8-K 1 form8k-12312002.txt FOR PERIOD DECEMBER 31, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report: December 31, 2002 HOMEGOLD FINANCIAL, INC. (Exact name of registrant as specified in its charter) SOUTH CAROLINA 000-8909 57-0513287 (State of other juris- (Commission (IRS Employer diction of incorporation) File Number) Identification Number) 1021 BRIARGATE CIRCLE, COLUMBIA, SOUTH CAROLINA 29210 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (803) 365-2500 The Exhibit Index appears on page 9 hereof. ITEM 2. SALE OF THE MAJORITY OF THE ASSETS OF RETAIL MORTGAGE DIVISION On December 31, 2002, HomeGold Financial, Inc. ("HGFN") completed the sale of the majority of the assets of its retail mortgage division headquartered in Lexington, SC to EMMCO, LLC ("EMMCO"), a South Carolina limited liability company. EMMCO was recently organized by Ronald J. Sheppard, formerly chief executive officer of HGFN, for the purpose of acquiring the purchased assets. The purchase price consisted of $150,000 cash, a $35 million 8% cumulative preferred capital interest in EMMCO and a non-voting economic interest in EMMCO. The non-voting economic interest entitles HGFN to approximately 50% of the distributions of the profits of EMMCO until the aggregate distributions of profits to HGFN shall equal $170 million. Thereafter the preferred capital interest is entitled to such distributions until such distributions shall equal $35 million plus accrued dividends. Upon liquidation of EMMCO, including a sale of substantially all of its assets, the preferred capital interest of HGFN is entitled to a preference in liquidation to the extent of $35 million together with accrued dividends and the non-voting economic interest of HGFN is entitled to receive 50% of the gross proceeds of sale; provided that the non-voting economic interest and the preferred capital interest in EMMCO may not receive more than $205 million plus accrued dividends on the preferred capital interest. The approval of HGFN is required for a sale of the business or substantially all of EMMCO's assets if distributions and sales proceeds do not equal $205 million plus all accrued dividends on the preferred capital interest. The assets transferred to EMMCO consisted primarily of the following: o Assignment of leases for 8 of the retail mortgage division's 17 locations; o The retail mortgage division's equipment and contracts related thereto; o Approximately $6.4 million in prepaid marketing expense; o Pending unfunded mortgage loans selected by EMMCO; o The 49% membership interest of HGFN in Connected Information Services, LLC, a title insurance joint venture; and o All of the capital stock of Surety Mortgage, Inc., HGFN's conforming mortgage loan origination subsidiary. In connection with the purchase of assets by EMMCO, R-DOC, LLC, ("R-DOC"), a South Carolina limited liability company recently organized by Mr. Sheppard borrowed $5 million from HGFN and also purchased from HGFN an office location at 113 Reed Avenue in Lexington, South Carolina and certain vacant land at their combined net book value of approximately $3,445,000. The loan and the purchase price are evidenced by a promissory note of R-DOC in the amount of approximately $8,445,000 payable in 60 equal quarterly payments of principal and interest at 7 1/2%. The promissory note of R-DOC is secured by all of the assets of R-DOC except the acquired real estate. EMMCO may withhold from distributions to HGFN an amount equal to quarterly amortization of principal and interest of the R-DOC promissory note and distribute the same to Mr. Sheppard for R-DOC to make payment against its promissory note to HGFN. Concurrently with the purchase of assets by EMMCO, Mr. Sheppard entered into a voting agreement with HGFN in which he agreed to vote the shares of common stock of HGFN owned by him (approximately 35%) as recommended by the board of directors of HGFN on all matters submitted to a vote of the shareholders of HGFN. Mr. Sheppard also agreed not to transfer his shares except to transferees approved by the board of directors of HGFN. The voting agreement expires on the earlier of: (i) ten (10) years from December 31, 2002, (ii) the written consent of HGFN and Mr. Sheppard, or (iii) the completion of all distribution requirements of the operating agreement of EMMCO to holders of non-voting units of economic interest and to holders of preferred capital interest. In connection with the transaction HGFN also entered into agreements to provide loan servicing services to EMMCO for a fee of one half point per annum of the principal balance of loans serviced and certain ancillary fees including, among others, late charges, NSF fees and prepayment fees and to provide certain management services including payroll, human resources and other administrative services for monthly fees of $65,000. The foregoing description of the transaction is qualified in its entirety by reference to the Amended and Restated Asset Purchase Agreement, the EMMCO Operating Agreement, the Voting Agreement between HGFN and Ronald J. Sheppard, the Loan Servicing Agreement between EMMCO and HomeGold, Inc., the Management Services Agreement between EMMCO and HomeGold, Inc., the promissory note of R-DOC to HomeGold, Inc. and the Security Agreement between R-DOC and HomeGold, Inc. filed herewith as exhibits. Prior to closing the transaction the board of directors of HGFN received an opinion dated December 31, 2002 from Smith Capital, Inc. of Charlotte, North Carolina that the transaction is fair to the stockholders of HGFN from a financial point of view. In giving the opinion Smith Capital, Inc. relied upon, and assumed without independent verification, the accuracy and completeness of certain publicly available information and information furnished by management of HGFN and EMMCO, including internal financial analyses and forecasts prepared by HGFN and EMMCO and their respective managements. The opinion states that it is based on economic, market and other conditions in effect on, and the information made available as of the date of the opinion. The opinion also states that it should be understood that subsequent developments may affect the opinion. The internal financial analyses and forecasts provided by the management of the Company and EMMCO included the best estimates of the management of such companies of future conditions and company performance. Such analyses and forecasts are inherently uncertain, and there can be no assurance that actual conditions or company performance will be as forecast. HGFN will continue to operate its wholesale mortgage operation, five of its remaining retail mortgage origination branches and its mortgage loan servicing operation and will continue its investment in FlexCheck, LLC, a payday lending company. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements of the Business Acquired. Not applicable. (b) Pro Forma Financial Information. Condensed statement of operations for the fiscal year ended December 31, 2001, condensed statement of operations for the eleven months ended November 30, 2002, condensed balance sheets as of November, 2002, notes to condensed financial information. HomeGold Financial, Inc. Condensed Financial Information The following unaudited condensed balance sheet presents the financial position of HomeGold Financial, Inc. as of November 30, 2002 assuming the sale transaction with EMMCO, LLC had occurred on that date. The unaudited condensed statements of operations present the results of operations (excluding any extraordinary items) of HomeGold Financial, Inc. for the fiscal year ended December 31, 2001 and the eleven months ended November 30, 2002 after giving pro forma effect to the divestiture of the majority of the Company's retail mortgage division as if it had occurred at the beginning ot the respective periods. The following financial information should be read in conjunction with the consolidated financial statements and related notes contained in the Company's 2001 Form 10-K and September 30, 2002, Form 10-Q. Forward-Looking Statements This report contains forward-looking statements that reflect management's current assumptions and estimates of future performance and economic conditions using information currently available. Such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions investors that any forward-looking statements are subject to risks and uncertainties that may cause actual results and future trends to differ materially from those projected, stated, or implied by the forward-looking statements. The Company's consolidated results and the forward-looking statements could be affected by, among other things: general economic conditions in the markets in which the Company operates; economic developments that have a particularly adverse effect on one or more of the markets served by the Company; the ability to execute management's internal operating plans; the timing and magnitude of capital expenditures; economic and market conditions in the U.S. and worldwide including inflation, recession, interest rates, acts of terrorism and other economic factors; overall competitve activities; lower origination volumes due to market conditions; 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 credit worthiness of borrowers and risk of default; loss of funding sources; loss of ability to sell loans; lower premiums on loan sales; general lending risks; dependence on Federal programs; regulation of lending activities; and changes in the regulatory environment. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONDENSED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS) HISTORICAL ADJUSTMENTS (1) PRO FORMA ----------------- ----------------- ----------------- REVENUES: Interest income $ 8,009 $ (1,753) $ 6,256 Servicing income 4,268 -- 4,268 Gain on sale of loans: Cash gain on sale of loans 12,808 (12,808) -- Loan fee income 28,060 (28,060) -- ----------------- ----------------- ----------------- Total gain on sale of loans 53,145 (42,621) 10,524 Other revenues 1,266 -- 1,266 ----------------- ----------------- ----------------- Total revenues 54,411 (42,621) 11,790 EXPENSES: Interest 20,609 (3,994) 16,615 Provision for credit losses 2,883 -- 2,883 Fair value write-down of residual receivables 10,490 -- 10,490 Salaries, wages and employee benefits 37,595 (30,076) 7,519 Business development costs 9,169 (8,891) 278 Other general and administrative expenses 26,758 (8,128) 18,630 ----------------- ----------------- ----------------- Total expenses 107,504 (51,089) 56,415 Loss before income taxes and minority interest and extraordinary item (53,093) (8,468) (44,625) Provision for income taxes 22,524 -- 22,524 ----------------- ----------------- ----------------- Income (loss) before minority interest (75,617) (8,468) (67,149) and extraordinary item Minority interest in losses of a subsidiary (4) -- (4) Extraordinary item - extinguishment of debt 2,022 -- 2,022 ----------------- ----------------- ----------------- NET LOSS $ (73,599) $ (8,468) $ (65,131) ================= ================= ================= EARNINGS PER SHARE: Historical: Basic $ (4.36) Diluted $ (4.36) Pro Forma: Basic $ (3.86) Diluted $ (3.86) WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 16,882,919 16,882,919 Diluted 16,882,919 16,882,919
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONDENSED STATEMENT OF OPERATIONS FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 2002 (IN THOUSANDS) HISTORICAL ADJUSTMENTS (1) PRO FORMA ----------------- ----------------- ----------------- REVENUES: Interest income $ 7,942 $ (1,738) $ 6,204 Servicing income 2,984 -- 2,984 Gain on sale of loans: Cash gain on sale of loans 13,940 (11,263) 2,677 Loan fee income 30,228 (24,837) 5,391 ----------------- ----------------- ----------------- Total gain on sale of loans 55,094 (37,838) 17,256 Other revenues 3,457 -- 3,457 ----------------- ----------------- ----------------- Total revenues 58,551 (37,838) 20,713 EXPENSES: Interest 22,389 (3,731) 18,658 Provision for credit losses (251) -- (251) Fair value write-down of residual receivables -- -- -- Salaries, wages and employee benefits 44,941 (34,020) 10,921 Business development costs 8,573 (8,328) 245 Other general and administrative expenses 24,227 (26,535) (3) (2,308) ----------------- ----------------- ----------------- Total expenses 99,879 (72,614) 27,265 Income (loss) before income taxes and minority interest and extraordinary item (41,328) 34,776 (6,552) Provision for income taxes 649 -- 649 ----------------- ----------------- ----------------- Income (loss) before minority interest (41,977) 34,776 (7,201) and extraordinary item Minority interest in loss of a subsidiary (6) -- (6) Extraordinary item - extinguishment of debt 17 -- 17 ----------------- ----------------- ----------------- NET LOSS $ (41,966) $ 34,776 $ (7,190) ================= ================= ================= LOSS PER SHARE: (9) Historical: Basic $ (2.48) Diluted $ (2.48) Pro Forma: Basic $ (0.58) Diluted $ (0.58) WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 16,918,283 16,918,283 Diluted 16,918,283 16,918,283
HOMEGOLD FINANCIAL, INC. AND SUBSIDIARIES CONDENSED BALANCE SHEETS NOVEMBER 30, 2002 (IN THOUSANDS) HISTORICAL ADJUSTMENTS (2) PRO FORMA ---------------- ----------------- ---------------- ASSETS Cash and cash equivalents $ 11,343 $ (5,000) $ 6,343 Loans receivable Loans receivable held for investment 3,693 -- 3,693 Loans receivable held for sale 54,939 -- 54,939 ---------------- ----------------- ---------------- Total loans receivable 58,632 -- 58,632 Less allowance for credit losses on loans (541) -- (541) Less deferred loan fees (556) -- (556) ---------------- ----------------- ---------------- Net loans receivable 57,535 -- 57,535 Other receivables: Accrued interest receivable 2,554 -- 2,554 Other receivables 26,726 8,445 (4) 35,171 ---------------- ----------------- ---------------- Total other receivables 29,280 -- 37,725 Residual receivables, net 48,618 -- 48,618 Property & equipment, net 22,119 (6,905) 15,214 Real estate and personal property held acquired through foreclosure 591 -- 591 Excess of cost over net assets of acquired businesses 19,381 -- 19,381 Debt origination costs 59 -- 59 Servicing asset 442 -- 442 Other assets 9,448 28,259 37,707 ---------------- ----------------- ---------------- TOTAL ASSETS $ 198,816 $ 24,799 $ 223,615 ================ ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Revolving warehouse lines of credit $ 43,796 $ -- $ 43,796 Investor savings: Notes payable to investors 227,883 -- 227,883 Subordinated debentures 42,538 -- 42,538 ---------------- ----------------- ---------------- Total investor savings 270,421 -- 270,421 Senior unsecured debt 6,225 -- 6,225 Accounts payable and accrued liabilities 2,349 -- 2,349 Remittances payable 940 -- 940 Accrued interest payable 1,492 -- 1,492 ---------------- ----------------- ---------------- Total other liabilities 4,781 -- 4,781 ---------------- ----------------- ---------------- Total liabilities 325,223 -- 325,223 Minority interest 14 -- 14 Shareholders' equity: Common stock 17 -- 17 Preferred stock 10,000 -- 10,000 Capital in excess of par 46,659 -- 46,659 Retained earnings (accumulated deficit) (183,097) 24,799 (5) (158,298) ---------------- ----------------- ---------------- Total shareholders' equity (126,421) 24,799 (101,622) ---------------- ----------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 198,816 $ 24,799 $ 223,615 ================ ================= ================
Notes to Condensed Financial Information (1) To eliminate the results of operations from the retail branches and support departments for the respective period reflected in the condensed financial statement of operation. (2) To record the divestiture of assets being purchased by EMMCO, LLC. (3) To record a $24.8 million gain on sale of assets to EMMCO, LLC due to EMMCO issuing HGFN $35 million of preferred capital interest in exchange for $10.2 million of assets. (4) To record a $8.4 million note receivable from R-DOC, LLC in exchange for $5 million cash and $3.4 million of buildings and land. (5) To record an $24.8 million adjustment in retained earnings (accumulated deficit) that resulted from the gain on sale of assets to EMMCO, L.L.C. (c) Exhibits. 99.3 Amended and Restated Asset Purchase Agreement between HomeGold, Inc. and EMMCO, LLC, dated as of December 31, 2002. 99.4 Operating Agreement of EMMCO, LLC dated as of December 31, 2002. 99.5 Voting Agreement between HomeGold Financial, Inc. and Ronald J. Sheppard dated December 31, 2002. 99.6 Loan Servicing Agreement between HomeGold, Inc. and EMMCO, LLC dated December 31, 2002. 99.7 Management Services Agreement between HomeGold, Inc. and EMMCO, LLC dated December 31, 2002. 99.8 Promissory Note of R-DOC, LLC to HomeGold, Inc. dated December 31, 2002. 99.9 Security Agreement between R-DOC, LLC and HomeGold, Inc. dated December 31, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HOMEGOLD FINANCIAL, INC. By: /s/ Karen A. Miller ------------------------------- Karen A. Miller Executive Vice President Chief Financial Officer Treasurer EXHIBIT INDEX 99.3 Amended and Restated Asset Purchase Agreement between HomeGold, Inc., and EMMCO, LLC dated as of December 31, 2002. 99.4 Operating Agreement of EMMCO, LLC dated as of December 31, 2002. 99.5 Voting Agreement between HomeGold Financial, Inc. and Ronald J. Sheppard dated December 31, 2002. 99.6 Loan Servicing Agreement between HomeGold, Inc. and EMMCO, LLC dated December 31, 2002. 99.7 Management Services Agreement between HomeGold, Inc. and EMMCO, LLC dated December 31, 2002. 99.8 Promissory Note of R-DOC, LLC to HomeGold, Inc. dated December 31, 2002. 99.9 Security Agreement between R-DOC, LLC and HomeGold, Inc. dated December 31, 2002.