-----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, L/isdW8u/y7Iql6RYhwwIsGtKjlnJo3IrN0hdj3VK+w7u1O5rQXhPMp4jtfsfcJo F2HV4v30QNHazDhFr19png== 0000950168-00-001399.txt : 20000516 0000950168-00-001399.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950168-00-001399 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEGOLD FINANCIAL INC CENTRAL INDEX KEY: 0000277028 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 570513287 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08909 FILM NUMBER: 635154 BUSINESS ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8642895400 MAIL ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 FORMER COMPANY: FORMER CONFORMED NAME: EMERGENT GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NRUC CORP DATE OF NAME CHANGE: 19911002 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL RAILWAY UTILIZATION CORP DATE OF NAME CHANGE: 19840813 10-Q 1 HOMEGOLD FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended MARCH 31, 2000. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________. COMMISSION FILE NUMBER 0-8909 ----------------------- HOMEGOLD FINANCIAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) SOUTH CAROLINA 57-0513287 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 3901 PELHAM ROAD GREENVILLE, SOUTH CAROLINA 29615 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 864-289-5000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. TITLE OF EACH CLASS: OUTSTANDING AT APRIL 30, 2000 - ----------------------------------------- ------------------------------- COMMON STOCK, PAR VALUE $0.05 PER SHARE 10,171,416 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES FORM 10-Q QUARTER ENDED MARCH 31, 2000 INDEX PART I. FINANCIAL INFORMATION Page - ------ --------------------- ---- Item 1. Financial Statements for HomeGold Financial, Inc. Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 4 Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings 43 Item 2. Changes in Securities 43 Item 3. Defaults Upon Senior Securities 44 Item 4. Submission of Matters to a Vote of Security Holders 44 Item 5. Other Information 45 Item 6. Exhibits and Reports on Form 8-K 47 2 PART I. FINANCIAL INFORMATION 3 ITEM 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC. HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, 2000 1999 ----------- --------- (In thousands) ASSETS (Unaudited) (Audited) ------ ------------ ---------- Cash and cash equivalents $ 13,135 $ 26,009 Restricted cash 5,338 5,314 Loans receivable 85,831 63,242 Less allowance for credit losses (6,889) (6,344) Less deferred loan fees (999) (730) Plus deferred loan costs 625 446 ------------ ---------- Net loans receivable 78,568 56,614 Income taxes receivable 332 461 Accrued interest receivable 1,374 1,423 Other receivables 11,923 8,059 Residual receivables, net 46,576 47,770 Property and equipment, net 16,589 17,160 Real estate acquired through foreclosure 6,784 7,673 Excess of cost over net assets of acquired businesses, net of accumulated amortization of $771,000 in 2000 and $748,000 in 1999 1,543 1,566 Debt origination costs 1,378 1,658 Deferred income tax asset, net 12,000 12,000 Servicing asset 812 867 Other assets 2,968 2,163 ------------ ---------- Total assets $ 199,320 $ 188,737 ============ ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving warehouse line of credit $ 35,179 $ 17,808 Investor savings: Notes payable to investors 130,902 127,065 Subordinated debentures 17,689 17,710 ------------ ---------- Total investor savings 148,591 144,775 Senior unsecured debt 11,704 12,134 Other liabilities: Accounts payable and accrued liabilities 3,985 4,120 Remittances payable 966 1,078 Income taxes payable 240 120 Accrued interest payable 666 845 ------------ ---------- Total other liabilities 5,857 6,163 ------------ ---------- Total liabilities 201,331 180,880 Minority interest 10 13 Commitments and contingencies Shareholders' equity: Common stock, par value $.05 per share - authorized 100,000,000 shares issued and outstanding 10,171,416 shares at March 31, 2000 and 10,149,629 shares at December 31, 1999 509 507 Capital in excess of par value 39,048 39,028 Accumulated deficit (41,578) (31,691) ------------ ---------- Total shareholders' equity (deficit) (2,021) 7,844 ------------ ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 199,320 $ 188,737 ============ ==========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands, except share data) REVENUES: Interest income $ 1,927 $ 3,338 Servicing income 2,004 2,402 Gain on sale of loans: Gross gain on sale of loans 1,854 1,173 Loan fees, net 432 957 ---------------- ---------------- Total net gain on sale of loans 2,286 2,130 Other revenues 510 396 ---------------- ---------------- Total revenues 6,727 8,266 ---------------- ---------------- EXPENSES: Interest 4,003 4,798 Provision for credit losses 990 81 Cost of real estate owned and defaulted loans 1,054 823 Fair market value adjustment of residual receivables 1,080 (53) Salaries, wages and employee benefits 4,912 5,671 Business development costs 1,841 1,190 Other general and administrative expenses 2,813 3,258 ---------------- ---------------- Total expenses 16,693 15,768 ---------------- ---------------- Loss before income taxes, minority interest, and extraordinary item (9,966) (7,502) Provision for income taxes 145 450 ---------------- ---------------- Loss before minority interest and extraordinary item (10,111) (7,952) Minority interest in loss of subsidiaries (1) 3 ---------------- ---------------- Loss before extraordinary item (10,112) (7,949) Extraordinary item-gain on extinguishment of debt, net of $0 tax 226 16,946 ---------------- ---------------- NET INCOME (LOSS) $ (9,886) $ 8,997 ================ ================ BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Loss before extraordinary item $ (0.99) $ (0.81) Extraordinary item, net of taxes 0.02 1.73 ---------------- ---------------- Net income (loss) $ (0.97) $ 0.92 ================ ================ Basic and diluted weighted average shares outstanding 10,170,698 9,792,174 ================ ================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------ 2000 1999 ------------- ------------ (In thousands) OPERATING ACTIVITIES: Net income (loss) $ (9,886) $ 8,997 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 638 693 Provision for credit losses on loans 990 81 Gain on retirement of senior unsecured debt (226) (16,946) Provision for losses on real estate owned 137 289 Fair market valve adjustment of residual receivables 1,080 (53) Loans originated with intent to sell (86,617) (56,963) Proceeds from loans sold 59,873 57,156 Other (607) 127 Changes in operating assets and liabilities increasing (decreasing) cash (4,400) 4,498 --------------- ------------- NET CASH USED IN OPERATING ACTIVITIES $ (39,018) $ (2,121) --------------- ------------- INVESTING ACTIVITIES: Loans originated for investment purposes $ (20) $ (136) Principal collections on loans not sold 4,095 7,679 Loans purchased for investment purposes (189) - Purchase of REO and loans from securitization trusts (2,475) - Proceeds from sale of real estate owned 3,728 2,548 Proceeds from sale of property and equipment 19 31 Purchase of property and equipment (23) (190) Other 5 7 --------------- ------------- Net cash provided by investing activities $ 5,140 $ 9,939 --------------- ------------- FINANCING ACTIVITIES: Advances on revolving warehouse lines of credit $ 89,236 $ 67,732 Payments on revolving warehouse lines of credit (71,865) (76,977) Retirement of senior unsecured debt (204) (18,404) Net increase (decrease) in notes payable to investors 3,837 (1,543) Net increase (decrease) in subordinated debentures (22) 1,121 Proceeds from issuance of common stock 22 99 Other - (6) --------------- ------------ Net cash provided by (used in) financing activities $ 21,004 $ (27,978) --------------- ------------- Net decrease in cash and cash equivalents $ (12,874) $ (20,160) CASH AND CASH EQUIVALENTS: Beginning of period 26,009 36,913 --------------- ------------- End of period $ 13,135 $ 16,753 =============== =============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. 6 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--BASIS OF PREPARATION HomeGold Financial, Inc. (referred to herein sometimes as the "Company" and "HGFN") states that the accompanying consolidated financial statements are prepared in accordance with the Securities and Exchange Commission's rules regarding interim financial statements, and therefore do not contain all disclosures required by generally accepted accounting principles for annual financial statements. Reference should be made to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, including the footnotes thereto. Certain previously reported amounts have been reclassified to conform to current year presentation. Such reclassifications had no effect on net operations or shareholders' equity as previously reported. The consolidated balance sheet as of March 31, 2000, and the consolidated statements of operations for the three-month periods ended March 31, 2000 and 1999, and the consolidated statements of cash flows for the three-month periods ended March 31, 2000 and 1999, are unaudited and in the opinion of management contain all known adjustments, which consist of only normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. These estimates include, among other things, valuation of real estate owned, assumptions used to value residual receivables, determination of the allowance for credit losses, and valuation of the deferred income tax asset. NOTE 2--CASH FLOW INFORMATION For the three-month periods ended March 31, 2000 and 1999, the Company paid interest of $4.2 million and $7.0 million, respectively. For the three-month period ended March 31, 2000, the Company made no income tax payments. For the three months ended March 31, 1999, the Company paid income taxes of $155,000. For the three-month periods ended March 31, 2000 and 1999, the Company foreclosed on property in the amount of $833,000 and $1.8 million, respectively. For the three-month period ended March 31, 2000, the change in operating assets and liabilities includes $4.0 million loaned to HomeSense. NOTE 3--CASH AND CASH EQUIVALENTS The Company maintains its primary checking accounts with two principal banks and makes overnight investments in reverse repurchase agreements with those banks. The amounts maintained in the checking accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At March 31, 2000, the amounts maintained in overnight investments in reverse repurchase agreements, which are not insured by the FDIC, totaled approximately $12.8 million. The investments were secured by U.S. Government securities pledged by the banks. The Company considers all highly liquid investments readily convertible to cash or having an original maturity of three months or less to be cash equivalents. NOTE 4--RESTRICTED CASH The Company maintains an investment account with a trustee relating to representations and warranties in connection with the sale of the small-business loan unit. This account is shown as restricted cash, and is invested in overnight investments or short-term U.S. Treasury Securities. 7 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5--CONTINGENCIES On February 26, 1999, the Company received notification from Transamerica Small Business Capital, Inc. ("Transamerica") that pursuant to the asset purchase agreement dated October 2, 1998, a loan for approximately $1.1 million was allegedly not made by the Company in accordance with stated representations. Transamerica has filed an action in the Circuit Court of Cook County, Illinois seeking to recover the loan amount from the Company's $5.3 million that is being maintained by the trustee, which is reflected as restricted cash on the Company's balance sheet. While management does not believe the Company has any liability relating to this claim and the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this time. As a part of the agreement to sell Sterling Lending ("SLC") in 1998, the Company guaranteed certain leases of office space used by SLC. In 1999, SLC filed for bankruptcy protection and due to the financial situation of SLC, the Company has been asked to perform under certain of the guarantees. The Company is resolving each lease through active negotiations with the landlords, and management feels that the resolution of these guarantees will not be material to the financial statements of the Company. On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins filed a purported class action lawsuit in New Hanover County, North Carolina Superior Court. The suit was filed against a subsidiary of the Company and others alleging a variety of statutory and common law claims arising out of mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). The plaintiffs are seeking unspecified monetary damages. As to the Company's subsidiary, the complaint alleges participation by the Company's subsidiary in an arrangement with Chase under which Chase allegedly charged excessive fees and interest to the consumers, and under which Chase allegedly received undisclosed premiums. There has been no class certification, and the Company intends to contest the case vigorously. Because this matter is in its early stages, it is not possible to evaluate the likelihood of an unfavorable outcome or estimate the amount of potential loss. On April 4, 2000 the Company received notice of a suit filed against it by Danka Funding Company, LLC ("Danka") in New Jersey Superior Court. In the suit, Danka seeks recovery of $355,865.80 allegedly due under copier equipment leases. While management does not believe the Company has any liability relating to this claim, and while the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this early stage. The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. NOTE 6--ADOPTION OF NEW ACCOUNTING STANDARDS Effective January 1, 1999, the Company adopted FASB Statement of Financial Accounting Standards ("SFAS") No. 134 "ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE". This statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. The adoption of this Standard did not have a material effect on the Company's financial statements. NOTE 7--RESIDUAL RECEIVABLES AND SALES AND SECURITIZATIONS OF LOANS In 1997, the Company began securitizing mortgage loans, whereby it sells the loans that it originates or purchases to a trust for cash, and records certain assets and income based upon the difference between all principal and interest received from the loans sold and (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used to value the residual receivable are appropriate and reasonable. At each reporting period, the Company assesses the fair value of these residual assets based on the present value of future cash flows expected under management's current best estimates of the key assumptions-credit losses, prepayment speed, forward yield curves, and discount rates commensurate with the risks involved and adjusts the recorded amounts to their estimated fair value. There have been no mortgage loans securitized to date in 2000. Total mortgage loans securitized in 1999 and 1998 were $59.6 million and $90.4 million, respectively. 8 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company also sells on a whole loan basis a significant portion of its loans (servicing released), including substantially all of its mortgage loans secured by second mortgage liens principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the second lien mortgage loans. Historically, the Company generally has been able to recognize higher premiums from securitizations compared to whole loan sales. However, cash flow is impacted more positively in the short term by whole loan sales, compared to securitizations. In 1999, the Company completed a securitization transaction in the second quarter. The Company securitized $59.6 million of loans for a weighted average premium of 2.88%. This securitization consisted of seasoned first and second lien mortgage loans, resulting in a lower than average premium. However, the securitization of seasoned loans resulted in additional liquidity of $33.0 million for the Company. Certain loans included in that securitization were ineligible for inclusion in the borrowing base under the Company's warehouse line of credit. During the last two quarters of the year, the Company sold its loans on a whole-loan, servicing released basis. The Company makes securitization decisions based on a number of factors including conditions in the secondary market, the aggregate size and weighted average coupon of loans available to sell, fixed costs associated with securitization transactions, and liquidity needs. The Company plans to sell substantially all its production in 2000 on a whole loan sale basis. NOTE 8--WAREHOUSE LINES OF CREDIT The Company had $35.2 million and $17.8 million in outstanding balances owed under its warehouse line of credit at March 31, 2000 and December 31, 1999 respectively. Under the terms of the revolving credit agreement, HomeGold, Inc. ("HGI") and Carolina Investors, Inc. ("CII"), both wholly-owned subsidiaries of HGFN, may collectively borrow up to a maximum of $100.0 million with interest at the prime rate plus 0.75%. This borrowing is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum availability of $10.0 million on the line of credit, and a requirement that CII maintain a minimum of $100.0 million in aggregate outstanding principal amount of notes due to investors. It also restricts the ability of HGI and, in certain circumstances, CII, to pay dividends or make loans or advances to HGFN. Management believes the Company is in compliance with such restrictive covenants at March 31, 2000. The revolving credit agreement matures on June 30, 2001. Availability under the credit agreement is determined based on eligible collateral as defined under the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The borrowing base adjusted for the $10.0 million minimum availability requirements would have allowed a maximum borrowing level based on eligible collateral of $40.1 million at March 31, 2000 and $18.9 million at December 31, 1999. Therefore, $5.0 million and $1.1 million were available under this agreement on March 31, 2000 and December 31, 1999, respectively. On April 28, 2000, the shareholders of HomeGold Financial, Inc. approved a merger agreement with HomeSense Financial Corp. and affiliated companies (collectively "HomeSense"), a privately owned business, located in Columbia, South Carolina. As of the effective date of and in connection with the Company's merger with HomeSense, the terms of the Company's existing revolving line of credit were modified, and certain lines of credit of HomeSense were amended so that those lines are available to the merged entity. Following the effective date of the merger, the Company will have collective borrowing ability under the existing line of credit with CIT Group/Business Credit, Inc., of up to $50.0 million. During the remainder of 2000, the line decreases in incremental steps, based on certain criteria, decreasing to $25.0 million at December 31, 2000. The maturity date, rates of interest, advance rates, and collateral will remain the same as currently under the revolving credit agreement. In connection with the merger, the Company entered into a new $40 million revolving warehouse line of credit with Household Commercial Financial Services, Inc. The line bears interest at the Prime rate plus .25% and is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum net worth of $10,000,000 commencing August 31, 2000, a leverage ratio of less than 35 to 1, and positive consolidated net income for each quarter beginning on or after July 1, 2000. The revolving credit agreement matures on April 30, 2001. 9 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is also negotiating an additional line of credit with Residential Mortgage Services of Texas ("RMST"). HomeSense had a $25.0 million warehouse facility with RMST prior to the merger, and RMST has agreed to leave this facility in place for one month in order to complete its due diligence on approving the new facility with HomeGold. The line bears interest at the Prime rate plus .75%. The agreement is structured as a purchase of the loans by RMST with a repurchase obligation by the Company. The Company also assumed an operating line of credit of $1,860,000 with Branch Banking & Trust Company ("BB&T") in connection with the merger. The line is secured by a $1.0 million certificate of deposit held by the bank. A principal payment of $500,000 is payable on May 15, 2000. Monthly principal payments of $56,667 plus interest are payable for twenty-four months beginning July 5, 2000. The line bears interest at LIBOR plus 2.5%. The Company also assumed a mortgage note of $2.0 million with Bank of America, N.A. in connection with the merger. The note matures on November 2, 2000, and bears interest at the Prime rate plus .25%. The note is secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a piece of investment property. NOTE 9--REORGANIZATION AGREEMENT WITH HOMESENSE FINANCIAL CORP. On April 28, 2000, the shareholders of HomeGold Financial, Inc. approved a merger agreement with HomeSense Financial Corp. and affiliated companies (collectively "HomeSense"), a privately owned business, located in Columbia, South Carolina. HomeSense is a specialized mortgage company that originates and sells mortgage loans in the sub-prime mortgage industry, whose principal loan product is a debt consolidation loan, generally collateralized by a first lien on the borrower's home. HomeSense originated an average of approximately $38 million per month in mortgage loans in the first quarter of 2000, with a mix of approximately 59% through its direct retail origination channels and 41% through its wholesale origination network. HomeSense originates its retail loan volume through both a direct retail branch network of eight offices, as well as through centrally-provided telemarketing leads, direct mail, and television advertising. As of the effective date of the merger, HGFN issued 6,780,944 shares of its common stock (40% of post-merger shares outstanding) in addition to 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share) for 100% of the outstanding stock of HomeSense. The Company completed this transaction on May 9, 2000. The merger was accounted for under the purchase method of accounting prescribed by generally accepted accounting principles. NOTE 10--SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS In September 1997, the Company sold $125.0 million in aggregate principal amount of Senior Notes. The Senior Notes constitute unsecured indebtedness of the Company. The Senior Notes mature on September 15, 2004, with interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. In the first quarter of 2000 and in fiscal 1999, the Company purchased $430,000 and $74.5 million, respectively, in aggregate principal amount of its Senior Notes in open market transactions. As a result of these repurchases, the Company recorded an extraordinary gain on extinguishment of debt of $226,000 in the first quarter of 2000, and $16.9 million in the first quarter of 1999. For the year ended December 31, 1999, the Company recognized $29.5 million of extraordinary gains from extinguishment of debt. $11.7 million of the Senior Notes remain outstanding as of March 31, 2000. 10 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. The indenture pertaining to the Senior Notes contains various restrictive covenants including limitations on, among other things, the incurrence of certain types of additional indebtedness, the payment of dividends and certain other payments, the ability of the Company's subsidiaries to incur further limitations on their ability to pay dividends or make other payments to the Company, liens, asset sales, the issuance of preferred stock by the Company's subsidiaries and transactions with affiliates. At March 31, 2000, management believes the Company was in compliance with such restrictive covenants. The Senior Notes are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries listed below. With the exception of the Guarantee by the Company's subsidiary CII, the Subsidiary Guarantees rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of such Guarantors. No existing debt of any of the existing subsidiaries, other than the CII subordinated debentures, is currently considered to be subordinated to the Senior Notes. The Guarantee by CII is equal in priority to CII's notes payable to investors and is senior to CII's subordinated debentures. The Company has included consolidating condensed financial data of the combined subsidiaries of the Company in these financial statements. The Company believes that providing the condensed consolidating information is of material interest to investors in the Senior Notes and has not presented separate financial statements for each of the wholly-owned Subsidiary Guarantors, because it was deemed that such financial statements would not provide investors with any material additional information. At both March 31, 2000 and December 31, 1999, all of the Subsidiary Guarantors were wholly-owned by the Company. The Subsidiary Guarantors of the Company's Senior Notes at March 31, 2000 consist of the following wholly-owned subsidiaries of the Company: HomeGold, Inc. Emergent Mortgage Corp. of Tennessee Carolina Investors, Inc. Emergent Insurance Agency Corp. Emergent Business Capital Asset Based Lending, Inc. Investments in subsidiaries are accounted for by the parent company and Subsidiary Guarantors on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the parent's and Subsidiary Guarantor's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Certain sums in the following tables may reflect immaterial rounding differences. As of March 31, 2000 and December 31, 1999, the Subsidiary Guarantors conduct all of the Company's operations, other than the investment of certain residual receivables through its special purpose securitization subsidiaries. 11 HOMEGOLD FINANCIAL, INC. CONSOLIDATING BALANCE SHEETS MARCH 31, 2000 (Unaudited, In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ----------- ----------- ------------ ------------ ASSETS ------ Cash and cash equivalents $ 196 12,938 1 - $ 13,135 Restricted cash 5,338 - - - 5,338 Loans receivable: Loans receivable - 85,831 - - 85,831 Notes receivable from other affiliates 7,443 52,294 5,964 (65,701) - ---------- ----------- ----------- ------------ ------------ Total loans receivable 7,443 138,125 5,964 (65,701) 85,831 Less allowance for credit losses on loans - (6,889) - - (6,889) Less deferred loan fees - (999) - - (999) Plus deferred loan costs - 625 - - 625 ---------- ----------- ----------- ------------ ------------ Net loans receivable 7,443 130,862 5,964 (65,701) 78,568 Income tax receivable - 332 - - 332 Accrued interest receivable 118 1,256 - - 1,374 Other receivables 5,006 6,917 - - 11,923 Investment in subsidiaries 32,244 - - (32,244) - Residual receivables, net - 4,294 42,282 - 46,576 Property and equipment, net - 16,589 - - 16,589 Real estate acquired through foreclosure - 6,784 - - 6,784 Net excess of cost over net assets of acquired businesses 37 1,506 - - 1,543 Deferred income tax asset, net 3,510 8,490 - - 12,000 Other assets 277 4,881 - - 5,158 ---------- ----------- ----------- ------------ ------------ TOTAL ASSETS $ 54,169 $ 194,849 $ 48,247 $ (97,945) $ 199,320 ========== =========== =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Revolving warehouse line of credit $ - $ 35,179 $ - $ - $ 35,179 Investor savings: Notes payable to investors - 130,902 - - 130,902 Subordinated debentures - 17,689 - - 17,689 ---------- ----------- ----------- ------------ ------------ Total investor savings - 148,591 - - 148,591 Senior unsecured debt 11,704 - - - 11,704 Subordinated debt to affiliates 44,456 13,407 - (57,863) - Other liabilities: Accounts payable and accrued liabilities - 3,985 - - 3,985 Remittances payable - 966 - - 966 Income taxes payable - 240 - - 240 Accrued interest payable 30 636 - - 666 Due to (from) affiliates - - 7,838 (7,838) - ---------- ----------- ----------- ------------ ------------ Total other liabilities 30 5,827 7,838 (7,838) 5,857 ---------- ----------- ----------- ------------ ------------ Total liabilities 56,190 203,004 7,838 (65,701) 201,331 Minority interest - - 10 - 10 Shareholders' equity: Common stock 509 998 2 (1,000) 509 Capital in excess of par value 39,048 76,042 48,808 (124,850) 39,048 Retained earnings (accumulated deficit) (41,578) (85,195) (8,411) 93,606 (41,578) ---------- ----------- ----------- ------------ ------------ Total shareholders' equity (deficit) (2,021) (8,155) 40,399 (32,244) (2,021) ---------- ----------- ----------- ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 54,169 194,849 48,247 (97,945) $ 199,320 ========== =========== =========== ============ ============
12 HOMEGOLD FINANCIAL, INC. CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1999 (Unaudited, In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------ ------------ ------------ ASSETS ------ Cash and cash equivalents $ 202 $ 25,806 $ 1 $ -- 26,009 Restricted cash 5,314 -- -- -- 5,314 Loans receivable: Loans receivable -- 63,242 -- -- 63,242 Notes receivable from affiliates 7,097 36,229 4,584 (47,910) -- ---------- ------------ ----------- ------------ ------------ Total loans receivable 7,097 99,471 4,584 (47,910) 63,242 Less allowance for credit losses on loans -- (6,344) -- -- (6,344) Less deferred loan fees -- (730) -- -- (730) Plus deferred loan costs -- 446 -- -- 446 ---------- ------------ ----------- ------------ ------------ Net loans receivable 7,097 92,843 4,584 (47,910) 56,614 Other Receivables: Income tax -- 461 -- -- 461 Accrued interest receivable 36 1,387 -- -- 1,423 Other receivables 1,006 7,053 -- -- 8,059 ---------- ------------ ----------- ------------ ------------ Total other receivables 1,042 8,901 -- -- 9,943 Investment in subsidiaries 31,487 -- -- (31,487) -- Residual receivables, net -- 4,545 43,225 -- 47,770 Net property and equipment -- 17,160 -- -- 17,160 Real estate acquired through foreclosure -- 7,673 -- -- 7,673 Net excess of cost over net assets of acquired 38 1,528 -- -- 1,566 businesses Deferred income tax asset, net 3,510 8,490 -- -- 12,000 Other assets 304 4,384 -- -- 4,688 ---------- ------------ ----------- ------------ ------------ TOTAL ASSETS $ 48,994 $ 171,330 $ 47,810 $ (79,397) 188,737 ========== ============ =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Revolving warehouse line of credit $ -- $ 17,808 $ -- $ -- 17,808 Investor savings: Notes payable to investors -- 127,065 -- -- 127,065 Subordinated debentures -- 17,710 -- -- 17,710 ---------- ------------ ----------- ------------ ------------ Total investor savings -- 144,775 -- -- 144,775 Senior unsecured debt 12,134 -- -- -- 12,134 Accounts payable and accrued liabilities -- 4,120 -- -- 4,120 Remittances payable -- 1,078 -- -- 1,078 Income taxes payable -- 120 -- -- 120 Accrued interest payable 384 461 -- -- 845 Due to (from) affiliates 28,632 -- 7,597 (36,229) -- ---------- ------------ ----------- ------------ ------------ Total other liabilities 29,016 5,779 7,597 (36,229) 6,163 Subordinated debt to affiliates -- 11,681 -- (11,681) -- ---------- ------------ ----------- ------------ ------------ Total liabilities 41,150 180,043 7,597 (47,910) 180,880 Minority interest -- (1) 14 -- 13 Shareholders' equity: Common stock 507 998 2 (1,000) 507 Capital in excess of par value 39,028 66,043 48,807 (114,850) 39,028 Retained earnings (accumulated deficit) (31,691) (75,753) (8,610) 84,363 (31,691) ---------- ------------ ----------- ------------ ------------ Total shareholders' equity (deficit) 7,844 (8,712) 40,199 (31,487) 7,844 ---------- ------------ ----------- ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 48,994 $ 171,330 $ 47,810 $ (79,397) 188,737 ========== ============ =========== ============ ============
13 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2000 (Unaudited, In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------- ------------ ------------- ------------ REVENUES: Interest income $ 289 $ 2,600 $ - $ (962) $ 1,927 Servicing income - 391 1,613 - 2,004 Gain on sale of loans: Gross gain on sale of loans - 1,854 - - 1,854 Loan fees, net - 432 - - 432 ------------ ------------- ------------ ------------- ------------ Total gain on sale of loans - 2,286 - - 2,286 Other revenues - 525 - (15) 510 ------------ ------------- ------------ ------------- ------------ Total revenues 289 5,802 1,613 (977) 6,727 ------------ ------------- ------------ ------------- ------------ EXPENSES: Interest 1,124 3,841 - (962) 4,003 Provision for credit losses - 990 - - 990 Costs of real estate owned and defaulted loans - 1,054 - - 1,054 Fair market value adjustment of residual receivables - 512 568 - 1,080 Salaries, wages and employee benefits - 4,912 - - 4,912 Business development costs - 1,841 - - 1,841 Other general and administrative expenses 33 2,795 - (15) 2,813 ------------ ------------- ------------ ------------- ------------ Total expenses 1,157 15,945 568 (977) 16,693 ------------ ------------- ------------ ------------- ------------ Income (loss) before income taxes, minority interest, and equity in undistributed earnings (loss) of subsidiaries (868) (10,143) 1,045 - (9,966) Earnings (loss) of subsidiaries (9,244) - - 9,244 - ------------ ------------- ------------ ------------- ------------ Income (loss) before income taxes and minority interest (10,112) (10,143) 1,045 9,244 (9,966) Provision for income taxes - 145 - - 145 ------------ ------------- ------------ ------------- ------------ Income (loss) before minority interest and extraordinary item (10,112) (10,288) 1,045 9,244 (10,111) Minority interest in loss of subsidiaries - (1) - - (1) ------------ ------------- ------------ ------------- ------------ Income (loss) before extraordinary item (10,112) (10,289) 1,045 9,244 (10,112) Extraordinary item-gain on extinguishment of debt, net of $0 tax 226 - - - 226 ------------ ------------- ------------ ------------- ------------ NET INCOME (LOSS) $ (9,886) $ (10,289) $ 1,045 $ 9,244 $ (9,886) ============ ============= ============ ============= ============
14 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 (Unaudited, In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ------------ ------------- ------------ ------------- ------------ REVENUES: Interest income $ 2,187 $ 5,198 $ -- $ (4,047) $ 3,338 Servicing income -- 1,902 500 -- 2,402 Gain on sale of loans: Gross gain on sale of loans -- 1,173 -- -- 1,173 Loan fees, net -- 957 -- -- 957 ------------ ------------- ------------ ------------- ------------ Total gain on sale of loans -- 2,130 -- -- 2,130 Other revenues 7 470 -- (81) 396 ------------ ------------- ------------ ------------- ------------ Total revenues 2,194 9,700 500 (4,128) 8,266 ------------ ------------- ------------ ------------- ------------ EXPENSES: Interest 2,004 6,841 -- (4,047) 4,798 Provision for credit losses -- 81 -- -- 81 Costs of real estate owned and defaulted loans -- 823 -- -- 823 Fair market value adjustment of residual receivables -- 60 (113) -- (53) Salaries, wages and employee benefits -- 5,671 -- -- 5,671 Business development costs -- 1,190 -- -- 1,190 Other general and administrative expenses 177 3,162 -- (81) 3,258 ------------ ------------- ------------ ------------- ------------ Total expenses 2,181 17,828 (113) (4,128) 15,768 ------------ ------------- ------------ ------------- ------------ Income (loss) before income taxes, minority interest, and equity in undistributed earnings (loss) of subsidiaries 13 (8,128) 613 -- (7,502) Earnings (loss) of subsidiaries (7,962) 613 -- 7,349 -- ------------ ------------- ------------ ------------- ------------ Income (loss) before income taxes and minority interest (7,949) (7,515) 613 7,349 (7,502) Provision for income taxes -- 450 -- -- 450 ------------ ------------- ------------ ------------- ------------ Income (loss) before minority interest and extraordinary item (7,949) (7,965) 613 7,349 (7,952) Minority interest in loss of subsidiaries -- -- 3 -- 3 ------------ ------------- ------------ ------------- ------------ Income (loss) before extraordinary item (7,949) (7,965) 616 7,349 (7,949) Extraordinary item-gain on extinguishment of debt, net of $0 tax 16,946 -- -- -- 16,946 ------------ ------------- ------------ ------------- ------------ NET INCOME (LOSS) $ 8,997 $ (7,965) $ 616 $ 7,349 $ 8,997 ============ ============= ============ ============= ============
15 CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2000 (Unaudited, In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ----------- ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ (9,886) (10,289) $ 1,045 $ 9,244 (9,886) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 9,244 - - (9,244) - Depreciation and amortization 1 637 - - 638 Provision for credit losses - 990 - - 990 Gain on retirement of senior unsecured debt (226) - - - (226) Loss on sale of real estate acquired through foreclosure - 137 - - 137 Fair market value adjustment of residual receivables - 1,080 - - 1,080 Loans originated with intent to sell - (86,617) - - (86,617) Proceeds from sold loans - 59,873 - - 59,873 Other - (607) - - (607) Changes in operating assets and liabilities increasing (decreasing) cash (4,435) (908) 943 - (4,400) ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (5,302) (35,704) 1,988 - (39,018) ----------- ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Loans originated for investment purposes - (20) - - (20) Loans purchased for investment purposes - (189) - - (189) Principal collections on loans not sold - 4,095 - - 4,095 Purchase of REO and loans from securitization trusts - (2,475) - - (2,475) Proceeds from sale of real estate owned - 3,728 - - 3,728 Proceeds from sale of property and equipment - 19 - - 19 Purchase of property and equipment - (23) - - (23) Other - 5 - - 5 ----------- ------------ ------------ ------------ ------------ Net cash provided by investing activities - 5,140 - - 5,140 ----------- ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Advances on revolving warehouse lines of credit - 89,236 - - 89,236 Payments on revolving warehouse lines of credit - (71,865) - - (71,865) Retirement of senior unsecured debt (204) - - - (204) Net increase in notes payable to investors - 3,837 - - 3,837 Net decrease in subordinated debentures - (22) - - (22) Advances (to) from subsidiary 5,478 (5,184) (294) - - Proceeds from issuance of additional common stock 22 - - - 22 Other - 1,694 (1,694) - - ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 5,296 17,696 (1,988) - 21,004 ----------- ------------ ------------ ------------ ------------ Net decrease in cash and cash equivalents (6) (12,868) - - (12,874) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 202 25,806 1 - 26,009 ----------- ------------ ----------- ------------ ------------ END OF PERIOD $ 196 $ 12,938 $ 1 $ - $ 13,135 =========== ============ =========== ============ ============
16 CONSOLIDATING STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 (Unaudited, In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ----------- ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 8,997 (7,965) $ 616 $ 7,349 8,997 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 7,962 602 -- (8,564) -- Depreciation and amortization 1 692 -- -- 693 Provision for credit losses on loans -- 81 -- -- 81 Gain on retirement of senior unsecured debt (16,946) -- -- -- (16,946) Loss on sale of real estate acquired through foreclosure -- 289 -- -- 289 Fair market value adjustment of residual receivables -- (53) -- -- (53) Loans originated with intent to sell -- (56,963) -- -- (56,963) Proceeds from sold loans -- 57,156 -- -- 57,156 Other -- 130 (3) -- 127 Changes in operating assets and liabilities increasing (decreasing) cash (1,924) 4,916 1,506 -- 4,498 ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (1,910) (1,115) 2,119 (1,215) (2,121) ----------- ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Loans originated for investment purposes -- (136) -- -- (136) Principal collections on loans not sold -- 7,679 -- -- 7,679 Proceeds from sale of real estate owned -- 2,548 -- -- 2,548 Proceeds from sale of property and equipment -- 31 -- -- 31 Purchase of property and equipment -- (190) -- -- (190) Other -- 7 -- -- 7 ----------- ------------ ------------ ------------ ------------ Net cash provided by investing activities -- 9,939 -- -- 9,939 ----------- ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Advances on revolving warehouse lines of credit -- 67,732 -- -- 67,732 Payments on revolving warehouse lines of credit -- (76,977) -- -- (76,977) Retirement of senior unsecured debt (18,404) -- -- -- (18,404) Net decrease in notes payable to investors -- (1,543) -- -- (1,543) Net increase in subordinated debentures -- 1,121 -- -- 1,121 Advances (to) from subsidiary 20,286 (15,672) (4,614) -- -- Proceeds from issuance of additional common stock 99 -- -- -- 99 Other (6) (1,209) (6) 1,215 (6) ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,975 (26,548) (4,620) 1,215 (27,978) ----------- ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 65 (17,724) (2,501) -- (20,160) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913 ----------- ------------ ------------ ------------ ------------ END OF PERIOD $ 261 $ 16,491 $ 1 $ -- 16,753 =========== ============ ============ ============ ============
17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The discussion should be read in conjunction with the HomeGold Financial, Inc. and Subsidiaries (the "Company") Unaudited Consolidated Financial Statements and Notes appearing elsewhere in this report. FORWARD - LOOKING INFORMATION From time to time, the Company makes oral and written statements that may constitute "forward-looking statements" (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Form 10-Q, as well as those made in other filings with the SEC, and other financial discussion and analysis by management that reflect projections or future financial or economic performance of the Company. Such forward-looking statements are based on management's current plans and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such risks and uncertainties include, but are not limited to: lower origination volume due to market conditions, inability to achieve desired efficiency levels, higher losses due to economic downturn or lower real estate values, loss of key employees, adverse consequences of changes in interest rate environment, deterioration of creditworthiness of borrowers and risk of default, general economic conditions in the Company's markets, including inflation, recession, interest rates and other economic factors, loss of funding sources, loss of ability to sell loans, general lending risks, impact of competition, regulation of lending activities, changes in the regulatory environment, lower than anticipated premiums on loan sales, lower than anticipated origination fees, adverse impact of lawsuits, faster than anticipated prepayments on loans, losses due to breach of representation or warranties under previous agreements, and other detrimental developments. The preceding list of risks and uncertainties, however, is not intended to be exhaustive, and should be read in conjunction with other cautionary statements made herein, including, but not limited to, risks identified from time to time in the Company's SEC reports, registration statements and public announcements. GENERAL The Company is headquartered in Greenville, South Carolina, and primarily engages in the business of originating, purchasing, selling, securitizing and servicing mortgage loan products to sub-prime customers. The Company commenced its lending operations in 1991 through the acquisition of CII, a small mortgage lending company, which had been in operation since 1963. MARKET CONDITIONS The financial services industry, including the markets in which the Company operates, is highly competitive. Competition is based on the type of loan, interest rates, and service. Traditional competitors in the financial services industry include commercial banks, credit unions, thrift institutions, credit card issuers, consumer and commercial finance companies, and leasing companies, many of which have considerably greater financial and marketing resources than the Company. Moreover, major brokerage firms, insurance companies, retailers and bank holding companies have formed substantial national financial services networks. The Company believes that it competes effectively in its markets by providing competitive rates and efficient, complete services. The Company faces significant competition in connection with its mortgage loan products, principally from national companies which focus their efforts on making mortgage loans to non-prime borrowers. Although these large national companies compete in the mortgage loan industry, this industry, as a whole, is highly fragmented and no one company has a significant share of the total mortgage loan market. The Company attempts to maintain its competitiveness by striving to service its retail mortgage loan customers in a friendly and expedient manner, and by maintaining and developing strong relationships with mortgage brokers. 18 The following table sets forth certain data relating to the Company's mortgage loan operations at and for the periods indicated:
AT AND FOR THE THREE MONTHS ENDED MARCH 31, AT AND FOR THE YEARS ENDED DECEMBER 31, ------------------------------- --------------------------------------------------- 2000 1999 1999 1998 1997 ------------- -------------- -------------- --------------- -------------- (DOLLARS IN THOUSANDS) MORTGAGE LOANS: Mortgage loans originated $ 84,083 $ 52,558 $ 234,005 $ 659,444 $ 1,176,800 Mortgage loans sold 59,873 57,156 220,382 623,675 435,333 Mortgage loans securitized -- -- 59,630 92,173 487,563 Total mortgage loans owned (period end) 75,261 105,777 52,854 117,685 231,145 Total serviced mortgage loans (period end) 405,151 505,232 408,529 550,304 768,556 Average mortgage loans owned (1) 70,937 108,794 72,711 245,915 215,790 Average serviced mortgage loans (1) 414,466 525,803 478,386 744,221 443,318 Average interest earned (1) 8.48% 10.31% 8.67% 10.34% 10.92%
- ------------------------------ (1) Averages are computed based on the daily averages except for monthly averages were used in 1997. At March 31, 2000, the Company has $10.6 million of loans receivable outstanding relating to its previously sold asset-based lending operations. The loans are primarily in default status and in various work-out situations. The Company has established reserves of $3.4 million against these receivables for estimated losses, and additional reserves may be needed in the future, depending on the Company's assessment of collectability. RESULTS OF OPERATIONS For the periods indicated, the following table sets forth certain information derived from the Company's Consolidated Financial Statements expressed as a percentage of total revenues.
FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------- 2000 1999 -------------- -------------- Interest income 28.6 % 40.4 % Servicing income 29.8 29.0 Gross gain on sale of loans 27.6 14.2 Loan fees, net 6.4 11.6 Other revenues 7.6 4.8 -------------- -------------- Total revenues 100.0 % 100.0 % ============== ============== Interest expense 59.5 % 58.0 % Provision for credit losses 14.7 1.0 Cost of real estate owned and defaulted loans 15.7 10.0 Fair value write-down (write-up) of residual receivables 16.1 (0.6) Salaries, wages and employee benefits 73.0 68.6 Business development costs 27.4 14.4 Other general and administrative expenses 41.8 39.4 -------------- -------------- Loss before income taxes, minority interest and extraordinary item (148.2) (90.8) Provision for income taxes 2.2 5.4 Extraordinary item-gain on extinguishment of debt, net 3.4 205.0 -------------- -------------- Net income (loss) (147.0)% 108.8 % ============== ==============
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 The Company recognized a net loss of $9.9 million for the three months ended March 31, 2000 as compared to a net income of $9.0 million for the three months ended March 31, 1999. Included in the $9.0 million net income for the first quarter of 1999 is an extraordinary gain of $16.9 million on the extinguishment of debt. Total revenues decreased $1.5 million, or 18.6%, to $6.7 million for the three months ended March 31, 2000 from $8.3 million for the three months ended March 31, 1999. 19 Interest income decreased $1.4 million, or 42.3%, to $1.9 million for the three months ended March 31, 2000 from $3.3 million for the three months ended March 31, 1999. The average yield in the first three months of 2000 was 8.10% compared to 10.30% in the same period of 1999. The reduction in the average yield earned in the three months ended March 31, 2000 compared to the first three months in 1999 resulted primarily from a change in the mix of the Company's total portfolio and due to certain small business loans originated by former subsidiaries that remain on the Company's balance sheet. Certain of these loans were performing and accruing interest in the first quarter of 1999, but were not accruing interest during the first quarter of 2000. The Company believes that it has taken proper steps to value these loans at net realizable value based on information currently available, but may need additional reserves against these loans in the future. Servicing income declined $398,000, or 16.6%, to $2.0 million for the three months ended March 31, 2000 from $2.4 million for the same period in 1999. The reduction was primarily due to a $111.0 million, or 20.7%, decrease in average serviced mortgage loan portfolio. The Company serviced an average of $414.5 million in mortgage loans in the first three months of 2000 compared to an average of $525.8 million in the first three months of 1999. The $111.3 million reduction in average mortgage loans serviced resulted from whole loan (servicing released) sales of substantially all production in 1999 and the first quarter of 2000, as well as repayments of loans in the securitized pools. Gross gains on sale of loans increased $681,000 or 58.1%, to $1.9 million for the three months ended March 31, 2000, from $1.2 million for the three months ended March 31, 1999. In the first quarter of 2000, the Company had mortgage whole loan sales of $59.9 million and received a net premium of 3.10% compared to loan sales of $57.2 million in the first three months of 1999 in which it received a net premium of 2.05%. The higher gains in 2000 were the result of an improvement in premiums being paid by investors in the overall secondary market. The Company believes the lower premiums received in 1999 were the result of conditions in the secondary market that followed financial problems in the industry late in 1998 when several major competitors in the industry filed bankruptcy or severely curtailed their participation in the non-prime segment of the mortgage industry. Net loan fees decreased $525,000, or 54.9%, to $432,000 for the three months ended March 31, 2000 from $957,000 for the same period in 1999. These fees are recognized as income as the loans are sold. The primary reason for lower net loan fees is the reduction in the loan fees received on loans produced in late 1999 and early 2000. Fees received on loans produced through the Company's retail channel declined from 4.83% of loan production in January 1999 to a low of 2.85% in November 1999. Some of the loans with lower fees collected were sold early in 2000, resulting in lower fee income than in the first quarter of 1999. Fees received on loans originated through the retail channel have rebounded in the first quarter of 2000 to 3.96% for the month of March 2000. These fees will be recognized as fee income as the related loans are sold in subsequent periods. Other revenue increased $114,000, or 28.8%, to $510,000 for the three months ended March 31, 2000 compared to $396,000 in the first three months of 1999. The increase relates primarily to increases in fees charged on loans related to underwriting, processing and document preparation and late charges collected during the month. Total expenses increased $900,000 or 5.7%, to $16.7 million for the three months ended March 31, 2000 from $15.8 million for the same period in 1999. Total expenses are comprised of interest expense, provision for credit losses, cost of real estate loans and defaulted loans, fair value adjustments of residual receivables, salaries, wages and employee benefits, business development costs, and other general and administrative expenses. The increased expenses are due largely to the provision for loan losses, fair value adjustments on residual receivables, and increases in advertising and marketing costs, partially offset by lower personnel and other costs. Interest expense decreased $800,000 or 16.7%, to $4.0 million for the three months ended March 31, 2000 from $4.8 million for the three months ended March 31, 1999. The decrease in interest expense was due principally to the reduction in the outstanding balance of the company's senior unsecured debt. The Company reduced the outstanding debt from $51.3 million at March 31, 1999 to $11.7 million at March 31, 2000. The debt pays interest at 10.75%. This decrease in interest expense was partially offset by higher expense related to increases in borrowings under the warehouse line of credit. Average outstanding balances under the warehouse line of credit were approximately $3.4 million during the first quarter of 1999, and approximately $30.6 million average outstanding during 2000. Provision for credit losses increased $909,000, to $990,000 for the three months ended March 31, 2000 from $81,000 for the same period in 1999. The increase in the required provision was the result of management's decision in mid 1999 to have additional reserves against amounts paid on behalf of borrowers for taxes, insurance, and attorney's fees, combined with an increase in the outstanding retained portfolio during the first quarter of 2000 versus decreases in the average loan portfolio during the first quarter of 1999. The Company incurred lower charge- 20 offs in 2000 compared to 1999. For the first quarters of 2000 and 1999, the Company charged-off $446,000 and $589,000, respectively, of mortgage loans Fair value adjustments to the residual receivables increased $1.1 million to $1.1 million in the first three months of 2000 from a credit adjustment of $53,000 in the first three months of 1999. The $1.1 million expense in 2000 includes losses on real estate owned in the pools of $798,000, adjustments to the value to real estate repurchased out of the pools in the amount of $200,000 and write-offs of funds advanced on loans in the pools of $178,000. Total general and administrative expense, including salaries, business development costs and other expenses, decreased $553,000, or 5.5%, to $9.6 million for the three months ended March 31, 2000, from $10.1 million for the same period in 1999. This resulted primarily because salaries, wages and employee benefits decreased $758,000, or 13.4%, to $4.9 million for the three months ended March 31, 2000, from $5.7 million for the same period in 1999. Personnel costs decreased due to a decrease in the average number of full-time equivalent employees ("FTE") from 420 in the first quarter of 1999 to 391 in the first quarter of 2000, as well as a decrease in the cost of health care plans provided by the company. The Company is self-insured, and average claims paid per FTE decreased from $475 per FTE per month in the first quarter of 1999 to $304 per FTE per month in 2000. Business development costs increased to $1.8 million in 2000 from $1.2 million for the first three months of 1999 due to increases in direct mail costs and due to establishment of a telemarketing program as a source of leads for the retail production channel. Other general and administrative expenses also declined $445,000, or 13.7%, to $2.8 million in the 2000 period compared to $3.3 million in the 1999 period. The primary reasons for the reductions are decrease in loan origination costs as the Company attempts to streamline its processes and reduce costs, as well as reductions in temporary and other contract labor. The Company has recorded current tax expense of $145,000 and $450,000 for the three months ended March 31, 2000 and 1999, respectively, even though the Company generated a pre-tax loss before extraordinary item for both periods. The current tax expense results from "excess inclusion income." Excess inclusion income is a result of the Company securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss from operations. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The extraordinary gain on the extinguishment of debt (discussed below) is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in income tax expense. In the first quarters of 2000 and 1999, the Company recorded an extraordinary gain on the extinguishment of debt of $226,000 and $16.9 million, respectively, related to the repurchase of $430,000 and $35.3 million, respectively, of its Senior Notes. The purchase price of the Senior Notes was $204,000 and $17.3 million, or 47.4% and 49.0%, respectively, of face value. FINANCIAL CONDITION Net loans receivable increased $22.0 million to $78.6 million at March 31, 2000 from $56.6 million at December 31, 1999. The increase in net loans receivable resulted primarily from increased production during the first 3 months of 2000. Average monthly loan production in 2000 to date is $28.0 million versus average monthly loan production of $19.5 million in 1999. The residual receivables were $46.6 million at March 31, 2000, and $47.8 million at December 31, 1999. This decrease resulted primarily from the amortization of the residual asset. Net property and equipment decreased by $571,000 to $16.6 million at March 31, 2000, from $17.2 million at December 31, 1999. This decrease resulted primarily from the depreciation expense. Real estate acquired in foreclosure decreased $889,000 to $6.8 million at March 31, 2000, from $7.7 million at December 31, 1999. The primary sources for funding the Company's receivables are borrowings issued under various credit arrangements (including the Credit Facilities, CII Notes, and the Company's Senior Notes) and the sale of loans. At March 31, 2000, the Company had debt outstanding under revolving warehouse lines of credit to banks of $35.2 million, which compares with $17.8 million at December 31, 1999. At March 31, 2000, the Company had $148.6 million of CII Notes and subordinated debentures outstanding, which compares with $144.8 million at December 31, 1999, for an increase of $3.8 million. 21 The aggregate principal amount of outstanding Senior Notes was $11.7 million at March 31, 2000 compared to $12.1 million on December 31, 1999. In the three months ended March 31, 2000, the Company purchased $430,000 of its Senior Notes for a purchase price of $204,000. The Company may, from time to time, purchase more of its Senior Notes depending on the Company's cash availability, market conditions, and other factors. Total shareholders' equity at March 31, 2000 was a deficiency of $2.0 million, compared to equity of $7.8 million at December 31, 1999, a decrease of $9.9 million. This decrease resulted principally from net losses of $10.1 million for the three months ended March 31, 2000, partially offset by the $226,000 extraordinary item from the gain on extinguishment of debt. In connection with the merger with HomeSense, which was effective May 9, 2000, the Company issued 6,780,944 shares of its common stock in addition to 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share), which increases the Company's shareholders' equity by approximately $17.1 million. ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE The Company is exposed to the risk of loan delinquencies and defaults with respect to loans retained in its portfolio. With respect to loans to be sold on a non-recourse basis, the Company is at risk for loan delinquencies and defaults on such loans while they are held by the Company pending such sale. To provide for credit losses, the Company charges against current earnings an amount necessary to maintain the allowance for credit losses at levels expected to cover inherent losses in loans receivable. The table below summarizes certain information with respect to the Company's allowance for credit losses on the owned portfolio for each of the periods indicated. SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON OWNED PORTFOLIO
AT AND FOR THE THREE MONTHS ENDED AT AND FOR THE YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------- 2000 1999 1998 1997 ------------ ------------ ----------- ------------ (IN THOUSANDS) Allowance for credit losses at beginning of period $ 6,344 $ 6,659 $ 6,528 $ 3,084 Net charge-offs (445) (3,654) (8,791) (5,166) Provision charged to expense 990 3,339 11,905 10,030 Write-down of allowance due to sale of receivables -- -- (2,983) -- Securitization transfers -- -- -- (1,420) ------------ ----------- ----------- ------------ Allowance for credit losses at end of the period $ 6,889 $ 6,344 $ 6,659 $ 6,528 ============ =========== =========== ============
The Company considers its allowance for credit losses at March 31, 2000 to be adequate in view of the Company's improving loss experience and the secured nature of most of the Company's outstanding loans. The Company's allowance for loan loss as a percentage of gross loans was 8.0% at March 31, 2000 and 10.0% at December 31, 1999. Included in the allowance for credit losses is $3.3 million of allowance on commercial loans at March 31, 2000 and at December 31, 1999. The percentage of mortgage loans past due 30 days or more declined to 9.7% at March 31, 2000 compared to 12.4% at December 31, 1999. The Company incurred net charge-offs of $446,000 in the first quarter of 2000 compared to $589,000 in net charge-offs in the first quarter of 1999. Although management considers the allowance appropriate and adequate to cover inherent losses in the loan portfolio, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for possible credit losses will not be required. 22 The table below summarizes certain information with respect to the Company's allowance for losses on the securitization residual assets for each of the periods indicated. SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS
AT AND FOR THE THREE MONTHS ENDED AT AND FOR THE YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------- 2000 1999 1998 1997 ------------ ------------ ----------- ------------ (IN THOUSANDS) RESIDUAL RECEIVABLES: Allowance for losses at beginning of period $ 7,176 $ 7,165 $ 14,255 $ 1,202 Net charge-offs -- (33) (147) (1,645) Anticipated losses netted against gain -- 1,266 2,242 13,278 Gain (loss) on sale of securitized REO (796) (1,628) -- -- Mark-to-market adjustment 439 406 (6,228) -- Allowance transferred from (to) owned portfolio -- -- -- 1,420 Sale of small-business residual assets -- -- (2,957) -- ------------- ------------ ----------- ----------- Allowance for losses at the end of the period $ 6,819 $ 7,176 $ 7,165 $ 14,255 ============= ============ =========== ===========
The value of the residual receivables retained by the Company would be impaired to the extent losses on the securitized loans exceed the amount estimated when determining the residual cash flows. The table below summarizes the Company's allowance for credit losses with respect to the Company's total combined serviced portfolio (including both owned and securitized loan pools) for each of the periods indicated. SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON COMBINED SERVICED PORTFOLIO
AT AND FOR THE THREE MONTHS ENDED AT AND FOR THE YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------- 2000 1999 1998 1997 ------------ ------------ ----------- ------------ (IN THOUSANDS) Allowance for credit losses at beginning of period $ 13,520 $ 13,824 $ 20,783 4,286 Net charge-offs (445) (3,687) (8,938) (6,811) Gain (loss) on sale of securitized REO (796) (1,628) -- -- Provision charged to expense 990 3,339 11,905 10,030 Anticipated losses netted against gain -- 1,266 2,242 13,278 Mark-to-market adjustment 439 406 (6,228) -- Write-down of allowance due to sale of loans receivable -- -- (2,983) -- Sale of small-business residual asset -- -- (2,957) -- ------------ ----------- ----------- ----------- Allowance for credit losses at the end of the period $ 13,708 $ 13,520 $ 13,824 $ 20,783 ============ =========== =========== =========== Allowance as a % of total serviced unguaranteed portfolio 3.30% 3.23% 2.48% 2.60% Annualized net charge-offs as a % of average serviced unguaranteed portfolio 0.43% 0.76% 1.08% 1.38% The total allowance for credit losses as shown on the balance sheet is as follows: Allowance for credit losses on loans receivable $ 6,889 $ 6,344 $ 6,659 6,528 Allowance for credit losses on residual receivable 6,819 7,176 7,165 14,255 ------------ ----------- ----------- ----------- Total allowance for credit losses $ 13,708 $ 13,520 $ 13,824 20,783 ============ =========== =========== ===========
23 Management closely monitors delinquencies to measure the quality of its loan portfolio and securitized loans and the potential for credit losses. Accrual of interest is discontinued when a loan is either over 90 days past due, or the collateral is determined to be inadequate, or when foreclosure proceedings begin. Collection efforts on charged-off loans continue until the obligation is satisfied or until it is determined that such obligation is not collectible or the cost of continued collection efforts would exceed the potential recovery. Recoveries of previously charged-off loans are credited to the allowance for credit losses. The following sets forth delinquencies as a percentage of the total serviced portfolio for the periods indicated.
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 1997 ---------------- -------------- -------------- ---------------- (Dollars in thousands) Loans past due 30-59 days $ 11,000 $ 16,461 $ 28,174 $ 29,174 As a % of total serviced portfolio 2.71 % 4.03 % 5.05 % 3.65 % Loans past due 60-89 days $ 3,792 $ 5,325 $ 8,647 $ 10,009 As a % of total serviced portfolio 0.94 % 1.30 % 1.55 % 1.25 % Loans past due 90+ days $ 24,552 $ 28,997 $ 38,109 $ 22,147 As a % of total serviced portfolio 6.06 % 7.10 % 6.84 % 2.76 % Total loans past due $ 39,344 $ 50,783 $ 74,930 $ 61,330 As a % of total serviced portfolio 9.71 % 12.43 % 13.44 % 7.66 %
Management monitors securitized pool delinquencies using a static pool analysis by month by pool balance. Current year results are not necessarily indicative of future performance. The following sets forth the static pool analysis for delinquencies by month in the Company's securitized mortgage loan pools.
CURRENT PRINCIPAL BALANCE - -------------------------------------------------------------------------------------------------------------------------------- MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 - -------------------------------------------------------------------------------------------------------------------------------- 1 $ 77,435,632 $ 120,860,326 $ 130,917,899 $ 118,585,860 $ 62,726,105 $ 59,219,199 2 $ 77,405,312 $ 120,119,653 $ 169,093,916 $ 118,061,792 $ 62,300,302 $ 57,977,700 3 $ 76,709,417 $ 119,364,510 $ 168,182,957 $ 148,291,454 $ 61,609,815 $ 57,201,142 4 $ 75,889,160 $ 118,965,905 $ 166,783,489 $ 146,880,279 $ 60,768,433 $ 56,168,578 5 $ 75,395,969 $ 117,238,693 $ 165,608,534 $ 145,775,696 $ 59,347,948 $ 55,351,358 6 $ 74,630,019 $ 115,870,168 $ 164,084,260 $ 144,465,651 $ 58,739,309 $ 54,561,477 7 $ 73,149,957 $ 113,537,447 $ 161,880,416 $ 143,048,555 $ 57,829,352 $ 53,610,555 8 $ 72,261,386 $ 112,100,397 $ 158,220,175 $ 140,482,698 $ 56,918,186 $ 52,592,079 9 $ 71,342,842 $ 110,468,401 $ 155,854,981 $ 137,318,432 $ 55,894,240 $ 51,544,836 10 $ 70,195,198 $ 107,887,242 $ 153,193,421 $ 134,991,772 $ 54,887,268 $ 50,557,441 11 $ 68,981,147 $ 105,138,088 $ 148,382,102 $ 131,582,081 $ 53,817,889 $ 49,432,647 12 $ 67,149,553 $ 102,142,062 $ 144,556,568 $ 129,029,429 $ 52,813,707 13 $ 65,705,603 $ 98,876,084 $ 140,265,621 $ 125,457,545 $ 51,834,618 14 $ 63,210,889 $ 95,394,444 $ 136,583,138 $ 121,706,895 $ 50,355,268 15 $ 60,052,314 $ 92,501,939 $ 133,252,925 $ 118,983,067 $ 49,261,441 16 $ 58,133,496 $ 89,402,897 $ 129,792,748 $ 116,012,173 $ 48,013,883 17 $ 56,900,372 $ 83,793,933 $ 127,118,396 $ 112,424,165 $ 46,682,595 18 $ 55,154,969 $ 81,637,626 $ 124,262,781 $ 109,695,150 $ 45,808,180 19 $ 50,852,179 $ 79,392,938 $ 119,512,141 $ 107,288,894 $ 44,422,122 20 $ 49,702,926 $ 77,843,648 $ 116,408,786 $ 104,842,028 $ 43,821,316 21 $ 48,629,373 $ 76,319,392 $ 113,506,699 $ 101,806,498 $ 42,973,221 22 $ 45,780,152 $ 74,512,970 $ 108,064,086 $ 98,013,963 $ 41,901,327 23 $ 44,612,888 $ 71,644,155 $ 104,734,353 $ 95,627,417 $ 41,054,409 24 $ 43,845,616 $ 69,074,182 $ 101,605,131 $ 92,702,818 $ 39,983,743 25 $ 42,879,623 $ 66,456,654 $ 98,057,107 $ 89,450,634 $ 38,501,039 26 $ 40,453,030 $ 63,909,211 $ 94,776,180 $ 87,745,088 27 $ 38,939,475 $ 61,789,775 $ 91,621,984 $ 85,848,197 28 $ 38,094,550 $ 59,776,201 $ 88,960,343 $ 83,961,093 29 $ 37,287,522 $ 56,901,545 $ 87,513,930 30 $ 36,315,115 $ 55,673,168 $ 84,993,550 31 $ 35,921,142 $ 54,358,523 $ 82,761,581 32 $ 34,976,083 $ 53,498,302 33 $ 33,841,626 $ 52,449,253 34 $ 33,114,404 $ 50,659,884 35 $ 32,042,753 36 $ 31,308,902 37 $ 30,544,226
24
DELINQUENCIES > 30 DAYS PAST DUE - --------------------------------------------------------------------------------------------------------------------------------- MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 - --------------------------------------------------------------------------------------------------------------------------------- 1 $ 0 $ 515,954 $ 609,201 $ 402,972 $ 44,600 $ 1,466,076 2 $ 1,499,056 $ 1,631,017 $ 2,042,757 $ 2,132,028 $ 1,223,964 $ 3,134,425 3 $ 1,931,761 $ 3,930,423 $ 4,498,266 $ 5,049,035 $ 2,013,525 $ 2,438,937 4 $ 3,760,774 $ 5,399,569 $ 8,546,414 $ 7,290,097 $ 3,872,888 $ 2,434,471 5 $ 5,220,385 $ 7,293,856 $ 12,337,604 $ 10,290,987 $ 3,825,651 $ 2,662,519 6 $ 5,849,574 $ 9,790,732 $ 13,432,454 $ 13,459,369 $ 5,199,587 $ 2,804,957 7 $ 6,777,962 $ 11,933,526 $ 15,076,729 $ 12,443,357 $ 6,248,301 $ 3,115,273 8 $ 8,078,783 $ 12,484,893 $ 17,745,496 $ 13,861,088 $ 5,983,226 $ 3,351,500 9 $ 8,528,559 $ 12,471,739 $ 18,099,411 $ 16,777,959 $ 6,591,674 $ 3,512,716 10 $ 10,008,415 $ 11,304,455 $ 16,680,011 $ 19,050,239 $ 6,317,098 $ 3,579,689 11 $ 10,728,125 $ 12,630,402 $ 18,929,917 $ 18,524,292 $ 5,701,474 $ 2,689,907 12 $ 9,257,295 $ 14,540,910 $ 21,295,026 $ 18,470,254 $ 5,950,145 13 $ 9,578,031 $ 12,933,959 $ 22,303,472 $ 18,645,129 $ 5,705,994 14 $ 10,757,672 $ 12,674,148 $ 21,746,520 $ 17,059,730 $ 5,287,678 15 $ 9,401,614 $ 14,212,157 $ 23,240,338 $ 15,698,435 $ 6,297,465 16 $ 8,127,303 $ 14,386,886 $ 22,031,312 $ 16,318,099 $ 6,255,440 17 $ 8,227,263 $ 11,723,546 $ 19,672,481 $ 15,292,242 $ 6,342,927 18 $ 8,708,963 $ 11,171,133 $ 18,472,732 $ 15,132,124 $ 7,150,420 19 $ 7,349,210 $ 12,018,899 $ 18,243,184 $ 15,706,290 $ 6,380,174 20 $ 7,217,783 $ 11,810,332 $ 18,119,731 $ 16,301,760 $ 6,080,991 21 $ 7,120,727 $ 11,040,206 $ 18,038,082 $ 15,464,631 $ 6,103,461 22 $ 6,661,879 $ 10,286,947 $ 16,452,727 $ 14,333,343 $ 6,165,388 23 $ 6,511,325 $ 10,414,360 $ 16,055,129 $ 15,895,532 $ 5,571,022 24 $ 6,250,278 $ 8,906,082 $ 15,924,085 $ 14,232,856 $ 5,290,607 25 $ 6,276,717 $ 9,514,340 $ 15,482,673 $ 13,162,282 $ 4,817,659 26 $ 5,442,995 $ 8,806,693 $ 15,438,560 $ 12,180,657 27 $ 4,900,780 $ 8,262,250 $ 14,301,848 $ 12,737,934 28 $ 6,106,097 $ 8,642,371 $ 13,359,698 $ 11,694,987 29 $ 4,982,511 $ 6,969,409 $ 13,659,548 30 $ 5,346,769 $ 7,939,953 $ 11,918,981 31 $ 5,756,594 $ 7,790,662 $ 10,833,705 32 $ 4,972,092 $ 6,957,167 33 $ 4,995,142 $ 6,445,310 34 $ 4,944,931 $ 6,168,132 35 $ 3,900,531 36 $ 3,884,396 37 $ 3,242,843
Included in the principal balances and delinquency amounts at March 31, 2000 and December 31, 1999 are $5.9 million and $4.7 million, respectively, of real estate acquired through foreclosure. 25
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE - --------------------------------------------------------------------------------------------------------------------- MONTHS FROM POOL INCEPTION 1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 AVERAGE - --------------------------------------------------------------------------------------------------------------------- 1 0.00 % 0.43 % 0.47 % 0.34 % 0.07 % 2.48 % 0.63 % 2 1.94 % 1.36 % 1.21 % 1.81 % 1.96 % 5.41 % 2.28 % 3 2.52 % 3.29 % 2.67 % 3.40 % 3.27 % 4.26 % 3.24 % 4 4.96 % 4.54 % 5.12 % 4.96 % 6.37 % 4.33 % 5.05 % 5 6.92 % 6.22 % 7.45 % 7.06 % 6.45 % 4.81 % 6.49 % 6 7.84 % 8.45 % 8.19 % 9.32 % 8.85 % 5.14 % 7.96 % 7 9.27 % 10.51 % 9.31 % 8.70 % 10.80 % 5.81 % 9.07 % 8 11.18 % 11.14 % 11.22 % 9.87 % 10.51 % 6.37 % 10.05 % 9 11.95 % 11.29 % 11.61 % 12.22 % 11.79 % 6.81 % 10.95 % 10 14.26 % 10.48 % 10.89 % 14.11 % 11.51 % 7.08 % 11.39 % 11 15.55 % 12.01 % 12.76 % 14.08 % 10.59 % 5.44 % 11.74 % 12 13.79 % 14.24 % 14.73 % 14.31 % 11.27 % 13.67 % 13 14.58 % 13.08 % 15.90 % 14.86 % 11.01 % 13.89 % 14 17.02 % 13.29 % 15.92 % 14.02 % 10.50 % 14.15 % 15 15.66 % 15.36 % 17.44 % 13.19 % 12.78 % 14.89 % 16 13.98 % 16.09 % 16.97 % 14.07 % 13.03 % 14.83 % 17 14.46 % 13.99 % 15.48 % 13.60 % 13.59 % 14.22 % 18 15.79 % 13.68 % 14.87 % 13.79 % 15.61 % 14.75 % 19 14.45 % 15.14 % 15.26 % 14.64 % 14.36 % 14.77 % 20 14.52 % 15.17 % 15.57 % 15.55 % 13.88 % 14.94 % 21 14.64 % 14.47 % 15.89 % 15.19 % 14.20 % 14.88 % 22 14.55 % 13.81 % 15.22 % 14.62 % 14.71 % 14.58 % 23 14.60 % 14.54 % 15.33 % 16.62 % 13.57 % 14.93 % 24 14.26 % 12.89 % 15.67 % 15.35 % 13.23 % 14.28 % 25 14.64 % 14.32 % 15.79 % 14.71 % 12.51 % 14.39 % 26 13.46 % 13.78 % 16.29 % 13.88 % 14.35 % 27 12.59 % 13.37 % 15.61 % 14.84 % 14.10 % 28 16.03 % 14.46 % 15.02 % 13.93 % 14.86 % 29 % 14.33 % 15.61 % 13.74 % 13.36 30 14.72 % 14.26 % 14.02 % 14.34 % 31 16.03 % 14.33 % 13.09 % 14.48 % 32 14.22 % 13.00 % 13.61 % 33 14.76 % 13.29 % 13.52 % 34 14.93 % 12.18 % 13.55 % 35 12.17 % 12.17 % 36 12.41 % 12.41 % 37 10.62 % 10.62 % Actual Historical Life to Date Prepayment Speed 23.5 % 24.0 % 22.6 % 20.7 % 19.7 % 17.1 % 22.5 %
LIQUIDITY AND CAPITAL RESOURCES The Company's business requires continued access to short- and long-term sources of debt financing and equity capital. As a result of increases in loan production and incurred operating expenses in excess of operating income, the Company experienced a $39.0 million net use of cash from operating activities in the first quarter of 2000. Although the Company's goal is to achieve a positive cash flow each quarter, no assurance can be given that this objective will be obtained due to the higher level of cash required to fund the loans purchased and originated. Currently, the Company's primary operating cash uses include the funding of (i) loan originations and purchases pending their securitization or sale, (ii) interest expense on CII investor savings notes, senior unsecured debt and its revolving warehouse credit facilities ("Credit Facilities"), (iii) fees, expenses, overcollateralization and tax payments incurred in connection with the securitization program and (iv) ongoing general and administrative and other operating expenses. The Company's primary operating sources of cash are (i) cash gains from whole-loan mortgage loan sales, (ii) cash payments of contractual and ancillary servicing revenues received by the Company in its capacity as servicer for securitized loans, (iii) interest income on loans receivable and certain cash balances, (iv) fee income received in connection with its retail mortgage loan originations, (v) excess cash flow received in each period with respect to residual receivables, and (vi) borrowings under warehouse lines of credit. The Company believes that additional sources of funds are needed to meet its future liquidity requirements, and no assurance can be given that these additional sources of funds can be attained. 26 The Company overcollateralizes loans as a credit enhancement on the mortgage loan securitization transactions. This requirement creates negative cash flows in the year of securitization. The Company decided to securitize only seasoned first and second mortgages in the second quarter of 1999, and to conduct whole loan sales for the remainder of the year. The Company plans to continue whole loan selling its production throughout 2000. This strategy is designed to maximize liquidity. Cash flow is also enhanced by the generation of loan fees in its retail mortgage loan operation and the utilization of a wholesale loan origination strategy whereby loans are generally funded at par, rather than at the significant premiums typically associated with a correspondent-based strategy. However, in 1999, the Company began paying some yield spread premiums as a way to increase its wholesale production. The table below summarizes cash flows provided by and used in operating activities by quarter in 2000, 1999 and for the years ended December 31, 1999 and 1998:
YEAR YEAR 1ST QTR 4TH QTR 3RD QTR 2ND QTR 1ST QTR ENDED ENDED 2000 1999 1999 1999 1999 1999 1998 --------- ---------- --------- --------- --------- --------- --------- (IN THOUSANDS) OPERATING CASH INCOME: Servicing fees received and excess cash flow from securitization trusts $ 2,651 $ 3,269 $ 4,044 $ 3,975 $ 4,334 $ 15,622 $ 16,548 Interest received 1,977 1,795 1,896 2,214 3,570 9,475 36,127 Cash gain on sale of loans 1,854 1,878 1,926 1,500 1,173 6,477 1,343 Cash loan origination fees received 1,327 819 1,097 1,507 1,418 4,841 18,255 Other cash income 510 450 409 222 528 1,609 5,388 --------- --------- --------- --------- --------- --------- --------- Total operating cash income 8,319 8,211 9,372 9,418 11,023 38,024 77,661 OPERATING CASH EXPENSES: Securitization costs -- -- -- (593) -- (593) (851 Cash operating expenses (10,001) (8,611) (8,879) (9,421) (10,545) (37,456) (99,551 Interest paid (4,183) (3,169) (4,848) (3,215) (7,459) (18,691) (37,519 Taxes paid 104 771 (1) (893) (155) (278) (2,515 --------- --------- --------- --------- --------- --------- --------- Total operating cash expenses (14,080) (11,009) (13,728) (14,122) (18,159) (57,018) (140,436 CASH FLOW (DEFICIT) DUE TO OPERATING CASH INCOME AND EXPENSES (5,761) (2,798) (4,356) (4,704) (7,136) (18,994) (62,775 CASH REVENUES TO CASH EXPENSES RATIO 59% 75% 68% 67% 61% 67% 55 OTHER CASH FLOWS: Cash provided by (used in) other payables and receivables (5,503) 2,906 (3,603) (11,866) 4,822 (7,741) (12,541 Cash provided by (used in) loans held for sale (27,754) (5,185) (5,703) 44,646 193 33,951 123,674 Cash provided from sale of residual receivables -- -- -- -- -- -- 16,958 Cash gain on sale of subsidiary assets -- -- -- -- -- -- 18,964 --------- --------- --------- --------- --------- --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (39,018) $ (5,077) $ (13,662) $ 28,076 $ (2,121) $ 7,216 $ 84,280 ========= ========= ========= ========= ========= ========= =========
Certain previously reported amounts have been reclassified to conform to current year presentation. Cash and cash equivalents were $13.1 million at March 31, 2000, and $26.0 million at December 31, 1999. Cash used in operating activities was $39.0 million for the three months ended March 31, 2000, compared to $2.1 million for the three months ended March 31, 1999; cash provided by investing activities was $5.1 million for the three months ended March 31, 2000 compared to $9.9 million for the three months ended March 31, 1999; and cash provided by financing activities was $21.0 million for the three months ended March 31, 2000 compared to cash used in financing activities of $28.0 million for the three months ended March 31, 1999. At March 31, 2000, the Company had a $100.0 million warehouse line of credit with CIT Group/Business Credit, Inc. ("CIT") to fund its Mortgage Loan originations. Based on the borrowing base limitations contained in the credit facility at March 31, 2000 and at December 31, 1999, the Company had aggregate outstanding borrowings of $35.2 million and $17.8 million, respectively, and aggregate borrowing availability of $5.0 million and $1.1 million, respectively. The credit facility bears interest at prime rate plus 0.75%. The credit facility matures on June 30, 2001. The credit facility contains certain covenants, including, but not limited to, covenants that impose limitations on the Company and its subsidiaries with respect to declaring or paying dividends and minimum CII Notes outstanding and loans and advances by HGI and CII to the Company. The Company believes that it is currently in compliance with the loan covenants. (See NOTE 8 TO CONSOLIDATED FINANCIAL STATEMENTS for more information.) 27 On April 28, 2000, the shareholders of HomeGold Financial, Inc. approved a merger agreement with HomeSense Financial Corp. and affiliated companies (collectively "HomeSense"), a privately owned business, located in Columbia, South Carolina. As of the effective date of and in connection with the Company's merger with HomeSense, the terms of the Company's existing revolving line of credit was modified, and certain lines of credit of HomeSense were amended so that those lines are available to the merged entity. Following the effective date of the merger, the Company will have collective borrowing ability under the existing line of credit with CIT Group/Business Credit, Inc., of up to $50.0 million. During the remainder of 2000, the line decreases in incremental steps, based on certain criteria, decreasing to $25.0 million at December 31, 2000. The maturity date, rates of interest, advance rates, and collateral will remain the same as currently under the revolving credit agreement. The average outstanding balance on the CIT line of credit during the three months ending March 31, 2000 was $27.4 million. During the month of April 30, 2000, the average outstanding balance on the CIT line of credit was $43.7 million. The Company will need to increase the size of its warehouse lines in order to maintain sufficient operating capital to fund its anticipated loan production. In connection with the merger, the Company entered into a new $40 million revolving warehouse line of credit with Household Commercial Financial Services, Inc. The line bears interest at the Prime rate plus .25% and is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum net worth of $10,000,000 commencing August 31, 2000, a leverage ratio of less than 35 to 1, and positive consolidated net income for each quarter beginning on or after July 1, 2000. The revolving credit agreement matures on April 30, 2001. The Company is also negotiating an additional line of credit with Residential Mortgage Services of Texas ("RMST"). HomeSense had a $25.0 million warehouse facility with RMST prior to the merger, and RMST has agreed to leave this facility in place for one month in order to complete its due diligence on approving the new facility with HomeGold. The line bears interest at the Prime rate plus .75%. The agreement is structured as a purchase of the loans by RMST with a repurchase obligation by the Company. The Company also assumed an operating line of credit of $1,860,000 with Branch Banking & Trust Company ("BB&T") in connection with the merger. The line is secured by a $1.0 million certificate of deposit held by the bank. A principal payment of $500,000 is payable on May 15, 2000. Monthly principal payments of $56,667 plus interest is payable for twenty-four months beginning July 5, 2000. The line bears interest at LIBOR plus 2.5%. The Company also assumed a mortgage note of $2.0 million with Bank of America, N.A. in connection with the merger. The note matures on November 2, 2000, and bears interest at the Prime rate plus .25%. The note is secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a piece of investment property. During 1997, the Company sold $125.0 million aggregate principal amount of Senior Notes. The Senior Notes constitute unsecured indebtedness of the Company. The Senior Notes are redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. This agreement contains, among other matters, restrictions on the payment of dividends. At March 31, 2000, management believes the Company was in compliance with such restrictive covenants. The Senior Notes are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). With the exception of the Guarantee by CII, the Subsidiary Guarantees rank PARI PASSU in right of payment with all existing and future unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of such Guarantors. The Guarantee by CII is equal in priority to CII's notes payable to investors and is senior to CII's subordinated debentures. The Company purchased $74.5 million face amount of its Senior Notes in 1999 and $430,000 in the first three months of 2000. At March 31, 2000 and December 31, 1999, $11.7 million and $12.1 million in aggregate principal amount of Senior Notes were outstanding, respectively. 28 CII engages in the sale of CII Notes to investors. The CII Notes are comprised of investor notes and subordinated debentures bearing fixed rates of interest, which are sold by CII only to South Carolina residents. The offering of the CII Notes is registered under South Carolina securities law and is believed to be exempt from Federal registration under the Federal intrastate exemption. CII believes it conducts its operations so as to qualify for the safe harbor provisions of Rule 147 promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act"). At March 31, 2000 and at December 31, 1999, CII had an aggregate of $130.9 million and $127.1 million of investor notes outstanding, respectively, bearing a weighted average interest rate of approximately 7.61%, and an aggregate of $17.7 million and $17.7 million of subordinated debentures, respectively, bearing a weighted average interest rate of 5.0%. The investor notes and subordinated debentures are subordinate in priority to the credit facility. Substantially all of the CII Notes and debentures have original maturities of one or two years. Total shareholders' deficit at March 31, 2000 was $2.0 million, compared to equity of $7.8 million at December 31, 1999, a decrease of $9.9 million. This decrease resulted principally from a net loss of $9.9 million for the three months ended March 31, 2000. In connection with the merger with HomeSense, which was effective May 9, 2000, the Company issued 6,780,944 shares of its common stock in addition to 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share), which increases the Company's shareholders' equity by approximately $17.1 million. The Company's primary objective in 2000 is to ensure adequate levels of liquidity as the Company increases loan originations. The Company plans to continue to generate cash through whole loan sales. These sales will generate cash that can be used to fund operating losses, or to fund declines in investor notes that could occur. The Company plans to operate more like a mortgage banker that originates and either sells or securitizes loans, retaining only a small portfolio of loans. Management believes that, based on its present level of liquidity combined with its borrowing availability under the warehouse line of credit and the Company's merger, additional sources of operating capital will be needed to support the 2000 operating plan. The Company continually evaluates the need to establish other sources of capital and will pursue those it considers appropriate based upon its needs and market conditions. LOAN SALES AND SECURITIZATIONS The Company has historically sold or securitized substantially all of its loans. For 2000, the Company anticipates selling its production on a whole loan basis (servicing released), principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the mortgage loans. However, no assurance can be given that the mortgage loans can be sold. To the extent that the loans are not sold, the Company retains the risk of loss. For the three months ended March 31, 2000 and 1999, the Company sold $59.9 million and $57.2 million of mortgage loans, respectively. No loans were securitized in the first quarter of 1999 or 2000. The Company has utilized securitizations in previous years principally to provide a lower cost of funds and reduce interest rate risk, while building servicing revenues by increasing the serviced portfolio. In connection with its securitizations, the Company has retained interest-only residual certificates representing residual interests in the trusts created by the securitization transactions. These subordinate residual securities totaled $46.6 million and $47.8 million, net of allowances, at March 31, 2000 and December 31, 1999, respectively. In a mortgage loan securitization, the Company sells mortgage loans it purchased or originated to a trust for cash. The trust sells asset-backed bonds secured by the loans to investors. The Company records certain assets and income based upon the difference between all principal and interest received from the loans sold and the following factors (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used in past securitizations, adjusted to current market conditions, are appropriate and reasonable. 29 The Company retains the right to service loans it securitizes. Fees for servicing loans are based on a stipulated percentage (generally 0.50% per annum) of the unpaid principal balance of the associated loans. On its mortgage loan securitizations, the Company has recognized a servicing asset in addition to its gain on sale of loans. The servicing asset is calculated as the present value of the expected future net servicing income in excess of adequate compensation for a substitute servicer, based on common industry assumptions and the Company's historical experience. These factors include default and prepayment speeds. For the six mortgage securitizations completed to date, the servicing asset recorded represents a 10 basis point strip of cash flows from the stipulated servicing percentage. The following sets forth facts and assumptions used by the Company in arriving at the valuation of the residual receivables relating to its mortgage loan securitizations at March 31, 2000:
1997-1 1997-2 1997-3 1997-4 1998-1 1999-1 ------------ ------------ ------------ ----------------------------------------- Outstanding balance of loans securitized $30,554,226 $50,659,884 $82,761,581 $83,961,093 $38,501,039 $49,432,647 Average stated principal balance 56,774 54,767 62,603 62,286 61,016 46,329 Weighted average coupon on loans 10.83% 10.65% 11.05% 10.95% 10.78% 10.98% Weighted average remaining term to stated maturity 170 mths 170 mths 174 mths 178 mths 188 mths 200 mths Weighted average LTV 76% 71.7% 74.8% 74.6% 75.4% 70.8% Percentage of first mortgage loans 100% 100% 100% 100% 100% 84.22% Weighted average pass-through rate to bondholders 7.61% 7.19% 7.07% 6.81% 6.64% 6.84% Assumed annual losses 0.60% 0.60% 0.60% 0.60% 0.60% 0.87% Remaining ramp period for losses 0 mths 0 mths 0 mths 0 mths 0 mths 8 mths Assumed cumulative losses as a % of UPB 1.93% 1.90% 1.90% 1.89% 1.87% 2.82% Annual servicing fee 0.50% 0.50% 0.50% 0.50% 0.50% 0.56% Servicing asset 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% Discount rate applied to cash flow after overcollateralization 12% 12% 12% 12% 12% 12% Prepayment speed: Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR 24 HEP Peak CPR (1) 28 CPR 28 CPR 28 CPR 28 CPR 28 CPR 24 HEP Tail CPR (1) 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 26/24 CPR 24 HEP CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths 24 HEP CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths 24 HEP CPR tail begins (1) 37/49 mths 37/49mths 37/49 mths 37/49 mths 37/49 mths 24 HEP Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185% 0.265% Initial overcollateralization required (2) 3.25% -- -- -- -- 9.5% Final overcollateralization required (2) 6.5% 3.75% 3.75% 3.75% 3.75% 13.5%
(1) CPR represents an industry standard of calculating prepayment speeds and refers to Constant Prepayment Rate. For its first five securitization pools, the Company uses a curve based on various CPR levels throughout the pool's life, based on its estimate of prepayment performance, as outlined in the table above. For the 1999-1 transaction the Company uses a 24 HEP (Home Equity Prepayment) curve. This curve, developed by Prudential Securities, ramps to the terminal CPR (in this case, 24%) over ten months and then remains constant for the life of the pool. (2) Based on percentage of original principal balance, subject to step-down provisions after 30 months. Each of the Company's mortgage loan securitizations have been credit-enhanced by an insurance policy provided through a monoline insurance company such that the senior certificates have received ratings of "Aaa" from Moody's Investors Services, Inc. ("Moody's") and "AAA" from Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). The Company generally expects to begin receiving excess cash flow on its mortgage loan securitizations approximately 16 months from the date of securitization, although this time period may be shorter or longer depending upon the securitization structure and performance of the loans securitized. Prior to such time, the monoline insurer requires a reserve provision to be created within the securitization trust which uses Excess Cash Flow to retire the securitization bond debt until the spread between the outstanding principal balance of the loans in the securitization trust and the securitization bond debt equals a specified percentage (depending on the structure of the securitization) of the initial securitization principal balance (the "overcollateralization limit"). Once this overcollateralization limit is met, excess cash flows are distributed to the Company. The Company begins to receive regular monthly servicing fees in the month following securitization. The gains recognized into income resulting from securitization transactions vary depending on the assumptions used, the specific characteristics of the underlying loan pools, and the structure of the transaction. The Company believes the assumptions it has used are appropriate and reasonable. 30 The Company assesses the carrying value of its residual receivables and servicing assets for impairment. There can be no assurance that the Company's estimates used to determine the gain on sale of loans, residual receivables, and servicing assets valuations will remain appropriate for the life of each securitization. If actual loan prepayments or defaults exceed the Company's estimates, the carrying value of the Company's residual receivables and/or servicing assets may be decreased through a charge against earnings in the period management recognizes the disparity. Conversely, if actual loan prepayments or defaults are better than the Company's estimates, the carrying value of the Company's residual receivables and/or servicing assets may be increased, with additional earnings recognized in the period management recognizes the disparity. ACCOUNTING CONSIDERATIONS In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES". All derivatives are to be measured at fair value and recognized in the balance sheet as assets or liabilities. This statement's effective date was delayed by the issuance of SFAS 137, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS 133", and is effective for fiscal years and quarters beginning after June 15, 2000. The Company does not expect that the adoption of SFAS 137 will have a material impact on the presentation of the Company's financial results or financial position. Accounting standards that have been issued by the FASB that will not require adoption until a future date and will impact the preparation of the financial statements will not have a material effect upon adoption. TAX CONSIDERATIONS As a result of operating losses incurred by the Company, the Company has net operating losses ("NOL") that can be used to offset future earnings. Federal tax laws provide that net operating loss carryforwards are restricted or eliminated upon certain changes of control. Applicable federal tax laws provide that a 50% "change of control," which is calculated over a rolling three-year period, would cause the loss of substantially all of the NOL. The Company believes its maximum cumulative change of control during the relevant three-year period was less than 50%. The Company's net deferred tax asset was $12.0 million at both March 31, 2000 and December 31, 1999. The amount of the deferred tax asset is deemed appropriate by management based on its belief that it is more likely than not that it will realize the benefit of this deferred tax asset, given the levels of historical taxable income and current projections for future taxable income over the periods in which the deferred tax asset would be realized. Should the Company deem that the realization of the benefit of the deferred tax asset is unlikely, then, the asset would need to be adjusted to net realizable value. The Company had a federal NOL of approximately $74.3 million at March 31, 2000. The current tax expense results from "excess inclusion income." Excess inclusion income is a result of the Company securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss from operations. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The extraordinary gain on the extinguishment of debt (discussed below) is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in income tax expense. 31 HEDGING ACTIVITIES The Company's profitability may be directly affected by fluctuations in interest rates. While the Company monitors interest rates it may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. While no hedging strategy is currently being utilized, the Company's interest rate hedging strategy may include shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements. Since the interest rates on the Company's warehouse line of credit used to fund and acquire loans is variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale could have a material adverse effect on the Company's results of operations and financial condition. The ultimate sale of the Company's loans generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. Without hedging these loans, increases in interest rates prior to sale of the loans may reduce the gain on sale or securitization of loans earned by the Company. There were no significant open hedging positions at either March 31, 2000 or December 31, 1999. IMPACT OF INFLATION Inflation affects the Company most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates that affect the Company's ability to earn a spread between interest received on its loans and the costs of its borrowings. The profitability of the Company is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the ability of the Company to originate and purchase loans and affect the mix of first and second-lien mortgage loan products. Generally, first-lien mortgage production increases relative to second-lien mortgage production in response to low interest rates and second-lien mortgage production increases relative to first-lien mortgage production during periods of high interest rates. A significant decline in interest rates could decrease the size of the Company's loan servicing portfolio by increasing the level of loan prepayments. Additionally, to the extent servicing rights and residual receivables have been capitalized on the books of the Company, higher than anticipated rates of loan prepayments or losses could require the Company to write down the value of such servicing rights and residual receivables, adversely impacting earnings. Fluctuating interest rates may also affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sales and the interest paid by the Company for funds borrowed under the Company's warehouse line of credit. THE MERGER The Company has entered into a Reorganization Agreement dated as of February 29, 2000 as amended by an Amendment #1 dated March 10, 2000, an Amendment #2 dated May 1, 2000 and an Amendment #3 dated May 9, 2000 with HomeSense Financial Corp., a South Carolina corporation headquartered in Lexington, South Carolina and certain of its affiliates (collectively "HomeSense"), whereby HomeSense will be merged with and into HomeGold Financial, Inc.'s subsidiary, HomeGold, Inc. (the "Merger"). In connection with the Merger, the Company issued to HomeSense shareholders 6,780,944 of HomeGold common stock valued at $1.04 per share using the average closing price over the 60-day period preceding the merger date plus 10,000,000 shares of Series A Non-convertible Preferred Stock (par value $1 per share). In connection with the Merger, the Company also expects to issue a five year warrant to purchase 250,000 shares of common stock of HomeGold at an exercise price of $1.50 per share to Raymond James, and options to purchase 825,423 shares of Common Stock at $1.75 per share to Mr. Sheppard as part of his employment contract. The Merger was approved by the Company's shareholders at the annual meeting on April 28, 2000. However, as of May 1, 2000, Amendment #2 to the merger agreement effected the following changes: o The equity requirement of HomeSense at the time of closing has been reduced from $3,373,233 to $2,373,233. o The Voting Agreement requirement has been deleted in its entirety. o The employment agreement has been amended to include an "additional bonus" section, indicating that a quarterly cash bonus in the amount of $200,000 will be paid to Mr. Sheppard as long as the Company's 10.75% Senior Notes due 2004 are outstanding, and the terms of the Series A Non-convertible Preferred Stock were amended to provide that no preferred stock dividends will be paid or owed as long as the Senior Notes are outstanding. 32 o The issuance of Series A Non-convertible Preferred Stock is reduced from 11 million shares to 10 million shares. As of May 9, 2000, Amendment #3 to the Merger Agreement restructured the Merger such that HomeSense will be merged with and into HomeGold Financial, Inc.'s subsidiary, HomeGold, Inc., instead of directly into HomeGold Financial, Inc. GENERAL NATURE OF BUSINESS CONDUCTED BY HOMESENSE. HomeSense is a non-conforming mortgage lender that originates and sells first and subordinate lien mortgage loans. HomeSense's principal loan product is a debt consolidation loan secured by a first lien on real property. This is the same general business in which HomeGold engages. SUMMARY OF THE MERGER. A summary of the material features of the Merger are as follows: DESCRIPTION OF THE MERGER AND CONSIDERATION TO BE ISSUED. HomeSense will be merged into HomeGold, Inc. The HomeSense shareholders will receive 6,780,944 shares of HomeGold common stock constituting 40% of the HomeGold common stock outstanding after consummation of the transaction. They will also be issued 10 million shares of Series A Non-convertible Preferred Stock (the terms of which are described in detail below). PRINCIPAL TERMS OF THE SERIES A NON-CONVERTIBLE PREFERRED STOCK: DIVIDENDS. The Series A Non-convertible Preferred Stock has an annual cumulative dividend of $0.08 per share, payable in quarterly installments. The annual cumulative dividend increases to $0.10 per share on January 1, 2005. No dividends will be paid or owed on the preferred stock until the Company's 10.75% senior unsecured notes have been retired. No dividend may be paid with respect to the HomeGold Common Stock or any other class of stock of HomeGold unless and until the cumulative dividend payable with respect to the Series A Non-convertible Preferred Stock is current and not in arrears. LIQUIDATION PREFERENCE. Upon any liquidation of HomeGold or any liquidating distributions by HomeGold, an amount equal to $1 per share, plus the cumulative dividend through the current date, shall be payable with respect to the preferred shares in preference and priority to any distribution with respect to HomeGold Common Stock or any other class of stock of HomeGold. VOTING RIGHTS. Holders of Series A Non-convertible Preferred Stock do not have voting rights, except with respect to amendments of the terms of the Series A Non-convertible Preferred Stock. CONVERSION RIGHTS. The Series A Non-convertible Preferred Stock is not convertible to HomeGold Common Stock or other securities. REDEMPTION RIGHTS AND SINKING FUND PROVISIONS. The Series A Non-convertible Preferred Stock has no right of redemption and is not subject to any sinking fund. Any and all shares of Series A Non-convertible Preferred Stock outstanding at any time shall be redeemable at par at the option of HomeGold upon notice to the holder(s) thereof. For further description of the merger, see discussion pertaining to Item 3 on the Company's Definitive Proxy Statement for the 2000 Annual Meeting of Shareholders of the Company, filed with the SEC, which description is incorporated herein by reference. PRO FORMA FINANCIAL INFORMATION The unaudited pro forma Consolidated Condensed Balance Sheet is based on combining the historical consolidated Balance Sheet for HomeGold at December 31, 1999 with the historical combined balance sheet of HomeSense at December 31, 1999, adjusting for the issuance of additional shares and preferred stock expected to be issued in the merger. The unaudited pro forma Consolidated Capitalization is based on combining the historical consolidated capitalization of HomeGold at December 31, 1999 with the historical combined capitalization of HomeSense at December 31, 1999, adjusting for the issuance of additional shares and preferred stock expected to be issued in the merger. The unaudited pro forma Consolidated Condensed Statement of Operations is based on combining the historical consolidated Statement of Operations for HomeGold for the year ended December 31, 1999 with the 33 historical combined Statement of Operations of HomeSense for the twelve months ended December 31, 1999. Historical earnings of HomeSense, which has a March 31 fiscal year, have been adjusted to reflect a December 31 fiscal year end by adding the preceding three month period to the nine months ended December 31, 1999. The Merger will be accounted for under the purchase method of accounting, and pro forma data are derived in accordance with such method. The pro forma data do not, given the operational and market overlap between HomeGold and HomeSense, reflect any potential benefits from potential cost savings or synergies expected to be achieved following the Merger. The unaudited pro forma Consolidated Condensed Financial Statements for December 31, 1999 differ from the presentation shown in the Company's Definitive Proxy Statement as the result of the changes incorporated by Amendment #2 to the Reorganization Agreement, whereby the issuance of preferred stock was reduced by 1.0 million shares, and a bonus is paid to Mr. Sheppard in lieu of dividends on the preferred stock. Information set forth below should be read in conjunction with such historical and pro forma financial statements and the notes thereto. The unaudited pro forma information is provided for informational purposes only and is not necessarily indicative of actual results that would have been achieved had the Merger been consummated at the beginning of the period presented, nor is it necessarily indicative of future results. PRO FORMA CAPITALIZATION TABLE
March 31, 2000 ------------------------------------- Purchase Accounting Pro Forma HomeGold HomeSense Adjustments Combined ----------------- ----------------- ---------------- ---------------- (Dollars in thousands, except per share amounts) Debt: Revolving warehouse lines of credit $ 35,179 $ 28,913 $ -- $ 64,092 Operating line of credit -- 157 -- 157 Senior unsecured debt 11,704 -- -- 11,704 Capital lease obligations -- 464 -- 464 Note payable -- 4,663 -- 4,663 ----------------- ----------------- ---------------- ---------------- Total debt 46,883 34,197 -- 81,080 ----------------- ----------------- ---------------- ---------------- Minority interest in subsidiaries 10 -- -- 10 Shareholder's equity: Series A Non-convertible Preferred stock -- -- 10,000 (a) 10,000 Common stock 509 27 339 (b) 848 (27) (c) Capital in excess of par value 39,048 3,121 6,713 (b) 45,546 (3,121) (c) (588) (d) 373 (e) Retained earnings (deficit) (41,578) -- -- (c) (41,578) Minority interest in affiliates -- (560) 560 (c) -- ----------------- ----------------- ---------------- ---------------- Total Shareholders' equity (2,021) 2,588 14,249 14,816 ----------------- ----------------- ---------------- ---------------- Total Capitalization $ 44,872 $ 36,785 $ 14,249 $ 95,906 ================= ================= ================ ================
(a) To record issuance of Series A Non-convertible Preferred Stock. (b) To record issuance of Common Stock. (c) To eliminate shareholders' equity of HomeSense. (d) To record distribution to shareholder. (e) To record contribution from shareholder. 34 PRO FORMA CAPITALIZATION TABLE
December 31, 1999 ------------------------------------- Purchase Accounting Pro Forma HomeGold HomeSense Adjustments Combined ----------------- ----------------- ---------------- ---------------- (Dollars in thousands, except per share amounts) Debt: Revolving warehouse lines of credit $ 17,808 $ 42,709 $ -- $ 60,517 Operating line of credit -- 2,434 -- 2,434 Senior unsecured debt 12,134 -- -- 12,134 Capital lease obligations -- 951 -- 951 Note payable -- 2,469 -- 2,469 ----------------- ----------------- ---------------- ---------------- Total debt 29,942 48,563 -- 78,505 ----------------- ----------------- ---------------- ---------------- Minority interest in subsidiaries 13 -- -- 13 Shareholder's equity: Series A Non-convertible Preferred stock -- -- 10,000 (a) 10,000 Common stock 507 38 339 (b) 846 (c) (38) Capital in excess of par value 39,028 1,780 6,781 (b) 45,809 (1,780) (c) Retained earnings (deficit) (31,691) (628) 628 (c) (31,691) Minority interest in affiliates -- 509 (509) (c) -- ----------------- ----------------- ---------------- ---------------- Total Shareholders' equity 7,844 1,699 15,421 24,964 ----------------- ----------------- ---------------- ---------------- Total Capitalization $ 37,799 $ 50,262 $ 15,421 $ 103,482 ================= ================= ================ ================
(a) To record issuance of Series A Non-convertible Preferred Stock. (b) To record issuance of Common Stock. (c) To eliminate shareholders' equity of HomeSense. (d) To record distribution to shareholder. (e) To record contribution from shareholder. 35 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
March 31, 2000 ------------------------------------- Purchase Accounting Pro Forma HomeGold HomeSense Adjustments Combined ---------------- ----------------- -------------------- -------------------- (Dollars in thousands, except per share amounts) Assets: Cash and cash equivalents $ 13,135 $ 754 $ 373 (i) $ 14,262 Restricted cash 5,338 1,000 -- 6,338 Loans receivable, net 78,568 28,691 -- 107,259 Accrued interest receivable 1,374 -- -- 1,374 Other receivables 11,923 6,288 (4,000) (a) 13,623 (588) (h) Residual receivables, net 46,576 -- -- 46,576 Property and equipment, net 16,589 4,925 -- 21,514 Real estate acquired through foreclosure 6,784 -- -- 6,784 Excess of cost over net assets of acquired businesses, net 1,543 -- 750 (b) 8,757 6,464 (c) Debt origination costs 1,378 -- -- 1,378 Deferred income tax asset, net 12,000 -- 8,000 (d) 20,000 Servicing asset 812 -- -- 812 Other assets 3,300 793 -- 4,093 ---------------- ---------------- ------------------- ------------------- Total assets $ 199,320 $ 42,451 $ 10,999 $ 252,770 ================ ================ =================== =================== Liabilities and shareholders' equity: Liabilities: Revolving warehouse lines of credit $ 35,179 $ 28,913 $ -- $ 64,092 Operating lines of credit -- 157 -- 157 Notes payable -- 4,663 -- 4,663 Capital lease obligations -- 464 -- 464 Investor savings 148,591 -- -- 148,591 Senior unsecured debt 11,704 -- -- 11,704 Accounts payable and accrued expenses 4,951 5,666 750 (b) 7,367 (4,000) (a) Accrued interest payable 666 -- -- 666 Other liabilities 240 -- -- 240 ---------------- ---------------- ------------------- ------------------- Total liabilities 201,331 39,863 (3,250) 237,944 ---------------- ---------------- ------------------- ------------------- Minority interest in subsidiaries 10 -- -- 10 Total shareholders' equity (2,021) 2,588 10,000 (e) 14,816 (2,588) (f) 7,052 (g) (588) (h) 373 (i) ---------------- ---------------- ------------------- ------------------- Total liabilities and shareholders' equity $ 199,320 $ 42,451 $ 10,999 $ 252,770 ================ ================ =================== ===================
(a) To record note receivable from Mr. Sheppard. (b) To record the estimated cost of the transaction. (c) To record excess of cost over net assets acquired. (d) To record reduction in reserves against deferred tax asset. (e) To record issuance of Series A Non-convertible Preferred Stock. (f) To eliminate shareholders' equity of HomeSense. (g) To record issuance of Common Stock, based on $1.04 per share, arrived at utilizing the average closing price for the 60-day period ending May 8, 2000. (h) To record distribution to shareholder. (i) To record contribution from shareholder. 36 UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
December 31, 1999 ------------------------------------- Purchase Accounting Pro Forma HomeGold HomeSense Adjustments Combined ---------------- ----------------- -------------------- -------------------- (Dollars in thousands, except per share amounts) Assets: Cash and cash equivalents $ 26,009 $ 1,224 $ -- $ 27,233 Restricted cash 5,314 1,000 -- 6,314 Loans receivable, net 56,614 42,542 -- 99,156 Accrued interest receivable 1,423 -- -- 1,423 Other receivables 8,520 1,744 4,000 (a) 14,264 Residual receivables, net 47,770 -- -- 47,770 Property and equipment, net 17,160 4,931 -- 22,091 Real estate acquired through foreclosure 7,673 -- -- 7,673 Excess of cost over net assets of 750 (b) acquired businesses, net 1,566 -- 3,421 (c) 5,737 Debt origination costs 1,658 -- -- 1,658 Deferred income tax asset, net 12,000 -- 8,000 (d) 20,000 Servicing asset 867 -- -- 867 Other assets 2,163 519 -- 2,682 ---------------- ---------------- ------------------- ------------------- Total assets $ 188,737 $ 51,960 $ 16,171 $ 256,868 ================ ================ =================== =================== Liabilities and shareholders' equity: Liabilities: Revolving warehouse lines of credit $ 17,808 $ 42,709 $ -- $ 60,517 Operating lines of credit -- 2,434 -- 2,434 Notes payable -- 2,469 -- 2,469 Capital lease obligations -- 951 -- 951 Investor savings 144,775 -- -- 144,775 Senior unsecured debt 12,134 -- -- 12,134 Accounts payable and accrued expenses 5,198 1,698 750 (b) 7,646 Accrued interest payable 845 -- -- 845 Other liabilities 120 -- -- 120 ---------------- ---------------- ------------------- ------------------- Total liabilities 180,880 50,261 750 231,891 ---------------- ---------------- ------------------- ------------------- Minority interest in subsidiaries 13 -- -- 13 Total shareholders' equity 7,844 1,699 10,000 (e) 24,964 (1,699) (f) 7,120 (g) ---------------- ---------------- ------------------- ------------------- Total liabilities and shareholders' equity $ 188,737 $ 51,960 $ 16,171 $ 256,868 ================ ================ =================== ===================
(a) To record note receivable from Mr. Sheppard. (b) To record the estimated cost of the transaction. (c) To record excess of cost over net assets acquired. (d) To record reduction in reserves against deferred tax asset. (e) To record issuance of Series A Non-convertible Preferred Stock. (f) To eliminate shareholders' equity of HomeSense. (g) To record issuance of Common Stock, based on $1.04 per share, arrived at utilizing the average closing price for the 60-day period ending May 8, 2000. 37 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Three months ended March 31, 2000 -------------------------------- Purchase Accounting Pro Forma HomeGold HomeSense Adjustments Combined -------------- --------------- -------------- -------------- (Dollars in thousands, except per share amounts) Revenues: Interest income $ 1,927 $ 5 $ -- $ 1,932 Servicing income 2,004 -- -- 2,004 Gain from origination and sale of loans, net 2,286 7,702 -- 9,988 Other revenues 510 -- -- 510 -------------- --------------- -------------- --------------- Total revenues 6,727 7,707 -- 14,434 -------------- --------------- -------------- --------------- Expenses: Interest 4,003 812 -- 4,815 Provision for credit losses 990 -- -- 990 Costs on real estate and defaulted loans 1,054 -- -- 1,054 Fair market value adjustment on residual receivables 1,080 -- -- 1,080 Salaries, wages and employee benefits 4,912 3,916 200 (c) 9,028 Advertising and business development costs 1,841 837 -- 2,678 Other general and administrative expenses 2,813 1,193 90 (a) 4,096 -------------- --------------- -------------- --------------- Total expenses 16,693 6,758 290 23,741 -------------- --------------- -------------- --------------- Income (loss) before income taxes, minority interest and extraordinary item (9,966) 949 (290) (9,307) Provision (benefit) for income taxes 145 -- -- 145 -------------- --------------- -------------- --------------- Income (loss) before minority interest and extraordinary item (10,111) 949 (290) (9,452) Minority interest in (earnings) loss of subsidiaries (1) (51) 51 (b) (1) -------------- --------------- -------------- --------------- Income (loss) before extraordinary item (10,112) 898 (239) (9,453) Extraordinary item-gain on extinguishment of debt, net of $0 tax 226 -- -- 226 -------------- --------------- -------------- --------------- Net income $ (9,886) $ 898 $ (239) $ (9,227) ============== =============== ============== =============== Dividends on Series A Non-convertible Preferred Stock -- -- -- -- -------------- --------------- -------------- --------------- Net income available to common shareholders $ (9,886) $ 898 $ (563) $ (9,227) ============== =============== ============== =============== Basic earnings (loss) per share of common stock (d): Income (loss) before extraordinary item $ (0.99) $ (0.55) Extraordinary item, net of taxes 0.02 0.01 -------------- --------------- Net income $ (0.97) $ (0.54) ============== ===============
(a) To record amortization of goodwill. (b) To eliminate HomeSense minority interest due to acquisition of 100% of the stock. (c) To record quarterly bonus. (d) Basic and fully diluted shares are the same due to anti-dilutive effect of common stock equivalents. The earnings (loss) per share reflected is prior to consideration of the dividends on the Series A Non-convertible Preferred Stock. 38 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1999 -------------------------------- Purchase Accounting Pro Forma HomeGold HomeSense Adjustments Combined -------------- --------------- -------------- -------------- (Dollars in thousands, except per share amounts) Revenues: Interest income $ 8,286 $ 111 $ -- $ 8,397 Servicing income 9,813 -- -- 9,813 Gain from origination and sale of loans, net 9,529 23,697 -- 33,226 Other revenues 1,609 -- -- 1,609 -------------- --------------- -------------- --------------- Total revenues 29,237 23,808 -- 53,045 -------------- --------------- -------------- --------------- Expenses: Interest 16,338 2,120 -- 18,458 Provision for credit losses 3,339 200 -- 3,539 Costs on real estate and defaulted loans 3,018 -- -- 3,018 Fair market value adjustment on residual receivables 3,327 -- -- 3,327 Salaries, wages and employee benefits 20,359 14,359 800 (d) 35,518 Advertising and business development costs 4,804 3,247 -- 8,051 Other general and administrative expenses 13,123 4,273 254 (b) 17,650 -------------- --------------- -------------- --------------- Total expenses 64,308 24,199 1,054 89,561 -------------- --------------- -------------- --------------- Income (loss) before income taxes, minority interest and extraordinary item (35,071) (391) (1,054) (36,516) Provision (benefit) for income taxes (7,394) -- -- (7,394) -------------- --------------- -------------- --------------- Income (loss) before minority interest and extraordinary item (27,677) (391) (1,054) (29,122) Minority interest in (earnings) loss of subsidiaries (8) (217) 217 (c) (8) -------------- --------------- -------------- --------------- Income (loss) before extraordinary item (27,685) (608) (29,130) (837) Extraordinary item-gain on extinguishment of debt, net of $0 tax 29,500 -- -- 29,500 -------------- --------------- -------------- --------------- Net income $ 1,815 $ (608) $ $ 370 (837) ============== =============== ============== =============== Dividends on Series A Non-convertible Preferred Stock -- -- -- -- -------------- --------------- -------------- --------------- Net income available to common shareholders $ 1,815 $ (608) (a) $ (837) $ 370 ============== =============== ============== =============== Basic earnings (loss) per share of common stock (e): Income (loss) before extraordinary item $ (2.78) $ (1.74) Extraordinary item, net of taxes 2.96 1.76 -------------- --------------- Net income $ 0.18 $ 0.02 ============== ===============
(a) For the nine month period ended December 31, 1999, HomeSense changed the method of accounting for loan sales to record the gain on sale and related loan fee income on the settlement date of the sale rather than accruing the estimated sale income at the time of origination. (b) To record amortization of goodwill. (c) To eliminate HomeSense minority interest due to acquisition of 100% of the stock. (d) To record quarterly bonus. (e) Basic and fully diluted shares are the same due to anti-dilutive effect of common stock equivalents. The earnings (loss) per share reflected is prior to consideration of the dividends on the Series A Non-convertible Preferred Stock. 39 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Company's market risk arises primarily from interest rate risk inherent in its lending, its holding of residual receivables and its investor savings activities. The structure of the Company's loan and investor savings portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with senior management. Senior management regularly reviews the Company's interest rate risk position and adopts balance sheet strategies that are intended to optimize operating earnings while maintaining market risk within acceptable limits. To estimate the impact that changes in interest rates would have on the Company's earnings, management uses simulation analysis. While the Company monitors interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. The Company's strategy for 2000 is to sell its loans within one month of production. Because the interest rates on the Company's warehouse lines of credit used to fund and acquire loans are variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale may reduce the gain on loan sales earned by the Company. There were no significant open hedging positions as of March 31, 2000. The Company's interest rate hedging strategy, when initiated, may include shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements. No interest rate hedging strategy is currently in place or anticipated. A significant reduction in market rates could accelerate the prepayment speed on loans held in the various securitized mortgage pools. An acceleration of prepayment on loans held in the securitized pools would have a negative impact on the carrying value of the residual assets. Simulation analysis is performed using a computer-based asset/liability model which incorporates current portfolio balances and rates, contractual maturities, repricing opportunities and assumptions about prepayments, future interest rates and future volumes. To measure the sensitivity of the Company's earnings, the results of multiple simulations, which assume changes in interest rates, are compared to the "base case" simulation, which assumes no changes in interest rates. The sensitivity of earnings is expressed as the annual dollar change in comparison to the "base case" simulation. The model assumes an immediate parallel shift in interest rates. As a result of the Company's interest rate position, a 100 basis point immediate increase in interest rates would result in a negative impact on projected earnings of $3.5 million and $1.4 million computed as of March 31, 2000 and December 31, 1999, respectively. A significant portion of this impact relates to a reduction in the anticipated sale premiums on loans being held for sale. The impact shown as of March 31, 2000 is much greater than the impact shown at December 31, 1999 due to the increased pro forma loans receivable on the balance sheet relating to the merger with HomeSense. The Company's earnings projection as of March 31, 2000 and December 31, 1999 assuming an immediate reduction of 100 basis points in market rates would result in a positive impact on projected earnings of $3.2 million and $893,000, respectively. A significant portion of the positive impact results from the Company's assumption that it would be selling a significant number of loans in subsequent periods. These loans would be at premium coupon rates in comparison to the lower market interest rates, and would bring higher sale premiums in the secondary market. The impact shown as of March 31, 2000 is much greater than the impact shown at December 31, 1999 due to the increased pro forma loans receivable on the balance sheet relating to the merger with HomeSense. Projected dollar impact on operating results brought about by changes in interest rates could be material relative to the Company's operating results. If simulation results indicate earnings sensitivity in excess of Management's acceptable limits, Management will seek to identify on-balance sheet and/or off-balance sheet strategies to bring earnings sensitivity within target guidelines. Management will continue to monitor the Company's interest rate risk position to manage the possible adverse impact on earnings caused by changes in interest rates. 40 These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. 41 PART II. OTHER INFORMATION 42 PART II. OTHER INFORMATION Item 1. Legal Proceedings On February 26, 1999, the Company received notification from Transamerica Small Business Capital, Inc. ("Transamerica") that pursuant to the Asset Purchase Agreement dated October 2, 1998, a loan for approximately $1.1 million was allegedly not made by the Company in accordance with stated representations. Transamerica has filed an action in the Circuit Court of Cook County, Illinois seeking to recover the loan amount from the Company's $5.3 million that is being maintained by the trustee. While management does not believe the Company has any liability relating to this claim and the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this time. As a part of the agreement to sell Sterling Lending ("SLC") in 1998, the Company guaranteed certain leases of office space used by SLC. In 1999, SLC filed for bankruptcy protection and due to the financial situation of SLC, the Company has been asked to perform under certain of the guarantees. The Company is resolving each lease through active negotiations with the landlords, and management feels that the resolution of these leases will not be material to the financial statements of the Company. On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins filed a purported class action lawsuit in New Hanover County, North Carolina Superior Court. Since that time, three similar and related suits have been filed in North Carolina. The suits were filed against a subsidiary of the Company and others alleging a variety of statutory and common law claims arising out of mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). The plaintiffs in these suits are seeking unspecified monetary damages. As to the Company's subsidiary, the complaints allege participation by the Company's subsidiary in an arrangement with Chase under which Chase allegedly charged excessive fees and interest to the consumers, and under which Chase allegedly received undisclosed premiums. There has been no class certification in any case, and the Company intends to contest the cases vigorously. Because these matters are in their early stages, it is not possible to evaluate the likelihood of an unfavorable outcome or estimate the amount of potential loss. On April 4, 2000 the Company received notice of a suit filed against it by Danka Funding Company, LLC ("Danka") in New Jersey Superior Court. In the suit, Danka seeks recovery of $355,865.80 allegedly due under copier equipment leases. While management does not believe the Company has any liability relating to this claim, and while the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this early stage. The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. Item 2. Changes in Securities On April 28, 2000, the shareholders of the Company approved amendments to the Company's Articles of Incorporation (1) reducing the par value of the Company's common stock from $0.05 to $0.001, (2) providing that no shareholder shall have a right to cumulate votes with respect to the election of directors and (3) authorizing the issuance of up to 20,000,000 shares of "blank check" preferred stock. In connection with consummation of the Merger of HomeSense into HomeGold, Inc. the Company's Board of Directors designated 15,300,000 shares of the "blank check" preferred stock as Series A Non-convertible Preferred Stock with a par value of $1.00 per share. For a description of the terms of the Series A Non-Convertible Preferred Stock and the effect of such terms on the Company's common stock see "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - The Merger - Summary of the Merger - Principal terms of the Series A Non-convertible Preferred Stock" which description is incorporated herein by reference. The Company issued 6,780,944 shares of its common stock and 10,000,000 shares of its Series A Non-convertible Preferred Stock to the shareholders of HomeSense in exchange for all of the outstanding stock of HomeSense. The Company issued these securities without registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. 43 In connection with the consummation of the Merger on May 9, 2000, the Company issued a warrant to purchase 250,000 shares of its common stock at an exercise price of $1.50 per share to Raymond James and Associates, Inc. in partial consideration for the delivery to the Company of a fairness opinion regarding the Merger. The warrant was exercisable on issuance, expires five years from the date of issuance and is transferable. The Company issued the warrant without registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. Also in connection with the Merger on May 9, 2000, the Company issued a non-transferable option to purchase 825,423 shares of its common stock at $1.75 per share to Ronald J. Sheppard, the pre-Merger owner of most of the shares of the stock of HomeSense, in connection with his entry into employment by the Company as its President and Chief Executive Officer. The option granted to Mr. Sheppard is intended to prevent his ownership of the Company's common stock from being diluted by the exercise by third parties of certain other outstanding options and warrants, including the warrant issued to Raymond James and Associates, Inc. (the "Other Options"). If any Other Options are exercised, Mr. Sheppard's option vests with respect to 67 shares of the Company's common stock for every 100 shares received upon exercise of Other Options, and Mr. Sheppard has 180 days from the vesting date in which to exercise his option with respect to those shares. If any Other Options lapse, Mr. Sheppard's option lapses with respect to 67 shares for every 100 shares of Other Options that lapse. The Company issued these securities without registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The shareholders of the Company voted on the election of directors and 6 other proposals at the Annual Meeting of Shareholders on April 28, 2000. 1. Election of Directors. Approved. For Withheld Tecumseh Hooper, Jr 9,273,542 156,015 J. Robert Philpott, Jr. 9,263,922 165.635 John M. Sterling, Jr. 9,273,542 156,015 Ronald J. Sheppard 9,269,896 159,661 Jan Sirota 9,277,254 152,303 Clarence Bauknight 9,277,254 152,303 Porter Rose 9,273,542 156,015 2. Proposal to amend the Company's 1995 Employee and Officer Stock Option Plan to increase the number of shares authorized for grant by 500,000. Approved. For 6,995,698 Against 423,597 Abstained 46,045 Broker non-votes 1,964,217 3. Proposal to approve the Reorganization Agreement Between HomeGold and HomeSense Financial Corp., and Affiliated Companies (including the Plan of Merger set forth therein) and the issuance of 6,780,944 shares of common stock, 11,000,000 shares of Series A non-convertible, preferred stock, a warrant to purchase 250,000 shares of common stock of HomeGold, and options to purchase 825,423 shares of common stock. Approved. For 7,302,397 Against 144,130 Abstained 18,813 Broker non-votes 1,964,217 44 4. Proposal to approve an amendment to the Company's Articles of Incorporation to authorize issuance of 20,000,000 shares of "Blank Check" preferred stock. Approved. For 6,951,135 Against 473,132 Abstained 41,073 Broker non-votes 1,964,217 5. Proposal to amend the Company's Employee Stock Purchase Plan to increase by 400,000 shares the number of shares authorized for issuance under the plan to a total of 600,000 shares. Approved. For 7,117,625 Against 324,783 Abstained 22,932 Broker non-votes 1,964,217 6. The proposal to amend the Company's Articles of Incorporation to provide that no shareholder shall have a right to cumulate votes with respect to the election of directors (the "Cumulative Vote Amendment"). Approved. For 6,817,903 Against 586,522 Abstained 60,915 Broker non-votes 1,964,217 7. The proposal to reduce the par value of the common stock from $0.05 per share to $0.001 per share. Approved. For 6,994,358 Against 411,697 Abstained 59,285 Broker non-votes 1,964,217 Item 5. Other Information Until April 28, 2000, the Company's common stock was traded on the NASDAQ National Market under the symbol "HGFN". On April 28, 2000, the Company's common stock was delisted from the Nasdaq National Market. See Item 6(b) Reports on Form 8-K which information is incorporated herein by reference. The Company's stock is currently traded on the Over the Counter Bulletin Board under the same symbol, HGFN. The Company filed a report on Form 8-K dated April 20, 2000 to disclose Nasdaq's intention to delist the Company's stock. In connection with the proposed merger with HomeSense Financial Corp., the Nasdaq staff believes that the proposed merger will result in a change of control and change in financial structure. As such, under Marketplace Rule 4430(f), the surviving company, HomeGold Financial, Inc. (the "Company" or "HomeGold"), will be required to submit an initial application and meet all initial Nasdaq National Market inclusion criteria. However, based on a review of the Company, the Nasdaq staff believes that the Company will not meet certain initial inclusion criteria. Accordingly, the staff has determined to delist HomeGold's securities from the Nasdaq National Market effective with the opening of business on April 28, 2000. Absent the HomeSense merger, HomeGold could have been delisted from Nasdaq for failure to meet the maintenance criteria for listing. 45 The following table sets forth the high and low closing sale prices of the common stock for the periods indicated, as reported by NASDAQ.
High Low ------------ ------------ YEAR ENDED DECEMBER 31, 1998 First Quarter $ 14.50 $ 7.50 Second Quarter $ 9.50 $ 3.25 Third Quarter $ 5.25 $ 2.00 Fourth Quarter $ 1.81 $ 0.44 YEAR ENDED DECEMBER 31, 1999 First Quarter $ 2.22 $ 0.34 Second Quarter $ 1.94 $ 1.06 Third Quarter $ 1.50 $ 0.97 Fourth Quarter $ 1.25 $ 0.63 YEAR ENDED DECEMBER 31, 2000 First Quarter $ 1.38 $ 1.06
On April 28, 2000, the closing price for the Company's common stock was $0.88. As of April 30, 2000, the Company had 10,171,416 outstanding shares of common stock held by 850 stockholders of record. No dividends on common stock were paid or declared during 1999 or 1998, and no dividends are expected to be paid on the common stock for the foreseeable future. The Indenture pertaining to the Company's 10-3/4% Senior Notes places certain restrictions on the Company's ability to pay dividends, and the Credit Facility to which the Company's subsidiaries HomeGold, Inc. and Carolina Investors, Inc. are parties restricts the ability of these subsidiaries to pay dividends and make loans and advances to the Company. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Liquidity and Capital Resources" which discussion is incorporated herein by reference. In conjunction with the Company's merger with HomeSense, the Company's President, Keith B. Giddens, the Company's Chief Operating Officer, John W. Crisler, and the Company's Executive Vice President- Structured Finance, Laird Minor, have resigned. INFORMATION REQUIRED TO BE REPORTED UNDER ITEM 2 OF FORM 8-K On May 9, 2000, the Company consummated the acquisition of HomeSense by Merger of HomeSense with and into the Company's subsidiary HomeGold, Inc. In connection with the Merger, HomeSense shareholders received 6,780,944 shares of the Company's common stock (valued at $1.04 per share, using the average closing price over the 60-day period preceding the merger date) and 10,000,000 shares of the Company's Series A Convertible Preferred Stock, par value $1.00 per share (valued at par value) in exchange for all of the outstanding stock of HomeSense, and HomeGold, Inc. succeeded to certain of the debts of HomeSense. Ronald J. Sheppard, the president and principal shareholder of HomeSense, was hired as President and Chief Executive Officer of the Company in connection with which he received an option to purchase 825,423 shares of the Company's common stock at $1.75 per share subject to certain conditions. Prior to the Merger, the Company loaned HomeSense $4,000,000, which HomeSense in turn loaned to Mr. Sheppard. Upon consummation of the Merger, Mr. Sheppard gave HomeGold, Inc. a $5,700,000 note evidencing this indebtedness and an additional $1,700,000 indebtedness to HomeSense previously incurred. The total consideration paid in the Merger was the result of negotiations between the parties as to the value of the Merger to each party thereto. HomeSense was engaged in substantially the same business as the Company, and physical property acquired with HomeSense in the Merger will continue to be used in such business. For further information about the Merger see "Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations - The Merger" which information is incorporated herein by reference. 46 The entities comprising HomeSense are as follows: HomeSense Financial Corp. EMMCO The Mortgage Service Station Inc. Doc-Write, Inc. Columbia Media Corp. EMC Holding Corp. EMC Training Corp. EMC Underwriting Corp. EMMCO The Mortgage Service Station of Alabama Inc. EMMCO The Mortgage Service Station of Texas Inc. Equitable Mortgage Corp. of Charleston Equitable Mortgage Corp. of Charlotte Equitable Mortgage Loan Center Corp. Equitable Mortgage Management Corp. HomeSense Financial Corp. of Alabama HomeSense Financial Corp. of Baton Rouge HomeSense Financial Corp. of Jackson HomeSense Financial Corp. of Little Rock HomeSense Financial Corp. of Memphis HomeSense Financial Corp. of Orlando HomeSense Financial Corp. of Savannah Mortgage Avenue, Corp. The financial statements of HomeSense will be filed by amendment within 60 days after May 24, 2000. For pro forma financial information required by Item 7(b) of Form 8-K see "Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations - The Merger - Pro Forma Financial Information" which information is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 2.1 Amendment #2 to Reorganization Agreement dated May 1, 2000. 2.2 Amendment #3 to Reorganization Agreement dated May 9, 2000. 3.1.1 Articles of Amendment to Articles of Incorporation of the Company filed with the South Carolina Secretary of State on May 9, 2000 reducing par value of common stock from $0.05 per share to $0.001 per share, eliminating cumulative voting with respect to election of directors and authorizing issuance of up to 20,000,000 shares of blank check preferred stock. 3.1.2 Articles of Amendment to Articles of Incorporation of the Company filed with the South Carolina Secretary of State on May 9, 2000 containing Certificate of Designation of Series A Non-convertible Preferred Stock of the Company. 10.1 See exhibits 2.1 and 2.2. 10.2.1 Amendment to the Company's 1995 Employee and Officer Stock Option Plan increasing number of shares authorized for grant by 500,000 to a total of 1,466,667 shares. 10.2.2 Amendment to the Company's 1995 Employee and Officer Stock Option Plan increasing number of shares authorized for grant by 500,000 to a total of 1,966,667 shares. 10.3.1 Fourth Amendment dated May 2, 2000, to Mortgage Loan Warehousing Agreement dated June 30, 1998 as amended, by and among HomeGold, Inc., Carolina Investors, Inc., the Financial Institutions Party thereto, and The CIT Group/Business Credit, Inc. as administrative agent. 10.3.2 Amendment No. 1 dated May 2, 2000, to Security Agreements dated June 30, 1998 of HomeGold, Inc. and Carolina Investors, Inc. 10.4.1 $40,000,000 Warehousing Line Revolving Credit Agreement by and between HomeGold, Inc. and Household Commercial Financial Services, Inc. dated as of May 2, 2000. 10.4.2 Security Agreement dated May 2, 2000 of HomeGold, Inc., the other entities listed on the signature pages thereto and Household Commercial Financial Services, Inc. 47 10.4.3 Guaranty dated May 2, 2000 of HomeGold Financial, Inc. and certain of its subsidiaries. 10.5 Severance Agreement dated April 28, 2000 between the Company and Keith B. Giddens. 10.6 Severance Agreement dated May 12, 2000 between the Company and John W. Crisler. 10.7 Form of Severance Agreement between the Company and employees listed in the schedule therewith. 10.8 Employment Agreement dated May 9, 2000 between the Company and Ronald J. Sheppard. 10.9 Mutual Indemnity Agreement dated May 9, 2000 between Ronald J. Sheppard and the Company. 10.10 Registration Rights Agreement dated May 9, 2000 between the Company and the individuals listed on Schedule 1 thereto. 10.11 Form of Stock Restriction Agreement. 27.1 Financial Data Schedule. b) Reports on Form 8-K ------------------- NASDAQ delisting on 4/20/00 - The Company filed a report on Form 8-K dated April 20, 2000 to disclose Nasdaq's intention to delist the Company's stock. 48 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOMEGOLD FINANCIAL, INC. Date: May 12, 2000 By: \s\ John M. Sterling, Jr. ----------------------------------------- John M. Sterling, Jr., Chairman of the Board By: \s\ Ronald J. Sheppard ----------------------------------------- Ronald J. Sheppard, Chief Executive Officer and President By: \s\ Kevin J. Mast ----------------------------------------- Kevin J. Mast, Executive Vice President, Chief Financial Officer, and Treasurer 49 EX-2.1 2 AMD #2 TO REORG AGREEMENT EXHIBIT 2.1 AMENDMENT #2 TO REORGANIZATION AGREEMENT BY AND BETWEEN HOMEGOLD FINANCIAL, INC. AND HOMESENSE FINANCIAL CORP. AND ITS AFFILIATED COMPANIES This AMENDMENT #2 to REORGANIZATION AGREEMENT (this "Amendment #2") is entered into as of this 1st day of May, 2000 by and among HomeGold Financial, Inc. ("HomeGold"), a corporation organized and existing under the laws of the State of South Carolina, and HomeSense Financial Corp., a corporation organized and existing under the laws of the State of South Carolina and each of the affiliated corporations of HomeSense set forth on the attached Schedule 3.5 to the Reorganization Agreement (as defined below) (collectively, where the context permits, "HomeSense"). WHEREAS, on February 29, 2000, the parties hereto entered into that certain Reorganization Agreement, as amended (the "Reorganization Agreement"), providing for the acquisition of HomeSense and its affiliated corporations by HomeGold through the merger of HomeSense and each of its affiliated corporations with and into HomeGold (the "Merger"); WHEREAS capitalized terms used herein and not otherwise defined herein, shall have the meanings ascribed to such terms in the Reorganization Agreement; WHEREAS the parties believe that it is in their best interests for this Amendment #2 to be executed (such Amendment #2 to be entered into as contemplated in Section 12.9 of the Reorganization Agreement); and NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties and agreements herein contained, HomeGold and HomeSense hereby agree as follows: SECTION I. VOTING AGREEMENT 1.1 APPENDIX E. The form of the Voting Agreement referred to in Section 7.9 and set forth on Appendix E, is hereby deleted, and the parties shall not be required to enter into any Voting Agreement in connection with the transactions contemplated in the Reorganization Agreement. SECTION II. EMPLOYMENT AGREEMENT 2.1 EMPLOYMENT AGREEMENT. The form of Employment Agreement with Ronald J. Sheppard, referenced in Sections 8.7 and 9.7 of the Reorganization Agreement, shall be as set forth in the attached Appendix, which is substituted as Appendix C to the Reorganization Agreement. SECTION III. TOTAL EQUITY OF THE HOMESENSE GROUP; MUTUAL INDEMNTY AGREEMENT 3.1 TOTAL EQUITY OF THE HOMESENSE GROUP. Section 5.1(c) of the Reorganization Agreement is amended by substituting $2,373,233 for $3,373,233 as the Total Equity of the HomeSense Group at the Effective Time. 3.2 MUTUAL INDEMNITY AGREEMENT. The form of the Mutual Indemnity Agreement shall be as set forth in the attached Appendix, which is substituted as Appendix G to the Reorganization Agreement. SECTION IV. SERIES A PREFERRED STOCK 1 4.1 CONSIDERATION FOR THE MERGER. Section 2.3(b) of the Reorganization Agreement is amended to reduce the number of Preferred Shares to be issued as merger consideration from 11 million to 10 million. All other references to number of shares of Series A Preferred Stock to be issued as merger consideration shall be correspondingly amended. 4.2 FORM OF RIGHTS AND PRIVILEGES. The form of rights and privileges with respect to the Series A Preferred Stock shall be as set forth on the attached Certificate of Designation, which is substituted as Appendix D to the Reorganization Agreement. SECTION V. CONSENTS 5.1 WAIVER OF CONSENTS. The parties waive the provisions of Section 8.14 and 9.4, with regard to third party consents, and no party shall be liable in any way for failure to obtain any consent or waiver. 5.2 REGULATORY APPROVALS. The parties hereby agree that Section 3.8 of the Reorganization Agreement is hereby deleted in its entirety, and HomeSense shall not be liable in any way in the event any regulatory or other governmental consent, authorization, license, permit franchise, registration or approval has not been obtained in connection with the transactions contemplated in the Reorganization Agreement or the business of HomeGold after the Effective Time. SECTION VI. PRECLOSING COVENANTS 6.1 HOMEGOLD COVENANTS. a. NASDAQ NATIONAL MARKET LISTING. The removal of HomeGold from Nasdaq National Market listing and HomeGold's consent to such removal is consented to and agreed to by the parties. b. GIDDENS SEVERANCE AGREEMENT. Severance arrangements with Keith Giddens are agreed to by the parties. 6.2 HOMESENSE COVENANTS. a. BYLAWS. The bylaws of several entities of the HomeSense Group may be amended, notwithstanding the provisions of Section 5.1(b). b. DISTRIBUTIONS. It is agreed that distributions may be made to HomeSense shareholders, after December 31, 1999, notwithstanding the provisions of Section 5.1(b) of the Reorganization Agreement. SECTION VII. MISCELLANEOUS 7.1 NO FURTHER AMENDMENTS. Except as expressly set forth herein, the Reorganization Agreement remains unamended and in full force and effect. IN WITNESS WHEREOF, this Amendment has been duly entered as of the date first written above. HOMEGOLD FINANCIAL, INC. 2 Witnesses _________________________ By: ___________________________________ John M. Sterling, Jr. _________________________ Chairman and CEO Witnesses HOMESENSE FINANCIAL CORP. & EACH MEMBER OF THE HOMESENSE GROUP PARTIES TO THE REORGANIZATION AGREEMENT _________________________ By: ___________________________________ Ronald J. Sheppard, President - ------------------------- EX-2.2 3 AMD #3 TO REORG. AGREEMENT EXHIBIT 2.2 AMENDMENT #3 TO REORGANIZATION AGREEMENT BY AND BETWEEN HOMEGOLD FINANCIAL, INC. AND HOMESENSE FINANCIAL CORP. AND ITS AFFILIATED COMPANIES This AMENDMENT #3 to REORGANIZATION AGREEMENT ("Amendment #3") is entered into as of this 9th day of May, 2000 by and among HomeGold Financial, Inc., a South Carolina corporation ("HomeGold"), HomeGold, Inc., a South Carolina corporation ("HGI"), HomeSense Financial Corp., a South Carolina corporation ("HomeSense"), and each of the affiliated corporations of HomeSense set forth on SCHEDULE 3.5 attached to the Reorganization Agreement (as defined below) and attached to the Plan of Merger (as defined below) attached hereto (collectively, with HomeSense, the "HomeSense Group"). WHEREAS, on February 29, 2000, HomeGold and the HomeSense Group entered into that certain Reorganization Agreement, which was amended by Amendment #1 to Reorganization Agreement dated March 10, 2000 and Amendment #2 to Reorganization Agreement dated May 1, 2000 (collectively, the "Reorganization Agreement"), providing for the acquisition of the HomeSense Group by HomeGold through the merger of each member of the HomeSense Group with and into HomeGold; WHEREAS, Section 2.1 of the Reorganization Agreement permits the parties thereto to restructure the merger subject to the conditions stated in such Section 2.1; WHEREAS the parties hereto believe that it is in their best interests to restructure the merger so that the members of the HomeSense Group are merged with and into HGI rather than HomeGold; NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties and agreements herein contained, HomeGold, HGI and each member of the HomeSense Group hereby agree as follows: SECTION I. DEFINITIONS 1.1 All capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Reorganization Agreement. 1.2 The definition of "Articles of Merger" set forth in Section 1.2 of the Reorganization Agreement is hereby deleted in its entirety and replaced with the following: "Articles of Merger" means articles of merger to be executed by HomeGold, Inc. in a form appropriate for filing with the Secretary of State of South Carolina, and including the Plan of Merger. 1.3 The definition of "Effective Time" set forth in Section 1.13 of the Reorganization Agreement is hereby deleted in its entirety and replaced with the following: "Effective Time" shall mean the time and date at which the Articles of Merger are filed with the South Carolina Secretary of State. 1 1.4 The definition of "Merger" set forth in the Reorganization Agreement is deleted in its entirety and replaced with the following: "Merger" means the merger of each member of the HomeSense Group with and into HomeGold, Inc. as set forth in the Plan of Merger. 1.5 The definition of "Plan of Merger" set forth in the Reorganization Agreement is deleted in its entirety and replaced with the following: "Plan of Merger" means the plan of merger set forth in EXHIBIT A hereto. SECTION II. MERGER RESTRUCTURED 2.1 Section 2.1 of the Reorganization Agreement is hereby deleted in its entirety and replaced with the following: 2.1 GENERAL PROVISIONS. Subject to the terms and conditions of this Agreement, at the Effective Time, each member of the HomeSense Group shall be merged with and into HomeGold, Inc. which shall be the Surviving Corporation, pursuant to the Plan of Merger. At the Effective Time, the separate corporate existence of each member of the HomeSense Group shall cease. The parties hereto, by mutual agreement, may at any time change the method of effecting the acquisition of the HomeSense Group (including without limitation the provisions of this Article II) if and to the extent they deem such change to be desirable; provided, however, that no such change shall (i) alter the type of consideration to be issued to the holders of stock of the members of the HomeSense Group as provided for in this Agreement, (ii) reduce the value of such consideration, (iii) adversely affect the intended tax-free treatment to such stockholders as a result of receiving such consideration or prevent the parties from obtaining the tax opinion of Wyche, Burgess, Freeman & Parham, P.A. referred to herein, (iv) materially impair the ability to receive any regulatory approvals for the transactions contemplated in this Agreement required by applicable laws, or (v) materially delay the Closing Date. 2.2 Immediately prior to the effectiveness of the Merger, HomeGold shall transfer the merger consideration set forth in Section 2.3 of the Reorganization Agreement (the "Merger Consideration") to HGI as a contribution to capital. In the Merger, the HomeSense shareholders will receive the Merger Consideration from HGI in exchange for all outstanding shares of HomeSense Stock as provided in the Plan of Merger. 2.3 APPENDIX A attached hereto is hereby added to the Reorganization Agreement as Appendix A thereto. 2.4 Appendix H to the Reorganization Agreement is hereby deleted in its entirety and replaced with the new APPENDIX H attached hereto. 2.5 Appendix I to the Reorganization Agreement is hereby deleted in its entirety and replaced with the new APPENDIX I attached hereto. 2 SECTION III. MISCELLANEOUS 3.1 NO FURTHER AMENDMENTS. Except as expressly set forth herein, the Reorganization Agreement remains unamended and in full force and effect. IN WITNESS WHEREOF, this Amendment #3 to Reorganization Agreement has been duly entered into as of the date first written above. Witnesses HOMEGOLD FINANCIAL, INC. _________________________ By: ______________________________________ John M. Sterling, Jr. , Chairman & CEO _________________________ Witnesses HOMESENSE FINANCIAL CORP. & EACH MEMBER OF THE HOMESENSE GROUP PARTIES TO THE REORGANIZATION AGREEMENT _________________________ By: ___________________________________ Ronald J. Sheppard, President _________________________ 3 APPENDIX A PLAN OF MERGER This PLAN OF MERGER (the "Plan of Merger") is entered into by and among HomeGold, Inc., a South Carolina corporation ("HGI"), HomeSense Financial Corp., a South Carolina corporation, and each of the affiliated corporations of HomeSense set forth on the attached SCHEDULE 3.5 to the Reorganization Agreement (as defined below) (collectively, where the context permits, "HomeSense"). WHEREAS, on February 29, 2000, HomeGold Financial, Inc., a South Carolina corporation ("HFI") and HomeSense entered into that certain Reorganization Agreement, which was amended by Amendment #1 to Reorganization Agreement dated March 10, 2000, Amendment #2 to Reorganization Agreement dated May 1, 2000 and Amendment #3 to Reorganization Agreement adding HGI as a party and dated May ___, 2000 (collectively, the "Reorganization Agreement") providing for the acquisition of HomeSense and its affiliated corporations by HGI through the merger of HomeSense and each of its affiliated corporations with and into HGI (the "Merger"); NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties and agreements herein contained, HGI and HomeSense hereby agree as follows: SECTION I. DEFINITIONS 1.1 ARTICLES OF MERGER. The Articles of Merger to be executed by HGI in a form appropriate for filing with the Secretary of State of South Carolina, and including this Plan of Merger. 1.2 HFI COMMON STOCK. The Common Stock of HFI. 1.3 HFI PREFERRED STOCK. The Series A Non-convertible Preferred Stock of HFI. 1.4 HOMESENSE STOCK. The capital stock of all of the members of the HomeSense Group. 1.5 THE HOMESENSE GROUP. The HomeSense Group includes HomeSense Financial Corp., a South Carolina corporation with headquarters in Columbia, South Carolina, and each of the affiliated corporations set forth on SCHEDULE 3.5 to the Reorganization Agreement, a copy of which is attached hereto. 1.6 EFFECTIVE TIME. The date and time which the Merger becomes effective, which shall be the time and date at which the Articles of Merger are filed with the South Carolina Secretary of State. 1.7 SURVIVING CORPORATION. The surviving corporation after consummation of the Merger, which shall be HGI. 4 SECTION II. PLAN OF MERGER 2.1 GENERAL PROVISIONS; SURVIVING CORPORATION. Subject to the terms and conditions of the Reorganization Agreement, at the Effective Time, each member of the HomeSense Group shall be merged with and into HGI, which shall be the Surviving Corporation. At the Effective Time, the separate corporate existence of each member of the HomeSense Group shall cease. 2.2 CONSIDERATION FOR THE MERGER. In the Merger, the HomeSense shareholders will receive, in exchange for all outstanding shares of HomeSense Stock, the following: (a) Six Million Seven Hundred Eighty Thousand Nine Hundred Forty Four (6,780,944) Shares of HFI Common Stock; and (b) Ten Million (10,000,000) shares of HFI Preferred Stock. 2.3 TAX TREATMENT. HGI and HomeSense intend that the Merger shall qualify as a tax-free reorganization under Section 368(a) of the U.S. Internal Revenue Code of 1986, as amended. 2.4 ARTICLES OF INCORPORATION. The Articles of Incorporation of HGI, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation after the Effective Time, until thereafter changed or amended as provided therein or by applicable law. 2.5 BYLAWS. The Bylaws of HGI as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. 2.6 BOARD OF DIRECTORS. The Board of Directors of HGI as constituted immediately prior to the Effective Time shall be the Board of Directors of the Surviving Corporation, until thereafter changed as permitted by its Articles of Incorporation, Bylaws and applicable law. SECTION III. ALLOCATION OF MERGER CONSIDERATION 3.1 SPECIAL DEFINITIONS. The following terms shall have the indicated definitions. "Wholly-owned Companies" shall mean each of HomeSense and its affiliated companies that are parties hereto, except EMMCO and Doc-Write, Inc. "EMMCO" shall mean EMMCO The Mortgage Service Station, Inc. "Closing Price" shall mean the last sale price of the HFI Common Stock as reported on Nasdaq prior to the date of the Effective Time. 3.2 ALLOCATION OF MERGER CONSIDERATION. The Merger Consideration set forth in Section 2.3 of the Agreement shall be allocated among the shareholders of HomeSense and each of the affiliated corporations as set forth below. 5 COMPANY CONSIDERATION - ------- ------------- EMMCO All outstanding shares of EMMCO common stock shall, in the aggregate, be converted into the right to receive a number of shares of HFI Common Stock equal to $1,722,222 divided by the Closing Price. Doc-Write, Inc. Each shareholder of Doc-Write, Inc. shall receive one share of HFI Common Stock. Wholly-owned Companies Shareholders of the Wholly-owned Companies shall receive all 10,000,000 shares of HFI Preferred Stock. Such shares shall be allocated among the Wholly-owned Companies in as nearly equal amounts as possible. Shareholders of the Wholly-owned Companies shall receive an aggregate amount of shares of HFI Common Stock equal to 6,780,944 minus the number of shares of HFI Common Stock issuable to EMMCO and Doc-Write, Inc. as referenced immediately above. Such shares shall be allocated among the Wholly-owned Companies in as nearly equal amounts as possible. 6 SCHEDULE 3.5 TO THE REORGANIZATION AGREEMENT HOMESENSE SUBSIDIARIES AND AFFILIATES HomeSense Financial Corp. EMMCO The Mortgage Service Station Inc. Doc-Write, Inc. Columbia Media Corp. EMC Holding Corp. EMC Training Corp. EMC Underwriting Corp. EMMCO The Mortgage Service Station of Alabama Inc. EMMCO The Mortgage Service Station of Texas Inc. Equitable Mortgage Corp. of Charleston Equitable Mortgage Corp. of Charlotte Equitable Mortgage Loan Center Corp. Equitable Mortgage Management Corp. HomeSense Financial Corp. of Alabama HomeSense Financial Corp. of Baton Rouge HomeSense Financial Corp. of Jackson HomeSense Financial Corp. of Little Rock HomeSense Financial Corp. of Memphis HomeSense Financial Corp. of Orlando HomeSense Financial Corp. of Savannah Mortgage Avenue, Corp. 7 APPENDIX H NON-RECOURSE PROMISSORY NOTE $5,700,000.00 May 9, 2000 For value received, Ronald J. Sheppard ("Promisor") promises to pay to the order of HomeGold, Inc., a South Carolina corporation (the "Company") the aggregate principal sum of Five Million Seven Hundred Thousand Dollars ($5,700,000). Interest shall accrue on a daily basis on the outstanding principal amount of this Note at a rate equal to 7.5% per annum, compounded quarterly, computed on the basis of a 360 day year and the actual number of days elapsed, and shall be payable quarterly in arrears on the 15th day of each calendar quarter after the date hereof until the entire principal amount hereof shall have been paid in full. All outstanding amounts of principal of, and accrued and unpaid interest under, this Note shall be due and payable on the first (1st) anniversary of the date hereof (the "Maturity Date"). Payments of principal of, and accrued and unpaid interest under, this Note shall be due and payable upon Promisor's receipt of proceeds from the transfer or redemption of any Pledged Shares (as defined in the Pledge Agreement between Promisor and the Company of even date herewith) in the full amount of such proceeds (net of costs of sale and any taxes attributable thereto) or such lesser amount as is necessary to pay the full amount of outstanding principal of and accrued interest under this Note and for Promisor to otherwise fully and finally discharge its obligations under this Note. Promisor may, at his option, pay all or any portion of the principal of, and accrued and unpaid interest under, this Note at any time prior to the maturity hereof without penalty or premium. Any payment hereunder shall be applied first to pay accrued and unpaid interest under this Note and second to reduce the outstanding principal amount of this Note. The amounts due under this Note are secured by a pledge of the Pledged Shares. All cash dividends declared and paid with respect to the Pledged Shares, or the portion of such dividends equal to the accrued and unpaid interest due under this Note if such portion is less than the entire amount of the dividends, shall be paid to the holder of this Note. Any and all redemption proceeds from the redemption of any Pledged Shares, shall be payable directly to the Company and shall be applied first to pay accrued but unpaid interest under this Note and second to reduce the outstanding principal amount of this Note. The Company is also authorized to offset amounts payable under this Note against bonuses payable to Ronald J. Sheppard pursuant to Section 5.3 of his Employment Agreement with HomeGold Financial, Inc. of even date herewith. This is a non-recourse note. In no event shall the Promisor have any personal liability whatsoever in respect of this Note. Notwithstanding anything contained herein to the contrary, the Company or any subsequent holder of this Note shall look solely to its rights and remedies under the Pledge Agreement with respect to any and all amounts owed under this Note. Promisor, or his successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and nonpayment of this Note, and expressly agrees that 8 this Note, or any payment hereunder, may be extended from time to time and that the holder hereof may accept security for this Note or release security for this Note, all without in any way affecting the liability of Promisor hereunder. Any failure by the Company to exercise any right hereunder shall not be construed as a waiver of its right to exercise the same or any other right hereunder at any other time. This Note and all rights hereunder shall be governed by the internal laws, and not the laws of conflicts, of the State of South Carolina. IN WITNESS WHEREOF, this Promissory Note has been executed as of the date first written above. -------------------------- Ronald J. Sheppard 9 APPENDIX I STOCK PLEDGE AGREEMENT THIS PLEDGE AGREEMENT is made as of May 9, 2000, between Ronald J. Sheppard ("Pledgor"), HomeGold Financial, Inc., a South Carolina corporation ("HomeGold," or the "Company") and HomeGold, Inc., a South Carolina corporation ("HGI"). This Pledge Agreement is entered into in connection with the closing of the transactions contemplated in the Reorganization Agreement dated February 29, 2000, as amended (the "Reorganization Agreement"), by and between HomeGold, HGI, HomeSense Financial Corp., a South Carolina corporation ("HomeSense"), and HomeSense's affiliated companies, pursuant to which Pledgor obtained (i) Six Million Seven Hundred Eighty Thousand Nine Hundred Forty Four (6,780,944) Shares of HomeGold's Common Stock (the "Common Stock") and (ii) Ten Million (10,000,000) shares of HomeGold's Series A Non-Convertible Preferred Stock, $1.00 par value per share (the "Preferred Stock"). Pledgor has delivered to HGI a promissory note of even date herewith in principal amount of Five Million Seven Hundred Thousand Dollars ($5,700,000) (the "Note"), which is to be secured by the pledge of (i) Four Million Five Hundred Sixty Thousand (4,560,000) shares of the Common Stock (the "Pledged Common Shares") and (ii) Five Million Seven Hundred Thousand (5,700,000) shares of the Preferred Stock (the "Pledged Preferred Shares," and collectively with the Pledged Common Shares, the "Pledged Shares"). This Pledge Agreement provides the terms and conditions upon which the Note and that certain Mutual Indemnity Agreement of even date herewith (the "Indemnity") by and between Pledgor and HomeGold are secured by a pledge to HomeGold and HGI of the Pledged Shares. NOW, THEREFORE, in consideration of the premises contained herein and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, Pledgor, HomeGold and HGI hereby agree as follows: 1. Pledge. Pledgor hereby pledges to HomeGold and HGI, and grants to HomeGold and HGI a security interest in, the Pledged Shares as security for the prompt and complete payment when due of the unpaid principal of and interest on the Note and full payment and performance of the obligations and liabilities of Pledgor under the Indemnity and hereunder. 2. Delivery of Pledged Shares. Upon the execution of this Pledge Agreement, Pledgor shall deliver to HomeGold and HGI the certificate(s) representing the Pledged Shares, together with duly executed forms of assignment sufficient to transfer title thereto to HomeGold and HGI. 3. Voting Rights. Notwithstanding anything to the contrary contained herein, during the term of this Pledge Agreement, Pledgor shall be entitled to all voting rights with respect to the Pledged Shares. 4. Cash Dividends. During the term of this Pledge Agreement, all cash dividends declared and paid in respect of the Pledged Common Shares shall be paid to Pledgor. During the term of this Pledge Agreement, all cash dividends declared and paid in respect of the Pledged Preferred Shares, or the portion of such cash dividends equal to the accrued and unpaid interest under the Note if such portion is less than the entire amount of such dividends, shall be paid to HGI and applied by HGI to the payment of accrued and unpaid interest under the Note, and the remaining cash dividends, if any, shall be paid to Pledgor. Upon the occurrence of and during the continuance of any Default, all cash dividends with respect to the Pledged Preferred Shares shall be paid to HGI and applied by HGI first to the payment of accrued and unpaid interest under the Note, and second to the payment of the outstanding principal amount of the Note. 5. Stock Dividends; Distributions, etc. If, while this Pledge Agreement is in effect, Pledgor becomes entitled to receive or receives any securities or other property as an addition to, in substitution of, or 10 in exchange for any of the Pledged Shares (whether as a distribution in connection with any recapitalization, reorganization or reclassification, a stock dividend or otherwise), Pledgor shall accept such securities or other property on behalf of and for the benefit of HomeGold and HGI as additional security for Pledgor's obligations under the Note and shall promptly deliver such additional security to HomeGold and HGI together with duly executed forms of assignment, and such additional security shall be deemed to be part of the Pledged Shares hereunder. 6. Default. Subject to the terms otherwise set forth herein, if Pledgor defaults in the payment of the principal or interest under the Note when it becomes due (whether upon demand, acceleration or otherwise) or any other event of default under the Note, the Indemnity, or this Pledge Agreement occurs (including without limitation the bankruptcy or insolvency of Pledgor) (each a "Default"), then, at the option or HomeGold and HGI acting jointly but not severally: (a) HomeGold may redeem Pledged Preferred Shares at $1.00 per share in an amount equal to the remaining unpaid principal of and accrued and unpaid interest on the Note plus any other amounts owed to HomeGold or HGI in connection with obligations of Pledgor secured by the Pledged Shares (and exercise the remedy set forth in paragraph (b) below to the extent the total value of the Preferred Pledged Shares is insufficient to satisfy Pledgor's obligations to HomeGold and HGI secured by the Pledged Shares); or (b) HomeGold and HGI, acting jointly but not severally, may exercise, subject to the terms otherwise set forth herein, any and all the rights, powers and remedies of any owner of the Pledged Preferred Shares (including the right to receive dividends and distributions with respect to such Pledged Preferred Shares except as otherwise proved herein) and shall have and may exercise without demand any and all the rights and remedies granted to a secured party upon default under the Uniform Commercial Code of the State of South Carolina or otherwise available to HomeGold or HGI under applicable law. Without limiting the foregoing, HomeGold and HGI are authorized to sell, assign and deliver at its discretion, from time to time, all or any part of the Pledged Preferred Shares at any private sale or public auction, on not less than ten days written notice to Pledgor. Pledgor shall have no right to redeem the Pledged Preferred Shares after any such sale or assignment. Notwithstanding anything contained herein to the contrary, such sale or assignment shall be at such price or prices and upon such terms as HomeGold and HGI may deem advisable subject to the following conditions: (i) HomeGold and HGI shall not sell or assign any Pledged Preferred Shares for consideration of less than $1.00 per share; and (ii) HomeGold and HGI shall not sell or assign any Common Pledged Shares until all Preferred Pledged Shares have been disposed of in accordance with the terms set forth herein. In case of any such sale, the proceeds of such sale shall be applied to the principal of and accrued interest on the Note and other obligations of Pledgor to HomeGold and HGI secured by the Pledged Shares; provided that after payment in full of the indebtedness evidenced by the Note and the other obligations of Pledgor to HomeGold and HGI secured by the Pledged Shares, the balance of the proceeds of sale then remaining shall be paid to Pledgor and Pledgor shall be entitled to the return of any of the Pledged Shares remaining in the hands of HomeGold and HGI. Notwithstanding any other provision of this Pledge Agreement to the contrary, Pledgor shall not be personally liable for any amount of the outstanding principal and accrued interest on the Note or for any deficiency if the remaining proceeds are insufficient to pay the indebtedness under the Note in full. 11 7. Payment of Indebtedness and Release of Pledged Shares. Upon payment in full of the indebtedness evidenced by the Note and termination of the Indemnity, HomeGold and HGI shall surrender the Pledged Shares and any additional security to Pledgor together with all forms of assignment. 8. No Other Liens; No Sales or Transfers. Since the date of issuance, Pledgor has not sold, transferred or assigned, nor granted any liens or encumbrances on, the Pledged Shares other than the lien granted herein. Pledgor hereby covenants that, until such time as all of the outstanding principal of and interest on the Note has been repaid, Pledgor shall not (i) create, incur, assume or suffer to exist any pledge, security interest, encumbrance, lien or charge of any kind against the Pledged Shares or Pledgor's rights as a holder thereof, other than pursuant to this Agreement, or (ii) sell or otherwise transfer any Pledged Shares or any interest therein. 9. Further Assurances. Pledgor agrees that at any time and from time to time upon the written request of HomeGold and HGI, Pledgor shall execute and deliver such further documents (including UCC financing statements) and do such further acts and things as HomeGold and HGI may reasonably request in order to effect the purposes of this Pledge Agreement. 10. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 11. No Waiver; Cumulative Remedies. Neither HomeGold nor HGI shall by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by HomeGold and HGI, and then only to the extent therein set forth. A waiver by HomeGold and HGI of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which HomeGold or HGI would otherwise have on any future occasion. No failure to exercise nor any delay in exercising on the part of HomeGold or HGI, any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are the exclusive rights and remedies of HomeGold and HGI hereunder. 12. Waivers, Amendments; Applicable Law. None of the terms or provisions of this Pledge Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the parties hereto. This Agreement and all obligations of the Pledgor hereunder shall together with the rights and remedies of HomeGold and HGI hereunder, inure to the benefit of HomeGold and HGI and their successors and assigns. This Pledge Agreement shall be governed by, and be construed to interpreted in accordance with, the laws of the State of South Carolina. 13. No Construction Against Either Party. In the event that there is any dispute regarding the interpretation or construction of the provisions of this Pledge Agreement, there shall be no presumption that any provision of this Pledge Agreement is to be construed against either party hereto. 12 IN WITNESS WHEREOF, this Pledge Agreement has been executed as of the date first written above. ------------------------------------- Ronald J. Sheppard HOMEGOLD FINANCIAL, INC. By: _______________________________ Name: _______________________________ Title: _______________________________ HOMEGOLD, INC. By: _______________________________ Name: _______________________________ Title: _______________________________ 13 STATE OF SOUTH CAROLINA SECRETARY OF STATE ARTICLES OF MERGER OR SHARE EXCHANGE Pursuant to Section 33-11-105 of the 1976 South Carolina Code, as amended, the undersigned as the surviving corporation in a merger or the acquiring corporation in a share exchange, as the case may be, hereby submits the following information: 1. The name of the surviving corporation is HomeGold, Inc. The names of the disappearing corporations are: HomeSense Financial Corp. EMMCO The Mortgage Service Station Inc. Doc-Write, Inc. Columbia Media Corp. EMC Holding Corp. EMC Training Corp. EMC Underwriting Corp. EMMCO The Mortgage Service Station of Alabama Inc. EMMCO The Mortgage Service Station of Texas Inc. Equitable Mortgage Corp. of Charleston Equitable Mortgage Corp. of Charlotte Equitable Mortgage Loan Center Corp. Equitable Mortgage Management Corp. HomeSense Financial Corp. of Alabama HomeSense Financial Corp. of Baton Rouge HomeSense Financial Corp. of Jackson HomeSense Financial Corp. of Little Rock HomeSense Financial Corp. of Memphis HomeSense Financial Corp. of Orlando HomeSense Financial Corp. of Savannah Mortgage Avenue, Corp. 2. Attached hereto and made a part hereof is a copy of the Plan of Merger. 3. Complete the following information to the extent it is relevant with respect to each corporation which is a party to the transaction: (a) Name of the surviving corporation: HomeGold, Inc. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
1 (b) Name of the disappearing corporation: HomeSense Financial Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ---------------------------- Common Stock 1000 1000 1000 1000 0 0
(c) Name of the disappearing corporation: EMMCO The Mortgage Service Station Inc. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ------------------------------- Common Stock 10,000 10,000 10,000 10,000 0 0
(d) Name of the disappearing corporation: Doc-Write, Inc. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ------------------------------- Common Stock 1000 1000 1000 1000 0 0
2 (e) Name of the disappearing corporation: Columbia Media Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ------------------------------ Common Stock 1000 1000 1000 1000 0 0
(f) Name of the disappearing corporation: EMC Holding Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ------------------------------- Common Stock 1000 1000 1000 1000 0 0
(g) Name of the disappearing corporation: EMC Training Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
3 (h) Name of the disappearing corporation: EMC Underwriting Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(i) Name of the disappearing corporation: EMMCO The Mortgage Service Station of Alabama Inc. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1 1 1 1 0 0
(j) Name of the disappearing corporation: EMMCO The Mortgage Service Station of Texas Inc. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1 1 1 1 0 0
4 (k) Name of the disappearing corporation: Equitable Mortgage Corp. of Charleston. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(l) Name of the disappearing corporation: Equitable Mortgage Corp. of Charlotte. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(m) Name of the disappearing corporation: Equitable Mortgage Loan Center Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
5 (n) Name of the disappearing corporation: Equitable Mortgage Management Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(o) Name of the disappearing corporation: HomeSense Financial Corp. of Alabama. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(p) Name of the disappearing corporation: HomeSense Financial Corp. of Baton Rouge. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
6 (q) Name of the disappearing corporation: HomeSense Financial Corp. of Jackson. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(r) Name of the disappearing corporation: HomeSense Financial Corp. of Little Rock. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
(s) Name of the disappearing corporation: HomeSense Financial Corp. of Memphis. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0
7 (t) Name of the disappearing corporation: HomeSense Financial Corp. of Orlando. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows:
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0 (u) Name of the disappearing corporation: HomeSense Financial Corp. of Savannah. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows: Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1000 1000 1000 1000 0 0 (v) Name of the disappearing corporation: Mortgage Avenue, Corp. Complete either (1) or (2), whichever is applicable: (1) [ ] Shareholder approval of the merger or stock exchange was not required (See Sections 33-11-103(h), 33-11-104(a), and 33-11-108(a)). (2) [x] The Plan of Merger or Share Exchange was duly approved by shareholders of the corporation as follows: Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Voted Group Shares to be Cast the Meeting For Against Abstain ------ -------- -------------- --------------- ----------------------------- Common Stock 1 1 1 1 0 0
4. Unless a delayed date is specified, the effective date of this document shall be the date it is accepted for filing by the Secretary of State (See Section 33-1-230(b)). Date: May ___, 2000 HomeGold, Inc. ------------------------------------------------ (Name of the Surviving or Acquiring Corporation) By: -------------------------------------------- John M. Sterling, Jr., Chairman 8 PLAN OF MERGER This PLAN OF MERGER (the "Plan of Merger") is entered into by and among HomeGold, Inc., a South Carolina corporation ("HGI"), HomeSense Financial Corp., a South Carolina corporation, and each of the affiliated corporations of HomeSense set forth on the attached SCHEDULE 3.5 to the Reorganization Agreement (as defined below) (collectively, where the context permits, "HomeSense"). WHEREAS, on February 29, 2000, HomeGold Financial, Inc., a South Carolina corporation ("HFI") and HomeSense entered into that certain Reorganization Agreement, which was amended by Amendment #1 to Reorganization Agreement dated March 10, 2000, Amendment #2 to Reorganization Agreement dated May 1, 2000 and Amendment #3 to Reorganization Agreement adding HGI as a party and dated May ___, 2000 (collectively, the "Reorganization Agreement") providing for the acquisition of HomeSense and its affiliated corporations by HGI through the merger of HomeSense and each of its affiliated corporations with and into HGI (the "Merger"); NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties and agreements herein contained, HGI and HomeSense hereby agree as follows: SECTION I. DEFINITIONS 1.1 ARTICLES OF MERGER. The Articles of Merger to be executed by HGI in a form appropriate for filing with the Secretary of State of South Carolina, and including this Plan of Merger. 1.2 HFI COMMON STOCK. The Common Stock of HFI. 1.3 HFI PREFERRED STOCK. The Series A Non-convertible Preferred Stock of HFI. 1.4 HOMESENSE STOCK. The capital stock of all of the members of the HomeSense Group. 1.5 THE HOMESENSE GROUP. The HomeSense Group includes HomeSense Financial Corp., a South Carolina corporation with headquarters in Columbia, South Carolina, and each of the affiliated corporations set forth on SCHEDULE 3.5 to the Reorganization Agreement, a copy of which is attached hereto. 1.6 EFFECTIVE TIME. The date and time which the Merger becomes effective, which shall be the time and date at which the Articles of Merger are filed with the South Carolina Secretary of State. 1.7 SURVIVING CORPORATION. The surviving corporation after consummation of the Merger, which shall be HGI. SECTION II. PLAN OF MERGER 2.1 GENERAL PROVISIONS; SURVIVING CORPORATION. Subject to the terms and conditions of the 9 Reorganization Agreement, at the Effective Time, each member of the HomeSense Group shall be merged with and into HGI, which shall be the Surviving Corporation. At the Effective Time, the separate corporate existence of each member of the HomeSense Group shall cease. 2.2 CONSIDERATION FOR THE MERGER. In the Merger, the HomeSense shareholders will receive, in exchange for all outstanding shares of HomeSense Stock, the following: (a) Six Million Seven Hundred Eighty Thousand Nine Hundred Forty Four (6,780,944) Shares of HFI Common Stock; and (b) Ten Million (10,000,000) shares of HFI Preferred Stock. 2.3 TAX TREATMENT. HGI and HomeSense intend that the Merger shall qualify as a tax-free reorganization under Section 368(a) of the U.S. Internal Revenue Code of 1986, as amended. 2.4 ARTICLES OF INCORPORATION. The Articles of Incorporation of HGI, as in effect immediately prior to the Effective Time, shall be the Articles of Incorporation of the Surviving Corporation after the Effective Time, until thereafter changed or amended as provided therein or by applicable law. 2.5 BYLAWS. The Bylaws of HGI as in effect immediately prior to the Effective Time shall be the Bylaws of the Surviving Corporation, until thereafter changed or amended as provided therein or by applicable law. 2.6 BOARD OF DIRECTORS. The Board of Directors of HGI as constituted immediately prior to the Effective Time shall be the Board of Directors of the Surviving Corporation, until thereafter changed as permitted by its Articles of Incorporation, Bylaws and applicable law. SECTION III. ALLOCATION OF MERGER CONSIDERATION 3.1 SPECIAL DEFINITIONS. The following terms shall have the indicated definitions. "Wholly-owned Companies" shall mean each of HomeSense and its affiliated companies that are parties hereto, except EMMCO and Doc-Write, Inc. "EMMCO" shall mean EMMCO The Mortgage Service Station, Inc. "Closing Price" shall mean the last sale price of the HFI Common Stock as reported on Nasdaq prior to the date of the Effective Time. 3.2 ALLOCATION OF MERGER CONSIDERATION. The Merger Consideration set forth in Section 2.3 of the Agreement shall be allocated among the shareholders of HomeSense and each of the affiliated corporations as set forth below. 10 COMPANY CONSIDERATION - ------- ------------- EMMCO All outstanding shares of EMMCO common stock shall, in the aggregate, be converted into the right to receive a number of shares of HFI Common Stock equal to $1,722,222 divided by the Closing Price. Doc-Write, Inc. Each shareholder of Doc-Write, Inc. shall receive one share of HFI Common Stock. Wholly-owned Companies Shareholders of the Wholly-owned Companies shall receive all 10,000,000 shares of HFI Preferred Stock. Such shares shall be allocated among the Wholly-owned Companies in as nearly equal amounts as possible. Shareholders of the Wholly-owned Companies shall receive an aggregate amount of shares of HFI Common Stock equal to 6,780,944 minus the number of shares of HFI Common Stock issuable to EMMCO and Doc-Write, Inc. as referenced immediately above. Such shares shall be allocated among the Wholly-owned Companies in as nearly equal amounts as possible. 11 SCHEDULE 3.5 TO THE REORGANIZATION AGREEMENT HOMESENSE SUBSIDIARIES AND AFFILIATES HomeSense Financial Corp. EMMCO The Mortgage Service Station Inc. Doc-Write, Inc. Columbia Media Corp. EMC Holding Corp. EMC Training Corp. EMC Underwriting Corp. EMMCO The Mortgage Service Station of Alabama Inc. EMMCO The Mortgage Service Station of Texas Inc. Equitable Mortgage Corp. of Charleston Equitable Mortgage Corp. of Charlotte Equitable Mortgage Loan Center Corp. Equitable Mortgage Management Corp. HomeSense Financial Corp. of Alabama HomeSense Financial Corp. of Baton Rouge HomeSense Financial Corp. of Jackson HomeSense Financial Corp. of Little Rock HomeSense Financial Corp. of Memphis HomeSense Financial Corp. of Orlando HomeSense Financial Corp. of Savannah Mortgage Avenue, Corp. 12 EX-3.1.1 4 ARTICLES OF AMENDMENT EXHIBIT 3.1.1 STATE OF SOUTH CAROLINA SECRETARY OF STATE ARTICLES OF AMENDMENT Pursuant Section 33-10-106 of the 1976 South Carolina Code of Laws, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is HomeGold Financial, Inc. 2. Date of Incorporation June 19, 1968 3. Agent's Name and Address William E. Long, Jr., 3901 Pelham Road, Greenville, SC 29615 4. On April 28, 2000 , the corporation adopted the following Amendment(s) of its Articles of Incorporation: (Type or attach the complete text of each Amendment) Please see the following exhibits attached hereto: Exhibit A (pertaining to cumulative voting); Exhibit B (pertaining to par value of common stock); and Exhibit C (authorizing certain preferred stock). 5. The manner, if not set forth in the Amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the Amendment shall be effected, is as follows: (if not applicable, insert "not applicable" or "NA"). N/A 6. Amendment(s) adopted by shareholder action. At the date of adoption of the Amendments, the number of outstanding shares of each voting group entitled to vote separately on the Amendments, and vote of such shares was: (1) With respect to the amendment set forth in Exhibit A (pertaining to cumulative voting):
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Group Shares to be Cast the Meeting For or Against ----- ------ ---------- ----------- ---------------------------- Common 10,171,416 10,171,416 9,429,557 6,817,903 586,522 Stock (2) With respect to the amendment set forth in Exhibit B (pertaining to par value of common stock): Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Group Shares to be Cast the Meeting For or Against ----- ------ ---------- ----------- ---------------------------- Common 10,171,416 10,171,416 9,429,557 6,994,358 411,697 Stock
(3) With respect to the amendment set forth in Exhibit C (authorizing certain preferred stock):
Number of Number of Number of Votes Number of Undisputed* Voting Outstanding Votes Entitled Represented at Shares Group Shares to be Cast the Meeting For or Against ----- ------ ---------- ----------- ---------------------------- Common 10,171,416 10,171,416 9,429,557 6,951,135 473,132 Stock
7. Unless a delayed dated is specified, the effective date of these Articles of Amendment shall be the date of acceptance for filing by the Secretary of State (See Section 33-1-230(b) of the 1976 South Carolina Code of Laws, as amended) N/A --------------------------------------------- Date May 1, 2000 HomeGold Financial, Inc. ------------- --------------------------------------------- Name of Corporation --------------------------------------------- Signature John M. Sterling, Jr., Chairman --------------------------------------------- Type or Print Name and Office DOM-ARTICLES OF AMENDMENT FORM REVISED BY SOUTH CAROLINA SECRETARY OF STATE, MAY 1999 EXHIBIT A TO ARTICLES OF AMENDMENT FOR HOMEGOLD FINANCIAL, INC. 1. No shareholder shall have a right to cumulate votes with respect to the election of Company directors. EXHIBIT B TO ARTICLES OF AMENDMENT FOR HOMEGOLD FINANCIAL, INC. 2. The par value of the Company's common stock shall be changed from $0.05 per share to $0.001 per share. EXHIBIT C TO ARTICLES OF AMENDMENT FOR HOMEGOLD FINANCIAL, INC. 3. The Articles of Incorporation are hereby amended to authorize for issuance, 20,000,000 shares of preferred stock. The relative rights, preferences and limitations of such preferred stock shall be determined by the Company's Board of Directors in its sole discretion. The Company's Board of Directors shall have the sole authority to issue shares of such preferred stock to whomever and for whatever purposes it, in its sole discretion, deems appropriate. The Board is expressly authorized to divide such preferred shares into separate series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series. Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. Among other things, the Board may designate the following variations among any of the various series of preferred stock without further action of the shareholders of the Company: (a) the distinctive serial designation and the number of shares constituting such series; (b) the dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s) the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; (c) the voting powers, full or limited, if any, of shares of such series; (d) whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; (e) the amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the association; (f) whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (g) whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the association and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (h) the price or other consideration for which the shares of such series shall be issued; and (i) whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. EX-3.1.2 5 ARTICLES OF AMENDMENT EXHIBIT 3.1.2 STATE OF SOUTH CAROLINA SECRETARY OF STATE ARTICLES OF AMENDMENT Pursuant Section 33-10-106 of the 1976 South Carolina Code of Laws, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is HomeGold Financial, Inc. 2. Date of Incorporation June 19, 1968 3. Agent's Name and Address William E. Long, Jr., 3901 Pelham Road, Greenville, SC 29615 4. On May 1, 2000 , the corporation adopted the following Amendment(s) of its Articles of Incorporation: (Type or attach the complete text of each Amendment) Please see Exhibit A attached hereto. 5. The manner, if not set forth in the Amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the Amendment shall be effected, is as follows: (if not applicable, insert "not applicable" or "NA"). N/A 6. Amendment(s) was duly adopted by the incorporators or board of directors without shareholder approval pursuant to Sections 33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South Carolina Code of Laws, as amended and shareholder action was not required. 7. Unless a delayed dated is specified, the effective date of these Articles of Amendment shall be the date of acceptance for filing by the Secretary of State (See Section 33-1-230(b) of the 1976 South Carolina Code of Laws, as amended) N/A --------------------------------------------- Date May 1, 2000 HomeGold Financial, Inc. ----------- --------------------------------------------- Name of Corporation --------------------------------------------- Signature John M. Sterling, Jr., Chairman --------------------------------------------- Type or Print Name and Office CERTIFICATE OF DESIGNATION SERIES A NON-CONVERTIBLE PREFERRED STOCK There is hereby established a series of Preferred Stock of the Corporation consisting of Fifteen Million Three Hundred Thousand (15,300,000) shares, $1.00 par value per share, designated "Series A Non-convertible Preferred Stock" having the preferences, limitations and relevant rights set forth below (the "Series A Preferred Stock"). SECTION I. DISTRIBUTIONS. (a) The holders of the Series A Preferred Stock shall be entitled to receive out of funds legally available therefor, cumulative annual cash dividends of $0.08 per share, increasing to $.10 per share on January 1, 2005, payable quarterly (i.e. $0.02 per share, increasing to $0.025 per share on January 1, 2005) on the 15th day of each calendar quarter in each year (a "Quarterly Dividend Payment Date") commencing on the first Quarterly Dividend Payment Date after the issuance of Series A Preferred Stock; provided however, that no such dividends shall be paid or payable, nor shall such dividends cumulate, so long as any of the Corporation's 10.75% Senior Notes due 2004 are outstanding. (b) The Series A Preferred Stock is superior with respect to dividends over the Common Stock and any subsequent series of preferred stock. Accordingly, no dividends in cash or property may be paid with respect to the Common Stock or any other security ranking junior to the Series A Preferred Stock in a particular fiscal year unless all dividends with respect to the Series A Preferred Stock for that particular fiscal year have been paid or sums sufficient set aside therefor. (c) The cash dividends on the Series A Preferred Stock are cumulative and, accordingly, no dividends or other distributions may be declared or paid on shares of the Common Stock or any security ranking junior to the Series A Preferred Stock unless all regular cash dividends on the Series A Preferred Stock for all past periods have been paid. Any dividends paid in part on the shares of the Series A Preferred Stock and any shares of other preferred stock ranking on a parity, as to dividends, with the Series A Preferred Stock, must be paid ratably in proportion to the dividends to which the holders of all such parity shares are respectively entitled. No interest or sum of money in lieu of interest will be payable in respect of any dividend payment or payments on Series A Preferred Stock. (d) Dividends payable on the Series A Preferred Stock shall be computed based on a 360-day year consisting of twelve 30-day months. Dividends will be payable to holders of record as they appear on the stock books of the Corporation on such record date, not more than 60 days nor less than 10 days preceding the Quarterly Dividend Payment Date, from time to time fixed in advance by the Board of Directors of the Corporation, or if no record date is fixed, to holders of record as of the close of business on the date on which the dividend is declared. Dividends for the partial year prior to the first Quarterly Dividend Payment Date shall be calculated pro rata based on a 360-day year consisting of twelve 30-day months. SECTION II. PREFERENCE ON LIQUIDATION. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of the Series A Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Corporation available for distribution to its shareholders, whether from capital, surplus or earnings, before any payment shall be made in respect of the shares of Common Stock or of any stock ranking on liquidation junior to the Series A Preferred Stock an amount equal to the par value per share of the Series A Preferred Stock (appropriately adjusted for any subdivision, combination, stock dividend or reclassification) plus all accrued but unpaid distributions thereon. If upon liquidation, dissolution or winding up of the Corporation, the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of the Series A Preferred Stock the full amount to which they shall be entitled, the holders of the Series A Preferred Stock shall share ratably (together with any other series ranking equal to the Series A Preferred Stock with respect to liquidation preference) in any distribution of assets in proportion to the full amount to which they are respectively entitled. For purposes of this Section II, neither the merger or consolidation of the Corporation into or with any other corporation, nor the sale of all or substantially all the assets of the Corporation, shall be deemed a voluntary or involuntary liquidation, dissolution or winding up of the Corporation. Series A Preferred Stock shall have priority in liquidation superior to that of any subsequent series of preferred stock. In particular, the Board of Directors shall not have the authority, without shareholder vote, to establish subsequent series of preferred stock having a priority in liquidation equal or superior to the Series A Preferred Stock. (b) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation which will involve the distribution of assets other than cash, the Corporation shall promptly engage competent independent appraisers reasonably acceptable to holders of a majority of the outstanding shares of Series A Preferred Stock (which may be the same appraisers engaged by the Corporation to appraise assets on behalf of holders of other capital stock of the Corporation) to determine the value of the assets to be distributed to the holders of shares of Series A Preferred Stock and any other securities of the Corporation. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice to each holder of shares of Series A Preferred Stock of the appraiser's valuation. SECTION III. VOTING. (a) Holders of the Series A Preferred Stock shall not be entitled to vote on any matter, except as expressly required by the South Carolina Business Corporation Act of 1988, as amended, or as expressly provided below. Whenever the approval or other action of holders of the Series A Preferred Stock voting as a separate class is required by the South Carolina Business Corporation Act of 1988, as amended, or this Certificate of Designation, each share of the Series A Preferred Stock shall be entitled to one vote, and the affirmative vote of a majority of such shares at a meeting at which a majority of such shares are present or represented shall be sufficient to constitute such approval or other action unless a higher percentage is required by applicable law. (b) Unless a higher percentage is otherwise expressly required by applicable law, approval of a majority of Series A Preferred Stock outstanding (voting as a class) shall be required (i) to create or authorize any class or series of stock ranking prior to or equal to the Series A Preferred Stock in respect of dividends or distribution of assets on liquidation or otherwise alter or abolish the liquidation preferences or any other preferential right of the Series A Preferred Stock, or (ii) designate or authorize additional shares of Series A Preferred Stock or (iii) to exclude or limit the voting rights as to these matters. SECTION IV. CONVERSION RIGHTS. The Series A Preferred Stock are not convertible into any Company security. SECTION V. PUT - REDEMPTION RIGHTS. The Series A Preferred Stock does not have any associated put, redemption or sinking fund rights. Any or all of the shares of Series A Preferred Stock outstanding at any time shall be redeemable at par at the option of the Company upon notice to the holder(s) thereof. In the event the Company elects to redeem less than all of the then outstanding shares, and there is more than one holder of the shares, the number of shares redeemed from each such holder shall be in proportion to their total number of shares held. SECTION VI. PROVISION FOR CONSOLIDATION, MERGER, ETC. In case the Corporation, (i) shall consolidate with or merge into any other entity and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) shall permit any other entity to consolidate with or merge into the Corporation and the Corporation shall be the continuing or surviving entity, but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other entity or cash or any other property, (iii) shall transfer all or substantially all of its properties or its assets to any other entity, or (iv) shall effect a capital reorganization or reclassification of the Common Stock (other than a capital reorganization or reclassification resulting in the issuance of additional shares of Common Stock for which adjustment is provided in Section V), then, in each such case, such transaction shall not be consummated unless the continuing or surviving entity shall expressly undertake the obligations hereunder. SECTION VII. REACQUIRED SHARES. Any shares of the Series A Preferred Stock redeemed or purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Series A Preferred Stock and may be reissued as part of a new series of preferred stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions or restrictions on issuance set forth herein. EX-10.2.1 6 AMD. #3 TO 1995 STOCK OPTION PLAN EXHIBIT 10.2.1 AMENDMENT NO. 3 TO THE HOMEGOLD FINANCIAL, INC. 1995 EMPLOYEE AND OFFICER STOCK OPTION PLAN The HomeGold Financial, Inc. 1995 Employee and Officer Stock Option Plan, as amended by Amendment No. 1 and Amendment No. 2 thereto (collectively, the "Plan") is hereby amended to increase the total number of shares issuable hereunder from 1,066,667 shares to 1,466,667 shares. In all other respects the Plan shall remain unchanged. This Amendment No. 3 shall be effective as of the 10th day of June 1999. EX-10.2.2 7 AMD. #4 TO 1995 STOCK OPTION PLAN EXHIBIT 10.2.2 AMENDMENT NO. 4 TO THE HOMEGOLD FINANCIAL, INC. 1995 EMPLOYEE AND OFFICER STOCK OPTION PLAN The HomeGold Financial, Inc. 1995 Employee and Officer Stock Option Plan, as amended by Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto (collectively, the "Plan") is hereby amended to increase the total number of shares issuable hereunder from 1,466,667 shares to 1,966,667 shares. In all other respects the Plan shall remain unchanged. This Amendment No. 4 shall be effective as of the 28th day of April 2000. EX-10.3.1 8 FORTH AMENDMENT TO MORT. LOAN AGMNT EXHIBIT 10.3.1 FOURTH AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT Fourth Amendment, dated as of May 2, 2000 to the Mortgage Loan Warehousing Agreement, dated as of June 30, 1998, as amended by the First Amendment, dated as of August 24, 1998, as amended by the Second Amendment, dated as of December 24, 1998, and as further amended the by Third Amendment, dated as of May 27, 1999 (as so amended, the "Loan Agreement"), by and among HomeGold, Inc., a South Carolina corporation ("HomeGold"), Carolina Investors, Inc., a South Carolina corporation ("Carolina" and together with HomeGold, each a "Borrower" and collectively, the "Borrowers"), the financial institutions party thereto (each a "Lender" and collectively the "Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). The Borrowers, the Lenders and the Administrative Agent desire to amend certain terms, covenants and conditions set forth in the Loan Agreement. In addition, the Borrowers have requested the Lenders to consent to certain actions taken by Borrowers. Accordingly, the Borrowers, the Administrative Agent and the Lenders hereby agree as follows: 1. Definitions. All capitalized terms used herein and not otherwise defined herein are used herein as defined in the Loan Agreement. 2. Commitments. (a) The maximum aggregate principal amount of the revolving credit facility set forth in the STATEMENT OF PURPOSE of the Loan Agreement is hereby amended by deleting the two references to "$100,000,000" contained therein and substituting in lieu thereof a reference to "$50,000,000". (b) Paragraph (d) of Section 10.13 to the Loan Agreement is hereby amended by deleting each reference to "Schedule I-A" contained therein and substituting in lieu thereof "Schedule I-B". (c) The definition of the terms "Commitment" and "Total Commitment" in Article XI of the Loan Agreement are hereby amended by deleting the words "Schedule I-A to this Agreement" and substituting in lieu thereof "Schedule I-B to this Agreement". 3. Indebtedness. The definition of the terms "Permitted Other Debt" and "Permitted Secured Debt" in Article XI of the Loan Agreement are hereby amended by deleting the words "Exhibit N-A attached hereto" and substituting in lieu thereof "Exhibit N-B attached hereto". 4. Investments; Advances. Section 7.07 of the Loan Agreement is hereby amended by (a) deleting the word "and" before clauses (C) and (D) and (b) inserting a new clause (E) after clause (D) therein and before the phrase "provided further," therein to read as follows: "and (E) HomeGold shall be permitted to make a loan, directly or indirectly, to Ron Sheppard in the principal amount of $4,000,000 and to acquire a loan made by HomeSense, Inc. to Ron Sheppard in the principal amount of $1,700,000, provided that such loans are (i) evidenced by one or more promissory notes (the "Sheppard Notes") made by Ron Sheppard to the applicable payee of each such loan and (ii) secured by a pledge to the Administrative Agent of (x) 4,560,000 shares of the common stock and 5,700,000 shares of preferred stock of EGI issued to Ron Sheppard in connection with EGI's acquisition of HomeSense, Inc. and (y) the Sheppard Notes, in each case accompanied by such transfer documents as the Administrative Agent shall request." 5. Dividends. Section 7.09 of the Loan Agreement is hereby amended by deleting clause (B) set forth in the first proviso of such Section and substituting in lieu thereof the following: "(B) in the case of the preferred stock issued by EGI in connection with its acquisition of HomeSense, Inc., the Companies may from time to time make a dividend or other distribution to EGI, the proceeds of which shall be used by EGI to pay scheduled dividends on such preferred stock, provided that, at the time of and after giving effect to such dividend or distribution (x) the condition set forth in clause (A) of this Section 7.09 is satisfied and (y) the Availability of the Companies is at least equal to the amount required to be maintained by the Companies pursuant to Section 7.17;" 6. Exhibits. Exhibit N-A to the Loan Agreement is hereby amended in its entirety to read as set forth in Annex II to this Amendment, for the purpose of listing the indebtedness assumed or incurred by HomeGold in connection with EGI's acquisition of HomeSense, Inc. 7. Schedules. Schedule I-A to the Loan Agreement is hereby amended in its entirety to read as set forth in Annex I to this Amendment. 8. Conditions to Effectiveness. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions shall have been satisfied being herein called the "Amendment Effective Date"): (a) The representations and warranties contained in this Amendment and in Article V of the Loan Agreement shall be true and correct on and as of the Amendment Effective Date as though made on and as of such date (except where such representations and warranties relate to an earlier date in which case such representations and warranties shall be true and correct as of such earlier date); no Event of Default or Default shall have occurred and be continuing on the Amendment Effective Date, or result from this Amendment becoming effective in accordance with its terms. (b) The Administrative Agent shall have received counterparts of this Amendment which bear the signatures of the Borrowers and each of the Lenders. -2- (c) The Administrative Agent shall have received certified copies of requests for copies or information on Form UCC-11, dated as of a recent date as determined by the Administrative Agent, listing all effective financing statements which name as debtor HomeSense, Inc. (or any of its affiliates) and which are filed in the jurisdictions referred to in paragraph (d) above, with copies of such financing statements, none of which, except as otherwise agreed to in writing by the Administrative Agent, shall cover any of the assets to be acquired by EGI and distributed by EGI to HomeGold. (d) The Borrowers shall have paid to the Administrative Agent for the benefit of the Lenders executing this Amendment an amendment fee of $50,000, which fee shall be non-refundable and fully earned on the Amendment Effective Date. (e) The Administrative Agent shall have received an acknowledgment and consent to this Amendment, substantially in the form of Annex III attached hereto, duly executed by EGI and EMC-TN. (f) All legal matters incident to this Amendment shall be satisfactory to the Administrative Agent and its counsel. 9. Conditions Subsequent. As a condition subsequent to the effectiveness of this Amendment, the Borrowers shall perform or cause to be performed the following (the failure by the Borrowers to so perform or cause to be performed constituting an Event of Default): (a) Within three Business Days of the Amendment Effective Date, the Administrative Agent shall have received a pledge amendment to the Pledge Agreement, duly executed by HomeGold, together with (i) the stock certificates representing the common stock and preferred stock of EGI issued to Ron Sheppard to be pledged to the Administrative Agent pursuant to Section 7.07(E) of the Loan Agreement, accompanied by undated stock powers executed in blank, and (ii) the Sheppard Notes in suitable form for transfer by delivery, accompanied by an estoppel letter from Ron Sheppard. (b) Within three Business Days of the Amendment Effective Date, the Adminstrative Agent shall have received UCC-1 financing statements executed by HomeGold, in form and substance satisfactory to the Administrative Agent, to be filed in the states of Alabama, Florida, Georgia, Mississippi and North Carolina. 10. Waiver and Consent. (a) Pursuant to the request of the Borrowers, the Lenders hereby consent to and waive any Event of Default that would arise from the indebtedness owing by EGI to HomeGold as of the fiscal quarter ending March 31, 2000, provided that the aggregate outstanding amount of such indebtedness does not exceed $45,000,000 as of the end of such fiscal quarter. (b) The Lenders' consent and waiver of any Event of Default relating to the actions set forth in paragraph (a) above (i) shall become effective as of the date set forth above when signed by the Lenders, (ii) shall be effective only in this specific instance and for the specific purposes set forth herein, and (iii) does not allow for any other or further departure from -3- the terms and conditions of the Loan Agreement or any other Credit Documents, which terms and conditions shall continue in full force and effect. 11. Third-Party Review. (a) The Borrowers acknowledge and agree that the Lenders shall have no obligation to finance either Borrower's purchase of Mortgage Loans that have been previously financed under any of the mortgage warehouse facilities assumed or entered into by HomeGold in connection with EGI's acquisition of HomeSense, Inc. (each, an "Assumed Warehouse Facility"), nor shall any such Mortgage Loans constitute Eligible Mortgage Loans, until (i) the Administrative Agent (or a third party designated by the Administrative Agent) shall have completed its review of the underwriting guidelines and origination procedures relating to such Mortgage Loans financed under each such Assumed Warehouse Facility, (ii) the results of such review shall be acceptable to the Administrative Agent and (iii) the Administrative Agent and the applicable lender under each such Assumed Warehouse Facility shall have entered into an intercreditor agreement in form and substance satisfactory to the Administrative Agent and the Lenders. (b) Notwithstanding the execution of this Amendment, the Administrative Agent reserves all of its powers, rights and privileges under the Credit Documents to implement reserves against the Borrowing Base and/or require the modification of other provisions in the Credit Documents based upon the Administrative Agent's review of the report dated April 14, 2000 prepared by The Clayton Group, Inc. 12. Representations and Warranties. Each of the Borrowers represents and warrants to the Lenders as follows: (a) Each Borrower (i) is duly organized, validly existing and in good standing under the laws of the state of its organization and (ii) has all requisite power, authority and legal right to execute, deliver and perform this Amendment, all other documents executed by it in connection with this Amendment, and to perform the Loan Agreement, as amended hereby. (b) The execution, delivery and performance by the Borrowers of this Amendment and all other documents executed by it in connection with this Amendment and the performance by the Borrowers of the Loan Agreement as amended hereby (i) have been duly authorized by all necessary action, (ii) do not and will not violate or create a default under any Borrower's organizational documents, any applicable law or any contractual restriction binding on or otherwise affecting any Borrower or any of such Borrower's properties, and (iii) except as provided in the Credit Documents, do not and will not result in or require the creation of any Lien, upon or with respect to any Borrower's property. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or other regulatory body is required in connection with the due execution, delivery and performance by any of the Borrowers of this Amendment and all other documents executed by it in connection with this Amendment and the performance by the Borrowers of the Loan Agreement as amended hereby. (d) This Amendment and the Loan Agreement, as amended hereby, and all other documents executed in connection with this Amendment constitute the legal, valid -4- and binding obligations of the Borrowers party thereto, enforceable against such Persons in accordance with their terms except to the extent the enforceability thereof may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect affecting generally the enforcement of creditors' rights and remedies and by general principles of equity. (e) The representations and warranties contained in Article V of the Loan Agreement are correct on and as of the Amendment Effective Date as though made on and as of the Amendment Effective Date (except to the extent such representations and warranties expressly relate to an earlier date), and no Event of Default or Default has occurred and is continuing on and as of the Amendment Effective Date under any Credit Document or any of documents relating to each Assumed Warehouse Facility which has not been waived in writing by the applicable lenders under such Assumed Warehouse Facility. 13. Continued Effectiveness of Loan Agreement. Each of the Borrowers hereby (i) confirms and agrees that each Credit Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the Amendment Effective Date of this Amendment all references in any such Credit Document to "the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment, and (ii) confirms and agrees that to the extent that any such Credit Document purports to assign or pledge to the Administrative Agent, or to grant to the Administrative Agent a Lien on any collateral as security for the Obligations of the Borrowers from time to time existing in respect of the Loan Agreement and the Credit Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and confirmed in all respects. 14. Miscellaneous. ------------- a. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. b. Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. c. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. d. The Borrowers will pay on demand all reasonable out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including, without limitation, the reasonable fees, disbursements and other charges of Schulte Roth & Zabel LLP, counsel to the Administrative Agent. -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. HOMEGOLD, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- CAROLINA INVESTORS, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- AGENT AND LENDER THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent & Lender By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- -6- LENDERS ------- DEUTSCHE FINANCIAL SERVICES CORPORATION By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- GMAC COMMERCIAL CREDIT LLC By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- -7- ANNEX I ------- SCHEDULE I-B TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF JUNE 30, 1998, AS AMENDED COMMITMENT SCHEDULE ------------------- PART A: From April 30, 2000 through May 31, 2000.
LENDER MAXIMUM COMMITMENT PERCENTAGE SHARE ------ ------------------ ---------------- The CIT Group/Business Credit, Inc. $37,500,000.00 75.00% Deutsche Financial Services Corporation 6,250,000.00 12.50% GMAC Commercial Credit LLC 6,250,000.00 12.50% ============== ====== TOTAL COMMITMENT $50,000,000.00 100.00%
PART B: (I) From May 31, 2000 through June 30, 2000, if Monthly Cash Flow for the month ended April 30, 2000 is greater than or equal to $500,000.
LENDER MAXIMUM COMMITMENT PERCENTAGE SHARE ------ ------------------ ---------------- The CIT Group/Business Credit, Inc. $37,500,000.00 75.00% Deutsche Financial Services Corporation 6,250,000.00 12.50% GMAC Commercial Credit LLC 6,250,000.00 12.50% ============== ====== TOTAL COMMITMENT $50,000,000.00 100.00%
(II) From May 31, 2000 through June 30, 2000, if Monthly Cash Flow for the month ended April 30, 2000 is less than $500,000.
LENDER MAXIMUM COMMITMENT PERCENTAGE SHARE ------ ------------------ ---------------- The CIT Group/Business Credit, Inc. $35,250,000.00 75.00% Deutsche Financial Services Corporation 5,875,000.00 12.50% GMAC Commercial Credit LLC 5,875,000.00 12.50% ============== ====== TOTAL COMMITMENT $47,000,000.00 100.00%
PART C: (I) From June 30, 2000 through July 31, 2000, if Monthly Cash Flow for the month ended May 31, 2000 is greater than or equal to $500,000, each Lender's Commitment and the Total Commitment shall be the amount set forth in paragraph (I) or (II) of Part B above, as applicable. (II) From June 30, 2000 through July 31, 2000, if Monthly Cash Flow for the month ended May 31, 2000 is less than $500,000, (x) each Lender's Commitment under paragraph (I) or (II) of Part B above, as applicable, shall be reduced by its Pro Rata Share of $3,000,000 and (y) the Total Commitment under paragraph (I) or (II) of Part B above, as applicable, shall be reduced by $3,000,000. PART D: (I) From July 31, 2000 through August 31, 2000, if Monthly Cash Flow for the month ended June 30, 2000 is greater than or equal to $500,000, each Lender's Commitment and the Total Commitment shall be the amount set forth in paragraph (I) or (II) of Part C above, as applicable. (II) From July 31, 2000 through August 31, 2000, if Monthly Cash Flow for the month ended June 30, 2000 is less than $500,000, (x) each Lender's Commitment under paragraph (I) or (II) of Part C above, as applicable, shall be reduced by its Pro Rata Share of $3,000,000 and (y) the Total Commitment under paragraph (I) or (II) of Part C above, as applicable, shall be reduced by $3,000,000. PART E: From August 31, 2000 through September 30, 2000, (I) the Total Commitment shall equal the lesser of (x) $47,000,000 and (y) the Total Commitment under paragraph (I) or (II) of Part D above, as applicable, minus $3,000,000, and (II) each Lender's Commitment shall equal its Pro Rata Share of the Total Commitment under clause (I) of this Part E. PART F: From September 30, 2000 through October 31, 2000, (I) the Total Commitment shall equal the lesser of (x) $44,000,000 and (y) the Total Commitment under clause (I)(y) of -2- Part E above, as applicable, minus $3,000,000, and (II) each Lender's Commitment shall equal its Pro Rata Share of the Total Commitment under clause (I) of this Part F. PART G: From October 31, 2000 through November 30, 2000, (I) the Total Commitment shall equal the lesser of (x) $41,000,000 and (y) the Total Commitment under clause (I)(y) of Part F above, as applicable, minus $3,000,000, and (II) each Lender's Commitment shall equal its Pro Rata Share of the Total Commitment under clause (I) of this Part G. PART H: From November 30, 2000 through December 31, 2000, (I) the Total Commitment shall equal the lesser of (x) $38,000,000 and (y) the Total Commitment under clause (I)(y) of Part G above, as applicable, minus $3,000,000, and (II) each Lender's Commitment shall equal its Pro Rata Share of the Total Commitment under clause (I) of this Part H. PART I: From and after December 31, 2000, (I) the Total Commitment shall equal $25,000,000, and (II) each Lender's Commitment shall equal its Pro Rata Share of the Total Commitment under clause (I) of this Part I. As used in this Schedule I-B, the term "Monthly Cash Flow" shall mean, for each month, the amount listed as EGI's "cash flow due to operating activities" for such month as set forth in EGI's monthly consolidated direct cash flow statement, a form of which is attached hereto as Schedule 1-B(x), furnished to the Lenders pursuant to Section 6.01(3) of the Agreement. For the avoidance of doubt, EGI's "cash flow due to operating activities" shall equal the difference between EGI's consolidated operating cash revenues and EGI's consolidated operating cash expenses, in each case based upon the categories of operating cash revenues and operating cash expenses listed in the form of EGI's monthly consolidated direct cash flow statement attached hereto as Schedule 1-B(x). -3- ANNEX II EXHIBIT N-B TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF JUNE 30, 1998, AS AMENDED SCHEDULE OF PERMITTED SECURED DEBT AND PERMITTED OTHER DEBT ----------------------------------------------------------- PERMITTED SECURED DEBT OF HOMEGOLD & CII: 1. "Repo" facilities on customary terms and conditions, provided that no such mortgage warehousing facility or "Repo" facilities may provide for "wet" fundings. 2. Credit facilities to finance the acquisition or maintenance of property, plant and equipment, provided that such facilities may only be secured by such property, plant or equipment. 3. Mortgage Loan from Bank of America, N.A. to HomeGold, Inc. secured by a Mortgage of Real Estate (Amended) from Sunset Real Estate Investment Corp., dated July 30, 1999, of record in the Register of Deeds Office for Lexington County, South Carolina, at Book 5374 and Page 234 (amending and restating a May 29, 1998 Mortgage of record in the Register of Deeds Office for Lexington County, South Carolina, at Book 4698 and Page 156), and by a Mortgage of Real Estate from DCS Real Estate, LLC, dated July 30, 1999, recorded in the Register of Deeds Office for Lexington County, South Carolina, at Book 5374 and Page 240). 4. Operating Line of Credit in the amount of $1,860,000 provided by BB&T Bank to HomeGold, Inc. secured by a pledge of a $1,000,000 certificate of deposit. 5. Operating Line of Credit in the amount of $350,000 provided by Bank of America, N.A. to HomeGold, Inc. secured by pledge and assignment of Depository Account maintained by HomeGold, Inc. at Bank of America, N.A. 6. Mortgage purchase facility provided by HSA Residential Mortgage Services of Texas, Inc. to HomeGold, Inc. in an amount up to $50,000,000. 7. Warehousing Line Revolving Credit Agreement, dated as of May 2, 2000, by and between HomeGold, Inc. and Household Commercial Financial Services, Inc., in an amount up to $50,000,000. PERMITTED OTHER DEBT OF HOMEGOLD & CII: 1. 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 Administrative Agent for the eventual payment thereof in the event it is found that such contested trade debt is payable by HOMEGOLD, Inc. or CII. 2. Guaranties by HOMEGOLD, INC. & CII of $125,000,000 in aggregate principal amount of EGI's 10-3/4% Senior Notes due 2004, Series A and Series B. 3. CII's Subordinated Debentures (Series B, Series C and Series D) and CII's Floating Rate Senior Notes (Series 93, Series 94, Series 95, Series 96, Series 97, and Series 99) each as listed on page 3 of that certain Prospectus of CII dated April 1, 1998 describing the Series D Subordinated Debentures and Series 99 Floating Rate Senior Notes and any future issuances of substantially similar securities of CII. -2- ANNEX III --------- ACKNOWLEDGMENT AND CONSENT -------------------------- The undersigned (each a "Loan Party"), each as a party to one or more Credit Documents, as defined in the Mortgage Loan Warehousing Agreement dated as of June 30, 1998 (the "Loan Agreement"), by and among HomeGold, Inc., Carolina Investors, Inc., the lenders parties thereto (the "Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in such capacity, the "Agent"), each hereby (i) acknowledges and consents to the Fourth Amendment dated the date hereof (the "Amendment", all terms defined therein being used herein as defined therein) to the Loan Agreement; (ii) confirms and agrees that each Credit Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the Amendment Effective Date all references in any such Credit Documents to "the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by the Amendment; and (iii) confirms and agrees that to the extent that any such Credit Document purports to assign or pledge to the Agent, or to grant to the Agent a security interest in or lien on, any collateral as security for the obligations of the Loan Party from time to time existing in respect of the Credit Documents, such pledge, assignment and/or grant of a security interest or lien is hereby ratified and confirmed in all respects as security for, in addition to the other obligations secured thereby, all obligations of such Loan Party outstanding upon the taking effect of the Amendment. Dated: May __, 2000 HOMEGOLD FINANCIAL, INC. (f/k/a Emergent Group, Inc.) By: ________________________ Title: _______________________ EMERGENT MORTGAGE CORPORATION OF TENNESSEE By: ________________________ Title: _______________________ EX-10.3.2 9 AMD. #1 TO SECURITY AGREEMENTS EXHIBIT 10.3.2 AMENDMENT NO. 1 TO SECURITY AGREEMENTS AMENDMENT NO. 1 dated as of May 2, 2000, to (i) Security Agreement dated as of June 30, 1998, made by HomeGold, Inc., a South Carolina corporation ("HomeGold"), in favor of The CIT Group/Business Credit, Inc., as administrative agent (the "Agent") for the Lenders party to the Credit Agreement (as defined in the Security Agreements hereinafter defined), and (ii) Security Agreement dated as of June 30, 1998, made by Carolina Investors, Inc., a South Carolina corporation ("CII" and together with HomeGold, each a "Grantor" and collectively the "Grantors"), in favor of the Agent (the Security Agreements described in (i) and (ii) above are hereinafter referred to as the "Security Agreements"). WHEREAS, as security for the Obligations (as defined in the Security Agreements) the Grantors executed and delivered to the Agent the Security Agreements providing for the grant to the Agent of a security interest in the Collateral (as defined in the Security Agreements); WHEREAS, the Grantors and the Agent wish to amend the Security Agreements to exclude as part of the Collateral the mortgage loans financed under a warehouse credit facility dated May 2, 2000 between HomeGold and Household Commercial Financial Services, Inc.; NOW, THEREFORE, in consideration of the premises and the agreements herein, the parties agree that each Security Agreement shall be amended as follows: 1. Definitions. Reference is hereby made to the Security Agreement for a statement of the terms thereof. All terms used in this Amendment which are defined in the Security Agreement and not otherwise defined herein shall have the same meanings herein as set forth in the Security Agreement. 2. Collateral. Section 2 of each Security Agreement is hereby amended by restating the last clause of such Section to read as follows: "in each case howsoever the Grantor's interest therein may arise or appear (whether by ownership, security interest, claim or otherwise); provided that, nothing hereunder constitutes or shall be deemed to constitute a grant of a security interest in favor of the Administrative Agent in the Grantor's interest in (a) any Mortgage Loans either (i) identified by the Grantor for inclusion in the borrowing base under the Warehousing Line Revolving Credit Agreement dated as of May 2, 2000, by and between HomeGold, Inc. and Household Commercial Financial Services, Inc. ("Household"), and not identified by the Grantor for inclusion in the Borrowing Base under the Credit Agreement, or (ii) in the possession of Household (or an agent or bailee acting on behalf of Household) (such Mortgage Loans are hereinafter referred to as "Household Mortgage Loans"), and not identified by the Grantor for inclusion in the Borrowing Base under the Credit Agreement, and (b) any other assets or property arising from or directly attributable to the Household Mortgage Loans." 3. Representations and Warranties. Each Grantor represents and warrants to the Agent as follows: a. The execution, delivery and performance by the Grantor of this Amendment and the performance by the Grantor of the Security Agreement to which it is a party as amended hereby (A) have been duly authorized by all necessary action and (B) do not and will not contravene its charter or bylaws or any applicable law. b. This Amendment and the Security Agreement to which it is a party, as amended hereby, constitute the legal, valid and binding obligations of the Grantor enforceable against the Grantor in accordance with their terms except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws and general principals affecting the enforcement of creditor's rights generally. c. The representations and warranties contained in Section 4 of the Security Agreement to which it is a party are correct on and as of the Effective Date (as defined below) as though made on and as of the Effective Date (except to the extent such representations and warranties expressly relate to an earlier date). 4. Continued Effectiveness of the Security Agreements. Each Security Agreement is, and shall continue to be, in full force and effect and is ratified and confirmed in all respects except that on and after the Effective Date (i) all references in a Security Agreement to "this Agreement", "hereto", "hereof", "hereunder" or words of like import referring to such Security Agreement shall mean such Security Agreement as amended by this Agreement and (ii) all references in any Credit Document to a Security Agreement," "thereto", "thereof, "thereunder, or words of like impact referring to a Security Agreement shall mean the Security Agreements as amended by this Agreement. 5. Effective Date. This Amendment shall become effective on the date first above written (the "Effective Date") when counterparts of this Amendment signed by each of the parties hereto shall have been received by the Agent. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date hereof written above. HOMEGOLD, INC. By: ____________________________ Title: ____________________________ CAROLINA INVESTORS, INC. By: ____________________________ Title: ____________________________ THE CIT GROUP/BUSINESS CREDIT, INC., as Agent By: ___________________________ Title: ___________________________ -3- EX-10.4.1 10 WAREHOUSING REVOLVING CREDIT AGREEMENT EXHIBIT 10.4.1 ================================================================================ $40,000,000 WAREHOUSING LINE REVOLVING CREDIT AGREEMENT BY AND BETWEEN HOMEGOLD, INC. AND HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. DATED AS OF MAY 2, 2000 ================================================================================ TABLE OF CONTENTS -----------------
Page SECTION 1. DEFINITIONS; INTERPRETATION...................................................................-1- Section 1.1. Definitions..........................................................................-1- Section 1.2. Interpretation.......................................................................-8- SECTION 2. THE CREDIT....................................................................................-9- Section 2.1. The Revolving Credit.................................................................-9- Section 2.2. Applicable Interest Rates............................................................-9- Section 2.3. Minimum Borrowing Amounts............................................................-9- Section 2.4. Borrowing Procedures.................................................................-9- Section 2.5. Prepayments.........................................................................-10- Section 2.6. The Note............................................................................-11- Section 2.7. Commitment Terminations.............................................................-11- SECTION 2.8 TERMINATION/NON-USAGE FEE...........................................................-11- SECTION 2.9 EXTENSION OF THE TERMINATION DATE...................................................-12- SECTION 3. FEES AND PAYMENTS............................................................................-12- Section 3.1. Transaction, Processing and Custodial Fees..........................................-12- Section 3.2. Audit Fees..........................................................................-12- Section 3.3. Place and Application of Payments...................................................-12- SECTION 4. THE COLLATERAL AND GUARANTY..................................................................-13- Section 4.1. The Collateral......................................................................-13- Section 4.2. Further Assurances..................................................................-13- Section 4.3. Guaranty............................................................................-13- SECTION 5. REPRESENTATIONS AND WARRANTIES...............................................................-13- Section 5.1. Organization and Qualification......................................................-13- Section 5.2. Subsidiaries........................................................................-14- Section 5.3. Corporate Authority and Validity of Obligations.....................................-14- Section 5.4. Use of Proceeds.....................................................................-14- Section 5.5. Financial Reports...................................................................-15- Section 5.6. No Material Adverse Change..........................................................-15- Section 5.7. Full Disclosure.....................................................................-15- Section 5.8. Good Title..........................................................................-15- Section 5.9. Investment Company..................................................................-15- Section 5.10. Litigation and Other Controversies..................................................-15- Section 5.11. Taxes...............................................................................-16- Section 5.12. Approvals...........................................................................-16- Section 5.13. Affiliate Transactions..............................................................-16- Section 5.14. ERISA...............................................................................-16-
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Section 5.15. Compliance with Laws................................................................-16- Section 5.16. Other Agreements....................................................................-17- Section 5.17. No Defaults.........................................................................-17- Section 5.18. Merger Agreements, etc..............................................................-17- SECTION 6. CONDITIONS PRECEDENT.........................................................................-18- Section 6.1. Initial Loan........................................................................-18- Section 6.2. All Loans...........................................................................-19- SECTION 7. COVENANTS....................................................................................-19- Section 7.1. Maintenance of Business.............................................................-19- Section 7.2. Maintenance of Property.............................................................-19- Section 7.3. Taxes and Assessments...............................................................-20- Section 7.4. Insurance...........................................................................-20- Section 7.5. Financial Reports...................................................................-20- Section 7.6. [RESERVED]..........................................................................-21- Section 7.7. Liens...............................................................................-22- Section 7.8. Mergers, Consolidations and Sales...................................................-22- Section 7.9. ERISA...............................................................................-22- Section 7.10. Compliance with Laws................................................................-22- Section 7.11. Burdensome Contracts with Affiliates................................................-22- Section 7.12. Maintenance of Subsidiaries.........................................................-22- Section 7.13. Change in the Nature of Business....................................................-23- Section 7.14. Net Worth...........................................................................-23- Section 7.15. Leverage Ratio......................................................................-23- Section 7.16. Net Income..........................................................................-23- Section 7.17. [INTENTIONALLY OMITTED].............................................................-23- SECTION 8. EVENTS OF DEFAULT AND REMEDIES...............................................................-23- Section 8.1. Events of Default...................................................................-23- Section 8.2. Remedies - Certain Events of Default................................................-25- Section 8.3. Remedies - Other Events of Default..................................................-25- Section 8.4. Expenses............................................................................-25- SECTION 9. MISCELLANEOUS................................................................................-26- Section 9.1. No Waiver of Rights.................................................................-26- Section 9.2. Non-Business Day....................................................................-26- Section 9.3. Documentary Taxes...................................................................-26- Section 9.4. Survival of Representations.........................................................-26- Section 9.5. Survival of Indemnities.............................................................-26- Section 9.6. Notices.............................................................................-26- Section 9.7. Counterparts........................................................................-27- Section 9.8. Successors and Assigns..............................................................-27- Section 9.9. Amendments..........................................................................-27- Section 9.10. Fees and Indemnification............................................................-27-
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Section 9.11. ....................................................................................-28- Section 9.12. Governing Law.......................................................................-28- Section 9.13. Headings............................................................................-28- Section 9.14. Entire Agreement....................................................................-28- Section 9.15. Terms of Collateral Documents Not Superseded........................................-28- Section 9.16. Construction........................................................................-28-
-iii- Page ---- -iv- Page ---- Exhibit A - Revolving Credit Note Exhibit B - States In Which Borrower Qualified to do Business Exhibit C - Required Documents Exhibit C-1- Additional Required Documents Exhibit D - Subsidiaries Exhibit E - Borrowing Base Certificate Exhibit F - Compliance Certificate Exhibit G - Pending Litigation Exhibit H - General Underwriting Guidelines -v- CREDIT AGREEMENT ---------------- THIS CREDIT AGREEMENT dated as of this 2nd day of May, 2000 by and between HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC., a Delaware corporation with its corporate office at 700 North Wood Dale Road, Building 3A, Wood Dale, Illinois 60191 ("Lender") and HOMEGOLD, INC., a South Carolina corporation (the "Borrower"). RECITALS WHEREAS, the Borrower has requested the Lender to provide the Borrower with a revolving warehouse line of credit facility for use by the Borrower in connection with its acquisition or origination of mortgage loans and, subject to the terms and conditions set forth herein, the Lender has agreed to provide such facility. NOW THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, the parties hereto agree as follows: SECTION 1. DEFINITIONS; INTERPRETATION SECTION 1.1. DEFINITIONS. The following terms when used herein have the following meanings: "ADDITIONAL REQUIRED DOCUMENTS" shall mean with respect to any Mortgage Loan, those items listed on EXHIBIT C-1 hereto. "AFFILIATE" means any Person, directly or indirectly controlling or controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to control another Person for the purposes of this definition if such 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, common directors, trustees or officers, by contract or otherwise. "APPLICABLE ADVANCE RATE" means, initially, 100% as such percentage may from time to time be reduced by the Lender in its sole discretion upon written notice to the Borrower, it being acknowledged and agreed that the initial Applicable Advance Rate has been determined by the Lender, in part based upon current returns for sales of mortgaged loans in the secondary market and in the event the Lender determines in its sole discretion that there has been an adverse change in such market it intends to reduce the Applicable Advance Rate hereunder. -1- "AVERAGE MONTHLY LOAN BALANCE" means, for any calendar month, the quotient obtained by dividing (a) the sum of the unpaid principal balance of all Loans outstanding for each day during such month by (b) the number of days in such month. "BORROWING BASE" means, as of any time it is to be determined the lesser of (a) the Applicable Advance Rate times the then outstanding unpaid principal amount of Eligible Mortgage Loans or (b) market value (as determined by the Lender in its sole discretion) of Eligible Mortgage Loans. "BUSINESS DAY" means any day other than a Saturday or Sunday on which banks are not authorized or required to close in Chicago, Illinois. "CAPITAL LEASE" means any lease of Property which in accordance with GAAP is required to be capitalized on the balance sheet of the lessee. "CAPITALIZED LEASE OBLIGATION" means the amount of the liability shown on the balance sheet of any Person in respect of a Capital Lease as determined in accordance with GAAP. "CLOSING AGENT" means any title company or other Person approved in writing by the Lender. "CODE" means the Internal Revenue code of 1986, as amended, and any successor statute thereto. "COLLATERAL" means all properties, rights, interests and privileges from time to time subject to the Liens granted to the Lender pursuant to the Collateral Documents. "COLLATERAL DOCUMENTS" means the Security Agreement and all other security agreements, financing statements and other documents as shall from time to time secure the Note or any other obligations of the Borrower hereunder or in connection herewith. "COMMITMENT" is defined in SECTION 2.1 hereof. "DEFAULT" means any event or condition, the occurrence of which would, with the passage of time or the giving of notice, or both, constitute an Event of Default. "DOMESTIC RATE" means for any day the rate per annum then most recently announced by Bank One, N.A., a national banking association, as its corporate base rate at Chicago, Illinois (or if such rate is not being quoted, the rate which is the successor to such rate, and if no successor is being quoted, the rate conceptually equivalent to such rate which the domestic commercial bank having the highest combined capital and surplus of any bank having its principal office in Chicago, Illinois is quoting). The Domestic Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Bank One, N.A. and the Lender may make commercial loans or other loans at rates of interest at, above or below the Domestic Rate. -2- "ELIGIBLE MORTGAGE LOAN" shall mean any Mortgage Loan having all of the following characteristics: (i) is the legal, valid and binding obligation of the maker thereof in full force and effect and is enforceable in accordance with its terms; (ii) is either a first or second Mortgage Loan which comports in all respects with General Underwriting Guidelines; (iii) was made or acquired by the Borrower in the ordinary course of the Borrower's business in accordance with the General Underwriting Guidelines, was in an original principal amount of not less than $10,000 and not more than $400,000, such Mortgage Loan was fully funded and the Borrower holds good and indefeasible sole title to such Mortgage Loan subject to no claims, liens, charges or other rights of any other Person other than, in the case of a second Mortgage Loan, the holder of a Permitted First Mortgage Lien; (iv) no payment under such Mortgage Loan is more than thirty (30) days past the due date set forth in the underlying promissory note and mortgage (or deed of trust); (v) the Lender has a perfected Lien and security interest in such Mortgage Loan free and clear of any Liens or claims of any other Person except, in the case of a second Mortgage Loan, the holder of a Permitted First Mortgage Lien; (vi) such Mortgage Loan has not been included in the Borrowing Base for more than ninety (90) days; (vii) such Mortgage Loan contains the entire agreement of the parties thereto with respect to the subject matter thereof and is not a Rewritten Mortgage Loan; (viii) such Mortgage Loan is secured by a valid and subsisting first or second, as the case may be, mortgage lien of record on the Property covered by the related mortgage or deed of trust 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 records, as of the date of recording, being acceptable to mortgage lending institutions generally and specifically referred to in a lender's title insurance policy delivered to the originator of said Mortgage Loan and (i) referred to or otherwise considered in the appraisal made for the originator of said 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 said Mortgage Loan or the use, enjoyment, value or marketability of the related Property; or (4) in the case of a second Mortgage Loan, a Permitted First Mortgage Lien; (ix) such Mortgage Loan is free of any default of any party thereto (including the Borrower), offsets, defenses or counterclaims to such Mortgage Loan, including the obligation of -3- the related obligor to pay the unpaid principal and interest on the underlying promissory note and free from any rescission, cancellation or avoidance whether by operation of law or otherwise; (x) a lender's title insurance policy, issued standard American Land Title Association form, or such other form satisfactory to the Lender by the applicable Closing Agent, in favor of the Borrower and such Borrower's successors and assigns (or the original lender and such lender's successors and assigns) in an amount at least equal to the original principal amount of such Mortgage Loan insuring the mortgagee's interest under the related Mortgage Loan as the holder of a valid first or second mortgage lien of record on the related Property subject only to exceptions described in clause (viii) above, was effective on the date of the origination or acquisition, as the case may be, of such Mortgage Loan, and, such policy will be valid and thereafter such policy shall continue in full force and effect; (xi) the Property subject to such Mortgage Loan is Property which is zoned and suitable for residential purposes; (xii) there is no proceeding pending or threatened for the total or partial condemnation of the Property subject to such Mortgage Loan, nor is such a proceeding currently occurring, and each Property is undamaged by waste, fire, earthquake, earth movement or other casualty; (xiii) no improvements on adjoining property encroach upon the Property subject to such Mortgage Loan, and are stated in the title insurance policy and affirmatively insured and such Property constitutes a legally subdivided parcel separate from any real property not covered by the Mortgage; (xiv) with respect to each Mortgage Loan secured by a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such deed of trust, and no fees or expenses are or will become payable by the owners to the trustee under the deed of trust, except in connection with a trustee's sale after default by the related mortgagor; (xv) the mortgage (or deed of trust) securing such Mortgage Loan contains customary and enforceable provisions which render the rights and remedies of the holder thereof adequate for the realization against the related Property of the benefits of the security, including (A) in the case of a deed of trust, by trustee's sale and (B) otherwise by judicial foreclosure and the Borrower is duly licensed to conduct business and is in good standing in the state in which the related Property is located. There is no homestead or other exemption available which could materially interfere with the right to sell the related Property at a trustee's sale or the right to foreclose the related mortgage; (xvi) an appraisal satisfying the General Underwriting Guidelines was performed with respect to each Mortgage Loan; -4- (xvii) the Borrower has no knowledge that there exist on the Property subject to such Mortgage Loan any hazardous materials, regulated substances, hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation; (xviii) such Mortgage Loan shall not be due from an Affiliate, subsidiary, officer or employee of any Borrower, from the United States or any agency or department thereof; or from any foreign debtor or borrower; (xix) such Mortgage Loan is and shall be evidenced by only one original mortgage note; (xx) each mortgage (or deed of trust) or an assignment thereof relating to such Mortgage Loan shall identify the Borrower, as the mortgagee; (xxi) the Required Documents for said Mortgage Loan have been delivered to the Lender or to the applicable Closing Agent which has agreed to send such Required Documents to the Lender within three (3) Business Days from the date of funding of the Loan related to said Mortgage Loan pursuant to an Escrow Agreement satisfactory to the Lender prior to the inclusion of said Mortgage Loan in the Borrowing Base and, if the Lender has so requested in writing, the Additional Required Documents have also been delivered to the Lender or the applicable Closing Agent on terms and conditions set forth above; (xxii) said Mortgage Loan was closed and recorded on the date first included in the Borrowing Base. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute. "ESCROW AGREEMENT" means an agreement between a Closing Agent and the Lender in such form as is acceptable to the Lender. "EVENT OF DEFAULT" means any event or condition specified in SECTION 8.1 hereof. "GAAP" means generally acceptable accounting principles as in effect from time to time, applied by the Borrower and its Subsidiaries as a basis consistent with the preparation of the Borrower's most recent financial statements furnished to the Lender pursuant to SECTION 5.5 hereof. "GENERAL UNDERWRITING GUIDELINES" shall mean the general underwriting guidelines set forth on EXHIBIT H hereto. "GUARANTY" shall mean a Guaranty satisfactory to the Lenders from the Guarantors. -5- "GUARANTORS" shall mean the Parent, the Affiliates of the Borrower signatories to the Guaranty and all Subsidiaries of the Borrower other than special purpose Subsidiaries formed in connection with loan securitizations. "HOMESENSE" MEANS HOMESENSE FINANCIAL CORP., a South Carolina corporation. "HOMESENSE CREDIT AGREEMENT" means that certain Credit Agreement dated September 13, 1999 between Homesense and Lender. "INDEBTEDNESS FOR BORROWED MONEY" means for any Person (without duplication) (i) all indebtedness created, assumed or incurred in any manner by such Person representing money borrowed (including by the issuance of debt securities), (ii) all indebtedness for the deferred purchase price of property or services (other than trade accounts payable arising in the ordinary course of business), (iii) all indebtedness secured by any Lien upon Property of such Person, whether or not such Person has assumed or becomes liable for the payment of such indebtedness, (iv) all Capitalized Lease Obligations of such Person and (v) all obligations of such Person on or with respect to letters of credit, bankers' acceptances and other extensions of credit whether or not representing obligations for borrowed money. "LIEN" means any mortgage, lien, security interest, pledge, charge or encumbrance of any kind in respect of any Property, including the interests of a vendor or lessor under any conditional sale, capital lease or other title retention arrangement. "LOANS" means and includes loans made under the Revolving Credit, and each of them singly. "LOAN DOCUMENTS" means this Agreement, the Note, the Guaranty and the Collateral Documents. "MATERIAL PLAN" is defined in SECTION 8.1(J) hereof. "MERGER" means the merger and related transactions contemplated by the Merger Agreements. "MERGER AGREEMENTS" means that certain Reorganization Agreement dated as of February 29, 2000 by and among Borrower, Homesense Financial Corp. and certain affiliates of Homesense Financial Corp. together with all other agreements and documents executed and delivered in connection therewith. "MORTGAGE LOAN" shall mean a loan secured by real estate including without limitation: (i) a promissory note and related mortgage (or deed of trust) and any other security documents, (ii) all reserves, guaranties and insurance policies, including without limitation, all mortgage and title insurance policies and rights of the owner of such loan to retain all or any part of such reserves -6- or to return premiums or payments with respect thereto and (iii) all right, title and interest of the owner of such Mortgage Loan in the Property covered by said mortgage (or deed of trust). "NET INCOME" means, with reference to any period, the net income (or net loss) of the Parent and its Subsidiaries for such period as computed on a consolidated basis in accordance with GAAP. "NET WORTH" means, as of any time the same is to be determined, the total shareholders' equity (including capital stock, additional paid-in-capital and retained earnings after deducting treasury stock, but excluding minority interest in Subsidiaries) which would appear on the balance sheet of the Parent and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "NOTE" is defined in SECTION 2.6 hereof. "OBLIGATIONS" means all unpaid principal of and accrued and unpaid interest on the Note, all accrued and unpaid fees and all other obligations of the Borrower to the Lender arising under the Loan Documents, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and howsoever evidenced, held or acquired. "PARENT" means Homegold Financial, Inc., a South Carolina corporation. "PBGC" means the Pension Benefit Guaranty Corporation or any Person succeeding to any or all of its functions under ERISA. "PERMITTED FIRST MORTGAGE LIEN" means any first mortgage lien permitted under General Underwriting Guidelines. "PERSON" means an individual, partnership, corporation, association, trust, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof. "PLAN" means any employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and either (i) is maintained by a member of the Controlled Group for employees of a member of the Controlled Group, (ii) is maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, or (iii) under which a member of the Controlled Group has any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years or by reason of being deemed a contributing sponsor under Section 4064 of ERISA. -7- "PROPERTY" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "REQUIRED DOCUMENTS" means, with respect to any Mortgage Loan, those items listed on EXHIBIT C hereto. "REVOLVING CREDIT" is defined in SECTION 2.1 hereof. "REWRITTEN MORTGAGE LOAN" means any Mortgage Loan in respect of which (i) the original terms have been rewritten, restructured or otherwise modified or (ii) forbearance has been granted; PROVIDED, HOWEVER, that a Rewritten Mortgage Loan shall not include a Mortgage Loan as to which the Borrower has permitted an assumption or granted a partial release in accordance with its prior practices and consistent with General Underwriting Guidelines. "SECURITY AGREEMENT" means that certain Security Agreement dated of even date herewith among the Borrower, the Guarantors and the Lender, as the same may from time to time be amended. "SUBSIDIARY" means any corporation or other entity of which more than fifty percent (50%) of the outstanding voting stock or comparable equity interests (including interests as a limited partner in a limited partnership) is at the time directly or indirectly owned by the Borrower, by one or more of its Subsidiaries, or by the Borrower and one or more of its Subsidiaries. "TERMINATION DATE" shall mean April 30, 2001, as the same may be extended pursuant to SECTION 2.9 hereof or such earlier date on which the Commitment is terminated in whole pursuant to SECTIONS 2.6, 8.2 OR 8.3 hereof. TOTAL LIABILITIES" means, as of any time the same is to be determined, the aggregate of all indebtedness, obligations, liabilities, reserves and any other items which would be listed as a liability on a balance sheet of the Borrower and its Subsidiaries determined on a consolidated basis in accordance with GAAP. "UNFUNDED VESTED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which the present value of all vested nonforfeitable accrued benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "WELFARE PLAN" means a "WELFARE PLAN," as defined in Section 3(1) of ERISA. "WHOLLY-OWNED" means a Subsidiary of which all of the issued and outstanding shares of stock (other than directors' qualifying shares as required by law) or other comparable equity interests shall be owned by the Borrower and/or one or more of its Wholly-Owned Subsidiaries. -8- SECTION 1.2. INTERPRETATION. The foregoing definitions are equally applicable to both the singular and plural forms of the terms defined. All references to times of day herein are references to Chicago, Illinois time unless otherwise specifically provided. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any consolidation or other accounting computation is required to be made for the purposes of this Agreement, the same shall be done in accordance with GAAP except where such principles are inconsistent with the specific provisions of this Agreement. SECTION 2. THE CREDIT SECTION 2.1. THE REVOLVING CREDIT. Subject to the terms and conditions hereof, the Lender agrees to extend a revolving credit (the "REVOLVING CREDIT") to the Borrower in an aggregate principal amount at any one time outstanding not to exceed the lesser of (i) $40,000,000 (the "Commitment") (subject to any reductions thereof pursuant to the terms hereof) or (ii) the Borrowing Base as then determined and computed, which may be availed of by the Borrower in its discretion from time to time, be repaid and used again, to and including the Termination Date. SECTION 2.2. APPLICABLE INTEREST RATES. (a) PRE-DEFAULT RATE. Each Loan made by the Lender shall bear interest (computed on the basis of a year of 365 or 366 days as the case may be for actual days elapsed) on the unpaid principal amount thereof from the date such Loan is made until maturity (whether by acceleration or otherwise) at a rate per annum determined by adding one fourth of one percent (.25%) to the Domestic Rate from time to time in effect, payable on the dates provided in SECTION 2.5 hereof and at maturity (whether by acceleration or otherwise). (b) DEFAULT RATE. If any payment (including any required prepayment) of principal on any Loan is not made when due (whether by acceleration or otherwise), such Loan shall bear interest (computed on the basis of a year of 365 or 366 as the case may be for actual days elapsed) from the date such payment was due until paid in full, payable on demand, at a rate per annum equal to the sum of six percent (6%) PLUS the Domestic Rate from time to time in effect. SECTION 2.3. MINIMUM BORROWING AMOUNTS. Each Loan shall be in an amount not less than $10,000. -9- SECTION 2.4. BORROWING PROCEDURES. (a) NOTICE TO THE LENDER. The Borrower shall give telephonic or telecopy notice to the Lender (which notice shall be irrevocable once given and, if by telephone, shall be promptly confirmed in writing) by no later than 3:30 p.m. (Chicago time) one Business Day prior to the date of any requested Loan. Each such notice shall (i) specify the date of the requested Loan (which shall be a Business Day) and the amount of the requested Loan and (ii) be accompanied by copies of the Required Documents (other than item nos. 2, 3 and 5 specified on Exhibit C for the Eligible Mortgage Loan(s) supporting such Loan. The Borrower agrees that the Lender may rely on any such telephonic or telecopy notice given by any person the Lender in good faith believes is authorized to request loans on behalf of the Borrower without the necessity of independent investigation and in the event any notice by such means conflicts with the written confirmation, such notice shall govern if the Lender has acted in reliance thereon. (b) DISBURSEMENT OF LOANS. Subject to SECTION 6 hereof, the Lender shall make the proceeds of each Loan available to the Borrower by crediting the same to the Remittance Account not later than the close of business on the date of such borrowing and, Borrower hereby directs Lender , unless the Lender in its sole discretion agrees otherwise, to wire transfer such proceeds directly to the Closing Agent in accordance with the relevant Escrow Agreement. The Lender and the Borrower acknowledge and agree that Borrower may from time to time make deposits from its own funds ("ADDITIONAL BORROWER DEPOSITS") into the Remittance Account which shall be held, subject to the security interest in favor of the Lender therein pursuant to the Security Agreement, for the account of the Borrower and the Lender agrees that it will, so long as no Default or Event of Default shall have occurred and be continuing, in connection with any wire transfer of Loan proceeds to a Closing Agent also include in such wire transfer an amount of Additional Borrower Deposits as Borrower shall designate to cover costs and fees owing by Borrower in connection with the funding or purchase of the related Mortgage Loans. The Borrower acknowledges that the Remittance Account is a non-interest bearing account and accordingly, it shall not be entitled to any interest or other additional amounts on account of Additional Borrower Deposits. SECTION 2.5. PREPAYMENTS. (a) VOLUNTARY. Subject to SECTION 2.8 hereof, the Borrower may prepay on any Business Day without premium or penalty and in whole or in part (but, if in part, then in an amount not less than $10,000) any Loans at any time on one Business Day's prior notice to the Lender by no later than 1:00 p.m. (Chicago time), such prepayment to be made by the payment of the principal amount to be prepaid together with accrued interest thereon and any expenses owing in connection therewith. (b) MANDATORY. (i) Concurrently with each reduction of the Commitment (whether voluntarily pursuant to SECTION 2.7 or otherwise) the Borrower shall prepay the Note by the amount, if any, necessary so that the aggregate outstanding principal balance of the Note shall not exceed the Commitment as so reduced, each such prepayment to be made by the payment of the principal amount to be prepaid plus accrued interest thereon and any expenses owing in connection therewith. (ii) The Borrower covenants and agrees that in the event that the outstanding principal amount of the Note shall at any time and for any reason exceed the Borrowing Base as then -10- determined and computed, the Borrower shall immediately without notice or demand pay over the amount of the excess to the Lender as and for a mandatory prepayment on the Note plus accrued interest, fees and expenses owing with respect to the amount so prepaid. (iii) Borrower shall cause (x) all proceeds (including without limitation all amounts payable with respect to principal, interest and premium) from sales of Mortgage Loans, (y) any payment on any Mortgage Loan which exceeds 2% of the original principal amount of such Mortgage Loan and (z) from and after written request by the Lender to do so, all Collateral Payments (as defined in the Security Agreement) in respect of the Mortgage Loans to be deposited directly into the Remittance Account. On the 10th and 25th of each month (a "Settlement Date"), all amounts on deposit in the Remittance Account shall, so long as no Default or Event of Default shall have occurred and be continuing, be applied as follows: (aa) first to the payment of all fees, expenses and interest owing in respect of the Loan(s) made hereunder in reliance on the Mortgage Loan(s) sold during the period commencing the immediately preceding Settlement Date and ending on the Business Day immediately preceding the relevant Settlement Date or in the case of first Settlement Date occurring after the date hereof, the period commencing the date hereof and ending on the Business Day immediately preceding such Settlement Date (a "Settlement Period"); (bb) second, to any other Obligations owing hereunder; (cc) third, to the payment of all principal owing in respect of the Loans made hereunder in reliance on the Mortgage Loan(s) sold during the relevant Settlement Period; and (dd) fourth, to the Borrower or to whomever the Lender determines to be lawfully entitle thereto. (c) REBORROWINGS. Any amount paid or prepaid on the Loans on or before the Termination Date may, subject to the terms and conditions of this Agreement, be borrowed, repaid and borrowed again. SECTION 2.6. THE NOTE. (a) All Loans made to the Borrower by the Lender shall be evidenced by a single Revolving Credit Note of the Borrower in the form of EXHIBIT A hereto (such Revolving Credit Note, as the same may from time to time be amended, together with any notes executed in replacement thereof are hereinafter referred to as the "NOTE"). Such Note shall be dated the date of issuance thereof and be payable to the order of the Lender in the principal amount of its Commitment. (b) The Lender shall record on its books or records or on a schedule to the Note the amount of each Loan made by it to the Borrower, and all payments of principal and interest and the principal balance from time to time outstanding thereon; PROVIDED THAT prior to the transfer of -11- any Note all such amounts shall be recorded on a schedule to such Note. The record thereof, whether shown on such books or records of the Lender or on a schedule to any Note, shall be prima facie evidence as to all such amounts; PROVIDED, HOWEVER, that the failure of the Lender to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay all Loans made to it hereunder together with accrued interest thereon. SECTION 2.7. COMMITMENT TERMINATIONS. The Borrower shall have the right at any time and from time to time, upon three (3) Business Days' prior written notice to the Lender to terminate without premium or penalty, in whole but not in part, the Commitment. Any termination of Commitment pursuant to this SECTION 2.7 may not be reinstated and concurrently with any such termination, the Borrower shall pay to the Lender all outstanding Obligations owing to Lender, together with any fee owing pursuant to Section 2.8 hereof. SECTION 2.8 TERMINATION/NON-USAGE FEE. If, during the period ending April 30, 2001, either the Borrower shall terminate the Commitment pursuant to Section 2.7 hereof or the Average Monthly Loan Balance during any calendar month is less than 10% of the Commitment amount, Borrower shall immediately pay Lender a fee equal to 2% of the Commitment amount. SECTION 2.9 EXTENSION OF THE TERMINATION DATE. The Borrower, pursuant to a written request delivered to Lender not more than 120, nor less than 60 days prior to the then scheduled Termination Date, may request the Lender to extend the Commitment for an additional one year period, expiring on the anniversary of the then scheduled Termination Date. The Lender shall notify Borrower within 30 days of its receipt of such request whether it agrees to such extension in which event the Commitment shall be extended for an additional one year period as so requested. In the event Lender shall either fail to respond or refuse to agree to such request, the Termination Date shall remain as scheduled. SECTION 3. FEES AND PAYMENTS SECTION 3.1. TRANSACTION, PROCESSING AND CUSTODIAL FEES. (a) The Borrower shall pay to the Lender wire transfer fees in an amount equal to $15.00 per wire transfer together with such processing fees and other charges as the Lender from time to time customarily imposes in connection with the disbursement and administration of Loans hereunder, such fees to be paid in accordance with SECTION 2.5 hereof. (b) The Borrower shall also pay to the Lender a custody fee in the amount of $35 for each Mortgage Loan pledged to secure Loans made hereunder, such fee to be due and payable on the date each such Loan is repaid hereunder, whether on the relevant Settlement Date or otherwise. -12- SECTION 3.2. AUDIT FEES. The Borrower shall pay to the Lender the Lender's costs and expenses in connection with audits of the Collateral performed by the Lender or its agents or representatives; PROVIDED, HOWEVER, that in the absence of any Default or Event of Default, the Borrower shall not be required to reimburse the Lender for more than two (2) such audit(s) per calendar year. SECTION 3.3. PLACE AND APPLICATION OF PAYMENTS. All payments of principal and interest on the Loans and all payments of fees and all other amounts payable under this Agreement shall be made by wire transfer or other immediately available funds at the place of payment to the Lender by no later than 1:00 p.m. (Chicago time) at the principal office of the Lender in Wood Dale, Illinois (or such other location as the Lender may designate to the Borrower). Any payments received after such time shall be deemed to have been received by the Lender on the next Business Day. All such payments shall be made in lawful money of the United States of America, in immediately available funds at the place of payment, without setoff or counterclaim. Anything contained herein to the contrary notwithstanding, all payments and collections received in respect of the indebtedness evidenced by the Note and all proceeds of Collateral received, in each instance, by the Lender after the occurrence of an Event of Default shall be applied as follows: (a) first to the payment of any outstanding costs and expenses incurred by the Lender in monitoring, verifying, protecting, preserving or enforcing any liens on the Collateral or in protecting, preserving or enforcing rights hereunder or under any other Loan Document, and in any event including all costs and expenses of a character which the Borrower has agreed to pay under SECTION 9.10 hereof; (b) second to the payment of any outstanding interest or other fees or amounts due hereunder, under the Note or any other Loan Document other than for principal; (c) third to the payment of principal owing on the Note; and (d) fourth to the Borrower or whomever may be lawfully entitled thereto. SECTION 4. THE COLLATERAL AND GUARANTY SECTION 4.1. THE COLLATERAL. The Note and the other obligations of the Borrower hereunder and under the other Loan Documents shall be secured by valid and perfected first priority Liens pursuant to the Security Agreement in favor of the Lender on all of the Borrower's and Guarantor's now existing and hereafter arising or acquired Mortgage Loans which are included in the Borrowing Base or which are transferred to the custody and control of the Lender and all accounts, general intangibles, instruments, documents, records and other rights and properties related to such Mortgage Loans (as more fully described in the Security Agreement) together with all proceeds relating thereto. -13- SECTION 4.2. FURTHER ASSURANCES. The Borrower covenants and agrees that it will, and will cause each Guarantor to, comply with all terms and conditions of each of the Collateral Documents and that it will, at any time, and from time to time as requested by the Lender, execute and deliver such further instruments and agreements and do such acts and things as or the Lender may deem necessary or appropriate to provide for or protect or perfect the lien of the Lender in the Collateral. SECTION 4.3. GUARANTY. The Obligations and all other indebtedness of the Borrower to the Lender shall at all times be guaranteed by the Guarantors pursuant to the Guaranty. SECTION 5. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender as follows: SECTION 5.1. ORGANIZATION AND QUALIFICATION. The Borrower is duly organized, validly existing and in good standing under the laws of the State of South Carolina, has full and adequate corporate power to own its Property and to carry on its business as now conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of its business conducted by it or the nature of the Property owned or leased by it makes such licensing or qualification necessary, including without limitation, the states listed on EXHIBIT B hereto except as otherwise disclosed in writing to the Lender and except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on the operations of the Borrower or its Subsidiaries taken as a whole unless such failure would affect the ability of the Borrower to enforce payment of any part of the Collateral. EXHIBIT B contains a listing of all states in which the Borrower is duly qualified and licensed to do business as of the date hereof. -14- SECTION 5.2. SUBSIDIARIES. Each Subsidiary is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was incorporated or organized, as the case may be, has full and adequate power to own its Property and carry on its business as conducted, and is duly licensed or qualified and in good standing in each jurisdiction in which the nature of its business as now conducted or proposed to be conducted by it or the nature of the Property owned or leased by it makes such licensing or qualification necessary except for those jurisdictions in which the failure to so qualify would not have a material adverse effect on the operations of the Borrower or its Subsidiaries taken as a whole unless such failure would affect the ability of the Borrower to enforce payment of any part of the Collateral. EXHIBIT D hereto identifies each Subsidiary, the jurisdiction of its incorporation or organization, as the case may be, the percentage of issued and outstanding shares of each class of its capital stock or other equity interests owned by the Borrower and the Subsidiaries and, if such percentage is not 100% (excluding directors' qualifying shares as required by law), a description of each class of its authorized capital stock and other equity interests and the number of shares of each class issued and outstanding. All of the issued and outstanding shares of capital stock and other equity interests of each Subsidiary are validly issued and outstanding and fully paid and nonassessable and all such shares and other equity interests indicated on EXHIBIT D as owned by the Borrower or a Subsidiary are owned, beneficially and of record, by the Borrower or such Subsidiary, free and clear of all Liens. There are no outstanding commitments or other obligations of any Subsidiary to issue, and no options, warrants or other rights of any Person to acquire, any shares of any class of capital stock or other equity interests of any Subsidiary. SECTION 5.3. CORPORATE AUTHORITY AND VALIDITY OF OBLIGATIONS. The Borrower has full right and authority to enter into the Loan Documents to make the borrowings herein provided for, to grant to the Lender the Liens described in the Collateral Documents, to issue its Note and to perform all of its obligations hereunder and under the other Loan Documents. The Loan Documents have been duly authorized, executed and delivered by the Borrower and constitute valid and binding obligations of the Borrower enforceable in accordance with their terms and the Loan Documents do not, nor does the performance or observance by the Borrower of any of the matters or things herein or therein provided for, contravene any provision of law or any judgment, injunction, order or decree binding upon the Borrower or any Subsidiary or any charter or by-law provision of the Borrower or any Subsidiary or any covenant, indenture or agreement of or affecting the Borrower or any Subsidiary or any of their respective Properties, or result in the creation or imposition of any Lien on any Property of the Borrower or any Subsidiary. SECTION 5.4. USE OF PROCEEDS. The Loans hereunder shall be used by the Borrower solely for the purchase or funding by it of Eligible Mortgage Loans. -15- SECTION 5.5. FINANCIAL REPORTS. The balance sheet of the Borrower as at December 31, 1999, and the related consolidated statements of income, retained earnings and cash flows of the Borrower for the fiscal year then ended and accompanying notes thereto, which financial statements are accompanied by the report of Elliott, Davis & Company, LLP, independent public accountants, and the unaudited balance sheet of the Borrower as at March 31, 2000, and the related consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the three (3) months then ended, heretofore furnished to the Lender, fairly present the financial condition of the Borrower as at such dates and the results of its operations and cash flows for the periods then ended in conformity with generally accepted accounting principles applied on a consistent basis; provided that the unaudited financial statements remain subject to normal year end adjustments. SECTION 5.6. NO MATERIAL ADVERSE CHANGE. Since December 31, 1999, there has been no change in the condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole, except changes in the ordinary course of business, none of which individually or in the aggregate have been materially adverse. SECTION 5.7. FULL DISCLOSURE. The statements and information furnished to the Lender in connection with the negotiation of this Agreement and the commitment by the Lender to provide the financing contemplated hereby do not contain any untrue statements of a material fact or omit a material fact necessary to make the material statements contained therein or herein not misleading, the Lender acknowledging that as to any projections furnished to the Lender, the Borrower does not warrant their accuracy, but only represents that the same were prepared on the basis of information and estimates the Borrower believed to be reasonable at the time such projections were prepared. SECTION 5.8. GOOD TITLE. The Borrower and its Subsidiaries have good and defensible title to their respective assets as reflected on the most recent consolidated balance sheet of the Borrower and its Subsidiaries furnished to the Lender (except for sales of assets by the Borrower and its Subsidiaries in the ordinary course of their respective businesses), subject to no Liens other than such thereof as are permitted by SECTION 7.7 hereof. SECTION 5.9. INVESTMENT COMPANY. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. -16- SECTION 5.10. LITIGATION AND OTHER CONTROVERSIES. Except as heretofore disclosed in writing to the Lender with respect to litigation or other controversies pending as of the date hereof, there is no litigation or governmental proceeding or labor controversy pending, nor to the knowledge of the Borrower threatened, against the Borrower or any Subsidiary which either (a) involves a claim for $10,000 or more or (b) if adversely determined would (i) impair the validity or enforceability of, or impair the ability of the Borrower to perform its obligations under this Agreement or any other Loan Document or (ii) result in any material adverse change in the financial condition or Property, business or operations of the Borrower and its Subsidiaries taken as a whole or (iii) have an adverse affect on the Collateral. SECTION 5.11. TAXES. All tax returns required to be filed by the Borrower or any Subsidiary in any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and other governmental charges upon the Borrower or any Subsidiary or upon any of their respective Properties, income or franchises, which are shown to be due and payable in such returns have been paid except as otherwise disclosed in writing to the Lender and except where such taxes are being contested in good faith and appropriate reserves have been established therefor. The Borrower does not know of any proposed additional tax assessment against it or its Subsidiaries for which adequate provision in accordance with GAAP has not been made on its accounts except as otherwise disclosed in writing to the Lender. Adequate provisions in accordance with GAAP for taxes on the books of the Borrower and each Subsidiary have been made for all open years, and for its current fiscal period. SECTION 5.12. APPROVALS. No authorization, consent, license, exemption, filing (except for the filing of financing statements as herein contemplated) or registration with any court or governmental department, agency or instrumentality, nor any approval or consent of the stockholders of the Borrower or any other Person, is or will be necessary to the valid execution, delivery or performance by the Borrower of this Agreement or any other Loan Document. SECTION 5.13. AFFILIATE TRANSACTIONS. Neither the Borrower nor any Subsidiary is a party to any contracts or agreements with any of its Affiliates (other than with Wholly-Owned Subsidiaries of the Parent which are Guarantors) on terms and conditions which are less favorable to the Borrower or such Subsidiary than would be usual and customary in similar contracts or agreements between Persons not affiliated with each other. -17- SECTION 5.14. ERISA. The Borrower and each Subsidiary are in compliance in all material respects with ERISA to the extent applicable to them and have received no notice to the contrary from the PBGC or any other governmental entity or agency. As of December 31, 1999, the Borrower and its Subsidiaries would have had no liability to PBGC in respect of Unfunded Vested Liabilities if all employee pension benefit plans maintained by the Borrower and its Subsidiaries had been terminated as of such date. No condition exists or event or transaction has occurred with respect to any Plan which could reasonably be expected to result in the incurrence by the Borrower or any Subsidiary of any material liability, fine or penalty under ERISA or the Code or in connection with any Plan. Neither the Borrower nor any Subsidiary has any contingent liability with respect to any post-retirement benefits under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA and liability for post-retirement medical and life insurance benefits. SECTION 5.15. COMPLIANCE WITH LAWS. The Borrower and its Subsidiaries are in compliance in all material respects with the requirements of all federal, state and local laws, rules and regulations applicable to or pertaining to the Properties or business operations of the Borrower or any Subsidiary (including, without limitation, the Federal Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act, the Magnuson-Moss Warranty Act, the Federal Reserve Board's Regulations "B" and "Z", the Soldiers' and Sailors' Civil Relief Act of 1940, and any other federal, state and local laws relating to interest, usury, consumer credit, equal credit opportunity, fair credit reporting, privacy, consumer protection, false or deceptive trade practices and disclosure, the Occupational Safety and Health Act of 1970, the Americans with Disabilities Act of 1990, and laws and regulations establishing quality criteria and standards for air, water, land and toxic or hazardous wastes or substances), non-compliance with which could have a material adverse effect on either (a) the financial condition, Properties, business or operations of the Borrower and its Subsidiaries, taken as a whole or (b) the Collateral. Neither the Borrower nor any Subsidiary has received notice to the effect that its operations are not in compliance with any of the requirements of applicable federal, state or local environmental, health and safety statutes and regulations or are the subject of any governmental investigation evaluating whether any remedial action is needed to respond to a release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could have a material adverse effect on the financial condition, Properties, business or operations of the Borrower or any Subsidiary. SECTION 5.16. OTHER AGREEMENTS. Neither the Borrower nor any Subsidiary is in default under the terms of any covenant, indenture or agreement of or affecting the Borrower, any Subsidiary or any of their Properties. SECTION 5.17. NO DEFAULTS. No Default or Event of Default has occurred and is continuing. SECTION 5.18. MERGER AGREEMENTS, ETC. (a) The Borrower has heretofore furnished the Lender a true and correct copy of the Merger Agreements and all amendments thereto. -18- (b) Each of Borrower and to the Borrower's knowledge, each other party to the Merger Agreements, has duly taken all necessary corporate, partnership or other organizational action to authorize the execution, delivery and performance of the Merger Agreements and the consummation of transactions contemplated thereby. (c) The Merger will comply with all applicable legal requirements, and all necessary governmental, regulatory, creditor, shareholder, partner and other material consents, approvals and exemptions required to be obtained by the Borrower and, to Borrower's knowledge, each other party to the Merger Agreements in connection with the Merger will be, prior to consummation of the Merger, duly obtained and will be in full force and effect. As of the date of the Merger Agreements, all applicable waiting periods with respect to the Merger will have expired without any action being taken by any competent governmental authority which restrains, prevents or imposes material adverse conditions upon the consummation of the Merger. (d) The execution and delivery of the Merger Agreements by the Borrower did not, and the consummation of the Merger will not, violate any statute or regulation of the United States (including any securities law) or of any state or other applicable jurisdiction, or any order, judgment or decree of any court or governmental body binding on the Borrower or, to the best of Borrower's knowledge, any other party to the Merger Agreements, or result in a breach of, or constitute a default under, any material agreement, indenture, instrument or other document, or any judgment, order or decree, to which the Borrower is a party or by which the Borrower is bound or, to the best of the Borrower's knowledge, to which any other party to the Merger Agreements is a party or by which any such party is bound. (e) No statement or representation made in the Merger Agreements by the Borrower or, to the best of the Company's knowledge, any other Person, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they are made, not materially misleading. SECTION 6. CONDITIONS PRECEDENT The obligation of the Lender to make any Loan or any other financial accommodation hereunder shall be subject to the following conditions precedent: SECTION 6.1. INITIAL LOAN. Prior to the making of the initial Loan hereunder: (a) The Lender shall have received the favorable written opinion of Wyche, Burgess, Freeman & Parham, P.A., counsel to the Borrower, in form and substance satisfactory to the Lender and Lender shall have received all opinions delivered in connection with the Merger, which opinions shall state, or be accompanied by letters which state that the Lender may rely thereon; -19- (b) The Lender shall have received (i) certified copies of resolutions of the Board of Directors of the Borrower and the Guarantors, authorizing the execution and delivery of this Agreement and the other Loan Documents, indicating the authorized signers of this Agreement and the other Loan Documents and all other documents relating thereto, the persons authorized to request Loans hereunder and the specimen signatures of such signers, and (ii) copies of certificates of good standing certified by the appropriate governmental officer in the jurisdiction of the Borrower's and each Guarantor's incorporation; (c) The Lender shall have received this Agreement, the Note and the other Loan Documents, together with any financing statements and amendments to existing financing statements requested by the Lender in connection therewith; (d) The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Agreement and the other Loan Documents; (e) The Lender shall have received certified copies of the Borrower's articles of incorporation and by-laws and all amendments thereto through the date hereof. (f) The Lender shall have received evidence or assurances satisfactory to it of the accuracy of the representations contained in SECTION 5.15 hereof. (g) Homesense shall have terminated the Commitment in its entirety of the Lender pursuant to the Homesense Credit Agreement. (h) The Merger shall have become effective in accordance with the terms of the Merger Agreements. SECTION 6.2. ALL LOANS. As of the time of the making of each Loan (including the initial Borrowing): (a) The Lender shall have received the notice and copies of the documents required by Section 2.4 hereof and a fully executed Escrow Agreement from the relevant Closing Agent(s). (b) Each of the representations and warranties of the Borrower set forth in Section 6 hereof shall be true and correct as of said time, except to the extent that any such representation or warranty relates solely to an earlier date; (c) The Borrower shall be in full compliance with all of the terms and conditions of this Agreement and of the other Loan Documents, and no Default or Event of Default shall have occurred and be continuing or would occur as a result of making such Borrowing; -20- (d) After giving effect to the Loan, the aggregate principal amount of all Loans hereunder shall not exceed the lesser of (i) the Borrowing Base and (ii) the Commitment; and (e) Such Loan shall not violate any order, judgment or decree of any court or other authority or any provision of law or regulation applicable to the Lender. Each request for a Loan hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in this SECTION 6.2. SECTION 7. COVENANTS The Borrower agrees that, so long as any Commitment is available to or any Obligations are outstanding hereunder, except to the extent compliance in any case or cases is waived in writing by the Lender: SECTION 7.1. MAINTENANCE OF BUSINESS. The Borrower shall, and shall cause each Subsidiary to, preserve and keep in force and effect its corporate existence and all licenses, permits and franchises necessary to the proper conduct of its business. SECTION 7.2. MAINTENANCE OF PROPERTY. The Borrower will maintain, preserve and keep its Properties in good repair, working order and condition (ordinary wear and tear excepted) and will from time to time make all needful and proper repairs, renewals, replacements, additions and betterments thereto so that at all times the efficiency thereof shall be fully preserved and maintained, and will cause each Subsidiary to do so in respect of Property owned or used by it. SECTION 7.3. TAXES AND ASSESSMENTS. The Borrower will duly pay and discharge, and will cause each Subsidiary to duly pay and discharge, all taxes, rates, assessments, fees and governmental charges upon or against it or its Properties, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith and by appropriate proceedings which prevent enforcement of the matter under contest and adequate reserves are provided therefor. SECTION 7.4. INSURANCE. The Borrower will insure and keep insured, and will cause each Subsidiary to insure and keep insured, with good and responsible insurance companies, all insurable Property owned by it which is of a character usually insured by Persons similarly situated and operating like Properties against loss or damage from such hazards and risks, and in such amounts, as are insured by Persons similarly situated and operating like Properties; and the Borrower will insure, and cause each Subsidiary to insure, such other hazards and risks (including employers' and public liability risks) with good and responsible insurance companies as and to the extent usually insured by Persons similarly situated and conducting similar businesses. The Borrower shall in any event maintain insurance on the Collateral to the extent required by the Collateral Documents. The Borrower will upon request of the Lender furnish a certificate setting forth in summary form the nature and extent of the insurance maintained pursuant to this Section. -21- SECTION 7.5. FINANCIAL REPORTS. The Parent and the Borrower will maintain a standard and modern system of accounting in accordance with GAAP and will furnish to the Lender and its duly authorized representatives such information (including financial statements) respecting the business and financial condition of the Parent and its Subsidiaries as the Lender may reasonably request; and without any request, will furnish to the Lender: (a) as soon as available, and in any event within ten (10) days after the end of each calendar month, a borrowing base certificate in the form attached hereto as EXHIBIT E showing the computation of the Borrowing Base in reasonable detail as of the close of such monthly period, certified to by the chief financial officer of the Borrower; (b) as soon as available, and in any event within thirty (30) days after the end of each calendar month, a copy of the consolidated and consolidating balance sheet and consolidated and consolidating statements of income, retained earnings and cash flows of the Parent and its Subsidiaries for such period, all in reasonable detail showing in comparative form the figures for the corresponding date and period in the previous fiscal year, prepared by the Parent in accordance with GAAP, together with a report on the aging of Mortgage Loans and a report of charge-offs, recoveries and repossession of collateral with respect to Mortgage Loans all in reasonable detail prepared by the Borrower, and in each case certified to by the chief financial officer of the Parent; (c) as soon as available, and in any event within ninety (90) days after the close of each fiscal year of the Parent, a copy of the consolidated and consolidating balance sheet of the Parent and its Subsidiaries as of the close of such fiscal year and the consolidated and consolidating statements of income, retained earnings and cash flows of the Parent and its Subsidiaries for such period, and accompanying notes thereto, all in reasonable detail showing in comparative form the figures for the previous fiscal year, accompanied by an unqualified opinion thereon of Elliott, Davis & Company, LLP or another firm of independent public accountants of recognized standing, selected by the Parent and satisfactory to the Lender, to the effect that the financial statements have been prepared in accordance with GAAP and present fairly in accordance with GAAP the consolidated and consolidating financial condition of the Parent and its Subsidiaries as of the close of such fiscal year and the results of their operations and cash flows for the fiscal year then ended and that an examination of such accounts in connection with such financial statements has been made in accordance with generally accepted auditing standards and, accordingly, such examination included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (d) not later than thirty (30) business days after receipt by the Borrower or Parent thereof, a copy of any management letters on internal accounting controls of the Parent or any Subsidiary prepared by its independent public accountants; (e) not later than thirty (30) business days after receipt by the Borrower or Parent thereof, a copy of any internal audit reports (with responses, when available) with respect to the Parent or any Subsidiary prepared by its controller's office or other in-house staff accountants; -22- (f) not later than thirty (30) business days after receipt by the Borrower or Parent thereof, a copy of each audit made by any regulatory agency of the books and records of the Parent or any of its Subsidiaries; and (g) promptly after knowledge thereof shall have come to the attention of any responsible officer of the Borrower or Parent , written notice of (i) any threatened or pending litigation or governmental proceeding or labor controversy against the Borrower or any Subsidiary, or any Guarantor which involves an amount of $10,000 or more or which, if adversely determined, would have a material adverse effect the financial condition, Properties, business or operations of the Borrower and its Subsidiaries, taken as a whole, or any Guarantor or of the occurrence of any Default or Event of Default hereunder and (ii) any material dispute or claim relating to any Mortgage Loan. Each of the financial statements furnished to the Lender pursuant to clauses (b) and (c) of this Section shall be accompanied by a written compliance certificate in the form attached hereto as EXHIBIT F signed by the chief financial officer of the Borrower to the effect that to the best of the chief financial officer's knowledge and belief no Default or Event of Default has occurred during the period covered by such statements or, if any such Default or Event of Default has occurred during such period, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Borrower to remedy the same. Such certificate shall also set forth the calculations supporting such statements in respect of SECTIONS 7.14, 7.15 and 7.16 of this Agreement SECTION 7.6. [RESERVED] SECTION 7.7. LIENS. The Borrower will not, nor will it permit any Subsidiary to, create, incur or permit to exist any Lien of any kind on any Collateral owned by the Borrower or any Subsidiary. SECTION 7.8. MERGERS, CONSOLIDATIONS AND SALES. The Borrower will not, nor will it permit any Subsidiary to, be a party to any merger or consolidation, or sell, transfer, lease or otherwise dispose of all or any substantial part of its Property, or in any event sell or discount (with or without recourse) any of its notes or accounts receivable (other than sales of mortgages not constituting Collateral in the ordinary course of business and sales of Collateral permitted under the Security Agreement). The sale, lease, transfer or other disposition of 5% of the assets of the Borrower or any Subsidiary shall be deemed substantial for the foregoing purposes. -23- SECTION 7.9. ERISA. The Borrower will, and will cause each Subsidiary to, promptly pay and discharge all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its Properties. The Borrower will, and will cause each Subsidiary to, promptly notify the Lender of (i) the occurrence of any reportable event (as defined in ERISA) with respect to a Plan, (ii) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor, (iii) its intention to terminate or withdraw from any Plan, and (iv) the occurrence of any event with respect to any Plan which would result in the incurrence by the Borrower or any Subsidiary of any material liability, fine or penalty, or any material increase in the contingent liability of the Borrower or any Subsidiary with respect to any post-retirement Welfare Plan benefit. SECTION 7.10. COMPLIANCE WITH LAWS. The Borrower will, and will cause each Subsidiary to, comply in all material respects with the requirements of all federal, state and local laws, rules, regulations, ordinances and orders applicable to or pertaining to the Collateral, Properties or business operations of the Borrower or any Subsidiary, non-compliance with which could have a material adverse effect on the financial condition, Properties, business or operations of the Borrower or any Subsidiary or could result in a Lien upon any of their Property. The Borrower agrees, at intervals reasonably acceptable to the Lender, to make periodic inspections of the documentation relating to mortgage loans made or acquired by it to monitor compliance of the same with applicable law and to provide the Lender with the results of such inspections. SECTION 7.11. BURDENSOME CONTRACTS WITH AFFILIATES. The Borrower will not, nor will it permit any Subsidiary to, enter into any contract, agreement or business arrangement with any of its Affiliates (other than with Wholly-Owned Subsidiaries) on terms and conditions which are less favorable to the Borrower or such Subsidiary than would be usual and customary in similar contracts, agreements or business arrangements between Persons not affiliated with each other. SECTION 7.12. MAINTENANCE OF SUBSIDIARIES. The Borrower will not assign, sell or transfer, or permit any Subsidiary to issue, assign, sell or transfer, any Voting Stock of a Subsidiary, provided that the foregoing shall not operate to prevent the issuance, sale and transfer to any person of any voting stock of a Subsidiary solely for the purpose of qualifying, and to the extent legally necessary to qualify, such person as a director of such Subsidiary nor shall it prevent the pledges of such subsidiary stock existing as of the date hereof. SECTION 7.13. CHANGE IN THE NATURE OF BUSINESS. The Borrower will not, and will not permit any Subsidiary to, engage in any business or activity if as a result the general nature of the business of the Borrower or any Subsidiary would be changed in any material respect from the general nature of the business engaged in by the Borrower or any Subsidiary on the date of this Agreement. SECTION 7.14. NET WORTH. The Parent shall, at the end of each month (commencing August 31, 2000) have Net Worth of not less than $10,000,000. -24- SECTION 7.15. LEVERAGE RATIO. The Parent shall not at any time have a ratio of Total Liabilities to Net Worth (the "LEVERAGE RATIO") of more than 35 to 1.0 SECTION 7.16. NET INCOME. The Parent shall for each fiscal quarter commencing on or after July 1, 2000 have positive Net Income for such quarter. SECTION 7.17. [INTENTIONALLY OMITTED] SECTION 8. EVENTS OF DEFAULT AND REMEDIES SECTION 8.1. EVENTS OF DEFAULT. Any one or more of the following shall constitute an Event of Default hereunder: (a) default in the payment when due of all or any part of the principal of or interest on the Note (whether at the stated maturity thereof or at any other time provided for in this Agreement) or of any fee or other amount payable by the Borrower hereunder or by the Borrower under any other Loan Document; or (b) default in the observance or performance of any covenant set forth in SECTIONS 7.5, 7.8, 7.9 or 7.13 or 7.14 through 7.17 hereof; or (c) default in the observance or performance of any other provision hereof or of any other Loan Document which is not remedied within thirty (30) days after the earlier to occur of (i) the date on which such failure shall first become known to any officer of the Borrower or (ii) the date on which written notice thereof is given to the Borrower by the Lender; or (d) any representation or warranty made by the Borrower herein or by Borrower or any Guarantor in any other Loan Document, or in any statement or certificate furnished by it pursuant hereto or thereto, or in connection with any Loan made hereunder, proves untrue in any material respect as of the date of the issuance or making thereof; or (e) any event occurs or condition exists (other than those described in clauses (a) through (d) above) which is specified as an Event of Default under any Loan Document, or any Loan Document shall for any reason not be or shall cease to be in full force and effect, or any Loan Document is declared to be null and void or any Guarantor or Borrower shall attempt to terminate or contest in any manner the validity, binding nature or enforceability of any Loan Document; or (f) default shall occur under any evidence of Indebtedness for Borrowed Money issued, assumed or guaranteed by the Borrower or any Guarantor or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continue for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated) or any such Indebtedness for -25- Borrowed Money shall not be paid when due (whether by lapse of time, acceleration or otherwise); or (g) any judgment or judgments, writ or writs, or warrant or warrants of attachment, or any similar process or processes in an aggregate amount in excess of $10,000 shall be entered or filed against the Borrower or any of its Subsidiaries or any Guarantor or against any of their Property, and in each case which remains unvacated, unbonded, unstayed or unsatisfied for a period of thirty (30) days; or (h) either (i) 40% of the issued and outstanding shares of the capital stock of the Parent ceases at any time and for any reason (including death or incapacity) to be owned, legally and beneficially, by Ronald J. Sheppard or (ii) a majority of the Members of the Board of Directors of the Borrower shall cease to be Continuing Members (for purposes of the foregoing, "CONTINUING MEMBERS" means a member of the Board of Directors of the Borrower on the date of the initial Loan hereunder or (iii) the Parent ceases to own 100% of the issued and outstanding capital stock of the Borrower; or (i) Ronald J. Sheppard shall at any time and for any reason (including death or incapacity) cease to be actively involved in the day-to-day management of the Borrower. (j) the Borrower, any Guarantor or any member of its Controlled Group shall fail to pay when due an amount or amounts aggregating in excess $1,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $25,000 (collectively, a "MATERIAL PLAN") shall be filed under Title IV of ERISA by the Borrower, any Guarantor or any other member of its Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against the Borrower, any Guarantor or any member of its Controlled Group to enforce Section 515 or 4219(c)(5) of ERISA and such proceeding shall not have been dismissed within thirty (30) days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (k) the Borrower or any Subsidiary or any Guarantor shall (i) have entered involuntarily against it an order for relief under the United States Bankruptcy Code, as amended, (ii) not pay, or admit in writing its inability to pay, its debts generally as they become due, (iii) make an assignment for the benefit of creditors, (iv) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any substantial part of its Property, (v) institute any proceeding seeking to have entered against it an order for relief under the United States Bankruptcy Code, as amended, to adjudicate it insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of -26- any such proceeding filed against it, or (vi) fail to contest in good faith any appointment or proceeding described in SECTION 8.1(L) hereof; or (l) a custodian, receiver, trustee, examiner, liquidator or similar official shall be appointed for the Borrower or any of its Subsidiaries or any Guarantor or any substantial part of any of their Property, or a proceeding described in SECTION 8.1(K)(V) shall be instituted against the Borrower or any of its Subsidiaries or any Guarantor, and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of thirty (30) days. SECTION 8.2. REMEDIES - CERTAIN EVENTS OF DEFAULT. When any Event of Default described in CLAUSES (A) THROUGH (J), both inclusive, of SECTION 8.1 has occurred and is continuing, the Lender may take either or both of the following actions: (a) terminate the obligation of the Lender to extend any further credit hereunder on the date (which may be the date thereof) stated in such notice; (b) declare the principal of and the accrued interest on the Note to be forthwith due and payable and thereupon the Note, including both principal and interest and all fees, charges and other amounts payable hereunder and under the other Loan Documents, shall be and become immediately due and payable without further demand, presentment, protest or notice of any kind. SECTION 8.3. REMEDIES - OTHER EVENTS OF DEFAULT. When any Event of Default described in clauses (k) or (L) of SECTION 8.1 has occurred and is continuing, then the Note, including both principal and interest, and all fees, charges and other amounts payable hereunder and under the other Loan Documents, shall immediately become due and payable without presentment, demand, protest or notice of any kind, and the obligations of the Lender to extend further credit pursuant to any of the terms hereof shall immediately terminate. SECTION 8.4. EXPENSES. The Borrower agrees to pay to the Lender, or any other holder of the Note, all costs and expenses incurred or paid by the Lender or any such holder, including reasonable attorneys' fees and court costs, in connection with any Default or Event of Default by the Borrower hereunder or in connection with the enforcement of any of the terms hereof or of the other Loan Documents. SECTION 9. MISCELLANEOUS SECTION 9.1. NO WAIVER OF RIGHTS. No delay or failure on the part of the Lender or on the part of the holder or holders of the Note in the exercise of any power or right shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise thereof preclude any other or further exercise of any other power or right, and the rights and remedies hereunder of the Lender and of the holder or holders of the Note are cumulative to, and not exclusive of, any rights or remedies which any of them would otherwise have. -27- SECTION 9.2. NON-BUSINESS DAY. If any payment of principal or interest on any Loan or of any fee hereunder shall fall due on a day which is not a Business Day, interest at the rate such principal bears for the period prior to maturity or at the rate such fee accrues shall continue to accrue from the stated due date thereof to and including the next succeeding Business Day, on which the same shall be payable. If any Settlement Date shall fall on a day which is not a Business Day, such Settlement Date shall be extended to the next succeeding Business Day. SECTION 9.3. DOCUMENTARY TAXES. The Borrower agrees that it will pay any documentary, stamp or similar taxes payable in respect to this Agreement, the Note or any other Loan Document, including interest and penalties, in the event any such taxes are assessed irrespective of when such assessment is made and whether or not any credit is then in use or available hereunder. SECTION 9.4. SURVIVAL OF REPRESENTATIONS. All representations and warranties made herein or in certificates given pursuant hereto shall survive the execution and delivery of this Agreement and of the Note, and shall continue in full force and effect with respect to the date as of which they were made as long as any credit is in use or available hereunder. SECTION 9.5. SURVIVAL OF INDEMNITIES. All indemnities with respect to the Loans shall survive the termination of this Agreement and the payment of the Loans and the Note. SECTION 9.6. NOTICES. Except as otherwise specified herein, all notices hereunder shall be in writing (including cable, telecopy or telex) and shall be given to the relevant party at its address or telecopier number set forth below or such other address, telecopier number or telex number as such party may hereafter specify by notice to the other, given by United States certified or registered mail, by telecopy or by other telecommunication device capable of creating a written record of such notice and its receipt. Notices hereunder shall be addressed to: If to the Borrower: ------------------ Homegold, Inc. 3901 Pelham Road Greenville, South Carolina 29615 Attention: Kevin Mast Telephone: 864-289-5321 Telecopy: 864-289-6301 -28- If to the Lender: ---------------- Household Commercial Financial Services, Inc. 700 North Wood Dale Road, Building 3A Wood Dale, Illinois 60191 Attention: Robert Carse Telephone: (630) 350-4237 Telecopy: (630) 616-3260 Each such notice, request or other communication shall be effective (i) if given by telecopier, when such telecopy is transmitted to the telecopier number specified in this Section and a confirmation of such telecopy has been received by the sender, (ii) if given by mail, five (5) days after such communication is deposited in the mail, certified or registered with return receipt requested, addressed as aforesaid or (iii) if given by any other means, when delivered at the addresses specified in this Section; PROVIDED THAT any notice given pursuant to Section 2 hereof shall be effective only upon receipt. SECTION 9.7. COUNTERPARTS. This Agreement may be executed in any number of counterparts, and by the different parties on different counterparts, each of which when executed shall be deemed an original but all such counterparts taken together shall constitute one and the same instrument. SECTION 9.8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Lender and its successors and assigns, including any subsequent holder of the Note; PROVIDED, HOWEVER, that the Borrower may not assign any of its rights or obligations hereunder without the written consent of the Lender. SECTION 9.9. AMENDMENTS. Any provision of this Agreement, the Note or the other Loan Documents may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Lender. SECTION 9.10. FEES AND INDEMNIFICATION. (a) The Borrower agrees to pay the reasonable fees and disbursements of counsel to the Lender, in connection with the preparation and execution of this Agreement and the other Loan Documents, and any recording or filing of any of the foregoing, and any amendment, waiver or consent related hereto, whether or not the transactions contemplated herein are consummated. The Borrower further agrees to pay the Lender or any other holder of the Obligations all costs and expenses (including court costs and attorneys' fees) incurred or paid by the Lender or any other holder of the Obligations in connection with any Default or Event of Default or in connection with the enforcement of this Agreement or any other Loan Document or any other instrument or document delivered thereunder. -29- (b) The Borrower further agrees to indemnify the Lender, its directors, officers and employees against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitations, all reasonable expenses of litigation or preparation therefor whether or not the Lender is a party thereto) which any of them may pay or incur arising out of or relating to this Agreement, any other Loan Document, the Collateral (including without limitation any environmental claims or liabilities related to any property subject to a Mortgage Loan) the transactions contemplated hereby or thereby or the direct or indirect application or proposed application of the proceeds of any Loan hereunder, other than those which arise from the gross negligence or willful misconduct of the party claiming indemnification. The obligations of the Borrower under this Section shall survive the termination of this Agreement. SECTION 9.11. ACKNOWLEDGEMENT OF ASSUMPTION. The Borrower acknowledges and agrees that pursuant to the Merger it has assumed al indebtedness, obligations and liabilities of Homesense, including all liabilities of Homesense to the Lender under the Homesense Credit Agreement which is being terminated as contemplated by Section 6.1(g) hereof. The Borrower hereby confirms its assumption of all Obligations under the Homesense Credit Agreement and agrees that the same shall be evidenced by the Note of the Borrower issued pursuant hereto. SECTION 9.12. GOVERNING LAW. This Agreement and the Note, and the rights and duties of the parties hereto and thereto, shall be construed and determined in accordance with the laws of the State of Illinois, without regard to the internal laws thereof with respect to conflicts of law. SECTION 9.13. HEADINGS. Section headings used in this Agreement are for reference only and shall not affect the construction of this Agreement. SECTION 9.14. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and any prior or contemporaneous agreements, whether written or oral, with respect thereto are superseded hereby. SECTION 9.15. TERMS OF COLLATERAL DOCUMENTS NOT SUPERSEDED. Nothing contained herein shall be deemed or construed to permit any act or omission which is prohibited by the terms of any Collateral Document, the covenants and agreements contained herein being in addition to and not in substitution for the covenants and agreements contained in the Collateral Documents. SECTION 9.16. CONSTRUCTION. The parties hereto acknowledge and agree that this Agreement shall not be construed more in favor of one than the other based upon which party drafted the same, it being acknowledged that all parties hereto contributed substantially to the negotiation and preparation of this Agreement. -30- Upon execution hereof by all the parties, this Agreement shall be a contract among the parties for the purposes hereinabove set forth. Dated as of May 2, 2000. HOMEGOLD, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- The undersigned executes and delivers this Agreement for purposes of confirming its agreements set forth in Section 7.5, 7.14, 7.15 and 7.16 thereof. HOMEGOLD FINANCIAL, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- Accepted and agreed to as of the day and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By: -------------------------------- Michael J. Hammond Vice President EXHIBIT A REVOLVING CREDIT NOTE $40,000,000 May 2, 2000 FOR VALUE RECEIVED, the undersigned, HOMEGOLD, INC., South Carolina corporation (the "BORROWER"), promises to pay to the order of HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. (the "LENDER") on the Termination Date of the hereinafter defined Credit Agreement, at the principal office of the Lender in Wood Dale, Illinois, in immediately available funds, the principal sum of Forty Million Dollars ($40,000,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower under the Revolving Credit pursuant to such Credit Agreement and with each such Loan to mature and become payable as provided in such Credit Agreement, together with interest on the principal amount of each such Loan from time to time outstanding hereunder at the rates, and payable in the manner and on the dates, specified in the Credit Agreement. The Lender shall record on its books or records or on a schedule attached to this Note, each Loan made by it pursuant to its Commitment, together with all payments of principal and interest and the principal balances from time to time outstanding hereon, provided that prior to the transfer of this Note all such amounts shall be recorded on a schedule attached to this Note. The record thereof, whether shown on such books or records or on the schedule to this Note, shall be prima facie evidence of the same, provided, however, that the failure of the Lender to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay all Loans made to it under the Revolving Credit pursuant to the Credit Agreement together with accrued interest thereon. This Note is the Note referred to in the Credit Agreement dated May 2, 2000, between the Borrower and the Lender (such Credit Agreement as the same may from time to time be amended or restated being referred to as the "CREDIT AGREEMENT") and payment hereof is secured by the Collateral Documents, and this Note and the holder hereof are entitled to all the benefits provided for thereby or referred to therein, to which Credit Agreement and Collateral Documents reference is hereby made for a statement thereof. All defined terms used in this Note, except terms otherwise defined herein, shall have the same meaning as in the Credit Agreement. Prepayments may be made hereon, certain prepayments are required to be made hereon and this Note may be declared due prior to the expressed maturity hereof, all in the events, on the terms and in the manner as provided for in the Credit Agreement and Collateral Documents. The Borrower hereby waives demand, presentment, protest or notice of any kind hereunder. This Note shall be governed by and construed in accordance with the laws of the State of Illinois. HOMEGOLD, INC. By: -------------------------------- Name: ------------------------------ Title: ----------------------------- EXHIBIT B STATES IN WHICH THE BORROWER IS QUALIFIED TO CONDUCT BUSINESS AS OF CLOSING EXHIBIT C REQUIRED DOCUMENTS 1. Mortgage note executed by a third party in favor of the Borrower (properly endorsed or assigned to the Borrower if purchased by the Borrower) and endorsed by the Borrower in blank. 2. Mortgage or deed of trust securing above mortgage note. In lieu of executed, original recorded documents, the Lender will accept a copy which has been stamped as having been recorded by the appropriate recorders office or, a copy of said mortgage or deed of trust accompanied by a transmittal letter from the Closing Agent to the appropriate recording office so long as the original recorded mortgage or a copy thereof indicating the original has been recorded from the appropriate recorder's office is delivered to the Lender within 60 days from the date the Borrower funded such Mortgage Loan or the date the Borrower acquired such Mortgage Loan, as appropriate. 3. Assignment of the mortgage or deed of trust by the Borrower in blank and in recordable form and the original or a duly certified copy of a proper assignment or assignments of the related mortgage or deed of trust from the original holder, through and subsequent transferees to the Borrower duly recorded. The assignment by the Borrower to the Lender shall not be filed for record unless the Lender shall determine in its sole discretion that it is necessary to do so in connection with the perfection of the security interest therein, such recordation to be at the Borrower's expense. 4. Either an appraisal conforming to General Underwriting Guidelines or a statement from the Borrower that no appraisal was required under the General Underwriting Guidelines. 5. Either a policy of title insurance written by a title company insuring the mortgage or deed of trust as a first or second, as appropriate, lien on the Property and in amount and containing exceptions satisfactory to the Lender or a commitment from such title company indicating that such a policy will be issued and such policy is delivered to lender within 30 days from the date of such commitment. 6. Original, or certified true and correct copy of the applicable HUD-1 statement. 7. Copy of Credit Bureau Report of obligors on Mortgage Loan. 8. Copy of Credit Application of obligors on Mortgage Loan. 9. Acknowledgement of Wet Funding Advice signed by Closing Agent. 10. HCFS's Mortgage Loan Cover Sheet (form attached). EXHIBIT C-1 ADDITIONAL REQUIRED DOCUMENTS 1. Other documentation as the Lender may deem appropriate, as well as documentation necessary to fulfill requirements of take-out commitments. 2. The Borrower will execute at any time such additional documents as may be necessary in the opinion of the Lender to transfer to the Lender for the title to any Collateral pledged and/or hypothecated pursuant to the Security Agreement. EXHIBIT D SUBSIDIARIES NAME JURISDICTION OF PERCENTAGE ---- INCORPORATION OF OWNERSHIP --------------- ------------ EXHIBIT E HOMEGOLD, INC. BORROWING BASE CERTIFICATE To: Household Commercial Financial Services, Inc. Pursuant to the terms of the Credit Agreement dated as of May 2, 2000 between us (the "CREDIT Agreement"), we submit this Borrowing Base Certificate to you and certify that the information set forth below and on any attachments to this Certificate is true, correct and complete as of the date of this Certificate. A. Borrowing Base
1. Gross Mortgage Loans _________ A1 2. Less: (a) Owed by an account debtor who is an _________ Affiliate, Shareholder, or Employee (b) Owed by an account debtor who is in an _________ insolvency or reorganization proceeding (c) Unpaid more than 30 days _________ (d) Subject to claims, offsets or defenses _________ (e) Rewritten or otherwise non-performing _________ (f) Included in Borrowing Base for more than _________ 90 days (g) Otherwise Ineligible _________ Sum of Lines A2(a)-A2(g) _________ A2 3. Eligible Mortgage Loans (line A1 minus A2) _________ A3 4. Borrowing Base (line A3 x 100%)(1) _________ A4 B. Revolving Credit Loans _________ B C. Unused Availability _________ (Commitment Amount minus Line B) C
- ---------- (1) Subject to reduction as provide in the Credit Agreement Dated as of this _______ day of ____________, _____. HOMEGOLD, INC. By: ---------------------------------- Its: --------------------------------- EXHIBIT F HOMEGOLD, INC. COMPLIANCE CERTIFICATE To: Household Commercial Financial Services, Inc. This Compliance Certificate is furnished to you pursuant to the requirements of Section 7.5 of that certain Credit Agreement dated as of May 2, 2000 (the "CREDIT AGREEMENT"), by and between HOMEGOLD FINANCIAL, INC. (the "BORROWER") and you (the "LENDER"). Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Credit Agreement. The Undersigned hereby certifies that: 1. I am the duly elected _____________________________________ of the Borrower; 2. I have reviewed the terms of the Credit Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Borrower and its Subsidiaries during the accounting period covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or the occurrence of any event which constitutes a Default or Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below; 4. The financial statements required pursuant to Section 7.5 of the Credit Agreement and being furnished to you concurrently with this certificate are true, correct and complete as of the dates and for the periods covered thereby; and 5. The Attachment hereto sets forth financial data and computations evidencing the Borrower's compliance with certain covenants of the Credit Agreement, all of which data and computations are true, correct and complete and have been made in accordance with the relevant Sections of the Credit Agreement. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Borrower has taken, is taking, or proposes to take with respect to each such condition or event: ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- ------------------------------------------------------- The foregoing certifications, together with the computations set forth in the Attachment hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this _________ day of __________________ _____. ------------------------------------- --------------------, ---------------- (Type or Print Name) (Title) ATTACHMENT TO COMPLIANCE CERTIFICATE HOMEGOLD, INC. COMPLIANCE CALCULATIONS FOR CREDIT AGREEMENT DATED AS OF MAY 2, 2000 CALCULATIONS AS OF ____________, __
A. TANGIBLE NET WORTH (SECTION 7.14) 1. Total shareholder's equity (Net Worth) $ _____________ A1 2. Line A1 must be greater than $ ------------- 3. Borrower in compliance? (circle) yes/no B. LEVERAGE RATIO (SECTION 7.15) 1. Total Liabilities $ _____________ B1 2. Net Worth (Line A1 above) $ _____________ 3. Ratio of Line B1 to Line B2 _________:1.00 4. Line B3 ratio must not exceed _________:1.00 5. Borrower in compliance? (circle) yes/no C. NET INCOME (SECTION 7.16) 1. Net Income for quarter $ _____________ 2. Line C1 amount must be equal to or greater than $ _____________ 3. Borrower in compliance? (circle) yes/no
EXHIBIT G PENDING LITIGATION EXHIBIT H UNDERWRITING GUIDELINES GENERAL 1. Household will purchase first mortgages and fixed-rate, closed-end home equity loans (HELs) in all states except Alabama. Household will purchase home equity lines of credit (HELOCs) in selected states; please refer to Section 6 for program availability. All loans purchased by Household must comply with state limitations. Negatively amortizing loans are unacceptable. 2. Adjustable rate mortgages will be qualified at the lower of the note rate plus 2% or the index plus the margin. Mortgages having a minimum of a two-year fixed rate period (such as the 2 year LIBOR or 3/1 CMT) will be qualified at the start rate. 3. Household's lending program may be used for primary residences, one-unit second homes and investor properties. 4. Credit documents are to be no more than 60 days old at the time of underwriting and must be dated within 90 days of the Note date. 5. Household will purchase mortgages made to natural persons only, who have reached the age of majority in the jurisdiction where the subject property is located. Mortgages made to corporations, partnerships, trusts, etc., are unacceptable. 6. Household will not purchase blanket or wrap-around mortgages, nor second mortgages that are subordinate to a wrap-around mortgages and cross-collateralization is not allowed. 7. The granting of a long-term mortgage to a borrower for the purpose of replacing interim financing used to fund the construction of a new residence will be treated as a refinance transaction. The value will b based on the lesser of acquisition cost (and value + cost of construction) or appraised value. If the site was owned less than one year, the lesser of the purchase price or appraised value will be used to determine site value. If the site was owned one year or more, the site value from the appraisal may be utilized. The purchase price of the site and construction costs must be fully documented. 8. Household considers the payoff of an installment land contract or a lease purchase agreement a purchase-money transaction when all of the proceeds are used to pay the outstanding balance on the contract. Household considers the payoff of an installment land contract a refinance when the proceeds exceed the outstanding balance on the contract. 9. If the borrower has been in title less than one year, the lesser of the sales price or appraised value will be used to calculate LTV for all refinance transactions. If no sales price is available, the maximum LTV will be reduced by 10%. 10. Household will purchase a maximum of three mortgage loans, up to $1,000,000 in total, to the same borrower. 11. Loan originators are required to conform with all applicable federal, state and local statutes and regulations regarding mortgage lending policies, practices and procedures. 12. No loans will be purchased where the total fees charged to the borrower by the lender exceed 10%, excluding appraisal and title report fees. 13. Section 32 loans with debt ratios greater than 50% will not be considered. PROPERTIES 1. 1-4 family residential properties. ACCEPTABLE PROPERTIES 2. Condominiums, where the project is complete with no additional phasing or annexation, at least 90% sold and closed, at least 60% owner-occupied; control of Homeowners Association (HOA) turned over to individual unit owners for at least one year, no more than 10% of units an be owned by a single entity; and otherwise meet current FNMA Type A guidelines. Household will not purchase mortgage loans on more than 10% of the units in a single condo project. 3. Planned Unit Developments (PUDs) which are at least 90% sold and closed, with control of HOA turned over to unit owners, and which otherwise meet FNMA guidelines. Single family detached residences located in a PUD are not subject to the above restrictions provided the HOA monthly assessment is minimal and the only common elements are greenbelts, berms, and similar types of minor improvements. 4. Modular, panelized, or prefabricated homes that are situated on permanent foundations; have assumed the characteristics of conventional site-build housing; and where there is proven, demonstrated market acceptance as evidence by at lease two recent, similar comparable sales included in the appraisal. 5. Double-wide manufactured homes (please refer to page 3-5) UNACCEPTABLE PROPERTIES 1. Single-wide mobile homes 2. Unimproved parcels of land 3. Cooperative units 4. Time sharing units 5. Properties in trust 6. Properties used for agricultural or commercial purposes 7. Unique properties (e.g., geodesic domes, earth homes, etc.) 8. Properties not suitable for year-round occupancy 9. Properties currently listed for sale (purchase transactions accepted) 10. Properties with health and/or safety hazards, adverse environmental conditions, etc. PROPERTY REQUIREMENTS 1. Real property must be owned in fee simple to be acceptable collateral; however, leasehold properties are acceptable if they meet FNMA guidelines; i.e., lease must exceed the term of the new mortgage by at least five years (ten years in Hawaii). All appraisals performed on leasehold properties must contain a minimum of two leasehold comparable sales. 2. Properties quit claimed within six months of the Note date are ineligible for purchase by Household. 3. The mortgaged property must evidence all applicable types of insurance (hazard, flood, etc.) in proper amounts of coverage, with the loan originator, its successors and/or its assigns, listed as mortgagee in loss payee clause in correct lien position. 4. A termite inspection report will be required for purchase-money mortgages where one is provided for in the real estate sales contract. Termite inspections will not otherwise be required unless recommended by the appraiser as a result of a visual inspection, or if the mortgaged property is situated on a pillar and post foundation. 5. A well and/or septic inspection report will be required for purchase money mortgages where one is provided for in the real estate sales contract. Well and/or septic inspections will not otherwise be required unless recommended by the appraiser as a result of a visual inspection. However, whenever a subject property is serviced by a well and/or septic system, the mortgagor must hold the lender and its successors/assigns, harmless from any liability for any condition or problem, pre-existing or otherwise, regarding the subject well and/or septic system. 6. A Plat of survey is required at closing in jurisdictions where such surveys are available only as needed to clear any survey exceptions noted on the title commitment/preliminary title report. Household will not purchase any mortgage loan with a survey exception noted on Schedule B of the final policy of title insurance. 7. Any tax liens must be paid off at closing. 8. Household will not purchase loans secured by any property where said property, or our lien interest therein could in any way be damaged, impaired, defeated, or extinguished by the operation of any covenants, conditions, restrictions, or rights of record, including any reversionary rights, which would be disclosed by proper title evidence in full compliance with Household requirements. FACTORY-BUILT HOUSING GUIDELINES INTRODUCTION Factory-build homes include modular, panelized, prefabricate, manufactured, and mobile homes. Single-wide mobile homes are not eligible as security for mortgage loans sold to Household. Quality of construction and marketability are key concerns when evaluating factory-built housing. FACTORY-BUILT GUIDELINES When factory-built homes meet the following criteria, they represent an acceptable risk to Household. 1. The subject property must assume the characteristics of site-built construction in both its appearance and functional utility. 2. The overall quality of construction is rated very good to excellent per Marshall and Swift Residential Cost Handbook specifications. 3. The property was built after January 1976, is double-wide or larger (minimum width 22 feet), and meets all applicable state, local, or BOCA (Building Officials and Code Administrators International) building codes, with proof of certificate provided in the appraisal report. 4. The home must be permanently attached and anchored to a permanent foundation and must be legally classified as real property. Any wheels, axles, and trailer hitches must be removed from the factory-build home. No leaseholds or land for which there is a pre-existing mortgage. If a purchase-money transaction, the purchase of the land and the unit must represent a single real estate transaction. 5. Owner-occupied, primary residences only. No second homes or investor properties. Full documentation level only. 6. Comparables must support marketability and value. If described a "manufactured home" or "double-wide", the comparable must include no more than on site-built home. 7. All necessary legal documentation should be accomplished perfect a security interest in real estate. LTV ADJUSTMENTS Double-wide are subject to a 10% reduction, with the maximum LTV/CLTV limited to 80%. DEBT-TO-INCOME CALCULATION ELIGIBLE INCOME Borrowers must have a history of receiving stable income from employment or other applicable sources. All income necessary to qualify for the loan must have a reasonable expectation of continuation and must be verified in writing. all gaps in employment must be satisfactorily explained in writing and must contain the borrower's signature. The Eligible Income Verification Chart, located on the following page, reflects various types of income and the requirements for history of receipt, continuation, and verification. EX-10.4.2 11 SECURITY AGREEMENT EXHIBIT 10.4.2 SECURITY AGREEMENT This Security Agreement (the "AGREEMENT") is dated as of May 2, 2000 by and between Homegold, Inc., a South Carolina corporation (the "BORROWER"), the other entities which are listed on the signature pages hereto as Debtors or which may from time to time become parties hereto as debtors (collectively, including the Borrower, the "DEBTORS" and individually each "DEBTOR") and Household Commercial Financial Services, Inc., a Delaware corporation with its mailing address at 700 North Wood Dale Road, Building 3A, Wood Dale, Illinois 60191 as secured party hereunder (the "LENDER"); W I T N E S S E T H T H A T: WHEREAS, the Borrower and the Lender have entered into a Credit Agreement dated as of May 2, 2000 (such Credit Agreement as the same may from time to time be amended or restated from time to time being hereinafter referred to as the "CREDIT AGREEMENT") pursuant to which the Lender has agreed, subject to certain terms and conditions, to extend credit to the Borrower; and WHEREAS, each of the other Debtors has executed and delivered a guaranty (as amended or modified from time to time, the "GUARANTY") of all obligations of the Borrower, including all obligations of the Borrower under the Credit Agreement; WHEREAS, as a condition precedent to entering into the Credit Agreement, the Lender has required, among other things, that the Debtors grant to the Lender, a lien on and security interest in certain personal property of the Borrower as collateral security for such credit facilities, the Guaranty and related obligations pursuant to this Agreement and various other instruments and documents; NOW, THEREFORE, for and in consideration of the execution and delivery by the Lender of the Credit Agreement, and other good and valuable consideration, receipt whereof is hereby acknowledged, the parties hereto hereby agree as follows: 1. TERMS DEFINED IN CREDIT AGREEMENT. All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. 2. GRANT OF SECURITY INTEREST IN THE COLLATERAL. (a) Each Debtor hereby grants to the Lender a security interest in, and acknowledges and agrees that the Lender has and shall continue to have a continuing security interest in, any and all right, title and interest of such Debtor, whether now existing or hereafter acquired or arising, in and to: (i) MORTGAGE LOANS. Mortgage Loans, whether now existing or hereafter arising and however evidenced or acquired, in which Debtor now has or hereafter acquires any rights and for which the promissory notes evidencing the same shall, from time to time, be either identified by Debtor for inclusion in the Borrowing Base or in the possession of the Lender (or an agent or bailee acting on behalf of the Lender) (the term "MORTGAGE LOANS" means and includes any loans made or acquired by Debtor secured by real estate including without limitation (i) all promissory notes, mortgages, deeds of trust or other security documents, (ii) all guaranties and insurance policies, including without limitation, all mortgage and title insurance policies and (iii) all right, title and interest of the owner of such loan in any interest in any kind of property or asset relating thereto whether real, personal or mixed, or tangible or intangible); (ii) RIGHTS AND CLAIMS RE: SALES AND TAKE-OUT COMMITMENTS. All rights and claims of Debtor, whether now existing or hereafter arising and however evidenced or acquired, relating to the sale and or other disposition of Mortgage Loans or any other Collateral, including, without limitation, (i) all payments and right to receive or retain sums of money on account of or for sales or other dispositions of Mortgage Loans or any other Collateral and (ii) all rights (but not obligations) of Debtor under all Take-Out Commitments, now existing or hereafter arising, covering any Mortgage Loans, all rights to deliver Mortgage Loans, to purchasers or permanent investors pursuant thereto and all proceeds resulting from the disposition of such Mortgage Loans, pursuant thereto (the term "TAKE-OUT COMMITMENT" means with respect to any Mortgage Loan: (a) a commitment issued in favor of and held by Debtor made by another party under which said party agrees to purchase such loan or (b) an underwriting agreement with a third party); (iii) SERVICING RIGHTS. All now existing or hereafter arising rights to service, administer and/or collect Mortgage Loans (unless any such assignment shall be prohibited) and all rights to the payment of money on account of such servicing, administration and/or collection activities; (iv) RECEIVABLES. Receivables, whether now existing or hereafter arising, and however evidenced or acquired, in which Debtor now has or hereafter acquires any rights which constitute or relate to any of the other Collateral herein described (the term "RECEIVABLES" means and includes accounts, accounts receivable, contract rights, instruments, notes, drafts, acceptances, documents, chattel paper, any right of Debtor to payment for services rendered, and whether or not earned by performance, and all other forms of obligations owing to Debtor, and general intangibles, all forms of obligations at any time owing to or held or acquired by Debtor and all of the Debtor's rights and claims with respect to such obligations (including its rights to receive payments on such obligations, all rights of Debtor under any arrangements authorizing Debtor to draw checks or drafts on the bank account of an obligor in respect of a Mortgage Loan, all rights of Debtor under any other automatic payment plan entered into by an obligor in respect of a Mortgage Loan, its rights to all collateral and other security therefor [including, without limitation, rights to all insurance of the foregoing as well as rights to any repossessed goods or real property] and its rights under all guaranties thereof); 2 (v) DEALER CLAIMS. All rights and claims of Debtor, whether now existing or hereafter arising, against dealers or others from whom it acquires Mortgage Loans or liens or security interests in Mortgage Loans (individually a "DEALER" and collectively "DEALERS"), including, without limitation, all payments (whether in cash or property), and rights to receive payments or retain sums of money on account of or for Mortgage Loans returned, charged back to or repurchased by the parties from whom Debtor has acquired Mortgage Loans or liens or security interests in Mortgage Loans, including rights under letters of credit furnished to support rights and claims against dealers (the foregoing being collectively referred to as the "DEALER CLAIMS"); (vi) INDEMNIFICATION CLAIMS. All rights and claims of Debtor, whether now existing or hereinafter arising, against title companies or other closing agents (collectively the "Closing Agents" and individually, a "Closing Agent") under any and all agreements or arrangements between Debtor and a Closing Agent in connection with the closing and funding of Mortgage Loans, (collectively, the "Indemnification Agreements"), including without limitation, all payments and rights to receive payments or other property thereunder; (vii) RECORDS AND CABINETS. Supporting evidence and documents relating to any of the above described property and agreements or arrangements for the processing or collection thereof, including without limitation, computer programs, disks, tapes and related electronic data processing media, together with rights of Debtor to retrieve the same from third parties, written applications, credit information, account cards, payment records, correspondence, notes and other evidences of indebtedness, insurance certificates and the like, together with all books of account, ledgers, tapes and discs and cabinets in or on which the same are reflected or maintained, all whether now existing or hereafter arising (the "RECORDS AND CABINETS"); (viii) REMITTANCE ACCOUNT. The Remittance Account and all deposit accounts of, or for the benefit of, Debtor or any Closing Agent and all sums now or hereafter on deposit therein, into which proceeds of loans made by the Lender to Debtor are deposited (the term "Remittance Account" means that certain account number 019-004-7827 maintained with Household Bank FSB under the sole custody and control of the Lender); (ix) PROCEEDS AND PRODUCTS. All proceeds and products of the foregoing and all insurance of the foregoing and proceeds thereof, whether now existing or hereafter arising; all of the foregoing being herein sometimes referred to as the "COLLATERAL". (b) This Agreement is made and given to secure, and shall secure, the prompt payment or performance in full when due, whether by lapse of time, acceleration or otherwise, of (i) all indebtedness, obligations and liabilities of each Debtor under or in connection with or evidenced by (w) the Credit Agreement or (x) the Notes from time to time issued by the Borrower thereunder or (y) the Guaranty or (z) this Agreement or any other Loan Document, in each case whether now existing or hereafter arising, due or to become due, direct or indirect, absolute or contingent, and 3 howsoever evidenced, held or acquired and (ii) all expenses and charges, legal and otherwise, incurred by Lender in collecting or enforcing any of such indebtedness, obligations and liabilities or in realizing on or protecting any security therefor, including, without limitation, the security afforded hereunder (all of such indebtedness, obligations, liabilities, expenses and charges identified in the immediately foregoing clauses (i) and (ii) being hereinafter referred to as the "SECURED OBLIGATIONS"). 3. DELIVERY OF COLLATERAL. (a) Each Debtor shall promptly deliver the Collateral or cause the Collateral to be delivered to the Lender hereunder. Delivery of the Collateral consisting of Mortgage Loans shall be effected by delivery of the Required Documents therefor. (b) Pending such delivery, all Collateral, including, without limitation, all promissory notes, mortgages, deeds of trust or other documents evidencing or relating to Mortgage Loans which may at anytime be in the possession of a Debtor shall be held by such Debtor subject to the security interest of the Lender therein solely as custodian, bailee and agent for and on behalf of the Lender subject to the instructions of the Lender. (c) Each delivery of Mortgage Loans shall be accompanied by a report of the applicable Debtor summarizing all pertinent information with respect to such Mortgage Loans. 4. ALLOCATION OF PAYMENTS RECEIVED. All amounts received by the Lender (including without limitation all amounts credited to the Remittance Account) on account of the sale or other disposition of the Collateral or otherwise, shall be remitted and applied as provided in SECTIONS 2.5 or 3.3, as appropriate, of the Credit Agreement. 5. HANDLING OF COLLATERAL; REMITTANCE ACCOUNT. (a) Unless an Event of Default shall have occurred and be continuing, from time to time until otherwise notified by the Required Banks (by telephone, telecopier or otherwise), the Lender is hereby authorized to release documentation relating to Mortgage Loans to a Debtor against a trust receipt executed by such Debtor in the form of EXHIBIT A hereto. Each Debtor hereby represents and warrants that any request by such Debtor for release of Collateral under this SECTION 5(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 such Debtor has requested such release in compliance with all terms and conditions of such release set forth herein and in the Credit Agreement, including, without limitation, the definition of Eligible Mortgage Loan. (b) Unless an Event of Default or Default shall have occurred and be continuing, in the event of a sale of Mortgage Loans, which will yield net proceeds to the applicable Debtor in an amount acceptable to Lender but in any event in a minimum amount at least equal to the amount by which the Note must be prepaid so that after giving effect to the release of the related Mortgage Loans involved in such sale, the outstanding principal balance of the Note will not exceed the Borrowing Base as then in effect (the "MINIMUM RELEASE PRICE") upon deposit into the Remittance 4 Account of all proceeds in respect to such sale, the Lender will transmit Mortgage Loans so sold as directed by such Debtor upon one business Day's prior notice. (c) Each Debtor shall direct any purchaser of any Mortgage Loan to remit all amounts (whether on account of principal, interest, premium or otherwise) payable on account of the sale of any Mortgage Loan ("Sales Proceeds) directly to the Remittance Account, to be handled and applied as proved in SECTIONS 2.5 or 3.3, as appropriate, of the Credit Agreement. Pursuant to Section 2 above each Debtor has granted a security interest in and lien upon the Remittance Account and in any and all amounts at any time held therein as collateral security for the Secured Obligations. This Section 9(c) shall constitute notice to Household Bank, FSB of such security interest pursuant to Section 9302(1)(g) of the Illinois Uniform Commercial Code and any other law or regulation requiring such notice. This Section 9(c) shall further constitute irrevocable notice to and Household Bank, FSB that Remittance Account is a "NO ACCESS" account to the Debtors. (d) Unless notified to the contrary by the Lender and if, but only if, such action is not inconsistent with the express provisions of this Security Agreement and the Credit Agreement and would not create an Event of Default or Default hereunder or thereunder, each Debtor may engage in the consumer finance mortgage business and, in connection therewith, may: originate, acquire and service mortgage loans; receive payments on mortgages from the obligors thereon and impounds and fees in connection therewith; retain, use and apply fees and payments made on account of the mortgages by the obligors thereunder; disburse from impound accounts; in the ordinary course of such Debtor's business, deal with and manage its records, files and other items described in Section 2 above; sell or otherwise dispose of mortgages not included in the Borrowing Base, with or without servicing rights; pledge mortgages to the extent permitted under the Credit Agreement; sell servicing rights; and enter into, exercise rights under, perform, modify, waive and cancel any Take-Out Commitments, provided however, that prior to receipt of any such notice from the Lender, each Debtor shall deposit any payment received by it directly to the Remittance Account on account of any Mortgage Loan which exceeds 2% of the principal amount of such Mortgage Loan. 6. COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES. So long as any Secured Obligations or any obligation to extend the same remain outstanding, each Debtor hereby covenants and agrees with, and represents and warrants to, the Lender that: (a) Each Debtor is the sole lawful owner of the Collateral and has the sole right, power and lawful authority to deliver this Agreement and to perform each and all of the matters and things herein provided for. (b) Each Debtor's chief executive office and chief place of business is 3901 Pelham Road, Greenville, South Carolina 29615, and that such Debtor has no other executive offices or places of business other than as set forth on Exhibit B hereto. Such Debtor will not maintain an executive office or place of business at a location other than those specified pursuant to the 5 immediately preceding sentence without first providing the Lender 30 days' prior written notice of its intent to do so; provided, however, that such Debtor will at all times maintain its chief executive office in the contiguous continental United States. Each Debtor's federal tax identification number is as set forth on Exhibit B hereto. (c) The Collateral and every part thereof is and will be free and clear of all security interests, liens, attachments, levies and encumbrances of every kind, nature and description and whether voluntary or involuntary, except for the security interest of the Lender therein and liens permitted under SECTION 7.7 of the Credit Agreement. Each Debtor will warrant and defend the Collateral against any claims and demands of all persons at any time claiming the same or any interest in the Collateral adverse to the Lender. (d) Each Mortgage Loan which is included at any time in the computation of the Borrowing Base, is an Eligible Mortgage Loan. (e) Each Debtor will promptly pay when due all taxes, assessments, and governmental charges and levies upon or against such Debtor or its operations or the Collateral or any other property of such Debtor, in each case before the same become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings which prevent foreclosure on or other realization upon the Collateral and preclude interference with the operation of such Debtor's business in the ordinary course, and such Debtor shall have established adequate reserves therefor. (f) Each Debtor will not, without the Lender's prior written consent, sell, assign, mortgage, lease or otherwise dispose of the Collateral or any interest therein except to the Lender and as otherwise permitted under SECTION 5 above. (g) Each Debtor will at all times allow the Lender or its representatives free access to and right of inspection of the premises of such Debtor and the Collateral. Such Debtor will not remove the Collateral from its present location without the Lender's prior written consent (provided that it is understood and agreed that if for any reason Collateral is at any time kept or located at locations other than its present location or locations hereafter consented to by the Lender, the Lender shall nevertheless have and retain a security interest therein). (h) Each Debtor agrees, at all times upon the request of the Lender to account fully for the Collateral and all proceeds thereof and further agrees, unless notified in writing to do otherwise, to promptly deliver to the Lender, in the form received, all Collateral or Proceeds thereof 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 such Debtor and identified as subject to the security interest in favor of the Lender. (i) Such Debtor has not invoiced payments due with respect to Mortgage Loans or other Receivables or otherwise transacted business, and does not invoice payments due with 6 respect to Mortgage Loans or other Receivables or otherwise transact business, under any trade names or styles other than in its name indicated at the beginning hereof. Such Debtor will not change its name or transact business under any trade name, in each case without first giving the Lender 30 days' prior written notice of its intent to do so. (j) Each Debtor agrees to execute and deliver to the Lender such further endorsements, agreements, financing statements and assignments or other instruments and documents and to do all such other things as the Lender may deem necessary or appropriate to assure the Lender its security interest and the priority thereof hereunder, including such financing statement or statements or amendments thereof or supplements thereto or other instruments as the Lender may from time to time require in order to comply with the Uniform Commercial Code as enacted in the State of Illinois and any successor statute(s) thereto (the "CODE"). Each Debtor agrees to promptly deliver to the Lender all originals of Collateral or proceeds constituting chattel paper or instruments. Each Debtor hereby agrees that a carbon, photographic or other reproduction of this Agreement or any such financing statement is sufficient for filing as a financing statement by the Lender without notice thereof to such Debtor wherever the Lender in its sole discretion desires to file the same. In the event for any reason the law of any other jurisdiction than Illinois becomes or is applicable to the Collateral or any part thereof, each Debtor agrees to execute and deliver all such instruments and to do all such other things as the Lender in its sole discretion deems necessary or appropriate to preserve, protect and enforce the security interest of the Lender under the law of such other jurisdiction to at least the same extent as such security interest would be protected under the Code. The Lender shall, after an Event of Default shall have occurred hereunder and while continuing, have the right to take physical possession of any and all of the Collateral and to maintain such possession on such Debtor's premises or to remove the Collateral or any part thereof to such other places as the Lender may desire. If the Lender exercises its right to take possession of the Collateral, such Debtor shall, upon Lender's demand, assemble the Collateral and make it available to the Lender at a place designated by the Lender. Such Debtor shall at its expense perform any and all other steps requested by Lender to preserve and protect the security interest hereby granted in the Collateral. (k) No Debtor will, except as permitted under SECTION 5(A) hereof, modify, compromise, extend, rescind or cancel any note, mortgage, deed of trust or other document, instrument or agreement relating to any Mortgage Loan pledged under this Security Agreement or consent to a postponement of strict compliance on the part of any party thereto with any material term or provision thereof. (l) Each Debtor will do all things that a prudent investor would deem necessary or desirable to maintain, preserve and protect the Collateral. (m) On failure of any Debtor to perform any of the covenants and agreements herein contained, the Lender may at its option perform the same and in so doing may expend such sums as the Lender may deem advisable in the performance thereof, including without limitation the payment of any insurance premiums, the payment of any taxes, liens and encumbrances, 7 expenditures made in defending against any adverse claims and all other expenditures which the Lender may be compelled to make by operation of law or which the Lender may make by agreement or otherwise for the protection of the security hereof. All such sums and amounts so expended shall be repayable by the applicable Debtor immediately without notice or demand, shall constitute additional Secured Obligations hereunder and shall bear interest from the date said amounts are expended at the rate per annum (computed on the basis of a year of 365 or 366 days, as the case may be for the actual number of days elapsed) determined by adding 6% to the Domestic Rate with any change in such rate per annum as so determined by reason of a change in such Domestic Rate to be effective on the date of such change in said Domestic Rate] (such rate per annum as so determined being hereinafter referred to as the "DEFAULT RATE"). No such performance of any covenant or agreement by the Lender on behalf of any Debtor, and no such advancement or expenditure therefor, shall relieve such Debtor of any default under the terms of this Agreement or in any way obligate the Lender to take any further or future action with respect thereto. The Lender in making any payment hereby authorized may do so according to any bill, statement or estimate procured from the appropriate public office or holder of the claim to be discharged without inquiry into the accuracy of such bill, statement or estimate or into the validity of any tax assessment, sale, forfeiture, tax lien or title or claim. The Lender in performing any act hereunder shall be the sole judge of whether such Debtor is required to perform the same under the terms of this Agreement. The Lender is authorized to charge the Remittance Account or any other depository or other account of such Debtor maintained with the Lender for the amount of such sums and amounts so expended by the Lender. 7. COLLECTION OF COLLATERAL PAYMENTS. (a) Subject to Section 5 hereof, each Debtor shall make collection of all Mortgage Loans, Receivables, Dealer Claims and any other sums due with respect to the Collateral (collectively, "COLLATERAL PAYMENTS") unless notified to the contrary by the Lender after the occurrence and during the continuance of any Default or Event of Default and may use the same to carry on its business in accordance with sound business practice and otherwise subject to the terms hereof and of any separate written agreements between such Debtor and the Lender; PROVIDED that, other than in the ordinary course of such Debtor's business and consistent with practices historically observed by it, such Debtor shall not, without the prior written consent of the Lender, grant any extension of the time of payment of any Collateral Payment, compromise or settle any Collateral Payment for less than the full amount thereof, release (in whole or in part) any person or property liable for the payment thereof or granted as collateral security therefor, or allow any credit or discount whatsoever thereon. (b) Upon request of the Lender to do so, all instruments (including any postdated checks) at any time constituting part of the Collateral Payments shall, upon receipt by such Debtor, be immediately endorsed to and deposited with the Lender in the same form as received by such Debtor. Whether or not the Lender has exercised any or all of its rights under other provisions of this SECTION 7, in the event the Lender requests such Debtor to do so: 8 (i) all chattel paper at any time constituting part of the Collateral Payments shall, upon receipt by such Debtor, be immediately endorsed to and deposited with the Lender; and/or (ii) such Debtor shall instruct all customers and account debtors to remit all payments in respect of Collateral Payments to a lock box or lock boxes under the sole custody and control of the Lender and which are maintained at post offices selected by such Debtor and acceptable to the Lender. (c) Upon the occurrence and during the continuation of any Default or Event of Default hereunder, whether or not the Lender has exercised any or all of its rights under other provisions of this SECTION 7, the Lender or its designee may notify account debtors or others at any time that Collateral Payments have been assigned to the Lender or of the Lender's security interest therein and either in its own name, or the name of such Debtor, or both, demand, collect (including, without limitation, through a lock box analogous to that described in SECTION 7(B)(II) hereof), receive, receipt for, sue for, compound and give acquittance for any or all amounts due or to become due on Collateral Payments, and in the Lender's discretion file any claim or take any other action or proceeding which Lender may deem necessary or appropriate to protect and realize upon the security interest of Lender in the Collateral Payments. 9. POWER OF ATTORNEY. In addition to any other powers of attorney contained herein, each Debtor appoints the Lender and its nominees, or any other person whom the Lender may designate as such Debtor's attorney in fact, with full power (i) to endorse such Debtor's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into the Lender's possession and (ii) to sign such Debtor's name on drafts against customers, on schedules and assignments of Collateral payments, on notices of assignment and on public records, on verifications of accounts, and on notices to customers, to notify the post office authorities to change the address for delivery of such Debtor's mail to an address designated by the Lender, and to receive, open and dispose of all mail addressed to such Debtor, provided that the Lender agrees, as a special covenant, to exercise such rights set forth in clauses (i) and (ii) only upon the occurrence and during the continuance of an Event of Default hereunder. The Lender may send requests for verification of Collateral Payments to customers or account debtors, and do all things necessary to carry out this Agreement. Each Debtor hereby ratifies and approves all acts of any such attorney and agrees that neither the Lender nor any such attorney will be liable for any acts or omissions nor for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct. The foregoing power of attorney, being coupled with an interest, is irrevocable until the Secured Obligations have been fully satisfied and the commitments of the Lender to extend credit to the Borrower under the Credit Agreement have terminated. The Lender may file one or more financing statements disclosing its security interest in any or all of the Collateral without such Debtor's signature appearing thereon. Each Debtor also hereby grants the Lender a power of attorney to execute any such financing statement, or amendments and supplements to financing statements, on behalf of such Debtor without notice thereof to such Debtor, which power of attorney is coupled with an interest and is irrevocable until the Secured 9 Obligations have been fully satisfied and the commitments of the Lender to extend credit to the Borrower under the Credit Agreement have terminated. 10. DEFAULTS AND REMEDIES. (a) The occurrence of any event or the existence of any condition which is specified as an Event of Default or Default under the Credit Agreement shall constitute an "EVENT OF DEFAULT" or "DEFAULT" hereunder. (b) Upon the occurrence and during the continuation of any Event of Default hereunder, the Lender shall have, in addition to all other rights provided herein or by law, the rights and remedies of a secured party under the Code (regardless of whether the Code is the law of the jurisdiction where the rights or remedies are asserted), and further the Lender may, without demand and without advertisement or notice, all of which each Debtor hereby waives, at any time or times, sell and deliver any or all Collateral held by it for its public or private sale, for cash, upon credit or otherwise, at such prices and upon such terms as the Lender deems advisable, in its sole discretion. In addition to all other sums due the Lender hereunder, the Debtors, jointly and severally shall pay the Lender all costs and expenses incurred by the Lender, including a reasonable allowance for attorneys' fees and court costs, in obtaining, liquidating or enforcing payment of Collateral or Secured Obligations or in the prosecution or defense of any action or proceeding by or against the Lender or any Debtor concerning any matter arising out of or connected with this Agreement or the Collateral or Secured Obligations, including without limitation any of the foregoing arising in, arising under or related to a case under the United States Bankruptcy Code. Any requirement of reasonable notice shall be met if such notice is personally served on or mailed, postage prepaid, to the Debtors at the mailing address shown at the beginning hereof at least 10 days before the time of sale or other event giving rise to the requirement of such notice. The Lender may be the purchaser at any such sale. Each Debtor hereby waives all of its rights of redemption from any such sale. Subject to the provisions of applicable law, the Lender may postpone or cause the postponement of the sale of all or any portion of the Collateral by announcement at the time and place of such sale, and such sale may, without further notice, be made at the time and place to which the sale was postponed or the Lender may further postpone such sale by announcement made at such time and place. (c) Failure by the Lender to exercise any right, remedy or option under this Agreement or any other agreement between any Debtor and the Lender or provided by law, or delay by the Lender in exercising the same, shall not operate as a waiver; no waiver by the Lender shall be effective unless it is in writing, signed by the Lender and then only to the extent specifically stated. For purposes of this Agreement, a Default or Event of Default hereunder shall be construed as continuing after its occurrence until the same is waived in writing by the Lender. Neither the Lender, nor any party acting as attorney for the Lender, shall be liable hereunder for any acts or omissions or for any error of judgment or mistake of fact or law other than their gross negligence or willful misconduct. The rights and remedies of the Lender under this Agreement shall be cumulative and not exclusive of any other right or remedy which the Lender may have. 10 11. APPLICATION OF PROCEEDS. The proceeds and avails of the Collateral at any time received by the Lender shall, (if received by the Lender in cash or its equivalent) be applied by the Lender in reduction of the Secured Obligations as set forth in SECTIONS 2.5 or 3.3, as appropriate of the Credit Agreement except as otherwise expressly provided herein. The Debtors shall remain liable to the Lender for any deficiency. Any surplus remaining after the full payment and satisfaction of the Secured Obligations shall be returned to the Borrower or to whomsoever the Lender reasonably determine to be lawfully entitled thereto. 12. CONTINUING AGREEMENT. This Agreement shall be a continuing agreement in every respect and shall remain in full force and effect until all of the Secured Obligations, both for principal and interest, have been fully paid and satisfied and any Commitment of the Lender to extend any credit to the Borrower under the Credit Agreement shall have terminated. Upon such termination of this Agreement, the Lender shall, upon the request and at the expense of the Borrower, forthwith release all its liens and security interests hereunder. 13. MISCELLANEOUS. (a) This Agreement cannot be changed or terminated orally. This Agreement shall create a continuing security interest in the Collateral and shall be binding upon each Debtor, its successors and assigns and shall inure, to the benefit of the Lender and its successors and assigns; provided, however, that no Debtor may assign its rights or delegate its duties hereunder without the Lender's prior written consent. Each Debtor hereby releases the Lender from any liability for any act or omission relating to the Collateral or this Agreement, except the Lender's gross negligence or willful misconduct. (b) All communications provided for herein shall be in writing, except as otherwise specifically provided for hereinabove, and shall be given and deemed to have been made if given in accordance with the provisions of SECTION 9.6 of the Credit Agreement, addressed as specified in SECTION 9.6 of the Credit Agreement. (c) In the event that any provision hereof shall be deemed to be invalid by reason of the operation of any law or by reason of the interpretation placed thereon by any court, this Agreement shall be construed as not containing such provision, but only as to such jurisdictions where such law or interpretation is operative, and the invalidity of such provision shall not affect the validity of any remaining provision hereof, and any and all other provisions hereof which are otherwise lawful and valid shall remain in full force and effect. (d) This Agreement shall, to the extent permitted by applicable law, be deemed to have been made in the State of Illinois and shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to principles of conflicts of laws. All terms which are used in this Agreement which are defined in the Code shall have the same meanings herein as said terms do in the Code unless this Agreement shall otherwise specifically provide. The headings 11 in this instrument are for convenience of reference only and shall not limit or otherwise affect the meaning of any provision hereof. (e) Each Debtor, by its execution hereof, acknowledges and agrees that it is and remains liable for the performance of any and all of its obligations under the Collateral to the same extent as though this Agreement had not been made. Each Debtor acknowledges that this Agreement constitutes an assignment of rights of such Debtor and not an assignment of any duties or obligations of such Debtor with respect to the Collateral, it being understood that the Lender shall not in any manner be responsible for the performance of any such duties or obligations. (f) This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each constituting an original, but all together one and the same instrument. 12 IN WITNESS WHEREOF, the Debtors have has caused this Agreement to be duly executed as of the date first above written. HOMEGOLD, INC., Address for Notices: 3901 Pelham Road By: ________________________________ Greenville, SC 29615 Name: ______________________________ Title: _____________________________ Address: HOMEGOLD FINANCIAL, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: CAROLINA INVESTORS, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: PREMIER FINANCIAL SERVICE, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: LOAN PRO$, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: REEDY RIVER VENTURES, L.P. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT SBIC, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT COMMERCIAL MORTGAGE, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT BUSINESS CAPITAL, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT AUTO HOLDINGS, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT INSURANCE AGENCY CORP. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT MORTGAGE CORP. OF TENNESSEE 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: HOMEGOLD REALTY, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Accepted and agreed to in Wood Dale, Illinois as of the date first above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By: _________________________________________ Michael J. Hammond Vice President Schedule of Exhibits to Security Agreement EXHIBIT DOCUMENT - ------- -------- A Form of Trust Receipt B Chief Executive Office and Principal Place of Business Exhibit A Form of Trust Receipt Date _______________________, 19___ The undersigned, _____________________________________, a _____________ corporation (the "DEBTOR"), acknowledges receipt from Household Commercial Financial Services, Inc. ("LENDER") for the exclusive benefit of the Lender pursuant to the Security Agreement (as those terms and capitalized terms not otherwise defined herein are defined in that certain Security Agreement dated as of ______________, ____, among the Lender and the Debtors party thereto, or from its duly appointed sub-agent, of the following described documentation for the identified Mortgage Loans (the "COLLATERAL DOCUMENTS"), possession of which is herewith entrusted to the Debtor solely for the purpose of correcting documentary defects relating thereto:
Loan Document Debtor Name Loan Number Note Amount Delivered ----------- ----------- ----------- ---------
It is hereby acknowledged that a security interest pursuant to the Illinois Uniform Commercial Code in the Collateral hereinabove described and in the Proceeds of said Collateral has been granted to Lender pursuant to the Security Agreement. The Debtor hereby represents and warrants that (a) the unpaid principal amount of the Mortgage Loans the Collateral Documents for which are requested to be released hereunder when added to the unpaid principal amount of all other Mortgage Loans included in the computation of the Borrowing Base the Collateral Documents for which have been similarly released does not exceed $______________ and (b) no Default or Event of Default has occurred under the Credit Agreement. In consideration of the aforesaid delivery by Lender (or by its duly appointed sub-agent), the Debtor hereby agrees to hold said Collateral in trust for Lender as provided under and in accordance with all provisions of the Security Agreement and to return said Collateral to Lender no later than the close of business on the tenth day following the date hereof or, if such day is not a Business Day, on the immediately succeeding Business Day. __________________________________________ By:_______________________________________ Name:_____________________________________ Title:____________________________________ Exhibit B
Other Offices/ Federal Tax Debtor Name Places of Business ID Number ----------- ------------------ ---------
EX-10.4.3 12 GUARANTY EXHIBIT 10.4.3 GUARANTY THIS GUARANTY dated as of May 2, 2000 is executed in favor of HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC., a Delaware corporation (the "Lender"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Homegold, Inc., a South Carolina corporation (the "Company") has entered into a Credit Agreement dated as of May 2, 2000 (as amended or otherwise modified from time to time, the "Credit Agreement"; terms used but not defined herein are used as defined in the Credit Agreement) with Lender, pursuant to which Lender has agreed to make loans to the Company; and WHEREAS, each of the undersigned will benefit from the making of loans pursuant to the Credit Agreement and is willing to guaranty the Liabilities (as defined below) as hereinafter set forth; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each of the undersigned hereby jointly and severally, unconditionally and irrevocably, as primary obligor and not merely as surety, guarantees the full and prompt payment when due, whether by acceleration or otherwise, and at all times thereafter, of all obligations (monetary or otherwise) of the Company to the Lender under or in connection with the Credit Agreement, the Note, any other Loan Document and any other document or instrument executed in connection therewith, in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due (all such obligations being herein collectively called the "Liabilities"); provided that the liability of each of the undersigned hereunder shall be limited to the maximum amount of the Liabilities which such undersigned may guaranty without violating any fraudulent conveyance or fraudulent transfer law (plus all costs and expenses paid or incurred by the Lender in enforcing this Guaranty against such undersigned). Each of the undersigned agrees that if any Event of Default shall occur under Section 8.1 of the Credit Agreement, and if such event shall occur at a time when any of the Liabilities may not then be due and payable, such undersigned will pay to the Lender forthwith the full amount which would be payable hereunder by such undersigned if all Liabilities were then due and payable. To secure all obligations of each of the undersigned hereunder, the Lender shall have a lien on and security interest in and may, without demand or notice of any kind, at any time and from time to time when any Event of Default exists, appropriate and apply toward the payment of such amount, in such order of application as the Lender may elect, any and all balances, credits, deposits, accounts or moneys of or in the name of such undersigned now or hereafter with the Lender and any and all property of every kind or description of or in the name of such undersigned now or hereafter, for any reason or purpose whatsoever, in the possession or control of, or in transit to, the Lender or any agent or bailee for the Lender. This Guaranty shall in all respects be a continuing, irrevocable, absolute and unconditional guaranty, and shall remain in full force and effect (notwithstanding, without limitation, the dissolution of any of the undersigned or that at any time or from time to time no Liabilities are outstanding) until the Commitment has terminated and all Liabilities have been paid in full. The undersigned further agree that if at any time all or any part of any payment theretofore applied by the Lender to any of the Liabilities is or must be rescinded or returned by the Lender for any reason whatsoever (including the insolvency, bankruptcy or reorganization of the Company or any of the undersigned), such Liabilities shall, for the purposes of this Guaranty, to the extent that such payment is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Lender, and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such Liabilities, all as though such application by the Lender had not been made. The Lender may, from time to time, at its sole discretion and without notice to the undersigned (or any of them), take any or all of the following actions: (a) retain or obtain a security interest in any property to secure any of the Liabilities or any obligation hereunder, (b) retain or obtain the primary or secondary obligation of any obligor or obligors, in addition to the undersigned, with respect to any of the Liabilities, (c) extend or renew any of the Liabilities for one or more periods (whether or not longer than the original period), alter or exchange any of the Liabilities, or release or compromise any obligation of any of the undersigned hereunder or any obligation of any nature of any other obligor with respect to any of the Liabilities, (d) release its security interest in, or surrender, release or permit any substitution or exchange for, all or any part of any property securing any of the Liabilities or any obligation hereunder, or extend or renew for one or more periods (whether or not longer than the original period) or release, compromise, alter or exchange any obligations of any nature of any obligor with respect to any such property, and (e) resort to the undersigned (or any of them) for payment of any of the Liabilities when due, whether or not the Lender shall have resorted to any property securing any of the Liabilities or any obligation hereunder or shall have proceeded against any other of the undersigned or any other obligor primarily or secondarily obligated with respect to any of the Liabilities. Each of the undersigned hereby expressly waives: (a) notice of the acceptance by the Lender of this Guaranty, (b) notice of the existence or creation or non-payment of all or any of the Liabilities, (c) presentment, demand, notice of dishonor, protest, and all other notices whatsoever, and (d) all diligence in collection or protection of or realization upon any Liabilities or any security for or guaranty of any Liabilities. 2 Notwithstanding any payment made by or for the account of any of the undersigned pursuant to this Guaranty, the undersigned shall not be subrogated to any right of the Lender until such time as the Lender shall have received final payment in cash of the full amount of all Liabilities. Each of the undersigned further agrees to pay all expenses (including the reasonable attorneys' fees and charges) paid or incurred by the Lender in endeavoring to collect the Liabilities of such undersigned, or any part thereof, and in enforcing this Guaranty against such undersigned. The creation or existence from time to time of additional Liabilities to the Lender is hereby authorized, without notice to the undersigned (or any of them), and shall in no way affect or impair the rights of the Lender or the obligations of the undersigned under this Guaranty, including each of the undersigned's guaranty of such additional Liabilities. The Lender may from time to time without notice to the undersigned (or any of them), assign or transfer any or all of the Liabilities or any interest therein; and, notwithstanding any such assignment or transfer or any subsequent assignment or transfer thereof, such Liabilities shall be and remain Liabilities for the purposes of this Guaranty, and each and every immediate and successive assignee or transferee of any of the Liabilities or of any interest therein shall, to the extent of the interest of such assignee or transferee in the Liabilities, be entitled to the benefits of this Guaranty to the same extent as if such assignee or transferee were an original Lender. No delay on the part of the Lender in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Lender of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy; nor shall any modification or waiver of any provision of this Guaranty be binding upon the Lender, except as expressly set forth in a writing duly signed and delivered on behalf of the Lender. No action of the Lender permitted hereunder shall in any way affect or impair the rights of the Lender or the obligations of the undersigned under this Guaranty. For purposes of this Guaranty, Liabilities shall include all obligations of the Company to the Lender arising under or in connection with the Credit Agreement, any Note, any other Loan Document or any other document or instrument executed in connection therewith, in each case notwithstanding any right or power of the Company or anyone else to assert any claim or defense as to the invalidity or unenforceability of any such obligation, and no such claim or defense shall affect or impair the obligations of any of the undersigned hereunder. This Guaranty shall be binding upon the undersigned and the successors and assigns of the undersigned; and to the extent that the Company or any of the undersigned is either a partnership or a corporation, all references herein to the Company and to the undersigned, respectively, shall be deemed to include any successor or successors, whether immediate or remote, to such partnership or corporation. The term "undersigned" as used herein shall mean all parties 3 executing this Guaranty and each of them, and all such parties shall be jointly and severally obligated hereunder. This Guaranty shall be governed by and construed in accordance with the laws of the State of Illinois applicable to contracts made and to be fully performed in such State. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guaranty shall be prohibited by or invalid under such 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 Guaranty. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, and each such counterpart shall be deemed to be an original but all such counterparts shall together constitute one and the same Guaranty. At any time after the date of this Guaranty, one or more additional Persons may become parties hereto by executing and delivering to the Agent a counterpart of this Guaranty. Immediately upon such execution and delivery (and without any further action), each such additional Person will become a party to, and will be bound by all of the terms of, this Guaranty. This Guaranty may be secured by one or more security agreements, pledge agreements, mortgages, deeds of trust or other similar documents. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY OTHER LOAN DOCUMENT, SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. EACH OF THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE. EACH OF THE UNDERSIGNED FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS SET FORTH OPPOSITE ITS SIGNATURE HERETO (OR SUCH OTHER ADDRESS AS IT SHALL HAVE SPECIFIED IN WRITING TO THE LENDER AS ITS ADDRESS FOR NOTICES HEREUNDER) OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. EACH OF THE UNDERSIGNED HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED 4 TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. EACH OF THE UNDERSIGNED, AND (BY ACCEPTING THE BENEFITS HEREOF) LENDER, HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS GUARANTY, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 5 IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered as of the day and year first above written. Address: HOMEGOLD FINANCIAL, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: CAROLINA INVESTORS, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: PREMIER FINANCIAL SERVICES INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: LOAN PRO$, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: REEDY RIVER VENTURES, L.P. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT SBIC, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT COMMERCIAL MORTGAGE, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT BUSINESS CAPITAL, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT AUTO HOLDINGS, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT INSURANCE AGENCY CORP. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Address: EMERGENT MORTGAGE CORP. OF TENNESSEE 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:______________________________ Its:_______________________________ Address: HOMEGOLD REALTY, INC. 3001 Pellham Road Greenville, South Carolina 29615 By:_________________________________ Name:_______________________________ Its:________________________________ Signature page for the Guaranty dated as of __________, ____ among ___________, ___________ and __________ and Household Commercial Financial Services, Inc., as Lender The undersigned is executing a counterpart hereof for purposes of becoming a party hereto: [ADDITIONAL GUARANTOR] By: ____________________________________________________ Title:______________________________________________ Address: EX-10.5 13 AGREEMENT OF SEPARATION EXHIBIT 10.5 AGREEMENT OF SEPARATION, WAIVER AND RELEASE AND NON-SOLICITATION FOR AND IN CONSIDERATION of the mutual promises of the parties to this Agreement of Separation, Waiver and Release and Non-Solicitation (the "Agreement"), the receipt and sufficiency of which are hereby acknowledged, Mr. Keith B. Giddens (hereinafter referred to as "Employee") and HomeGold Financial, Inc. (hereinafter referred to as the "Company", and where applicable, including any and all of its corporate affiliates,) agree as follows: 1. The parties agree that Employee's employment with the Company will terminate effective April 28, 2000 (the "Effective Date"). 2. Subject to the performance by Employee of the terms and provisions of this Agreement, the Company hereby agrees to pay Employee a lump sum of $220,000 (the "Lump Sum") accounting for 12 months of severance pay at the expiration of the revocation period referred to below (seven days after the date this Agreement is executed or seven days after the Effective Date, whichever is later), less all legally required or authorized deductions. On or before the Effective Date, Company shall deposit the Lump Sum in a trust account established by the Wyche, Burgess, Freeman & Parham, P.A. law firm to be held in escrow. 3. In addition to the compensation provided above: a. Company will transfer title of the automobile Employee now uses (the "Automobile") free and clear of all liens and encumbrances on the Effective Date. It is the intent of the parties that Employee shall receive the automobile net of federal and South Carolina income tax; therefore, the Company will advance as federal and South Carolina income tax withholding payments an amount calculated on the basis of applicable withholding tables (based on Employee's actual tax bracket) on the "grossed up" amount of the automobile's current value plus the withholding amounts advanced as set forth above. b. Company agrees to provide to Employee (and his family, as the case may be) the health and life insurance coverage provided to Employee and his family immediately prior to the Effective Date at no cost to Employee or his family for a period of twelve (12) months from the Effective Date so long as Employee (and his family, as the case may be) is not adequately covered by health insurance coverage of a similar quality by any other source. c. Company will pay for and provide to Employee out-placement services through Right Associates for three months, beginning no later than July 1, 2000, or until Employee finds suitable employment, whichever comes first. Page 1 of 5 d. All options previously granted to Employee shall be fully vested as of the Effective Date, and Employee shall have a period of one year from the Effective Date, until April 28, 2001, to exercise any such options. All unexercised options shall lapse at the close of business on April 28, 2001. 4. In consideration of the promises made by the Company herein, which Employee acknowledges to exceed anything that the Company had a pre-existing obligation to provide, Employee does hereby for himself and his heirs, estate, personal representatives, successors, and assigns, fully release and discharge the Company and each of its respective agents, employees, representatives, attorneys, directors, officers, stockholders, affiliated corporations, parent or subsidiary corporations, predecessors, successors and assigns, and the successors and assigns of any of the foregoing (the "Released Parties"), of and from any and all grievances, charges, employment contracts, agreements, suits, liabilities, legal actions or claims of any nature whatsoever, whether known or unknown, arising from or related to his employment with or separation from the Company or the Company's employment policies, practices, and benefits, including claims arising under federal, state, or local statute, ordinance, common law, regulation, equity or other source including, but not limited to, any and all claims of age, disability, race, color, sex, national origin, ancestry, religion, or other discrimination or harassment, any claims arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. .ss 2000e, et seq.; the Civil Rights Act of 1866, 1871, and 1964, as amended; the Employee Retirement Income Security Act (ERISA), 29 U.S.C. .ss 1001 et seq.; Section 1981 of Title 42 of the U.S. Code; the Americans with Disabilities Act, 29 U.S.C. .ss 12101 et seq.; the Age Discrimination in Employment Act, 29 U.S.C. .ss 621, et seq.; and the Family and Medical Leave Act, 29 U.S.C. .ss 2601 et seq.; claims arising under the laws of South Carolina or any other state, and claims asserting breach of contract (whether express or implied), promissory estoppel, wrongful termination, defamation, invasion of privacy, injury to credit, outrage, distress, humiliation, loss of standing and prestige, personal injury, loss of consortium, tort, or other common law causes of action, or claims for workers' compensation or other compensation for bodily injury. Employee waives only those rights or claims that arose from events occurring before the date this Agreement is executed. The released claims include, but are not limited to, any claims for back pay, front pay, damages, court costs, attorneys' fees, punitive damages, reinstatement or any other monetary or equitable relief. Employee shall waive any right to, and will not accept, any other remedy obtained through the efforts of any other individual or agency, state or federal, relating to his employment. Employee's return of the above-recited consideration does not entitle him to institute action against the Company. If Employee sues Company in violation of this paragraph, Employee agrees to pay all costs and expenses incurred by the Company in defending the suit, including reasonable attorneys' fees. 5. Company does hereby for itself its representatives, successors, and assigns, fully release and discharge Employee of and from any and all grievances, charges, employment contracts, agreements, suits, liabilities, legal actions or claims of any nature whatsoever, arising from or related to Employee's employment with or separation from the Company, including claims arising under federal, state, or local statute, ordinance, common law, regulation, equity or other source. Company waives only those rights or claims that arose Page 2 of 5 from events occurring before the Execution Date. If Company sues Employee in violation of this paragraph, Company agrees to pay all costs and expenses incurred by the Employee in defending the suit, including reasonable attorneys' fees. 6. Employee acknowledges and agrees that neither the Company nor any of the Released Parties owes him any wages, benefits, accrued vacation or sick leave, salary, or other compensation in any amount whatsoever other than as expressly agreed to herein. Employee agrees that to the extent that he is otherwise due any such amounts or compensation or expenses of any nature, the Company's obligation to pay these amounts is satisfied and subsumed in full by the compensation set forth above. 7. Employee agrees not to disparage the Company in any way to any person, including but not limited to any customer or potential customer of the Company. Employee also agrees not to make disparaging comments about the Company, its owners, any of its employees, services, products, or policies to any other person (including, without limitation, present or future customers, suppliers or employees of the Company). In addition, Employee agrees to keep confidential, and not disclose to any person, all Confidential Information learned by him while in a relationship with the Company. For purposes of this agreement, Confidential Information includes all information (whether in written form, on electronic media, or oral) about the Company, its finances, prospects, operations, customer lists, price lists, product lists, plans, marketing strategy or trade secrets as defined by the South Carolina Trade Secrets Act. 8. Company agrees not to disparage Employee or his employment with the Company to any third party. Employee is to direct all employment references to the Vice-President of Finance or CFO of the Company in writing, who agrees only to provide the following information: dates of employment, position(s) held, and confirmation of the last compensation package (i.e., base salary, bonus, benefits). Employee authorizes the Vice President of Finance or CFO of the Company to inform inquirers that Employee left the Company to pursue other business opportunities. 9. In exchange for the consideration cited above, Employee covenants and agrees: a. For a period of 12 months after the Effective Date, he will not, for himself or on behalf of any third party, directly or indirectly solicit, influence, contact, sell to, service, or deal with any Customer (as defined below) of the Company for the purpose of i) providing services similar to such Customer in competition with the Company; or ii) diverting or attempting to divert from the Company the business of the Customer of the Company. "Customer" shall be limited to any actual customer or client of the Company (a) that Employee solicited during his/her employment with the Company; or (b) that Employee knows to have been contacted or solicited by or on behalf of the Company during the 12 month period prior to the termination of Employee's employment. Page 3 of 5 b. For a period of 12 months after the Effective Date, he will not, for himself or on behalf of any Third Party, directly or indirectly: i) consult, attempt to hire, or encourage any present employee of the Company to end his/her employment with the Company to accept employment with any Third Party that competes, directly or indirectly, with the Company; or ii) consult, attempt to hire, or encourage any former employee of the Company who has been away from the Company for less than one month to accept employment with any Third Party that competes, directly or indirectly, with the Company. c. The parties hereto recognize that irreparable damage will result to the Company in the event of the breach of any of the covenants contained in this paragraph. The parties therefore agree that the Company shall be entitled, in addition to any other remedies or damages available to it under the South Carolina Trade Secrets Act or other statutory or common law, to obtain injunctive relief without bond in order to restrain the violation of such covenants by Employee. 10. This Agreement does not constitute an admission of any wrongdoing by the Company but is a release by Employee of all existing potential claims, whether known or unknown, entered solely for the purpose of resolving any disputes that might exist between the parties. 11. To comply with the Older Workers Benefits Protection Act of 1990, the Company has advised Employee of the legal requirements of this Act and this Agreement fully incorporates those legal requirements by reference and as follows: a. This Agreement is written in layman's terms, and Employee hereby represents to the Company that he understands and comprehends its terms; b. Employee is hereby advised to, and has had an opportunity to consult with an attorney to review the Agreement prior to executing it; c. The Agreement specifically refers to rights and claims arising under the Age Discrimination in Employment Act; d. Employee does not waive any rights or claims that result from events occurring after the date the Agreement is executed; e. Employee hereby acknowledges that he is receiving consideration beyond anything of value to which he already is entitled; f. Employee has twenty-one days from his receipt hereof to consider this proposed Agreement. Employee's failure to accept the proposed Agreement by close of business on the twenty-first day following his receipt of the Agreement may be deemed rejection of its terms; Page 4 of 5 g. Employee has the right to revoke the Agreement for seven days following his signing of the Agreement, and after the expiration of that seven days the executed Agreement shall be of full validity, force, and effect. 12. This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and the parties have made no agreements, representations, or warranties relating to the subject matter of this Agreement that are not set forth herein. No amendment or modification of this Agreement shall be valid unless made in writing and signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived except by written instrument signed by the waiving party. 13. Employee hereby represents and warrants that he has not assigned, transferred, or conveyed to any individual or entity any alleged right, claim or cause of action of any kind which is included within the above releases. Employee further represents and warrants that he is aware of no lien or other encumbrance on his rights, claims, and causes of action, and that he is entitled to receive from the Company payment of the full amount of the proceeds due to him under this Agreement. 14. This Agreement was made in, and shall be governed by and enforced under the laws of, the State of South Carolina, without regard to choice of law principles. This Agreement may be enforced only in a court of competent jurisdiction in Greenville County, South Carolina and Employee agrees to submit to jurisdiction in Greenville County, South Carolina whether or not he is then residing in South Carolina. In the event of litigation of any dispute regarding or related to this Agreement, the prevailing party at such litigation shall be liable to the other for all costs and expenses, including, without limitation, reasonable attorney fees and expert witness fees. Executed and agreed to on _____________________, 2000 (the "Execution Date"). READ CAREFULLY. THIS RELEASE ENDS YOUR CLAIMS AGAINST THE COMPANY. WITNESSES: HOMEGOLD FINANCIAL, INC. ____________________ By:______________________ Its: ____________________ EMPLOYEE ____________________ _________________________ Keith B. Giddens Page 5 of 5 EX-10.6 14 AGREEMENT OF SEPARATION EXHIBIT 10.6 AGREEMENT OF SEPARATION, WAIVER AND RELEASE AND NON-SOLICITATION FOR AND IN CONSIDERATION of the mutual promises of the parties to this Agreement of Separation, Waiver and Release and Non-Solicitation (the "Agreement"), the receipt and sufficiency of which are hereby acknowledged, Mr. John W. Crisler (hereinafter referred to as "Employee") and HomeGold Financial, Inc. (hereinafter referred to as to the "Company," and where applicable, including any and all of its corporate affiliates,) agree as follows: 1. The parties agree that Employee's employment with the Company will terminate effective September 1, 2000 (the "Effective Date"). Subject to the performance by Employee of the terms and provisions of this Agreement, the Company hereby agrees to continue to pay Employee his biweekly salary through the close of business on September 1, 2000, less all legally required or authorized deductions. 2. In addition to the compensation provided, the Company agrees to pay Employee on or before ______________, 2000, the sum of Ten Thousand ($10,000) Dollars for Employee's moving expenses. 3. In consideration of the promises made by the Company herein, which Employee acknowledges to exceed anything that the Company had a pre-existing obligation to provide, Employee does hereby for himself and his heirs, estate, personal representatives, successors, and assigns, fully release and discharge the Company and each of its respective agents, employees, representatives, attorneys, directors, officers, stockholders, affiliated corporations, parent or subsidiary corporations, predecessors, successors and assigns, and the successors and assigns of any of the foregoing (the "Released Parties"), of and from any and all grievances, charges, employment contracts, agreements, suits, liabilities, legal actions or claims of any nature whatsoever, whether known or unknown, arising from or related to his employment with or separation from the Company or the Company's employment policies, practices, and benefits, including claims arising under federal, state, or local statute, ordinance, common law, regulation, equity or other source including, but not limited to, any and all claims of age, disability, race, color, sex, national origin, ancestry, religion, or other discrimination or harassment, any claims arising under Title VII of the Civil Rights Acts of 1964, 42 U.S.C. ss. 2000e, et seq.; the Civil Rights Act of 1866, 1871, and 1964, as amended; the Employee Retirement Income Security Act (ERISA), 29 U.S.C. ss.ss. 1001 et seq.; Section 1981 of Title 42 of the U.S. Code; the Americans with Disabilities Act, 29 U.S.C. ss.ss. 12101 et seq.; the Age Discrimination in Employment Act, 29 U.S.C. ss. 621, et seq.; and the Family and Medical Act, 29 U.S.C. ss.ss. 2601 et seq.; claims arising under the laws of South Carolina or any other state, and claims asserting breach of contract (whether express or implied), promissory estoppel, wrongful termination, defamation, invasion of privacy, injury to credit, outrage, distress, humiliation, loss of standing and prestige, personal injury, loss of consortium, tort, or other common law causes of action, or claims for workers' compensation or other compensation for bodily injury. Employee waives only those rights or claims that arose from events occurring before the date this Agreement is executed. The released claims include, but are not limited to, any claims for back pay, front pay, damages, court costs, attorneys' fees, punitive damages, reinstatement or any other monetary or equitable relief. Employee shall waive any right to, and will not accept, any other remedy obtained through the efforts of any other individual or agency, state or federal, relating to his employment. Employee's return of the above-recited consideration does not entitle him to institute action against the Company. If Employee sues Company in violation of this paragraph, Employee agrees to pay all costs and expenses incurred by the Company in defending the suit, including reasonable attorneys' fees. 4. Company does hereby for itself, its representatives, successors, and assigns, fully release and discharge Employee of and from any and all grievances, charges, employment contracts, agreements, suits, liabilities, legal actions or claims of any nature whatsoever, arising from or related to Employee's employment with or separation from the Company, including claims arising under federal, state, or local statute, ordinance, common law, regulation, equity or other source. Company waives only those rights or claims that arose from events occurring before the Execution Date. If Company sues Employee in violation of this paragraph, Company agrees to pay all costs and expenses incurred by the Employee in defending the suit, including reasonable attorneys' fees. 5. Employee acknowledges and agrees that this Agreement supercedes and replaces all previous agreements and that neither the Company nor any of the Released Parties owes him any wages, benefits, accrued vacation or sick leave, salary, or other compensation in any amount whatsoever other than as expressly agreed to herein. Employee agrees that to the extent that he is otherwise due any such amounts or compensation or expenses of any nature, the Company's obligation to pay these amounts is satisfied and subsumed in full by the compensation set forth above. 6. Employee agrees not to disparage the Company in any way to any person, including but not limited to any customer or potential customer of the Company. Employee also agrees not to make disparaging comments about the Company, its owners, any of its employees, services, products, or policies to any other person (including, without limitation, present or future customers, suppliers or employees of the Company). In addition, Employee agrees to keep confidential, and not disclose to any person, all Confidential Information learned by him while in a relationship with the Company. For purposes of this agreement, Confidential Information includes all information (whether in written form, on electronic media, or oral) about the Company, its finances, prospects, operations, customer lists, price lists, product lists, plans, marketing strategy or trade secrets as defined by the South Carolina Trade Secrets Act. 7. Company agrees not to disparage Employee or his employment with the Company to any third party. Employee is to direct all employment references to the Vice-President of Finance or CFO of the Company in writing, who agrees only to provide the following information: dates of employment, position(s) held, and confirmation of the last compensation package (i.e., base salary, bonus, benefits). Employee authorizes the Vice President of Finance or CFO of the Company to inform inquirers that Employee left the Company to pursue other business opportunities. 8. In exchange for the consideration cited above, Employee covenants and agrees: a. For a period of 12 months after the Effective Date, he will not, for himself or on behalf of any Third Party, directly or indirectly: i) consult, attempt to hire, or encourage any present employee of the Company to end his/her employment with the Company to accept employment with any Third Party that competes, directly or indirectly, with the Company; or ii) consult, attempt to hire, or encourage any former employee of the Company who has been away from the Company for less than one month to accept employment with any Third Party that competes, directly or indirectly, with the Company. b. The parties hereto recognize that irreparable damage will result to the Company in the event of the breach of any of the covenants contained in this paragraph. The parties therefore agree that the Company shall be entitled, in addition to any other remedies or damages available to it under the South Carolina Trade Secrets Act or other statutory or common law, to obtain injunctive relief without bond in order to restrain the violation of such covenants by Employee. 9. This Agreement does not constitute an admission of any wrongdoing by the Company but is a release by Employee of all existing potential claims, whether known or unknown, entered solely for the purpose of resolving any disputes that might exist between the parties. 10. To comply with the Older Workers Benefits Protection Act of 1990, the Company has advised Employee of the legal requirements of this Act and this Agreement fully incorporates those legal requirements by reference and as follows: a. This Agreement is written in layman's terms, and Employee hereby represents to the Company that he understands and comprehends its terms; b. Employee is hereby advised to, and has had an opportunity to consult with an attorney to review the Agreement prior to executing it; c. The Agreement specifically refers to rights and claims arising under the Age Discrimination in Employment Act; d. Employee does not waive any rights or claims that result from events occurring after the date the Agreement is executed; e. Employee hereby acknowledges that he is receiving consideration beyond anything of value to which he already is entitled; f. Employee has twenty-one days from his receipt hereof to consider this proposed Agreement. Employee's failure to accept the proposed Agreement by close of business on the twenty-first day following his receipt of the Agreement may be deemed rejection of its terms; g. Employee has the right to revoke the Agreement for seven days following his signing of the Agreement, and after the expiration of that seven days the executed Agreement shall be of full validity, force, and effect. 11. This Agreement contains the entire agreement of the parties relating to the subject matter hereof, and the parties have made no agreements, representations, or warranties relating to the subject matter of this Agreement that are not set forth herein. No amendment or modification of this Agreement shall be valid unless made in writing and signed by the parties hereto. No term or condition of this Agreement shall be deemed to have been waived except by written instrument signed by the waiving party. 12. Employee hereby represents and warrants that he has not assigned, transferred, or conveyed to any individual or entity any alleged right, claim or cause of action of any kind which is included within the above releases. Employee further represents and warrants that he is aware of no lien or other encumbrance of his rights, claims, and causes of action, and that he is entitled to receive from the Company payment of the full amount of the proceeds due to him under this Agreement. 13. This Agreement was made in, and shall be governed by and enforced under the laws of, the State of South Carolina, without regard to choice of law principles. This Agreement may be enforced only in a court of competent jurisdiction in Greenville County, South Carolina and Employee agrees to submit to jurisdiction in Greenville County, South Carolina whether or not he is then residing in South Carolina. In the event of litigation of any dispute regarding or related to this Agreement, the prevailing party at such litigation shall be liable to the other for all costs and expenses, including, without limitation, reasonable attorney fees and expert witness fees. Executed and agreed to on ________________________, 2000 (the "Execution Date"). READ CAREFULLY. THIS RELEASE ENDS YOUR CLAIMS AGAINST THE COMPANY WITNESSES: HOMEGOLD FINANCIAL, INC. _______________________ By:____________________________ Its:___________________________ EMPLOYEE _______________________ _______________________________ JOHN W. CRISLER EX-10.7 15 EMPLOYMENT SEVERANCE AGREEMENT EXHIBIT 10.7 Below is the form of the Employment Severance Agreement entered into between the Company and the persons listed below, including the dates of the agreements, and the number of months of severance compensation under item 4.2:
Individual Date of Agreement Months of Severance Protection ---------- ----------------- ------------------------------ H. Kim Bullard April 7, 2000 12 months William E. Long, Jr. April 6, 2000 12 months Kevin J. Mast April 6, 2000 24 months Karen A. Miller April 6, 2000 12 months Laird Minor April 7, 2000 12 months
EMPLOYMENT SEVERANCE AGREEMENT THIS EMPLOYMENT SEVERANCE AGREEMENT is entered into by and between HomeGold Financial, Inc., a South Carolina corporation, and all of its subsidiaries and affiliates (collectively, the "Corporation") and ___________ (the "Executive"), this ____ day of April, 2000. The Board of Directors of the Corporation has determined that it is in the best interests of the Corporation and its stockholders to aid in the competitive employment and retention of key executives and to diminish the distraction of its executives and assure that the Corporation will have the continued dedication of its executives notwithstanding the possibility, threat or occurrence of a change in control. In order to accomplish these objectives, the Board of Directors has authorized the Corporation to enter into this Employment Severance Agreement (the "Agreement") with the Executive. 1. COVERAGE 1.1 This Agreement provides for the payment of severance compensation to the Executive if his or her employment is terminated in any manner which is other than a Termination for Cause, a Voluntary Termination, or the retirement, death, or disability of the Executive. 1.2 This Agreement also provides for the payment of severance compensation to the Executive if the Executive's resignation is based upon: (a) a substantial reduction in responsibility, or authority of Executive without consent of the Executive; or (b) a relocation of Executive's services to a location which is a more than 35 miles from the location where Executive was primarily employed immediately preceding the effective date of this Agreement without the written consent of the Executive; or (c) any reduction in an Executive's Base Salary in excess of ten percent; none of which shall be deemed a Voluntary Termination. 2. DEFINITIONS 2.1 "Base Salary" means the base rate of compensation paid to the Executive immediately preceding the month during which the Date of Termination occurs, without regard to bonus or incentive 1 payments, relocation or other allowances or payments under any benefit plan or perquisites of any nature. 2.2 "Corporation" means HomeGold Financial, Inc. and its subsidiaries and affiliated companies. 2.3 "Date of Termination" means the last date on which the Executive is actively employed by the Corporation. 2.4 "Executive" means the officer whose name appears the recital of this Agreement. 2.5 "Termination for Cause" means: (a) in the judgment of management of the Corporation, continuing and habitual failure to perform the material duties of the Executive or willful breach in material respects of the obligations of Executive to the Corporation, either of which cause significant harm to the Corporation; (b) in the judgment of management of the Corporation, an act of willful misconduct or gross negligence in the performance of an Executive's material duties or obligations to the Corporation, except in the event of Executive's disability, causing significant harm to the Corporation; or (c) in the judgment of management of the Corporation, an act of dishonesty or breach of trust on the part of an Executive resulting or intended to result directly or indirectly in personal gain or enrichment at the expense of the Corporation; or (d) failure to be acquitted of any criminal offense or acts: (i) constituting a felony under the laws of the United States of America or any state thereof; or (ii) involving dishonesty or a breach of trust. 2.6 "Voluntary Termination" means any termination not by the Corporation, except a resignation based upon the circumstances described in subparagraph 1.2 above. 3. EMPLOYMENT 3.1 So long as Corporation employs Executive, said employment shall be "at will." 3.2 Nothing in this Agreement will limit the Executive's continuing or future participation during his or her employment in any benefit, bonus, incentive or other plans provided by the Corporation. 4. SEVERANCE COMPENSATION AND BENEFITS 4.1 The Executive whose employment is terminated under circumstances covered by Paragraph I above shall be paid by the Corporation severance compensation in cash in a lump sum within Thirty (30) days following the Date of Termination. 4.2 The Executive whose employment is terminated under circumstances covered by Paragraph I above shall receive severance compensation in the amount of ___________ months of Base Salary, plus payment of any bonus or incentive pay earned and due in accordance with any applicable plan or policy of the Corporation. 4.3 The Executive shall not be obligated to seek other employment in mitigation of the severance compensation payable under this Agreement and any subsequent employment, if obtained, shall not in any manner effect the payments to be made hereunder. 4.4 The Executive and his or her family will continue to be covered under Corporation's medical insurance policy for twelve (12) months following termination under circumstances covered by Paragraph 1 above. 2 4.5 Upon termination under circumstance covered by paragraph 1 above, all stock options held by Executive to purchase the Company's stock shall be exercisable for the period of twelve (12) months following termination of Executive's employment. 4.6 Payment of any benefits (other than severance compensation) under any other benefit plan of the Corporation shall be made in accordance with the terms of such plan. 4.7 The Corporation may withhold from any amounts payable under this Agreement such federal, state and local taxes as shall be required pursuant to applicable laws or regulations. 5. ENFORCEMENT The prevailing party shall be entitled to recover from the non-prevailing party all legal fees and expenses of the prevailing party in the event there is a disagreement between the parties hereto concerning the validity or enforceability of, or any determination under, this Agreement. 6. OUTPLACEMENT The Executive terminated under circumstances covered by Paragraph I herein shall, at the request of Executive, receive outplacement services for three months with Right Associates or a comparable agency, at the cost of the Corporation. 7. SUCCESSORS, ASSIGNMENT AND ASSUMPTION 7.1 The Executive may not assign the benefits provided by this Agreement. Notwithstanding the foregoing, the benefits provided herein may be enforced by an Executive's heirs or legal representatives. 7.2 The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume this Agreement and provide the benefits hereunder in the same manner and to the same extent that the Corporation would be required to perform as if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as defined above and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 8. MISCELLANEOUS 8.1 If the Corporation does not breach any material term of this Agreement, receipt by Executive of all severance compensation hereunder shall operate as a general release of Corporation for any claim of wrongful discharge and/or discrimination. 8.2 If the Corporation does not breach any material term of this Agreement, Executive commits not to: (a) disparage the Corporation to any third parties, (b) disclose confidential information concerning the Corporation to third parties, and/or (c) solicit the Corporation's employees or customers for a period of two years. 8.3 This Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina. 8.4 This Agreement contains the entire agreement of the parties and may not be amended or modified except by further written agreement executed by the parties hereto. 3 8.5 The invalidity or non-enforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 8.6 The Executive's failure to insist on the strict compliance with or performance of any provision of this Agreement shall not be deemed to be a waiver of that provision or any other provision of this Agreement. 8.7 All notices, consents, waivers or communications which are required or permitted hereunder shall be sufficient if given in writing and delivered personally or by registered or certified mail, return receipt requested, postage prepaid, as follows (or to such other addressee or address as shall be set forth in a notice given in the same manner): If to the Corporation: HomeGold Financial, Inc. 3901 Pelham Rd. Greenville, SC 29615 Attn: Chief Executive Officer If to Executive: _______________________ _______________________ _______________________ All such notices shall be deemed to have been given when delivered or mailed in the manner provided above. IN WITNESS WHEREOF, the parties hereto have signed this Agreement as of the date first above written. HomeGold Financial, Inc. Executive By: ____________________ Signature: ________________ Name: John M. Sterling, Jr. Name: ____________________ Title: Chairman and Chief Executive Officer 4 EX-10.8 16 EMPLOYMENT AGREEMENT EXHIBIT 10.8 STATE OF SOUTH CAROLINA ) ) EMPLOYMENT AND NONCOMPETITION ) AGREEMENT COUNTY OF GREENVILLE ) THIS EMPLOYMENT AND NONCOMPETITION AGREEMENT ("Agreement") is made and entered into effective as of the 1st day of May, 2000 (the "Effective Date") by and between RONALD J. SHEPPARD, an individual ("Employee"), and HOMEGOLD FINANCIAL, INC., a South Carolina corporation headquartered in Greenville, South Carolina (the "Company"). As used herein, the term "Company" shall include the Company and any and all of its subsidiaries where the context so applies. W I T N E S S E T H WHEREAS, the Company desires to enter into an employment relationship with Employee on certain terms and conditions as set forth herein; and WHEREAS, Employee has agreed to accept such employment upon the terms and conditions as set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. POSITION. Subject to the terms and conditions of this Agreement, the Company hereby employs the Employee and Employee hereby accepts such employment as President and Chief Executive Officer of the Company. 2. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings specified below. "Cause" shall mean: (a) fraud; or (b) embezzlement; or (c) conviction of the Employee of any felony; or (d) a material breach of, or the willful failure or refusal by the Employee to perform and discharge the Employee's duties, responsibilities and obligations under this Agreement, as determined by the Board in its reasonable judgment, or the failure of the Employee to follow reasonable directives and performance standards established by the Board which breach, failure or refusal remains uncured for a period of thirty (30) days after receipt of a written request from the Board for cure; or (e) any act of moral turpitude or willful misconduct by the Employee which is intended to result in personal enrichment of the Employee at the expense of the Company, or any of its affiliates, or which has a material adverse impact on the business or reputation of the Company or any of its affiliates (such determination to be made by the Board in its reasonable judgment); or 1 (f) intentional material damage to the property or business of the Company; or (g) gross negligence; or (h) the ineligibility of the Employee to perform his duties because of a ruling, directive or other action by any agency of the United States or any state of the United States having regulatory authority over the Company, which ineligibility remains uncured for a period of ninety (90) days after receipt of a written request from the Board for cure. "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, rule or regulation of similar effect. "Common Stock" shall mean, the Company's common stock. "Disability" or "Disabled" shall mean the Employee's inability as a result of physical or mental incapacity to substantially perform his duties for the Company on a full-time basis for a period of six (6) months as determined in good faith by the Board. "Involuntary Termination" shall mean the termination of Employee's employment by the Employee which is due to (i) a substantial change of the Employee's responsibilities, position (including status as President and Chief Executive Officer of the Company, its successor or ultimate parent entity, office, title, reporting relationships or working conditions) authority or duties of this Agreement; or (ii) a substantial reduction in the Employee's compensation or benefits. "Person" shall mean any individual, corporation, bank, partnership, joint venture, association, joint stock company, trust, unincorporated organization or other entity. 3. DUTIES. During the term hereof, the Employee shall have such duties and authority as are typical of someone in his position with a company such as the Company, including, without limitation, those specified in the Company's bylaws or those reasonably set forth by the Board. Employee shall report to the Board. Employee agrees that during the Term hereof, he will devote his full time, attention and energies to the diligent performance of his duties. Employee shall not, without the prior written consent of the Company, at any time during the Term hereof engage in any venture or activity which the Board may in good faith consider to interfere with Employee's performance of his duties hereunder. 4. TERM. Unless earlier terminated as provided herein, the Employee's employment hereunder shall be for a term of three years commencing on the Effective Date hereof (the "Term"). 4.1 Upon Employee's death or Disability, the Company shall have the right to terminate this Agreement immediately. Upon such termination, the Employee (or his estate) shall be entitled to receive from the Company as severance upon such termination, the compensation and benefits, as provided in Sections 5.2, 5.3, and 5.4, through the date of Employee's death or Disability. 2 4.2 At any time, the Company shall have the right to terminate Employee's employment immediately for Cause, after which the Company's obligation hereunder shall cease as of the date of the termination. 4.3 Employee shall have the right to terminate his employment hereunder if (i) the Company materially breaches this Agreement and such breach is not cured within 30 days after written notice of such breach is given by Employee to the Company; (ii) or there is an Involuntary Termination. 4.4 If Employee's employment is terminated other than pursuant to Section 4.3, the Company's obligations under this Agreement shall cease as of the date of such termination. 5. COMPENSATION AND BENEFITS. In consideration of Employee's services and covenants hereunder, Company shall pay to Employee the compensation and benefits described below (which compensation shall be paid in accordance with the normal compensation practices of the Company and shall be subject to such deductions and withholdings as are required by law or policies of the Company in effect from time to time, except as otherwise provided in this Section 5): 5.1 Annual Salary. During the Term hereof, the Company shall pay to Employee an initial base salary of $250,000 per year in twenty six bi-weekly installments or according to such other schedule as Employee and the Company may agree to. Employee's salary will be reviewed by the Compensation Committee of the Board at the beginning of each of its fiscal years and, in the sole discretion of the Compensation Committee of the Board, may be adjusted for such year. 5.2 Bonus. In addition to the above salary, the Company shall pay to Employee an annual cash bonus, equal to two (2%) of the Net Income of the Company for the fiscal year, before income taxes, as reflected on the Company's audited financial statements. Such bonus shall be paid to Employee within thirty (30) days after receipt of the Independent Auditor's Report on the Company's audited financial statements as of December 31 or such other fiscal year end as the Company may adopt. 5.3 Additional Bonus. In addition to the above salary and bonus, the Company, until such time as none of the Company's 10.75% Senior Notes due 2004 (the "Senior Notes") remain outstanding, shall pay to Employee on the first (1st) day of each August, November, February and May commencing on August 1, 2000, a quarterly cash bonus in the amount of Two Hundred Thousand Dollars ($200,000.00) subject to adjustment as provided in this Section 5.3. In the event such Senior Notes are no longer outstanding, the Company shall immediately pay to Employee an amount equal to one quarter's cash bonus as set forth above, multiplied by a fraction whose numerator is the number of days in such calendar quarter which have elapsed until the date the final Senior Note is no longer outstanding, and whose denominator is the total number of days in such calendar quarter. In the event of any reduction in the number of shares of the Company's Series A Non-convertible Preferred Stock (the "Preferred Stock") owned by Employee from the number acquired by Employee on or about the date hereof, the amount of the bonus provided for in this Section 5.3 shall automatically and concurrently be reduced in equal proportion to the reduction in Preferred Stock ownership of Employee. Such a 3 reduction in the bonus provided for in this Section 5.3 shall be made each time the number of shares of Preferred Stock owned by Employee decreases. Unless the Employee and the Company mutually agree otherwise in writing, the terms of this Section 5.3 and the quarterly bonus payments payable hereunder shall survive the termination of Employee's employment hereunder for any reason and shall survive the expiration or termination of this Agreement. 5.4 Stock Options. The Company hereby grants to the Employee the option to purchase up to Eight Hundred Twenty Five Thousand Four Hundred Twenty Three (825,423) shares of Common Stock, on the terms and conditions set forth in the attached Grant of Option. 5.5 Benefits. Employee shall be entitled to share in any employee benefits generally provided by the Company to its most highly ranking employees and officers for so long as the Company provides such benefits and to any other benefits given to Employee in the sole discretion of the Board. 5.6 Business Expenses. As a condition of employment, Employee is required to incur reasonable and necessary expenses for the promotion of the business of the Company, including without limitation, expenses of entertainment, travel, telephone costs and similar expenses. Provided that Employee provides the Company with reasonable written documentation as required under the Company's policies and procedures to support reimbursement, the Company shall reimburse Employee for all such expenses reasonably incurred by Employee in the performance of his duties under this Agreement. 6. CONFIDENTIALITY; NON-COMPETITION. 6.1 Covenant Term. Employee covenants and agrees that for so long as he is employed by the Company and, unless his employment is terminated by the Company without Cause or is terminated by Employee pursuant to Section 4.3 above, for a period of two (2) years after the date his employment is terminated (the "Covenant Term"), he will not, directly or indirectly, engage in any activity prohibited pursuant to the terms of this Section 6. 6.2 NonCompetition. Employee agrees that for the Covenant Term, he will not, without the prior written consent of the Company, directly or indirectly, (i) own, manage, operate, control or participate in, or be associated with as a director, officer, shareholder, partner, joint venturer, employee, consultant or otherwise, any financial services business including, but not limited to, consumer lending which competes, directly or indirectly, with the Company within any metropolitan statistical service area in which the Company provides such services on the date of termination of Employee's employment (the "Prohibited Business"); (ii) become financially interested in any person or entity engaged in any such Prohibited Business, other than as a passive investor owning, directly or indirectly, not more than 5% of the equity securities of a public corporation; (iii) solicit or attempt to solicit any employee of the Company either to work for the Employee personally or on behalf of any other person or entity whether or not engaged in a Prohibited Business; or (iv) solicit or attempt to solicit, for the purpose of providing the services identified in subpart (i) above, any customer of the Company with which the Employee had material 4 contact during the twelvemonth period immediately prior to the Employee's departure from the Company. 6.3 NonDisclosure of Confidential Information. As used in this Agreement, the term "Confidential Information" shall mean any information which (i) is not generally available to the public or within the Company's field of industry; and (ii) pertains to or relates in any way to the Company or its businesses, proprietary techniques, know-how, independent interpretations of market information, strategic plans and organizational approaches, activities, products or services including, without limitation, financial information, analyses, intellectual property rights, employee compensation information, reports, marketing methods or other trade secrets. Employee acknowledges that he may come into possession of certain Confidential Information of the Company or its affiliates, and agrees that all such Confidential Information is the sole and exclusive property of the Company. During the Covenant Term, Employee shall not disclose any such Confidential Information, directly or indirectly, nor use it in any way, either during the Covenant Term or at any time thereafter, except as required by law or by any court or governmental agency or body. All files, records, documents, pricing and other information, data and similar items in any medium whatsoever relating to the business, assets or prospects of the Company or its affiliates, whether prepared by Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be copied or removed from the premises of the Company without the Company's prior written consent. The terms of this Section 6.3 are not intended to limit any definitions, protections or remedies available to the Company under any local, state or federal law applicable to trade secrets or confidential information. 6.4 Remedies. Employee acknowledges that any violation of this Section 6 will cause irreparable harm to the Company and that damages are not an adequate remedy. Employee therefore agrees that the Company shall be entitled to injunctive relief enjoining, prohibiting and restraining Employee from the continuance of any such violation, in addition to any monetary damages which might occur by reason of a violation of this Section 6 or any other remedies at law or in equity, including, without limitation, specific performance. 6.5 Independent Covenants. The covenants set forth in this Section 6 are and shall be deemed and construed as separate and independent covenants. Should any part or provision of such covenants be held invalid, void or unenforceable by any court of competent jurisdiction, such invalidity or unenforceability shall not render invalid, void or unenforceable any other part or provision thereof. Specifically, and without limiting the generality of the foregoing, if any portion of this Section 6 is found to be invalid by a court of competent jurisdiction because its duration, the territory and/or the restricted activities are invalid or unreasonable in scope, such duration, territory and/or restricted activity, as the case may be, shall be redefined by consideration of the reasonable concerns and needs of the Company such that the intent of the Company, in consummating the transactions contemplated by the Agreement will not be impaired and shall be enforceable to the fullest extent permissible under applicable laws. 5 7. ASSIGNMENT. The parties acknowledge that this Agreement has been entered into due to, among other things, the special skills of Employee, and agree that Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. 8. NOTICES. All notices, requests, demands, and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered or seven days after mailing if mailed, first class, certified or registered mail, postage prepaid: To the Company: John M. Sterling Jr. HomeGold Financial, Inc. 3901 Pelham Road Greenville, South Carolina 29615 Copies to: William E. Long, Jr. HomeGold Financial, Inc. 3901 Pelham Road Greenville, South Carolina 29615 Cary H. Hall, Esq. Wyche, Burgess, Freeman & Parham, P.A. Post Office Box 728 (29602-0728) 44 East Camperdown Way Greenville, South Carolina 29601 To Employee: Ronald J. Sheppard 113 Reed Avenue Lexington, South Carolina 29072 Copy to: Mark L. Bender, Esq. Nexsen Pruet Jacobs & Pollard LLP P.O. Drawer 2426 Columbia, South Carolina 29202 Any party may change the address to which notices, requests, demands, and other communications shall be delivered or mailed by giving notice thereof to the other party in the same manner provided herein. 9. PROVISIONS SEVERABLE. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability shall not affect the validity, legality or 6 enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which shall remain in full force and effect. 10. WAIVER. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition. No waiver shall be valid unless in writing signed by the party sought to be bound. 11. REPRESENTATIONS. Employee agrees that this Agreement constitutes the legal, valid and binding obligation of Employee, enforceable in accordance with its terms. Employee further represents and warrants to Company that he is subject to no agreement or obligation (including, without limitation, any non-competition or confidentiality agreement) or bound by any contract with any Person, corporation, or other entity that would prohibit him from entering into or delivering this Agreement or taking the position described herein or in any way interfere with the performance of his duties and obligations to Company under this Agreement. Employee agrees to indemnify and hold harmless the Company and its officers, directors, employees, managers, members, shareholders and agents from and against any (1) claim (and the expenses associated therewith, including without limitation reasonable attorney's fees) by a third party under a non-competition, confidentiality or similar agreement or (2) any loss arising as a result of Employee's breach of any of Employee's representations or warranties contained in this Agreement, including the exhibits and other attachments hereto. 12. AMENDMENTS AND MODIFICATIONS. This Agreement may be amended or modified only by a writing signed by the parties hereto. The parties hereby agree that this Agreement contains the entire agreement and understanding by and between the parties with respect to Employee's employment, and no representations, promises, agreements, or understandings, written or oral, relating to the employment of the Employee by the Company not contained herein shall be of any force or effect. 13. GOVERNING LAW. The validity and effect of this agreement shall be governed by and construed and enforced in accordance with the laws of the State of South Carolina, without giving effect to South Carolina's rules of conflicts law, and regardless of the place or places of its physical execution or performance. 14. CAPTIONS. The captions contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one instrument. 7 16. NO CONSTRUCTION AGAINST EITHER PARTY. In the event that there is any dispute regarding the interpretation or construction of the provisions of this Agreement, there shall be no presumption that any provision of this Agreement is to be construed against either party hereto. ****************** 8 IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. _______________________ ___________________________ Witness RONALD J. SHEPPARD HOMEGOLD FINANCIAL, INC. ________________________ By: _______________________ Witness Name: _____________________ Title: ____________________ 9 GRANT OF OPTION 1. Grant of Option. Subject to the terms and conditions hereinafter set forth, The Company hereby grants to the Employee, as of the ___ day of April, 2000, options ("Options") to purchase up to Eight Hundred Twenty Five Thousand Four Hundred Twenty Three (825,423) shares of the Common Stock of the Company (the "Option Shares") at the Exercise Price of One Dollar and Seventy Five Cents ($1.75) per Share. 2. Vesting of Option. The Options granted hereby shall vest as set forth below: (a) Options hereunder shall vest and become exercisable upon, and only upon, the issuance of shares pursuant to the exercise of any of the Outstanding Options, as defined below. Options for sixty-seven shares hereunder shall vest for each one hundred shares issued upon exercise of an Outstanding Option. Such vested options shall lapse unless exercised by Employee within 180 days after the Company gives him written notice of the issuance of the shares, pursuant to the exercise of an Outstanding Option, which caused the vesting of such options hereunder. (b) Upon the lapse, cancellation or expiration of any of the Outstanding Options, 67 of the Options granted hereunder shall lapse for each 100 shares of the Outstanding Options which lapse, are cancelled or expire. (c) The "Outstanding Options" are: Options for 404,000 shares granted on or about December 2, 1998 Options for 584,134 shares granted during 1999 Warrants for 250,000 shares when granted to Raymond James 3. Exercise of Options. (a) The Employee may exercise the Option with respect to all or any part of the number of Option Shares then exercisable hereunder by giving the Company written notice of intent to exercise. The notice of exercise shall specify the number of Option Shares as to which the Option is to be exercised and the date of exercise thereof, which date shall be at least five days after the giving of such notice unless an earlier time shall have been mutually agreed upon. (b) Full payment by the Employee of the Exercise Price for the Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise. 4. Adjustment of and Changes in Shares of The Company . In any event of any change in the outstanding shares of Common Stock of the Company by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Company shall appropriately adjust the number of Option Shares subject hereto and the Exercise Price. 10 5. No Rights of Shareholders. The Employee shall not have any of the rights and privileges of a shareholder of the Company with respect to any Shares purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 6. Non-Transferability of Option. The Option hereunder shall be exercisable only by the Employee and the Option shall not be transferable nor shall the Option be subject to attachment, execution or other similar process. In the event of (a) any attempt by the Employee to alienate, assign, pledge, hypothecate or otherwise dispose of the Option or (b) the levy of any attachment, execution or similar process upon the rights or interest hereby conferred, the Company may terminate the Option by notice to the Employee, and it shall thereupon become null and void. 11 EX-10.9 17 MUTUAL INDEMNITY AGREEMENT EXHIBIT 10.9 THIS CONTRACT IS SUBJECT TO ARBITRATION PURSUANT TO S.C. CODE ------------------------------------------------------------- " 15-48-10 (UNLESS THE UNITED STATES ARBITRATION ACT APPLIES) ------------------------------------------------------------- MUTUAL INDEMNITY AGREEMENT This Mutual Indemnity Agreement is entered into between HomeGold Financial, Inc. ("HomeGold") and Ronald J. Sheppard ("Sheppard"). WHEREAS, HomeGold has entered into that certain Reorganization Agreement dated February 29, 2000, as amended (the "Reorganization Agreement"), with HomeSense Financial Corporation and its affiliated corporations listed in SCHEDULE 3.5 to the Reorganization Agreement (collectively "HomeSense") pursuant to which HomeSense will be merged into HomeGold; WHEREAS, Sheppard, as the principal shareholder of HomeSense has agreed to indemnify HomeGold on a non-recourse basis against losses it may incur as a result of breaches of HomeSense's warranties, representations and obligations pursuant to the Reorganization Agreement, subject to the limitations set forth in this Mutual Indemnity Agreement; and WHEREAS, HomeGold has agreed to indemnify Sheppard on a non-recourse basis against losses he may incur as a result of breaches of HomeGold's warranties, representations and obligations pursuant to the Reorganization Agreement, subject to the limitations set forth in this Mutual Indemnity Agreement; NOW, THEREFORE, it is agreed as follows: 1. Indemnity by Sheppard for Losses incurred by HomeGold as a ---------------------------------------------------------- result of breach of HomeSense's warranties, representations ----------------------------------------------------------- and obligations pursuant to the Reorganization Agreement. --------------------------------------------------------- If HomeGold incurs any loss or damage as a result of breach of any warranty or representation made by HomeSense in the Reorganization Agreement or the failure of HomeSense to comply with any obligation under the Reorganization Agreement, then Sheppard shall surrender for cancellation shares of Preferred Stock equal, in par value, to the amount of such losses or damages. Notwithstanding any other provision of this Agreement, the Reorganization Agreement, or any other agreement, document or instrument contemplated by the foregoing, Sheppard's liability under this Paragraph 1 shall be non-recourse such that the sole and exclusive source of recovery by HomeGold (or any person or entity claiming by, on behalf of or through HomeGold) shall be the Preferred Stock. In no event shall Sheppard have any personal liability whatsoever in respect of this Paragraph 1. 1 2. Indemnity by HomeGold for Losses incurred by Sheppard as a ---------------------------------------------------------- result of breach of HomeGold's warranties, representations and -------------------------------------------------------------- obligations pursuant to the Reorganization Agreement. ----------------------------------------------------- If Sheppard incurs any loss or damage as a result of breach of any warranty or representation made by HomeGold in the Reorganization Agreement or the failure of HomeGold to comply with any obligation under the Reorganization Agreement, then HomeGold shall issue to Sheppard shares of Preferred Stock equal, in par value, to the amount of such losses or damages, provided that HomeGold shall in no event be required to issue more than Five Million Three Hundred Thousand (5,300,000) shares of Preferred Stock hereunder. HomeGold will at all times reserve and keep available the number of shares of Preferred Stock that shall be sufficient to satisfy the requirements of this Section 2. 3. Cash Payments in the event that the Equity of HomeSense at the -------------------------------------------------------------- Closing, determined in accordance with generally accepted --------------------------------------------------------- accounting principles, is greater or less than $2,373,233. ---------------------------------------------------------- (a) If the Total Equity (i.e. total assets less total liabilities) of HomeSense, at the Closing Date, determined in accordance with generally accepted accounting principles by the auditors of HomeGold upon completion of an audit, is greater than $2,373,233, then HomeGold shall immediately pay to Sheppard, in cash, the amount of such excess and, if such Total Equity at the Closing Date is less than $2,373,233, then Sheppard shall immediately pay to HomeGold, in cash, the amount of such deficiency. Notwithstanding any accounting rule or requirement or any provision of this Agreement to the contrary, HomeGold acknowledges and agrees that for purposes of calculating Total Equity, HomeSense's assets shall include the Sheppard Indebtedness as defined in Section 5.4 of the Reorganization Agreement (i.e., such indebtedness shall not be excluded from Total Equity), and shall not be reduced by an payments due to HomeSense's lenders which are paid to such lenders as a result of, or in connection with, the Merger. (b) HomeGold shall advise Sheppard as soon as practical after the Closing of the auditors' determination of the Total Equity of HomeSense at the Closing. If Sheppard disputes such determination, then such dispute shall be resolved by arbitration in accordance with the provisions of Section 8 below. 4. Release of Guarantees and Obligations. HomeGold covenants and agrees to use its good faith best efforts as soon as practicable after the Effective Time (as defined in the Reorganization Agreement) to obtain the full and unconditional written release of Sheppard (in form and content reasonably satisfactory to Sheppard) from any and all liability under or in respect of any indebtedness or other obligation of HomeGold or HomeSense, other than liability with respect to third party tort claims, for which Sheppard is or becomes liable or responsible (whether by guarantee or otherwise) at or after the Effective Time (the "Guaranteed Obligations"). 5. Subrogation. HomeSense and HomeGold, jointly and severally, covenant and agree that, with respect to any Guaranteed Obligation, Sheppard shall be, to the fullest extent 2 permitted by law, subrogated to all rights of each creditor (including all rights of such creditor as a secured party, if any) under any and all Guaranteed Obligations. 6. Indemnity With Respect to Guarantied Obligations. HomeGold shall indemnify and hold Sheppard harmless against any liability with respect to the Guarantied Obligations. Any indemnification payments pursuant to this Section 6 shall be paid in cash, and such cash payments shall be the exclusive remedy under this Section 6. 7. Exclusive Remedy. The provisions of this Agreement shall constitute the exclusive remedies of HomeGold, HomeSense and Sheppard with respect to breach of any provision of the Reorganization Agreement. 8. Dispute Resolution. Any dispute hereunder shall be resolved by arbitration in accordance with the rules of the American Arbitration Association, with the expenses of such arbitration to be borne by HomeGold. IN WITNESS WHEREOF, this Mutual Indemnity Agreement is executed this 1st day of May, 2000. HOMEGOLD FINANCIAL, INC. By:_________________________________ John M. Sterling, Jr., CEO ____________________________________ Ronald J. Sheppard 3 EX-10.10 18 REGISTRATION RIGHTS AGREEMENT EXHIBIT 10.10 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of May 9, 2000, among HomeGold Financial, Inc., a corporation organized under the laws of the State of South Carolina (the "Company"), and the individuals identified on Schedule 1 of this Agreement (collectively, the "Purchasers"). WHEREAS, the Company and HomeSense Financial Corp. are parties to that certain Reorganization Agreement dated February 29, 2000, as amended (the "Reorganization Agreement"), pursuant to which the Purchasers, among other things, will be issued shares of the Company's Common Stock (as defined below). WHEREAS, included as an appendix to the Reorganization Agreement is an Employment Agreement between the Company and Ronald J. Sheppard ("Sheppard") pursuant to which Sheppard is granted options for the purchase of Common Stock (the "Options"); and WHEREAS, the Company desires to grant to the Purchasers registration rights as set forth herein with respect to the shares of Common Stock being issued under the Reorganization Agreement and to grant to Sheppard registration rights as set forth herein with respect to the shares of Common Stock issuable upon exercise of the Options. The Company and the Purchasers hereby agree as follows: 1. Definitions. ----------- Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Reorganization Agreement. As used in this Agreement, the following terms shall have the following meanings: "Advice" shall have the meaning set forth in Section 6(b). "Affiliate" means, with respect to any Person, any other Person that directly or indirectly controls or is controlled by or under common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the terms of "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Blackout Period" shall have the meaning set forth in Section 2(b). "Board" shall have the meaning set forth in Section 2(b). "Business Day" means any day except Saturday, Sunday and any day which shall be a legal holiday or a day on which banking institutions in the state of New York generally are authorized or required by law or other government actions to close. 1 "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's Common Stock, par value $0.05 per share. "Effectiveness Date" means with respect to the Registration Statement the earlier of the 180th day following the Closing Date and the date which is within five (5) days of the date on which the Commission informs the Company that the Commission (i) will not review the Registration Statement or (ii) that the Company may request the acceleration of the effectiveness of the Registration Statement. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Filing Date" means the date the Registration Statement is filed, which Filing Date shall be 60 days from the earliest date on which any Holder is entitled to transfer at least one share of Common Stock without restriction pursuant to that certain Stock Restriction Agreement between certain shareholders of the Company, a form of which Stock Purchase Agreement is set forth as Appendix B to the Reorganization Agreement. "Holder" or "Holders" means the holder or holders, as the case may be, from time to time of Registrable Securities, including without limitation, the Purchasers and their assignees. "Indemnified Party" shall have the meaning set forth in Section 7(c). "Indemnifying Party" shall have the meaning set forth in Section 7(c). "Losses" shall have the meaning set forth in Section 7(a). "OTC Bulletin Board" means the over-the-counter electronic bulletin board. "Person" means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference in such Prospectus. 2 "Registrable Securities" means (i) the shares of Common Stock (A) issued pursuant to the Reorganization Agreement (the "Common Shares") and (B) issuable upon exercise of the Options (the "Option Shares"), and upon any stock split, stock dividend, recapitalization or similar event with respect to such Common Shares and Option Shares, and (ii) any other dividend or other distribution with respect to, conversion or exchange of, or in replacement of, Registrable Securities; provided, however, that Registrable Securities shall include (but not be limited to) a number of shares of Common Stock equal to no less than 100% of the maximum number of shares of Common Stock which would be issuable pursuant to the Reorganization Agreement and upon exercise of the Options, assuming such exercise occurred on the Closing Date or the Filing Date, whichever date would result in the greater number of Registrable Securities. Notwithstanding anything herein contained to the contrary, such registered shares of Common Stock shall be allocated among the Holders pro rata based on the total number of Registrable Securities issued or issuable as of each date that a Registration Statement, as amended, relating to the resale of the Registrable Securities is declared effective by the Commission. "Registration Statement" means the registration statement and any additional registration statements contemplated by this Agreement, including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference in such registration statement. "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 158" means Rule 158 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended. "Special Counsel" means any special counsel to the Holders, for which the Holders will be reimbursed by the Company pursuant to Section 5. 2. Registration. ------------ (a) On or prior to the Filing Date the Company shall prepare and file with the Commission a "shelf" Registration Statement covering all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415; provided, however, that the Company shall not be required to register any Registrable Securities pursuant to this Section 2(a) that are eligible for sale pursuant to Rule 144 of the Securities Act. The Registration Statement shall be on Form S-3 (or on another form appropriate for such registration in accordance herewith). The Company shall (i) not permit any securities other than the Registrable Securities to be included in the Registration Statement and (ii) 3 use its best efforts to cause the Registration Statement to be declared effective under the Securities Act (including filing with the Commission a request for acceleration of effectiveness in accordance with Rule 461 promulgated under the Securities Act within five (5) Business Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be "reviewed," or not be subject to further review) within sixty (60) days from the Filing Date, and to keep such Registration Statement continuously effective under the Securities Act until such date as is the earlier of (x) the date when all Registrable Securities covered by such Registration Statement have been sold or (y) the date on which the Registrable Securities may be sold without any restriction pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter, addressed to the Company's transfer agent to such effect (the "Effectiveness Period"). If an additional Registration Statement is required, for any reason, to be filed because the actual number of shares of Common Shares and Option Shares exceeds the number of shares of Common Stock initially registered in respect of the Common Shares and the Option Shares based upon the computation on the Closing Date, the Company shall have 20 Business Days to file such additional Registration Statement, and the Company shall use its best efforts to cause such additional Registration Statement to be declared effective by the Commission as soon as possible, but in no event later than 30 days after filing. (b) If (i) there is material non-public information regarding the Company which the Company's Board of Directors (the "Board") reasonably determines not to be in the Company's best interest to disclose and which the Company is not otherwise required to disclose, or (ii) there is a significant business opportunity (including, but not limited to, the acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or other similar transaction) available to the Company which the Board reasonably determines not to be in the Company's best interest to disclose and which the Company would be required to disclose under the Registration Statement, then the Company may postpone or suspend filing or effectiveness of a registration statement for a period not to exceed 90 consecutive days, provided that the Company may not postpone or suspend its obligation under this Section 2(b) for more than 120 days in the aggregate during any 12 month period (each, a "Blackout Period"). (c) In connection with the Company's registration obligations under this Section 2, the Company shall (i) Prepare and file with the Commission on or prior to the Filing Date, a Registration Statement on Form S-3 (or on another form appropriate for such registration in accordance herewith) in accordance with the method or methods of distribution thereof as specified by the Holders (except if otherwise directed by the Holders), and cause the Registration Statement to become effective and remain effective as provided herein; provided, however, that not less than five (5) Business Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated therein by reference), the Company shall (x) furnish to the Holders and any Special Counsel, copies of all such documents proposed to be filed, which documents (other than those incorporated by reference) will be subject to the review of such Holders and such Special Counsel, and (y) the 4 Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities or any Special Counsel shall reasonably object in writing within three (3) Business Days of their receipt thereof; (ii) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (iii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424 (or any similar provisions then in force) promulgated under the Securities Act; (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented; and (v) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and any Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, however, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action that would subject it to general service of process in any such jurisdiction where it is not then so subject or subject the Company to any material tax in any such jurisdiction where it is not then so subject. 3. Piggy Back Registrations; Underwritten Offerings. ------------------------------------------------ (a) If at any time when there is not an effective Registration Statement covering Common Shares or Option Shares, the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or its then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Company shall promptly send to each 5 holder of Registrable Securities written notice of such determination and, if within 30 days after receipt of such notice, any such holder shall so request in writing (which request shall specify the Registrable Securities intended to be disposed of by the Holders), the Company will cause the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the holder, to the extent requisite to permit the disposition of the Registrable Securities so to be registered. If at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to such holder and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay expenses in accordance with Section 5 hereof), and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities being registered pursuant to this Section 3(a) for the same period as the delay in registering such other securities. The Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered; provided, however, that the Company shall not be required to register any Registrable Securities pursuant to this Section 3(a) that are eligible for sale pursuant to Rule 144 of the Securities Act. (b) In the case of an underwritten public offering, if the managing underwriter(s) or underwriter(s) should reasonably object to the inclusion of the Registrable Securities in such registration statement, then if the Company after consultation with the managing underwriter should reasonably determine that the inclusion of such Registrable Securities, would materially adversely affect the offering contemplated in such registration statement, and based on such determination recommends inclusion in such registration statement of fewer or none of the Registrable Securities of the Holders, then (i) the number of Registrable Securities of the Holders included in such registration statement shall be reduced pro rata among such Holders (based upon the number of Registrable Securities requested to be included in the registration), if the Company after consultation with the underwriter(s) recommends the inclusion of fewer Registrable Securities, or (ii) none of the Registrable Securities of the Holders shall be included in such registration statement, if the Company after consultation with the underwriter(s) recommends the inclusion of none of such Registrable Securities; provided, however, that if securities are being offered for the account of other persons or entities as well as the Company, such reduction shall not represent a greater fraction of the number of Registrable Securities intended to be offered by the Holders than the fraction of similar reductions imposed on such other persons or entities (other than the Company). (c) In any registration undertaken pursuant to this Section 3, the Company shall register or qualify or seek one or more exemptions from such registration or qualification of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as the Company shall determine, and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement. 4. Additional Registration Obligations. In connection with the Company's registration obligations under Sections 2 and 3, the Company shall: 6 (a) Respond as promptly as possible to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and as promptly as possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; (b) Within two (2) business days after the Registration Statement which includes the Registrable Securities is ordered effective by the Commission, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Holders whose Registrable Securities are included in such Registration Statement) confirmation that the Registration Statement has been declared effective by the Commission in the form attached hereto as Exhibit A. (c) Notify the Holders of Registrable Securities to be sold and any Special Counsel as promptly as possible (and, in the case of (i)(A) below, not less than five (5) Business Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one (1) Business Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) if at any time any of the representations and warranties of the Company contained in any agreement contemplated hereby ceases to be true and correct in all material respects; (v) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (vi) of the occurrence of any event that makes any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make 7 the statements therein, in the light of the circumstances under which they were made, not misleading. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain as soon as practicable the withdrawal of, (i) any order suspending the effectiveness of the Registration Statement or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction. (e) If requested by the Holders of a majority in interest of the Registrable Securities, (i) promptly incorporate in a Prospectus supplement or post-effective amendment to the Registration Statement such information as the Company reasonably agrees should be included therein and (ii) make all required filings of such Prospectus supplement or such post-effective amendment as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (f) Promptly deliver to each Holder and any Special Counsel, without charge, as many copies of the Registration Statement, Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (g) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to a Registration Statement, which certificates shall be free of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any Holder may request at least two (2) Business Days prior to any sale of Registrable Securities. (h) Upon the occurrence of any event contemplated by Section 4(c)(vi), as promptly as possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (i) Use its best efforts to cause all Registrable Securities relating to such Registration Statement to be listed on the Nasdaq Stock Market or on any other stock exchange on which similar securities issued by the Company are then listed. (j) Comply in all material respects with all applicable rules and regulations of the Commission and make generally available to is security holders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 not later than 45 days after the end of any 12 month period (or 90 days after the end of any 12 month period if such period is a fiscal year) commencing on the first day of the first 8 fiscal quarter of the Company after the effective date of the Registration Statement, which statement shall conform to the requirements of Rule 158. (k) Require each selling Holder to furnish to the Company information regarding such Holder and the distribution of such Registrable Securities as is required by law to be disclosed in the Registration Statement, and the Company may exclude from such registration the Registrable Securities of any such Holder who fails to furnish such information within a reasonable time prior to the filing of each Registration Statement, supplemented Prospectus and/or amended Registration Statement. (l) If the Registration Statement refers to any Holder by name or otherwise as the holder of any securities of the Company, then such Holder shall have the right to require (if such reference to such Holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force) the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. 5. Registration Expenses --------------------- Except for any underwriting fees and discounts and selling commissions applicable to the sale of Registrable Securities sold by the Holders, all of which shall be paid by the Holders, all fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not the Registration Statement is filed or becomes effective and whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Nasdaq Stock Market, the Over-the-Counter Bulletin Board or any other securities exchange or market on which Registrable Securities are required hereunder to be listed, (B) with respect to filings required to be made with the Commission, and (C) in compliance with state securities or Blue Sky laws (including, without limitation, fees and disbursements of counsel for the Holders in connection with Blue Sky qualifications of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as the Holders of a majority of Registrable Securities may designate)), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and Special Counsel for the Holders, in the case of the Special Counsel, to a maximum amount of $15,000, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement, including, without limitation, the Company's independent public accountants (including the expenses of any comfort letters or costs associated with the delivery by independent public accountants of a comfort letter or comfort letters). In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. 6. Obligations of Holders. ----------------------- 9 (a) Each Holder covenants and agrees that (i) it will not sell any Registrable Securities under the Registration Statement filed pursuant to Section 2 until it has received copies of the Prospectus as then amended or supplemented as contemplated in Section 4(f) and notice from the Company that such Registration Statement and any post-effective amendments thereto have become effective as contemplated by Section 4(c) and (ii) it and its officers, directors or Affiliates, if any, will comply with the prospectus delivery requirements of the Securities Act as applicable to them in connection with sales of Registrable Securities pursuant to the Registration Statement. (b) Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 4(c)(ii), 4(c)(iii), 4(c)(iv), 4(c)(v) or 4(c)(vi), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement contemplated by Section 4(h), or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. 7. Indemnification --------------- (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, costs of preparation and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, which information was reasonably relied on by the Company for use therein or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of an Indemnified Party (as defined in Section 7(c) to 10 this Agreement) and shall survive the transfer of the Registrable Securities by the Holders. (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, the directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon any untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any form of prospectus, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in the light of the circumstances under which they were made) not misleading, to the extent, but only to the extent, that such untrue statement or omission is contained in or omitted from any information so furnished in writing by such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus and that such information was reasonably relied upon by the Company for use in the Registration Statement, such Prospectus or such form of prospectus or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus Supplement. Notwithstanding anything to the contrary contained herein, the Holder shall be liable under this Section 7(b) for only that amount as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party promptly shall notify the Person from whom indemnity is sought (the "Indemnifying Party) in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; or (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the 11 Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Business Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 7(a) or 7(b) is unavailable to an Indemnified Party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 7(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. Notwithstanding anything to the contrary contained herein, the Holder shall be liable or required to contribute under this Section 7(c) for only that amount as does not exceed the net proceeds to such Holder as a result of the sale of Registrable Securities pursuant to such Registration Statement. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. No Person guilty of fraudulent misrepresentation (within the meaning of Section 12 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 8. Rule 144. --------- As long as any Holder owns Common Shares, Options or Option Shares, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to Section 13(a) or 15(d) of the Exchange Act and to promptly furnish the Holders with true and complete copies of all such filings. As long as any Holder owns Common Shares, Options or Option Shares, if the Company is not required to file reports pursuant to Section 13(a) or 15(d) of the Exchange Act, it will prepare and furnish to the Holders and make publicly available in accordance with Rule 144(c) promulgated under the Securities Act annual and quarterly financial statements, together with a discussion and analysis of such financial statements in form and substance substantially similar to those that would otherwise be required to be included in reports required by Section 13(a) or 15(d) of the Exchange Act, as well as any other information required thereby, in the time period that such filings would have been required to have been made under the Exchange Act. The Company further covenants that it will take such further action as any Holder may reasonably request, all to the extent required from time to time to enable such Person to sell Common Shares and Option Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 promulgated under the Securities Act, including compliance with the provisions of the Reorganization Agreement relating to the transfer of the Common Shares and Option Shares. Upon the request of any Holder, the Company shall deliver to such Holder a written certification of a duly authorized officer as to whether it has complied with such requirements. 9. Miscellaneous. (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. Neither the Company nor any of its subsidiaries has, as of the date hereof entered into and currently in effect, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Neither the Company nor any of its subsidiaries has previously entered into any agreement currently in effect granting any registration rights with respect to any of its securities to any Person. Without limiting the generality of the foregoing, without the written consent of the Holders of a majority of the then outstanding Registrable Securities, the Company shall not grant to any Person the right to request the Company to register any securities of the Company under the Securities Act unless the rights so granted are subject in all respects 13 to the prior rights in full of the Holders set forth herein, and are not otherwise in conflict with the provisions of this Agreement. (c) No Piggyback on Registrations. Neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement, and the Company shall not after the date hereof enter into any agreement providing such right to any of its security holders, unless the right so granted is subject in all respects to the prior rights in full of the Holders set forth herein, and is not otherwise in conflict with the provisions of this Agreement. (d) Specific Enforcement, Consent to Jurisdiction. (i) The Company and the Holders acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof or thereof, this being in addition to any other remedy to which any of them may be entitled by law or equity. (ii) Each of the Company and the Holders (i) hereby irrevocably submits to the jurisdiction of the United States District Court sitting in the District of South Carolina for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. Each of the Company and the Holders consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this Section 9(d) shall affect or limit any right to serve process in any other manner permitted by law. (e) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and each of the Holders. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (f) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earlier of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified for notice prior to 14 5:00 p.m., eastern standard time, on a Business Day, (ii) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified for notice later than 5:00 p.m., eastern standard time, on any date and earlier than 11:59 p.m., eastern standard time, on such date, (iii) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service or (iv) actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be with respect to each Holder at its address set forth under its name on Schedule 1 attached hereto, or with respect to the Company, addressed to: HomeGold Financial, Inc. 3901 Pelham Road Greenville, South Carolina 29615 Attn.: John M. Sterling, Jr. or to such other address or addresses or facsimile number or numbers as any such party may most recently have designated in writing to the other parties hereto by such notice. Copies of notices to the Company shall be sent to Cary H. Hall, Jr., Esq., Wyche, Burgess, Freeman & Parham, P.A., 44 East Camperdown Way, Greenville, South Carolina 29601, Facsimile No.: 864-235-8900. Copies of notices to the Purchasers shall be sent to Mark Bender, Esq., Nexsen Pruet Jacobs and Pollard, LLP, Suite 1500, P.O. Drawer 2426, Columbia, South Carolina 29201 Facsimile No.:803-253-8277. (g) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns and shall inure to the benefit of each Holder and its successors and assigns. The Company may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign its rights hereunder in the manner and to the Persons as permitted under the Reorganization Agreement. (h) Assignment of Registration Rights. The rights of each Holder hereunder, including the right to have the Company register for resale Registrable Securities in accordance with the terms of this Agreement, shall be automatically assignable by each Holder to any transferee of such Holder of all or a portion of the shares of the Registrable Securities if: (i) the Holder agrees in writing with the transferee or assignee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment, (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such transferee or assignee, and (b) the securities with respect to which such registration rights are being transferred or assigned, (iii) following such transfer or assignment the further disposition of such securities by the transferee or assignees is restricted under the Securities Act and applicable provincial and state securities laws, (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this Section 9(h), the transferee or assignee agrees in writing with the Company to be bound by all of the provisions of this Agreement, (v) such transfer shall have been made in accordance with the applicable requirements of the Reorganization Agreement, and (vi) the number of shares of the Registrable Securities transferred to such transferee is equal to or greater than one percent (1%) of the number of the then outstanding shares of Common Stock of the Company. In addition, each Holder shall 15 have the right to assign its rights hereunder to any other Person with the prior written consent of the Company, which consent shall not be unreasonably withheld. The rights to assignment shall apply to the Holders (and to subsequent) successors and assigns. (i) Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina, without regard to principles of conflicts of law thereof. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held to be invalid, illegal, void or unenforceable in any respect, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. (n) Shares Held by the Company and its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company or its Affiliates (other than any Holder or transferees or successors or assigns thereof if such Holder is deemed to be an Affiliate solely by reason of its holdings of such Registrable Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [Remainder of Page Intentionally Left Blank] 16 IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed by their respective authorized persons as of the date first indicated above. HOMEGOLD FINANCIAL, INC. By: --------------------------------- Name: Title: ------------------------ PURCHASERS ------------------------------------ Ronald J. Sheppard ------------------------------------ R. Joe Arnold ------------------------------------ Matthew J. Arnold ------------------------------------ David C. Gaffney ------------------------------------ Larry C. Hamilton ------------------------------------ John W. Neal ------------------------------------ Charles D. Sides, Jr. ------------------------------------ Terrell E. Stubbs 17 SCHEDULE 1 HOLDERS Ronald J. Sheppard R. Joe Arnold Matthew J. Arnold David C. Gaffney Larry C. Hamilton John W. Neal Charles D. Sides, Jr. Terrell E. Stubbs 18 EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT [TRANSFER AGENT] ATTN: ________________________ RE: HOMEGOLD FINANCIAL, INC. ------------------------ Ladies and Gentlemen: We are counsel to HomeGold Financial, Inc., a company organized under the laws of the State of South Carolina (the "COMPANY"), and have represented the Company in connection with that certain Reorganization Agreement, as amended (the "REORGANIZATION AGREEMENT") entered into by and among the Company and the buyers named therein (collectively, the "HOLDERS") pursuant to which the Company issued to the Holders (i) shares of its common stock, par value $0.05 per share (the "COMMON SHARES") and (ii) options to purchase shares of the Common Stock (the "OPTIONS"). Pursuant to the Reorganization Agreement, the Company has also entered into a Registration Rights Agreement with the Holders (the "REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed, among other things, to register the Registrable Securities (as defined in the Registration Rights Agreement), including Common Shares and the shares of Common Stock issuable upon exercise of the Options, under the Securities Act of 1933, as amended (the "1933 ACT"). In connection with the Company's obligations under the Registration Rights Agreement, on ________________[date], the Company filed a Registration Statement on Form [S-3] (File No. 333-_____________) (the "REGISTRATION STATEMENT") with the Securities and Exchange Commission (the "SEC") relating to the Registrable Securities which names each of the Holders as a selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, [COMPANY'S COUNSEL] By: ------------------------------- cc: [LIST NAMES OF HOLDERS] 19 EX-10.11 19 STOCK RESTRICTION AGREEMENT EXHIBIT 10.11 FORM OF STOCK RESTRICTION AGREEMENT The persons listed below have entered into the Stock Restriction Agreement set forth below in connection with the consummation of the merger of HomeSense Financial Corp. and certain of its affiliates with and into HomeGold, Inc.; R. Joe Arnold Matthew J. Arnold Elizabeth S. Jarrett David C. Gaffney Elizabeth Sterling Jarrett Larry C. Hamilton Robert Elliott Jarrett John W. Neal William Blakely Jarrett Ronald J. Sheppard Daniel E.H. Sterling Charles D. Sides, Jr. Sterling Family Ltd. Partnership Terrell E. Stubbs Charles Taylor Sterling Mary Francis Wyche Elizabeth H. Sterling Sarah Wyche Coenen John M. Sterling IV Wyche Profit Sharing Plan John M. Sterling, Jr. Bradford Wheeler Wyche Estate of Buck Mickel Harriet Wyche Buck A. Mickel C.T. Wyche Charles C. Mickel Mickel Investment Group, Inc. Charles C. Mickel, Custodian Minor H. Mickel Charles C. Michel, Custodian 2 Rachelle Ellison Mickel Charles C. Mickel, Custodian 3 Anne Carter Shaw Harold E. Shaw, Jr. Minor M. Shaw Harold Ellis Shaw III Kathryn Alston Shaw Buck A. Mickel, Custodian for Tyler Vaughan Mickel STOCK RESTRICTION AGREEMENT This Stock Restriction Agreement is entered into by and between the undersigned shareholders of HomeGold Financial, Inc. ("HomeGold"). WHEREAS, HomeGold is entitled to claim net operating loss carry forwards for federal income tax purposes, the tax benefits of which will be substantial and material in the future; and WHEREAS, the tax benefits of the HomeGold loss carry forwards will be greatly reduced, and possibly lost entirely, if an "Ownership Change", within the meaning of Section 382(g) of the Internal Revenue Code, occurs; and WHEREAS, it is in the mutual best interest of the principal shareholders of HomeGold to take steps to insure that an Ownership Change will not take place and therefore each of the undersigned shareholders of HomeGold has agreed to the restrictions set forth below upon their purchase and sale of the shares of HomeGold. NOW, THEREFORE, in consideration of the mutual promises herein contained, each of the undersigned shareholders agrees that prior to any purchase or sale of the Common Stock of HomeGold, such party will give written notice to the Company, at the address below, specifying whether such purchase or sale will be an open market transaction or a purchase by a specific person or a sale to a specific person and will not consummate such purchase or sale if the Company advises such party within five (5) days of its receipt of such written notice, that such proposed purchase or sale could reasonably be expected to create an "Owner Shift" within the meaning of Section 382(g)(2) of the Internal Revenue Code. In this connection each party will provide the Company such additional information as it may reasonably request in order to make that determination set forth above, including the identity of the proposed seller or purchaser unless it is proposed that such sale take place as a market transaction. The foregoing restrictions shall terminate upon any of the following: (a) the expiration of three years after the Closing of the merger of HomeGold and HomeSense Financial Corp.; (b) an Ownership Change, as defined in Section 382(g) of the Internal Revenue Code; (c) HomeGold shall have ceased to have at least $5,000,000 of net operating loss carry forwards; or (d) the HomeGold Board shall determine that the restrictions are no longer necessary. Each of the undersigned shareholders agree that HomeGold shall be entitled to treat any attempted purchase or sale in violation of the terms of this Agreement as null and void and HomeGold shall be entitled to disregard such attempted purchase or sale. It is agreed that HomeGold's stock transfer agent may be given "stop transfer" instructions consistent with the foregoing. Each of the undersigned agrees to make available to HomeGold all certificates representing HomeGold stock owned by the undersigned, so that such certificates may be legended to note the restrictions imposed by this Agreement. This Agreement may be signed in counterparts. HOMEGOLD FINANCIAL, INC. By: ____________________________ EX-27 20 FINANCIAL DATA SCHEDULE
5 LEGEND - THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277028 HOMEGOLD FINANCIAL, INC. 1000 US DOLLAR DEC-31-2000 JAN-1-2000 MAR-31-2000 3-MOS 1 13135 0 85831 (6889) 0 0 22933 (6344) 199320 0 11704 509 0 0 (2530) 199320 0 6727 0 11700 0 990 4003 (9966) (10111) (10112) 0 226 0 (9886) (.097) (0.97) * FOOTNOTE (1) Unclassified Balance Sheet
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