------- Keith B. Giddens Chief Executive Officer ----------------------------------------- Kevin Mast Vice President, Secretary ----------------------------------------- and Treasurer
9. Attached hereto as Exhibit 5 is a true and complete copy of the April 17, 1992 Loan Guaranty Agreement (Deferred Participation) between the Borrower and the SBA. That Agreement is now in full force and effect and has not been modified in any respect. IN WITNESS WHEREOF, I have signed this Certificate and affixed to it the Borrower's corporate seal on December __, 1993. ---------------------------------------- Secretary [Seal] -2- 31 EXHIBIT 4 ---- Board of Directors' Resolutions ---- RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed to borrow from NationsBank of Georgia, N.A. ("NationsBank"), from time to time, on behalf of this Corporation, such sums as they or any of them may deem necessary or desirable in connection with the operation of the business of this Corporation, upon such terms and conditions as shall be obtained through negotiation with NationsBank, and to execute one or more or financing agreements and promissory notes in respect thereto in the name of this Corporation for the payment of such amounts so borrowed, and further to extend, renew, renegotiate, refinance, or otherwise modify such terms and conditions by agreement with NationsBank. FURTHER RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed to request, from time to time, on behalf of this Corporation, as they deem necessary or desirable for the operation of the business of this Corporation, that NationsBank make advances and overadvances to this Corporation, such advances and overadvances to become subject to the terms and conditions of any agreement with regard to the loan financing of accounts receivable existing at the time of such request or any modification, extension, renewal, or renegotiation thereof. FURTHER RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed, from time to time, on behalf of this Corporation, to secure any such loans, advances, overadvances, or other indebtedness to NationsBank however arising, by pledging, or by granting full lien rights and full security title and security interest in and to, any and all of the assets of this Corporation, both real and personal, and such officers are jointly and severally authorized to execute any and all instruments necessary or desired by NationsBank in any manner as may now or hereafter be recognized by the laws of the United States or any state, or of any foreign state. FURTHER RESOLVED, that any such officers of this Corporation be and are hereby jointly and severally authorized and directed, on behalf of this Corporation, to do such other things and to execute such other documents as may be necessary or desirable to effect the foregoing transactions, including the execution of financing statements and such other notices or instruments as may be necessary or requested by NationsBank. FURTHER RESOLVED, that all acts and deeds of any officer of this Corporation heretofore performed on behalf of this Corporation in entering into, executing, performing, carrying out, or otherwise pertaining to the arrangements and intentions authorized by these resolutions be and they hereby are ratified, approved, confirmed, and declared binding upon this Corporation. FURTHER RESOLVED, that the Secretary of this Corporation shall certify to NationsBank the names of the presently duly elected and qualified officers of this Corporation and shall from time to time hereafter as each change in identity of those officers is made, immediately certify such change to 1 32 NationsBank, and NationsBank shall be fully protected in relying on such certification(s) (or the absence thereof), and shall be indemnified and saved harmless by this Corporation from any claim, demand, expense, loss, or damage resulting from or growing out of honoring the signature of any officer so certified or for refusing to honor any signature not so certified. FURTHER RESOLVED, that the foregoing resolutions shall remain in full force and effect until the close of business on the banking day after written notice of their amendment or rescission shall have been received by NationsBank and that receipt of such notice shall not affect any action taken by NationsBank prior thereto. FURTHER RESOLVED, that the Secretary of this Corporation be, and hereby is, authorized and directed to certify to NationsBank the foregoing resolutions and that the provisions thereof are in accordance with the provisions of law and of the articles of incorporation and by-laws of this Corporation. -2- 33 EXHIBIT B Borrower's CEO's Certificate for the Benefit of NationsBank of Georgia, N.A. I, Keith B. Giddens, Chief Executive Officer of Emergent Business Capital, Inc. (the "Borrower"), a South Carolina corporation, do hereby certify, pursuant to Section 4.1 of the Loan and Security Agreement (the "Agreement") between NationsBank of Georgia, N.A. (the "Lender") and the Borrower, dated as of December ___, 1993, that Kevin Mast has been duly elected, has duly qualified, as of the date of the execution of the Agreement was, and on the date hereof is, the Secretary of the Borrower, and that the signature appearing below is a true specimen of his signature. - -------------------------- Kevin Mast, Secretary December ___, 1993. ----------------------------------------- Keith B. Giddens, Chief Executive Officer 1 34 EXHIBIT C [To Be Retyped on Letterhead of Counsel to the Borrower] December ___, 1993 NationsBank of Georgia, N.A. P.O. Box 3406 Atlanta, Georgia 30302-3406 Re: Emergent Business Capital, Inc. Ladies and Gentlemen: We have acted as counsel to Emergent Business Capital, Inc. (the "Borrower"), a South Carolina corporation, in connection with its execution and delivery of the December ___, 1993 Loan and Security Agreement (the "Loan Agreement") between it and you, and certain related documents. Unless otherwise specified in this opinion letter, the terms used herein have the same meanings as in the Loan Agreement. We also have acted as counsel to the Guarantors in connection with the execution and delivery by each of its Guarantee and the execution and delivery by Carolina Investors, Inc. ("Carolina") of the Subordination Agreement. In so acting, we have examined the Loan Agreement, the Four-Party Agreement, and the Subordination Agreement (the "Borrower Documents"), and each Guarantee, and originals or copies of all other documents that we deemed relevant and necessary as a basis for the opinions hereinafter set forth. Based upon the foregoing, we are of the opinion that: (1) The Borrower is a corporation duly organized and validly existing in good standing under the laws of South Carolina, and has all requisite power and authority to conduct its business, to own and operate its properties, and to execute, deliver, and perform all of its obligations under the Borrower Documents. The Borrower has no Subsidiary. The Borrower is duly qualified, licensed, or domesticated and in good standing as a foreign corporation duly authorized to do business in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary (as set forth in Section 7.3 of the Loan Agreement). (2) The Borrower's execution, delivery, and performance of the Borrower Documents have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of shareholders of the Borrower or violate the articles of incorporation, by-laws, or 1 35 Securities of the Borrower, (b) violate any provision of any law, rule, or regulation (including Regulation X of the Board of Governors of the Federal Reserve System) of the United States or of South Carolina, or, to the best of our knowledge, any order, judgment, injunction, decree, determination, or award of any court, arbitrator, or governmental department, agency, or other instrumentality, (c) to the best of our knowledge, result in a breach of or constitute a default under any agreement or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (d) result in, or require, to the best of our knowledge, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by the Borrower (other than the Liens created by the Loan Documents). To the best of our knowledge, the Borrower is not in violation of any provision of any of the items described in clause (b) of this paragraph or in default under any provision of any of the items described in clause (c) of this paragraph. (3) No authorization, consent, approval, license, or exemption of, or filing or registration with, any court or governmental department, agency, or other instrumentality of the United States or of South Carolina is or will be necessary to the Borrower's valid execution, delivery, or performance of the Borrower Documents or for the payment to the Lender of all sums due and payable thereunder. (4) The Borrower Documents have each been duly executed and delivered by the Borrower, and constitute the Borrower's legal, valid, and binding obligations, enforceable against the Borrower in accordance with their terms, except as limited by bankruptcy, insolvency, and similar laws affecting creditors' rights generally and by general principles of equity. (5) To the best of our knowledge, there are no actions, suits, or proceedings pending or threatened against or affecting the Borrower or any of the Guarantors or the properties of the Borrower or any of the Guarantors before any court, arbitrator, or governmental department, commission, board, bureau, agency, or other instrumentality (state, federal, or foreign) which, if determined adversely to the Borrower or any of the Guarantors, would have a materially adverse effect on the financial condition, properties, or operations of the Borrower or any of the Guarantors, or create a Lien on any property of the Borrower or any of the Guarantors. (6) You should perfect all the security interests granted under the Loan Agreement (in Collateral for which a security interest can be perfected by filing UCC-1 financing statements) by filing a UCC-1 financing statement in the attached form with the South Carolina Secretary of State. Upon the filing of such financing statement, you will have a perfected first-priority security interest in such Collateral, and no further recording or filing in South Carolina or any other jurisdiction is necessary or advisable in order to establish and perfect such first-priority security interest. (7) Each Guarantee has been duly authorized, executed, and delivered by the Guarantor named therein, and constitutes such Guarantor's legal, valid, and binding obligation, enforceable against such Guarantor in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws affecting creditors' rights generally and by general principles of equity. (8) The Subordination Agreement has been duly authorized, executed, and delivered by Carolina, and constitutes Carolina's legal, valid, and binding obligation, enforceable against Carolina in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, and similar laws affecting creditors' rights generally and by general principles of equity. -2- 36 This opinion is limited to the laws of the United States and of South Carolina. The opinion in paragraph no. 4 is given as if the laws of South Carolina governed the Borrower Documents, despite their express choice of Georgia law as the law governing their construction and interpretation. No opinion is given as to the validity of the choice of law in the Borrower Documents. Our opinions set forth herein as to the validity, binding effect, and enforceability of the Borrower Documents are specifically qualified to the extent that the validity, binding effect, or enforceability of any obligations of the Borrower under any of the Borrower Documents, or the availability or enforceability of any of the remedies provided therein, may be subject to or limited by (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, and other statutory or decisional laws, heretofore or hereafter enacted or in effect, affecting the rights of creditors generally to the extent the same may constitutionally be applied including, without limitation, decisional or statutory law concerning recourse by creditors to security in the absence of notice of a hearing; (ii) the exercise of judicial or administrative discretion in accordance with general equitable principles; (iii) the possible unenforceability of any provision requiring or in effect requiring that waivers or amendments of any provision of any of the Borrower Documents, or any related document, may be effected only in writing; (iv) the possible unenforceability of provisions imposing increased interest rates or late payment charges upon delinquency in payment or default, to the extent that any such provision is deemed a "penalty"; (v) limitations imposed by rules and statutes regarding forum, venue, pleading, service of process, qualification to do business, and statutes of limitation; or (vi) limitations on the availability or enforceability of the remedies of specific performance or injunctive relief and of waivers contained in the Borrower Documents, all of which may be limited by equitable principles or applicable laws, rules, regulations, court decisions, and constitutional requirements. All opinions rendered herein are limited to the existing laws of the State of South Carolina and laws of the United States of America, all as in effect on the date hereof, and we express no opinion as to any other laws, rules, or regulations of such jurisdictions or matters governed by such laws, rules, or regulations; nor do we undertake, by delivery hereof or otherwise, to advise you of any changes in such laws, rules, or regulations. This opinion is made as of the date hereof, and we undertake no (and hereby disclaim any) obligation to advise you of any change in any matter set forth herein. This opinion is limited to the matters expressly set forth herein and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion is solely for your benefit in connection with the Borrower Documents and may not be relied upon in any manner by any other person. Very truly yours, By: ---------------------------------- -3- 37 SCHEDULE 1 Liens ----- NONE 1 38 SCHEDULE 2 Trademarks, Tradenames, Name Changes, etc. ------------------------------------------ Carolina Business Capital, Inc. 1 39 SCHEDULE 3 Litigation ---------- NONE 1 40 The Company hereby undertakes to provide to the Commission upon request, copies of any schedules and exhibits to this Loan and Security Agreement dated as of December 29, 1993 between NationsBank of Georgia, N.A., and Emergent Business Capital, Inc., $32,000,000. 41 AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT This Amendment is entered into as of April 26th, 1995, between Emergent Business Capital, Inc. ("Borrower") and NationsBank of Georgia, N.A. ("NationsBank"). Borrower and NationsBank are party to a December 29, 1993 Loan and Security Agreement (the "Agreement"). Borrower and NationsBank agree as follows: 1. Definitions. Terms defined in the Agreement have the same meanings as in the Agreement when used in this Amendment. 2. Amendments. The Agreement is hereby amended as follows: (a) In Section 2.1(a), clause (ii), change "65%" to "80%". (b) Change the first sentence in Section 2.2 to read as follows in its entirety: The Loans shall bear interest on the average daily net balance thereof, calculated monthly, at a fluctuating rate of interest equal to the Prime Rate. (c) At the end of the third paragraph of Section 2.2, immediately before the period, add "(such fee not to exceed $25,000 per year)". (d) Change the first two sentences of Section 2.7 to read as follows: This Agreement shall be effective on the date set forth in the first paragraph of this Agreement, and shall continue in full force and effect until December 29, 1998 and from year to year thereafter unless terminated on December 29, 1998 or any subsequent anniversary thereof by either party's giving to the other not less than 60 days' prior written notice. If the Borrower terminates this Agreement other than on December 29, 1998 or any subsequent anniversary thereof, the Borrower shall pay to the Lender an early termination fee equal to $150,000 for any termination before December 29, 1998, $100,000 for any termination after December 29, 1998 and before December 29, 1999, and $50,000 for any termination thereafter not on a December 29. (e) As previously provided in a June 30, 1994 letter, all references in Sections 7.3(a) and 7.3(b) to "Carolina Investors, Inc." have been changed to "Emergent Financial Corporation". (f) Change the text of Section 7.13 to read as follows: 1 42 The Borrower shall maintain at all times a Tangible Net Worth of not less than $3,000,000 during 1995, $3,750,000 during 1996, $4,500,000 during 1997, and $5,250,000 during 1998, and continuing to increase by $750,000 each fiscal year thereafter. (g) Change Section 7.15 to read "[Intentionally deleted]". 3. Effective Date. The amendments to the Agreement set forth in Section 2 hereof shall be effective on and as of the date of this Amendment (the "Effective Date"), provided that all of the following conditions precedent have been satisfied on such date in a manner satisfactory to NationsBank: (a) NationsBank shall have received a fully-executed counterpart of this Amendment. (b) All legal matters incident to this Amendment shall be satisfactory to counsel for NationsBank. (c) No default under the Agreement shall exist, and no status or condition shall exist which with the giving of notice or the passage of time or both would constitute a default under the Agreement; Borrower's representations in this Amendment shall be true; and no lawsuit or proceeding shall be pending (or, to Borrower's knowledge, threatened) against Borrower which may have a materially adverse effect upon Borrower's financial condition or upon Borrower's ability to carry out the transactions contemplated by this Amendment and the Agreement as amended hereby. (d) NationsBank shall have received such other documents as NationsBank shall reasonably request. 4. Representations, etc. Borrower represents, covenants, and warrants that no Default exists, and that the Obligations are owing without defense, offset, recoupment right, or counterclaim. 5. Fees and Expenses. Borrower shall reimburse NationsBank for NationsBank's expenses in connection with this Amendment, including attorneys' fees, on demand. Borrower authorizes NationsBank to charge Borrower's line of credit under the Agreement to pay for such fees and expenses (regardless of the amount of collateral or eligible collateral then existing). 6. Agreement. (a) Except as specifically amended hereby, the Agreement shall remain unchanged and continue in full force and effect in accordance with its terms. From and after the Effective Date, each reference in the Agreement (including all Exhibits and Schedules thereto) to "this 2 43 Agreement", "hereto", "hereof", and terms of similar import shall refer to the Agreement as amended by this Amendment, and all references to the Agreement in any document, instrument, certificate, note, or other agreement executed in connection therewith shall be deemed to refer to the Agreement as so amended. (b) Borrower waives, releases, and forever discharges NationsBank and its directors, officers, agents, employees, successors, and assigns from any and all claims and defenses with respect to the Agreement and any and all documents, instruments, certificates, notes, and other agreements executed in connection therewith, and covenants not to sue NationsBank based upon any such claim or defense. 7. Applicable Law. This Amendment shall be governed by and construed in accordance with the laws of Georgia. 8. Further Assurances. Borrower shall promptly and duly execute and deliver such documents, and take such further action, as NationsBank reasonably requests to effectuate the purpose and intent of this Amendment. 9. Headings. Section headings in this Amendment are for convenience only, and are not a substantive part of this Amendment. 10. Counterparts. This Amendment may be executed separately in counterparts. IN WITNESS WHEREOF, Borrower and NationsBank have executed this Amendment No. 1 to Loan and Security Agreement. [Seal] EMERGENT BUSINESS CAPITAL, INC. Attest: By: /s/ Keith B. Giddens ---------------------------------- Title: Chief Executive Officer /s/ Kevin J. Mast - ----------------------------- Secretary NATIONSBANK OF GEORGIA, N.A. By: /s/ John Bohan ---------------------------------- Title: Vice President 3 44 AMENDMENT NO. 2 TO LOAN AND SECURITY AGREEMENT This Amendment is entered into as of May 30, 1995, between Emergent Business Capital, Inc. ("Borrower") and Nationsbank of Georgia, N.A. ("NationsBank"). Borrower and NationsBank are party to a December 29, 1993 Loan and Security Agreement (the "Agreement"). 1. Amendments. The Agreement is hereby amended as follows: 2. The following language shall be added to the end of section 8.8"; provided however that the Borrower may sell, lease or otherwise transfer all or any substantial part of its assets material to its operations if such sale or transfer is being pursued in connection with the securitization of such assets". 3. Effective Date. The amendments to the Agreement set forth in Section 2 hereof shall be effective on and as of the date of this Amendment (the "Effective Date"), provided that all of the following conditions precedent have been satisfied on such date in a manner satisfactory to NationsBank: (a) NationsBank shall have received a fully-executed counterpart of this Amendment. (b) All legal matters incident to this Amendment shall be satisfactory to counsel for NationsBank. (c) No default under the Agreement shall exist, and no status or condition shall exist which with the giving of notice or the passage of time or both would constitute a default under the Agreement; Borrower's representations in this Amendment shall be true; and no lawsuit or proceeding shall be pending (or, to Borrower's knowledge, threatened) against Borrower which may have a materially adverse effect upon Borrower's financial condition or upon Borrower's ability to carry out the transactions contemplated by this Amendment and the Agreement as amended hereby. (d) NationsBank shall have received such other documents as NationsBank shall reasonably request. 4. Representations, etc. Borrower represents, covenants, and warrants that no Default exists, and that the Obligations are owing without defense, offset, recoupment right, or counterclaim. 5. Fees and Expenses. Borrower shall reimburse NationsBank for NationsBank's expenses in connection with this Amendment, including attorneys' fees, on demand. Borrower authorizes NationsBank to charge Borrower's line of credit under the Agreement to pay for such fees and expenses (regardless of the amount of collateral or eligible collateral then existing). -1- 45 6. Agreement. (a) Except as specifically amended hereby, the Agreement shall remain unchanged and continue in full force and effect in accordance with its terms. From and after the Effective Date, each reference in the Agreement (including all Exhibits and Schedules thereto) to "this Agreement", "hereto", "hereof", and terms of similar import shall refer to the Agreement as amended by this Amendment, and all references to the Agreement in any document, instrument, certificate, note, or other agreement executed in connection therewith shall be deemed to refer to the Agreement as so amended. (b) Borrower waives, releases, and forever discharges NationsBank and its directors, officers, agents, employees, successors, and assigns from any and all claims and defenses with respect to the Agreement and any and all documents, instruments, certificates, notes, and other agreements executed in connection therewith, and covenants not to sue NationsBank based upon any such claim or defense. 7. Applicable Law. This Amendment shall be governed by and construed in accordance with the laws of Georgia. 8. Further Assurances. Borrower shall promptly and duly execute and deliver such documents, and take such further action, as NationsBank requests to effectuate the purpose and intent of this Amendment. 9. Headings. Section headings in this Amendment are for convenience only, and are not a substantive part of this Amendment. 10. Counterparts. This Amendment may be executed separately in counterparts. IN WITNESS WHEREOF, Borrower and NationsBank have executed this Amendment No. 2 to Loan and Security Agreement. [Seal] EMERGENT BUSINESS CAPITAL, INC. Attest: By: /s/ Keith B. Giddens ---------------------------------- Title: Chief Executive Officer /s/ Kevin J. Mast - ------------------------------- Secretary NATIONSBANK OF GEORGIA, N.A. By: /s/ John Bohan ---------------------------------- Title: Vice President -2- 46 AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT This Amendment is entered into as of October 10th, 1995, between Emergent Business Capital, Inc. ("Borrower") and NationsBank of Georgia, N.A. ("NationsBank"). Borrower and NationsBank are party to a December 29, 1993 Loan and Security Agreement, as amended by Amendment No. 1 dated April 26, 1995 and Amendment No. 2 dated May 22, 1995 (the "Agreement"). Borrower and NationsBank agree as follows: 1. Definitions. Terms defined in the Agreement have the same meanings as in the Agreement when used in this Amendment. 2. Amendments. The Agreement is hereby amended as follows: (a) In Section 1.1, in the definition of "Loans", change "$32,000,000" to "$24,000,000". (b) In Section 1.1, in the definition of "Tangible Net Worth", change "the Borrower's total assets" to "the total assets of the Borrower and its consolidated Subsidiaries", and change "the Borrower's stockholders" to "stockholders". (c) In Section 1.1, in the definition of "Total Liabilities", change "the Borrower" to "the Borrower and its consolidated Subsidiaries". (d) In the first proviso in Section 2.1(a), change "$24,000,000" to "$16,000,000". (e) In the third paragraph in Section 2.2, change the parenthetical to read: "(i.e., $16,000,000 minus the average daily principal amount of Stub Loans outstanding)". (f) In Section 6.5, change the text to "The Borrower has no Subsidiary except Emergent Commercial Mortgage, Inc. and Emergent Business Capital Holdings Corp." (g) Change Section 7.13 to read as follows: 7.13 TANGIBLE NET WORTH. The Borrower shall maintain at all times a Tangible Net Worth of not less than $3,000,000 during 1995, $3,750,000 during 1996, $4,500,000 during 1997, and $5,250,000 during 1998, and continuing to increase by $750,000 each fiscal year thereafter. (b) Change Section 7.14 to read as follows: -1- 47 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. The Borrower shall maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 6 to 1. 3. Effective Date. The amendments to the Agreement set forth in Section 2 hereof shall be effective on and as of the date of this Amendment (the "Effective Date"). 4. Representations, etc. Borrower represents, covenants, and warrants that no Default exists, and that the Obligations are owing without defense, offset, recoupment right, or counterclaim. 5. Fees and Expenses. Borrower shall reimburse NationsBank for NationsBank's expenses in connection with this Amendment, including attorneys' fees, on demand. Borrower authorizes NationsBank to charge Borrower's line of credit under the Agreement to pay for such fees and expenses (regardless of the amount of collateral or eligible collateral then existing). 6. Agreement. Except as specifically amended hereby, the Agreement shall remain unchanged and continue in full force and effect in accordance with its terms. From and after the Effective Date, each reference in the Agreement (including all Exhibits and Schedules thereto) to "this Agreement", "hereto", "hereof", and terms of similar import shall refer to the Agreement as amended by this Amendment, and all references to the Agreement in any document, instrument, certificate, note, or other agreement executed in connection therewith shall be deemed to refer to the Agreement as so amended. 7. Applicable Law. This Amendment shall be governed by and construed in accordance with the laws of Georgia. 8. Further Assurances. Borrower shall promptly and duly execute and deliver such documents, and take such further action, as NationsBank reasonably requests to effectuate the purpose and intent of this Amendment. 9. Headings. Section headings in this Amendment are for convenience only, and are not a substantive part of this Amendment. 10. Counterparts. This Amendment may be executed separately in counterparts. -2- 48 IN WITNESS WHEREOF, Borrower and NationsBank have executed this Amendment No. 3 to Loan and Security Agreement. [Seal] EMERGENT BUSINESS CAPITAL, INC. Attest: By: /s/ John A. Bickley --------------------------- Title: President /s/ Kevin J. Mast - -------------------------------- Secretary NATIONSBANK OF GEORGIA, N.A. By: /s/ John Bohan --------------------------- Title: Vice President -3- 49 June 8, 1995 Mr. Kevin J. Mast Vice President and Chief Financial Officer Emergent Business Capital, Inc. P. O. Box 17526 Greenville, SC 29606 Re: December 29, 1993 Loan and Security Agreement ("L&SA") between NationsBank of Georgia, N.A. ("NationsBank") and Emergent Business Capital, Inc. ("Emergent") Kevin: Section 8.14 of the LS&A requires the Lender's written consent if Emergent's Capital Expenditures during the fiscal year exceed $100,000. You have informed us that Capital Expenditures will exceed that amount, primarily due to the expense of a computer upgrade. This letter constitutes our written approval of Capital Expenditures up to $300,000 for the current fiscal year. NationsBank of Georgia, N.A. By: /s/ John Bohan ----------------------- John Bohan Vice President EX-10.8 8 LOAN & SECURITY AGREEMENT ($8,000,000) 1 Exhibit 10.8 ______________________________ LOAN AND SECURITY AGREEMENT dated as of October 10, 1995 between NationsBank of Georgia, N.A., Lender, and Emergent Commercial Mortgage, Inc., Borrower. $8,000,000 ______________________________ i 2 TABLE OF CONTENTS
Section Page ------- ---- 1. DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3 USE OF DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.4 SECTION AND EXHIBIT REFERENCES, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. AMOUNT AND TERMS OF THE LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 THE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.4 CHARGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.5 PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.6 PAYMENT ON NON-BANKING DAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.7 EFFECTIVE DATE AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.8 STATEMENTS OF ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3. SECURITY INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4. CONDITIONS PRECEDENT TO ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.1 DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.2 OTHER CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5. CLOSING PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 TRANSFERS OF LOAN DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 RELEASE OF SECURITY INTEREST IN COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6. GENERAL REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.1 ORGANIZATION, STANDING, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.2 ENFORCEABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.3 QUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC . . . . . . . . . . . 12 6.5 SUBSIDIARIES; PARENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.6 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.7 CHANGES IN FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.8 TAX RETURNS AND PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.11 LITIGATION, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.12 ADVERSE DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.13 DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.14 MARGIN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.15 INVESTMENT COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
-i- 3 6.16 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.17 LOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.18 SOLVENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.19 NAME CHANGE; MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.1 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.2 TAXES AND LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.4 INSPECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . 18 7.6 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.7 NOTICE OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.8 MAINTENANCE OF PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.9 NOTICE OF ERISA DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.11 PAYMENT OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION . . . . . . . . . . . . . . . . . . . . . . . . 19 7.13 TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.15 INTEREST COVERAGE RATIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.16 EBC SUBSIDIARY. The Borrower shall be a wholly-owned Subsidiary of EBC. 8. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.1 DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.2 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.3 GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8.4 PLAN LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.5 FISCAL YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.6 OTHER TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.7 MERGER; SUBSIDIARY; ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.8 SALE OF ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.9 CHANGES IN BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.10 DIVIDENDS AND REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 8.11 LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.12 PLEDGE OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.13 INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8.14 CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 9. POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10. REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 11.1 NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 11.2 AMENDMENTS, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 11.3 ADDRESSES FOR NOTICES, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
-ii- 4 11.4 COSTS, EXPENSES, AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11.5 COMMERCIAL TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11.6 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.8 TIME IS OF THE ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.9 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.10 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.11 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.12 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.13 GOVERNING LAW; CONSENT TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 11.14 WAIVER OF TRIAL BY JURY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Exhibits: Exhibit A - - Form of Borrower's Secretary's Certificate (Section 1.1) Exhibit B - - Form of Borrower's CEO's Certificate (Section 1.1) Exhibit C - - Form of Opinion (Section 1.1) Exhibit D - - Form of Escrow Agreement (Section 1.1) Schedules: Schedule 1 - - Liens (Section 8.2) Schedule 2 - - Trademarks, Trade Names, Name Changes, etc. (Sections 6.10 and 6.19) Schedule 3 - - Litigation (Section 6.11) -iii- 5 LOAN AND SECURITY AGREEMENT This Agreement is made as of the 10th day of October, 1995, between NationsBank of Georgia, N.A. (the "Lender") and Emergent Commercial Mortgage, Inc. (the "Borrower"), a South Carolina corporation. The Borrower wants the Lender to finance the Borrower's portfolio of SBA "504 Program" loans, and the Lender is willing to make such financing available upon the conditions and terms set forth in this Agreement. The Borrower and the Lender therefore agree as follows: 1. DEFINITIONS AND ACCOUNTING TERMS 1.1 DEFINITIONS. The following terms, when capitalized as in this Section 1.1, shall have the following meanings: "Advance": the proceeds of a Loan. "Affiliate" of any designated Person: another Person controlling, controlled by, or under common control with such designated Person (but not including the Lender), and shall include (x) the spouse, parents, brothers, sisters, children, and grandchildren of such designated Person, (y) any association, partnership, trust, entity, or enterprise in which such designated Person is a director, officer, or general partner or in which such designated Person together with Affiliates of such designated Person own in the aggregate at least a 10% beneficial interest in assets, profits, or losses, and (z) any Subsidiary of such designated Person. "Banking Day": a day for dealings by and between banks, excluding Saturday, Sunday, any legal holiday in Atlanta, Georgia, and any other day on which banking institutions in Atlanta, Georgia are generally closed. "Borrower's CEO's Certificate": the Certificate of the Borrower's Chief Executive Officer, substantially in the form of Exhibit B. "Borrower's Secretary's Certificate": the Certificate of the Borrower's Secretary, substantially in the form of Exhibit A. "Borrowing Base": defined in Section 2.1(a). "Capital Expenditures": the dollar amount of gross expenditures (including obligations under leases which are required under GAAP to be capitalized for financial reporting purposes) made or incurred for fixed assets, real property, and plant and equipment which are required to be capitalized for financial reporting purposes in accordance with GAAP. "Code": the Internal Revenue Code of 1986, as amended. 1 6 "Collateral": all property described in Section 3 hereof, and all the Borrower's other property in which the Lender at any time has a security interest or which at any time are in the Lender's possession or control. "Default": (x) an event, act, or condition that would be an Event of Default but for the requirement(s) that notice be given or time elapse, or (y) an Event of Default. "EBC": Emergent Business Capital, Inc. "EBC L&SA": the December 29, 1993 Loan and Security Agreement between the Lender and EBC. "EBIT": the total earnings of EBC and its consolidated Subsidiaries from all sources, excluding extraordinary items, before deducting interest or income tax expense, but after deducting depreciation and amortization expense. "EFC": Emergent Financial Corporation. "Eligible Loan: a commercial loan for which the Borrower holds a first mortgage lien on the property being financed and which (1) is held by the Borrower and funded in accordance with an issued SBA Commitment, (2) remains at all times eligible for SBA funding under that SBA Commitment, including compliance with all budgetary and other conditions, and (3) meets all the Lender's other funding requirements which may be imposed with respect to the loan involved (which may include a takeout purchase commitment from a reliable "504 Program" lender). "ERISA": the Employee Retirement Income Security Act of 1974, as amended. "Event of Default": any of the following: (1) non-payment, within seven days after the due date, of any amount payable on any of the Obligations; (2) failure to perform any material agreement or meet any obligation of the Borrower contained herein; (3) nonpayment when due of any premium on any insurance policy required to be maintained under Section 7.1 hereof; (4) the existence of a default under any other agreement between the Borrower or EBC and the Lender or any Affiliate of the Lender's; (5) any statement, representation, or warranty of the Borrower made in writing herein or in any other writing at any time furnished or made by the Borrower to the Lender is untrue in any material respect as of the date furnished or made; (6) suspension of the operation of the Borrower's present business; (7) any Obligor becomes insolvent or unable to pay debts as they mature, admits in writing that it is so, makes a conveyance fraudulent as to creditors under any state or federal law, or makes an assignment for the benefit of creditors, or a proceeding is instituted by or against any Obligor alleging that such Obligor is insolvent or unable to pay debts as they mature, or a petition under any provision of Title 11 of the United States Code (entitled "Bankruptcy"), as amended, is brought by or against any Obligor; (8) entry of any judgment for more than $50,000 against any Obligor; (9) creation, assertion, or filing of any Lien (other than a Permitted Lien) against any of the property of any Obligor; (10) dissolution, merger, or consolidation of any Obligor (other than a merger or consolidation of the Borrower or the Guarantor with or into the Borrower or the Guarantor); (11) termination or withdrawal of any guarantee for any of the Obligations, or the failure for any other reason of any such guarantee or agreement to be enforceable by the Lender in accordance with its terms; (12) transfer of a substantial part of the property of any Obligor; (13) sale, transfer, or exchange, either directly or indirectly, of a controlling stock interest of the Borrower or the Guarantor; (14) appointment of a receiver for the Collateral or for any property in which -2- 7 the Borrower has an interest; (15) seizure of the Collateral by any third party; (16) at least 5% (face value) of the Borrower's loan portfolio are at least 90 days past due, and have remained at least 90 days past due for at least 30 days; or (17) the Lender in good faith believes that the prospect of payment or performance of the Obligations has been impaired. "GAAP": generally accepted accounting principles applied in a manner consistent with the financial statements described in Section 6.6. "Guarantee": the document by that name, dated the date of this Agreement, of the Guarantor, in favor of the Lender. "Guarantor": Emergent Business Capital, Inc. "herein", "hereof", "hereunder", etc.: in, of, under, etc. this Agreement (and not merely in, of, under, etc. the section or provision where that reference appears). "including": containing, embracing, or involving the enumerated item(s), but not necessarily limited to such item(s). "Insurance": the policy or policies of insurance described in Section 7.1, including all required endorsements thereto. "Interest on NationsBank Debt": the interest on the Obligations and all "Obligations" under the EBC L&SA during the period for which computation is being made. "Lien": any mortgage, pledge, deed of trust, assignment, security interest, encumbrance, hypothecation, lien, or charge of any kind, including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction. "Loans": the loan(s) under Section 2.1(a) in the principal amount of up to $8,000,000, plus any Overadvances, made by the Lender to the Borrower under this Agreement. "Obligations": all present and future (a) duties, obligations, and liabilities of the Borrower to the Lender under this Agreement, or under any document or agreement executed and delivered pursuant to or in connection with this Agreement, (b) sums owing to the Lender for goods or services purchased by the Borrower from any other firm financed by the Lender, (c) obligations under all notes and contracts of suretyship, guarantee, or accommodation made by the Borrower in favor of the Lender, and (d) all other obligations of the Borrower to the Lender, however and whenever created, arising, or evidenced, whether direct or indirect, through assignment from third parties, absolute, contingent, or otherwise, primary or secondary, now or hereafter existing, or due or to become due. "Obligor": the Borrower, any guarantor, or any other party at any time primarily or secondarily, directly or indirectly liable on any of the Obligations. "Opinion": the legal opinion, of counsel to the Borrower satisfactory to the Lender, substantially in the form of Exhibit C. -3- 8 "or": at least one, but not necessarily only one, of the alternatives enumerated. "Overadvances": loans by the Lender to the Borrower in excess of those described in Section 2.1(a). "Permitted Lien": a Lien permitted by Section 8.2. "Person": any individual, joint venture, partnership, firm, corporation, trust, unincorporated organization, or other organization or entity, or a governmental body or any department or agency thereof. "Plan": any present or future employee benefit plan (as defined in Section 3 of ERISA) and any trust created thereunder, covered by Title I or Title IV of ERISA, established or maintained for employees of the Borrower or the Guarantor. "Prime Rate": the rate of interest announced by NationsBank of Georgia, N.A. from time to time as its "Prime Rate". "Projections": the Borrower's forecasted consolidated and consolidating balance sheets, profit-and-loss statements, and cash-flow statements, all prepared on a basis consistent with the Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Reportable Event": as defined in Title IV of ERISA. "SBA": the United States Small Business Administration, an agency of the United States government. "SBA Commitment": the SBA's commitment to purchase a portion of the loans equal to 40% of the cost of the property financed, on a basis whereby the SBA's lien on the property financed is subordinated to the Borrower's lien on that property, upon completion of the construction period for the underlying property. "Securities": any share(s) of beneficial or equity interest or capital stock or any other instrument commonly understood to be a "security", excluding promissory notes issued for money borrowed in commercial transactions. "Solvent": has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage, is able to pay its debts as they mature, and owns property having a value, both at fair valuation and at present fair saleable value, greater than the amount required to pay its debts. "Subordinated Debt": EBC's debt that is subordinated (as to right and time of payment) to the Obligations under the Subordination Agreement. "Subordination Agreement": the December 29, 1993 Agreement of Subordination and Assignment of Carolina Investors, Inc. and EBC in favor of the Lender. -4- 9 "Subsidiary" of any designated corporation: any other corporation more than 20% of the shares of voting stock of which is owned, directly or indirectly, by such designated corporation, including subsidiary of a subsidiary. "Tangible Net Worth": the total assets of EBC and its consolidated Subsidiaries, plus Subordinated Debt, minus Total Liabilities (excluding from the definition of total assets the amount of (a) any write-up in the book value of any asset resulting from a revaluation thereof after December 31, 1992, (b) treasury stock, (c) Receivables and other amounts due from stockholders and other Affiliates, (d) unamortized debt discount and expense and (e) patents, trademarks, trade names, goodwill, deferred charges, organizational expenses and other intangible assets, all determined in accordance with GAAP). "Total Liabilities": all obligations of EBC and its consolidated Subsidiaries to pay money, excluding Subordinated Debt. 1.2 ACCOUNTING TERMS. All accounting terms used herein shall be construed in accordance with GAAP applied consistently with those principles applied in the preparation of the financial statements referred to in Section 6.6, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with GAAP. In the event of ambiguities in GAAP, the more conservative principle or interpretation shall be used. 1.3 USE OF DEFINED TERMS. Any defined term used in the plural preceded by "the" encompasses all members of the relevant class. Any defined term used in the singular preceded by "any" indicates any number of the members of the relevant class. Any agreement or instrument referred to in Section 1.1, or the term "Agreement", means such agreement or instrument as from time to time supplemented and amended. A definition in singular form applies to the plural form of the term, and vice versa. 1.4 SECTION AND EXHIBIT REFERENCES, ETC. References to sections, exhibits, and the like refer to those in or attached to this Agreement unless otherwise specified. 2. AMOUNT AND TERMS OF THE LOANS 2.1 THE LOANS. (a) Revolving Loans. The Lender agrees to make loans to the Borrower, and the Borrower agrees to borrow from the Lender, upon request of the Borrower from time to time, up to 50% of the Borrower's Eligible Loans (the sum of the Eligible Loans being the "Borrowing Base"); provided, that the total amount of all Loans outstanding at any time under this sentence shall not exceed $8,000,000. The amounts of such Loans shall be determined in the sole discretion of the Lender to be consistent with the value of the Eligible Loans, taking into account all fluctuations of the value thereof in light of the Lender's experience and sound business principles. Such determinations shall be subject to the requirements of good faith on the Lender's part, the Borrower's undertakings hereunder, and especially the Borrower's grant to the Lender of a security interest in the Collateral as security for the Loans and all other Obligations of the Borrower to the Lender, which will, of necessity, fluctuate in amount, and to the condition that the Lender at all times be fully secured. To the extent necessary to reduce the total amount of all Loans outstanding to the maximum amount then available under clauses (i) and (ii) of this Section 2.1, the Borrower shall pay to the Lender, on demand, the amount of outstanding Loans in excess of that maximum amount. -5- 10 An Eligible Loan shall be included in the Borrowing Base when the Borrower has provided the Lender with a copy of the related SBA Commitment, the original loan documentation for that loan (to the extent requested by the Lender), and such other documentation as the Lender reasonably requests, by fax or otherwise. (b) Overadvances. The Lender may make Overadvances as, in its sole and absolute discretion, it determines to lend. Any such Overadvances may be evidenced by a written agreement between the Lender and the Borrower, which agreement may provide, at the Lender's option, for interest and fees on such Overadvances in addition to those specified hereunder. Except to the extent otherwise provided in any such agreement, any such Overadvances shall be "Loans", shall be repayable upon demand, and shall in all other respects be subject to the terms and conditions of this Agreement. 2.2 INTEREST AND OTHER CHARGES. The Loans shall bear interest on the average daily net balance thereof, calculated monthly, at a fluctuating rate of interest equal to the Prime Rate. Changes in the rate of interest shall be effected monthly to reflect changes in the Prime Rate, as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Interest shall be due and payable monthly, on the first day of each month, for the preceding month. The final payment of all accrued and unpaid interest shall be due and payable on the date that the outstanding principal amount of the Loans is paid or due and payable in full. After an Event of Default, interest shall also be due and payable upon the Lender's demand from time to time. The Lender shall inform the Borrower of the amount of interest due and payable as of each payment date set forth in the preceding paragraph, and the Borrower shall pay the interest when due or the Lender may, in its discretion, charge such amount to the Borrower's account under this Agreement. As additional consideration for the credit facility established in Section 2.1, the Borrower agrees to pay to the Lender a fee, payable on the first day of each month for the preceding month, equal to the average unused principal portion of the maximum loan facility hereunder (i.e., $8,000,000 minus the average daily principal amount of Loans outstanding) times 0.125% per annum. For interest computation purposes, Borrower's account will be credited for each remittance received on the day that the underlying funds are collected; the day of receipt of funds shall be deemed to be the following Banking Day if the receipt is after the Lender's cutoff time for receipt of funds or if such day is not a Banking Day. If the outstanding principal amount of the Loans becomes due and payable or if any payment of principal or interest is not timely made, or (at the Lender's option) if any Event of Default exists, interest shall accrue on the unpaid principal balance of the Loans or on such defaulted principal payment, from the date that the Loans became so due and payable or that the defaulted payment was not timely made, at a rate of 4% per annum above the Prime Rate. Changes in the rate shall be effected monthly to reflect changes in the Prime Rate as follows: The rate shall be adjusted on the first day of each month based on the Prime Rate in effect at the close of business on the last Banking Day of the preceding calendar month. Such interest shall continue to accrue until the date of payment of all principal and accrued but unpaid interest or such defaulted payment, as applicable, and shall be due and payable upon demand from time to time by the Lender. -6- 11 2.3 COMPUTATION OF INTEREST AND OTHER CHARGES. Interest on the Loans, and other periodic charges hereunder, shall be computed on the basis of a 360-day year and actual days lapsed. 2.4 CHARGES. The Borrower and the Lender hereby agree that the only charges imposed by the Lender upon the Borrower for the use of money in connection herewith are and shall be the interest described in Section 2.2. All other charges imposed by the Lender upon the Borrower in connection with the Loans, any commitment fees, collection fees, letter of credit fees, facility fees, origination fees, prepayment charges or early termination fees, default charges, late charges, attorneys' fees, and reimbursement for costs and expenses paid by the Lender to third parties, or for damages incurred by Lender, are and shall be deemed to be charges made to compensate the Lender for underwriting or administrative services and costs and other services or costs performed and incurred, and to be performed and incurred, by the Lender in connection with the Loans, and shall under no circumstances be deemed to be charges for the use of money. In no event shall the amount of interest due or payable hereunder exceed the maximum rate of interest allowed by applicable law, and if any such payment is made by the Borrower or received by the Lender, then such excess sum shall be credited as a payment of principal, unless the Borrower notifies the Lender, in writing, that the Borrower elects to have such excess sum returned to it forthwith. It is the express intent hereof that the Borrower not pay and the Lender not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Borrower under applicable law. 2.5 PAYMENT. All payments by the Borrower shall be made to the Lender at its address referred to in Section 11.3 hereof in lawful money of the United States of America and in immediately available funds. 2.6 PAYMENT ON NON-BANKING DAYS. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment shall be made on the following Banking Day, and such extension of time shall be included in the computation of interest. 2.7 EFFECTIVE DATE AND TERMINATION. This Agreement shall be effective on the date set forth in the first paragraph of this Agreement, and shall continue in full force and effect until December 29, 1998 and from year to year thereafter unless terminated on December 29, 1998 or any anniversary thereof by either party's giving to the other not less than 60 days' prior written notice. If the Borrower terminates this Agreement other than on December 29, 1998 or any anniversary thereof, the Borrower shall pay to the Lender an early termination fee equal to $100,000 for any termination before December 29, 1998, $50,000 for any termination after December 29, 1998 and before December 29, 1999, and $25,000 for any termination thereafter not on a December 29. Upon the occurrence of an Event of Default, the Lender shall have the right to terminate this Agreement at any time without notice. This Agreement shall automatically terminate upon the termination of the December 29, 1993 Loan and Security Agreement, as from time to time amended, between the Lender and EBC. Notwithstanding any termination of this Agreement, the Lender shall retain all of its rights and remedies hereunder (including its security interest in the Collateral), and the Borrower shall continue to be bound by all the terms, conditions, and provisions hereof until all of the Obligations of every nature have been fully disposed of, concluded, finally paid, satisfied, and liquidated. -7- 12 2.8 STATEMENTS OF ACCOUNT. The Lender shall render a statement of account monthly, and, absent manifest error, such statement rendered by the Lender shall bind the Borrower and the Lender (unless the Borrower or the Lender notifies the other in writing to the contrary within 30 days after the date of each statement rendered; and any such notice shall be deemed an objection only to those items specifically objected to therein). 3. SECURITY INTERESTS As security for the full payment and performance of the Obligations, the Borrower hereby grants to the Lender a security interest in all of the following property and interests in property of the Borrower, whether now owned or existing or acquired or arising in the future or in which the Borrower now has or in the future acquires any rights, and wherever located: (a) all right, title, and interest in any loan made by the Borrower, including all related documentation, and all guarantees, collateral, and other security therefor, (b) all of the Borrower's accounts, inventory, general intangibles, instruments, chattel paper, documents, equipment, and other goods, (c) all accessions to, substitutions for, and replacements, products, and proceeds of any of the foregoing, including insurance proceeds and rental payments, and (d) all books and records (including customer lists, credit files, computer programs, print-outs, and other computer materials and records) pertaining to any of the foregoing. The Borrower shall execute and deliver all supplemental documentation that the Lender from time to time requests to perfect or maintain the perfection of the security interest granted in this Section, and shall pay (or reimburse the Lender for) the cost of filing or recording any such documentation, on demand. 4. CONDITIONS PRECEDENT TO ADVANCES 4.1 DOCUMENTS. The determination by the Lender to make Advances is subject to the Lender's having received the following, in form and substance satisfactory to the Lender: (a) the Guarantee, (b) the Borrower's Secretary's Certificate, (c) the Borrower's CEO's Certificate, (d) certified copies of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, (e) the Opinion, (f) appropriate UCC-1 financing statements, -8- 13 (g) the documentation described in Section 5.1 for each loan for which an Advance is made, and (h) such other documentation as the Lender reasonably requests. 4.2 OTHER CONDITIONS PRECEDENT. In addition to the foregoing, any obligation of the Lender to make each Advance is subject to the following conditions precedent: (a) the representations and warranties contained in Section 6 (except 6.13, 6.17, and 6.19) hereof shall be correct on and as of the date of the Advances with the same effect as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; (b) since the date of the statements referred to in Section 6.6 hereof, no materially adverse change shall have occurred in the Borrower's business, prospects, condition, affairs, operations, or assets, nor in its right or ability to carry on its operations; (c) no Default shall exist or would result from the Advance; and d. the Lender in its sole discretion determines that such Advance will be fully secured, as provided for in Section 2.1, and will not cause the outstanding balance of the Loans to exceed the limits described in Section 2.1. 5. CLOSING PROCEDURES. 5.1 TRANSFERS OF LOAN DOCUMENTS. Before the Lender funds an Advance for an Eligible Loan, the Borrower shall provide the Lender with a copy of the related SBA Commitment, all original loan documentation for that loan (to the extent requested by the Lender), and such other documentation as Lender reasonably requests, by fax or otherwise. The Borrower shall deliver the original of each underlying note to the Lender by the third Banking Day following the closing for the related Eligible Loan. In addition, if the Borrower requests a Loan for which the Borrowing Base would be insufficient without the Lender's having a perfected security interest in the related underlying note, then if and to the extent that the Lender so requests, the Borrower shall execute and deliver to the Lender the underlying note and all other documents relating to that Eligible Loan, and properly executed assignments of each such document, in recordable form acceptable to the Lender in its sole discretion. The originals of all such collateral, loan, and other documents shall be held by the Borrower unless specifically requested by the Lender. The Lender may hold any such specifically-requested documents until the Lender releases its security interest in such Collateral pursuant to Section 5.2 (unless an Event of Default exists, in which case the Lender shall have its right to pursue the rights and remedies). Neither the Lender's execution of this Agreement nor its taking of any action contemplated or permitted hereunder shall constitute or be deemed to be an assumption of any of the Borrower's liabilities or obligations, and the Lender shall not thereby be deemed to have consented to any reporting requirements of, or other regulations by, the SBA. 5.2 RELEASE OF SECURITY INTEREST IN COLLATERAL. Upon receipt of payment in full of any Loan, the Lender shall release its security interest in the related loan, and shall return any related note that it holds. -9- 14 6. GENERAL REPRESENTATIONS AND WARRANTIES. In order to induce the Lender to enter into this Agreement and to make Advances hereunder, the Borrower represents and warrants the following: 6.1 ORGANIZATION, STANDING, ETC. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of South Carolina, and has all requisite power and authority (corporate and otherwise) to own and operate its properties and to carry on its business as now conducted and proposed to be conducted; and the Borrower has all requisite power and authority (corporate and otherwise) to execute, deliver, and perform its obligations under this Agreement and all other documents executed in connection therewith. 6.2 ENFORCEABILITY. This Agreement, and all other documents executed in connection with the Loans, when delivered for value received, shall constitute valid and binding obligations of the Borrower enforceable in accordance with their terms. 6.3 QUALIFICATION. The Borrower is duly qualified, licensed, or domesticated, and in good standing as a foreign corporation duly authorized to do business, in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary, as follows: Alabama, Florida, Louisiana, Mississippi, North Carolina, and Tennessee. 6.4 COMPLIANCE WITH ARTICLES OF INCORPORATION, BY-LAWS, AND OTHER INSTRUMENTS, ETC. (a) The Borrower is not in violation of any material term of its articles of incorporation or by-laws, and no event, status, or condition has occurred or exists which upon notice or lapse of time, or both, would constitute a violation thereof; (b) to the best of its knowledge, the Borrower is not in violation of any material term of any mortgage, indenture, or agreement relating to outstanding borrowings to which it is a party, or of any judgment, decree, or order to which it is subject, or of any other instrument, lease, contract, or agreement to which it is a party, or of any statute, or governmental rule or regulation applicable to it, and no event, status, or condition has occurred or exists which upon the giving of notice or lapse of time, or both, would constitute a material violation of any such term; (c) the Borrower's execution, delivery, and performance of this Agreement and the other instruments and agreements provided for by this Agreement to which the Borrower is, or is to be, a party, and the carrying out of the transactions contemplated hereby and thereby have been duly authorized by all requisite action on the part of the Borrower (corporate and otherwise) and will not result in any violation of the articles of incorporation or by-laws of the Borrower, or violate or constitute a default under any term of anything described in clause (b) above, or result in the creation of any mortgage, lien, encumbrance or charge upon any of the properties or assets of the Borrower pursuant to any term of anything described in clause (b) above; and (d) there is no term of anything described in clause (b) above which materially adversely affects or in the future may (so far as the Borrower can now foresee) materially adversely affect the Borrower's business, prospects, condition, affairs, operations, properties, or assets. 6.5 SUBSIDIARIES; PARENT. The Borrower has no Subsidiary. EBC owns all the stock of the Borrower. 6.6 FINANCIAL STATEMENTS. The Borrower has furnished the Lender with copies of the fiscal year-end consolidated and consolidating balance sheet of EFC and its consolidated subsidiaries -10- 15 as at December 31, 1994, and the consolidated and consolidating statements of income and of cash flows of such corporations for such fiscal year, which annual financial statements have been examined by Elliott Davis & Co., independent certified public accountants; and copies of such financial statements for each month thereafter through July 31, 1995, duly certified by the chief financial officer of EFC. Such financial statements are complete and have been prepared in accordance with GAAP applied on a basis consistent with the accounting principles applied in the preceding fiscal period, and present fairly the financial condition of EFC as at the dates indicated and the results of the operations of EFC for such periods. Such financial statements show all liabilities (direct, indirect, and contingent, including guarantee and surety obligations) of the Borrower and the Guarantor as of the respective dates thereof, except those arising in the ordinary course of business since the date of the last of such financial statements. 6.7 CHANGES IN FINANCIAL CONDITION. Since the date of the annual financial statements referenced in Section 6.6, there has been no change in the assets, liabilities, or financial condition of the Borrower or the Guarantor from that set forth or reflected in the fiscal year-end balance sheet referred to in Section 6.6, other than changes in the ordinary course of business, none of which has been, either in any case or in the aggregate, materially adverse. 6.8 TAX RETURNS AND PAYMENTS. All federal, state, and local tax returns and reports of the Borrower or the Guarantor required to be filed have been filed, and all taxes, assessments, fees, and other governmental charges upon the Borrower or the Guarantor, or upon any of the properties, assets, incomes, or franchises of either, which are due and payable in accordance with such returns and reports, have been paid, other than those presently (a) payable without penalty or interest, or (b) contested in good faith and by appropriate and lawful proceedings prosecuted diligently. The aggregate amount of the taxes, assessments, charges, and levies so contested is not material to the condition (financial or otherwise) and operations of the Borrower or the Guarantor. The charges, accruals, and reserves on the books of the Borrower and the Guarantor in respect of federal, state, and local taxes for all fiscal periods to date are adequate, and the Borrower knows of no unpaid assessment for additional federal, state, or local taxes for any such fiscal period or of any basis therefor. 6.9 TITLE TO PROPERTIES AND ASSETS; LIENS; ETC. The Borrower has (a) good and marketable title to its properties and assets, including the Collateral and the properties and assets reflected in the fiscal year-end balance sheet referred to in Section 6.6, except properties and assets disposed of since the date of such balance sheet in the ordinary course of business, and (b) good and marketable title to its leasehold estates and such properties, assets, and leasehold interests are subject to no covenant, restriction, easement, right, lease, or Lien, other than Permitted Liens. 6.10 PATENTS; TRADEMARKS; FRANCHISES; ETC. The Borrower owns or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, and licenses, and rights with respect thereto, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others, and, in each case, subject to no Lien, lease, license, or option, except as specified on Schedule 2. Each such asset or agreement is in full force and effect, and the holder thereof has fulfilled and performed all of its obligations with respect thereto. No event has occurred or exists which permits, or after notice or lapse of time or both would permit, revocation or termination, or which materially adversely affects or in the future may materially adversely affect, the rights of such holder thereof with respect thereto. No other license or franchise is necessary to the operations of the business of the Borrower as now conducted or proposed to be conducted. The Borrower -11- 16 does not do business (and has not done business since the date that it was formed) under any trade names or tradestyles other than those listed on Schedule 2. 6.11 LITIGATION, ETC. Except as specified on Schedule 3, there are no actions, proceedings, or investigations, however described or denominated, pending or (to the knowledge of the Borrower) threatened (or any basis therefor known to the Borrower) which, either in any case or in the aggregate, might result in any materially adverse change in the Borrower's or the Guarantor's business, prospects, condition, affairs, operations, properties, or assets, or in its right or ability to carry on its operations as now conducted or proposed to be conducted, or might result in any material liability on the part of the Borrower or the Guarantor, and none which questions the validity of this Agreement or any of the other instruments or agreements provided for by this Agreement or of any action taken or to be taken in connection with the transactions contemplated hereby or thereby. 6.12 ADVERSE DEVELOPMENTS. Since the date of the latest financial statements referred to in Section 6.6, neither the financial condition, business operations, affairs, or prospects of the Borrower or the Guarantor, nor the properties or assets of either, have been materially adversely affected in any way as the result of any legislative or regulatory change, or any revocation, amendment, or termination, or any pending or threatened such action, or any franchise or license or right to do business, or any fire, explosion, flood, drought, windstorm, earthquake, accident, casualty, labor trouble, riot, condemnation, requisition, embargo or Act of God or the public enemy or of armed forces, or otherwise, whether or not insured against. 6.13 DISCLOSURE. To the best of the Borrower's knowledge, neither this Agreement nor the financial statements referred to in Section 6.6 nor any other document, certificate or statement furnished to Lender by or on behalf of the Borrower or the Guarantor in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading. 6.14 MARGIN SECURITIES. The Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of the Loans has been or will be used, directly or indirectly, to purchase or carry any margin securities within the meaning of Regulation U. 6.15 INVESTMENT COMPANY. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.16 ERISA. The Borrower, the Guarantor, and each Plan is in compliance with those portions of ERISA and the Code pertaining to each Plan. No Plan that is subject to the minimum funding standards of ERISA or the Code has incurred any accumulated funding deficiency within the meaning of ERISA or the Code. Neither the Borrower nor the Guarantor has incurred, and no facts lead the Borrower to believe it or the Guarantor will incur, any liability to the Pension Benefit Guaranty Corporation in connection with any Plan. The assets of each Plan that is subject to Title IV of ERISA are sufficient to provide the benefits under such Plan which the Pension Benefit Guaranty Corporation would guarantee the payment thereof if such Plan terminated, and are also sufficient to provide all other benefits due under the Plan. No Reportable Event has occurred and is continuing with respect to any Plan. No Plan nor any trust created under a Plan, nor any trustee or administrator thereof, has engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) which -12- 17 would subject any Plan, any trust created thereunder, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust, to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code. Neither the Borrower nor the Guarantor is required to contribute to or is contributing to a "multiemployer pension plan" (as defined in the Multiemployer Pension Plan Amendments Act of 1980), and neither the Borrower nor the Guarantor has any "withdrawal liability" (as defined in such Act) to any multiemployer pension plan. 6.17 LOCATIONS. The Borrower's principal place of business and chief executive office is located at its address specified in Section 11.3. 6.18 SOLVENCY. The Borrower is Solvent. 6.19 NAME CHANGE; MERGER. During the past five years, the Borrower has not changed its corporate name or been party to a merger or consolidation, except as specified in Schedule 2. 7. AFFIRMATIVE COVENANTS. The Borrower covenants, for so long as any Loan is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 7.1 INSURANCE. The Borrower shall insure its property against all risks to which it is exposed, including loss, damage, fire, theft, and all other such risks, and in such amounts, as would be prudent for similar businesses similarly situated, including loss, damage, fire, theft, and all other such risks, and in such amounts, with such companies, under such policies, and in such form as shall be satisfactory to the Lender. In addition, the Borrower will maintain comprehensive public liability and worker's compensation insurance and such other insurance against loss or damage as are customarily carried by corporations similarly situated, with reputable insurers, in such amounts, with such deductibles, and by such methods as shall be adequate and in any event in amounts of not less than the amounts generally maintained by other companies engaged in similar businesses. 7.2 TAXES AND LIABILITIES. The Borrower shall pay and discharge, when due, all taxes, assessments, and governmental charges or levies imposed upon it or its income or profits, or against its properties, and all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; provided, that the Borrower shall not be required to pay any such tax, assessment, charge, levy, or claim so long as it is being contested in good faith and by appropriate and lawful proceedings diligently pursued and with respect to which adequate reserves have been set aside on its books. 7.3 ACCOUNTING; FINANCIAL STATEMENTS; ETC. The Borrower will deliver to Lender: (a) within 30 days after the end of each of the first 11 months in each fiscal year of the Borrower a consolidating balance sheet of EFC and its consolidated subsidiaries (including the Borrower), as at the end of such period and statements of income and of cash flows of such corporations for such period and for the year-to-date period then ended, setting forth in each case in comparative form the figures for the corresponding period of the previous fiscal year, in form and detail as reasonably required by the Lender, and certified as complete and correct by the chief financial officer of EFC or of -13- 18 the Borrower, together with a certificate by such officer stating that, as of the date of such certification, no Default exists (or, if any Default exists, specifying the nature thereof and what action the Borrower has taken, is taking or proposes to take with respect thereto); (b) within 90 days after the end of each fiscal year, a consolidated balance sheet of Emergent Group, Inc. and a consolidating balance sheet of EFC and its consolidated subsidiaries (including the Borrower) as at the end of such fiscal year, and statements of profit and loss, shareholders' equity, and changes in cash flows of such corporations for such year, setting forth in each case in comparative form the figures for the previous fiscal year in form and detail as reasonably required by the Lender, and accompanied by an unqualified report and opinion on such financial statements (including on the supplemental schedules) from Elliot Davis & Company (or other certified public accountants satisfactory to the Lender), which report and opinion shall be prepared in accordance with GAAP, together with a certificate by the chief financial officer of EFC or of the Borrower of the character specified in Section 7.3(a), and a certificate by such accountants stating whether or not their examination has disclosed the occurrence or existence of any Default, and, if their examination has disclosed a Default, specifying the nature and period of existence thereof, and demonstrating as at the end of such accounting period in reasonable detail compliance during such accounting period with Sections 6.18, 7.6, 7.13, 7.14, 7.15, 8.10, 8.11, 8.12, and 8.14; (c) copies of all other statements or reports prepared by or supplied to the Borrower by its accountants or auditors reflecting the financial position of the Borrower; (d) within 30 days after the end of each fiscal year, Projections for the next three years, year-by-year; (e) within 90 days after the end of each fiscal year, financial statements, of the type described in Section 7.3(b), for the Guarantor; and (f) with reasonable promptness, such other data and information as the Lender from time to time reasonably requests. 7.4 INSPECTION. The Borrower will permit authorized representatives designated by the Lender to visit and inspect any of the properties of the Borrower, including its books and records (and to make extracts therefrom), and to discuss its affairs, finances, and accounts with its officers, directors, employees, and accountants, all at such reasonable times and as often as the Lender reasonably requests. The Borrower will at all times keep accurate and complete records with respect to the Collateral. 7.5 MAINTENANCE OF CORPORATE EXISTENCE; COMPLIANCE WITH LAWS. The Borrower shall at all times preserve and maintain in full force and effect its corporate existence, powers, rights, licenses, permits, and franchises in the jurisdiction of its incorporation, and shall operate in full compliance with all applicable laws, statutes, regulations, certificates of authority, and orders in respect of the conduct of its business, and shall qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or appropriate in view of its business and operations. 7.6 USE OF PROCEEDS. The proceeds of the Loans will be used solely for repaying existing debt, and for general corporate purposes. No part of the proceeds will be used to cause a violation of Section 6.14. -14- 19 7.7 NOTICE OF DEFAULT. The Borrower shall promptly notify the Lender in writing upon the occurrence or existence of any known Default, and shall provide to the Lender with such written notice a detailed statement by a responsible officer of the Borrower of all relevant facts and the action being taken or proposed to be taken by the Borrower with respect thereto. 7.8 MAINTENANCE OF PROPERTIES. The Borrower shall maintain or cause to be maintained in good repair, working order, and condition all properties used or useful in its business, and from time to time will make or cause to be made all appropriate repairs, renewals, and replacement thereof. The Borrower will not do or permit any act or thing which might impair the value or commit or permit any waste of its properties or any part thereof or permit any unlawful occupation, business, or trade to be conducted on or from any of its properties. 7.9 NOTICE OF ERISA DEVELOPMENTS. As soon as possible and in any event within 30 days after the Borrower knows or has reason to know of any Reportable Event or "prohibited transaction" (as defined in Section 6.16) with respect to any Plan or that the Pension Benefit Guaranty Corporation or the Borrower has instituted or will institute proceedings under ERISA to terminate a Plan subject to Title IV of ERISA, or a partial termination of a Plan has or is alleged to have occurred, or any litigation regarding a Plan or naming the trustee of a Plan or the Borrower or the Guarantor with respect to a Plan is threatened or instituted, the Borrower shall provide to the Lender the written statement of the chief financial officer of the Borrower setting forth details of such Reportable Event, prohibited transaction, termination proceeding, partial termination, or litigation and the action being or proposed to be taken with respect thereto, together with copies of the notice of such Reportable Event or any other notices, applications, or forms submitted to the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any notices or correspondence received from the Pension Benefit Guaranty Corporation, Internal Revenue Service, or United States Department of Labor, and copies of any pleadings, notices, or other documents relating to such litigation. 7.10 NOTICE OF LITIGATION OR ADVERSE CHANGE. The Borrower shall promptly give to the Lender written notice (a) of all threatened or actual actions, suits, investigations, or proceedings by or before any court, arbitrator, or governmental department, commission, board, bureau, agency or other instrumentality (state, federal, or foreign), affecting the Borrower or the Guarantor or the rights or other properties of the Borrower or the Guarantor, except any litigation or proceedings which is not likely to affect the financial condition of the Borrower or the Guarantor or to impair the right or ability of the Borrower or the Guarantor to discharge the Obligations; (b) of any materially adverse change in the condition (financial or otherwise) of the Borrower or the Guarantor; and (c) of any seizure or levy upon any part of any of the Borrower's or the Guarantor's properties under any process or by a receiver. 7.11 PAYMENT OF LOANS. The Borrower shall punctually pay the principal and interest on the Loans, and all other sums falling due hereunder or under any other documents executed in connection with the Loans, in accordance with the terms hereof and thereof. 7.12 NOTIFICATION OF CHANGE OF NAME OR BUSINESS LOCATION. The Borrower shall notify the Lender immediately of each change in the Borrower's corporate name and trade names, in the location of the Borrower's principal place of business, in each location where any of the Collateral is kept, and the office where the Borrower's books and records are kept. -15- 20 7.13 TANGIBLE NET WORTH. EBC shall maintain at all times a Tangible Net Worth of not less than $3,000,000 during 1995, $3,750,000 during 1996, $4,500,000 during 1997, and $5,250,000 during 1998, and continuing to increase by $750,000 each fiscal year thereafter. 7.14 RATIO OF TOTAL LIABILITIES TO TANGIBLE NET WORTH. EBC shall maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 6 to 1. 7.15 INTEREST COVERAGE RATIO. EBC shall maintain during each consecutive four-quarter period (or such lesser number of quarters for which this Agreement has been in effect) a ratio of EBIT to Interest on NationsBank Debt of at least 1.5 to 1. 7.16 EBC SUBSIDIARY. The Borrower shall be a wholly-owned Subsidiary of EBC. 8. NEGATIVE COVENANTS. The Borrower covenants, for so long as any of the Loans is outstanding or any of the other Obligations remains unpaid or unperformed, as follows: 8.1 DEBT. The Borrower will not obtain or attempt to obtain from any party (other than for the purpose of repaying the Obligations in full) any loans, advances, or other financial accommodations or arrangements other than (a) the Obligations, (b) debt underlying any purchase money security interest permitted by Section 8.2 not to exceed, in aggregated principal amount, $100,000 minus any such debt owed by EBC at any one time outstanding, (c) unsecured borrowings not to exceed in the aggregate $500,000 minus any such debt owed by EBC at any one time outstanding, (d) unsecured trade credit, incurred in the ordinary course of business, having commercially customary terms, and (e) borrowings from EBC or Carolina Investors, Inc. that are fully subordinated to the Obligations. 8.2 LIENS. The Borrower shall not create, incur, assume, or suffer to exist any Lien of any kind upon any of its property or assets (including the Collateral), whether now owned or hereafter acquired, except (a) Liens in favor of the Lender; (b) Liens existing on the date hereof and specified on Schedule 1; (c) Liens on property securing all or part of the purchase price of such property if (1) such Lien is created contemporaneously with the acquisition of such property, (2) such Lien attaches only to the specific item(s) of property so acquired, (3) such Lien secures only the debt incurred to acquire such property, and (4) the debt secured by such Lien is permitted by Section 8.1; and (d) Liens for taxes, or for other claims, that are not then due. 8.3 GUARANTEES. The Borrower shall not guarantee, endorse, become surety with respect to, or otherwise become directly or contingently liable for or in connection with the obligations of any other Person, except by endorsement of negotiable instruments for deposit or collection and similar transactions in the ordinary course of business. 8.4 PLAN LIABILITIES. The Borrower shall not permit the aggregate present value of accrued benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis, or permit the aggregate present value of vested benefits of any Plan subject to Title IV of ERISA, computed in accordance with actuarial principles and assumptions applied on a uniform -16- 21 and consistent basis by an enrolled actuary of recognized standing acceptable to the Lender, to exceed the aggregate value of assets of the Plan, computed on a fair market value basis. 8.5 FISCAL YEAR. The Borrower will not change its fiscal year from a year ending on December 31 without prior written notice to the Lender. 8.6 OTHER TRANSACTIONS. The Borrower will not engage in any transaction with any of its officers, directors, employees, or Affiliates, except for an "arms-length" transaction on terms no more favorable to the other party than would be granted to an unaffiliated Person, which transaction shall be approved by its disinterested directors and shall be disclosed in a timely manner to the Lender before being consummated. 8.7 MERGER; SUBSIDIARY; ETC. The Borrower will not merge or consolidate with any other corporation, form or acquire any Subsidiary, or issue any share of capital stock. 8.8 SALE OF ASSETS. The Borrower will not sell, lease or otherwise transfer all or any substantial part of its assets material to its operations, except in the ordinary course of its business; provided, that it may in any calendar year dispose of items of equipment having an aggregate market value of not more than $50,000, minus any such equipment disposed of by EBC, if the Borrower uses the proceeds of such disposition to acquire property of a similar nature. 8.9 CHANGES IN BUSINESS. The Borrower will not engage in any business other than the business presently conducted by it on the date of this Agreement and business of substantially the same type or directly related thereto. 8.10 DIVIDENDS AND REDEMPTIONS. The Borrower will not declare or pay any dividend (other than a dividend payable solely in common stock of the Borrower) on any share of any class of its capital stock, or apply any of its property or assets to the purchase, redemption, or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption, or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of capital stock of the Borrower. 8.11 LOANS. The Borrower will not make any loans or advances to or extend any credit to any Person except (a) the extension of trade credit in the ordinary course of business, and (b) advances to employees not to exceed to any one employee an outstanding total of $5,000 minus any advances to such employee by EBC. 8.12 PLEDGE OF CREDIT. The Borrower will not pledge the Lender's credit for any purpose whatsoever. 8.13 INVESTMENTS. The Borrower shall not purchase, acquire, or otherwise invest in any Person except: (a) Eligible Loans, (b) direct obligations of the United States of America maturing within one year from the acquisition thereof, (c) certificates of deposit issued by, or investment accounts in, banks or financial institutions having a net worth of not less than $50,000,000, (d) commercial paper rated A-1 by Standard & Poor's Corporation or P-1 by Moody's Investors Service, Inc., (e) overnight repurchase agreements issued by the Lender or any corporate Affiliate of the Lender's, or (f) assets received from foreclosing on a loan. -17- 22 8.14 CAPITAL EXPENDITURES. The Borrower shall not make or incur Capital Expenditures in excess of $100,000 during any fiscal year of the Borrower, unless the Lender gives its prior written consent (which shall not be unreasonably withheld). 9. POWER OF ATTORNEY. The Borrower hereby appoints and constitutes the Lender as its attorney-in-fact to do any of the following if an Event of Default exists: to receive, open, and dispose of all mail addressed to the Borrower pertaining to Collateral (or appearing to the Lender possibly to pertain to Collateral); to notify the postal authorities to change the address and delivery of mail addressed to the Borrower to such address as the Lender shall designate; to endorse the Borrower's name upon any notes, acceptances, checks, drafts, money orders, and other forms of payment that come into the Lender's possession, and to deposit or otherwise collect the same; to sign the Borrower's name on any document relating to any Collateral; to execute in the name of the Borrower any affidavits and notices with regard to any and all lien rights; and to do all other acts and things necessary to carry out this Agreement. The Borrower hereby waives notice of presentment, protest, and dishonor of any instrument so endorsed by the Lender. All the Lender's acts as attorney-in-fact are hereby authorized, ratified, and approved by the Borrower, and the Borrower agrees that, as attorney-in-fact, the Lender shall not be liable for any acts of omission or commission, nor for any error of judgment or mistake of fact or law, except to the extent of loss or damage caused directly and primarily by the Lender's gross negligence or willful misconduct. This power, being coupled with an interest, is irrevocable so long as this Agreement remains in effect or any of the Obligations remains outstanding. 10. REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, the entire outstanding principal amount of the Loans, together with all accrued but unpaid interest thereon, and all other of the Obligations shall, at the option of the Lender, immediately become absolute and due and payable, without presentation, demand of payment, protest, notice for demand of payment, protest and notice of nonpayment, or any other notice of any kind with respect thereto, all of which are hereby expressly waived by the Borrower to the full extent permitted by law. The Lender may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and other applicable law in Georgia or any other applicable jurisdiction. The Borrower agrees, after the occurrence of any Event of Default, immediately to assemble at the Borrower's expense all the Collateral at a convenient place acceptable to the Lender, and to surrender such property to the Lender. The Borrower agrees to pay all costs that the Lender pays or incurs to collect the Obligations or enforce its rights hereunder. The Borrower agrees that the Lender may charge the Borrower's account for, and that the Borrower will pay on demand, all costs and expenses, including 15% of the total amount involved as attorneys' fees (not to exceed the amount of attorneys' fees actually incurred), incurred: (i) to liquidate any Collateral, (ii) to obtain or enforce payment of any Obligations, or (iii) to prosecute or defend any action or proceeding either against the Lender or against the Borrower concerning any matter growing out of or connected with this Agreement or any Receivable or any Obligation. The Borrower agrees that the Lender may apply any proceeds from disposing of the Collateral first to any security interest(s), lien(s), or encumbrance(s) prior to the Lender's security interest. -18- 23 The Lender shall be entitled to hold or set off any sums and all other property of the Borrower's, at any time to the credit of the Borrower or in the possession of the Lender, whether by pledge or otherwise, or upon or in which the Lender may have a lien or security interest. Recourse to security shall not at any time be required, and the Borrower shall at all times remain liable for the repayment to the Lender of all Obligations in accordance with their terms, regardless of the existence or non-existence of any Event of Default. 11. MISCELLANEOUS. 11.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Lender in exercising any right, power, or remedy hereunder, or under any other document or agreement given by the Borrower or received by the Lender in connection herewith, shall operate as a waiver thereof, and no waiver shall be valid unless in writing signed by the Lender (and then only to the extent therein stated); nor shall any single or partial exercise of any such right, power, or remedy preclude any other or further exercise thereof or the exercise of any other right, power, or remedy hereunder or thereunder. The remedies herein and therein provided are cumulative and not exclusive of any remedies provided by law or in equity. 11.2 AMENDMENTS, ETC. No amendment, modification, termination, or waiver of any provision of this Agreement or of any other document or agreement given by the Lender or received by the Borrower in connection herewith, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless it is in writing and signed by the Lender (and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given). No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 11.3 ADDRESSES FOR NOTICES, ETC. All notices, requests, demands, and other communications provided for hereunder, other than routine communications in the ordinary course of business, shall be in writing (including telecopies) and mailed, telecopied, or delivered as follows: if to the Borrower: Emergent Commercial Mortgage, Inc. 15 S. Main Street, Suite 750 Greenville, South Carolina 29601 Attention: Kevin J. Mast Fax: (803) 271-8374 with a copy to: Cary H. Hall, Jr. Wyche, Burgess, Freeman & Parham 44 East Camperdown Way Greenville, South Carolina 29601 Fax: (803) 235-8900 if to the Lender: -19- 24 NationsBank of Georgia, N.A. Business Credit Division P. O. Box 3406 Atlanta, Georgia 30302-3406 Attention: John F. Bohan Fax: (404) 607-6439 or, as to each party, at such other address as it designates in a written notice to the other party complying as to the delivery with the terms of this Section. Except as otherwise expressly provided in this Agreement, all such notices, requests, demands, and other communications shall, when mailed or telecopied, be effective two Banking Days after being deposited in the mails (postage paid) or when sent over a telecopier owned or operated by a party hereto with an answerback response set forth on the sender's copy of the document, addressed as aforesaid, and otherwise shall be effective upon receipt. 11.4 COSTS, EXPENSES, AND TAXES. The Borrower shall pay to the Lender, on demand, all costs and expenses paid or incurred by the Lender in connection with the preparation, reproduction, execution, delivery, administration, or enforcement of this Agreement and other instruments and documents from time to time delivered in connection with this Agreement, including the fees and expenses of counsel for the Lender, and in connection with the Lender's initial evaluation of the line of credit contemplated by this Agreement (including travel and field exam expenses). In addition, the Borrower shall pay any and all stamp and other taxes and recording and filing fees payable or determined to be payable in connection with the execution and delivery of this Agreement and all other instruments and documents from time to time delivered in connection with this Agreement, and shall save and hold harmless the Lender from and against any and all liabilities with respect to or resulting from any delay in paying or failure to pay such taxes or fees. 11.5 COMMERCIAL TRANSACTION. THE BORROWER HEREBY ACKNOWLEDGES THAT THE OBLIGATIONS AROSE OUT OF A "COMMERCIAL TRANSACTION" (AS DEFINED IN O.C.G.A. Section 44-14-260(1), CONCERNING FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY), AND AGREES THAT AFTER ANY EVENT OF DEFAULT (AS "Event of Default" IS DEFINED IN SECTION 1.1), THE LENDER SHALL HAVE THE RIGHT TO AN IMMEDIATE WRIT OF POSSESSION WITHOUT NOTICE OR HEARING. THE BORROWER KNOWINGLY AND INTELLIGENTLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO ANY NOTICE OR POSTING OF A BOND BY THE LENDER PRIOR TO SEIZURE BY THE LENDER (OR THE LENDER'S TRANSFEREES, ASSIGNS, OR SUCCESSORS IN INTEREST) OF THE COLLATERAL OR ANY PORTION THEREOF. THIS IS INTENDED BY THE BORROWER AS A "WAIVER" AS DEFINED IN O.C.G.A. Section 44-14-260(3) (RELATING TO FORECLOSURE OF INTERESTS IN PERSONAL PROPERTY). 11.6 SUCCESSORS AND ASSIGNS. All of the terms of this Agreement, and each of the documents and agreements executed and delivered pursuant to this Agreement, shall bind, benefit, and be enforceable by the successors and assignees of the parties hereto, whether so expressed or not. The Borrower shall not assign or transfer this Agreement, or any of its rights hereunder, without the prior written consent of the Lender. 11.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, covenants, and agreements contained herein or made in writing by the Borrower in connection -20- 25 herewith shall survive the execution and delivery of this Agreement and any and all other documents and instruments relating to or arising out of any of the foregoing. 11.8 TIME IS OF THE ESSENCE. Time is of the essence of this Agreement. 11.9 HEADINGS. The headings in this Agreement are for convenience of reference only, and are not a substantive part of the agreement. 11.10 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 11.11 SEVERABILITY. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. In case any one or more of the provisions in this Agreement shall for any reason be held to be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 11.12 COUNTERPARTS. This Agreement may be executed in separate counterparts. 11.13 GOVERNING LAW; CONSENT TO JURISDICTION. THIS AGREEMENT AND THE OTHER DOCUMENTS AND AGREEMENTS EXECUTED IN CONNECTION HEREWITH (UNLESS SPECIFICALLY STIPULATED TO THE CONTRARY IN SUCH DOCUMENT OR AGREEMENT), AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF GEORGIA (DISREGARDING ANY CONFLICTS-OF-LAWS RULE THAT WOULD APPLY THE LAW OF ANY OTHER JURISDICTION). THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT SITTING IN ATLANTA, GEORGIA, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS OR AGREEMENTS DESCRIBED OR CONTEMPLATED HEREIN, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH UNITED STATES FEDERAL OR STATE COURT. SERVICE OF COPIES OF THE SUMMONS AND COMPLAINT AND ANY OTHER PROCESS WHICH MAY BE SERVED ON THE BORROWER IN ANY SUCH ACTION OR PROCEEDING MAY BE MADE BY MAILING OR DELIVERING A COPY OF SUCH PROCESS TO THE BORROWER IN ACCORDANCE WITH SECTION 11.3 HEREOF. 11.14 WAIVER OF TRIAL BY JURY. THE BORROWER AND THE LENDER EACH WAIVE ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO TRANSACTIONS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER DOCUMENTS DESCRIBED OR CONTEMPLATED HEREIN. -21- 26 IN WITNESS WHEREOF, the Borrower and the Lender have executed this Loan and Security Agreement. EMERGENT COMMERCIAL MORTGAGE, INC. [Seal] By: /s/ ------------------------------ Title: Attest: By: /s/ -------------------------- Secretary Accepted this 10th day of October, 1995, in Atlanta, Georgia. NATIONSBANK OF GEORGIA, N.A. By: /s/ ------------------------------ Title: 22 27 EXHIBIT A Borrower's Secretary's Certificate for the Benefit of NationsBank of Georgia, N.A. I, Kevin J. Mast, Secretary of Emergent Commercial Mortgage, Inc. (the "Borrower"), a South Carolina corporation, hereby certify that: 1. Attached hereto as Exhibit 1 is a certified copy of the articles of incorporation of the Borrower as originally filed, together with all amendments thereto. 2. Attached hereto as Exhibit 2 is a true and correct copy of the by-laws of the Borrower. Those by-laws have not been amended, modified, or revoked, and are in full force and effect as of the date hereof. 3. Attached hereto as Exhibit 3 is a good standing certificate for the Borrower issued by the South Carolina Secretary of State on ______________, 1995. 4. The Borrower has since the date of the certificate referred to in Paragraph 3 above through the date hereof remained in good standing under the laws of the state of South Carolina. 5. No suit or proceeding for the dissolution or liquidation of the Borrower has been instituted or is now threatened. 6. Attached hereto as Exhibit 4 is a true and complete copy of resolutions of the Board of Directors of the Borrower, adopted at a meeting duly called and held on ______________, 1995, at which meeting a quorum for the transaction of business was present and acting throughout. The corporate action in adopting those resolutions was duly taken at that meeting in accordance with the provisions of law and of the Borrower's articles of incorporation and by-laws, and those resolutions are now in full force and effect and have not been modified in any respect. 7. The resolutions referred to in Paragraph 6 authorized the Borrower and its officers referred to therein to execute and deliver, and to do all things necessary or appropriate for the payment and performance of all the Borrower's obligations under, the Loan and Security Agreement (the "Agreement") dated as of October ___, 1995, between NationsBank of Georgia, N.A. (the "Lender") and the Borrower, and all certificates, agreements and other documents to be executed and delivered to the Lender by the Borrower pursuant to the Agreement, and pursuant to the specific resolutions referred to in Paragraph 6. 8. The following persons have been duly elected, have duly qualified, as of the date of the execution of the Agreement were, and on the date hereof are, officers of the Borrower, holding the offices set opposite their names below, and the signatures set opposite their names below are their genuine signatures: 1 28
Name Title Signature ---- ----- --------- Keith B. Giddens Chief Executive Officer ----------------------------------------------------- Kevin J. Mast Vice President, Secretary and Treasurer ----------------------------------------------------- John A. Bickley President -----------------------------------------------------
IN WITNESS WHEREOF, I have signed this Certificate and affixed to it the Borrower's corporate seal on October ___, 1995. ----------------------------------- Secretary [Seal] -2- 29 EXHIBIT 4 ---- Board of Directors' Resolutions ---- RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed to borrow from NationsBank of Georgia, N.A. ("NationsBank"), from time to time, on behalf of this Corporation, such sums as they or any of them may deem necessary or desirable in connection with the operation of the business of this Corporation, upon such terms and conditions as shall be obtained through negotiation with NationsBank, and to execute one or more or financing agreements and promissory notes in respect thereto in the name of this Corporation for the payment of such amounts so borrowed, and further to extend, renew, renegotiate, refinance, or otherwise modify such terms and conditions by agreement with NationsBank. FURTHER RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed to request, from time to time, on behalf of this Corporation, as they deem necessary or desirable for the operation of the business of this Corporation, that NationsBank make advances and overadvances to this Corporation, such advances and overadvances to become subject to the terms and conditions of any agreement with regard to the loan financing of accounts receivable existing at the time of such request or any modification, extension, renewal, or renegotiation thereof. FURTHER RESOLVED, that the officers of this Corporation be and they hereby are jointly and severally authorized and directed, from time to time, on behalf of this Corporation, to secure any such loans, advances, overadvances, or other indebtedness to NationsBank however arising, by pledging, or by granting full lien rights and full security title and security interest in and to, any and all of the assets of this Corporation, both real and personal, and such officers are jointly and severally authorized to execute any and all instruments necessary or desired by NationsBank in any manner as may now or hereafter be recognized by the laws of the United States or any state, or of any foreign state. FURTHER RESOLVED, that any such officers of this Corporation be and are hereby jointly and severally authorized and directed, on behalf of this Corporation, to do such other things and to execute such other documents as may be necessary or desirable to effect the foregoing transactions, including the execution of financing statements and such other notices or instruments as may be necessary or requested by NationsBank. FURTHER RESOLVED, that all acts and deeds of any officer of this Corporation heretofore performed on behalf of this Corporation in entering into, executing, performing, carrying out, or otherwise pertaining to the arrangements and intentions authorized by these resolutions be and they hereby are ratified, approved, confirmed, and declared binding upon this Corporation. FURTHER RESOLVED, that the Secretary of this Corporation shall certify to NationsBank the names of the presently duly elected and qualified officers of this Corporation and shall from time to time hereafter as each change in identity of those officers is made, immediately certify such change to 1 30 NationsBank, and NationsBank shall be fully protected in relying on such certification(s) (or the absence thereof), and shall be indemnified and saved harmless by this Corporation from any claim, demand, expense, loss, or damage resulting from or growing out of honoring the signature of any officer so certified or for refusing to honor any signature not so certified. FURTHER RESOLVED, that the foregoing resolutions shall remain in full force and effect until the close of business on the banking day after written notice of their amendment or rescission shall have been received by NationsBank and that receipt of such notice shall not affect any action taken by NationsBank prior thereto. FURTHER RESOLVED, that the Secretary of this Corporation be, and hereby is, authorized and directed to certify to NationsBank the foregoing resolutions and that the provisions thereof are in accordance with the provisions of law and of the articles of incorporation and by-laws of this Corporation. -2- 31 EXHIBIT B Borrower's CEO's Certificate for the Benefit of NationsBank of Georgia, N.A. I, Keith B. Giddens, Chief Executive Officer of Emergent Commercial Mortgage, Inc. (the "Borrower"), a South Carolina corporation, do hereby certify, pursuant to Section 4.1 of the Loan and Security Agreement (the "Agreement") between NationsBank of Georgia, N.A. (the "Lender") and the Borrower, dated as of October ___, 1995, that Kevin J. Mast has been duly elected, has duly qualified, as of the date of the execution of the Agreement was, and on the date hereof is, the Secretary of the Borrower, and that the signature appearing below is a true specimen of his signature. - -------------------------------------- Kevin J. Mast, Secretary October ___, 1995. ------------------------------------------- Keith B. Giddens, Chief Executive Officer 1 32 EXHIBIT C [To Be Retyped on Letterhead of Counsel to the Borrower] October ___, 1995 NationsBank of Georgia, N.A. P.O. Box 3406 Atlanta, Georgia 30302-3406 Re: Emergent Commercial Mortgage, Inc. Ladies and Gentlemen: We have acted as counsel to Emergent Commercial Mortgage, Inc. (the "Borrower"), a South Carolina corporation, in connection with its execution and delivery of the October ___, 1995 Loan and Security Agreement (the "Loan Agreement") between it and you, and certain related documents. Unless otherwise specified in this opinion letter, the terms used herein have the same meanings as in the Loan Agreement. We also have acted as counsel to Emergent Business Credit, Inc. in connection with its execution and delivery of the Guarantee. In so acting, we have examined the Loan Agreement and the Guarantee, and originals or copies of all other documents that we deemed relevant and necessary as a basis for the opinions hereinafter set forth. Based upon the foregoing, we are of the opinion that: (1) The Borrower is a corporation duly organized and validly existing in good standing under the laws of South Carolina, and has all requisite power and authority to conduct its business, to own and operate its properties, and to execute, deliver, and perform all of its obligations under the Loan Agreement. The Borrower has no Subsidiary. The Borrower is duly qualified, licensed, or domesticated and in good standing as a foreign corporation duly authorized to do business in all jurisdictions in which the character of its properties owned or the nature of its activities conducted makes such qualification, licensing, or domestication necessary (as set forth in Section 7.3 of the Loan Agreement). (2) The Borrower's execution, delivery, and performance of the Loan Agreement have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of shareholders of the Borrower or violate the articles of incorporation, by-laws, or Securities of the Borrower, (b) violate any provision of any law, rule, or regulation (including Regulation 1 33 X of the Board of Governors of the Federal Reserve System) of the United States or of South Carolina, or, to the best of our knowledge, any order, judgment, injunction, decree, determination, or award of any court, arbitrator, or governmental department, agency, or other instrumentality, (c) to the best of our knowledge, result in a breach of or constitute a default under any agreement or instrument to which the Borrower is a party or by which it or its properties may be bound or affected, or (d) result in, or require, to the best of our knowledge, the creation or imposition of any Lien upon or with respect to any of the properties now owned or hereafter acquired by the Borrower (other than the Liens created by the Loan Agreement). To the best of our knowledge, the Borrower is not in violation of any provision of any of the items described in clause (b) of this paragraph or in default under any provision of any of the items described in clause (c) of this paragraph. (3) No authorization, consent, approval, license, or exemption of, or filing or registration with, any court or governmental department, agency, or other instrumentality of the United States or of South Carolina is or will be necessary to the Borrower's valid execution, delivery, or performance of the Loan Agreement or for the payment to the Lender of all sums due and payable thereunder. (4) The Loan Agreement has been duly executed and delivered by the Borrower, and constitute the Borrower's legal, valid, and binding obligation, enforceable against the Borrower in accordance with its terms. (5) To the best of our knowledge, there are no actions, suits, or proceedings pending or threatened against or affecting the Borrower of the Guarantor or the properties of the Borrower or the Guarantor before any court, arbitrator, or governmental department, commission, board, bureau, agency, or other instrumentality (state, federal, or foreign) which, if determined adversely to the Borrower or the Guarantor, would have a materially adverse effect on the financial condition, properties, or operations of the Borrower or the Guarantor, or create a Lien on any property of the Borrower or the Guarantor. (6) You should perfect all the security interests granted under the Loan Agreement (in Collateral for which a security interest can be perfected by filing UCC-1 financing statements) by filing a UCC-1 financing statement in the attached form with the South Carolina Secretary of State. Upon the filing of such financing statement, you will have a perfected first-priority security interest in such Collateral, and no further recording or filing in South Carolina or any other jurisdiction is necessary or advisable in order to establish and perfect such first-priority security interest. (7) The Guarantee has been duly authorized, executed, and delivered by the Guarantor, and constitutes the Guarantor's legal, valid, and binding obligation, enforceable against the Guarantor in accordance with its terms. This opinion is limited to the laws of the United States and of South Carolina. The opinions in paragraphs nos. 4 and 7 are given as if the laws of South Carolina governed the Loan Agreement and the Guarantee, despite their express choice of Georgia law as the law governing their construction and interpretation. No opinion is given as to the validity of the choice of law in the Loan Agreement and the Guarantee. Our opinions set forth herein as to the validity, binding effect, and enforceability of the Loan Agreement and the Guarantee are specifically qualified to the extent that the validity, binding effect, or enforceability of any obligations of the Borrower and the Guarantor thereunder or the availability or -2- 34 enforceability of any of the remedies provided therein, may be subject to or limited by (i) applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium, and other statutory or decisional laws, heretofore or hereafter enacted or in effect, affecting the rights of creditors generally to the extent the same may constitutionally be applied including, without limitation, decisional or statutory law concerning recourse by creditors to security in the absence of notice of a hearing; (ii) the exercise of judicial or administrative discretion in accordance with general equitable principles; (iii) the possible unenforceability of any provision requiring or in effect requiring that waivers or amendments of any provision of the Loan Agreement or the Guarantee, or any related document, may be effected only in writing; (iv) the possible unenforceability of provisions imposing increased interest rates or late payment charges upon delinquency in payment or default, to the extent that any such provision is deemed a "penalty"; (v) limitations imposed by rules and statutes regarding forum, venue, pleading, service of process, qualification to do business, and statutes of limitation; or (vi) limitations on the availability or enforceability of the remedies of specific performance or injunctive relief and of waivers contained in the Loan Agreement or the Guarantee, all of which may be limited by equitable principles or applicable laws, rules, regulations, court decisions, and constitutional requirements. All opinions rendered herein are limited to the existing laws of the State of South Carolina and laws of the United States of America, all as in effect on the date hereof, and we express no opinion as to any other laws, rules, or regulations of such jurisdictions or matters governed by such laws, rules, or regulations; nor do we undertake, by delivery hereof or otherwise, to advise you of any changes in such laws, rules, or regulations. This opinion is made as of the date hereof, and we undertake no (and hereby disclaim any) obligation to advise you of any change in any matter set forth herein. This opinion is limited to the matters expressly set forth herein and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion is solely for your benefit in connection with the Loan Agreement and the Guarantee and may not be relied upon in any manner by any other person. Very truly yours, WYCHE, BURGESS, FREEMAN & PARHAM, P.A. By: --------------------------------------------- Cary H. Hall, Jr. -3- 35 SCHEDULE 1 Liens NONE 1 36 SCHEDULE 2 Trademarks, Tradenames, Name Changes, etc. NONE 1 37 SCHEDULE 3 Litigation NONE 1 EX-10.9 9 MORTGAGE LOAN WAREHOUSING AGREEMENT 1 EXHIBIT 10.9 MORTGAGE LOAN WAREHOUSING AGREEMENT THIS MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Agreement") is made as of the _____ day of _________, 1994, by and between CAROLINA INVESTORS, INC., a ________ corporation (the "Company") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking corporation (the "Lender"). STATEMENT OF PURPOSE The Company has requested the Lender to extend to the Company a mortgage warehousing line of credit, and the Lender has agreed to do so on the terms and subject to the conditions set forth herein. All capitalized terms not otherwise defined herein are defined in Paragraph 10 hereof. Now, therefore, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Credit Facility. 1(a) Lending Limit. Subject to the conditions set forth herein, the Lender agrees that it shall from time to time up to and including the Business Day immediately preceding the Maturity Date, advance loans (the "Loans" or a "Loan") to the Company in amounts not to exceed, in the aggregate at any one time outstanding (determined after giving effect to the other transactions contemplated by the Loan Request pursuant to which said Loan was requested), the lesser of: (1) The Credit Limit; and (2) The Collateral Value of the Borrowing Base. 1(b) Interest Rate. All Loans shall bear interest at the Applicable Corporate Base Rate. 1(c) Payment of Interest. The Company shall pay to the Lender interest on Loans outstanding hereunder from the date disbursed to but not including the date of payment. Interest on Loans shall be payable monthly, in arrears, as provided in Paragraph 2(d) below. 2. Miscellaneous Lending Provisions. 2(a) Use of Proceeds. The proceeds of all Loans shall be used by the Company for the purpose of originating and acquiring Mortgage Loans and for other general corporate purposes in the ordinary course of the Company's business. 2(b) Request For Loans; Making of Loans. If the Company desires to borrow a Loan hereunder, the Company shall make a Loan Request to the Lender no later than 10:00 a.m. (Charlotte, North Carolina time) on the proposed funding date. The Lender shall make available the proposed Loan by crediting the amount thereof in immediately available same day 2 funds to the Funding Account no later than 4:00 p.m. (Charlotte, North Carolina time) on such date. 2(c) Note. The obligation of the Company to repay the Loans shall be evidenced by a note payable to the order of the Lender in the form attached hereto as Exhibit A (the "Note"). 2(d) Interest and Fee Billing and Payment. The Lender shall, on or before the fifth Business Day of each month, deliver to the Company an interest and fee billing for the immediately preceding month, which billing shall set forth interest accrued and payable on Loans and fees payable hereunder for such month and which billing shall be payable no later than the second Business Day following receipt thereof by the Company. In the alternative, the Lender may debit the Company's account(s) maintained with the Lender for the amount of such accrued interest and fees payable. The Lender shall send the Company a detailed accounting of the amount of interest and fees so debited. 2(e) Repayment of Principal. Subject to the prepayment requirements of Paragraph 2(j) below and the required application of proceeds from the sale or other disposition of Mortgage Loans as provided in the Security Agreement, the Company shall pay the principal amount of all Loans on the Maturity Date. 2(f) Borrowing Base Conformity. (1) The Company shall cause to be maintained with the Lender a Borrowing Base such that the Collateral Value of the Borrowing Base is not less than, at any date, the sum of the aggregate dollar amount of outstanding Loans. (2) The Company shall prepay Loans to the Lender, upon telephonic or facsimile demand by the Lender, on any day in the amount by which the aggregate principal amount of outstanding Loans exceeds the Collateral Value of the Borrowing Base, said prepayment to be made on the date on which demand is made by the Lender if made prior to 4:00 p.m. (Charlotte, North Carolina time) or, if made later than 4:00 p.m. (Charlotte, North Carolina time), before 9:00 a.m. (Charlotte, North Carolina time) on the next Business Day. (3) If at such time as the Company shall be required to prepay Loans under this Paragraph 2(f) there shall not have occurred and be continuing an Event of Default or Potential Default hereunder, in lieu of prepaying the Loans as required, the Company may deliver to the Lender additional Eligible Mortgage Loans such that the Collateral Value of the Borrowing Base, after giving effect to the inclusion of such Eligible Mortgage Loans in the Borrowing Base, shall be in compliance with the requirements of subparagraphs (1) and (2) above. 2(g) Nature and Place of Payments. All payments made on account of the Obligations shall be made to the Lender and the Lender is hereby irrevocably authorized to debit the Settlement Account on account thereof. All payments made on account of the Obligations shall be made without setoff or counterclaim in lawful money of the United States of America in immediately available same day funds, free and clear of and without deduction for any taxes, 2 3 fees or other charges of any nature whatsoever imposed by any taxing authority and if received by the Lender by 4:00 p.m. (Charlotte, North Carolina time) such payment will be credited on the Business Day received. If a payment is received after 4:00 p.m. (Charlotte, North Carolina time) by the Lender, such payment will be credited on the next succeeding Business Day and interest thereon shall be payable at the then applicable rate until credited. If any payment required to be made by the Company hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest thereon shall be payable at the then applicable rate during such extension. 2(h) Post-Maturity Interest. Any Obligations not paid when due (whether at stated maturity, upon acceleration or otherwise) shall bear interest from the date due until paid in full at a per annum rate equal to two percent (2%) above the interest rate otherwise applicable thereto, or, if such Obligations do not otherwise bear interest, two percent (2%) above the Applicable Corporate Base Rate. 2(i) Computations. All computations of interest and fees payable hereunder shall be based upon a year of 360 days for the actual number of days elapsed. 2(j) Prepayments. (1) The Company may voluntarily prepay Loans hereunder in whole or in part at any time. (2) Loans hereunder are subject to mandatory prepayment pursuant to Paragraph 2(f) above and, in addition, by application of proceeds of the sale or other disposition of Collateral as provided in the Security Agreement. 2(k) Allocation of Payments Received. (1) Prior to the occurrence of an Event of Default and acceleration of all Loans outstanding hereunder or termination of the commitment of the Lender to advance Loans hereunder, all amounts received by the Lender shall be applied against the outstanding Obligations. (2) Following the occurrence of an Event of Default and acceleration of all Loans outstanding hereunder or termination of the commitment of the Lender to advance Loans hereunder, all amounts received by the Lender on account of the Obligations shall be applied by the Lender as follows: (i) First, to the payment of reasonable costs and expenses incurred by the Lender in the enforcement of its rights under the Credit Documents, including, without limitation, all costs and expenses of collection, attorneys' fees, court costs and foreclosure expenses; (ii) Second, to the Lender to be applied against the Obligations until the Obligations shall have been paid in full; and (iii) Third, to such Persons as may be legally entitled thereto. 3 4 2(l) Fees. The Company shall pay the following fees to the Lender: (1) Such closing fees as are agreed to in writing by the Company and the Lender, said fees to be payable on or before the date of making the first Loan hereunder. (2) A commitment fee, such fee to be computed on a per annum basis payable in monthly installments, in arrears, on the applicable dates specified in Paragraph 2(d) hereof, each such installment to be in an amount equal to the product of: (i) the average daily amount by which the Credit Limit exceeds the amount of Loans outstanding, multiplied by (ii) 0.25%, divided by (iii) 12. 3. Security Agreement; Guaranties; Additional Documents. 3(a) Security Agreement and Financing Statements. On or before the date hereof, the Company shall execute and deliver to the Lender: (1) a security agreement in the form of that attached hereto as Exhibit B (the "Security Agreement"), pursuant to which the Company shall pledge, assign and grant to the Lender a perfected, first priority security interest in and lien upon the Collateral, and (2) such UCC financing statements as the Lender may request. 3(b) Guaranties. On or before the date hereof, the Company shall cause to be executed and delivered to the Lender by each of the Guarantors a continuing guaranty substantially in the form of that attached hereto as Exhibit C (collectively, the "Guaranties"). 3(c) Further Documents. The Company agrees to execute and deliver and to cause to be executed and delivered to the Lender from time to time such confirmatory and supplementary security agreements, financing statements and other documents, instruments and agreements as the Lender may reasonably request, which are in the Lender's judgment necessary or desirable to obtain for the Lender the benefit of the Credit Documents and the Collateral. 4. Conditions to Making of Loans. 4(a) First Loan. As conditions precedent to the Lender's obligation to make the first Loan hereunder: (1) The Company shall have delivered, or shall have caused to be delivered, to the Lender, in form and substance satisfactory to the Lender and its counsel, each of the following: (i) A duly executed copy of this Agreement; (ii) A duly executed copy of the Security Agreement and of each of the Guaranties; (iii) A duly executed copy of the Note; (iv) Duly executed copies of all financing statements and other documents, instruments and agreements, properly executed, deemed 4 5 necessary or appropriate by the Lender, in its reasonable discretion, to obtain for the Lender a perfected, first priority security interest in and lien upon the Collateral; (v) Such credit applications, financial statements, authorizations and such information concerning the Company or either of the Guarantors or the business, operations and conditions (financial and otherwise) of the Company or either of the Guarantors as the Lender may reasonably request; (vi) Certified copies of resolutions of the Board of Directors of each of the Company and the Guarantors approving the execution and delivery of the Credit Documents to which such Person is a party, the performance of the Obligations and any other obligations thereunder and the consummation of the transactions contemplated thereby; (vii) A certificate of the Secretary or an Assistant Secretary of each of the Company and the Guarantors certifying the names and true signatures of the officers of such Person authorized to execute and deliver the Credit Documents to which such Person is a party; (viii) A copy of the Articles of Incorporation of each of the Company and the Guarantors, certified by the respective Secretary or an Assistant Secretary of such Person as of the date of this Agreement as being accurate and complete; (ix) A copy of the Bylaws of each of the Company and the Guarantors, certified by the respective Secretary or an Assistant Secretary of such Person as of the date of this Agreement as being accurate and complete; (x) A certificate (A) of the Secretary of State of the State of South Carolina, certifying as of a recent date that the Company is in good standing; (B) of the Secretary of State of South Carolina, certifying as of a recent date that EFI is in good standing; and (C) of the Secretary of State of the State of South Carolina, certifying as of a recent date that EGI is in good standing; (xi) An opinion of counsel for the Company and the Guarantors substantially in the form of Exhibit D attached hereto and covering such other matters as the Lender may reasonably request; (xii) Evidence satisfactory to the Lender that each of the Funding Account and the Settlement Account has been opened; (xiii) A duly completed Borrowing Base Schedule dated as of the date of the first Loan hereunder and certified by the Company to be true in all respects; and 5 6 (xiv) A Covenant Compliance Certificate demonstrating in detail satisfactory to the Lender that the Company is in compliance with the covenants set forth in Paragraphs 7(j), 7(k), 7(l), 7(m), 7(n), 7(o), 7(p), 7(q), 7(r), 7(s), 7(t) and 7(u) below. (2) All acts and conditions (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings or registrations) required to be done and performed and to have happened precedent to the execution, delivery and performance of the Credit Documents and to constitute the same legal, valid and binding obligations, enforceable in accordance with their respective terms, shall have been done and performed and shall have happened in due and strict compliance with all applicable laws. (3) All documentation, including, without limitation, documentation for corporate and legal proceedings in connection with the transactions contemplated by the Credit Documents shall be satisfactory in form and substance to the Lender and its counsel. (4) All fees required to be paid on or before the date hereof pursuant to Paragraph 2(l) above shall have been paid prior to (or will be paid concurrently with) the making of the first Loan hereunder. 4(b) Ongoing Loans. As conditions precedent to the Lender's obligation to make any Loan hereunder, including the first Loan, at and as of the date of advance thereof; (1) There shall have been delivered to the Lender a Loan Request therefor; (2) The representations and warranties of the Company contained in the Credit Documents shall be accurate and complete in all respects as if made on and as of the date of such advance, conversion or continuance; (3) There shall not have occurred an Event of Default or Potential Default; (4) Following the funding of the requested Loan, the aggregate principal amount of Loans outstanding will not exceed the lesser of: (i) the Credit Limit and (ii) the Collateral Value of the Borrowing Base; (5) There shall not have occurred any material adverse change in the financial condition, assets, nature of assets, operations or prospects of the Company from that represented in this Agreement, the other Credit Documents, or the documents or information furnished to the Lender in connection herewith or therewith; and (6) The Required Documents for the Mortgage Loan(s) being funded therewith shall have been received by the Lender. 6 7 By making a Loan Request to the Lender hereunder, the Company shall be deemed to have represented and warranted the accuracy and completeness of the statements set forth in subparagraphs (b)(2) through (b)(6) above. 5. Representations and Warranties of the Company. The Company represents and warrants to the Lender that: 5(a) Financial Condition. The consolidated financial statements, dated the Statement Date and the Interim Date, copies of which have been furnished to the Lender, are complete and correct and have been prepared to present fairly, in accordance with GAAP, the financial condition of the Company and its Subsidiaries at such dates and the results of the operations and changes in financial position of the Company and its Subsidiaries for the fiscal periods then ended. 5(b) No Change. As of the date hereof, there has been no material adverse change in the business, operations, assets or financial or other condition of the Company or its Subsidiaries from that shown on the consolidated financial statements dated as of the Interim Date referred to in Paragraph 5(a) above. 5(c) Corporate Existence; Compliance with Law. The Company: (1) is duly organized, validly existing and in good standing as a corporation under the laws of the State of South Carolina and is qualified to do business in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to qualify could have a material adverse effect on the Company or its property or business or on the ability of the Company to pay or perform the Obligations, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes so to do, and (3) is in compliance with all Requirements of Law and Contractual Obligations including, without limitation, the federal Consumer Credit Protection Act, the federal Real Estate Settlement Procedures Act, the federal Equal Credit Opportunity Act, the federal Truth-in-Lending Act, and the regulations promulgated thereunder, the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company or on the Collateral or the Collateral Value of the Borrowing Base. 5(d) Corporate Power; Authorization; Enforceable Obligations. The Company has the corporate power and authority and the legal right to execute, deliver and perform the Credit Documents and has taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents. The Credit Documents have been duly executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. 5(e) No Legal Bar. The execution, delivery and performance of the Credit Documents, the borrowing hereunder and the use of the proceeds thereof, will not violate any Requirement of Law or any Contractual Obligation of the Company the violation of which could 7 8 have a material adverse effect on the business, operations, assets or financial or other condition of the Company or on the Collateral or the Collateral Value of the Borrowing Base or create or result in the creation of any Lien (except the Lien created by the Security Agreement) on any assets of the Company. 5(f) No Material Litigation. Except as disclosed on Exhibit E hereto, no litigation, investigation or proceeding of or before any court, arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or against any of its properties or revenues which is likely to be adversely determined and which, if adversely determined, is likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company or on the Collateral or the Collateral Value of the Borrowing Base. 5(g) Taxes. To the best of the Company's knowledge, all tax returns that are required to be filed by or on behalf of the Company have been filed and all taxes shown to be due and payable on said returns or on any assessments made against the Company or any of its property (other than taxes which are being contested in good faith by appropriate proceedings and as to which the Company has established adequate reserves in conformity with GAAP) have been paid and taxes which unknown to the Company were not paid. 5(h) Investment Company Act. The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 5(i) Federal Reserve Board Regulations. The Company is not engaged and will not engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan issued hereunder will be used, directly or indirectly, for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System. 5(j) ERISA. The Company and each of its ERISA Affiliates are in compliance in all respects with the requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Company or any of its ERISA Affiliates which is likely to result in the termination of such Plan for purposes of Title IV of ERISA. 5(k) Assets. The Company has good and marketable title to all property and assets reflected in the financial statements referred to in Paragraph 5(a) above, except property and assets sold or otherwise disposed of in the ordinary course of business subsequent to the respective dates thereof. The Company has no outstanding Liens on any of its properties or assets and there are no security agreements to which the Company is a party, nor any title retention agreements, whether in the form of leases or otherwise, of any personal property except as permitted under Paragraph 7(a) below. 5(l) Securities Acts. The Company has not issued any unregistered securities in violation of the registration requirements of Paragraph 5 of the Securities Act of 1933, as amended, or any other law, and is not violating any rule, regulation or requirement under the 8 9 Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended. The Company is not required to qualify an indenture under the Trust Indenture Act of 1939, as amended, in connection with its execution and delivery of the Note. 5(m) Consents, etc. No consent, approval, authorization of, or registration, declaration or filing with, any Governmental Authority is required on the part of the Company in connection with the execution and delivery of the Credit Documents (other than filings to perfect the security interests granted by it) or the performance of or compliance with the terms, provisions and conditions hereof or thereof. 5(n) No Other Warehousing Indebtedness. After the funding of the first Loan hereunder, the Company will have no other mortgage warehousing Indebtedness other than that shown on Exhibit I attached hereto, and such mortgage warehousing Indebtedness shown on Exhibit I attached hereto, together with the Indebtedness evidenced by this Agreement, shall constitute the sole mortgage warehousing Indebtedness of the Company. 5(o) Ownership. Schedule II attached hereto and incorporated herein by reference lists all of the shareholders of Company as of the effective date of this Agreement. 5(p) Subsidiaries. As of the effective date of this Agreement, the Company has the following two (2) Subsidiaries: (i) Premier Financial Services, Inc., a __________ corporation, and (ii) The Loan Pro$, Inc., a ___________ corporation. As of the effective date of this Agreement, the Company is the sole shareholder of Premier Financial Services, Inc. and owns eighty percent (80%) of the outstanding capital stock of The Loan Pro$, Inc. 5(q) Investor Obligations. No consent, approval, authorization of, or registration, declaration or filing with, any Governmental Authority, other than those consents, approvals or authorizations already received, and those registrations, declarations and filings already made, are required on the part of the Company in connection with its issuance of Investor Obligations. The Company is authorized and eligible to issue Investor Obligations. 6. Affirmative Covenants. The Company hereby covenants and agrees with the Lender that, as long as any Obligations remain unpaid or the Lender has any obligation to make Loans hereunder, the Company shall: 6(a) Financial Statements. Furnish or cause to be furnished to the Lender: (1) Within ninety (90) days after the last day of each fiscal year of the Company, consolidated statements of income and cash flows for such year and consolidated balance sheets as of the end of such year of the Company and its Subsidiaries, presented fairly in accordance with GAAP and accompanied by an unqualified report of a firm of independent certified public accountants acceptable to the Lender and including therewith a copy of any management letter from such certified public accountants; (2) Within thirty (30) days after the last day of each calendar month, consolidated statements of income for such month and consolidated balance sheets as of the end of such month of the Company and its Subsidiaries accompanied in each case by 9 10 a Covenant Compliance Certificate of the appropriate officer of the Company, stating that such financial statements are prepared fairly in accordance with GAAP and demonstrating in detail satisfactory to the Lender compliance with the financial covenants set forth in Paragraphs 7(j), 7(k), 7(l), 7(m), 7(n), 7(o), 7(p), 7(q), 7(r), 7(s), 7(t), and 7(u) below as of and at the end of such month. 6(b) Certificates; Reports; Other Information. Furnish or cause to be furnished to the Lender: (1) Within fifteen (15) days after the last day of each calendar month, a Monthly Operating Report; (2) No less frequently than monthly, within ten (10) days after the last day of each calendar month unless otherwise requested in writing by the Lender and more frequently at Lender's request, a report for such month showing, for all Eligible Mortgage Loans included in the Borrowing Base during such month, (i) the current unpaid principal balance of such Eligible Mortgage Loans, and (ii) the payment status of such Eligible Mortgage Loans, including information regarding 30, 60 and 90 day delinquencies of such Eligible Mortgage Loans. (3) Promptly, such additional financial and other information, including, without limitation, financial statements of the Company, and information regarding the Collateral as the Lender may from time to time reasonably request; (4) Promptly, and in any event within five (5) business days after received, sent or filed by the Company, (i) copies of any and all forms, reports, supplements or other documents of any kind filed by the Company, any Subsidiary of the Company or by either Guarantor with the Securities Commission of the State of South Carolina; and (ii) copies of all correspondence between the Securities Commission of the State of South Carolina and any of the Company, any Subsidiary of the Company or either Guarantor; and (5) Promptly, and in any event within five (5) business days after filed by the Company, copies of any and all forms, reports, supplements or other documents of any kind filed by the Company or by either Guarantor with the Securities and Exchange Commission. 6(c) Payment of Indebtedness. Pay or otherwise satisfy at or before maturity or before it becomes delinquent or accelerated, as the case may be, all its Indebtedness (including taxes), except Indebtedness being contested in good faith by appropriate proceedings and for which provision is made to the satisfaction of the Lender for the payment thereof in the event the Company is found to be obligated to pay such Indebtedness and which Indebtedness is thereupon promptly paid by the Company. 6(d) Maintenance of Existence and Properties. Maintain its corporate existence and obtain and maintain all rights, privileges, licenses, approvals, franchises, properties and assets necessary or desirable in the normal conduct of its business, including but not limited to 10 11 all approvals with respect to the Securities and Exchange Commission or the Securities Commission of the State of South Carolina, and comply with all Contractual Obligations and Requirements of Law (including, without limitation, any Requirements of Law under or in connection with ERISA, the federal Consumer Credit Protection Act, the federal Real Estate Settlement Procedures Act, the federal Equal Credit Opportunity Act, the federal Truth-in-Lending Act, and any regulations promulgated thereunder), except where the failure to so comply is not likely to have a material adverse effect on the business, operations, assets or financial or other condition of the Company or on the Collateral or the Collateral Value of the Borrowing Base. 6(e) Inspection of Property; Books and Records; Audits. (1) Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and (2) Permit: (i) representatives of the Lender to (A) visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired by the Lender (but, prior to the occurrence of an Event of Default, only upon not less than two Business Days' prior notice), and (B) discuss the business, operations, properties and financial and other condition of the Company with officers and employees of the Company, and with its independent certified public accountants, and (ii) representatives of the Lender to conduct periodic operational audits of the Company's business and operations. 6(f) Notices. Promptly give written notice to the Lender of: (1) The occurrence of any Potential Default or Event of Default known to responsible management personnel of the Company and the proposed method of cure thereof; (2) Any litigation or proceeding affecting the Company or the Collateral which could have a material adverse effect on the Collateral, the Collateral Value of the Borrowing Base or the business, operations, property, or financial or other condition of the Company; (3) A material adverse change known to responsible management personnel of the Company in the business, operations, property or financial or other condition of the Company; and (4) Any changes in the following senior management positions of the Company: President, Chief Executive Officer, Chief Financial Officer, or any Executive Vice President. 6(g) Expenses. Pay all reasonable out-of-pocket costs and expenses (including fees and disbursements of legal counsel) of the Lender: (1) incident to the preparation and negotiation of the Credit Documents, including with respect to or in connection with any waiver 11 12 or amendment thereof or thereto, (2) associated with any periodic audits conducted pursuant to Paragraph 6(e)(2)(ii) above, and (3) incident to the enforcement of payment of the Obligations, whether by judicial proceedings or otherwise, including, without limitation, in connection with bankruptcy, insolvency, liquidations reorganization moratorium or other similar proceedings involving the Company or a "workout" of the Obligations. The obligations of the Company under this Paragraph 6(g) shall be effective and enforceable whether or not any Loan is advanced by the Lender hereunder and shall survive payment of all other Obligations. 6(h) Credit Documents. Comply with and observe all terms and conditions of the Credit Documents. 6(i) Insurance. Obtain and maintain insurance with responsible companies in such amounts and against such risks as are usually carried by corporations engaged in similar businesses similarly situated, including, without limitation, errors and omissions coverage in form and substance acceptable to Lender, and will use best efforts to obtain an insurance policy containing fidelity coverage, and furnish the Lender on request full information as to all such insurance, and to provide within five (5) days after receipt, certificates or other documents evidencing the renewal of each such policy. 6(j) Investor Obligations. The Company shall obtain all consents, approvals and authorizations of, and shall make all registrations, declarations and filings with, any Governmental Authority which are required on the part of the Company in connection with its issuance of Investor Obligations. The Company shall at all times remain authorized and eligible to issue Investor Obligations. 7. Negative Covenants. The Company hereby agrees that, as long as any Obligations remain unpaid or the Lender has any obligation to make Loans hereunder, the Company shall not at any time, directly or indirectly: 7(a) Liens. Create, incur, assume or suffer to exist, any Lien upon the Collateral except as contemplated by the Security Agreement, or create, incur, assume or suffer to exist any Lien upon any of its other property and assets (including servicing rights) except: (1) Liens for current taxes, assessments or other governmental charges which are not delinquent or which remain payable without penalty, or the validity of which are contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof, provided the Company shall have set aside on its books and shall maintain adequate reserves for the payment of same in conformity with GAAP; (2) Liens, deposits or pledges made to secure statutory obligations, surety or appeal bonds, or bonds for the release of attachments or for stay of execution, or to secure the performance of bids, tenders, contracts (other than for the payment of borrowed money), leases or for purposes of like general nature in the ordinary course of the Company's business; (3) Purchase money security interests for property (except Mortgage Loans) hereafter acquired, conditional sale agreements, or other title retention 12 13 agreements, with respect to property hereafter acquired; provided, however, that no such security interest or agreement shall affect any servicing rights or extend to any property other than the property acquired; and (4) Liens securing Permitted Secured Debt. 7(b) Indebtedness. Create, incur, assume or suffer to exist, or otherwise become or be liable in respect of any Indebtedness except: (1) The Obligations; (2) Investor Obligations; (3) Indebtedness reflected in the financial statements referred to in Paragraph 5(a) above; (4) Trade debt incurred in the ordinary course of business, paid within thirty (30) days after the same has become due and payable or which is being contested in good faith, provided provision is made to the satisfaction of the Lender for the eventual payment thereof in the event it is found that such contested trade debt is payable by the Company; (5) Indebtedness secured by Liens permitted under Paragraph 7(a) above; and (6) Permitted Other Debt. 7(c) Consolidation and Merger; Change of Business. Liquidate or dissolve or enter into any consolidation, merger, partnership, joint venture, syndicate or other combination or make any change in the nature of its business as a mortgage banker as presently conducted. 7(d) Acquisitions. Without the prior consent of the Lender (which consent shall not be unreasonably withheld), purchase or acquire or incur liability for the purchase or acquisition of any or all of the assets or business of any Person, other than in the normal course of business as currently conducted. 7(e) Transfer of Stock. Permit the acquisition, purchase, redemption, retirement, transfer or issuance of any shares of its capital stock now or hereafter outstanding which would result in EFI owning less than one hundred percent (100%) of its outstanding capital stock. 7(f) Subsidiaries. Without the prior consent of the Lender (which consent shall not be unreasonably withheld), organize any Subsidiary other than those in existence as of the effective date of this Agreement, or sell any Subsidiary in existence as of the effective date of this Agreement. 13 14 7(g) Investments; Advances; Guaranties. Make or commit to make any advance, loan or extension of credit (other than Mortgage Loans made in the ordinary course of the Company's business) or capital contribution to, or purchase any stocks, bonds, notes, debentures or other securities of, or make any other investment in, or guaranty the indebtedness or other obligations of, any Person, in excess of the level permitted in Paragraph 7(o) below. 7(h) Sale of Assets. Sell, lease, assign, transfer or otherwise dispose of any of the assets of the Company or its Subsidiaries (other than obsolete or worn out property), whether now owned or hereafter acquired, other than in the ordinary course of business as currently conducted and at fair market value (it being expressly agreed and understood that the sale or other disposition of Mortgage Loans with or without servicing released and of mortgage servicing rights is in the ordinary course of business). 7(i) Dividends. Without the prior consent of the Lender (which consent shall not be unreasonably withheld), during any fiscal quarter, declare and pay any dividends, or return any capital, to its shareholders or authorize or make any other distribution, payment or delivery of property or cash to its shareholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any option or warrants issued by it for or with respect to its capital stock), or set aside any funds for any of the foregoing purposes; provided, however, that the Company shall make no dividend or distribution under this Paragraph 7(i) if, at the time of or after giving effect to such dividend or distribution, an Event of Default shall have occurred and be continuing. 7(j) Liabilities to Tangible Net Worth Ratio. Permit its ratio at any date of Total Liabilities to Tangible Net Worth to be more than 35.0:1.0. 7(k) Minimum Tangible Net Worth. Permit its Tangible Net Worth as of the last day of any month to be less than $2,750,000.00. 7(l) Liabilities to Book Net Worth Ratio. Permit its ratio at any date of Total Liabilities to Book Net Worth to be more than 20.0:1.0. 7(m) Minimum Book Net Worth. Permit its Book Net Worth as of the last day of any month to be less than $5,000,000.00. 7(n) Minimum Cash and Cash Equivalents. Permit the amount of Cash and Cash Equivalents as of the last day of any fiscal quarter to be less than $500,000.00. 7(o) Maximum Affiliate Receivables. Permit the amount of Affiliate Receivables to exceed an amount equal to (i) $21,000,000.00, less (ii) one hundred percent (100%) of all Affiliate Receivables owed to the Company by any Affiliate of the Company at the time of the sale of such Affiliate. 7(p) Non-Performing Assets to Mortgage Loans Ratio. Permit its ratio at any date of the outstanding principal balance of all Mortgage Loans owned by the Company to Non-Performing Assets, each calculated as of such date, to be less than 5.0:1.0. 14 15 7(q) Non-Performing Assets to Book Net Worth Ratio. Permit its ratio at any date of Non-Performing Assets as of such date to Book Net Worth to be more than 1.75:1.0. 7(r) Non-Performing Assets to Tangible Net Worth Ratio. Permit its ratio at any date of Non- Performing Assets as of such date to Tangible Net Worth to be more than 3.0:1.0. 7(s) Delinquency Ratio. Permit its ratio of all Mortgage Loans owned by the Company to Mortgage Loans with respect to which any payment of principal or interest is more than thirty (30) days past due the payment due date set forth in the underlying loan documents to be less than 5.0:1.0. 7(t) Interest Coverage. Permit, as of the last day of any month, the amount of interest actually received by the Company during such month with respect to Mortgage Loans owned by the Company to be less than the amount of interest expense incurred by the Company during such month with respect to (i) Investor Obligations, (ii) the Obligations, and (iii) any other Indebtedness of the Company to financial institutions with respect to term loans or revolving credit facilities under which the Company is a borrower. 7(u) Cash Basis EBITDA to Interest Expense Ratio. Permit its ratio, as of the last day of any month, of Cash Basis EBITDA for such month, to the amount of interest expense incurred by the Company during such month with respect to (i) Investor Obligations, (ii) Obligations and (iii) any other Indebtedness of the Company owed to financial institutions with respect to term loans or revolving credit facilities under which the Company is a borrower, to be less than 1:15:1.0. 8. Events of Default. Upon the occurrence of any of the following events (an "Event of Default"): 8(a) The Company shall fail to pay principal or interest on any Loan or any fee payable pursuant to Paragraph 2(l) above or any amount payable pursuant to Paragraph 2(f)(2) above when due; or 8(b) Any representation or warranty made or deemed made by the Company or either of the Guarantors in any Credit Document or in connection with any Credit Document shall be inaccurate or incomplete in any respect on or as of the date made or deemed made; or 8(c) The Company shall fail to maintain its corporate existence or shall default in the observance or performance of any covenant or agreement contained in Paragraph 7 above or in the Security Agreement; provided, however, that the failure of the Company to perform any covenant contained in Paragraphs 7(j) through 7(u), inclusive, above, shall not constitute an Event of Default hereunder unless such failure has continued uncured for thirty (30) days; or 8(d) The Company shall fail to observe or perform any other term or provision contained in the Credit Documents and such failure shall continue for thirty (30) days after the Company has received notice of such failure; or 15 16 8(e) The Company shall default in any payment of principal of or interest on any Indebtedness or in any payment of principal or of interest with respect to the Investor Obligations or Indebtedness owed by the Company to any financial institution, or any other event shall occur, the effect of which is to permit such Indebtedness to be declared or otherwise to become due prior to its stated maturity; or 8(f) (1) The Company or either of the Guarantors shall commence any case, proceeding or other action (i) relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to the Company or either of the Guarantors, or seeking to adjudicate the Company or either of the Guarantors a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to the Company or either of the Guarantors or the debts of any of them, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for the Company or for all or any substantial part of the Company's assets, or the Company or either of the Guarantors shall make a general assignment for the benefit of its or their creditors; or (2) there shall be commenced against the Company or either of the Guarantors any case, proceeding or other action of a nature referred to in clause (1) above which (i) results in the entry of an order for relief or any such adjudication or appointment, or (ii) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (3) there shall be commenced against the Company or either of the Guarantors any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or substantially all of the assets of any of them which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within sixty (60) days from the entry thereof; or (4) the Company or either of the Guarantors shall take any action in furtherance of, or indicating its or their consent to, approval of, or acquiescence in (other than in connection with a final settlement), any of the acts set forth in clauses (1), (2) or (3) above; or (5) the Company or either of the Guarantors shall generally not, or shall be unable to, or shall admit in writing its or their inability to pay its or their debts as they become due; or 8(g) (1) The Company or any of its ERISA Affiliates shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (2) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (3) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the Lender, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for ten days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for ten days after commencement thereof, as the case may be, (4) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (5) any withdrawal liability to a Multiemployer Plan shall be incurred by the Company or any of its ERISA Affiliates or (6) any other event or condition shall occur or exist; and in each case in clauses (1) through (6) above, such event or condition, together with all other such events or conditions, if any, is likely to subject the Company or any of its respective ERISA Affiliates to any tax, penalty or other liabilities in the aggregate material in relation to the business, 16 17 operations, property or financial or other condition of the Company or any of its ERISA Affiliates; or 8(h) One or more judgments or decrees shall be entered against the Company and all such judgments or decrees shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within sixty (60) days from the entry thereof; or 8(i) Either of the Guarantors shall fail to observe or perform any term or provision of the Guaranty to which such Guarantor is a party or shall attempt to rescind or revoke such Guaranty, with respect to future transactions or otherwise; or 8(j) Any acquisition, purchase, redemption, retirement, transfer or issuance of the Company's capital stock shall occur in violation of Paragraph 7(e) above; or 8(k) Any acquisition, purchase, redemption, retirement, transfer or issuance of the capital stock of EFI shall occur which would result in EGI failing to own at least eighty percent (80%) of the outstanding capital stock of EFI; or 8(l) The principal amount of the Investor Obligations shall decline by more than twenty percent (20%) during any month; THEN: (1) Automatically upon the occurrence of an Event of Default under Paragraph 8(f) above; and (2) In all other cases, at the option of the Lender, the Lender's obligation to make Loans hereunder shall terminate and the principal balance of outstanding Loans and interest accrued but unpaid thereon shall become immediately due and payable, without demand upon or presentment to the Company, which are expressly waived by the Company. 9. Miscellaneous Provisions. 9(a) Assignment. The Company may not assign its rights or obligations under this Agreement without the prior written consent of the Lender. The Lender shall not assign its rights and obligations under this Agreement to any other party not a party to this Agreement as of the date hereof; provided, however, that the Lender may at any time pledge or assign all or any portion of the Lender's rights under this Agreement and the other Credit Documents to a Federal Reserve Bank. Subject to the foregoing, all provisions contained in this Agreement or any document or agreement referred to herein or relating hereto shall inure to the benefit of the Lender, its successors and assigns, and shall be binding upon the Company, its successors and assigns. 9(b) Amendment. Neither this Agreement nor any of the other Credit Documents may be amended or terms or provisions hereof or thereof waived unless such amendment or 17 18 waiver is in writing and signed by the Lender and the Company. It is expressly agreed and understood that the failure by the Lender to elect to accelerate amounts outstanding hereunder or to terminate the obligation of the Lender to make Loans hereunder shall not constitute an amendment or waiver of any term or provision of this Agreement. 9(c) Cumulative Rights; No Waiver. The rights, powers and remedies of the Lender under the Credit Documents are cumulative and in addition to all rights, powers and remedies provided under any and all agreements among the Company and the Lender relating hereto, at law, in equity or otherwise. Any delay or failure by the Lender to exercise any right, power or remedy shall not constitute a waiver thereof by the Lender, and no single or partial exercise by the Lender of any right, power or remedy shall preclude other or further exercise thereof or any exercise of any other rights, powers or remedies. 9(d) Entire Agreement. This Agreement and the documents and agreements referred to herein embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 9(e) Survival. All representations, warranties, covenants and agreements on the part of the Company and the Guarantors contained in the Credit Documents shall survive the termination of this Agreement and shall be effective until the Obligations are paid and performed in full or longer as expressly provided herein. 9(f) Notices. All notices given by any party to the others under the Credit Documents shall be in writing unless otherwise provided for herein, delivered personally or by depositing the same in the United States mail, registered, with postage prepaid, addressed to the party at the address set forth on Schedule I attached hereto. Any party may change the address to which notices are to be sent by notice of such change to each other party given as provided herein. Such notices shall be effective on the date received or, if mailed, on the third Business Day following the date mailed. 9(g) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina. 9(h) Sub-Participation by Lender. The Lender may at any time sell to one or more financial institutions (each of such financial institutions being herein called a "Participant") participating interests in any of the Obligations held by the Lender and its commitments hereunder; provided, however, that: (1) no participation contemplated by this Paragraph 9(h) shall relieve the Lender from its obligations hereunder or under any other Credit Document; (2) the Lender shall remain solely responsible for the performance of such obligations; and (3) the Company shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under the Credit Documents. 9(i) Counterparts. This Agreement and the other Credit Documents may be executed in any number of counterparts, all of which together shall constitute one agreement. 18 19 9(j) Exculpatory Provisions. The Lender shall be liable to the Company for any action taken or omitted to be taken by the Lender under or in connection with the Credit Documents or with respect to the Collateral only to the extent of actual damages suffered by the Company as a result of such action or inaction and only to the extent that such action or inaction is not taken or omitted at the Company's direction. 9(k) Indemnification. The Company agrees to indemnify, defend and hold harmless the Lender from and against any and all claims, obligations, penalties, actions, suits, judgments, costs, disbursements, losses, liabilities and damages (including, without limitation, attorneys' fees) of any kind whatsoever which may at any time be imposed on, assessed against or incurred by the Lender in any way relating to or arising out of the Credit Documents or any documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Lender in connection with the foregoing; provided, the Company shall not be liable for any portion of any such claims, obligations, etc., arising out of or resulting from the negligence, gross negligence or willful misconduct of the Lender or its employees. The indemnification obligations of the Company under this Paragraph 9(k) shall survive termination of this Agreement and payment in full of the Obligations. 10. Definitions. For purposes of this Agreement, the terms set forth below shall have the following meanings: "Additional Required Documents" shall mean for any Mortgage Loan those items described on Exhibit F attached hereto. "Affiliate" shall mean, as to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with, such Person. "Control" as used herein means the power to direct the management and policies of such Person. "Affiliate Receivables" shall mean that amount reflected on the consolidated balance sheet of the Company and its Subsidiaries as due to the Company from Affiliates of the Company (and as determined in accordance with GAAP). "Agreement" shall mean this Agreement, as the same may be amended, extended or replaced from time to time. "Applicable Corporate Base Rate" shall mean, at any time, the Corporate Base Rate at such time plus zero percent (0.00%) per annum. "Book Net Worth" shall mean the excess of total assets of the Company and its Subsidiaries over Total Liabilities of the Company and its Subsidiaries determined in accordance with GAAP. "Borrowing Base" shall mean at any date all Eligible Mortgage Loans delivered to and held by the Lender or otherwise identified as Collateral under the Security Agreement as collateral security for the Obligations. 19 20 "Borrowing Base Schedule" shall mean a schedule prepared by the Lender and certified to by the Company in the form of that attached hereto as Exhibit G. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banks in Charlotte, North Carolina are authorized or obligated to close their regular banking business. "Capitalized Lease Obligations" of any Person shall mean the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Cash and Cash Equivalents" shall mean (i) negotiable currency and coins of the United States held by the Company or its Subsidiaries, (ii) balances in non-restricted bank deposit accounts maintained by or for the benefit of the Company or its Subsidiaries which are freely accessible by the Company or its Subsidiaries, (iii) securities held by or for the benefit of the Company or its Subsidiaries which are issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than six (6) months from the date of acquisition, (iv) time deposits and certificates of deposit of any commercial bank incorporated in the United States of recognized standing having capital and surplus in excess of $500,000,000 held by or for the benefit of the Company or its Subsidiaries with maturities of not more than six months from the date of acquisition by the Company or its Subsidiaries, (v) investments of the Company or its Subsidiaries in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (iii) or (iv) above, and (vi) amounts available to be borrowed by the Company under, and pursuant to the terms and provisions governing, any revolving lines of credit made available to the Company. "Cash Basis EBITDA" shall mean, for any period and without duplication, the sum of the following for the Company and its Subsidiaries: (a) net income (or loss) after taxes for such period, plus (b) to the extent reflected in net income (or loss) after taxes for such period, the aggregate for such period of (i) interest expense on all Indebtedness of the Company and its Subsidiaries, (ii) provision for income taxes, (iii) depreciation and amortization expense, and (iv) any other non-cash expenses; minus (c) to the extent reflected in net income (or loss) after taxes for such period, the aggregate for such period of (i) extraordinary gains (or plus any extraordinary losses) for such period, (ii) all amounts which reflect increases in equity accounts or asset values (whether due to write-ups or otherwise) which are not directly related to cash investments; (iii) dividends or other distributions to the Company or its Subsidiaries which have been declared or allocated but which have not yet been paid to the Company or its Subsidiaries or which have been paid in some form other than cash (e.g. stock dividends); and (iv) any other non-cash revenues. For the purposes of this definition, "net income (or loss)" shall mean net income (or loss) as calculated in accordance with GAAP. 20 21 "Change of Control" shall mean if the persons who are directors of the Company as of the date hereof (together with those who subsequently become directors of the Company and whose election, or nomination for election by the Company's stockholders, is approved by the vote of at least three-quarters of the directors who were either directors as of the date hereof or directors elected or nominated to succeed them as herein provided), shall cease to constitute a majority of the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Collateral" shall have the meaning given such term in the Security Agreement. "Collateral Value of the Borrowing Base" shall mean at any date the sum of the Unit Collateral Values of all Eligible Mortgage Loans included in the Borrowing Base at such date (including Eligible Mortgage Loans shipped to a permanent investor for purchase pending delivery of the sales proceeds thereof to the Settlement Account). "Commonly Controlled Entity" of a Person shall mean a Person, whether or not incorporated, which is under common control with such Person within the meaning of Section 414(c) of the Internal Revenue Code. "Company" shall have the meaning given such term in the introductory paragraph hereof. "Contact Office" shall mean the office of the Lender at One First Union Center, 301 South College Street, Charlotte, North Carolina 28288. "Contractual Obligation" as to any Person shall mean any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Corporate Base Rate" shall mean a rate per annum equal to the rate announced from time to time by the Lender to be its "Prime Rate" as such "Prime Rate" may change from time to time, said changes to occur on the first date the "Prime Rate" changes; it being understood that the "Prime Rate" is the rate announced by the Lender from time to time as its "Prime Rate" and is not necessarily the lowest interest rate charged by the Lender to its customers. "Covenant Compliance Certificate" shall mean a certificate in the form of Exhibit H attached hereto. "Credit Documents" shall mean this Agreement, the Security Agreement, the Guaranties, the Note and each other document, instrument and agreement executed by the Company or the Guarantors in connection herewith, as any of the same may be amended, extended or replaced from time to time. "Credit Limit" shall mean $10,000,000.00. "EFI" shall mean Emergent Financial, Inc., a South Carolina corporation. 21 22 "EGI" shall mean Emergent Group, Inc., a South Carolina corporation. "Eligible Mortgage Loan" shall mean a Mortgage Loan with respect to which each of the following statements shall be accurate and complete (and the Company by confirming the inclusion of such Mortgage Loan in any computation of the Collateral Value of the Borrowing Base shall be deemed to so represent and warrant to the Lender at and as of the date of such computation): (a) Said Mortgage Loan is a binding and valid obligation of the Obligor thereon, in full force and effect and enforceable in accordance with its terms. (b) Said Mortgage Loan is genuine in all respects as appearing on its face and as represented in the books and records of the Company and all information set forth therein is true and correct. (c) Said Mortgage Loan is free of any default of any party thereto (including the Company), other than as expressly permitted pursuant to subparagraph (d) below, counterclaims, offsets and defenses and from any rescission, cancellation or avoidance, whether by operation of law or otherwise. (d) No payment under said Mortgage Loan is more than sixty (60) days past due the payment due date set forth in the underlying promissory note and deed of trust (or mortgage). (e) Said Mortgage Loan contains the entire agreement of the parties thereto with respect to the subject matter thereof, has not been modified or amended in any respect and is free of concessions or understandings with the Obligor thereon of any kind not expressed in writing therein. (f) Said Mortgage Loan is in all respects as required by and in accordance with all applicable laws and regulations governing the same, including, without limitation, the federal Consumer Credit Protection Act, the federal Real Estate Settlement Procedures Act, the federal Equal Credit Opportunity Act, the federal Truth-in-Lending Act, and the regulations promulgated thereunder and all applicable usury laws and restrictions, and all notices, disclosures and other statements or information required by law or regulation to be given, and any other act required by law or regulation to be performed, in connection with said Mortgage Loan have been given and performed as required. (g) All advance payments and other deposits on said Mortgage Loan have been paid in cash, and no part of said sums has been loaned, directly or indirectly, by the Company to the Obligor and there have been no prepayments on account of said Mortgage Loan, and said Mortgage Loan has been fully advanced. (h) At all times said Mortgage Loan will be free and clear of all Liens, except in favor of the Lender. 22 23 (i) The Property covered by said Mortgage Loan is insured against loss or damage by fire and all other hazards normally included within standard extended coverage in accordance with the provisions of said Mortgage Loan with the Company named as a loss payee thereon. (j) The Property covered by said Mortgage Loan is free and clear of all Liens except of the Company subject only to (1) the Lien of current real property taxes and assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and other matters of the public record, as of the date of recording, as are acceptable to mortgage lending institutions generally and specifically referred to in a lender's title insurance policy delivered to the originator of the Mortgage Loan and (i) referred to or otherwise considered in the appraisal made for the originator of the Mortgage Loan or (ii) which do not materially adversely affect the appraised value of the Property as set forth in such appraisal; (3) 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 Loan or the use, enjoyment, value or marketability of the related Property; and (4) Liens subordinate in priority to the Lien in favor of the Company. (k) If said Mortgage Loan has been withdrawn from the possession of the Lender and: (1) If said Mortgage Loan was withdrawn by the Company for purposes of correcting clerical or other nonsubstantive documentation problems pursuant to a trust receipt, as permitted under Paragraph 6 of the Security Agreement, the Unit Collateral Value of said Mortgage Loan when added to the Unit Collateral Value of other Mortgage Loans included in the calculation of the Collateral Value of the Borrowing Base the promissory notes for which have been similarly withdrawn by the Company does not exceed $500,000, and the promissory note and other documents relating to said Mortgage Loan are returned to the Lender within ten (10) calendar days from the date of withdrawal; and (2) If said Mortgage Loan was shipped by the Lender directly to a permanent investor for purchase, the full purchase price therefor has been received by the Lender (or said Mortgage Loan has been returned to the Lender) within thirty (30) days from the date of shipment by the Lender. (l) The outstanding principal balance of such Mortgage Loan is not less than $40,000 and does not exceed $350,000. (m) The improvements on the Property consist of a completed one-to-four unit single family residence, including but not limited to a condominium, planned unit development or townhouse but excluding in any event a co-op or a mobile home. (n) There has been delivered to the Lender the Required Documents for said Mortgage Loan. 23 24 (o) Said Mortgage Loan is not subject to any servicing arrangement with any Person other than the Company nor are any servicing rights relating to said Mortgage Loan subject to any Lien, claim, interest or negative pledge in favor of any Person other than as permitted hereunder. (p) Said Mortgage Loan was originated after January 1, 1993. (q) Said Mortgage Loan has not previously been included in the Borrowing Base, then shipped to an investor and returned, for whatever reason, to the Lender. (r) The Company obtained an appraisal in connection with the origination of said Mortgage Loan as would satisfy all appraisal requirements for said Mortgage Loan if such had been originated by a federally insured depositary institution. (s) Said Mortgage Loan is secured by a first priority mortgage or deed of trust on the Property covered thereby. (t) Said Mortgage Loan is not a revolving credit facility; (u) The proceeds of said Mortgage Loan were used by the Obligor thereon to purchase the Property and improvements thereon covered thereby or to refinance a previous loan secured by the Property and improvements thereon covered thereby, and were not used by the Obligor thereon to construct the improvements on the Property covered thereby. (v) No real property taxes or insurance payments due and payable with respect to the Property covered by said Mortgage Loan are past due the payment due date thereof. (w) The original principal balance of said Mortgage Loan is not greater than eighty-five percent (85%) of the fair market value of the Property covered by such Mortgage Loan, as shown on the appraisal delivered to Lender as a Required Document in connection with such Mortgage Loan. Provided, however, that notwithstanding the compliance of any Mortgage Loan delivered to Lender with the requirements set forth in subparagraphs (a) through (w) above, Lender shall have the right to exclude such Mortgage Loan as an "Eligible Mortgage Loan" hereunder by reason of Lender's reasonable concerns regarding the appraisal of the Property covered thereby, the credit history or employment stability of the Obligor thereon, the market value of the Mortgage Loan or of the Property covered thereby, or the enforceability of any agreement, document or instrument securing such Mortgage Loan. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may from time to time be supplemented or amended. "ERISA Affiliate" shall mean, with respect to any Person, any trade or business (whether or not incorporated) that is a member of the group of which such Person is a member and which is treated as a single employer under Section 414 of the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder in effect from time to time. 24 25 "Event of Default" shall have the meaning set forth in Paragraph 8 above. "Funding Account" shall mean Account No. _____________ maintained in Lender's name alone with the Lender at the Contact Office. "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. "Governmental Authority" shall mean any nation or governments any state or other political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranties" shall have the meaning given such term in Paragraph 3(b) above, as both or either of such instruments may be amended, extended or replaced from time to time, and "Guaranty" shall mean either of such instruments, as the context requires. "Guarantors" shall mean, collectively, EFI and EGI, and "Guarantor" shall mean either of the foregoing Persons, as the context requires. "Indebtedness" of any Person shall mean all items of indebtedness which, in accordance with GAAP and practices thereof, would be included in determining liabilities as shown on the liability side of a statement of condition of such Person as of the date as of which indebtedness is to be determined, including: without limitation, all obligations for money borrowed and Capitalized Lease Obligations, and shall also include all indebtedness and liabilities of others assumed or guaranteed by such Person or in respect of which such Person is secondarily or contingently liable (other than by endorsement of instruments in the course of collection) whether by reason of any agreement to acquire such indebtedness or to supply or advance sums or otherwise. "Interim Date" shall mean September 30, 1994. "Investor Obligations" shall mean the obligations of the Company, if any, to pay principal and interest to those Persons who have established deposit or time deposit accounts with the Company or who are the holders of certificates of deposit issued by the Company, which obligations shall be evidenced by promissory notes made payable by the Company to the order of such Persons. "Lender" shall have the meaning given such term in the introductory paragraph hereof. "Lien" shall mean any security interest, mortgage, pledge, lien, claim on property, charge or encumbrance (including any conditional sale or other title retention agreement), any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction. "Loan" shall have the meaning given such term in Paragraph 1(a) above. 25 26 "Loan Request" shall mean a request for a Loan conveyed to the Lender from a duly authorized officer of the Company substantially in the form of that attached hereto as Exhibit L, with such request to be confirmed in writing upon the request of the Lender. "Maturity Date" shall mean the earlier of: (a) March 31, 1995, as such date may be extended from time to time in writing by the Lender, in its sole discretion, and (b) the date the Lender terminates its obligation to make further Loans hereunder pursuant to Paragraph 8 above. "Monthly Operating Report" shall mean a report substantially in the form of that attached hereto as Exhibit K. "Mortgage Loan" shall mean a residential real estate secured loan, including, without limitation: (a) a promissory note, any reformation thereof and related deed of trust (or mortgage) and security agreement; (b) all guaranties and insurance policies, including, without limitation, all mortgage and title insurance policies and all fire and extended coverage insurance policies and rights of the Company to return premiums or payments with respect thereto; and (c) all right, title and interest of the Company in the Property covered by said deed of trust (or mortgage). "Multiemployer Plan" shall mean, as to the Company or any of its ERISA Affiliates, a Plan of such Person which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Non-Performing Assets" shall mean, as to the Company, (i) the outstanding principal balance of all Mortgage Loans owned by the Company which are classified as "non-accruing" or "non-performing" on the most recent Monthly Operating Report delivered by the Company to the Lender or which are in the process of foreclosure, and (ii) the amount shown on the most recent consolidated balance sheet of the Company and its Subsidiaries as the value of all real property owned by the Company or its Subsidiaries other than any real property on which the offices of the Company or its Subsidiaries are located. "Note" shall mean have the meaning given such term in Paragraph 2(c) hereof. "Obligations" shall mean any and all debts, obligations and liabilities of the Company to the Lender (whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred), arising out of or related to the Credit Documents. "Obligor" shall mean the Person or Persons obligated to pay the Indebtedness which is the subject of a Mortgage Loan. "Participant" shall have the meaning given such term in Paragraph 9(h) above. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA and any successor thereto. 26 27 "Permitted Other Debt" shall mean that Indebtedness described as "Permitted Other Debt" on Exhibit I attached hereto. "Permitted Secured Debt" shall mean that Indebtedness which is the subject of a Lien and described as "Permitted Secured Debt" on Exhibit I attached hereto. "Person" shall mean any corporation, natural person, firm, joint venture, partnerships, trust, unincorporated organization or Governmental Authority. "Plan" shall mean, as the Company or any of its ERISA Affiliates, any pension plan that is covered by Title IV of ERISA and in respect of which such Person or a Commonly Controlled Entity of such Person is an "employer" as defined in Section 3(5) of ERISA. "Potential Default" shall mean an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default. "Proceeds" shall mean whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. "Property" shall mean the real property, including the improvements thereon, and the personal property (tangible and intangible) which are encumbered pursuant to a Mortgage Loan. "Reportable Event" shall mean a reportable event as defined in Title IV of ERISA, except actions of general applicability by the Secretary of Labor under Section 110 of ERISA. "Required Documents" shall mean for any Mortgage Loan those items described on Exhibit J attached hereto. "Requirements of Law" shall mean, as to any Person, the Articles or Certificate of Incorporation and Bylaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or a final and binding determination of an arbitrator or a determination of a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Security Agreement" shall have the meaning given such term in Paragraph 3(a) above, as the same may be amended, extended or replaced from time to time. "Settlement Account" shall mean Account No. _____________ maintained in the name of the Lender at the Contact Office. "Single Employer Plan" shall mean, as to the Company or any of its ERISA Affiliates, any Plan of such Person which is not a Multiemployer Plan. "Statement Date" shall mean December 31, 1993. 27 28 "Subsidiary" shall mean any corporation, partnership or joint venture more than fifty percent (50%) of the stock or other ownership interest of which having by the terms thereof ordinary voting power to elect the board of directors, managers or trustees of such corporation, partnership or joint venture (irrespective of whether or not at the time stock of any other class or classes of such corporation, partnership or joint venture shall have or might have voting power by reason of the happening of any contingency) shall, at the time as of which any determination is being made, be owned, either directly or through Subsidiaries. "Tangible Net Worth" shall mean at any date: (a) Book Net Worth, minus (b) The sum of all assets of the Company and its Subsidiaries which would be classified as intangible assets under GAAP, including, without limitation, purchased and capitalized value of servicing rights, excess servicing fees, goodwill (whether representing the excess cost over book value of assets acquired or otherwise), patents, trademarks, trade names, copyrights, franchises and deferred charges (including, without limitation, unamortized debt discount and expense, organization costs and research and product development costs). "Total Liabilities" shall mean total liabilities of the Company and its Subsidiaries determined in accordance with GAAP. "Unit Collateral Value" shall mean at any time, with respect to each Eligible Mortgage Loan included in the Borrowing Base, seventy-five percent (75%) of the unpaid principal balance thereof at such time. 28 29 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and sealed as of the day and year first above written. CAROLINA INVESTORS, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: By By ------------------------ --------------------------------- Name Name ---------------------- ------------------------------- Title Title --------------------- ------------------------------ FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association [CORPORATE SEAL] ATTEST: By By ------------------------ --------------------------------- Name Name ---------------------- ------------------------------- Title Title --------------------- ------------------------------ EMERGENT FINANCIAL, INC., a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By By ------------------------ --------------------------------- Name Name ---------------------- ------------------------------- Title Title --------------------- ------------------------------ EMERGENT GROUP, INC., a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By By ------------------------ --------------------------------- Name Name ---------------------- ------------------------------- Title Title --------------------- ------------------------------
29 30 LIST OF SCHEDULES AND EXHIBITS Schedule I Schedule of Addresses Schedule II Shareholders of Company Exhibit A Form of Promissory Note Exhibit B Form of Security and Collateral Agency Agreement Exhibit C Form of Guaranty Exhibit D Form of Legal Opinion of Counsel for the Company and the Guarantors Exhibit E Litigation Schedule Exhibit F Schedule of Additional Required Documents Exhibit G Form of Borrowing Base Schedule Exhibit H Form of Covenant Compliance Certificate Exhibit I Schedule of Permitted Other Debt (Including Permitted Secured Debt) Exhibit J Schedule of Required Documents Exhibit K Form of Monthly Operating Report Exhibit L Form of Loan Request 30 31 SCHEDULE I TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ____________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA SCHEDULE OF ADDRESSES BORROWER: Carolina Investors, Inc. 208 Garvin Street Pickens, South Carolina 29671 Attention: ------------------- BANK: First Union National Bank of North Carolina One First Union Center, CORP-6, TW-19 301 South College Street Charlotte, North Carolina 28288 Attention: Mr. R. Steven Hall GUARANTORS: Emergent Financial, Inc. - --------------------------------------------------- - --------------------------------------------------- Attention: ------------------------------- Emergent Group, Inc. - --------------------------------------------------- - --------------------------------------------------- Attention: ------------------------------- 31 32 SCHEDULE II TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF _____________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA SHAREHOLDERS OF COMPANY COMMON VOTING STOCK Shareholder Number of Shares - ----------- ---------------- - ------------------------------------------- ----------------- - ------------------------------------------- ----------------- TOTAL NUMBER OF SHARES ----------------- PREFERRED STOCK Shareholder Number of Shares - ----------- ---------------- - ------------------------------------------- ----------------- TOTAL NUMBER OF SHARES -----------------
32 33 EXHIBIT A TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF __________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF PROMISSORY NOTE 33 34 EXHIBIT B TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF SECURITY AGREEMENT 34 35 EXHIBIT C TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF _________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF GUARANTY 35 36 EXHIBIT D TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF __________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF LEGAL OPINION OF COUNSEL FOR COMPANY AND GUARANTORS 36 37 EXHIBIT E TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA LITIGATION SCHEDULE 37 38 EXHIBIT F TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA SCHEDULE OF ADDITIONAL REQUIRED DOCUMENTS 1. Original disclosure statements complying with Regulation Z ("Truth in Lending") of the Board of Governors of the Federal Reserve System and all agreements relating thereto; 2. Original Equal Credit Opportunity Act notice and additional disclosure statements or agreements relating thereto; 3. Survey of the Property covered by the Mortgage Loan, including a determination of whether or not such Property falls into a flood zone as identified by a HUD identified flood map; 4. Written statement signed by the attorney, title company or closing agent responsible for supervising the closing of the Mortgage Loan that such person or entity closed the Mortgage Loan in accordance with any closing instructions received by such person or entity; 5. A casualty insurance policy on the property subject to the Mortgage Loan covering fire, hazard and extended coverage, and if applicable, flood and earthquake insurance, all in amounts not less than the principal amount of the promissory note relating to the Mortgage Loan (or the maximum amount issuable for flood insurance) which insurance has been endorsed to provide for payment thereof to the Company, as mortgagee, together with written notice to the mortgagor of the fact, if true, that mortgagor's property lies within a flood zone; and 6. Original executed application by the Obligor on such Mortgage Loan for such Mortgage Loan; 7. Original or copy of credit bureau report on the Obligor on such Mortgage Loan; 8. Original HUD-1 settlement statement duly executed by the Obligor on such Mortgage Loan; and 9. Such other documents as the Lender may reasonably request from time to time, including but not limited to verification of employment of the Obligor on such Mortgage Loan, verification of deposit by such Obligor (if applicable), and any inspection reports performed with respect to such Obligor or the Property covered by such Mortgage Loan. 38 39 EXHIBIT G TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF BORROWING BASE SCHEDULE This Borrowing Base Schedule is furnished pursuant to the Mortgage Loan Warehousing Agreement dated as of ___________, 1994, as amended from time to time, among the Company and the Lender (the "Agreement"). Unless otherwise defined herein, the terms used in this Borrowing Base Schedule have the meanings ascribed thereto in the Agreement. A. Aggregate Unit Collateral Values of Eligible Mortgage Loans in Borrowing Base as of previous Borrowing Base Schedule delivered by the Company $ ------------ B. Aggregate Unit Collateral Values of Eligible Mortgage Loans submitted for inclusion in Borrowing Base since previous Borrowing Base Schedule delivered by the Company $ ------------ C. Sum of (A plus B) $ ------------ D. Aggregate Unit Collateral Values of Eligible Mortgage Loans previously released by the Lender under trust receipts for which the full purchase price has been received by the Lender since previous Borrowing Base Schedule delivered by the Company $ ------------ E. Amount by which Aggregate Unit Collateral Values of Eligible Mortgage Loans withdrawn from the possession of the Lender under a trust receipt and not returned to the Lender exceeds $500,000 $ ------------ F. Aggregate Unit Collateral Values of Eligible Mortgage Loans withdrawn from the possession of the Lender under a trust receipt more than 10 days prior to the date
39 40 of this schedule and not returned to the Lender $ ----------- G. Aggregate Unit Collateral Values of Eligible Mortgage Loans withdrawn from the possession of the Lender and shipped to an investor for purchase more than 30 days prior to the date of this schedule and not returned to the Lender or for which the full purchase price has not been received by the Lender $ ----------- H. Sum of (D plus E plus F plus G) $ ----------- I. Adjusted Collateral Value of the Borrowing Base (C minus H) $ ----------- J. Aggregate principal amount of Loans outstanding $ ----------- K. Borrowing Base availability (I minus J; must equal or exceed zero) $ ----------- The undersigned hereby certifies that, as of the date hereof: (1) I am the duly elected _______________ of the Company; (2) The above schedule accurately states the Collateral Value of the Borrowing Base and the aggregate principal amount of Loans outstanding; (3) All Mortgage Loans included in the Borrowing Base as Eligible Mortgage Loans comply in all respects with the requirements of the definition of "Eligible Mortgage Loan"; and (4) I have no knowledge of the existence of any condition or event which constitutes an Event of Default under the Agreement.
Certified on behalf of the undersigned this _____ day of _________, 19___. CAROLINA INVESTORS, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- 40 41 EXHIBIT H TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF COVENANT COMPLIANCE CERTIFICATE TO: First Union National Bank of North Carolina This is the Covenant Compliance Certificate referred to in Section 6(a)(2) of the Mortgage Loan Warehousing Agreement dated as of ______, 1994, by and between the Company and the Lender (the "Agreement," with capitalized terms not otherwise defined herein having the same meanings assigned such terms in the Agreement). Attached hereto are the financial statements of the undersigned as of ______________ __, 19__ prepared by the Company. This Covenant Compliance Certificate and the attached financial statements are furnished for the purpose of procuring credit, and shall be substituted therefor. I hereby certify that (i) I have carefully read the attached financial statements, (ii) the attached financial statements are complete, true and correct statements to the best of my knowledge and belief, (iii) the attached financial statements were prepared in conformity with GAAP applied on a basis consistent with that of the preceding year, subject to year-end audit adjustments, and (iv) the attached financial statements fairly present the financial position of the Company and the results of its operations as of _________________, 19___ and for the period then ended. I also hereby certify that, as of the date hereof, (i) each and every covenant of the Company contained in the Agreement has been performed and observed (except for covenants made in connection with Mortgage Loans, it being the intention of the parties to the Agreement that the violation or breach of any such covenant in respect of any Mortgage Loan regarding the qualification of such Mortgage Loan as an "Eligible Mortgage Loan" under the Agreement shall not constitute an Event of Default, provided that such Mortgage Loan is excluded from the calculation of the Borrowing Base) and (ii) no Event of Default or Potential Default has occurred under the Agreement. Attached are calculations of the financial ratios set forth in Sections 7(j), 7(k), 7(l), 7(m), 7(n), 7(o), 7(p) 7(q), 7(r), 7(s), 7(t) and 7(u) of the Agreement as of the date hereof, which calculations are hereby certified to be complete, true and correct calculations of the financial ratios contained in such sections. 41 42 Certified on behalf of the undersigned this ____ day of ______________, 19__. CAROLINA INVESTORS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 42 43 EXHIBIT I TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA SCHEDULE OF PERMITTED OTHER DEBT (INCLUDING PERMITTED SECURED DEBT) 43 44 EXHIBIT J TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA SCHEDULE OF REQUIRED DOCUMENTS 1. An original written Loan Request, signed by an officer of the Company who is authorized to make such request; 2. An original fully completed Delivery Certificate (as defined in the Security Agreement); 3. The original executed promissory note relating to the Mortgage Loan (properly endorsed or assigned to the Company if purchased by the Company), which promissory note shall be duly endorsed in blank and assigned in blank without recourse by the Company; 4. The original executed mortgage or deed of trust relating to the Mortgage Loan; 5. An original executed and recordable but unrecorded assignment of the mortgage or deed of trust relating to the Mortgage Loan (unless the Lender determines that under applicable State law the assignment should be recorded in order to adequately protect its interest, in which case the assignment shall be recorded by the Company and a certified true copy thereof shall be provided to the Lender), together with the original or a duly certified copy of a proper assignment or assignments of the mortgage or deed of trust from the original holder through any subsequent transferees to the Company, duly recorded if local requirements in the jurisdiction in which the Property is located required the recordation of such assignment or assignments; 6. An original (or a certified copy of a) mortgagee title insurance policy issued by a nationally recognized title insurance company acceptable to the Lender, together with any attachments and customary endorsements thereto, which insures that the mortgage or deed of trust securing the promissory note relating to the Mortgage Loan is a valid and enforceable first lien on the Property covered by the mortgage Loan with no prior liens or encumbrances); 7. A copy of the first two pages of an appraisal of the Property covered by the Mortgage Loan by an appraiser acceptable to the Lender in its sole and absolute discretion, which appraisal demonstrates that the principal amount of the promissory note relating to such Mortgage Loan is not greater than the lesser of (i) eighty-five percent (85%) of the fair market appraisal of such Property or (ii) the purchase price paid by the Obligor on such Mortgage Loan for the Property, provided that such purchase occurred simultaneously with the closing of the Mortgage Loan; and 8. Satisfactory evidence of compliance with the requirements of such other laws as may, from time to time, become applicable to the Mortgage Loan. 44 45 EXHIBIT K TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA MONTHLY OPERATING REPORT 45 46 EXHIBIT L TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF ___________, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA LOAN REQUEST 46 47 PROMISSORY NOTE _________ __, 1994 FOR VALUE RECEIVED, CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company"), hereby unconditionally promises to pay to the order of FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association (the "Lender"), at its office located at One First Union Center, CORP-6, TW-19, 301 South College Street, Charlotte, North Carolina 28288, in lawful money of the United States and in immediately available funds, on the dates required under that certain Mortgage Loan Warehousing Agreement dated as of _______ ___, 1994 by and between the Company and the Lender (as the same may be amended, extended or replaced from time to time, the "Agreement" and with the capitalized terms not otherwise defined herein used with the meanings given such terms in the Agreement), the principal amount of each Loan made under the Agreement. The Company further agrees to pay interest in like money and funds at the office of the Lender referred to above, on the unpaid principal balance hereof from the date advanced until paid in full on the dates and at the applicable rates set forth in the Agreement. The holder of this Note is hereby authorized to record the date and amount of each Loan, the date and amount of each payment of principal and interest, and applicable interest rates and other information with respect thereto, on the schedules annexed to and constituting a part of this Note (or by any analogous method the holder hereof may elect consistent with its customary practices) and any such recordation shall, absent manifest error, constitute prima facie evidence of the accuracy of the information so recorded; provided, however, that the failure to make a notation of the inaccuracy of any notation shall not limit or otherwise affect the obligations of the Company under the Credit Documents. This Note is the Note referred to in, and is entitled to all the benefits of, the Agreement. Reference is hereby made to the Agreement and to the Security Agreement for rights and obligations of payment and prepayment, collateral security, Events of Default and the rights of acceleration of the maturity hereof upon the occurrence of an Event of Default. This Note shall be governed by, and construed in accordance with, the laws of the State of North Carolina, and is being executed and sealed by the duly authorized officers of the Company as of the day and year first above written. CAROLINA INVESTORS, INC., a South Carolina corporation [CORPORATE SEAL] ATTEST: By: --------------------------------- Name: ------------------------------- By: Title: ----------------------- ------------------------------ Name: --------------------- Title: -------------------- 47 48 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Security Agreement") is made and dated as of the ____ day of __________, 1994, by and among CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company"), in favor of FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association (the "Lender"). RECITALS A. Pursuant to that certain Mortgage Loan Warehousing Agreement dated as of _________ __, 1994 by and between the Company and the Lender (as same may be amended, extended or replaced from time to time, the "Warehousing Agreement", and with capitalized terms not otherwise defined herein used with the same meanings as in the Warehousing Agreement), the Lender has agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. B. As a condition precedent to the effectiveness of the Warehousing Agreement, the Company is required to execute and deliver to the Lender this Security Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 9. Delivery of Collateral. The Company shall deliver to the Lender, or cause to be delivered to the Lender, that portion of the Collateral Consisting of Mortgage Loans to be included in the computation of the Collateral Value of the Borrowing Base. Delivery of Collateral consisting of Mortgage Loans shall be effected by delivery of the Required Documents therefor. The Lender's responsibility to review such Collateral is limited to the review steps described on Exhibit 1 hereto, said review of Collateral delivered on any Business Day to be completed before the opening of business of the Lender on the next succeeding Business Day; provided, however, that in the event the Company delivers Collateral to the Lender on any Business Day in an amount which exceeds the Lender's reasonable capacity to review such Collateral before the opening of business of the Lender on the next succeeding Business Day, the Lender shall not be obligated to review such Collateral before the opening of business of the Lender on the next succeeding Business Day but shall use its best efforts to do so. No Collateral will be included in the computation of the Collateral Value of the Borrowing Base until the Lender's review thereof has been completed pursuant to this Paragraph 1 and Paragraph 4 below. All Mortgage Loans at any time delivered to the Lender hereunder shall be held by the Lender in a fire resistant vault, drawer or other suitable depositary maintained and controlled solely by the Lender, conspicuously marked to show the interests of the Lender therein and not commingled with any other assets or property of, or held by, the Lender. The Lender is not, and shall not at any time in the future be, subject, with respect to the Collateral, in any manner or to any extent, to the direction or control of the Company except as expressly permitted hereunder or under the other Credit Documents. Under no circumstances will the Lender deliver possession of the Collateral to the Company except in accordance with the express terms of this Security Agreement. 10. Grant of Security Interest. The Company hereby pledges, assigns and grants to the Lender, a first perfected security interest in the property described in Paragraph 3 below (collectively and severally, the "Collateral"), to secure payment and performance of the Obligations. 48 49 11. Collateral. The Collateral shall consist of all now existing and hereafter arising right, title and interest of the Company in, under and to each of the following: (a) All Mortgage Loans now owned or hereafter acquired or originated by the Company, including, without limitation, the promissory notes or other instruments or agreements evidencing the indebtedness of Obligors thereon, all mortgages, deeds to secure debt, trust deeds and security agreements related thereto, all rights to payment thereunder, all rights in the Properties securing payment of the indebtedness of the Obligors thereon, all rights under documents related thereto, such as guaranties and insurance policies (issued by governmental agencies or otherwise), including, without limitation, mortgage and title insurance policies, fire and extended coverage insurance policies (including the right to any return premiums), and all rights in cash deposits consisting of impounds, insurance premiums or other funds held on account thereof; (b) All rights of the Company (but not its obligations) under any agreements to sell such Collateral, now existing or hereafter arising, covering any part of the foregoing Collateral, all rights to deliver Mortgage Loans to investors and other purchasers pursuant thereto and all proceeds resulting from the disposition of such Collateral pursuant thereto; (c) All now existing and hereafter arising rights to service, administer and collect Mortgage Loans (it being acknowledged and agreed that prior to the occurrence of an Event of Default and acceleration of the Obligations, the security interest in such servicing rights granted hereunder shall be automatically terminated without need for further action upon the sale, transfer or other disposition of the related Mortgage Loan in accordance with the provisions of the Credit Documents), and all rights to the payment of money on account of such servicing, administration and collection activities; (d) All now existing and hereafter arising accounts, contract rights and general intangibles constituting or relating to any of the foregoing Collateral; (e) All now existing and hereafter acquired files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other books, records, information and data of the Company relating to the foregoing Collateral (including all information, records, data, programs, tapes, discs, and cards necessary or helpful in the administration or servicing of the foregoing Collateral); (f) The Funding Account, the Settlement Account and any and all funds at any time held in any such accounts; and (g) All products and Proceeds of the foregoing Collateral. 12. Lender's Review of Collateral. Each delivery of Mortgage Loans to the Lender shall be accompanied by a certificate substantially in the form attached as Exhibit 6 hereto (the "Delivery Certificate"). Upon any receipt of Required Documents for any Mortgage Loan, the Lender shall review the same and verify that: (a) All Required Documents relating to such item of Collateral appear regular on their face and are in the Lender's possession; and (b) The statements set forth on Exhibit 1 hereto are accurate and complete in all respects. 49 50 Such verification for Collateral delivered shall be set forth in the schedule referred to in Paragraph 5(b) below. If the Lender notes any exception in the review described in subparagraph (a) or (b) above or questions, in its reasonable discretion, the genuineness, regularity, propriety, or accuracy of any item of Collateral, the Lender shall so note in the next such schedule delivered. In the event that the Company had been requested to deliver the Additional Required Documents with respect to any Mortgage Loan, the Lender shall review and verify such Additional Required Documents consistent with the obligations of the Lender above. 13. Collateral Value Determination. (a) No later than 1:00 p.m. (Charlotte, North Carolina time) on each Business Day (i) on which any Collateral is delivered to the Lender by the Company, or (ii) on which any Collateral is released by the Lender pursuant to Paragraph 6 below, the Lender shall compute the Collateral Value of the Borrowing Base (a "Collateral Value Determination") as of 1:00 p.m. on such Business Day and make a notation thereof. (b) No later than 1:00 p.m. (Charlotte, North Carolina time) on each Business Day, the Lender shall prepare and deliver to the Company via facsimile a schedule showing the composition of the Borrowing Base, on a per- Mortgage Loan basis, as of such time. The Company shall certify as to the accuracy of such schedule and shall return such schedule, with such certification attached, to the Lender via facsimile no later than 2:00 p.m. (Charlotte, North Carolina time) on each such Business Day. 14. Handling of Collateral; Settlement Account. (a) Prior to the occurrence of an Event of Default, from time to time, the Lender may release documentation relating to Mortgage Loans to the Company against a trust receipt executed by the Company in the form of Exhibit 2 hereto. The Company and the Lender will comply with the trust receipt procedures specified on Exhibit 3 hereto. The Company hereby represents and warrants that any request by the Company for release of Collateral under this subparagraph 6(a) shall be solely for the purposes of correcting clerical or other non-substantial documentation problems in preparation of returning such Collateral to the Lender for ultimate sale or exchange and that the Company has requested such release in compliance with all terms and conditions of such release set forth herein and in the Warehousing Agreement, including, without limitation, subparagraph (k)(1) of the definition of Eligible Mortgage Loan. (b) Prior to the occurrence of an Event of Default, upon delivery by the Company to the Lender of a shipping request in the form of that attached hereto as Exhibit 4, the Lender will transmit Mortgage Loans held by it as directed by the Company to an investor in connection with the sale thereof, such transmittal to be under cover of a transmittal letter in the form of that attached hereto as Exhibit 5 (or such other form as may be required under any government program pursuant to which the relevant Mortgage Loans are being shipped). In no event shall the Lender have any obligation to obtain written acknowledgement of receipt from the addressee of any transmittal letter or other communication sent by the Lender hereunder. (c) All amounts payable on account of the sale of Mortgage Loans (including, but not limited to a sale pursuant to a repurchase agreement) will be instructed to be paid directly by the purchaser to the Settlement Account. Pursuant to Paragraph 2 above the Company has granted a security interest in and lien upon the Settlement Account and in any and all amounts at any time held therein to the Lender as collateral security for the Obligations. The Lender shall hold such security interest in and lien upon the accounts referred to in Paragraph 3(f) above and all funds at any time held therein for its 50 51 benefit with all rights of a secured party under the Uniform Commercial Code of all relevant jurisdictions. (d) Prior to the occurrence of an Event of Default, the Lender shall take such steps as it may be reasonably directed from time to time by the Company in writing which are not inconsistent with the provisions of this Security Agreement and the other Credit Documents and which the Company deems necessary to enable the Company to perform and comply with agreements for the sale or other disposition in whole or in part of Mortgage Loans. (e) Prior to the occurrence of an Event of Default and acceleration of the Obligations and if, but only if, such action is not inconsistent with the express provisions of this Security Agreement and the other Credit Documents and would not create an Event of Default or Potential Default, the Company may, in connection with its residential mortgage banking business: originate, acquire and service Mortgage Loans; receive payments on Mortgage Loans from the Obligors thereon and impounds and fees in connection therewith; retain, use and apply fees and payments made on account of the Mortgage Loans by the Obligors thereunder; disburse from impound accounts; in the ordinary course of the Company's business, create, use, destroy and transfer records, files and other items described in Paragraph 3(e) above; sell or otherwise dispose of Mortgage Loans not included in the computation of the Collateral Value of the Borrowing Base, with or without servicing rights; pledge Mortgage Loans to the extent permitted under the Credit Documents; sell servicing rights; and enter into, exercise rights under, perform, modify, waive and cancel any agreements for the sale or other disposition of Mortgage Loans. (f) Following the occurrence of an Event of Default, the Lender shall not, and shall incur no liability to the Company or any other Person for refusing, in its sole discretion, to, deliver any item of Collateral to the Company or any other Person (other than under existing agreements for sale of such Collateral). 15. Costs and Expenses. The Lender shall notify the Company of all extraordinary costs and expenses (including, without limitation, expenses of legal counsel to the Lender) of the Lender directly relating to the Lender's performance of this Security Agreement, and such extraordinary costs and expenses shall be paid promptly by the Company or, if already paid by the Lender, the Company promptly shall reimburse the Lender therefor. 16. Representations and Warranties. The Company hereby represents and warrants that: (a) the Company is the sole owner of the Collateral (or, in the case of after-acquired Collateral, at the time the Company acquires rights in the Collateral, will be the sole owner thereof); (b) except for security interests in favor of the Lender, no Person has (or, in the case of after-acquired Collateral, at the time the Company acquires rights therein, will have) any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral and, in any event, the Lender has a perfected, first priority security interest thereon; (c) all information heretofore, herein or hereafter supplied to the Lender by or on behalf of the Company with respect to the Collateral is or will be accurate and complete; and (d) each Mortgage Loan is, at all dates when it is submitted by Company for inclusion in the computation of the Collateral Value of the Borrowing Base, an Eligible Mortgage Loan. 17. Covenants of the Company. The Company hereby agrees: (a) to procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writings deemed necessary or appropriate by the Lender to perfect, maintain and protect its security interest hereunder and the priority thereof and to deliver promptly to the Lender all originals of Collateral or Proceeds consisting of chattel paper or instruments; (b) not to surrender or lose possession of (other than to the Lender), sell, encumber, or otherwise dispose of or transfer, any Collateral or right or interest therein other than 51 52 shipment of Mortgage Loans under agreements for the sale thereof and as otherwise permitted under Paragraph 6 above; (c) at all times to account fully for and promptly to deliver to the Lender, in the form received, all Collateral or Proceeds received, endorsed to the Lender as appropriate and accompanied by such assignments and powers, duly executed, as the Lender shall request, and until so delivered all Collateral and Proceeds shall be held in trust for the Lender, separate from all other property of the Company and identified as the property of the Lender; (d) at any reasonable time, upon demand by the Lender, to exhibit to and allow inspection by the Lender (or Persons designated by the Lender) of the Collateral and the records concerning the Collateral; (e) to keep the records concerning the Collateral at the location(s) set forth in Paragraph 16 below and not to remove the records from such location(s) without the prior written consent of the Lender; (f) at the request of the Lender, to place on each of its records pertaining to the Collateral a legend, in form and content satisfactory to the Lender, indicating that such Collateral has been assigned to the Lender; (g) not to modify, compromise, extend, rescind or cancel any deed of trust, mortgage, note or other document, instrument or agreement connected with any Mortgage Loan pledged under this Security Agreement or any document relating thereto or connected therewith or consent to a postponement of strict compliance on the part of any party thereto with any term or provision thereof; (h) to keep the Collateral insured against loss, damage, theft, and other risks customarily covered by insurance, and such other risks as the Lender may request; (i) to do all acts that a prudent investor would deem necessary or desirable to maintain, preserve and protect the Collateral; (j) not knowingly to use or permit any Collateral to be used unlawfully or in violation of any provision of this Security Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (k) to pay (or require to be paid) prior to their becoming delinquent all taxes, assessments, insurance premiums, charges, encumbrances, and liens now or hereafter imposed upon or affecting any Collateral; (l) to notify the Lender before any such change shall occur of any change in the Company's name, identity or structure through merger, consolidation or otherwise; (m) to appear in and defend, at the Company's cost and expense, any action or proceeding which may affect its title to or the Lender's interest in the Collateral; (n) to keep accurate and complete records of the Collateral and to provide the Lender with such records and such reports and information relating to the Collateral as the Lender may request from time to time; and (o) to comply with all laws, regulations and ordinances relating to the possession, operation, maintenance and control of the Collateral. 18. Collection of Collateral Payments. (a) The Company shall, at its sole cost and expense, endeavor to obtain payment, when due and payable, of all sums due or to become due with respect to any Collateral (each such payment being referred to as a "Collateral Payment"), including, without limitation, the taking of such action with respect thereto as the Lender may request, or, in the absence of such request, as the Company may reasonably deem advisable; provided, however, that the Company shall not, without the prior written consent of the Lender, grant or agree to any rebate, refund, compromise or extension with respect to any Collateral Payment or accept any prepayment on account thereof. Upon the request of the Lender following the occurrence of an Event of Default (and subject to the requirements of applicable law), the Company will notify and direct any party who is or might become obligated to make any Collateral Payment, to make payment thereof to the Lender (or to the Company in care of the Lender) at such address as the Lender may designate. The Company will reimburse the Lender promptly upon demand for all out-of-pocket costs and expenses, including reasonable attorneys' fees and litigation expenses, incurred by the Lender in seeking to collect any Collateral Payment. (b) If there shall occur an Event of Default, upon the request of the Lender the Company will transmit and deliver to the Lender, forthwith upon receipt and in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed where required so that such items may be collected by the Lender) which may be received by the Company at any time as payment on account of any Collateral Payment and if such request shall be made, until delivery to the 52 53 Lender, such items will be held in trust for the Lender and will not be comming led by the Company with any of its other funds or property. Thereafter, the Lender is hereby authorized and empowered to endorse the name of the Company on any check, draft or other instrument for the payment of money received by the Lender on account of any Collateral Payment if the Lender believes such endorsement is necessary or desirable for purposes of collection. (c) The Company hereby agrees to indemnify, defend and save harmless the Lender and its agents, officers, employees and representatives from and against all reasonable liabilities and expenses on account of any adverse claim asserted against the Lender relating to any moneys received by the Lender on account of any Collateral Payment (other than as a direct result of the negligence, gross negligence or willful misconduct of the Lender or its employees) and such obligation of the Company shall continue in effect after and notwithstanding the discharge of the Obligations and the release of the security interest granted in Paragraph 2 above. 19. Authorized Action by Lender. The Company hereby irrevocably appoints the Lender as its attorney-in- fact to do (but the Lender shall not be obligated to and shall incur no liability to the Company or any third party for failure so to do) at any time and from time to time following the occurrence of an Event of Default, any act which the Company is obligated by this Security Agreement to do, and to exercise such rights and powers as the Company might exercise with respect to the Collateral, including, without limitation, the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process and preserve the Collateral; (d) transfer the Collateral to the Lender's own or its nominee's name; and (e) make any compromise or settlement, and take any other action it deems advisable with respect to the Collateral. Notwithstanding anything contained herein, in no event shall the Lender be required to make any presentment, demand or protest, or give any notice and the Lender need not take any action to preserve any rights against any prior party or any other person in connection with the Obligations or with respect to the Collateral. 20. Default and Remedies. Upon the occurrence of an Event of Default and following the acceleration of the Obligations, the Lender shall have the right to, without notice to or demand upon the Company: (a) foreclose or otherwise enforce the Lender's security interest in the Collateral in any manner permitted by law or provided for hereunder; (b) sell or otherwise dispose of the Collateral or any part thereof at one or more public or private sales, whether or not such Collateral is present at the place of sale, for cash or credit or future delivery and without assumption of any credit risk, on such terms and in such manner as the Lender may determine; (c) require the Company to assemble the Collateral or books and records relating thereto and make such available to the Lender at a place to be designated by the Lender; (d) enter onto property where any Collateral or books and records relating thereto are located and take possession thereof with or without judicial process; and (e) prior to the disposition of the Collateral, prepare it for disposition in any manner and to the extent the Lender deems appropriate. Upon any sale or other disposition pursuant to this Security Agreement, the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral or portion thereof so sold or disposed of and all proceeds thereof shall be applied to the Obligations. Each purchaser at any such sale or other disposition shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of the Company, and the Company specifically waives (to the extent permitted by law) all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. 53 54 21. Binding Upon Successors. All rights of the Lender under this Security Agreement shall inure to the benefit of its successors and assigns, and all obligations of the Company shall bind its successors and assigns. 22. Entire Agreement; Severability. This Security Agreement contains the entire security agreement with respect to the Collateral between the Lender and the Company. All waivers by the Company provided for in this Security Agreement have been specifically negotiated by the parties with full cognizance and understanding of their rights. If any of the provisions of this Security Agreement shall be held invalid or unenforceable, this Security Agreement shall be construed as if not containing such provisions, and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 23. Choice of Law. This Security Agreement shall be construed in accordance with and governed by the laws of the State of North Carolina and, where applicable and except as otherwise defined herein, terms used herein shall have the meanings given them in the Uniform Commercial Code as in effect from time to time in the State of North Carolina. 24. Place of Business; Records. The Company represents and warrants that its chief place of business is at 208 Garvin Street, Pickens, South Carolina 29671, and that its books and records concerning the Collateral are kept at its chief place of business. 25. Notice. Any written notice, consent or other communication provided for in this Security Agreement shall be delivered or sent as provided in the Warehousing Agreement. EXECUTED and sealed the day and year first above written. CAROLINA INVESTORS, INC., a South Carolina corporation [CORPORATE SEAL] ATTEST: By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- -------------------------- FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association [CORPORATE SEAL] ATTEST: By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Title: Title: --------------------------- --------------------------
54 55 SCHEDULE OF EXHIBITS TO SECURITY AGREEMENT
EXHIBIT DOCUMENT - ------- -------- 1 Required Review Steps 2 Form of Trust Receipt 3 Trust Receipt Procedures 4 Form of Shipping Request 5 Form of Whole Loan Sale Transmittal Letter 6 Form of Delivery Certificate
56 EXHIBIT 1 TO SECURITY AGREEMENT REQUIRED REVIEW STEPS 1. All submitted documents, including the report attached to the Delivery Certificate, are consistent as to borrower name, loan face amount, loan type and the Company's loan number. 2. The note and mortgage/deed of trust each bears an original signature or signatures which appear to be those of the person or persons named as the maker and mortgagor/trustor, or, in the case of a certified copy of the mortgage/deed of trust, such copy bears what appears to be a reproduction of such signature or signatures. 3. Except for (a) the endorsement to the Company of the note in the event such loan was purchased by the Company and (b) the endorsement in blank of the note by the Company, neither the note, the mortgage/deed of trust, nor the assignment(s) of the mortgage/deed of trust contain any irregular writings which appear on their face to affect the validity of any such endorsement or to restrict the enforceability of the document on which they appear. 4. The note is endorsed in blank and such endorsement bears an original signature of an authorized officer of the Company, based on the current list of such officers supplied by the Company. 5. The assignment of the mortgage/deed of trust bears an original signature of an authorized officer of the Company, based on the current list of such officers supplied by the Company. 57 EXHIBIT 2 TO SECURITY AGREEMENT FORM OF TRUST RECEIPT Date: ___________, 19__ The undersigned, CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company"), acknowledges receipt from FIRST UNION NATIONAL BANK OF NORTH CAROLINA (the "Lender") pursuant to the Security Agreement (as those terms and capitalized terms not otherwise defined herein are defined in that certain Mortgage Loan Warehousing Agreement dated as of ______________, 1994, among the Lender and the Company), or from its duly appointed agent, of the following described documentation for the identified Mortgage Loans (the "Collateral Documents"), possession of which is herewith entrusted to the Company solely for the purpose of correcting documentary defects relating thereto: Loan Document Borrower Name Loan Number Note Amount Delivered ------------- - ------------- ----------- ----------- --------- It is hereby acknowledged that a security interest pursuant to the Uniform Commercial Code as in effect in the State of North Carolina in the Collateral hereinabove described and in the Proceeds of said Collateral has been granted to the Lender pursuant to the Security Agreement. The Company hereby represents and warrants that the Unit Collateral Value of the Mortgage Loans for which the Collateral Documents are requested to be released hereunder when added to the Unit Collateral Value of all other Mortgage Loans included in the computation of the Collateral Value of the Borrowing Base the Collateral Documents for which have been similarly released does not exceed $500,000. In consideration of the aforesaid delivery by the Lender (or by its duly appointed agent), the Company hereby agrees to hold said Collateral Documents in trust for the Lender as provided under and in accordance with all provisions of the Security Agreement and to return said Collateral Documents to the Lender no later than the close of business on the tenth calendar day following the date hereof or, if such day is not a Business Day, on the immediately succeeding Business Day. CAROLINA INVESTORS, INC., a South Carolina corporation By: ------------------------- Name: ----------------------- Title: ---------------------- 58 EXHIBIT 3 TO SECURITY AGREEMENT TRUST RECEIPT PROCEDURES The Company and Lender will adhere to the following procedures with respect to trust receipts: The Lender will maintain all original trust receipts in a vault, drawer or other suitable depositary with a one hour fire rating maintained and controlled solely by the Lender. 59 EXHIBIT 4 TO SECURITY AGREEMENT FORM OF SHIPPING REQUEST (For Whole Loan Deliveries) Date: ---------------- FIRST UNION NATIONAL BANK OF NORTH CAROLINA One First Union Center 301 South College Street Charlotte, North Carolina 28288 Attention: --------------------- --------------------- This letter is to serve as authorization for you to endorse and ship the following loans: Loan Number Borrower Name Note Amount to the following address under a commitment or agreement of sale (the "Commitment") from an investor as follows: NAME: ADDRESS: ATTENTION: Please endorse the notes as follows: Please ship the loan documents either by ___________________ or by such other courier service as we have designated to you as "approved." The courier shall act as an independent contractor bailee acting solely on your behalf as Lender, as defined in that certain Mortgage Loan Warehousing Agreement dated as of __________, 1994, as the same may be amended, extended or replaced from time to time, but we acknowledge and agree that you are not responsible for any delays in shipment or any other actions or inactions of the courier; however, because the Commitment expires on ______________, 199_, we ask that you deliver the loan documents to the courier no later than _________________, 199_. Please have the courier bill us by using our acct #____________. If you should have any questions, or should feel the need for additional documentation, please do not hesitate to call _________________ CAROLINA INVESTORS, INC., a South Carolina corporation By: ------------------------- Name: ----------------------- Title: ---------------------- 60 EXHIBIT 5 TO SECURITY AGREEMENT (INVESTOR) FORM OF WHOLE LOAN SALE TRANSMITTAL LETTER [LETTERHEAD OF LENDER] __________ __, 1994 Dear [Investor]: Enclosed is(are) _____ original promissory note(s) in the original principal amount of $_________________ ("Notes") evidencing the Mortgage Loans described on the attached SCHEDULE A, along with other related documents (collectively, "Collateral"). A security interest in the Collateral has been granted to First Union National Bank of North Carolina ("FUNB") by Carolina Investors, Inc. ("Seller"). All Collateral now or hereafter delivered to you is to be held by you as a bailee for the benefit of FUNB, and subject to FUNB's direction and control. By taking possession of Collateral, you agree to the terms of bailments as set forth in this letter. ***WIRE INSTRUCTIONS*** Payments for all notes accepted for purchase are to be wire transferred to FIRST UNION NATIONAL BANK OF NORTH CAROLINA (ABA #053000219) at One First Union Center, Charlotte, NC 28288-0731, for the account of Carolina Investors, Inc. (Acct. #20-0000020585). Please reference the Mortgagor(s)' name on the wire instructions. Upon FUNB's receipt of such proceeds, FUNB's security interest in the Collateral shall terminate without further action. The Collateral has not been assigned or transferred by FUNB to any other party and FUNB has not recorded any security interests therein. Notes which are not accepted for purchase, together with all other related documents, should be returned, within 30 days after the date of this letter to: First Union National Bank of North Carolina, One First Union Center, Charlotte, NC 28288-0731, Attention: Vic Lazich, Corporate Banking Group Loan Operations, CORP-2, TW-18. Please do not honor any communications from Seller relating to any Collateral or payment without the written consent of FUNB, or until FUNB has received proceeds of the sale of such Note(s). 61 Do not deliver any Collateral or payment to any third party without the written consent of FUNB. If you have any questions, please feel free to call. Very truly yours, First Union National Bank of North Carolina By: -------------------------------- Victor C. Lazich Vice President Specialized Industries/Mortgage Banking (704) 374-2220 ***UPON RECEIPT*** NOTE: By accepting the mortgage loan(s) delivered to you with this letter, you consent to be the custodian, agent and bailee for the lenders on the terms described in this letter. The above-signed, as collateral agent, requests that you acknowledge receipt of the enclosed mortgage loan(s) and this letter by signing and returning the enclosed copy of this letter and attached SCHEDULE A to the above-signed; however, your failure to do so does not nullify such consent. - ---------------------------- -------------------- Agreed and Accepted by Date authorized representative of [Investor] 62 EXHIBIT 6 TO SECURITY AGREEMENT FORM OF DELIVERY CERTIFICATE 63 EXHIBIT A TO UCC-1 FINANCING STATEMENT LISTING CAROLINA INVESTORS, INC. AS DEBTOR AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA AS SECURED PARTY All now existing and hereafter arising right, title and interest of the Debtor in, under and to each of the following: (a) All Mortgage Loans now owned or hereafter acquired or originated by the Debtor, including, without limitation, the promissory notes or other instruments or agreements evidencing the indebtedness of obligors thereon, all mortgages, deeds to secure debt, trust deeds and security agreements related thereto, all rights to payment thereunder, all rights in the real property securing payment of the indebtedness of the obligors thereon, all rights under documents related thereto, such as guaranties and insurance policies (issued by governmental agencies or otherwise), including, without limitation, mortgage and title insurance policies, fire and extended coverage insurance policies (including the right to any return premiums), and all rights in cash deposits consisting of impounds, insurance premiums or other funds held on account thereof; (b) All rights of the Debtor (but not its obligations) under any agreements to sell such Collateral, now existing or hereafter arising, covering any part of the foregoing Collateral, all rights to deliver Mortgage Loans to investors and other purchasers pursuant thereto and all proceeds resulting from the disposition of such Collateral pursuant thereto; (c) All now existing and hereafter arising rights to service, administer and collect Mortgage Loans (it being acknowledged and agreed that prior to the occurrence of an Event of Default under the Credit Agreement (as hereinafter defined) and acceleration of the Obligations, the security interest in such servicing rights granted hereunder shall be automatically terminated without need for further action upon the sale, transfer or other disposition of the related Mortgage Loan in accordance with the provisions of the Credit Agreement and the documents, instruments and agreements executed in connection therewith), and all rights to the payment of money on account of such servicing, administration and collection activities; (d) All now existing and hereafter arising accounts, contract rights and general intangibles constituting or relating to any of the foregoing Collateral; (e) All now existing and hereafter acquired files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other books, records, information and data of the Debtor relating to the foregoing Collateral (including all information, records, data, programs, tapes, discs, and cards necessary or helpful in the administration or servicing of the foregoing Collateral); (f) The Funding Account, the Settlement Account and any and all funds at any time held in any such accounts; and (g) All products and Proceeds of the foregoing Collateral. All capitalized terms used and not defined herein shall have the meanings attributed to such terms in that certain Mortgage Loan Warehousing Agreement between the Debtor and the Secured Party dated 64 as of ______________, 1994 as the same may be amended, modified, restated, replaced or supplemented from time to time (the "Credit Agreement"). 65 GUARANTY THIS GUARANTY (the "Guaranty") is made and dated as of the _____ day of __________, 1994 by EMERGENT FINANCIAL, INC., a South Carolina corporation ("Guarantor"). RECITALS A. Pursuant to that certain Mortgage Loan Warehousing Agreement dated as of __________ ____, 1994 between CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA (the "Lender") (as amended, extended and replaced from time to time, the "Warehousing Agreement," and with capitalized terms not otherwise defined herein used with the same meanings as in the Warehousing Agreement) the Lender has agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. B. As a condition precedent to the effectiveness of the Credit Documents, Guarantor is required to execute and deliver to the Lender this Guaranty. C. Guarantor is the owner of one hundred percent (100%) of the outstanding capital voting stock of the Company and thus will derive material benefit from the extension of credit by the Lender to the Company pursuant to the Warehousing Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor hereby agrees as follows: AGREEMENT 1. Guarantor hereby irrevocably and unconditionally guarantees, jointly and severally, the payment when due, upon maturity, acceleration or otherwise, of the Obligations, whether heretofore, now, or hereafter made, incurred or created, whether voluntary or involuntary and however arising, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such Obligations are from time to time reduced or extinguished and thereafter increased or incurred, whether or not the Company may be liable individually or jointly with others, whether or not recovery upon such Obligations may be or hereafter become barred by any statute of limitations, and whether or not such Obligations may be or hereafter become otherwise invalid or unenforceable. This Guaranty is a guaranty of payment and not of collection. 2. Guarantor irrevocably and unconditionally guarantees, jointly and severally, the payment of the Obligations whether or not due or payable by the Company upon: (a) the dissolution, insolvency or business failure of, or any assignment for benefit of creditors by, or commencement of any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceedings by or against, the Company or Guarantor, or (b) the appointment of a receiver for, or the attachment, restraint of or making or levying of any order of court or legal process affecting, the property of the Company or Guarantor, and unconditionally promises to pay such Obligations to the Lender, or order, on demand, in lawful money of the United States. 3. The liability of Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Obligations, whether executed by Guarantor or by any other party, and the liability of Guarantor hereunder is not affected or impaired by (a) any direction of application of payment by the Company or by any other party, or (b) any other guaranty, undertaking or maximum liability of Guarantor or of any other party as to the Obligations, or (c) any payment on or in reduction of any such 66 other guaranty or undertaking, or (d) any revocation or release of any obligations of any other guarantor of the Obligations, or (e) any dissolution of, termination of, or increase, decrease or change in the personnel of, Guarantor, or (f) any payment made to the Lender on the Obligations which any of such Persons repay to the Company pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and Guarantor waives any right to the deferral or modification of Guarantor's obligations hereunder by reason of any such proceeding. 4. The obligations of Guarantor hereunder are independent of the Obligations of the Company, and a separate action or actions may be brought and prosecuted against Guarantor whether or not action is brought against the Company and whether or not the Company is joined in any such action or actions. Any payment by the Company or other circumstance which operates to toll any statute of limitations as to the Company shall operate to toll the statute of limitations as to Guarantor. 5. Guarantor authorizes the Lender (whether or not after termination of this Guaranty), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Obligations and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as the Lender in its discretion may determine; and (d) release or substitute any one or more endorsers, guarantors, the Company or other obligors. The Lender may without notice to or the further consent of Company or Guarantor assign this Guaranty in whole or in part to any person acquiring an interest in the Obligations. 6. It is not necessary for the Lender to inquire into the capacity or power of the Company or the officers acting or purporting to act on its behalf, and the Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 7. Guarantor waives any right to require the Lender to (a) proceed against the Company or any other party; (b) proceed against or exhaust any security held from the Company; or (c) pursue any other remedy in its power whatsoever. To this end, and without limiting the generality of the foregoing, Guarantor expressly waives any rights Guarantor might otherwise have had under the provisions of North Carolina General Statutes Section Section 26-7 et seq.. The Lender, may, at its election, foreclose on any security held for the Obligations by one or more judicial or nonjudicial sales, or exercise any other right or remedy it may have against the Company, or any security, without affecting or impairing in any way the liability of Guarantor hereunder except to the extent the Obligations have been paid. Guarantor waives any defense arising out of any such election, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Company or any security. Guarantor hereby waives any claim or other rights which Guarantor may now have or may hereafter acquire against the Company or any other guarantor of all or any of the Obligations that arise from the existence or performance of Guarantor's obligations under this Guaranty or any other of the Credit Documents (as such claims and rights being referred to as the "Guarantor's Conditional Rights"), including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, or indemnification, or any right to participate in any claim or remedy which the Lender has against the Company or any collateral which the Lender now has or hereafter acquires for the Obligations, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, by any payment made hereunder or otherwise, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or setoff or in any other manner, payment or security on account of such claim or other rights. If, notwithstanding the foregoing provisions, any amount shall be paid to Guarantor on account of Guarantor's Conditional Rights and 67 either (a) such amount is paid to Guarantor at any time when the Obligations shall not have been paid or performed in full, or (b) regardless of when such amount is paid to Guarantor, any payment made by the Company to the Lender is at any time determined to be a preferential payment, then such amount paid to Guarantor shall be deemed to be held in trust for the benefit of the Lender and shall forthwith be paid to the Lender to be credited and applied upon the Obligations, whether matured or unmatured, in such order and manner as the Lender shall determine. To the extent that any of the provisions of this Paragraph shall not be enforceable, Guarantor agrees that until such time as the Obligations have been paid and performed in full and the period of time has expired during which any payment made by the Company or Guarantor to the Lender may be determined to be a preferential payment, Guarantor's Conditional Rights to the extent not validly waived shall be subordinate to the Lender's right to full payment and performance of the Obligations and Guarantor shall not seek to enforce the Guarantor's Conditional Rights during such period. Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Obligations. Guarantor assumes all responsibility for being and keeping itself informed of the Company's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks which Guarantor assumes and incurs hereunder, and agrees that the Lender shall have no duty to advise Guarantor of information known to it regarding such circumstances or risks. 8. In addition to the Obligations, Guarantor agrees to pay reasonable attorneys' fees and all other costs and expenses incurred by the Lender in enforcing this Guaranty in any action or proceeding arising out of, or relating to, this Guaranty. This Guaranty and the liability and obligations of Guarantor hereunder are binding upon Guarantor and its successors and assigns, and this Guaranty inures to the benefit of and is enforceable by the Lender and its successors, transferees, and assigns. 9. No right or power of the Lender hereunder shall be deemed to have been waived by any act or conduct on the part of the Lender, or by any neglect to exercise such right or power, or by any delay in so doing; and every right or power shall continue in full force and effect until specifically waived or released by an instrument in writing executed by the Lender. 10. Guarantor agrees to execute any and all further documents, instruments and agreements as the Lender from time to time reasonably requests to evidence Guarantor's obligations hereunder. 11. Guarantor hereby represents and warrants and agrees that: (a) Guarantor: (1) is duly organized, validly existing and in good standing as a corporation under the laws of the State of South Carolina and is in good standing as a foreign corporation in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to so be in good standing could have a material adverse effect on the property or business of Guarantor or on Guarantor's ability to pay or perform the Obligations or its obligations hereunder, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes to do so, (3) is in compliance with all Requirements of Law and Contractual Obligations to the extent that failure to so comply could have a material adverse effect on Guarantor or Company or either of their property or business or on the ability of the Company to pay or perform the Obligations or the ability of Guarantor to pay or perform Guarantor's obligations hereunder, and (4) has reviewed and approved the Credit Documents. 68 (b) Guarantor has the corporate power and authority and the legal right to execute, deliver and perform the Credit Documents to which Guarantor is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of this Guaranty. The Credit Documents to which Guarantor is a party have been duly executed and delivered on behalf of Guarantor and constitute legal, valid and binding obligations of Guarantor enforceable against Guarantor in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. (c) The execution, delivery and performance by Guarantor of the Credit Documents to which Guarantor is a party will not violate any Requirement of Law or any Contractual Obligation of Guarantor to the extent that failure to comply could have a material adverse effect on Guarantor or its property or business or on the ability to pay or perform the Obligations or its obligations hereunder. (d) Except as disclosed on Exhibit 1 hereto, no litigation, investigation or proceeding of or before any court, arbitrator or Governmental Authority is pending or, to the knowledge of Guarantor, threatened by or against Guarantor or any of its Subsidiaries or against any of such Person's properties or revenues which is likely to be adversely determined and which, if adversely determined, is likely to have a material adverse effect on the business, operations, property or financial or other condition of Guarantor or the Company or on Guarantor and its Consolidated Subsidiaries taken as a whole or on the Collateral or the Collateral Value of the Borrowing Base. (e) Each of Guarantor, the Company and each of Guarantor's Consolidated Subsidiaries has filed or caused to be filed all tax returns that are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against any of them or any of the property of any of them other than taxes which are being contested in good faith by appropriate proceedings and as to which Guarantor, the Company or such Subsidiary has established adequate reserves in conformity with GAAP. (f) Guarantor is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (g) Guarantor owns, and at all times hereafter will own, one hundred percent (100%) of the issued and outstanding capital voting stock of the Company. Guarantor will not pledge, assign, hypothecate, encumber or otherwise grant a security interest in any of the capital voting stock of Company. All of the issued and outstanding shares of capital voting stock of the Company have been duly authorized and issued and are fully paid and non-assessable. (h) Neither the Guarantor nor the Company, nor any of the Subsidiaries of either Guarantor or the Company, is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan made under the Warehousing Agreement will be used, directly or indirectly, for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent 69 with, the applicable provisions of the Regulations of the Board of Governors of the Federal Reserve System. (i) Guarantor and each of its ERISA Affiliates, if any, are in compliance in all respects with the requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Company or any of its ERISA Affiliates which is likely to result in the termination of such Plan for purposes of Title IV of ERISA. (j) Guarantor has not issued any unregistered securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other existing applicable law, and is in compliance, in all material respects, with all existing applicable rules, regulations and requirements under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended. (k) No consent, approval, authorization of, or registration, declaration or filing with, any Governmental Authority is required on the part of Guarantor in connection with the execution and delivery of the Credit Documents to which Guarantor is a party or the performance of or compliance with the terms, provisions and conditions hereof or thereof. (l) Guarantor shall not permit the acquisition, purchase, redemption, retirement, transfer or issuance of any shares of its capital stock now or hereafter outstanding which would result in Emergent Group, Inc. owning less than eighty percent (80%) of Guarantor's outstanding capital stock. 12. This Guaranty shall be deemed to be made under and shall be governed by the laws of the State of North Carolina. 13. If any of the provisions of this Guaranty shall contravene or be held invalid under the laws of any jurisdiction, this Guaranty shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. Executed and sealed as of the day and year first above written. EMERGENT FINANCIAL, INC., a South Carolina corporation [CORPORATE SEAL] By: ------------------------------ Name: ------------------------------ Attest: Title: ------------------------------ By: ------------------------- Name: ------------------------- Title: ------------------------- 70 GUARANTY THIS GUARANTY (the "Guaranty") is made and dated as of the _____ day of __________, 1994 by EMERGENT GROUP, INC., a South Carolina corporation ("Guarantor"). RECITALS A. Pursuant to that certain Mortgage Loan Warehousing Agreement dated as of __________ ____, 1994 between CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA (the "Lender") (as amended, extended and replaced from time to time, the "Warehousing Agreement," and with capitalized terms not otherwise defined herein used with the same meanings as in the Warehousing Agreement) the Lender has agreed to extend credit to the Company on the terms and subject to the conditions set forth therein. B. As a condition precedent to the effectiveness of the Credit Documents, Guarantor is required to execute and deliver to the Lender this Guaranty. C. Guarantor is the owner of one hundred percent (100%) of the outstanding capital voting stock of Emergent Financial, Inc., a South Carolina corporation ("EFI"), which in turn is the owner of one hundred percent (100%) of the outstanding capital voting stock of the Company, and thus Guarantor will derive material benefit from the extension of credit by the Lender to the Company pursuant to the Warehousing Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor hereby agrees as follows: AGREEMENT 1. Guarantor hereby irrevocably and unconditionally guarantees, jointly and severally, the payment when due, upon maturity, acceleration or otherwise, of the Obligations, whether heretofore, now, or hereafter made, incurred or created, whether voluntary or involuntary and however arising, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such Obligations are from time to time reduced or extinguished and thereafter increased or incurred, whether or not the Company may be liable individually or jointly with others, whether or not recovery upon such Obligations may be or hereafter become barred by any statute of limitations, and whether or not such Obligations may be or hereafter become otherwise invalid or unenforceable. This Guaranty is a guaranty of payment and not of collection. 2. Guarantor irrevocably and unconditionally guarantees, jointly and severally, the payment of the Obligations whether or not due or payable by the Company upon: (a) the dissolution, insolvency or business failure of, or any assignment for benefit of creditors by, or commencement of any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceedings by or against, the Company or Guarantor, or (b) the appointment of a receiver for, or the attachment, restraint of or making or levying of any order of court or legal process affecting, the property of the Company or Guarantor, and unconditionally promises to pay such Obligations to the Lender, or order, on demand, in lawful money of the United States. 3. The liability of Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Obligations, whether executed by Guarantor or by any other party, and the liability of Guarantor hereunder is not affected or impaired by (a) any direction of application of payment by the Company or by any other party, or (b) any other guaranty, undertaking or maximum liability of Guarantor or of any other party as to the Obligations, or (c) any payment on or in reduction of any such 71 other guaranty or undertaking, or (d) any revocation or release of any obligations of any other guarantor of the Obligations, or (e) any dissolution of, termination of, or increase, decrease or change in the personnel of, Guarantor, or (f) any payment made to the Lender on the Obligations which any of such Persons repay to the Company pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and Guarantor waives any right to the deferral or modification of Guarantor's obligations hereunder by reason of any such proceeding. 4. The obligations of Guarantor hereunder are independent of the Obligations of the Company, and a separate action or actions may be brought and prosecuted against Guarantor whether or not action is brought against the Company and whether or not the Company is joined in any such action or actions. Any payment by the Company or other circumstance which operates to toll any statute of limitations as to the Company shall operate to toll the statute of limitations as to Guarantor. 5. Guarantor authorizes the Lender (whether or not after termination of this Guaranty), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Obligations and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as the Lender in its discretion may determine; and (d) release or substitute any one or more endorsers, guarantors, the Company or other obligors. The Lender may without notice to or the further consent of Company or Guarantor assign this Guaranty in whole or in part to any person acquiring an interest in the Obligations. 6. It is not necessary for the Lender to inquire into the capacity or power of the Company or the officers acting or purporting to act on its behalf, and the Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 7. Guarantor waives any right to require the Lender to (a) proceed against the Company or any other party; (b) proceed against or exhaust any security held from the Company; or (c) pursue any other remedy in its power whatsoever. To this end, and without limiting the generality of the foregoing, Guarantor expressly waives any rights Guarantor might otherwise have had under the provisions of North Carolina General Statutes Section Section 26-7 et seq.. The Lender, may, at its election, foreclose on any security held for the Obligations by one or more judicial or nonjudicial sales, or exercise any other right or remedy it may have against the Company, or any security, without affecting or impairing in any way the liability of Guarantor hereunder except to the extent the Obligations have been paid. Guarantor waives any defense arising out of any such election, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Company or any security. Guarantor hereby waives any claim or other rights which Guarantor may now have or may hereafter acquire against the Company or any other guarantor of all or any of the Obligations that arise from the existence or performance of Guarantor's obligations under this Guaranty or any other of the Credit Documents (as such claims and rights being referred to as the "Guarantor's Conditional Rights"), including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, or indemnification, or any right to participate in any claim or remedy which the Lender has against the Company or any collateral which the Lender now has or hereafter acquires for the Obligations, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, by any payment made hereunder or otherwise, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or setoff or in any other manner, payment or security on account of such claim or other rights. If, notwithstanding the foregoing provisions, any amount shall be paid to Guarantor on account of Guarantor's Conditional Rights and 72 either (a) such amount is paid to Guarantor at any time when the Obligations shall not have been paid or performed in full, or (b) regardless of when such amount is paid to Guarantor, any payment made by the Company to the Lender is at any time determined to be a preferential payment, then such amount paid to Guarantor shall be deemed to be held in trust for the benefit of the Lender and shall forthwith be paid to the Lender to be credited and applied upon the Obligations, whether matured or unmatured, in such order and manner as the Lender shall determine. To the extent that any of the provisions of this Paragraph shall not be enforceable, Guarantor agrees that until such time as the Obligations have been paid and performed in full and the period of time has expired during which any payment made by the Company or Guarantor to the Lender may be determined to be a preferential payment, Guarantor's Conditional Rights to the extent not validly waived shall be subordinate to the Lender's right to full payment and performance of the Obligations and Guarantor shall not seek to enforce the Guarantor's Conditional Rights during such period. Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Obligations. Guarantor assumes all responsibility for being and keeping itself informed of the Company's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks which Guarantor assumes and incurs hereunder, and agrees that the Lender shall have no duty to advise Guarantor of information known to it regarding such circumstances or risks. 8. In addition to the Obligations, Guarantor agrees to pay reasonable attorneys' fees and all other costs and expenses incurred by the Lender in enforcing this Guaranty in any action or proceeding arising out of, or relating to, this Guaranty. This Guaranty and the liability and obligations of Guarantor hereunder are binding upon Guarantor and its successors and assigns, and this Guaranty inures to the benefit of and is enforceable by the Lender and its successors, transferees, and assigns. 9. No right or power of the Lender hereunder shall be deemed to have been waived by any act or conduct on the part of the Lender, or by any neglect to exercise such right or power, or by any delay in so doing; and every right or power shall continue in full force and effect until specifically waived or released by an instrument in writing executed by the Lender. 10. Guarantor agrees to execute any and all further documents, instruments and agreements as the Lender from time to time reasonably requests to evidence Guarantor's obligations hereunder. 11. Guarantor hereby represents and warrants and agrees that: (a) Guarantor: (1) is duly organized, validly existing and in good standing as a corporation under the laws of the State of South Carolina and is in good standing as a foreign corporation in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to so be in good standing could have a material adverse effect on the property or business of Guarantor or on Guarantor's ability to pay or perform the Obligations or its obligations hereunder, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes to do so, (3) is in compliance with all Requirements of Law and Contractual Obligations to the extent that failure to so comply could have a material adverse effect on Guarantor or Company or either of their property or business or on the ability of the Company to pay or perform the Obligations or the ability of Guarantor to pay or perform Guarantor's obligations hereunder, and (4) has reviewed and approved the Credit Documents. 73 (b) Guarantor has the corporate power and authority and the legal right to execute, deliver and perform the Credit Documents to which Guarantor is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of this Guaranty. The Credit Documents to which Guarantor is a party have been duly executed and delivered on behalf of Guarantor and constitute legal, valid and binding obligations of Guarantor enforceable against Guarantor in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. (c) The execution, delivery and performance by Guarantor of the Credit Documents to which Guarantor is a party will not violate any Requirement of Law or any Contractual Obligation of Guarantor to the extent that failure to comply could have a material adverse effect on Guarantor or its property or business or on the ability to pay or perform the Obligations or its obligations hereunder. (d) Except as disclosed on Exhibit 1 hereto, no litigation, investigation or proceeding of or before any court, arbitrator or Governmental Authority is pending or, to the knowledge of Guarantor, threatened by or against Guarantor or any of its Subsidiaries or against any of such Person's properties or revenues which is likely to be adversely determined and which, if adversely determined, is likely to have a material adverse effect on the business, operations, property or financial or other condition of Guarantor or the Company or on Guarantor and its Consolidated Subsidiaries taken as a whole or on the Collateral or the Collateral Value of the Borrowing Base. (e) Each of Guarantor, the Company and each of Guarantor's Consolidated Subsidiaries has filed or caused to be filed all tax returns that are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against any of them or any of the property of any of them other than taxes which are being contested in good faith by appropriate proceedings and as to which Guarantor, the Company or such Subsidiary has established adequate reserves in conformity with GAAP. (f) Guarantor is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (g) As of the date hereof, Guarantor owns one hundred percent (100%) of the issued and outstanding capital voting stock of EFI. At all times hereafter, Guarantor will own at least eighty percent (80%) of the issued and outstanding capital voting stock of EFI. Guarantor will not pledge, assign, hypothecate, encumber or otherwise grant a security interest in any of the capital voting stock of EFI which it owns or in which it has a beneficial interest. All of the issued and outstanding shares of capital voting stock of EFI have been duly authorized and issued and are fully paid and non-assessable. (h) Neither the Guarantor nor the Company, nor any of the Subsidiaries of either Guarantor or the Company, is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin 74 stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan made under the Warehousing Agreement will be used, directly or indirectly, for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the applicable provisions of the Regulations of the Board of Governors of the Federal Reserve System. (i) Guarantor and each of its ERISA Affiliates, if any, are in compliance in all respects with the requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Company or any of its ERISA Affiliates which is likely to result in the termination of such Plan for purposes of Title IV of ERISA. (j) Guarantor has not issued any unregistered securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other existing applicable law, and is in compliance, in all material respects, with all existing applicable rules, regulations and requirements under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended. (k) No consent, approval, authorization of, or registration, declaration or filing with, any Governmental Authority is required on the part of Guarantor in connection with the execution and delivery of the Credit Documents to which Guarantor is a party or the performance of or compliance with the terms, provisions and conditions hereof or thereof. 12. This Guaranty shall be deemed to be made under and shall be governed by the laws of the State of North Carolina. 13. If any of the provisions of this Guaranty shall contravene or be held invalid under the laws of any jurisdiction, this Guaranty shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. Executed and sealed as of the day and year first above written. EMERGENT GROUP, INC., a South Carolina corporation [CORPORATE SEAL] By: ------------------------------ Name: ------------------------------ Attest: Title: ------------------------------ By: ------------------------- Name: ------------------------- Title: ------------------------- 75 March 31, 1995 First Union National Bank of North Carolina One First Union Center, 19th floor 301 South College Street Charlotte, North Carolina 28288 Attention: Mr. R. Steven Hall Re: Mortgage Loan Warehousing Agreement dated as of November 22, 1994 between Carolina Investors, Inc. and First Union National Bank of North Carolina (the "Warehousing Agreement") Ladies and Gentlemen: This letter will serve as a request by Carolina Investors, Inc. that the Warehousing Agreement be amended as follows: 1. AMENDMENTS TO WAREHOUSING AGREEMENT: a. The definition of the term "Maturity Date" contained in Section 10 of the Warehousing Agreement shall be amended by deleting the date "March 31, 1995" from subsection (a) thereof and inserting the date "April 30, 1995" in lieu thereof. b. The Warehousing Agreement and all schedules thereto, as well as all other Credit Documents (as defined therein), shall be amended or modified as necessary to effect the amendment set forth in subsection a. above. Except as specifically amended herein, the Warehousing Agreement and the Credit Documents (as defined therein) shall remain in full force and effect. Emergent Financial Corporation and Emergent Group, Inc., as Guarantors under, and as defined in, the Warehousing Agreement, join in the execution and delivery of this letter to acknowledge and consent to the terms hereof and hereby reaffirm their obligations under the Guaranties (as defined in the Warehousing Agreement). 76 Firs Union National Bank of North Carolina March 31, 1995 Upon the execution of this letter by First Union National Bank of North Carolina, the above amendments shall become effective as of the date hereof. Very truly yours, CAROLINA INVESTORS, INC. By: -------------------------- Name: -------------------------- Title: -------------------------- GUARANTORS: EMERGENT FINANCIAL CORPORATION By: -------------------------- Name: -------------------------- Title: -------------------------- EMERGENT GROUP, INC. By: -------------------------- Name: -------------------------- Title: -------------------------- ACKNOWLEDGED AND AGREED TO AS OF THE DATE SET FORTH ABOVE: FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: ------------------------- Name: ------------------------- Title: ------------------------- 77 First Union National Bank of North Carolina March 31, 1995 FIRST AMENDMENT TO SECURITY AGREEMENT THIS FIRST AMENDMENT TO SECURITY AGREEMENT dated as of ___________________, 1995 (this "Amendment") is made by and among CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company") and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association (the "Lender"). STATEMENT OF PURPOSE WHEREAS, pursuant to that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 between the Company and the Lender (as the same has been and may be amended, extended or replaced from time to time, the "Credit Agreement"), the Lender has agreed to extend credit to the Company on the terms and subject to the conditions set forth therein; and WHEREAS, both of the parties hereto are parties to a Security Agreement dated as of November 22, 1994 (the "Security Agreement"), which Security Agreement was executed in connection with the Credit Agreement; and WHEREAS, the parties hereto wish to amend the Security Agreement to provide for the modification of various terms and covenants thereof; NOW, THEREFORE, in consideration of the premises and agreements contained herein, and for good and valuable consideration, the receipt and sufficiency of which are acknowledged by the parties hereto, the parties hereto hereby agree as follows: 1. All capitalized terms used herein and not otherwise defined shall have the respective meanings which such terms have under the Security Agreement. 2. Paragraph 2 of the Security Agreement is hereby amended by adding the phrase "and the Guaranteed Obligations" to the end of the sentence contained in such paragraph. 3. Paragraph 3(c) of the Security Agreement is hereby amended by adding the phrase "or the Guaranteed Obligations" directly following the word "Obligations" contained in such paragraph. 4. Paragraph 6(c) of the Security Agreement is hereby amended by adding the phrase "and the Guaranteed Obligations" directly following the word "Obligations" contained in the second sentence thereof. 5. Paragraph 6(e) of the Security Agreement is hereby amended by adding the phrase "or the Guaranteed Obligations" directly following the word "Obligations" contained in such paragraph. 6. Paragraph 10(c) of the Security Agreement is hereby amended by adding the phrase "and the Guaranteed Obligations" directly following the word "Obligations" contained in such paragraph. 7. Paragraph 11 of the Security Agreement is hereby amended by adding the phrase "or the Guaranteed Obligations" directly following the word "Obligations" contained in the second sentence thereof. 78 First Union National Bank of North Carolina March 31, 1995 8. Paragraph 12 of the Security Agreement is hereby amended by adding the phrase "or the Guaranteed Obligations" directly following the word "Obligations" contained in the first sentence thereof. 9. Paragraph 12 of the Security Agreement is hereby amended by adding the phrase "or the Guaranteed Obligations, in the Lender's sole discretion" directly following the word "Obligations" contained in the second sentence thereof. 10. Exhibit 2 to the Security Agreement is hereby amended by deleting the amount "$500,000" contained in the third paragraph thereof and substituting the amount "$250,000" in lieu thereof. 11. This Amendment shall become effective as of the date hereof. 12. This Amendment is limited and, except as set forth herein, shall not constitute a modification, acceptance or waiver of any other provision of the Security Agreement, or any other document or instrument entered into in connection therewith. 13. This Amendment may be executed in any number of counterparts by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. A complete set of counterparts shall be lodged with the Company and the Lender. 14. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of North Carolina. 15. From and after the date hereof, all references in the Security Agreement, and any other document or instrument entered into in connection therewith, to the Security Agreement shall be deemed to be references to the Security Agreement as amended hereby. IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. CAROLINA INVESTORS, INC., a South Carolina corporation By: ------------------------------- Name: ------------------------------- Title: ------------------------------- FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association By: ------------------------------- Name: ------------------------------- Title: ------------------------------- 79 First Union National Bank of North Carolina March 31, 1995 EXHIBIT A TO UCC-1 FINANCING STATEMENT LISTING CAROLINA INVESTORS, INC. AS DEBTOR AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA AS SECURED PARTY All now existing and hereafter arising right, title and interest of the Debtor in, under and to each of the following: (1) All Mortgage Loans now owned or hereafter acquired or originated by the Debtor, including, without limitation, the promissory notes or other instruments or agreements evidencing the indebtedness of obligors thereon, all mortgages, deeds to secure debt, trust deeds and security agreements related thereto, all rights to payment thereunder, all rights in the real property securing payment of the indebtedness of the obligors thereon, all rights under documents related thereto, such as guaranties and insurance policies (issued by governmental agencies or otherwise), including, without limitation, mortgage and title insurance policies, fire and extended coverage insurance policies (including the right to any return premiums), and all rights in cash deposits consisting of impounds, insurance premiums or other funds held on account thereof; (2) All rights of the Debtor (but not its obligations) under any agreements to sell such Collateral, now existing or hereafter arising, covering any part of the foregoing Collateral, all rights to deliver Mortgage Loans to investors and other purchasers pursuant thereto and all proceeds resulting from the disposition of such Collateral pursuant thereto; (3) All now existing and hereafter arising rights to service, administer and collect Mortgage Loans (it being acknowledged and agreed that prior to the occurrence of an Event of Default under the Credit Agreement (as hereinafter defined) and acceleration of the Obligations or the Guaranteed Obligations, the security interest in such servicing rights granted hereunder shall be automatically terminated without need for further action upon the sale, transfer or other disposition of the related Mortgage Loan in accordance with the provisions of the Credit Agreement and the documents, instruments and agreements executed in connection therewith), and all rights to the payment of money on account of such servicing, administration and collection activities; (4) All now existing and hereafter arising accounts, contract rights and general intangibles constituting or relating to any of the foregoing Collateral; (5) All now existing and hereafter acquired files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other books, records, information and data of the Debtor relating to the foregoing Collateral (including all information, records, data, programs, tapes, discs, and cards necessary or helpful in the administration or servicing of the foregoing Collateral); (6) The Funding Account, the Settlement Account and any and all funds at any time held in any such accounts; and (7) All products and Proceeds of the foregoing Collateral. 80 First Union National Bank of North Carolina March 31, 1995 All capitalized terms used and not defined herein shall have the meanings attributed to such terms in that certain Mortgage Loan Warehousing Agreement between the Debtor and the Secured Party dated as of November 22, 1994 as the same may be amended, modified, restated, replaced or supplemented from time to time (the "Credit Agreement"). 81 First Union National Bank of North Carolina March 31, 1995 REAFFIRMATION OF GUARANTY TO: First Union National Bank of North Carolina One First Union Center 301 South College Street, CORP-15, TW-08 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of ____________________, 1995, is made by EMERGENT FINANCIAL CORPORATION, a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Third Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Group, Inc., Emergent Mortgage Corp. and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and the Lender and by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, is the reaffirmation of the terms of the Guaranty. Guarantor owns directly or indirectly 100% of the stock of the Borrower and thus will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment and to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 82 First Union National Bank of North Carolina March 31, 1995 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT FINANCIAL CORPORATION, [CORPORATE SEAL] a South Carolina corporation ATTEST: By: - ------------------------- ---------------------------------- Secretary President 83 First Union National Bank of North Carolina March 31, 1995 REAFFIRMATION OF GUARANTY TO: First Union National Bank of North Carolina One First Union Center; 301 South College Street, CORP-15, TW-08 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of __________________, 1995, is made by EMERGENT GROUP, INC., a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Third Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Financial Corporation, Emergent Mortgage Corp. and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and the Lender and by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 among the Borrower the Guarantors (other than Emergent Mortgage Corp.) and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, is the reaffirmation of the terms of the Guaranty. Guarantor owns directly or indirectly 100% of the stock of the Borrower and thus will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment and to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 84 First Union National Bank of North Carolina March 31, 1995 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT GROUP, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: By: - ------------------------------- ------------------------------ Secretary President 85 First Union National Bank of North Carolina March 31, 1995 GUARANTY THIS GUARANTY (the "Guaranty") is made and dated as of the _____ day of __________, 1995 by Emergent Mortgage Corp., a South Carolina corporation ("Guarantor"). RECITALS A. Pursuant to that certain Mortgage Loan Warehousing Agreement dated as of ___________, 1995 between Guarantor and FIRST UNION NATIONAL BANK OF NORTH CAROLINA (the "Lender") (as amended, extended and replaced from time to time, the "EMC Warehousing Agreement") the Lender has agreed to extend credit to Guarantor on the terms and subject to the conditions set forth therein. B. Pursuant to that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 between CAROLINA INVESTORS, INC., a South Carolina corporation (the "Company") and the Lender (as amended, extended and replaced form time to time, the "Warehousing Agreement," and with capitalized terms not otherwise defined herein used with the same meanings as in the Warehousing Agreement) the Lender has extended credit to the Company on the terms and subject to the conditions set forth therein. C. As a condition precedent to the continued availability of credit to the Company under the Warehousing Agreement, and as a condition precedent to the effectiveness of the EMC Warehousing Agreement and the extension to Guarantor of the credit facility referred to therein, Guarantor is required to execute and deliver to the Lender this Guaranty. D. Both one hundred percent (100%) of the outstanding capital voting stock of the Company and one hundred percent (100%) of the outstanding capital voting stock of the Guarantor are owned by Emergent Financial Corporation and thus Guarantor will derive material benefit both from the continued extension of credit by the Lender to the Company pursuant to the Warehousing Agreement and from the extension of credit by the Lender to the Guarantor pursuant to the EMC Warehousing Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor hereby agrees as follows: AGREEMENT 1. Guarantor hereby irrevocably and unconditionally guarantees, jointly and severally, the payment when due, upon maturity, acceleration or otherwise, of the Obligations, whether heretofore, now, or hereafter made, incurred or created, whether voluntary or involuntary and however arising, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such Obligations are from time to time reduced or extinguished and thereafter increased or incurred, whether or not the Company may be liable individually or jointly with others, whether or not recovery upon such Obligations may be or hereafter become barred by any statute of limitations, and whether or not such Obligations may be or hereafter become otherwise invalid or unenforceable. This Guaranty is a guaranty of payment and not of collection. 86 First Union National Bank of North Carolina March 31, 1995 2. Guarantor irrevocably and unconditionally guarantees, jointly and severally, the payment of the Obligations whether or not due or payable by the Company upon: (a) the dissolution, insolvency or business failure of, or any assignment for benefit of creditors by, or commencement of any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceedings by or against, the Company or Guarantor, or (b) the appointment of a receiver for, or the attachment, restraint of or making or levying of any order of court or legal process affecting, the property of the Company or Guarantor, and unconditionally promises to pay such Obligations to the Lender, or order, on demand, in lawful money of the United States. 3. The liability of Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Obligations, whether executed by Guarantor or by any other party, and the liability of Guarantor hereunder is not affected or impaired by (a) any direction of application of payment by the Company or by any other party, or (b) any other guaranty, undertaking or maximum liability of Guarantor or of any other party as to the Obligations, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any revocation or release of any obligations of any other guarantor of the Obligations, or (e) any dissolution of, termination of, or increase, decrease or change in the personnel of, Guarantor, or (f) any payment made to the Lender on the Obligations which any of such Persons repay to the Company pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and Guarantor waives any right to the deferral or modification of Guarantor's obligations hereunder by reason of any such proceeding. 4. The obligations of Guarantor hereunder are independent of the Obligations of the Company, and a separate action or actions may be brought and prosecuted against Guarantor whether or not action is brought against the Company and whether or not the Company is joined in any such action or actions. Any payment by the Company or other circumstance which operates to toll any statute of limitations as to the Company shall operate to toll the statute of limitations as to Guarantor. 5. Guarantor authorizes the Lender (whether or not after termination of this Guaranty), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Obligations and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as the Lender in its discretion may determine; and (d) release or substitute any one or more endorsers, guarantors, the Company or other obligors. The Lender may without notice to or the further consent of Company or Guarantor assign this Guaranty in whole or in part to any person acquiring an interest in the Obligations. 6. It is not necessary for the Lender to inquire into the capacity or power of the Company or the officers acting or purporting to act on its behalf, and the Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 7. Guarantor waives any right to require the Lender to (a) proceed against the Company or any other party; (b) proceed against or exhaust any security held from the Company; or (c) pursue any other remedy in its power whatsoever. To this end, and without limiting the generality of the foregoing, Guarantor expressly waives any rights Guarantor might otherwise have had under the provisions of North Carolina General Statutes Section Section 26-7 et seq.. The Lender, may, at its election, foreclose on any security 87 First Union National Bank of North Carolina March 31, 1995 held for the Obligations by one or more judicial or nonjudicial sales, or exercise any other right or remedy it may have against the Company, or any security, without affecting or impairing in any way the liability of Guarantor hereunder except to the extent the Obligations have been paid. Guarantor waives any defense arising out of any such election, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Company or any security. Guarantor hereby waives any claim or other rights which Guarantor may now have or may hereafter acquire against the Company or any other guarantor of all or any of the Obligations that arise from the existence or performance of Guarantor's obligations under this Guaranty or any other of the Credit Documents (as such claims and rights being referred to as the "Guarantor's Conditional Rights"), including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, or indemnification, or any right to participate in any claim or remedy which the Lender has against the Company or any collateral which the Lender now has or hereafter acquires for the Obligations, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, by any payment made hereunder or otherwise, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or setoff or in any other manner, payment or security on account of such claim or other rights. If, notwithstanding the foregoing provisions, any amount shall be paid to Guarantor on account of Guarantor's Conditional Rights and either (a) such amount is paid to Guarantor at any time when the Obligations shall not have been paid or performed in full, or (b) regardless of when such amount is paid to Guarantor, any payment made by the Company to the Lender is at any time determined to be a preferential payment, then such amount paid to Guarantor shall be deemed to be held in trust for the benefit of the Lender and shall forthwith be paid to the Lender to be credited and applied upon the Obligations, whether matured or unmatured, in such order and manner as the Lender shall determine. To the extent that any of the provisions of this Paragraph shall not be enforceable, Guarantor agrees that until such time as the Obligations have been paid and performed in full and the period of time has expired during which any payment made by the Company or Guarantor to the Lender may be determined to be a preferential payment, Guarantor's Conditional Rights to the extent not validly waived shall be subordinate to the Lender's right to full payment and performance of the Obligations and Guarantor shall not seek to enforce the Guarantor's Conditional Rights during such period. Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Obligations. Guarantor assumes all responsibility for being and keeping itself informed of the Company's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks which Guarantor assumes and incurs hereunder, and agrees that the Lender shall have no duty to advise Guarantor of information known to it regarding such circumstances or risks. 8. In addition to the Obligations, Guarantor agrees to pay reasonable attorneys' fees and all other costs and expenses incurred by the Lender in enforcing this Guaranty in any action or proceeding arising out of, or relating to, this Guaranty. This Guaranty and the liability and obligations of Guarantor hereunder are binding upon Guarantor and its successors and assigns, and this Guaranty inures to the benefit of and is enforceable by the Lender and its successors, transferees, and assigns. 9. No right or power of the Lender hereunder shall be deemed to have been waived by any act or conduct on the part of the Lender, or by any neglect to exercise such right or power, or by any delay in so doing; and every right or power shall continue in full force and effect until specifically waived or released by an instrument in writing executed by the Lender. 88 First Union National Bank of North Carolina March 31, 1995 10. Guarantor agrees to execute any and all further documents, instruments and agreements as the Lender from time to time reasonably requests to evidence Guarantor's obligations hereunder. 11. Guarantor hereby represents and warrants and agrees that: (a) Guarantor: (1) is duly organized, validly existing and in good standing as a corporation under the laws of the State of South Carolina and is in good standing as a foreign corporation in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to so be in good standing could have a material adverse effect on the property or business of Guarantor or on Guarantor's ability to pay or perform the Obligations or its obligations hereunder, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes to do so, (3) is in compliance with all Requirements of Law and Contractual Obligations to the extent that failure to so comply could have a material adverse effect on Guarantor or Company or either of their property or business or on the ability of the Company to pay or perform the Obligations or the ability of Guarantor to pay or perform Guarantor's obligations hereunder, and (4) has reviewed and approved the Credit Documents. (b) Guarantor has the corporate power and authority and the legal right to execute, deliver and perform the Credit Documents to which Guarantor is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of this Guaranty. The Credit Documents to which Guarantor is a party have been duly executed and delivered on behalf of Guarantor and constitute legal, valid and binding obligations of Guarantor enforceable against Guarantor in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. (c) The execution, delivery and performance by Guarantor of the Credit Documents to which Guarantor is a party will not violate any Requirement of Law or any Contractual Obligation of Guarantor to the extent that failure to comply could have a material adverse effect on Guarantor or its property or business or on the ability to pay or perform the Obligations or its obligations hereunder. (d) Except as disclosed on Exhibit 1 hereto, no litigation, investigation or proceeding of or before any court, arbitrator or Governmental Authority is pending or, to the knowledge of Guarantor, threatened by or against Guarantor or any of its Subsidiaries or against any of such Person's properties or revenues which is likely to be adversely determined and which, if adversely determined, is likely to have a material adverse effect on the business, operations, property or financial or other condition of Guarantor or the Company or on Guarantor and its Consolidated Subsidiaries taken as a whole or on the Collateral or the Collateral Value of the Borrowing Base. (e) Each of Guarantor, the Company and each of Guarantor's Consolidated Subsidiaries has filed or caused to be filed all tax returns that are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against any of them or any of the property of any of them other than taxes which 89 First Union National Bank of North Carolina March 31, 1995 are being contested in good faith by appropriate proceedings and as to which Guarantor, the Company or such Subsidiary has established adequate reserves in conformity with GAAP. (f) Guarantor is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (g) Neither the Guarantor nor the Company, nor any of the Subsidiaries of either Guarantor or the Company, is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan made under the Warehousing Agreement will be used, directly or indirectly, for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the applicable provisions of the Regulations of the Board of Governors of the Federal Reserve System. (h) Guarantor and each of its ERISA Affiliates, if any, are in compliance in all respects with the requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Company or any of its ERISA Affiliates which is likely to result in the termination of such Plan for purposes of Title IV of ERISA. (i) Guarantor has not issued any unregistered securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other existing applicable law, and is in compliance, in all material respects, with all existing applicable rules, regulations and requirements under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended. (j) No consent, approval, authorization of, or registration, declaration or filing with, any Governmental Authority is required on the part of Guarantor in connection with the execution and delivery of the Credit Documents to which Guarantor is a party or the performance of or compliance with the terms, provisions and conditions hereof or thereof. (k) Guarantor shall not permit the acquisition, purchase, redemption, retirement, transfer or issuance of any shares of its capital stock now or hereafter outstanding which would result in Emergent Financial Corporation owning less than one hundred percent (100%) of Guarantor's outstanding capital stock. 12. This Guaranty shall be deemed to be made under and shall be governed by the laws of the State of North Carolina. 13. If any of the provisions of this Guaranty shall contravene or be held invalid under the laws of any jurisdiction, this Guaranty shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 90 First Union National Bank of North Carolina March 31, 1995 Executed and sealed as of the day and year first above written. Emergent Mortgage Corp., a South Carolina corporation [CORPORATE SEAL] By: ------------------------------ Name: ------------------------------ Attest: Title: ------------------------------ By: ------------------------------ Name: ------------------------------ Title: ------------------------------ 91 First Union National Bank of North Carolina March 31, 1995 SECOND AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT SECOND AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment"), dated as of April 30, 1995, among CAROLINA INVESTORS, INC. ("Borrower") EMERGENT FINANCIAL CORPORATION and EMERGENT GROUP, INC. (each, jointly and severally, a "Guarantor" and, collectively, the "Guarantors"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("Lender"). W I T N E S S E T H: WHEREAS, the Borrower and the Lender are parties to a Mortgage Loan Warehousing Agreement dated as of November 22, 1994, as previously amended by that certain letter agreement dated as of March 31, 1995 (as so amended, the "Agreement"); and WHEREAS, the parties hereto wish to amend the Agreement as set forth below; and WHEREAS, subject to and upon the terms and conditions herein set forth, the Lender is willing to continue to make available to the Borrower the credit facilities provided for in the Agreement; and WHEREAS, a specific condition to the willingness of the Lender to continue to make available to the Borrower the credit facilities provided for in the Agreement, is the reaffirmation by each of the Guarantors of the Guaranty to which such Guarantor is a party; and WHEREAS, each of the Guarantors will derive a material benefit from the continued availability to the Borrower of the credit facilities provided for in the Agreement and is therefore willing to reaffirm the Guaranty to which such Guarantor is a party; NOW, THEREFORE, in consideration of the premises and agreements contained herein, the parties hereto hereby agree as follows: 6. All capitalized terms used herein and not otherwise defined shall have the respective meanings provided to such terms in the Agreement, as amended hereby. 7. Amendments to the Agreement. a. Section 2(l)(2) of the Agreement is hereby deleted in its entirety and replaced with the following: "(2) A commitment fee, such fee to be computed on a per annum basis payable in monthly installments, in arrears, on the applicable dates specified in Paragraph 2(d) hereof, each such installment to be in an amount equal to the product of: (i) the average daily amount by which the Credit Limit exceeds the amount of Loans outstanding, multiplied by (ii) 0.125%, divided by (iii) 12." b. The following phrase is hereby added to the end of Section 7(g) of the Agreement immediately prior to the period at the end thereof: 92 First Union National Bank of North Carolina March 31, 1995 "; provided, however, that the Company shall be permitted to guaranty any indebtedness or other obligations of the following two (2) Subsidiaries of the Company: (i) Premier Financial Services, Inc., and (ii) The Loan Pro$, Inc. which may be incurred in the normal course of such Subsidiaries' business, so long as the Company or Emergent Financial Corporation remains the sole shareholder of Premier Financial Services, Inc. and continues to own at least eighty percent (80%) of the outstanding capital stock of The Loan Pro$, Inc. c. Section 7(o) of the Agreement is hereby deleted in its entirety and replaced with the following: "7(o) Maximum Affiliate Receivables. Permit the amount of Affiliate Receivables to exceed an amount equal to (i)(A) from the date hereof through and including June 29, 1995, $21,000,000, (B) from June 30, 1995 through and including December 30, 1995, $15,000,000 and (c) on December 31, 1995 and thereafter, $10,000,000; less (ii) one hundred percent (100%) of all Affiliate Receivables owed to the Company by any Affiliate of the Company at the time of the sale of such Affiliate; provided, however, that in the event that the Company requests that the Lender waive any amount contained in subsection (i) hereof, the Lender shall not unreasonably withhold its consent to such waiver, provided that such waiver is in an amount and for a time period reasonably acceptable to the Lender in its sole discretion." d. The definition of the term "Credit Limit" contained in Section 10 of the Agreement is hereby amended by deleting the amount "$10,000,000" therefrom and inserting the amount "$20,000,000" in lieu thereof. e. Subparagraph (j) in the definition of the term "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby amended by adding the following phrase immediately prior to the period at the end thereof: "; and (5) in the case of second priority Mortgage Loans, one (1) lien superior in priority to the Lien in favor of the Company" f. Subparagraph (l) in the definition of the term "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby deleted in its entirety and replaced with the following: "(l) The outstanding principal balance of such Mortgage Loan is not less than $40,000 and does not exceed $350,000; provided, however, that the outstanding principal balance of any Mortgage Loan may be less than $40,000 so long as (i) the outstanding principal balance of such Mortgage Loan is not less than $20,000, and (ii) the Unit Collateral Value of such Mortgage Loan, when added to the Unit Collateral Values of all other Mortgage Loans with respect to which the outstanding principal balance is less than $40,000, shall not exceed $5,000,000." g. Subparagraph (m) in the definition of the term "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby deleted in its entirety and replaced with the following: 93 First Union National Bank of North Carolina March 31, 1995 "(m) The Property shall be improved, such improvements to consist of a completed one-to-four unit owner-occupied single family residence, including, but not limited to, a condominium, planned unit development or townhouse but excluding in any event a co-op or mobile home." h. Subparagraph (p) in the definition of the term "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby deleted in its entirety and replaced with the following: "(p) Said Mortgage Loan was originated after January 1, 1991." i. Subparagraph (s) in the definition of the term "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby deleted in its entirety and replaced with the following: "(s) Said Mortgage Loan is secured by a first or second priority mortgage or deed of trust on the Property covered thereby." j. Subparagraph (w) in the definition of the term "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby deleted in its entirety and replaced with the following: "(w)(i) The original principal balance of said Mortgage Loan is not greater than eighty-five percent (85%) of the fair market value of the Property covered by such Mortgage Loan, as shown on the appraisal delivered to Lender as a Required Document in connection with such Mortgage Loan; and (ii) the aggregate original principal balances of all Mortgage Loans delivered to the Lender as Eligible Mortgage Loans is not greater than eighty percent (80%) of the aggregate fair market value of all the Properties covered by such Mortgage Loans, as shown on the appraisals delivered to Lender as Required Documents in connection with such Mortgage Loans." k. The definition of the term "Maturity Date" contained in Section 10 of the Agreement is hereby amended by deleting the date "April 30, 1995" from subsection (a) thereof and inserting the date "March 30, 1996" in lieu thereof. l. The definition of the term "Unit Collateral Value" contained in Section 10 of the Agreement is hereby deleted in its entirety and replaced with the following: "'Unit Collateral Value' shall mean at any time, with respect to each Eligible Mortgage Loan included in the Borrowing Base, eighty percent (80%) of the unpaid principal balance thereof at such time." m. Exhibit G to the Agreement is hereby deleted in its entirety and the form of Exhibit G attached as ANNEX II hereto is substituted in lieu thereof. n. Exhibit J to the Agreement is hereby deleted in its entirety and the form of Exhibit J attached as ANNEX III hereto is substituted in lieu thereof. 8. This Amendment shall become effective as of the date hereof, provided that the Agent shall have received the following items: 94 First Union National Bank of North Carolina March 31, 1995 (A) A copy of this Amendment executed by the Borrower, by each of the Guarantors and the Lender (whether such party shall have signed the same or different copies); (B) A Reaffirmation of Guaranty (the "Reaffirmation") executed by each of the Guarantors in favor of the Lender, each such Reaffirmation to be substantially in the form of ANNEX I hereto; and (C) Resolutions of the Borrower and of each of the Guarantors authorizing the execution of this Amendment and, in the case of each of the Guarantors, the Reaffirmation to which such Guarantor is a party. 9. The Borrower hereby represents and warrants that as of the effective date hereof, there exists no Default or Event of Default under the Agreement and the Borrower has no claim or cause of action against the Lender arising out of or relating in any way to the Agreement (as amended hereby) or the other Credit Documents, and the Borrower hereby waives and releases any and all claims or causes of action which the Borrower may have as of the effective date hereof against the Lender arising out of or relating in any way to the Agreement (as amended hereby) or the other Credit Documents. 10. This Amendment is limited and, except as set forth herein, shall not constitute a modification, acceptance or waiver of any provision of the Agreement, or any other document or instrument entered into in connection therewith. 11. This Amendment may be executed in any number of counterparts by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. A complete set of counterparts shall be lodged with each of the Borrower and the Lender. 12. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of North Carolina. 13. From and after the date hereof, all references in the Agreement, and any other document or instrument entered into in connection therewith, to the Agreement shall be deemed to be references to the Agreement as amended hereby. 14. The Guarantors join in the execution and delivery of this Amendment to acknowledge and consent to the terms hereof and hereby reaffirm their obligations under the Guaranties. 15. THE LENDER, THE GUARANTORS AND THE BORROWER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AMENDMENT. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 95 First Union National Bank of North Carolina March 31, 1995 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and sealed as of the day and year first above written. CAROLINA INVESTORS, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: By: By: -------------------------- ----------------------------- Name: Name: -------------------------- ----------------------------- Title: Title: -------------------------- ----------------------------- FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association [CORPORATE SEAL] ATTEST: By: By: -------------------------- ----------------------------- Name: Name: -------------------------- ----------------------------- Title: Title: -------------------------- ----------------------------- EMERGENT FINANCIAL CORPORATION, a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By: By: -------------------------- ----------------------------- Name: Name: -------------------------- ----------------------------- Title: Title: -------------------------- ----------------------------- EMERGENT GROUP, INC., a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By: By: -------------------------- ----------------------------- Name: Name: -------------------------- ----------------------------- Title: Title: -------------------------- ----------------------------- 96 First Union National Bank of North Carolina March 31, 1995 ANNEX I REAFFIRMATION OF GUARANTY 97 First Union National Bank of North Carolina March 31, 1995 ANNEX II EXHIBIT G TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF NOVEMBER 22, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA FORM OF BORROWING BASE SCHEDULE This Borrowing Base Schedule is furnished pursuant to the Mortgage Loan Warehousing Agreement dated as of November 22, 1994, as amended from time to time, among the Company and the Lender (the "Agreement"). Unless otherwise defined herein, the terms used in this Borrowing Base Schedule have the meanings ascribed thereto in the Agreement. A. Aggregate Unit Collateral Values of Eligible Mortgage Loans in Borrowing Base as of previous Borrowing Base Schedule delivered by the Company $ ------------ B. Aggregate Unit Collateral Values of Eligible Mortgage Loans submitted for inclusion in Borrowing Base since previous Borrowing Base Schedule delivered by the Company $ ------------ C. Sum of (A plus B) $ ------------ D. Aggregate Unit Collateral Values of Eligible Mortgage Loans previously released by the Lender under trust receipts for which the full purchase price has been received by the Lender since previous Borrowing Base Schedule delivered by the Company $ ------------ E. Amount by which Aggregate Unit Collateral Values of Eligible Mortgage Loans withdrawn from the possession of the Lender under a trust receipt and not returned to the Lender exceeds $500,000 $ ------------
98 First Union National Bank of North Carolina March 31, 1995 F. Aggregate Unit Collateral Values of Eligible Mortgage Loans withdrawn from the possession of the Lender under a trust receipt more than 10 days prior to the date of this schedule and not returned to the Lender $ ----------- G. Aggregate Unit Collateral Values of Eligible Mortgage Loans withdrawn from the possession of the Lender and shipped to an investor for purchase more than 30 days prior to the date of this schedule and not returned to the Lender or for which the full purchase price has not been received by the Lender $ ----------- H. Aggregate Unit Collateral Value of Eligible Mortgage Loans for which the original recorded mortgage has not been delivered to the Lender within 150 days of inclusion in the Borrowing Base $ ----------- I. Amount by which the Unit Collateral Values of all Mortgage Loans with respect to which the outstanding principal balance is less than $40,000 exceeds $5,000,000 $ ----------- J. Sum of (D plus E plus F plus G plus H plus I) $ ----------- K. Adjusted Collateral Value of the Borrowing Base (C minus J) $ ----------- L. Aggregate principal amount of Loans outstanding $ ----------- M. Borrowing Base availability (K minus L; must equal or exceed zero) $ -----------
The undersigned hereby certifies that, as of the date hereof: (1) I am the duly elected _______________ of the Company; (2) The above schedule accurately states the Collateral Value of the Borrowing Base and the aggregate principal amount of Loans outstanding; (3) All Mortgage Loans included in the Borrowing Base as Eligible Mortgage Loans comply in all respects with the requirements of the definition of "Eligible Mortgage Loan"; and 99 First Union National Bank of North Carolina March 31, 1995 (4) I have no knowledge of the existence of any condition or event which constitutes an Event of Default under the Agreement. Certified on behalf of the undersigned this _____ day of _________, 19___. CAROLINA INVESTORS, INC. By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- 100 First Union National Bank of North Carolina March 31, 1995 ANNEX III EXHIBIT J TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF NOVEMBER 22, 1994 BY AND BETWEEN CAROLINA INVESTORS, INC. AND FIRST UNION NATIONAL BANK OF NORTH CAROLINA SCHEDULE OF REQUIRED DOCUMENTS 1. An original written Loan Request, signed by an officer of the Company who is authorized to make such request; 2. An original fully completed Delivery Certificate (as defined in the Security Agreement); 3. The original executed promissory note relating to the Mortgage Loan (properly endorsed or assigned to the Company if purchased by the Company), which promissory note shall be duly endorsed in blank and assigned in blank without recourse by the Company; 4. The original executed mortgage or deed of trust relating to the Mortgage Loan duly recorded in the appropriate jurisdiction; provided, however, that a certified copy of the executed mortgage or deed of trust relating to the Mortgage Loan may be delivered to the Lender in lieu of the original recorded deed of trust or mortgage until such time as the original recorded mortgage or deed of trust is received from the recording jurisdiction and submitted to the Lender, provided further that such original recorded deed of trust or mortgage must be delivered to the Lender within one hundred fifty (150) days following the inclusion of the Mortgage Loan in the Borrowing Base; 5. An original executed and recordable but unrecorded assignment of the mortgage or deed of trust relating to the Mortgage Loan (unless the Lender determines that under applicable State law the assignment should be recorded in order to adequately protect its interest, in which case the assignment shall be recorded by the Company and a certified true copy thereof shall be provided to the Lender), together with the original or a duly certified copy of a proper assignment or assignments of the mortgage or deed of trust from the original holder through any subsequent transferees to the Company, duly recorded if local requirements in the jurisdiction in which the Property is located required the recordation of such assignment or assignments; 6. An original (or a certified copy of a) mortgagee title insurance policy issued by a nationally recognized title insurance company acceptable to the Lender, together with any attachments and customary endorsements thereto, which insures that the mortgage or deed of trust securing the promissory note relating to the Mortgage Loan is a valid and enforceable first or second lien on the Property covered by the Mortgage Loan); 7. A copy of the first two pages of an appraisal of the Property covered by the Mortgage Loan by an appraiser acceptable to the Lender in its sole and absolute discretion, which appraisal demonstrates that the principal amount of the promissory note relating to such Mortgage Loan is not greater than the lesser of (i) eighty-five percent (85%) of the fair market appraisal of such Property or (ii) the purchase price paid by the Obligor on such Mortgage Loan for the Property, provided that such purchase occurred simultaneously with the closing of the Mortgage Loan; and 101 First Union National Bank of North Carolina March 31, 1995 8. Satisfactory evidence of compliance with the requirements of such other laws as may, from time to time, become applicable to the Mortgage Loan. 102 First Union National Bank of North Carolina March 31, 1995 REAFFIRMATION OF GUARANTY TO: First Union National Bank of North Carolina One First Union Center 301 South College Street, CORP-15, TW-19 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of April 30, 1995, is made by EMERGENT FINANCIAL CORPORATION, a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Second Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Group, Inc. and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, is the reaffirmation of the terms of the Guaranty. Guarantor owns directly or indirectly 100% of the stock of the Borrower and thus will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment and to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 103 First Union National Bank of North Carolina March 31, 1995 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT FINANCIAL CORPORATION, [CORPORATE SEAL] a South Carolina corporation ATTEST: By: - ----------------------------- --------------------------- Secretary President 104 First Union National Bank of North Carolina March 31, 1995 REAFFIRMATION OF GUARANTY TO: First Union National Bank of North Carolina One First Union Center 301 South College Street, CORP-15, TW-19 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of April 30, 1995, is made by EMERGENT GROUP, INC., a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Second Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Financial Corporation and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, is the reaffirmation of the terms of the Guaranty. Guarantor owns directly or indirectly 100% of the stock of the Borrower and thus will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment and to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 105 First Union National Bank of North Carolina March 31, 1995 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT GROUP, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: By: - ----------------------------- --------------------------------- Secretary President 106 First Union National Bank of North Carolina March 31, 1995 THIRD AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT THIRD AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment"), dated as of ___________, 1995, among CAROLINA INVESTORS, INC. ("Borrower"), EMERGENT FINANCIAL CORPORATION, EMERGENT GROUP, INC. and EMERGENT MORTGAGE CORP. (each, jointly and severally, a "Guarantor" and, collectively, the "Guarantors"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("Lender"). W I T N E S S E T H: WHEREAS, the Borrower and the Lender are parties to a Mortgage Loan Warehousing Agreement dated as of November 22, 1994, as previously amended by that certain letter agreement dated as of March 31, 1995 and by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 (as so amended, the "Agreement"); and WHEREAS, the parties hereto wish to amend the Agreement as set forth below; and WHEREAS, subject to and upon the terms and conditions herein set forth, the Lender is willing to continue to make available to the Borrower the credit facilities provided for in the Agreement; and WHEREAS, a specific condition to the willingness of the Lender to continue to make available to the Borrower the credit facilities provided for in the Agreement, is the reaffirmation by each of Emergent Financial Corporation and Emergent Group, Inc. of the Guaranty to which such Guarantor is a party and the guaranty by Emergent Mortgage Corporation of the Obligations; and WHEREAS, each of the Guarantors will derive a material benefit from the continued availability to the Borrower of the credit facilities provided for in the Agreement and therefore each of Emergent Financial Corporation and Emergent Group, Inc. is willing to reaffirm the Guaranty to which such Guarantor is a party and Emergent Mortgage Corporation is willing to enter into a guaranty of the Obligations; NOW, THEREFORE, in consideration of the premises and agreements contained herein, the parties hereto hereby agree as follows: 9. All capitalized terms used herein and not otherwise defined shall have the respective meanings provided to such terms in the Agreement, as amended hereby. 10. Amendments to the Agreement. a. Section 1(a)(1) of the Agreement is hereby deleted in its entirety and replaced with the following: "(1) The difference of (A) the Credit Limit and (B) the principal amount outstanding under the EMC Facility;" b. Section 2(b) of the Agreement is hereby amended by deleting the time "10:00 a.m." contained therein and substituting the time "12:00 p.m." in lieu thereof. 107 First Union National Bank of North Carolina March 31, 1995 c. Section 2(l)(2) of the Agreement is hereby deleted in its entirety and replaced with the following: "(2) A commitment fee, such fee to be computed on a per annum basis payable in monthly installments, in arrears, on the applicable dates specified in Paragraph 2(d) hereof, each such installment to be in an amount equal to the product of: (i) the average daily amount by which the Credit Limit exceeds the sum of (A) the amount of Loans outstanding and (B) the principal amount outstanding under the EMC Facility, multiplied by (ii) 0.125%, divided by (iii) 12." d. Section 3(a) of the Agreement is hereby deleted in its entirety and replaced with the following: "3(a) Security Agreement and Financing Statements. On or before the date hereof, the Company shall execute and deliver to the Lender: (1) a security agreement in the form of that attached hereto as Exhibit B (the "Security Agreement"), pursuant to which the Company shall pledge, assign and grant to the Lender a perfected, first priority security interest in and lien upon the Collateral as security for the Obligations and the Guaranteed Obligations, and (2) such UCC financing statements as the Lender may request." e. Section 3(b) of the Agreement is hereby deleted in its entirety and replaced with the following: "3(b) Parent Guaranties. On or before the date hereof, the Company shall cause to be executed and delivered to the Lender by each of the Parent Guarantors a continuing guaranty substantially in the form of that attached hereto as Exhibit C-1 (collectively, the "Parent Guaranties")." f. The existing Section 3(c) to the Agreement is hereby changed to Section 3(d) and a new Section 3(c) is hereby added to the Agreement as follows: "3(c) Affiliate Guaranty. Upon request of the Lender, the Company shall cause to be executed and delivered to the Lender by EMC a continuing guaranty substantially in the form of that attached hereto as Exhibit C-2 (the "Affiliate Guaranty")." g. Section 5(p) of the Agreement is hereby deleted in its entirety and replaced with the following: "5(p) Subsidiaries. The Company has no Subsidiaries." h. Section 6(a)(2) of the Agreement is hereby amended by deleting the phrase "7(k), 7(l), 7(m), 7(n), 7(o), 7(p), 7(q), 7(r), 7(s), 7(t), and 7(u)" therefrom and substituting the phrase "7(k) through 7(u), inclusive," in lieu thereof. i. Section 6(a)(2) of the Agreement is hereby amended by adding the following phrase immediately preceding the period at the end thereof: 108 First Union National Bank of North Carolina March 31, 1995 "and further stating that no default or event of default exists under any credit or financing agreement to which any Affiliate of the Company is a party". j. Section 6(a)(4) and 6(a)(5) of the Agreement are hereby amended by deleting the phrase "either Guarantor" in each instance in which it appears therein and substituting the phrase "any Guarantor" therefor in each instance. k. A new Section 6(b)(6) is hereby added to the Agreement as follows: "(6) Promptly, and in any event within five (5) business days after the Company receives notice thereof, notice of the occurrence of any default or event of default under any credit or financing agreement to which any Affiliate of the Company is a party. l. Section 7(f) of the Agreement is hereby deleted in its entirety and replaced with the following: "7(f) Subsidiaries. Without the prior consent of the Lender (which consent shall not be unreasonably withheld), organize any Subsidiary." m. Section 7(g) of the Agreement is hereby deleted in its entirety and replaced with the following: "7(g) Investments; Advances; Guaranties. Make or commit to make any advance, loan or extension of credit (other than Mortgage Loans made in the ordinary course of the Company's business) or capital contribution to, or purchase any stocks, bonds, notes, debenture or other securities of, or make any other investment in, or guaranty the indebtedness or obligations of any other Person, in excess of the level permitted in Paragraph 7(o) below; provided, however, that (i) the Company shall be permitted to guaranty the indebtedness or other obligations of the following two (2) Affiliates of the Company: (A) Premier Financial Services, Inc., and (B) The Loan Pro$, Inc., which may be incurred in the normal course of such Affiliates' business, so long as Emergent Financial Corporation remains the sole shareholder of Premier Financial Services, Inc. and continues to own at least eighty percent (80%) of the outstanding capital stock of The Loan Pro$, Inc., (ii) the Company shall be permitted to guaranty any indebtedness of EMC to the Lender under the EMC Facility pursuant to the Company Guaranty, and (iii) the Company shall be permitted to make advances to EMC." n. Section 7(i) of the Agreement is hereby deleted in its entirety and the following paragraph is substituted in lieu thereof: "7(i) Dividends. Without the prior consent of the Lender (which consent shall not be unreasonably withheld), during any period consisting of four (4) consecutive fiscal quarters, declare and pay any dividends, or return any capital, to its shareholders or authorize or make any other distribution, payment or delivery of property or cash to its shareholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock now or hereafter outstanding (or any option or warrants issued by it for or with respect to its capital stock), or set aside any funds for any of the foregoing purposes, in excess of fifty 109 First Union National Bank of North Carolina March 31, 1995 percent (50%) of the Company's net income as determined in accordance with GAAP in effect as of the most recent quarter end for such four (4) consecutive fiscal quarters; provided, however, that the Company shall make no dividend or distribution under this Paragraph 7(i) if, at the time of or after giving effect to such dividend or distribution, an Event of Default shall have occurred and be continuing." o. Section 7(k) of the Agreement is hereby amended by deleting the amount "$2,750,000.00" contained therein and substituting the amount "$4,000,000.00" therefor. p. Section 7(m) of the Agreement is hereby amended by deleting the amount "$5,000,000.00" contained therein and substituting the amount "$6,500,000.00" therefor. q. Section 7(o) of the Agreement is hereby deleted in its entirety and the following paragraph is substituted in lieu thereof: "7(o) Maximum Affiliate Receivables. Permit the amount of Affiliate Receivables at any time to exceed the lesser of (i) an amount equal to $25,000,000 less one hundred percent (100%) of all Affiliate Receivables owed to the Company by any Affiliate of the Company at the time of the sale of such Affiliate; or (ii) Book Net Worth plus twenty percent (20%) of Investor Obligations." r. Section 7(p) of the Agreement is hereby deleted in its entirety. s. Section 7(q) of the Agreement is hereby amended by deleting the ratio "1.75:1.0" contained therein and substituting the amount "1.25:1.0" therefor. t. Section 7(r) of the Agreement is hereby amended by deleting the ratio "3.0:1.0" contained therein and substituting the amount "1.75:1.0" therefor. u. Section 7(s) of the Agreement is hereby deleted in its entirety and substituting the following paragraph in lieu thereof: "7(s) Delinquency Ratio. Permit the ratio of (i) all Mortgage Loans owned by the Company and all mortgage loans owned by EMC, collectively, to (ii) all Mortgage Loans owned by the Company and all mortgage loans owned by EMC, in each case with respect to which any payment of principal or interest is more than thirty (30) days past due the payment due date set forth in the underlying loan documents, collectively, to be less than 5.0:1.0." v. Section 7(t) of the Agreement is hereby deleted in its entirety. w. Section 8(b) of the Agreement is hereby amended by deleting the phrase "either of the Guarantors" contained therein and substituting the phrase "any of the Guarantors" in lieu thereof. x. Section 8(f) of the Agreement is hereby amended by deleting the phrase "either of the Guarantors" in each instance in which it is contained therein and substituting the phrase "any of the Guarantors" in lieu thereof in each instance. 110 First Union National Bank of North Carolina March 31, 1995 y. Section 8(i) of the Agreement is hereby amended by deleting the phrase "Either of the Guarantors" contained therein and substituting the phrase "Any of the Guarantors" in lieu thereof in each instance. z. The following paragraphs are hereby added as new Paragraphs 8(m) and 8(n) to the Agreement: "8(m) An Event of Default shall occur under the EMC Facility; or "8(n) A default or event of default shall occur under any credit or financing agreement to which any Affiliate of the Company is a party, any applicable cure period provided for in such credit or financing agreement shall have lapsed, and such default or event of default shall have continued uncured for thirty (30) days following the lapse of such cure period, if any (provided, however, that notwithstanding the foregoing, the occurrence of a payment default under any such credit or financing agreement shall constitute an automatic and immediate Event of Default hereunder). aa. The following definitions are hereby added to Section 10 of the Agreement as new definitions: "`Affiliate Guaranty' shall have the meaning given such term in Paragraph 3(c) above, as such instrument may be amended, extended or replaced from time to time." "`Company Guaranty' shall mean that certain Guaranty of even date herewith executed and delivered by the Company to the Lender, pursuant to which the Company shall guaranty the payment and performance of the Guaranteed Obligations." "`EMC' shall mean Emergent Mortgage Corporation, a South Carolina corporation." "`EMC Facility' shall mean that certain revolving credit facility extended by the Lender to EMC pursuant to the terms of that certain Mortgage Loan Warehousing Agreement dated as of __________________, 1995 between EMC and the Lender and any and all agreements, documents and instruments executed in connection therewith, as any of such items may be amended, extended or replaced from time to time." "`Guaranteed Obligations' shall mean any and all debts, obligations, and liabilities of EMC to the Lender (whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished, and later increased, created or incurred), arising out of or related to the EMC Facility or any of the agreements, documents and instruments executed in connection therewith." "`Parent Guaranties' shall have the meaning given such term in Paragraph 3(b) above, as both or either of such instruments may be amended, extended or replaced from time to time, and "Parent Guaranty" shall mean either of such instruments, as the context requires." 111 First Union National Bank of North Carolina March 31, 1995 "`Parent Guarantors' shall mean, collectively, EFI and EGI, and "Parent Guarantor" shall mean either of the foregoing Persons, as the context requires." bb. The definition of "Affiliate Receivables" contained in Section 10 of the Agreement is hereby deleted in its entirety and the following definition is hereby substituted in lieu thereof: "`Affiliate Receivables' shall mean that amount reflected on the consolidated balance sheet of the Company and its Subsidiaries as due to the Company from Affiliates of the Company other than EMC (and as determined in accordance with GAAP)." cc. The definition of "Borrowing Base" contained in Section 10 of the Agreement is hereby amended by adding the phrase "and the Guaranteed Obligations" to the end thereof. dd. The definition of "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby amended by deleting the amount "$500,000" contained in subsection (k)(1) thereof and substituting the amount "$250,000" in lieu thereof. ee. The definition of "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby amended by deleting subsection (l) thereof in its entirety and substituting the following in lieu thereof: "(l) The outstanding principal balance of such Mortgage Loan is not less than $40,000 and does not exceed $350,000; provided, however, that the outstanding principal balance of any Mortgage Loan may be less than $40,000 so long as (i) the outstanding principal balance of such Mortgage Loan is not less than $20,000, and (ii) the Unit Collateral Value of such Mortgage Loan, when added to (A) the Unit Collateral Value of all other Mortgage Loans with respect to which the outstanding principal balance is less than $40,000, and (B) the "Unit Collateral Value" of all mortgage loans delivered to the Lender as "Eligible Mortgage Loans" under the EMC Facility with respect to which the outstanding principal balance is less than $40,000, shall not exceed $5,000,000." ff. The definition of "Eligible Mortgage Loan" contained in Section 10 of the Agreement is hereby amended by deleting subsection (w) thereof in its entirety and substituting the following in lieu thereof: "(w) (i) The original principal balance of said Mortgage Loan is not greater than eighty-five percent (85%) of the fair market value of the Property covered by such Mortgage Loan, as shown on the appraisal delivered to Lender as a Required Document in connection with such Mortgage Loan; and (ii) the aggregate principal balance of (A) all Mortgage Loans delivered to the Lender as Eligible Mortgage Loans plus (B) all mortgage loans delivered to the Lender as "Eligible Mortgage Loans" under the EMC Facility, is not greater than eighty percent (80%) of the aggregate fair market value of (X) all the Properties covered by such Mortgage Loans, as shown on the appraisals delivered to Lender as Required Documents in connection with such Mortgage Loans, plus (Y) all the real property covered by those mortgage loans delivered to the Lender as "Eligible Mortgage Loans" under the EMC Facility, as shown on the appraisals delivered to Lender delivered in connection therewith." 112 First Union National Bank of North Carolina March 31, 1995 gg. The definition of "Guaranties" contained in Section 10 of the Agreement is hereby deleted in its entirety and the following definition is substituted in lieu thereof: "`Guaranties' shall mean, collectively, the Parent Guaranties and the Affiliate Guaranty, and "Guaranty" shall mean any of such instruments, as the context requires." hh. The definition of "Guarantors" contained in Section 10 of the Agreement is hereby deleted in its entirety and the following definition is substituted in lieu thereof: "`Guarantors' shall mean, collectively, the Parent Guaranties and EMC, and "Guarantor" shall mean any of the foregoing Persons, as the context requires." ii. The definition of "Monthly Operating Report" contained in Section 10 of the Agreement is hereby deleted in its entirety and the following definition is substituted in lieu thereof: "'Monthly Operating Report'" shall mean a report with respect to the Company and EMC, collectively, substantially in the form of that attached hereto as Exhibit K." jj. The definition of "Non-Performing Assets" contained in Section 10 of the Agreement is hereby deleted in its entirety and the following definition is substituted in lieu thereof: "'Non-Performing Assets' shall mean, as to the Company and EMC, collectively, (i) the outstanding principal balance of all Mortgage Loans owned by the Company, and the outstanding principal balance of all mortgage loans owned by EMC, which are classified as "non-accruing" or "non- performing" on the most recent Monthly Operating Report delivered by either the Company or EMC to the Lender on which are in the process of foreclosure, and (ii) the amount shown on the most recent consolidated balance sheet of the Company and its Subsidiaries as the value of all real property owned by the Company or its Subsidiaries other than any real property on which the offices of the Company or its Subsidiaries are located, and (iii) the amount shown on the most recent balance sheet of EMC as the value of all real property owned by EMC other than any real property on which the offices of EMC are located." kk. Schedule I to the Agreement is hereby amended by adding the following name and address thereto as an additional Guarantor: "Emergent Mortgage Corporation 208 Garvin Street Pickens, South Carolina 29671 Attention: Keith B. Giddens" ll. Exhibit C to the Agreement is hereby changed to Exhibit C-1 of the Agreement and a new Exhibit C-2 is hereby added to the Agreement in the form attached as ANNEX I hereto. mm. Exhibit G to the Agreement is hereby amended by deleting the amount "$500,000" contained in Section E thereof and substituting the amount "$250,000" in lieu thereof. 113 First Union National Bank of North Carolina March 31, 1995 nn. Exhibit G to the Agreement is hereby amended by deleting Section I thereof in its entirety and substituting the following paragraph in lieu thereof: "I. Amount by which the sum of (i) the Unit Collateral Value of all Mortgage Loans with respect to which the outstanding principal balance is less than $40,000, plus (ii) the "Unit Collateral Value" of all mortgage loans delivered to the Lender as "Eligible Mortgage Loans" under the EMC Facility with respect to which the outstanding principal balance is less than $40,000, exceeds $5,000,000 $_________" oo. Exhibit H to the Agreement is hereby amended by deleting the phrase "7(k), 7(l), 7(m), 7(n), 7(o), 7(p), 7(q), 7(r), 7(s), 7(t), and 7(u)" from the fourth paragraph thereof and substituting the phrase "7(k) through 7(u), inclusive," in lieu thereof. pp. Exhibit H to the Agreement is hereby amended by adding the following phrase to the end of the third paragraph thereof, immediately preceding the period at the end thereof: ", and (iii) no default or event of default exists under any credit or financing agreement to which any Affiliate of the Company is a party" 11. This Amendment shall become effective as of the date hereof, provided that the Agent shall have received the following items: (A) A copy of this Amendment executed by the Borrower, by each of the Guarantors and the Lender (whether such parties shall have signed the same or different copies); (B) The Affiliate Guaranty executed by EMC in favor of the Lender; (C) A Reaffirmation of Guaranty (the "Reaffirmation") executed by each of Emergent Financial Corporation and Emergent Group, Inc. in favor of the Lender; (D) A copy of the First Amendment to Security Agreement executed by the Borrower and the Lender (whether such parties shall have signed the same or different copies) in form and substance satisfactory to the Lender; (E) Such UCC-3 Financial Statement amendments listing the Borrower as debtor and the Lender as secured party as may be requested by the Lender; and (F) Resolutions of the Borrower and of each of the Guarantors authorizing (i) the execution of this Amendment, (ii) in the case of Emergent Financial Corporation and Emergent Group, Inc., the Reaffirmation to which such Guarantor is a party, and (iii) in the case of EMC, the Guaranty to which EMC is a party. 114 First Union National Bank of North Carolina March 31, 1995 12. The Borrower hereby represents and warrants that as of the effective date hereof, there exists no Default or Event of Default under the Agreement and the Borrower has no claim or cause of action against the Lender arising out of or relating in any way to the Agreement (as amended hereby) or the other Credit Documents, and the Borrower hereby waives and releases any and all claims or causes of action which the Borrower may have as of the effective date hereof against the Lender arising out of or relating in any way to the Agreement (as amended hereby) or the other Credit Documents. 13. This Amendment is limited and, except as set forth herein, shall not constitute a modification, acceptance or waiver of any provision of the Agreement, or any other document or instrument entered into in connection therewith. 14. This Amendment may be executed in any number of counterparts by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. A complete set of counterparts shall be lodged with each of the Borrower and the Lender. 15. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of North Carolina. 16. From and after the date hereof, all references in the Agreement, and any other document or instrument entered into in connection therewith, to the Agreement shall be deemed to be references to the Agreement as amended hereby. 17. The Guarantors join in the execution and delivery of this Amendment to acknowledge and consent to the terms hereof and hereby reaffirm their obligations under the Guaranties. 18. THE LENDER, THE GUARANTORS AND THE BORROWER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AMENDMENT. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 115 First Union National Bank of North Carolina March 31, 1995 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and sealed as of the day and year first above written. CAROLINA INVESTORS, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: By: By: -------------------------- --------------------------- Name: Name: -------------------------- --------------------------- Title: Title: -------------------------- --------------------------- FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a national banking association [CORPORATE SEAL] ATTEST: By: By: -------------------------- --------------------------- Name: Name: -------------------------- --------------------------- Title: Title: -------------------------- --------------------------- EMERGENT FINANCIAL CORPORATION, a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By: By: -------------------------- --------------------------- Name: Name: -------------------------- --------------------------- Title: Title: -------------------------- --------------------------- EMERGENT GROUP, INC., a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By: By: -------------------------- --------------------------- Name: Name: -------------------------- --------------------------- Title: Title: -------------------------- --------------------------- EMERGENT MORTGAGE CORP., a South Carolina corporation, as a Guarantor [CORPORATE SEAL] ATTEST: By: By: -------------------------- --------------------------- Name: Name: -------------------------- --------------------------- Title: Title: -------------------------- --------------------------- 116 First Union National Bank of North Carolina March 31, 1995 ANNEX I 117 The Company hereby undertakes to provide to the Commission upon request, copies of any schedules and exhibits to this Mortgage Loan Warehouse Agreement dated November 22, 1994 between Carolina Investors, Inc., and First Union National Bank of North Carolina. 118 FOURTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT FOURTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT (the "Amendment"), dated as of November 22, 1994, among CAROLINA INVESTORS, INC. ("Borrower"), EMERGENT FINANCIAL CORPORATION, EMERGENT GROUP, INC. and EMERGENT MORTGAGE CORP. (each, jointly and severally, a "Guarantor" and, collectively, the "Guarantors"), and FIRST UNION NATIONAL BANK OF NORTH CAROLINA ("Lender"). W I T N E S S E T H: WHEREAS, the Borrower and the Lender are parties to a Mortgage Loan Warehousing Agreement dated as of November 22, 1994, as previously amended by that certain letter agreement dated as of March 31, 1995, by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 and by that certain Third Amendment to Mortgage Loan Warehousing Agreement dated as of October 20, 1995 (as so amended, the "Agreement"); and WHEREAS, the parties hereto wish to amend the Agreement as set forth below; and WHEREAS, subject to and upon the terms and conditions herein set forth, the Lender is willing to continue to make available to the Borrower the credit facilities provided for in the Agreement; and WHEREAS, a specific condition to the willingness of the Lender to continue to make available to the Borrower the credit facilities provided for in the Agreement, is the reaffirmation by each of the Guarantors of the Guaranty to which such Guarantor is a party; and WHEREAS, each of the Guarantors will derive a material benefit from the continued availability to the Borrower of the credit facilities provided for in the Agreement and therefore each of the Guarantors is willing to reaffirm the Guaranty to which such guarantor is a party; NOW, THEREFORE, in consideration of the premises and agreements contained herein, the parties hereto hereby agree as follows: 1. All capitalized terms used herein and not otherwise defined shall have the respective meanings provided to such terms in the Agreement, as amended hereby. 2. Amendments to the Agreement. a. Paragraph 7(g) of the Agreement is hereby deleted in its entirety and replaced with the following: "7(g) Investments; Advances; Guaranties. Make or commit to make any advance, loan or extension of credit (other than Mortgage Loans made in the 119 ordinary course of the Company's business) or capital contribution to, or purchase any stocks, bonds, notes, debenture or other securities of, or make any other investment in, or guaranty the indebtedness or obligations of any other Person, in excess of the level permitted in Paragraph 7(o) below; provided, however, that (i) the Company shall be permitted to guaranty the indebtedness or other obligations of the following two (2) Affiliates of the Company: (A) Premier Financial Services, Inc., and (B) The Loan Pro$, Inc., which may be incurred in the normal course of such Affiliates' business, so long as Emergent Financial Corporation remains the sole shareholder of Premier Financial Services, Inc. and continues to own at least eighty percent (80%) of the outstanding capital stock of The Loan Pro$, Inc., (ii) the Company shall be permitted to guaranty any indebtedness of EMC to the lenders party to the EMC Syndicated Facility thereunder pursuant to the Syndicated Guaranty, and (iii) the Company shall be permitted to make advances to EMC." b. Paragraph 7(m) of the Agreement is hereby deleted in its entirety and the following paragraph is substituted in lieu thereof: "7(m) Minimum Book Net Worth. Permit its Book Net Worth as of the last day of any month to be less than the sum of (a) $9,000,000 plus (b) 100% of all capital contributions made to the Company after the date of the Mortgage Loan Warehousing Agreement which evidences the EMC Syndicated Facility." c. Paragraph 7(o) of the Agreement is hereby deleted in its entirety and the following paragraph is substituted in lieu thereof: "7(o) Maximum Affiliate Receivables. Permit the amount of Affiliate Receivables from Affiliates other than EMC to exceed $30,000,000 at any time." d. Paragraph 7(p) which had been deleted in a previous amendment and not replaced is hereby replaced with the following provision: "7(p) Percentage of Book Net Worth to Total Assets. Permit its Book Net Worth at any date to be less than six percent (6%) of its total assets as determined in accordance with GAAP." e. Paragraph 8(l) of the Agreement is hereby deleted and the following paragraph is substituted in lieu thereof: "8(l) The principal amount of the Investor Obligations shall decline by more than twenty percent (20%) during any two (2) consecutive calendar month period." 2 120 f. Paragraph 8(m) of the Agreement is hereby deleted in its entirety and the following paragraph is substituted in lieu thereof: "8(m) An Event of Default shall occur under the EMC Syndicated Facility; or" g. The definitions of "Guaranty Obligations" and "Investor Obligations" contained in Paragraph 10 of the Agreement are hereby deleted and the following are substituted in lieu thereof: "`Guaranty Obligations' shall mean any and all debts, obligations and liabilities of EMC (whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished, increased, created or incurred), arising out of or related to the EMC Syndicated Facility or any of the agreements, documents and instruments executed in connection therewith." "`Investor Obligations' shall mean those obligations of the Company to pay principal and interest to holders of the Company's Subordinated Debentures (Series S, Series T, Series W, Series U, Series V and Series A) and Floating Rate Senior Notes (Series 90, Series 91, Series 92, Series 93, Series 94, Series 95 and Series 96) each as listed on page 10 of that certain Prospectus of the Company dated March 1, 1995 describing the Series A Subordinated Debentures and the Series 96 Floating Rate Senior Notes, together with obligations of the Company to pay principal and interest to holders of any similar Subordinated Debentures or Floating Rate Senior Notes issued by the Company subsequent to the above Series." h. Paragraph 10 of the Agreement is hereby amended by deleting the definition of "EMC Facility". i. The following definitions are hereby added to Paragraph 10 of the Agreement as new definitions: "`EMC Syndicated Facility' shall mean that certain revolving credit facility extended by certain lenders to EMC pursuant to the terms of that certain Mortgage Loan Warehousing Agreement dated as of ______________________, 19__ among EMC, the Lender in its capacity as administrative agent, the Lender in its capacity as collateral agent, and the lenders party thereto, and any and all agreements, documents and instruments executed in connection therewith, as any of such items may be amended, extended or replaced from time to time." 3 121 "`Syndicated Guaranty' shall mean that certain Guaranty of even date herewith executed and delivered by the Company to the Lender in its capacity as collateral agent for the lenders party to the EMC Syndicated Facility, pursuant to which the Company shall guaranty the payment and performance of the obligations thereunder." 3. This Amendment shall become effective as of the date hereof, provided that the Agent shall have received the following items: (A) A copy of this Amendment executed by the Borrower, by each of the Guarantors and the Lender (whether such parties shall have signed the same or different copies); (B) A Reaffirmation of Guaranty (the "Reaffirmation") executed by each of the Guarantors in favor of the Lender; and (C) Resolutions of the Borrower and of each of the Guarantors authorizing (i) the execution of this Amendment, and (ii) in the case of the Guarantors, the Reaffirmation to which such Guarantor is a party. 4. The Borrower hereby represents and warrants that as of the effective date hereof, there exists no Default or Event of Default under the Agreement and the Borrower has no claim or cause of action against the Lender arising out of or relating in any way to the Agreement (as amended hereby) or the other Credit Documents, and the Borrower hereby waives and releases any and all claims or causes of action which the Borrower may have as of the effective date hereof against the Lender arising out of or relating in any way to the Agreement (as amended hereby) or the other Credit Documents. 5. This Amendment is limited and, except as set forth herein, shall not constitute a modification, acceptance or waiver of any provision of the Agreement, or any other document or instrument entered into in connection therewith. 6. This Amendment may be executed in any number of counterparts by the different parties hereto on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. A complete set of counterparts shall be lodged with each of the Borrower and the Lender. 7. This Amendment and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of North Carolina. 8. From and after the date hereof, all references in the Agreement, and any other document or instrument entered into in connection therewith, to the Agreement shall be deemed to be references to the Agreement as amended hereby. 4 122 9. The Guarantors join in the execution and delivery of this Amendment to acknowledge and consent to the terms hereof and hereby reaffirm their obligations under the Guaranties. 10. THE LENDER, THE GUARANTORS AND THE BORROWER EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT ANY OF THEM MAY HAVE TO A TRAIL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AMENDMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY RELATING HERETO OR THERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LENDER TO ENTER INTO THIS AMENDMENT. [THE BALANCE OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 5 123 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and sealed as of the day and year first above written. CAROLINA INVESTORS, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: By /s/ J. P. Cox By /s/ Keith B. Giddens ---------------------------------- ------------------------------------- Name J. Phil Cox Name Keith B. Giddens -------------------------------- ----------------------------------- Title Secretary Title Chief Executive Officer ------------------------------- ---------------------------------- FIRST UNION NATIONAL BANK OF NORTH [CORPORATE SEAL] CAROLINA, a national banking association ATTEST: By By ---------------------------------- ------------------------------------- Name Name -------------------------------- ------------------------------------ Title Title ------------------------------- ---------------------------------- EMERGENT FINANCIAL CORPORATION, a [CORPORATE SEAL] South Carolina corporation, as a Guarantor ATTEST: By /s/ Kevin J. Mast By /s/ Keith B. Giddens ---------------------------------- ------------------------------------- Name Kevin J. Mast Name Keith B. Giddens -------------------------------- ----------------------------------- Title Treasurer Title President ------------------------------- ---------------------------------- EMERGENT GROUP, INC., a South [CORPORATE SEAL] Carolina corporation, as a Guarantor ATTEST: By /s/ Kevin J. Mast By /s/ Keith B. Giddens ---------------------------------- ------------------------------------- Name Kevin J. Mast Name Keith B. Giddens -------------------------------- ----------------------------------- Title Treasurer Title Chief Executive Officer ------------------------------- ----------------------------------
6 124 EMERGENT MORTGAGE CORP, a [CORPORATE SEAL] South Carolina corporation ATTEST: By /s/ J. P. Cox By /s/ Keith B. Giddens ---------------------------------- ------------------------------------- Name J. Phil Cox Name Keith B. Giddens -------------------------------- ----------------------------------- Title Secretary Title Chief Executive Officer ------------------------------- ----------------------------------
7 125 REAFFIRMATION OF GUARANTY (CII Facility) TO: First Union National Bank of North Carolina One First Union Center 301 South College Street, CORP-15, TW-19 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of ____________________, 1996, is made by EMERGENT GROUP, INC., a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Fourth Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Financial Corporation , Emergent Mortgage Corp. and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and the Lender, by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 among the Borrower the Guarantors (other than Emergent Mortgage Corp.) and the Lender and by that certain Third Amendment to Mortgage Loan Warehousing Agreement dated as of October 20, 1995 among the Borrower, the Guarantors and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, is the reaffirmation of the terms of the Guaranty. Guarantor owns directly or indirectly 100% of the stock of the Borrower and thus will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment and to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 8 126 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT GROUP, INC., [CORPORATE SEAL] a South Carolina corporation ATTEST: Kevin J. Mast By: /s/ Keith B. Giddens - ------------------------ ------------------------- Treasurer COO and Exec V.P. 9 127 REAFFIRMATION OF GUARANTY (CII Facility) TO: First Union National Bank of North Carolina One First Union Center 301 South College Street, CORP-15, TW-19 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of ________________________,1996, is made by EMERGENT FINANCIAL CORPORATION, a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Fourth Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Group, Inc., Emergent Mortgage Corp. and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors (other than Emergent Mortgage Corp.) and the Lender, by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 among the Borrower the Guarantors (other than Emergent Mortgage Corp.) and the Lender and by that certain Third Amendment to Mortgage Loan Warehousing Agreement dated as of October 20, 1995 among the Borrower, the Guarantors and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, is the reaffirmation of the terms of the Guaranty. Guarantor owns directly or indirectly 100% of the stock of the Borrower and thus will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment and to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 10 128 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT FINANCIAL CORPORATION, [CORPORATE SEAL] a South Carolina corporation ATTEST: Kevin J. Mast By: /s/ Keith B. Giddens - ----------------------- --------------------------- Treasurer President 11 129 REAFFIRMATION OF GUARANTY (CII Facility) TO: First Union National Bank of North Carolina One First Union Center 301 South College Street, CORP-15, TW-19 Charlotte, North Carolina 28288 THIS REAFFIRMATION OF GUARANTY (this "Reaffirmation"), dated as of _______________________________, 1996, is made by EMERGENT MORTGAGE CORP., a South Carolina corporation ("Guarantor"), in favor of the "Lender" (as defined below) and is executed pursuant to the terms of that certain Fourth Amendment to Mortgage Loan Warehousing Agreement of even date herewith (the "Amendment") among Carolina Investors, Inc. ("Borrower") the Guarantor, Emergent Financial Corporation , Emergent Group, Inc. and First Union National Bank of North Carolina ("Lender") which Amendment amends that certain Mortgage Loan Warehousing Agreement dated as of November 22, 1994 among the Borrower, the Guarantors (other than Guarantor) and Lender, as previously amended by that certain letter agreement dated as of March 31, 1995 among the Borrower, the Guarantors (other than Guarantor) and the Lender, by that certain Second Amendment to Mortgage Loan Warehousing Agreement dated as of April 30, 1995 among the Borrower the Guarantors (other than Guarantor) and the Lender and by that certain Third Amendment to Mortgage Loan Warehousing Agreement dated as of October 20, 1995 among the Borrower, the Guarantors and the Lender (as so amended, the "Warehousing Agreement"). Capitalized terms used in this Reaffirmation and not otherwise defined herein shall have the meanings set forth in the Warehousing Agreement, as amended by the Amendment. Pursuant to the terms and conditions of the Warehousing Agreement, Guarantor executed a Guaranty dated as of November 22, 1994 in favor of the Lender, pursuant to which Guarantor agreed to guaranty the payment of the Obligations of Borrower to Lender. Lender has agreed to amend the Warehousing Agreement as set forth in the Amendment. A specific condition to the willingness of the Lender to enter into the Amendment and to continue to make available to Borrower the credit facilities provided for in the Warehousing Agreement, as so amended, and for Lender to continue to make available to the Guarantor the credit facilities provided for in the EMC Warehousing Agreement (as defined in the Guaranty) is the reaffirmation of the terms of the Guaranty. Both 100% of the stock of the Guarantor and 100% of the stock of the Borrower are owned by Emergent Financial Corporation, and thus Guarantor will benefit from the continued availability to Borrower of the credit facilities provided for in the Warehousing Agreement and the continued availability to Guarantor of the credit facilities provided for in the EMC Warehousing Agreement. To induce the Lender to modify the terms of the Warehousing Agreement pursuant to the Amendment, to continue to make available to Borrower the credit facilities provided for the Warehousing Agreement, as so amended, and to continue to make available to Guarantor the credit facilities provided for in the EMC Warehousing Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby reaffirms its obligations under the Guaranty and agrees that the Guaranty shall remain in full force and effect with respect to the Obligations. 12 130 IN WITNESS WHEREOF, the undersigned has executed this Reaffirmation under seal as of the date and year first written above. GUARANTOR EMERGENT MORTGAGE CORP., [CORPORATE SEAL] a South Carolina corporation ATTEST: /s/ J. P. Cox By: /s/ Dennis Kanupp - -------------------------- ------------------------- Secretary President 13 EX-21.1 10 LISTING OF SUBSIDIARIES 1 First Union National Bank of North Carolina March 31, 1995 Exhibit 21.1
Subsidiary State of Incorporation - --------------------------------------- ---------------------- CambridgeBanc, Inc. South Carolina Carolina Investors, Inc. South Carolina Premier Financial Services, Inc. South Carolina Pickens Railroad Company South Carolina (81% owned) Emergent Auto Holdings Corp. South Carolina Emergent Business Capital, Inc. South Carolina Emergent Business Capital Holdings Corp. South Carolina Emergent Commercial Mortgage Corporation South Carolina Emergent Equity Advisors, Inc. South Carolina Emergent Financial Corporation South Carolina Emergent Mortgage Corporation South Carolina N. R. Realty Corporation (Inactive) South Carolina The Mississippian Railway, Inc. (Inactive) South Carolina Graham County Railroad, Inc. (Inactive) South Carolina ATACS of South Carolina, Inc. (Inactive) South Carolina The Loan Pro$, Inc. South Carolina (80% owned)
EX-23.2 11 CONSENT OF ELLIOT, DAVIS & COMPANY, LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 31, 1996, in the Registration Statement (Form S-1) and related Prospectus of Emergent Group, Inc. for the registration of 3,000,000 shares of its Common Stock. ELLIOTT, DAVIS & COMPANY, L.L.P. Greenville, South Carolina September 20, 1996 -----END PRIVACY-ENHANCED MESSAGE-----