-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JeDp7NdoCE1//qZw23HERYHefXTCtzHTjPqWZj17jkgCNBxbi7LcINbW0uOzEHEA tjIsfvmR2rrXFcSXSKcByw== /in/edgar/work/0000950168-00-002448/0000950168-00-002448.txt : 20001116 0000950168-00-002448.hdr.sgml : 20001116 ACCESSION NUMBER: 0000950168-00-002448 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEGOLD FINANCIAL INC CENTRAL INDEX KEY: 0000277028 STANDARD INDUSTRIAL CLASSIFICATION: [6141 ] IRS NUMBER: 570513287 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08909 FILM NUMBER: 768339 BUSINESS ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8642895400 MAIL ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 FORMER COMPANY: FORMER CONFORMED NAME: EMERGENT GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NRUC CORP DATE OF NAME CHANGE: 19911002 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL RAILWAY UTILIZATION CORP DATE OF NAME CHANGE: 19840813 10-Q 1 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 SEPTEMBER 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 October 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 16,810,149 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES Form 10-Q Quarter Ended SEPTEMBER 30, 2000
INDEX PART I. FINANCIAL INFORMATION Page - ------ --------------------- ---- Item 1. Financial Statements for HomeGold Financial, Inc. Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the Nine Months Ended September 30, 2000 and 1999 and for the Three Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 5 Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 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 30 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings 31 Item 2. Changes in Securities 31 Item 3. Defaults Upon Senior Securities 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Item 5. Other Information 31 Item 6. Exhibits and Reports on Form 8-K 32
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC. HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2000 1999 -------------- ------------- (In thousands) ASSETS (Unaudited) (Audited) Cash and cash equivalents $ 9,921 $ 26,009 Restricted cash 6,069 5,314 Loans receivable 69,450 62,958 Less allowance for credit losses on loans (4,246) (6,344) -------------- ------------- Net loans receivable 65,204 56,614 Income taxes receivable 341 461 Accrued interest receivable 1,822 1,423 Other receivables 10,558 8,059 Residual receivable, net 61,477 47,770 Property and equipment, net 22,134 17,160 Real estate and personal property acquired through foreclosure 1,769 7,673 Excess of cost over net assets of acquired businesses, net of accumulated amortization of $1,389 in 2000 and $748 in 1999 20,443 1,566 Debt origination costs, net 442 1,658 Deferred income tax asset, net 22,000 12,000 Servicing asset 732 867 Other assets 3,050 2,163 -------------- ------------- Total assets $ 225,962 $ 188,737 =============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving warehouse lines of credit $ 37,632 17,808 Other borrowings 3,661 -- Investor savings: Notes payable to investors 141,776 127,065 Subordinated debentures 19,054 17,710 -------------- ------------- Total investor savings 160,830 144,775 Senior unsecured debt 11,214 12,134 Other liabilities: Accounts payable and accrued liabilities 7,022 4,120 Remittances payable 892 1,078 Income taxes payable 458 120 Accrued interest payable 1,640 845 -------------- ------------- Total other liabilities 10,012 6,163 -------------- ------------- Total liabilities 223,349 180,880 Minority interest 6 13 Shareholders' equity: Preferred stock, par value $1.00 per share- authorized 20,000,000 shares, issued and outstanding 10,000,000 shares at September 30, 2000 and 0 shares at December 31, 1999 10,000 -- Common stock, par value $.001 per share at September 30, 2000 and 0.05 at December 31, 1999- authorized 100,000,000 shares, issued and outstanding 16,810,149 shares at September 30, 2000 and 10,149,629 shares at December 31, 1999 17 507 Capital in excess of par value 46,643 39,028 Note receivable from shareholder (5,908) -- Retained earnings (deficit) (48,145) (31,691) -------------- ------------- Total shareholders' equity 2,607 7,844 Total liabilities and shareholders' equity $ 225,962 $ 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 Nine Months Ended For the Three Months Ended September 30, September 30, --------------------------------- ------------------------------ 2000 1999 2000 1999 ------------- ------------ ------------ ------------- (In thousands, except share data) REVENUES: Interest income $ 9,390 $ 6,727 $ 3,784 $ 1,771 Servicing income 6,127 7,616 1,907 2,606 Gain on sale of loans 8,498 4,459 3,554 70 Loan fees, net 12,977 3,089 6,926 716 ------------- ------------ ------------- ------------- Total revenue from loans and investments 36,992 21,891 16,171 5,163 Other revenues 1,512 1,159 573 409 ------------- ------------ ------------- ------------- Total revenues 38,504 23,050 16,744 5,572 ------------- ------------ ------------- ------------- EXPENSES: Interest 14,564 12,765 5,680 3,778 Provision for credit losses 2,292 1,323 650 1,672 Cost on real estate owned and defaulted loans 2,841 2,140 914 729 Fair value write-down of residual receivable 2,143 1,631 509 856 Salaries, wages and employee benefits 21,337 15,860 8,469 4,957 Business development costs 6,012 3,757 2,136 1,330 Other general and administrative expenses 15,830 9,716 6,528 2,920 ------------- ------------ ------------- ------------- Total expenses 65,019 47,192 24,886 16,242 ------------- ------------ ------------- ------------- Loss before income taxes, minority interest and extraordinary item (26,515) (24,142) (8,142) (10,670) Provision for (benefit from) income taxes (9,485) 675 (9,820) 55 ------------- ------------ ------------- ------------- Income (loss) before minority interest and extraordinary item (17,030) (24,817) 1,678 (10,725) Minority interest in loss of subsidiaries (3) (7) (2) (3) ------------- ------------ ------------- ------------- Income (loss) before extraordinary item (17,033) (24,824) 1,676 (10,728) Extraordinary item-gain on extinguishment of debt, net of $0 tax 579 29,370 261 8,143 ------------- ------------ ------------- ------------- Net income (loss) $ (16,454) $ 4,546 1,937 $ (2,585) ============= ============ ============= ============= Basic and diluted earnings (loss) per share of common stock: Income (loss) before extraordinary item $ (1.25) $ (2.49) 0.10 $ (1.07) Extraordinary item, net of taxes 0.04 2.94 0.02 0.81 ------------- ------------ ------------- ------------- Net income (loss) $ (1.21) $ 0.45 0.12 $ (0.26) ============= ============ ============= ============= Basic and diluted weighted average shares outstanding 13,651,181 9,983,479 16,805,023 10,070,150 ============= ============ ============= =============
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 Nine Months Ended September 30, ----------------------------------- 2000 1999 --------------- ---------------- (In thousands) OPERATING ACTIVITIES: Net income (loss) $ (16,454) $ 4,546 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,709 2,065 Provision for credit losses on loans 2,292 1,323 Gain on retirement of senior unsecured debt (579) (29,370) Loss on real estate acquired through 1,380 355 foreclosure Fair value write-down of residual receivable 2,143 1,631 Loans originated with intent to sell (441,223) (181,944) Proceeds from loans sold 374,971 163,332 Proceeds from securitization of loans 44,588 59,630 Other (10,300) 993 Net changes in operating assets and (27,015) (10,267) liabilities -------------- --------------- Net cash provided by (used in) operating activities $ (67,488) $ 12,294 -------------- --------------- INVESTING ACTIVITIES: Loans originated or purchased for investment purposes $ (409) $ (1,815) Principal collections on loans not sold 40,948 16,332 Proceeds from sale of real estate and personal property acquired through foreclosure 9,710 6,637 Proceeds from sale of property and equipment 45 199 Purchase of property and equipment (147) (549) Loan to shareholder (5,908) -- Other (2,867) (6,686) -------------- --------------- Net cash provided by investing activities $ 41,372 $ 14,118 -------------- --------------- FINANCING ACTIVITIES: Advances on revolving warehouse lines of credit $ 557,878 $ 210,023 Payments on revolving warehouse lines of credit (563,637) (223,437) Retirement of senior unsecured debt (341) (44,871) Net increase (decrease) in notes payable to investors (7,510) 6,294 Net increase (decrease) in subordinated debentures 23,565 2,178 Proceeds from issuance of common stock 73 179 -------------- --------------- Net cash provided by (used in) financing activities $ 10,028 $ (49,634) -------------- --------------- Net decrease in cash and cash equivalents $ (16,088) $ (23,222) CASH AND CASH EQUIVALENTS: Beginning of period 26,009 36,913 -------------- --------------- End of period $ 9,921 $ 13,691 ============== ===============
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 Nine Months Ended September 30, 2000 and 1999
Common Stock Note --------------------- Capital in Receivable Retained Total Shares Excess of Preferred from Earnings Shareholders' Issued Amount Par Value Stock Shareholder (Deficit) Equity ----------- -------- ---------- --------- ----------- --------- ------------- Balance at December 31, 1998 9,733,374 $ 486 $38,821 $ -- $ -- $(33,506) $ 5,801 Shares issued: Exercise of stock options 3,200 -- 3 -- -- -- 3 Employee Stock Purchase Plan 102,604 5 39 -- -- -- 44 Officer/Director Compensation 310,783 16 165 -- -- -- 181 Other shares issued (332) -- -- -- -- -- -- Net income -- -- -- -- -- 1,815 1,815 ------------ ------ -------- ------- -------- ---------- --------- Balance at December 31, 1999 10,149,629 507 39,028 -- -- (31,691) 7,844 Change in par from $0.05 to $0.001 -- (490) 490 -- -- -- -- Shares issued: Employee Stock Purchase Plan 46,606 1 35 -- -- -- 36 Officer/Director Compensation 61,540 3 45 -- -- -- 48 Share Cancellation (228,570) (11) (11) Shares issued in HomeSense Merger 6,780,944 7 7,045 -- -- -- 7,052 Shares issued in HomeSense Merger -- -- -- 10,000 -- -- 10,000 Note Receivable from Shareholder -- -- -- -- (5,908) -- (5,908) Net income -- -- -- -- (16,454) (16,454) ------------ ------ -------- ------- -------- ---------- --------- Balance at September 30, 2000 16,810,149 $ 17 $46,643 $10,000 $(5,908) $(48,145) $ 2,607 ============ ====== ======== ======= ======== ========== =========
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 September 30, 2000, and the consolidated statements of operations for the nine-month and three-month periods ended September 30, 2000 and 1999, and the consolidated statements of cash flows for the nine-month periods ended September 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 (approximately 40% of post-merger shares outstanding) valued at $1.04 per share plus an additional 10 million shares of Series A Non-convertible Preferred Stock (par value $1 per share) for 100% of the outstanding stock of HomeSense. The merger was accounted for under the purchase method of accounting prescribed by generally accepted accounting principles. The transaction resulted in $19.5 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 Nine Months Ended September 30, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 48,426 $ 33,636 Income before extraordinary items (17,751) (25,301) Net income (16,648) 4,320 Earnings per share (0.99) 0.26
The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies that might be achieved from combined operations. The pro forma results do not necessarily represent results that would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. 7 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3--CASH FLOW INFORMATION For the nine-month periods ended September 30, 2000 and 1999, the Company paid interest of $13.8 million and $15.5 million, respectively. For the nine-month periods ended September 30, 2000 and 1999, the Company paid income taxes of $177,000 and $1.0 million, respectively. For the nine-month periods ended September 30, 2000 and 1999, the Company foreclosed on property in the amount of $2.3 million and $3.3 million, respectively. During the nine months ended September 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 September 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 $9.8 million. The investments were secured by U.S. Government securities pledged by the banks. The Company considers all highly liquid investments readily convertible to cash or having an original maturity of three months or less to be cash equivalents. 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 the first nine months of 2000 and 1999 were $64.5 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. Certain loans included in that securitization were ineligible for inclusion in the borrowing base under the Company's warehouse line of credit. During 2000, the Company completed two securitization transactions. The first transaction occurred in the second quarter of the year involving $41.6 million of loans securitized substantially at par value. The second transaction occurred in the third quarter of the year and included $22.9 million of loans. This transaction carried a weighted average premium of 1.16%. Both 2000 securitizations consisted primarily of mortgage loans not eligible for inclusion in the borrowing base under the Company's warehouse lines of credit and not readily marketable for the secondary market. In August 2000, the Company exceeded the twelve month rolling loss trigger in the 1998 securitization pool which resulted in approximately $173,000 of cash flow being retained by the trustee that would have been paid to the Company. At which time the Company returns performance of this pool below the required trigger, the return of cash flow back to the Company will continue. While the Company has not yet exceeded any other triggers, it has had to continually monitor the performance of the pools for which it services. Should any trigger threshold be exceeded, certain cash flows would be retained by the trustee as defined in the securitization agreements as increased overcollateralization. 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 September 30, 2000, the maximum commitment was $38 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 $5.1 million at September 30, 2000 and $18.9 million at December 31, 1999. After considering outstanding borrowings under the line of credit of $4.9 million and $17.8 million, respectively, the Company had $200,000 and $1.1 million, respectively, of immediate availability under this agreement on September 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 0.25% and is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum net worth of the Company of $10,000,000 commencing August 31, 2000, a leverage ratio of less than 35 to 1, and positive consolidated net income for each quarter beginning on or after July 1, 2000. The revolving credit agreement had an original maturity date of April 30, 2001. The revolving credit agreement was subsequently amended under an amendment and forbearance agreement whereby the lender agreed to forebear from exercising its rights on account of existing events of default and whereby the maturity date was amended to January 25, 2001. The advance rate was also amended to 97% from 100% for all loans made after October 23, 2000. Availability under the credit agreement is determined based on eligible collateral as defined 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 9 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS level based on eligible collateral of $21.8 million at September 30, 2000. After considering outstanding borrowings under the line of credit of $21.8 million, the Company had no immediate availability under this agreement at September 30, 2000. Prior to the merger, HomeSense had a $25 million revolving purchase facility with Residential Mortgage Services of Texas ("RMST"). This agreement was amended at the time of the merger to extend to the merged entity. The agreement is structured as a purchase of the mortgages by RMST, subject to a limited right of RMST to require the repurchase of defective mortgages by the Company. The facility bears interest at the prime rate plus 0.75%. At September 30, 2000, the Company had outstanding purchased mortgages of $10.9 million on the facility. The Company received a notice of termination of the facility on September 19, 2000. The termination notice reduces the commitment amount in five phases leading to full termination of the facility on December 31, 2000. At September 30, 2000, the maximum commitment was $15.0 million. The Company believes that no event of default has occurred on its warehouse lines of credit for which it has not obtained a waiver or forbearance. 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 was scheduled to mature on November 2, 2000. The Company has received a commitment from Bank of America to extend the loan maturity date to March 2, 2001. The note bears interest at the prime rate plus 1.5%. The note is secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a parcel of real estate 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 nine months ended September 30, 2000 and the year ended December 31, 1999, the Company purchased $920,000 and $74.5 million, respectively, in aggregate principal amount of its Senior Notes in open market transactions. The Company recognized extraordinary gains from extinguishment of debt of $579,000 for the purchases made during the nine months ended September 30, 2000 and $29.5 million for its purchases during the year ended December 31, 1999. The Company recorded an extraordinary gain on extinguishment of debt of $261,000 in the third quarter of 2000, and $8.1 million in the third quarter of 1999. Remaining Senior Notes outstanding as of September 30, 2000 totaled $11.2 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 September 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. 10 HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 September 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 September 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. 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 September 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 September 30, 2000 (Unaudited) (In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ -------------- ------------ ------------ ASSETS Cash and cash equivalents $ 204 9,716 1 -- $ 9,921 Restricted cash 5,069 1,000 -- -- 6,069 Loans receivable: Loans receivable -- 69,450 -- -- 69,450 Notes receivable from other affiliates 7,686 54,807 11,767 (74,260) -- ---------- ------------ -------------- ------------ ------------ Total loans receivable 7,686 124,257 11,767 (74,260) 69,450 Less allowance for credit losses on loans -- (4,246) -- -- (4,246) ---------- ------------ -------------- ------------ ------------ Net loans receivable 7,686 120,011 11,767 (74,260) 65,204 Income tax receivable -- 341 -- -- 341 Accrued interest receivable 79 1,743 -- -- 1,822 Other receivables -- 10,558 -- -- 10,558 Investment in subsidiaries 40,304 43,439 -- (83,743) -- Residual receivable, net 1,000 20,271 40,206 -- 61,477 Property and equipment, net -- 22,134 -- -- 22,134 Real estate and personal property acquired through foreclosure -- 1,769 -- -- 1,769 Excess of cost over net assets of acquired businesses, net 36 20,407 -- -- 20,443 Deferred income tax asset, net 1,810 20,190 -- -- 22,000 Other assets 236 3,988 -- -- 4,224 ---------- ------------ -------------- ------------ ------------ Total assets $ 56,424 $ 275,567 $ 51,974 $ (158,003) $ 225,962 ========== ============ ============== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving warehouse lines of credit and other borrowings $ -- $ 41,293 $ -- $ -- $ 41,293 Investor savings: Notes payable to investors -- 141,776 -- -- 141,776 Subordinated debentures -- 19,054 -- -- 19,054 ---------- ------------ -------------- ------------ ------------ Total investor savings -- 160,830 -- -- 160,830 Senior unsecured debt 11,214 -- -- -- 11,214 Other liabilities: Accounts payable and accrued liabilities -- 7,022 -- -- 7,022 Remittances payable -- 892 -- -- 892 Income taxes payable -- 458 -- -- 458 Accrued interest payable 27 1,613 -- -- 1,640 Due to (from) affiliates -- 23,155 8,528 (31,683) -- ---------- ------------ -------------- ------------ ------------ Total other liabilities 27 33,140 8,528 (31,683) 10,012 Subordinated debt to affiliates 42,576 -- -- (42,576) -- ---------- ------------ -------------- ------------ ------------ Total liabilities 53,817 235,263 8,528 (74,259) 223,349 Minority interest -- (1) 7 -- 6 Shareholders' equity: Common stock 17 1,000 2 (1,002) 17 Preferred stock 10,000 -- -- -- 10,000 Capital in excess of par value 46,643 141,902 48,807 (190,709) 46,643 Note receivable from shareholder (5,908) (5,908) -- 5,908 (5,908) Retained earnings (deficit) (48,145) (96,689) (5,370) 102,059 (48,145) ---------- ------------ -------------- ------------ ------------ Total shareholders' equity 2,607 40,305 43,439 (83,744) 2,607 ---------- ------------ -------------- ------------ ------------ Total liabilities and shareholders' equity $ 56,424 275,567 51,974 (158,003) $ 225,962 ========== ============ ============== ============ ============
12 HOMEGOLD FINANCIAL, INC. CONSOLIDATING BALANCE SHEETS December 31, 1999 (Unaudited) (In thousands)
Combined Wholly-Owned Combined Parent Guarantor Non-Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------- ------------ ------------ ASSETS Cash and cash equivalents $ 202 $ 25,806 $ 1 $ -- $ 26,009 Restricted cash 5,314 -- -- -- 5,314 Loans receivable: Loans receivable -- 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 Nine Months Ended September 30, 2000 (Unaudited) (In thousands)
Combined Combined Wholly-Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ----------- ----------- REVENUES: Interest income $ 866 $ 11,835 $ -- $ (3,311) $ 9,390 Servicing income -- 641 5,486 -- 6,127 Gain on sale of loans -- 8,498 -- -- 8,498 Loan fees, net -- 12,977 -- -- 12,977 ----------- ------------- ------------ ----------- ----------- Total revenue from loans and investments 866 33,951 5,486 (3,311) 36,992 Other revenues -- 1,556 -- (44) 1,512 ----------- ------------- ------------ ----------- ----------- Total revenues 866 35,507 5,486 (3,355) 38,504 EXPENSES: Interest 3,721 14,154 -- (3,311) 14,564 Provision for credit losses -- 2,292 -- -- 2,292 Costs on REO and defaulted loans -- 2,841 -- -- 2,841 Fair market write-down of residual receivable -- 2,019 124 -- 2,143 Salaries, wages and employee benefits -- 21,337 -- -- 21,337 Business development costs -- 6,012 -- -- 6,012 Restructuring charges -- 2,375 -- -- 2,375 Other general and administrative expenses 150 13,349 -- (44) 13,455 ----------- ------------- ------------ ----------- ----------- Total expenses 3,871 64,379 124 (3,355) 65,019 ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest, and equity in undistributed earnings (loss) of subsidiaries (3,005) (28,872) 5,362 -- (26,515) Earnings (loss) of subsidiaries (12,328) 5,842 -- 6,486 -- ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest and extraordinary item (15,333) (23,030) 5,362 6,486 (26,515) Provision (benefit) for income taxes 1,700 (11,185) -- -- (9,485) -------- ---------- --------- -------- -------- Income (loss) before minority interest and extraordinary item (17,033) (11,845) 5,362 6,486 (17,030) Minority interest in loss of subsidiaries -- -- (3) -- (3) ----------- ------------- ------------ ----------- ----------- Net income before extraordinary item (17,033) (11,845) 5,359 6,486 (17,033) Extraordianary item - gain on extinquishment of debt 579 -- -- -- 579 ----------- ------------- ------------ ----------- ----------- Net income (loss) $ (16,454) $ (11,845) $ 5,359 $ 6,486 $ (16,454) =========== ============= ============ =========== ===========
Nine Months Ended September 30, 1999 (Unaudited) (In thousands)
Combined Combined Wholly-Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ----------- ----------- REVENUES: Interest income $ 3,260 $ 6,519 $ -- $ (3,052) $ 6,727 Servicing income -- 3,794 3,822 -- 7,616 Gain on sale of loans -- 4,459 -- -- 4,459 Loan fees, net -- 3,089 -- -- 3,089 ----------- ------------- ------------ ----------- ----------- Total revenue from loans and investments 3,260 17,861 3,822 (3,052) 21,891 Other revenues 8 1,141 10 -- 1,159 ----------- ------------- ------------ ----------- ----------- Total revenues 3,268 19,002 3,832 (3,052) 23,050 EXPENSES: Interest 4,022 11,795 -- (3,052) 12,765 Provision for credit losses -- 1,323 -- -- 1,323 Fair market write-down of residual receivable -- 1,362 269 -- 1,631 Salaries, wages and employee benefits -- 15,860 -- -- 15,860 Business development costs -- 3,757 -- -- 3,757 Other general and administrative expenses 356 11,499 1 -- 11,856 ----------- ---------- ------------ ----------- ----------- Total expenses 4,378 45,596 270 (3,052) 47,192 ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest, and equity in undistributed earnings (loss) of subsidiaries (1,110) (26,594) 3,562 -- (24,142) Earnings (loss) of subsidiaries (23,714) -- -- 23,714 -- ----------- ------------- ------------ ----------- ----------- Income (loss) before income taxes, minority interest and extraordinary item (24,824) (26,594) 3,562 23,714 (24,142) Provision (benefit) for income taxes -- 675 -- -- 675 ----------- ------------- ------------ ----------- ----------- Income (loss) before minority interest and extraordinary item (24,824) (27,269) 3,562 23,714 (24,817) Minority interest in loss of subsidiaries -- (7) -- -- (7) ----------- ------------- ------------ ----------- ----------- Net income before extraordinary item (24,824) (27,276) 3,562 23,714 (24,824) Extraordianary item - gain on extinquishment of debt 29,370 -- -- -- 29,370 ----------- ------------- ------------ ----------- ----------- Net income (loss) $ 4,546 $ (27,276) $ 3,562 $ 23,714 $ 4,546 =========== ============= ============ =========== ===========
14 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 2000 (Unaudited) (In thousands)
Combined Combined Wholly-Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ------------ ------------ REVENUES: Interest income $ 266 $ 4,489 $ -- $ (971) $ 3,784 Servicing income -- (71) 1,978 -- 1,907 Gain on sale of loans -- 3,554 -- -- 3,554 Loan fees, net -- 6,926 -- -- 6,926 ---------- ------------ ----------- ----------- ----------- Total revenue from loans and investments 266 14,898 1,978 (971) 16,171 Other revenues -- 588 -- (15) 573 ---------- ------------ ----------- ----------- ----------- Total revenues 266 15,486 1,978 (986) 16,744 EXPENSES: Interest 1,082 5,569 -- (971) 5,680 Provision for credit losses -- 650 -- -- 650 Cost on REO and defaulted loans -- 914 -- -- 914 Fair market write-down of residual receivable -- 1,938 (1,429) -- 509 Salaries, wages and employee benefits -- 8,469 -- -- 8,469 Business development costs -- 2,360 -- -- 2,360 Other general and administrative expenses 34 6,285 -- (15) 6,304 ---------- ------------ ----------- ----------- ----------- Total expenses $ 1,116 $ 26,185 $ (1,429) $ (986) $ 24,886 ---------- ------------ ----------- ----------- ----------- Income (loss) before income taxes, minority interest, and equity in undistributed earnings (loss) of subsidiaries (850) (10,699) 3,407 -- (8,142) Earnings (loss) of subsidiaries 4,226 5,842 -- (10,068) -- ---------- ------------ ----------- ----------- ----------- Income (loss) before income taxes, minority interest and extraordinary item 3,376 (4,857) 3,407 (10,068) (8,142) Provision (benefit) for income taxes 1,700 (11,520) -- -- (9,820) ---------- ------------ ----------- ----------- ----------- Income (loss) before minority interest and extraordinary item 1,676 6,663 3,407 (10,068) 1,678 Minority interest in loss of subsidiaries -- 1 (3) -- (2) ---------- ------------ ----------- ----------- ----------- Income before extraordinary item 1,676 6,664 3,404 (10,068) 1,676 Extraordinary item - gain on extinquishment of debt 261 -- -- -- 261 ---------- ------------ ----------- ----------- ----------- Net income (loss) $ 1,937 $ 6,664 $ 3,404 $ (10,068) $ 1,937 ========== ============= ============ ============ ============
Three Months Ended September 30, 1999 (Unaudited) (In thousands)
Combined Combined Wholly-Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------- ------------ ------------ ------------ REVENUES: Interest income $ 236 $ 1,711 $ -- $ (176) $ 1,771 Servicing income -- 374 2,232 -- 2,606 Gain on sale of loans -- 70 -- -- 70 Loan fees, net -- 716 -- -- 716 ----------- ------------- ------------ ------------ ------------ Total revenue from loans and investments 236 2,871 2,232 (176) 5,163 Other revenues -- 264 8 137 409 ----------- ------------- ------------ ------------ ------------ Total revenues 236 3,135 2,240 (39) 5,572 EXPENSES: Interest 746 3,208 -- (176) 3,778 Provision for credit losses -- 1,672 -- -- 1,672 Fair market write-down of residual receivable -- 995 (139) -- 856 Salaries, wages and employee benefits -- 4,957 -- -- 4,957 Business development costs -- 1,330 -- -- 1,330 Other general and administrative expenses 57 3,455 -- 137 3,649 ----------- ------------- ------------ ------------ ------------ Total expenses 803 15,617 (139) (39) 16,242 ----------- ------------- ------------ ------------ ------------ Income (loss) before income taxes, minority interest, and equity in undistributed earnings (loss) of subsidiaries (567) (12,482) 2,379 -- (10,670) Earnings (loss) of subsidiaries (10,161) 1,178 (1,178) 10,161 -- ----------- ------------- ------------ ------------ ------------ Income (loss) before income taxes, minority interest and extraordinary item (10,728) (11,304) 1,201 10,161 (10,670) Provision (benefit) for income taxes -- 55 -- -- 55 ----------- ------------- ------------ ------------ ------------- Income (loss) before minority interest and extraordinary item (10,728) (11,359) 1,261 10,161 (10,725) Minority interest in loss of subsidiaries -- (3) -- -- (3) ----------- ------------- ------------ ------------ ------------ Income before extraordinary item (10,728) (11,362) 1,201 10,161 (10,728) Extraordinary item - gain on extinquishment of debt 8,143 -- -- -- 8,143 ----------- ------------- -- --------- -- --------- -- --------- Net income (loss) $ (2,585) $ (11,362) $ 1,201 $ 10,161 $ (2,585) =========== ============= ============ ============ ============
15 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENT OF CASH FLOWS Nine Months Ended September 30, 2000 (Unaudited) (In thousands)
Combined Wholly- Combined Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ----------- ------------ ------------ OPERATING ACTIVITIES: Net income (loss) $ (16,454) $ (11,845) $ 5,359 $ 6,486 (16,454) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 12,328 (5,842) -- (6,486) -- Depreciation and amortization -- 2,709 -- -- 2,709 Provision for credit losses -- 2,292 -- -- 2,292 Gain on retirement of senior unsecured debt 579 (1,158) -- -- (579) Loss on sale of real estate acquired through foreclosure -- 1,380 -- -- 1,380 Fair value write-down of residual receivable -- 2,143 -- -- 2,143 Loans originated with intent to sell -- (441,223) -- -- (441,223) Proceeds from sold loans -- 374,971 -- -- 374,971 Proceeds from securitization of loans -- 44,588 -- -- 44,588 Other -- (10,300) -- -- (10,300) Changes in operating assets and liabilities increasing (decreasing) cash (81) (29,953) 3,019 -- (27,015) ----------- ------------ ----------- ------------ ------------ Net cash provided by (used in) operating activities (1,928) (72,238) 8,378 -- (67,488) ----------- ------------ ----------- ------------ ------------ INVESTING ACTIVITIES: Loans originated for investment purposes -- (220) -- -- (220) Loans purchased for investment purposes -- (189) -- -- (189) Principal collections on loans not sold -- 40,948 -- -- 40,948 Proceeds from sale of real estate and personal property acquired through foreclosure -- 9,710 -- -- 9,710 Proceeds from sale of property and equipment -- 45 -- -- 45 Purchase of property and equipment -- (147) -- -- (147) Loans to shareholders (5,908) -- -- -- (5,908) Other -- (2,867) -- -- (2,867) ----------- ------------ ----------- ------------ ------------ Net cash provided by in investing activities (4,000) 39,572 -- -- 35,572 ----------- ------------ ----------- ------------ ------------ FINANCING ACTIVITIES: Advances on warehouse lines of credit -- 557,878 -- -- 557,878 Payments on warehouse lines of credit -- (563,637) -- -- (563,637) Retirement of senior unsecured debt (341) -- -- -- (341) Net increase in notes payable to investors -- (7,510) -- -- (7,510) Net increase in subordinated debentures -- 23,565 -- -- 23,565 Advances (to) from subsidiary 9,879 (1,508) (8,371) -- -- Proceeds from issuance of additional common stock -- 73 -- -- 73 Other -- 7 (7) -- -- ----------- ------------ ----------- ------------ ------------ Net cash provided by (used in) financing activities 9,538 8,868 (8,378) -- 10,028 ----------- ------------ ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 2 (16,090) -- -- (16,088) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 202 25,806 1 -- 26,009 ----------- ------------ ----------- ------------ ------------ END OF PERIOD $ 204 $ 9,716 $ 1 $ -- 9,921 =========== ============ =========== ============ ============
16 HOMEGOLD FINANCIAL, INC. CONSOLIDATING STATEMENT OF CASH FLOWS Nine Months Ended September 30, 1999 (Unaudited) (In thousands)
Combined Wholly- Combined Owned Non- Parent Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ----------- ------------- ------------ ------------- OPERATING ACTIVITIES: Net income (loss) $ 4,546 (27,276) $ 3,562 $ 23,714 $ 4,546 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 23,714 -- -- (23,714) -- Depreciation and amortization 1 2,064 -- -- 2,065 Provision for credit losses -- 1,323 -- -- 1,323 Gain on retirement of senior unsecured debt (29,370) -- -- -- (29,370) Loss on sale of real estate acquired through foreclosure -- 355 -- -- 355 Fair value write-down of residual receivable -- 1,631 -- -- 1,631 Loans originated with intent to sell -- (181,944) -- -- (181,944) Proceeds from sold loans -- 163,332 -- -- 163,332 Proceeds from securitization of loans -- 59,630 -- -- 59,630 Other -- 993 -- -- 993 Changes in operating assets and liabilities increasing (decreasing) cash (1,263) 22,936 (31,940) -- (10,267) ----------- ----------- ------------- ------------ ------------- Net cash provided by (used in) operating activities (2,372) 43,044 (28,378) -- 12,294 ----------- ----------- ------------- ------------ ------------- INVESTING ACTIVITIES: Loans originated for investment purposes -- (1,815) -- -- (1,815) Principal collections on loans not sold -- 16,332 -- -- 16,332 Proceeds from sale of real estate acquired through foreclosure -- 6,637 -- -- 6,637 Proceeds from sale of property and equipment -- 199 -- -- 199 Purchase of property and equipment -- (549) -- -- (549) Other -- (6,686) -- -- (6,686) ----------- ----------- ------------- ------------ ------------- Net cash provided by in investing activities -- 14,118 -- -- 14,118 ----------- ----------- ------------- ------------ ------------- FINANCING ACTIVITIES: Advances on warehouse lines of credit -- 210,023 -- -- 210,023 Payments on warehouse lines of credit -- (223,437) -- -- (223,437) Retirement of senior unsecured debt (44,871) -- -- -- (44,871) Net increase in notes payable to investors -- 6,294 -- -- 6,294 Net increase in subordinated debentures -- 2,178 -- -- 2,178 Advances (to) from subsidiary 46,973 (76,083) 29,110 -- -- Proceeds from issuance of additional common stock 179 (2) 2 -- 179 Other -- 3,235 (3,235) -- -- ----------- ----------- ------------- ------------ ------------- Net cash provided by (used in) financing activities 2,281 (77,792) 26,877 -- (49,634) ----------- ----------- ------------- ------------ ------------- Net decrease in cash and cash equivalents (91) (20,630) (2,501) -- (23,222) CASH AND CASH EQUIVALENTS: BEGINNING OF PERIOD 196 34,215 2,502 -- 36,913 ----------- ----------- ------------- ------------ ------------- END OF PERIOD $ 105 13,585 $ 1 $ -- $ 13,691 =========== =========== ============= ============ =============
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 by the Company to Transamerica pursuant to an asset purchase agreement dated October 2, 1998 was not made by the Company's subsidiary 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 funds held in escrow in connection with the transaction with Transamerica. On June 5, 2000 Transamerica allowed the release from escrow to the Company of $450,000, and the balance of the escrow account, reflected on the balance sheet as restricted cash, is $5,068,723 as of September 30, 2000. 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." The Company intends to defend itself vigorously and seek the release of escrowed funds. On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins filed a purported class action lawsuit in New Hanover County, North Carolina Superior Court. That suit has been transferred to North Carolina Business Court. The suit was filed against 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"). On February 22, 2000, Michael and Kimberly Chasten filed a similar action in Duplin County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Southern District of North Carolina. On March 21, 2000, Rosa and Royal Utley filled a similar suit in New Hanover County, North Carolina Superior Court. On April 13, 2000 Reginald Troy filed a similar action in New Hanover County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Southern District of North Carolina. The plaintiffs in all of these cases are seeking unspecified monetary damages. As to the Company's subsidiary, the complaints in these four cases allege participation by the Company's subsidiary in an arrangement with Chase under which Chase allegedly charged excessive fees and interest to the consumers, and under which Chase allegedly received undisclosed premiums. There has been no class certification in any of the cases, and the Company intends to contest each case vigorously. On April 4, 2000, the Company received notice of a suit filed against it by Danka Funding Company, LLC ("Danka") in New Jersey Superior Court. In the suit, Danka seeks recovery of $356,000 allegedly due under copier equipment leases. It is not possible to evaluate the likelihood or amount of an unfavorable outcome at this stage. 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 EVENT On November 3, 2000, the Company entered into a $10 million warehouse line of credit agreement with PCFS Financial Services. The line bears interest at a rate of prime plus 1.75%, and is due upon demand at the discretion of PCFS Financial Services. The Company expects to begin using this facility mid-November. The line of credit will be collateralized by mortgage loan receivables. 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 renew or replace existing credit facilities to fund loan originations, 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 Nine Months Ended September 30, ------------------------------------ 2000 1999 ---------------- ---------------- (In thousands) Revenue $ 48,426 $ 33,636 Income before extraordinary items (17,751) (25,301) Net income (16,648) 4,320 Earnings per share (0.99) 0.26
The amounts are based upon certain assumptions and estimates, and do not reflect any benefit from economies that might be achieved from combined operations. The pro forma results do not necessarily represent results that would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations. Results of Operations Nine months ended September 30, 2000, compared to nine months ended September 30, 1999 The Company recognized a net loss of $16.5 million for the nine months ended September 30, 2000 ("the 2000 period") as compared to net income of $4.5 million for the nine months ended September 30, 1999 ("the 1999 period"). Included in the net loss and net income figures for the 2000 and 1999 periods were extraordinary gains on the extinguishment of debt of $579,000 and $29.4 million, respectively. Excluding extraordinary gains, the net losses for the 2000 and 1999 periods were $17.0 million and $24.8 million, respectively. In addition, two other nonrecurring items were recorded during the 2000 period which had an affect on net income: the Company recorded a deferred tax benefit of $10.0 million, and the Company recorded $2.4 million in restructuring expenses related to the HomeSense merger. Total revenues for the 2000 period increased $15.5 million (67.0%) compared to the nine months ended September 30, 1999. The increase in total revenues is comprised of a $9.9 million (320.1%) increase in net loan fees, a $4.0 million (90.6%) increase in gain on sale of loans, and a $2.7 million (39.6%) increase in interest income, partially offset by a $1.5 million (19.6%) decrease in servicing income. The increase in net loan fees is primarily attributable to a $257.9 million (140.3%) increase in production and an increase in average loan origination fees charged, to 3.3% from 2.9%. The overall increase in production is attributable to the merger, combining the production capacity of HomeGold with that of HomeSense. The increase in average origination fees charged occurred because of a shift in the mix of wholesale and retail production, resulting from the Company's decision to end wholesale production operations as of August 1, 2000. During the 1999 period, wholesale production accounted for 45.0% of the Company's total production, and during the 2000 period, wholesale production accounted for 42.2% of the Company's total production. The increase in interest income resulted primarily from an $11.5 million (13.1%) increase in average loans receivable outstanding. The increase in average loans receivable outstanding relates primarily to the increase in mortgage loan production mentioned above. In addition, the Company experienced an approximate 230 basis point increase in the average yield on loans receivable outstanding. The increase in gains on sale of loans resulted from an increase in the volume of loan sales, partially offset by a reduction in the average premium obtained in the 2000 period compared to the 1999 period. In the 2000 period, the Company had mortgage whole loan sales of $375.0 million at an average premium of 2.3% compared to mortgage whole loan sales of $163.3 million at an average premium of 2.7% in the 1999 period. The higher sales were primarily a result of increased loan production. The Company believes the reduction in premiums received is primarily due to changes in market conditions. 20 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 2000 period compared to the 1999 period resulted primarily from repayments of loans in the securitized pools as well as amortization of the residual assets. Total expenses for the 2000 period, excluding the restructuring costs, increased $15.4 million (32.7%) compared to the nine months ended September 30, 1999. The increase in total expenses was primarily comprised of an $11.4 million (39.0%) increase in general and administrative expenses, a $2.2 million (42.8%) increase in costs related to the securitization pools, real estate owned, and portfolio credit losses, and a $1.8 million (14.1%) increase in interest expense. In general and administrative expenses, personnel costs increased $5.5 million (34.5%), business development costs increased $2.3 million (60.0%), and other general and administrative costs increased $3.7 million (38.2%). The increase in personnel costs resulted primarily from the combination of employees resulting from the merger. The number of employees increased from 406 at September 30, 1999 to 715 at September 30, 2000. Likewise, the increase in business development costs and other general and administrative costs are primarily attributable to the additional costs related to the merged company. The increase in costs related to the securitization pools, real estate owned, and portfolio credit losses include a $969,000 (73.2%) increase in the provision for credit losses, a $701,000 (32.8%) increase in costs on owned real estate and defaulted loans, and a $512,000 (31.4%) increase in the fair value adjustment on residual receivables. The increase in the provision for credit losses resulted from higher levels of loans held for investment, along with management's decision in early 2000 to record additional reserves against amounts paid on behalf of borrowers for taxes, insurance, and attorney's fees, partially offset by a lower loan delinquency rate. The increase in costs on owned real estate and defaulted loans is due to higher levels of real estate acquired through foreclosure in the 2000 period over the 1999 period. These higher levels are related to seasoning of the retained portfolio and repurchases from securitized pools. Changes in valuation assumptions were required in the first nine months of 2000, primarily related to the assumed loss rates in the 1997 pools. The change in assumed loss rates, due to lower than expected actual losses, resulted in an increase in fair value of the residual receivable. However, this increase was offset by actual losses on foreclosed properties in all the securitization pools, causing the write-down of the overall residual receivable. The increase in interest expense is the result of additional borrowings associated with the increase in the Company's average loan portfolio and the cost of borrowings that were required to fund the Company's operating losses, the combination of which was partially offset by a decrease in interest costs related to the reduction of outstanding senior unsecured notes resulting from the Company's repurchase of notes throughout 1999 and 2000. The Company has recorded current tax expense of $515,000 and $675,000 for the 2000 and 1999 periods, respectively, although the Company generated a pre-tax loss before extraordinary item for both periods. The Company has also recorded a $10 million deferred tax benefit as a result of the Company's latest 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 using a REMIC structure. 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 NOL's and did not result in any incremental increase in current income tax expense. The latest securitizations were structured utilizing alternative structures that do not generate excess inclusion income. During the 1999 period, the Company recorded a $29.4 million extraordinary gain on the extinguishment of debt related to the purchase of $74.2 million of its Senior Notes. The purchase price of the Senior Notes was $42.7 million, or a weighted average of 57.5% of face value. A proportionate share of the unamortized debt origination cost ($2.1 million) relating to the issuance of the Senior Notes was charged against this gain. The extraordinary gain on the extinguishment of debt for the 2000 period was $579,000, resulting from a minor purchase of the Company's Senior Notes. At September 30, 2000, the Company had $11.2 million of Senior Notes outstanding. 21 Three months ended September 30, 2000 compared to three months ended September 30, 1999 The Company recognized net income of $1.9 million for the three months ended September 30, 2000 ("the 2000 period") as compared to a net loss of $2.6 million for the three months ended September 30, 1999 ("the 1999 period"). Included in the net income and net loss figures for the 2000 and 1999 periods were extraordinary gains of $261,000 and $8.1 million on the extinguishment of debt, respectively. Excluding extraordinary gains, the net income for the 2000 period was $1.7 million and the net loss for the 1999 period was $10.7 million. In addition, two other nonrecurring items were recorded during the 2000 period which had an affect on net income: the Company recorded a deferred tax benefit of $10.0 million, and the Company recorded $99,000 in restructuring expenses related to the merger. Total revenues increased $11.2 million (200.5%) for the 2000 period compared to the 1999 period. The increase in total revenues was comprised of a $6.2 million (867.3%) increase in net loan fees, a $3.5 million (4,977.1%) increase in gain on sale of loans, and a $2.0 million (113.7%) increase in interest income, partially offset by a $699,000 (26.8%) decrease in servicing income. The increase in net loan fees is primarily attributable to a $90.2 million (139.1%) increase in production and an increase in average loan origination fees charged, to 4.38% from 2.18%. The overall increase in production is attributable to the merger, combining the production capacity of HomeGold with that of HomeSense. The increase in average origination fees charged occurred because of a shift in the mix of wholesale and retail production, resulting from the Company's decision to end wholesale production operations as of August 1, 2000. During the 1999 period, wholesale production accounted for 48.8% of the Company's total production, and during the 2000 period, wholesale production accounted for only 19.7% of the Company's total production. The increase in gain on sale of loans is attributable to the unusually low loan sales related to production in the 1999 period compared to normal loan sales related to production in the 2000 period. The increase in interest income resulted primarily from a $42.5 million (70.4%) increase in average loans receivable outstanding. The increase in average loans receivable outstanding relates primarily to the increase in mortgage loan production mentioned above. In addition, the Company experienced an approximate 390 basis point increase in average yield. 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 2000 period compared to the 1999 period resulted primarily from repayments of loans in the securitized pools as well as amortization of the residual assets. Total expenses for the 2000 period, excluding the restructuring costs, increased $8.6 million (53.1%) compared to the 1999 period. The increase in total expenses was primarily comprised of a $7.8 million (115.9%) increase in general and administrative expenses and a $1.9 million (50.3%) increase in interest expense. These increases were partially offset by a $1.2 million (36.4%) decrease in costs related to the securitization pools, real estate owned, and provision for credit losses. In general and administrative expenses, personnel costs increased $3.5 million (70.8%), business development costs increased $806,000 (60.6%), and other general and administrative costs increased $3.5 million (120.1%). The increase in personnel costs resulted primarily from the combination of employees resulting from the merger. The number of employees increased from 406 at September 30, 1999 to 715 at September 30, 2000. Likewise, the increase in business development costs and other general and administrative costs are primarily attributable to the additional costs related to the merged company. The decrease in costs related to the securitization pools, real estate owned, and portfolio credit losses include a $1.0 million (61.1%) decrease in the provision for credit losses and a $347,000 (40.5%) decrease in the fair value adjustment on residual receivables, partially offset by a $185,000 (25.4%) increase in costs on owned real estate and defaulted loans. The decrease in the provision for credit losses resulted from a non-recurring adjustment of the reserve for credit losses to anticipated levels, partially offset by higher levels of loans held for investment, along with management's decision in early 2000 to record additional reserves against amounts paid on behalf of borrowers for taxes, insurance, and attorney's fees, partially offset by a lower loan delinquency rate. The decrease in the fair value write-down of the residual receivables was due to a change in valuation assumptions related to the assumed loss rates in the 1997 pools. The impact of this change increased the valuation of the residual assets by $895,000. The increase in costs on owned real estate and defaulted loans is due to higher levels of real estate acquired through foreclosure in the 2000 period over the 1999 period. These higher levels are related to seasoning of the retained portfolio and repurchases from securitized pools. 22 The increase in interest expense is the result of additional borrowings associated with the increase in the Company's average loan portfolio and the cost of borrowings that were required to fund the Company's operating losses, the combination of which was partially offset by a decrease in interest costs related to the reduction of outstanding senior unsecured notes resulting from the Company's repurchase of notes throughout 1999 and 2000. The Company has recorded current tax expense of $180,000 and $55,000 for the 2000 and 1999 periods, respectively, although the Company generated a pre-tax loss before extraordinary item for both periods. The Company has also recorded a $10 million deferred tax benefit as a result of the Company's latest 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 using a REMIC structure. 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 NOL's and did not result in any incremental increase in current income tax expense. The latest securitizations were structured utilizing alternative structures that do not generate excess inclusion income. During the 1999 period, the Company recorded a $8.1 million extraordinary gain on the extinguishment of debt related to the purchase of $25.0 million of its Senior Notes. The purchase price of the Senior Notes was $16.1 million, or a weighted average of 64.7% of face value. A proportionate share of the unamortized debt origination cost ($0.7 million) relating to the issuance of the Senior Notes was charged against this gain. The extraordinary gain on the extinguishment of debt for the 2000 period was $261,000, resulting from a minor purchase of the Company's Senior Notes. At September 30, 2000, the Company had $11.2 million of Senior Notes outstanding. Financial Condition Net loans receivable increased to $65.2 million at September 30, 2000 from $56.6 million at December 31, 1999. The increase in net loans receivable resulted primarily from increased production due to the merger. Average monthly loan production in 2000 to date is $49.1 million compared to average monthly loan production of $20.4 million in 1999. The residual receivables were $61.5 million at September 30, 2000, compared to $47.8 million at December 31, 1999. This increase resulted primarily from net residual assets of $16.0 million retained on the 2000 securitization transactions completed in June and September and an $895,000 increase in value resulting from a change in the assumed loss rates of the 1997 pools, due to lower than expected actual losses. These increases were partially offset by the amortization of the other residual assets from prior securitizations. Net property and equipment increased to $22.1 million at September 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 $1.8 million at September 30, 2000, from $7.7 million at December 31, 1999. This decrease resulted from the sale of foreclosed properties, partially offset by additional foreclosures on mortgage loans within the period. As a result of the merger, net excess of cost over net assets of acquired businesses increased to $20.4 million at September 30, 2000, from $1.6 million at December 31, 1999. The net deferred income tax asset increased from $12.0 million at December 31, 1999 to $22.0 million at September 30, 2000. The increase is the result of the Company's latest assessment of the recoverability of the net operating loss carryforwards based upon recent changes in its management team, business strategy, opportunities in the marketplace and projected conditions. Total net operating loss carryforwards are now $92.9 million. Approximately $87.7 million does not begin to expire until 2006 and beyond. 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 September 30, 2000, the Company had $41.3 million outstanding under revolving warehouse lines of credit and other obligations to banks, compared with $17.8 million at December 31, 1999. At September 30, 2000, the Company had $160.8 million of CII notes payable to investors and subordinated debentures outstanding, compared with $144.8 million at December 31, 1999. 23 The aggregate principal amount of outstanding Senior Notes was $11.2 million at September 30, 2000, compared to $12.1 million on December 31, 1999. In the nine months ended September 30, 2000, the Company purchased $920,000 of its Senior Notes for a purchase price of $341,000. The Company may, from time to time, purchase more of its Senior Notes depending on the Company's cash availability, market conditions, and other factors. Total shareholders' equity at September 30, 2000 was $2.6 million, compared to $7.8 million at December 31, 1999. This decrease is attributable to the net loss of $16.4 million for the nine months ended September 30, 2000 and the classification in shareholders' equity of a $5.8 million note receivable from a shareholder, arising from the merger. This decrease is partially offset by an increase in preferred stock and paid-in capital in excess of par value, also arising from the merger. 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 increased 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 serviced mortgage loans past due 30 days or more declined to 8.50% at September 30, 2000 compared to 12.43% at December 31, 1999. The Company incurred net charge-offs on retained loans of $1.8 million in the nine months ended September 30, 2000 compared to $2.2 million in net charge-offs on retained loans in the nine months ended September 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. 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 150 days past due, or the loan is over 90 days past due and the loan-to-value ratio is greater than 90%, 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's allowance for loan loss as a percentage of gross loans was 6.1% at September 30, 2000 and 10.0% at December 31, 1999. The Company considers its allowance for credit losses at September 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. 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 $67.5 million net use of cash from operating activities in the first nine 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 its revolving warehouse credit facilities ("Credit Facilities"), senior unsecured debt and CII investor savings notes, (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. 24 The Company believes that additional sources of funds are needed, including warehouse lines of credit, to meet its future liquidity requirements. No assurance can be given that these additional sources of funds can be attained. Cash and cash equivalents were $9.9 million at September 30, 2000, and $26.0 million at December 31, 1999. Cash used by operating activities was $67.5 million for the nine months ended September 30, 2000, compared to cash provided by operating activities of $12.3 million for the nine months ended September 30, 1999. Cash provided by investing activities was $41.4 million for the nine months ended September 30, 2000 compared to $14.1 million for the nine months ended September 30, 1999. Cash provided by financing activities was $10.0 million for the nine months ended September 30, 2000 compared to cash used in financing activities of $49.6 million for the nine months ended September 30, 1999. The increase in cash used by operating activities was principally due to operating losses incurred for the nine month period ended September 30, 2000 when compared to the same period of 1999. Cash provided by investing activities in both the nine months ended September 30, 2000 and 1999, resulted primarily from principal collections on loans not sold. The cash provided in financing activities in the nine months ended September 30, 2000, resulted primarily an increase of $23.6 million of subordinated debentures 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 September 30, 2000, the maximum commitment was $38 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 $5.1 million at September 30, 2000 and $18.9 million at December 31, 1999. After considering outstanding borrowings under the line of credit of $4.9 million and $17.8 million, respectively, the Company had $200,000 and $1.1 million, respectively, of immediate availability under this agreement on September 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 0.25% and is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum net worth of the Company of $10,000,000 commencing August 31, 2000, a leverage ratio of less than 35 to 1, and positive consolidated net income for each quarter beginning on or after July 1, 2000. The revolving credit agreement had an original maturity date of April 30, 2001. The revolving credit agreement was subsequently amended under an amendment and forbearance agreement whereby the lender agreed to forebear from exercising its rights on account of existing events of default and whereby the maturity date was amended to January 25, 2001. The advance rate was also amended to 97% from 100% for all loans made after October 23, 2000. Availability under the credit agreement is determined based on eligible collateral as defined 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 $21.8 million at September 30, 2000. After considering outstanding borrowings under the line of credit of $21.8 million, the Company had no immediate availability under this agreement at September 30, 2000. Prior to the merger, HomeSense had a $25 million revolving purchase facility with Residential Mortgage Services of Texas ("RMST"). This agreement was amended at the time of the merger to extend to the merged entity. The agreement is structured as a purchase of the mortgages by RMST, subject to a limited right of RMST to require the repurchase of defective mortgages by the Company. The facility bears interest at the prime rate plus 0.75%. At September 30, 2000, the Company had outstanding purchased mortgages of $10.9 million on the facility. The Company received a notice of termination of the facility on September 19, 2000. The termination notice reduces the commitment amount in five phases leading to full termination of the facility on December 31, 2000. At September 30, 2000, the maximum commitment was $15.0 million. The Company believes that no event of default has occurred on its warehouse lines of credit for which it has not obtained a waiver or forbearance. 25 On November 3, 2000, the Company entered into a $10 million warehouse line of credit agreement with PCFS Financial Services. The lender has indicated that future increases in the commitment amount will be considered based upon satisfactory performance of the line of credit The Company is currently pursuing warehouse credit facilities to replace the expiring facilities discussed above. In the event these efforts ultimately prove unsuccessful, the Company's operations could be materially and adversely affected. 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 was scheduled to mature on November 2, 2000. The Company has received a commitment from Bank of America to extend the loan maturity date to March 2, 2001. The note bears interest at the prime rate plus 1.5%. The note is secured by a mortgage on the Company's building in Lexington, South Carolina, as well as a parcel of real estate 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 September 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 $920,000 in the first nine months of 2000. At September 30, 2000 and December 31, 1999, $11.2 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 September 30, 2000 and at December 31, 1999, CII had an aggregate of $141.8 million and $127.1 million of investor notes outstanding, respectively, and an aggregate of $19.1 million and $17.7 million, respectively, of subordinated debentures. 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 September 30, 2000 was $2.6 million, compared to $7.8 million at December 31, 1999. This decrease is attributable to the net loss of $16.4 million for the nine months ended September 30, 2000 and the classification in shareholders' equity of a $5.8 million note receivable from a shareholder, arising from the merger. This decrease is partially offset by an increase in preferred stock and paid-in capital in excess of par value, also arising from the merger. 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 increased the Company's shareholders' equity by approximately $17.1 million. The Company's primary objective in 2000 is to ensure adequate levels of liquidity as the Company increases loan originations. The Company plans to continue to generate cash through whole loan sales. These sales will generate cash that can be used to fund operating losses, or to fund declines in investor notes that could occur. The Company plans to operate more like a mortgage banker that originates and either sells or securitizes loans, retaining only a small portfolio of loans. Management believes that, based on its present level of liquidity combined with its borrowing availability under the warehouse lines of credit, 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. 26 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 nine months ended September 30, 2000 and 1999, the Company sold $375.0 million and $163.3 million of mortgage loans, respectively. Securitization transactions were completed in the nine months ended September 30, 2000 and 1999 totaling $64.5 million and $59.6 million respectively. 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 $61.5 million and $47.8 million, net of allowances, at September 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 generally retains the right to service the loans it securitizes. However, the Company released servicing rights for the two securitization transactions completed during 2000. 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 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. 27 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 of $22.0 million at September 30, 2000 reflects a gross deferred tax asset of $32.7 million with a related valuation allowance of $10.7 million. The amount of the net 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, the asset would then be adjusted to its estimated net realizable value. The Company had a federal NOL of approximately $87.7 million at September 30, 2000. Approximately $90.5 million does not begin to expire until 2006 and beyond. 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 September 30, 2000 or December 31, 1999. 28 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. 29 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 September 30, 2000. 30 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 by the Company to Transamerica pursuant to an asset purchase agreement dated October 2, 1998 was not made by the Company's subsidiary 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 funds held in escrow in connection with the transaction with Transamerica. On June 5, 2000 Transamerica allowed the release from escrow to the Company of $450,000, and the balance of the escrow account, reflected on the balance sheet as restricted cash, is $5,068,723 as of September 30, 2000. 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." The Company intends to defend itself vigorously. On August 20, 1999, Janice Tomlin, Isaiah Tomlin, and Constance Wiggins filed a purported class action lawsuit in New Hanover County, North Carolina Superior Court. That suit has been transferred to North Carolina Business Court. The suit was filed against 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"). On February 22, 2000, Michael and Kimberly Chasten filed a similar action in Duplin County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Southern District of North Carolina. On March 21, 2000, Rosa and Royal Utley filled a similar suit in New Hanover County, North Carolina Superior Court. On April 13, 2000 Reginald Troy filed a similar action in New Hanover County, North Carolina Superior Court. That suit has been removed to the United States District Court for the Southern District of North Carolina. The plaintiffs in all of these cases are seeking unspecified monetary damages. As to the Company's subsidiary, the complaints in these four cases allege participation by the Company's subsidiary in an arrangement with Chase under which Chase allegedly charged excessive fees and interest to the consumers, and under which Chase allegedly received undisclosed premiums. There has been no class certification in any of the cases, and the Company intends to contest each case vigorously. 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. 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 None Item 3. Defaults Upon Senior Securities No event of default has occurred for which the Company has not obtained a waiver or forbearance. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information Pursuant to the HomeSense merger agreement, various representations, warranties and covenants were made by the parties to the merger. Allegations have been made to the effect that each of the parties to the merger has failed in some respects to fully comply with its obligations under the merger agreement. The Board of Directors is investigating each of these On September 29, 2000 Larry D. Gosnell was appointed Chief Financial Officer of the Company and on November 14, 2000 Mr. Gosnell resigned from this position. 31 allegations and will attempt to resolve such allegations in a manner which is fair to the parties and in the best interests of all of the shareholders of HomeGold. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.12 First Amendment to Credit Agreement, Household Commercial Financial Services, Inc., dated May 30, 2000. 10.13 Second Amendment to Credit Agreement, Household Commercial Financial Services, Inc., dated September 20, 2000. 10.14 Third Amendment to Credit Agreement and Forbearance Agreement, Household Commercial Financial Services, Inc., dated October 25, 2000. 27.1 Financial Data Schedule. b) Reports on Form 8-K 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. 32 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: November 14, 2000 By: \s\ Ronald J. Sheppard ------------------------------------------- Ronald J. Sheppard. Chief Executive Officer Date: November 14, 2000 By: \s\ William E. Long ------------------------------------------- William E. Long Executive Vice President
33 EX-10.12 2 0002.txt FIRST AMENDMENT TO CREDIT HOMEGOLD, INC. FIRST AMENDMENT TO CREDIT AGREEMENT Household Commercial Financial Services, Inc. Woodale, Illinois 60191 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of May 2, 2000 (the "Credit Agreement") between the undersigned, Homegold, Inc., a South Carolina corporation (the "Borrower") and you (the "Lender"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Lender increase the amount of the Commitment under the Credit Agreement from $40,000,000 to initially $50,000,000 subject to further increases, upon the satisfaction of certain conditions, up to $100,000,000 and make certain other amendments to the Credit Agreement and the Lender is willing to do so under the terms and conditions set forth in this Amendment. 1. AMENDMENTS. Upon your acceptance hereof in the space provided for that purpose below, the Credit Agreement shall be and hereby is amended as follows: 1.1. Section 1.1 of the Credit Agreement shall be amending the definition of Commitment contained therein in its entirety to read as follows: "Commitment" means (i) $75,000,000 if and so long as there shall have been pledged (in a manner and pursuant to documentation satisfactory to the Lender in its sole discretion) in favor of the Lender a certificate of deposit (or other cash collateral acceptable to the Lender in its sole discretion) in an amount equal to or greater than $10,000,000 but less than $13,000,000, (ii) $100,000,000 if and so long as there shall have been pledged (in a manner and pursuant to documentation satisfactory to the Lender in its sole discretion) in favor of the Lender a certificate of deposit (or other cash collateral acceptable to the Lender in its sole discretion) in an amount equal to or greater than $13,000,000 and (iii) $50,000,000 at all other times. 1.2. Section 2.1 of the Credit Agreement shall be amended by deleting "(i) $40,000,000 (the "Commitment") (subject to any reductions thereof pursuant to the terms hereof" and by substituting therefor "(i) the Commitment (subject to any reductions thereof pursuant to the terms hereof". 1.3. Exhibit A to the Credit Agreement shall be amended in its entirety and as so amended shall read as set forth on Exhibit A attached hereto. 1.4. Any reference in the Credit Agreement or any other Loan Document to "Note" or "Revolving Credit Note" shall be references to the Replacement Revolving Credit Note delivered pursuant to 2.1 of this Amendment. 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 2.1. The Borrower and the Lender shall have executed and delivered this Amendment and the Borrower shall have executed and delivered to Lender a replacement Revolving Credit Note in the form of Exhibit A to the Credit Agreement as amended hereby. 2.2. The Guarantors shall have consented hereto in the space provided for such purpose below. 2.3. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Lender and its counsel. 2.4. The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Amendment to the extent the Lender or its counsel may reasonably request. 3. REPRESENTATIONS. In order to induce the Lender to execute and deliver this Amendment, the Borrower hereby represents to the Lender that as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lender) and the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment. 4. MISCELLANEOUS. 4.1 The Borrower and the Guarantors have heretofore executed and delivered to the Lender that certain Security Agreement dated as of May 2, 2000 (the "Security Agreement"). The Borrower hereby, and the Guarantors by their consent hereto in the space provided for that purpose below, each acknowledges and agrees that, notwithstanding the execution and delivery of this Amendment, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Amendment. -2- 4.2. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 4.3. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for the Lender. 4.4. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. -3- Dated as of May 30, 2000. HOMEGOLD, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ Accepted and agreed to in Wood Dale, Illinois as of the date and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By: ______________________________________ Michael J. Hammond Vice President CONSENT The undersigned have heretofore executed and delivered to the Lender (i) a Guaranty dated May 2, 2000 (the "Guaranty") and (ii) a Security Agreement dated May 2, 2000 (the "Security Agreement"). Each of the undersigned hereby consents to the Amendment to Credit Agreement set forth above and confirms that the Guaranty and the Security Agreement and all of such undersigned's obligations thereunder remain in full force and effect and, without limiting the foregoing, acknowledges and agrees that the increased amount of credit made available to the Borrower under the Credit Agreement pursuant to such Amendment constitutes (a) indebtedness which is guarantied by the undersigned under the Guaranty and (b) indebtedness which is secured by the Security Agreement. Each of the undersigned further agrees that the consent of the undersigned to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty or Security Agreement. HOMEGOLD FINANCIAL, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ CAROLINA INVESTORS, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ PREMIER FINANCIAL SERVICES INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ LOAN PRO$, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ REEDY RIVER VENTURES, L.P. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT SBIC, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT COMMERCIAL MORTGAGE, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT BUSINESS CAPITAL, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT INSURANCE AGENCY CORP. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT MORTGAGE CORP. OF TENNESSEE By:________________________________________ Name:______________________________________ Its:_______________________________________ HOMEGOLD REALTY, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EXHIBIT A REPLACEMENT REVOLVING CREDIT NOTE $100,000,000 May 30, 2000 FOR VALUE RECEIVED, the undersigned, HOMEGOLD, INC., a South Carolina corporation (the "Borrower"), promises to pay to the order of HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. (the "Lender") on the Termination Date of the hereinafter defined Credit Agreement, at the principal office of the Lender in Wood Dale, Illinois, in immediately available funds, the principal sum of ONE HUNDRED MILLION Dollars ($100,000,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower under the Revolving Credit pursuant to such Credit Agreement and with each such Loan to mature and become payable as provided in such Credit Agreement, together with interest on the principal amount of each such Loan from time to time outstanding hereunder at the rates, and payable in the manner and on the dates, specified in the Credit Agreement. The Lender shall record on its books or records or on a schedule attached to this Note, each Loan made by it pursuant to its Commitment, together with all payments of principal and interest and the principal balances from time to time outstanding hereon, provided that prior to the transfer of this Note all such amounts shall be recorded on a schedule attached to this Note. The record thereof, whether shown on such books or records or on the schedule to this Note, shall be prima facie evidence of the same, provided, however, that the failure of the Lender to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay all Loans made to it under the Revolving Credit pursuant to the Credit Agreement together with accrued interest thereon. This Note is the Note referred to in the Credit Agreement dated as of May 2, 2000 as amended , between the Borrower and the Lender (such Credit Agreement as the same may from time to time be amended or restated being referred to as the "Credit Agreement") and payment hereof is secured by the Collateral Documents, and this Note and the holder hereof are entitled to all the benefits provided for thereby or referred to therein, to which Credit Agreement and Collateral Documents reference is hereby made for a statement thereof. All defined terms used in this Note, except terms otherwise defined herein, shall have the same meaning as in the Credit Agreement. Prepayments may be made hereon, certain prepayments are required to be made hereon and this Note may be declared due prior to the expressed maturity hereof, all in the events, on the terms and in the manner as provided for in the Credit Agreement and Collateral Documents. The Borrower hereby waives demand, presentment, protest or notice of any kind hereunder. This Note is issued in substitution and replacement for, and evidences the indebtedness currently evidenced by that certain Revolving Credit Note of the Borrower dated as of May 2, 2000 payable to the order of the Lender. This Note shall be governed by and construed in accordance with the laws of the State of Illinois. HOMEGOLD, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ REPLACEMENT REVOLVING CREDIT NOTE $100,000,000 May 30, 2000 FOR VALUE RECEIVED, the undersigned, HOMEGOLD, INC., a South Carolina corporation (the "Borrower"), promises to pay to the order of HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. (the "Lender") on the Termination Date of the hereinafter defined Credit Agreement, at the principal office of the Lender in Wood Dale, Illinois, in immediately available funds, the principal sum of ONE HUNDRED MILLION Dollars ($100,000,000) or, if less, the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower under the Revolving Credit pursuant to such Credit Agreement and with each such Loan to mature and become payable as provided in such Credit Agreement, together with interest on the principal amount of each such Loan from time to time outstanding hereunder at the rates, and payable in the manner and on the dates, specified in the Credit Agreement. The Lender shall record on its books or records or on a schedule attached to this Note, each Loan made by it pursuant to its Commitment, together with all payments of principal and interest and the principal balances from time to time outstanding hereon, provided that prior to the transfer of this Note all such amounts shall be recorded on a schedule attached to this Note. The record thereof, whether shown on such books or records or on the schedule to this Note, shall be prima facie evidence of the same, provided, however, that the failure of the Lender to record any of the foregoing or any error in any such record shall not limit or otherwise affect the obligation of the Borrower to repay all Loans made to it under the Revolving Credit pursuant to the Credit Agreement together with accrued interest thereon. This Note is the Note referred to in the Credit Agreement dated as of May 2, 2000 as amended , between the Borrower and the Lender (such Credit Agreement as the same may from time to time be amended or restated being referred to as the "Credit Agreement") and payment hereof is secured by the Collateral Documents, and this Note and the holder hereof are entitled to all the benefits provided for thereby or referred to therein, to which Credit Agreement and Collateral Documents reference is hereby made for a statement thereof. All defined terms used in this Note, except terms otherwise defined herein, shall have the same meaning as in the Credit Agreement. Prepayments may be made hereon, certain prepayments are required to be made hereon and this Note may be declared due prior to the expressed maturity hereof, all in the events, on the terms and in the manner as provided for in the Credit Agreement and Collateral Documents. The Borrower hereby waives demand, presentment, protest or notice of any kind hereunder. This Note is issued in substitution and replacement for, and evidences the indebtedness currently evidenced by that certain Revolving Credit Note of the Borrower dated as of May 2, 2000 payable to the order of the Lender. This Note shall be governed by and construed in accordance with the laws of the State of Illinois. HOMEGOLD, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EX-10.13 3 0003.txt SECOND AMENDMENT TO CREDIT HOMEGOLD, INC. SECOND AMENDMENT TO CREDIT AGREEMENT Household Commercial Financial Services, Inc. Woodale, Illinois 60191 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of May 2, 2000 as heretofore amended (the "Credit Agreement") between the undersigned, Homegold, Inc., a South Carolina corporation (the "Borrower") and you (the "Lender"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Lender make certain amendments to the Credit Agreement and the Lender is willing to do so under the terms and conditions set forth in this Amendment. 1. AMENDMENTS. Upon your acceptance hereof in the space provided for that purpose below, the Credit Agreement shall be and hereby is amended as follows: 1.1. Section 1.1 of the Credit Agreement shall be amending the definition of Commitment contained therein in its entirety to read as follows: "Commitment" means $50,000,000. 1.2. The definition of "Termination Date" contained in Section 1.1 of the Credit Agreement shall be amended by deleting "April 30, 2001" appearing therein and by substituting "December 31, 2000" therefor. 1.3. Section 2.9 of the Credit Agreement shall be amended in its entirety and as so amended shall read as follows: "Section 2.9 Extension of the Termination Date. The Borrower, pursuant to a written request delivered to Lender not more than 45, nor less than 30 days prior to the then scheduled Termination Date, may request the Lender to extend the Commitment for an additional period of one calendar quarter, expiring on the last day of the calendar quarter immediately following the then scheduled Termination Date. The Lender shall notify the Borrower within 15 days of its receipt of each such extension request whether it objects to such extension in which event the Termination Date shall remain as scheduled. In the event Lender shall either fail to respond or affirmatively agree in writing to such request, the Termination Date shall be extended for an additional calendar quarter period as so requested. The foregoing to the contrary notwithstanding, in no event shall the Termination Date be extended beyond December 31, 2003 pursuant to the foregoing provisions." 1.4. Section 9 of the Credit Agreement shall be amended by adding a new Section 9.17 at the end thereof which reads as follows: "Section 9.17. Assignments. The Lender may, with the prior written consent of the Borrower (which consent shall not be unreasonably withheld or delayed and, in any event, shall not be required for an assignment by Lender to one of its Affiliates) at any time assign and delegate to another financial institution or other Person (any Person to which such an assignment and delegation is to be made being herein called "Assignee") all of the Lenders' Loans and Commitment provided that the Borrower shall be entitled to continue to deal solely and directly with the Lender in connection with the interests so assigned until the date when all of the following conditions shall have been satisfied: (i) one (1) Business Day shall have passed after written notice of such assignment and delegation (together with payment instructions, addresses and related information with respect tot he Assignee) shall have been given to the Borrower; and (ii) the assigning Lender and the Assignee shall have executed and delivered an Assignment Agreement and furnished a copy thereof to the Borrower From and after the date on which the conditions described above have been met, the Assignee shall be deemed automatically to have become party hereto and shall have the rights and obligations of the Lender hereunder and the assigning Lender shall be released from its obligations hereunder. Within five Business Days after effectiveness of any assignment and delegation, the Borrower shall execute and deliver to the Assignee Lender a new Note (such Note to be in exchange for, but not in payment of, the predecessor Note held by the assigning Lender). Each such Note shall be dated the effective date of such assignment. The assigning Lender shall mark the predecessor Note "exchanged" and deliver it to the Borrower. Accrued interest on the predecessor Note shall be paid as provided in the Assignment Agreement. Within five Business Days after requested to do so, Borrower shall also execute and deliver such UCC and other Collateral assignments as may be requested by Assignee Lender on the assigning Lender. 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent: 2.1. The Borrower and the Lender shall have executed and delivered this Amendment. 2.2. The Guarantors shall have consented hereto in the space provided for such purpose below. 2.3. Legal matters incident to the execution and delivery of this Amendment shall be satisfactory to the Lender and its counsel. 2.4. The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Amendment to the extent the Lender or its counsel may reasonably request. 3. REPRESENTATIONS. In order to induce the Lender to execute and deliver this Amendment, the Borrower hereby represents to the Lender that as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lender) and the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect to this Amendment. 4. MISCELLANEOUS. 4.1 The Borrower and the Guarantors have heretofore executed and delivered to the Lender that certain Security Agreement dated as of May 2, 2000 (the "Security Agreement"). The Borrower hereby, and the Guarantors by their consent hereto in the space provided for that purpose below, each acknowledges and agrees that, notwithstanding the execution and delivery of this Amendment, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Amendment. 4.2. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Amendment need not be made in the Credit Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 4.3. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Amendment, including the fees and expenses of counsel for the Lender. 4.4. This Amendment may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Amendment by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Amendment shall be governed by the internal laws of the State of Illinois. Dated as of September 20, 2000. HOMEGOLD, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ Accepted and agreed to in Wood Dale, Illinois as of the date and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By:________________________________________ Michael J. Hammond Vice President CONSENT The undersigned have heretofore executed and delivered to the Lender (i) a Guaranty dated May 2, 2000 (the "Guaranty") and (ii) a Security Agreement dated May 2, 2000 (the "Security Agreement"). Each of the undersigned hereby consents to the Amendment to Credit Agreement set forth above and confirms that the Guaranty and the Security Agreement remain in full force and effect in accordance with the terms thereof. Each of the undersigned further agrees that the consent of the undersigned to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty or Security Agreement. HOMEGOLD FINANCIAL, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ CAROLINA INVESTORS, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ PREMIER FINANCIAL SERVICES INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ LOAN PRO$, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ REEDY RIVER VENTURES, L.P. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT SBIC, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT COMMERCIAL MORTGAGE, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT BUSINESS CAPITAL, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT INSURANCE AGENCY CORP. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT MORTGAGE CORP. OF TENNESSEE By:________________________________________ Name:______________________________________ Its:_______________________________________ HOMEGOLD REALTY, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EX-10.14 4 0004.txt THIRD AMENDMENT TO CREDIT AGREEMENT HOMEGOLD, INC. THIRD AMENDMENT TO CREDIT AGREEMENT AND FORBEARANCE AGREEMENT Household Commercial Financial Services, Inc. Woodale, Illinois 60191 Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of May 2, 2000 as heretofore amended (the "Credit Agreement") between the undersigned, Homegold, Inc., a South Carolina corporation (the "Borrower") and you (the "Lender"). All capitalized terms used herein without definition shall have the same meanings herein as such terms have in the Credit Agreement. The Borrower has requested that the Lender make certain amendments to the Credit Agreement and forbear from exercising its rights on account of existing Events of Defaults and the Lender is willing to do so under the terms and conditions set forth in this Agreement. 1. AMENDMENTS. Upon your acceptance hereof in the space provided for that purpose below, the Credit Agreement shall be and hereby is amended as follows: 1.1 Section 1.1 of the Credit Agreement shall be amended by adding the following new definitions thereto: "Corporate Guaranty" shall mean a Guaranty satisfactory to the Lender from the Corporate Guarantors. "Corporate Guarantors" shall mean the Parent, the Affiliates of the Borrower signatories to the Corporate Guaranty and all Subsidiaries of the Borrower other than special purpose Subsidiaries formed in connection with loan securitizations. "Sheppard Guaranty" shall mean a Guaranty satisfactory to the Lender from Ronald J. Sheppard. 1.2 The definition of Eligible Mortgage Loan contained in Section 1.1 of the Credit Agreement shall be amended by replacing the period at the end of clause (xxii) with a semi-colon and adding the following clause at the end thereof: (xxiii) New City Fraud Prevention Service shall have performed its customary services and inspections with respect to such Mortgage Loan. 1.3. Section 1.1 of the Credit Agreement shall be amending the definitions of "Applicable Advance Rate" , "Closing Agent", "Guaranty" and "Guarantors" contained therein in their entirety to read as follows: "Applicable Advance Rate" means, initially, 100% with respect to all Loans made hereunder prior to October 23, 2000 and 97% with respect to all Loans made hereunder on and after October 23, 2000, in each case as such percentages may from time to time be reduced by the Lender in its sole discretion upon written notice to the Borrower, it being understood and agreed that such initial Applicable Advance Rate has been determined by the Lender in part based upon current returns for sales of mortgage loans in the secondary market and in the event the Lender determines in its sole discretion that there has been an adverse change in such market it intends to reduce the Applicable Advance Rate hereunder. "Closing Agent" means Integrated Real Estate Solutions. "Guaranty" means collectively, the Corporate Guaranty and the Sheppard Guaranty and also each of them individually. "Guarantors" means, collectively, the Corporate Guarantors and Ronald J. Sheppard and also each of them individually. 1.4. The definition of "Termination Date" contained in Section 1.1 of the Credit Agreement shall be amended by deleting "December 31, 2000" appearing therein and by substituting "January 25, 2001" therefor. 1.5. Section 2.4(b) shall be amended by deleting the second sentence thereof. 1.6. Section 2.9 of the Credit Agreement shall be deleted in its entirety. 1.7. Section 8.1(f) of the Credit Agreement shall be amended in its entirety and as so amended shall read as follows: "(f) either (i) default shall occur under any evidence of Indebtedness for Borrowed Money issued, assumed or guaranteed by the Borrower or any Guarantor or under any indenture, agreement or other instrument under which the same may be issued, and such default shall continued for a period of time sufficient to permit the acceleration of the maturity of any such Indebtedness for Borrowed Money (whether or not such maturity is in fact accelerated) or any such Indebtedness for Borrowed Money shall not be paid when due (whether by lapse of time, acceleration or otherwise) or (ii) Borrower or any Guarantor shall fail to pay or perform when due any repurchase obligation or any other outstanding obligation owing by it to Household Financial Services, Inc. or any of its Affiliates; or " 2. FORBEARANCE. Events of Default have occurred and are continuing under Sections 8.1(a) and 8.1(b) of the Credit Agreement as a result of the Borrower's failure to make certain prepayments required under Section 2.5(b)(ii) of the Credit Agreement and the non-compliance with the covenants contained in Sections 7.14, 7.15 and 7.16 of the Credit Agreement. As a result of such Events of Default, Lender is no longer obligated to make Loans to Borrower and is also entitled to accelerate payment of all Loans and to exercise certain other rights and remedies specified in the Credit Agreement. As an accommodation to Borrower while not waiving any such Events of Default, but subject to compliance by Borrower with the terms and conditions hereinafter set forth, Lender agrees to (i) forebear through January 25, 2001 from accelerating the Loans or exercising any rights and remedies to which it is entitled as a result of the occurrence thereof except as provided herein and (ii) continue to extend Loans to the Borrower on the terms and conditions set forth in the Credit Agreement as amended hereby. This forbearance agreement is conditioned upon compliance by the Borrower with the following: (a) On or before October 27, 2000, Borrower shall prepay the Loans in a minimum amount sufficient to reduce the principal amount of Loans made against all Mortgage Loans to an amount not in excess of the Borrowing Base as then determined and computed; (b) On or before October 27, 2000, Ronald J. Sheppard shall execute and deliver a Guaranty of Borrower's obligations to Lender satisfactory to the Lender. (c) On or before October 27, 2000, Borrower shall have satisfied all repurchase obligations owing by it to Household Financial Services, Inc. This agreement shall not establish a custom or course of dealing and does not waive, limit or postpone any of Borrower's obligations under the Credit Agreement, any of the Loan Documents or otherwise, and any discussions (written or oral) which have occurred or which may hereafter occur are not, and shall not be deemed to be, a waiver, limitation or postponement of any of Lender's rights and remedies under the Credit Agreement, any of the Loan Documents or applicable law, all of which rights and remedies are expressly reserved. This agreement shall not become effective until the conditions precedent set forth in Section 3 hereof have been satisfied. This agreement shall expire on January 25, 2001 at which time all terms and conditions of the Credit Agreement shall apply without giving effect to the forebearance provided for herein and Lender shall be entitled to exercise all rights and remedies available to it on account of any Event of Default, whether existing as of the date hereof or otherwise. 3. CONDITIONS PRECEDENT. The effectiveness of this Agreement is subject to the satisfaction of all of the following conditions precedent on or before October 27, 2000: 3.1. The Borrower and the Lender shall have executed and delivered this Agreement. 3.2. The Corporate Guarantors shall have consented hereto in the space provided for such purpose below. 3.3 Ronald J. Sheppard shall have executed and delivered the Sheppard Guaranty. 3.3. Legal matters incident to the execution and delivery of this Agreement shall be satisfactory to the Lender and its counsel. 3.4. The Lender shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the execution and delivery of this Agreement to the extent the Lender or its counsel may reasonably request. 4. REPRESENTATIONS. In order to induce the Lender to execute and deliver this Agreement, the Borrower hereby represents to the Lender that as of the date hereof, the representations and warranties set forth in Section 5 of the Credit Agreement are and shall be and remain true and correct (except that the representations contained in Section 5.5 shall be deemed to refer to the most recent financial statements of the Borrower delivered to the Lender) and except as set forth in Section 2 hereof, the Borrower is in full compliance with all of the terms and conditions of the Credit Agreement and no Default or Event of Default has occurred and is continuing under the Credit Agreement or shall result after giving effect hereof. 5. MISCELLANEOUS. 4.1 The Borrower and the Corporate Guarantors have heretofore executed and delivered to the Lender that certain Security Agreement dated as of May 2, 2000 (the "Security Agreement"). The Borrower hereby, and the Corporate Guarantors by their consent hereto in the space provided for that purpose below, each acknowledges and agrees that, notwithstanding the execution and delivery of this Agreement, the Security Agreement remains in full force and effect and the rights and remedies of the Lender thereunder, the obligations of the Borrower and Corporate Guarantors thereunder and the liens and security interests created and provided for thereunder remain in full force and effect and shall not be affected, impaired or discharged hereby. Nothing herein contained shall in any manner affect or impair the priority of the liens and security interests created and provided for by the Security Agreement as to the indebtedness which would be secured thereby prior to giving effect to this Agreement. 5.2. Except as specifically amended herein, the Credit Agreement shall continue in full force and effect in accordance with its original terms. Reference to this specific Agreement need not be made in the Credit Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to or with respect to the Credit Agreement, any reference in any of such items to the Credit Agreement being sufficient to refer to the Credit Agreement as amended hereby. 5.3. The Borrower agrees to pay on demand all costs and expenses of or incurred by the Lender in connection with the negotiation, preparation, execution and delivery of this Agreement, including the fees and expenses of counsel for the Lender. 5.4. This Agreement may be executed in any number of counterparts, and by the different parties on different counterpart signature pages, all of which taken together shall constitute one and the same agreement. Any of the parties hereto may execute this Agreement by signing any such counterpart and each of such counterparts shall for all purposes be deemed to be an original. This Agreement shall be governed by the internal laws of the State of Illinois. 5.5 The Borrower hereby directs the Lender to apply all sums on deposit as of the date hereof in the Remittance Account (as defined in the Security Agreement) as follows: (a) first to all Obligations owing to Lender as of the date hereof; (b) second, to Household Financial Services, Inc. ("HFS") in satisfaction of all repurchase obligations of Borrower owing to HFS; and (c) third, with the balance, if any, to the Borrower or, in Lender's discretion, to be held in the Remittance Account as cash collateral for future Obligations of the Borrower. Dated as of October 25, 2000. HOMEGOLD, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ Accepted and agreed to in Wood Dale, Illinois as of the date and year last above written. HOUSEHOLD COMMERCIAL FINANCIAL SERVICES, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ CONSENT The undersigned have heretofore executed and delivered to the Lender (i) a Guaranty dated May 2, 2000 (the "Guaranty") and (ii) a Security Agreement dated May 2, 2000 (the "Security Agreement"). Each of the undersigned hereby consents to the Agreement set forth above and confirms that the Guaranty and the Security Agreement remain in full force and effect in accordance with the terms thereof. Each of the undersigned further agrees that the consent of the undersigned to any further amendments to the Credit Agreement shall not be required as a result of this consent having been obtained, except to the extent, if any, required by the Guaranty or Security Agreement. HOMEGOLD FINANCIAL, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ CAROLINA INVESTORS, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ PREMIER FINANCIAL SERVICES INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ LOAN PRO$, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT BUSINESS CAPITAL ASSET BASED LENDING, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ REEDY RIVER VENTURES, L.P. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT SBIC, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT COMMERCIAL MORTGAGE, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT BUSINESS CAPITAL, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT INSURANCE AGENCY CORP. By:________________________________________ Name:______________________________________ Its:_______________________________________ EMERGENT MORTGAGE CORP. OF TENNESSEE By:________________________________________ Name:______________________________________ Its:_______________________________________ HOMEGOLD REALTY, INC. By:________________________________________ Name:______________________________________ Its:_______________________________________ EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000277028 HOMEGOLD FINANCIAL, INC. 1,000 US DOLLAR 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 1 15,990 0 69,450 4,246 0 0 30,052 7,918 225,962 0 0 17 10,000 0 (7,410) 225,962 0 38,504 0 65,018 0 2,292 14,564 (26,514) (9,485) (17,033) 0 579 0 (16,454) (1.21) (1.21) Unclassified Balance Sheet
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