-----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, Fqj0P6P4HbG1W+KD+/zbjBsyAOselgY5eehScyl2seWbOvGLp4m0ptIFZXHptyyH 51J2VRddipS7FWdRWC0xIw== 0000950168-99-001052.txt : 19990402 0000950168-99-001052.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950168-99-001052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMEGOLD FINANCIAL INC CENTRAL INDEX KEY: 0000277028 STANDARD INDUSTRIAL CLASSIFICATION: PERSONAL CREDIT INSTITUTIONS [6141] IRS NUMBER: 570513287 STATE OF INCORPORATION: SC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08909 FILM NUMBER: 99583220 BUSINESS ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 BUSINESS PHONE: 8642895400 MAIL ADDRESS: STREET 1: 3901 PELHAM ROAD CITY: GREENVILLE STATE: SC ZIP: 29615 FORMER COMPANY: FORMER CONFORMED NAME: EMERGENT GROUP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: NRUC CORP DATE OF NAME CHANGE: 19911002 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL RAILWAY UTILIZATION CORP DATE OF NAME CHANGE: 19840813 10-K 1 HOME GOLD 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to _______________________ Commission File No. 0-8909 HOMEGOLD FINANCIAL, INC. (Exact name of registrant as specified in its charter)
South Carolina 57-0513287 - ------------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.) organization)
3901 Pelham Road, Greenville, South Carolina 29615 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 864-289-5000 Securities registered under Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which registered - ---------------------------- ------------------------------------------------ None None Securities registered under Section 12(g) of the Act: Title of Each Class - -------------------------------------------------------------------------------- Common Stock, par value $.05 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 22, 1999, the aggregate market value of voting stock held by non-affiliates of registrant was approximately $12.9 million. As of March 22, 1999, 9,811,599 shares of the Registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's Proxy Statement for the Annual Meeting of Shareholders scheduled for May 12, 1999 to be filed not later than 120 days after December 31, 1998 is incorporated by reference into Part III hereof. PART I ITEM 1. BUSINESS GENERAL HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and its subsidiaries (collectively, "HGFN" or "the Company") are primarily engaged in the business of originating, selling, securitizing and servicing first and second residential mortgage loan products ("Mortgage Loans"). Prior to November 1998, the Company also engaged in the business of originating, selling, securitizing and servicing small-business loan products partially guaranteed by the United States Small Business Administration ("SBA") and small-business loans collateralized by accounts receivable and inventory and mezzanine loans (collectively, "Small-Business Loans"). Prior to March 1998, the Company also engaged, to a lesser extent, in making auto loans ("Auto Loans"). The Company makes substantially all of its loans to non-prime borrowers who have limited access to credit or who may be considered credit-impaired under conventional lending standards. The Company commenced its lending operations in 1991 with the acquisition of Carolina Investors, Inc. ("CII"), a South Carolina non-prime mortgage lender, which had been in business since 1963. Since such acquisition, the Company has significantly expanded its lending operations and through December 31, 1997 experienced a compounded annual growth rate in total loan originations of 84%. During 1998, loan production dropped 33% from 1997 levels. During the years 1998, 1997 and 1996, the Company originated $904.1 million, $1.3 billion and $436.8 million in loans, respectively. The loan growth in prior years was accelerated by the implementation of the Company's retail Mortgage Loan origination strategy during 1997 and 1996. See " -- Mortgage Loan Products." Of the Company's loan originations for the year ended December 31, 1998, 84% were Mortgage Loans, 16% were Small Business Loans and less than 1% were Auto Loans. Substantially all of the auto loan assets were sold in the first quarter of 1998, while substantially all of the small-business loan assets were sold in fourth quarter 1998. The Company no longer makes Small Business or Auto Loans. HomeGold Financial, Inc.'s major operating subsidiaries are HomeGold, Inc. and Carolina Investors, Inc. MORTGAGE LOAN PRODUCTS OVERVIEW The Company provides Mortgage Loan Products primarily to owners of single family residences who use the loan proceeds for such purposes as refinancing, debt consolidation, home improvements and educational expenditures. The Company believes the non-prime mortgage market is highly fragmented and growing rapidly. A leading industry publication estimates that total loan originations for the non-prime mortgage industry grew approximately 32% to $165 billion in 1998 from $125.0 billion in 1997. In addition, it estimates that the top 25 lenders to the non-prime mortgage loan industry represented, in aggregate, approximately 53% of 1998 loan originations (through September 30, 1998), with the top five lenders representing approximately 27% of the total. 2 Substantially all of the Mortgage Loans are made to non-prime borrowers. These borrowers generally have limited access to credit, or are considered credit-impaired by conventional lenders such as thrift institutions and commercial banks. These conventional lending sources generally impose stringent and inflexible loan underwriting guidelines and generally require a longer period of time, as compared to the Company, to approve and fund loans. Loan applications of non-prime borrowers are generally characterized by one or more of the following: (1) limited or unfavorable credit history, including bankruptcy, (2) problems with employment history, (3) insufficient debt coverage, (4) self-employment or (5) inadequate collateral. The Company has developed a comprehensive credit analysis system for its loan originations, which is designed to ensure that credit standards are maintained and consistent underwriting procedures are followed. The Company's focus is to capture higher quality non-prime borrowers. During 1998, 77% of the Mortgage Loans originated by the Company were to borrowers internally classified as "AA/A/A-", while 14% of such loans were internally classified as "B". The Company believes that its customers require or seek a high degree of personalized service and swift response to their loan applications. Also, the Company believes that its customers generally focus more on the amount of the monthly payment than the interest rate charged. Furthermore, because the Company's customers are generally credit-impaired for one or more reasons, the customers are typically not in a position to obtain better rates from traditional lending institutions. In 1998, approximately 56%, or $371.1 million, of the Company's Mortgage Loans originated during 1998 were originated through the Company's retail operation with remainder being originated by wholesale brokers. In 1998, 76% of the Mortgage Loans the Company originated were secured by first-liens. These first-lien Mortgage Loans had an average principal balance of approximately $65,000, a weighted average interest rate of approximately 10.4% and an average loan-to value ("LTV") ratio of 82.1%. Approximately 24% of the Mortgage Loans originated by the Company were secured by a second lien Mortgage Loan, some of which were to the same borrower as the first-lien mortgage loan, which resulted in combined LTV ratios that averaged 101% on these loans and may have been as high as 125% under the Company's guidelines. Such second-lien Mortgage Loans originated during 1998 had an average principal balance of approximately $24,000 and a weighted average interest rate of approximately 14%. In order to reduce the Company's credit risk, second-lien Mortgage Loans with a combined LTV ratio greater than 100% are generally pre-approved and pre-underwritten by a third party and generally sold without recourse on a whole loan basis with certain representations and warranties. Second-lien Mortgage Loans with a combined LTV ratio less than 100% are underwritten by the Company. These loans are generally sold on a whole loan basis without recourse. However, no assurance can be given that the second-lien mortgage loans can be sold. To the extent that the loans are not sold, the Company retains the risk of loss. At December 31, 1998 and 1997, the Company had retained $19.0 million and $69.8 million, respectively, of second-lien mortgage loans on its balance sheet. While the Company has not historically securitized its second-lien mortgage loans, it may choose to do so in the future. 3 The Company has invested significantly in technology and the training of personnel to improve and expand its underwriting, servicing, and collection functions. The Company believes its current operations are capable of supporting increases in both loan origination volume and securitization servicing capacity with only modest increases in fixed expenses. MORTGAGE LOAN ORIGINATION The Company originates its Mortgage Loan products on a retail basis using direct mail marketing techniques. Responses are directed through the Company's call center in Greenville, South Carolina. Mortgage loans are originated on a wholesale basis through approximately 700 independent mortgage brokers and mortgage bankers (collectively, the "Mortgage Bankers"). The Company conducts its mortgage lending operations in 44 states. The Company believes that its use of retail and wholesale origination is an effective diversification strategy which enables it to penetrate the non-prime mortgage loan market through multiple channels. The following table sets forth mortgage loan originations by channel for the period indicated: LOAN ORIGINATIONS BY CHANNEL
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------- 1ST MORTGAGE 2ND MORTGAGE LOANS LOANS TOTAL ------------- -------------- ------------- (DOLLARS IN THOUSANDS) Retail Loan originations $ 258,631 $ 112,503 $ 371,134 Average principal balance per loan $ 63 $ 28 $ 52 Weighted average initial LTV ratio 81% 105% 88% Weighted average coupon rate 10.79% 14.42% 11.89% Wholesale Loan originations $ 243,822 $ 44,488 $ 288,310 Average principal balance per loan $ 67 $ 17 $ 59 Weighted average initial LTV ratio 81% 95% 83% Weighted average coupon rate 10.05% 13.82% 10.63% Total Loan originations $ 502,453 $ 156,991 $ 659,444 Average principal balance per loan $ 65 $ 24 $ 55 Weighted average initial LTV ratio 81% 102% 86% Weighted average coupon rate 10.43% 14.25% 11.34%
4 RETAIL OPERATION. Since 1996, the Company has focused a significant portion of its resources in developing its retail loan products and in developing its related delivery systems. In this manner, the Company reduced its dependence on third-party origination sources. In 1998, retail Mortgage Loan originations represented 56% of the Company's total Mortgage Loan originations compared to 52% and 46% in 1997 and 1996, respectively. Retail Mortgage Loan originations during 1998, 1997 and 1996 totaled $371.1 million, $562.7 million, and $68.8 million, respectively. The Company believes that its retail operation has significant long-term profit potential because it expects that the origination and other fees (typically paid to the broker-originators) will more than offset the infrastructure expenses associated with operating a retail operation. The Company also believes that the retail operation will allow more Company control over the underwriting process and its borrower relationship. The retail operation will also reduce reliance on wholesale sources, while building brand recognition. The Company's retail operation was established in April 1996. Unlike many of its competitors (particularly non-prime mortgage lenders that began operations as traditional finance companies), the Company markets its HomeGold(R) retail lending operations in large part through direct mail and telemarketing methods, as compared to a traditional "bricks and mortar" retail approach in which loans are originated out of local, walk-in retail offices. The Company believes that this strategy allows it to target different areas of the country more quickly, depending on the economic, business and other characteristics that may exist at a particular point in time. The Company also believes that this strategy avoids the expense typically associated with "bricks and mortar" operations. The Company currently uses a central operating center consisting of originators, underwriters, and loan processors which it believes will enable it to realize economies of scale and to compete more efficiently than through a decentralized retail operation. The Company utilized multiple, regional operating centers in Greenville, Indianapolis, Phoenix, and Houston in most of 1998 and in 1997 and 1996. These regional operating centers were consolidated into the Greenville retail operation in November of 1998. The Company believes that it is more cost efficient to operate as one centralized operation. The Company's quarterly retail Mortgage Loan volume for 1998 and 1997 is set forth in the table below: RETAIL MORTGAGE LOAN ORIGINATIONS (DOLLARS IN THOUSANDS)
4th 3rd 2nd 1st 4th 3rd 2nd QTR 1st QTR QTR QTR QTR QTR QTR QTR 1998 1998 1998 1998 1997 1997 1997 1997 ------- -------- ------- ------- ------- ------- -------- ------- Retail Mortgage Loan Originations: Indianapolis $ 7,228 $ 25,586 $ 28,832 $ 33,274 $ 48,214 $ 64,141 $ 59,245 $ 55,639 Phoenix 9,355 26,323 22,971 33,381 42,012 40,216 40,998 25,440 Greenville 13,150 29,589 29,542 21,486 42,299 44,795 38,240 8,338 Houston 2,295 8,469 15,026 21,487 11,625 -- -- -- Sterling Lending -- 10,613 17,391 15,136 15,167 14,646 10,051 1,643 Corporation (1) ------- -------- ------- ------- ------- ------- -------- ------- Total Retail Mortgage Loan Originations $ 32,028 $100,580 $113,762 $124,764 $159,317 $163,798 $148,534 $ 91,060 ======== ======== ======== ======== ======== ======== ======== ========
- -------------------- (1) Sterling Lending Corporation was sold in August of 1998. 5 In January 1998, the Company reorganized its Mortgage Loan delivery system to provide improved segregation between its originations/sales function and its underwriting function. The separation of the underwriting and sales functions has resulted in an improvement in the quality of loans originated. However, in connection with this reorganization, several managers of the Company's retail operations left the Company. This reorganization resulted in a significant reduction in loan volume levels during 1998. The consolidation of all the retail operations into the Greenville location resulted in further reductions in loan origination volumes. These reductions had a significant negative impact on the operating results of 1998. However, the Company believes that the personnel reduction and consolidation of operations are in the best long-term interest of the Company, because it believes it can originate loans more cost effectively from one location. WHOLESALE LENDING OPERATION. All of the Mortgage Loans originated on a wholesale basis by the Company are originated through Mortgage Bankers with whom the Company seeks to develop and maintain continuing relationships. As a wholesale originator of Mortgage Loans, the Company funds the Mortgage Loans at closing. However, the Mortgage Loans may be closed in either the Company's name or in the name of the Mortgage Banker with the Company taking an assignment of the Mortgage Banker's interest. During 1998, 1997, and 1996, the Company conducted its wholesale loan operations through approximately 700, 1,000, and 330 Mortgage Bankers, respectively. Wholesale Mortgage Loan originations during 1998, 1997, and 1996, totaled $288.3 million, $520.1 million, and $259.8 million, respectively. The Company believes that its wholesale lending operation will continue to constitute an important part of its business strategy and that the wholesale operation, when coupled with retail origination channels, will maximize the Company's potential growth and penetration of the non-prime mortgage loan market. This is because there are a large number of independent mortgage brokers who require outside funding of their loans. The wholesale strategy of funding individual loans from brokers at par, rather than at the premiums typically associated with bulk purchases, provides more favorable cash flow for the Company. WHOLESALE MORTGAGE LOAN ORIGINATIONS (DOLLARS IN THOUSANDS)
4th 3rd 2nd 1st 4th 3rd 2nd 1st QTR QTR QTR QTR QTR QTR QTR QTR 1998 1998 1998 1998 1997 1997 1997 1997 -------- ------- -------- ------- ------- ------- ------- -------- Wholesale Originations $30,078 $59,452 $93,097 $105,683 $149,043 $136,397 $134,513 $100,154
Efficiency levels within the wholesale lending operation have deteriorated due to employee turnover, tightening of underwriting guidelines, and industry difficulties. The Company is seeking to improve the efficiency of its wholesale loan originations in 1999 by trying to improve average origination volume per person. 6 GEOGRAPHIC DIVERSIFICATION. Since the Company commenced its retail mortgage operations in 1996, it has significantly expanded its geographic presence. During 1998, 1997, and 1996, Mortgage Loan originations by state were as shown below:
State 1998 % 1997 % 1996 % ----------------- -------- ------ --------- ------ ------- ------ North Carolina $ 108,714 16.4% $ 198,485 18.4% $ 89,976 27.4% South Carolina 87,435 13.3 147,663 13.6 90,411 27.5 Florida 43,698 6.6 101,612 9.4 39,589 12.0 Georgia 34,725 5.3 80,012 7.4 13,381 4.1 Louisiana 33,238 5.0 53,917 5.0 5,080 1.6 Tennessee 30,538 4.6 55,872 5.2 15,239 4.6 Michigan 29,461 4.5 61,836 5.7 10,959 3.3 Virginia 28,836 4.4 50,556 4.7 13,666 4.2 Illinois 28,479 4.3 1,466 0.1 -- -- Pennsylvania 28,425 4.3 275 -- -- -- Missouri 22,864 3.5 2,594 0.2 2,168 0.7 Indiana 20,700 3.1 51,046 4.7 16,373 5.0 Ohio 19,643 3.0 328 -- 199 -- Mississippi 19,523 3.0 13,579 1.3 2,731 0.8 All other states 123,165 18.7 263,575 24.3 28,877 8.8 ---------- ----- ----------- ----- ---------- ----- Total $ 659,444 100.0% $ 1,082,816 100.0% $ 328,649 100.0% ========== ===== =========== ===== ========== =====
LOAN UNDERWRITING In the application and approval process associated with the Company's retail Mortgage Loan operations, a Company loan officer finds potential borrowers through leads generated by direct mail marketing techniques and calling campaigns. After obtaining an initial loan application, additional information is compiled and gathered by loan processors, who then forward the file to the underwriting department for approval. The underwriting department generally completes its review within one business day after procurement of all necessary documentation. Upon approval by the underwriting department, the loan is generally forwarded by the loan closing department to an attorney or title company for closing. For loans originated through Mortgage Bankers, the application and necessary underwriting information is generally gathered by the Mortgage Banker and forwarded to the Company's underwriting department for approval before the loan is closed and funded. Creditworthiness is assessed through a variety of means, including calculating debt to income ratios, examining the applicant's credit history through credit reporting bureaus, verifying an applicant's employment status and income, and checking the applicant's payment history with respect to any first-lien mortgage on the property. The Company uses several procedures to verify information obtained from an applicant. In order to verify an applicant's employment status and income, the Company generally obtains such verification from the applicant's employer. The Company requires self-employed borrowers to provide a copy of their tax return. 7 The Company generally requires an independent appraisal on all loans. Loans in excess of $350,000 generally require two independent appraisals. The Company generally requires title insurance for all real estate loans. The Company also generally requires real estate improvements to be fully insured as to fire and other commonly insurable risks and regularly monitors its loans to ensure that insurance is maintained for the period of the loan. The following table provides a general overview of the Company's principal underwriting criteria for first Mortgage Loans, set forth according to internal product types: INTERNAL PRODUCT TYPE - FIRST MORTGAGES
------------ ----------- ------------ ----------- ----------- ------------ AA A A- B C D ------------ ----------- ------------ ----------- ----------- ------------ Existing mortgage No 30 day Maximum Maximum of Maximum Maximum Cannot be (maximum historical late of one 30 two 30 day of three of four in delinquencies) payments day late late 30 day 30 day foreclosure in the payment payments late late last 24 in last in last 12 payments payments months 12 months; in the in the months; and one 60 last 12 last 12 and one day late months; months; 60 day payment in maximum maximum late the last of one 60 of one 60 payment 24 months day late day late in the payment payment last 24 in the in the months last 24 last 12 months months; maximum of one 90 day late payment in the last 24 months Other credit Maximum of Maximum Maximum of Maximum 30, 60, No criteria history (maximum two 30 day of one 60 one 60 day of one 90 and 90+ historical late day late late day late day late delinquencies) payments payment payment in payment payments in the in the the last in the acceptable, last 24 last 24 24 months, last 24 provided months months, with months that the with minimal 30 borrower minimal day late has at 30 day payments least late in the minimal payments last 24 favorable in the months credit last 24 history months Bankruptcy filings None in None in None in None in None in No criteria past 3 past 3 past 3 past 2 past year years years years years Maximum debt service to income 45% 45% 45% 45% 50% 50% ratio (1) Maximum LTV ratio: Owner occupied 100% 100% 90% 85% 80% 70% Non-owner occupied 80% 75% 75% 70% 65% No product
- ------------ (1) Maximum debt service to income ratio may increase by 5% in each category (except AA loans) if disposable income meets certain thresholds. 8 The following table provides a general overview of the Company's principal underwriting criteria for second Mortgage Loans, set forth according to internal product types: INTERNAL PRODUCT TYPE - SECOND MORTGAGES
----------------- ---------------- ------------------- ------------ PIGGYBACK LESS PIGGYBACK 125% CLTV PERSONAL THAN OR EQUAL GREATER THAN PREAPPROVAL HOME LOAN TO $15,000 $15,000 REQUIRED ----------------- ---------------- ------------------- ------------ Existing mortgage No 30 day late Maximum of one No 30 day late Maximum of (maximum historical payments in 30 day late payments in last one 30 day delinquencies) last 12 months; payment in 12 months late Maximum of two last 12 months payment in 30 day late last 12 payments in months months 13 through 24 Other credit history Maximum of Maximum of two N/A Maximum of (maximum historical three 30 day 30 day late two 30 day delinquencies) late payments payments in late in last 12 last 12 payments months; Maximum months, unless in last 12 of five 30 day credit score months, late payments is greater unless in months 13 than 650 credit through 24; score is Maximum of one greater 60 day late than 650 payment Bankruptcy filings None None in past None in past None in three years seven years past three years Maximum debt service to income ratio (1) 45% 45% 45% 45% Maximum LTV ratio 100% 100% 125% 100%
- ------------ (1) Maximum debt service to income ratio may increase by 5% on Piggybacks greater than $15,000 and on Personal home loans if disposable income meets certain thresholds. 9 The following tables provide information regarding the Company's first and second-lien Mortgage Loan originations by credit classification for the years ended December 31, 1998 and 1997: LOAN ORIGINATIONS BY CREDIT CLASSIFICATION YEAR ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
INTERNAL LOAN CLASSIFICATION ----------------------------------------------------------- AA/A/A- B C D TOTALS ------- ------- ------- ------- ------- FIRST-LIEN MORTGAGE LOANS Amount $ 369,153 $ 76,776 $ 44,226 $ 12,298 $ 502,453 Percentage 73.5% 15.3% 8.8% 2.4% 100.0% Weighted average coupon 10.0 11.1 12.0 13.8 10.4 Weighted average LTV ratio 83.7 79.9 76.0 68.5 82.1 SECOND-LIEN MORTGAGE LOANS Amount $ 138,166 $ 14,102 $ 4,321 $ 402 $ 156,991 Percentage 88.0% 9.0% 2.7% .3% 100.0% Weighted average coupon 14.2 14.3 14.2 14.6 14.2 Weighted average LTV ratio 102.6 92.0 84.5 80.8 101.1
LOAN ORIGINATIONS BY CREDIT CLASSIFICATION YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) INTERNAL LOAN CLASSIFICATION ----------------------------------------------------------- AA/A/A- B C D TOTALS ------- ------- ------- ------- ------- FIRST-LIEN MORTGAGE LOANS Amount $ 584,991 $ 162,279 $ 56,097 $ 17,820 $ 821,187 Percentage 71.2% 19.8% 6.8% 2.2% 100.0% Weighted average coupon 10.7 11.7 12.9 14.0 11.1 Weighted average LTV ratio 78.9 78.0 74.3 68.4 78.2 SECOND-LIEN MORTGAGE LOANS Amount $ 224,547 $ 28,447 $ 7,234 $ 1,401 $ 261,629 Percentage 85.8% 10.9% 2.8% 0.5% 100.0% Weighted average coupon 14.6 15.0 14.8 14.7 14.7 Weighted average LTV ratio 102.2 92.3 85.9 79.4 100.5
Loan officers are trained to structure loans that meet the applicant's needs, while satisfying the Company's lending criteria. If an applicant does not meet the lending criteria, the loan officer may offer to make a smaller loan, or request that the borrower obtain a co-borrower or guarantor, in order to bring the application within the Company's lending parameters. The amount the Company will lend to a particular borrower is determined by a number of factors, including the borrower's creditworthiness, the value of the borrower's equity in the real estate, and the ratio of such equity to the home's appraised value. In connection with its Mortgage Loan products, the Company collects nonrefundable loan fees and various other fees, depending on state law, such as fees for credit reports, lien searches, title insurance and recordings, and appraisal fees. In connection with the servicing of the loans, the Company may receive late fees and insufficient funds fees, where permitted by applicable law. SALE AND SECURITIZATION OF MORTGAGE LOANS The Company sells a significant portion of the loans it originates, primarily through two methods, whole loan cash sales and securitization. 10 Whole loan cash sales are where loans are generally packaged in pools of approximately $5.0 million. Historically, the Company has sold its Mortgage Loans "servicing released" (i.e., without retention of the servicing rights and associated revenues) and on a non-recourse basis, with certain representations and warranties. The Company is required to repurchase any loan if it is subsequently determined that any representation and warranty made with respect to such loan was untrue. In 1997, the Company began securitizing mortgage loans. Under this method, the Company sells Mortgage Loans it purchased or originated to a trust for cash. The trust sells asset-backed bonds secured by the loans to investors. The Company records certain assets and income based upon the difference between all principal and interest received from the loans sold and the following factors (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used in past securitizations are appropriate and reasonable. The following table sets forth for the periods indicated, Mortgage Loans securitized and Mortgage Loans sold on a whole loan basis and Mortgage Loans originated:
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) Mortgage loans securitized $ 90,352 487,563 $ -- Mortgage loans sold 625,480 435,333 284,794 ---------- ----------- ---------- Total Mortgage loans sold or securitized $ 715,832 922,896 $ 284,794 ========== =========== ========== Total Mortgage loans originations $ 659,444 1,082,816 $ 328,649 % of Mortgage loan originations sold or 108% 85% 87% securitized
Historically, in connection with the cash sale of Mortgage Loans prior to 1998, the Company received premiums ranging from 2% to 6% of the principal amount of the Mortgage Loans being sold, depending on prevailing interest rates and the terms of the loans. However, during 1998, 1997, and 1996, the weighted average premiums (discount) on the whole loan cash sales were (.40)%, 2.75%, and 5.86%, respectively. For the years ended December 31, 1998, 1997, and 1996, gains (losses) recognized by the Company in connection with the whole loan cash sales of Mortgage Loans were $(2.5) million, $11.1 million, and $18.3 million, respectively. 11 The Company believes the significant change in the premiums (discounts) received in 1998 resulted primarily from two factors. First, the Company sold at a discount substantially all of the second lien mortgage loans it held, that were not underwritten in accordance with Company guidelines. In an effort to increase loan production, former employees approved loans that did not meet Company guidelines. Second, the Company received significantly lower premiums on loan sales in the third and fourth quarters of 1998 because of a market surplus in the supply of loans in the resale market. The Company believes this surplus, in turn, resulted from the decision of issuers of securitized loan pools to sell their loan products in the whole loan cash market when securitization, as a means of financing, became less attractive. Securitization became less attractive as the corporate interest rate spreads required by investors increased in the latter half of 1998. Investors required higher spreads because of concerns related to higher than anticipated prepayments on securitized loan pools and concerns about the credit worthiness of several issuers. During the first quarter of 1999, the market premiums paid on whole loan cash sale of mortgage loans improved compared to the last half of 1998. The Company anticipates that premiums on loans sold in 1999 will range from 1% to 4%. However, no assurance can be given that the Company will actually realize these levels. The Company is currently receiving an average of approximately 2.5%. Typically, purchasers of Mortgage Loan pools are large financial institutions, many of which purchase the Mortgage Loans for inclusion in larger pools of loans which, in turn, are sold to institutional investors. During 1997, the Company securitized a substantial portion of its Mortgage Loans. The Company completed one securitization in the first quarter of 1998. The Company decided to sell most of the loans originated in the remaining three quarters of 1998 through whole loan sales to maximize cash flow and liquidity. Historically, the Company generally has been able to recognize higher premiums from securitizations compared to whole loan sale. However, cash flow is impacted more positively in the short term by whole loan sales, compared to securitizations. The Company is planning to securitize a portion of its existing portfolio in 1999. However, no assurance can be given that this anticipated securitization will be completed. During 1998, the weighted average premium on the securitized Mortgage Loans was 8.75%. For the year ended December 31, 1998, gains recognized into income by the Company in connection with the securitization of Mortgage Loans were $7.3 million. The gains recognized into income, resulting from securitization transactions, can 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. See " Loan Sales and Securitizations" under Management's Discussion and Analysis of Financial Condition and Results of Operations. 12 MORTGAGE LOAN SERVICING, DELINQUENCIES AND COLLECTIONS SERVICING The Company maintains a centralized portfolio management department located in Greenville, South Carolina which services Mortgage Loans. Prior to 1997, the Company did not retain the servicing on Mortgage Loans sold. Beginning in March 1997, the Company began retaining servicing for Mortgage Loans it securitized. Servicing includes depositing cash received and posting payments to account for principal and interest, remitting funds to the Trustee, imaging documents, collection activities on past due accounts, management of loss mitigation activities and foreclosure and sale of properties, ensuring that insurance is in place, monitoring payment of real estate property taxes, customer service and retention activities and warehouse funding management. The Company does not escrow funds for purposes of insurance and taxes. However, it has the right to purchase insurance and pay taxes, which, if paid by the Company, are charged back to the borrower. The Company serves as master servicer for the five Mortgage Loan securitizations which it has effected to date. In connection with such securitizations, the Company's servicing operation was reviewed by the rating agencies which rated the bonds issued in connection with such securitizations. The Company increased its servicing capabilities and staffing significantly during 1997 and 1996 in anticipation of increased origination growth and increased servicing responsibilities resulting from future loan securitizations. A centralized quality control department reviews a substantial portion of the Mortgage Loans subsequent to funding to maintain consistency and compliance with the Company's documentation and underwriting standards. Because the Company completed only one securitization in 1998, and sold the majority of loans originated on a "servicing released" basis, the servicing portfolio has declined from $768.6 million at December 31, 1997, to $550.3 million at December 31, 1998. Consistent with the Company's strategy to match staffing levels with servicing volume, staffing levels declined in 1998. 13 DELINQUENCIES AND COLLECTIONS Collection efforts generally begin when a Mortgage Loan is over eight days past due, unless the account has previous unpaid late fees, in which case collection efforts generally begin when an account is over one day past due. At that time, the Company generally contacts the borrower by telephone to determine the reason for the delinquency and attempts to bring the account current. Typically, after an account becomes 15 days past due, the Company sends a reminder letter to the borrower, and then sends subsequent letters at 30 days past due, 41 days past due, and 55 days past due. In general, at 41 days past due, the Company sends a right-to-cure letter. After 90 days, the Company sends a five day demand letter and turns the account over to an attorney. In addition to written notices, the Company attempts to maintain telephone contact with the borrower at various times throughout the delinquency period. If the status of the account continues to deteriorate, the Company's loss mitigation unit works on a dual track along with the foreclosure unit to try to save the borrowers from a foreclosure action, while at the same time, trying to keep the foreclosure timelines as short as possible. In limited circumstances, when a borrower is experiencing difficulty in making timely payments, the Mortgage Loan Operations may temporarily adjust the borrower's payment schedule. The determination of how to work out a delinquent loan is based upon a number of factors, including the borrower's payment history and the reason for the current inability to make timely payments. The Company utilizes a proprietary Real Rewards program designed to counsel its borrowers on budgeting concepts, to assist them in their personal financial planning, to help them avoid costly foreclosure action and to educate them on the advantages and the importance of maintaining good credit. The Company stresses to the borrowers the importance of their home, and why they should make the mortgage payment ahead of other creditors in the event of tight cash flow. When a loan is 90 days past due, generally, it is placed on non-accrual status and the Company initiates foreclosure proceedings. In connection with such foreclosure, the Company reviews the loan and the facts surrounding its delinquency, and may reappraise the underlying property. Regulations and practices regarding foreclosure and the rights of the mortgagor in default vary greatly from state to state. If deemed appropriate, the Company will bid in its loan amount at the foreclosure sale or accept a deed in lieu of foreclosure. The residential real estate owned portfolio, which is carried at the lower of carrying value or appraised fair market value less estimated cost to sell, totaled $5.9 million, $2.5 million and $3.0 million at December 31, 1998, 1997 and 1996, respectively. 14 The following table sets forth for the periods indicated information relating to the delinquency and loss experience of the Company with respect to its Mortgage Loans serviced:
Year Ended December 31, ----------------------------------- 1998 1997 1996 ---------- --------- ---------- (Dollars in Thousands) Total serviced Mortgage Loans (period end) (1) $ 550,304 $ 768,556 $ 146,231 Serviced Mortgage Loans (period end) (2) 550,304 700,248 146,231 Average serviced Mortgage Loans (2) 743,362 411,549 97,281 Delinquency (period end) (3) 30-59 days past due: Principal balance $ 28,174 $ 25,424 $ 4,450 % of serviced Mortgage Loans (2) 5.12% 3.63% 3.04% 60-89 days past due: Principal balance $ 8,647 $ 9,383 $ 1,530 % of serviced Mortgage Loans (2) 1.57% 1.34% 1.05% 90 days or more past due: Principal balance $ 38,109 $ 21,233 $ 4,633 % of serviced Mortgage Loans (2) 6.93% 3.03% 3.17% Total delinquencies: Principal balance $ 74,930 $ 56,040 $ 10,613 % of serviced Mortgage Loans (2) 13.62% 8.00% 7.26% Real estate owned (period end) $ 5,881 $ 2,522 $ 2,959 Net charge-offs 6,842 1,305 792 % of net charge-offs to average serviced 0.92% 0.32% 0.81% Mortgage Loans
(1) Includes loans subserviced for others, where the Company has no credit risk. (2) Does not include loans subserviced for others, where the Company has no credit risk. (3) For 1998 and 1997, the Company is calculating delinquencies based on number of payments past due, in accordance with industry standards, compared with number of days past due used in 1996. Since substantially all of the Company's loans are to non-prime borrowers who have limited access to credit or who may be considered credit-impaired by conventional lending standards, the percentage of the Company's loans past due is expected to be higher than a financial institution that provides loans to prime borrowers. The Company also expected that the delinquency percentages would increase during 1998 and 1997 as the mortgage loan portfolios began to mature. During 1996 and 1997 the Company increased significantly the size of the Mortgage Loan portfolio. During 1998 the Company began to reduce the size of the portfolio. This resulted in the current production being sold, leaving a significantly higher percentage of matured loans in the portfolio. Therefore, the Company would expect a higher percentage of loans to become past due. 15 SMALL BUSINESS LOAN PRODUCTS OVERVIEW The Company sold substantially all of the assets of the small business loan operations in the fourth quarter of 1998. The Company maintains a $5.1 million investment account with a trustee relating to representations and warranties in connection with the sale of the small business loan unit. On February 26, 1999, the Company received notification from TransAmerica Small Business Capital, Inc. ("TransAmerica") that pursuant to the asset purchase agreement dated October 2, 1998, that a loan for approximately $1.1 million was allegedly not made by the Company in accordance with stated representations. TransAmerica is seeking to recover the loan amount from the Company's $5.1 million that is being maintained by the trustee. The Company is currently reviewing the facts to determine this claim's validity. Prior to the sale, the Company's small business loan unit provided loan products to small businesses, primarily for the acquisition or refinancing of property, plant and equipment, working capital and debt consolidation. The Company's principal strategy related to the small business loan products was to market the Company's SBA loans, asset-based small business loans and mezzanine loans as products of a single commercial loan company capable of meeting the range of commercial credit needs of small businesses in various stages of development. The Company no longer offers the small business loan products. The Small Business Loan Unit originations during 1998, 1997, and 1996 totaled $122.9 million, $81.0 million, and $68.2 million, respectively. This unit sold $141.0 million, $41.2 million, and $33.1 million of loans during 1998, 1997, and 1996, respectively. This unit also securitized $1.8 million, $24.3 million, and $12.9 million of loans in 1998, 1997, and 1996, respectively. The Small Business Loan Unit realized net income in 1998, 1997, and 1996 of $11.0 million, $5.0 million, and $2.2 million, respectively. Included in the 1998 net income was a $19.0 million pre-tax gain on sale of the Small Business Loan Unit's net assets. AUTO LOAN PRODUCTS The Company sold substantially all of the assets of the auto loan unit on March 19, 1998 for $20.4 million, the approximate book value of the assets. The Company no longer offers auto loans as one of its financial products. Prior to the sale of the auto loan assets, this unit recorded a net loss of approximately $110,000 for the period that began January 1, 1998 and ended March 19, 1998. This product line also recorded losses of $1.9 million and $1.1 million for the years ended December 31, 1997 and 1996, respectively. COMPETITION The financial services industry, including the markets in which the Company operates, is highly competitive. Competition is based on the type of loan, interest rates, and service. Traditional competitors in the financial services industry include commercial banks, credit unions, thrift institutions, credit card issuers, consumer and commercial finance companies, and leasing companies, many of which have considerably greater financial and marketing resources than the Company. Moreover, major brokerage firms, insurance companies, 16 retailers and bank holding companies have formed substantial national financial services networks. The Company believes that it competes effectively in its markets by providing competitive rates and efficient, complete services. The Company faces significant competition in connection with its Mortgage Loan products, principally from national companies which focus their efforts on making mortgage loans to non-prime borrowers. Many of these companies have considerably greater financial and marketing resources than the Company. Although these large national companies compete in the mortgage loan industry, this industry, as a whole, is highly fragmented and no one company has a significant share of the total mortgage loan market. The Company attempts to maintain its competitiveness by servicing its retail mortgage loans and by maintaining and developing its strong relationships with Mortgage Bankers. If the Company is not successful in these regards, the Company's operations could be materially and adversely affected. See "Mortgage Loan Products -- Mortgage Loan Origination." REGULATION GENERAL The Company's operations are subject to extensive local, state and federal regulations including, but not limited to, the following federal statutes and regulations promulgated thereunder: Title 1 of the Consumer Credit Protection Act of 1968, as amended (including certain provisions thereof commonly known as the "Truth-in-Lending Act" or "TILA"), the Equal Credit Opportunity Act of 1974, as amended ("ECOA"), the Home Mortgage Disclosure Act, the Fair Credit Reporting Act of 1970, as amended ("FCRA"), the Fair Debt Collection Practices Act, as amended, the Real Estate Settlement Procedures Act ("RESPA") and the National Housing Act, as amended. In addition, the Company is subject to state laws and regulations, including those with respect to the amount of interest and other charges which lenders can collect on loans (e.g., usury laws). In the opinion of management, existing statutes and regulations have not had a materially adverse effect on the business done by the Company. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon the future business, financial condition or prospects of the Company. The Company believes that it is in substantial compliance with state and federal laws and regulations governing its lending activities. However, there can be no assurance that the Company will not inadvertently violate one or more of such laws and regulations. Such violations may result in actions for damages, claims for refunds of payments made, certain fines and penalties, injunctions against certain practices, and the potential forfeiture of rights to repayment of loans. Further adverse changes in the laws or regulations to which the Company's business is subject, or in the interpretation thereof, could have a material adverse effect on the Company's business. 17 MORTGAGE LOANS Mortgage lending laws generally require lenders to be licensed, and place limitations on the amount, duration and charges for various categories of loans, require adequate disclosure of certain contract terms and place limitations on certain collection practices and creditor remedies. Many states have usury laws which limit interest rates, although the limits generally are considerably higher than current interest rates charged by the Company. State regulatory authorities may conduct audits of the books, records and practices of the Company's operations. The Company is licensed to do business in each state in which it does business and in which such licensing is required and believes it is in compliance in all material respects with these regulations. The Company's Mortgage Loan origination activities are subject to TILA. TILA contains disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. TILA also guarantees consumers a three-day right to cancel certain credit transactions, including any refinanced mortgage or junior mortgage loan on a consumer's primary residence. The Company believes that it is in substantial compliance in all material respects with TILA. The Company is also required to comply with the ECOA, which, in part, prohibits creditors from discriminating against applicants on the basis of race, color, religion, national origin, sex, age or marital status. ECOA restricts creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by the lender regarding consumer rights and requires lenders to advise applicants who are turned down for credit of the reasons therefor. In instances where a loan applicant is denied credit or the rate or charge for a loan is increased as a result of information obtained from a consumer credit agency, another statute, the FCRA, requires the lender to supply the applicant with the name, address and phone number of the reporting agency. RESPA was enacted to provide consumers with more effective advance disclosures about the nature and costs of the settlement process, and to eliminate kickbacks or referral fees that raised the costs of settlement services. RESPA applies to virtually all mortgages on residential real property that is designed principally for occupancy of one to four families. Specific disclosures mandated by RESPA include, without limitation, estimates of closing costs, transfers of servicing, affiliated business arrangements and other settlement information. EMPLOYEES At December 31, 1998, the Company employed a total of 468 full-time equivalent employees. Although the Company has experienced several layoffs during 1998, it believes that relations with the remaining employees are good. ITEM 2. PROPERTIES The Company's headquarters are located at 3901 Pelham Road, Greenville, South Carolina and are owned by the Company. At December 31, 1998, the Company owned one office and leased twenty offices. None of the leases, considered separately or collectively, are believed to be material to the Company's operations. The Company believes that its leased and owned locations are suitable and adequate for their intended purposes. 18 ITEM 3. LEGAL PROCEEDINGS As previously disclosed, on April 27, 1998, Capital City Acceptance, Inc. filed an arbitration demand against the Company, its directors and selected officers with the American Arbitration Association in Charlotte, NC. The plaintiff demands were dismissed by an arbitration decision delivered on January 13, 1999. On February 26, 1999, the Company received notification from TransAmerica Small Business Capital, Inc. ("TransAmerica") that pursuant to the asset purchase agreement dated October 2, 1998, that a loan for approximately $1.1 million was allegedly not made by the Company in accordance with stated representations. TransAmerica is seeking to recover the loan amount from the Company's $5.1 million that is being maintained by the trustee. The Company is currently reviewing the facts to determine this claim's validity. The Company and its subsidiaries are, from time to time, parties to various legal actions arising in the normal course of business. Management believes that there is no proceeding threatened or pending against the Company or any of its subsidiaries that, if determined adversely, would have a materially adverse effect on the operations, profitability or financial condition of the Company or any of its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the Company's 1998 fiscal year. 19 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock presently is traded on the NASDAQ National Market under the symbol "HGFN". In the first quarter of 1999, the Company received notice from NASDAQ that its stock would be delisted. The Company has appealed NASDAQ's notice to "delist" the Company's stock. The Company believes that it has presented evidence to NASDAQ to support the decision that the Company's stock activity should continue to be listed. However, no assurance can be given that the Company will prevail in the appeal. As of February 28, 1999, the Company was in compliance with the current requirements for continued listing on NASDAQ. The Company expects a decision to be reached in April 1999. The following table sets forth the high and low bid prices of the common stock for the periods indicated, as reported by NASDAQ. High Bid Low Bid -------- ------- YEAR ENDED DECEMBER 31, 1997 First Quarter $ 16.25 $ 10.50 Second Quarter $ 12.25 $ 8.75 Third Quarter $ 18.63 $ 10.75 Fourth Quarter $ 20.00 $ 10.50 YEAR ENDED DECEMBER 31, 1998 First Quarter $ 14.75 $ 7.25 Second Quarter $ 9.69 $ 3.25 Third Quarter $ 5.50 $ 1.75 Fourth Quarter $ 2.00 $ .34 The bid quotes above reflect inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. On March 22, 1999, the closing price for the Company's common stock was $1.31. As of March 22, 1999, the Company had 9,811,599 outstanding shares of common stock held by 823 stockholders of record. No dividends on common stock were paid or declared during 1998 or 1997, and no dividends are expected to be paid on the common stock for the foreseeable future. The Indenture pertaining to the Company's 10-3/4% Senior Notes places certain restrictions on the Company's ability to pay dividends, and the Credit Facility to which the Company's subsidiaries HomeGold, Inc. and Carolina Investors, Inc. are parties restricts the ability of these subsidiaries to pay dividends and make loans and advances to the Company. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Liquidity and Capital Resources" which discussion is incorporated herein by reference. 20 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth historical selected financial information of the Company as of the dates and for the periods indicated. The statement of income data, cash flow data, and balance sheet data are derived from the audited financial statements of the Company. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Report.
YEAR ENDED DECEMBER 31, 1998 1997 1996 1995 1994 ----------- ---------- --------- --------- ---------- (Dollars in thousands) STATEMENT OF INCOME DATA: Interest Income $ 35,075 $ 34,008 $ 17,908 $ 15,193 $ 10,691 Servicing income 12,239 8,514 3,274 446 212 Gain on sale of loans: Gross gain on sale of loans 9,472 52,828 23,815 9,169 6,450 Loan fees, net 11,745 30,207 4,150 586 276 ----------- ---------- ---------- --------- --------- Total gain on sale of loans 21,217 83,035 27,965 9,755 Gain on sale of subsidiaries' net assets (1) 18,964 -- -- -- -- Other revenues 4,230 1,399 1,241 884 566 ----------- ---------- ---------- --------- ---------- Total revenues 91,725 126,956 50,388 26,278 18,195 Interest expense 35,968 25,133 11,021 8,527 5,879 Provision for credit losses 11,906 10,030 5,416 2,480 2,510 Unrealized loss on residual receivable 13,638 -- -- -- -- Restructuring charges (2) 6,838 -- -- -- -- General and administrative expenses 96,366 84,284 23,490 10,419 7,359 - ----------- ---------- ---------- --------- ---------- Total expenses 164,716 119,447 39,927 21,426 15,748 ----------- ---------- ---------- --------- ---------- Income (loss) from continuing operations before income taxes, (72,991) 7,509 10,461 4,852 2,447 minority interest and extraordinary item Provision (benefit) for income taxes 3,017 (3,900) 718 190 609 ----------- ---------- ---------- --------- ---------- Income (loss) from continuing operations before minority interest and extraordinary item (76,008) 11,409 9,743 4,662 1,838 Minority interest in (earnings) loss of 47 (156) 352 (81) (46) subsidiaries ----------- ---------- ---------- --------- ---------- Income (loss) from continuing operations before extraordinary item (75,961) 11,253 10,095 4,581 1,792 Income (loss) from discontinued operations -- -- -- (3,924) 546 (3) Extraordinary item-gain on extinguishment of debt, net of $0 tax (4) 18,216 -- -- -- -- ----------- ---------- ---------- --------- ---------- Net income (loss) $ (57,745) $ 11,253 $ 10,095 $ 657 $ 2,338 =========== ========== ========== ========= ========== DILUTED EARNINGS PER SHARE: Continuing operations (7.81) 1.17 1.42 0.69 0.27 Discontinued operations -- -- -- (0.59) 0.08 Extraordinary item 1.87 -- -- -- -- ----------- ---------- ---------- --------- ---------- Net income (loss) per share $ (5.94) $ 1.17 $ 1.42 $ 0.10 $ 0.35 =========== ========== ========== ========= ========== CASH FLOW DATA: Cash flow due to operating cash income and (62,775) (26,652) 14,174 6,849 4,909 expenses Cash provided by (used in) loans held for 147,055 (119,637) (92,652) (17,025) 11,811 sale and other ----------- ---------- ---------- --------- ---------- Net cash provided by (used in) operating activities $ 84,280 $ (146,289) $ (78,478) $ (10,176) $ 16,720 == ======== = ======== = ======== = ======= = ======== BALANCE SHEET DATA: Total gross loans receivable $ 124,739 $ 297,615 $ 189,532 $ 126,458 $ 95,398 Total residual assets 43,857 63,202 13,215 3,831 1,872 Total assets 257,209 416,152 224,149 144,931 109,448 Total debt 239,276 336,920 169,596 129,950 95,015 Total shareholders' equity $ 5,801 $ 63,374 $ 46,635 $ 9,885 $ 9,700
- ----------------------------------- (1) See Footnote 12. Sale of Subsidiary and Subsidiary's Assets in Notes to Consolidated Financial Statements. (2) See Footnote 14. Restructuring Charge in Notes to Consolidated Financial Statements. (3) The Company discontinued its apparel segment in 1995 and its transportation segment in 1994 (4) See Footnote 17. Extraordinary Item-Gain on Extinguishment of Debt in Notes to Consolidated Financial Statements. (5) The Company did not pay any cash dividends on its common stock in the five years ended December 31, 1998. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion should be read in conjunction with the Consolidated Financial Statements and notes of the Company appearing elsewhere in this report. FORWARD - LOOKING INFORMATION From time to time, the Company makes oral and written statements that may constitute "forward-looking statements" (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company desires to take advantage of the "safe harbor" provisions in the Act for forward-looking statements made from time to time, including, but not limited to, the forward-looking statements made in this Annual Report on Form 10-K (the "Annual Report"), as well as those made in other filings with the SEC, its letter to Shareholders, and other financial discussion and analysis by management that reflect projections or future financial or economic performance of the Company. Such forward-looking statements are based on management's current plans and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In the preparation of this Annual Report, where such forward-looking statements appear, the Company has sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. Such factors include, but are not limited to: lower origination volume due to market conditions, inability to achieve desired efficiency levels, higher losses due to economic downturn or lower real estate values, loss of key employees, adverse consequences of changes in 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, dependence on Federal programs, 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, the Company's ability to complete the implementation of its Year 2000 program on a timely basis and the ability of the Company's suppliers, vendors, customers, and other third parties on which the Company relies to be Year 2000 ready, 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. The Company does not have, and expressly disclaims, any obligation to release publicly any updates or any changes in the Company's expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based. 22 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. Prior to the sale of the Company's auto loan portfolio in March 1998, the Company also originated, securitized and serviced auto loans. Prior to the sale of substantially all of the assets of the small business loan unit in the fourth quarter of 1998, the Company made loans to small businesses primarily for the acquisition or refinancing of real estate or property, plant and equipment, working capital, and debt consolidation. The Company commenced its lending operations in 1991 through the acquisition of Carolina Investors, Inc. ("CII"), a small mortgage lending company, which had been in operation since 1963. From the date of this acquisition through December 31, 1997, the Company has experienced a compounded annual growth rate of 84% in loan originations. In 1998, loan originations declined 33% from the prior year. There were two primary factors that resulted in lower production in 1998 compared to 1997. First was a decision at the beginning of 1998 to segregate the origination and the underwriting processes. In connection with this reorganization, several managers of the HomeGold retail operations left the Company. Second was a decision by the Company to "tighten" underwriting guidelines in response to investor concerns related to the quality of loans that the Company and its competitors were originating. In 1997, the Company decided to focus primarily on the Company's larger direct mail retail mortgage operation and its mortgage brokerage business. This resulted in the sale of the small retail origination subsidiary, Sterling Lending Corp. ("SLC") in August 1998. In the fourth quarter of 1997, the Company began restructuring its Mortgage Loan retail product line distribution channel. As a result of the restructuring and other factors, mortgage loan origination volumes declined each quarter in 1998. Having assessed market conditions, management made strategic decisions to streamline retail mortgage lending operations. Retail lending operations located in Indianapolis, Indiana, Phoenix, Arizona, and Houston, Texas were consolidated in November 1998 into the Greenville retail operating center located at the Company headquarters in Greenville, South Carolina. The impact of the above restructuring resulted in the elimination of 204 positions or approximately 28% of the Company's work force. The Company incurred a $6.8 million restructuring charge in the fourth quarter as a result of this decision. Management feels these charges will be beneficial by creating efficiencies through consolidation of operations and implementation of future strategic directives, and better aligning expenses with current levels of production. The Company believes as a result of higher than anticipated prepayments on securitized loan pools and concerns in the market about the credit worthiness of several issuers of securitized assets, corporate interest rates spreads within the industry have widened significantly in the last half of the third quarter of 1998. These conditions have negatively impacted the securitization and whole loan sale markets. As spreads widened, securitization as a means of financing has become less attractive. As a result, more issuers are turning to the whole loan sale market. As this whole loan product flows into the market, whole loan sale premiums have eroded, which has, in turn, adversely impacted issuer's profitability and created a liquidity crisis for the industry. 23 The Company responded to the higher than anticipated prepayments on securitized loan pools by increasing the prepayment assumptions from 20 CPR ("constant prepayment rate") to 30 CPR. This decision resulted in a fair market value write-down of $13.6 million during 1998. The Company also responded to the market liquidity concerns by making liquidity the Company's primary objective in 1998. This decision resulted in a strategy in the last nine months in 1998 of selling all loans on a whole loan cash basis and not participating in any securitizations. This decision also resulted in reducing the size of the loan portfolio. The loan portfolio declined $171.5 million or 59.5%. A part of the loan portfolio reduction resulted from the sale of the auto loan portfolio and the sale of the small business loan portfolio. The sale of the auto loan portfolio resulted in the company receiving $20.4 million while the sale of the small business loan portfolio resulted in the company receiving net cash proceeds of approximately $49.3 million after repayment of warehouse lines of credit, required escrow funding, and payment of transaction costs. The Company's decision to reduce the loan portfolio size also allowed the Company to use excess liquidity to repurchase $38.4 million of its senior unsecured debt, and realize an extraordinary gain of $18.2 million on the extinguishment of this debt. The Company may, from time to time, continue to acquire its senior debt. In the first two months of 1999, the Company repurchased an additional $35.4 million of senior debt, for a net gain of $16.9 million. As a result of higher customer loan prepayments than anticipated on both the portfolio and the securitized loan pools and the decision to reduce the loan portfolio by whole loan selling loans, the Company's serviced mortgage loan portfolio declined from $768.6 million at the end of 1997 to $550.3 million at the end of 1998. The combination of the above factors resulted in the Company having $36.9 million of cash and overnight investments on hand at December 31, 1998. The Company also had additional availability under its warehouse line of credit at the end of 1998 of $21.0 million. The Company believes that its effort to closely monitor its liquidity position has allowed the Company to weather the market turmoil in late 1998 while several competitors in the sub-prime mortgage industry were forced out of business. 24 The following table sets forth certain data relating to the Company's various loan products at and for the periods indicated:
AT AND FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------- 1998 1997 1996 --------- --------- ---------- (DOLLARS IN THOUSANDS) MORTGAGE LOANS: Mortgage loans originated $ 659,444 $ 1,176,800 $ 350,276 Mortgage loans sold 623,675 435,333 284,794 Mortgage loans securitized 92,173 487,563 -- Total mortgage loans owned (period end) 117,685 231,145 146,231 Total serviced mortgage loans (period end) 550,304 768,556 146,231 Total serviced unguaranteed mortgage loans 550,304 700,248 146,231 (period end) (1) Average mortgage loans owned (2) 245,915 215,790 97,281 Average serviced mortgage loans (2) 744,221 443,318 97,281 Average serviced unguaranteed mortgage loans (1) 743,362 411,549 97,281 Average interest earned (2) 10.34% 10.92% 11.97% SMALL BUSINESS LOANS: Small business loans originated $ 122,902 $ 81,018 $ 68,210 Small business loans sold 141,041 41,232 33,060 Small business loans securitized 1,827 24,286 12,851 Total small business loans owned (period end) 7,054 45,186 29,385 Total serviced small business loans (period end) 7,054 198,876 140,809 Total serviced unguaranteed small business loans 7,054 78,822 44,017 (period end) (3) Average small business loans owned (2) 59,598 38,427 26,700 Average serviced small business loans (2) 202,446 165,053 125,723 Average serviced unguaranteed small business 82,270 61,420 34,442 loans (2) (3) Average interest earned (2) 14.28% 15.89% 12.61% AUTO LOANS: Auto loans originated $ 2,982 $ 15,703 $ 18,287 Auto loans sold 20,898 -- -- Auto loans securitized -- 16,107 Total auto loans owned (period end) -- 21,284 13,916 Total serviced auto loans (period end) -- 21,284 22,033 Average auto loans owned (2) 5,340 17,104 11,917 Average serviced auto loans (2) 5,340 22,267 21,277 Average interest earned (2) 21.28% 24.05% 23.57% TOTAL LOANS: Total loans receivable (period end) $ 124,739 $ 297,615 $ 189,532 Total serviced loans (period end) 557,358 988,716 309,073 Total serviced unguaranteed loans (period end) 557,358 800,354 212,281 (1)(3)
- -------------------------------------------------------------------------------- (1) Excludes loans serviced for others with no credit risk to the Company. (2) Averages are computed based on the daily averages except for monthly averages for Mortgage Loans in 1997 and 1996. (3) Excludes guaranteed portion of SBA Loans. 25 RESULTS OF OPERATIONS For the periods indicated, the following table sets forth certain information derived from the Company's Consolidated Financial Statements expressed as a percentage of total revenues.
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 -------- -------- --------- Interest income 38.2 % 26.8 % 35.5 % Servicing income 13.3 6.7 6.5 Gross gain on sale of loans 10.4 41.6 47.3 Loan fee, net 12.8 23.8 8.2 Gain on sale of subsidiaries' net asset 20.7 -- -- Other revenues 4.6 1.1 2.5 ======== ======== ========= Total revenues 100.0 % 100.0 % 100.0 % ======== ======== ========= Interest expense 39.2 % 19.8 % 21.9 % Provision for credit losses 13.0 7.9 10.7 Fair market writedown on residual receivables 14.9 -- -- Salaries, wages and employee benefits 61.7 37.8 27.1 Business development costs 11.8 5.9 3.2 Restructuring charges 7.5 -- -- Other general and administrative expenses 31.5 22.7 16.3 Income from income taxes, minority interest (79.6) 5.9 20.8 and extraordinary item Provision (benefit) for income taxes 3.3 (3.1) 1.4 Minority interest in (earnings) loss of -- (0.1) 0.7 subsidiary Extraordinary item 19.9 -- -- -------- -------- --------- Net income (loss) (63.0) % 8.9 % 20.1 % ======== ======== =========
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997 The Company recognized a net loss of $57.7 million for the year ended December 31, 1998 as compared to net income of $11.3 million for the year ended December 31, 1997. This net loss was mainly due to the Company's loan production volume being below capacity levels in relation to the general and administrative expense structure. Included in the $57.7 million net loss are several unusual items that included a $13.6 million write-down in the value of its residual receivables due to faster than anticipated prepayment speeds on its securitization pools, a $6.8 million restructuring charge, a gain on sale of subsidiaries' net assets of $19.0 million, and an $18.2 million gain on extinguishment of debt. Total revenues decreased $35.2 million, or 27.8%, to $91.7 million for the year ended December 31, 1998 from $127.0 million for the year ended December 31, 1997. The lower level of revenues resulted principally from lower than anticipated mortgage loan originations and decreases in gain on sale of loans. The decrease in gain on sale of loans was partly offset by higher interest income and servicing income, and gain on sale of subsidiaries' net assets. 26 Interest income increased $1.1 million, or 3.1%, to $35.1 million for the year ended December 31, 1998 from $34.0 million for the year ended December 31, 1997. The increase in interest income resulted primarily from a $39.5 million or 14.6% increase in average loan balance to $310.9 million in 1998 from $271.4 million in 1997. This increase was partly offset by a reduction in the average yield of 125 basis points. The yield in 1998 was 11.28% compared to 12.53% in 1997. The increase in the average loan balance resulted from a $30.2 million increase in the Company's mortgage loan portfolio, a $21.2 million increase in the small-business loan portfolio and a $11.9 million reduction in the auto loan portfolio. The increase in the average mortgage portfolio related primarily to growth in the portfolio in the first six months of 1998. In the third quarter of 1998, the Company began reducing the amount of mortgage loans held in its portfolio. The reduction in the yield earned resulted from both a change in the mix of the Company's total portfolio, more mortgage and small business and less auto, combined with lower mortgage and commercial rates. Weighted average mortgage rates declined 58 basis points from 10.92% in 1997 to 10.34% in 1998. Weighted average commercial rates declined 161 basis points from 15.89% in 1998 to 14.28 % in 1999. Servicing income increased $3.7 million, or 43.8%, to $12.2 million for the year ended December 31, 1998 from $8.5 million for the year ended December 31, 1997. This increase was due principally to the securitization of mortgage loans throughout 1997 and in the first quarter of 1998, for which the Company retained servicing rights. Prior to 1997, all mortgage loans sold were sold servicing released, therefore the mortgage serviced portfolio was just beginning to grow during 1997. The average serviced mortgage loan portfolio increased $300.9 million, or 40.4%, to $744.2 million for the year ended December 31, 1998 from $443.3 million for the year ended December 31, 1997. Gross gain on sale of loans declined $43.4 million, or 82.1%, to $9.5 million for this year ended December 31, 1998, from $53.9 million for the year ended December 31, 1997. Cash gain on sale of loans decreased $12.8 million, or 90.5%, to $1.3 million for the year ended December 31, 1998 from $14.2 million for the year ended December 31, 1997. The decrease resulted principally from lower premiums and discounts on sales of mortgage loans. The Company believes the significant change in the premiums (discounts) received in 1998 resulted primarily from two factors. First, the Company sold at a discount substantially all of the second lien mortgage loans it held, that were not underwritten in accordance with Company guidelines. In an effort to increase loan production, former employees approved loans that did not meet Company guidelines. Second, the Company received significantly lower premiums on loan sales in the third and fourth quarters of 1998 because of a market surplus in the supply of loans in the resale market. The Company believes this surplus, in turn, resulted from the decision of issuers of securitized loan pools to sell their loan products in the whole loan cash market when securitization, as a means of financing, became less attractive. Securitization became less attractive as the corporate interest rate spreads required by investors increased in the latter half of 1998. Investors required higher spreads because of concerns related to higher than anticipated prepayments on securitized loan pools and concerns about the credit worthiness of several issuers. Loans sold increased $261.1 million, or 50.4%, to $778.9 million for the year ended December 31, 1998 from $517.8 million for the year ended December 31, 1997. The increase in loans sold resulted from the Company's decision to increase its liquidity by reducing its loan portfolio. The weighted average cash gain on sale of Loans was 0.2% and 2.7% for the years ended December 31, 1998 and 1997, respectively. 27 Non-cash gain on sale of loans decreased $30.5 million, or 79.0%, to $8.1 million for the year ended December 31, 1998 from $38.7 million for the year ended December 31, 1997. The decrease in non-cash gain on sale of loans was due principally to the Company's decision not to do a mortgage securitization in the last three quarters of 1998. The Company securitized $92.3 million in loans for the year ended December 31, 1998 and recognized a weighted average non-cash gain on sale as a percentage of loans securitized of 8.81%, net of expenses. The Company securitized $509.8 million in loans for the year ended December 31, 1997 and recognized a weighted average non-cash gain on sale as a percentage of loans securitized of 7.59%, net of expenses. Loan fees decreased $18.5 million, or 61.1%, to $11.7 million for the year ended December 31, 1998 from $30.2 million for the year ended December 31, 1997. Loan fees received as a percentage of retail production for the year ended December 31, 1998 were 4.65% as compared to 4.82% for the year ended December 31, 1997. Loan fees are deferred and recognized as interest income over the life of the loan. All unamortized loan fees, net of origination costs, are realized as part of the gain on sale of loans when the loans are sold or securitized. In 1998, the Company realized a net $19.0 million gain on sale of subsidiaries' net assets. The Company completed the sale of substantially all of the assets of its auto loan unit for book value on March 19, 1998. No significant gain or loss was recognized on this transaction. On August 21, 1998, the Company completed the sale of its small branch network retail mortgage origination unit, Sterling Lending Corporation. There was no significant gain or loss recorded as a result of this sale. On November 13, 1998, the Company sold the majority of the assets of its small business lending units. The gain realized in 1998 was approximately $19.7 million net of related costs. On December 2, 1998, the Company sold the majority of its asset-based lending unit. This transaction completed the disposition of all non-mortgage-related activities of the Company. The sale resulted in a pre-tax loss of $755,000. Other revenues increased $2.8 million to $4.2 million for the year ended December 31, 1998 from $1.4 million for the year ended December 31, 1997. Other revenues are comprised principally of insurance commissions, underwriting fees, late charges, warrant valuations, and management fees received in connection with the mezzanine lending operation. The increase of other revenues resulted principally from the increased value of securities owned relating to the commercial mezzanine lending operation in the amount of approximately $500,000 and higher underwriting fees and late charge fees received in 1998. 28 Total expenses increased $45.3 million, or 37.9%, to $164.7 million for the year ended December 31, 1998 from $119.4 million for the year ended December 31, 1997. Total expenses are comprised of interest expense, provision for credit losses, fair value write-down of residual receivables, salaries, wages and employee benefits, business development costs, and other general and administrative expenses. The increased expenses are due largely to the Company's increased Mortgage Loan retail origination operations during 1997 with the opening of the Greenville office in the first quarter and the opening of the Houston office in the fourth quarter. However, management has reduced general and administrative expenses during 1998 from an average of $9.9 million per month in the first quarter of 1998, to $8.6 million per month in the second quarter of 1998, to $7.4 in the third quarter of 1998, and to $6.3 in the fourth quarter of 1998 (excluding $6.8 million restructuring charge). Management anticipates that in the first quarter of 1999 general and administrative expenses will be lower than the fourth quarter 1998, mainly as a result of personnel reductions and the restructuring initiated in November 1998. First quarter 1999 general and administrative expenses are anticipated to average approximately $3.6 million per month. Interest expense increased $10.8 million, or 43.1%, to $36.0 million for the year ended December 31, 1998 from $25.1 million for the year ended December 31, 1997. The increase in interest expense was due principally to additional borrowings associated with the increase in the Company's average mortgage and small-business loan portfolio, the offering of the Company's Senior Notes due 2004 ("Senior Notes") in September 1997, and the higher borrowing levels that were required to fund the Company's operating loss in 1998. For the year ended December 31, 1998 and 1997, the Company incurred interest expense of approximately $13.5 million and $5.1 million, respectively related to the Senior Notes. Provision for credit losses increased $1.9 million, or 18.7%, to $11.9 million for the year ended December 31, 1998 from $10.0 million for the year ended December 31, 1997. The increase in the provision was made to maintain the general reserves for credit losses associated with loans held for investment, as well as to increase specific reserves for possible losses with regard to particular loans, including delinquent loans purchased out of the mortgage securitizations, which totaled $10.0 million for the year ended December 31, 1998. As the result of higher than anticipated prepayments in 1998, the Company modified the estimated prepayment speeds on all of its mortgage loan securitization transactions to peak at 30 constant prepayment rate ("CPR") up from the previous prepayment speeds of 20 CPR. This resulted in a write-down of residual receivables of $13.6 million in 1998. No such write-down was necessary in 1997. In November 1998, the Company decided to close three retail loan origination centers and to consolidate all operations into one location. This decision resulted in a restructuring charge of $6.8 million. The restructuring charge related to the write-down of fixed assets to net realizable value on assets no longer used by the Company was $3.6 million, the estimated costs of employee relocation costs and employee severance was approximately $1.4 million, and the estimated net lease cost on facilities no longer being used was $1.8 million. 29 Total general and administrative expense increased $12.1 million, or 14.3%, to $96.4 million for the year ended December 31, 1998, from $84.3 million for the year ended December 31, 1997. This resulted primarily because salaries, wages and employee benefits increased $8.5 million, or 17.8%, to $56.6 million in 1998, from $48.0 million in 1997, and business development costs increased $3.3 million to $10.8 million in 1998 from $7.5 million in 1997. The increased personnel costs resulted from the expansion of the mortgage retail product distribution channels in 1997 and early 1998 in the portfolio management, underwriting, processing, and closing departments, and the increased expenses associated with the opening of retail regional operating centers in Greenville (first quarter of 1997) and Houston (fourth quarter of 1997). The higher business development costs also related to the retail lending expansion. The higher general and administrative expenses were also the result of expenditures associated with an anticipated higher level of production volume planned for in 1998, which did not occur. The Company has recorded current income tax expense of $3.0 million for the year ended December 31, 1998, even though overall the Company generated a pre-tax loss for the year ended December 31, 1998. The Company has not recorded a deferred tax benefit related to the current loss due to management's assessment of the recoverability of the related deferred tax asset. The current tax is due on income called "excess inclusion income." Excess inclusion income is a result of the Company securitizing loans in pools to third party investors. These transactions generate income for the Company that is included in the overall loss. However, according to IRS regulations, a portion of that income is subject to federal tax in the current period regardless of other current period losses or NOL carryovers otherwise available to offset regular taxable income. The excess inclusion income approximates the net interest the Company receives on the loans in the pools after the bondholders are paid their share of the interest less the sum of the daily accruals, an amount allowed for tax purposes as a reasonable economic return on the retained ownership interest. YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total revenues increased $76.6 million, or 152%, to $127.0 million in 1997 from $50.4 million in 1996. The higher level of revenues resulted principally from increases in interest income, servicing income, and gain on sale of loans. Interest income increased $16.1 million, or 90%, to $34.0 million in 1997 from $17.9 million in 1996. This growth resulted primarily from the growth in the mortgage loan portfolio. Interest income earned by the mortgage loan portfolio increased $12.6 million, or 92%, to $26.3 million in 1997 from $13.7 million in 1996. This increase was due principally to the growth in the average outstanding mortgage loan portfolio, which increased $143.0 million, or 147%, to $240.3 million in 1997 from $97.3 million in 1996, reflecting the increased loan origination levels generated by the Company's additional mortgage loan originators. Servicing income increased $5.2 million, or 158%, to $8.5 million in 1997 from $3.3 million in 1996. This increase was due principally to the securitization of Mortgage Loans in 1997, for which the Company retained servicing rights. Prior to 1997, the Company sold its mortgage loans without retaining servicing rights. The Company securitized $487.6 million in mortgage loans in 1997. The average serviced mortgage loan portfolio increased $343.5 million, or 353%, to $440.8 million from $97.3 million. 30 Gross gain on sale of loans increased $29.0 million or 121.8%, to $52.8 million for the year ended December 31, 1997, from $23.8 million for the year ended December 31, 1996. Cash gain on sale of loans decreased $6.7 million, or 32%, to $14.2 million in 1997 from $20.9 million in 1996. The decrease resulted principally from decreased premiums on sales of Mortgage Loans. The weighted average gain on sale of Mortgage Loans decreased 3.3%, or 54%, to 2.8% in 1997 from 6.1% in 1996. This decrease in premiums is due primarily to the product sold in 1997 compared to 1996. In 1996, the majority of loans sold was first mortgage loans. In 1997, most first mortgage loans originated were securitized, while second mortgage loans were whole-loan sold. Mortgage Loans sold increased $150.5 million, or 53%, to $435.3 million in 1997 from $284.8 million in 1996. Non-cash gain on sale of loans increased $35.7 million to $38.7 million in 1997 from $3.0 million in 1996. The increase in non-cash gain on sale of loans was due principally to the securitization of mortgage loans in 1997, which was not done prior to 1997. The Company securitized $487.6 million in mortgage loans in 1997 and recognized a weighted average non-cash gain on sale as a percentage of loans securitized of 7.4%, net of expenses. All non-cash gain on sale of loans in 1996 related to the small business loan portfolio. Loan fees increased $26.0 million to $30.2 million in 1997 from $4.2 million in 1996. The higher loan fees were due principally to the increase in retail mortgage loan originations. The Company receives substantially higher fees on loans it originates through its retail operations than it receives on loans purchased. Retail loan originations increased $493.9 million, or 718%, to $562.7 million in 1997 from $68.8 million in 1996. Loan fees are deferred and recognized as interest income over the life of the loan. All unamortized loan fees, net of origination costs, are realized as part of the gain on sale of loans when the loans are sold or securitized. Other revenues increased $158,000, or 13%, to $1.4 million in 1997 from $1.2 million in 1996. Other revenues are comprised principally of insurance commissions and management fees. The increase of other revenues resulted principally from the increase in the Company's loan originations. Total expenses increased $79.5 million, or 199%, to $119.4 million in 1997 from $39.9 million in 1996. Total expenses are comprised of interest expense, provision for credit losses, salaries, wages and employee benefits, business development, and other general and administrative expenses. Interest expense increased $14.1 million, or 128%, to $25.1 million in 1997 from $11.0 million in 1996. The increase in interest expense was due principally to increased borrowings by the Company associated with increased mortgage loan originations and the offering of the Company's Senior Notes. Interest expense related to the Mortgage Loan Portfolio increased $10.1 million in 1997 from 1996. Average borrowings attributable to the Mortgage Loan portfolio, both under its warehouse credit facilities and in connection with the sales of notes payable to investors and subordinated debentures, increased $134.6 million, or 105%, to $262.3 million at December 31, 1997 from $127.7 million at December 31, 1996. In September 1997, the Company also completed the $125.0 million offering of the Company's Senior Notes with interest payable at 10.75%. 31 Provision for credit losses increased $4.6 million, or 85%, to $10.0 million in 1997 from $5.4 million in 1996. The provision was made to maintain the general reserves for credit losses associated with loans held for investment, as well as to increase specific reserves for possible losses with regard to particular loans. General and administrative expense increased $60.8 million, or 259%, to $84.3 million in 1997 from $23.5 million in 1996. This is a result primarily from increased personnel costs due to the continued expansion of the mortgage retail product distribution channels in 1997 in the portfolio management, underwriting, processing, and closing departments, and the increased expenses associated with the opening of retail lending offices in Greenville and Houston in 1997. General and administrative expenses increased to 13.4% of average serviced loans in 1997 from 9.6% in 1996, principally as a result of the higher costs associated with the retail mortgage origination facilities. Retail production increased 717% in 1997. Net income increased $1.2 million, or 12%, to $11.3 million in 1997 from $10.1 million in 1996. The improvement in income was due principally to the increased growth and profitability of the small business loan operations. The Company also recorded a $3.9 million tax benefit in 1997 due to the recognition of the deferred tax benefit associated with the net operating loss carryforward. FINANCIAL CONDITION Net loans receivable decreased $171.5 million to $116.9 million at December 31, 1998 from $288.4 million at December 31, 1997. The reduction in net loans receivable resulted primarily from two company decisions: (1) to sell the auto and the small business loan portfolios with outstanding loan balances at December 31, 1997, of $21.3 million and $45.2 million, respectively; and (2) to increase liquidity and reduce debt by selling residential mortgage loans. The residual receivables were $43.9 million at December 31, 1998, and $63.2 million at December 31, 1997. This decrease resulted primarily from the amortization of the residual asset, the write-downs as a result of higher than anticipated prepayments, the sale of the small business loan residual receivables, partially offset by the amount of retention of the residual interest certificates in the Company's Mortgage Loan securitization completed in the first quarter of 1998. Net property and equipment increased by $1.6 million to $19.7 million at December 31, 1998, from $18.1 million at December 31, 1997. This increase resulted primarily from the $4.8 million renovation of the new corporate office building in Greenville, South Carolina, and approximately $1.6 million of computer software cost that was classified as other assets at December 31, 1997 since the software had not been implemented in 1997. These amounts were partly offset by a $3.6 million restructuring charge related to the write-offs of equipment that resulted from the closing of three retail loan origination offices. Also included in other assets at December 31, 1997 was $1.1 million of pre-funded payroll expense. Due to the holidays, the cash required for the first payroll in 1998 was pre-funded. Real estate and personal property acquired in foreclosure increased $2.6 million to $5.9 million at December 31, 1998, from $3.3 million at December 31, 1997. 32 The primary source of funding the Company's receivables comes from borrowings issued under various credit arrangements (including the Credit Facilities, CII Notes, and the Company's Senior Notes). At December 31, 1998, the Company had debt outstanding under revolving warehouse lines of credit to banks of $16.7 million, which compares with $77.6 million at December 31, 1997, for a decrease of $60.9 million. During the second quarter of 1998, the Company obtained a three-year $200 million revolving warehouse line of credit that was used to replace a warehouse line of credit with another financial institution that matured on June 30, 1998. This line of credit was subsequently reduced to $100.0 million to reflect the Company's reduced loan volume levels. At December 31, 1998, the Company had $135.9 million of CII Notes and subordinated debentures outstanding, which compares with $134.3 million at December 31, 1997, for an increase of $1.6 million. The aggregate principal amount of outstanding Senior Notes was $86.6 million at December 31, 1998 compared to $125.0 million on December 31, 1997. In 1998, the Company purchased $38.4 million face amount of its Senior Notes for a purchase price of $18.9 million. The Company may, from time to time, purchase more of its Senior Notes depending on the Company's cash availability, market conditions, and other factors. Total shareholders' equity at December 31, 1998 was $5.8 million, which compares to $63.4 million at December 31, 1997, a decrease of $57.6 million. This decrease resulted principally from a net loss of $57.7 million for the year ended December 31, 1998. ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE The Company is exposed to the risk of loan delinquencies and defaults with respect to loans retained in its portfolio. With respect to loans to be sold on a non-recourse basis, the Company is at risk for loan delinquencies and defaults on such loans while they are held by the Company pending such sale. To provide for credit losses, the Company charges against current earnings an amount necessary to maintain the allowance for credit losses at levels expected to cover inherent losses in loans receivable. The table below summarizes certain information with respect to the Company's allowance for credit losses on the owned portfolio for each of the periods indicated.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON OWNED PORTFOLIO AT AND FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Allowance for credit losses at beginning of $ 6,528 $ 3,084 $ 1,874 period Net charge-offs (8,791) (5,166) (2,494) Provision charged to expense 11,905 10,030 5,416 Write-down of allowance due to sale of receivables (2,983) (1,420) (1,712) --------- --------- --------- Allowance for credit losses at the end of the period $ 6,659 $ 6,528 $ 3,084 ========= ========= =========
33 The Company considers its allowance for credit losses to be adequate in view of the Company's loss experience and the secured nature of most of the Company's outstanding loans. Although management considers the allowance appropriate and adequate to cover inherent losses in the loan portfolio, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for possible credit losses will not be required. The table below summarizes certain information with respect to the Company's allowance for losses on the securitization residual assets for each of the periods indicated.
SUMMARY OF EMBEDDED ALLOWANCE FOR LOSSES ON SECURITIZATION RESIDUAL ASSETS AT AND FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS) RESIDUAL SECURITIES: Allowance for losses at beginning of $ 14,255 $ 1,202 $ 773 period Net charge-offs (147) (1,645) (1,283) Anticipated losses net against gain 2,242 13,278 -- Allowance transferred from (to) owned -- 1,420 1,712 portfolio Mark-to-market adjustment (6,228) -- -- Sale of small business residual assets (2,957) -- -- ----------- ----------- ----------- Allowance for losses at end of period $ 7,165 $ 14,255 $ 1,202 =========== =========== ===========
The value of the residual receivables retained by the Company would be impaired to the extent losses on the securitized loans exceed the amount estimated when determining the residual cash flows. The table below summarizes the Company's allowance for credit losses with respect to the Company's total combined serviced portfolio (including both owned and securitized loan pools) for each of the periods indicated.
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES ON COMBINED SERVICED PORTFOLIO AT AND FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS) Allowance for credit losses at beginning $ 20,783 $ 4,286 $ 2,647 of period Net charge-offs (8,938) (6,811) (3,777) Provision charged to expense 11,905 10,030 5,416 Provision netted against gain on 2,242 13,278 -- securitizations Mark-to-market adjustment (6,228) -- -- Sale of small business residual assets (2,957) -- -- Write-down of allowance due to sale of (2,983) -- -- receivables --------- -------- -------- Allowance for credit losses at the end of the period $ 13,824 $ 20,783 $ 4,286 ========= ======== ======== The total allowance for credit losses as shown on the balance sheet is as follows: Allowance for credit losses on loans $ 6,659 $ 6,528 $ 3,084 Allowance for credit losses on residual 7,165 14,255 1,202 receivables --------- -------- -------- Total allowance for credit losses $ 13,824 $ 20,783 $ 4,286 ========= ======== ========
34 The following table sets forth the Company's allowance for credit losses on the combined serviced portfolio at the end of the periods indicated, the credit loss experience over the periods indicated, and delinquent loan information at the dates indicated for loans receivable at least 30 days past due.
AT AND FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------------------------------- ALLOWANCE FOR CREDIT LOSSES AS A % OF COMBINED SERVICED LOANS (1): Mortgage loans 2.09% 1.98% 0.80% Small business loans 32.61 6.76 3.84 Auto loans -- 7.58 6.45 Total allowance for credit losses as a % of serviced loans 2.48 2.60 2.02 NET CHARGE-OFFS AS A % OF AVERAGE COMBINED SERVICED LOANS (2): Mortgage loans 0.92 0.32 0.81 Small business loans 1.58 2.74 2.71 Auto loans 14.95 17.17 9.65 Total net charge-offs as a % of total serviced loans 1.08 1.38 2.47 LOANS RECEIVABLE PAST DUE 30 DAYS OR MORE AS A % OF COMBINED SERVICED LOANS (1): Mortgage loans 13.62 8.00 7.26 Small business loans -- 4.17 7.92 Auto loans -- 9.41 17.09 Total loans receivable past due 30 days or more as a % of total 13.44 7.66 8.41 serviced loans TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF COMBINED SERVICED LOANS PAST 35.27% 94.33% 88.71% DUE 90 DAYS OR MORE (1)
------------------ (1) For purposes of these calculations, combined serviced loans represents all loans for which the Company bears credit risk, and includes all portfolio Mortgage Loans and Auto Loans, all securitized loans, and the Small Business Loans, but excludes the guaranteed portion of the SBA Loans and Mortgage Loans serviced without credit risk. (2) Average serviced loans have been determined by using beginning and ending balances for the period presented except that the 1996 and 1997 averages are calculated based on the daily averages for small business loans and auto loans and monthly averages for the Mortgage Loans (rather than the beginning and ending balances). Management closely monitors delinquencies to measure the quality of its loan portfolio and securitized loans and the potential for credit losses. Accrual of interest is discontinued and reversed when a loan is either over 90 days past due, the collateral is determined to be inadequate, or when foreclosure proceedings begin. Collection efforts on charged-off loans continue until the obligation is satisfied or until it is determined that such obligation is not collectible or the cost of continued collection efforts would exceed the potential recovery. Recoveries of previously charged-off loans are credited to the allowance for credit losses. 35 Management monitors securitized pool delinquencies using a static pool analysis by month by pool balance. Since these pools are new, it is anticipated that the delinquencies will ramp up during the first one to two years. Current year results are not necessarily indicative of future performance. The following sets forth the static pool analysis for delinquencies by month in the Company's securitized mortgage loan pools.
CURRENT PRINCIPAL BALANCE - -------------------------------------------------------------------------------------------------- MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1 INCEPTION - -------------------------------------------------------------------------------------------------- 1 $ 77,435,632 $ 120,860,326 $ 130,917,899 $ 118,585,860 $ 62,726,105 2 $ 77,405,312 $ 120,119,653 $ 169,093,916 $ 118,061,792 $ 62,300,302 3 $ 76,709,417 $ 119,364,510 $ 168,182,957 $ 148,291,454 $ 61,609,815 4 $ 75,889,160 $ 118,965,905 $ 166,783,489 $ 146,880,279 $ 60,768,433 5 $ 75,395,969 $ 117,238,693 $ 165,608,534 $ 145,775,696 $ 59,347,948 6 $ 74,630,019 $ 115,870,168 $ 164,084,260 $ 144,465,651 $ 58,739,309 7 $ 73,149,957 $ 113,537,447 $ 161,880,416 $ 143,048,555 $ 57,829,352 8 $ 72,261,386 $ 112,100,397 $ 158,220,175 $ 140,482,698 $ 56,918,186 9 $ 71,342,842 $ 110,468,401 $ 155,854,981 $ 137,318,432 $ 55,894,240 10 $ 70,195,198 $ 107,887,242 $ 153,193,421 $ 134,991,772 $ 54,887,268 11 $ 68,981,147 $ 105,138,088 $ 148,382,102 $ 131,582,081 12 $ 67,149,553 $ 102,142,062 $ 144,556,568 $ 129,029,429 13 $ 65,705,603 $ 98,876,084 $ 140,265,621 $ 125,457,545 14 $ 63,210,889 $ 95,394,444 $ 136,583,138 15 $ 60,052,314 $ 92,501,939 $ 133,252,925 16 $ 58,133,496 $ 89,402,897 $ 129,792,748 17 $ 56,900,372 $ 83,793,933 18 $ 55,154,969 $ 81,637,626 19 $ 50,852,179 $ 79,392,938 20 $ 49,702,926 21 $ 48,629,373 22 $ 45,780,152 DELINQUENCIES > 30 DAYS PAST DUE - -------------------------------------------------------------------------------------------------- MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1 INCEPTION - -------------------------------------------------------------------------------------------------- 1 $ 0 $ 515,954 $ 609,201 $ 402,972 $ 44,600 2 $ 1,499,056 $ 1,631,017 $ 2,042,757 $ 2,132,028 $ 1,223,964 3 $ 1,931,761 $ 3,930,423 $ 4,498,266 $ 5,049,035 $ 2,013,525 4 $ 3,760,774 $ 5,399,569 $ 8,546,414 $ 7,290,097 $ 3,872,888 5 $ 5,220,385 $ 7,293,856 $ 12,337,604 $ 10,290,987 $ 3,825,651 6 $ 5,849,574 $ 9,790,732 $ 13,432,454 $ 13,459,369 $ 5,199,587 7 $ 6,777,962 $ 11,933,526 $ 15,076,729 $ 12,443,357 $ 6,248,301 8 $ 8,078,783 $ 12,484,893 $ 17,745,496 $ 13,861,088 $ 5,983,226 9 $ 8,528,559 $ 12,471,739 $ 18,099,411 $ 16,777,959 $ 6,591,674 10 $ 10,008,415 $ 11,304,455 $ 16,680,011 $ 19,050,239 $ 6,317,098 11 $ 10,728,125 $ 12,630,402 $ 18,929,917 $ 18,524,292 12 $ 9,257,295 $ 14,540,910 $ 21,295,026 $ 18,470,254 13 $ 9,578,031 $ 12,933,959 $ 22,303,472 $ 18,645,129 14 $ 10,757,672 $ 12,674,148 $ 21,746,520 15 $ 9,401,614 $ 14,212,157 $ 23,240,338 16 $ 8,127,303 $ 14,386,886 $ 22,031,312 17 $ 8,227,263 $ 11,723,546 18 $ 8,708,963 $ 11,171,133 19 $ 7,349,210 $ 12,018,899 20 $ 7,217,783 21 $ 7,120,727 22 $ 6,661,879
Included in the principal balances and delinquency amounts is $2.7 million of real estate acquired through foreclosure. 36
DELINQUENCIES > 30 DAYS PAST DUE AS A PERCENT OF CURRENT BALANCE - --------------------------------------------------------------------------------------- MONTHS FROM POOL 1997-1 1997-2 1997-3 1997-4 1998-1 AVERAGE INCEPTION - --------------------------------------------------------------------------------------- 1 0.00 % 0.43 % 0.47 % 0.34 % 0.07 % 0.26 % 2 1.94 % 1.36 % 1.21 % 1.81 % 1.96 % 1.65 % 3 2.52 % 3.29 % 2.67 % 3.40 % 3.27 % 3.03 % 4 4.96 % 4.54 % 5.12 % 4.96 % 6.37 % 5.19 % 5 6.92 % 6.22 % 7.45 % 7.06 % 6.45 % 6.82 % 6 7.84 % 8.45 % 8.19 % 9.32 % 8.85 % 8.53 % 7 9.27 % 10.51 % 9.31 % 8.70 % 10.80 % 9.72 % 8 11.18 % 11.14 % 11.22 % 9.87 % 10.51 % 10.78 % 9 11.95 % 11.29 % 11.61 % 12.22 % 11.79 % 11.77 % 10 14.26 % 10.48 % 10.89 % 14.11 % 11.51 % 12.25 % 11 15.55 % 12.01 % 12.76 % 14.08 % 13.60 % 12 13.79 % 14.24 % 14.73 % 14.31 % 14.27 % 13 14.58 % 13.08 % 15.90 % 14.86 % 14.61 % 14 17.02 % 13.29 % 15.92 % 15.41 % 15 15.66 % 15.36 % 17.44 % 16.15 % 16 13.98 % 16.09 % 16.97 % 15.68 % 17 14.46 % 13.99 % 14.22 % 18 15.79 % 13.68 % 14.74 % 19 14.45 % 15.14 % 14.80 % 20 14.52 % 14.5 % 21 14.64 % 14.64 % 22 14.55 % 14.55 % ACTUAL HISTORICAL LIFE TO DATE PREPAYMENT SPEED 22.05 % 20.51 % 16.80 % 14.47 % 14.00 %
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 selling its loans for cash in the whole loan market and as a result of selling more loans in 1998 than were originated in 1998, the Company experienced a positive cash flow from operating activities in 1998. Although the Company's goal is to achieve a positive cash flow each quarter, no assurance can be given that this objective will be obtained due to the higher level of cash required to fund the loans purchased and originated. Currently, the Company's primary operating cash uses include the funding of (i) loan originations and purchases pending their securitization or sale, (ii) interest expense on CII investor savings notes ("CII Notes"), senior unsecured debt and its revolving warehouse credit facilities ("Credit Facilities"), (iii) fees, expenses, overcollateralization and tax payments incurred in connection with the securitization program and (iv) ongoing administrative and other operating expenses. The Company's primary operating sources of cash are (i) cash gains from whole-loan mortgage loan sales, (ii) cash payments of contractual and ancillary servicing revenues received by the Company in its capacity as servicer for securitized loans, (iii) interest income on loans receivable and certain cash balances, (iv) fee income received in connection with its retail mortgage loan originations, and (v) excess cash flow received in each period with respect to residual receivables. While the Company believes that such sources of funds will be adequate to meet its liquidity requirements, no assurance of such fact may be given. 37 The Company overcollateralizes loans as a credit enhancement on the mortgage securitization transactions. This requirement creates negative cash flows in the year of securitization. The Company determined in the second quarter of 1998 to conduct whole loan sales for the remainder of the year so as to improve liquidity. Accordingly, the Company did not securitize any mortgage loans in the last three quarters of 1998. Cash flow is also enhanced by the generation of loan fees in its retail mortgage loan operation and the utilization of a wholesale loan origination strategy whereby loans are generally funded at par, rather than at the significant premiums typically associated with a correspondent-based strategy. However, in 1999, the Company began paying, on a limited basis, some yield spread premiums as a way to increase its wholesale production. The table below summarizes cash flows provided by and used in operating activities:
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ----------- ------------ ----------- (IN THOUSANDS) OPERATING CASH INCOME: Servicing fees received and excess cash flow from $ 16,548 $ 3,687 $ 3,782 securitization trusts Interest received 36,127 31,716 17,392 Cash gain on sale of loans 1,343 14,153 20,862 Cash loan origination fees received 18,255 31,843 4,714 Other cash income 5,388 1,875 1,266 -------- --------- -------- Total operating cash income 77,661 83,274 48,016 OPERATING CASH EXPENSES: Securitization costs (851) (3,646) (849) Securitization hedge losses -- (2,125) -- Cash operating expenses (99,551) (81,594) (21,625) Interest paid (37,519) (20,980) (11,046) Taxes paid (2,515) (1,581) (322) -------- --------- -------- Total operating cash expenses (140,436) (109,926) (33,842) CASH FLOW (DEFICIT) DUE TO OPERATING CASH INCOME (62,775) (26,652) 14,174 AND EXPENSES OTHER CASH FLOWS: Cash used in other payables and receivables (12,541) (5,355) (4,949) Cash provided (used) in loans held for sale 123,674 (114,282) (86,770) Cash provided from sale of residual receivables 16,958 -- -- Cash gain on sale of subsidiary assets 18,964 -- -- ----------- ------------ ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 84,280 $ (146,289) $ (77,545) =========== ============ ===========
Although the Company's 1998 operating activities resulted in providing $84.3 million in net cash, $123.7 million, $17.0 million and $19.0 million resulted from cash provided from loans sold, sale of residual receivables and gain on sale of subsidiaries' assets, respectively. Cash flow (deficit) due to operating cash income and expense was ($62.8) million, ($26.7) million and $14.2 million in 1998, 1997 and 1996, respectively. 38 Cash and cash equivalents were $36.9 million at December 31, 1998, $7.6 million at December 31, 1997, and $1.3 million at December 31, 1996. Cash provided by operating activities was $84.3 million for the year ended December 31, 1998, compared to a usage of $146.3 million for the year ended December 31, 1997; cash provided by investing activities was $24.3 million for the year ended December 31, 1998, compared to cash used in investing activities of $11.6 million for the year ended December 31, 1997; and cash used in financing activities was $79.3 million for the year ended December 31, 1998, compared to cash provided by financing activities of $164.2 million for the year ended December 31, 1997. The increase in cash provided by operations was due principally to the increase in loan sales in relation to loan origination volume during 1998. Cash provided by investing activities was principally from the principal on loans not sold. The decrease in cash provided by financing activities was due principally to a $60.9 million net reduction on warehouse lines of credit. At December 31, 1998, the Company had a $100.0 million warehouse line of credit with CIT Group/Business Credit, Inc. ("CIT") to fund its Mortgage Loan originations. Based on the borrowing base limitations contained in the credit facility, at December 31, 1998, the Company had aggregate outstanding borrowings of $16.7 million and aggregate borrowing availability of $21.0 million. The credit facility bears interest at Prime + 0.75%. The credit facility matures on June 30, 2002. The credit facility contains certain covenants, including, but not limited to, covenants that impose limitations on the Company and its subsidiaries with respect to declaring or paying dividends and minimum CII Notes outstanding and loans and advances by HGI and CII to the Company. The Company believes that it is currently in compliance with the loan covenants. During 1997, the Company sold $125.0 million aggregate principal amount of Senior Notes due 2004. The Senior Notes due 2004 constitute unsecured indebtedness of the Company. The Senior Notes due 2004 are redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. This agreement requires, among other matters, restrictions on the payment of dividends. At December 31, 1998, management believes the Company was in compliance with such restrictive covenants. The Senior Notes due 2004 are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries (the "Subsidiary Guarantors"). With the exception of the Guarantee by CII, the Subsidiary Guarantees rank 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 $38.4 million face amount of its senior notes in 1998 and $35.9 million in the first two months of 1999. At December 31, 1998, $86.4 million in aggregate principal amount of Senior Notes were outstanding. At February 28, 1999, $51.3 million was outstanding. 39 CII engages in the sale of CII Notes to investors. The CII Notes are comprised of senior notes and subordinated debentures bearing fixed rates of interest which are sold by CII only to South Carolina residents. The offering of the CII Notes is registered under South Carolina securities law and is believed to be exempt from Federal registration under the Federal intrastate exemption. CII believes it conducts its operations so as to qualify for the safe harbor provisions of Rule 147 promulgated pursuant to the Securities Act of 1933, as amended (the "Securities Act"). At December 31, 1998, CII had an aggregate of $118.6 million of investor notes outstanding bearing a weighted average interest rate of 7.4%, and an aggregate of $17.3 million of subordinated debentures bearing a weighted average interest rate of 5.0%. The investor notes and subordinated debentures are subordinate in priority to the credit facility. Substantially all of the CII Notes and debentures have one-year maturities. Shareholders' equity decreased in 1998 by $57.6 million to $5.8 million at December 31, 1998, from $63.4 million at December 31, 1997. During 1997, stockholders equity increased $16.7 million to $63.4 million at December 31, 1997, from $46.6 million at December 31, 1996. The decrease in 1998 relates primarily to the losses incurred for the year, while the increase in 1997 resulted principally from the retention of income by the Company and the issuance of 494,000 additional shares of common stock at a value of $5.2 million related to the acquisition of the remaining 87% of Reedy River Ventures L.P. that the Company did not already own. The Company's primary objective in 1999 will be to insure adequate levels of liquidity as the Company strives to increase loan originations. The Company anticipates incurring operating losses in 1999. The Company plans to continue to reduce the loan portfolio through either whole loan sale or through securitizations. These sales will generate additional cash that can be used to fund operating losses, to fund declines in investor notes that could occur, or purchase additional subordinated debt, reducing interest expense. The Company plans to operate more like a mortgage banker that originates and sells loans, retaining only a small portfolio of loans until such time that the Company's operations support the levels of cash flow to justify rebuilding a portfolio of loans. Combining the Company's present level of liquidity, with its borrowing availability under the warehouse line of credit, and the Company's plans to further reduce both the senior subordinated debt and loan portfolio, Management believes these strategies will provide adequate cash flow to support the 1999 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. The Company currently does not anticipate incurring any significant capital expenditures in 1999. 40 LOAN SALES AND SECURITIZATIONS The Company sells or securitizes substantially all of its loans. The Company sells on a whole loan basis a significant amount of its Mortgage Loans (servicing released), including substantially all of its Mortgage Loans secured by second liens, principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the second lien mortgage loans. However, no assurance can be given that the second mortgage loans can be sold. To the extent that the loans are not sold, the Company retains the risk of loss. At December 31, 1998 and 1997, the Company had retained $19.0 and $69.8 million, respectively, of second mortgage loans on its balance sheet. During 1998, 1997, and 1996, the Company sold $623.7 million, $435.3 million, and $284.8 million, respectively, of Mortgage Loans and $141.0, $41.2 million, and $33.1 million, respectively, of the guaranteed portions of SBA Loans. On a quarterly basis in 1997, the Company securitized substantial amounts of its Mortgage Loans, totaling $487.6 million. In the first quarter of 1998, the Company securitized $92.2 million of Mortgage Loans. Although securitizations provide liquidity, the Company has utilized securitizations principally to provide a lower cost of funds and reduce interest rate risk, while building servicing revenues by increasing the serviced portfolio. In connection with its securitizations, the Company has retained interest-only residual certificates representing residual interests in the trusts. These subordinate residual securities totaled $43.9 million, net of allowances, at December 31, 1998. A new securitization structure was completed for the fourth quarter 1997 Mortgage Loan securitization. This structure utilizes a real estate investment trust ("REIT") and allows sales treatment for financial reporting purposes, but debt treatment for tax purposes. Accordingly, this structure eliminates current taxes payable on the book gain, while maintaining the structural efficiency of tranching, previously only available through a real estate mortgage investment conduit ("REMIC") transaction. Additionally, under this structure, the Company has distributed .46% ownership in the REIT to a certain class of employees, with an initial value of approximately $62,000. In 1997, the Company began securitizing mortgage loans. Under this method, the Company sells Mortgage Loans it purchased or originated to a trust for cash. The trust sells asset-backed bonds secured by the loans to investors. The Company records certain assets and income based upon the difference between all principal and interest received from the loans sold and the following factors (i) all principal and interest required to be passed through to the asset-backed bond investors, (ii) all excess contractual servicing fees, (iii) other recurring fees and (iv) an estimate of losses on the loans (collectively, the "Excess Cash Flow"). At the time of the securitization, the Company estimates these amounts based upon a declining principal balance of the underlying loans, adjusted by an estimated prepayment and loss rate, and capitalizes these amounts using a discount rate that market participants would use for similar financial instruments. These capitalized assets are recorded as a residual receivable. The Company believes the assumptions it has used in past securitizations are appropriate and reasonable. 41 The Company retains the right to service loans it securitizes. Fees for servicing loans are based on a stipulated percentage (generally 0.50% per annum) of the unpaid principal balance of the associated loans. On its mortgage loan securitizations, the Company has recognized a servicing asset in addition to its gain on sale of loans. The servicing asset is calculated as the present value of the expected future net servicing income in excess of adequate compensation for a substitute servicer, based on common industry assumptions and the Company's historical experience. These factors include default and prepayment speeds. For the five mortgage securitizations completed to date, the servicing asset recorded represents a 10 basis point strip of cash flows from the stipulated servicing percentage. The following sets forth facts and assumptions used by the Company in arriving at the valuation of the residual receivables relating to its Mortgage Loan securitizations at December 31, 1998:
1997-1 1997-2 1997-3 1997-4 1998-1 ---------- ---------- ----------- ----------- - ---------- Outstanding balance of loans $45,780,152 $79,392,938 $129,792,748 $125,457,545 $54,887,268 securitized Average stated principal balance 59,610 58,679 65,321 65,038 63,527 Weighted average coupon on loans 10.83% 10.73% 11.10% 11.01% 10.90% Weighted average remaining term to 182 mths 182 mths 185 mths 191 mths 198 mths stated maturity Weighted average LTV 78% 74% 76% 76% 76% % of first mortgage loans 100% 100% 100% 100% 100% Weighted average pass-through rate to 7.36% 7.01% 6.90% 6.64% 5.49% bondholders Assumed annual losses 0.60 0.60 0.60 0.60 0.60 Ramp period for losses 0 mths 0 mths 0 mths 0 mths 3 mths Assumed cumulative losses as a % of UPB 1.72% 1.70% 1.64% 1.65% 1.53% Annual servicing fee 0.50 0.50 0.50 0.50 0.50 Servicing asset 0.10 0.10 0.10 0.10 0.10 Discount rate applied to cash flow after overcollateralization 12.00 12.00 12.00 12.00 12.00 Prepayment speed: Initial CPR (1) 0 CPR 0 CPR 0 CPR 0 CPR 0 CPR Peak CPR (1) 30 CPR 30 CPR 30 CPR 30 CPR 30 CPR Tail CPR (1) 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR 28/26 CPR CPR ramp period (1) 12 mths 12 mths 12 mths 12 mths 12 mths CPR peak period (1) 24 mths 24 mths 24 mths 24 mths 24 mths CPR tail begins (1) 37/49 mths 37/49 mths 37/49 mths 37/49 mths 37/49 mths Annual wrap fee and trustee fee 0.285% 0.205% 0.195% 0.187% 0.185% Initial overcollateralization required (2) 3.25 -- -- -- -- Final overcollateralization required (2) 6.50 3.75 3.75 3.75 3.75
(1) CPR represents an industry standard of calculating prepayment speeds and refers to Constant Prepayment Rate. The Company uses a curve based on various CPR levels throughout the pool's life, based on its estimate of prepayment performance, as outlined in the table above. (2) Based on percentage of original principal balance, subject to step-down provisions after 30 months. Each of the Company's Mortgage Loan securitizations have been credit-enhanced by an insurance policy provided through a monoline insurance company such that the senior certificates have received ratings of "Aaa" from Moody's Investors Services, Inc. ("Moody's") and "AAA" from Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's"). 42 The Company expects to begin receiving Excess Cash Flow on its Mortgage Loan securitizations approximately 16 months from the date of securitization, although this time period may be shorter or longer depending upon the securitization structure and performance of the loans securitized. Prior to such time, the monoline insurer requires a reserve provision to be created within the securitization trust which uses Excess Cash Flow to retire the securitization bond debt until the spread between the outstanding principal balance of the loans in the securitization trust and the securitization bond debt equals a specified percentage (depending on the structure of the securitization) of the initial securitization principal balance (the "overcollateralization limit"). Once this overcollateralization limit is met, excess cash flows are distributed to the Company. The Company begins to receive regular monthly servicing fees in the month following securitization. The gains recognized into income resulting from securitization transactions vary depending on the assumptions used, the specific characteristics of the underlying loan pools, and the structure of the transaction. The Company believes the assumptions it has used are appropriate and reasonable. 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. At December 31, 1998 key economic assumptions and the sensitivity of the current fair value of residual cash flows to immediate 5 percent and 10 percent adverse changes in assumed economics is as follows (dollars in thousands). Loans -------------- Carrying amount/fair value of retained interests $ 43,857 Weighted-average life (in years) 2.67 Prepayment speed assumption (annual rate) 30 % Impact on fair value of 5% adverse change $ 806 Impact on fair value of 10% adverse change $ 1,567 Expected credit losses (annual rate) 0.60 % Impact on fair value of 5% adverse change $ 284 Impact on fair value of 10% adverse change $ 567 Residual cash flows discount rate (annual) 12.0 % Impact on fair value of 5% adverse change $ 643 Impact on fair value of 10% adverse change $ 1,268 43 These sensitivities are hypothetical and should be viewed with caution. As the figures indicate, any change in fair value based on a 5 percent variation in assumptions cannot be extrapolated because the relationship of the change in assumption to the change in fair value is not linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independent from any change in another assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. TAX CONSIDERATIONS As a result of operating losses incurred by the Company, the Company has net operating losses ("NOL") that can be used to offset future earnings. Federal tax laws provide that net operating loss carryforwards are restricted or eliminated upon certain changes of control. Applicable federal tax laws provide that a 50% "change of control," which is calculated over a rolling three-year period, would cause the loss of substantially all of the NOL. The Company believes its maximum cumulative change of control during the relevant three-year period was less than 50%. During 1998, the Company established a valuation allowance of $21.7 million against its deferred tax asset, resulting in a net deferred tax asset of $4.2 million at December 31, 1998. Management based the decision to record the valuation allowance based on the significant operating losses incurred during 1998. The amount of the reserves was established such that the amount of deferred tax assets on the books remained constant to the level at December 31, 1997. The amount of the remaining deferred tax asset is deemed appropriate by management based on its belief that it is more likely than not that it will realize the benefit of this deferred tax asset, given the levels of historical taxable income and current projections for future taxable income over the periods in which the deferred tax assets would be realized. The Company had a federal NOL of approximately $58.0 million at December 31, 1998. 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. The Company's interest rate hedging strategy includes shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements. Since the interest rates on the Company's warehouse line of credit used to fund and acquire loans is variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale could have a material adverse effect on the Company's results of operations and financial condition. The ultimate sale of the Company's loans generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. Without hedging these loans, increases in interest rates prior to sale of the loans may reduce the gain on sale or securitization of loans earned by the Company. 44 ACCOUNTING CONSIDERATIONS In June 1998, Financial Accounting Standard Board ("FASB") 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, 1999. This 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. The Company has not assessed the impact of this standard. In October 1998, FASB issued SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" which is effective for the first fiscal quarter beginning after December 31, 1998. This statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise. The adoption of this standard is not expected to have a material effect on the Company's financial statements. IMPACT OF INFLATION Inflation affects the Company most significantly in the area of loan originations and can have a substantial effect on interest rates. Interest rates normally increase during periods of high inflation and decrease during periods of low inflation. Profitability may be directly affected by the level and fluctuation in interest rates which affect the Company's ability to earn a spread between interest received on its loans and the costs of its borrowings. The profitability of the Company is likely to be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the ability of the Company to originate and purchase loans and affect the mix of first and second-lien mortgage loan products. Generally, first-lien mortgage production increases relative to second-lien mortgage production in response to low interest rates and second-lien mortgage production increases relative to first-lien mortgage production during periods of high interest rates. A significant decline in interest rates could decrease the size of the Company's loan servicing portfolio by increasing the level of loan prepayments. Additionally, to the extent servicing rights and residual receivables have been capitalized on the books of the Company, higher than anticipated rates of loan prepayments or losses could require the Company to write down the value of such servicing rights and residual receivables, adversely impacting earnings. Fluctuating interest rates may also affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sales and the interest paid by the Company for funds borrowed under the Company's warehouse line of credit. 45 YEAR 2000 GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send statements, or engage in similar normal business activities. Based on recent assessments, the Company determined that it will be required to modify or replace portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing, and implementation. To date, the Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicated that most of the Company's significant information technology systems were year 2000 compliant, but this assessment has identified some portions which require remediation or upgrades. For its information technology exposures, to date the company is 95% complete on the remediation phase and 80% complete on the testing and implementation phases. The Company expects to complete these phases no later than April 30, 1999. Accordingly, the Company does not believe that the Year 2000 presents a material exposure. In addition, the Company has gathered information about the Year 2000 compliance status of its significant suppliers and subcontractors and continues to monitor their compliance. NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR 2000 The Company has queried its significant suppliers and subcontractors in writing. To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The effect of non-compliance by external agents is not determinable. 46 COSTS The Company will utilize both internal and external resources to reprogram, or replace, test, and implement the software and operating equipment for Year 2000 modifications. The total cost of the Year 2000 project is estimated at $100,000 and is being funded through operating cash flows. To date, the Company has incurred approximately $81,000 ($66,000 expensed and $15,000 capitalized for new systems and equipment), related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $19,000 is attributable to the purchase of software and upgrades, which will be expensed as incurred. RISKS Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, the Company would temporarily be unable to engage in normal business activities on and after January 1, 2000. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. CONTINGENCY PLAN The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds, and adjusting staffing strategies.
---------------------------------------------------------------------------------------- Resolution Phases Assessment Remediation Testing Implementation ---------------------------------------------------------------------------------------- Information 100% Complete 95% Complete, 80% Complete, 80% Complete. Technology Expected Expected Expected completion E completion completion date, April, 1999 X date, April, date, April, P 1999 1999 O ---------------------------------------------------------------------------------------- S ---------------------------------------------------------------------------------------- U Operating 100% Complete 95% Complete 95% Complete 95% Complete R Equipment with Expected Expected Expected completion E Embedded Chips completion completion date, March, 1999 or Software date, March, date, March, 1999 1999 T ---------------------------------------------------------------------------------------- Y ---------------------------------------------------------------------------------------- P 3rd Party 100% Complete N/A N/A N/A E for contract _______________ _____________ _____________________ reviews. 95% complete 80% complete 80% complete for ______________ for system for system system interfaces. 100% Complete interfaces. interfaces. Expected completion for surveying Expected Expected date, April, 1999 all critical completion completion _____________________ 3rd parties date, April, date, April, Implement 1999 1999 contingency plans or _______________ other alternatives Develop as necessary. contingency Expected completion plans as date, April, 1999 appropriate. Expected completion date, March, 1999 ----------------------------------------------------------------------------------------
47 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. The Company's market risk arises primarily from interest rate risk inherent in its lending, its holding of residual receivables and its investor savings activities. The structure of the Company's loan and investor savings portfolios is such that a significant rise or decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with senior management. Senior management regularly reviews the Company's interest rate risk position and adopts balance sheet strategies that are intended to optimize operating earnings while maintaining market risk within acceptable guidelines. To estimate the impact that changes in interest rates would have on the Company's earnings, management uses Simulation Analysis. Simulation Analysis is performed using a computer-based asset/liability model which incorporates current portfolio balances and rates, contractual maturities, repricing opportunities and assumptions about prepayments, future interest rates and future volumes. To measure the sensitivity of the Company's earnings, the result of multiple simulations, which assume changes in interest rates, are compared to the "base case" simulation, which assumes no changes in interest rates. The sensitivity of earnings is expressed as a percentage change in comparison to the "base case" simulation. The model assumes an immediate parallel shift in interest rates. The Company's interest rate risk position based on simulation results as of December 31, 1998 is as follows: Basis point change in interest rates (100) 100 Projected percentage change in net income (22.3)% (5.9)% While the Company monitors interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. As of December 31, 1998, the Company did not hedge its loans held for whole-loan sales. The Company's present strategy is to sell the substantial portion of the current month's production that is designated for whole-loan sales in the following month and the remaining loans in the subsequent month. Because the interest rates on the Company's warehouse lines of credit used to fund and acquire loans are variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale may reduce the gain on loan sales earned by the Company. There were no open hedging positions at year-end. 48 On loans originated for inclusion in securitized pools, the Company generally employs a strategy designed to hedge some of the risks associated with changes in interest rates. The Company's interest rate hedging strategy, includes shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements relating to loans pending a securitization transaction. The ultimate sale of the Company's loans included in a securitized transaction generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. However, a significant reduction in market rates could accelerate the prepayment speed on loans held in the various securitized mortgage pools. An acceleration of prepayment on loans held in the securitized pools would have a negative impact on the carry value of the residual assets. There were no open hedging positions at year end. Projected percentage changes in operating results brought about by changes in interest rates could be material relative to the Company's operating results. If simulation results indicate earnings sensitivity in excess of Management's acceptable limits, Management will seek to identify on-balance sheet and/or off-balance sheet strategies to bring earnings sensitivity within target guidelines. Management will continue to monitor the Company's interest rate risk position to manage the possible adverse impact on earnings caused by changes in interest rates. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Supplementary Data are set forth herein commencing on page F-1 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 21, 1998, the Company changed principal accounting firms from KPMG Peat Marwick LLP to Elliott, Davis & Company, LLP. The discussion of this change in the Company's certifying accountant is incorporated by reference to the Company's current report on Form 8-K dated September 25, 1998 and filed with the Commission on September 25, 1998 (Commission file no. 000-8909). 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the Company's proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report. 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of Report. 1. FINANCIAL STATEMENTS FOR HOMEGOLD FINANCIAL, INC.: The Financial Statements are listed in the index to Consolidated Financial Statements on page F-1 of this Report. 2. FINANCIAL STATEMENT SCHEDULES: Not applicable. 3. EXHIBITS: The exhibits are listed on the Exhibit Index attached hereto. 51 EXHIBIT INDEX 3.1.1 Restated Articles of Incorporation as filed with the South Carolina Secretary of State on June 6, 1997: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 1998 for the quarter ended March 31, 1998, Commission File No. 000-08909 (Exhibit 3.1). 3.1.2 Articles of Amendment as filed with the South Carolina Secretary of State on June 24, 1998: Incorporated by Reference to the Company's Current Report on Form 8-K filed on July 7, 1998, Commission File No. 000-08909 (Exhibit 3.1). 3.1.3 Resignation of Registered Agent and Notice of Change of Registered Agent as filed with the South Carolina Secretary of State on July 15, 1998. 3.2 Amended and Restated Bylaws dated March 12, 1997: Incorporated by Reference to the Company's Quarterly Report on Form 10-Q filed on May 15, 1998 for the quarter ended March 31, 1998, Commission File No. 000-08909 (Exhibit 3.2). 4.1.1 Indenture Dated as of September 23, 1997 among Emergent Group, Inc. (n/k/a HomeGold Financial, Inc., the Company), the Subsidiary Guarantors Named Therein and Bankers Trust Company, as Trustee pertaining to the Company's 10.75% Senior Notes due 2004: Incorporated by Reference to the Company's Registration Statement on Form S-4 filed on November 13, 1997, Commission File No. 333-39339 (Exhibit 4.1). 4.1.2 Supplemental Indenture adding Emergent Insurance Agency, Inc. as Subsidiary Guarantor dated November 3, 1997. 4.1.3 Officers' Certificate and Opinion of Counsel dated March 18, 1998, and Notice to Trustee dated March 30, 1998, for release from Guarantees of The Loan Pro$, Inc. and Premier Financial Services, Inc. 4.1.4 Officers' Certificate, Opinion of Counsel dated August 21, 1998, and Notice to Trustee dated September 10, 1998, for release from Guarantees of Sterling Lending Corporation and Sterling Lending Insurance Agency. 4.1.5 Supplemental Indenture #1, dated as of August 19, 1998. 4.1.6 Officers' Certificate, Opinion of Counsel and Notice to Trustee dated November 13, 1999, for release from Guarantees of Emergent Business Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a/ Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc. 4.2 See Exhibits listed under 3 above. 10.1 HomeGold Financial, Inc. Stock Option Plan: Incorporated by reference to Exhibit 10.1 of the Company's Registration Statement on Form S-1, Commission File No. 333-01393. 10.2.1 1995 Officer and Employee Stock Option Plan: Incorporated by reference to Exhibit 10.1 of the Company's 1995 Notice of Annual Meeting and Proxy Statement, Commission File No. 000-08909. 10.2.2 Amendment No. 1 to the 1995 Employee and Officer Stock Option Plan, dated May 27, 1997: Incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Commission on July 10, 1998, Commission File No. 333-58861. 10.2.3 Amendment No. 2 to the 1995 Employee and Officer Stock Option Plan, dated June 10, 1998: Incorporated by reference to the Company's Registration Statement on Form S-8 filed with the Commission on July 10, 1998, Commission File No. 333-58861. 10.3 1995 Director Stock Option Plan: Incorporated by reference to an exhibit filed with the Company's 1995 Notice of Annual Meeting and Proxy Statement. 10.4 1995 Restricted Stock Agreement Plan: Incorporated by reference to Exhibit 10.4 of the Company's Registration Statement on Form S-1, Commission File No. 333-01393. 10.5 HomeGold Financial, Inc. Employee Stock Purchase Plan: Incorporated by reference to Exhibit 99.1 of the Company's registration statement on Form S-8, Commission File No. 333-20179. 10.6.1 Mortgage Loan Warehousing Agreement dated June 30, 1998, by and among HomeGold, Inc. and Carolina Investors, Inc., as Borrowers, the Financial Institutions Party Thereto, as Lenders, and The CIT Group/Business Credit, Inc. as Administrative Agent: Incorporated by Reference to the Company's 8-K filed on July 7, 1998, Commission File No. 000-08909 (Exhibit 10.1). 52 10.6.2 First Amendment to Mortgage Loan Warehousing Agreement dated August 24, 1998. 10.6.3 Second Amendment to Mortgage Loan Warehousing Agreement dated December 24, 1998. 10.7.1 Asset Purchase Agreement dated October 2, 1998, by and among TransAmerica Business Credit Corporation and Certain Subsidiaries thereof, the Sellers named therein HomeGold Financial, Inc. Incorporated by reference to the Company's current report on Form 8-K dated October 2, 1998, Commission File No. 000-08909. 10.7.2 Amendment dated November 12, 1998, by and among TBCC, TransAmerica Growth Capital, Inc., TransAmerica Small Business Services, Inc., the Sellers named therein and HomeGold Financial, Inc. to the Asset Purchase Agreement dated October 7, 1998. 16.1 Letter of KPMG Peat Marwick dated September 25, 1998. Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated September 25, 1998, Commission File No. 000-08909. 21.0 Listing of subsidiaries. 23.1 Consent of Elliott, Davis & Company, L.L.P. to include report of Independent Auditors for the year ended December 31, 1998. 23.2 Consent of KPMG Peat Marwick, LLP to include report of independent auditors for the two years ended December 31, 1997. 27.1 Financial Data Schedule (For SEC Use Only). (b) Reports on Form 8-K filed in the fourth quarter of 1998: (1) On October 2, 1998, the Company filed a Form 8-K with respect to the execution of Definitive Purchase Agreement for the Sale of the SBA Portfolio to TransAmerica Credit Corporation. (2) On November 13, 1998, the Company filed a Form 8-K with respect to historical and pro forma financial statements related to the sale of the SBA portfolio to TransAmerica Credit Corporation. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HOMEGOLD FINANCIAL, INC. --------------------------------------------- Registrant March 4, 1999 \s\ John M. Sterling, Jr. - --------------------------------------------- ---------------------------------------------- (Date) John M. Sterling, Jr., Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. \s\ J. Robert Philpott, Jr. \s\ Tecumseh Hooper, Jr. - --------------------------------------------- ---------------------------------------------- J. Robert Philpott, Jr. Tecumseh Hooper, Jr. Director Director \s\ John M. Sterling, Jr. \s\ Clarence B. Bauknight - --------------------------------------------- ---------------------------------------------- John M. Sterling, Jr., Chairman of the Clarence B. Bauknight Board of Directors and Chief Executive Director Officer \s\ Larry G. Blackwell \s\ Porter B. Rose - --------------------------------------------- ---------------------------------------------- Larry G. Blackwell Porter B. Rose Director Director \s\ Keith B. Giddens \s\ Kevin J. Mast - --------------------------------------------- --------------------------------------------- Keith B. Giddens, President, Chief Kevin J. Mast, Executive Vice President, Operating Officer and Director Chief Financial Officer and Treasurer March 4, 1999 - --------------------------------------------- (Date)
54 HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES 1998 REPORT ON CONSOLIDATED FINANCIAL STATEMENTS HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES 1998 REPORT ON CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Independent Auditors' Report ..................................................2 Audited Consolidated Financial Statements Consolidated Balance Sheets............................................3 Consolidated Statements of Operations..................................5 Consolidated Statements of Shareholders' Equity........................6 Consolidated Statements of Cash Flows..................................7 Notes to Consolidated Financial Statements ............................8 INDEPENDENT AUDITORS' REPORT ---------------------------- Shareholders and Board of Directors HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES Greenville, South Carolina We have audited the accompanying consolidated balance sheet of HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES as of December 31, 1998 and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES as of December 31, 1997, and for each of the two years in the period then ended, were audited by other auditors whose report dated February 27, 1998, expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) AND SUBSIDIARIES as of December 31, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Elliott, Davis & Company, L.L.P. Greenville, South Carolina February 19, 1999, except for Note 2 and Note 27, as to which the date is February 24, 1999.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, ------------------------- 1998 1997 ----------- ---------- ASSETS (In thousands) ------ Cash and cash equivalents $ 36,913 $ 7,561 Restricted cash 5,100 -- Loans receivable 124,740 297,615 Less allowance for credit losses on loans (6,659) (6,528) Less deferred loan fees (2,071) (4,316) Plus deferred loan costs 888 1,658 ----------- ---------- Net loans receivable 116,898 288,429 Income taxes receivable 900 1,029 Accrued interest receivable 2,613 4,407 Other receivables 12,028 9,651 Residual receivable, net 43,857 63,202 Property and equipment, net 19,665 18,080 Real estate and personal property acquired through foreclosure 5,881 3,295 Excess of cost over net assets of acquired businesses, net of accumulated 1,660 2,874 amortization of $654,000 in 1998 and $978,000 in 1997 Debt origination costs 4,681 4,767 Deferred income tax asset, net 4,151 4,151 Servicing asset 940 1,468 Other assets 1,921 7,238 ----------- ---------- TOTAL ASSETS $ 257,208 $ 416,152 =========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, -------------------------- 1998 1997 ------------ ---------- LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands) ------------------------------------ Liabilities: Revolving warehouse lines of credit $ 16,736 $ 77,605 Investor savings: Notes payable to investors 118,586 115,368 Subordinated debentures 17,304 18,947 ------------ ---------- Total investor savings 135,890 134,315 Senior unsecured debt 86,650 125,000 Accounts payable and accrued liabilities 6,656 6,517 Remittances payable 1,871 4,591 Income taxes payable 382 -- Accrued interest payable 3,199 4,750 ------------ ---------- Total other liabilities 12,108 15,858 ------------ ---------- Total liabilities 251,384 352,778 Minority interest 23 -- Shareholders' equity: Common stock, par value $.05 per share - authorized 100,000,000 shares issued and outstanding 9,733,374 shares in 1998 and 9,686,477 shares in 1997 486 484 Capital in excess of par value 38,821 38,609 Retained earnings (deficit) (33,506) 24,281 ------------ ---------- Total shareholders' equity 5,801 63,374 ------------ ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 257,208 $ 416,152 ============ ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ------------ ------------ ------------- (In thousands, except share data) REVENUES: Interest income $ 35,075 $ 34,008 $ 17,908 Servicing income 12,239 8,514 3,274 Gain on sale of loans: Gross gain on sale of loans 9,472 52,828 23,815 Loan fee, net 11,745 30,207 4,150 ------------ ------------ ------------- Total gain on sale of loans 21,217 83,035 27,965 Gain on sale of subsidiaries' net assets 18,964 -- -- Other revenues 4,230 1,399 1,241 ------------ ------------ ------------- Total revenues 91,725 126,956 50,388 ------------ ------------ ------------- EXPENSES: Interest 35,968 25,133 11,021 Provision for credit losses 11,906 10,030 5,416 Fair market value writedown on residual receivables 13,638 -- -- Salaries, wages and employee benefits 56,584 48,044 13,663 Business development costs 10,818 7,486 1,603 Restructuring charges 6,838 -- -- Other general and administrative expense 28,964 28,754 8,224 ------------ ------------ ------------- Total expenses 164,716 119,447 39,927 ------------ ------------ ------------- Income (loss) before income taxes, minority interest and (72,991) 7,509 10,461 extraordinary item Provision (benefit) for income taxes 3,017 (3,900) 718 ------------ ------------ ------------- Income (loss) before minority interest and (76,008) 11,409 9,743 extraordinary item Minority interest in (earnings) loss of subsidiaries 47 (156) 352 ------------ ------------ ------------- Income (loss) before extraordinary item (75,961) 11,253 10,095 Extraordinary item--gain on extinguishment of debt, net of $0 18,216 -- -- tax ============ ============ ============= NET INCOME (LOSS) $ (57,745) $ 11,253 $ 10,095 ============ ============ ============= BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Income (loss) before extraordinary item $ (7.81) $ 1.20 $ 1.47 Extraordinary item, net of taxes 1.87 -- -- ============ ============ ============= Net income (loss) (5.94) 1.20 1.47 ============ ============ ============= Basic weighted average shares outstanding 9,719,262 9,406,221 6,852,420 ============ ============ ============= DILUTED EARNING (LOSS) PER SHARE OF COMMON STOCK: Income (loss) before extraordinary item $ (7.81) $ 1.17 $ 1.42 Extraordinary item, net of tax 1.87 -- -- ============ ============ ============= Net income (loss) (5.94) 1.17 1.42 ============ ============ ============= Diluted weighted average shares outstanding 9,719,262 9,598,811 7,099,874 ============ ============ =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 Class A Common Stock Common Stock -------------------- ------------------------ Capital in Excess Retained Shares Shares of Par Earnings Issued Amount Issued Amount Value (Deficit) Total ----------- -------- ------------ ---------- ---------- ---------- ---------- (In thousands, except share data) Balance at December 31, 1995 121,000 $ 6 6,276,474 $ 314 $ 6,632 $ 2,933 $ 9,885 Shares issued: Exercise of stock options 2,026 -- 110,668 5 156 -- 161 Conversion of Class A Common Stock to Common Stock 6,387,142 319 (6,387,142) (319) -- -- -- Exercise of stock warrants 111,932 6 -- -- 288 -- 294 Issuance of Common Stock 2,519,031 126 -- -- 26,074 -- 26,200 Net income -- -- -- -- -- 10,095 10,095 ----------- -------- ------------ ---------- ---------- ---------- ---------- Balance at December 31, 1996 9,141,131 457 -- -- 33,150 13,028 46,635 Shares issued: Exercise of stock options 40,667 2 -- -- 227 -- 229 Exercise of restricted stock 2,900 -- -- -- -- -- -- options Employee Stock Purchase Plan 7,534 -- -- -- 67 -- 67 Purchase of Reedy River 494,195 25 -- -- 5,164 -- 5,189 Ventures LP Other shares issued 50 -- -- -- 1 -- 1 Net income -- -- -- -- -- 11,253 11,253 ----------- -------- ------------ ---------- ---------- ---------- ---------- Balance at December 31, 1997 9,686,477 484 -- -- 38,609 24,281 63,374 Shares issued: Exercise of stock options 9,467 -- -- -- 21 -- 21 Employee Stock Purchase Plan 37,430 2 -- -- 191 -- 193 Dividends Paid -- -- -- -- -- (42) (42) Net loss -- -- -- -- -- (57,745) (57,745) ----------- -------- ------------ ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1998 9,733,374 $ 486 -- $ -- $ 38,821 $ (33,506) $ 5,801 =========== ======== ============ ========== ========== ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 -------------- -------------- ------------ (In thousands) OPERATING ACTIVITIES: Net income (loss) $ (57,745) $ 11,253 $ 10,095 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,626 2,691 1,334 Fair value writedown on residual receivables 13,638 Benefit for deferred income taxes -- (3,813) (141) Provision for credit losses on loans 11,906 10,030 5,416 Provision for losses on real estate owned 696 -- -- Gain on retirement of senior unsecured debt (18,216) -- -- Net (increase) decrease in deferred loan 770 (1,573) 145 costs Net increase (decrease) in unearned discount and other deferrals (2,245) 2,812 665 Loans originated with intent to sell (747,442) (1,140,333) (387,600) Proceeds from loans sold 778,948 517,803 271,858 Proceeds from securitization of loans 92,316 509,781 30,128 Restructuring charge 5,760 -- -- Other 994 (902) (1,481) Changes in operating assets and liabilities increasing (decreasing) cash 1,274 (54,038) (7,964) -------------- -------------- ------------- Net cash provided by (used in) operating activities $ 84,280 $ (146,289) $ (77,545) -------------- -------------- ------------ INVESTING ACTIVITIES: Loans originated $ (156,617) $ (133,188) $ (49,173) Principal collections on loans not sold 182,196 128,552 61,868 Proceeds from sale of real estate and personal property acquired through foreclosure 7,593 6,652 3,383 Proceeds from sale of property and equipment 2,808 29 160 Purchase of property and equipment (11,701) (13,222) (4,894) Other 48 (411) (84) --------------- -------------- ------------ Net cash provided by (used in) investing activities 24,327 (11,588) 11,260 --------------- -------------- ------------ FINANCING ACTIVITIES: Advances on warehouse lines of credit 1,416,500 1,139,815 509,118 Payments on warehouse lines of credit (1,477,369) (1,117,704) (485,257) Net increase in notes payable to investors 3,218 17,381 15,855 Net increase (decrease) in subordinated debentures (1,643) 2,832 (70) Net proceeds from issuance of senior unsecured debt -- 120,578 -- Retirement of senior unsecured debt (20,134) -- -- Proceeds from issuance of common stock 214 1,260 26,655 Other (41) -- -- --------------- -------------- ------------ Net cash provided by (used in) financing activities (79,255) 164,162 66,301 --------------- -------------- ------------ Net increase in cash and cash equivalents 29,352 6,285 16 CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR 7,561 1,276 1,260 --------------- -------------- ------------ END OF YEAR $ 36,913 $ 7,561 $ 1,276 =============== ============== ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THESE STATEMENTS. HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES BUSINESS HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and its subsidiaries ("HGFN" or "the Company") are primarily engaged in the business of originating, selling, securitizing and servicing first and second-lien residential mortgage loan products. Prior to November 1998, the Company also engaged in the business of originating, selling, securitizing and servicing commercial loan products partially guaranteed by the United States Small Business Administration ("SBA") and commercial loans collateralized by accounts receivable and inventory and mezzanine loans. The funds for these loans are obtained principally through the utilization of various bank warehouse lines of credit, proceeds from securitization of loans, and the issuance of senior unsecured debt, notes payable and subordinated debentures to investors. Substantially all of the Company's loans are made to non-prime borrowers. These borrowers generally have limited access to credit or are otherwise considered to be credit impaired by conventional lenders. CONSOLIDATION AND ESTIMATES The consolidated financial statements include the accounts of the Company and its subsidiaries. All subsidiaries at December 31, 1998 were wholly-owned except for one special purpose corporation that is 99.54% owned. Included in the consolidated financial statements of operations are the operations of the various subsidiaries that were sold during 1998. All significant intercompany items and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. These estimates include, among other things, valuation of real estate owned, assumptions used to value residual receivables and determination of the allowance for credit losses. ADOPTION OF NEW ACCOUNTING POLICIES Effective January 1, 1998, the Company adopted the provisions of Statements of Financial Accounting Standards ("SFAS") No. 130 "REPORTING COMPREHENSIVE INCOME". This Statement establishes standards for reporting comprehensive income and its components in a full set of general purpose financial statements. The objective of the Statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events during the period other than transactions with owners. Comprehensive income is divided into net income and other comprehensive income. Adoption of this Statement did not change total shareholders' equity. Net income and comprehensive income are the same for the years ended December 31, 1998, 1997 and 1996. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADOPTION OF NEW ACCOUNTING POLICIES (CONTINUED) Effective December 15, 1998, the Company adopted the provisions of SFAS No. 131 "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". This Statement establishes standards for the method that public entities report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about product and services, geographical areas, and major customers. The Company believes that it operates as one segment. SALES AND SECURITIZATION OF LOANS In 1996, the Company began securitizing 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 residual receivable. The Company believes the assumptions it has used 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. In 1997, the Company began securitizing mortgage loans. Total mortgage loans securitized in 1998 and 1997 was $92.2 million and $487.6 million, respectively. Since 1996, the Company has securitized $39.0 million of small business loans, with $1.8 million in small business loan securitizations in 1998. The small business loans represent the unguaranteed portion of SBA loans originated or purchased by the Company. The securitization transactions in 1996 were accounted for under SFAS No. 77 and were reflected as sales under this pronouncement. The Company also sells on a whole loan basis a significant portion of its loans (servicing released), including substantially all of its mortgage loans secured by second liens and loans originated by strategic alliance mortgage brokers, and all of its SBA guaranteed loan participations (servicing retained), principally to secure the additional cash flow associated with the premiums paid in connection with such sales and to eliminate the credit risk associated with the second lien mortgage loans. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SALES AND SECURITIZATION OF LOANS (CONTINUED) All securitizations in 1998 were completed prior to March 31, 1998. The Company's strategy for the remainder of 1998 was to sell loans on a whole loan basis. The Company may return to securitization transactions in 1999 if various conditions, including market conditions warrant. The Company's has entered into strategic alliance mortgage banker agreements whereby the Company provides funding and secondary marketing activities for its strategic alliance mortgage bankers ("Strategic Alliance Mortgage Banker"). In exchange, the Strategic Alliance Mortgage Bankers agree to provide the Company with all of their mortgage loan production that meets the Company's underwriting criteria. The premiums earned on the secondary market are then split between the Company and its Strategic Alliance Mortgage Banker. The terms of these agreements range from 2 to 5 years. In the event the Strategic Alliance Mortgage Banker terminates the agreement early, the contract generally provides for a termination fee equal to, at a minimum, all of the premium income received by the Strategic Alliance Mortgage Banker over the last twelve months. This termination fee is considered to be a recoupment of previously shared premiums, and accordingly is included in gain on sale of loans in the Statements of Income. No gain was recognized in 1998 or 1997 related to terminations. For the year ended December 31, 1996, two Strategic Alliance Mortgage Bankers terminated their agreements early. Accordingly, the Company has recognized $7.3 million in gain on sale of loans in 1996 relating to these terminations. CASH AND CASH EQUIVALENTS The Company maintains its primary checking accounts with three principal banks and maintains overnight investments in reverse repurchase agreements with those same banks. The amounts maintained in the checking accounts are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 1998, 1997 and 1996, the amounts maintained in the overnight investments in reverse repurchase agreements, which are not insured by the FDIC, totaled $31.6 million, $5.3 million and $282,000, respectively. These investments were collateralized by U. S. Government securities pledged by the banks. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. RESTRICTED CASH The Company maintains an investment account with a trustee relating to representations and warranties in connection with the sale of the small-business loan unit. This account is shown as restricted cash, and is invested in overnight investments or short-term U.S. Treasury securities. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOANS RECEIVABLE AND INTEREST INCOME Loans receivable in 1998 consist primarily of first and second residential mortgage loans, and asset-based small-business loans. In prior years, it also included SBA loans and automobile loans. During 1998, the Company sold the majority of its small-business and auto loans. The Company presently is not originating these types of loans. Non-refundable loan fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. Collateral is often taken to provide an additional measure of security. Generally, the cash flow or earning power of the borrower represents the primary source of repayment and collateral liquidation a secondary source of repayment. The Company determines the need for collateral on a case-by- case or product-by-product basis. Factors considered include the current and prospective creditworthiness of the customer, terms of the instrument and economic conditions. Interest income on loans receivable is recognized on the accrual basis as earned. Fees received, net of direct costs incurred, for the origination of loans and insurance commissions, are deferred and amortized into interest income over the contractual life of the loan using the interest method. Any unamortized amounts are recognized into income at the time the loan is repaid or sold. Accrual of interest is discontinued and reversed when a loan is either over 90 days past due, the collateral is determined to be inadequate or when foreclosure proceedings begin. Loans receivable held for sale are carried at the lower of aggregate cost or market. There was no allowance for market losses on loans receivable held for sale at December 31, 1998 and 1997. ALLOWANCE FOR CREDIT LOSSES The allowance for credit losses is based on management's ongoing evaluation of the loan portfolio and reflects an amount that, in management's opinion, is adequate to absorb inherent losses in the existing portfolio. In evaluating the portfolio, management takes into consideration numerous factors including delinquencies, current economic conditions, prior loan loss experience, the composition of the serviced loan portfolio, and management's estimate of anticipated credit losses. Loans, including those deemed impaired, are charged against the allowance at such time as they are determined to be uncollectible. Subsequent recoveries are credited to the allowance. Management considers the year-end allowance appropriate and adequate to cover inherent losses in the loan portfolio; however, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable. Actual results could differ from these estimates. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for credit losses or that additional increases in the allowance for credit losses will not be required. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING FOR IMPAIRED LOANS The Company assesses a specific allowance on mortgage loans, by reviewing on a loan-by-loan basis each month, all loans over 90 days past due or any loans that are in bankruptcy. A loan's impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company's policy is to evaluate impaired loans based on the fair value of the collateral, since the majority of loans originated by the Company are collateral dependent. Interest income from impaired loans is recorded using the cash collection method. REAL ESTATE ACQUIRED THROUGH FORECLOSURE Real estate acquired through foreclosure represents properties that have been acquired through actual foreclosures or deeds received in lieu of loan payments. These assets are recorded at the lower of the carrying value of the loans or the estimated fair value of the related real estate, net of estimated selling costs. The excess carrying value, if any, of the loan over the estimated fair value of the asset is charged to the allowance for credit losses upon transfer. Costs relating to the development and improvement of the properties are capitalized whereas those costs relating to holding the property are charged to expense. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Estimated lives are 15 to 40 years for buildings and improvements, 3 to 7 years for furniture, fixtures and equipment, and the lease period for leasehold improvements. Additions to property and equipment and major replacements or improvements are capitalized at cost. Maintenance, repairs and minor replacements are expensed when incurred. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and identifiable intangibles held and used by the Company are reviewed for impairment whenever management believes events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. No impairment loss was recognized for continuing operations in the two years ended December 31, 1997. In November 1998, the Company decided to close three retail loan centers and to consolidate all operations into one location. This decision resulted in a restructuring charge of $6.8 million. The restructuring charge relates to the write-down of fixed assets to net realizable value on assets no longer used by the Company and the estimated net lease cost on facilities no longer being used. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) AMORTIZATION The excess of cost over related net assets of businesses acquired is amortized using the straight-line method principally over 25 years. On a periodic basis, the Company reviews goodwill for events or changes in circumstances that may indicate that the carrying amount of goodwill may not be recoverable. The Company utilizes estimated future cash flows of the purchased subsidiary in determining any impairment on the excess of cost over the related net assets. DEBT ORIGINATION COSTS The Company capitalizes costs incurred to obtain warehouse lines of credit and senior unsecured debt. These costs are amortized as an addition to interest expense over the terms in the loan agreements. The Company also reduces the debt origination costs by the unamortized portion of the senior unsecured debt that is purchased. These amounts have been netted against the gain on extinguishment of debt. REMITTANCES PAYABLE The Company retains the servicing rights on its mortgage securitization transactions. The Company receives the payments from the borrowers and records a liability until the funds are remitted to the Trustee. INCOME TAXES The Company and its subsidiaries file a consolidated Federal income tax return. The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred income taxes arise principally from depreciation, unrealized gains on loans held for sale, certain securitization transactions, amortization of intangibles, allowances for credit losses, and net operating loss carryforwards. Management establishes on a quarterly basis a valuation allowance for deferred assets. Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize net deferred tax assets. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING EXPENSE Advertising, promotional, and other business development costs are generally expensed as incurred except as noted herein. External costs incurred in producing media advertising are expensed the first time the advertising takes place. In 1997, the Company began using a direct mail marketing approach for its retail mortgage business. External costs related to direct mailings are capitalized in accordance with Statement of Position 93-7 and amortized over a three-month period. Total expenses recognized in 1998 and 1997 for direct mailings were approximately $8.8 million and $5.9 million, respectively. The total amounts capitalized into other assets on the balance sheet at December 31, 1998 and 1997 were approximately $842,000 and $1.9 million. INTEREST RATE RISK MANAGEMENT The Company's operations may be directly affected by fluctuations in interest rates. While the Company monitors interest rates and may, from time to time, employ a strategy designed to hedge some of the risks associated with changes in interest rates, no assurance can be given that the Company's results of operations and financial condition will not be adversely affected during periods of fluctuations in interest rates. The Company currently does not hedge its loans held for whole-loan sales. The Company's present strategy is to sell a substantial portion of the current months' production that is designated for whole-loan sales in the following month and the remaining loans in the subsequent month. Because the interest rates on the Company's warehouse lines of credit used to fund and acquire loans are variable and the rates charged on loans the Company originates are fixed, increases in the interest rates after loans are originated and prior to their sale may reduce the gain on loan sales earned by the Company. There were no open hedging positions at year-end. On loans originated for inclusion in securitized pools, the Company generally employs a strategy designed to hedge some of the risks associated with changes in interest rates. The Company's interest rate hedging strategy, includes shorting interest rate futures and treasury forwards, and entering into interest-rate lock agreements relating to loans pending a securitization transaction. The ultimate sale of the Company's loans included in a securitized transaction generally will fix the spread between the interest rates paid by borrowers and the interest rates paid to investors in securitization transactions with respect to such loans, although increases in interest rates may narrow the potential spread that existed at the time the loans were originated by the Company. EARNINGS PER SHARE Earnings per share ("EPS") are computed in accordance with SFAS No. 128, "EARNINGS PER Share". Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company. Common stock equivalents included in the diluted EPS computation consist of stock options, which are computed using the treasury stock method. In 1998, due to the Company's net loss, the common stock equivalents were not included in the diluted EPS calculation since their inclusion would be antidilutive. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECLASSIFICATIONS Certain previously reported amounts have been reclassified to conform to current year presentation. Such reclassifications had no effect on net income or shareholders' equity as previously reported. ACCOUNTING CONSIDERATIONS In June 1998, Financial Accounting Standards Board ("FASB") issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. This 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. The Company has not assessed the impact of this standard. In October 1998, FASB issued SFAS No. 134 "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" which is effective for the first fiscal quarter beginning after December 31, 1998. This statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking enterprise with the subsequent accounting for securities retained after the securitization of other types of assets by a non-mortgage banking enterprise. The adoption of this standard is not expected to have a material effect on the Company's financial statements. NOTE 2. SIGNIFICANT TRANSACTIONS AND EVENTS The year 1998 was marked by many significant events that were a direct result of redefined corporate objectives in response to changes in the industry and the Company's 1998 loss. In 1998, the Company recognized a loss of $57.7 million as compared to net income of $11.3 million in 1997. The 1998 net loss was primarily due to the Company's loan production volume being below capacity in relation to the general and administrative expense structure and lower premiums and discounts on sales of mortgage loans. Loan production declined to $904.1 million in 1998 from $1.3 billion in 1997. Gross gain on sale of loans declined $43.4 million or 82.1% during 1998. There were two primary reasons for lower production in 1998 compared to 1997. First was a decision at the beginning of 1998 to segregate the origination and the underwriting processes. In connection with this reorganization, several managers of the HomeGold retail operations left the Company. Second was a decision by the Company to "tighten" underwriting guidelines in response to investor concerns related to the quality of loans that the Company and its competitors were originating. These decisions improved the quality of loans originated, but had a significant negative impact on the volume of loans originated. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. SIGNIFICANT TRANSACTIONS AND EVENTS (CONTINUED) The significant change in the premiums (discounts) received in 1998 resulted primarily from two factors. First, the Company sold at a discount substantially all of the second lien mortgage loans it held, that were not underwritten in accordance with Company guidelines. In an effort to increase loan production, former employees approved loans that did not meet Company guidelines. Second, the Company received significantly lower premiums on loan sales in the third and fourth quarters of 1998 because of a market surplus in the supply of loans in the resale market. The Company believes this surplus, in turn, resulted from the decision of issuers of securitized loan pools to sell their loan products in the whole loan cash market when securitization, as a means of financing, became less attractive. Securitization became less attractive as the corporate interest rate spreads required by investors increased in the latter half of 1998. Investors required higher spreads because of concerns related to higher than anticipated prepayments on securitized loan pools and concerns about the credit worthiness of several issuers. Specific management decisions made during the fourth quarter of 1997 and throughout 1998 significantly impacted the Company's financial statements. This footnote provides a summary of the more significant transactions and the subsequent footnotes reflect the significant changes that occurred during 1998. The following information is only for the purpose of providing a brief overview and is qualified in its entirety by the additional information that is enclosed in the following notes. The company's primary objectives in 1998 were to insure adequate levels of liquidity, to match operating expenses with loan origination volumes, and to focus management's attention on the Company's larger residential mortgage loan operations. o To ensure adequate liquidity, the company secured a $100 million dollar line of credit in June 1998 to replace an existing maturing line of credit. o The Company decided to reduce the loan portfolio size and to use excess liquidity to repurchase $38.4 million of its senior unsecured debt. The reduction in senior debt resulted in an extraordinary gain of $18.2 million on the extinguishment of this debt. o The sales of the Company's auto loan portfolio and related assets in March 1998, the sale of the small retail residential mortgage loan origination company in August 1998, and the sale of the small-business loan portfolio and related assets in fourth quarter of 1998, resulted in a gain on the sale of net assets of $19.0 million. These transactions required a significant amount of management time and attention in 1998. As a result of the sales in 1998, management is now able to focus on the Company's larger retail mortgage loan products and its mortgage brokerage products. These transactions provided the company with approximately $70.1 million of cash proceeds after reducing bank lines of credit. o The Company completed one small mortgage loan securitization in 1998 compared to four securitizations in 1997. The decision in April to sell the mortgage loans on a servicing released basis for cash resulted in lower premiums on sales, reduced the company's serviced portfolio from $768.6 million at the end of 1997 to $550.3 million at the end of 1998 and positively impacted the Company's operating cash flow. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. SIGNIFICANT TRANSACTIONS AND EVENTS (CONTINUED) o The Company responded to higher than anticipated prepayments on securitized loan pools by increasing the prepayment assumptions used in valuing the Company's residual assets. This resulted in a $13.6 million fair market value write-down on residual assets during 1998. o The Company reduced the number of employees from a high of 1,300 employees at the beginning of the year to 450 employees at the end of 1998 in an effort to bring loan production costs and overall general and administrative expenses more in line with the lower loan volume levels. A significant portion of the staff reductions resulted from the Company's decision to consolidate the retail centers outside of Greenville, South Carolina into the Greenville corporate headquarters building. This decision resulted in the company recording a $6.8 million restructuring charge. Management believes these charges will be beneficial by creating efficiencies through consolidation of operations and implementation of future strategic directives, and better aligning expenses with current levels of production. o The Company's 1998 decisions resulted in a liquidity position of $57.9 million at December 31, 1998, representing $36.9 million of cash and cash equivalents and $21.0 million of availability under the credit agreement. The Company believes that its liquidity position will provide the funds necessary for the Company to complete its plan of increasing loan production and loan sales to a level that will result in an operating profit on a monthly basis in the fourth quarter of 1999. o The Company's primary objective for 1999 is to increase loan originations. The Company believes that the current staffing level is more than adequate to support substantially higher levels of production. o The Company also anticipates continuing to repurchase senior subordinated debt. The Company realized a $16.9 million extraordinary gain in the first two months of 1999 on the repurchase of $35.3 million of senior debt. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. LOANS RECEIVABLE The following is a summary of loans receivable by type of loan:
December 31, ----------------------------------- 1998 1997 ----------------- --------------- (In thousands) Mortgage Loans: First mortgage residential property $ 92,696 $ 152,371 Second mortgage residential property 18,992 69,836 Real estate loans on rental property 1,285 2,609 Construction loans 2,932 6,329 --------------- --------------- Total mortgage loans 115,905 231,145 --------------- --------------- Small-Business Loans: Guaranteed portion of SBA loans -- 10,732 Unguaranteed portion of SBA loans -- 6,619 Small-business loans secured by real estate -- 1,787 Asset-based small-business loans 7,054 18,798 Mezzanine loans -- 7,250 --------------- --------------- Total small-business loans 7,054 45,186 --------------- --------------- Auto loans -- 21,284 Other loans 1,781 -- --------------- --------------- Total loans receivable $ 124,740 $ 297,615 =============== ===============
Included in loans receivable are $74.1 million and $156.8 million at December 31, 1998 and 1997, respectively that are being held for sale. Included in loans receivable are loans from related parties of $640,000 and $509,000 at December 31, 1998 and 1997, respectively. Notes receivable from related parties included advances of $100,000 in 1998 and $736,000 in 1996. No advances were made in 1997. Repayments from related parties were $28,000, $560,000 and $30,000 in 1998, 1997 and 1996, respectively. First mortgage residential loans generally have contractual maturities of 12 to 360 months with an average interest rate at both December 31, 1998 and 1997 of approximately 11%. Second mortgage residential loans have contractual maturities of 12 to 360 months with an average interest rate at December 31, 1998 and 1997 of approximately 14% and 15%, respectively. Construction loans generally have contractual maturities of 12 months with an average interest rate at both December 31, 1998 and 1997 of approximately 11%. Asset-based loans generally are due on demand and had average interest rates at December 31, 1998 and 1997 of approximately 19% and 21%, respectively. Loans sold and serviced for others at December 31, 1998 and 1997 were approximately $432.6 million and $691.1 million, respectively, and are not included in assets in the accompanying balance sheets. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. LOANS RECEIVABLE (CONTINUED) At December 31, 1998, the Company's serviced for others mortgage loan portfolio by type of collateral is summarized as follows (in thousands): First mortgage residential property $ 422,723 $ 97.7 % Real estate loans on rental property 9,896 2.3 ------------- ---------- $ 432,619 $ 100.0 % ============== ========== The Company services loans in 50 states. South Carolina, North Carolina, Florida and Georgia serviced loans represent approximately 16%, 15%, 9% and 8%, respectively, of the Company's total serviced loan portfolio at December 31, 1998. No other state represents more than 6% of total serviced loans. An analysis of the allowance for credit losses is as follows:
Years Ended December 31, -------------------------------------------- 1998 1997 1996 -------------- ------------ ----------- (In thousands) Balance at beginning of year $ 6,528 $ 3,084 1,874 Provision for credit losses 11,906 10,030 5,416 Net charge offs (8,792) (5,166) (2,494) Allowance related to loans sold (2,983) -- -- Securitization transfers -- (1,420) (1,712) ============ ============ =========== Balance at end of year $ 6,659 $ 6,528 3,084 ============ ============ ===========
As of December 31, 1998, 1997, and 1996, loans totaling $7.9 million, $8.9 million, and $4.9 million, respectively, were on non-accrual status. The associated interest income not recognized on these non-accrual loans was approximately $2.0 million, $809,000, and $593,000 during the years ended December 31, 1998, 1997 and 1996, respectively. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These instruments expose the Company to credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at December 31, 1998 related to these items is summarized below: Contract Amount ------------------ (In thousands) Loan commitments: Approved loan commitments $ 4,587 Unadvanced portion of loans 1,032 ------------------ Total loan commitments $ 5,619 ================== HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. LOANS RECEIVABLE (CONTINUED) Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held is primarily residential property. Interest rates on loan commitments are generally fixed rates. NOTE 4. OTHER RECEIVABLES The following is a summary of other receivables:
December 31, ---------------------------------- 1998 1997 ---------------- --------------- (In thousands) Note receivable from sale of asset-based lending unit(1) $ 2,200 $ -- Final purchase price adjustment on sale of assets to 4,339 -- TransAmerica(2) Advanced funds to trust(3) 2,514 329 Receivable from mortgage trust(4) 1,394 530 Receivable from auto trust(5) -- 3,000 Advances to strategic partners -- 2,074 Other 1,581 3,718 ------------- -------------- $ 12,028 $ 9,651 ============= ==============
- -------------- (1) Note receivable from Emergent Asset-Based Lending, LLC, a Maryland Limited Liability Company that is payable over two years, bearing interest at Prime plus 1%. (2) Received in January 1999. (3) Trust agreements require the Company to advance interest on delinquent customer accounts. (4) Excess distribution from mortgage trust received in January 1999. (5) Receivable received in January 1998 related to "unwinding" the auto securitization that was NOTE 5. RESIDUAL RECEIVABLE In connection with its mortgage loan securitizations and SBA loan securitizations and sales, the Company has retained residual interests in the trusts. During 1998, the Company's residual interests relating to its SBA loan securitizations were sold. The $43.9 million residual asset at December 31, 1998 resulted from mortgage loan securitizations. At December 31, 1997, the $63.2 million residual asset resulted from the Company's interest in $46.7 million of mortgage loan securitizations and $16.5 million of SBA loan securitizations. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. RESIDUAL RECEIVABLE (CONTINUED) The following summarizes activity in the residual receivable:
Years Ended December 31, --------------------------------------------- 1998 1997 1996 --------------- ------------- ----------- (In thousands) Gross balance, beginning of year $ 77,457 $ 14,417 $ 5,377 Gain on sale of loans 12,322 57,516 4,770 Increase in the discounted value of future cash flows, 14,289 10,311 -- net Mark to market value adjustment (19,366) -- -- Amortization of original residual asset value (15,920) (3,984) (1,661) Sale of small-business commercial residual receivable (14,845) -- -- Other (2,915) (803) 5,931 ------------- ------------ ----------- Gross balance, end of year 51,022 77,457 14,417 Less allowance for losses on residual receivable (7,165) (14,255) (1,202) ------------- ------------ ----------- Balance at end of year $ 43,857 $ 63,202 $ 13,215 ============= ============ ===========
An analysis of the allowance for losses, which is embedded in the interest-only strip security, is as follows:
Years Ended December 31, -------------------------------------------- 1998 1997 1996 --------------- ------------ ---------- (In thousands) Balance at beginning of year $ 14,255 $ 1,202 $ 773 Anticipated losses netted against gain 2,242 13,278 -- Mark to market adjustment (5,728) -- -- Sale of small-business commercial residual asset (2,957) -- -- Net charge offs (647) (1,645) (1,283) Transfer from allowance for loan loss -- 1,420 1,712 ------------- ----------- ------------ Balance at end of year $ 7,165 $ 14,255 $ 1,202 ============= =========== ===========
The allowance represents management's estimate of losses to be incurred over the life of the securitized pool. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5. RESIDUAL RECEIVABLE (CONTINUED) The Company sold $90.5 million of mortgage loans in one securitization transaction in 1998, $487.6 million of mortgage loans in four securitization transactions in 1997 and none in 1996. The company also sold $1.8 million small business loans in one securitization transaction in 1998, $24.3 million in two securitization transactions in 1997 and $12.9 million in one securitization transaction in 1996. In 1996, the company sold $16.1 million of automobile loans in a single securitization transaction. No automobile loans were securitized in 1998 or 1997. The Company received net cash proceeds from the securitizations of $92.3 million, $509.8 million, and $30.1 million in 1998, 1997, and 1996, respectively. The Company recorded a gain on sale of these loans of $10.1 million, $44.2 million and $4.8 million in 1998, 1997, and 1996, respectively. In all securitizations entered into the three years ended December 31, 1998, the Company retained servicing responsibilities and subordinated interests. The Company receives annual servicing fees approximating 40 basis points of the outstanding balance, and rights to future cash flows arising after the investors in the securitization trust received the return for which they are contracted. As a result of the sale of the assets in both the auto and small business loan units, the Company has no future rights related to the auto or small business loan securitizations. The investors and their securitization trusts have no recourse to the Company's other assets for failure of debtors to pay when due. Most of the Company's retained interests are generally restricted, however, until investors have been fully paid and subordinate to investor's interests. The value of the Company's portion of the securitization is subject to substantial credit, prepayment, and interest rate risk on the transferred financial assets. The Company received cash proceeds from servicing fees and excess cash flow on Company's retained interest in securitized loans of $16.5 million, $3.7 million, and $3.8 million in 1998, 1997, and 1996, respectively. The various securitized loan trusts have delinquency percentage and loan charge-off percentage covenants that if exceeded would significantly delay the timing of when the Company receives the excess cash generated by the trust. The excess cash results from the customer loan rates exceeding the rates paid to the investors. The securitization agreements allow the Company to repurchase delinquent or foreclosed assets. The Company purchased from the securitized loan trusts approximately $10.0 million and $694,000 of delinquent or foreclosed assets in 1998 and 1997, respectively. None were purchased in 1996. As of December 31, 1998, the Company was in compliance with the securitization agreement covenants. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. PROPERTY AND EQUIPMENT The following is a summary of property and equipment:
December 31, --------------------------------- 1998 1997 --------------- -------------- (In thousands) Land $ 948 $ 1,247 Buildings and leasehold improvements 10,880 6,106 Equipment and computers 8,772 8,792 Furniture and fixtures 2,702 5,318 Vehicles 190 404 ------------- -------------- Total property and equipment 23,492 21,867 Less accumulated depreciation (3,827) (3,787) ------------- -------------- Net property and equipment $ 19,665 $ 18,080 ============= ==============
Depreciation expense was $3.3 million, $2.2 million, and $901,000 in 1998, 1997, and 1996, respectively. The Company leases various property and equipment, office space and automobiles under operating leases. In 1998, the Company recorded a $1.8 million non-cash restructuring charge related to future minimum rental expense for operating leased assets and facilities that are no longer used in the Company's normal course of business. The following is a schedule of future minimum cash rental payments and future minimum operating lease expense by year for all operating leases that have initial or remaining noncancelable terms in excess of one year (in thousands): Future Future Cash Lease Payment Expense ------------- ------------- 1999 $ 3,241 $ 2,150 2000 2,833 2,423 2001 1,392 1,190 2002 733 641 2003 264 259 ------------- ------------- $ 8,463 $ 6,663 ============= ============= Total rental expense was approximately $4.9 million in 1998, $2.8 million in 1997, and $843,000 in 1996. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE An analysis of real estate and personal property acquired through foreclosure is as follows:
December 31, --------------------------------- 1998 1997 --------------- -------------- (In thousands) Balance at beginning of year $ 3,295 $ 4,720 Loan foreclosures and improvements 11,777 5,888 Dispositions, net (8,495) (7,313) ------------- -------------- 6,577 3,295 Provision for allowance for real estate and personal property acquired through foreclosure (696) -- ------------- -------------- Balance at end of year $ 5,881 $ 3,295 ============= ==============
NOTE 8. EXCESS OF COST OVER NET ASSETS OF ACQUIRED BUSINESSES An analysis of excess of cost over net assets of acquired business is as follows:
December 31, --------------------------------- 1998 1997 --------------- -------------- (In thousands) Balance at beginning of year $ 2,874 $ 2,722 Additions from purchase of Reedy River Ventures, LP -- 349 Amortization expense (172) (197) Sale of intangible asset (1,042) -- ------------- -------------- Balance at end of year $ 1,660 $ 2,874 ============= ==============
NOTE 9. WAREHOUSE LINES OF CREDIT Warehouse lines of credit are summarized as follows:
December 31, --------------------------------- 1998 1997 --------------- --------------- (In thousands) Warehouse lines of credit to mortgage Subsidiaries $ 16,736 $ 63,141 Warehouse lines of credit to small business Lending subsidiaries -- 14,464 ------------- -------------- $ 16,736 $ 77,605 ============= ==============
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. WAREHOUSE LINES OF CREDIT (CONTINUED) Under the terms of the revolving credit agreement, HomeGold, Inc. ("HGI"), a wholly-owned subsidiary of HGFN, or Carolina Investors, Inc. ("CII"), a wholly-owned subsidiary of HGFN, may borrow up to a maximum of $100,000,000 with interest at the Prime Rate plus 0.75%. The note is collateralized by mortgage loan receivables. The agreement requires, among other matters, minimum availability of $20,000,000 on the line of credit, and a requirement that CII maintain a minimum of $100,000,000 in aggregate outstanding principal amount of notes due to investors. It also restricts the ability of HGI and, in certain circumstances, Carolina Investors, Inc., to pay dividends or make loans or advances to HGFN. Management believes the Company is in compliance with such restrictive covenants at December 31, 1998. The revolving credit agreement matures on June 30, 2001. Availability under the credit agreement is determined based on eligible collateral as defined under the agreement, for which the Company has forwarded to the bank the required loan files and documentation. The borrowing base adjusted for the $20,000,000 minimum availability requirements would have allowed a maximum borrowing level based on eligible collateral of $37,751,598 at December 31, 1998. HGI had outstanding borrowings of $16,735,702, and CII had no outstanding borrowings at December 31, 1998. Therefore, $21,015,896 was available under this agreement on December 31, 1998. The warehouse lines of credit to the small business lending subsidiaries were paid off and terminated at the time that the majority of their respective assets and liabilities were sold. NOTE 10. INVESTOR SAVINGS Investor savings are summarized as follows: December 31, -------------------------------- 1998 1997 ---------------- ------------- (In thousands) Notes payable to investors $ 118,586 $ 115,368 Subordinated debentures 17,304 18,947 -------------- ------------- $ 135,890 $ 134,315 ============== ============= Notes payable to investors are issued by a subsidiary company, CII, in any denomination greater than $10,000 and are registered under the South Carolina Uniform Securities Act. The notes payable to investors are PARI PASSU with the senior unsecured debt of HGFN. The notes mature from one to three years from date of issuance. Interest is payable monthly, quarterly or at maturity at the option of the investors. Interest rates on the notes are fixed until maturity and range from 5% to 9%. At December 31, 1998, 1997 and 1996, the weighted average rate was 7.38%, 7.69% and 8.08%, respectively. Subordinated debentures are issued by CII in any denomination greater than $100 and are registered under the South Carolina Uniform Securities Act. The subordinated debentures mature one year from date of issuance and have interest rates of 5%. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. INVESTOR SAVINGS (CONTINUED) The notes and debentures are subordinated to all bank debt, notes payable to investors, and senior unsecured debt. These notes and debentures are not secured by a pledge of any specific assets at CII, nor guaranteed by the Company. At December 31, 1998, 1997 and 1996, notes payable to investors include an aggregate of approximately $27.4 million, $26.3 million and $21.0 million, respectively, of individual investments exceeding $100,000. The investor savings at December 31, 1998 mature as follows (in thousands): 1999 $ 97,764 2000 38,126 ============= $ 135,890 ============= NOTE 11. SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS In September 1997, the Company sold $125.0 million in aggregate principal amount of Senior Notes due 2004 ("Senior Notes"). The Senior Notes constitute unsecured indebtedness of the Company. The Senior Notes mature on September 15, 2004, with interest payable semi-annually at 10.75%. The Senior Notes will be redeemable at the option of the Company, in whole or in part, on or after September 15, 2001, at predetermined redemption prices plus accrued and unpaid interest to the date of redemption. In 1998, the Company purchased $38.4 million in aggregate principal amount of its Senior Notes in open market transactions for a combined purchase price of $18.9 million or 49.4% of face value. The Company has purchased additional Senior Notes in 1999, (see Note 27-Subsequent Event) and may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. The indenture pertaining to the Senior Notes contains various restrictive covenants including limitations on, among other things, the incurrence of certain types of additional indebtedness, the payment of dividends and certain other payments, the ability of the Company's subsidiaries to incur further limitations on their ability to pay dividends or make other payments to the Company, liens, asset sales, the issuance of preferred stock by the Company's subsidiaries and transactions with affiliates. At December 31, 1998, management believes the Company was in compliance with such restrictive covenants. The Senior Notes are fully and unconditionally guaranteed (the "Subsidiary Guarantees") jointly and severally on an unsecured basis (each, a "Guarantee") by certain of the Company's subsidiaries listed in Note 26 (the "Subsidiary Guarantors"). With the exception of the Guarantee by the Company's subsidiary CII, the Subsidiary Guarantees rank 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. All existing debt of all subsidiaries other than CII are currently considered to be subordinated to the Senior Notes. The Guarantee by CII is equal in priority to CII's notes payable to investors and is senior to CII's subordinated debentures. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11. SENIOR UNSECURED DEBT AND SUBSIDIARY GUARANTORS (CONTINUED) Included in Note 26 are consolidating condensed financial data of the combined subsidiaries of the Company. The Company believes that providing the condensed consolidating information is of material interest to investors in the Senior Notes and has not presented separate financial statements for each of the wholly-owned Subsidiary Guarantors, because it was deemed that such financial statements would not provide investors with any material additional information. At December 31, 1998, all of the subsidiary guarantors were wholly-owned by the Company. NOTE 12. SALE OF SUBSIDIARY AND SUBSIDIARY'S ASSETS As part of the Company's effort to focus on its larger retail lending operation that operates primarily through direct mail and telemarketing methods, the Company chose to sell its small branch network retail origination company. This company historically had originated its mortgage loan products through a traditional "brick and mortar" retail approach. The Company also chose to sell substantially all of the assets related to the auto and small-business units. The Company also decided to no longer offer these financial products. The Company completed the sale of substantially all of the assets related to its auto loan operation for book value on March 19, 1998, to TranSouth Financial Corporation, a subsidiary of Associates Financial Services Company, Inc. This sale provided the Company with cash proceeds of approximately $20.4 million. No significant gain or loss was recognized on this transaction. The Company no longer originates auto loans. Prior to the asset sale, this product line recorded a net loss of approximately $110,000 for the period ended March 19, 1998. The auto loan operations also recorded losses of $1.9 million and $1.1 million for the years ended December 31, 1997 and 1996, respectively. On August 21, 1998, the Company completed the sale of its small branch network retail mortgage origination company, Sterling Lending Corporation, to First National Security Corporation of Beaumont, Texas. The sale resulted in cash proceeds of $400,000 to HomeGold Financial, Inc. and a note receivable for $1.1 million, payable over 5 years at 7% interest. There was no significant gain or loss recorded as a result of this sale. For the period in 1998 prior to the sale of Sterling Lending, and for the years ended December 31, 1997 and 1996, Sterling Lending recorded losses of $3.4 million, $3.8 million, and $864,000, respectively. On November 13, 1998, the Company sold the majority of the assets of its small business lending units, including the 7(a) SBA lending unit, its 504 SBA lending unit, and its SBIC mezzanine lending unit, to Transamerica Business Credit Corporation. Total sales proceeds from this sale were $100.3 million. After repayment of the related warehouse lines of credit, escrowing $5 million holdback in the purchase price, and paying transaction costs, the Company received net cash proceeds of approximately $49.3 million. The gain realized in 1998 was approximately $19.7 million net of related costs. The Company recorded in 1998, income (including the pre-tax $19.0 million gain on sale of net assets) of $14.4 million on these operating units that were sold. For the years ended December 31, 1997 and 1996, income from the operations of these sold units were $6.7 million and $2.3 million, respectively. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. SALE OF SUBSIDIARY AND SUBSIDIARY'S ASSETS (CONTINUED) On December 2, 1998, the Company sold the majority of its asset-based lending operation to Emergent Asset Based Lending LLC, a Maryland Limited Liability Company. This transaction completed the disposition of all non-mortgage-related activities of the Company. The sale resulted in a pre-tax loss of $755,000. The Company received a note receivable of $2.2 million payable over two years at an interest rate of Prime plus 1%. The Company recorded in 1998 a net loss (including the pre-tax $755,000 loss on the sale of assets) of $3.4 million on this operating unit that was sold. For the years ended December 31, 1997 and 1996, losses from operations from this unit were $1.7 million and $49,000, respectively.
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (In thousands) Sold Sold Small Retained Mortgage Auto Business Consolidated Operations Operations Operations Operations Total (1) (2) Sold (3) ------------ ------------ -------------- ------------- ------------ REVENUES: Interest income $ 25,450 $ 10 $ 1,102 $ 8,513 $ 35,075 Servicing income 9,417 -- -- 2,822 12,239 Gain on sale of loans: Gross gain on sale of loans 3,966 1,415 -- 4,091 9,472 Loan fees, net 9,489 1,520 7 729 11,745 ------------ ------------ -------------- ------------- ------------ Total gain on sale of loans 13,455 2,935 7 4,820 21,217 Gain on sale of -- -- -- 18,964 18,964 subsidiaries' net assets Other revenues 2,874 217 58 1,081 4,230 ------------ ------------ -------------- ------------- ------------ Total revenues 51,196 3,162 1,167 36,200 91,725 EXPENSES: Interest 30,786 125 287 4,770 35,968 Provision for credit losses 8,231 -- 554 3,121 11,906 Fair value write-down of residual receivables 11,682 -- -- 1,956 13,638 Restructuring charges 6,838 -- -- -- 6,838 General and administrative expense 75,625 6,460 440 13,841 96,366 ------------ ------------ -------------- ------------- ------------ Total expenses 133,162 6,585 1,281 23,688 164,716 ------------ ------------ -------------- ------------- ------------ Gain (loss) before income taxes, minority interest, and Extraordinary item (81,966) (3,423) (114) 12,512 (72,991) Provision (benefit) for income taxes 1,532 (46) (4) 1,535 3,017 ------------ ------------ -------------- ------------- ------------- Gain (loss) before minority interest and Extraordinary item (83,498) (3,377) (110) 10,977 (76,008) Minority interest in loss of subsidiaries 47 -- -- -- 47 ------------ ------------ -------------- ------------- ------------ Gain (loss) before extraordinary item (83,451) (3,377) (110) 10,977 (75,961) Extraordinary item - gain on extinguishment of debt, net of $0 tax 18,216 -- -- -- 18,216 ------------ ------------ -------------- ------------- ------------ NET GAIN (LOSS) $ (65,235) $ (3,377) $ (110) $ 10,977 (4) $ (57,745) ============ ============ ============== ============= ============
(1) Represents Sterling Lending Corporation, a retail mortgage lending subsidiary which was sold in August 1998. (2) Substantially all of the assets of the Company's auto loan unit were sold in March 1998. The Company operated its auto loan unit through two subsidiaries - The Loan Pro$, Inc. and Premier Financial Services, Inc. (3) Represents the Company's small-business loan unit, including its 7(a) SBA lending unit, its 504 SBA lending unit, its SBIC mezzanine lending unit and its asset-based lending unit. (4) Includes $19.0 million in gain on sale of subsidiaries' net assets. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. FAIR MARKET VALUE WRITE-DOWN ON RESIDUAL RECEIVABLE As the result of higher than anticipated prepayments in 1998, the Company modified the estimated prepayment speeds on all of its mortgage loan securitization transactions to peak at 30 constant prepayment rate ("CPR") up from the previous prepayment speeds of 20 CPR. This resulted in a write-down of residual receivables of $13.6 million in 1998. No such write-down was necessary in 1997. NOTE 14. RESTRUCTURING CHARGES In November 1998, the Company decided to close three retail loan centers and to consolidate all operations into one location. This decision resulted in a restructuring charge of $6.8 million. The restructuring charge related to the write-down of fixed assets to net realizable value on assets no longer used by the Company was $3.6 million. The estimated net lease cost on facilities no longer being used was $1.8 million, and the estimated costs of employee relocation cost and employee severance was approximately $1.4 million NOTE 15. OTHER GENERAL AND ADMINISTRATIVE EXPENSES Other general and administrative expenses for the years ended December 31, 1998, 1997, and 1996 consist of the following:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- Depreciation expense $ 3,337 $ 2,220 $ 901 Amortization expense 289 471 433 Legal and professional fees 3,125 6,749 1,026 Loan costs 4,318 2,657 130 Deferred loan costs (5,917) (1,658) -- Travel and entertainment 3,362 3,493 1,116 Office rent and utilities 2,827 2,206 750 Telephone 4,228 3,411 697 Office supplies 2,015 2,322 590 Foreclosed property costs 2,319 876 380 Equipment and miscellaneous rental 2,285 611 93 Repairs and maintenance 966 413 198 Postage and handling charges 1,146 1,136 368 Other 4,664 3,847 1,542 -------------- -------------- ------------- TOTAL OTHER GENERAL AND ADMINISTRATIVE $ 28,964 $ 28,754 $ 8,224 ============== ============== =============
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16. INCOME TAXES A reconciliation of the provision for Federal and state income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes, minority interest, and extraordinary item are as follows:
Years Ended December 31, ------------------------------------------ 1998 1997 1996 -------------- ----------- ----------- (in thousands) Statutory Federal rate of 34% applied to pre-tax income From continuing operations before minority interest and extraordinary item $ (24,817) $ 2,553 $ 3,557 Gain on repurchase of bonds 6,193 -- -- State income taxes, net of federal income tax benefit 279 (16) 350 Change in the valuation allowance for deferred tax assets allocated to income tax expense 21,672 (7,508) (3,229) Nondeductible expenses 91 107 17 Amortization of excess cost over net assets of acquired Businesses 46 66 64 Other, net (447) 898 (41) ------------ ----------- ----------- $ 3,017 $ (3,900) $ 718 ============ =========== ===========
The extraordinary gain on the extinguishment of debt is net of $0 tax since the gain was offset against prior NOLs and did not result in any incremental increase in income tax expense. Provision (benefit) for income taxes from continuing operations is comprised of the following:
Years Ended December 31, ------------------------------------------ 1998 1997 1996 -------------- ----------- ----------- (in thousands) Current Federal $ 2,594 $ 289 $ 199 State and local 423 (376) 660 ------------ ----------- ----------- 3,017 (87) 859 Deferred Federal -- (4,165) (11) State and local -- 352 (130) ------------ ----------- ----------- -- (3,813) (141) Total Federal 2,594 (3,876) 188 State and local 423 (24) 530 ------------- ----------- ----------- $ 3,017 $ (3,900) $ 718 ============ =========== ===========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and AMT credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax asset are as follows:
December 31, -------------------------- 1998 1997 ------------ ---------- (In thousands) Deferred tax liabilities: Differences between book and tax basis of property $ (1,011) $ (796) Difference between book and tax basis of the residual receivables associated with the Company's investment in the Real Estate Investment Trust (1,513) (3,849) Deferred loan costs (333) (608) Other (11) (90) =========== ========== Total gross deferred tax liabilities $ (2,868) $ (5,343) =========== ========== Deferred tax assets: Differences between book and tax basis of deposit base intangibles $ 178 $ 216 Differences between book and tax basis of REMIC residual receivables 5,318 -- Allowance for credit losses 3,582 3,525 AMT credit carryforward 58 608 Operating loss carryforward 17,871 4,171 Deferred loan fees 780 -- REO reserve 114 -- Restructuring reserve-leases 640 -- Unrealized gain on loans to be sold -- 909 Other 150 65 ----------- ---------- Total gross deferred tax assets 28,691 9,494 Less valuation allowance (21,672) -- Less gross deferred tax liabilities (2,868) (5,343) ----------- ---------- Net deferred tax asset $ 4,151 $ 4,151 =========== ==========
The valuation allowance for deferred tax assets at December 31, 1998 was $21.7 million. The increase (decrease) in the valuation allowance for the year ended December 31, 1998 and the year ended December 31, 1997 was $21.7 million and ($7.5) million, respectively. The valuation allowance at December 31, 1998 relates primarily to net operating losses ("NOL") carryforwards. The decision to record the valuation allowance in 1998 was based on changes in 1998 earnings (loss) projections. The Company experienced a taxable loss for 1998. The ability to fully utilize all of the NOL's expiring in 1999 is reduced by the Company's current year loss and the inability to use current period earnings classified as "excess inclusion" to offset prior NOL's. Earnings of approximately $6.0 million for the year ended December 31, 1998 and $4.0 million in 1997 were classified as excess inclusion and were not able to be offset with prior year NOL's. Management believes that it is more likely than not that the results of future operations and tax planning strategies available to the Company will generate sufficient taxable income to realize the net deferred tax asset. Management continues to evaluate this each quarter, and may take additional reserves against this asset if deemed necessary in the future. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16. INCOME TAXES (CONTINUED) As of December 31, 1998, the Company has available Federal NOL carryforwards expiring as follows (in thousands): 1999 $ 5,456 2000 3,297 2001 1,911 2002 and after 41,896 ------------- $ 52,560 ============= There are no known significant pending assessments from taxing authorities regarding taxation issues at the Company or its subsidiaries. NOTE 17. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF DEBT In 1998, the Company purchased $38.4 million face amount of its Senior Notes in the market for a purchase price of $18.9 million or 49.4% of face value. A proportionate share of the unamortized debt origination costs ($1.2 million) relating to the issuance of the Senior Notes was charged against this gain, to record a net gain of $18.2 million. The Company may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. See "Note 27. Subsequent Event." NOTE 18. STATEMENT OF CASH FLOWS The following information relates to the Statement of Cash Flows for the three years ended December 31, 1998, 1997, and 1996:
YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ---------- ----------- --------- Changes in operating assets and liabilities increasing (decreasing) cash: Restricted cash $ (5,100) $ -- $ -- Other receivables (2,657) (5,223) (2,984) Residual receivable 6,124 (46,318) (6,583) Accrued interest receivable 1,794 (2,292) (516) Servicing asset 528 (1,468) -- Other assets 6,373 (5,378) (1,052) Remittance due to loan participants (2,720) 1,072 2,331 Accrued interest payable (1,551) 4,153 (24) Income taxes payable 511 (1,666) 637 Other liabilities (2,028) 3,082 227 ---------- ----------- --------- $ 1,274 $ (54,038) $(7,964) ========== =========== =========
The Company foreclosed on, or repossessed property used to collateralize loans receivable in the amount of $12.1 million, $5.4 million, and $4.5 million, in 1998, 1997, and 1996, respectively. The Company sold real estate held for sale by issuing loans to the buyers in the amount of $66,000, $74,000 and $40,000 in 1998, 1997 and 1996, respectively. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18. STATEMENT OF CASH FLOWS (CONTINUED) During 1997, the Company transferred approximately $30.0 million of loans receivable held for investment to loans receivable held for sale primarily in connection with the sale of the auto loan assets. The Company paid income taxes of $2.5 million, $1.6 million, and $322,000 in 1998, 1997, and 1996, respectively. The Company paid interest of $37.5 million, $21.0 million, and $11.0 million in 1998, 1997, and 1996, respectively. NOTE 19. STOCK OPTION PLANS On May 21, 1981, the shareholders approved an employee stock option plan and on May 22, 1984, the shareholders approved an increase in the number of shares of common stock, which may be granted from 250,000 to 500,000. Under the terms of the plan, the Company may grant options to key employees and directors to purchase up to a total of 500,000 shares of its $.05 par value common stock. The option price is the fair market value at date of grant. The options expire five years from date of grant, are not transferable other than on death, and are exercisable 20% on the date of grant and 20% per year on a cumulative basis for each year subsequent to the date of grant. No additional shares are available for grant under this stock option plan, and there are 12,000 unexercised options outstanding at December 31, 1998, of which 12,000 are exercisable. On June 9, 1995, the shareholders approved a stock option plan under which the Board of Directors may issue 566,667 shares of common stock. In May 1997 and in June of 1998, the shareholders approved an additional 150,000 and 350,000 shares of common stock, respectively. Therefore, under the terms of the plan, the Company may grant options to key employees to purchase up to a total of 1,066,667 shares of its $.05 par value common stock. The option price is the fair market value at date of grant. Prices for incentive stock options granted to employees who own 10% or more of the Company's stock are at 110% of market value at date of grant. The options expire ten years from date of grant, are not transferable other than on death, and are exercisable 20% on the date of grant and 20% per year on a cumulative basis for each year subsequent to the date of grant. The remaining options available for grant under the plan consist of 46,230 common stock options at December 31, 1998, and there are 945,675 unexercised options outstanding at December 31, 1998, of which 325,088 are exercisable. Also on June 9, 1995, the shareholders approved a stock option plan under which each non-employee member of the Board of Directors receives options to purchase 666 shares of common stock each December 31 beginning in 1995 through 1999. Under the terms of the plan, the Company may grant options totaling 33,333. The terms of the plan are identical to the employee stock option plan approved on June 9, 1995. The remaining options available for grant under this plan consist of 27,606 common stock options at December 31, 1998, and there are 5,328 unexercised options outstanding at December 31, 1998, of which 3,730 are exercisable. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19. STOCK OPTION PLANS (CONTINUED) On April 18, 1996, the shareholders approved a restricted stock agreement plan to provide additional incentives to members of the Board of Directors of the Company who are not employees of the Company. Shares that may be issued pursuant to the Restricted Stock Agreements under the Plan shall not exceed 50,000 shares in the aggregate. The Plan provides that, on each grant date, each eligible director will automatically receive from the Company an Agreement to purchase for $.05 per share that number of shares having a fair market value equal to $12,000. For purposes of the Plan, the grant date is January 31 of each calendar year commencing with the 1996 calendar year. At December 31, 1998, there were 14,500 agreements granted under this plan with 11,600 unexercised agreements outstanding, all of which are exercisable. Shares subject to a Restricted Stock Agreement are initially non-transferable and subject to forfeiture. Shares granted to a recipient become freely transferable and no longer subject to forfeiture at a rate of 20% of the total number of shares covered by such agreement on each of the five anniversaries of the grant date, beginning with the first anniversary of such grant. The Articles of Incorporation of the Company were amended by vote of the shareholders at the Annual Meeting of Shareholders on April 18, 1996. The Class A Common Stock, $0.05 par value, was converted to common stock on a one-for-one basis effective April 19, 1996. All authorized but unissued shares of Class A Common Stock were canceled. The number of authorized shares of common stock was increased from 4,000,000 to 30,000,000. By vote of the shareholders at the Annual Meeting of Shareholders on May 27, 1997, the number of authorized shares of common stock was increased from 30,000,000 to 100,000,000. The Company filed a registration statement with the Securities and Exchange Commission on September 20, 1996, for the issuance of 3,000,000 shares of common stock of which 2,119,031 shares were offered by the Company, and 880,969 shares were offered by certain selling shareholders. No officers or directors of the Company sold any shares in connection with the offering. The offering was effective on November 8, 1996. On December 11, 1996, the underwriters of the public offering exercised the option to purchase an additional 400,000 shares of common stock in accordance with the terms of the registration statements. Total gross proceeds of approximately $28,969,000 were raised as a result of the issuance of stock, which was offset by approximately $2,769,000 in costs and expenses relating to the transaction. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19. STOCK OPTION PLANS (CONTINUED) Activity in stock options is as follows:
Years Ended December 31, ------------------------------------------- 1998 1997 1996 ------------- ----------- ----------- Options outstanding, beginning of year 483,971 487,638 339,000 Date of Grant Issued at: - ----------------- ----------------- 11-11-96 $12.25 per share -- -- 258,000 12-15-96 $11.25 per share -- -- 3,330 02-11-97 $13.50 per share -- 1,000 -- 05-02-97 $13.00 per share -- 10,000 -- 08-06-97 $14.25 per share -- 5,000 -- 09-26-97 $13.50 per share -- 21,000 -- 01-16-98 $8.00 per share 6,000 -- -- 01-16-98 $9.00 per share 15,000 -- -- 03-12-98 $9.75 per share 205,000 -- -- 04-14-98 $8.75 per share 16,900 -- -- 05-26-98 $6.75 per share 50,000 -- -- 09-04-98 $2.440 per share 7,000 -- -- 12-02-98 $0.9375 per 400,000 -- -- share ---------- ----------- ----------- Total Granted 699,900 37,000 261,330 ---------- ----------- ----------- Expired, canceled or forfeited: $1.32 per share (2,668) -- -- $2.440 per share 0 -- -- $4.625 per share (28,800) -- -- $8.00 per share (6,000) -- -- $8.75 per share 0 -- -- $9.00 per share (15,000) -- -- $9.75 per share (50,000) -- -- $10.38 per share (directors plan) (400) -- -- $11.25 per share (directors plan) (533) -- -- $12.25 per share (87,000) -- -- $13.50 per share (1,000) -- -- $13.50 per share (15,000) -- -- $14.25 per share (5,000) -- -- ---------- ----------- ----------- (211,401) -- -- Exercised: $1.0825 per share (6,667) (17,336) (74,197) $1.32 per share -- (13,332) (29,335) $4.625 per share (1,600) (9,600) (9,160) $5.09 per share (1,200) -- -- $10.380 per share -- (266) -- $11.250 per share -- (133) -- ---------- ----------- -- ----------- Total exercised, canceled, expired, or (220,868) (40,667) (112,692) forfeited ---------- ----------- ----------- Options end of year 963,003 483,971 487,638 outstanding, ========== =========== =========== Exercisable, end of year 340,818 193,839 98,973 ========== =========== =========== Available for grant, end of year 73,836 292,340 179,340 ========== =========== ===========
The above table does not include the 14,500 restricted stock agreements issued in 1996 of which 11,600 are unexercised. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19. STOCK OPTION PLANS (CONTINUED) The Company has adopted the disclosure-only provisions of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION." As such, the stock-based compensation utilized by the Company has been accounted for under APB Opinion No. 25. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997, and 1996 consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ------------- ----------- ------------ (In thousands, except per share data) Net income - as reported $ (57,745) $ 11,253 $ 10,095 Net income - pro forma (58,025) 10,969 9,875 Diluted earnings per share - as reported (5.94) 1.17 1.42 Diluted earnings per share - pro forma (5.97) 1.14 1.39
The fair value of each option grant is estimated on the date of grant using a Black-Scholes valuation model with the following weighted average assumptions used in 1997 and 1996: dividend yield of 0%, expected volatility of 64.0%, risk-free interest rate of approximately 5.7%, and expected lives of 3 years. The weighted average assumption used in 1998 were dividend yield of 0%, expected volatility of 142%, risk-free interest rate of 4.64% and expected lives of 5 years. The pro forma amounts disclosed above may not be representative of the effects on reported net income for future periods. The Company implemented an Employee Stock Purchase Plan ("ESPP") in 1997. The ESPP allows eligible employees the right to purchase common stock at the end of each of two six-month offering periods (January 1 through June 30 and July 1 through December 31). Eligible employees must work 20 or more hours per week and have been employed for a period of 1 year. The stock is purchased at 85% of the lower of the market price at the beginning or ending of each six-month offering period. A liability is recorded for ESPP withholdings not yet applied towards the purchase of common stock. The Company's Board of Directors has authorized 200,000 shares to be issued under the Espp. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20. TRANSACTIONS WITH RELATED PARTIES The Company engaged in the following related party transactions: The Company obtains legal services from Wyche, Burgess, Freeman & Parham, P.A., certain members of which, when considered in the aggregate, beneficially own 596,351 shares of the Company's capital stock. A partner of the firm also serves as secretary to the Company. Total charges for these services were approximately $659,000 in 1998, $308,000 in 1997, and $756,000 in 1996. Notes payable to investors and subordinated debentures include amounts due to officers, directors and key employees of approximately $661,000, $660,000 and $694,000 at December 31, 1998, 1997 and 1996, respectively. The Company also had notes receivable from related parties at December 31, 1998, 1997 and 1996 of approximately $168,000, $509,000 and $1.1 million, respectively. NOTE 21. EMPLOYEE RETIREMENT PLAN The Company has a matched savings plan under Section 401(k) of the Internal Revenue Code covering employees meeting certain eligibility requirements. The plan allows employees who have completed 30 days of service to participate in the plan and provides for Company contributions, subject to certain limitations. Company matching contributions are 50% of employee contributions to a maximum of 6% of compensation for each employee. The Company's contributions under the plan totaled approximately $879,000 in 1998, $761,000 in 1997, and $60,000 in 1996. NOTE 22. COMMITMENTS AND CONTINGENCIES The Company may from time to time enter into forward commitments to sell residential first mortgage loans to reduce risk associated with originating and holding loans for sale. At December 31, 1998, the Company had no outstanding forward commitment contracts. From time to time, the Company or its subsidiaries are defendants in legal actions involving claims arising in the normal course of its business. The Company believes that, as a result of its legal defenses and insurance arrangements, none of these actions, if decided adversely, would have a material effect on the business, financial condition, results of operations or cash flows of the Company taken as a whole. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The quarterly results of operations for the year ended December 31, 1998, are as follows:
Quarter Ended ------------------------------------------------------------- March 31, June 30, September December 30, 31, 1998 1998 1998 1998 -------------- ------------ ------------ ------------ (in thousands, except share data) REVENUES: Interest income $ 8,673 $ 10,516 10,364 $ 5,522 Servicing income 4,222 3,379 2,597 2,041 Gain on sale of loans: Gross gain (loss) on sale of loans 6,517 6,775 2,529 (6,349) Loan fees, net 3,602 3,228 3,261 1,654 ------------- ------------- ------------ ------------ Total gain (loss) on sale 10,119 10,003 5,790 (4,695) Gain on sale of subsidiaries-net assets -- -- -- 18,964 Other revenues 1,540 879 1,092 719 ------------- ------------- ----------- ------------ Total revenues 24,554 24,777 19,843 22,551 EXPENSES: Interest 8,432 9,953 9,950 7,633 Provision for credit losses 4,829 2,111 3,639 1,327 Fair market writedown (writeup) on 1,580 7,330 5,320 (592) residual receivables Salaries, wages and employee benefits 18,272 16,105 12,487 9,720 Business development costs 3,479 3,055 1,954 2,330 Restructuring charges -- -- -- 6,838 Other general and administrative 7,902 6,631 7,671 6,760 ------------- ------------- ----------- ------------ Total expenses 44,494 45,185 41,021 34,016 ------------- ------------- ----------- ------------ Loss before income taxes, minority interest and (19,940) (20,408) (21,178) (11,465) extraordinary item Provision (benefit) for income taxes 679 2,565 866 (1,093) Minority interest in (earnings) loss of 4 (2) 11 34 subsidiaries ------------- ------------- ----------- ------------ Income before extraordinary item (20,615) (22,975) (22,033) (10,338) Extraordinary item-gain on extinguishment of debt, net -- -- 7,724 10,492 of $0 tax ------------- ------------- ----------- ------------ Net income (loss) $ (20,615) $ (22,975) (14,309) $ 154 ============= ============= =========== ============ Basic earnings (loss) per share of common stock: Loss before extraordinary item $ (2.12) $ (2.37) (2.26) $ (1.06) Extraordinary item, net of taxes -- -- .79 1.08 ------------- ------------- ----------- ------------ Net income (loss) $ (2.12) $ (2.37) (1.47) $ .02 ============= ============= =========== ============ Basic weighted average shares outstanding 9,701,993 9,708,083 9,733,099 9,733,374 ============= ============= =========== ============ Diluted earnings (loss) per share of common stock: Loss before extraordinary item $ (2.12) (2.37) (2.26) (1.06) Extraordinary item, net of tax -- -- .79 1.08 ============= ============= =========== ============ Net income (loss) (2.12) (2.37) (1.47) .02 ============= ============= =========== ============ Diluted weighted average shares outstanding 9,701,993 9,708,083 9,733,099 9,733,374 ============= ============= =========== ============
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED) The quarterly results of operations for the year ended December 31, 1997, are as follows:
Quarter Ended --------------------------------------------------------------- March 31, June 30, September December 31, 30, 1997 1997 1997 1997 -------------- ------------ ------------- ------------- (in thousands, except share data) REVENUES: Interest income $ 6,207 $ 8,817 $ 10,842 $ 8,142 Servicing income 1,145 1,940 2,920 2,509 Gain on sale of loans: Gross gain on sale of loans 6,218 11,889 14,674 20,047 Loan fees, net 5,878 7,337 8,852 8,140 ------------ ------------ ------------- ------------- Total gain on sale 12,096 19,226 23,526 28,187 Other revenues 237 196 328 638 ------------ ------------ ------------- ------------- Total revenues 19,685 30,179 37,616 39,476 ------------ ------------ ------------- ------------- EXPENSES: Interest 3,727 6,055 6,953 8,398 Provision for credit losses 2,073 2,599 2,415 2,943 Salaries, wages and employee benefits 8,045 10,715 13,825 15,459 Business development costs 1,213 1,806 1,980 2,487 Other general and administrative 4,027 5,908 8,173 10,646 ------------ ------------ ------------- ------------- Total expenses 19,085 27,083 33,346 39,933 ------------ ------------ ------------- ------------- Income before income taxes and minority interest 600 3,096 4,270 (457) Provision (benefit) for income taxes 42 (1,667) (350) (1,925) Minority interest in earnings of (156) -- -- -- subsidiaries ------------ ------------ ------------- ------------- Net income $ 402 $ 4,763 $ 4,620 $ 1,468 ============ ============ ============= ============= Basic earnings per share of common stock $ 0.04 $ 0.52 $ 0.48 $ 0.15 ============ ============ ============= ============= Basic weighted average shares outstanding 9,143,176 9,147,570 9,651,566 9,674,044 ============ ============ ============= ============= Diluted earnings per share of common stock $ 0.04 $ 0.51 $ 0.47 $ 0.15 ============ ============ ============= ============= Diluted weighted average shares outstanding 9,351,103 9,310,153 9,861,750 9,885,032 ============ ============ ============= =============
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 24. EARNINGS PER SHARE Effective January 29, 1996, the Company declared a two-for-one stock split effected in the form of a 100% stock dividend. The weighted average number of shares of Common Stock have been restated for all periods presented to reflect this stock split. The following table sets forth the computation of basic and fully diluted earnings per share.
For the Year Ended December 31, ----------------------------------------------- 1998 1997 1996 ------------- ------------- -------------- (in thousands, except per share data) Numerator Net income (loss)-numerator for basic and fully diluted $ (57,745) $ 11,253 $ 10,095 EPS Denominator Basic weighted average shares o/s-denominator for basic 9,719,262 9,406,221 6,852,420 EPS Effect of dilutive employee stock options -- 192,590 247,454 ------------- ------------- -------------- Fully diluted weighted average shares o/s-denominator for fully 9,719,262 9,598,811 7,099,874 diluted EPS Basic earnings per common share $ (5.94) $ 1.20 $ 1.47 Fully diluted earnings per common share $ (5.94) $ 1.17 $ 1.42
The computation of fully diluted EPS in 1998 does not take into account the effect of any outstanding common stock equivalents since their inclusion would be antidilutive. NOTE 25. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information whether or not recognized in the balance sheet, when it is practicable to estimate the fair value. SFAS 107 defines a financial instrument as cash, evidence of an ownership interest in an entity or contractual obligations which require the exchange of cash or financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company's common stock, property and equipment and other assets and liabilities. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS AND RESTRICTED CASH For these short-term instruments, the carrying amount is a reasonable estimate of fair value. LOANS RECEIVABLE For residential mortgage loans, small business loans and auto loans fair value is estimated using the market prices received on recent sales or securitizations of these loans in the secondary market. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 25. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) RESIDUAL RECEIVABLE, NET The fair value of the residual receivable is calculated using prepayment, default and interest rate assumptions that the Company believes market participants would use for similar instruments at the time of sale. Projected performance is monitored on an ongoing basis. INVESTOR SAVINGS Due to their short-term maturity, usually one year, the fair value of the notes due investors and subordinated debentures is the current carrying amount. NOTES PAYABLE TO BANKS AND OTHER The fair value of notes payable to banks and other approximates the carrying amount. Rates with similar terms and maturities currently available to the Company are used to estimate fair value of existing debt. SENIOR UNSECURED DEBT The fair value of senior unsecured debt is based on the market value of the publicly traded securities. COMMITMENTS TO EXTEND CREDIT The fair value of commitments to extend credit is determined by using the anticipated market prices that the loans will generate in the secondary market. The estimated fair values of the Company's financial instruments at December 31 were as follows:
1998 1997 --------------------------- -------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------ ------------ ----------- ----------- (IN THOUSANDS) Financial Assets: Cash and cash equivalents $ 36,913 $ 36,913 7,561 $ 7,561 Restricted cash 5,100 5,100 -- -- Loans receivable 116,898 120,000 288,429 296,000 Residual receivable 43,857 43,857 63,202 63,202 Financial Liabilities: Notes payable to banks and other $ 16,736 $ 16,736 77,605 $ 77,605 Investor savings: Notes due to investors 118,586 118,586 115,368 115,368 Subordinated debentures 17,304 17,304 18,947 18,947 Senior unsecured debt 86,650 43,000 125,000 125,000 Commitments to extend credit 5,619 5,800 100,293 105,308
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 26. CONSOLIDATING CONDENSED FINANCIAL DATA OF THE COMBINED SUBSIDIARIES THAT GUARANTEED SENIOR DEBT The Subsidiary Guarantors of the Company's Senior Notes at December 31, 1998 consist of the following wholly owned subsidiaries of the Company: HomeGold, Inc. (f/k/a Emergent Mortgage Corp.) Emergent Mortgage Corp. of Tennessee Carolina Investors, Inc. Emergent Insurance Agency Corp. Investments in subsidiaries are accounted for by the Parent and Subsidiary Guarantors on the equity method for the purposes of the consolidating financial data. Earnings of subsidiaries are therefore reflected in the parent's and Subsidiary Guarantor's investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Certain sums in the following tables may reflect immaterial rounding differences. As of December 31, 1998, the Subsidiary Guarantors conduct all of the Company's operations, other than the investment of certain residual receivables through its special purpose bankruptcy-remote securitization subsidiaries. Prior to March 1998, The Loan Pro$, Inc. and Premier Financial Services, Inc. (the Company's auto loan units) were guarantors of this indebtedness, but their guarantees terminated when substantially all of the assets of the auto loan units were sold to TranSouth Financial Corporation, a subsidiary of Associates Financial Services Company, Inc., in March 1998. Prior to August 21, 1998, Sterling Lending Corporation (an 80% owned subsidiary of the Company) and Sterling Lending Insurance Agency, Inc. (a 100% owned subsidiary of Sterling Lending Corporation) were also guarantors of this indebtedness, but their guarantees terminated when they were sold to First National Security Corporation of Beaumont, Texas, in August 1998. Therefore the operations of Sterling Lending (a non-wholly-owned guarantor subsidiary) are included in the consolidated statements of operations for the respective periods prior to August 21, 1998. The majority of the assets of Emergent Business Capital, Inc., Emergent Commercial Mortgage, Inc., Emergent Business Capital Equity Group, Inc. and Reedy River Ventures Limited Partnership were sold to Transamerica Business Credit Corporation on November 13, 1998. Accordingly, any guarantees of these companies were terminated upon consummation of that sale. A substantial majority of the assets of Emergent Business Capital Asset Based Lending, Inc. were sold to Emergent Asset-Based Lending LLC, a Maryland Limited Liability Company, on December 2, 1998. HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1998 (Unaudited) (Dollars in thousands) Combined Combined Wholly-Owned Non Combined Guarantor Wholly-OwnedNon-Guarantor Parent Subsidiaries Guarantor Subsidiaries Company Subsidiaries EliminationsConsolidated --------- ----------- ---------- ----------- ---------- ----------- ASSETS Cash and cash equivalents $ 196 $ 34,215 $ -- $ 2,502 $ -- $ 36,913 Restricted cash 5,100 -- -- -- -- 5,100 Loans receivable: Loans receivable -- 124,740 -- -- -- 124,740 Notes receivable from affiliates 48,876 -- -- 3 (48,879) -- --------- ----------- ---------- ---------- ---------- ----------- Total loans receivable 48,876 124,740 -- 3 (48,879) 124,740 Less allowance for credit losses on -- (6,659) -- -- -- (6,659) loans Less deferred loan fees -- (2,071) -- -- -- (2,071) Plus deferred loan costs -- 888 -- -- -- 888 --------- ----------- ---------- ---------- ---------- ----------- Net loans receivable 48,876 116,898 -- 3 (48,879) 116,898 Other Receivables: Income tax -- 900 -- -- -- 900 Accrued interest receivable 21 2,592 -- -- -- 2,613 Other receivables 4 11,126 -- 898 -- 12,028 --------- ----------- ---------- ---------- ---------- ----------- Total other receivables 25 14,618 -- 898 -- 15,541 Investment in subsidiaries 35,550 -- -- -- (35,550) -- Residual receivables, net -- 31,752 -- 12,105 -- 43,857 Net property and equipment -- 19,665 -- -- -- 19,665 Real estate and personal property -- 5,881 -- -- -- 5,881 acquired through foreclosure Net excess of cost over net assets of 40 1,620 -- -- -- 1,660 acquired businesses Deferred tax 3,510 641 -- -- -- 4,151 Other assets 2,696 4,846 -- -- -- 7,542 --------- ----------- ---------- ---------- ---------- ----------- TOTAL ASSETS $ 95,993 $ 230,136 $ -- $ 15,508 $ (84,429) $ 257,208 ========= =========== ========== ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving warehouse lines of credit $ -- $ 16,736 $ -- $ -- $ -- $ 16,736 Investor savings: Notes payable to investors -- 118,586 -- -- -- 118,586 Subordinated debentures -- 17,304 -- -- -- 17,304 --------- ----------- ---------- ---------- ---------- ----------- Total investor savings -- 135,890 -- -- -- 135,890 Senior unsecured debt 86,650 -- -- -- -- 86,650 Accounts payable and accrued liabilities 624 6,032 -- -- -- 6,656 Remittances payable -- 1,871 -- -- -- 1,871 Income taxes payable 201 181 -- -- -- 382 Accrued interest payable 2,717 482 -- -- -- 3,199 Due to (from) affiliates -- (7,947) -- 7,947 -- -- --------- ----------- ---------- ---------- ---------- ----------- Total other liabilities 3,542 619 -- 7,947 -- 12,108 Subordinated debt to affiliates -- 48,879 -- -- (48,879) -- --------- ----------- ---------- ---------- ---------- ----------- Total liabilities 90,192 202,124 -- 7,947 (48,879) 251,384 Minority interest -- -- -- 23 -- 23 Shareholders' equity: Common stock 486 4,091 -- 1 (4,092) 486 Preferred stock -- -- -- -- -- -- Capital in excess of par value 38,821 71,683 -- 17,675 (89,358) 38,821 Retained earnings (deficit) (33,506) (47,762) -- (10,138) 57,900 (33,506) ------- ----------- ------- -------- -------- Total shareholders' equity 5,801 28,012 -- 7,538 (35,550) 5,801 --------- ----------- ---------- ---------- ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,993 $ 230,136 $ -- $ 15,508 $ (84,429) $ 257,208 ======= ========= ========== ======= ======== ========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING BALANCE SHEETS DECEMBER 31, 1997 (Unaudited) (Dollars in thousands) Combined Combined Wholly-Owned Non Combined Guarantor Wholly-OwnedNon-Guarantor Parent Subsidiaries Guarantor Subsidiaries Company Subsidiaries EliminationsConsolidated --------- ----------- ---------- ----------- ---------- ----------- ASSETS Cash and cash equivalents $ 713 $ 6,411 $ 263 $ 174 $ -- $ 7,561 Loans receivable: Loans receivable -- 281,040 9,325 7,250 -- 297,615 Notes receivable from affiliates 71,854 31,851 -- 25 (103,730) -- --------- ----------- ---------- ---------- ---------- ----------- Total loans receivable 71,854 312,891 9,325 7,275 (103,730) 297,615 Less allowance for credit losses on -- (6,528) -- -- -- (6,528) loans Less deferred loan fees -- (3,556) (568) (192) -- (4,316) Plus deferred loan costs -- 1,458 200 -- -- 1,658 --------- ----------- ---------- ---------- ---------- ----------- Net loans receivable 71,854 304,265 8,957 7,083 (103,730) 288,429 Other Receivables: Income tax 1,029 -- -- -- -- 1,029 Accrued interest receivable -- 4,250 63 94 -- 4,407 Other receivables 2,649 6,802 496 -- (296) 9,651 --------- ----------- ---------- ---------- ---------- ----------- Total other receivables 3,678 11,052 559 94 (296) 15,087 Investment in subsidiaries 107,989 -- -- -- (107,989) -- Residual receivables, net -- 43,579 -- 19,623 -- 63,202 Net property and equipment 1,666 15,086 1,328 -- -- 18,080 Real estate and personal property -- 3,295 -- -- -- 3,295 acquired through foreclosure Net excess of cost over net assets of 42 3,426 -- 342 (936) 2,874 acquired businesses Deferred tax 4,588 2,117 -- -- (2,554) 4,151 Other assets 4,822 8,207 207 237 -- 13,473 --------- ----------- ---------- ---------- ---------- ----------- TOTAL ASSETS $ 195,352 $ 397,438 $ 11,314 $ 27,553 $ (215,505) $ 416,152 ========= =========== ========== ========== ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Revolving warehouse lines of credit $ -- $ 77,605 $ -- $ -- $ -- $ 77,605 Investor savings: Notes payable to investors -- 115,368 -- -- -- 115,368 Subordinated debentures -- 18,947 -- -- -- 18,947 --------- ----------- ---------- ---------- ---------- ----------- Total investor savings -- 134,315 -- -- -- 134,315 Senior unsecured debt 125,000 -- -- -- -- 125,000 Accounts payable and accrued liabilities 312 7,408 760 22 (1,985) 6,517 Remittances payable -- 4,591 -- -- -- 4,591 Accrued interest payable 3,645 1,105 -- -- -- 4,750 Due to affiliates 3,021 -- -- 7,057 (10,078) -- --------- ----------- ---------- ---------- ---------- ----------- Total other liabilities 6,978 13,104 760 7,079 (12,063) 15,858 Subordinated debt to affiliates -- 63,969 9,544 16,829 (90,342) -- --------- ----------- ---------- ---------- ---------- ----------- Total liabilities 131,978 288,993 10,304 23,908 (102,405) 352,778 Shareholders' equity: Common stock 484 4,259 -- 10 (4,269) 484 Preferred stock -- 4,621 5,700 -- (10,321) -- Capital in excess of par value 38,609 64,570 -- 3,102 (67,672) 38,609 Retained earnings (deficit) 24,281 34,995 (4,690) 533 (30,838) 24,281 --------- ----------- ---------- ---------- ---------- ----------- Total shareholders' equity 63,374 108,445 1,010 3,645 (113,100) 63,374 --------- ----------- ---------- ---------- ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 195,352 $ 397,438 $ 11,314 $ 27,553 $ (215,505) $ 416,152 ========= =========== ========= ========= ========== ==========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (Unaudited) (Dollars in thousands) Combined Combined Non Combined Wholly-Owned Wholly-OwnedNon-Guarantor Parent Guarantor Guarantor Subsidiaries Company Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ---------- ----------- ----------- ------------- REVENUES: Interest income $ 8,109 $ 34,551 $ 10 $ 1,238 $ (8,833) $ 35,075 Servicing income -- 18,646 -- 2,734 (9,141) 12,239 Gain on sale of loans: Gross gain on sale of loans -- 8,057 1,415 -- -- 9,472 Loan fees, net -- 10,136 1,520 89 -- 11,745 ----------- ------------ ---------- ----------- ----------- ------------- Total gain on sale of loans -- 18,193 2,935 89 -- 21,217 Gain on sale of subsidiaries' net assets -- 18,964 -- -- -- 18,964 Other revenues 927 3,242 217 489 (645) 4,230 ----------- ------------ ---------- ----------- ----------- ------------- Total revenues 9,036 93,596 3,162 4,550 (18,619) 91,725 ----------- ------------ ---------- ----------- ----------- ------------- EXPENSES: Interest 14,479 30,420 125 402 (9,458) 35,968 Provision for credit losses 20 11,886 -- -- -- 11,906 Fair value write-down of residual receivables -- 9,902 -- 3,736 -- 13,638 Salaries, wages and employee 3,176 49,769 3,639 -- -- 56,584 benefits Business development costs 2 10,547 269 -- -- 10,818 Restructuring charges -- 6,838 -- -- -- 6,838 Other general and administrative (2,216) 28,395 2,552 256 (23) 28,964 expense ----------- --------- ---------- ----------- ----------- ------------- Total expenses 15,461 147,757 6,585 4,394 (9,481) 164,716 ----------- ------------ ---------- ----------- ----------- ------------- Income (loss) before income taxes, minority interest, equity in undistributed earnings of subsidiaries, and extraordinary item (6,425) (54,161) (3,423) 156 (9,138) (72,991) Equity in undistributed earnings (loss) of subsidiaries (69,668) (10,138) -- -- 79,806 -- ----------- ------------ ---------- ----------- ----------- ------------- Income (loss) before income taxes, minority interest, and extraordinary item (76,093) (64,299) (3,423) 156 70,668 (72,991) Provision (benefit) for income taxes (132) 3,195 (46) -- -- 3,017 -------- --------- -------- --------- ----------- Income (loss) before minority interest and extraordinary item (75,961) (67,494) (3,377) 156 70,668 (76,008) Minority interest in (earnings) loss of subsidiaries -- -- -- 47 -- 47 ----------- ------------ ---------- ----------- ----------- ------------- Income (loss) before extraordinary iterm (75,961) (67,494) (3,377) 203 70,668 (75,961) Extraordinary item-gain on extinguishment of debt, net of $0 tax 18,216 -- -- -- -- 18,216 ----------- ------------ ---------- ----------- ----------- ------------- NET INCOME (LOSS) $ (57,745) $ (67,494) $ (3,377) $ 203 $ 70,668 $ (57,745) =========== ============ ========== =========== =========== =============
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (Unaudited) (Dollars in thousands) Combined Combined Wholly-Owned Non Combined Guarantor Wholly-OwnedNon-Guarantor Parent Subsidiaries Guarantor Subsidiaries Company Subsidiaries Eliminations Consolidated --------- ----------- ---------- ----------- ---------- ---------- REVENUES: Interest income $ 2,620 $ 33,753 $ 50 $ 423 $ (2,838) $ 34,008 Servicing income -- 8,514 -- -- -- 8,514 Gain on sale of loans: Gross gain on sale of loans -- 51,409 1,419 -- -- 52,828 Loan fees, net -- 28,024 2,137 46 -- 30,207 --------- ----------- ---------- ----------- ---------- ----------- Total gain on sale of loans -- 79,433 3,556 46 -- 83,035 Other revenues 253 923 11 405 (193) 1,399 --------- ----------- ---------- ----------- ---------- ----------- Total revenues 2,873 122,623 3,617 874 (3,031) 126,956 EXPENSES: Interest 4,436 23,308 193 203 (3,007) 25,133 Provision for credit losses -- 10,030 -- -- -- 10,030 Salaries, wages and employee benefits 4,421 40,032 3,591 -- -- 48,044 Business development costs 25 7,206 255 -- -- 7,486 Other general and administrative (5,026) 30,390 3,302 116 (28) 28,754 expense --------- --------- ---------- ----------- ---------- ----------- Total expenses 3,856 110,966 7,341 319 (3,035) 119,447 --------- ----------- ---------- ----------- ---------- ----------- Income before income taxes, minority interest, and equity in undistributed earnings of subsidiaries (983) 11,657 (3,724) 555 4 7,509 Equity in undistributed earnings of 8,302 -- -- -- (8,302) -- subsidiaries --------- ----------- ---------- ----------- ---------- ----------- Income before income taxes and 7,319 11,657 (3,724) 555 (8,298) 7,509 minority interest Provision (benefit) for income taxes (3,917) (106) 101 22 -- (3,900) ------- --------- ---------- -------- -------- -------- Income before minority interest 11,236 11,763 (3,825) 533 (8,298) 11,409 Minority interest in (earnings) loss 17 (173) -- -- -- (156) of subsidiaries --------- ----------- ---------- ----------- ---------- ----------- NET INCOME $ 11,253 $ 11,590 $ (3,825) $ 533 $ (8,298) $ 11,253 ========= =========== ========== =========== ========== =========== HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONSOLIDATING STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 (Unaudited) (Dollars in thousands) Combined Combined Wholly- Non Wholly- Combined Owned Owned Non- Parent Guarantor Guarantor Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated --------- ----------- ---------- ----------- ------------ ------------ REVENUES: Interest income $ 88 $ 18,277 $ 19 $ -- $ (476) $ 17,908 Servicing income -- 3,274 -- -- -- 3,274 Gain on sale of loans: Gross gain on sale of loans -- 23,799 16 -- -- 23,815 Loan fees, net -- 4,078 72 -- -- 4,150 --------- ---------- ----------- ---------- ---------- ----------- Total gain on sale of loans -- 27,877 88 -- -- 27,965 Other revenues 406 835 -- -- -- 1,241 --------- ---------- ----------- ---------- ---------- ----------- Total revenues 494 50,263 107 -- (476) 50,388 EXPENSES: Interest 457 11,019 21 -- (476) 11,021 Provision for credit losses -- 5,416 -- -- -- 5,416 Salaries, wages and employee benefits 1,931 11,221 511 -- -- 13,663 Business development costs 17 1,557 29 -- -- 1,603 Other general and administrative (1,717) 9,469 472 -- -- 8,224 expense --------- -------- ----------- ---------- ---------- -------- Total expenses 688 38,682 1,033 -- (476) 39,927 --------- ---------- ----------- ---------- ---------- ----------- Income before income taxes, minority interest, and equity in undistributed earnings of subsidiaries (194) 11,581 (926) -- -- 10,461 Equity in undistributed earnings of subsidiaries 10,116 -- -- -- (10,116) -- --------- ---------- ----------- ---------- ---------- ----------- Income before income taxes and minority interest 9,922 11,581 (926) -- (10,116) 10,461 Provision (benefit) for income taxes 6 774 (62) -- -- 718 ------- -------- ----------- ----------- -------- -------- Income before minority interest 9,916 10,807 (864) -- (10,116) 9,743 Minority interest in loss of subsidiaries 179 173 -- -- -- 352 --------- ---------- ----------- ---------- ---------- ----------- NET INCOME $ 10,095 $ 10,980 $ (864) $ -- $ (10,116) $ 10,095 ========= ========== =========== ========== ========== ===========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (Unaudited) (Dollars in thousands) Combined Combined Wholly- Non Wholly- Combined Owned Owned Non- Parent Guarantor Guarantor Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated --------- ----------- ------------ ------------ ------------ ----------- OPERATING ACTIVITIES: Net income (loss) $ (57,745) $ (67,494) $ (3,377) $ 203 $ 70,668 $ (57,745) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries 69,668 10,138 -- -- (79,806) -- Depreciation and amortization 430 2,992 192 12 -- 3,626 Fair market writedown of residual receivable -- 11,144 -- 2,494 -- 13,638 Provision (benefit) for deferred income taxes 692 (371) (321) -- -- -- Provision for credit losses 20 11,886 -- -- -- 11,906 Provision for losses on real estate owned -- 696 -- -- -- 696 Gain on retirement of senior unsecured debt (18,216) -- -- -- -- (18,216) Net (increase) decrease in deferred loan costs -- 770 -- -- -- 770 Net increase (decrease) in unearned discount and other deferrals -- (2,245) -- -- -- (2,245) Loans originated with intent to sell -- (708,004) (39,438) -- -- (747,442) Principal proceeds from sold loans 178 718,406 48,764 11,600 -- 778,948 Proceeds from securitization of loans -- 92,316 -- -- -- 92,316 Restructuring charge-fixed assets -- 3,593 -- -- -- 3,593 Other 44 1,142 -- (192) -- 994 Changes in operating assets and liabilities increasing (decreasing) cash 3,419 (5,612) (29) 5,663 -- 3,441 --------- ----------- ---------- ---------- ---------- ----------- Net cash provided by (used in) operating activities (1,510) 69,357 5,791 19,780 (9,138) 84,280 INVESTING ACTIVITIES: Loans originated for investment purposes (468) (150,549) -- (5,600) -- (156,617) Principal collections on loans not sold 65 180,881 -- 1,250 -- 182,196 Proceeds from sale of real estate and personal property acquired through foreclosure 453 7,140 -- -- -- 7,593 Proceeds from the sale of property and equipment (1,262) 4,070 -- -- -- 2,808 Purchase of property and equipment (64) (11,463) (174) -- -- (11,701) Other (748) (514) 1,310 -- -- 48 --------- ----------- ---------- ---------- ---------- ----------- Net cash provided by (used in) investing activities (2,024) 29,565 1,136 (4,350) -- 24,327 FINANCING ACTIVITIES: Advances on notes payable to banks -- 324,400 -- 9,653 -- 334,053 Payments on notes payable to banks -- (385,269) -- (9,653) -- (394,922) Net increase in notes payable to investors -- 3,218 -- -- -- 3,218 Net (decrease) increase in subordinated debentures -- (1,643) -- -- -- (1,643) Retirement of senior unsecured debt (20,134) -- -- -- -- (20,134) Advances (to) from subsidiary 22,978 (11,824) (7,190) (13,102) 9,138 -- Proceeds from issuance of additional common stock 214 -- -- -- -- 214 Other (41) -- -- -- -- (41) --------- --------- --------- ---------- -------- ----------- Net cash provided by (used in) financing activities 3,017 (71,118) (7,190) (13,102) 9,138 (79,255) --------- ----------- ---------- ---------- ---------- ----------- Net increase (decrease) in cash and cash equivalents (517) 27,804 (263) 2,328 -- 29,352 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 713 6,411 263 174 -- 7,561 ------- --------- ---------- ---------- ---------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR 196 34,215 -- 2,502 -- 36,913 ========= =========== ========== ========== ========== ===========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (Unaudited) (Dollars in thousands) Combined Combined Wholly- Non Wholly- Combined Owned Owned Non- Parent Guarantor Guarantor Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ---------- ------------ ------------ ------------ ------------ ------------ OPERATING ACTIVITIES: Net income $ 11,253 $ 11,590 $ (3,825) $ 533 $ (8,298) $ 11,253 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries (8,302) -- -- -- 8,302 -- Depreciation and amortization 304 2,009 375 7 (4) 2,691 Provision for deferred income taxes (3,291) (853) 331 -- -- (3,813) Provision for credit losses -- 10,030 -- -- -- 10,030 Net (increase) decrease in deferred costs (1,573) -- -- -- (1,573) Net increase (decrease) in unearned discount and deferrals 2,252 368 192 2,812 Loans originated with intent to sell -- (1,098,826) (41,507) -- -- (1,140,333) Principal proceeds from sold loans -- 485,622 32,181 -- -- 517,803 Proceeds from securitization of loans -- 509,781 -- -- -- 509,781 Other 15 (917) -- -- -- (902) Changes in operating assets and liabilities increasing (decreasing) cash 3,375 (46,295) (202) (10,916) -- (54,038) ---------- ----------- ---------- ---------- ----------- ----------- Net cash provided by (used in) operating activities 3,354 (127,180) (12,279) (10,184) -- (146,289) INVESTING ACTIVITIES: Loans originated for investment purposes -- (124,938) -- (8,250) -- (133,188) Principal collections on loans not sold -- 127,552 -- 1,000 -- 128,552 Principal collections on asset-backed securities -- -- -- -- -- -- Additional investment in subsidiary (54,168) 53,389 -- 779 -- -- Proceeds from sale of real estate and personal property acquired through foreclosure -- 6,652 -- -- -- 6,652 Proceeds from sale of property and equipment 29 -- -- -- -- 29 Purchase of property and equipment (1,438) (10,591) (1,193) -- -- (13,222) Other (40) (371) -- -- -- (411) ---------- ----------- ---------- ---------- ----------- ----------- Net cash provided by (used in) investing activities (55,617) 51,693 (1,193) (6,471) -- (11,588) FINANCING ACTIVITIES: Advances on notes payable to banks -- 1,139,815 -- -- -- 1,139,815 Payments on notes payable to banks -- (1,117,704) -- -- -- (1,117,704) Net increase in notes payable to investors -- 17,381 -- -- -- 17,381 Net (decrease) increase in subordinated debentures -- 2,832 -- -- -- 2,832 Advances (to) from subsidiary (69,054) 38,616 13,609 16,829 -- -- Proceeds from issuance of senior unsecured debt 120,578 -- -- -- -- 120,578 Proceeds from issuance of additional common stock 1,260 -- -- -- -- 1,260 ---------- ----------- ---------- ----------- ----------- ---------- Net cash provided by financing activities 52,784 80,940 13,609 16,829 -- 164,162 ---------- ----------- ---------- ---------- ----------- ----------- Net increase in cash and cash equivalents 521 5,453 137 174 -- 6,285 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 192 958 126 -- -- 1,276 ======== ========= ========== ======== ========= ========= CASH AND CASH EQUIVALENTS, END OF YEAR $ 713 $ 6,411 $ 263 $ 174 $ $ 7,561 ========== =========== ========== ========== =========== ===========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 (Unaudited) (Dollars in thousands) Combined Combined Wholly- Non Wholly- Combined Owned Owned Non- Parent Guarantor Guarantor Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated --------- ---------- ---------- ----------- ---------- ----------- OPERATING ACTIVITIES: Net income $ 10,095 $ 10,980 $ (864) $ -- $ (10,116) $ 10,095 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiaries (10,120) -- -- -- 10,120 -- Depreciation and amortization 72 1,162 104 -- (4) 1,334 Provision for deferred income taxes 76 (218) 1 -- -- (141) Provision for credit losses -- 5,416 -- -- -- 5,416 Net (increase) decrease in deferred costs -- 145 -- -- -- 145 Net increase (decrease) in unearned discount and deferrals -- 665 -- -- -- 665 Loans originated with intent to sell -- (386,405) (1,195) -- -- (387,600) Principal proceeds from sold loans -- 270,663 1,195 -- -- 271,858 Proceeds from securitization of loans -- 30,128 -- -- -- 30,128 Other -- (1,481) -- -- -- (1,481) Changes in operating assets and liabilities Increasing (decreasing) cash (568) (7,023) (373) -- -- (7,964) --------- ---------- ---------- ----------- ---------- ----------- Net cash provided by (used in) operating activities (445) (75,968) (1,132) -- -- (77,545) INVESTING ACTIVITIES: Loans originated for investment purposes (513) (48,660) -- -- -- (49,173) Principal collections on loans not sold -- 61,868 -- -- -- 61,868 Additional investment in subsidiary (18,825) 18,825 -- -- -- -- Proceeds from sale of real estate and personal property acquired through foreclosure -- 3,383 -- -- -- 3,383 Proceeds from sale of property and equipment -- 160 -- -- -- 160 Purchase of property and equipment (532) (3,985) (377) -- -- (4,894) Other -- (84) -- -- -- (84) --------- ---------- ---------- ----------- ---------- ----------- Net cash provided by (used in) investing activities (19,870) 31,507 (377) -- -- 11,260 FINANCING ACTIVITIES: Advances on notes payable to banks -- 509,118 -- -- -- 509,118 Payments on notes payable to banks -- (485,257) -- -- -- (485,257) Net increase in notes payable to investors -- 15,855 -- -- -- 15,855 Net (decrease) increase in subordinated debentures -- (70) -- -- -- (70) Advances (to) from subsidiary (6,511) 4,876 1,635 -- -- -- Proceeds from issuance of additional common stock 26,655 -- -- -- -- 26,655 ------- -------- ---------- -------- -------- ----------- Net cash provided by (used in) financing activities 20,144 44,522 1,635 -- -- 66,301 --------- ---------- ---------- ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents (171) 61 126 -- -- 16 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 363 897 -- -- -- 1,260 --------- ---------- ---------- ----------- ---------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 192 $ 958 $ 126 $ -- $ -- $ 1,276 ========= ========== ========== =========== ========== ===========
HOMEGOLD FINANCIAL, INC. AND SUBSIDAIRIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 27. SUBSEQUENT EVENTS In the first two months of 1999, the Company purchased $35.3 million in aggregate principal amount of its Senior Notes due 2004 in the market for a purchase price of $17.3 million or 49% of face value. A proportionate share of the unamortized debt origination costs ($1.6 million) relating to the issuance of the Senior Notes was charged against this gain, to record a net gain of $16.9 million. The Company may, from time to time, purchase more of its Senior Notes depending on its cash needs, market conditions, and other factors. EX-3 2 EXHIBIT 3.1.3 STATE OF SOUTH CAROLINA SECRETARY OF STATE RESIGNATION OF REGISTERED AGENT OF A SOUTH CAROLINA CORPORATION Pursuant to Sections 33-5-103 and 33-15-109 of the 1976 South Carolina Code, as amended, the undersigned hereby submits the following: 1. The name of the corporation that is affected by this document is HomeGold Financial, Inc., (f/k/a) Emergent Group, Inc.; 2. Wade M. Hall hereby resigns as the registered agent of the above-named corporation effective upon acceptance for filing by the Office of the Secretary of State. Date: 7/6/98 /s/ Wade M. Hall ----------------------- ------------------------------------- Wade M. Hall, Registered Agent STATE OF SOUTH CAROLINA SECRETARY OF STATE NOTICE OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH OF A SOUTH CAROLINA OR FOREIGN CORPORATION Pursuant to Sections 33-5-102 and 33-15-108 of the 1976 South Carolina Code, as amended, the undersigned corporation submits the following information. 1. Name of the corporaiton is HomeGold Financial, Inc. (f/k/a) Emergent Group, Inc. 2. The corporation is (complete either a or b, whichever is applicable): a. [x] a domestic corporation incorporated in South Carolina on 6/19/68 CON 8/23/91; or ------------------- b. [ ] a foreign corporation incorporated in _______________ (state) on _____________________ (date), and authorized to do business in South Carolina on ____________ (date). 3. The street address of the current registered office in South Carolina is 15 -- S. Main Street, Suite 750 in the city of Greenville, South Carolina 29601. ------------------------- ---------- ----- 4. If the current registered office is to be changed, the street address to which its registered office is to be changed is ------------------------- (street & number) in the city of , Carolina (ZIP code). ----------- --------- 5. The name of the present registered agent is Wade M. Hall. ------------ 6. If the current agent is to be changed, the name of the successor registered agent is Mark S. Keegan. -------------- *I hereby consent to the appointment as registered agent of the corporation. /s/ Mark S. Keegan ----------------------------------- (Signature of New Registered Agent) 7. The address of the registered office and the address of the business office of the registered agent, as changed, will be identical. EX-3 3 EXHIBIT 3.1.3 STATE OF SOUTH CAROLINA SECRETARY OF STATE NOTICE OF CHANGE OF REGISTERED OFFICE OR REGISTERED AGENT OR BOTH OF A SOUTH CAROLINA OR FOREIGN CORPORATION Pursuant to Sections 33-5-102 and 33-15-108 of the 1976 South Carolina Code, as amended, the undersigned corporation submits the following information. 1. Name of the corporaiton is HomeGold Financial, Inc. (f/k/a) Emergent Group, Inc. 2. The corporation is (complete either a or b, whichever is applicable): a. [x] a domestic corporation incorporated in South Carolina on 6/19/68 CON 8/23/91; or ------------------- b. [ ] a foreign corporation incorporated in _______________ (state) on _____________________ (date), and authorized to do business in South Carolina on ____________ (date). 3. The street address of the current registered office in South Carolina is 15 -- S. Main Street, Suite 750 in the city of Greenville, South Carolina 29601. ------------------------- ---------- ----- 4. If the current registered office is to be changed, the street address to which its registered office is to be changed is ------------------------- (street & number) in the city of , Carolina (ZIP code). ----------- --------- 5. The name of the present registered agent is Wade M. Hall. ------------ 6. If the current agent is to be changed, the name of the successor registered agent is Mark S. Keegan. -------------- *I hereby consent to the appointment as registered agent of the corporation. /s/ Mark S. Keegan ----------------------------------- (Signature of New Registered Agent) 7. The address of the registered office and the address of the business office of the registered agent, as changed, will be identical. EX-4 4 EX4.1.2 SUPPLEMENTAL INDENTURE This Supplemental Indenture is executed to be effective as of this third day of November, 1997 by the undersigned Emergent Insurance Agency Corp. (the "Company"). RECITALS The Company is a wholly-owned subsidiary of Emergent Group, Inc. ("EGI"), a South Carolina corporation, which on September 23, 1997 issued $125,000,000 of 10-3/4% Senior Notes Due 2004, Series A (the "Senior Notes"). EGI expects to issue up to $125,000,000 of 10-3/4% Senior Notes Due 2004, Series B (the "Exchange Notes") to be exchanged for an equal aggregate principal amount of Senior Notes tendered in an exchange offer registered with the U.S. Securities and Exchange Commission. The Senior Notes are, and the Exchange Notes will be, subject to an indenture dated September 23, 1997 (the "Indenture") between EGI, the Subsidiary Guarantors named therein and Bankers Trust Company, as Trustee (the "Trustee"). Substantially all of EGI's subsidiaries executed that certain Subsidiary Guarantee dated as of September 23, 1997 pursuant to which they guaranteed EGI's repayment of the Senior Notes as set forth therein (the "Subsidiary Guarantee"). The Company will derive indirect economic benefit from the issuance of both the Senior Notes and the Exchange Notes and has determined to be subject to the provisions of the Indenture as a Subsidiary Guarantor (as defined in the Indenture) and guarantee the Senior Notes in the manner contemplated by the Subsidiary Guarantee. ADHERENCE By execution hereof, the Company agrees to become subject to the provisions of the Indenture as a Subsidiary Guarantor and to become a party to the Subsidiary Guarantee and to have all of the rights and obligations of a Subsidiary Guarantor thereunder. IN WITNESS WHEREOF, this Supplemental Indenture is executed to be effective as of the date first written above. Witness: EMERGENT INSURANCE AGENCY CORP. /s/ Kevin J. Mast By: /s/ Keith B. Giddens ----------------- -------------------- (signature) - ------------------------------------------------- Keith B. Giddens, Chief Executive Officer ----------------------------------------- (print name and title) EX-4 5 EXHIBIT 4.1.3.1 [Wyche, Burgess, Freeman & Parham, P.A. letterhead] (864) 242-8290 March 30, 1998 BY FEDERAL EXPRESS Bankers Trust Company Four Albany Street New York, NY 10015 Attn: Ms. Sandra Shaffer Corporate Trust & Agency Group RE: Release of The Loan Pro$, Inc. and Premier Financial Services, Inc. (the "Guarantors") from their guarantee (the "Guarantee") of Emergent Group, Inc.'s (the "Company") 10-3/4% Senior Notes, due 2004, Series A and B (the "Notes") Sandra: On March 18, 1998, the Company sold substantially all of the assets of the Guarantors (the "Sale"). Pursuant to the terms of the indenture, dated September 23, 1997 (the "Indenture"), between the Company, the Subsidiary Guarantors (as defined in the Indenture and including the Guarantors) and Bankers Trust Company as trustee (the "Trustee"), the Company and the Guarantors hereby notify the Trustee of the release of the Guarantors from their Guarantees pursuant to the terms of Sections 1013 and 1203 of the Indenture. Please find enclosed the following documents required by Sections 1013 and 1203 of the Indenture: (1) an Officers' Certificate (as defined in the Indenture); (2) board resolutions of the Company and the Guarantors pertaining to the adequacy of consideration received in the asset sale; and (3) an Opinion of Counsel (as defined in the Indenture). The board resolution of Emergent Group, Inc. is dated January 28, 1998, which was the day the Sale was originally expected to close, and described the Sale as a stock sale to Capital City Acceptance, Inc. rather than an asset sale to TranSouth Financial Corporation. The Company and the Guarantors believe that the Sale as it finally occurred on March 18, 1998 is materially the same as the transaction approved in the January 28, 1998 board resolution of the Company and so has not provided a new board resolution. Pursuant to the terms of Section 1203 of the Indenture, please send us an acknowledgment of your receipt of the enclosed documents and an acknowledgment of the release of the Guarantors from their Guarantees. If I can be of any assistance to you, please do not hesitate to call me. It has been a pleasure working with you in this matter. With best regards, I remain Very truly yours, /s/ Eric K. Graben Eric K. Graben Enclosures cc: Don Lancaster, Esq. Seward & Kissell One Battery Park Plaza New York, NY 10004 EX-4 6 EXHIBIT 4.1.3.2 [Wyche, Burgess, Freeman & Parham, P.A. letterhead] (864)242-8200 March 18, 1998 Bankers Trust Company Four Albany Street New York, NY 10015 Attn: Ms. Sandra Shaffer Corporate Trust & Agency Group RE: Release of The Loan Pro$, Inc. and Premier Financial Services, Inc. (the "Guarantors") from their guarantee (the "Guarantee(s)") of Emergent Group, Inc.'s (the "Company") 10-3/4% Senior Notes, due 2004, Series A and Series B (the "Notes") Dear Ladies & Gentlemen: We have acted as counsel to the Company, a South Carolina Corporation, and the Guarantors, also South Carolina Corporations, for the issuance of the Company's Notes and the Guarantees thereof and for the Sale described below. The Notes and Guarantees were issued pursuant to an indenture dated September 23, 1997 (the "Indenture") between the Company, the Subsidiary Guarantors (as defined therein and two of which are the Guarantors discussed herein) and you, Bankers Trust Company, as trustee (the "Trustee"). Substantially all of the assets of the Guarantors have been sold to TranSouth Financial Services for cash (the "Sale"). The Sale closed on the date hereof. In this connection, we have examined the Notes, the Guarantees and the Indenture, in particular, but not limited to, Article 12 of the Indenture titled "Subsidiary Guarantee," Section 1203 thereof titled "Release of Subsidiary Guarantors," Article 10 thereof titled "Covenants," Section 1013 thereof titled "Limitation on Sales of Assets" and the definitional provisions of the Indenture relating thereto. We have also examined in this connection, originals or copies of such corporate documents and records of the Company and the Guarantors, including but not limited to documents pertaining to the Sale, certificates of public officials, certificates of the Company, the Guarantor or any officer thereof and such other documents as we have deemed relevant and necessary as the basis for this opinion and statement. With respect to matters of fact, we have relied upon certificates of public officials, certificates of the Company, the Guarantors or any officer thereof and oral statements of the officers of the Company and the Guarantors and have assumed, without independent investigation, the accuracy of the factual statements made and the information contained in such certificates or statements. We have assumed, without investigation, the genuiness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as copies, and the accuracy and completeness of all documents made available to us by the Company or the Guarantors. We have assumed, without investigation, the legal capacity of all persons. We have assumed, without investigation, that there has not been any mutual mistake of fact or misunderstanding. With respect to agreements, instruments and other documents executed by entities or individuals other than or in addition to the Company or the Guarantors, we have assumed, without investigation, the power and authority of any such other entity or individual to enter into and perform all of its, her or his obligations under such agreements, instruments and other documents, the due execution and delivery by each such entity or individual of such agreements, instruments and other documents and that such agreements, instruments and other documents are the valid, binding and enforceable obligations of each other such entity or individual. In our opinion, we have made such examination or investigation as is necessary to enable us to express an informed opinion as set forth below. Based on and subject to the foregoing, and subject to the comments, limitations and qualifications set forth below, it is our opinion that the Company and the Guarantors have complied with all covenants and conditions of the Indenture, particularly Articles 10 and 12 thereof, necessary for the Guarantors to be released form their Guarantees as of the date hereof pursuant to the terms of the Indenture. We do not herein intend to express any opinion, statement or belief as to any matter governed by (or that purports to be governed by) any law other than, and our opinions, statements and beliefs are limited solely to, the existing laws of the State of South Carolina and the existing Federal laws of the United States of America. We express no opinion with regard to any matter that is or may be (or that purports to be) governed by the law of any other state or jurisdiction. The law covered by the opinions expressed herein does not include any statute, ordinance, decision, rule or regulation of any political subdivision of any State. We note that the Indenture, the Notes and the Guarantees by their terms are to be governed by the laws of the State of New York, and for purposes hereof, we have assumed that the laws of the State of New York (and the interpretation of such laws) are identical to South Carolina law. We further express no opinion as to any matter governed by or arising under the South Carolina Uniform Securities Act, the securities laws of any other State, any environmental law, the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act, as amended, the Federal Power Act, as amended, or any rule or regulation promulgated under any of the foregoing laws. No opinion is given as to any choice-of-law provision contained in the Indenture, the Notes, the Guarantees or any other document. This letter is rendered as of the date hereof and applies only to matters specifically covered by this letter, and we disclaim any continuing responsibility for matters occurring after the date of this letter or any obligation to update this letter. This opinion is limited to the matters expressly set forth herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion letter is being provided to you in connection with the release of the Guarantors from their Guarantees and is not to be used, circulated, quoted or otherwise relied upon by any other person or entity, or for any other purpose, without our express written consent. Very truly yours, /s/ Wyche, Burgess, Freeman & Parham, P.A. WYCHE, BURGESS, FREEMAN & PARHAM, P.A. cc: Kevin J. Mast Wade Hall EX-4 7 EXHIBIT 4.1.3.3 EMERGENT GROUP, INC. THE LOAN PRO$, INC. PREMIER FINANCIAL SERVICES, INC. CERTIFICATE OF COMPLIANCE WITH THE INDENTURE DATED SEPTEMBER 23, 1997 The undersigned companies, Emergent Group, Inc., a South Carolina corporation (the "Company"), and The Loan Pro$, Inc. and Premier Financial Services, Inc., both South Carolina corporations (the "Guarantors"), hereby certify to Bankers Trust Company (the "Trustee"), as of the date hereof, that: (1) Purpose. This Certificate is being issued to the Trustee as required by Sections 102 and 1203 of the indenture dated September 23, 1997 (the "Indenture") between the Company, the Subsidiary Guarantors (as defined in the Indenture and two of which are the Guarantors) and the Trustee pertaining to the Company's 10-3/4% Senior Notes, due 2004, Series A and Series B, as guaranteed by the Guarantors (collectively, the "Notes") in connection with the release of the Guarantors from their guarantees of the Notes (the "Subsidiary Guarantees") by reason of the sale of substantially all of the assets of the Guarantors to TranSouth Financial Corporation for cash (together, the "Sale"), which transaction closed as of the date hereof. The representations, warranties and certifications set forth herein shall survive the delivery of the Opinion. (2) Knowledge of Conditions and Covenants in the Indenture. The officers signing on behalf of the undersigned companies have read the Notes and the Indenture, particularly Article 12 thereof titled "Subsidiary Guarantee" and Section 1203 thereof titled "Release of Subsidiary Guarantors," Article 10 thereof titled "Covenants" and Section 1013 thereof titled "Limitation on Sales of Assets" and all definitions in the Indenture relating thereto. (3) Nature and Scope of Examination or Investigation. In addition to the examination and investigation described in paragraph (2) above, the officers signing on behalf of the undersigned companies have examined originals or copies of such corporate documents and records of the Company and the Guarantors, including but not limited to documents pertaining to the Sale, and such other documents as the officers signing on behalf of the undersigned companies have deemed relevant and necessary as the basis for this opinion and statement. (4) Belief that Examination or Investigation is Adequate to Certify Compliance. In the opinion of the officers signing on behalf of the undersigned companies, such officers have made such examination or investigation as is necessary to enable them, on behalf of the undersigned companies, to express an informed opinion as to whether or not the relevant conditions and covenants of the Indenture have been complied with by the Company and the Guarantors in order for the Guarantors to be released from their Subsidiary Guarantees as provided in the terms of the Indenture. (5) Opinion of Compliance with the Indenture. In the opinion of the officers signing on behalf of the undersigned companies, the Company and the Guarantors have complied with the conditions and covenants provided in the Indenture, particularly Articles 10 and 12 thereof, necessary for the Guarantors to be released from their Subsidiary Guarantees as of the date hereof as provided in the terms of the Indenture. The Boards of Directors of the Company and the Guarantors have determined in good faith that the Company and the Guarantors have received in the Sale cash consideration for the Guarantors' assets at least equal to fair market value of such assets as evidenced by the Board Resolutions attached hereto, which Resolutions were duly entered into in compliance with the requirements of the Certificate of Incorporation and Bylaws of the Company and the Guarantors and which remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, the undersigned corporations have executed this Certificate as of March 18, 1998. EMERGENT GROUP, INC. By: /s/ Robert S. Davis ---------------------------------------- Name: Robert S. Davis ----------------------------------- Its: Chairman of the Board, President, VICE PRESIDENT (circle one) -------------- By: /s/ Kevin J. Mast ----------------------------------- Name: Kevin J. Mast ----------------------------------- Its: TREASURER, Assistant Treasurer, Secretary, Assistant Secretary (circle one) SIGNATURES CONTINUED ON FOLLOWING PAGE THE LOAN PRO$, INC. By: /s/ Keith B. Giddens ------------------------------------ Name: --------------------------------- Its: CHAIRMAN OF THE BOARD, President, --------------------------------- Vice President (circle one) By: /s/ Kevin J. Mast ------------------------------------ Name: Kevin J. Mast ----------------------------------- Its: TREASURER, Assistant Treasurer, Secretary, Assistant Secretary (circle one) PREMIER FINANCIAL SERVICES, INC. By: /s/ Kevin J. Mast ------------------------------------ Name: Kevin J. Mast ----------------------------------- Its: Chairman of the Board, President, VICE PRESIDENT (circle one) By: /s/ Wade M. Hall ------------------------------------ Name: Wade M. Hall ----------------------------------- Its: Treasurer, Assistant Treasurer, SECRETARY, Assistant Secretary (circle one) RESOLUTION OF THE BOARD OF DIRECTORS OF EMERGENT GROUP, INC. REGARDING CONSIDERATION RECEIVED IN THE SALE OF PREMIER FINANCIAL SERVICES, INC. & THE LOAN PRO$, INC. The members of the Board of Directors (the "Board") of Emergent Group, Inc., a South Carolina corporation (the "Company"), do hereby adopt the following resolution of the Board by unanimous written consent, waiving any and all requirements of meeting or notice with respect thereto. WHEREAS, the Board has previously caused the Company to contract with Capital City Acceptance, Inc. to sell (the "Sale") all of the Company's capital stock in the Company's subsidiaries Premier Financial Services, Inc. and the Loan Pro$, Inc. (together, the "Guarantors") for cash consideration substantially equal to $20.8 million (the "Consideration"), and WHEREAS, the Board expects the Sale to close on or about January 29, 1998, and WHEREAS, the Board has conducted such investigation as it deems reasonably necessary in order to determine the fairness of the Consideration in relation to the value of the Guarantors; NOW THEREFORE, be it resolved as follows: RESOLVED, that, in the good faith opinion of the Board, the Consideration represents, and will represent at the closing of the Sale, an amount at least equal to the fair market value of all of the Company's capital stock in the Guarantors. Dated January 29, 1998. /s/ John S. Sterling, Jr. /s/ Keith B. Giddens - -------------------------------------------------------------------------------- John M. Sterling, Jr. Keith B. Giddens /s/ Clarence B. Bauknight /s/ Tecumseh Hooper, Jr. - -------------------------------------------------------------------------------- Clarence B. Bauknight Tecumseh Hooper, Jr. /s/ Buck Mickel /s/ Porter B. Rose - -------------------------------------------------------------------------------- Buck Mickel Porter B. Rose /s/ J. Robert Philpott, Jr. /s/ Larry G. Blackwell - -------------------------------------------------------------------------------- J. Robert Philpott, Jr. Larry G. Blackwell RESOLUTION OF THE BOARD OF DIRECTORS OF PREMIER FINANCIAL SERVICES, INC. REGARDING CONSIDERATION RECEIVED IN THE SALE OF PREMIER FINANCIAL SERVICES, INC. & THE LOAN PRO$, INC. The members of the Board of Directors (the "Board") of Premier Financial Services Inc., a South Carolina corporation (the "Company"), do hereby adopt the following resolution of the Board by unanimous written consent, waiving any and all requirements of meeting or notice with respect thereto. WHEREAS, the Company expects to sell substantially all of its assets to TranSouth Financial Corporation ("TranSouth") pursuant to the terms of a contract between Emergent Group, Inc., Capital City Acceptance, Inc. and TranSouth whereby substantially all of the combined assets of the Company and the Loan Pro$, Inc. (together, the "Guarantors") will be sold (the "Sale") to TranSouth for cash consideration substantially equal to approximately $20.5 million (the "Consideration"), and WHEREAS, the Board expects the Sale to be consummated by or about March 18, 1998, and WHEREAS, the Board has conducted such investigation as it deems reasonably necessary in order to determine the fairness of the Consideration in relation to the combined value of the Guarantors; NOW THEREFORE, be it resolved as follows: RESOLVED, that, in the good faith opinion of the Board, the Consideration represents, and will represent at the closing of the Sale, an amount at least substantially equal to the fair market value of the combined assets of the Guarantors being sold in the Sale. Dated March 17, 1998. /s/ Kevin J. Mast /s/ Keith B. Giddens - -------------------------------------------------------------------------------- Kevin J. Mast Keith B. Giddens /s/ Kimberley Bullard /s/ Kenneth Bentley - -------------------------------------------------------------------------------- Kimberley Bullard Kenneth Bentley /s/ J. Phil Cox - ------------------- J. Phil Cox RESOLUTION OF THE BOARD OF DIRECTORS OF THE LOAN PRO$, INC. REGARDING CONSIDERATION RECEIVED IN THE SALE OF PREMIER FINANCIAL SERVICES, INC. & THE LOAN PRO$, INC. The members of the Board of Directors (the "Board") of The Loan Pro$, Inc., a South Carolina corporation (the "Company"), do hereby adopt the following resolution of the Board by unanimous written consent, waiving any and all requirements of meeting or notice with respect thereto. WHEREAS, the Company expects to sell substantially all of its assets to TranSouth Financial Corporation ("TranSouth") pursuant to the terms of a contract between Emergent Group, Inc., Capital City Acceptance, Inc. and TranSouth whereby substantially all of the combined assets of the Company and Premier Financial Services, Inc. (together, the "Guarantors") will be sold (the "Sale") to TranSouth for cash consideration substantially equal to approximately $20.5 million (the "Consideration"), and WHEREAS, the Board expects the Sale to be consummated by or about March 18, 1998, and WHEREAS, the Board has conducted such investigation as it deems reasonably necessary in order to determine the fairness of the Consideration in relation to the value of the Guarantors; NOW THEREFORE, be it resolved as follows: RESOLVED, that, in the good faith opinion of the Board, the Consideration represents, and will represent at the closing of the Sale, an amount at least substantially equal to the fair market value of the combined assets of the Guarantors being sold in the Sale. Dated March 17, 1998. /s/ Kevin J. Mast /s/ Keith B. Giddens - -------------------------------------------------------------------------------- Kevin J. Mast Keith B. Giddens /s/ Ron Long /s/ Chris Long - -------------------------------------------------------------------------------- Ron Long Chris Long /s/ J. Phil Cox - -------------------------------------- J. Phil Cox EX-4 8 EXHIBT 4.1.4.1 [HomeGold Financial, Inc. Letterhead] September 10, 1998 Bankers Trust Company Four Albany Street New York, NY 10015 Attn: Ms. Ednora Lenares Corporate Trust and Agency Group RE: Release of Sterling Lending Corporation ("Sterling") and its wholly-owned subsidiary Sterling Lending Insurance Agency, Inc. ("Sterling Insurance") from their guarantees (the "Guarantees") of HomeGold Financial, Inc.'s 10-3/4% Senior Notes, due 2004 (the "Notes") Dear Ladies & Gentlemen: As of August 21, 1998, HomeGold Financial, Inc. (f/k/a Emergent Group, Inc., hereinafter, the "Company") sold all of its capital stock of Sterling to FNSC Mortgage Corporation, a subsidiary of First National Security Corp., for cash in an amount of less than $2 million (the "Sale"). Sterling and Sterling Insurance are Subsidiary Guarantors as defined in the indenture for the Notes and the Subsidiary Guarantees thereof dated September 23, 1997 (the "Indenture"), between the Company, the Subsidiary Guarantors (as defined in the Indenture) and Bankers Trust Company, as trustee (the "Trustee"). Section 1013 of the Indenture has recently been amended by Amendment No.1 thereto by replacing the words "$1 million" contained therein with the words "$2 million." The purpose of this letter is to inform you that as of August 21, 1998, Sterling and Sterling Insurance are released from their Guarantees (which are Subsidiary Guarantees as defined in the Indenture) as provided in Section 1203 of the Indenture as a result of the Sale. As required by such Section 1203, please find enclosed an Officers' Certificate and an Opinion of Counsel (both as defined in the Indenture) pertaining to the Sale. Please sign below one copy of this letter and return it to us to indicate your acknowledgment of the release of Sterling and Sterling Insurance from their Guarantees. With best regards, I am Very truly yours, /s/ Ashley Steele Nutley Ashley Steele Nutley Bankers Trust Company hereby acknowledges receipt of this letter and the Officers' Certificate and Opinion of Counsel mentioned herein and acknowledges that Sterling Lending Corporation and Sterling Lending Insurance Agency are released thereby from their Guarantees (which are Subsidiary Guarantees as defined in the Indenture) of the Notes. BANKERS TRUST COMPANY Date: 9/28/98 ------- By: /s/ Ednora G. Linares ------------------------------------ Name: Ednora G. Linares ------------------------------------ Title: Assistant Vice President ------------------------------------ EX-4 9 EXHIBIT 4.1.4.2 [Homegold Financial, Inc. Letterhead] August 21, 1998 Bankers Trust Company Four Albany Street New York, NY 10015 Attn: Ms. Ednora Lenares Corporate Trust & Agency Group RE: Release of Sterling Lending Corporation and Sterling Lending Insurance Agency, Inc. (the "Guarantors") from their guarantees (the "Guarantee(s)") of HomeGold Financial, Inc.'s (f/k/a Emergent Group, Inc., hereinafter, the "Company") 10-3/4% Senior Notes, due 2004, Series A and Series B (the "Notes") Dear Ladies & Gentlemen: I am General Counsel to the Company, a South Carolina Corporation, Sterling Lending Corporation, a South Carolina Corporation and a subsidiary of the Company, and Sterling Lending Insurance Agency, Inc., a Louisiana corporation and a subsidiary of Sterling Lending Corporation, for the issuance of the Company's Notes and the Guarantees thereof and for the Sale described below. The Notes and Guarantees were issued pursuant to an indenture dated September 23, 1997, as amended by Amendment No. 1 thereto amending Section 1013 thereof (the "Indenture"), between the Company, the Subsidiary Guarantors (as defined therein and two of which are the Guarantors discussed herein) and you, Bankers Trust Company, as trustee (the "Trustee"). The Company sold all of its capital stock in Sterling Lending Corporation to FNSC Mortgage Corporation, a subsidiary of First National Security Corp. on the date of this opinion for cash in an amount of less than two million dollars ($2,000,000) (the "Sale"). In this connection, I have examined the Notes, the Guarantees and the Indenture, in particular, but not limited to, Article 12 of the Indenture titled "Subsidiary Guarantee," Section 1203 thereof titled "Release of Subsidiary Guarantors," Article 10 thereof titled "Covenants," Section 1013 thereof, as amended, titled "Limitation on Sales of Assets" and the definitional provisions of the Indenture relating thereto. I have also examined in this connection, originals or copies of such corporate documents and records of the Company and the Guarantors and such other documents as I have deemed relevant and necessary as the basis for this opinion and statement. With respect to matters of fact, I have relied upon information provided to me by officers and employees of the Company and the Guarantors and have assumed, without independent investigation, the accuracy of the information provided to me. I have assumed, without investigation, the genuiness of all signatures, the authenticity of all documents submitted to me as originals, the conformity to authentic original documents of all documents submitted to me as copies, and the accuracy and completeness of all documents made available to me by the Company or the Guarantors. I have assumed, without investigation, the legal capacity of all persons. I have assumed, without investigation, that there has not been any mutual mistake of fact or misunderstanding. With respect to agreements, instruments and other documents executed by entities or individuals other than or in addition to the Company or the Guarantors, I have assumed, without investigation, the power and authority of any such other entity or individual to enter into and perform all of its, her or his obligations under such agreements, instruments and other documents, the due execution and delivery by each such entity or individual of such agreements, instruments and other documents and that such agreements, instruments and other documents are the valid, binding and enforceable obligations of each other such entity or individual. In my opinion, I have made such examination or investigation as is necessary to enable me to express an informed opinion as set forth below. Based on and subject to the foregoing, and subject to the comments, limitations and qualifications set forth below, it is my opinion that the Company has complied with all covenants and conditions of the Indenture, particularly Articles 10 and 12 thereof, necessary for the Guarantors to be released from their Guarantees as of the date hereof pursuant to the terms of the Indenture. I do not herein intend to express any opinion, statement or belief as to any matter governed by (or that purports to be governed by) any law other than, and my opinions, statements and beliefs are limited solely to, the existing laws of the State of South Carolina and the existing Federal laws of the United States of America. I express no opinion with regard to any matter that is or may be (or that purports to be) governed by the law of any other state or jurisdiction. The law covered by the opinions expressed herein does not include any statute, ordinance, decision, rule or regulation of any political subdivision of any State. I note that the Indenture, the Notes and the Guarantees by their terms are to be governed by the laws of the State of New York, and for purposes hereof, I have assumed that the laws of the State of New York (and the interpretation of such laws) are identical to South Carolina law. I further express no opinion as to any matter governed by or arising under the South Carolina Uniform Securities Act, the securities laws of any other State, any environmental law, the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act, as amended, the Federal Power Act, as amended, or any rule or regulation promulgated under any of the foregoing laws. No opinion is given as to any choice-of-law provision contained in the Indenture, the Notes, the Guarantees or any other document. This letter is rendered as of the date hereof and applies only to matters specifically covered by this letter, and we disclaim any continuing responsibility for matters occurring after the date of this letter or any obligation to update this letter. This opinion is limited to the matters expressly set forth herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion letter is being provided to you in connection with the release of the Guarantors from their Guarantees and is not to be used, circulated, quoted or otherwise relied upon by any other person or entity, or for any other purpose, without my express written consent. Very truly yours, /s/ Ashley Steele Nutley Ashley Steele Nutley General Counsel EX-4 10 EXHIBIT 4.1.4.3 HOMEGOLD FINANCIAL, INC. (F/K/A EMERGENT GROUP, INC.) CERTIFICATE OF COMPLIANCE WITH THE INDENTURE DATED SEPTEMBER 23, 1997 The undersigned company, HomeGold Financial, Inc. (f/k/a/ Emergent Group, Inc.), a South Carolina corporation (the "Company") hereby certifies to Bankers Trust Company (the "Trustee") that: (1) Purpose. This Certificate is being issued to the Trustee as required by Sections 102 and 1203 of the indenture dated September 23, 1997, as amended by Amendment No. 1 thereto amending Section 1013 thereof (the "Indenture"), between the Company, the Subsidiary Guarantors (as defined in the Indenture) and the Trustee pertaining to the Company's 10-3/4% Senior Notes, due 2004, Series A and Series B, as guaranteed by the Guarantors (collectively, the "Notes") in connection with the release of Sterling Lending Corporation, a South Carolina corporation and subsidiary of the Company, and Sterling Lending Insurance Agency, a Louisiana corporation and a subsidiary of Sterling Lending Corporation (each a "Guarantor" and together, the "Guarantors") from their guarantees of the Notes (the "Subsidiary Guarantees") by reason of the sale of all of the Company's capital stock of Sterling Lending Corporation to First National Security Corp. for cash in an amount of less than two million dollars ($2,000,000)( the "Sale"), which transaction closed on August 21, 1998. The representations, warranties and certifications set forth herein shall survive the delivery of this Certificate. (2) Knowledge of Conditions and Covenants in the Indenture. The officers signing on behalf of the Company have read the Notes and the Indenture, particularly Article 12 thereof titled "Subsidiary Guarantee" and Section 1203 thereof titled "Release of Subsidiary Guarantors," Article 10 thereof titled "Covenants" and Section 1013 thereof titled "Limitation on Sales of Assets" and all definitions in the Indenture relating thereto. (3) Nature and Scope of Examination or Investigation. In addition to the examination and investigation described in paragraph (2) above, the officers signing on behalf of the Company have examined originals or copies of such corporate documents and records of the Company and the Guarantors, including but not limited to documents pertaining to the Sale, and such other documents as the officers signing on behalf of the Company have deemed relevant and necessary as the basis for this opinion and statement. (4) Belief that Examination or Investigation is Adequate to Certify Compliance. In the opinion of the officers signing on behalf of the Company, such officers have made such examination or investigation as is necessary to enable them, on behalf of the undersigned companies, to express an informed opinion as to whether or not the relevant conditions and covenants of the Indenture have been complied with by the Company in order for the Guarantors to be released from their Subsidiary Guarantees as provided in the terms of the Indenture. (5) Opinion of Compliance with the Indenture. In the opinion of the officers signing on behalf of the Company, the Company has complied with the conditions and covenants provided in the Indenture, particularly Articles 10 and 12 thereof, necessary for the Guarantors to be released from their Subsidiary Guarantees as of the date hereof as provided in the terms of the Indenture. IN WITNESS WHEREOF, the undersigned corporations have executed this Certificate to be effective as of August 21, 1998. HOMEGOLD FINANCIAL, INC. By: /s/ Kevin J. Mast ------------------------------------ Name: Kevin J. Mast ---------------------------------- Its: Chairman of the Board, President, VICE PRESIDENT (circle one) By: /s/ Keith B. Giddens ------------------------------------ Name: Keith B. Giddens, President ---------------------------------- Its: EX-4 11 EXHIBIT 4.1.6.1 [Wyche, Burgess, Freeman &Parham letterhead] (864) 242-8200 November 13, 1998 Bankers Trust Company Four Albany Street New York, NY 10015 Attn: Ms. Sandra Shaffer Corporate Trust & Agency Group RE: Release of Emergent Business Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc. (each a "Guarantor" and collectively, the "Guarantors") from their guarantees (each a "Guarantee" and collectively, the "Guarantees") of the 10-3/4% Senior Notes, due 2004, Series A and Series B (the "Notes") of HomeGold Financial, Inc. (f/k/a Emergent Group, Inc., hereinafter, the "Company") Dear Ladies & Gentlemen: We have acted as counsel to the Company, a South Carolina corporation, and each of the Guarantors, also South Carolina corporations, for the issuance of the Company's Notes and the Guarantees thereof and for the Sale described below. The Notes and Guarantees were issued pursuant to an indenture dated September 23, 1997 (the "Indenture") between the Company, the Subsidiary Guarantors (as defined therein and three of which are the Guarantors discussed herein) and you, Bankers Trust Company, as trustee (the "Trustee"). Substantially all of the assets of the Guarantors have been sold to TransAmerica Business Credit Corporation ("TransAmerica") and certain subsidiaries thereof (collectively, the "Buyers") for cash (the "Sale") pursuant to the terms of an Asset Purchase Agreement dated October 2, 1998 by and among TransAmerica and certain subsidiaries thereof, the Guarantors, Reedy River Ventures Limited Partnership and the Company (the "Asset Purchase Agreement"). The Sale closed on the date hereof. In this connection, we have examined the Notes, the Guarantees and the Indenture, in particular, but not limited to, Article 12 of the Indenture titled "Subsidiary Guarantee," Section 1203 thereof titled "Release of Subsidiary Guarantors," Article 10 thereof titled "Covenants," Section 1013 thereof titled "Limitation on Sales of Assets" and the definitional provisions of the Indenture relating thereto. We have also examined in this connection, the Asset Purchase Agreement and originals or copies of such corporate documents and records of the Company and the Guarantors, including but not limited to documents pertaining to the Sale, certificates of public officials, certificates of the Company, the Guarantors or any officer thereof and such other documents as we have deemed relevant and necessary as the basis for this opinion and statement. With respect to matters of fact, we have relied upon certificates of public officials, certificates of the Company, the Guarantors or any officer thereof and oral statements of the officers of the Company and the Guarantors and have assumed, without independent investigation, the accuracy of the factual statements made and the information contained in such certificates or statements. We have assumed, without investigation, the genuiness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to authentic original documents of all documents submitted to us as copies, and the accuracy and completeness of all documents made available to us by the Company or the Guarantors. We have assumed, without investigation, the legal capacity of all persons. We have assumed, without investigation, that there has not been any mutual mistake of fact or misunderstanding. With respect to agreements, instruments and other documents executed by entities or individuals other than or in addition to the Company or the Guarantors, we have assumed, without investigation, the power and authority of any such other entity or individual to enter into and perform all of its, her or his obligations under such agreements, instruments and other documents, the due execution and delivery by each such entity or individual of such agreements, instruments and other documents and that such agreements, instruments and other documents are the valid, binding and enforceable obligations of each other such entity or individual. In our opinion, we have made such examination or investigation as is necessary to enable us to express an informed opinion as set forth below. Based on and subject to the foregoing, and subject to the comments, limitations and qualifications set forth below, it is our opinion that the Company and the Guarantors have complied with all covenants and conditions of the Indenture, particularly Articles 10 and 12 thereof, necessary for the Guarantors to be released from their Guarantees as of the date hereof pursuant to the terms of the Indenture. We do not herein intend to express any opinion, statement or belief as to any matter governed by (or that purports to be governed by) any law other than, and our opinions, statements and beliefs are limited solely to, the existing laws of the State of South Carolina and the existing Federal laws of the United States of America. We express no opinion with regard to any matter that is or may be (or that purports to be) governed by the law of any other state or jurisdiction. The law covered by the opinions expressed herein does not include any statute, ordinance, decision, rule or regulation of any political subdivision of any State. We note that the Indenture, the Notes and the Guarantees by their terms are to be governed by the laws of the State of New York, and for purposes hereof, we have assumed that the laws of the State of New York (and the interpretation of such laws) are identical to South Carolina law. We further express no opinion as to any matter governed by or arising under the South Carolina Uniform Securities Act, the securities laws of any other State, any environmental law, the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act, as amended, the Federal Power Act, as amended, or any rule or regulation promulgated under any of the foregoing laws. No opinion is given as to any choice-of-law provision contained in the Indenture, the Notes, the Guarantees or any other document. This letter is rendered as of the date hereof and applies only to matters specifically covered by this letter, and we disclaim any continuing responsibility for matters occurring after the date of this letter or any obligation to update this letter. This opinion is limited to the matters expressly set forth herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein. This opinion letter is being provided to you in connection with the release of the Guarantors from their Guarantees and is not to be used, circulated, quoted or otherwise relied upon by any other person or entity, or for any other purpose, without our express written consent. Very truly yours, WYCHE, BURGESS, FREEMAN & PARHAM, P.A. /s/ Wyche, Burgess, Freeman & Parham, P.A. cc: Kevin J. Mast Mark Keegan, Esq. EX-4 12 EXHIBIT 4.1.6.2 RESOLUTIONS BY UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF EMERGENT BUSINESS CAPITAL, INC. PERTAINING TO SALE OF ASSETS TO TRANSAMERICA BUSINESS CREDIT CORPORATION The board of directors (the "Board") of Emergent Business Capital, Inc. (the "Company") hereby adopts the following resolutions by unanimous written consent, waiving any requirement of notice and a meeting, to be effective as of October 2, 1998: WHEREAS, the Board has examined preliminary drafts and an execution copy of that certain asset purchase agreement by and among TransAmerica Business Credit Corporation ("TransAmerica") and certain subsidiaries thereof, the sellers named therein and HomeGold Financial, Inc. (the "Agreement"); and WHEREAS, the Board believes that it is in the best interest of the Company and its shareholder to sell substantially all of its assets (including all of its ownership interest in Emergent Business Capital Holdings Corporation) to TransAmerica or certain of its subsidiaries pursuant to the terms of the Agreement; and WHEREAS, the Board has made such investigation as it believes necessary to determine the fairness of the consideration to be received by the Company in exchange for the assets to be sold pursuant to the Agreement; NOW THEREFORE, be it resolved as follows: RESOLVED, that the Company is hereby authorized to enter into and perform its obligations under the Agreement; RESOLVED, that the Board believes that the consideration to be received by the Company in exchange for the assets to be sold pursuant to the Agreement is at least equal to the fair market value of such assets; RESOLVED, that the President, any Vice President, Secretary, any Assistant Secretary, Treasurer and any Assistant Treasurer (collectively, the "Officers"), and each of the foregoing persons, are hereby authorized to execute and deliver the Agreement on behalf of the Company and to take or cause to be taken such other actions and execute or cause to be executed such other documents as may be necessary, in such Officer's reasonable discretion, to effectuate the purposes of these resolutions and the transactions contemplated in the Agreement; RESOLVED, that these resolutions may be executed in multiple counterparts which taken together shall constitute a single document. IN WITNESS WHEREOF, the members of the Board have set their signatures below: THE BOARD OF DIRECTORS OF EMERGENT BUSINESS CAPITAL, INC. /s/ Keith B. Giddens /s/ Kevin J. Mast - -------------------------------------------------------------------------------- Keith B. Giddens Kevin J. Mast /s/ John M. Sterling, Jr. - ------------------------- John M. Sterling, Jr. CONSENT OF SOLE SHAREHOLDER The undersigned, being the sole shareholder of Emergent Business Capital, Inc., hereby consents to the foregoing resolutions waiving any requirement of notice and a meeting, to be effective as of October 2, 1998. HOMEGOLD FINANCIAL, INC. By: /s/ John M. Sterling, Jr. -------------------------------- John M. Sterling, Jr. Chairman of the Board Chief Executive Officer EX-4 13 EXHIBIT 4.1.6.3 RESOLUTIONS BY UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF EMERGENT BUSINESS CAPITAL EQUITY GROUP, INC. PERTAINING TO SALE OF ASSETS TO TRANSAMERICA BUSINESS CREDIT CORPORATION The board of directors (the "Board") of Emergent Business Capital Equity Group, Inc. (the "Company") hereby adopts the following resolutions by unanimous written consent, waiving any requirement of notice and a meeting, to be effective as of October 2, 1998: WHEREAS, the Board has examined preliminary drafts and an execution copy of that certain asset purchase agreement by and among TransAmerica Business Credit Corporation ("TransAmerica") and certain subsidiaries thereof, the sellers named therein and HomeGold Financial, Inc. (the "Agreement"); and WHEREAS, the Board believes that it is in the best interest of the Company and its shareholder to sell substantially all of its assets to TransAmerica or certain of its subsidiaries pursuant to the terms of the Agreement; and WHEREAS, the Board has made such investigation as it believes necessary to determine the fairness of the consideration to be received by the Company in exchange for the assets to be sold pursuant to the Agreement; NOW THEREFORE, be it resolved as follows: RESOLVED, that the Company is hereby authorized to enter into and perform its obligations under the Agreement; RESOLVED, that the Board believes that the consideration to be received by the Company in exchange for the assets to be sold pursuant to the Agreement is at least equal to the fair market value of such assets; RESOLVED, that the President, any Vice President, Secretary, any Assistant Secretary, Treasurer and any Assistant Treasurer (collectively, the "Officers"), and each of the foregoing persons, are hereby authorized to execute and deliver the Agreement on behalf of the Company and to take or cause to be taken such other actions and execute or cause to be executed such other documents as may be necessary, in such Officer's reasonable discretion, to effectuate the purposes of these resolutions and the transactions contemplated in the Agreement; RESOLVED, that these resolutions may be executed in multiple counterparts which taken together shall constitute a single document. IN WITNESS WHEREOF, the members of the Board have set their signatures below: THE BOARD OF DIRECTORS OF EMERGENT BUSINESS CAPITAL EQUITY GROUP, INC. /s/ Keith B. Giddens /s/ Kevin J. Mast - -------------------------------------------------------------------------------- Keith B. Giddens Kevin J. Mast /s/ John M. Sterling, Jr. - ----------------------------- John M. Sterling, Jr. CONSENT OF SOLE SHAREHOLDER The undersigned, being the sole shareholder of Emergent Business Capital Equity Group, Inc., hereby consents to the foregoing resolutions waiving any requirement of notice and a meeting, to be effective as of October 2, 1998. HOMEGOLD FINANCIAL, INC. By: /s/ John M. Sterling, Jr. -------------------------------- John M. Sterling, Jr. Chairman of the Board Chief Executive Officer EX-4 14 EXHIBIT 4.1.6.4 [HomeGold Financial, Inc. letterhead] November 13, 1998 Bankers Trust Company Four Albany Street New York, NY 10015 Attn: Ms. Ednora Lenares Corporate Trust and Agency Group RE: Release of Emergent Business Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a/ Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc. (each a "Guarantor" and collectively, the "Guarantors") from their guarantees (the "Guarantees") of HomeGold Financial, Inc.'s 10-3/4% Senior Notes, due 2004 (the "Notes") Dear Ladies & Gentlemen: As of the date hereof, substantially all of the assets of the Guarantors were sold for cash (the "Sale") to TransAmerica Business Credit Corporation ("TransAmerica") and certain of its subsidiaries (collectively, the "Buyers") as part of the closing of the transactions contemplated in that certain Asset Purchase Agreement dated October 2, 1998 (the "Asset Purchase Agreement") by and among TransAmerica and certain subsidiaries thereof, the Sellers named therein and HomeGold Financial, Inc. (f/k/a Emergent Group, Inc., hereinafter, the "Company"). All of the cash proceeds from the sale of the Guarantors' assets were used, as of the date hereof, to reduce the outstanding balance and the total commitment under that certain Mortgage Loan Warehousing Agreement dated June 30, 1998, by and among HomeGold, Inc. and Carolina Investors, Inc. as Borrowers, the Financial Institutions Party Thereto as Lenders and The CIT Group/Business Credit, Inc. as Administrative Agent. The Guarantors, HomeGold, Inc. and Carolina Investors, Inc. are South Carolina corporations, wholly-owned subsidiaries of the Company and "Subsidiary Guarantors" as defined in the indenture for the Notes and the Subsidiary Guarantees thereof dated September 23, 1997 (the "Indenture"), between the Company, the Subsidiary Guarantors (as defined in the Indenture) and Bankers Trust Company, as trustee (the "Trustee"). The purpose of this letter is to inform you that as of the date hereof, the Guarantors are released from their Guarantees (which are Subsidiary Guarantees as defined in the Indenture) as provided in Section 1203 of the Indenture as a result of the Sale. As required by such Section 1203, please find enclosed an Officers' Certificate (as defined in the Indenture), an Opinion of Counsel (as defined in the Indenture) and Board Resolutions (as defined in the Indenture) of the Guarantors pertaining to the Sale. Please sign below one copy of this letter and return it to us to indicate your acknowledgment of the release of the Guarantors from their Guarantees. With best regards, I am Very truly yours, /s/ Kevin J. Mast -------------------------------- Kevin J. Mast Vice President HomeGold Financial, Inc. Bankers Trust Company hereby acknowledges receipt of this letter and the Officers' Certificate, Opinion of Counsel and Board Resolutions mentioned herein and acknowledges that Emergent Business Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc. are released thereby from their Guarantees (which are Subsidiary Guarantees as defined in the Indenture) of the Notes. BANKERS TRUST COMPANY Date: 11/16/98 -------- By: /s/ Ednora G. Linares ----------------------- Name: Ednora G. Linares --------------------- Title: Assistant Vice President ------------------------ EX-4 15 EXHIBIT 4.1.6.5 RESOLUTIONS BY UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF EMERGENT COMMERCIAL MORTGAGE, INC. PERTAINING TO SALE OF ASSETS TO TRANSAMERICA BUSINESS CREDIT CORPORATION The board of directors (the "Board") of Emergent Commercial Mortgage, Inc. (the "Company") hereby adopts the following resolutions by unanimous written consent, waiving any requirement of notice and a meeting, to be effective as of October 2, 1998: WHEREAS, the Board has examined preliminary drafts and an execution copy of that certain asset purchase agreement by and among TransAmerica Business Credit Corporation ("TransAmerica") and certain subsidiaries thereof, the sellers named therein and HomeGold Financial, Inc. (the "Agreement"); and WHEREAS, the Board believes that it is in the best interest of the Company and its shareholder to sell substantially all of its assets to TransAmerica or certain of its subsidiaries pursuant to the terms of the Agreement; and WHEREAS, the Board has made such investigation as it believes necessary to determine the fairness of the consideration to be received by the Company in exchange for the assets to be sold pursuant to the Agreement; NOW, THEREFORE, be it resolved as follows: RESOLVED, that the Company is hereby authorized to enter into and perform its obligations under the Agreement; RESOLVED, that the Board believes that the consideration to be received by the Company in exchange for the assets to be sold pursuant to the Agreement is at least equal to the fair market value of such assets; RESOLVED, that the President, any Vice President, Secretary, any Assistant Secretary, Treasurer and any Assistant Treasurer (collectively, the "Officers"), and each of the foregoing persons, are hereby authorized to execute and deliver the Agreement on behalf of the Company and to take or cause to be taken such other actions and execute or cause to be executed such other documents as may be necessary, in such Officer's reasonable discretion, to effectuate the purposes of these resolutions and the transactions contemplated in the Agreement; RESOLVED, that these resolutions may be executed in multiple counterparts which taken together shall constitute a single document. IN WITNESS WHEREOF, the members of the Board have set their signatures below: THE BOARD OF DIRECTORS OF EMERGENT COMMERCIAL MORTGAGE, INC. /s/ Keith B. Giddens /s/ Kevin J. Mast - ----------------------------------------------------- Keith B. Giddens Kevin J. Mast /s/ John M. Sterling, Jr. - ------------------------- John M. Sterling, Jr. CONSENT OF SOLE SHAREHOLDER The undersigned, being the sole shareholder of Emergent Commercial Mortgage, Inc., hereby consents to the foregoing resolutions waiving any requirement of notice and a meeting, to be effective as of October 2, 1998. HOMEGOLD FINANCIAL, INC. By: /s/ John M. Sterling, Jr. -------------------------- John M. Sterling, Jr. Chairman of the Board Chief Executive Officer EX-4 16 EXHIBIT 4.1.6.6 HOMEGOLD FINANCIAL, INC. EMERGENT BUSINESS CAPITAL, INC. EMERGENT BUSINESS CAPITAL MORTGAGE, INC. CERTIFICATE OF COMPLIANCE WITH THE INDENTURE DATED SEPTEMBER 23, 1997 The undersigned companies, HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.), a South Carolina corporation (the "Company"), and Emergent Business Capital, Inc., Emergent Business Capital Equity Group, Inc. (f/k/a Emergent Equity Advisors, Inc.) and Emergent Commercial Mortgage, Inc., all three being South Carolina corporations (each a "Guarantor" and collectively, the "Guarantors"), hereby certify to Bankers Trust Company (the "Trustee"), as of the date hereof, that: (1) Purpose. This Certificate is being issued to the Trustee as required by Sections 102 and 1203 of the indenture dated September 23, 1997 (the "Indenture") between the Company, the Subsidiary Guarantors (as defined in the Indenture and three of which are the Guarantors and the Trustee pertaining to the Company's 10-3/4% Senior Notes, due 2004, Series A and Series B, as guaranteed by the Subsidiary Guarantors (collectively, the "Notes") in connection with the release of the Guarantors from their guarantees of the Notes (the "Subsidiary Guarantees") by reason of the sale of the sale of substantially all of the assets of the Guarantors to TransAmerica Business Credit Corporation ("TransAmerica") and certain subsidiaries thereof (collectively, the "Buyers") for cash (the "Sale") pursuant to that certain Asset Purchase Agreement dated October 2, 1998, by and among TransAmerica and certain subsidiaries thereof, the Guarantors, Reedy River Ventures Limited Partnership and the Company (the "Asset Purchase Agreement"), which transaction closed as of the date hereof. The representations, warranties and certifications set forth herein shall survive the delivery of this Certificate. (2) Knowledge of Conditions and Covenants in the Indenture. The officers signing on behalf of the undersigned companies have read the Notes and the Indenture, particularly Article 12 thereof titled "Subsidiary Guarantee" and Section 1203 thereof titled "Release of Subsidiary Guarantors," Article 10 thereof titled "Covenants" and Section 1013 thereof titled "Limitation on Sales of Assets" and all definitions in the Indenture relating thereto. (3) Nature and Scope of Examination or Investigation. In addition to the examination and investigation described in paragraph (2) above, the officers signing on behalf of the undersigned companies have examined original or copies of the Asset Purchase Agreement and such corporate documents and records of the Company and the Guarantors, including but not limited to documents pertaining to the Sale, and such other documents as the officers signing on behalf of the undersigned companies have deemed relevant and necessary as the basis for this opinion and statement. (4) Belief that Examination or Investigation is Adequate to Certify Compliance. In the opinion of the officers signing on behalf of the undersigned companies, such officers have made such examination or investigation as is necessary to enable them, on behalf of the undersigned companies, to express an informed opinion as to whether or not the relevant conditions and covenants of the Indenture have been complied with by the Company and the Guarantors in order for the Guarantors to be released from their Subsidiary Guarantees as provided in the terms of the Indenture. (5) Opinion of Compliance with Indenture. In the opinion of the officers signing on behalf of the undersigned companies, the Company and the Guarantors have complied with the conditions and covenants provided in the Indenture, particularly Articles 10 and 12 thereof, necessary for the Guarnators to be released from their Subsidiary Guarantees as of the date hereof as provided in the terms of the Indenture. The Board of Directors of each of the Guarantors has determined in good faith that each Guarantor has received in the Sale cash consideration for the assets sold at least equal to fair market value of such assets as evidenced by the Board Resolutions attached hereto, which Resolutions were duly entered into in compliance with the requirements of the Certificate of Incorporation and Bylaws of each Guarantor as applicable and which remain in full force and effect without amendment or modification. IN WITNESS WHEREOF, the undersigned corporations have executed this Certificate as of November 13, 1998. HOMEGOLD FINANCIAL, INC. By:/s/ Keith B. Giddens ---------------------- Name: Keith B. Giddens ------------------ Its: Chairman of the Board, President, ----------------------------------- Vice President (circle one) ----------------------------------- By:/s/ Kevin J. Mast ------------------- Name: Kevin J. Mast ------------------- Its: Treasurer, Assistant Treasurer, ---------------------------------- Secretary, Assistant Secretary (circle one) SIGNATURES CONTINUED ON FOLLOWING PAGE EMERGENT BUSINESS CAPITAL, INC. By:/s/ Keith B. Giddens ---------------------- Name: Keith B. Giddens ------------------ Its: Chairman of the Board, President, ----------------------------------- Vice President (circle one) ----------------------------------- By:/s/ Kevin J. Mast ------------------- Name: Kevin J. Mast ------------------- Its: Treasurer, Assistant Treasurer, ---------------------------------- Secretary, Assistant Secretary (circle one) By:/s/Keith B. Giddens ---------------------- Name: Keith B. Giddens ------------------ Its: Chairman of the Board, President, ----------------------------------- Vice President (circle one) ------------------------------------ By:/s/Kevin J. Mast ------------------- Name: Kevin J. Mast ------------------- Its: Treasurer, Assistant Treasurer, ---------------------------------- Secretary, Assistant Secretary (circle one) EMERGENT COMMERCIAL MORTGAGE, INC. By:/s/ Keith B. Giddens ---------------------- Name: Keith B. Giddens ------------------ Its: Chairman of the Board, President, ----------------------------------- Vice President (circle one) ----------------------------------- By:/s/ Kevin J. Mast ------------------- Name: Kevin J. Mast ------------------- Its: Treasurer, Assistant Treasurer, ---------------------------------- Secretary, Assistant Secretary (circle one) EX-10 17 EXHIBIT 10.6.2 FIRST AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT First Amendment, dated as of August 24, 1998 to the Mortgage Loan Warehousing Agreement, dated as of June 30, 1998 (the "Loan Agreement"), by and among HomeGold, Inc., a South Carolina corporation (the "HomeGold"), Carolina Investors, Inc., a South Carolina corporation ("Carolina" and together with HomeGold, each a "Borrower" and collectively, the "Borrowers"), the lenders listed on Schedule I hereto under the captions "Continuing Lenders" (the "Continuing Lenders") and "Additional Lenders" (the "Additional Lenders" and together with the Continuing Lenders, each a "Lender" and collectively the "Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in such capacity, the "Agent"). The Borrowers, the Lenders and the Agent desire to (i) add the Additional Lenders as parties to the Loan Agreement and (ii) amend certain other terms and conditions hereafter set forth. In addition, the Continuing Lenders wish to assign a portion of their interests in the Total Commitment and the Loans outstanding under the Loan Agreement to the Additional Lenders and the Additional Lenders wish to accept such assignments. Accordingly, the Borrowers, the Agent and the Lenders hereby agree as follows: 1. Definitions. All capitalized terms used herein and not otherwise defined herein are used herein as defined in the Loan Agreement. 2. Wet Mortgage Loan Sublimit. Article XI to the Loan Agreement is hereby amended to include a defined term of "Wet Mortgage Loan Sublimit" therein to read as follows: "'Wet Mortgage Loan Sublimit' shall mean, at the time of determination, the maximum amount of Wet Mortgage Loans that qualify for inclusion in the Borrowing Base, as determined in accordance with the proviso to subparagraph (n) of the definition of 'Eligible Mortgage Loan'." 3. Majority Lenders. The definition of the term "Majority Lenders" set forth in Article XI to the Loan Agreement is hereby amended in its entirety to read as follows: "'Majority Lenders' shall mean (i) prior to the occurrence of an Event of Default, those Lenders holding sixty-six and two-thirds percent (66-2/3%) of the Total Commitment, and (ii) after the occurrence and during the continuance of an Event of Default, those Lenders holding sixty-six and two-thirds percent (66- 2/3%) of the Loans outstanding under the Agreement, provided that, with respect to (i) and (ii) above, until such time as the Pro Rata Share of CIT is less than sixty-six and two-thirds percent (66-2/3%), CIT shall not constitute the Majority Lender without being joined by one additional Lender. 4. Amendments and Waivers. Section 10.03 of the Loan Agreement is hereby amended by deleting the reference to "Section 10.08" set forth in clause (v) of Section 10.03 and substituting in its place a reference to "Section 9.08". 5. Confidentiality. Section 10.15 of the Loan Agreement is hereby amended by deleting the third sentence thereof and substituting in its place the following: "Subject to the other provisions of this Section 10.15, each Lender and the Administrative Agent may disclose confidential information to its Affiliates or any of its officers, directors, employees, attorneys, accountants or other professionals engaged by any Lender, its Affiliates or the Administrative Agent only after determining that such third party has been instructed to hold such information in confidence to the same extent as if it were a Lender." 6. Assignments. (a) On and as of the Amendment Effective Date (as hereinafter defined), each of the Continuing Lenders shall assign and each of the Additional Lenders shall purchase, at the principal amount thereof, such interests in the Loans outstanding on such date as shall be necessary in order that, after giving effect to all such assignments and purchases, the Loans outstanding will be held by the Lenders ratably in accordance with their Pro Rata Shares in the Total Commitment, as set forth in Annex I to this Amendment. Such assignments and purchases shall be without recourse, representation or warranty, except that (i) each Continuing Lender represents that it is the legal and beneficial owner of the interests assigned by it free and clear of any Lien and (ii) paragraphs 2 (other than clauses (i) and (v) of the first paragraph thereof), 4 and 5 of Exhibit F to the Loan Agreement are hereby incorporated by reference as if set forth herein and each Continuing Lender shall be deemed to have made the representations, warranties and statements of Assignor in such paragraphs and each Additional Lender shall be deemed to have made the representations, warranties and statements of Assignee in such paragraphs. (b) On the Amendment Effective Date (i) the Additional Lenders shall pay the purchase price for the Loans purchased by it pursuant to paragraph (a) of this Section 6 by wire transfer of immediately available funds to the Agent in New York, New York, not later than 12:00 noon, New York City time, and (ii) the Agent shall promptly pay to each Continuing Lender, out of the amounts received by it pursuant to clause (i) of this paragraph (b), the purchase price for the interests assigned by it pursuant to such paragraph (a) by wire transfer of immediately available funds to an account designated by such Lender. (c) The Borrowers hereby consent to the assignments and purchases provided for in paragraphs (a) and (b) of this Section 6 and agree that each Additional Lender shall have all of the rights of a Lender under the Loan Agreement with respect to the interests purchased by it pursuant to such paragraphs. Commencing on the Amendment Effective Date, each Additional Lender will be a party to the Loan Agreement, agrees to be bound by the terms -2- and conditions of the Loan Agreement and the Loan Documents and will have all of the rights and obligations of a Lender under the Loan Agreement and the Loan Documents. 6. Delivery of Notes. The Continuing Lenders shall deliver to the Agent, for delivery to and cancellation by the Borrowers, all Notes issued by the Borrowers and held by the Continuing Lenders under the Loan Agreement (collectively, the "Old Notes"), which Old Notes are hereby deemed cancelled effective from delivery of the New Notes to the Agent. The Borrowers shall execute and deliver to the Agent for the account of each Lender the Notes which such Lender is entitled to receive pursuant to Section 2.02 of the Loan Agreement, in the form of Exhibit A thereto and in the principal amount for each Lender equal to its Pro Rata Share of the Total Commitment, as set forth in Annex I to this Amendment (the "New Notes"). The Agent shall release and deliver the Old Notes to the Borrowers for cancellation and deliver the New Notes to the Lenders. 7. Accrued Interest and Fees. At the times and pursuant to the terms contained in the Loan Agreement, the Agent will pay all accrued interest and all fees payable pursuant to Section 2.07(e) of the Loan Agreement to the Lenders entitled thereto after giving effect to the assignments and purchases made pursuant to Section 6 above. 8. Schedule. Schedule I to the Loan Agreement is hereby amended in its entirety to read as set forth in Annex I to this Amendment. 9. Conditions to Effectiveness. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions shall have been satisfied being herein called the "Amendment Effective Date"): (i) The representations and warranties contained in this Amendment and in Article V of the Loan Agreement shall be true and correct on and as of the Amendment Effective Date as though made on and as of such date (except where such representations and warranties relate to an earlier date in which case such representations and warranties shall be true and correct as of such earlier date); no Event of Default or Default shall have occurred and be continuing on the Amendment Effective Date, or result from this Amendment becoming effective in accordance with its terms. (ii) The Agent shall have received counterparts of this Amendment which bear the signatures of the Borrowers and each of the Lenders. (iii) The Agent shall have received the New Notes, duly executed by each of the Borrowers. (iv) The Agent shall have received an acknowledgment and consent to this Amendment, substantially in the form of Annex II attached hereto, duly executed by EGI and EMC-TN. (v) All legal matters incident to this Amendment shall be satisfactory to the Agent and its counsel. -3- 10. Representations and Warranties. Each of the Borrowers represents and warrants to the Lenders as follows: (a) Each Borrower (i) is duly organized, validly existing and in good standing under the laws of the state of its organization and (ii) has all requisite power, authority and legal right to execute, deliver and perform this Amendment, the New Notes, all other documents executed by it in connection with this Amendment, and to perform the Loan Agreement, as amended hereby. (b) The execution, delivery and performance by the Borrowers of this Amendment and all other documents executed by it in connection with this Amendment, the execution, delivery and performance by each Borrower of the New Notes and the performance by the Borrowers of the Loan Agreement as amended hereby (i) have been duly authorized by all necessary action, (ii) do not and will not violate or create a default under any Borrower's organizational documents, any applicable law or any contractual restriction binding on or otherwise affecting any Borrower or any of such Borrower's properties, and (iii) except as provided in the Loan Documents, do not and will not result in or require the creation of any Lien, upon or with respect to any Borrower's property. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or other regulatory body is required in connection with the due execution, delivery and performance by any of the Borrowers of this Amendment and all other documents executed by it in connection with this Amendment, the execution, delivery and performance by each Borrower of the New Notes and the performance by the Borrowers of the Loan Agreement as amended hereby. (d) This Amendment and the Loan Agreement, as amended hereby, and all other documents executed in connection with this Amendment constitute the legal, valid and binding obligations of the Borrowers party thereto, enforceable against such Persons in accordance with their terms except to the extent the enforceability thereof may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect affecting generally the enforcement of creditors' rights and remedies and by general principles of equity. (e) The representations and warranties contained in Article V of the Loan Agreement are correct on and as of the Amendment Effective Date as though made on and as of the Amendment Effective Date (except to the extent such representations and warranties expressly relate to an earlier date), and no Event of Default or Default, has occurred and is continuing on and as of the Amendment Effective Date. 11. Continued Effectiveness of Loan Agreement. Each of the Borrowers hereby (i) confirms and agrees that each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the Amendment Effective Date of this Amendment all references in any such Loan Document to "the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this -4- Amendment, and (ii) confirms and agrees that to the extent that any such Loan Document purports to assign or pledge to the Agent, or to grant to the Agent a Lien on any collateral as security for the Obligations of the Borrowers from time to time existing in respect of the Loan Agreement and the Loan Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and confirmed in all respects. 12. Miscellaneous. a. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. b. Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. c. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. d. The Borrowers will pay on demand all reasonable out-of-pocket costs and expenses of the Agent in connection with the preparation, execution and delivery of this Amendment, including, without limitation, the reasonable fees, disbursements and other charges of Schulte Roth & Zabel LLP, counsel to the Agent. -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. HOMEGOLD, INC. By: -------------------------------- Name: ------------------------------ Title: ------------------------------ CAROLINA INVESTORS, INC. By: -------------------------------- Name: ------------------------------ Title: ------------------------------ AGENT AND LENDER ---------------- THE CIT GROUP/BUSINESS CREDIT, INC., as Agent By: -------------------------------- Name: ------------------------------ Title: ----------------------------- -6- LENDERS DEUTSCHE FINANCIAL SERVICES CORPORATION By: -------------------------------------- Name: ------------------------------------- Title: ----------------------------------- Address: 3225 Cumberland Boulevard, Suite 700 Atlanta, GA 30339 Attn: William D. Kearney Senior Vice President Telephone: (770) 933-8824 Telecopier: (770) 933-2993 Wiring Instructions: SunTrust Bank, N.A. (Atlanta, GA) ABA #: 061-000-104 AC#: 8801873384 REF: HomeGold -7- BNY FINANCIAL CORPORATION By: -------------------------------------- Name: ------------------------------------- Title: ----------------------------------- Address: 1290 Avenue of the Americas New York, New York 10104 Attn: Frank Imperato Vice President Telephone: (212) 408-7026 Telecopier: (212) 408-7162 Wiring Instructions: The Bank of New York 101 Barclay Street, New York, NY ABA #: 021-000-018 AC#: 8090653114 REF: HomeGold, Inc. ATTN: Frank Imperato Vice President -8- SCHEDULE I CONTINUING LENDERS: - ------------------- The CIT Group/Business Credit, Inc. ADDITIONAL LENDERS: - ------------------- Deutsche Financial Services Corporation BNY Financial Corporation ANNEX I SCHEDULE I TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF JUNE 30, 1998
Commitment Schedule ------------------- Lender Maximum Commitment Percentage Share ------ ------------------ ---------------- The CIT Group/Business Credit, $150,000,000.00 75.00% Inc. Deutsche Financial Services 25,000,000.00 12.50% Corporation BNY Financial Corporation 25,000,000.00 12.50% ============= ====== TOTAL COMMITMENT $200,000,000.00 100.00%
ANNEX II ACKNOWLEDGMENT AND CONSENT -------------------------- The undersigned (each a "Loan Party"), each as a party to one or more Loan Documents, as defined in the Mortgage Loan Warehousing Agreement dated as of June 30, 1998 (the "Loan Agreement"), by and among HomeGold, Inc., Carolina Investors, Inc., the lenders parties thereto (the "Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in such capacity, the "Agent"), each hereby (i) acknowledges and consents to the First Amendment dated the date hereof (the "Amendment", all terms defined therein being used herein as defined therein) to the Loan Agreement; (ii) confirms and agrees that each Loan Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the Amendment Effective Date all references in any such Loan Documents to "the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by the Amendment; and (iii) confirms and agrees that to the extent that any such Loan Document purports to assign or pledge to the Agent, or to grant to the Agent a security interest in or lien on, any collateral as security for the obligations of the Loan Party from time to time existing in respect of the Loan Documents, such pledge, assignment and/or grant of a security interest or lien is hereby ratified and confirmed in all respects as security for, in addition to the other obligations secured thereby, all obligations of such Loan Party outstanding upon the taking effect of the Amendment. Dated: August __, 1998 HOMEGOLD FINANCIAL, INC. (f/k/a Emergent Group, Inc.) By: ________________________ Title: _______________________ EMERGENT MORTGAGE CORPORATION OF TENNESSEE By: ________________________ Title: _______________________ EX-10 18 EXHIBIT 10.6.3 SECOND AMENDMENT TO MORTGAGE LOAN WAREHOUSING AGREEMENT Second Amendment, dated as of December 24, 1998 to the Mortgage Loan Warehousing Agreement, dated as of June 30, 1998, as amended by the First Amendment, dated as of August 24, 1998 (as so amended, the "Loan Agreement"), by and among HomeGold, Inc., a South Carolina corporation (the "HomeGold"), Carolina Investors, Inc., a South Carolina corporation ("Carolina" and together with HomeGold, each a "Borrower" and collectively, the "Borrowers"), the financial institutions party thereto (each a "Lender" and collectively the "Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). The Borrowers, the Lenders and the Administrative Agent desire to amend certain terms, covenants and conditions set forth in the Loan Agreement. In addition, the Borrowers have requested the Lenders to consent to certain actions taken by Borrowers. Accordingly, the Borrowers, the Administrative Agent and the Lenders hereby agree as follows: 1. Definitions. All capitalized terms used herein and not otherwise defined herein are used herein as defined in the Loan Agreement. 2. Commitments. (a) The maximum aggregate principal amount of the revolving credit facility set forth in the STATEMENT OF PURPOSE of the Loan Agreement is hereby amended by deleting the two references to "$200,000,000" contained therein and substituting in lieu thereof a reference to "$100,000,000". (b) Paragraph (d) of Section 10.13 to the Loan Agreement is hereby amended by deleting each reference to "Schedule I" contained therein and substituting in lieu thereof "Schedule IA". (c) The definition of the terms "Commitment" and "Total Commitment" in Article XI of the Loan Agreement are hereby amended by deleting the words "Schedule I to this Agreement" and substituting in lieu thereof "Schedule IA to this Agreement". 3. Indebtedness. The definition of the terms "Permitted Other Debt" and "Permitted Secured Debt" in Article XI of the Loan Agreement are hereby amended by deleting the words "Exhibit N attached hereto" and substituting in lieu thereof "Exhibit N-A attached hereto". 4. Interest Rates. (a) The definition of the term "Applicable Eurodollar Rate Margin" set forth in Article XI to the Loan Agreement is hereby deleted in its entirety. (b) The definition of the term "Applicable Prime Rate Margin" set forth in Article XI to the Loan Agreement is hereby amended in its entirety to read as follows: "'Applicable Prime Rate Margin' shall mean, with respect to a Prime Loan, 0.75%." (c) The definitions of the terms "Pricing Grid" and "Pricing Grid Effective Date" set forth in Article XI to the Loan Agreement are hereby deleted in their entirety. (d) Paragraph (a) of Section 2.05 to the Loan Agreement is hereby amended in its entirety to read as follows: "(a) Interest Rate. Each Loan which is a Prime Loan shall bear interest on the principal amount thereof from time to time outstanding from the date of such Loan, until such principal amount becomes due, at a rate per annum equal to the Prime Rate plus the Applicable Prime Rate Margin." 5. EGI. The definition of the term "EGI" set forth in Article XI to the Loan Agreement is hereby amended in its entirety to read as follows: "'EGI' shall mean HomeGold Financial, Inc., formerly known as Emergent Group, Inc., a South Carolina corporation." 6. Prepayment of Loans. (a) Section 2.06(d) of the Loan Agreement is hereby amended by deleting the first sentence thereof and substituting in its place the following: "The Companies shall have the right to sell Collateral for the fair market value thereof (or, with respect to Mortgage Loans, the Fair Market Value thereof), provided that (i) any such sale shall only be made with the prior written consent of the Administrative Agent after the occurrence and during the continuance of an Event of Default, and (ii) the Collateral Sale Proceeds (including, without limitation, proceeds from the sale of real estate acquired by any Company or any Subsidiary thereof by foreclosure, deed in lieu of foreclosure or by similar means) shall promptly and in any event within two (2) Business Days of the receipt thereof be paid to the Administrative Agent and applied to the repayment of the Obligations." (b) Section 2.06 of the Loan Agreement is hereby further amended by inserting paragraph (f) at the end thereof to read as follows: "(f) Except as otherwise expressly provided in this Section 2.06, payments with respect to any paragraph of this Section 2.06 are in addition to payments made or required to be made under any other paragraph of this Section 2.06. Prepayments of the Loans pursuant to this Section 2.06 shall be applied to the "A" Loans or the "B" Loans by the Administrative Agent, first, based upon the Company making such prepayment and, second, based upon such factors as the Administrative Agent deem -2- appropriate in the exercise of its reasonable business judgment (which factors may include the minimization or reduction of the payments required by Section 2.12 hereof)." 7. Chief Executive Office. Section 5.17 of the Loan Agreement is hereby amended by deleting the reference to "15 South Main Street, Suite 750, Greenville, South Carolina 29601" therein and substituting in lieu thereof "3901 Pelham Road, Greenville, South Carolina 29615". 8. License to Issue CII Debentures and Notes. Section 6.04 of the Loan Agreement is hereby amended by inserting a "(1)" before the word "Maintain" therein, and by inserting a new paragraph (2) after paragraph (1) to read as follows: "(2) Obtain and maintain all rights, privileges, licenses, approvals, franchises, properties and assets necessary to permit CII to issue its subordinated debentures and floating rate senior notes (as described in the definition of "CII Investor Obligations") or any similar debt securities, including, without limitation, all approvals with respect to the Securities and Exchange Commission or the Securities Commission of the State of South Carolina." 9. Agent's Accountants. (a) Section 6.05 of the Loan Agreement is hereby amended by deleting clause (ii) of paragraph (2) thereof (excluding, however, the proviso set forth in such paragraph (2)) and substituting in lieu thereof the following: "(ii) representatives of the Administrative Agent or any Lender (including, without limitation, Ernst & Young LLP or any other independent accountants retained by the Administrative Agent) to (x) conduct periodic operational audits of the business and operations of any Company, and (y) at such times as determined by Administrative Agent, review and analyze the Companies' business plan and make recommendations with respect to such plan and the implementation thereof, in the case of the Administrative Agent and Ernst & Young LLP or such other independent accountants retained by the Administrative Agent, at the Companies' expense; provided, that the terms of engagement of Ernst & Young LLP or such other independent accountants retained by the Administrative Agent for the purposes set forth in clause (y) above shall be mutually agreed upon by the Administrative Agent, the Companies and such independent accountants;" (b) Paragraph (2) of Section 6.05 of the Loan Agreement is hereby further amended by inserting the word "further," after the word "provided," following clause (ii) therein. 10. Subsidiaries. Section 7.06 of the Loan Agreement is hereby amended by inserting the phrase "HomeGold Realty, Inc.," between the phrases "EMC-TN," and "State Mortgage Originators" set forth therein. 11. Investments; Advances. (a) Section 7.07 of the Loan Agreement is hereby amended by inserting a new clause (D) after clause (C) therein and before the phrase "provided further," therein to read as follows: -3- "and (D) if the Companies receive cash net proceeds of $20,000,000 or more from the sale or other disposition of Mortgage Loans not included and not eligible for inclusion in the Borrowing Base, the Companies may, within 120 days of the receipt of such proceeds, make advances or loans to EGI in an aggregate amount not to exceed $10,000,000, the proceeds of which shall be used to effect a repurchase or redemption of EGI Notes, provided that, if the Companies receive less than $20,000,000 cash net proceeds from any such sale, no more than fifty percent (50%) of such cash net proceeds received by the Companies may be advanced or loaned to EGI to effect a repurchase or redemption of EGI Notes;" (b) Clause (C) of Section 7.07 of the Loan Agreement is hereby amended in its entirety to read as follows: "(C) each Company shall be permitted to make loans or advances to any other Company, provided that (i) the repayment of all such loans and advances is subordinated to the payment of the Obligations pursuant to the terms of and evidenced by one or more promissory notes substantially in the form of Exhibit O hereto, (ii) such notes shall be pledged to the Administrative Agent for the benefit of the Lenders, and (iii) HomeGold shall not make loans or advances to CII to the extent all or any portion of the proceeds of such loans or advances are to be distributed by CII, directly or indirectly, to EGI (the "Designated Loan") if the Designated Loan could not be made directly by HomeGold to EGI pursuant to the provisions of clause (D) of this Section;" 12. Dividends. Section 7.09 of the Loan Agreement is hereby amended by deleting the first proviso set forth therein and substituting in lieu thereof the following: "provided, however, that (A) no Company shall make any dividend or distribution under this Section 7.09 if, at the time of or after giving effect to such dividend or distribution, an Event of Default shall have occurred and be continuing, and (B) if the Companies receive cash net proceeds of $20,000,000 or more from the sale or other disposition of Mortgage Loans not included and not eligible for inclusion in the Borrowing Base, the Companies may, within 120 days of the receipt of such proceeds, make a dividend or other distribution to EGI in an aggregate amount not to exceed $10,000,000, the proceeds of which shall be used to effect a repurchase or redemption of EGI Notes, provided that, if the Companies receive less than $20,000,000 cash net proceeds from any such sale, no more than fifty percent (50%) of such cash net proceeds received by the Companies may be distributed to EGI to effect a repurchase or redemption of EGI Notes;" 13. Minimum Availability. Section 7.17 of the Loan Agreement is hereby amended by deleting the reference to "$10,000,000" set forth therein and substituting in lieu thereof a reference to "$20,000,000". -4- 14. CII Investor Obligations. Section 7.18 of the Loan Agreement is hereby amended in its entirety to read as follows: "Permit the aggregate outstanding principal amount of the CII Investor Obligations to be less than $100,000,000 at all times." 15. Events of Default. Paragraph (D) of Section 8.01 of the Loan Agreement is hereby amended by deleting the phrase ", or (iv)" contained therein and substituting in lieu thereof ", or (v)", and by inserting a new clause (iv) after clause (iii) therein and before the phrase ", or (v)", which new clause (iv) shall read as follows: ", (iv) the covenant contained in Section 6.04(2) of this Agreement and such default shall continue unremedied for a period of 60 days" 16. Exhibits. Exhibit N to the Loan Agreement is hereby amended in its entirety to read as set forth in Annex II to this Amendment, for the purpose of listing the indebtedness of the Borrowers to EGI as Permitted Other Debt. 17. Schedules. Schedule I to the Loan Agreement is hereby amended in its entirety to read as set forth in Annex I to this Amendment. Schedule III to the Loan Agreement is hereby deleted in its entirety. 18. Acknowledgement Regarding Elimination of LIBOR Option. The parties hereto acknowledge and agree that, from and after the Amendment Effective Date, the Borrowers shall not be entitled to borrow an Eurodollar Loan under the Loan Agreement or to request the Administrative Agent to convert any Prime Loan or any portion thereof to an Eurodollar Loan or to continue any existing Eurodollar Loan or any portion thereof into a subsequent Interest Period, notwithstanding any provisions set forth in the Loan Agreement to the contrary. From and after the Amendment Effective Date, the Borrowers shall only have the right to borrow Prime Loans under the Loan Agreement. 19. Conditions to Effectiveness. This Amendment shall become effective only upon satisfaction in full of the following conditions precedent (the first date upon which all such conditions shall have been satisfied being herein called the "Amendment Effective Date"): (i) The representations and warranties contained in this Amendment and in Article V of the Loan Agreement shall be true and correct on and as of the Amendment Effective Date as though made on and as of such date (except (i) with respect to the general financial condition of the Borrowers, the Guarantors or any of their Subsidiaries and (ii) where such representations and warranties relate to an earlier date in which case such representations and warranties shall be true and correct as of such earlier date); no Event of Default or Default shall have occurred and be continuing on the Amendment Effective Date, or result from this Amendment becoming effective in accordance with its terms. -5- (ii) The Administrative Agent shall have received counterparts of this Amendment which bear the signatures of the Borrowers and each of the Lenders. (iii) The Administrative Agent shall have received a pledge amendment to the Pledge Agreement, duly executed by HomeGold, together with the stock certificates representing all of the common stock of Realty (as defined below), accompanied by an undated stock power executed in blank. (iv) The Administrative Agent shall have received a guaranty substantially in the form attached as Exhibit J to the Loan Agreement, duly executed by Realty in favor of the Administrative Agent. (v) The Administrative Agent shall have received an acknowledgment and consent to this Amendment, substantially in the form of Annex III attached hereto, duly executed by EGI and EMC-TN. (vi) All legal matters incident to this Amendment shall be satisfactory to the Administrative Agent and its counsel. 20. Waiver and Consent. (a) Pursuant to the request of the Borrowers, the Lenders hereby consent to and waive any Event of Default that would arise from (i) the Borrowers' retention of the accounting firm of Elliot, Davis & Company LLP as its independent public accountants for the period through December 31, 1999, and (ii) the establishment of HomeGold Realty, Inc. ("Realty"), as a direct, wholly-owned subsidiary of HomeGold, provided that the sole function of Realty will be to hold and sell real estate acquired by HomeGold through foreclosure, deed in lieu of foreclosure or similar means. (b) The Lenders' consent and waiver of any Event of Default relating to the actions set forth in paragraph (a) above (i) shall become effective as of the date set forth above when signed by the Lenders, (ii) shall be effective only in this specific instance and for the specific purposes set forth herein, and (iii) does not allow for any other or further departure from the terms and conditions of the Loan Agreement or any other Credit Documents, which terms and conditions shall continue in full force and effect. 21. Representations and Warranties. Each of the Borrowers represents and warrants to the Lenders as follows: (a) Each Borrower (i) is duly organized, validly existing and in good standing under the laws of the state of its organization and (ii) has all requisite power, authority and legal right to execute, deliver and perform this Amendment, the New Notes, all other documents executed by it in connection with this Amendment, and to perform the Loan Agreement, as amended hereby. (b) The execution, delivery and performance by the Borrowers of this Amendment and all other documents executed by it in connection with this Amendment, the execution, delivery and performance by each Borrower of the New Notes and the performance by -6- the Borrowers of the Loan Agreement as amended hereby (i) have been duly authorized by all necessary action, (ii) do not and will not violate or create a default under any Borrower's organizational documents, any applicable law or any contractual restriction binding on or otherwise affecting any Borrower or any of such Borrower's properties, and (iii) except as provided in the Credit Documents, do not and will not result in or require the creation of any Lien, upon or with respect to any Borrower's property. (c) No authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or other regulatory body is required in connection with the due execution, delivery and performance by any of the Borrowers of this Amendment and all other documents executed by it in connection with this Amendment, the execution, delivery and performance by each Borrower of the New Notes and the performance by the Borrowers of the Loan Agreement as amended hereby. (d) This Amendment and the Loan Agreement, as amended hereby, and all other documents executed in connection with this Amendment constitute the legal, valid and binding obligations of the Borrowers party thereto, enforceable against such Persons in accordance with their terms except to the extent the enforceability thereof may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect affecting generally the enforcement of creditors' rights and remedies and by general principles of equity. (e) The representations and warranties contained in Article V of the Loan Agreement are correct on and as of the Amendment Effective Date as though made on and as of the Amendment Effective Date (except to the extent such representations and warranties expressly relate (i) to an earlier date and (ii) to the general financial condition of the Borrowers, the Guarantors or any of their Subsidiaries), and no Event of Default or Default, has occurred and is continuing on and as of the Amendment Effective Date. 22. Continued Effectiveness of Loan Agreement. Each of the Borrowers hereby (i) confirms and agrees that each Credit Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the Amendment Effective Date of this Amendment all references in any such Credit Document to "the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by this Amendment, and (ii) confirms and agrees that to the extent that any such Credit Document purports to assign or pledge to the Administrative Agent, or to grant to the Administrative Agent a Lien on any collateral as security for the Obligations of the Borrowers from time to time existing in respect of the Loan Agreement and the Credit Documents, such pledge, assignment and/or grant of a Lien is hereby ratified and confirmed in all respects. 23. Miscellaneous. a. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. -7- b. Section and paragraph headings herein are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. c. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. d. The Borrowers will pay on demand all reasonable out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including, without limitation, the reasonable fees, disbursements and other charges of Schulte Roth & Zabel LLP, counsel to the Administrative Agent. -8- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. HOMEGOLD, INC. By: -------------------------------- Name: ------------------------------ Title: ------------------------------ CAROLINA INVESTORS, INC. By: -------------------------------- Name: ------------------------------ Title: ------------------------------ AGENT AND LENDER THE CIT GROUP/BUSINESS CREDIT, INC., as Administrative Agent & Lender By: --------------------------------- Name: ------------------------------ Title: ------------------------------ -9- LENDERS DEUTSCHE FINANCIAL SERVICES CORPORATION By: ----------------------------------- Name: ---------------------------------- Title: --------------------------------- BNY FINANCIAL CORPORATION By: ----------------------------------- Name: ---------------------------------- Title: --------------------------------- -10- ANNEX I SCHEDULE IA TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF JUNE 30, 1998, AS AMENDED Commitment Schedule -------------------
Lender Maximum Commitment Percentage Share ------ ------------------ ---------------- The CIT Group/Business Credit, $75,000,000.00 75.00% Inc. Deutsche Financial Services 12,500,000.00 12.50% Corporation BNY Financial Corporation 12,500,000.00 12.50% ============= ====== TOTAL COMMITMENT $100,000,000.00 100.00%
ANNEX II EXHIBIT N-A TO MORTGAGE LOAN WAREHOUSING AGREEMENT DATED AS OF JUNE 30, 1998, AS AMENDED SCHEDULE OF PERMITTED SECURED DEBT AND PERMITTED OTHER DEBT PERMITTED SECURED DEBT OF HOMEGOLD & CII: 1. "Repo" facilities on customary terms and conditions, provided that no such mortgage warehousing facility or "Repo" facilities may provide for "wet" fundings. 2. Credit facilities to finance the acquisition or maintenance of property, plant and equipment, provided that such facilities may only be secured by such property, plant or equipment. 3. Mortgage Loan from Wachovia Bank, N.A. to HOMEGOLD, INC. secured by building on Pelham Road in Greenville, South Carolina. PERMITTED OTHER DEBT OF HOMEGOLD & CII: 1. Trade debt incurred in the ordinary course of business, paid within thirty (30) days after the same has become due and payable or which is being contested in good faith, provided provision is made to the satisfaction of the Administrative Agent for the eventual payment thereof in the event it is found that such contested trade debt is payable by HOMEGOLD, Inc. or CII. 2. Guaranties by HOMEGOLD, INC. & CII of $125,000,000 in aggregate principal amount of EGI's 10-3/4% Senior Notes due 2004, Series A and Series B. 3. CII's Subordinated Debentures (Series B, Series C and Series D) and CII's Floating Rate Senior Notes (Series 93, Series 94, Series 95, Series 96, Series 97, and Series 99) each as listed on page 3 of that certain Prospectus of CII dated April 1, 1998 describing the Series D Subordinated Debentures and Series 99 Floating Rate Senior Notes and any future issuances of substantially similar securities of CII. 4. Indebtedness of HomeGold and CII to EGI existing as of November 30, 1998; provided that, after the occurrence and during the continuance of an Event of Default, neither HomeGold or CII shall be permitted to make any payments to EGI in respect of such Indebtedness without the prior written consent of the Majority Lenders. ANNEX III ACKNOWLEDGMENT AND CONSENT The undersigned (each a "Loan Party"), each as a party to one or more Credit Documents, as defined in the Mortgage Loan Warehousing Agreement dated as of June 30, 1998 (the "Loan Agreement"), by and among HomeGold, Inc., Carolina Investors, Inc., the lenders parties thereto (the "Lenders"), and The CIT Group/Business Credit, Inc., as administrative agent for the Lenders (in such capacity, the "Agent"), each hereby (i) acknowledges and consents to the Second Amendment dated the date hereof (the "Amendment", all terms defined therein being used herein as defined therein) to the Loan Agreement; (ii) confirms and agrees that each Credit Document to which it is a party is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that on and after the Amendment Effective Date all references in any such Credit Documents to "the Loan Agreement", "thereto", "thereof", "thereunder" or words of like import referring to the Loan Agreement shall mean the Loan Agreement as amended by the Amendment; and (iii) confirms and agrees that to the extent that any such Credit Document purports to assign or pledge to the Agent, or to grant to the Agent a security interest in or lien on, any collateral as security for the obligations of the Loan Party from time to time existing in respect of the Credit Documents, such pledge, assignment and/or grant of a security interest or lien is hereby ratified and confirmed in all respects as security for, in addition to the other obligations secured thereby, all obligations of such Loan Party outstanding upon the taking effect of the Amendment. Dated: December __, 1998 HOMEGOLD FINANCIAL, INC. (f/k/a Emergent Group, Inc.) By: ________________________ Title: _______________________ EMERGENT MORTGAGE CORPORATION OF TENNESSEE By: ________________________ Title: _______________________ EX-10 19 EXHIBIT 10.7.2 AMENDMENT TO ASSET PURCHASE AGREEMENT This AMENDMENT TO ASSET PURCHASE AGREEMENT (THIS "AMENDMENT"), dated as of November 12, 1998, is entered into by and among TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation ("TBCC"). TRANSAMERICA GROWTH CAPITAL, INC., a Delaware corporation (the "SB1C SUBSIDIARY"), TRANSAMERICA SMALL BUSINESS SERVICES, INC., a Delaware corporation (the "SECTION 7(A) SUBSIDIARY," and collectively with TBCC and the SBIC Subsidiary, the "BUYERS"), each of the SELLERS named on the signature pages hereof (individually a "SELLER" and collectively, the "SELLERS") and HOMEGOLD FINANCIAL, INC., a South Carolina corporation (the "PARENT"). W I T N E S S E T H: WHEREAS, TBCC, the SBIC Subsidiary, the Section 7(a) Subsidiary, the Sellers and HomeGold Financial, Inc. are parties to an Asset Purchase Agreement dated as of October 2, 1998 (the "AGREEMENT"); WHEREAS, the parties hereto desire to amend the Agreement in certain respects as provided forherein; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINED TERMS. Terms used in this Amendment which are defined in the Agreement shall have the meaning assigned to such terms in the Agreement unless otherwise defined herein. SECTION 2. AMENDMENTS TO AGREEMENT. 2.1 RECITAL. The first Recital to the Agreement is amended in its entirety to read as follows: "WHEREAS, the Sellers are engaged in the businesses of making mezzanine loans, loans pursuant to Section 7(a) of the Small Business Act, and first mortgage commercial loans that are senior to loans made pursuant to Section 504 of the Small Business Investment Act;" 2.2 DEFINITIONS. (a) The definitions of "BUSINESSES," "CLOSING PAYMENT," "ESTIMATED CLOSING PAYMENT" AND "RECEIVABLE" in the Agreement are amended in their entirety to read as follows: "BUSINESSES" means all activities currently conducted by the Sellers or EBCH relating to (i) the making of mezzanine loans (including the purchase of warrants and other equity investments in connection therewith); (ii) the making of investments and loans as a Small Business Investment Company (as defined in the Small Business Investment Act); (iii) the making of loans pursuant to Section 7(a) of the Small Business Act, (iv) the making of first mortgage commercial loans that are senior to loans made pursuant to Section 504 of the Small Business Investment Act, and (v) servicing, liquidation, collection and funding activities (including asset-backed securities transactions) in connection with any of the foregoing, but excluding the activities relating to the Retained Assets and Retained Liabilities. "CLOSING PAYMENT" means the Purchase Price as determined under SECTION 3.2(C) LESS $5,000,000. "ESTIMATED CLOSING Payment" means the Estimated Purchase Price less $5,000,000. "RECEIVABLE" means an account receivable, trade receivable, loan receivable, note receivable or other account or right to payment generated through the extension of credit or purchased or acquired in the operation of the Businesses." (b) The first sentence of the definition of "HOLDBACK AMOUNT" in the Agreement is amended in its entirety to read as follows: ""HOLDBACK AMOUNT" means, subject to disbursement as specified in Section 12.5 and in the Escrow Agreement, (i) $5,000,000 from the Closing Date to but not including the date that is six months after the Closing Date, (ii) $4,000,000 from and including the date that is six months after the Closing Date to but not including the first anniversary of the Closing Date, (iii) $3,500,000 from and including the first anniversary of the Closing Date to but not including the date that is eighteen months after the Closing Date, and (iv) $3,000,000 from and including the date that is eighteen months after the Closing Date; provided, however, that each of the amounts specified in clauses (i), (ii), (iii) and (iv) shall be increased by the amount of interest earned thereon under the Escrow Agreement from the Closing Date to the date of such determination, which accumulated interest shall be fully available to satisfy payment of Indemnifiable Losses from the Holdback Amount pursuant to Section 12.5." (c) The following definitions are added to Article I in appropriate alphabetical sequence: "NON-SBA RELATED CONTRACTS" means all Contracts other than SBA Related Contracts. "NON-SBA RELATED RECEIVABLES" means all Receivables other than SBA Related Receivables. "NON-SBA RELATED RECEIVABLE COLLATERAL DOCUMENTS" means all Receivable Collateral Documents other than SBA Related Receivable Collateral Documents. "NON-SBA RELATED RECEIVABLE CREDIT SUPPORT DOCUMENTS" means all Receivable Credit Support Documents other than SBA Related Receivable Credit Support Documents. "NON-SBA RELATED RECEIVABLE DOCUMENTS" means all Receivable Documents other than SBA Related Receivable Documents. "SBA RELATED CONTRACTS" means all Contracts arising in connection with the Businesses under which Emergent Business Capital, Inc. or Reedy River Ventures Limited Partnership has any rights or obligations. "SBA RELATED RECEIVABLES" means all Receivables arising in connection with the Businesses of Emergent Business Capital, Inc. or Reedy River Ventures Limited Partnership and all Receivables arising in connection with the Businesses in which Emergent Business Capital, Inc. or Reedy River Ventures Limited Partnership has any right, title or interest. "SBA RELATED RECEIVABLE COLLATERAL DOCUMENTS" means all Receivable Collateral Documents related to SBA Related Receivables. "SBA RELATED RECEIVABLE CREDIT SUPPORT DOCUMENTS" means all Receivable Credit Support Documents related to SBA Related Receivables. "SBA RELATED RECEIVABLE DOCUMENTS" means all Receivable Documents related to SBA Related Receivables. "SMALL BUSINESS INVESTMENT ACT" means the Small Business Investment Act, as amended." 2.3 PURCHASE AND SALE. The proviso appearing at the end of Section 2.1 of the Agreement is amended in its entirety to read as follows: "provided, however, that (i) Emergent Business Capital, Inc. shall sell, assign, transfer, convey and deliver to the Section 7(a) Subsidiary, and the Section 7(a) Subsidiary agrees to purchase from Emergent Business Capital, Inc., the Section 7(a) Permits, the Shares and the Transferred Assets and Assumed Liabilities of Emergent Business Capital, Inc. relating to the making of loans pursuant to Section 7(a) of the Small Business Act, as more fully set forth in the Transfer Instruments; and (ii) Reedy River Ventures Limited Partnership shall sell, assign, transfer, convey and deliver to the SBIC Subsidiary, and the SBIC Subsidiary agrees to purchase from Reedy River Ventures Limited Partnership, the SBIC Permits and the Transferred Assets and Assumed Liabilities of Reedy River Ventures Limited Partnership, as more fully set forth in the Transfer Instruments." 2.4 ASSUMED LIABILITIES. (a) Section 2.4(a)(i) of the Agreement is amended in its entirety to read as follows: "(i)(A) all obligations and liabilities of the Sellers arising under any SBA Related Receivables, SBA Related Receivable Documents, SBA Related Receivable Collateral Documents or SBA Related Receivable Credit Support Documents or SBA Related Contracts acquired pursuant to Section 2.2(a), but exclusive of any obligations and liabilities of the Sellers set forth on Schedule 2.4; and (B) all obligations and liabilities of the Sellers, which are required to be performed, and which accrue, after the Closing Date, arising under the Non-SBA Related Receivables, Non-SBA Related Receivable Documents, Non-SBA Related Receivable Collateral Documents and Non-SBA Related Receivable Credit Support Documents and the Non-SBA Related Contracts acquired pursuant to Section 2.2(a) (but not any liabilities of the Sellers in respect of a breach of or default under such Non-SBA Related Receivables, Non-SBA Related Receivable Documents, Non-SBA Related Receivable Collateral Documents, Non-SBA Related Receivable Credit Support Documents or Non-SBA Related Contracts arising prior to the Closing for which claims are brought prior to the sixth anniversary of the Closing Date);" (b) Section 2.4(a) of the Agreement is further amended by deleting the word "and" appearing at the end of clause (iii) thereof, deleting the period at the end of clause (iv) thereof and replacing it with a semi-colon and the word "and" and inserting the following: "(v) all liabilities and obligations arising from any legal, administrative or arbitration proceeding, suit or action of any nature against Emergent Business Capital, Inc. or Reedy River Ventures Limited Partnership arising in connection with the conduct of such entities' Businesses prior to the Closing, but exclusive of any liabilities and obligations set forth on Schedule 2.4." 2.5 RETAINED LIABILITIES. Section 2.5(d) of the Agreement is amended in its entirety to read as follows: "(d) any liability or obligation arising from any legal, administrative or arbitration proceeding, suit or action of any nature against Emergent Commercial Mortgage, Inc. or Emergent Business Capital Equity Group, Inc. arising in connection with the conduct of such entities' Businesses prior to the Closing, and any liability or obligation to the extent set forth on Schedule 2.4 arising from any legal, administrative or arbitration proceeding, suit or action of any nature against Emergent Business Capital, Inc. or Reedy River Ventures Limited Partnership arising in connection with the conduct of such entities' Businesses prior to the Closing;" 2.6 CONTRACT AND RECEIVABLES. The second sentence of Section 4.7(b) of the Agreement is amended in its entirety to read as follows: "The Sellers have made available, and at Closing shall deliver, to the Buyers originals (or complete and correct copies followed by the originals, if available, within 30 days of Closing) of all Receivable Documents, Receivable Credit Support Documents and Receivable Collateral Documents evidencing or otherwise relating to the Receivables." 2.7 REPRESENTATIONS AND WARRANTIES OF THE SELLERS. The following new Sections 4.27 and 4.28 are hereby added to the Agreement: "4.27 CERTAIN AGREEMENTS. There are no oral agreements or contracts pursuant to which any Seller or EBCH (a) provides, or has provided to it, services, (b) purchases or leases from any third party, any products, goods or services, or (c) maintains any confidentiality or non-competition covenants with a third party. 4.28 CERTAIN CLAIMS. There are no claims, howsoever arising, asserted by any Person or Governmental Authority against any Seller or EBCH, nor has any Seller or EBCH engaged in any activity or other conduct which would give rise to any claim, for negligence, gross negligence, fraud, malfeasance, willful misconduct or otherwise in connection with the making, monitoring, funding, liquidation, enforcement, servicing or collection of any loan or in connection with any extension of credit (including, without limitation, in connection with any Receivable), or any similar claims and matters." 2.8 CONDITIONS TO THE OBLIGATIONS OF THE BUYERS. Section 8.2(m) of the Agreement is amended in its entirety to read as follows: "(m) SHARES OF EBCH. The Section 7(a) Subsidiary shall have received the Shares duly assigned to it by Emergent Business Capital, Inc." 2.9 NONCOMPETITION AND NONSOLICITATION COVENANT. Clause (a) of Section 9.1 of the Agreement is amended in its entirety to read as follows: "(a) engaging in any activity that is the same as or substantially similar to providing mezzanine loans (including the purchase of warrants and other equity investments in connection therewith), providing loans pursuant to Section 7(a) of the Small Business Act, or providing first mortgage commercial loans that are senior to loans made pursuant to Section 504 of the Small Business Investment Act;" 2.10 INDEMNIFICATION BY THE SELLERS. Section 12.2(a) of the Agreement is amended by deleting the word "or" appearing at the end of clause (v) thereof, deleting the period at the end of clause (vi) thereof and replacing it with a semi-colon and the word "or" and inserting the following: "(vii) notwithstanding the assumption by the Buyers pursuant to Sections 2.4(a)(i)(A) and 2.4(a)(v) of the obligations and liabilities described therein, all such obligations and liabilities of the Sellers which have been so assumed pursuant to such Sections 2.4(a)(i)(A) and 2.4(a)(v)." 2.11 GROUNDS FOR TERMINATION. Section 11.1(b) of the Agreement is amended by deleting the date "October 31, 1998" appearing in the third line thereof and inserting the date "November 15, 1998" in lieu thereof. 2.12 HOLDBACK AMOUNT. Section 12.5 of the Agreement is amended by deleting the phrase "plus all accrued and unpaid interest thereon" appearing in the third sentence. 2.13 SCHEDULES. The Agreement is amended by adding Schedule 2.4 to the Agreement in the form attached hereto. 2.14 ESCROW AGREEMENT. (a) Section 1 of Exhibit C to the Agreement is amended by deleting the dollar amount "$4,000,000" appearing in the second line thereof and inserting the dollar amount "$5,000,000" in lieu thereof. (b) Section 2 of Exhibit C to the Agreement is amended by deleting the second sentence thereof and inserting the following in lieu thereof: "Interest earned on the Escrow Amount (to the extent not previously released pursuant to Section 3(a) shall be distributed to the Parent for the benefit of the Sellers on the date of termination of the escrow pursuant to Section 5. The Sellers shall be responsible for the payment of any taxes on the interest earned on the Escrow Amount." SECTION 3. MISCELLANEOUS. 3.1 GOVERNING LAW; SEVERABILITY. THIS AMENDMENT IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, APPLICABLE TO CONTRACTS MADE AND TO BE ENTIRELY PERFORMED IN SAID STATE. If any provision of this Amendment shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid and enforceable provision as similar as possible to the provision at issue. 3.2 INTERPRETATION. The headings preceding the text of Sections and subsections included in this Amendment are for convenience only and shall not be deemed part of this Amendment or be given any effect in interpreting this Amendment. The use of the terms "including" or "include" shall, in all cases, mean "including, without limitation," and "include, without limitation," respectively. The use of the masculine, feminine or neuter gender herein shall, as applicable, also refer to the other genders. Except as the context otherwise requires, the use of the singular form of any term shall also refer to the plural, and vice versa. Unless the context otherwise requires, whenever the terms "hereto", "hereunder", "herein" or "hereof" are used in this Amendment, such terms shall be construed as referring to this entire Amendment. This Amendment is the result of negotiations among, and has been reviewed by, counsel to the other parties thereto and is the product of all parties. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Amendment against the party that drafted it has no application and is expressly waived. 3.3 COUNTERPARTS. This Amendment may be executed in one or more counterparts, all of which shall together constitute one and the same instrument, and shall become effective when one or more counterparts hereof have been signed by the Buyers and delivered to the Sellers and one or more counterparts hereof have been signed by the Sellers and delivered to the Buyers. 3.4 REFERENCES TO AGREEMENT. Except as herein amended, the Agreement shall remain in full force and effect and is hereby ratified in all respects. On and after the effectiveness of the amendments to the Agreement accomplished hereby, (i) each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall be a reference to the Agreement as amended hereby, (ii) and each reference to the Agreement in any agreement, document or other instrument executed and delivered prior hereto shall be a reference to the Agreement as amended by this Amendment. 3.5 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. EX-21 20 EXHIBIT 21.0 Exhibit 21.0
Subsidiary State of Incorporation ------------------------------------------------------ ------------------------------ HomeGold, Inc. South Carolina HomeGold, Inc. of Tennessee (a subsidiary of HomeGold, Inc.) South Carolina Emergent Mortgage Holdings Corporation (a subsidiary of HomeGold, Inc.) Delaware Emergent Mortgage Holdings Corporation II (a subsidiary of HomeGold, Inc.) Delaware Emergent Residual Holdings Corporation (a subsidiary of Emergent Mortgage Holdings Corporation II) Delaware Emergent Insurance Agency Corporation South Carolina Carolina Investors, Inc. South Carolina HomeGold Realty, Inc. (a subsidiary of HomeGold, Inc.) South Carolina
EX-23 21 EXHIBIT 23.1 Exhibit 23.1 INDEPENDENT AUDITOR'S CONSENT The Board of Directors HomeGold Financial, Inc. We consent to incorporation by reference in the registration statements on Form S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock Plan, (No. 333-07927) 1995 Restricted Stock Agreement Plan, (No. 333-07923) 1995 Officer and Employee Stock Option Plan and (No. 333-20179) Employee Stock Purchase Plan of HomeGold Financial, Inc. of our report dated February 19 and February 24, 1999, relating to the consolidated balance sheet of HomeGold Financial, Inc. and subsidiaries (the "Company") as of December 31, 1998 and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended, which report appears in the 1998 Annual Report on Form 10-K of the Company. /s/ ELLIOTT, DAVIS & COMPANY, L.L.P. ------------------------------------ ELLIOTT, DAVIS & COMPANY, L.L.P. Greenville, South Carolina March 29, 1999 EX-23 22 EXHIBIT 23.2 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and Subsidiaries Greenville, South Carolina We Consent to incorporation by reference in the registration statements on Form S-8 (No. 333-07925) 1995 Director Stock Option Plan Stock Plan, (No. 333-07927) 1995 Restricted Stock Agreement Plan, (No. 333-07923) 1995 Officer and Employee Stock Option Plan and (No. 333-20179) Employee Stock Purchase of HomeGold Financial, Inc. of our report dated February 27, 1998, relating to the consolidated balance sheets of HomeGold Financial, Inc. and subsidiaries (the "Company") as of December 31, 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended, which report appears in the 1998 Annual Report on Form 10-K of the Company. /s/ KPMG Peat Marwick, L.L.P. -------------------------- KPMG Peat Marwick, L.L.P. Greenville, South Carolina March 30, 1999 Shareholders and Board of Directors HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and Subsidiaries Greenville, South Carolina We have audited the accompanying consolidated balance sheet of HomeGold Financial, Inc.(f/k/a Emergent Group, Inc.) and subsidiaries as of December 31, 1997 and the related consolidated statements of operations, shareholder's equity, and cash flows for the two years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts of disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of HomeGold Financial, Inc. (f/k/a Emergent Group, Inc.) and subsidiaries as of December 31, 1997 and the results of their operations and their cash flows for the two years then ended in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK, L.L.P. ------------------------------- KPMG PEAT MARWICK, L.L.P. Greenville, South Carolina February 27, 1998 EX-27 23 EXHIBIT 27
5 0000277028 HOMEGOLD FINANCIAL, INC 1000 YEAR DEC-31-1998 JAN-1-1998 DEC-31-1998 36,913 43,857 124,740 6,659 0 0 23,492 3,827 257,208 0 86,650 0 0 486 5,315 257,208 0 91,725 0 116,842 0 11,906 35,968 (72,991) 3,017 (75,961) 0 18,216 0 (57,745) (5.94) (5.94)
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