10-Q 1 0001.txt HOMEGOLD FINANCIAL, INC. 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 JUNE 30, 2000. OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________. Commission File Number 0-8909 ----------------------- HOMEGOLD FINANCIAL, INC. (Exact name of registrant as specified in its charter) South Carolina 57-0513287 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 3901 Pelham Road Greenville, South Carolina 29615 (Address of Principal Executive Offices) 864-289-5000 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date.
Title of each Class: Outstanding at July 31, 2000 ------------------------------------------------- ----------------------------------- Series A Non-convertible Preferred Stock, par value $1.00 per share 10,000,000 Common Stock, par value $0.001 per share 16,785,330
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES Form 10-Q Quarter Ended JUNE 30, 2000 INDEX -----
PART I. FINANCIAL INFORMATION Page ------ --------------------- ---- Item 1. Financial Statements for HomeGold Financial, Inc. Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the Six Months Ended June 30, 2000 and 1999 and for the Three Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 5 Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 19 Item 3. Disclosures About Market Risk 29 PART II. OTHER INFORMATION -------- ----------------- Item 1. Legal Proceedings 30 Item 2. Changes in Securities 30 Item 3. Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 34
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC. HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 ----------------- ----------------- (In thousands) ASSETS (Unaudited) (Audited) ------ Cash and cash equivalents $ 11,659 $ 26,009 Restricted cash 6,017 5,314 Loans receivable 128,885 62,958 Less allowance for credit losses on loans (4,275) (6,344) ----------------- ----------------- Net loans receivable 124,610 56,614 Income taxes receivable 353 461 Accrued interest receivable 1,796 1,423 Other receivables 7,419 8,059 Residual receivable, net 56,259 47,770 Property and equipment, net 22,766 17,160 Real estate and personal property acquired through foreclosure 4,334 7,673 Excess of cost over net assets of acquired businesses, net of accumulated amortization of $1,012 in 2000 and $748 in 1999 20,868 1,566 Debt origination costs, net 343 1,658 Deferred income tax asset, net 12,000 12,000 Servicing asset 763 867 Other assets 2,392 2,163 ----------------- ----------------- Total assets $ 271,579 $ 188,737 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Revolving warehouse lines of credit $ 92,925 17,808 Other borrowings 3,795 -- Investor savings: Notes payable to investors 127,859 127,065 Subordinated debentures 25,960 17,710 ----------------- ----------------- Total investor savings 153,819 144,775 Senior unsecured debt 11,579 12,134 Other liabilities: Accounts payable and accrued liabilities 5,722 4,120 Remittances payable 1,349 1,078 Income taxes payable 278 120 Accrued interest payable 1,343 845 ----------------- ----------------- Total other liabilities 8,692 6,163 ----------------- ----------------- Total liabilities 270,810 180,880 Minority interest 7 13 Shareholders' equity: Preferred stock , par value $1.00 per share- authorized 20,000,000 shares, issued and outstanding 10,000,000 shares at June 30, 2000 and 0 shares at December 31, 1999 10,000 -- Common stock, par value $.001 per share at June 30, 2000 and 0.05 at December 31, 1999 10,149,629 - authorized 100,000,000 shares, issued and oustanding 16,785,330 17 507 shares at June 30, 2000 and shares at December 31, 1999 Capital in excess of par value 46,628 39,028 Note receivable from shareholder (5,801) -- Retained earnings (deficit) (50,082) (31,691) ----------------- ----------------- Total shareholders' equity 762 7,844 Total liabilities and shareholders' equity $ 271,579 188,737 ================= =================
See Notes to Unaudited Consolidated Financial Statements, which are an integral part of these statements. 3 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Six Months Ended June 30, For the Three Months Ended June 30, ------------------------------------ ------------------------------------ 2000 1999 2000 1999 --------------- ----------------- ----------------- ----------------- (In thousands, except share data) REVENUES: Interest income $ 5,606 $ 4,956 3,679 1,618 Servicing income 4,220 5,010 2,216 2,608 Gain on sale of loans 4,944 4,389 3,090 3,216 Loan fees, net 6,051 2,373 5,620 1,416 --------------- ----------------- ----------------- ----------------- Total revenue from loans and investments 20,821 16,728 14,605 8,858 Other revenues 939 750 429 354 --------------- ----------------- ----------------- ----------------- Total revenues 21,760 17,478 15,034 9,212 --------------- ----------------- ----------------- ----------------- EXPENSES: Interest 8,884 8,987 4,881 4,189 Provision for (recapture of) credit losses 1,642 (349) 652 (430) Fair value write-down of residual receivable 1,634 775 555 828 Salaries, wages and employee benefits 12,868 10,903 7,955 5,232 Business development costs 3,651 2,427 1,811 1,237 Other general and administrative expenses 11,453 8,207 7,587 4,126 --------------- ----------------- ----------------- ----------------- Total expenses 40,132 30,950 23,441 15,182 --------------- ----------------- ----------------- ----------------- Loss before income taxes, minority interest and extraordinary item (18,372) (13,472) (8,407) (5,970) Provision for income taxes 335 620 190 170 --------------- ----------------- ----------------- ----------------- Loss before minority interest and extraordinary (18,707) (14,092) (8,597) (6,140) item Minority interest in (income) loss of subsidiaries (1) (4) 1 (7) --------------- ----------------- ----------------- ----------------- Loss before extraordinary item (18,708) (14,096) (8,596) (6,147) Extraordinary item-gain on extinguishment of debt, net of $0 tax 318 21,227 92 4,281 --------------- ----------------- ----------------- ----------------- Net income (loss) $ (18,390) $ 7,131 $ (8,504) $ (1,866) =============== ================= ================= ================= Basic and diluted earnings (loss) per share of common stock: Loss before extraordinary item $ (1.55) $ (1.44) $ (0.62) $ (0.63) Extraordinary item, net of taxes 0.03 2.16 0.01 0.44 --------------- ----------------- ----------------- ----------------- Net income (loss) $ (1.52) $ 0.72 $ (0.61) $ (0.19) =============== ================= ================= ================= Basic and diluted weighted average shares outstanding 12,056,931 9,809,798 13,943,164 9,827,228 =============== ================= ================= =================
See Notes to Unaudited Consolidated Financial Statements, which are an integral part of these statements. 4 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended June 30, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) OPERATING ACTIVITIES: Net income (loss) $ (18,390) $ 7,131 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 1,606 1,386 Provision for (recapture of) credit losses on loans 1,642 (349) Gain on retirement of senior unsecured debt (318) (21,227) Loss on real estate acquired through foreclosure 840 1,319 Fair value write-down of residual receivable 1,634 775 Loans originated with intent to sell (286,436) (117,364) Proceeds from loans sold 203,223 102,573 Proceeds from securitization of loans 21,732 59,630 Other (302) (646) Net changes in operating assets and liabilities (18,570) (7,272) ---------------- ---------------- Net cash provided by (used in) operating activities $ (93,339) $ 25,956 ---------------- ---------------- INVESTING ACTIVITIES: Loans originated or purchased for investment purposes $ (259) $ (1,608) Principal collections on loans not sold 22,162 12,486 Proceeds from sale of real estate and personal property acquired through foreclosure 7,272 4,009 Proceeds from sale of property and equipment 44 141 Purchase of property and equipment (34) (432) Loan to shareholder (4,000) -- Other (4,671) (2,145) ---------------- ---------------- Net cash provided by investing activities $ 20,514 $ 12,451 ---------------- ---------------- FINANCING ACTIVITIES: Advances on revolving warehouse lines of credit $ 367,968 $ 111,853 Payments on revolving warehouse lines of credit (318,300) (128,590) Retirement of senior unsecured debt (237) (28,059) Net increase in notes payable to investors 794 2,800 Net increase (decrease) in subordinated debentures 8,250 2,730 Proceeds from issuance of common stock -- 149 ---------------- Net cash provided by (used in) financing activities $ 58,475 $ (39,117) ---------------- ---------------- Net (decrease) in cash and cash equivalents $ (14,350) $ (710) CASH AND CASH EQUIVALENTS: Beginning of period 26,009 36,913 ---------------- ---------------- End of period $ 11,659 $ 36,203 ================ ================
See Notes to Unaudited Consolidated Financial Statements, which are an integral part of these statements. 5 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For The Six Months Ended June 30, 2000 and 1999
Common Stock ----------------------- Note Capital in Receivable Retained Shares Excess of Preferred from Earnings Issued Amount Par Value Stock Shareholder (Deficit) ------------ --------- ------------ ---------- ------------ ------------ Balance at December 31, 1998 9,733,374 $ 486 $ 38,821 $ -- $ -- $ (33,506) Shares issued: Exercise of stock options 2,000 3 -- -- -- Exercise of restricted stock options 65,159 -- -- -- -- -- Employee Stock Purchase Plan -- 3 24 -- -- -- Officer/Director Compensation 44,118 3 116 -- -- Other shares issued (332) -- -- Net income -- -- -- -- -- 7,131 ------------ --------- ------------ ---------- ------------ ------------ Balance at June 30, 1999 9,844,319 492 38,964 -- -- (26,375) Balance at December 31, 1999 10,149,629 507 39,028 -- -- (31,691) Change in par from $0.05 to $0.001 (490) 490 -- -- Shares issued: Employee Stock Purchase Plan 21,787 1 20 -- -- -- Officer/Director Compensation 61,540 3 45 -- -- -- Share Cancellation (228,570) (11) Shares issued in HomeSense Merger 6,780,944 7 7,045 -- -- Shares issued in HomeSense Merger 10,000 -- Note Receivable from Shareholder -- (5,801) Other -- -- -- -- -- Net income -- -- -- -- -- (18,391) ------------ --------- ------------ ---------- ------------ ------------ Balance at June 30, 2000 16,785,330 $ 17 $ 46,628 $ 10,000 $ (5,801) $ (50,082) ============ ========= ============ ========== ============ ============ Total Shareholders' Equity --------------- Balance at December 31, 1998 $ 5,801 Shares issued: Exercise of stock options 3 Exercise of restricted stock options -- Employee Stock Purchase Plan 27 Officer/Director Compensation 119 Other shares issued Net income 7,131 --------------- Balance at June 30, 1999 13,081 Balance at December 31, 1999 7,844 Change in par from $0.05 to $0.001 -- Shares issued: Employee Stock Purchase Plan 21 Officer/Director Compensation 48 Share Cancellation (11) Shares issued in HomeSense Merger 7,052 Shares issued in HomeSense Merger 10,000 Note Receivable from Shareholder (5,801) Other -- Net income (18,391) --------------- Balance at June 30, 2000 $ 762 ===============
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 reported prior to its adoption. The consolidated balance sheet as of June 30, 2000, and the consolidated statements of operations for the six-month and three-month periods ended June 30, 2000 and 1999, and the consolidated statements of cash flows for the six-month periods ended June 30, 2000 and 1999, are unaudited and in the opinion of management contain all known adjustments, which consist of only normal recurring adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. These estimates include, among other things, valuation of real estate owned, assumptions used to value residual receivables and determination of the allowance for credit losses. NOTE 2--MERGER WITH HOMESENSE FINANCIAL CORP. On April 28, 2000, the shareholders of HomeGold Financial, Inc. approved a merger agreement with HomeSense Financial Corp. and affiliated companies (collectively "HomeSense"), a privately owned business, located in Lexington, South Carolina. HomeSense is a specialized mortgage company that originates and sells mortgage loans in the sub-prime mortgage industry, whose principal loan product is a debt consolidation loan, generally collateralized by a first lien on the borrower's home. HomeSense originates its loan volume through a direct retail branch network of eight offices, as well as through centrally provided telemarketing leads, direct mail, and television advertising. As of May 9, 2000, the effective date of the merger, HGFN issued 6,780,944 shares of its common stock (40% of post-merger shares outstanding) valued at $1.04 per share plus an additional 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share) for 100% of the outstanding stock of HomeSense. The merger was accounted for under the purchase method of accounting prescribed by generally accepted accounting principles. The transaction resulted in $19.5 million of goodwill, which is being amortized on a straight line basis over 15 years. The results of operations of HomeSense are included in the accompanying financial statements from the date of the acquisition. The following summarized unaudited pro forma financial information assumes the acquisition had occurred on January 1 of each year:
For the Six Months Ended June 30, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 31,682 $ 28,064 Income before extraordinary items (19,426) (14,571) Net income (18,584) 6,334 Earnings per share (1.24) 0.38
The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. 7 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3--CASH FLOW INFORMATION For the six-month periods ended June 30, 2000 and 1999, the Company paid interest of $8.4 million and $10.7 million, respectively. For the six-month periods ended June 30, 2000 and 1999, the Company paid income taxes of $177,000 and $1.1 million, respectively. For the six-month periods ended June 30, 2000 and 1999, the Company foreclosed on property in the amount of $1.9 million and $2.3 million, respectively. During the six months ended June 30, 2000 in connection with the HomeSense merger the following non cash items were recorded: (In thousands) Loans receivable $ 29,244 Property and equipment, net 5,800 Goodwill 19,500 Revolving warehouse lines of credit 29,244 Preferred stock 10,000 Common stock 7 Capital in excess of par value 7,045 NOTE 4--CASH, CASH EQUIVALENTS AND RESTRICTED CASH The Company maintains its primary checking accounts with one principal bank and makes overnight investments in reverse repurchase agreements with that bank, as well as other short-term investments in a money manager fund of the bank. The amounts maintained in the checking accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At June 30, 2000, the amounts maintained in overnight investments in reverse repurchase agreements and other short-term investments, which are not insured by the FDIC, totaled approximately $12.3 million. The investments were secured by U.S. Government securities pledged by the banks. The Company considers all highly liquid investments readily convertible to cash or having an original maturity of three months or less to be cash equivalents. The Company maintains an investment account with a trustee relating to representations and warranties in connection with the sale of the small-business loan unit. This account is shown as restricted cash, and is invested in overnight investments or short-term U.S. Treasury Securities. Additional restricted cash is maintained as part of the Company's primary checking account relationship with one principal bank. NOTE 5--RESIDUAL RECEIVABLES AND SALES AND SECURITIZATIONS OF LOANS In 1997, the Company began securitizing mortgage loans, whereby it sells the loans that it originates or purchases to a trust for cash, and records certain assets and income based upon the difference between all principal and interest received from the loans sold and (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used to value the residual receivable are appropriate and reasonable. At each reporting period, the Company assesses the fair value of these residual assets based on the present value of future cash flows expected under management's current best estimates of the key assumptions-credit losses, prepayment speed, forward yield curves, and discount rates commensurate with the risks involved and adjusts the recorded amounts to their estimated fair value. 8 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company makes securitization decisions based on a number of factors including conditions in the secondary market, the aggregate size and weighted average coupon of loans available to sell, fixed costs associated with securitization transactions, and liquidity needs. Total mortgage loans securitized in 2000 and 1999 were $41.6 million and $59.6 million, respectively. In 1999, the Company completed a securitization transaction in the second quarter. The Company securitized $59.6 million of loans for a weighted average premium of 2.88%. This securitization consisted of seasoned first and second lien mortgage loans, resulting in a lower than average premium. Certain loans included in that securitization were ineligible for inclusion in the borrowing base under the Company's warehouse line of credit. In 2000, the Company completed a securitization transaction in the second quarter. The Company securitized $41.6 million of loans substantially at par value. This securitization consisted primarily of mortgage loans not eligible for inclusion in the borrowing base under the Company's warehouse lines of credit and not readily marketable for the secondary market. NOTE 6--WAREHOUSE LINES OF CREDIT AND OTHER BORROWINGS Prior to the Company's merger with HomeSense, the Company had a $100 million revolving warehouse line of credit with CIT Group/Business Credit, Inc. ("CIT") to fund its mortgage loan originations. The credit facility bears interest at prime rate plus 0.75% and matures on June 30, 2001. The credit facility contains certain covenants, including, but not limited to, covenants that require a minimum availability of $10.0 million on the line of credit and covenants that impose limitations on the Company and its subsidiaries with respect to declaring or paying dividends, minimum CII Notes outstanding, and loans and advances by HGI and CII to the Company. As of the effective date of and in connection with the Company's merger with HomeSense, the terms of the CIT line of credit were modified to reduce the maximum commitment to $50 million. The agreement stipulates incremental decreases in the maximum commitment, based on certain criteria, to $25 million at December 31, 2000. At June 30, 2000, the maximum commitment was $47 million. The maturity date, rates of interest, advance rates, and collateral requirements remain unchanged. Availability under the credit agreement is determined based on eligible collateral as defined under the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The borrowing base adjusted for the $10.0 million minimum availability requirements would have allowed a maximum borrowing level based on eligible collateral of $33.7 million at June 30, 2000 and $18.9 million at December 31, 1999. Therefore, after considering the outstanding borrowings under the line of credit of $33.1 million and $17.8 million, respectively, the Company had $600,000 and $1.1 million, respectively, of immediate availability under this agreement on June 30, 2000 and December 31, 1999, based on its existing borrowing base. In connection with the merger, the Company entered into a new $40 million revolving warehouse line of credit with Household Commercial Financial Services, Inc. Subsequent to the merger, the maximum commitment was increased to $50 million. The line bears interest at the Prime rate plus .25% and is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum net worth of the Company of $10,000,000 commencing August 31, 2000, a leverage ratio of less than 35 to 1, and positive consolidated net income for each quarter beginning on or after July 1, 2000. The revolving credit agreement matures on April 30, 2001. Availability under the credit agreement is determined based on eligible collateral as defined under the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The borrowing base would have allowed a maximum borrowing level based on eligible collateral of $40.1million at June 30, 2000. Therefore, after considering the outstanding borrowings under the line of credit of $35.6 million, the Company had $4.5 million of immediate availability under this agreement at June 30, 2000. Prior to the merger, HomeSense negotiated a $25 million revolving purchase facility with Residential Mortgage Services of Texas ("RMST"). This agreement was amended at the time of the merger to extend to the merged entity. The facility bears interest at the Prime rate plus .75%. The agreement is structured as a purchase of the mortgages by RMST, subject to a limited right of RMST to require the repurchase of defective mortgages by the Company. At June 30, 2000, the Company had outstanding purchased mortgages of $24.2 million. The Company believes that it is currently in compliance with the loan covenants included in its warehouse lines of credit and its revolving purchase facility. 9 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company assumed an operating line of credit of $1,860,000 with Branch Banking & Trust Company ("BB&T") in connection with the merger. The line is secured by a $1.0 million certificate of deposit held by the bank. Monthly principal and interest payments are payable for twenty-four months beginning July 5, 2000. The line bears interest at LIBOR plus 2.5%. The Company also assumed a mortgage note of $2.0 million with Bank of America, N.A. in connection with the merger. The note matures on November 2, 2000, and bears interest at the Prime rate plus .25%. The note is secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a piece of investment property. NOTE 7--SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS In September 1997, the Company sold $125.0 million in aggregate principal amount of Senior Notes. The Senior Notes constitute unsecured indebtedness of the Company. The Senior Notes mature on September 15, 2004, with interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. In the six months ended June 30, 2000 and in fiscal 1999, the Company purchased $555,000 and $74.5 million, respectively, in aggregate principal amount of its Senior Notes in open market transactions. As a result of these repurchases, the Company recorded an extraordinary gain on extinguishment of debt of $92,000 in the second quarter of 2000, and $4.3 million in the second quarter of 1999. For the six months ended June 30, 2000 and the year ended December 31, 1999, the Company recognized $318,000 and $29.5 million, respectively, of extraordinary gains from extinguishment of debt. Remaining Senior Notes outstanding as of June 30, 2000 totaled $11.6 million. The Company may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. The indenture pertaining to the Senior Notes contains various restrictive covenants including limitations on, among other things, the incurrence of certain types of additional indebtedness, the payment of dividends and certain other payments, the ability of the Company's subsidiaries to incur further limitations on their ability to pay dividends or make other payments to the Company, liens, asset sales, the issuance of preferred stock by the Company's subsidiaries and transactions with affiliates. At June 30, 2000, management believes the Company was in compliance with such restrictive covenants. The Senior Notes are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries listed below. With the exception of the Guarantee by the Company's subsidiary CII, the Subsidiary Guarantees rank pari passu in right of payment with all existing and future unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of such Guarantors. No existing debt of any of the existing subsidiaries, other than the CII subordinated debentures, is currently considered to be subordinated to the Senior Notes. The Guarantee by CII is equal in priority to CII's notes payable to investors and is senior to CII's subordinated debentures. The Company has included consolidating condensed financial data of the combined subsidiaries of the Company in these financial statements. The Company believes that providing the condensed consolidating information is of material interest to investors in the Senior Notes and has not presented separate financial statements for each of the wholly-owned Subsidiary Guarantors, because it was deemed that such financial statements would not provide investors with any material additional information. At both June 30, 2000 and December 31, 1999, all of the Subsidiary Guarantors were wholly-owned by the Company. The Subsidiary Guarantors of the Company's Senior Notes at June 30, 2000 consist of the following wholly-owned subsidiaries of the Company: HomeGold, Inc. Emergent Mortgage Corp. of Tennessee Carolina Investors, Inc. Emergent Insurance Agency Corp. Emergent Business Capital Asset Based Lending, Inc. 10 Investments in subsidiaries are accounted for by the parent company and Subsidiary Guarantors on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the parent's and Subsidiary Guarantor's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Certain sums in the following tables may reflect immaterial rounding differences. As of June 30, 2000 and December 31, 1999, the Subsidiary Guarantors conduct all of the Company's operations, other than the investment of certain residual receivables through its special purpose securitization subsidiaries. 11 HOMEGOLD FINANCIAL, INC. CONSOLIDATING BALANCE SHEETS June 30, 2000 (Unaudited) (In thousands)
Combined Wholly- Combined Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ----------- ----------- ------------ ------------ ASSETS ------ Cash and cash equivalents $ 209 $ 11,449 $ 1 $ -- $ 11,659 Restricted cash 5,017 1,000 -- -- 6,017 Loans receivable: Loans receivable -- 128,885 -- -- 128,885 Notes receivable from other affiliates 6,638 40,250 9,049 (55,937) -- ---------- ----------- ----------- ------------ ------------ Total loans receivable 6,638 169,135 9,049 (55,937) 128,885 Less allowance for credit losses on loans -- (4,275) -- -- (4,275) ---------- ----------- ----------- ------------ ------------ Net loans receivable 6,638 164,860 9,049 (55,937) 124,610 Income tax receivable -- 353 -- -- 353 Accrued interest receivable 78 1,718 -- -- 1,796 Other receivables -- 7,419 -- -- 7,419 Investment in subsidiaries 36,183 -- -- (36,183) -- Residual receivable, net 1,000 15,441 39,818 -- 56,259 Property and equipment, net -- 22,766 -- -- 22,766 Real estate and personal property acquired -- 4,334 -- -- 4,334 through foreclosure Excess of cost over net assets of acquired 37 20,831 -- -- 20,868 businesses, net Deferred income tax asset, net 3,510 8,490 -- -- 12,000 Other assets 259 3,239 -- -- 3,498 ---------- ----------- ----------- ------------ ------------ Total assets $ 52,931 $ 261,900 $ 48,868 $ (92,120) $ 271,579 ========== =========== =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Revolving warehouse lines of credit and $ -- $ 96,720 $ -- $ -- $ 96,720 other borrowings Investor savings: Notes payable to investors -- 127,859 -- -- 127,859 Subordinated debentures -- 25,960 -- -- 25,960 ---------- ----------- ----------- ------------ ------------ Total investor savings -- 153,819 -- -- 153,819 Senior unsecured debt 11,579 -- -- -- 11,579 Other liabilities: Accounts payable and accrued liabilities -- 5,722 -- -- 5,722 Remittances payable -- 1,349 -- -- 1,349 Income taxes payable -- 278 -- -- 278 Accrued interest payable 340 1,003 -- -- 1,343 Due to (from) affiliates -- (8,275) 8,275 -- -- ---------- ----------- ----------- ------------ ------------ Total other liabilities 340 77 8,275 -- 8,692 Subordinated debt to affiliates 40,250 15,687 -- (55,937) -- ---------- ----------- ----------- ------------ ------------ Total liabilities 52,169 266,303 8,275 (55,937) 270,810 Minority interest -- 1 6 -- 7 Shareholders' equity: Common stock 17 998 2 (1,000) 17 Preferred stock 10,000 -- -- -- 10,000 Capital in excess of par value 46,628 93,095 48,807 (141,902) 46,628 Note receivable from shareholder (5,801) (5,801) -- 5,801 (5,801) Retained earnings (deficit) (50,082) (92,696) (8,222) 100,918 (50,082) ---------- ----------- ----------- ------------ ------------ Total shareholders' equity 762 (4,404) 40,587 (36,183) 762 ---------- ----------- ----------- ------------ ------------ Total liabilities and shareholders' equity $ 52,931 $ 261,900 $ 48,868 $ (92,120) $ 271,579 ========== =========== =========== ============ ============
12 HOMEGOLD FINANCIAL, INC. CONSOLIDATING BALANCE SHEETS December 31, 1999 (Unaudited) (In thousands)
Combined Wholly- Combined Owned Non- Parent Guarantor 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 -- 62,958 -- -- 62,958 Notes receivable from affiliates 7,097 36,229 4,584 (47,910) -- ---------- ----------- ----------- ------------ ------------ Total loans receivable 7,097 99,187 4,584 (47,910) 62,958 Less allowance for credit losses on loans -- (6,344) -- -- (6,344) ---------- ----------- ----------- ------------ ------------ Net loans receivable 7,097 92,843 4,584 (47,910) 56,614 Other Receivables: Income tax -- 461 -- -- 461 Accrued interest receivable 36 1,387 -- -- 1,423 Other receivables 1,006 7,053 -- -- 8,059 Investment in subsidiaries 31,487 -- -- (31,487) -- Residual receivable, net -- 4,545 43,225 -- 47,770 Property and equipment, net -- 17,160 -- -- 17,160 Real estate and personal property acquired -- 7,673 -- -- 7,673 through foreclosure Excess of cost over net assets of acquired 38 1,528 -- -- 1,566 businesses, net Deferred income tax asset, net 3,510 8,490 -- -- 12,000 Other assets 304 4,384 -- -- 4,688 ---------- ----------- ----------- ------------ ------------ Total assets $ 48,994 $ 171,330 $ 47,810 $ (79,397) $ 188,737 ========== =========== =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Liabilities: Revolving warehouse lines of credit $ -- $ 17,808 $ -- $ -- $ 17,808 Investor savings: Notes payable to investors -- 127,065 -- -- 127,065 Subordinated debentures -- 17,710 -- -- 17,710 ---------- ----------- ----------- ------------ ------------ Total investor savings -- 144,775 -- -- 144,775 Senior unsecured debt 12,134 -- -- -- 12,134 Accounts payable and accrued liabilities -- 4,120 -- -- 4,120 Remittances payable -- 1,078 -- -- 1,078 Income taxes payable -- 120 -- -- 120 Accrued interest payable 384 461 -- -- 845 Due to (from) affiliates 28,632 -- 7,597 (36,229) -- ---------- ----------- ----------- ------------ ------------ Total other liabilities 29,016 5,779 7,597 (36,229) 6,163 Subordinated debt to affiliates -- 11,681 -- (11,681) -- Total liabilities 41,150 180,043 7,597 (47,910) 180,880 Minority interest -- (1) 14 -- 13 Shareholders' equity: Common stock 507 998 2 (1,000) 507 Capital in excess of par value 39,028 66,043 48,807 (114,850) 39,028 Retained earnings (deficit) (31,691) (75,753) (8,610) 84,363 (31,691) ---------- ----------- ----------- ------------ ------------ Total shareholders' equity 7,844 (8,712) 40,199 (31,487) 7,844 ---------- ----------- ----------- ------------ ------------ Total liabilities and shareholders' equity $ 48,994 $ 171,330 $ 47,810 $ (79,397) $ 188,737 ========== =========== =========== ============ ============
13 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS Six Months Ended June 30, 2000 (Unaudited) (In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ----------- ----------- REVENUES: Interest income $ 600 $ 7,346 $ -- $ (2,340) $ 5,606 Servicing income -- 712 3,508 -- 4,220 Gain on sale of loans -- 4,944 -- -- 4,944 Loan fees, net -- 6,051 -- -- 6,051 ----------- ------------- ------------ ----------- ----------- Total revenue from loans and investments 600 19,053 3,508 (2,340) 20,821 Other revenues -- 968 -- (29) 939 ----------- ------------- ------------ ----------- ----------- Total revenues 600 20,021 3,508 (2,369) 21,760 EXPENSES: Interest 2,639 8,585 -- (2,340) 8,884 Recapture of credit losses -- 1,642 -- -- 1,642 Fair market write-down of residual receivable -- 81 1,553 -- 1,634 Salaries, wages and employee benefits -- 12,868 -- -- 12,868 Business development costs -- 3,651 -- -- 3,651 Other general and administrative expenses 116 11,366 -- (29) 11,453 ----------- ------------- ------------ ----------- ----------- Total expenses 2,755 38,193 1,553 (2,369) 40,132 ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest, and (2,155) (18,172) 1,955 -- (18,372) equity in undistributed earnings (loss) of subsidiaries Earnings (loss) of subsidiaries (16,554) -- -- 16,554 -- ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest and (18,709) (18,172) 1,955 16,554 (18,372) extraordinary item Provision (benefit) for income taxes -- 335 -- -- 335 ----------- ------------- ------------ ----------- ----------- Income (loss) before minority interest and (18,709) (18,507) 1,955 16,554 (18,707) extraordinary item Minority interest in loss of subsidiaries -- (1) -- -- (1) ----------- ------------- ------------ ----------- ----------- Net income before extraordinary item (18,709) (18,508) 1,955 16,554 (18,708) Extraordianary item - gain on extinquishment of debt 318 -- -- -- 318 ----------- ------------- ------------ ----------- ----------- Net income (loss) $ (18,391) $ (18,508) $ 1,955 $ 16,554 $ (18,390) =========== ============= ============ =========== ===========
Six Months Ended June 30, 1999 (Unaudited) (In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ----------- ----------- REVENUES: Interest income $ 3,024 $ 4,808 $ -- $ (2,876) $ 4,956 Servicing income -- 3,420 1,590 -- 5,010 Gain on sale of loans -- 4,389 -- -- 4,389 Loan fees, net -- 2,373 -- -- 2,373 ----------- ------------- ------------ ----------- ----------- Total revenue from loans and investments 3,024 14,990 1,590 (2,876) 16,728 Other revenues 8 877 2 (137) 750 ----------- ------------- ------------ ----------- ----------- Total revenues 3,032 15,867 1,592 (3,013) 17,478 EXPENSES: Interest 3,276 8,587 -- (2,876) 8,987 Recapture of credit losses -- (349) -- -- (349) Fair market write-down of residual receivable -- 367 408 -- 775 Salaries, wages and employee benefits -- 10,903 -- -- 10,903 Business development costs -- 2,427 -- -- 2,427 Other general and administrative expenses 299 8,044 1 (137) 8,207 ----------- ------------- ------------ ----------- ----------- Total expenses 3,575 29,979 409 (3,013) 30,950 ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest, and (543) (14,112) 1,183 -- (13,472) equity in undistributed earnings (loss) of subsidiaries Earnings (loss) of subsidiaries (13,553) (1,178) 1,178 13,553 -- ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest and (14,096) (15,290) 2,361 13,553 (13,472) extraordinary item Provision (benefit) for income taxes -- 620 -- -- 620 ----------- ------------- ------------ ----------- ----------- Income (loss) before minority interest and (14,096) (15,910) 2,361 13,553 (14,092) extraordinary item Minority interest in loss of subsidiaries -- (4) -- -- (4) ----------- ------------- ------------ ----------- ----------- Net income before extraordinary item (14,096) (15,914) 2,361 13,553 (14,096) Extraordianary item - gain on extinquishment of debt 21,227 -- -- -- 21,227 ----------- ------------- ------------ ----------- ----------- Net income (loss) $ 7,131 $ (15,914) $ 2,361 $ 13,553 $ 7,131 =========== ============= ============ =========== ===========
14 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended June 30, 2000 (Unaudited) (In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ------------ ------------ REVENUES: Interest income $ 311 $ 4,746 $ -- $ (1,378) $ 3,679 Servicing income -- 321 1,895 -- 2,216 Gain on sale of loans -- 3,090 -- -- 3,090 Loan fees, net -- 5,620 -- -- 5,620 ----------- ------------- ------------ ------------ ------------ Total revenue from loans and investments 311 13,777 1,895 (1,378) 14,605 Other revenues -- 443 -- (14) 429 ----------- ------------- ------------ ------------ ------------ Total revenues 311 14,220 1,895 (1,392) 15,034 EXPENSES: Interest 1,515 4,744 -- (1,378) 4,881 Recapture of credit losses -- 652 -- -- 652 Fair market write-down of residual receivable -- (431) 986 -- 555 Salaries, wages and employee benefits -- 7,955 -- -- 7,955 Business development costs -- 1,811 -- -- 1,811 Other general and administrative expenses 83 7,518 -- (14) 7,587 ----------- ------------- ------------ ------------ ------------ Total expenses 1,598 22,249 986 (1,392) 23,441 ----------- ------------- ------------ ------------ ------------ Income (loss) before income taxes, minority interest, (1,287) (8,029) 909 -- (8,407) and equity in undistributed earnings (loss) of subsidiaries Earnings (loss) of subsidiaries (7,310) -- -- 7,310 -- ----------- ------------- ------------ ------------ ------------ Income (loss) before income taxes, minority interest (8,597) (8,029) 909 7,310 (8,407) and extraordinary item Provision (benefit) for income taxes -- 190 -- -- 190 ----------- ------------- ------------ ------------ ------------ Income (loss) before minority interest and (8,597) (8,219) 909 7,310 (8,597) extraordinary item Minority interest in loss of subsidiaries -- 1 -- -- 1 ----------- ------------- ------------ ------------ ------------ Income before extraordinary item (8,597) (8,218) 909 7,310 (8,596) Extraordinary item - gain on extinquishment of debt 92 -- -- -- 92 ----------- ------------- ------------ ------------ ------------ Net income (loss) $ (8,505) $ (8,218) $ 909 $ 7,310 $ (8,504) =========== ============= ============ ============ ============
Three Months Ended June 30, 1999 (Unaudited) (In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ------------ ------------ REVENUES: Interest income $ 837 $ 1,771 $ -- $ (990) $ 1,618 Servicing income -- 303 1,090 1,215 2,608 Gain on sale of loans -- 3,216 -- -- 3,216 Loan fees, net -- 1,416 -- -- 1,416 ----------- ------------- ------------ ------------ ------------ Total revenue from loans and investments 837 6,706 1,090 225 8,858 Other revenues 1 407 2 (56) 354 ----------- ------------- ------------ ------------ ------------ Total revenues 838 7,113 1,092 169 9,212 EXPENSES: Interest 1,272 3,907 -- (990) 4,189 Recapture of credit losses -- (430) -- -- (430) Fair market write-down of residual receivable -- 307 521 -- 828 Salaries, wages and employee benefits -- 5,232 -- -- 5,232 Business development costs -- 1,237 -- -- 1,237 Other general and administrative expenses 122 4,059 1 (56) 4,126 ----------- ------------- ------------ ------------ ------------ Total expenses 1,394 14,312 522 (1,046) 15,182 ----------- ------------- ------------ ------------ ------------ Income (loss) before income taxes, minority interest, (556) (7,199) 570 1,215 (5,970) and equity in undistributed earnings (loss) of subsidiaries Earnings (loss) of subsidiaries (5,591) (576) 1,178 4,989 -- ----------- ------------- ------------ ------------ ------------ Income (loss) before income taxes, minority interest (6,147) (7,775) 1,748 6,204 (5,970) and extraordinary item Provision (benefit) for income taxes -- 170 -- -- 170 ----------- ------------- ------------ ------------ ------------ Income (loss) before minority interest and (6,147) (7,945) 1,748 6,204 (6,140) extraordinary item Minority interest in loss of subsidiaries -- (4) (3) -- (7) Extraordinary item - gain on extinquishment of debt 4,281 -- -- -- 4,281 ----------- ------------- ------------ ------------ ------------ Net income (loss) $ (1,866) $ (7,949) $ 1,745 $ 6,204 $ (1,866) =========== ============= ============ ============ ============
15 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENT OF CASH FLOWS Six Months Ended June 30, 2000 (Unaudited) (In thousands)
Combined Wholly- Combined Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ----------- ----------- ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ (18,391) $ (18,508) $ 1,955 $ 16,554 $ (18,390) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 16,554 -- -- (16,554) -- Depreciation and amortization -- 1,606 -- -- 1,606 Provision for credit losses -- 1,642 -- -- 1,642 Gain on retirement of senior unsecured debt (318) -- -- -- (318) Loss on sale of real estate acquired through foreclosure -- 840 -- -- 840 Fair value write-down of residual receivable -- 1,634 -- -- 1,634 Loans originated with intent to sell -- (286,436) -- -- (286,436) Proceeds from sold loans -- 203,223 -- -- 203,223 Proceeds from securitization of loans -- 21,732 -- -- 21,732 Other -- (302) -- -- (302) Changes in operating assets and liabilities increasing (decreasing) cash 262 (22,238) 3,406 -- (18,570) ----------- ------------ ----------- ------------ ----------- Net cash provided by (used in) operating activities (1,893) (96,807) 5,361 -- (93,339) ----------- ------------ ----------- ------------ ----------- INVESTING ACTIVITIES: Loans originated for investment purposes -- (259) -- -- (259) Principal collections on loans not sold -- 22,162 -- -- 22,162 Proceeds from sale of real estate and personal property acquired through foreclosure -- 7,272 -- -- 7,272 Proceeds from sale of property and equipment -- 44 -- -- 44 Purchase of property and equipment -- (34) -- -- (34) Loan to shareholder (4,000) -- -- -- (4,000) Other -- (4,671) -- -- (4,671) ----------- ------------ ----------- ------------ ------------ Net cash provided by in investing activities (4,000) 24,514 -- -- 20,514 ----------- ------------ ----------- ------------ ------------ FINANCING ACTIVITIES: Advances on warehouse lines of credit -- 367,968 -- -- 367,968 Payments on warehouse lines of credit -- (318,300) -- -- (318,300) Retirement of senior unsecured debt (237) -- -- -- (237) Net increase in notes payable to investors -- 794 -- -- 794 Net increase in subordinated debentures -- 8,250 -- -- 8,250 Advances (to) from subsidiary 6,137 (4,008) (2,129) -- -- Other -- 3,232 (3,232) -- -- ----------- ------------ ----------- ------------ ------------ Net cash provided by (used in) financing activities 5,900 57,936 (5,361) -- 58,475 ----------- ------------ ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 7 (14,357) -- -- (14,350) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 202 25,806 1 -- 26,009 ----------- ------------ ----------- ------------ ------------ END OF PERIOD $ 209 $ 11,449 $ 1 $ -- $ 11,659 =========== ============ =========== ============ ============
16 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENT OF CASH FLOWS Six Months Ended June 30, 1999 (Unaudited) (In thousands)
Combined Wholly- Combined Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ----------- ----------- ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ 7,131 $ (15,914) $ 2,361 $ 13,553 $ 7,131 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 13,553 1,178 (1,178) (13,553) -- Depreciation and amortization 1 1,385 -- -- 1,386 Provision for credit losses -- (349) -- -- (349) Gain on retirement of senior unsecured debt (21,227) -- -- -- (21,227) Loss on sale of real estate acquired through foreclosure -- 1,319 -- -- 1,319 Fair value write-down of residual receivable -- 775 -- -- 775 Loans originated with intent to sell -- (117,364) -- -- (117,364) Proceeds from sold loans -- 102,573 -- -- 102,573 Proceeds from securitization of loans -- 59,630 -- -- 59,630 Other -- (646) -- -- (646) Changes in operating assets and liabilities increasing (decreasing) cash (577) 25,614 (32,309) -- (7,272) ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) operating activities (1,119) 58,201 (31,126) -- 25,956 ----------- ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Loans originated for investment purposes -- (1,608) -- -- (1,608) Principal collections on loans not sold -- 12,486 -- -- 12,486 Proceeds from sale of real estate and personal property acquired through foreclosure -- 4,009 -- -- 4,009 Proceeds from sale of property and equipment -- 141 -- -- 141 Purchase of property and equipment -- (432) -- -- (432) Other -- (2,145) -- -- (2,145) ----------- ------------ ------------ ------------ ------------ Net cash provided by in investing activities -- 12,451 -- -- 12,451 ----------- ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Advances on warehouse lines of credit -- 111,853 -- -- 111,853 Payments on warehouse lines of credit -- (128,590) -- -- (128,590) Retirement of senior unsecured debt (28,059) -- -- -- (28,059) Net increase in notes payable to investors -- 2,800 -- -- 2,800 Net increase in subordinated debentures -- 2,730 -- -- 2,730 Advances (to) from subsidiary 29,200 (60,084) 30,884 -- -- Proceeds from issuance of additional common stock 149 -- -- -- 149 Other -- 2,260 (2,260) -- -- ----------- ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,290 (69,031) 28,624 -- (39,117) ----------- ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 171 1,621 (2,502) -- (710) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913 ----------- ------------ ------------ ------------ ------------ END OF PERIOD $ 367 $ 35,836 $ -- $ -- $ 36,203 =========== ============ ============ ============ ============
17 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8--CONTINGENCIES On February 26, 1999, the Company received notification from Transamerica Small Business Capital, Inc. ("Transamerica") claiming that a loan in the original principal amount of $1.1 million sold to it pursuant to an asset purchase agreement dated October 2, 1998 was not made by the Company in accordance with stated representations. Transamerica has filed an action in the Circuit Court of Cook County, Illinois seeking to recover the loan amount from the Company's $5.3 million that is being maintained by the trustee, which is reflected as restricted cash on the Company's balance sheet. On June 21, 2000, Transamerica amended its complaint to add another loan, claiming damage of "not less than $200,000," and allegations concerning servicing fee income claiming damage of "not less than $116,000." While management does not believe the Company has any liability relating to these claims, and the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this time. As a part of the agreement to sell Sterling Lending ("SLC") in 1998, the Company guaranteed certain leases of office space used by SLC. In 1999, SLC filed for bankruptcy protection and due to the financial situation of SLC, the Company has been asked to perform under certain of the guarantees. The Company is resolving each lease through active negotiations with the landlords, and management feels that the resolution of these guarantees will not be material to the financial statements of the Company. On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins filed a purported class action lawsuit in New Hanover County, North Carolina Superior Court. The suit was filed against a subsidiary of the Company and others alleging a variety of statutory and common law claims arising out of mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). Since that time, four additional suits have been filed in New Hanover County by plaintiffs claiming to be similarly situated to the Tomlins. The plaintiffs in these cases are seeking unspecified monetary damages. As to the Company's subsidiary, the complaint alleges participation by the Company's subsidiary in an arrangement with Chase under which Chase allegedly charged excessive fees and interest to the consumers, and under which Chase allegedly received undisclosed premiums. There has been no class certification, and the Company intends to contest these cases vigorously. Because these matters are in their early stages, it is not possible to evaluate the likelihood of an unfavorable outcome or estimate the amount of potential loss. On April 4, 2000, the Company received notice of a suit filed against it by Danka Funding Company, LLC ("Danka") in New Jersey Superior Court. In the suit, Danka seeks recovery of $355,865.80 allegedly due under copier equipment leases. While management does not believe the Company has any liability relating to this claim, and while the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this early stage. The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. NOTE 9--SUBSEQUENT EVENTS At the end of July, 2000, the decision was made by the Company to cease operations as a wholesale lender. This decision was based on a review of the wholesale business unit's profitability and company resources. The Company does not expect to incur significant cost in connection with its discontinuation of its wholesale operation. Going forward, the Company will redirect its mortgage lending efforts to focus solely on its higher margin and more profitable retail originations. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The discussion should be read in conjunction with the HomeGold Financial, Inc. and Subsidiaries (the "Company") Unaudited Consolidated Financial Statements and Notes appearing elsewhere in this report. Forward - Looking Information From time to time, the Company makes oral and written statements that may constitute "forward-looking statements" (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Form 10-Q, as well as those made in other filings with the SEC, and other financial discussion and analysis by management that reflect projections or future financial or economic performance of the Company. Such forward-looking statements are based on management's current plans and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Such risks and uncertainties include, but are not limited to: lower origination volume due to market conditions, inability to achieve desired efficiency levels, higher losses due to economic downturn or lower real estate values, loss of key employees, negative cash flows and capital needs, delinquencies and losses in securitization trusts, right to terminate mortgage servicing and related negative impact on cash flow, adverse consequences of changes in interest rate environment, deterioration of creditworthiness of borrowers and risk of default, general economic conditions in the Company's markets, including inflation, recession, interest rates and other economic factors, loss of funding sources, loss of ability to sell loans, general lending risks, impact of competition, regulation of lending activities, changes in the regulatory environment, lower than anticipated premiums on loan sales, lower than anticipated origination fees, adverse impact of lawsuits, faster than anticipated prepayments on loans, losses due to breach of representation or warranties under previous agreements and other detrimental developments. The preceding list of risks and uncertainties, however, is not intended to be exhaustive, and should be read in conjunction with other cautionary statements made herein, including, but not limited to, risks identified from time to time in the Company's SEC reports, registration statements and public announcements. General The Company is headquartered in Greenville, South Carolina, and primarily engages in the business of originating, purchasing, selling, securitizing and servicing mortgage loan products to sub-prime customers. The Company commenced its lending operations in 1991 through the acquisition of CII, a small mortgage lending company, which had been in operation since 1963. Market Conditions The financial services industry, including the markets in which the Company operates, is highly competitive. Competition is based on the type of loan, interest rates, and service. Traditional competitors in the financial services industry include commercial banks, credit unions, thrift institutions, credit card issuers, consumer and commercial finance companies, and leasing companies. While the Company faces significant competition in connection with its mortgage loan products, it believes that it competes effectively in its markets by providing competitive rates and efficient, complete services. Merger with HomeSense Financial Corp. On April 28, 2000, the shareholders of HomeGold Financial, Inc. approved a merger agreement with HomeSense Financial Corp. and affiliated companies (collectively "HomeSense"), a privately owned business, located in Lexington, South Carolina. HomeSense is a specialized mortgage company that originates and sells mortgage loans in the sub-prime mortgage industry, whose principal loan product is a debt consolidation loan, generally collateralized by a first lien on the borrower's home. HomeSense originates its loan volume through a direct retail branch network of eight offices, as well as through centrally provided telemarketing leads, direct mail, and television advertising. 19 As of May 9, 2000, the effective date of the merger, HGFN issued 6,780,944 shares of its common stock (40% of post-merger shares outstanding) valued at $1.04 per share plus an additional 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share) for 100% of the outstanding stock of HomeSense. The merger was accounted for under the purchase method of accounting prescribed by generally accepted accounting principles. The transaction resulted in $19.5 million of goodwill, which is being amortized on a straight line basis over 15 years. The results of operations of HomeSense are included in the accompanying financial statements from the date of the acquisition. The following summarized unaudited pro forma financial information assumes the acquisition had occurred on January 1 of each year:
For the Six Months Ended June 30, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 31,682 $ 28,064 Income before extraordinary items (19,426) (14,571) Net income (18,584) 6,334 Earnings per share (1.24) 0.38
The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies which might be achieved from combined operations. The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. Results of Operations Six months ended June 30, 2000, compared to six months ended June 30, 1999 The Company recognized a net loss of $18.4 million for the six months ended June 30, 2000 as compared to a net income of $7.1 million for the six months ended June 30, 1999. Included in the net loss and net income figures for the 2000 and 1999 periods were extraordinary gains of $0.3 million and $21.2 million on the extinguishment of debt, respectively. Excluding extraordinary gains, the net losses for the 2000 and 1999 periods were $18.7 million and $14.1 million, respectively. Total revenues for the six months ended June 30, 2000 increased $4.3 million compared to the six months ended June 30, 1999. The increase in total revenues resulted primarily from a $3.7 million increase in net loan fees, along with a $0.7 million increase in interest income and a $0.6 million increase in gain on sale of loans, and partially offset by a $0.8 million decrease in servicing income. The increase in net loan fees is primarily attributable to a $169.1 million increase in production and an increase in average loan origination fees charged, to 2.1% from 2.0%. The increase in interest income resulted primarily from a $9.0 million, increase in average loans receivable outstanding. The increase in average loans receivable outstanding relates primarily to the increase in productions mentioned above. The increase in gains on sale of loans resulted from an increase in the number of loans sold, partially offset by a reduction in the net premiums received in the first six months of 2000 compared to the same period in 1999. In the first six months of 2000, the Company had mortgage whole loan sales of $203.2 million at a net premium of 2.4% compared to mortgage whole loan sales of $102.6 million at a net premium of 4.3% in the first six months of 1999. The higher sales were a result, in part, of greater loan production. The reduction in premiums received is primarily from changes in market conditions. The decline in servicing income was primarily due to a decrease in average serviced loan portfolio. The reduction in the average mortgage loans serviced in the first six months of 2000 compared to the same period in 1999 resulted from whole loan (servicing released) sales of substantially all production in 1999 and the first six months of 2000, as well as repayments of loans in the securitized pools. Total expenses for the six months ended June 30, 2000 increased $9.2 million compared to the six months ended June 30, 1999. The increase in total expenses resulted primarily from a $3.2 million increase in other general and administrative expenses, a $2.0 million increase in provision for credit losses, a $2.0 million increase in payroll expense, a $1.2 million increase in business development costs, and a $0.9 million increase in fair value write-down of residual receivable. 20 The increase in other general and administrative expenses resulted primarily from non-recurring restructuring charges of $2.3 million. In addition, amortization expense increased $0.2 million, resulting from amortization of goodwill arising from the merger with HomeSense. The increase in the provision for credit losses to $1.6 million from net recoveries of $0.3 million, resulted from management's decision in early 2000 to record additional reserves against amounts paid on behalf of borrowers for taxes, insurance, and attorney's fees, combined with a significantly larger loan portfolio partially offset by a lower loan delinquency rate. The increase in salaries, wages and employee benefits resulted primarily from the addition of employees due to the merger. The Company increased the number of employees to 790 at June 30, 2000 from 408 at June 30, 1999. The increase in business development costs is primarily related to the increased retail mortgage production mentioned above. The Company's marketing efforts are largely commission-based, resulting in a direct correspondence between production levels and marketing costs. The increase in the fair value write-down of the residual receivable was due to faster-than-anticipated prepayments on the Company's securitization pools. No changes in valuation assumptions were required in the first six months of 2000. The Company has recorded current tax expense of $335,000 and $620,000 for the six months ended June 30, 2000 and 1999, respectively, although the Company generated a pre-tax loss before extraordinary item for both periods. The Company has not recorded a deferred tax benefit related to the current operating losses due to management's assessment of the recoverability of the related deferred tax asset. The current tax expense results from "excess inclusion income." Excess inclusion income is a result of the Company's securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss from operations. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The extraordinary gain on the extinguishment of debt (discussed below) is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in current income tax expense. The latest two securitizations were structured utilizing alternatives to a REMIC which does not generate excess inclusion income. In the first six months of 1999, the Company recorded a $21.2 million extraordinary gain on the extinguishment of debt related to the purchase of $49.3 million of its Senior Notes. The purchase price of the Senior Notes was $26.6 million, or a weighted average of 54.0% of face value. A proportionate share of the unamortized debt origination cost ($1.5 million) relating to the issuance of the Senior Notes was charged against this gain. The extraordinary gain on the extinguishment of debt for the first six months of 2000 was $0.3 million, resulting from a minor purchase of the Company's Senior Notes. Three months ended June 30, 2000 compared to three months ended June 30, 1999 The Company recognized a net loss of $8.5 million for the three months ended June 30, 2000 as compared to net income of $1.9 million for the three months ended June 30, 1999. Included in the net loss and net income figures for the 2000 and 1999 periods were extraordinary gains of $0.1 million and $4.3 million on the extinguishment of debt, respectively. Excluding extraordinary gains, the net losses for the 2000 and 1999 periods were $8.6 million and $6.1 million, respectively. Total revenues increased $5.8 million, for the three months ended June 30, 2000 compared to the three months ended June 30, 1999. The increase in total revenues resulted primarily from a $4.2 million increase in net loan fees and a $2.1 million increase in interest income, partially offset by a $0.4 million decrease in servicing income. The increase in net loan fees is primarily attributable to a $139.4 million increase in production and an increase in average loan origination fees charged, to 2.8% from 2.1% for the three months ended June 30, 2000 and the three months ended June 30, 1999, respectively. 21 The increase in interest income resulted primarily from an increase in average loans receivable outstanding. The increase in average loans receivable outstanding relates primarily to the increase in production mentioned above. The decline in servicing income was primarily due to a decrease in average serviced loan portfolio. The reduction in the average mortgage loans serviced in the three months ended June 30, 2000 compared to the same period in 1999 resulted from whole loan (servicing released) sales of substantially all production in 1999 and the first six months of 2000, as well as repayments of loans in the securitized pools. Total expenses for the three months ended June 30, 2000 increased $8.3 million compared to the three months ended June 30, 1999. The increase in total expenses resulted primarily from a $3.5 million increase in other general and administrative expenses, a $2.7 million increase in payroll expense, a $1.1 million increase in provision for credit losses, a $0.6 million increase in business development costs, and a $0.7 million increase in interest expense, partially offset by a $0.3 million decrease in fair value write-down of residual receivable. The increase in other general and administrative expenses resulted primarily from non-recurring restructuring charges of $2.3 million. In addition, amortization expense increased $0.2 million resulting from amortization of goodwill arising from the merger with HomeSense. The increase in salaries, wages and employee benefits resulted primarily from the addition of employees due to the merger. The Company increased the number of employees to 790 at June 30, 2000 from 408 at June 30, 1999. The increase in the provision for credit losses, to $0.7 million from net recoveries of $0.4 million, resulted from management's decision in early 2000 to have additional reserves against amounts paid on behalf of borrowers for taxes, insurance, and attorney's fees, combined with a significantly larger loan portfolio partially offset by a lower loan delinquency rate. The increase in business development costs is primarily related to the increased retail mortgage production mentioned above. The Company's marketing efforts are largely commission-based, resulting in a direct correspondence between production levels and marketing costs. The increase in interest expense was due principally to the increase in borrowings associated with the increase in the Company's average loan portfolio. The decrease in the fair value write-down of residual receivable was due to slower-than-anticipated prepayments on the Company's securitization pools. No changes in valuation assumptions were required in the comparable period for 2000. The Company has recorded current tax expense of $190,000 and $170,000 for the three months ended June 30, 2000 and 1999, respectively, although the Company generated a pre-tax loss before extraordinary item for both periods. The Company has not recorded a deferred tax benefit related to the current operating losses due to management's assessment of the recoverability of the related deferred tax asset. The current tax expense results from "excess inclusion income." Excess inclusion income is a result of the Company securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss from operations. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The extraordinary gain on the extinguishment of debt (discussed below) is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in current income tax expense. In the three months ended June 30, 1999, the Company recorded a $4.3 million extraordinary gain on the extinguishment of debt related to the purchase of $13.9 million of its Senior Notes. The purchase price of the Senior Notes was $9.3 million, or a weighted average of 66.9% of face value. A proportionate share of the unamortized debt origination cost ($300,000) relating to the issuance of the Senior Notes was charged against this gain. The extraordinary gain on the extinguishment of debt for the three months ended June 30, 2000 was $0.1 million, resulting from a minor purchase of the Company's Senior Notes. 22 Financial Condition Net loans receivable increased to $124.6 million at June 30, 2000 from $56.6 million at December 31, 1999. The increase in net loans receivable resulted primarily from increased production in the HomeGold operation, as well as in the HomeSense merger. Average monthly loan production in 2000 to date is $47.7 million compared to average monthly loan production of $19.6 million in 1999. The residual receivables were $56.3 million at June 30, 2000, compared to $47.8 million at December 31, 1999. This increase resulted primarily from the residual retained on the 2000-1 securitization transaction completed in May 2000, partially offset by the amortization of the other residual assets from prior securitizations. Net property and equipment increased to $22.8 million at June 30, 2000, from $17.2 million at December 31, 1999, an increase of $5.6 million, which is attributable to the merger with HomeSense. Real estate and personal property acquired in foreclosure decreased to $4.3 million at June 30, 2000, from $7.7 million at December 31, 1999. This decrease resulted primarily from the sale of foreclosed properties, partially offset by additional foreclosures on mortgage loans within the period. As a result of the merger, net Excess of cost over net assets of acquired businesses increased to $20.9 million at June 30, 2000, from $1.6 million at December 31, 1999. The primary sources for funding the Company's receivables comes from borrowings issued under various credit arrangements (including the warehouse lines of credit, CII notes payable to investors and subordinated debentures, and the Company's Senior Notes) and the sale or securitization of loans. At June 30, 2000, the Company had $92.9 million outstanding under revolving warehouse lines of credit to banks, compared with $17.8 million at December 31, 1999. At June 30, 2000, the Company had $153.8 million of CII notes payable to investors and subordinated debentures outstanding, compared with $144.8 million at December 31, 1999. The aggregate principal amount of outstanding Senior Notes was $11.6 million at June 30, 2000, compared to $12.1 million on December 31, 1999. In the six months ended June 30, 2000, the Company purchased $0.5 million of its Senior Notes for a purchase price of $0.2 million. The Company may, from time to time, purchase more of its Senior Notes depending on the Company's cash availability, market conditions, and other factors. Total shareholders' equity at June 30, 2000 was $0.8 million, compared to $7.8 million at December 31, 1999. This decrease is attributable to the net loss of $18.4 million for the six months ended June 30, 2000 and the classification in shareholders' equity of a $5.8 million note receivable from a shareholder arising from the merger with HomeSense, partially offset by an increase in preferred stock and paid-in capital in excess of par value arising from the merger (see below). In connection with the merger with HomeSense, which was effective May 9, 2000, the Company issued 6,780,944 shares of its common stock in addition to 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share), which increases the Company's shareholders' equity by approximately $17.1 million. Allowance for Credit Losses and Credit Loss Experience The Company is exposed to the risk of loan delinquencies and defaults with respect to loans retained in its portfolio. With respect to loans to be sold on a non-recourse basis, the Company is at risk for loan delinquencies and defaults on such loans while they are held by the Company pending such sale and, in certain cases, where the terms of sale include a warranty against first payment defaults. To provide for credit losses, the Company charges against current earnings an amount necessary to maintain the allowance for credit losses at levels expected to cover inherent losses in loans receivable. The percentage of total mortgage loans past due 30 days or more declined to 7.77% at June 30, 2000 compared to 13.44% at December 31, 1999. The Company incurred net charge-offs on retained loans of $1.3 million in the six months ended June 30, 2000 compared to $1.5 million in net charge-offs on retained loans in the six months ended June 30, 1999. Although management considers the allowance appropriate and adequate to cover inherent losses in the loan portfolio, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for possible credit losses will not be required. 23 Management closely monitors delinquencies to measure the quality of its loan portfolio and securitized loans and the potential for credit losses. Accrual of interest is discontinued and reversed when a loan is either over 90 days past due, or the collateral is determined to be inadequate, or when foreclosure proceedings begin. Collection efforts on charged-off loans continue until the obligation is satisfied or until it is determined that such obligation is not collectible or the cost of continued collection efforts would exceed the potential recovery. Recoveries of previously charged-off loans are credited to the allowance for credit losses. The Company considers its allowance for credit losses at June 30, 2000 to be adequate in view of the Company's ability to sell a significant portion of its loans, improving loss experience and the secured nature of most of the Company's outstanding loans. The Company's allowance for loan loss as a percentage of gross loans was 3.3% at June 30, 2000 and 10.0% at December 31, 1999. Liquidity and Capital Resources The Company's business requires continued access to short- and long-term sources of debt financing and equity capital. As a result of increases in loan production and incurred operating expenses in excess of operating income, the Company experienced a $93.3 million net use of cash from operating activities in the first six months of 2000. Although the Company's goal is to achieve a positive cash flow each quarter, no assurance can be given that this objective will be attained due to the higher level of cash required to fund the loans purchased and originated. Currently, the Company's primary operating cash uses include the funding of (i) loan originations and purchases pending their securitization or sale, (ii) interest expense on CII investor savings notes, senior unsecured debt and its revolving warehouse credit facilities ("Credit Facilities"), (iii) fees, expenses, overcollateralization and tax payments incurred in connection with the securitization program and (iv) ongoing general and administrative and other operating expenses. The Company's primary operating sources of cash are (i) cash proceeds of whole-loan mortgage loan sales, (ii) cash payments for contractual and ancillary servicing revenues received by the Company in its capacity as servicer for securitized loans, (iii) interest income on loans receivable and certain cash balances, (iv) fee income received in connection with its retail mortgage loan originations, (v) excess cash flow received in each period with respect to residual receivables and (vi) borrowings under warehouse lines of credit. The Company believes that additional sources of funds are needed to meet its future liquidity requirements, and no assurance can be given that these additional sources of funds can be attained. Cash and cash equivalents were $11.7 million at June 30, 2000, and $26.0 million at December 31, 1999. Cash used by operating activities was $93.3 million for the six months ended June 30, 2000, compared to cash provided by operating activities of $26.0 million for the six months ended June 30, 1999. Cash provided by investing activities was $20.5 million for the six months ended June 30, 2000 compared to $12.5 million for the six months ended June 30, 1999. Cash provided by financing activities was $58.5 million for the six months ended June 30, 2000 compared to cash used in financing activities of $39.1 million for the six months ended June 30, 1999. The increase in cash used by operating activities was principally due to incurred operating expenses in excess of operating income for the six month period ended June 30, 2000 when compared to the same period of 1999, coupled with lower loan sales as a percentage of loans originated. Cash provided by investing activities in both the six months ended June 30, 2000 and 1999, resulted primarily from principal collections on loans not sold. The cash provided in financing activities in the six months ended June 30, 2000, resulted primarily from advances on the Company's revolving warehouse lines of credit. Prior to the Company's merger with HomeSense, the Company had a $100 million revolving warehouse line of credit with CIT Group/Business Credit, Inc. ("CIT") to fund its mortgage loan originations. The credit facility bears interest at prime rate plus 0.75% and matures on June 30, 2001. The credit facility contains certain covenants, including, but not limited to, covenants that require a minimum availability of $10.0 million on the line of credit and covenants that impose limitations on the Company and its subsidiaries with respect to declaring or paying dividends, minimum CII Notes outstanding, and loans and advances by HGI and CII to the Company. As of the effective date of and in connection with the Company's merger with HomeSense, the terms of the CIT line of credit were modified to reduce the maximum commitment to $50 million. The agreement stipulates incremental decreases in the maximum commitment, based on certain criteria, to $25 million at December 31, 2000. At June 30, 2000, the maximum commitment was $47 million. The maturity date, rates of interest, advance rates, and collateral requirements remain unchanged. Availability under the credit agreement is determined based on eligible collateral as defined under the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The borrowing base adjusted for the $10.0 million minimum availability requirements would have allowed a maximum borrowing level based on eligible collateral of $33.7 million at June 30, 2000 and $18.9 million at December 31, 1999. Therefore, after considering the outstanding borrowings under the line of credit of $33.1 million and $17.8 million, respectively, the Company had $600,000 and $1.1 million, respectively, of immediate availability under this agreement on June 30, 2000 and December 31, 1999, based on its existing borrowing base. 24 In connection with the merger, the Company entered into a new $40 million revolving warehouse line of credit with Household Commercial Financial Services, Inc. Subsequent to the merger, the maximum commitment was increased to $50 million. The line bears interest at the Prime rate plus .25% and is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum net worth of the Company of $10,000,000 commencing August 31, 2000, a leverage ratio of less than 35 to 1, and positive consolidated net income for each quarter beginning on or after July 1, 2000. The revolving credit agreement matures on April 30, 2001. Availability under the credit agreement is determined based on eligible collateral as defined under the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The borrowing base would have allowed a maximum borrowing level based on eligible collateral of $40.1million at June 30, 2000. Therefore, after considering the outstanding borrowings under the line of credit of $35.6 million, the Company had $4.5 million of immediate availability under this agreement at June 30, 2000. Prior to the merger, HomeSense negotiated a $25 million revolving purchase facility with Residential Mortgage Services of Texas ("RMST"). This agreement was amended at the time of the merger to extend to the merged entity. The facility bears interest at the Prime rate plus .75%. The agreement is structured as a purchase of the mortgages by RMST, subject to a limited right of RMST to require the repurchase of defective mortgages by the Company. At June 30, 2000, the Company had outstanding purchased mortgages of $24.2 million. The Company assumed an operating line of credit of $1,860,000 with Branch Banking & Trust Company ("BB&T") in connection with the merger. The line is secured by a $1.0 million certificate of deposit held by the bank. A principal payment of $500,000 is payable on May 15, 2000. Monthly principal and interest payments are payable for twenty-four months beginning July 5, 2000. The line bears interest at LIBOR plus 2.5%. The Company also assumed a mortgage note of $2.0 million with Bank of America, N.A. in connection with the merger. The note matures on November 2, 2000, and bears interest at the Prime rate plus .25%. The note is secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a piece of investment property. During 1997, the Company sold $125.0 million aggregate principal amount of Senior Notes. The Senior Notes constitute unsecured indebtedness of the Company. The Senior Notes are redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. This agreement contains, among other matters, restrictions on the payment of dividends. At June 30, 2000, management believes the Company was in compliance with such restrictive covenants. The Senior Notes are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). With the exception of the Guarantee by CII, the Subsidiary Guarantees rank pari passu in right of payment with all existing and future unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of payment to all existing and future subordinated indebtedness of such Guarantors. The Guarantee by CII is equal in priority to CII's notes payable to investors and is senior to CII's subordinated debentures. The Company purchased $74.5 million face amount of its Senior Notes in 1999 and $555,000 in the first six months of 2000. At June 30, 2000 and December 31, 1999, $11.6 million and $12.1 million in aggregate principal amount of Senior Notes were outstanding, respectively. CII engages in the sale of CII notes to investors. The CII notes are comprised of investor notes and subordinated debentures bearing fixed rates of interest, which are sold by CII only to South Carolina residents. The offering of the CII notes is registered under South Carolina securities law and is believed to be exempt from Federal registration under the Federal intrastate exemption. CII believes it conducts its operations so as to qualify for the safe harbor provisions of Rule 147 promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act"). At June 30, 2000 and at December 31, 1999, CII had an aggregate of $127.9 million and $127.1 million of investor notes outstanding, respectively, and an aggregate of $26.0 million and $17.7 million, respectively. The investor notes and subordinated debentures are subordinate in priority to the credit facility. Substantially all of the CII notes and debentures have original maturities of one or two years. Total shareholders' equity at June 30, 2000 was $800,000, compared to $7.8 million at December 31, 1999, a decrease of $7.0 million. This decrease resulted primarily from net loss of $18.4 million for the six months ended June 30, 2000 and a note receivable from a principal shareholder of $5.8 million incurred during the merger, classified as contra equity. These decreases were offset by an increase in capital of $17.1 million as a result of the Company issuing 6,780,944 shares of its common stock and 10 million shares of Series A non-convertible preferred stock in connection with the merger with HomeSense. 25 The Company's primary objective in 2000 is to ensure adequate levels of liquidity as the Company increases loan originations. The Company plans to continue to generate cash through whole loan sales. These sales will generate cash that can be used to fund operating losses, or to fund declines in investor notes that could occur. The Company plans to operate more like a mortgage banker that originates and either sells or securitizes loans, retaining only a small portfolio of loans. Management believes that, based on its present level of liquidity combined with its borrowing availability under the warehouse line of credit and the Company's merger, additional sources of operating capital will be needed to support the 2000 operating plan. The Company continually evaluates the need to establish other sources of capital and will pursue those it considers appropriate based upon its need and market conditions. Loan Sales and Securitizations The Company sells or securitizes substantially all of its loans. The Company sells its production on a whole loan basis (servicing released), principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the mortgage loans. However, no assurance can be given that the mortgage loans can be sold. To the extent that the loans are not sold, the Company retains the risk of loss. For the six months ended June 30, 2000 and 1999, the Company sold $203.2 million and $102.6 million of mortgage loans, respectively. Securitization transactions were completed in the second quarter of both 2000 and 1999 totalling $41.6 million and $59.6 million respectively per transaction. In connection with its securitizations, the Company has retained interest-only residual certificates representing residual interests in the trusts created by the securitization transactions. These subordinate residual securities totaled $56.3 million and $47.8 million, net of allowances, at June 30, 2000 and December 31, 1999, respectively. In a mortgage loan securitization, the Company sells mortgage loans it purchased or originated to a trust for cash. The trust sells asset-backed bonds secured by the loans to investors. The Company records certain assets and income based upon the difference between all principal and interest received from the loans sold and the following factors (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by estimated prepayment and loss rates, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as residual receivables. The Company believes the assumptions it has used in past securitizations, adjusted to current market conditions, are appropriate and reasonable. The Company retains the right to service loans it securitizes. Fees for servicing loans are based on a stipulated percentage (generally 0.50% per annum) of the unpaid principal balance of the associated loans. On its mortgage loan securitizations, the Company has recognized a servicing asset in addition to its gain on sale of loans. The servicing asset is calculated as the present value of the expected future net servicing income in excess of adequate compensation for a substitute servicer, based on common industry assumptions and the Company's historical experience. These factors include default and prepayment speeds. The Company generally expects to begin receiving excess cash flow on its mortgage loan securitizations approximately 16 months from the date of securitization, although this time period may be shorter or longer depending upon the securitization structure and performance of the loans securitized. Prior to such time, the monoline insurer requires a reserve provision to be created within the securitization trust which uses Excess Cash Flow to retire the securitization bond debt until the spread between the outstanding principal balance of the loans in the securitization trust and the securitization bond debt equals a specified percentage (depending on the structure of the securitization) of the initial securitization principal balance (the "overcollateralization limit"). Once this overcollateralization limit is met, excess cash flows are distributed to the Company. The Company begins to receive regular monthly servicing fees in the month following securitization. The gains recognized into income resulting from securitization transactions vary depending on the assumptions used, the specific characteristics of the underlying loan pools, and the structure of the transaction. The Company believes the assumptions it has used are appropriate and reasonable. The Company assesses the carrying value of its residual receivables and servicing assets for impairment. There can be no assurance that the Company's estimates used to determine the gain on sale of loans, residual receivables, and servicing assets valuations will remain appropriate for the life of each securitization. If actual loan prepayments or defaults exceed the Company's estimates, the carrying value of the Company's residual receivables and/or servicing assets may be decreased through a charge against earnings in the period management recognizes the 26 disparity. Conversely, if actual loan prepayments or defaults are better than the Company's estimates, the carrying value of the Company's residual receivables and/or servicing assets may be increased, with additional earnings recognized in the period management recognizes the disparity. Accounting Considerations In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, as amended by SFAS 137. This SFAS statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Since the Company has no significant hedging positions outstanding, management estimates that the implementation of this standard will have no material impact on its financial statements. Accounting standards that have been issued by the FASB that will not require adoption until a future date and will impact the preparation of the financial statements will not have a material effect upon adoption. Tax Considerations As a result of operating losses incurred by the Company, the Company has net operating losses ("NOL") that can be used to offset future earnings. Federal tax laws provide that net operating loss carryforwards are restricted or eliminated upon certain changes of control. Applicable federal tax laws provide that a 50% "change of control," which is calculated over a rolling three-year period, would cause the loss of substantially all of the NOL. The Company believes its maximum cumulative change of control during the relevant three-year period was less than 50%. The Company's net deferred tax asset was $12.0 million at both June 30, 2000 and December 31, 1999. The amount of the deferred tax asset is deemed appropriate by management based on its belief that it is more likely than not that it will realize the benefit of this deferred tax asset, given the levels of historical taxable income and current projections for future taxable income over the periods in which the deferred tax asset would be realized. Should the Company deem that the realization of the benefit of the deferred tax asset is unlikely, then, the asset would need to be adjusted to net realizable value. The Company had a federal NOL of approximately $87.9 million at June 30, 2000. The current tax expense results from "excess inclusion income." Excess inclusion income is a result of the Company securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss from operations. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. The extraordinary gain on the extinguishment of debt (discussed below) is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in income tax expense. Hedging Activities The Company's profitability may be directly affected by fluctuations in interest rates. While the Company monitors interest rates it may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. While no hedging strategy is currently being utilized, the Company's interest rate hedging strategy may include shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements. Since the interest rates on the Company's warehouse line of credit used to fund and acquire loans is variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale could have a material adverse effect on the Company's results of operations and financial condition. The ultimate sale of the Company's loans generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. Without hedging these loans, increases in interest rates prior to sale of the loans may reduce the gain on sale or securitization of loans earned by the Company. There were no significant open hedging positions at either June 30, 2000 or December 31, 1999. 27 Impact of Inflation Inflation affects the Company most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates that affect the Company's ability to earn a spread between interest received on its loans and the costs of its borrowings. The profitability of the Company is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the ability of the Company to originate and purchase loans and affect the mix of first and second-lien mortgage loan products. Generally, first-lien mortgage production increases relative to second-lien mortgage production in response to low interest rates and second-lien mortgage production increases relative to first-lien mortgage production during periods of high interest rates. A significant decline in interest rates could decrease the size of the Company's loan servicing portfolio by increasing the level of loan prepayments. Additionally, to the extent servicing rights and residual receivables have been capitalized on the books of the Company, higher than anticipated rates of loan prepayments or losses could require the Company to write down the value of such servicing rights and residual receivables, adversely impacting earnings. Fluctuating interest rates may also affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sales and the interest paid by the Company for funds borrowed under the Company's warehouse line of credit. 28 ITEM 3. DISCLOSURES ABOUT MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Company's market risk arises primarily from interest rate risk inherent in its lending, its holding of residual receivables and its investor savings activities. The structure of the Company's loan and investor savings portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with senior management. Senior management regularly reviews the Company's interest rate risk position and adopts balance sheet strategies that are intended to optimize operating earnings while maintaining market risk within acceptable limits. To estimate the impact that changes in interest rates would have on the Company's earnings, management uses simulation analysis. While the Company monitors interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. The Company's strategy for 2000 is to sell its loans within one month of production. Because the interest rates on the Company's warehouse lines of credit used to fund and acquire loans are variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale may reduce the gain on loan sales earned by the Company. There were no significant open hedging positions as of June 30, 2000. 29 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- On February 26, 1999, the Company received notification from Transamerica Small Business Capital, Inc. ("Transamerica") claiming that a loan in the original principal amount of $1.1 million sold to it pursuant to an asset purchase agreement dated October 2, 1998 was not made by the Company in accordance with stated representations. Transamerica has filed an action in the Circuit Court of Cook County, Illinois seeking to recover the loan amount from the Company's $5.3 million that is being maintained by the trustee, which is reflected as restricted cash on the Company's balance sheet. On June 21, 2000, Transamerica amended its complaint to add another loan, claiming damage of "not less than $200,000," and allegations concerning servicing fee income claiming damage of "not less than $116,000." While management does not believe the Company has any liability relating to these claims, and the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this time. As a part of the agreement to sell Sterling Lending ("SLC") in 1998, the Company guaranteed certain leases of office space used by SLC. In 1999, SLC filed for bankruptcy protection and due to the financial situation of SLC, the Company has been asked to perform under certain of the guarantees. The Company is resolving each lease through active negotiations with the landlords, and management feels that the resolution of these guarantees will not be material to the financial statements of the Company. On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins filed a purported class action lawsuit in New Hanover County, North Carolina Superior Court. The suit was filed against a subsidiary of the Company and others alleging a variety of statutory and common law claims arising out of mortgage loans they obtained through Chase Mortgage Brokers ("Chase"). Since that time, four additional suits have been filed in New Hanover County by plaintiffs claiming to be similarly situated to the Tomlins. The plaintiffs in these cases are seeking unspecified monetary damages. As to the Company's subsidiary, the complaint alleges participation by the Company's subsidiary in an arrangement with Chase under which Chase allegedly charged excessive fees and interest to the consumers, and under which Chase allegedly received undisclosed premiums. There has been no class certification, and the Company intends to contest these cases vigorously. Because these matters are in their early stages, it is not possible to evaluate the likelihood of an unfavorable outcome or estimate the amount of potential loss. On April 4, 2000, the Company received notice of a suit filed against it by Danka Funding Company, LLC ("Danka") in New Jersey Superior Court. In the suit, Danka seeks recovery of $355,865.80 allegedly due under copier equipment leases. While management does not believe the Company has any liability relating to this claim, and while the Company intends to defend itself vigorously, it is not possible to evaluate the likelihood of an unfavorable outcome at this early stage. The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. Item 2. Changes in Securities --------------------- On April 28, 2000, the shareholders of the Company approved amendments to the Company's Articles of Incorporation (1) reducing the par value of the Company's common stock from $0.05 to $0.001, (2) providing that no shareholder shall have a right to cumulate votes with respect to the election of directors and (3) authorizing the issuance of up to 20,000,000 shares of "blank check" preferred stock. 30 In connection with consummation of the Merger of HomeSense into HomeGold, Inc. the Company's Board of Directors designated 15,300,000 shares of the "blank check" preferred stock as Series A Non-convertible Preferred Stock with a par value of $1.00 per share. For a description of the terms of the Series A Non-Convertible Preferred Stock and the effect of such terms on the Company's common stock see "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - The Merger - Summary of the Merger - Principal terms of the Series A Non-convertible Preferred Stock" which description is incorporated herein by reference. The Company issued 6,780,944 shares of its common stock and 10,000,000 shares of its Series A Non-convertible Preferred Stock to the shareholders of HomeSense in exchange for all of the outstanding stock of HomeSense. The Company issued these securities without registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. In connection with the consummation of the Merger on May 9, 2000, the Company issued a warrant to purchase 250,000 shares of its common stock at an exercise price of $1.50 per share to Raymond James and Associates, Inc. in partial consideration for the delivery to the Company of a fairness opinion regarding the Merger. The warrant was exercisable on issuance, expires five years from the date of issuance and is transferable. The Company issued the warrant without registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. Also in connection with the Merger on May 9, 2000, the Company issued a non-transferable option to purchase 825,423 shares of its common stock at $1.75 per share to Ronald J. Sheppard, the pre-Merger owner of most of the shares of the stock of HomeSense, in connection with his entry into employment by the Company as its President and Chief Executive Officer. The option granted to Mr. Sheppard is intended to prevent his ownership of the Company's common stock from being diluted by the exercise by third parties of certain other outstanding options and warrants, including the warrant issued to Raymond James and Associates, Inc. (the "Other Options"). If any Other Options are exercised, Mr. Sheppard's option vests with respect to 67 shares of the Company's common stock for every 100 shares received upon exercise of Other Options, and Mr. Sheppard has 180 days from the vesting date in which to exercise his option with respect to those shares. If any Other Options lapse, Mr. Sheppard's option lapses with respect to 67 shares for every 100 shares of Other Options that lapse. The Company issued these securities without registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving a public offering. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The shareholders of the Company voted on the election of directors and 6 other proposals at the Annual Meeting of Shareholders on April 28, 2000.
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 31 3. Proposal to approve the Reorganization Agreement Between HomeGold and HomeSense Financial Corp., and Affiliated Companies (including the Plan of Merger set forth therein) and the issuance of 6,780,944 shares of common stock, 11,000,000 shares of Series A non-convertible, preferred stock, a warrant to purchase 250,000 shares of common stock of HomeGold, and options to purchase 825,423 shares of common stock. Approved. For 7,302,397 Against 144,130 Abstained 18,813 Broker non-votes 1,964,217 4. Proposal to approve an amendment to the Company's Articles of Incorporation to authorize issuance of 20,000,000 shares of "Blank Check" preferred stock. Approved. For 6,951,135 Against 473,132 Abstained 41,073 Broker non-votes 1,964,217 5. Proposal to amend the Company's Employee Stock Purchase Plan to increase by 400,000 shares the number of shares authorized for issuance under the plan to a total of 600,000 shares. Approved. For 7,117,625 Against 324,783 Abstained 22,932 Broker non-votes 1,964,217 6. The proposal to amend the Company's Articles of Incorporation to provide that no shareholder shall have a right to cumulate votes with respect to the election of directors (the "Cumulative Vote Amendment"). Approved. For 6,817,903 Against 586,522 Abstained 60,915 Broker non-votes 1,964,217 7. The proposal to reduce the par value of the common stock from $0.05 per share to $0.001 per share. Approved. For 6,994,358 Against 411,697 Abstained 59,285 Broker non-votes 1,964,217 Item 5. Other Information ----------------- Until April 28, 2000, the Company's common stock was traded on the NASDAQ National Market under the symbol "HGFN". On April 28, 2000, the Company's common stock was delisted from the Nasdaq National Market. See Item 6(b) Reports on Form 8-K which information is incorporated herein by reference. The Company's stock is currently traded on the Over the Counter Bulletin Board under the same symbol, HGFN. The Company filed a report on Form 8-K dated April 20, 2000 to disclose Nasdaq's intention to delist the Company's stock. In connection with the proposed merger with HomeSense Financial Corp., the Nasdaq staff believes that the proposed merger will result in a change of control and change in financial structure. As such, under Marketplace Rule 4430(f), the surviving company, HomeGold Financial, Inc. (the "Company" or "HomeGold"), will be required to submit an initial application and meet all initial Nasdaq National Market inclusion criteria. However, based on a review of the Company, the Nasdaq staff believes that the Company will not meet certain initial inclusion criteria. Accordingly, the staff has determined to delist HomeGold's securities from the Nasdaq National Market effective with the opening of business on April 28, 2000. Absent the HomeSense merger, HomeGold could have been delisted from Nasdaq for failure to meet the maintenance criteria for listing. 32 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. 33 The entities comprising HomeSense are as follows: HomeSense Financial Corp. EMMCO The Mortgage Service Station Inc. Doc-Write, Inc. Columbia Media Corp. EMC Holding Corp. EMC Training Corp. EMC Underwriting Corp. EMMCO The Mortgage Service Station of Alabama Inc. EMMCO The Mortgage Service Station of Texas Inc. Equitable Mortgage Corp. of Charleston Equitable Mortgage Corp. of Charlotte Equitable Mortgage Loan Center Corp. Equitable Mortgage Management Corp. HomeSense Financial Corp. of Alabama HomeSense Financial Corp. of Baton Rouge HomeSense Financial Corp. of Jackson HomeSense Financial Corp. of Little Rock HomeSense Financial Corp. of Memphis HomeSense Financial Corp. of Orlando HomeSense Financial Corp. of Savannah Mortgage Avenue, Corp. Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits -------- 2.1 Amendment #2 to Reorganization Agreement dated May 1, 2000. 2.2 Amendment #3 to Reorganization Agreement dated May 9, 2000. 3.1.1 Articles of Amendment to Articles of Incorporation of the Company filed with the South Carolina Secretary of State on May 9, 2000 reducing par value of common stock from $0.05 per share to $0.001 per share, eliminating cumulative voting with respect to election of directors and authorizing issuance of up to 20,000,000 shares of blank check preferred stock. 3.1.2 Articles of Amendment to Articles of Incorporation of the Company filed with the South Carolina Secretary of State on May 9, 2000 containing Certificate of Designation of Series A Non-convertible Preferred Stock of the Company. 10.1 See exhibits 2.1 and 2.2. 10.2.1 Amendment to the Company's 1995 Employee and Officer Stock Option Plan increasing number of shares authorized for grant by 500,000 to a total of 1,466,667 shares. 10.2.2 Amendment to the Company's 1995 Employee and Officer Stock Option Plan increasing number of shares authorized for grant by 500,000 to a total of 1,966,667 shares. 10.3.1 Fourth Amendment dated May 2, 2000, to Mortgage Loan Warehousing Agreement dated June 30, 1998 as amended, by and among HomeGold, Inc., Carolina Investors, Inc., the Financial Institutions Party thereto, and The CIT Group/Business Credit, Inc. as administrative agent. 10.3.2 Amendment No. 1 dated May 2, 2000, to Security Agreements dated June 30, 1998 of HomeGold, Inc. and Carolina Investors, Inc. 10.4.1 $40,000,000 Warehousing Line Revolving Credit Agreement by and between HomeGold, Inc. and Household Commercial Financial Services, Inc. dated as of May 2, 2000. 10.4.2 Security Agreement dated May 2, 2000 of HomeGold, Inc., the other entities listed on the signature pages thereto and Household Commercial Financial Services, Inc. 10.4.3 Guaranty dated May 2, 2000 of HomeGold Financial, Inc. and certain of its subsidiaries. 34 10.5 Severance Agreement dated April 28, 2000 between the Company and Keith B. Giddens. 10.6 Severance Agreement dated May 12, 2000 between the Company and John W. Crisler. 10.7 Form of Severance Agreement between the Company and employees listed in the schedule therewith. 10.8 Employment Agreement dated May 9, 2000 between the Company and Ronald J. Sheppard. 10.9 Mutual Indemnity Agreement dated May 9, 2000 between Ronald J. Sheppard and the Company. 10.10 Registration Rights Agreement dated May 9, 2000 between the Company and the individuals listed on Schedule 1 thereto. 10.11 Form of Stock Restriction Agreement. 27.1 Financial Data Schedule. b) Reports on Form 8-K ------------------- NASDAQ delisting on 4/20/00 - The Company filed a report on Form 8-K dated April 20, 2000 to disclose Nasdaq's intention to delist the Company's stock. Other events - The Company filed a report on Form 8-K dated July 13, 2000 to disclose the departure of the Company's Chief Financial Officer and the appointment of the interim Chief Financial Officer. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOMEGOLD FINANCIAL, INC. Date: August 22, 2000 By: \s\ Ronald J. Sheppard --------------------------------------- Ronald J. Sheppard. Chief Executive Officer Date: August 22, 2000 By: \s\ William Long --------------------------------------- William Long Executive Vice President, Acting Chief Financial Officer 36