As filed with the Securities and Exchange Commission on November 3, 1997.
Registration No. 333-39339
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EMERGENT GROUP, INC.
EMERGENT MORTGAGE CORP. EMERGENT MORTGAGE CORP. OF TENNESSEE
CAROLINA INVESTORS, INC. EMERGENT FINANCIAL CORP.
STERLING LENDING CORPORATION EMERGENT EQUITY ADVISORS, INC.
STERLING LENDING INSURANCE AGENCY THE LOAN PRO$, INC.
EMERGENT BUSINESS CAPITAL, INC. PREMIER FINANCIAL SRVICES, INC.
EMERGENT COMMERCIAL MORTGAGE, INC. EMERGENT INSURANCE AGENCY CORP.
(Exact names of registrants as specified in their charters)
South Carolina 6162 57-0513287
- ----------------------------- ----------------------------------- ---------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
15 SOUTH MAIN STREET, SUITE 750
GREENVILLE, SOUTH CAROLINA 29601
(864) 235-8056
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
JOHN M. STERLING, JR.
CHIEF EXECUTIVE OFFICER
EMERGENT GROUP, INC.
15 SOUTH MAIN STREET, SUITE 750
GREENVILLE, SOUTH CAROLINA 29601
(864) 235-8056
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
WILLIAM P. CRAWFORD, JR., ESQ.
WYCHE, BURGESS, FREEMAN & PARHAM, P.A.
POST OFFICE BOX 728
GREENVILLE, SOUTH CAROLINA 29602-0728
(864) 242-8200 (TELEPHONE)
(864) 235-8900 (FACSIMILE)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed maximum
Title of each class of offering price per Proposed maximum Amount of
securities to be registered Amount to be registered note(1) aggregate offering price registration fee
- -------------------------- ------------------------ --------------------- ------------------------- ---------------------
10-3/4% Senior Notes due $125,000,000 100% $125,000,000 $36,878.79(2)
2004, Series B
- -------------------------- ------------------------ --------------------- ------------------------- ---------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
(A redherring appears on the left hand side of this page, rotated 90 degrees.
Text follows.)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS [LOGO OF EMERGENT GROUP, INC. APPEARS HERE]
November 12, 1997
EMERGENT GROUP, INC.
OFFER TO EXCHANGE ITS
10-3/4% SENIOR NOTES DUE 2004, SERIES B
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OUTSTANDING
10-3/4% SENIOR NOTES DUE 2004, SERIES A
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON
DECEMBER 17, 1997, UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION
(THE "EXPIRATION DATE").
Emergent Group, Inc., a South Carolina corporation (the "Company"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus (the "Prospectus") and the accompanying
Letter of Transmittal (the "Letter of Transmittal"), to exchange up to $125.0
million in aggregate principal amount of its 10-3/4% Senior Notes due 2004,
Series B (the "Exchange Notes") for equal principal amounts of its outstanding
10-3/4% Senior Notes due 2004, Series A (the "Senior Notes"). The Exchange Notes
are substantially identical (including principal amount, interest rate, maturity
and redemption rights) to the Senior Notes for which they may be exchanged
pursuant to this offer, except that (i) the offering and sale of the Exchange
Notes will have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and (ii) holders of Exchange Notes will not be entitled
to certain rights of holders of Senior Notes under a Registration Rights
Agreement (as defined herein) of the Company. The Senior Notes have been, and
the Exchange Notes will be, issued under an Indenture dated as of September 23,
1997 (the "Indenture") by and among the Company, the Subsidiary Guarantors (as
defined herein) and Bankers Trust Company, as trustee (the "Trustee"). The
Company will not receive any proceeds from this Exchange Offer; however,
pursuant to the Registration Rights Agreement, the Company will bear certain
offering expenses. See "The Exchange Offer-- Senior Notes Registration Rights."
The Senior Notes together with the Exchange Notes are referred to herein as the
"Notes."
The Exchange Notes will bear interest at the same rate and on the same
terms as the Senior Notes. Consequently, interest on the Exchange Notes will be
payable semi-annually in arrears on March 15 and September 15 of each year,
commencing on March 15, 1998. The Exchange Notes will mature on September 15,
2004, and may be redeemed at the option of the Company, in whole or in part, on
or after September 15, 2001, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, including under certain circumstances
additional interest resulting from any registration default that may have
aoccured as discussed herein, to the applicable redemption date. Upon a Change
of Control (as defined herein), each holder of Exchange Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral multiple thereof) of such holder's Exchange Notes at an offer price
in cash equal to 101% of the principal amount thereof, plus accrued and unpaid
interest thereon, including under certain circumstances additional interest
resulting from any registration default that may have occured as discussed
herin, to the date of purchase. See "Description of Exchange Notes -- Optional
Redemption" and -- Change of Control."
The Exchange Notes will be general unsecured obligations of the Company
and will rank pari passu in right of payment with all existing and future
unsecured unsubordinated indebtedness of the Company and senior in right of
payment to all existing and future subordinated indebtedness of the Company. In
addition, the Exchange Notes will be fully and unconditionally guaranteed on a
joint and several basis (each, a "Guarantee") by each of the Company's existing
and future Subsidiaries (as defined herein), other than any Subsidiary that is
either a Securitization Special Purpose Subsidiary or a Small Business
Investment Company (each as defined herein) and Subsidiaries designated in the
future as "Unrestricted Subsidiaries" in accordance with the Indenture (as
defined herein) (collectively, the "Subsidiary Guarantors"). With the exception
of the Guarantee by the Company's subsidiary, Carolina Investors, Inc. ("CII"),
the Guarantees will 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
Subsidiary Guarantors. The Guarantee by CII will be a senior subordinated
obligation of CII, subordinated in right of payment to all existing and future
senior indebtedness of CII (which, as of June 30, 1997, totaled $16.1 million,
all of which was secured), and will rank pari passu in right of payment with all
existing and future senior subordinated indebtedness of CII (which, as of June
30, 1997, totaled $105.7 million) and senior in right of payment to all
subordinated indebtedness of CII (which, as of June 30, 1997, totaled $19.2
million). See "Description of Exchange Notes." The Exchange Notes and the
Guarantees will be subordinated to all existing and future secured indebtedness
of the Company and the Subsidiary Guarantors (to the extent of the assets
securing such indebtedness). As of June 30, 1997, after giving pro forma effect
to the Offering of the Senior Notes, the Company and the Subsidiary Guarantors
had approximately $53.6 million of secured indebtedness outstanding. See
"Description of Exchange Notes."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS WITH RESPECT TO THE SENIOR NOTES
AND THE EXCHANGE NOTES.
The Company will accept for exchange any and all Senior Notes validly
tendered by eligible holders and not withdrawn prior to 5:00 p.m. Eastern time
on December 17, 1997, unless extended by the Company in its
sole discretion (the "Expiration Date"). Tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is
subject to certain customary conditions. The Senior Notes may be tendered only
in integral multiples of $1,000. See "The Exchange Offer."
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal provides that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the Exchange Notes received in exchange for Senior Notes where
such Senior Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, beginning on the date of this Prospectus and ending on the close of
business no more than one year after the date of this Prospectus, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Explanatory Note," "The Exchange Offer -- Terms of the
Exchange Offer" and "Plan of Distribution."
The Senior Notes are not listed on any securities exchange and are not
traded on the National Association of Securities Dealers Automated Quotation
System, Inc. ("Nasdaq"). The Senior Notes are traded through the National
Association of Securities Dealers, Inc.'s ("NASD") PORTAL trading system under
the symbol "EMERNP04," and it is expected that the Exchange Notes will be
eligible for trading through the PORTAL system. The Company does not intend to
list the Exchange Notes on any national securities exchange or to seek admission
thereof to trading on Nasdaq.
The Initial Purchasers (as defined herein) have advised the Company that
they have made a market in the Senior Notes, and that they may make a market in
the Senior Notes and in the Exchange Notes; however, they are not obligated to
do so and any market-making activity may be discontinued at any time. As a
result, there is no assurance that an active public market will develop or
continue for the Exchange Notes, or that the market, if any, that develops for
the Exchange Notes will be similar to the limited market that currently exists
for the Senior Notes. To the extent that a market for the Exchange Notes does
develop, the market value of the Exchange Notes will depend on market conditions
(such as yields on alternative investments), general economic conditions, the
Company's financial condition and certain other factors. Such conditions might
cause the Exchange Notes, to the extent that they are traded, to trade at a
significant discount from face value. See "Risk Factors -- Lack of Public
Market."
Except as specifically requested by a holder on the Letter of
Transmittal, the Exchange Notes will be issued in the form of a Global Note (as
defined herein). Beneficial interests in the Global Note representing the
Exchange Notes will be shown on, and transfers thereof will be effected through,
records maintained by The Depository Trust Company ("DTC") and its participants.
See "Explanatory Note."
The Company will not receive any proceeds from, and has agreed to bear
the expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer. See "The Exchange Offer."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SENIOR NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF
TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
UNTIL FEBRUARY 16, 1998 DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE
NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO
DELIVER A PROSPECTUS IN CONNECTION THEREWITH. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2
EXPLANATORY NOTE
This Registration Statement covers $125.0 million in aggregate principal
amount of 10-3/4% Senior Notes due 2004, Series B of the Company (the "Exchange
Notes") to be offered in exchange for equal principal amounts of the Company's
outstanding 10-3/4% Senior Notes due 2004, Series A (the "Senior Notes"). This
Registration Statement is being filed to satisfy certain requirements of a
Registration Rights Agreement (the "Registration Rights Agreement") dated as of
September 23, 1997, by and among the Company, the Subsidiary Guarantors (as
defined herein) and First Union Capital Markets Corp., JP Morgan Securities,
Inc. and Wheat, First Securities, Inc. (collectively, the "Initial Purchasers")
of the Senior Notes.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC" or the "Commission") set forth in no-action letters issued
to unrelated third parties (see e.g. EXXON CAPITAL HOLDINGS CORP., SEC No-Action
Letter (available April 13, 1989) and MORGAN STANLEY & CO. INC., SEC No-Action
Letter (available June 5, 1991), collectively, the "No-Action Letters"), holders
of Senior Notes who tender their Senior Notes in the Exchange Offer with the
intention of participating in a distribution of the Exchange Notes will not be
able to rely on the No-Action Letters or similar no-action letters. The Company
believes that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for Senior Notes may be offered for resale, resold and otherwise
transferred by a holder thereof (other than (i) a broker-dealer who purchases
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act; PROVIDED that the holder is acquiring the
Exchange Notes in the ordinary course of its business and is not participating,
and had no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes. Holders of Senior Notes wishing to accept
the Exchange Offer must represent to the Company, as required by the
Registration Rights Agreement, that such conditions have been met. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Senior Notes, where such Senior Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Company believes that none of the registered holders of the Senior
Notes is an affiliate (as such term is defined in Rule 405 under the Securities
Act) of the Company.
The Company hereby notifies each holder of Senior Notes that any
broker-dealer that holds Senior Notes acquired for its own account as a result
of market-making activities or other trading activities and who receives
Exchange Notes pursuant to the Exchange Offer may be a statutory underwriter,
and must deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of the Exchange Notes. Any broker-dealer that holds
Senior Notes acquired for its own account as a result of market-making or other
trading activities acknowledges and agrees, as a term of the Exchange Offer,
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of Exchange Notes received pursuant to the
Exchange Offer. However, by so doing, the broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act. Such
broker-dealer will also be deemed to represent and warrant to the Company that
it is not participating in, and has no intent to participate in, any
distribution of Exchange Notes, and has not entered into any arrangement or
understanding with any person to distribute the Exchange Notes.
In the event that (i) any holder of Senior Notes is prohibited by
applicable law or Commission policy from participating in the Exchange Offer, or
(ii) any such holder may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the Prospectus
contained in this Registration Statement is not appropriate or available for
such resales by such holder, or (iii) such holder is a broker-dealer and holds
Senior Notes acquired directly from the Company or one of its affiliates, then
the Company has agreed to file a shelf registration statement pursuant to Rule
415 under the Securities Act for resales of Senior Notes for holders meeting
certain requirements, pursuant to the Registration Rights Agreement. See
"Summary -- The Exchange Offer," "The Exchange Offer" and "Plan of
Distribution."
Any Senior Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent any Senior Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered and unregistered
Senior Notes could be adversely affected. Following consummation of the Exchange
Offer, the holders of Senior Notes will continue to be subject to the existing
restrictions upon transfer thereof and the Company will have fulfilled certain
of its obligations under the Registration Rights Agreement. Holders of Senior
Notes who do not tender their Senior Notes generally will not have any further
registration rights under the Registration Rights Agreement or otherwise. See
"Risk Factors -- Failure to Exchange Senior Notes" and "The Exchange Offer."
The Company expects that, similar to the Senior Notes, and except as
specifically requested by a holder on the Letter of Transmittal, the Exchange
Notes will be issued in the form of a Global Note (as defined herein), which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of the Depositary's
nominee, Cede & Co. Beneficial interests in the Global Note representing the
Exchange Notes will be shown on, and transfers thereof will be effected through,
records maintained by the Depositary and its participants. After the initial
issuance of the Global Note, Exchange Notes in certificated form may be issued
in exchange for the Global Note on the terms and conditions set forth in the
Indenture. See "Description of Exchange Notes -- Book-Entry, Delivery and Form."
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. See "Available Information" for information regarding the
reports, proxy statements and other information filed by the Company with the
Commission.
In addition, the Company has agreed that, for so long as any of the
Senior Notes are "restricted securities" within the meaning of Rule 144(a)(3)
under the Securities Act, it will make available to any prospective purchaser of
the Senior Notes or
3
holder of the Senior Notes upon the request of such prospective purchaser or
holder the information required by Rule 144A(d)(4) under the Securities Act.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND 21E OF THE EXCHANGE ACT. SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS
OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IMPORTANT
FACTORS ("CAUTIONARY STATEMENTS") THAT COULD CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, THOSE STATEMENTS MADE IN CONJUNCTION WITH THE FORWARD-LOOKING
STATEMENTS INCLUDED UNDER "RISK FACTORS" AND OTHERWISE HEREIN. ALL WRITTEN OR
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
REPORTS TO SECURITY HOLDERS
See "Description of Exchange Notes -- SEC Reports" for a description of
reports that will be available to Holders of the Exchange Notes.
4
TABLE OF CONTENTS
EXPLANATORY NOTE..........................................................................................................3
SUMMARY...................................................................................................................8
The Company........................................................................................................8
Mortgage Loan Division.............................................................................................8
Small Business Loan Division.......................................................................................9
The Exchange Offer................................................................................................11
Summary of Terms of Exchange Notes................................................................................14
Risk Factors......................................................................................................15
Summary Consolidated Financial and Operating Data.................................................................16
RISK FACTORS.............................................................................................................19
Failure To Exchange Senior Notes..................................................................................19
Leverage; Asset Encumbrance.......................................................................................19
Ability to Service Debt; Negative Cash Flows......................................................................20
Dependence on Securitizations and Loan Sales......................................................................20
Availability of Funding Sources...................................................................................20
Creditworthiness of Non-prime Borrowers and Risk of Default.......................................................21
Credit Risks Associated with High LTV Loans.......................................................................21
Potential Change in Valuation of Interest-Only and Residual Certificates..........................................21
Contingent Risks..................................................................................................21
Right to Terminate Servicing Rights; Delinquencies................................................................21
Management of Rapid Growth........................................................................................21
Non-attainment of Growth in Retail Originations...................................................................21
Limited History in Securitization Servicing.......................................................................22
Termination of Mortgage Banker Relationships and Strategic Alliance Agreements....................................22
Economic Conditions...............................................................................................22
Adequacy of Allowance for Credit Losses...........................................................................22
Dependence on Federal Programs and Related Agreements.............................................................24
Interest Rate Sensitivity.........................................................................................24
Hedging Risks.....................................................................................................24
Competition.......................................................................................................24
Regulation of Lending Activities; Changing Regulatory Environment.................................................24
Fraudulent Conveyance Considerations..............................................................................24
Dependence upon Key Executives....................................................................................24
Actual Results May Differ From Forward Looking Statements.........................................................25
USE OF PROCEEDS..........................................................................................................26
CAPITALIZATION...........................................................................................................26
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA.......................................................................27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................32
General...........................................................................................................32
Operating Cash Flow...............................................................................................33
Profitability.....................................................................................................34
Results of Operations.............................................................................................35
Six Months Ended June 30, 1997 Compared To Six Months Ended June 30, 1996.....................................35
Year Ended December 31, 1996 Compared To Year Ended December 31, 1995.........................................35
Year Ended December 31, 1995 Compared To Year Ended December 31, 1994.........................................36
Financial Condition...............................................................................................37
Discontinued Operations...........................................................................................38
Transportation Segment........................................................................................38
Apparel Segment...............................................................................................38
Allowance for Credit Losses and Credit Loss Experience............................................................38
Summary of Allowance for Credit Losses............................................................................39
Liquidity and Capital Resources...................................................................................40
Loan Sales and Securitizations....................................................................................41
Accounting Considerations.........................................................................................41
Tax Considerations - The NOL......................................................................................42
Inflation and Interest Rates......................................................................................43
5
BUSINESS.................................................................................................................44
General...........................................................................................................44
Mortgage Loan Division............................................................................................45
Overview......................................................................................................45
Mortgage Loan Origination.....................................................................................46
Loan Originations by Channel .................................................................................46
Retail Mortgage Loan Originations ............................................................................47
Loan Underwriting.............................................................................................48
Internal Loan Classification..................................................................................48
Loan Originations by Credit Classification....................................................................49
Mortgage Loan Servicing, Delinquencies and Collections........................................................51
Servicing..................................................................................................51
Delinquencies and Collections .............................................................................51
Small Business Loan Division......................................................................................52
Overview......................................................................................................52
Small Business Loan Customers.................................................................................53
Section 7(a) Loan Program.....................................................................................53
SBA Guarantees................................................................................................54
Loan Origination and Approval.................................................................................54
Small Business Loan Sales and Securitizations.................................................................54
Small Business Loan Servicing, Delinquencies and Collections..................................................55
Servicing..................................................................................................55
Delinquencies and Collections .............................................................................55
Auto Loan Division................................................................................................57
Overview......................................................................................................57
Loan Securitizations..........................................................................................57
Servicing, Collection and Delinquencies.......................................................................57
Auto Loan Delinquencies and Charge-Offs ..........................................................................58
Competition.......................................................................................................59
Regulation........................................................................................................59
General.......................................................................................................59
Mortgage Loans................................................................................................59
Small Business Loans..........................................................................................60
Auto Loans....................................................................................................60
Employees.........................................................................................................61
Properties........................................................................................................61
Legal Proceedings.................................................................................................61
MANAGEMENT...............................................................................................................62
Executive Officers and Directors..................................................................................62
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................................64
CERTAIN TRANSACTIONS.....................................................................................................66
THE EXCHANGE OFFER.......................................................................................................67
Purpose of the Exchange Offer.....................................................................................67
Resale of the Exchange Notes......................................................................................67
Terms of the Exchange Offer.......................................................................................67
Expiration Date; Extensions; Amendments...........................................................................68
Interest on the Exchange Notes....................................................................................68
Procedures for Tendering..........................................................................................68
Return of Senior Notes............................................................................................69
Book-Entry Transfer...............................................................................................70
Guaranteed Delivery Procedures....................................................................................70
Withdrawal of Tenders.............................................................................................70
Conditions........................................................................................................70
Senior Notes Registration Rights..................................................................................70
Termination of Certain Rights.....................................................................................71
Exchange Agent....................................................................................................71
Fees and Expenses.................................................................................................72
Consequence of Failures to Exchange...............................................................................72
Accounting Treatment..............................................................................................72
Appraisal Rights..................................................................................................72
DESCRIPTION OF EXCHANGE NOTES............................................................................................73
General...........................................................................................................73
Maturity, Interest and Principal..................................................................................73
Optional Redemption...............................................................................................73
6
Mandatory Redemption .............................................................................................74
Certain Covenants.................................................................................................74
Limitation on Additional Indebtedness.........................................................................74
Limitation on CII Indebtedness................................................................................74
Limitation on Restricted Payments.............................................................................74
Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.......................75
Limitation on Liens...........................................................................................75
Limitation on Sales of Assets.................................................................................75
Limitation on Preferred Stock of Subsidiaries.................................................................76
Limitation on Transactions with Affiliates....................................................................76
Payments for Consent .............................................................................................77
Change of Control Offer...........................................................................................77
Merger, Consolidation or Sale of Assets...........................................................................78
SEC Reports.......................................................................................................78
Subsidiary Guarantees.............................................................................................78
Events of Default.................................................................................................78
Satisfaction and Discharge of the Indenture.......................................................................79
Defeasance........................................................................................................79
Modification and Waiver...........................................................................................80
Governing Law.....................................................................................................80
The Trustee.......................................................................................................80
Certain Definitions...............................................................................................80
Form, Denomination, Book-entry Procedures and Transfer............................................................88
Depository Procedures.............................................................................................88
Exchange of Book-entry Notes for Certificated Notes...............................................................89
DESCRIPTION OF OTHER INDEBTEDNESS........................................................................................90
Mortgage Loan Division............................................................................................90
Small Business Loan Division......................................................................................90
Auto Loan Division................................................................................................91
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................................................................92
PLAN OF DISTRIBUTION.....................................................................................................93
LEGAL MATTERS............................................................................................................94
EXPERTS..................................................................................................................94
AVAILABLE INFORMATION....................................................................................................94
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE .......................................................................94
INDEX TO FINANCIAL STATEMENTS...........................................................................................F-1
INDEPENDENT AUDITORS' REPORT.....................................................................................F-2
CONSOLIDATED BALANCE SHEETS......................................................................................F-3
7
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE HEREIN. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF, AMONG OTHER THINGS, THE CAUTIONARY
STATEMENTS, INCLUDING WITHOUT LIMITATION THE FACTORS SET FORTH BEOW UNDER "RISK
FACTORS." THE INFORMATION SET FORTH BELOW UNDER "RISK FACTORS" SHOULD BE
CONSIDERED CARFULLY IN EVALUATING THE EXCHANGE OFFER. UNLESS THE CONTEXT
REQUIRES OTHERWISE, ALL REFERENCES TO THE COMPANY INCLUDE THE COMPANY AND ALL OF
ITS SUBSIDIARIES.
THE COMPANY
Emergent Group, Inc. is a diversified financial services company that
originates, services, sells and securitizes residential mortgage loans
("Mortgage Loans"), small business loans ("Small Business Loans") and, to a
lesser extent, used automobile loans ("Auto Loans"). The Company makes
substantially all of its loans to borrowers who have limited access to credit or
who may be considered credit-impaired by conventional lending standards
("non-prime borrowers"). Based on industry publications, the Company believes
that it is among the top 15 retail originators of non-prime Mortgage Loans and
among the top 30 originators of wholesale and retail Mortgage Loans, in
aggregate, in the United States. According to the U.S. Small Business
Administration ("SBA"), the Company was the seventh largest originator of SBA
loans in the United States, by principal amount of SBA loans approved, for the
SBA's fiscal year ended September 30, 1996.
The Company commenced its lending operations in 1991 with the
acquisition of Carolina Investors, Inc. ("CII"), a South Carolina non-prime
mortgage lender which has been in business since 1963. Since such acquisition,
the Company has significantly expanded its lending operations and through
December 31, 1996 experienced a compounded annual growth rate in total loan
originations of 86%. During the years 1994, 1995 and 1996, the Company
originated $150.0 million, $249.5 million and $415.1 million in loans,
respectively. This loan growth has been accelerated by the successful
implementation during 1996 and 1997 of the Company's retail Mortgage Loan
origination strategy. The Company's loan originations increased 164% to $513.7
million for the six months ended June 30, 1997 compared to $194.4 million for
the six months ended June 30, 1996. Of the Company's loan originations for the
six months ended June 30, 1997, 92% were Mortgage Loans, 6% were Small Business
Loans and 2% were Auto Loans. The Company currently intends to divest its Auto
Loan operations.
The Company believes the rapid market penetration and growth of its
retail Mortgage Loan operation results in part from its philosophy of
encouraging its retail Mortgage Loan customers to become debt free in the
shortest practicable time-frame. The Company believes that this approach is
unique among its competitors. By providing coupled first and second lien
Mortgage Loans, which typically have terms of 15 years and are used to
consolidate higher interest rate consumer debt, the Company provides customers
with similar monthly payments, but more rapid debt reduction, than typical 30
year mortgages. The Company's originators are trained to emphasize the benefits
of both rapid debt repayment and monthly debt service reduction. In addition,
borrowers are provided access to a free financial counseling program, known as
REAL REWARDS, which was developed by the Company to help individual borrowers
accelerate debt repayment and improve their credit ratings.
The Company markets its Small Business Loan operation as a commercial
lender offering a variety of loan products capable of meeting substantially all
of the commercial credit needs of small businesses in various stages of
development, and believes it is one of only a few national, non-bank lending
operations which focuses on smaller businesses with debt needs of generally less
than $2.0 million.
MORTGAGE LOAN DIVISION
The Company's Mortgage Loan operation (the "Mortgage Loan Division")
makes Mortgage Loans 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. The Mortgage Bankers
Association estimates that total loan originations for the non-prime mortgage
industry grew approximately 21% from $120 billion in 1995 to $145 billion in
1996. In addition, industry publications estimate that the top 25 lenders to the
non-prime mortgage loan industry represented, in aggregate, approximately 21% of
1996 loan originations, with the largest lender representing approximately 4% of
the total. The Company believes there are opportunities to capture market share
from independent brokers who cannot provide the level of service, rapid response
time and operating efficiencies typically associated with larger lending
entities such as the Company.
The Company has developed a comprehensive credit analysis system for
its loan originations 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, and during the first six months of
1997, 72% and 20% of the Mortgage Loans originated by the Company were to
borrowers internally classified as "AA/A" and "B", respectively. In addition,
55% of the Company's first Mortgage Loans originated in the first six months of
1997 have maturities of 15 years or less, which provides for more rapid
reduction of principal and, consequently, a faster improvement in loan-to-value
("LTV") ratios compared to traditional 30 year mortgages.
In the first six months of 1997, 75% of the Mortgage Loans originated
were secured by first liens. Such first Mortgage Loans had an average principal
balance of approximately $66,500, a weighted average interest rate of
approximately 11% and an average LTV ratio of 79%. Approximately 43%, or $154.0
million, of the Company's first Mortgage Loans originated during the first six
months of 1997 were originated through the Company's retail operation. In
connection with approximately 60% of
8
such loans, the Company also made a second Mortgage Loan to the same borrower,
which resulted in combined LTV ratios that averaged 105%, and may have been as
high as 125%. Such second Mortgage Loans had an average principal balance of
approximately $26,400 and a weighted average interest rate of approximately 15%.
The Company believes this structure of coupled first and second
Mortgage Loans generally will result in slower prepayment rates on its first
Mortgage Loans compared with stand-alone first mortgage loans, because borrowers
have less opportunity to refinance, since the second mortgage generally must be
repaid or refinanced in order to refinance the first mortgage. In order to
reduce the Company's credit risk, second Mortgage Loans with a combined LTV
ratio greater than 100% are 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 Mortgage Loans with a combined LTV ratio
less than 100% are underwritten by the Company and generally sold on a whole
loan basis without recourse.
The Company has invested significantly in technology and personnel to
improve and expand its underwriting, servicing, and collection functions. The
members of the Company's front-line management team have an average of over 11
years of experience in the non-prime mortgage industry. Also, a substantial
number of the Company's retail underwriters, originators and servicers hired to
date have significant prior industry experience. The Company believes its
current operations are capable of handling substantial increases in both loan
origination volume and securitization servicing capacity with only modest
increases in fixed expenses. The Company believes that this industry-specific
experience, coupled with the Company's underwriting guidelines, existing MIS
systems and servicing infrastructure will enable the Company to execute
successfully its business strategy.
The Mortgage Loan Division originates Mortgage Loans on a retail basis
through regional offices and on a wholesale basis through independent mortgage
brokers and mortgage bankers (collectively, the "Mortgage Bankers"). The
Company's mortgage lending operations are currently conducted in 42 states
through twelve retail offices and approximately 700 Mortgage Bankers. The
Company has established strategic alliance agreements with certain Mortgage
Bankers (the "Strategic Alliance Mortgage Bankers"), which require the Strategic
Alliance Mortgage Bankers to sell to the Company all of their loans up to
specified levels which meet the Company's underwriting criteria in exchange for
delegated underwriting, administrative support and expedited funding. The
Company believes that its use of retail and wholesale origination and strategic
alliances is an effective diversification strategy which enables the Company to
penetrate the non-prime mortgage loan market through multiple channels without
being overly dependent on any one channel. Principal elements of the Company's
retail and wholesale Mortgage Loan operations are outlined below.
o RETAIL LOAN ORIGINATIONS. Since the first quarter of 1996, the Company
has successfully focused a significant portion of its resources on
developing its retail loan operation, thereby reducing its dependence
on third party origination sources. In June 1997, retail Mortgage Loan
originations represented 53% of the Company's total Mortgage Loan
originations. The Company believes that its retail operation has
significant long-term profit potential because 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 the
borrower relationship, reduce reliance on wholesale sources and build
brand recognition.
Unlike many of its competitors (particularly non-prime mortgage lenders
that began operations as traditional finance companies), the Company
markets its retail lending operations in large part through direct mail
and telemarketing methods, as compared to a traditional "bricks and
mortar" retail approach. 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 uses large regional operating
centers consisting of underwriters, originators and loan processors
which enable it to realize economies of scale and to compete more
efficiently than through traditional retail operations.
o WHOLESALE LOAN ORIGINATIONS. The Company believes that its wholesale
lending operation will continue to play an important part in its
business 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, particularly because
there are a large number of independent mortgage brokers who require
outside funding of their loans. The wholesale strategy also provides
more favorable cash flow than a correspondent-based strategy because
such loans are generally funded at par, rather than at the premiums
typically associated with bulk correspondent purchases.
SMALL BUSINESS LOAN DIVISION
The Company's Small Business Loan operation (the "Small Business Loan
Division") makes loans to small businesses primarily for the acquisition or
refinancing of property, plant and equipment, working capital and debt
consolidation. The Company's principal strategy in the Small Business Loan
Division is to market the Company's SBA loans ("SBA Loans"), asset-based small
business 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 believes that it is one of only a few national, non-bank lenders
that focus on smaller businesses with debt needs of generally less than $2.0
million, that also offers such businesses various commercial loan products
designed to meet substantially all of their financing needs.
9
During 1994, 1995 and 1996, Small Business Loan originations totaled
$43.1 million, $39.6 million and $68.2 million, respectively. During the six
months ended June 30, 1997, Small Business Loan originations totaled $31.0
million. Principal loan products of the Company's Small Business Loan Division
consist of the following:
o SBA LOANS. For the first six months of 1997, approximately 71% of the
Company's Small Business Loans were SBA Loans. The Company is one of
approximately 12 non-depository entities in the United States utilizing
a license to make SBA Loans. Substantially all of the Company's SBA
Loans are made under Section 7(a) ("Section 7(a) Loans") of the Small
Business Act of 1953, as amended (the "Small Business Act"). During the
six months ended June 30, 1997, the Company originated approximately
$22.1 million in SBA Loans. The SBA guarantees on a pro rata basis
generally 75% of the original principal amount of an SBA Loan, subject
to a maximum guarantee amount per borrower of $750,000. The Company
sells participations representing the SBA-guaranteed portion of its SBA
Loans (the "SBA Loan Participations") in the secondary market. In
connection with such sales, the Company typically receives cash
premiums of approximately 10% of the guaranteed portion being sold. In
addition, the Company retains servicing rights for which it currently
receives an average of 2% of the guaranteed portion annually over the
life of the loan. The Company securitizes the unguaranteed portions of
its SBA Loans. According to the SBA, the Company was the seventh
largest originator of SBA Loans in the United States, by principal
amount of SBA Loans approved, for the SBA's fiscal year ended September
30, 1996. The Company intends to expand its SBA Loan operations by
utilizing its "Preferred Lender" status (the highest designation) with
the SBA to minimize response time and maximize loan production, opening
additional offices, increasing the number of relationships with
referral sources such as commercial loan and real estate brokers
("Commercial Loan Brokers") and increasing the number of internal
business development officers.
o ASSET-BASED LOANS. The Small Business Loan Division also provides
Asset-Based Small Business Loans, which are revolving working capital
loans secured by accounts receivable, inventory and equipment to small
and medium-sized businesses. The Company's asset-based lending
operation, which began in April 1996, originated approximately $8.9
million in the first six months of 1997 (based on the aggregate
commitment amount of loans closed).
o MEZZANINE LOANS. The Small Business Loan Division also makes mezzanine
loans through Reedy River Ventures Limited Partnership ("Reedy River
Ventures"), which is a Small Business Investment Company, and serves as
investment manager for a venture fund which makes seed capital
investments. The Company acquired Reedy River Ventures in June 1997.
Reedy River Ventures currently has $5.0 million in outstanding loans
receivable. Prior to June 1997, the Company owned a minority interest
in Reedy River Ventures and served as its general partner and
investment manager.
10
THE EXCHANGE OFFER
Securities Offered $125.0 million in aggregate principal amount of 10-3/4% Senior Notes due
September 15, 2004, Series B.
The Exchange Offer Pursuant to an Exchange and Registration Rights Agreement (the "Registration
Rights Agreement") between the Company and the Initial Purchasers, the Company
and the Subsidiary Guarantors have agreed to file, within 45 days following the
closing of the sale of the Senior Notes in the Offering (the "Closing"), a registration
statement relating to an exchange offer (the "Exchange Offer") pursuant to which
the Company and the Subsidiary Guarantors will offer to issue securities that are
substantially identical to the Senior Notes and the Guarantees in exchange for the
then outstanding Senior Notes tendered at the option of the Holders thereof and to
use their best efforts to cause such registration statement to become effective within
120 days following the Closing. The Company has further agreed to keep the
Exchange Offer open for a period of at least 30 days.
Under current interpretations of applicable law by the staff of the Commission, holders
of Senior Notes who receive Exchange Notes in exchange therefor pursuant to the
Exchange Offer would be permitted to resell such securities into the public market
without further registration or delivery of a prospectus, except that any such holder
who is a broker or dealer would be required to deliver a copy of the Exchange Offer
prospectus in connection with any such resale. The Company and the Subsidiary
Guarantors have agreed to keep such prospectus current so as to enable brokers and
dealers to effect such resales for a period of 180 days following completion of the
Exchange Offer. Certain holders who participate in the Exchange Offer will not be
permitted to rely on the interpretations of the Commission staff. For a discussion of
the requirements that must be met in order to rely on the interpretations, see
"Exchange Offer; Registration Rights."
In the event the interpretations of the Commission staff are changed such that the
Exchange Notes received in the Exchange Offer would not in general be freely
transferable, the Company and the Subsidiary Guarantors have agreed to use their best
efforts to cause to become effective a "shelf" registration statement with respect to
the resale of the Senior Notes (a "Resale Registration") and to keep such Resale
Registration effective until the second anniversary of the effective date of such
registration statement. In such event, Holders who registered their Senior Notes would
be permitted to resell their Senior Notes into the public market, but only if they
delivered a copy of the prospectus for the Resale Registration in connection with such
resales.
In the event that (i) the Company has not filed the registration statement relating to
the Exchange Offer (or, if applicable, the Resale Registration) within 45 days
following the Closing, (ii) such applicable registration statement has not become
effective within 120 days following the Closing, (iii) the Exchange Offer has not been
consummated within 30 business days after the effective date of the Exchange Offer
registration statement or (iv) any required registration statement is filed and
declared effective but shall thereafter cease to be effective (except as permitted by
the Registration Rights Agreement) without being promptly succeeded by an additional
registration statement filed and declared effective, then the per annum interest rate
on the Notes will increase by 0.5%, and the per annum interest rate on the Notes will
increase by an additional 0.25% for each subsequent 90-day period during which any such
registration default remains in effect, up to a maximum additional interest rate of 2%,
for the period from the occurrence of the registration default until such time as no
registration default is in effect (at which time the interest rate will be reduced to
its initial rate). See "Exchange Offer; Registration Rights".
If the Company makes the Exchange Offer, the Company will be entitled to close the
Exchange Offer 30 days after the commencement thereof provided that it has accepted all
Notes tendered thereunder. The Holders of any Notes not tendered in the Exchange Offer
will not be entitled to require the Company to file a Resale Registration, and the
interest rate on such Notes will remain at its initial level.
Holders of Senior Notes will not have dissenters' or appraisal rights in connection
with the Exchange Offer. See "The Exchange Offer -- Appraisal Rights."
11
Expiration Date The Exchange Offer will expire at 5:00 p.m., Eastern time, on December 17, 1997
unless the Exchange Offer is extended by the Company in its sole discretion,
in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended. See "The Exchange Offer -- Expiration
Date; Extensions; Amendments."
Conditions to the Exchange The Exchange Offer is subject to certain customary conditions, which may be
Offer waived, to the extent permitted by law, by the Company. See "The Exchange Offer
-- Conditions."
Procedures for Tendering Each eligible holder of Senior Notes wishing to accept the Exchange Offer must
Exchange Notes complete, sign and date the accompanying Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile, together with the Senior Notes
and any other required documentation to the Exchange Agent (as defined herein) at the
address set forth in the Letter of Transmittal. Certain brokers, dealers, commercial
banks, trust companies and other nominees may also effect tenders by book-entry
transfer, including an Agent's Message in lieu of the Letter of Transmittal.
By executing the Letter of Transmittal, or by use of an Agent's Message,
each holder will represent to the Company that, among other things, (i) the Exchange
Notes to be acquired by such holder of Senior Notes in connection with the Exchange
Offer are being acquired by such holder in the ordinary course of its business, (ii)
such holder has no arrangement or understanding with any person to participate in a
distribution of the Exchange Notes, (iii) that if such holder is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for the
purposes of distributing Exchange Notes, such holder will comply with the registration
and prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes acquired by such person and cannot
rely on the position of the staff of the Commission set forth in the No-Action Letters
(see "The Exchange Offer -- Resale of the Exchange Notes"), (iv) such holder
understands that a secondary resale transaction described in clause (iii) above and any
resales of Exchange Notes obtained by such holder directly from the Company should be
covered by an effective registration statement containing the selling security holder
information required by Item 507 or Item 508, as applicable, of Regulation S-K of the
Commission and (v) such holder is not an "affiliate" as defined in Rule 405 under the
Securities Act, of the Company. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Senior Notes that were acquired as a
result of market-making activities or other trading activities, such holder will be
required to acknowledge in the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such holder will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. See "The Exchange
Offer -- Procedures for Tendering."
Special Procedures for Beneficial Any beneficial owner whose Senior Notes are registered in the name of a broker, dealer,
Owners commercial bank, trust company or other nominee and who wishes to tender such Senior
Notes in the Exchange Offer should contact such registered holder promptly and instruct
such registered holder to tender on such beneficial owner's behalf. If such beneficial
owner wishes to tender on such owner's own behalf, such owner must, prior to completing
and executing the Letter of Transmittal and delivering such owner's Senior Notes,
either make appropriate arrangements to register ownership of the Senior Notes in such
owner's name or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time and may not be able to be
completed prior to the Expiration Date. See "The Exchange Offer -- Procedures for
Tendering."
Guaranteed Delivery Holders of Senior Notes who wish to tender their Senior Notes and whose Senior Notes
Procedures are not immediately available or who cannot deliver their Senior Notes, the Letter of
Transmittal or any other documents required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for book-entry transfer) prior to the
Expiration Date must tender their Senior Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures."
13
Withdrawal Rights Tenders may be withdrawn at any time prior to 5:00 p.m., Eastern time, on the
Expiration Date pursuant to the procedures described under "The Exchange Offer --
Withdrawal of Tenders."
Acceptance of the Senior Notes and Subject to the satisfaction or waiver of the conditions to the Exchange Offer, the
Delivery of the Exchange Notes Company will accept for exchange any and all Senior Notes that are properly tendered in
the Exchange Offer, and not withdrawn, prior to 5:00 p.m., Eastern time, on the
Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be
delivered on the earliest practicable date following the Expiration Date. See "The
Exchange Offer -- Terms of the Exchange Offer."
Certain Federal Income Tax For a discussion of certain federal income tax considerations relating to the exchange
Consequences of the Exchange Notes for Senior Notes, see "Certain Federal Income Tax
Considerations."
Registration Rights Agreement The Senior Notes were sold by the Company on September 23, 1997 to the Initial
Purchasers pursuant to a purchase agreement dated September 17, 1997 (the
"Purchase Agreement") by and among the Company, the Subsidiary Guarantors
and the Initial Purchasers, in an offering consisting in the aggregate of $125,000,000
of the Senior Notes. Pursuant to the Purchase Agreement, the Company, the
Subsidiary Guarantors and the Initial Purchasers entered into the Registration Rights
Agreement, which grants the holders of the Senior Notes certain exchange and
registration rights. This Exchange Offer is intended to satisfy such rights, which
generally will terminate upon the consummation of the Exchange Offer. The
holders of the Exchange Notes will not be entitled to any exchange or registration
rights with respect to the Exchange Notes. See "The Exchange Offer -- Senior
Notes Registration Rights."
Effect on Holders of the As a result of the making of this Exchange Offer, the Company will have fulfilled
Senior Notes certain of its obligations under the Registration Rights Agreement, and holders of
Senior Notes who do not tender their Senior Notes generally will not have any further
registration rights under the Registration Rights Agreement or otherwise. Such holders
will continue to hold the untendered Senior Notes and will be entitled to all the
rights and subject to all the limitations, including, without limitation, transfer
restrictions, applicable thereto under the Indenture, except to the extent such rights
or limitations, by their terms, terminate or cease to have further effectiveness as a
result of the Exchange Offer. Accordingly, if any Senior Notes are tendered and
accepted in the Exchange Offer, the trading market, if any, for the untendered Senior
Notes could be adversely affected.
Exchange Agent The Bankers Trust Company is serving as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
14
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are substantially identical to
the form and terms of the Senior Notes which they replace except that (i) the
Exchange Offer will have been registered under the Securities Act and,
therefore, the Exchange Notes will not bear legends restricting the transfer
thereof and (ii) the holders of Exchange Notes generally will not be entitled to
further registration rights under the Registration Rights Agreement, which
rights generally will have been satisfied when the Exchange Offer is
consummated. The Exchange Notes will evidence the same indebtedness as the
Senior Notes which they replace and will be issued under, and be entitled to the
benefits of, the Indenture. See "Description of Exchange Notes."
Maturity Date.................................. September 15, 2004.
Interest Payment Dates......................... Each March 15 and September 15, commencing March 15, 1998.
Optional Redemption............................ The Exchange Notes will be redeemable at the option of the
Company, in whole or in part, on or after September 15, 2001, at the
redemption prices set forth herein, plus accrued and unpaid interest
to the date of redemption. See "Description of Exchange Notes --
Optional Redemption."
Prior to September 15, 2000, the Company, at its option, may redeem in
the aggregate up to 25% of the original principal amount of the Exchange
Notes at 110.75% of the aggregate principal amount so redeemed, plus
accrued and unpaid interest to the redemption date, with the Net
Proceeds of one or more Public Equity Offerings, provided that at least
$93.75 million of the principal amount of the Exchange Notes originally
issued remain outstanding immediately after the occurrence of any such
redemption and that any such redemption occurs within 90 days following
the closing of any such Public Equity Offering. See "Description of
Exchange Notes -- Optional Redemption."
Mandatory Redemption........................... None.
Ranking........................................ The Exchange Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment with all existing and future
unsecured unsubordinated indebtedness of the Company and senior in right
of payment to all existing and future subordinated indebtedness of the
Company. The Guarantee of each of the Subsidiary Guarantors other than
CII will rank pari passu in right of payment with all existing and
future unsubordinated indebtedness of such Subsidiary Guarantor and
senior in right of payment to all existing and future subordinated
indebtedness of the Subsidiary Guarantors. However, the Exchange Notes
and Guarantees will be effectively subordinated to all existing and
future secured indebtedness of the Company and such Subsidiary
Guarantors (to the extent of the assets securing such indebtedness). The
Guarantee by CII will be a senior subordinated obligation of CII,
subordinated in right of payment to all existing and future CII Senior
Indebtedness (as defined herein) (which, as of June 30, 1997, totaled
$16.1 million, all of which was secured), and will rank pari passu in
right of payment with all existing and future senior subordinated
indebtedness of CII (which, as of June 30, 1997, totaled $105.7 million)
and senior in right of payment to all subordinated indebtedness of CII
(which, as of June 30, 1997, totaled $19.2 million). As of June 30,
1997, after giving pro forma effect to the Offering of the Senior Notes,
the Company and the Subsidiary Guarantors had approximately $53.6
million of secured indebtedness outstanding.
15
Guarantees..................................... The obligations of the Company under the Exchange Notes will be
fully and unconditionally guaranteed on a joint and several basis by
each of the existing and future Restricted Subsidiaries of the
Company, other than any Restricted Subsidiary that is a
Securitization Special Purpose Subsidiary or a Small Business
Investment Company and any Subsidiary designated in the future as
an "Unrestricted Subsidiary" in accordance with the Indenture. See
"Description of the Exchange Notes -- Subsidiary Guarantees."
Change of Control.............................. In the event of a Change of Control, each Holder of the Exchange
Notes may require the Company to repurchase the Exchange Notes
held by such Holder at 101% of the principal amount thereof plus
accrued and unpaid interest to the date of repurchase. See
"Description of Exchange Notes -- Certain Covenants -- Change of
Control Offer."
Certain Covenants.............................. The Indenture will contain certain covenants, including, but not
limited to, covenants with limitations on the following matters: (i)
restricted payments; (ii) incurrence of additional indebtedness; (iii)
issuance of preferred stock; (iv) incurrence of additional liens; (v)
dividends and other payment restrictions affecting Restricted
Subsidiaries; (vi) restrictions on distributions from subsidiaries; (vii)
merger, consolidation or sale of assets; and (viii) transactions with
affiliates. However, all of these limitations are subject to a number
of important exceptions and qualifications. See "Description of
Exchange Notes -- Certain Covenants."
Use of Proceeds................................ The Company will not receive proceeds from the Exchange Offer.
The net proceeds from the sale of the Senior Notes will be used to
repay outstanding indebtedness under the Company's existing credit
facilities and warehouse facilities. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
1992 1993 1994 1995 1996 1996 1997
(Dollars in thousands)
STATEMENT OF INCOME DATA:
Revenues:
Interest and servicing revenue......... $6,980 $7,983 $10,903 $15,639 $21,182 $9,937 $18,109
Cash gain on sale of loans............. 1,686 3,193 4,990 8,987 21,554 6,996 7,295
Non cash gain on sale of loans......... -- 412 1,460 182 2,261 472 10,812
Other revenues......................... 342 458 842 1,470 5,391 904 13,648
Total revenues.................... 9,008 12,046 18,195 26,278 50,388 18,309 49,864
Expenses:
Interest expense....................... 4,315 5,073 5,879 8,527 11,021 5,576 9,782
Provision for credit losses............ 349 686 2,510 2,480 5,416 1,532 4,671
General and administrative expenses.... 4,698 5,624 7,359 10,419 23,490 7,622 31,715
Total expenses.................... 9,362 11,383 15,748 21,426 39,927 14,730 46,168
Income (loss) from continuing operations (1)(2) (249) 937 1,792 4,581 10,095 3,436 5,165
Income (loss) from discontinued operations (1). 685 260 546 (3,924) -- -- --
Net income (loss) (1)....................... $436 $1,197 $2,338 $657 $10,095 $3,436 $5,165
CASH FLOW DATA:
Cash flow due to operating cash income
and expenses (3) $519 $2,424 $4,909 $6,849 $14,560 $6,107 $(2,006)
Cash (used in) provided by loans held
for sale and other (3,497) (830) 11,811 (17,025) (74,088) 46,863 (121,767)
Net cash (used in) provided by operating
activities.................................. $(2,978) $1,594 $16,720 $(10,176) $(59,528) $52,970 $(123,773)
OPERATING DATA:
Total loans sold....................... $10,827 $31,052 $85,772 $153,055 $317,854 $159,833 $176,126
Total loans securitized................ -- -- -- 17,063 28,958 16,107 203,366
Loans originated or purchased:
Mortgage Loans.................... $30,613 $20,536 $99,373 $192,800 $328,649 $153,802 $474,261
Small Business Loans.............. 23,909 37,867 43,123 39,560 68,210 30,583 30,996
Automobile Loans.................. 2,760 5,230 7,547 17,148 18,287 10,052 8,488
Total loans originated or purchased $57,282 $63,633 $150,043 $249,508 $415,146 $194,437 $513,745
Loans serviced (period end) (4):
Mortgage Loans.................... $42,460 $42,335 $60,151 $88,165 $146,231 $70,430 $444,472
Small Business Loans:
Guaranteed portion........... 17,649 47,314 70,038 83,829 96,792 93,468 106,848
Unguaranteed portion......... 4,033 11,238 18,771 24,867 44,017 32,219 63,043
Automobile Loans.................. 4,347 6,011 8,483 17,673 22,033 21,865 22,556
Total loans serviced (period end) $68,489 $106,898 $157,443 $214,534 $309,073 $217,982 $636,919
Weighted average interest rate earned:
Mortgage Loans.................... 13.82% 11.96% 12.37% 12.10% 11.97% 12.24% 10.19%
Small Business Loans.............. 4.80 7.65 10.11 10.39 12.61 12.61 14.15
Automobile Loans.................. 26.54 28.33 28.28 27.40 23.57 22.72 24.12
Total weighted average
interest rate earned 14.37% 12.50% 13.22% 13.70% 13.18% 13.07% 11.52%
Weighted average interest rate paid.... 7.74% 7.24% 6.94% 7.57% 7.36% 8.64% 7.88%
Expense coverage ratio (5)............. 96.22 102.21 106.27 121.80 120.54 121.09 84.59
Ratio of earnings to fixed charges (6) 0.9 1.1 1.4 1.6 1.9 1.6 1.4
ASSET QUALITY DATA:
Delinquent loans 30 days or more past due (7):
Mortgage Loans.................... 23.53% 17.66% 14.43% 7.26% 13.70% 5.78% 5.78%
Small Business Loans.............. 1.19 1.11 9.69 7.92 10.52 3.20 3.20
Automobile Loans.................. 9.51 3.72 12.83 17.09 14.40 10.82 10.82
Total loans 30 days or more
past due. 17.90% 12.75% 13.31% 8.41% 12.88% 5.69% 5.69%
Net charge-offs (8):
Mortgage Loans.................... 0.19% 1.05% 2.96% 1.04% 0.81% 0.03% 0.38%
Small Business Loans.............. -- 0.05 0.21 1.43 2.71 0.39 2.42
Automobile Loans.................. 4.93 5.03 2.53 3.68 9.65 5.51 15.40
Total net charge-offs........ 0.68% 1.29% 2.36% 1.43% 2.47% 0.96% 1.60%
17
June 30, 1997
Actual Pro Forma (9)
BALANCE SHEET DATA:
Total gross loans receivable................................................................. $310,063 $310,063
Total gross residual assets (10).............................................................. 35,291 35,291
Total assets................................................................................. 364,988 369,238
Notes offered hereby......................................................................... -- 125,000
Other debt................................................................................... 299,243 178,493
Total debt................................................................................... 299,243 303,493
Shareholders' equity......................................................................... 57,155 57,155
FINANCIAL RATIOS:
Ratio of shareholders' equity to managed assets (11)......................................... 9.8% 9.7%
Ratio of gross residual assets to shareholders' equity (10)................................... 61.7 61.7
Ratio of total loans receivable to total debt................................................ 103.6 102.2
Ratio of total gross loans receivable and residual assets to total debt (10).................. 115.4 113.8
(1) Includes the impact of the utilization of the Company's net operating loss
carryforward (the "NOL"), which totaled approximately $13.5 million and
$564,000 at December 31, 1996 and June 30, 1997, respectively. Absent the
utilization of the NOL, for the year ended December 31, 1996 and the six
months ended June 30, 1997, net income would have been approximately $6.8
million and $2.1 million, respectively.
(2) The amount set forth with respect to the year ended December 31, 1993
includes $113,000, which reflects the cumulative effect of a change in the
method of accounting for income taxes.
(3) Cash flow due to operating cash income and expenses reflects cash provided
by (used in) operating activities excluding loan origination activity or
loan sales proceeds, change in other payables and receivables and cash
provided by (used in) operating activities of discontinued operations.
(4) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all
securitized loans, and the Small Business Loans, but, solely for purposes
of calculating the allowance ratio and net charge-off ratio, excludes the
guaranteed portion of the SBA Loans.
(5) Expense coverage ratio represents total revenues, less non-cash gain on
sale of loans, expressed as a percentage of total expenses.
(6) Ratio of earnings to fixed charges represents pre-tax income from
continuing operations adjusted for interest expense and amortization
of debt origination costs expressed as a percentage of interest expense
plus amortization of debt origination costs.
(7) Delinquent loans more than 30 days past due are expressed as a percentage
of total serviced Mortgage Loans, the unguaranteed portion of Small
Business Loans, and Auto Loans, as applicable, as of the end of the period
indicated. No information is available for December 31, 1992.
(8) Net charge-offs of loans are expressed as a percentage of average serviced
Mortgage Loans, the unguaranteed portion of Small Business Loans and Auto
Loans, as applicable, for the period indicated, except for the six month
periods ended June 30, 1996 and 1997, which have been annualized.
(9) Adjusted to reflect the sale of the Notes and the application of the
estimated net proceeds thereof as described under "Use of Proceeds."
(10) Residual assets consist of restricted cash and interest-only, subordinate
and residual certificates resulting from securitizations and interest-only
certificates resulting from the sale of SBA Loan Participations.
(11) Managed assets consists of total assets plus loans serviced for others, but
excludes the guaranteed portion of SBA Loans.
18
RISK FACTORS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF THE COMPANY'S
MANAGEMENT AS WELL AS ON ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE
TO THE COMPANY AT THE TIME SUCH STATEMENTS WERE MADE. WHEN USED IN THIS
PROSPECTUS, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND"
AND SIMILAR EXPRESSIONS, AS THEY RELATE TO THE COMPANY, ARE INTENDED TO IDENTIFY
SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THESE STATEMENTS
ARE REASONABLE, PROSPECTIVE PURCHASERS SHOULD BE AWARE THAT ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED BY SUCH FORWARD-LOOKING STATEMENTS AS A
RESULT OF THE RISK FACTORS SET FORTH BELOW OR OTHER FACTORS. PROSPECTIVE
PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS, AS WELL AS THE OTHER
INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS. THE COMPANY CAUTIONS THE
READER, HOWEVER, THAT THIS LIST OF FACTORS MAY NOT BE EXHAUSTIVE AND THAT THESE
OR OTHER FACTORS, MANY OF WHICH ARE OUTSIDE OF THE COMPANY'S CONTROL, COULD HAVE
A MATERIAL ADVERSE EFFECT ON THE COMPANY AND ITS ABILITY TO SERVICE ITS
INDEBTEDNESS, INCLUDING PRINCIPAL, REGULAR INTEREST PAYMENTS AND POSSIBLE
ADDITIONAL INTEREST PAYMENTS THAT MAY ARISE IN THE EVENT OF A REGISTRATION
DEFUALT AS DISCUSSED HEREIN WITH RESPECT TO THE EXCHANGE NOTES. FURTHERMORE, THE
COMPANY MAY NOT UPDATE OR REVISE THE FORWARD-LOOKING STATEMENTS TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS. PROSPECTIVE PURCHASERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN. ALL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS
SET FORTH BELOW.
FAILURE TO EXCHANGE SENIOR NOTES
Exchange Notes will be issued in exchange for Senior Notes only after
timely receipt by the Exchange Agent of such Senior Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Senior Notes desiring to tender such Senior Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Senior
Notes for exchange. Senior Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Senior Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Senior Notes, where such
Senior Notes were acquired by such broker-dealer as a result of market-making
activities or any other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. To
the extent that Senior Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Senior Notes could
be adversely affected due to the limited amount, or "float," of the Senior Notes
that is expected to remain outstanding following the Exchange Offer. Generally,
a lower "float" of a security could result in less demand to purchase such
security and could, therefore, result in lower prices for such security. For the
same reason, to the extent that a large amount of Senior Notes is not tendered
or is tendered and not accepted in the Exchange Offer, the trading market for
the Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
LEVERAGE; ASSET ENCUMBRANCE
The Company currently has substantial outstanding indebtedness, and,
subsequent to the Exchange Offer, the Company will be significantly leveraged.
Although the covenants under the Indenture restrict the incurrence of
Indebtedness by the Company and its Restricted Subsidiaries, the Indenture does
not limit the amount of Indebtedness under the Company's warehouse facilities
that qualifies as Permitted Warehouse Indebtedness (as defined herein).
Permitted Warehouse Indebtedness generally means indebtedness used exclusively
to finance or refinance the origination or purchase of loans by the Company or a
Subsidiary, up to the lesser of (i) the amount advanced by the warehouse lender
or (ii) 100% of the principal amount of such loans. See "Description of Exchange
Notes -- Certain Definitions." All Permitted Warehouse Indebtedness is secured
by the loans financed thereby. Although lenders under Permitted Warehouse
Indebtedness in a default or bankruptcy situation can be expected to seek
payment first out of the collateral securing such indebtedness, such existing
indebtedness is recourse to the Subsidiaries incurring such indebtedness and all
of such indebtedness is unconditionally guaranteed by the Company. Similarly,
although the Company used the proceeds from the Offering of the Senior
Notes to repay existing indebtedness under its existing credit facilities and
warehouse facilities (collectively, the "Credit Facilities"), the Indenture
limits but does not prohibit the Company's incurrence of Indebtedness secured by
interest-only and residual certificates, and such indebtedness would also be
recourse to the Subsidiaries incurring such indebtedness. Thus, if the value of
the collateral securing any such indebtedness was to be insufficient to repay
such indebtedness in full, the lenders would be entitled to seek payment of the
shortfall, if any, from the Subsidiary incurring such indebtedness, and in some
cases, from the Company. See " -- Availability of Funding Sources." The
Indenture also permits the Company and its Restricted Subsidiaries to incur
substantial amounts of additional secured indebtedness. At June 30, 1997, on a
pro forma basis giving effect to the Offering of the Senior Notes and the
application of the net proceeds therefrom, aggregate outstanding consolidated
indebtedness (including the current maturities thereof) of the Company would
have been approximately $303.5 million, of which $53.6 million would have been
secured indebtedness to which the Notes and the Guarantees are
effectively subordinated, and the Company would have unused borrowing capacity
(subject to borrowing base limitations) of an additional $154.2 million of
indebtedness (all of which would be secured) under its Credit Facilities. In
addition, the guarantee by CII is a senior subordinated obligation of CII,
subordinated in right of payment to all existing and future senior indebtedness
of CII (which, as of June 30, 1997, totaled $16.1 million, all of which was
secured), and ranks pari passu in right of payment with all existing and
future senior subordinated indebtedness of CII (which, as of June 30, 1997,
totaled $105.7 million) and senior in right of payment to all subordinated
indebtedness of CII (which, as of June 30, 1997, totaled $19.2 million). See
"Capitalization."
19
The degree to which the Company is leveraged could have important
consequences to the holders of the Exchange Notes, including: (i) the Company
may be more vulnerable to adverse general economic and industry conditions; (ii)
the Company may find it more difficult to obtain additional financing for future
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes; and (iii) the Company will have to dedicate a substantial
portion of the Company's cash flow from operations to the payment of principal
and interest on Indebtedness (a substantial portion of which may become due
prior to the maturity of the Notes), thereby reducing the funds
available for operations and future business opportunities. In addition, the
instruments governing the Indebtedness of the Company, including the Indenture,
impose significant operating and financial restrictions on the Company. These
restrictions could also limit the ability of the Company to effect future
financings, make needed capital expenditures, withstand a future downturn in
business or the economy, or otherwise conduct necessary corporate activities.
The Company's ability to sustain its growth and make payments of
principal or interest on, or to refinance, its Indebtedness (including the
Exchange Notes) will depend on its future operating performance, and its ability
to effect additional securitizations, and debt and/or equity financing which, to
a certain extent, is subject to economic, financial, competitive, and other
factors beyond its control. If the Company is unable to generate sufficient cash
flow in the future to service its debt, it may be required to refinance all or a
portion of its existing debt, including the Exchange Notes, or to obtain
additional financing. There can be no assurance that any such refinancing would
be available or that any additional financing could be obtained on terms
reasonably satisfactory to the Company. The inability to obtain additional
financing could have a material adverse effect on the Company and on its ability
to service debt, including the Exchange Notes. See " -- Ability to Service Debt;
Negative Cash Flows" and " -- Availability of Funding Sources."
From time to time, the Company and certain of its subsidiaries have
sought and obtained waivers to and amendments under several of the Credit
Facilities relating to certain financial ratios and covenants. Waivers are
typically requested and granted for limited periods, after which either a
further waiver is requested or compliance makes a further waiver unnecessary.
Compliance with such ratios is generally tested on a quarterly basis, and
certificates relating to compliance are generally required after the financial
statements for such quarters become available. Currently, the Company is in
compliance with all its financial covenants in its Credit Facilities.
Traditionally, the Company has been able to secure any waivers and amendments it
has required from time to time. No assurances can be given, however, that future
waivers will be forthcoming. The failure to obtain any such waivers would result
in an event of default under the relevant Credit Facility, thereby permitting
acceleration of the indebtedness under such facility as well as indebtedness
under other instruments that contain cross-acceleration or cross- default
provisions, which could have a material adverse effect on the Company's
financial condition.
ABILITY TO SERVICE DEBT; NEGATIVE CASH FLOWS
There can be no assurance that the cash available from operations and
financing activities will be sufficient to enable the Company to make required
interest payments on the Exchange Notes and its other obligations and required
payments. The Company may encounter liquidity problems while attempting to
withstand competitive pressures or adverse economic conditions, which could
affect its ability to meet such obligations. In such circumstances, the ability
of the Company to repay the Exchange Notes could be materially adversely
affected. The Company requires substantial amounts of cash to fund its loan
origination, loan purchase, and securitization activities. The Company expects
to continue to operate on a negative cash flow basis due to increases in the
volume of loan originations and purchases and due to the growth of its
securitization program. In a securitization, the Company recognizes at closing a
gain on sale for the loans securitized and incurs significant associated taxes
(both current and deferred) and expenses but only receives the cash from such
gain from the interest-only and residual certificates and from servicing of the
loans, which are payable over the actual life of the loans securitized. For the
year ended December 31, 1996 and the six months ended June 30, 1997, the Company
operated on this negative cash flow basis using $59.5 million and $123.8
million, respectively, in operating activities. This negative cash flow is
expected to increase for the foreseeable future as the Company continues to
grow.
DEPENDENCE ON SECURITIZATIONS AND LOAN SALES
The Company is expected to rely significantly upon securitizations to
generate cash proceeds for repayment of its warehouse facilities and to create
availability to originate and purchase additional loans. Further, gain on sale
of loans generated by the Company's securitizations is expected to represent a
significant portion of the Company's revenues. The Company anticipates
securitizing Mortgage Loans on at least a quarterly basis and Small Business
Loans on at least an annual basis. Several factors affect the Company's ability
to complete securitizations, including conditions in the securities markets
generally, conditions in the asset-backed securities market specifically, the
credit quality of the Company's portfolio of loans, and the Company's ability to
obtain credit enhancement. In addition, the Company has not had significant past
experience with securitization. It has engaged in three non-Mortgage Loan
securitizations (the first of which was in June 1995) and began quarterly
Mortgage Loan securitizations in the first quarter of 1997. Accordingly, if the
Company were unable to securitize profitably a sufficient number of loans in a
particular financial reporting period, then the Company's revenue, representing
the gain on sale, for such period would decline and could result in lower income
or a loss for such period. In addition, unanticipated delays in closing
securitizations could increase the Company's costs associated with carrying its
loans during the warehousing period, including hedging costs. Any impairment of,
or delay in, the Company's ability to complete securitizations could result in a
material adverse effect on the Company's financial condition and results of
operations.
In addition to securitizations, a material portion of the Company's
profits and cash flows is generated through the sale of loans. To the extent
that the Company is unable to sell its loans on terms acceptable to the Company,
the Company's ability to repay the Exchange Notes could be materially and
adversely affected.
AVAILABILITY OF FUNDING SOURCES
The Company, like most financial service companies, has a constant need
for capital to finance its lending activities. Historically, the Company has
funded the majority of its lending activities through borrowings pursuant to its
existing Credit Facilities, by selling, through a subsidiary, CII, senior
subordinated notes ("CII Senior Subordinated Notes") and subordinated debentures
("CII Subordinated Debentures" and, collectively with the CII Senior
Subordinated Notes, the "CII Notes") with maturities generally of one year from
their varying dates of issuance to residents of South Carolina, by securitizing
or selling a substantial portion of the loans it originates, and through the
issuance of equity securities. If the Company were unable to securitize its
loans or sell its loans in the secondary markets, the Company's Credit
Facilities were terminated, the Company were unable to sell CII Notes, or
holders of CII Notes were unwilling to renew their CII Notes, or the Company
were unable to access the equity markets, the Company's operations,
profitability or financial condition could be materially and adversely affected.
20
In particular, if the holders of CII Notes determined not to renew their CII
Notes, any replacement funding if available would likely be at a higher interest
rate. Also, the Credit Facilities contain a number of financial covenants,
including, but not limited to, covenants with respect to debt to net worth
ratios, and minimum adjusted tangible net worth. In the event that the Company's
financial performance were to deteriorate materially, the Company's ability to
borrow under the Credit Facilities or renew the Credit Facilities could be
impaired. Furthermore, there can be no assurance that the Company's existing
lenders will agree to refinance such debt, that other lenders would be willing
to extend lines of credit to the Company or that funds otherwise generated from
operations would be sufficient to satisfy such obligations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Also, the Credit Facilities contain borrowing base limitations that
effectively limit the available borrowings under a particular Credit Facility to
an amount less than the stated maximum facility amount. For example, although at
June 30, 1997 the Company had Credit Facilities providing for borrowings of up
to an aggregate of $401.5 million and outstanding borrowings of $174.4 million,
the Company only had existing unused borrowing availability under the borrowing
base limitations of the Credit Facilities of $33.4 million. In the event that
the Company is unable to securitize or sell loans or increase its borrowing
capacity, its operations, profitability or financial condition (and its ability
to repay the Exchange Notes) could be materially and adversely affected.
CREDITWORTHINESS OF NON-PRIME BORROWERS AND RISK OF DEFAULT
Substantially all of the Company's loans are made in the non-prime
credit market, which consists of borrowers who are deemed to be credit-impaired
due to various factors. These factors include, among others, the manner in which
they have managed previous credit, the existence of prior bankruptcies, the
absence or limited extent of their prior credit history or their limited
financial resources. Consequently, the Company's loans, relative to commercial,
mortgage and consumer loans made to prime borrowers, involve a significantly
higher probability of default and greater servicing and collection costs. The
Company's profitability depends upon its ability to properly evaluate the
collateral and creditworthiness of non-prime borrowers and to efficiently and
effectively service and collect its loan portfolio. There can be no assurance
that the performance of the Company's loan portfolio will be maintained, that
the Company's systems and controls will continue to be adequate or that the rate
of future defaults and/or losses will be consistent with prior experience or at
levels that will maintain the Company's profitability.
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. Following the sale of such loans, the
Company's loan delinquency and default risk with respect to such loans is
limited to those circumstances in which it is required to repurchase such loans
due to a breach by it of a representation or warranty in connection with the
whole loan sale. This risk with respect to breaches of representations or
warranties also exists for loans sold through securitization. In addition, in
securitization transactions, the subordinate and/or residual certificates bear
the risk of default for the entire pool of securitized loans to the extent of
such certificates' value. Accordingly, the value of the subordinate and/or
residual certificates retained by the Company would be impaired to the extent of
losses on the securitized loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Credit Losses and
Credit Loss Experience."
CREDIT RISKS ASSOCIATED WITH HIGH LTV LOANS
Certain of the Company's loan products have high LTV ratios. The
Company typically sells these high LTV loans within 30 days of origination. In
the event that the Company were unable to sell such loans, such sales were
delayed, or the Company chose not to sell such loans, the Company's credit risk
associated with such loans would continue. Although secured by real property,
the collateral of such high LTV loans often will not be sufficient to cover the
principal amount of the loans in the event of default. The principal balance of
such a loan, inclusive of other loans secured by the same property, may exceed
the value of the underlying property at the time of the making of the loan by as
much as 25%. Consequently, the Company is less likely to use foreclosure as a
means to mitigate its losses upon the default of such loans or to recover any
meaningful amounts in the event of a foreclosure. LTV determinations are based
on an appraised value of the underlying property. Accordingly, there can be no
assurance that such values accurately reflect prevailing market prices of such
properties, either when made or upon a default on the related loan. For such
loans, the Company relies primarily on the creditworthiness of the borrower.
Losses not covered by the underlying properties could have a material adverse
effect on the Company's results of operations and financial condition (including
its ability to repay the Exchange Notes).
POTENTIAL CHANGE IN VALUATION OF INTEREST-ONLY AND RESIDUAL CERTIFICATES
The Company sells or securitizes substantially all of the loans that it
originates or purchases. The Company derives a substantial portion of its income
by recording a gain on sale when loans are securitized. In a securitization, the
Company receives as an investment the interest-only and residual certificates
created as a result of such securitization. The Company calculates the value of
its interest-only and residual certificates based upon their fair values. The
fair value of these assets is determined based on various economic factors,
including loan types, balances, interest rates, dates of origination, terms and
geographic locations. The Company also uses other available information
applicable to the types of loans the Company originates and purchases, such as
reports on prepayment rates, interest rates, collateral value, economic
forecasts and historical default and prepayment rates of the portfolio under
review. The Company estimates the expected cash flows that it will receive over
the life of a portfolio of loans. These expected cash flows constitute the
excess of the interest rate payable by the obligors of loans over the interest
rate passed through to the purchasers of the related securities, less applicable
recurring fees and credit losses. The Company discounts the expected cash flows
using an interest rate that market participants would use for similar financial
instruments. At June 30, 1997, the Company's balance sheet reflected the fair
value of interest-only and residual certificates (net of allowances) of $25.9
million.
Realization of the value of these interest-only and residual
certificates in cash is subject to the prepayment and loss characteristics of
the underlying loans and to the timing and ultimate realization of the stream of
cash flows associated with such loans. Significant prepayment or loss experience
would impair the future cash flows of the interest-only and residual
certificates. If actual experience differs from the assumptions used in
determination of the asset value, future cash flows and earnings could be
negatively impacted and the Company could be required to write-down the value of
its interest-only and residual certificates. No assurance can be given that the
Company's receivables will not experience significant prepayments or losses or
as to whether, and in what amounts, the Company in the future may have to
write-down the value of the interest-only and residual certificates from its
securitization transactions. In addition, if the prevailing interest rate rose,
the
21
required discount rate might also rise, resulting in impairment of the value of
the interest-only and residual certificates. The Company believes that there is
no active market for the sale of its interest-only and residual certificates. No
assurance can be given that these assets could be sold at their stated value on
the balance sheet, if at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CONTINGENT RISKS
Although the Company sells or securitizes on a nonrecourse basis a
substantial portion of the loans that it originates, the Company retains some
degree of credit risk with respect to securitized loans. During the period of
time that loans are held pending sale or securitization, the Company is subject
to the various business risks associated with lending, including the risk of
borrower default, the risk of foreclosure and the risk that an increase in
interest rates would result in a decline in the value of loans to potential
purchasers. The Company's Mortgage Loan securitizations generally require the
use of the excess cash flow distributions related to the residual certificates
to accelerate the amortization of certificate holders' principal balances
relative to the amortization of the mortgage loans held by the trust up to
certain pre-set levels, while the SBA Loan and Auto Loan securitizations require
a specified cash spread account. The resulting overcollateralization amount or
cash spread account serves as credit enhancement for the related trust and
therefore is available to absorb losses realized on loans held by such trust.
Generally, the form of credit enhancement agreements entered into in connection
with securitization transactions contains specified limits on the delinquency,
default and loss rates on the receivables included in each trust. If at any
measuring date, the delinquency, default or loss rate with respect to any trust
were to exceed the specified delinquency, default and loss rates, excess cash
flow from the trust, if any, would be used to fund an increased
overcollateralization limit or spread account limit instead of being distributed
to the Company, which would have an adverse effect on the Company's cash flow.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition, when borrowers are delinquent in making monthly
payments on loans included in a securitization, the Company is required to
advance interest payments with respect to such delinquent loans to the extent
that the Company deems that such advances will be ultimately recoverable. These
advances require funding from the Company's capital resources but have priority
of repayment from the succeeding month's collections. Lastly, agreements
effecting whole loan sales and securitizations require the Company to commit to
repurchase or replace loans that do not conform to the representations and
warranties made by the Company at the time of sale. The Company has, from time
to time, been required to repurchase or replace an immaterial amount of loans
due to a violation of a representation or warranty. There can be no assurance
that in the future the Company will not be required to repurchase or replace
loans, and any such repurchases could have a material adverse effect on the
Company's financial condition and results of operations.
In the ordinary course of its business, the Company is subject to
claims made against it by borrowers and investors purchasing its loans arising
from, among other things, losses that are claimed to have been incurred as a
result of alleged breaches of fiduciary obligations, misrepresentations, errors
and omissions of employees, officers and agents of the Company (including its
appraisers), incomplete documentation and failures by the Company to comply with
various laws and regulations applicable to its business. Any claims asserted in
the future may result in legal expenses or liabilities which could have a
material adverse effect on the Company's financial condition and results of
operations.
RIGHT TO TERMINATE SERVICING RIGHTS; DELINQUENCIES
The pooling and servicing agreements entered into in connection with
the Company's securitizations set forth certain conditions under which the
insurer or the trustee of a particular securitization can terminate the
Company's right to act as servicer. If, at any measuring date, the loss and
delinquency performance of the Mortgage Loans in the securitization exceeds
certain levels, the monoline insurance company may terminate the Company's
servicing rights. The monoline insurer has other rights to terminate servicing
if the Company were to breach its obligations under the pooling and servicing
agreements, losses on foreclosure were to exceed specified limits, the insurer
was required to make payments under its policy, or if the Company failed to meet
certain financial tests, including a minimum net worth test. There can be no
assurance that the Company's servicing rights with respect to the Mortgage Loans
in such securitizations, or any other securitization, will not be terminated in
the future. Any termination of the Company's right to act as servicer under a
securitization would result in a loss of servicing revenue and could materially
and adversely affect its ability to engage in future securitizations, either of
which could have a material adverse effect on the Company's financial condition
and results of operations (including its ability to repay the Exchange Notes).
In addition, high delinquency rates have a negative impact on cash flows.
Provisions in the pooling and servicing agreements have the effect of requiring
the overcollateralization account, which is primarily funded by excess cash flow
from the loans held in the trust, to be increased to certain specified levels
when delinquency rates exceed predetermined limits. This increase, in turn,
would delay the receipt by the Company of cash flows under its interest-only and
residual certificates.
MANAGEMENT OF RAPID GROWTH
Since the acquisition of CII in 1991, and particularly since April 1996, the
Company has expanded into new geographic regions and products and substantially
increased its volume of loans originated and purchased. In particular, the
Company has significantly ramped up its retail lending operation. In light of
such growth, the historical financial performance of the Company may be of
limited relevance in predicting future performance. Any credit or other problems
associated with the large number of loans originated and purchased in the recent
past may not become apparent until sometime in the future. The Company's
continued growth and expansion will place additional pressures on the Company's
personnel and systems. Any future growth may be limited by, among other things,
the Company's need for continued funding sources, access to capital markets,
ability to attract and retain qualified personnel, sensitivity to economic
slowdowns, fluctuations in interest rates and competition from other consumer
finance companies and from new market entrants. There can be no assurance that
the Company will successfully obtain or apply the human, operations and
financial resources needed to manage a developing and expanding business.
Failure by the Company to manage its growth effectively, or to sustain its
historical levels of performance in credit analysis and transaction structuring
with respect to the increased loan origination and purchase volume, could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Mortgage Loan Division."
NON-ATTAINMENT OF GROWTH IN RETAIL ORIGINATIONS
22
In April 1996, the Company established its retail mortgage lending
operations, and currently originates retail Mortgage Loans through eleven
offices in Arizona, Florida, Georgia, Indiana, Louisiana, Mississippi and South
Carolina. A key element of the Company's strategic plan is to continue to
increase significantly its retail Mortgage Loan originations. However, because
the retail mortgage lending operations were only recently established and have a
limited operating history, there is no assurance that the Company will be able
to achieve this planned growth. In the event that the Company's retail mortgage
lending operations do not perform as expected, the Company's operations,
profitability or financial condition (and its ability to repay the Exchange
Notes) could be materially and adversely affected.
LIMITED HISTORY IN SECURITIZATION SERVICING
To date, the Company has engaged in five securitizations, all of which
have been relatively recent and all of which are currently serviced by the
Company. In March 1997 and June 1997, the Company securitized $77.5 million and
$121.2 million, respectively, of Mortgage Loans. From 1995 through 1997, the
Company securitized a total of $34.6 million of loans representing the
unguaranteed portions of the Company's SBA Loans, and $16.1 million of Auto
Loans. Accordingly, the Company has not had significant experience in servicing
securitized loans. Furthermore, a material portion of its revenues is expected
to come from servicing securitized loans. To the extent that the Company
experiences difficulty servicing loans or is terminated as servicer, the
Company's operations, profitability or financial condition (and its ability to
repay the Exchange Notes) could be materially and adversely affected.
TERMINATION OF MORTGAGE BANKER RELATIONSHIPS AND STRATEGIC ALLIANCE AGREEMENTS
The Company's business of originating Mortgage Loans on a wholesale
basis depends, in part, upon its ability to establish and maintain relationships
with Mortgage Bankers. For the year ended December 31, 1996, $259.8 million, or
79%, of the Company's Mortgage Loans were originated in connection with Mortgage
Bankers, $190.7 million of which were originated through Strategic Alliance
Mortgage Bankers, which represented 58% of the Company's total Mortgage Loan
originations for such period. During the first six months of 1997, Mortgage Loan
originations totaled $474.3 million, $73.2 million, or 15%, of which were
originated through Strategic Alliance Mortgage Bankers. The Company's loan
originations could be adversely affected by the termination of one or more of
the strategic alliance agreements. The Company will seek to enter into strategic
alliance agreements with other Mortgage Bankers in the future. The Company's
volume of Mortgage Loans is also expected to be influenced by its ability to
secure and maintain these new strategic alliance agreements.
The existing strategic alliance agreements provide that the Strategic
Alliance Mortgage Bankers must first offer to the Company the right to purchase
all of their loans up to specified levels which meet the Company's underwriting
criteria and, subject to certain limitations and conditions, obligate the
Company to purchase such loans. These agreements have terms ranging from three
to five years and are scheduled to terminate beginning in 2000. Although the
Company will seek to renew these agreements at the end of their terms, there can
be no assurance that such agreements will be renewed or that loan volumes will
be maintained. Furthermore, in the past, certain Strategic Alliance Mortgage
Bankers have unilaterally terminated their agreements with the Company prior to
their scheduled expiration. In the event of the termination or non-renewal of
the Company's relationship with one or more Mortgage Bankers associated with a
material amount of the Company's Mortgage Loans, the Company's operations,
profitability or financial condition (and its ability to repay the Exchange
Notes) could be materially and adversely affected.
Except for the agreements with the Strategic Alliance Mortgage Bankers,
there are no contractual arrangements between the Company and its Mortgage
Bankers with respect to the Mortgage Bankers' referrals of Mortgage Loans to the
Company. Accordingly, any such Mortgage Banker could decline to utilize the
Company to originate and fund its loans. In the event that a large number of
Mortgage Bankers representing a material amount of Mortgage Loans were to decide
not to utilize the Company, the Company's operations, profitability or financial
condition (and its ability to repay the Exchange Notes) could be materially and
adversely affected.
ECONOMIC CONDITIONS
The Company's business may be adversely affected by periods of economic
slowdown or recession which may be accompanied by decreased demand for consumer
credit and declining collateral values. Any material decline in real estate
values reduces the ability of borrowers to use home equity to support borrowings
and increases the LTV ratios of Mortgage Loans previously made by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of default. Furthermore, delinquencies, foreclosures and losses
generally increase during economic slowdowns or recessions. Because of the
Company's focus on borrowers who are unable or unwilling to obtain financing
from conventional lending sources, the actual rates of delinquencies,
foreclosures and losses on such loans could be higher under adverse economic
conditions than those experienced in the lending industry in general. In
addition, any sustained period of such increased delinquencies, foreclosures or
losses could adversely affect the pricing of the Company's loan sales, whether
through whole loan sales or securitizations. In the event that pools of loans
sold and serviced by the Company experience higher delinquencies, foreclosures
or losses than anticipated, the Company's operations, profitability or financial
condition (and its ability to repay the Exchange Notes) could be materially and
adversely affected.
ADEQUACY OF ALLOWANCE FOR CREDIT LOSSES
There are certain risks inherent in making all loans, including risks
with respect to the period of time over which loans may be repaid, risks
resulting from changes in economic and industry conditions, risks inherent in
dealing with individual borrowers and, in the case of a collateralized loan,
risks resulting from uncertainties as to the future value of the collateral.
There is also risk associated with the potential impairment of SBA Loans, if the
SBA should determine that a resulting loss associated with an SBA Loan is
attributable to a failure by the Company to comply with SBA policies and
procedures in connection with the origination, documentation, funding or
servicing of the loan.
The Company maintains an allowance for credit losses based on, among
other things, historical experience, an evaluation of economic conditions and
regular reviews of delinquencies and loan portfolio quality. However, this
allowance may not be sufficient and 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
23
losses will not be required, any of which could have a material adverse effect
on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Credit Losses and Credit Loss Experience."
DEPENDENCE ON FEDERAL PROGRAMS AND RELATED AGREEMENTS
A portion of the Company's business is dependent upon the continuation
of various federally funded programs, such as the SBA's Section 7(a) loan
program. Of the total loans originated by the Company during the year ended
December 31, 1996 and the first six months of 1997, approximately 13% and 4%,
respectively, by principal amount, were SBA Section 7(a) loans. The
discontinuation, elimination or significant reduction of guarantee levels, or
any modification of the qualification criteria or the permissible loan purposes
under any of these federal programs, could have a material adverse effect on the
Company's operations or financial condition. In addition, in the event that the
Company were to lose its status as a "Preferred Lender," the Company could be
materially and adversely affected. See "Business -- Small Business Loan
Division."
During 1995, the SBA reviewed the funding available for the guarantee
of SBA Loans under the government's SBA lending program and in connection with
such review instituted a number of changes, which included the implementation of
$500,000 as the maximum loan amount that could be made under the SBA program and
the preclusion of the use of SBA Loans for purposes of refinancing most forms of
existing debt. These two major changes were ultimately rescinded in connection
with certain other changes in the SBA program instituted in October 1995.
However, these temporary changes had a material adverse effect on the Small
Business Loan Division's loan volume for 1995. Although the permanent changes
instituted with respect to SBA Loans in October 1995 are not expected to have a
material adverse effect on the Small Business Loan Division in the future, the
SBA's actions in 1995 illustrate the potential for governmental regulation
having a material adverse effect on the Company's operations. The agreement
pursuant to which the SBA has agreed to guarantee SBA Loans made by the Company
may be terminated by either the Company or the SBA on 10 days prior written
notice to the other party. The termination or non-renewal of this agreement or
any change in the SBA program could have a material adverse effect on the
Company's operations, profitability or financial condition (and its ability to
repay the Exchange Notes). See "Business -- Small Business Loan Division" and "
- -- Regulation."
INTEREST RATE SENSITIVITY
The Company is subject to certain interest rate risks, particularly
with respect to its Mortgage Loans and Auto Loans, which bear fixed rates of
interest and are principally funded with variable rate debt. In the event that
interest rates rise dramatically in a relatively short period of time, the
Company's interest spread and certain premiums received upon the sale of loans
would decrease, which could materially and adversely affect the Company's
operations, profitability or financial condition (and its ability to repay the
Exchange Notes). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
HEDGING RISKS
The Company, from time to time, purchases hedge instruments to hedge
against interest rate risk. In the event that the hedges purchased do not
perfectly match the interest rate risk being hedged, the Company could have
losses on the hedge instruments which are not offset by corresponding gains on
the loan sales.
COMPETITION
The non-prime financial market is very fragmented and highly
competitive. The Company believes that there are numerous traditional sources of
credit providing, or capable of providing, financing to the Company's market
segment. In addition, there are numerous other companies engaged in or capable
of pooling and selling loans. Historically, commercial banks, savings and loans,
credit unions, financing subsidiaries of automobile manufacturers and other
lenders providing traditional financing (many of which are larger, have
significantly greater financial resources and have relationships with
established captive transaction networks) have not consistently served the
Company's market segment. However, these traditional financing sources have
recently begun to target non-prime financial markets. If these traditional
financing sources continue to enter, particularly at increased levels, the
Company's market segment, the Company's operations, profitability or financial
condition (and its ability to repay the Exchange Notes) could be materially and
adversely affected. In addition, if the Company were to experience increased
competition from other traditional or non-traditional sources of credit, such
increased competition may result in a reduction in the interest rates charged to
borrowers or a reduction in the volume of originated loans. A reduction in such
interest rates or loan volume could materially and adversely affect the
Company's operations, profitability or financial condition (and its ability to
repay the Exchange Notes). See "Business -- Competition."
REGULATION OF LENDING ACTIVITIES; CHANGING REGULATORY ENVIRONMENT
The operations of the Company are subject to extensive regulation by
federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing various requirements and
restrictions, including, among other things, regulating credit granting
activities, requiring licensing as a condition to lending operations,
establishing maximum interest rates, insurance coverages and charges, requiring
disclosures to customers, governing secured transactions and setting collection,
repossession and claims handling procedures and other trade practices.
Furthermore, there can be no assurance that more restrictive laws, rules and
regulations will not be adopted in the future which could make compliance much
more difficult or expensive, restrict the Company's ability to originate or
purchase loans, or otherwise adversely affect the Company's operations,
profitability or financial condition (and its ability to repay the Exchange
Notes). See "Business -- Regulation."
FRAUDULENT CONVEYANCE CONSIDERATIONS
Under applicable provisions of federal bankruptcy law or comparable
provisions of state fraudulent conveyance law, if, among other things, the
Company or any of the Subsidiary Guarantors, at the time it incurred the
indebtedness evidenced by the Notes or its Guarantee, as the case may be,
(i)(a) was or is insolvent or rendered insolvent by reason of such occurrence
or (b) was or is engaged in a business or transaction for which the assets
remaining with the Company are insufficient to provide for payment of such
debts as they mature, and (ii) the Company or such Subsidiary Guarantor
received or receives less than the reasonable equivalent value of fair
consideration for the incurrence of such indebtedness, the Exchange Notes and
the Guarantees could be voided, or claims in respect of the Exchange Notes or
such Guarantees could be subordinated to all other debts of the Company or
such Subsidiary Guarantors, as the case may be. In addition, the payment of
interest and principal by the Company pursuant to the Exchange Notes or the
payment of amounts by a Subsidiary Guarantor pursuant to a Guarantee could be
voided and required to be returned to the person making such payment, or to a
fund for the benefit of the creditors of the Company or such Subsidiary
Guarantor, as the case may be.
The measures of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any proceeding with respect to the
foregoing. Generally, however, the Company or a Subsidiary Guarantor would be
considered insolvent if (i) the sum of its debts, including contingent
liabilities, were greater than the saleable value of all of its assets at a fair
valuation or if the present saleable value of its assets were less than the
amount of its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature, or (ii) it could not pay its
debts as they become due.
To the extent any Guarantees were voided as a fraudulent conveyance or
held unenforceable for any other reason, holders of the Exchange Notes would
cease to have any claim in respect of such Subsidiary Guarantor and would be
creditors solely of the Company and any Subsidiary Guarantor whose Guarantee was
not voided or held unenforceable. In such event, the claims of the holders of
the Exchange Notes against the issuer of an invalid Guarantee would be subject
to the prior payment of all liabilities and preferred stock claims of such
Subsidiary Guarantor. There can be no assurances that, after providing for all
prior claims and preferred stock interests, if any, there would be sufficient
assets to satisfy the claims of the holders of the Exchange Notes relating to
any voided portions of any Guarantees. The Company is a holding company whose
material assets consist primarily of the capital stock of the Subsidiary
Guarantors. Consequently, the Company is dependent upon dividends paid by the
Subsidiary Guarantors to pay its operating expenses, service its debt
obligations, including the Exchange Notes, and satisfy any mandatory repurchase
obligations relating to the Exchange Notes, as a result of a Change of Control
or sale or other disposition of certain assets. See "Description of Exchange
Notes" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
On the basis of historical financial information, recent operating
history as discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other factors, the Company and each
Subsidiary Guarantor believe that, after giving effect to the indebtedness
incurred in connection with the Offering of the Senior Notes, each Subsidiary
Guarantor is not insolvent, does not have unreasonably small capital for
the businesses in which it is engaged, has not incurred debts beyond its ability
to pay such debts as they mature and has sufficient assets to satisfy any
probable money judgment against it in any pending action. There can be no
assurance, however, as to what standard a court would apply in making such
determination.
DEPENDENCE UPON KEY EXECUTIVES
The Company's growth and development to date have been dependent upon
the services of certain members of its senior management. The loss of the
services of one or more such members of senior management could have a material
adverse effect on the Company. See "Management."
24
ACTUAL RESULTS MAY DIFFER FROM FORWARD LOOKING STATEMENTS
Statements in this Memorandum that reflect projections or expectations
of future financial or economic performance of the Company, and statements of
the Company's plans and objectives for future operations, are "forward looking"
statements. No assurance can be given that actual results or events will not
differ materially from those projected, estimated, assumed or anticipated in any
such forward looking statements. Important factors that could result in such
differences, in addition to the risk factors identified above, include: general
economic conditions in the Company's markets, including inflation, recession,
interest rates and other economic factors.
25
USE OF PROCEEDS
The Company will not receive proceeds from the Exchange Offer. The net
proceeds received by the Company from the sale of the Senior Notes was
approximately $120.75 million after deducting the Initial Purchasers' discounts
and estimated expenses from the Offering of the Senior Notes. All of such net
proceeds were used to repay outstanding indebtedness under the Credit
Facilities. At June 30, 1997, such indebtedness totaled $174.3 million. The
indebtedness repaid with the proceeds of the Offering of the Senior Notes had a
weighted average interest rate at June 30, 1997 of approximately 7.7% and
maturity dates ranging from December 1997 to December 2000.
In connection with the repayment of indebtedness referenced above, the
Company is not terminating the relevant Credit Facilities, except for the Auto
Loan Division Credit Facilities (as defined in "Description of Other
Indebtedness -- Auto Loan Division") which are being paid in full and
terminated. Accordingly, in the future, the Company expects to borrow under such
Credit Facilities (except the Auto Loan Division Credit Facilities) in order to
fund additional loan demand. Because the Auto Loan Division is expected to be
sold and is not expanding its operations, the Company does not believe that the
Auto Loan Division will have any material funding requirements. Any such funding
requirements are expected to be met through intercompany debt. The amount of
such additional borrowing will depend, among other things, upon the Company's
loan demand and profitability.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1997 (i) on a historical basis and (ii) on a pro forma basis giving
effect to the Offering and the anticipated application of the estimated net
proceeds therefrom as described in the "Use of Proceeds". This table 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 the Notes thereto included elsewhere in this Prospectus.
At June 30, 1997
-----------------
Pro
Actual Forma
------ -----
(Dollars in
Thousands)
Debt:
Credit Facilities (1).............................................................................. $174,353 $53,603
Notes offered hereby............................................................................... -- 125,000
CII Senior Subordinated Notes (2).................................................................. 105,730 105,730
CII Subordinated Debentures (3).................................................................... 19,160 19,160
--------- ---------
Total debt......................................................................................... 299,243 303,493
--------- ---------
Shareholders' equity:
Common stock, $0.05 par value; 100,000,000 authorized shares;
9,643,157 shares issued and outstanding......................................................... 482 482
Additional paid-in capital......................................................................... 38,479 38,479
Retained earnings.................................................................................. 18,194 18,194
--------- ---------
Total shareholders' equity......................................................................... 57,155 57,155
Total capitalization.................................................................................. $356,398 $360,648
--------- ---------
(1) The Company's Credit Facilities provide for aggregate borrowing
availability of up to $401.5 million, subject to certain borrowing base
limitations which, at June 30, 1997, would have allowed additional
borrowing of $33.4 million, and after giving effect to the Offering of
the Senior Notes, would have allowed additional borrowing of $154.2
million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources."
(2) The CII Senior Subordinated Notes are continuously sold by CII (a
wholly-owned subsidiary of the Company) only to South Carolina
residents. The CII Senior Subordinated Notes bear fixed rates of
interest (a weighted average of 7.2% at June 30, 1997) and have a
one-year term from their varying dates of issue. The CII Senior
Subordinated Notes are subordinate in priority to the $20.0 million
warehouse facility for CII, and will rank pari passu with CII's
Guarantee of the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
(3) The CII Subordinated Debentures are continuously sold by CII only to
South Carolina residents. The CII Subordinated Debentures bear fixed
rates of interest (a weighted average of 5.0% at June 30, 1997) and
have a one-year term from their varying dates of issue. The CII
Subordinated Debentures are subordinate in priority to the $20.0
million warehouse facility for CII, the CII Senior Subordinated Notes
and CII's Guarantee of the Notes.
26
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following unaudited selected consolidated financial and operating
data at and for the five years ended December 31, 1996 are derived from the
audited financial statements of the Company. The data for the six months ended
June 30, 1996 and 1997 are unaudited. The data set forth below are qualified by
reference to, and 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 herein.
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1996
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Interest revenue.......................................... $6,943 $7,692 $10,691 $15,193 $17,908 $8,375
Servicing revenue......................................... 37 291 212 446 3,274 1,562
Cash gain on sale of loans................................ 1,686 3,193 4,990 8,987 21,554 6,996
Non-cash gain on sale of loans............................ -- 412 1,460 182 2,261 472
Loan fee income........................................... 151 279 276 586 4,150 426
Other revenues............................................ 191 179 566 884 1,241 478
Total revenues............................................ 9,008 12,046 18,195 26,278 50,388 18,309
Interest on warehouse lines of credit..................... 218 419 848 2,303 3,167 1,698
Interest on CII Notes..................................... 4,097 4,654 5,031 6,224 7,854 3,878
Provision for credit losses............................... 349 686 2,510 2,480 5,416 1,532
General and administrative expenses....................... 4,698 5,624 7,359 10,419 23,490 7,622
Total expenses............................................ 9,362 11,383 15,748 21,426 39,927 14,730
Income (loss) from continuing operations before minority
interest, income taxes and cumulative effect of change
in accounting principle (1)............................... (354) 663 2,447 4,852 10,461 3,579
Income taxes (2).......................................... (130) (186) 609 190 718 121
Income (loss) from continuing operations before minority
interest and cumulative effect of change in accounting
principle (1)............................................. (224) 849 1,838 4,662 9,743 3,458
Minority interest......................................... (25) (25) (46) (81) 352 (22)
Income from continuing operations before cumulative
effect of change in accounting principle (1).............. (249) 824 1,792 4,581 10,095 3,436
Income (loss) from discontinued operations................ 685 260 546 (3,924) -- --
Cumulative effect of change in accounting principle (1)... -- 113 -- -- -- --
Net income................................................ $436 $1,197 $2,338 $657 $10,095 $3,436
CASH FLOW DATA:
Cash flow due to operating cash income and expenses (3)... $519 $2,424 $4,909 $6,849 $14,560 $6,107
Cash (used in) provided by loans held for sale and other.. (3,497) (830) 11,811 (17,025) (74,088) 46,863
Net cash (used in) provided by operating activities....... $(2,978) $1,594 $16,720 $(10,176) $(59,528) $52,970
27
OPERATING DATA:
Loans originated or purchased:
Mortgage Loans............................................ $30,613 $20,536 $99,373 $192,800 $328,649 $153,802
Small Business Loans...................................... 23,909 37,867 43,123 39,560 68,210 30,583
Automobile Loans.......................................... 2,760 5,230 7,547 17,148 18,287 10,052
Total loans originated or purchased....................... $57,282 $63,633 $150,043 $249,508 $415,146 $194,437
Loans sold:
Mortgage Loans............................................ $-- $-- $54,564 $127,632 $284,794 $143,924
Small Business Loans...................................... 10,827 31,052 31,208 25,423 33,060 15,909
Automobile Loans.......................................... -- -- -- -- -- --
Total loans sold.......................................... $10,827 $31,052 $85,772 $153,055 $317,854 $159,833
Loans securitized:
Mortgage Loans............................................ $-- $-- $-- $-- $-- $--
Small Business Loans...................................... -- -- -- 17,063 12,851 --
Auto Loans................................................ -- -- -- -- 16,107 16,107
Total loans securitized................................... $-- $-- $-- $17,063 $28,958 $16,107
SIX MONTHS
ENDED
JUNE 30,
1997
STATEMENT OF INCOME DATA:
Interest revenue.......................................... $15,024
Servicing revenue......................................... 3,085
Cash gain on sale of loans................................ 7,295
Non-cash gain on sale of loans............................ 10,812
Loan fee income........................................... 13,215
Other revenues............................................ 433
Total revenues............................................ 49,864
Interest on warehouse lines of credit..................... 5,736
Interest on CII Notes..................................... 4,046
Provision for credit losses............................... 4,671
General and administrative expenses....................... 31,715
Total expenses............................................ 46,168
Income (loss) from continuing operations before minority
interest, income taxes and cumulative effect of change
in accounting principle (1)............................... 3,696
Income taxes (2).......................................... (1,625)
Income (loss) from continuing operations before minority
interest and cumulative effect of change in accounting
principle (1)............................................. 5,321
Minority interest......................................... (156)
Income from continuing operations before cumulative
effect of change in accounting principle (1).............. 5,165
Income (loss) from discontinued operations................ --
Cumulative effect of change in accounting principle
(1)....................................................... --
Net income................................................ $5,165
CASH FLOW DATA:
Cash flow due to operating cash income and expenses
(3)....................................................... $(2,006)
Cash (used in) provided by loans held for sale and
other..................................................... (121,767)
Net cash (used in) provided by operating activities.......$(123,773)
28
SIX MONTHS
ENDED
JUNE 30,
1997
(continued)
OPERATING DATA:
Loans originated or purchased:
Mortgage Loans............................................ $474,261
Small Business Loans...................................... 30,996
Automobile Loans.......................................... 8,488
Total loans originated or purchased....................... $513,745
Loans sold:
Mortgage Loans............................................ $158,480
Small Business Loans...................................... 17,646
Automobile Loans.......................................... --
Total loans sold.......................................... $176,126
Loans securitized:
Mortgage Loans............................................ $198,740
Small Business Loans...................................... 4,626
Auto Loans................................................ --
Total loans securitized................................... $203,366
29
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1992 1993 1994 1995 1996 1996
(DOLLARS IN THOUSANDS)
Loans serviced (period end) (4):
Mortgage Loans $42,460 $42,335 $60,151 $88,165 $146,231 $70,430
Small Business Loans:
Guaranteed portion........................................ 17,649 47,314 70,038 83,829 96,792 93,468
Unguaranteed portion...................................... 4,033 11,238 18,771 24,867 44,017 32,219
Automobile Loans.......................................... 4,347 6,011 8,483 17,673 22,033 21,865
Total loans serviced (period end)................. $68,489 $106,898 $157,443 $214,534 $309,073 $217,982
Weighted average interest rate earned:
Mortgage Loans............................................ 13.82% 11.96% 12.37% 12.10% 11.97% 12.24%
Small Business Loans...................................... 4.80 7.65 10.11 10.39 12.61 12.61
Automobile Loans.......................................... 26.54 28.33 28.28 27.40 23.57 22.72
Total weighted average interest rate earned....... 14.37% 12.50% 13.22% 13.70% 13.18% 13.07%
Weighted average interest rate paid....................... 7.74% 7.24% 6.94% 7.57% 7.36% 8.64%
Expense coverage ratio (5)................................ 96.22 102.21 106.27 121.80 120.54 121.09
ASSET QUALITY DATA:
Delinquent Loans 30 days or more past due (6):
Mortgage Loans............................................ 23.53% 17.66% 14.43% 7.26% 13.70%
Small Business Loans...................................... 1.19 1.11 9.69 7.92 10.52
Automobile Loans.......................................... 9.51 3.72 12.83 17.09 14.40
Total loans 30 days or more past due.............. 17.90% 12.75% 13.31% 8.41% 12.88%
Net charge-offs (7):
Mortgage Loans............................................ 0.19% 1.05% 2.96% 1.04% 0.81% 0.03%
Small Business Loans...................................... 0.05 0.21 1.43 2.71 0.39
Automobile Loans.......................................... 4.93 5.03 2.53 3.68 9.65 5.51
Total net charge-offs............................. 0.68% 1.29% 2.36% 1.43% 2.47% 0.96%
BALANCE SHEET DATA:
Total gross loans receivable.............................. $56,785 $66,279 $95,398 $126,458 $189,532 $103,265
Total gross residual assets (8)........................... 4.2 1,872 4,604 14,417 9,262
Total assets.............................................. 70,359 84,279 109,448 144,931 224,149 146,657
Total debt................................................ 64,840 76,195 95,015 129,950 169,596 128,334
Total shareholders' equity................................ 5,057 7,362 9,700 9,885 46,635 13,535
SIX MONTHS ENDED
JUNE 30,
1997
Loans serviced (period end) (4):
Mortgage Loans $444,472
Small Business Loans:
Guaranteed portion........................................ 106,848
Unguaranteed portion...................................... 63,043
Automobile Loans.......................................... 22,556
Total loans serviced (period end)................. $636,919
Weighted average interest rate earned:
Mortgage Loans............................................ 10.19%
Small Business Loans...................................... 14.15
Automobile Loans.......................................... 24.12
Total weighted average interest rate earned....... 11.52%
Weighted average interest rate paid....................... 7.88%
Expense coverage ratio (5)................................ 84.59
30
ASSET QUALITY DATA:
Delinquent Loans 30 days or more past due (6):
Mortgage Loans............................................ 5.78%
Small Business Loans...................................... 3.20
Automobile Loans.......................................... 10.82
Total loans 30 days or more past due.............. 5.69%
Net charge-offs (7):
Mortgage Loans............................................ 0.38%
Small Business Loans...................................... 2.42
Automobile Loans.......................................... 15.40
Total net charge-offs............................. 1.60%
BALANCE SHEET DATA:
Total gross loans receivable.............................. $310,063
Total gross residual assets (8)........................... 35,290
Total assets.............................................. 364,988
Total debt................................................ 299,243
Total shareholders' equity................................ 57,155
(1) The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," effective January 1, 1993. The adoption of
SFAS No. 109 had the cumulative effect of (i) increasing the Company's net
income in 1993 by $113,000 and (ii) reducing the Company's effective tax rate
from approximately 45% to approximately 22%. The Company recognized no deferred
tax benefits of operating loss carryforwards as a result of the adoption of SFAS
No. 109.
(2) The income tax benefit for the six months ended June 30, 1997 is a result of
the reduction in the valuation allowance associated with the NOL and other
deferred tax assets.
(3) Cash flow due to operating cash income and expenses reflects cash provided
by (used in) operating activities excluding loan origination activity or loan
sales proceeds, change in other payables and receivables and cash provided by
(used in) operating activities of discontinued operations.
(4) Serviced loans includes all portfolio Mortgage Loans and Auto Loans, all
securitized loans, and the Small Business Loans, but, solely for purposes of
calculating the allowance ratio and the net charge-off ratio, excludes the
guaranteed portion of the SBA Loans. Operating Data stated as a percentage of
serviced loans (except period end data) for the six-month periods ended June 30,
1996 and 1997 have been annualized.
(5) Expense coverage ratio represents total revenues, less non-cash gain on sale
of loans, expressed as a percentage of total expenses.
(6) Delinquent loans more than 30 days past due are expressed as a percentage of
total serviced Mortgage Loans, the unguaranteed portion of Small Business Loans,
and Auto Loans, as applicable, as of the end of the period indicated. No
information is available for December 31, 1992.
(7) Net charge-offs of loans are expressed as a percentage of average serviced
Mortgage Loans, the unguaranteed portion of Small Business Loans and Auto Loans,
as applicable, for the period indicated, except for the six-month periods ended
June 30, 1996 and 1997, which have been annualized.
(8) Residual assets consist of restricted cash and interest-only, subordinate
and residual certificates resulting from securitizations and interest-only
certificates resulting from the sale of SBA Loan Participations.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
preceding "Selected Consolidated Financial and Operating Data" and the other
historical financial statements of the Company, including the notes thereto,
appearing elsewhere herein. As used herein, "Discontinued Operations" refers to
the Company's transportation segment and apparel segment operations. Unless
otherwise noted, the discussion contained herein relates to the continuing
operations of the Company, which solely consist of its financial services
segment operations.
GENERAL
The Company is a diversified financial services company headquartered
in Greenville, South Carolina which makes Mortgage Loans, Small Business Loans
and Auto Loans. The Company commenced its lending operations in 1991 through the
acquisition of Carolina Investors, Inc., a small mortgage lending company which
has been in operation since 1963. Since such acquisition through December 31,
1996, the Company has experienced a compounded annual growth rate of 86% in loan
originations. Since 1996, the Company has been focused principally on expanding
its Mortgage Loan Division and Small Business Division, and has recently
determined to pursue the divestiture of its Auto Loan Division. The Auto Loan
Division has historically originated only a small percentage of total Company
loans and is not believed to have the profit potential of the Company's Mortgage
and Small Business Divisions.
The Company's total serviced loans increased from $157.4 million at
December 31, 1994, to $214.5 million at December 31, 1995, to $309.1 million at
December 31, 1996 and to $636.9 million at June 30, 1997. Mortgage Loans have
increased during all such periods principally as a result of an increase in the
number of Mortgage Bankers originating loans through the Mortgage Loan Division,
as well as increased loan volume from existing Mortgage Bankers and due to the
startup and growth of the retail operation. Small Business Loans have increased
due to the opening of additional offices, an increase in the number of
Commercial Loan Brokers which refer loans to the Small Business Loan Division,
and new product offerings. However, in 1995, the SBA adopted certain policies,
such as the temporary implementation of a maximum SBA Loan amount of $500,000
and the temporary prohibition of the use of SBA Loan proceeds for certain
refinancings (which temporary limitations were removed in October 1995).
Consequently, Small Business Loan volume in 1995 was relatively unchanged from
the 1994 level. Auto Loans increased during all such periods, prior to 1997,
principally as a result of an increase in the number of loan production offices
and successful efforts at establishing additional auto dealer relationships.
Beginning in September 1996, the Company curtailed the expansion of its Auto
Loan operations and, since that time, the Company has experienced a decline in
Auto Loan originations.
32
The following table sets forth certain data relating to the Company's loans at
and for the periods indicated:
Year Ended Six Months Ended
December 31, June 30,
1994 1995 1996 1996 1997
(Dollars in Thousands)
MORTGAGE LOANS:
Mortgage Loans originated....................................... $99,373 $192,800 $328,649 $153,802 $474,261
Total Mortgage Loans (period end)............................... 60,151 88,165 146,231 70,430 247,892
Total serviced Mortgage Loans (period end)...................... 60,151 88,165 146,231 70,430 444,472
Average Mortgage Loans (1)...................................... 51,243 74,158 97,281 92,188 215,304
Average serviced Mortgage Loans (1)............................. 51,243 74,158 97,281 92,188 286,618
Average interest earned (1)..................................... 12.37% 12.10% 11.97% 12.24% 10.19%
SMALL BUSINESS LOANS:
Small Business Loans originated................................. $43,123 $39,560 $68,210 $30,583 $30,996
Total Small Business Loans (period end)......................... 26,764 20,620 29,385 24,013 44,491
Total serviced Small Business Loans (period end)................ 88,809 108,696 140,809 125,687 169,891
Total serviced unguaranteed Small
Business Loans (period end) (2)................................. 18,771 24,867 44,017 32,219 63,043
Average Small Business Loans (1)................................ 22,348 23,692 26,700 20,839 29,652
Average serviced Small Business Loans (1)....................... 73,681 98,753 125,723 116,038 150,249
Average serviced unguaranteed Small
Business Loans (2)(3)........................................... 15,004 21,819 34,442 28,201 51,030
Average interest earned (1)..................................... 10.11% 10.39% 12.61% 12.61% 14.15%
AUTO LOANS:
Auto Loans originated........................................... $7,547 $17,148 $18,287 $10,052 $8,488
Total Auto Loans (period end)................................... 8,483 17,673 13,916 8,822 17,680
Total serviced Auto Loans (period end).......................... 8,483 17,673 22,033 21,865 22,556
Average Auto Loans (1).......................................... 7,247 13,078 11,917 12,138 15,869
Average serviced Auto Loans (1)................................. 7,247 13,078 21,277 19,883 22,435
Average interest earned (1)..................................... 28.28% 27.40% 23.57% 22.72% 24.12%
TOTAL LOANS:
Total loans receivable (period end)............................. $95,398 $126,458 $189,532 $103,265 $310,063
Total serviced loans (period end)............................... 157,443 214,534 309,073 217,982 636,919
(1) Averages are computed using beginning and ending balances for the period
presented, except 1996 and 1997 averages, which are calculated based on
the daily averages for Small Business Loan Division and Auto Loan Division
and monthly averages for Mortgage Loan Division (rather than the beginning
and ending balances).
(2) Excludes guaranteed portion of SBA Loans.
(3) Averages are computed using beginning and ending balances for the period
presented.
OPERATING CASH FLOW
The Company expects to operate on a negative cash flow basis due to
increases in the volume of loans purchased and originated and due to the growth
of its securitization program. The Company's primary operating sources of cash
are (i) excess cash flow received in each period with respect to interest-only
and residual certificates, (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) cash gains from the sale of SBA Loan Participations and
whole loan Mortgage Loan sales. The Company's primary operating cash uses
include the funding of (i) Mortgage Loan originations and purchases pending
their securitization or sale, (ii) interest expense on CII Notes and on Credit
Facilities and other financing, (iii) fees, expenses and tax payments incurred
in connection with the securitization program and (iv) ongoing administrative
and other operating expenses.
The Company reduces the negative cash flow impact of securitizations by
its ongoing sale of whole loans, 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.
33
The table below summarizes cash flows provided by and used in operating
activities:
Year Ended Six Months Ended
December 31, June 30,
1994 1995 1996 1996 1997
(Dollars in Thousands)
Operating Cash Income:
Servicing fees received and excess cash flow from
securitization trusts.................................... $694 $1,259 $3,782 $1,757 $3,652
Interest received............................................. 10,498 14,549 17,392 8,501 13,913
Cash gain on sale of loans.................................... 4,990 8,987 21,554 6,996 7,295
Cash loan origination fees received........................... 729 -- 4,961 1,463 15,599
Other cash income............................................. 637 491 1,267 554 447
Total operating cash income.............................. 17,548 25,286 48,956 19,271 40,906
Operating Cash Expenses:
Securitization costs.......................................... -- (266) (873) (503) (1,664)
Securitization hedge losses................................... -- -- -- -- (1,606)
Cash operating expenses....................................... (6,576) (9,480) (22,156) (7,125) (30,480)
Interest on CII Notes and warehouse financing................. (5,849) (8,424) (11,045) (5,506) (8,596)
Taxes paid.................................................... (214) (267) (322) (30) (566)
Total operating cash expenses............................ (12,639) (18,437) (34,396) (13,164) (42,912)
Cash flow due to operating cash income and expenses................ 4,909 6,849 14,560 6,107 (2,006)
Other Cash Flows:
Cash provided by (used in) other payables and receivables..... 1,080 (4,850) (6,346) (2,719) (2,988)
Cash provided by (used in) loans held for sale................ 11,984 (13,767) (67,819) 49,505 (118,779)
Net cash provided by (used in) operating activities of
discontinued operations.................................. (1,253) 1,592 77 77 --
Net cash provided by (used in) operating activities...... $16,720 $(10,176) $(59,528) $52,970 $(123,773)
PROFITABILITY
The principal components of the Company's profitability are (i) net
interest revenues associated with the Company's loans receivable, (ii) servicing
revenues associated with loans serviced for others, (iii) gain on the sale of
Mortgage Loans associated with securitizations and whole loan sales, (iv) gains
resulting from the sale of the SBA Loan Participations, and (v) loan origination
fees generated by the Company's retail Mortgage Loan operation.
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Financial Statements.
Year Ended Six Months Ended
December 31, June 30,
1994 1995 1996 1996 1997
(Percentage of Total Revenues)
Interest revenue..................................................... 58.8% 57.8% 35.5% 45.8% 30.1%
Servicing revenue.................................................... 1.1 1.7 6.5 8.5 6.2
Cash gain on sale of loans........................................... 27.4 34.2 42.8 38.2 14.6
Non-cash gain on sale of loans....................................... 8.0 0.7 4.5 2.6 21.7
Loan fee income...................................................... 1.5 2.2 8.2 2.3 26.5
Other revenues....................................................... 3.2 3.4 2.5 2.6 0.9
Total revenues.................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Interest expense..................................................... 32.3% 32.5% 21.9% 30.5% 19.6%
General and administrative expenses.................................. 40.4 39.6 46.6 41.6 63.6
Provision for credit losses.......................................... 13.8 9.4 10.7 8.4 9.4
Income from continuing operations before income taxes................ 13.5 18.5 20.8 19.5 7.4
Income tax expense................................................... 3.3 0.8 1.4 0.6 (3.3)
Minority interest.................................................... (0.3) (0.3) 0.7 (0.1) (0.3)
Income (loss) from discontinued operations........................... 3.0 (14.9) -- -- --
Net income...................................................... 12.9% 2.5% 20.1% 18.8% 10.4%
34
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
TOTAL REVENUES. Total revenues increased $31.6 million, or 173%, from
$18.3 million for the six month period ended June 30, 1996, to $49.9 million for
the six month period ended June 30, 1997. The increase in revenues resulted
principally from increases in interest revenue, servicing revenue and gain on
sale of loans.
INTEREST REVENUE. Interest revenue increased $6.6 million, or 79%, from
$8.4 million for the six month period ended June 30, 1996, to $15.0 million for
the six month period ended June 30, 1997. This increase was due principally to
the growth in the loan portfolio of the Mortgage Loan Division. Interest revenue
earned by the Mortgage Loan Division increased $5.7 million, or 88%, from $6.5
million for the six month period ended June 30, 1996, to $12.2 million for the
six month period ended June 30, 1997.
SERVICING REVENUE. Servicing revenue increased $1.5 million, or 94%,
from $1.6 million for the six month period ended June 30, 1996, to $3.1 million
for the six month period ended June 30, 1997. The increase was due to the
securitization of the unguaranteed portion of SBA Loans in November of 1996 and
the securitizations of Mortgage Loans in March 1997 and June 1997. The Company's
total serviced portfolio increased $418.9 million, or 192%, from $218.0 million
at June 30, 1996, to $636.9 million at June 30, 1997.
GAIN ON SALE OF LOANS. Cash gain on sale of loans increased $299,000,
or 4%, from $7.0 million for the six month period ended June 30, 1996, to $7.3
million for the six month period ended June 30, 1997. Non-cash gain on sale of
loans increased $10.3 million from $472,000 for the six month period ended June
30, 1996, to $10.8 million for the six month period ended June 30, 1997. The
increase resulted primarily from securitizations of Mortgage Loans in the first
and second quarters of 1997.
LOAN FEE INCOME. Loan fee income increased $12.8 million from $426,000
for the six month period ended June 30, 1996, to $13.2 million for the six month
period ended June 30, 1997. This increase was due principally to the increase in
the Company's retail Mortgage Loan originations. The Company began its retail
operations in April 1996 and generated $239.6 million in Mortgage Loans in the
first six months of 1997 through its retail operations.
OTHER REVENUES. Other revenues decreased $45,000, or 9%, from $478,000
for the six month period ended June 30, 1996, to $433,000 for the six month
period ended June 30, 1997. Other revenues are comprised principally of
insurance commissions.
TOTAL EXPENSES. Total expenses increased $31.5 million, or 214%, from
$14.7 million for the six month period ended June 30, 1996, to $46.2 million for
the six month period ended June 30, 1997. Total expenses are comprised of
interest expense, provision for credit losses, and general and administrative
expenses.
INTEREST EXPENSE. Interest expense increased $4.2 million, or 75%, from
$5.6 million for the six month period ended June 30, 1996, to $9.8 million for
the six month period ended June 30, 1997. The increase was due principally to
increased borrowings by the Mortgage Loan Division associated with increased
loan originations. Borrowings attributable to the Mortgage Loan Division, both
under the Credit Facilities and in connection with the sales of CII Notes,
totaled $264.7 million as of June 30, 1997, which represented an increase of
145%, compared to $108.1 million as of June 30, 1996. Borrowings attributable to
the Small Business Loan Division totaled $28.4 million as of June 30, 1997,
which represented an increase of 78%, compared to $16.0 million as of June 30,
1996. This increase in debt resulted principally from the loan origination
activity for the six month period ended June 30, 1997, as compared to the same
period in 1996.
PROVISION FOR CREDIT LOSSES. Provision for credit losses increased $3.2
million, or 213%, from $1.5 million for the six month period ended June 30,
1996, to $4.7 million for the six month period ended June 30, 1997. The
provision was made to maintain the general reserves for credit losses associated
with loan growth, as well as to fund specific reserves for possible losses
associated with particular loans.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $24.1 million, or 317%, from $7.6 million for the six month
period ended June 30, 1996, to $31.7 million for the six month period ended June
30, 1997. This primarily resulted from increased personnel and other costs from
$4.3 million in the first six months of 1996 to $18.8 million in the first six
months of 1997, which resulted principally from the continued expansion in the
servicing and underwriting areas and increased expenses associated with seven
new retail locations. In addition, advertising and promotion expenses increased
$2.7 million to $3.0 million in the first half of 1997 as compared to the prior
year's period, also as a result of the continued expansion of the retail
operations.
INCOME TAXES. Income taxes decreased $1.7 million from $121,000 for the
six month period ended June 30, 1996 to a tax benefit of $1.6 million for the
six month period ended June 30, 1997, as a result of the reduction in the
valuation allowance associated with the Company's NOL and deferred tax assets.
NET INCOME. Net income increased $1.8 million, or 53%, from $3.4
million for the six month period ended June 30, 1996, to $5.2 million for the
six month period ended June 30, 1997. Net income as a percentage of total
revenues decreased from 18.8% for the six months ended June 30, 1996 to 10.4%
for the six months ended June 30, 1997 as a result of the Company's investment
in expansions and infrastructure to facilitate its rapid growth.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUES. Total revenues increased $24.1 million, or 92%, from
$26.3 million in 1995 to $50.4 million in 1996. The increase in revenues
resulted principally from increases in interest revenue, servicing revenue and
gain on sale of loans.
35
INTEREST REVENUE. Interest revenue increased $2.7 million, or 18%, from
$15.2 million in 1995 to $17.9 million in 1996. This increase was due
principally to the growth in the loan portfolio of the Mortgage Loan Division.
Interest revenue earned by the Mortgage Loan Division increased $4.6 million, or
51%, from $9.1 million in 1995 to $13.7 million in 1996.
SERVICING REVENUE. Servicing revenue increased $2.8 million from
$446,000 in 1995 to $3.3 million in 1996. This increase was due to the
securitizations of Small Business Loans and Auto Loans in 1996, for which the
Company retains servicing rights.
GAIN ON SALE OF LOANS. Non-cash gain on sale of loans increased $2.1
million, from $182,000 in 1995 to $2.3 million in 1996. This increase resulted
principally from the securitization of Small Business Loans in November 1996.
Cash gain on sale of loans increased $12.6 million, or 40%, from $9.0 million in
1995 to $21.6 million in 1996. The increase resulted partially from increased
sales of Mortgage Loans and Small Business Loans associated with the increased
loan originations. Mortgage Loans sold increased $157.2 million, or 123%, from
$127.6 million in 1995 to $284.8 million in 1996. Small Business Loans sold
increased $7.7 million, or 30%, from $25.4 million in 1995 to $33.1 million in
1996. Additionally, the Company received a recoupment of previously shared
premiums of $7.3 million in connection with the settlement with certain
Strategic Alliance Mortgage Bankers who terminated their agreements with the
Company in 1996.
LOAN FEES. Loan fees increased $3.6 million from $586,000 in 1995 to
$4.2 million in 1996. The increase in loan fees was due principally to the
increase in loan originations in the Mortgage Loan Division.
OTHER REVENUES. Other revenues increased $357,000, or 40%, from
$884,000 in 1995 to $1.2 million in 1996. Other revenues is comprised
principally of insurance commissions. The increase of other revenues resulted
principally from the increase in the Company's loan originations.
TOTAL EXPENSES. Total expenses increased $18.5 million, or 86%, from
$21.4 million in 1995 to $39.9 million in 1996. Total expenses are comprised of
interest expense, provision for credit losses and general and administrative
expenses.
INTEREST EXPENSE. Interest expense increased $2.5 million, or 29%, from
$8.5 million in 1995 to $11.0 million in 1996. The increase was due principally
to increased borrowings by the Mortgage and Small Business Loan Divisions
resulting from increased loan originations. Borrowings attributable to the
Mortgage Loan Division, both under the Credit Facilities and in connection with
the sales of CII Notes, increased $55.7 million, or 53%, from $105.2 million at
December 31, 1995 to $160.9 million at December 31, 1996. Interest expense in
the Mortgage Loan Division increased $2.4 million in 1996 from 1995. Total
borrowings attributable to the Small Business Loan Division decreased $6.1
million, or 41%, from $14.8 million at December 31, 1995 to $8.7 million at
December 31, 1996. This decrease in debt resulted principally from cash received
from the securitization completed in November 1996, which was used to pay down
outstanding debt. Interest expense in the Small Business Loan Division increased
$198,000 in 1996 from 1995. There were no borrowings outstanding in the Auto
Loan Division as of December 31, 1996, down from $9.9 million at December 31,
1995. This decrease resulted principally from cash received from the
securitization transaction completed in March 1996 and from the Company's public
offering completed in November 1996. The offering was used to pay outstanding
debt. Interest expense in the Auto Loan Division decreased $220,000 in 1996 from
1995.
PROVISION FOR CREDIT LOSSES. Provision for credit losses increased $2.9
million, or 116%, from $2.5 million in 1995 to $5.4 million in 1996. The
provision was made to maintain the general reserves for credit losses associated
with loan originations, as well as to increase specific reserves for possible
losses with particular loans.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $13.1 million, or 126%, from $10.4 million in 1995 to $23.5
million in 1996. This was a result of increased personnel costs in the Mortgage
Loan Division due to the continued expansion in the servicing and underwriting
departments, and the increased expenses associated with the opening of retail
lending offices in Indianapolis, Baton Rouge, New Orleans, and Phoenix. General
and administrative expenses increased from 5.63% of average serviced loans in
1995 to 9.62% in 1996, principally as a result of the costs associated with the
retail mortgage origination facilities, for which the related production was
sold on a non-recourse, servicing-released basis (i.e., without retention of the
servicing rights and associated revenues), with customary representations and
warranties. Accordingly, costs have been increased relative to the serviced
portfolio.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
increased $5.5 million, or 120%, from $4.6 million in 1995 to $10.1 million in
1996. The improvement in income was due principally to the increased growth and
profitability of the Mortgage Loan Division, although the Small Business Loan
Division's profitability also increased significantly in 1996 from 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUES. Total revenues increased $8.1 million, or 44%, from
$18.2 million in 1994 to $26.3 million in 1995. The increase in revenues
resulted principally from increases in interest revenue, servicing revenue and
gain on sale of loans.
INTEREST REVENUE. Interest revenue increased $4.5 million, or 42%, from
$10.7 million in 1994 to $15.2 million in 1995. This increase was due
principally to the growth in the loan portfolio in the Mortgage Loan Division.
Interest revenue earned by the Mortgage Loan Division increased $2.8 million, or
44%, from $6.3 million in 1994 to $9.1 million in 1995. Interest revenue earned
by the Small Business Loan Division increased $200,000, or 9%, from $2.3 million
in 1994 to $2.5 million in 1995. This increase resulted from continued growth in
serviced SBA Loans, despite the temporary changes in the SBA policies which
negatively impacted the Company's SBA Loan originations. Interest revenue earned
by the Auto Loan Division increased $1.5 million, or 71%, from $2.1 million in
1994 to $3.6 million in 1995. The increase in interest revenue for the Auto Loan
Division was due to the growth of its loan portfolio.
SERVICING REVENUE. Servicing revenue increased $234,000, or 110%, from
$212,000 in 1994 to $446,000 in 1995. This increase was due to the
securitization of loans in the Small Business Loan Division in June 1995 as well
as the increase in the guaranteed portion of sold SBA Loans serviced by the
Company as a result of increased loan originations.
36
GAIN ON SALE OF LOANS. Gain on sale of loans increased $2.7 million, or
42%, from $6.5 million in 1994 to $9.2 million in 1995. Gain on sale of loans
was generated by the sale of Mortgage Loans and SBA Loan Participations. The
increase resulted principally from increased sales of Mortgage Loans associated
with the increased loan originations of the Mortgage Loan Division.
LOAN FEES. Loan fees increased $310,000, or 112%, from $276,000 in 1994
to $586,000 in 1995. The increase in loan fees was due principally to the
increase in loan originations in the Mortgage Loan Division.
OTHER REVENUES. Other revenues increased $318,000, or 56%, from
$566,000 in 1994 to $884,000 in 1995. Other revenues is comprised principally of
insurance commissions and management fees paid in connection with the management
of Reedy River Ventures and Palmetto Seed Capital Limited Partnership. The
increase in other revenues resulted principally from the increase in the
Company's loan originations, as well as from increased management fees.
TOTAL EXPENSES. Total expenses increased $5.6 million, or 36%, from
$15.8 million in 1994 to $21.4 million in 1995. Total expenses are comprised of
interest expense, provision for credit losses and general and administrative
expenses.
INTEREST EXPENSE. Interest expense increased $2.6 million, or 44%, from
$5.9 million in 1994 to $8.5 million in 1995. The increase was due principally
to increased borrowings by the Mortgage and Auto Loan Divisions associated with
increased loan originations. Total borrowings attributable to the Mortgage Loan
Division, both under the Credit Facilities and in connection with the sale of
CII Notes, increased $27.7 million, or 36%, from $77.5 million at December 31,
1994 to $105.2 million at December 31, 1995. Interest expense in the Mortgage
Loan Division increased $1.6 million, or 31%, from $5.1 million in 1994 to $6.7
million in 1995. Total borrowings attributable to the Small Business Loan
Division increased $456,000, or 3%, from $14.4 million at December 31, 1994 to
$14.8 million at December 31, 1995. This increase in debt resulted principally
from increased loan origination activity, partially offset by a reduction to
outstanding debt due to the securitization transaction completed in June 1995.
Interest expense in the Small Business Loan Division increased $553,000, or
117%, from $471,000 in 1994 to $1.0 million in 1995. Total borrowings
attributable to the Auto Loan Division increased $7.0 million, or 241%, from
$2.9 million at December 31, 1994 to $9.9 million at December 31, 1995. Interest
expense in the Auto Loan Division increased $500,000, or 189%, from $264,000 in
1994 to $764,000 in 1995.
PROVISION FOR CREDIT LOSSES. Provision for credit losses remained
stable at $2.5 million in 1994 and in 1995. The provision was made to maintain
the general reserves for credit losses associated with loan growth, as well as
to fund specific reserves for possible losses associated with particular loans.
In 1994, the majority of the provision resulted from the write-down to market
value of certain foreclosed properties in the amount of $1.7 million. These
foreclosed properties related principally to speculative construction loans made
by CII prior to its acquisition by the Company. Speculative construction loans
are no longer being made by the Company.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $3.0 million, or 40%, from $7.4 million in 1994 to $10.4
million in 1995 principally as a result of increased personnel costs of $1.7
million due primarily to the continued expansion in the servicing and
underwriting areas, increased legal, audit and professional fees of $504,000
associated with the Company's stock tender offer in February 1995 and other
corporate transactions, and increased expenses of $477,000 associated with the
opening of three new loan production offices by the Auto Loan Division. General
and administrative expenses increased from 5.59% of average serviced loans in
1994 to 5.63% in 1995, principally as a result of the increase in the Mortgage
Loan Division's servicing operations in anticipation of increased originations
of Mortgage Loans, including Mortgage Loans which may be sold servicing
retained.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
increased $2.8 million, or 155%, from $1.8 million in 1994 to $4.6 million in
1995. The improvement in income was due principally to increased growth and
profitability of the Mortgage Loan Division. Absent the utilization of the NOL,
income from continuing operations for the years ended December 31, 1994 and 1995
would have been approximately $1.5 million and $2.9 million, respectively.
FINANCIAL CONDITION
Net loans receivable increased $116.6 million to $301.6 million at June
30, 1997 from $185.0 million at December 31, 1996. The increase in investment in
asset-backed securities of $3.4 million was due to the retention of the residual
interest certificates in the Company's Mortgage Loan securitizations completed
in March 1997 and June 1997. The interest-only strip security increased by $14.6
million to $18.9 million at June 30, 1997, from $4.3 million at December 31,
1996. This increase was due to the estimated present value of the excess cash
flow on loans sold with servicing retained of $15.2 million, offset by
amortization of $566,000.
Net property, plant and equipment, increased by $3.1 million to $10.3
million at June 30, 1997, from $7.2 million at December 31, 1996. The Company
purchased additional computer equipment to provide system improvements and
equipment supporting electronic document generation, storage, and retrieval, and
purchased additional furniture and office equipment in connection with the
expansion of its retail operations and servicing center.
The primary source of funding for the Company's receivables comes from
borrowings issued under various credit arrangements (including the Credit
Facilities and the CII Notes). At June 30, 1997, the Company had notes payable
to banks of $174.4 million, which compares with $55.5 million at December 31,
1996, for an increase of $118.9 million. At June 30, 1997, the Company had
$124.9 million of CII Notes outstanding, which compares with $114.1 million at
December 31, 1996, for an increase of $10.8 million.
Total stockholders' equity at June 30, 1997 was $57.2 million, which
compares to $46.6 million at December 31, 1996, an increase of $10.6 million.
This increase resulted from net income of $5.2 million for the six months ended
June 30, 1997 and the issuance of stock in the amount of $5.2 million related to
the acquisition of the 87% of Reedy River Ventures which it did not already own.
DISCONTINUED OPERATIONS
37
TRANSPORTATION SEGMENT
In connection with the Company's strategic plan to focus its business
efforts on the financial services segment, the Company divested its
transportation segment operations during 1994 and 1995. As a result, the
transportation segment has been classified as discontinued operations, and,
accordingly, the Company's Consolidated Financial Statements and the Notes
related thereto segregate continuing and discontinued operations. The
transportation segment had pre-tax income of $2.8 million in 1994, and a loss of
$333,000 in 1995. The profits in 1994 resulted principally from gains on the
sale of boxcars and other assets. Operating revenues for the transportation
segment were $1.4 million in 1994, and $390,000 in 1995. These decreases in
revenues were due principally to the progressive sale of assets associated with
the transportation segment. The Company does not believe that there are material
liabilities, contingent or otherwise, with respect to its transportation
segment.
APPAREL SEGMENT
In connection with the Company's strategic plan to focus its business
efforts on the financial services segment, the Company sold all of the
outstanding stock of Young Generations, Inc. (a former Company subsidiary which
manufactures children's apparel) ("YGI") in exchange for a non-recourse note in
September 1995, thereby divesting its apparel segment operations. In connection
with the sale of YGI, the Company wrote off all amounts due the Company from YGI
as intercompany debt and amounts due to the Company from the purchasers of the
YGI stock, which amounts totaled $3.9 million, net of income taxes of $156,000.
The Company remains contingently liable for its guarantee of certain bank loans
and certain trade accounts payable which at June 30, 1997 totaled $384,000 and
were secured by substantially all of YGI's assets. In 1996 and 1997, the Company
loaned additional amounts to YGI, $750,000 of which remained outstanding at June
30, 1997. As a result of the sale of YGI, the operating results of the apparel
segment have been classified as discontinued operations. Since the Senior Note
offering, the Company has loaned an additional $50,000 to YGI. The Company
does not anticipate making any future loans to YGI. Management does not
anticipate any significant charges to future earnings as a result of these
guarantees and loans to YGI.
The apparel segment had net losses of $31,000 in 1994 and $1.3 million
in 1995. The net loss in 1994 was decreased by the receipt of $1.25 million in
life insurance proceeds due to the death of YGI's President. The apparel segment
had revenues of $12.2 million in 1994, and $7.3 million in 1995.
ALLOWANCE FOR CREDIT LOSSES AND CREDIT LOSS EXPERIENCE
The Company is exposed to the risk of loan delinquencies and defaults,
particularly 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. Following the sale of such loans, the Company's loan
delinquency and default risk with respect to such loans is limited to those
circumstances in which it is required to repurchase such loans due to a breach
of a representation or warranty in connection with the whole loan sale. This
risk with respect to breaches of representations or warranties also exists for
loans sold through securitization. In addition, in securitization transactions,
the interest-only, subordinate and/or residual certificates bear the risk of
default for the entire pool of securitized loans to the extent of such
certificates' value. Accordingly, the value of the interest-only, subordinate
and/or residual certificates retained by the Company would be impaired to the
extent of losses on the securitized loans.
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 future losses of principal on its portfolio loans and
its interest-only and residual asset-backed certificates held as a result of its
securitizations of loans (which represent all loans for which the Company bears
credit risk). At June 30, 1997, the total allowance for credit losses on the
managed portfolio for the Company was $10.8 million, including $6.2 million
reserved for potential losses relating to the Company's securitized Mortgage,
SBA, and Auto Loans. This compares to an allowance for credit losses on the
managed portfolio at December 31, 1996 of $4.3 million, which included $1.2
million reserved for potential losses relating to the Company's securitized SBA
Loans.
The Company does not currently service any loans for which it does not
have credit risk other than the guaranteed portion of its SBA Loans. However,
the Company's credit risk on its securitized loans is limited to its investment
in its interest-only and residual asset-backed certificates.
The table below summarizes certain information with respect to the
Company's allowance for credit losses on the managed portfolio and the
composition of charge-offs and recoveries for each of the periods indicated.
38
SUMMARY OF ALLOWANCE FOR CREDIT LOSSES
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1994 1995 1996 1997
(DOLLARS IN THOUSANDS)
Allowance for credit losses at beginning of period $952 $1,730 $2,647 $4,286
Total loans charged-off............................................................ (1,808) (1,718) (4,223) (3,197)
Total loans recovered.............................................................. 76 155 446 308
Net charge-offs.................................................................... (1,732) (1,563) (3,777) (2,889)
Provision charged to expense....................................................... 2,510 2,480 5,416 4,671
Provision netted against gain on securitizations................................... -- -- -- 4,767
Allowance for credit losses at end of period....................................... $1,730 $2,647 $4,286 $10,835
The total allowance for credit losses as shown on the balance sheet is as
follows:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1994 1995 1996 1997
(DOLLARS IN THOUSANDS)
Allowance for losses on investment in asset-backed securities...................... $-- $773 $354 $764
Allowance for losses on interest-only securities................................... -- -- 848 5,450
Allowance for credit losses on loans............................................... 1,730 1,874 3,084 4,621
Allowance for credit losses at end of period....................................... $1,730 $2,647 $4,286 $10,835
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 possible losses, 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
possible credit losses or that additional increases in the allowance for
possible credit losses will not be required.
Management closely monitors delinquency to measure the quality of its
loan portfolio and securitized loans and the potential for credit losses. The
Company's policy is to place a loan on non-accrual status after it becomes 90
days past due, or sooner if the interest is deemed uncollectible. 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.
39
The following table sets forth the Company's allowance for credit
losses 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.
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1994 1995 1996 1997
ALLOWANCE FOR CREDIT LOSSES AS A % OF SERVICED LOANS (1):
Mortgage Loan Division......................................................... 1.23% 0.93% 0.80% 1.55%
Small Business Loan Division................................................... 3.91 4.50 3.84 4.33
Auto Loan Division............................................................. 3.00 4.03 6.45 5.30
Weighted average............................................................... 1.98% 2.03% 2.02% 2.04%
NET CHARGE-OFFS AS A % OF AVERAGE SERVICED LOANS (2):
Mortgage Loan Division......................................................... 2.96%(3) 1.04% 0.81% 0.38%
Small Business Loan Division................................................... 0.21 1.43 2.71 2.42
Auto Loan Division............................................................. 2.53 3.68 9.65 15.40
Weighted average............................................................... 2.36% 1.43% 2.47% 1.60%
LOANS RECEIVABLE PAST DUE 30 DAYS OR MORE AS A % OF SERVICED LOANS (1):
Mortgage Loan Division......................................................... 17.66% 14.43% 7.26% 5.78%
Small Business Loan Division................................................... 1.11 9.69 7.92 3.20
Auto Loan Division............................................................. 3.72 12.83 17.09 10.82
Weighted average............................................................... 12.75% 13.31% 8.41% 5.69%
TOTAL ALLOWANCE FOR CREDIT LOSSES AS A % OF
SERVICED LOANS PAST DUE 90 DAYS OR MORE: (1)................................... 94.20% 73.21% 88.71% 91.38%
(1) For purposes of these calculations, 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.
(2) Average serviced loans have been determined by using beginning and
ending balances for the period presented, except the 1996 and 1997
averages, which are calculated based on the daily averages for the
Small Business Loan Division and the Auto Loan Division and monthly
averages for the Mortgage Loan Division. Net charge-offs as a
percentage of average serviced loans for the six month period ended
June 30, 1997 have been annualized.
(3) Approximately 90% of the amount in 1994 relates to the write-down to
market of certain foreclosed properties associated with speculative
construction loans made by CII prior to its acquisition by the Company.
The Company no longer makes speculative construction loans.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business requires continued access to short- and
long-term sources of debt financing and equity capital. The Company's cash
requirements arise from loan originations and purchases, repayments of debt upon
maturity, payments of operating and interest expenses, expansion activities and
capital expenditures. The Company's primary sources of liquidity are cash flow
from operations, sales of the loans it originates and purchases, proceeds from
the sale of CII Notes, borrowings under the Credit Facilities and proceeds from
securitizations of loans. 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.
Shareholders' equity increased from $9.7 million at December 31, 1994,
to $9.9 million at December 31, 1995, to $46.6 million at December 31, 1996, to
$57.2 million at June 30, 1997. Each of these increases resulted principally
from the retention of income by the Company and, for 1996, the public stock
offering with proceeds of $26.2 million and, for 1997, the issuance of 494,000
additional shares of common stock at a value of $5.2 million in connection with
the acquisition of the 87% of Reedy River Ventures that the Company did not
already own.
Cash and cash equivalents were $1.3 million at December 31, 1995, $1.3
million at December 31, 1996, and $2.4 million at June 30, 1997. Cash provided
by (used in) operating activities decreased from $53.0 million for the six month
period ended June 30, 1996, to ($123.8) million for the six month period ended
June 30, 1997; cash used in investing activities decreased from $30.0 million
for the six month period ended June 30, 1996, to $5.6 million for the six month
period ended June 30, 1997; and cash provided by (used in) financing activities
increased from ($1.4) million for the six month period ended June 30, 1996, to
$130.5 million for the six month period ended June 30, 1997. The increase in
cash provided by operations was due principally to the increase in loans sold
and securitized during the first six month period of 1997 and the increase in
net income. Cash used in investing activities was principally for the net
increase in loans originated with the expectation of holding the loans until
maturity. Cash used in financing activities was due principally to the repayment
of the Credit Facilities, principally from the proceeds of the securitization of
$16.1 million in Auto Loans in March 1996, partially offset by the cash provided
by the sale of CII Notes by the Mortgage Loan Division. At June 30, 1997, the
Company's Credit Facilities were comprised of three warehouse credit facilities
providing for borrowings of up to $345.0 million for the Mortgage Loan Division
(collectively, the "Mortgage Loan Division Facilities") consisting of a $200.0
million facility and a $125.0 million facility for Emergent Mortgage Corp. and a
$20.0 million facility for CII, credit facilities of $50.0 million for the Small
Business Loan Division (the "Small Business Loan Division Facilities"), and
credit facilities of $6.5 million for the Auto Loan Division (the "Auto Loan
Division Facilities"). Based on the borrowing base limitations contained in the
Credit Facilities, at June 30, 1997, the Company had aggregate outstanding
borrowings of $139.8 million and aggregate borrowing availability of $30.2
million under the Mortgage Loan Division Facilities, aggregate outstanding
borrowings of $28.4 million and aggregate borrowing availability of $2.9 million
under the
40
Small Business Loan Division Facilities, and aggregate outstanding borrowings of
$6.1 million and aggregate borrowing availability of $360,000 under the Auto
Loan Division Facilities. The Mortgage Loan Division Facilities and the Small
Business Loan Division Facilities bear interest at variable rates ranging from
the federal funds rate plus 1.875% to the lender's prime rate, while the Auto
Loan Division Facilities bear interest at 0.75% over the lender's prime rate.
The Credit Facilities have original terms ranging from three months to three
years and are renewable upon the mutual agreement of the Company and the
respective lender.
The Credit Facilities contain a number of financial covenants,
including, but not limited to, covenants with respect to certain debt to equity
ratios, borrowing base calculations and minimum adjusted tangible net worth. The
Credit Facilities also contain certain other covenants, including, but not
limited to, covenants that impose limitations on the Company with respect to
declaring or paying dividends, making payments with respect to certain
subordinated debt, and making certain changes to its equity capital structure.
The Company has obtained waivers for certain covenant violations and believes
that it is currently in material compliance with the other covenants not covered
under the waivers.
CII engages in the sale of CII Notes to investors who are South
Carolina residents. The CII Notes are comprised of the CII Senior Subordinated
Notes and the CII Subordinated Debentures, which bear fixed rates of interest
and have maturities of one year from their various dates of issuance. The
offering of the CII Notes is registered under South Carolina securities law and
is exempt from federal registration under the federal intrastate exemption. CII
conducts its operations so as to qualify for the safe harbor provisions of Rule
147 promulgated pursuant to the Securities Act. At June 30, 1997, CII had an
aggregate of $105.7 million of CII Senior Subordinated Notes outstanding bearing
a weighted average interest rate of 7.2% and an aggregate of $19.2 million of
CII Subordinated Debentures bearing a weighted average interest rate of 5.0%.
The CII Senior Subordinated Notes and CII Subordinated Debentures are
subordinate in priority to the $20.0 million CII warehouse credit facility. The
Company expects that after the Offering of the Senior Notes, CII will continue
the offering of the CII Notes.
LOAN SALES AND SECURITIZATIONS
The Company sells or securitizes substantially all of its Mortgage
Loans and SBA Loans. During 1995 and 1996, the Company sold $127.6 million and
$284.8 million, respectively, of Mortgage Loans and $25.4 million and $33.1
million, respectively, of SBA Loan Participations. During the six months ended
June 30, 1997, the Company sold $158.5 million of Mortgage Loans and $17.6
million of SBA Loan Participations.
In March 1997 and June 1997, the Company securitized $77.5 million and
$121.2 million, respectively, of Mortgage Loans. Since 1995, the Company has
securitized $34.6 million of loans representing the unguaranteed portions of the
SBA Loans and $16.1 million of Auto 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 Mortgage
Loan, SBA Loan, and Auto Loan securitizations, the Company has retained
interest-only and residual certificates representing residual interests in the
trusts. These securities totaled approximately $25.9 million, net of allowances,
at June 30, 1997. See "Business -- Mortgage Loan Division -- Sale and
Securitization of Mortgage Loans" and "Business -- Small Business Loan Division
- -- Securitization of SBA Loans."
In securitizations, the Company 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 rate, and capitalizes
these amounts using a discount rate that market participants would use for
similar financial instruments. These capitalized assets are recorded on the
Company's balance sheet as interest-only and residual certificates (as
"Interest-only Strip Securities" and "Investment in Asset-backed Securities"),
and are aggregated and reported on the income statement as gain on sale of
loans, after being reduced (increased) by the costs of securitization and any
hedge losses (gains).
Each of the Company's Mortgage Loan securitizations have been
credit-enhanced by an insurance policy provided through a monoline insurance
company to receive ratings of "Aaa" from Moody's Investors Services, Inc.
("Moody's") and "AAA" from Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"). The Company plans to continue
to pursue securitizations in the future, including the quarterly securitization
of a substantial portion of its Mortgage Loans, principally because the Company
believes that securitization is potentially more profitable than whole loan
sales and because the Company (as servicer) wants to maintain the relationship
with its loan customers.
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 structure
and performance of the securitization. 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 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 Flow is distributed to the Company. The Company begins to
receive regular monthly servicing fees in the month following securitization.
The Company also sells on a whole loan basis all of its SBA Loan
participations (servicing retained) and a portion of its Mortgage Loans
(servicing released), including substantially all of its Mortgage Loans secured
by second liens and loans originated through Strategic Alliance Mortgage
Bankers, principally to secure the additional cash flow associated with the
premiums paid in connection with such sales and to eliminate the credit risk.
In addition to the Excess Cash Flow from securitizations and proceeds
from whole loan sales, the Company earns the net interest spread on loans
receivable held in its portfolio, origination fees on its Mortgage Loans and
servicing fees of 0.50% per annum on the Mortgage Loans, 0.40% per annum on the
SBA Loans and 3.00% per annum on the Auto Loans it services for others.
ACCOUNTING CONSIDERATIONS
41
In June 1996, Financial Accounting Standards Board ("FASB") issued SFAS
No. 125 which provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial- components approach that focuses on
control. SFAS No. 125 distinguishes transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. Effective
January 1, 1997, the Company adopted SFAS No. 125, which supersedes SFAS No.
122, "Accounting for Mortgage Servicing Rights."
Securitization of a financial asset, a portion of a financial asset, or
a pool of financial assets in which the transferor surrenders control over the
assets transferred, is accounted for as a sale. If the transfer does not qualify
as a sale, the transferred assets will remain on the balance sheet and the
proceeds raised will be accounted for as a secured borrowing with no gain or
loss recognition. Because the Company's transfers of loans made in connection
with its securitizations qualify as sales under this pronouncement, the required
accounting will be an allocation of basis approach.
After the securitization of Mortgage Loans held for sale, the
asset-backed securities retained by the Company (whether they are subordinate
classes or interest-only or residual certificates) are classified as trading
securities and reported at fair value under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
Servicing assets created in a securitization (contractually specified
servicing fees which are due the servicer in exchange for servicing those
assets) are initially measured at their allocated carrying amount, based upon
the relative fair value at the date of securitization. Servicing assets are to
be amortized in proportion to, and over the period of, estimated net servicing
income (the excess of servicing revenues over servicing costs).
SFAS No. 125 requires mortgage banking entities that acquire or
originate loans and subsequently sell or securitize those loans and retain the
mortgage servicing rights to allocate the total cost of the loans to the
mortgage servicing rights and the mortgage loans without the mortgage servicing
rights. The Company determines fair value based upon the present value of
estimated net future servicing revenues less the estimated cost that would
fairly compensate a substitute servicer to service the loans. The servicing
asset is then recorded on the balance sheet and accounted for under SFAS No. 125
using the allocation of cost relative to fair value approach. The assumptions
used to calculate fair value are the same assumptions used to determine the fair
value of the Interest-only Strip Security. The cost allocated to the servicing
rights is amortized in proportion to and over the period of estimated net future
cash flows related to servicing income.
SFAS No. 125 also requires impairment evaluations of all amounts
capitalized as servicing rights, including those purchased before the adoption
of SFAS No. 125, based upon the fair value of the underlying servicing rights.
The continuing effects of SFAS No. 125 on the Company's financial position and
results of operations will depend on several factors, including among other
things, the amount of acquired or originated loans sold or securitized, the
type, term and credit quality of loans and estimates of future prepayment rates.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128 "Earnings Per Share" which is effective for annual and
interim periods ending after December 15, 1997. It supersedes the presentation
of primary earnings per share with a presentation of basic earnings per share
which does not consider the effect of common stock equivalents. The computation
of diluted earnings per share, which gives effect to all dilutive potential
common shares that were outstanding during the period, is consistent with the
computation of fully diluted earnings per share per Accounting Principles Board
Opinion No. 15. The adoption of this standard is not expected to have a material
effect on the Company's earnings per share.
In June 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which is effective for annual and interim periods ending after December 15,
1997. This statement requires that all items that are required to be recognized
under accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
In June 1997, FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information" which is effective for annual and interim
periods ending after December 15, 1997. 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 adoption of
this standard is not expected to have a material effect on the Company's
financial reporting.
TAX CONSIDERATIONS -- THE NOL
As a result of the operating losses incurred by the Company under prior
management in its discontinued transportation segment operations, the Company
generated the NOL. 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. Although the calculation of the "change of
control" is factually difficult to determine, the Company believes that it has
had a maximum cumulative change of control of 33% during the relevant three-year
period.
No net deferred tax asset was recognized with respect to the NOL for
the years ended December 31, 1994, 1995, and 1996. Deferred tax assets of
approximately $7.2 million, less a valuation allowance of $4.4 million, were
recorded as of June 30, 1997. At June 30, 1997, the Company reduced its
valuation allowance associated with its deferred tax assets by $1.9 million
based upon the level 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 $13.5 million remaining
at December 31, 1996. By June 30, 1997, the Company had generated enough taxable
income to use all of the remaining NOL except for approximately $564,000. The
expected taxable income for the remainder of 1997 is projected to allow the
Company to fully utilize all remaining NOLs in 1997. In assessing the
realizability of deferred tax assets, the Company determined that it is more
likely than not that all of the deferred tax assets will be realized. The
Company continues to carry a valuation
42
allowance against its deferred tax asset relating to the current year temporary
differences generated by the difference in book and taxable income.
As a result of the reduction of the valuation allowance for deferred
tax assets in 1996, the Company expects that, based on current projections, the
effective tax rate on its earnings for the remainder of 1997 will be 4.7%. The
Company expects that the effective tax rate on its earnings for 1998 will be
37%.
INFLATION AND INTEREST RATES
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
mortgage loan products. Generally, first mortgage production increases relative
to second mortgage production in response to low interest rates and second
mortgage production increases relative to first 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,
interest-only and residual classes of certificates 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, interest-only and residual certificates, 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 facilities.
43
BUSINESS
GENERAL
Emergent Group, Inc. is a diversified financial services company that
originates, services, sells and securitizes Mortgage Loans, Small Business Loans
and, to a lesser extent, 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 by conventional lending standards. Based on industry
publications, the Company believes that it is among the top 15 retail
originators of non-prime Mortgage Loans and among the top 30 originators of
wholesale and retail Mortgage Loans, in aggregate, in the United States.
According to SBA reports, the Company was the seventh largest originator of SBA
Loans in the United States, by principal amount of SBA Loans approved, for the
SBA's fiscal year ended September 30, 1996.
The Company commenced its lending operations in 1991 with the
acquisition of CII, a South Carolina non-prime mortgage lender which has been in
business since 1963. Since such acquisition, the Company has significantly
expanded its lending operations and through December 31, 1996 experienced a
compounded annual growth rate in total loan originations of 86%. During the
years 1994, 1995 and 1996, the Company originated $150.0 million, $249.5 million
and $415.1 million in loans, respectively. This loan growth has been accelerated
by the successful implementation during 1996 and 1997 of the Company's retail
Mortgage Loan origination strategy. See " -- Mortgage Loan Division." The
Company's loan originations increased 164% to $513.7 million for the six months
ended June 30, 1997 compared to $194.4 million for the six months ended June 30,
1996. Of the Company's loan originations for the six months ended June 30, 1997,
92% were Mortgage Loans, 6% were Small Business Loans and 2% were Auto Loans.
The Company currently intends to divest its Auto Loan operations.
The Company believes the rapid market penetration and growth of its
retail Mortgage Loan operation results in part from its philosophy of
encouraging its retail Mortgage Loan customers to become debt free in the
shortest practicable time-frame. The Company believes that this approach is
unique among its competitors. By providing coupled first and second lien
Mortgage Loans, which typically have terms of 15 years and are used to
consolidate higher interest rate consumer debt, the Company provides customers
with similar monthly payments, but more rapid debt reduction, than typical 30
year mortgages. The Company's originators are trained to emphasize the benefits
of both rapid debt repayment and monthly debt service reduction. In addition,
borrowers are provided access to a free financial counseling program, known as
REAL REWARDS(TM) which was developed by the Company to help individual borrowers
accelerate debt repayment and improve their credit ratings.
The Company markets its Small Business Loan operation as a commercial
lender offering a variety of loan products capable of meeting substantially all
of the commercial credit needs of small businesses in various stages of
development, and believes it is one of only a few national, non-bank lending
operations which focuses on smaller businesses with debt needs of generally less
than $2.0 million.
The following chart sets forth the Company's major operating
subsidiaries by division. All operating subsidiaries are wholly-owned, unless
otherwise indicated.
EMERGENT GROUP, INC.
MORTGAGE LOAN DIVISION SMALL BUSINESS LOAN DIVISION AUTO LOAN DIVISION
Carolina Investors, Inc. Emergent Business Capital, Inc. The Loan Pro$, Inc. (1)
Emergent Mortgage Corp. Emergent Commercial Mortgage, Inc. Premier Financial Services, Inc.
Sterling Lending Corporation (1) Emergent Financial Corp.
Emergent Equity Advisors, Inc.
Reedy River Ventures Limited
Partnership
(1) 80% owned subsidiaries
44
MORTGAGE LOAN DIVISION
OVERVIEW
The Company's Mortgage Loan Division makes Mortgage Loans 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. The Mortgage Bankers Association estimates that
total loan originations for the non-prime mortgage industry grew approximately
21% from $120.0 billion in 1995 to $145.0 billion in 1996. In addition, industry
publications estimate that the top 25 lenders to the non-prime mortgage loan
industry represented, in aggregate, approximately 21% of 1996 loan originations,
with the largest lender representing approximately 4% of the total. The Company
believes there are opportunities to capture market share from independent
brokers who cannot provide the level of service, rapid response time and
operating efficiencies typically associated with larger lending entities such as
the Company.
The Company has developed a comprehensive credit analysis system for
its loan originations 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, and during the first six months of
1997, 72% and 20% of the Mortgage Loans originated by the Company were to
borrowers internally classified as "AA/A" and "B", respectively. In addition,
55% of the Company's first Mortgage Loans originated in the first six months of
1997 have maturities of 15 years or less, which provides for more rapid
reduction of principal and, consequently, a faster improvement in loan-to-value
("LTV") ratios compared to traditional 30 year mortgages.
In the first six months of 1997, 75% of the Mortgage Loans originated
were secured by first liens. Such first Mortgage Loans had an average principal
balance of approximately $66,500, a weighted average interest rate of
approximately 11% and an average LTV ratio of 79%. Approximately 43%, or $154.0
million, of the Company's first Mortgage Loans originated during the first six
months of 1997 were originated through the Company's retail operation. In
connection with approximately 60% of such loans, the Company also made a second
Mortgage Loan to the same borrower, which resulted in combined LTV ratios that
averaged 105% and may have been as high as 125%. Such second Mortgage Loans
originated during the six months ended June 30, 1997 had an average principal
balance of approximately $26,400 and a weighted average interest rate of
approximately 15%.
The Company believes this structure of coupled first and second
Mortgage Loans generally will result in slower prepayment rates on its first
Mortgage Loans compared with stand-alone first mortgage loans, because borrowers
have less opportunity to refinance, since the second mortgage generally must be
repaid or refinanced in order to refinance the first mortgage. In order to
reduce the Company's credit risk, second Mortgage Loans with a combined LTV
ratio greater than 100% are 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 Mortgage Loans with a combined LTV ratio
less than 100% are underwritten by the Company and generally sold on a whole
loan basis without recourse.
The Company has invested significantly in technology and personnel to
improve and expand its underwriting, servicing, and collection functions. The
members of the Company's front-line management team have an average of over 11
years of experience in the non-prime mortgage industry. Also, a substantial
number of the Company's retail underwriters, originators and servicers hired to
date have significant prior industry experience. The Company believes its
current operations are capable of handling substantial increases in both loan
origination volume and securitization servicing capacity with only modest
increases in fixed expenses. The Company believes that this industry-specific
experience, coupled with the Company's underwriting guidelines, existing MIS
systems and servicing infrastructure will enable the Company to execute
successfully its business strategy.
Substantially all of the Mortgage Loans are made to non-prime
borrowers. These borrowers generally have limited access to credit or are
considered to be 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. Certain
lenders in the non-prime market may internally classify borrowers (generally
with letters from A to D) according to the perceived credit quality of the loan.
However, the Company does not believe that there are uniform guidelines among
various non-prime lenders with respect to the classification of borrowers. See "
- -- Loan Underwriting."
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. Consequently, the Company's
customers many times are less sensitive to the percentage charged, assuming the
amount of the monthly payment is otherwise acceptable. 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.
45
MORTGAGE LOAN ORIGINATION
The Mortgage Loan Division originates Mortgage Loans on a retail basis
through regional offices and on a wholesale basis through Mortgage Bankers. The
Company's mortgage lending operations are currently conducted in 42 states
through twelve retail offices and approximately 700 Mortgage Bankers. The
Company has established strategic alliance agreements with the Strategic
Alliance Mortgage Bankers, which require the Strategic Alliance Mortgage Bankers
to sell to the Company all of their loans up to specified levels which meet the
Company's underwriting criteria in exchange for delegated underwriting,
administrative support and expedited funding. The Company believes that its use
of retail and wholesale origination and strategic alliances is an effective
diversification strategy which enables the Company to penetrate the non-prime
mortgage loan market through multiple channels without being overly dependent on
any one channel.
The following chart outlines the principal activities of the Company's
Mortgage Loan Division.
------------
BORROWER
------------
|
|
--------------------------------------------------
| |
----------- ---------
WHOLESALE RETAIL
----------- ---------
| | | |
---------- -------------------- ------------- ------------------
BROKER STRATEGIC ALLIANCE HOMEGOLD(TM) STERLING LENDING
WHOLESALE CORPORATION
---------- -------------------- ------------- ------------------
|
Refers loan to Closes loan in own name Regional retail loan Decentralized retail
and sells loan to origination loan origination
| | | |
----------------------------------------------------------------
EMERGENT MORTGAGE CORPORATION
----------------------------------------------------------------
Sells loan through securitization Sells loan on whole loan
and recognizes gain on sale basis, without recourse, to
represented by interest-only and institutional purchasers for
residual certificates. a cash gain on sale.
| | |
- ---------------- -------------------- ----------------------
SECURITIZATION WHOLE LOAN SALE SELL TO CII FOR
SERVICING RELEASED RETENTION IN PORTFOLIO
- ---------------- -------------------- ----------------------
|
Services all securitized loans, |
earning a fixed, recurring |
servicing fee and ancillary |
service income. |
- ---------------- |
LOAN SERVICING |
PORTFOLIO ___________________________________________________|
- ----------------
The following table sets forth loan originations by channel for the
periods indicated:
LOAN ORIGINATIONS BY CHANNEL
SIX MONTHS ENDED JUNE 30, 1997
FIRST SECOND TOTAL
MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
Retail
Loan originations.......................................................... $154,006 $85,588 $239,594
Average principal balance per loan......................................... 66 26 43
Weighted average initial LTV ratio......................................... 77.11% 104.96% 87.30%
Weighted average coupon rate............................................... 11.24 14.73 12.51
Mortgage Broker Wholesale
Loan originations.......................................................... $140,024 $21,466 $161,490
Average principal balance per loan......................................... 73 17 48
Weighted average initial LTV ratio......................................... 82.00% 94.73% 84.00%
Weighted average coupon rate............................................... 10.47 14.52 11.11
Strategic Alliance Mortgage Broker Wholesale
Loan originations.......................................................... $62,503 $10,674 $73,177
Average principal balance per loan......................................... 58 15 40
Weighted average initial LTV ratio......................................... 78.31% 91.27% 80.27%
Weighted average coupon rate............................................... 11.51 15.03 12.06
Total
Loan originations.......................................................... $356,533 $117,728 $474,261
Average principal balance per loan......................................... 67 23 44
Weighted average initial LTV ratio......................................... 79.07% 101.86% 85.17%
Weighted average coupon rate............................................... 11.01 14.72 12.01
RETAIL OPERATION. The Company primarily utilizes a regional approach
for all aspects (origination, underwriting, processing and funding) of its
retail Mortgage Loan operation. However, to a lesser extent, the Company also
utilizes a second approach through another Company subsidiary which has
centralized underwriting, funding and processing functions, but a decentralized,
state-by-state approach to origination.
Since the first quarter of 1996, the Company has successfully focused a
significant portion of its resources in developing its retail loan operation,
thereby reducing its dependence on third-party origination sources. In June
1997, retail Mortgage Loan originations represented 53% of the Company's total
Mortgage Loan originations. The Company believes that its retail operation has
significant long-term profit potential because 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 the borrower relationship, reduce reliance on
wholesale sources and build brand recognition.
The Company began its regional approach to retail lending in April 1996
through the establishment of its Indianapolis, Indiana office under its
registered trademark, "HomeGold." Unlike many of its competitors (particularly
non-prime mortgage lenders that began operations as traditional finance
companies), the Company markets its retail lending operations in large part
through direct mail and telemarketing methods, as compared to a traditional
"bricks and mortar" retail approach. 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 uses large
regional operating centers consisting of underwriters, originators and loan
processors which enable it to realize economies of scale and to compete more
efficiently than through traditional retail operations. Since April 1996, the
Company has established three additional regional operation centers located in
Phoenix, Arizona; Greenville, South Carolina and Houston, Texas. From May
through December 1996, HomeGold originated $67.6 million in Mortgage Loans.
For the six months ended June 30, 1997, HomeGold's Mortgage Loan volume totaled
$227.9 million, which constituted approximately 95% of the Company's total
retail Mortgage Loan originations during this period.
46
The second, decentralized origination approach, which commenced
operations in October 1996, is conducted through Sterling Lending Corporation
("SLC"), an 80%-owned subsidiary of the Company. SLC currently has seven retail
offices in Louisiana, Mississippi, Georgia, and Florida, and a loan processing
and underwriting center in Baton Rouge, Louisiana which services loans
originated through the other offices. The Company expects this decentralized
origination operation to utilize more offices than the HomeGold operation, and
its potential customers will be identified through courthouse searches and
purchased lists and then solicited through direct mail and inbound and outbound
telephone. From October through December 1996, SLC originated $1.2 million in
Mortgage Loans. For the first and second quarters of 1997, SLC Mortgage Loan
volume totaled $1.6 million and $10.1 million, respectively.
The Company's quarterly retail Mortgage Loan volume since inception of
the Company's retail loan operations in April 1996 is set forth in the table
below.
RETAIL MORTGAGE LOAN ORIGINATIONS
(DOLLARS IN THOUSANDS)
3RD. 1ST.
1ST QTR. 2ND QTR. QTR. 4TH QTR. QTR. 2ND QTR.
1996 1996 1996 1996 1997 1997
Retail Mortgage Loan originations:
Indianapolis HomeGold office............................... $-- $3,490 $18,490 $41,456 $55,639 $59,245
Phoenix HomeGold office.................................... -- -- -- 4,211 25,440 40,998
Greenville HomeGold office................................. -- -- -- -- 8,338 38,240
Sterling Lending Corporation offices....................... -- -- -- 1,195 1,643 10,051
Total Retail Mortgage Loan Originations.................... $-- $3,490 $18,490 $46,862 $91,060 $148,534
% increase over prior quarter.............................. n/a n/a 429.8% 153.4% 94.3% 63.1%
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 has a relationship. Certain of these Mortgage Bankers are Strategic
Alliance Mortgage Bankers, with which the Company has a special arrangement, as
described below. As a wholesale originator of Mortgage Loans, the Company funds
the Mortgage Loans at closing, although 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 1995 and 1996 and
the first six months of 1997, the Company conducted its wholesale loan
operations through approximately 120, 330 and 700 Mortgage Bankers,
respectively. Wholesale Mortgage Loan originations during 1995 and 1996 and the
first six months of 1997, totaled $192.8 million, $259.8 million and $234.7
million, respectively.
The Company believes that its wholesale lending operation will continue
to play an important part in its business 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, particularly
because there are a large number of independent mortgage brokers who require
outside funding of their loans. The wholesale strategy also provides more
favorable cash flow than a correspondent-based strategy because such loans are
generally funded at par, rather than at the premiums typically associated with
bulk correspondent purchases.
STRATEGIC ALLIANCE MORTGAGE BANKERS. In 1994, the Company began seeking
to enter into strategic alliance agreements with Mortgage Bankers that the
Company believed were able to consistently generate large volumes of quality
mortgage loans. These strategic alliance agreements require that the Strategic
Alliance Mortgage Bankers must first offer to the Company the right to purchase
all of their loans which meet the Company's underwriting criteria and, subject
to certain limitations and conditions, obligate the Company to purchase such
loans. The Strategic Alliance Mortgage Bankers are accorded additional services,
information and authority by the Company, including the provision of capital
through arrangements similar to warehouse lending and the provision of
additional MIS and accounting services. These strategic alliance agreements have
terms ranging from three to five years and are generally terminable only at the
expiration of their term. Various strategic alliance agreements are scheduled to
terminate beginning in 2000. Notwithstanding the fact that strategic alliance
agreements are generally not terminable prior to the expiration of their terms,
in certain instances, Strategic Alliance Mortgage Bankers have unilaterally
terminated such agreements prior to their stated expiration. In the event the
Strategic Alliance Mortgage Banker terminates the agreement prior to its
expiration, the contract provides for a termination fee equal to, at a minimum,
all of the premium income shared 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 the gain on sale of
loans. The Company currently has six Strategic Alliance Mortgage Bankers, in
four of which the Company has a minority equity interest. Although compensation
under strategic alliance agreements varies from agreement to agreement, such
compensation generally involves sharing of premiums or losses received upon sale
of the loan. The Strategic Alliance Mortgage Banker also retains all origination
fees.
Strategic Alliance Mortgage Bankers accounted for approximately $145.0
million, or 75%, of the Company's Mortgage Loans originated in 1995,
approximately $190.7 million, or 58%, of the Company's Mortgage Loans originated
in 1996, and approximately $73.2 million, or 15%, of the Company's Mortgage
Loans originated in the first six months of 1997.
The Company plans to increase the number of Mortgage Bankers with which
it is affiliated. The Company also seeks to identify specific Mortgage Bankers
either from its group of affiliated Mortgage Bankers or from unaffiliated
Mortgage Bankers and enter into strategic alliance agreements with these
parties.
GEOGRAPHIC DIVERSIFICATION. Since the Company commenced its retail
mortgage operations in 1996, it has significantly expanded its geographic
presence. During 1994, 1995, 1996 and the first six months of 1997, Mortgage
Loan originations by state were as shown below:
47
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
STATE 1994 % 1995 % 1996 % 1997 %
(DOLLARS IN THOUSANDS)
North Carolina...................... $49,100 49.4% $97,400 50.5% $89,976 27.4% $88,239 18.6%
South Carolina...................... 42,600 42.9 37,600 19.5 90,411 27.5 74,598 15.7
Florida............................. -- -- 16,200 8.4 39,589 12.0 45,920 9.7
Georgia............................. -- -- -- -- 13,381 4.1 37,889 8.0
Indiana............................. -- -- -- -- 16,373 5.0 28,300 6.0
Tennessee........................... 1,800 1.8 8,800 4.6 15,239 4.6 25,940 5.5
Michigan............................ -- -- -- -- 10,959 3.3 22,368 4.7
Louisiana........................... -- -- -- -- 5,080 1.6 21,218 4.5
Virginia............................ 400 0.4 9,600 5.0 13,666 4.2 21,089 4.5
Maryland............................ 89 -- -- -- 89 0.0 16,028 3.4
All other states.................... 5,500 5.5 23,200 12.0 33,886 10.3 92,672 19.4
Total............................... $99,400 100.0% $192,800 100.0% $328,649 100.0% $474,261 100.0%
LOAN UNDERWRITING
In the application and approval process associated with the Company's
retail Mortgage Loan operations, a Company loan officer in a retail loan
origination office obtains an initial loan application, which is processed
through the underwriting department associated with the particular loan
origination office. The Company is responsible for securing all necessary
underwriting information associated with such application. 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 to an attorney or title company for
closing.
The application and approval process for wholesale Mortgage Loans
depends upon the specific Mortgage Bankers involved in the origination process.
Loans originated through the Strategic Alliance Mortgage Bankers are initially
evaluated and underwritten by the Strategic Alliance Mortgage Bankers. After the
Strategic Alliance Mortgage Bankers have gathered the necessary underwriting
information and evaluated and approved the application, summary loan information
and a funding request are forwarded to the Company for review on an expedited
basis, which review is generally completed within two business days. After
approval by the Company, the Strategic Alliance Mortgage Banker forwards the
loan package to an attorney or title company for closing. In the origination and
assignment process, the Strategic Alliance Mortgage Banker makes representations
and warranties to the Company with respect to the Mortgage Loan, including a
representation that the Mortgage Loan meets the Company's underwriting criteria.
With respect to loans originated through Mortgage Bankers other than the
Strategic Alliance Mortgage Bankers, the necessary underwriting information is
gathered by both the Mortgage Banker and the Mortgage Loan Division's central
credit department. After review and evaluation, a loan officer in the credit
department makes the final credit decision before funding.
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 the first
mortgage, if any, on the property. The Company uses several procedures to verify
information obtained from an applicant. The applicant's outstanding balance and
payment history on any senior mortgage is verified by calling the senior
mortgage lender. In order to verify an applicant's employment status and income,
the Company generally obtains such verification from the applicant's employer
and, in the case of self-employed borrowers, the Company requires a copy of the
borrower's tax return.
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 generally requires real estate improvements to be fully insured as to
fire and other commonly insured-against 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 loan classification:
INTERNAL LOAN CLASSIFICATION
AA A B C
Existing mortgage history No 30 day late Maximum of two Maximum of three Maximum of four 30
(maximum historical payments in the 30 day late 30 day late day late payments
delinquencies) last 24 months payments in payments in the in the last 12
last 12 months; last 12 months; months;
and one 60 day maximum of one 60 maximum of one 60
late payment in day late payment in day late payment
the last 24 the last 24 months in the last 12
months months;
maximum of one 90
day late payment
in the last 24
months
Other credit history Maximum of two Maximum of one Maximum of one 90 30, 60 and 90+ day
(maximum historical 30 day late 60 day late day late payment late payments
delinquencies) payments in the payment in the in the last 24 acceptable,
48
last 24 months last 24 months, months provided that the
with minimal 30 borrower has at
day late least minimal
payments in the favorable credit
last 24 months history
Bankruptcy filings None None in past None in past None in past
5 years 2 years 2 years
Maximum debt service 45% 45% 45% 50%
to income ratio (1)
Maximum LTV ratio:
Owner occupied 90% 90% 85% 80%
Non-owner occupied 80% 75% 70% 65%
D
Existing mortgage history Cannot be in
(maximum historical foreclosure
delinquencies)
Other credit history No criteria
(maximum historical
delinquencies)
Bankruptcy filings No criteria
Maximum debt service 50%
to income ratio (1)
Maximum LTV ratio:
Owner occupied 70%
Non-owner occupied 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.
49
The following table provides information regarding the Company's first
and second Mortgage Loan originations by credit classification for the six
months ended June 30, 1997:
LOAN ORIGINATIONS BY CREDIT CLASSIFICATION
SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
INTERNAL LOAN CLASSIFICATION
AA/A B C D TOTALS
FIRST MORTGAGE LOANS
Total........................................ $256,177 $70,185 $25,042 $5,129 $356,533
% of total................................... 71.85% 19.69% 7.02% 1.44% 100.00%
Weighted average coupon...................... 10.59 11.61 13.02 14.09 11.01
Weighted average LTV ratio................... 79.95 78.18 74.74 68.67 79.07
SECOND MORTGAGE LOANS
Total........................................ $103,111 $11,447 $2,847 $323 $117,728
% of total................................... 87.58% 9.72% 2.42% 0.28% 100.00%
Weighted average coupon...................... 14.66 15.23 14.93 15.13 14.72
Weighted average LTV ratio................... 103.53 91.15 87.02 77.57 101.86
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 that the
Company will lend to a particular borrower is determined by a number of factors
including the applicant'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 Mortgage Loans, 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, prepayment fees and insufficient funds fees, where permitted by
applicable law.
SALE AND SECURITIZATION OF MORTGAGE LOANS
The following table sets forth for the periods indicated, Mortgage
Loans securitized and Mortgage Loans sold on a whole loan basis and loans
originated:
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
(DOLLARS IN THOUSANDS)
Mortgage Loans securitized........................................ $-- $-- $-- $-- $198,740
Mortgage Loans sold............................................... $54,565 $127,632 $284,794 $143,924 $158,480
Total Mortgage Loans sold or securitized.......................... $54,565 $127,632 $284,794 $143,924 $357,220
Total Mortgage Loan originations.................................. $99,373 $192,800 $328,649 $153,802 $474,261
% of Mortgage Loan originations sold or securitized............... 55% 66% 87% 94% 75%
The Company began selling Mortgage Loans on a whole loan basis in 1994
and for the years ended December 31, 1995 and 1996, the Company sold $127.6
million and $284.8 million, respectively. For the first six months of 1997, the
Company sold $158.5 million of Mortgage Loans. The Mortgage Loans to be sold are
generally packaged in pools of approximately $20.0 million and offered to
several potential purchasers for the purpose of obtaining bids. After obtaining
bids, the pool is generally sold to the highest bidder. Historically, the
Mortgage Loans have been sold 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 connection with the sale of Mortgage Loans, the Company receives
premiums generally ranging from 3% to 6% of the principal amount of the Mortgage
Loan being sold, depending on prevailing interest rates and the term of the
loan. During 1995, 1996 and the first six months of 1997, the weighted average
premiums on the Mortgage Loans sold were 7.04%, 5.86%, and 3.32%, respectively.
For the years ended December 31, 1995 and 1996 and the six months ended June 30,
1997, gains recognized by the Company in connection with the sale of Mortgage
Loans were $6.0 million, $18.3 million and $5.6 million, respectively.
Purchasers of Mortgage Loan pools are typically 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.
Beginning in the first quarter of 1997, the Company began securitizing
a substantial portion of its Mortgage Loans. The Company expects to continue its
practice of quarterly Mortgage Loan securitizations. The following sets forth
facts and assumptions used by the Company in arriving at the gain on sale
relating to its Mortgage Loan securitizations:
MARCH 1997 JUNE 1997
50
Loans securitized............................................................................ $77,526,090 $121,214,000
Average stated principal balance............................................................. 63,288 63,190
Weighted average original term to stated maturity............................................ 209 months 200 months
Weighted average coupon on loans............................................................. 11.01% 10.80%
Weighted average LTV ratio................................................................... 80.62 75.94
% of first mortgage loans.................................................................... 100.00 100.00
% secured by primary residence............................................................... 98.60 98.80
Weighted average pass-through rate to bondholders............................................ 7.40 7.06
Spread of pass-through rate over comparable treasury rate.................................... 0.89 0.78
Estimated annual losses...................................................................... 0.50 0.50
Annual servicing fee......................................................................... 0.50 0.50
Discount rate implicit in cash flow before overcollateralization............................. 26.00 22.00
Discount rate applied to cash flow after overcollateralization............................... 12.00 12.00
Discount rate applied to losses.............................................................. 0.00 0.00
Annual wrap fee and trustee fee.............................................................. 0.285 0.205
Initial overcollateralization (1)............................................................ 3.25 0.00
Final overcollateralization (1).............................................................. 6.50 3.75
Prepayment speed (2)......................................................................... 18 HEP 18 HEP
(1) Based on percentage of original principal balance, subject to step-down
provisions after 30 months.
(2) Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The variable the Company used in its
securitization model to indicate rate at prepayment was Home Equity
Prepayment ("HEP"). For example, 18 HEP assumes that the pool of loans
prepays in the first month at a constant prepayment rate of 1.8% and
increases by an additional 1.8% each month thereafter until the tenth
month, where it remains at a constant annual prepayment rate equal to
18% (the "Prepayment Assumption"). HEP represents an assumed annualized
rate of prepayment relative to the then outstanding principal balance
on a pool of new mortgage loans.
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.
MORTGAGE LOAN SERVICING, DELINQUENCIES AND COLLECTIONS
SERVICING
The Company maintains a centralized portfolio management department
located in Greenville, South Carolina which services its Mortgage Loans. Prior
to 1997, the Company did not retain the servicing on Mortgage Loans sold but,
beginning in March 1997, has begun securitizing Mortgage Loans for which it
retains the servicing. Servicing includes collecting payments from borrowers,
accounting for principal and interest, contacting delinquent borrowers, ensuring
that insurance is in place, monitoring payment of real estate property taxes,
and supervising foreclosures and bankruptcies in the event of unremedied
defaults. The Company does not escrow funds for purposes of insurance and taxes.
However, it monitors the maintenance of insurance and payments of taxes and
generally has the right to force-place insurance and pay taxes, which, if paid
by the Company, are charged back to the borrower.
The Company also serves as master servicer for the two 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 1996 and the first half of 1997 in anticipation of
increased origination growth and increased requirements 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.
DELINQUENCIES AND COLLECTIONS
Collection efforts generally begin when an account is over five days
past due. At that time, the Mortgage Loan Division contacts the borrower by
telephone to determine the reason for the delinquency and attempts to bring the
account current. After an account becomes 15 days past due, weekly letters are
sent to the borrower. In general, at 30 days past due, a right-to-cure letter is
sent; at 61 days a five-day demand letter is sent; and at 68 days, the account
is turned over to an attorney. In addition to written notices, the Company
attempts to maintain telephone contact with the borrower throughout the
delinquency period. If the status of the account continues to deteriorate, the
Mortgage Loan Division undertakes an analysis to determine the appropriate
action. In limited circumstances, when a borrower is experiencing difficulty in
making timely payments, the Mortgage Loan Division may temporarily adjust the
borrower's payment schedule without changing the loan's delinquency status. 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.
When a loan is 90 days past due in accordance with its original terms,
it is placed on non-accrual status and foreclosure proceedings are generally
initiated. In connection with such foreclosure, the loan and the facts
surrounding its delinquency are reviewed, and the underlying property may be
reappraised. 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 real
51
estate owned portfolio, which is carried at the lower of carrying value or
appraised fair market value less estimated cost to sell, totaled $3.0 million
and $2.9 million at December 31, 1996 and June 30, 1997, respectively.
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:
SIX
MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1997
(DOLLARS IN THOUSANDS)
Total serviced mortgage loans (period end)..................................... $60,151 $88,165 $146,231 $444,472
Average serviced mortgage loans................................................ 51,243 74,158 97,281 286,618
Delinquency (period end) 30-59 days past due:
Principal balance.............................................................. $4,789 $6,833 $4,450 $10,850
% of total serviced Mortgage Loans............................................. 7.96% 7.75% 3.04% 2.44%
60-89 days past due:
Principal balance.............................................................. $1,724 $1,587 $1,530 $4,319
% of total serviced Mortgage Loans............................................. 2.87% 1.80% 1.05% 0.97%
90 days or more past due:
Principal balance.............................................................. $4,108 $4,300 $4,633 $10,541
% of total serviced Mortgage Loans............................................. 6.83% 4.88% 3.17% 2.37%
Total delinquencies:
Principal balance.............................................................. $10,621 $12,720 $10,613 $25,709
% of total serviced Mortgage Loans............................................. 17.66% 14.43% 7.26% 5.78%
Real estate owned (period end)................................................. $3,361 $2,811 $2,959 $2,948
Net charge-offs................................................................ 1,518 771 792 544
% of net charge-offs (based on average serviced Mortgage Loans)................ 2.96% 1.04% 0.81% 0.38%
Over the last several years, and more acutely in the most recent six
month period, the Company has expanded rapidly. The reduction to loans past due
as a percentage of total serviced mortgage loans is due, in part, to the
increased origination volume. The Company anticipates that its total
delinquencies will generally be higher than they were at June 30, 1997 as the
portfolio becomes more seasoned.
SMALL BUSINESS LOAN DIVISION
OVERVIEW
The Company's Small Business Loan Division makes loans to small
businesses primarily for the acquisition or refinancing of property, plant and
equipment, working capital and debt consolidation. The Company's principal
strategy in the Small Business Loan Division is 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 believes
that it is one of only a few national, non-bank lenders that focus on smaller
businesses with debt needs of generally less than $2.0 million, that also offers
such businesses various commercial loan products designed to meet substantially
all of their financing needs. During 1994, 1995 and 1996, Small Business Loan
originations totaled $43.1 million, $39.6 million and $68.2 million,
respectively. During the six months ended June 30, 1997, Small Business Loan
originations totaled $31.0 million.
The Small Business Loan Division's lending operation is conducted
through a total of eight offices and is currently divided into four regions: (1)
the Southeastern Region, which is headquartered in Greenville, South Carolina,
(2) the Gulf Coast Region, which is headquartered in Panama City, Florida, (3)
the Rocky Mountain Region, which is headquartered in Denver, Colorado, and (4)
the Southwestern Region, which is headquartered in Dallas, Texas.
Principal loan products of the Small Business Loan Division are summarized
below.
o SBA LOANS. For the first six months of 1997, approximately 71% of the
Company's Small Business Loans were SBA Loans. The Company is one of
approximately 12 non-depository entities in the United States utilizing a
license to make SBA Loans. Substantially all of the Company's SBA Loans
are Section 7(a) Loans. During the six months ended June 30, 1997, the
Company originated approximately $22.1 million in SBA Loans. The SBA
guarantees on a pro rata basis generally 75% of the original principal
amount of an SBA Loan, subject to a maximum guarantee amount per borrower
of $750,000. The Company sells the SBA Loan Participations in the
secondary market. In connection with such sales, the Company typically
receives cash premiums of approximately 10% of the guaranteed portion
being sold. In addition, the Company retains servicing rights for which
it currently receives an average of 2% of the guaranteed portion of the
SBA Loans annually over the life of the loan. The Company securitizes the
unguaranteed portions of its SBA Loans. According to the SBA, the Company
was the seventh largest originator of SBA Loans in the United States, by
principal amount of SBA Loans approved, for the SBA's fiscal year ended
September 30, 1996. The Company intends to expand its SBA Loan operations
by utilizing its "Preferred Lender" status (the highest designation) with
the SBA to minimize response time and maximize loan production, opening
additional offices, increasing the number of relationships with referral
sources such as Commercial Loan Brokers and increasing the number of
internal business development officers.
52
o ASSET-BASED LOANS. The Small Business Loan Division also provides
Asset-Based Small Business Loans, which are revolving working capital
loans secured by accounts receivable, inventory and equipment to small
and medium-sized businesses. The Company's asset-based lending operation,
which began in April 1996, originated approximately $8.9 million in the
first six months of 1997 (based on the aggregate commitment of loans
closed).
o MEZZANINE LOANS. In June 1997, the Company acquired Reedy River Ventures,
an SBIC, and through this entity makes mezzanine loans, accompanied by
equity participations. The Company served as General Partner to Reedy
River Ventures prior to that time. At June 30, 1997, Reedy River Ventures
had loans receivable outstanding of approximately $5.0 million. The
Company expects to utilize Reedy River Ventures, along with the Company's
SBA Loans and Asset-Based Small Business Loans, to present the Company as
a single commercial loan company capable of meeting the commercial credit
needs of small businesses in various stages of development. The Small
Business Loan Division, through Emergent Equity Advisors, Inc., also
serves as investment manager for Palmetto Seed Capital Limited
Partnership, an entity which provides venture capital to start-up
companies principally located within South Carolina.
The Company also offers a commercial real estate loan product
originated under Section 504 of the Small Business Act. The Company is
considering offering a "Low Doc" SBA Loan product which would have principal
balances of up to $100,000. The Company has filed an application with the U.S.
Department of Agriculture seeking approval to participate in its "Business and
Industry" loan program, and continually reviews various additional loan
products. The Company expects that it will continue to focus its SBA lending
efforts principally on Section 7(a) Loans, although future regulatory changes
could alter such decision.
SMALL BUSINESS LOAN CUSTOMERS
The Company's Small Business Loan customers are commercial businesses
which generally do not have access to traditional bank financing. Such financing
may be unavailable because of a variety of factors, including inadequate
collateral, insufficient debt coverage, short operating history, lack of
management experience or an unfavorable credit history. A number of SBA Loans
have been made to business franchisees in connection with the acquisition of
national franchises. In connection with the Small Business Loans, the Company
generally obtains the guarantee of the principals involved in the business,
which, in the case of SBA Loans, is typically secured by real property.
The Company's SBA Loans are made only to borrowers who meet defined
criteria of the SBA as to the definition of a "small business." These criteria
differ based upon the industry in which the potential borrower operates. The
portion of the loan guaranteed by the SBA, the term of the loan and the range of
interest rates charged are also regulated by the SBA. The Company underwrites
SBA loans utilizing these SBA criteria, as well as by assessing the available
collateral, personal guarantees, and projected earnings and cash flow of the
small business on a case by case basis.
All SBA Loans originated by the Company have variable interest rates
which adjust quarterly, require monthly payments and are scheduled to amortize
fully over their stated term. SBA Loans originated by the Company have terms
ranging from seven to 25 years depending upon the use of proceeds, with a
weighted average term of approximately 16 years. Generally, seven-year loans are
made for working capital, 10-year loans for equipment and 25-year loans for real
estate.
SECTION 7(A) LOAN PROGRAM
Section 7(a) Loans are term loans made to commercial businesses which
qualify under SBA regulations as "small businesses." These loans may be made
only for the purposes set forth in the SBA regulations, which include
principally the acquisition or refinancing of property, plant and equipment, and
for working capital or debt consolidation.
The SBA administers three levels of lender participation in its Section
7(a) Loan program. Under the first level of lender participation, known as the
Guaranteed Participant Program, the lender gathers and processes data from
applicants and forwards it, along with its request for the SBA's guarantee, to
the local SBA office. The SBA then completes an independent analysis and makes
its decision on the loan application. SBA turnaround time on such applications
can vary greatly, depending on its backlog of loan applications. Under the
second level of lender participation, known as the Certified Lender Program, the
lender (the "Certified Lender") gathers and processes the application and makes
its request to the SBA, as in the Guaranteed Participant Program procedure. The
SBA then performs a review of the lender's credit analysis on an expedited
basis, which review is generally completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio quality and
volume criteria before authorizing lenders to participate as Certified Lenders.
Authorization is granted by the SBA on a district-by-district basis. Under the
third level of lender participation, known as the Preferred Lender Program, the
lender has the authority to approve a loan and to obligate the SBA to guarantee
the loan without submitting an application to the SBA for credit review.
However, the lender (the "Preferred Lender") is required to secure confirmation
from the SBA that the applicant qualifies as a small business. Such confirmation
generally takes less than 24 hours. The standards established for participants
in the Preferred Lender Program, the SBA's highest designation, are more
stringent than those for participants in the Certified Lender Program and
involve meeting additional portfolio quality and volume requirements.
The Company has been designated a Preferred Lender by the SBA in 34 of
the 65 SBA districts. The Company generates a substantial majority of its SBA
Loans in these 34 SBA districts. The SBA may suspend or revoke Preferred Lender
status for reasons such as loan performance, failure to make the required number
of loans under the expedited procedures, or violations of applicable statutes,
regulations or published SBA policies and procedures. The SBA performs periodic
audits of its non-bank licensed lenders to ensure compliance with its policies
and procedures.
SBA GUARANTEES
53
Under the Preferred Lender Program, the SBA guarantees on a pro rata
basis generally 80% on loans of $100,000 or less, and 75% on loans in excess of
$100,000. However, the SBA's maximum guarantee per borrower under the Section
7(a) SBA Loan program is $750,000.
In the event of a default by a borrower on an SBA Loan, if the SBA
establishes that any resulting loss is attributable to a failure by the Company
to comply with SBA policies and procedures in connection with the origination,
documentation or funding of the loan, the SBA may seek recovery of funds from
the Company. With respect to SBA Loan Participations which have been sold, the
SBA first will honor its guarantee and then seek compensation from the Company
in the event that a loss is deemed to be attributable to such failure to comply
with SBA policies and procedures. The SBA has previously determined two of the
Company's loans to be impaired to the extent of $89,000. The SBA has notified
the Company as to the potential for impairment of guarantee on two additional
loans. The Company believes it is adequately reserved in relation to these
potential impairments.
LOAN ORIGINATION AND APPROVAL
In the past five years, the Company's Small Business Loan origination
offices have made loans in 28 states. The Company's Small Business Loans
generally range in size from $100,000 to $1.5 million. The Company's average SBA
loan size for originations during 1996 and the first six months of 1997 was
$679,000 and $630,000, respectively.
SBA Loans are originated directly by the Company's loan officers in its
eight branch offices and are primarily generated through Commercial Loan Brokers
located in its market areas. Approximately 75% of the SBA Loans originated in
the first six months of 1997 were originated through Commercial Loan Brokers,
who generally are paid referral fees by the Company. The Company does not have
any contractual agreements with any of these brokers obligating them to refer
loans to the Company. In 1996, the Company originated Small Business Loans in
connection with approximately 45 Commercial Loan Brokers, and no single
Commercial Loan Broker accounted for more than 15% of the Company's Small
Business Loans. The Company also attempts to maintain strong relationships with
commercial banks, attorneys, accountants and other potential loan referral
sources.
Applicants for SBA Loans are generally required to provide historical
financial statements for three years and/or projected statements of operations
for two years. They are also generally required to provide proof of equity,
personal guarantees and assignments of affiliated leases and life insurance.
Credit reports are generally obtained from independent credit reporting agencies
for all applicants. These reports are reviewed by the SBA lending operation's
credit officers. Independent appraisals are generally required on real estate
pledged as collateral.
The SBA Loans generally have a variable rate of interest which is
limited to a maximum of 2.75% over the prime rate, adjusted on the first day of
each calendar quarter. The Company's Asset-Based Small Business Loans have
variable rates of interest which range generally from 2.0% to 3.0% above the
prime lending rate. However, these Asset-Based Small Business Loans also provide
for servicing and other processing fees, which cause the effective rate
associated with such loans to be approximately 24% for the loans originated to
date. Asset-Based Small Business Loans are evidenced by variable-rate, revolving
credit notes, which are payable upon demand. However, the Company generally
commits to make the credit facility available for a period of one to two years,
provided that certain covenants and conditions are met. Applicants for
Asset-Based Small Business Loans are generally required to provide cash flow
projections and inventory and accounts receivable aging and turn-over
information. Such aging and turnover information is provided to the Company on a
daily basis.
All loans made by the Small Business Loan Division generally must be
approved by the Company's credit administration department. All SBA Loans in
excess of $1.0 million must also be approved by either the President or
Executive Vice President of the SBA lending operation. After approval by such
officers, the loan application is produced and forwarded to the SBA office
servicing the location of the applicant. If an SBA Loan is being made in a
district where the Small Business Loan Division is certified as a Preferred
Lender, no prior credit approval of the SBA is required before the loan
transaction can be consummated. However, if the SBA Loan is being made in a
district where the Small Business Loan Division is not certified as a Preferred
Lender, the loan cannot be made until the SBA office approves the loan, issues
an authorization letter and assigns a loan number.
SMALL BUSINESS LOAN SALES AND SECURITIZATIONS
To date, the only Small Business Loans which the Company has sold or
securitized are SBA Loans. The following table sets forth for Small Business
Loans for the periods indicated, loans securitized and loans sold on a whole
loan basis and loan originations.
Six Months Ended
Year Ended December 31, June 30,
1994 1995 1996 1996 1997
(Dollars in Thousands)
Small Business Loans securitized.................................. $-- $17,063 $12,851 $-- $4,626
Small Business Loans sold......................................... $31,207 $25,423 $33,060 $15,909 $17,646
Total Small Business Loans sold or securitized.................... $31,207 $42,486 $45,911 $15,909 $22,272
Total Small Business Loan originations............................ $43,123 $39,560 $68,210 $30,583 $30,996
% of Small Business Loan originations sold or securitized......... 72% 107% 67% 52% 72%
LOAN SALES. Upon final disbursement of the proceeds of each SBA Loan,
the Company obtains bids in the secondary market for the SBA Loan Participation
associated with that SBA Loan. The SBA Loan Participation is generally sold to
the highest bidder. The Company retains the unguaranteed portion of the loan and
the servicing rights to the entire loan. The Small Business Loan Division sells
the SBA Loan Participations generally to financial institutions or other
institutional investors. Purchasers of the SBA Loan Participations share ratably
with the Small Business Loan Division (holding the unguaranteed portion) with
respect to all principal collected from the borrowers with respect to the SBA
Loans. SBA lenders are required to pay a fee of 0.5% per annum to the SBA on the
outstanding balance of the guaranteed portion of all loans, which fee is
deducted from remittances to the holders of the SBA Loan Participations.
54
In connection with the sale of SBA Loan Participations, the Small
Business Loan Division receives, in addition to excess servicing revenue, cash
premiums of approximately 10% of the guaranteed portion being sold. During 1994,
1995 and 1996 and the first six months of 1997, the weighted average premiums on
the SBA Loan Participations sold, together with the additional servicing
revenue, aggregated 11.79%, 13.75%, 14.17% and 14.80%, respectively, of the SBA
Loan Participations sold. For the years ended December 31, 1994, 1995 and 1996,
premiums recognized by the Company in connection with the sale of SBA Loan
Participations were $4.0 million, $3.9 million and $5.5 million, respectively.
For the first six months of 1997, premiums recognized by the Company in
connection with the sale of SBA Loan Participations were $2.4 million.
SECURITIZATION. In June 1995 and November 1996, the Company securitized
approximately $17.1 million and $17.5 million (including $4.6 million which was
prefunded and closed in January 1997), respectively, of the unguaranteed
portions of its SBA Loans. Each securitization was effected through a grantor
trust (the "Trust"), the ownership of which was represented by Class A and Class
B certificates. The Class A certificates were purchased by investors, while the
Company retained the Class B certificates. These certificates give the holders
thereof the right to receive payments and other recoveries attributable to the
unguaranteed portion of the SBA Loans held by the Trust. The Class B
Certificates issued in June 1995 and November 1996 represent approximately 10%
and 9%, respectively, of the principal amount of the SBA Loans transferred in
the securitization and are subordinate in payment and all other respects to the
Class A Certificates. Accordingly, in the event that payments received by the
Trust are not sufficient to pay certain expenses of the Trust and the required
principal and interest payments due on the Class A Certificates, the Company, as
holder of the Class B Certificates, would not be entitled to receive principal
or interest payments due thereon.
The Company serves as master servicer for the Trust and, accordingly,
forwards payments received on account of the SBA Loans held by the Trust to the
trustee of the Trust, which, in turn, pays the holders of the certificates in
accordance with the terms of and priorities set forth in the securitization
documents. Because the transfer of the SBA Loans to the Trust constitutes a sale
of the underlying SBA loans, no liability is created on the Company's
consolidated financial statements. However, the Company has the obligation to
repurchase the SBA Loans from the Trust in the event that certain
representations made with respect to the transferred SBA Loans are breached or
in the event of certain defaults by the Company, as master servicer. The Class A
certificates received a rating of Aaa from Moody's Investors Service, Inc. The
Class B Certificates were not rated. In connection with the securitization, the
Small Business Loan Division received funds substantially equal to the Class A
certificates' percentage of the total principal amount of the SBA Loans
transferred to the Trust.
Currently the SBA approves securitization structures on a
transaction-by-transaction basis with no minimum required retention percentages.
Current rules also require non-depository SBA lenders to maintain unencumbered
capital of $1.0 million or 10% of the Company's share of outstanding loans,
whichever is greater. The SBA is proposing to modify its rules regarding the
financing and securitization of the unguaranteed portion of loans guaranteed
under Section 7(a) of the Small Business Act. Present regulations provide these
options only to non- depository lenders such as the Company. These proposed
rules would permit both depository and non-depository lenders to pledge or
securitize the unguaranteed portions of SBA Loans. Under the proposal,
participating lenders which undertake securitizations would be required to
retain the equivalent of at least a 5% interest in each loan. The proposed rules
would also increase the amount of required minimum equity for small business
lending companies by 8% of the retained tranche, unless the lender puts up a 5%
cash reserve. The proposed regulations would reduce the economic benefits of
securitization to the Company, and could also impact liquidity of the Company
and availability of funding. However, management believes that securitization of
its SBA Loans will still be economical.
SMALL BUSINESS LOAN SERVICING, DELINQUENCIES AND COLLECTIONS
SERVICING
The Company services substantially all the Small Business Loans it
originates from a central location in Greenville, South Carolina. Servicing
includes collecting payments from borrowers; remitting payments with respect to
securitized loans to the trustee of the trust, and with respect to SBA Loan
Participations, to Colson Services Corp. ("Colson Services"); accounting for
principal and interest; contacting delinquent borrowers; and supervising
foreclosures. The Company initially reviews loan files to confirm that the loans
were originated in accordance with SBA regulations and Company policies.
Thereafter, the Company conducts periodic reviews of the borrower's financial
condition.
The SBA has contracted with Colson Services to serve as the exclusive
fiscal and transfer agent for the SBA Loan Participations sold in the secondary
market. The Company collects payments from borrowers and remits to Colson
Services amounts due to investors. Colson Services then remits such amounts to
the investors and administers the transfer of SBA Loan Participations from one
investor to another.
DELINQUENCIES AND COLLECTIONS
When an SBA Loan becomes delinquent, the Company contacts the borrower
to determine the circumstances of the delinquency and attempts to maintain close
contact with the borrower until the loan is brought current or is liquidated.
When an SBA Loan becomes 60 days past due, the Company is required to notify the
SBA of such delinquency. Generally, after a loan becomes 90 days delinquent, the
Company places the loan on non-accrual status, delivers a default notice to the
borrower and, upon notification to and approval by the SBA, begins the legal
process of foreclosure and liquidation. Foreclosure proceedings are generally
conducted by the Company, although where the SBA Loan was not made under the
Preferred Lender program, the SBA has the right to conduct the foreclosure. Any
loss after foreclosure and liquidation is allocated pro rata between the
guaranteed and the unguaranteed portions of the SBA Loan. Generally, after an
SBA Loan becomes 60 to 90 days past due, the SBA, upon the request of the
Company (as servicer of the loan), repurchases the guaranteed portion of the
principal balance of the SBA Loan from the holder, together with accrued
interest covering a period of up to 120 days.
The asset-based lending operation monitors its borrowers daily for
availability under the lines of credit. Loans are placed on watch if the
borrower is experiencing tight cash flow and poor profitability. Loans are
placed on non-accrual status if collection of the interest is deemed to be
doubtful. In the event of a default, the Company makes an assessment of the
borrower's financial condition and nature of the default to determine further
action. If repayment of the loan is considered doubtful, a demand letter is sent
and the Company begins the process to take control of the collateral.
55
When a mezzanine loan becomes delinquent, the Company contacts the
borrower by telephone to determine the circumstances of the delinquency and
attempts to maintain close contact with the borrower until the loan is brought
current or is liquidated. When a mezzanine loan becomes more than 30 days past
due, the Company delivers a default notice to the borrower. When a mezzanine
loan becomes more than 90 days past due, the Company places the loan on
non-accrual status and begins the legal process of foreclosure and liquidation.
56
The following table sets forth for the periods indicated information
relating to the delinquency and loss experience of the Company with respect to
its Small Business Loans serviced:
SIX
Months
Year Ended Ended
December 31, June 30,
1994 1995 1996 1997
(Dollars in Thousands)
Total serviced Small Business Loans (period end)........................... $88,809 $108,696 $140,809 $169,891
Total unguaranteed serviced Small Business Loans........................... 18,771 24,867 44,017 63,043
Average unguaranteed serviced Small Business Loans......................... 15,004 21,819 34,442 51,030
Delinquency (period end) 30-59 days past due:
Principal Balance.......................................................... $208 $717 $1,482 $452
% of total unguaranteed Small Business Loans............................... 1.11% 2.89% 3.37% 0.72%
60-89 days past due:
Principal Balance.......................................................... $-- $1,081 $391 $379
% of total unguaranteed Small Business Loans............................... 0.00% 4.35% 0.89% 0.60%
90 days or more past due:
Principal Balance.......................................................... $-- $612 $1,612 $1,187
% of total unguaranteed Small Business Loans............................... 0.00% 2.46% 3.66% 1.88%
Total delinquencies:
Principal Balance.......................................................... $208 $2,410 $3,485 $2,018
% of total unguaranteed Small Business Loans............................... 1.11% 9.69% 7.92% 3.20%
Real estate owned (period end)............................................. $129 $18 $-- $13
Net charge-offs............................................................ 31 311 932 618
% of net charge-offs (based on average unguaranteed serviced
Small Business Loans)...................................................... 0.21% 1.43% 2.71% 2.42%
AUTO LOAN DIVISION
OVERVIEW
The Company's Auto Loan Division makes loans directly to non-prime
borrowers for the purchase of used automobiles. The Company is currently
pursuing the divestiture of its Auto Loan operation. In anticipation of the
divestiture of the Auto Loan Division, the Company does not plan to expand its
Auto Loan operations.
The Company currently operates its Auto Loan Division through eight
locations, and at June 30, 1997, had a total of $22.6 million of serviced Auto
Loans. Over 75% of the Auto Loans are made directly by the Company through
referrals from used automobile dealers located in South Carolina. Less than 25%
of the Auto Loans originated in the first six months of 1997 were "indirect"
loans purchased from dealers, all of which were located in South Carolina. Of
the dealers which referred loans to the Company in 1996 and the first six months
of 1997, the Company estimates that half of such dealers were franchised dealers
and half were independent dealers.
The non-prime consumer automobile market is comprised of borrowers who
generally do not have access to other conventional sources of automobile credit
because they do not meet the credit standards imposed by other lenders. As a
result of its borrowers' credit status, the Company charges relatively high
rates of interest to such consumers, which, in the first six months of 1997,
ranged from 18% to 46% (with an average yield of 27%). By contrast, banks,
thrift institutions, and financing subsidiaries of manufacturers and retailers
generally impose more stringent, objective credit requirements and generally
charge lower interest rates based on the prevailing interest rate environment at
the time of origination.
The Company began making Auto Loans with its acquisition of 80% of the
common stock of The Loan Pro$, Inc. ("Loan Pro$") in 1991. At the time of
acquisition, Loan Pro$ had $1.8 million in loans and operated through one
location. The Company also acquired Premier Financial Services, Inc. ("Premier")
in 1991. At the time of acquisition, Premier had approximately $3.0 million in
loans, which were principally personal property loans, and operated through
three locations. During 1993, the Company decided to terminate Premier's
unsecured personal property loan operation and focus its lending efforts on
secured automobile lending. During 1994, 1995 and 1996, Auto Loan originations
totaled $7.5 million, $17.1 million and $18.3 million, respectively. During the
first six months of 1997, Auto Loan originations totaled $8.5 million.
LOAN SECURITIZATIONS
The following table sets forth total loans securitized and total loans
originated for the periods indicated for the Auto Loan Division.
57
Six Months Ended
Year Ended December 31, June 30,
1994 1995 1996 1996 1997
(DOLLARS IN THOUSANDS)
Total Auto Loans securitized........................................ $-- $-- $16,107 $16,107 $--
Total Auto Loan originations........................................ 7,547 17,148 18,287 10,052 8,488
% of loan originations securitized.................................. -- -- 88% 160% --
SERVICING, COLLECTION AND DELINQUENCIES
The Company's borrowers are required to remit their monthly payments
using the payment coupon book provided to them at the time the credit is
extended. Consequently, the Company does not issue monthly statements to
borrowers. If a payment is not received within five days after its due date,
the Company telephones the borrower, and attempts to maintain weekly contact
thereafter until the loan is brought current. If a payment is not received
within 11 days after its due date, the borrower is sent a right-to-cure letter.
In certain instances, the automobile is picked up and stored by the Company
after the right-to-cure letter has been received. After 30 days, the branch
manager contacts the borrower. After 45 to 60 days, at the discretion of the
branch manager, the Company generally repossesses the automobile. In certain
instances, borrowers are permitted to recover their repossessed vehicles if
they cure defaults under their loan.
Repossessed automobiles are usually offered for sale by the Company
through independent dealers. If such efforts are unsuccessful, the automobiles
are sold at public auction. The time between repossession and public sale
generally ranges from one to six months. The book value of repossessed
automobiles held by the Company at December 31, 1996 and June 30, 1997 was $1.8
million and $1.1 million, respectively.
The following table illustrates the Company's delinquency and
charge-off experience with respect to its Auto Loans. The Company currently does
not service any Auto Loans for which it does not have credit risk. However, the
Company's credit risk on its securitized loans is limited to its investment in
its interest-only and residual asset-backed certificates and Interest-only Strip
Securities.
AUTO LOAN DELINQUENCIES AND CHARGE-OFFS
Six Months
Ended
Year Ended December 31, June 30,
1994 1995 1996 1997
(DOLLARS IN THOUSANDS)
Total serviced Auto Loans (period end)....................................... $8,483 $17,673 $22,033 $22,555
Average serviced Auto Loans.................................................. 7,247 13,078 21,277 22,435
Delinquency (period end) 30-59 days past due:
Principal balance............................................................ $194 $1,659 $2,480 $1,673
% of total serviced Auto Loans............................................... 2.29% 9.39% 11.26% 7.42%
60-89 days past due:
Principal balance............................................................ $67 $473 $869 $486
% of total serviced Auto Loans............................................... 0.79% 2.68% 3.94% 2.16%
90 days or more past due:
Principal balance............................................................ $54 $136 $416 $281
% of total serviced Auto Loans............................................... 0.64% 0.77% 1.89% 1.25%
Total delinquencies:
Principal balance............................................................ $315 $2,268 $3,765 $2,440
% of total serviced Auto Loans............................................... 3.72% 12.83% 17.09% 10.82%
Repossessed automobiles (period end)......................................... $113 $676 $1,761 $1,103
Net charge-offs.............................................................. 183 481 2,053 1,727
% of net charge-offs (based on average serviced Auto Loans).................. 2.53% 3.68% 9.65% 15.40%
58
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, substantial national financial services
networks have been formed by major brokerage firms, insurance companies,
retailers and bank holding companies. 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 operations, 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,
the industry, as a whole, is highly fragmented and no one company has a large
percentage of the total mortgage loan market. The Company attempts to maintain
its competitiveness by continuing to expand its retail Mortgage Loan operation
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 Division -- Mortgage Loan Origination."
The Company faces significant competition in all markets in which it
makes Small Business Loans to non-prime borrowers. The Company's major
competitors vary from region to region. However, its primary competitors are
small independent banks and larger finance companies. Because SBA Loan interest
rates and terms offered by lenders are relatively uniform, the Company believes
that the principal source of competition in making SBA Loans relates to the
quality of service provided by the lender and the relationships established with
the borrower. Competition with respect to Asset-Based Small Business Loans to
non-prime borrowers is also principally based upon the quality of the service
provided by the lender and the relationships established with the borrower and
secondarily upon the interest rate and other terms of such loans. Competition
for its mezzanine lending operation comes from a variety of sources, ranging
from small private venture funds to larger institutions. The Company believes
that it is important that it maintain good relations with the Commercial Loan
Brokers, accountants and attorneys, who are a significant source of Small
Business Loan originations.
The consumer finance business, and the Auto Loan business in
particular, is highly competitive. Because the Company's Auto Loan business is
limited to a particular area of the consumer finance industry and because the
Company's customer base consists of individuals who generally do not have access
to other traditional sources of consumer credit, the Company usually does not
compete directly with banks, savings and loans, financing subsidiaries of
manufacturers and retailers of automobiles, and other traditional consumer
financing sources with respect to Auto Loans. However, in each market where the
Company operates, there are generally a number of other non-prime lenders that
compete for the Auto Loans, including local finance companies. Certain of these
non-prime lenders are larger and have greater resources than the Company.
Furthermore, the Company believes that conventional lenders are increasingly
seeking to operate in the non-prime consumer market. Such additional competition
could have a material adverse effect on the Company and its ability to attract
customers. The Company believes that the principal bases for competition in the
Auto Loan business are the monthly payment amount, the speed of the credit
determination process and the general level of service provided to the dealers.
Accordingly, the Company believes that it is important that it maintain good
relationships with its associated dealers.
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: the Small Business Act, the
Small Business Investment Act of 1958, as amended (the "SBIA"), 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 (the "ECOA"), the Home Mortgage
Disclosure Act, the Fair Credit Reporting Act of 1970, as amended (the "FCRA"),
the Fair Debt Collection Practices Act, as amended, the Real Estate Settlement
Procedures Act (the "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.
MORTGAGE LOANS
Mortgage lending laws generally require licensing of the lender,
limitations on the amount, duration and charges for various categories of loans,
adequate disclosure of certain contract terms and 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.
59
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.
SMALL BUSINESS LOANS
The SBA Loans made by the Small Business Loan Division are governed by
federal statutes (the Small Business Act and SBIA) and may be subject to
regulation by certain states. These federal statutes and regulations specify the
types of loans and loan amounts which are eligible for the SBA's guarantee as
well as the servicing requirements imposed on the lender to maintain SBA
guarantees.
The Company is also required to comply with certain portions of ECOA
which are applicable to commercial loans, including SBA Loans. The Company must
comply with ECOA's prohibition against discrimination on the basis of race,
color, religion, national origin, sex, age, or marital status and with the
portion of Regulation B under the ECOA that requires lenders to advise loan
applicants of the reasons their credit request was declined or subject to other
adverse action. The Company believes it is in substantial compliance in all
material respects with ECOA.
The SBA is proposing to modify its rules regarding the financing and
securitization of the unguaranteed portion of loans guaranteed under Section
7(a) of the Small Business Act. Present regulations provide these options only
to non-depository lenders such as the Company. These proposed rules would permit
both depository and non-depository lenders to pledge or securitize the
unguaranteed portions of SBA Loans. Under the proposal, participating lenders
which undertake securitizations would be required to retain the equivalent of at
least a 5% interest in each loan. The proposed rules would also increase the
amount of required minimum equity for small business lending companies by 8% of
the retained tranche, unless the lender puts up a 5% cash reserve. The proposed
regulations will reduce the economic benefits of securitization to the Company,
and could also impact liquidity of the Company and availability of funding.
However, management believes that securitization of its SBA Loans will still be
economical, and that it will have sufficient availability of funding. However,
many uncertainties could impact the outcome of this forward-looking statement,
and no assurance can be made that actual results will not differ materially.
The Company's Asset-Based Small Business Loans and mezzanine loans are
generally not regulated except to the extent set forth above in " -- Regulation
- -- General."
AUTO LOANS
The Company's Auto Loan business is subject to extensive supervision
and regulation under state and federal laws and regulations, which, among other
things, require that the Company obtain and maintain certain licenses and
qualifications, regulate the interest rates, fees and other charges the Company
is allowed to charge, limit or prescribe certain other terms of the Company's
loans, require specified disclosures to consumers, govern the sale and terms of
insurance products offered by the Company and the insurers for which it acts as
agent, and define the Company's rights to repossess and sell collateral.
The Company's Auto Loan business is currently limited to South Carolina
and is therefore subject to certain South Carolina laws and regulations,
including the South Carolina Consumer Protection Code (the "SC Code"). With
respect to their direct lending activities, Premier and Loan Pro$ are each
licensed under the SC Code as a "supervised lender" (a lender making consumer
loans at interest rates in excess of 12% per annum), and are subject to
regulation by the Consumer Finance Division of the State Board of Financial
Institutions and by the South Carolina Department of Consumer Affairs. These
state regulatory agencies audit the Company's local offices from time to time,
and each state agency performs an annual compliance audit of the Company's
operations.
The SC Code and the regulations thereunder generally do not limit the
finance charges that may be contracted for with respect to loans having a cash
advance exceeding $600, but require supervised lenders to file schedules showing
maximum finance charges for each category and amount of supervised loans. Such
schedules must express finance charges in terms of annual percentage rates
determined in accordance with TILA, and must be conspicuously posted in each
location where loans are originated in the format and with certain notices set
forth in regulations promulgated under the SC Code. The SC Code and regulations
thereunder also, among other things, limit or regulate closing costs, insurance
premiums, delinquency, deferral, refinancing, consolidation and conversion fees
and other additional charges which may be assessed in connection with consumer
loans, prescribe certain disclosures and notices to borrowers and cosigners,
prescribe maximum repayment terms for loans of $1,000 or less, define and limit
creditors' remedies on default, prescribe certain record-keeping and reporting
procedures and requirements, and regulate other aspects of consumer finance
transactions, including permitted collateral, application of payments, limits on
scheduled balloon payments, rebates on prepayments, certain terms, disclosures
and formalities in the loan contract, and other matters.
The SC Code contains provisions similar to the foregoing which are
applicable to consumer credit sale transactions in which a consumer's purchase
of goods or services is financed by the seller or by the seller's assignment of
the retail installment sale contract to another
60
lender. These provisions are applicable to the Company's indirect financing of
automobile purchases. The SC Code provides that the seller effecting the credit
sale is responsible for licensing and compliance with respect to loans
originated in connection with credit sales, and does not impose on the assignee
any obligation of the seller with respect to events occurring before the
assignment. However, upon the assignment, the Company is subject to the
provisions governing credit sales. The Company believes that it and the dealers
from which it accepts assignment of consumer loans are in substantial compliance
with the provisions of the SC Code governing credit sales.
The Company's Auto Loan business is also subject to extensive federal
regulation in connection with its consumer loans, including TILA, ECOA and FCRA
and the regulations thereunder, and certain rules of the Federal Trade
Commission. These laws and regulations are referenced above under " --
Regulation -- Mortgage Loans." The Company's Auto Loan business is also subject
to the rules of the Federal Trade Commission, which limit the types of property
a creditor may accept as collateral to secure a consumer loan and provide for
the preservation of the consumer's claims and defenses when a consumer
obligation is assigned to a subsequent holder. The Company believes that it is
in substantial compliance in all material respects with TILA, ECOA, FCRA and the
Federal Trade Commission rules.
EMPLOYEES
At June 30, 1997, the Company employed a total of 956 full-time
equivalent employees. The Company believes that its relations with its employees
are good.
PROPERTIES
The Company's headquarters are located at 15 South Main Street, Suite
750, Greenville, South Carolina and are leased. At June 30, 1997, the Company
owned three offices and leased 32 offices. None of the leases or properties
owned is 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. The Company would expect to lease or purchase any properties
necessary for any expansion.
LEGAL PROCEEDINGS
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.
In July, 1997, an action was commenced against the Company in the
United States District Court for the District of Puerto Rico. The complaint
alleges that the Company breached the terms of a confidentiality agreement with
the plaintiff concerning the possibility of commencing residential mortgage loan
operations in Puerto Rico. The complaint also alleges that the Company breached
an employment agreement with plaintiff and a development agreement with him to
begin operations in Puerto Rico. The Company denies that it breached any
confidentiality agreement and also denies that it reached any agreement with the
plaintiff. The Company has retained counsel in Puerto Rico and intends to
vigorously defend against this action, which the Company believes is without
merit.
61
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names and ages of the Company's
executive officers and directors, the positions and offices with the Company
held by each such person, and the period that each such person has served as an
executive officer or director of the Company.
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
John M. Sterling, Jr. 59 Chief Executive Officer 1991
and Chairman of the Board
Keith B. Giddens 42 President, Chief Operating 1992
Officer and Director
Kevin J. Mast 37 Vice President, Chief Financial 1995
Officer and Treasurer
Robert S. Davis 50 Vice President -- Administration 1990
Clarence B. Bauknight(1) 60 Director 1995
Tecumseh Hooper, Jr.(2) 49 Director 1991
Buck Mickel(1) 70 Director 1991
Porter B. Rose 54 Director 1991
J. Robert Philpott(1)(2) 50 Director 1997
Larry G. Blackwell, Ph.D(2) 56 Director 1997
(1) Members of the Compensation Committee.
(2) Members of the Audit Committee.
JOHN M. STERLING, JR. has served as Chief Executive Officer and
Chairman of the Board of the Company since January 1991. In addition, Mr.
Sterling also served as President of the Company from January 1991 to August
1996. Mr. Sterling was Chairman of the Board and Chief Executive Officer of
Modern Office Machines, Inc. ("MOM") from 1981 through August 1992. Mr.
Sterling has served as General Partner and Manager of Reedy River Ventures,
which is a Small Business Investment Company licensed by the SBA and which was
recently acquired by the Company. Mr. Sterling also serves on the Board of
Directors of Datastream Systems, Inc. and several private companies.
KEITH B. GIDDENS has served as President and Chief Operating Officer
since August 1996, and as Executive Vice President and Chief Operating Officer
of the Company from November 1995 to August 1996 and Chief Executive Officer of
CII, Premier, Loan Pro$ and EBC since the date of their respective acquisitions
by the Company in 1991. Mr. Giddens was a partner and certified public
accountant in the public accounting firm of Ernst & Young from October 1988
through April 1991 and a Senior Manager at such firm from October 1984 through
September 1988.
KEVIN J. MAST has served as Vice President and Chief Financial Officer
of the Company since August 1996 and as Treasurer of the Company since November
1995, Executive Vice President and Chief Financial Officer and Treasurer of EBC
since April 1992, Chief Financial Officer and Treasurer of Loan Pro$ and Premier
since April 1995, Treasurer of CII since April 1995, and Treasurer of Emergent
Mortgage Corp. and Sterling Lending Corporation since their inception. From June
1991 to October 1992, Mr. Mast served as Executive Vice President and Chief
Financial Officer of Citizens Bank & Trust Co. and its parent company Business
Banc of America. Prior to that time, Mr. Mast was an audit Senior Manager and
certified public accountant at Ernst & Young where he specialized in the audits
of financial institutions.
ROBERT S. DAVIS has served as Vice President -- Administration since
August 1996 and as Chief Financial Officer of the Company from January 1991 to
August 1996, as Treasurer from 1992 to 1995, as Vice President of Finance from
November 1989 through June 1990, as President and Treasurer from June through
December 1990, and as Corporate Controller from 1986 through November 1989.
Prior to 1986, Mr. Davis was Chief Financial Officer of Alexander's Wholesale
Distributors, Inc., a catalog retailer of consumer goods. Prior to that time,
Mr. Davis was a certified public accountant with a predecessor firm to KPMG
Peat Marwick.
CLARENCE B. BAUKNIGHT has been Chairman of the Board and Chief
Executive Officer of Builderway, Inc. since 1976. Builderway, Inc. is engaged
in the business of distribution and retail sale of building supplies and
appliances. Mr. Bauknight has also served since 1978 as Chairman of the Board
and Chief Executive Officer of Enterprise Computer Systems, Inc. which is
engaged in the development of computer software for the building supply
industry. Mr. Bauknight also serves on the Board of Directors of Builder Marts
of America, Inc., a building supply company. Mr. Bauknight was a founder of all
three of these companies.
TECUMSEH HOOPER, JR. served as Treasurer of the Company from January
1991 through 1992. Mr. Hooper has served as President, Mid-South Region of IKON
Solutions, Inc. ("IKON"), MOM's parent company, since 1995 and President of MOM
since 1982. From October 1994 through September 1995, Mr. Hooper served as the
Southeast Regional Director for IKON. From 1981 to 1995, Mr. Hooper also served
as General Partner of Reedy River Ventures, prior to its acquisition by the
Company.
BUCK MICKEL is Chairman of Mickel Investment Group, a private
investment company in Greenville, SC. Mr. Mickel has served in various
executive positions, including Vice Chairman of the Board of Fluor Corporation,
a construction firm, from which he resigned in 1987, and Chairman of the Board
of Daniel International Corporation, a construction firm and a subsidiary of
Fluor Corporation, from which he resigned in 1987. Mr. Mickel also serves on
the Board of Directors of Fluor Corporation, Liberty Corporation, Duke Power
Company, Delta Woodside Industries, Inc. and Insignia Financial Group, Inc.
62
PORTER B. ROSE has served as principal in Philpott Ball & Company
since July 1997. Prior to July 1997, he served as President of Liberty
Insurance Services, Inc. (from January 1995), President of Liberty Investment
Group, Inc. ("Liberty Group") (from April 1992), and Chairman of Liberty
Capital Advisors, Inc. ("Liberty Capital") and Liberty Properties Group, Inc.
(from January 1987) (collectively, the "Liberty Subsidiaries"). Mr. Rose served
as President of Liberty Capital from January 1987 to April 1992 and as
Executive Vice President of Investments for Liberty Life Insurance Company from
1983 through 1987. The Liberty Subsidiaries were engaged in property
development and the management of investment portfolios for Liberty
Corporation, its subsidiaries and other clients.
J. ROBERT PHILPOTT has been president of Philpott Ball & Company since
1991. Philpott Ball & Company, which Mr. Philpott founded in 1991, is engaged in
the business of providing investment banking services to small to mid-size
companies. Mr. Philpott was Managing Director of the Capital Markets Group for
Interstate/Johnson Lane Corporation, an investment banking firm ("IJL"), from
1989 to 1990. From 1985 to 1989, Mr. Philpott served as Senior Vice President
and Manager of IJL's Corporate Finance Department. From 1981 to 1985, he served
as Vice President in the Corporate Finance Department of J.C. Bradford &
Company, an investment banking firm. Mr. Philpott serves on the Board of
Directors of Pluma, Inc.
LARRY G. BLACKWELL, PH.D has been Chairman of the Board, CEO, and
President of Datastream Systems, Inc. since 1986. Datastream Systems, Inc. is
engaged in the business of developing and marketing computer software used for
industrial maintenance. Dr. Blackwell served as President of the Datastream
Division of RMT, a subsidiary of Wisconsin Power and Light, from 1984 through
1986, at which time Dr. Blackwell purchased the Datastream Division from RMT.
From 1974 until 1984, Dr. Blackwell served as Chairman of EDI Technology
Companies, an environmental and industrial process engineering consulting
company of which he was the co-founder.
All directors of the Company serve one-year terms and until the
election and qualification of their respective successors. The Company's
executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth below is furnished as of July 7, 1997, with
respect to common stock owned beneficially or of record by (i) persons known to
the Company to be the beneficial owner of more than 5% of the common stock as of
that date, (ii) each of the directors and executive officers individually and
(iii) all directors and executive officers as a group. Unless otherwise noted,
each person has sole voting and investment power with respect to such person's
shares owned. All share amounts in the table include shares which are not
outstanding but which are the subject of options exercisable in the 60 days
following the date hereof.
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OUTSTANDING
SHARES (1)
Wellington Management Co., LLP
75 State Street
Boston, MA 02109 1,223,600(2) 12.69%
John M. Sterling, Jr.
P. O. Box 17526
Greenville, SC 29606 1,016,943(3) 10.55%
The Sterling Family Limited Partnership
P. O. Box 17526
Greenville, SC 29606 797,168(4) 8.27%
Clarence B. Bauknight
P. O. Box 2183
Greenville, SC 29602 256,985(5) 2.66%
Buck Mickel
P. O. Box 19019
Greenville, SC 29602-9019 250,991(6) 2.60%
Tecumseh Hooper, Jr.
P. O. Box 5615
Greenville, SC 29606 227,247(7) 2.36%
Keith B. Giddens
P.O. Box 17526
Greenville, SC 29606 184,308(8) 1.91%
Larry G. Blackwell
50 Datastream Plaza
Greenville, SC 29605 90,700 *
Robert S. Davis
P. O. Box 17526
Greenville, SC 29606 84,306(9) *
Porter B. Rose
P. O. Box 789
Greenville, SC 29602 23,965(10) *
Kevin J. Mast
P. O. Box 17526
Greenville, SC 29606 20,340(11) *
J. Robert Philpott, Jr.
212 South Tryon Street
Charlotte, NC 28281 9,000 *
All Executive Officers and Directors
as a Group (10 persons) 2,164,785 22.45%
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, shares are deemed "beneficially owned" if the named person or
group has the right to acquire ownership of such shares within 60 days.
The percentage for each person or group is computed on the assumption
that shares subject to acquisition upon the exercise of options by such
person or group are outstanding, but that no other such shares
similarly subject to acquisition by other persons are outstanding.
64
(2) Includes 768,600 shares of common stock owned by Wellington Management
Co., LLP ("WMC") directly. Also includes 455,000 shares of common stock
managed by WMC for which WMC does not have voting power.
(3) Includes 122,991 shares of common stock owned by Mr. Sterling directly;
797,168 shares of common stock owned by The Sterling Family Limited
Partnership, a limited partnership whose general partners are Mr.
Sterling and his spouse and the limited partners of which are their
three adult children, 3,332 shares owned by Mr. Sterling's Keough
retirement plan; and 70,786 shares of common stock owned by a trust of
which Mr. Sterling is the trustee, as to which shares Mr. Sterling
disclaims beneficial ownership. Also includes 22,666 shares of common
stock which may be acquired pursuant to currently exercisable stock
options.
(4) The Sterling Family Limited Partnership is a limited partnership of
which Mr. Sterling and his wife, Elizabeth H. Sterling, serve as the
general partners and the limited partners of which are their three
adult children.
(5) Includes 6 shares of common stock owned by Mr. Bauknight's IRA account;
253,680 shares of common stock owned by a partnership whose partners
are Mr. Bauknight, his spouse and his two adult children; 399 shares of
common stock which may be acquired pursuant to currently exercisable
stock options; and 2,900 shares of common stock which may be acquired
pursuant to the Company's Restricted Stock Agreement Plan (the "Plan").
(6) Includes 14,631 shares of common stock owned by Mr. Mickel directly.
Also includes 236,360 shares of common stock owned by Mr. Mickel's
spouse, as to which shares he disclaims beneficial ownership.
(7) Includes 218,948 shares of common stock owned by Mr. Hooper directly
and 5,000 shares owned by Mr. Hooper's children. Also includes 399
shares of common stock which may be acquired pursuant to currently
exercisable stock options and 2,900 shares of common stock which may be
acquired pursuant to the Plan.
(8) Includes 99,842 shares of common stock owned by Mr. Giddens directly;
15,996 shares of common stock owned by a trust administered by Mr.
Giddens' spouse for his three children; and 35,000 shares of common
stock owned by the Giddens Family Limited Partnership, a limited
partnership whose general partners are Mr. Giddens and his spouse and
the limited partners of which are their three children. Also includes
33,470 shares of common stock that may be acquired pursuant to
currently exercisable stock options.
(9) Includes 62,132 shares of common stock owned by Mr. Davis directly.
Also includes 22,174 shares of common stock which may be acquired
pursuant to currently exercisable stock options.
(10) Includes 20,666 shares of common stock owned by Mr. Rose directly; 399
shares of common stock which may be acquired pursuant to currently
exercisable stock options and 2,900 shares of common stock which may be
acquired pursuant to the Plan.
(11) Includes 10,807 shares of common stock owned by Mr. Mast directly and
9,533 shares of common stock which may be acquired pursuant to
currently exercisable stock options.
* Less than one percent of the outstanding shares of the class.
65
CERTAIN TRANSACTIONS
Prior to June 1997, the Company owned 12.78% of Reedy River Ventures
and, over the past several years, has provided management services to such
entity. In June 1997, the Company acquired the balance of the ownership
interests in Reedy River Ventures for $5.2 million, which was paid in the form
of common stock. Prior to such acquisition, certain of the Company's officers
and directors, namely John M. Sterling, Jr., Buck Mickel, Tecumseh Hooper, Jr.
and Clarence B. Bauknight, were partners of Reedy River Ventures. During 1995,
1996 and the first six months of 1997, Reedy River Ventures paid the Company
$250,000, $175,000 and $87,500, respectively, in management fees.
The Company has retained Philpott Ball & Company ("PB&C") to advise the
Company in connection with the proposed sale of the Auto Loan Division. Under
such arrangement, the Company will pay PB&C a retainer of $3,000 per month for a
minimum of four months and, upon sale of the Auto Loan Division, 1% of the sales
price. The Company will also reimburse PB&C its incidental out-of-pocket
expenses. Mr. Rose and Mr. Philpott are principals in PB&C.
Certain officers, directors and employees of the Company held CII Notes
which at June 30, 1997 aggregated approximately $682,000. These CII Notes were
purchased on terms which were the same as those available to purchasers not
affiliated with the Company.
66
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill certain
obligations of the Company with respect to the Registration Rights Agreement.
The Senior Notes were originally issued and sold on September 23, 1997
(the "Issue Date") to the Initial Purchasers pursuant to the Purchase Agreement.
Such sales were not registered under the Securities Act in reliance upon the
exemption provided by Section 4(2) of the Securities Act and Rule 144A of the
Securities Act. In connection with the sale of the Senior Notes, the Company
agreed to file with the Commission a registration statement relating to an
exchange offer (the "Exchange Offer Registration Statement") pursuant to which
another series of notes of the Company covered by such registration statement
and containing the same terms as the Senior Notes, except as set forth in this
Prospectus, would be offered in exchange for Senior Notes tendered at the option
of the holders thereof. A copy of the Registration Rights Agreement has been
filed as an exhibit to the Registration Statement.
The Company, the Subsidiary Guarantors and the Initial Purchasers of
the Senior Notes enter into the Registration Rights Agreement dated September
23, 1997, pursuant to which the Company and the Subsidiary Guarantors agreed to
use their best efforts to file under the Securities Act, as soon as practicable,
but no later than November 7, 1997, a registration statement relating to the
Exchange Notes and the Exchange Offer. The Company and the Subsidiary Guarantors
also agreed to use their best efforts to cause such registration statement to
become effective under the Securities Act as soon as practicable, but no later
than January 21, 1998. The Company and the Subsidiary Guarantors further agreed
to use their best efforts to commence and complete the Exchange Offer promptly
after such registration statement becomes effective, hold the Exchange Offer
open for at least 30 days and exchange Exchange Notes for all Senior Notes that
have been tendered and not withdrawn on or prior to the expiration of the
Exchange Offer. The Exchange Offer will be deemed to be completed only if the
Exchange Notes received by holders other than restricted holders (as defined in
the Registration Rights Agreement) in the Exchange Offer for Senior Notes are,
upon receipt, transferable by each such holder without restriction under the
Securities Act and without material restrictions under the blue sky or
securities laws of a substantial majority of the States of the United States of
America, it being understood that broker-dealers receiving Exchange Securities
will be subject to certain prospectus delivery requirements with respect to
resale of the Exchange Securities. The Exchange Offer shall be deemed to be
completed upon the earlier to occur of (i) the Company and the Subsidiary
Guarantors having exchanged the Exchange Notes for all outstanding Senior Notes
pursuant to the Exchange Offer and (ii) the Company and the Subsidiary
Guarantors having exchanged, pursuant to the Exchange Offer, Exchange Notes for
all Senior Notes that have been properly tendered and not withdrawn before the
expiration of the Exchange Offer, which shall be on a date that is at least 30
days following the commencement of the Exchange Offer. The Company and the
Subsidiary Guarantors agreed (i) to include in the Registration Statement a
prospectus for use in any resales by any holder of Notes that is a broker-dealer
and (ii) to keep the Registration Statement effective for a period ending on the
earlier of the 180th day after the Exchange Offer has been completed or such
time as such broker-dealers no longer own any Notes.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer who
purchases Notes directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) any such holder that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who exchanges Senior Notes for Exchange Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement with any person to participate, in a distribution of the
Exchange Notes, will be allowed to resell Exchange Notes to the public without
further registration under the Securities Act and without delivering to the
purchasers of the Exchange Notes a prospectus that satisfies the requirements of
Section 10 of the Securities Act. See the No- Action Letters. However, if any
holder acquires Exchange Notes in the Exchange Offer for the purpose of
distributing or participating in the distribution of the Exchange Notes or is a
broker-dealer, such holder cannot rely on the position of the staff of the
Commission enumerated in the No-Action Letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Notes, where such Senior Notes were acquired by
such broker-dealer as a result of market making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Senior Notes where such Senior Notes were acquired by
such broker-dealer as a result of market-making or other trading activities.
Pursuant to the Registration Rights Agreement, the Company has agreed to make
this Prospectus, as it may be amended or supplemented from time to time,
available to broker-dealers for use in connection with any resale for a period
of up to one year after the date of this Prospectus. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company will accept any and all
Senior Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Senior Notes surrendered pursuant to
the Exchange Offer. Senior Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and
terms of the Senior Notes except that (i) the Exchange Offer will be registered
under the Securities Act and, therefore, the Exchange Notes will not bear
legends restricting the transfer thereof and (ii) holders of the Exchange Notes
will not be entitled to any of the rights of holders of Senior Notes under the
Registration Rights Agreement, which rights will generally terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness
67
as the Senior Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the Indenture, which also authorized the issuance
of the Senior Notes, such that both series of Notes will be treated as a single
class of debt securities under the Indenture.
As of the date of this Prospectus, $125.0 million in aggregate
principal amount of the Senior Notes are outstanding and registered in the name
of Cede & Co., as nominee for the Depositary. Only a registered holder of the
Senior Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Senior Notes entitled to participate in the Exchange
Offer.
The Company intends to conduct the Exchange Offer in accordance with
the provisions of the Registration Rights Agreement and the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Senior
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders of Senior Notes for the purposes of receiving the Exchange Notes from
the Company.
Holders who tender Senior Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Senior
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Exchange Offer will expire on the Expiration Date. The term
"Expiration Date" shall mean 5:00 p.m., New York City time on December 17,
1997, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Senior Notes deposited to date, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Senior Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such delay,
extension or termination to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 10-3/4% per
annum. Interest on the Exchange Notes will be payable semi-annually in arrears
on each March 15 and September 15, commencing March 15, 1998. Holders of
Exchange Notes will receive interest on March 15, 1998 from the date of initial
issuance of the Exchange Notes, plus an amount equal to the accrued interest on
the Senior Notes from the date of initial delivery to the date of exchange
thereof for Exchange Notes. Holders of Senior Notes that are accepted for
exchange will be deemed to have waived the right to receive any interest accrued
on the Senior Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Senior Notes may tender such Senior Notes
in the Exchange Offer. In order for Senior Notes to be validly tendered pursuant
to the Exchange Offer, a holder of Senior Notes must complete, sign and date
the Letter of Transmittal, (or a facsimile thereof) or an Agent's Message (as
defined below), with any required signature guarantees and any other required
documents, must be received by the Exchange Agent at one of its addresses set
forth under "--Exchange Agent," and either (i) tendered Senior Notes must be
received by the Exchange Agent, or (ii) such Senior Notes must be tendered
pursuant to the procedures for book-entry transfer set forth below and a
book-entry confirmation, including an Agent's Message if the tendering holder
has not delivered a Letter of Transmittal, must be received by the Exchange
Agent, in each case prior to the Expiration Date, or (iii) the guaranteed
delivery procedures set forth below must be complied with.
The term "Agent's Message" means a message, transmitted by the
Depositary to, and received by, the Exchange Agent and forming part of a
book-entry confirmation, which states that the Depositary has received an
express acknowledgement from the tendering participant, which acknowledgement
states that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal against such participant.
The tender by a holder that is not withdrawn prior to the Expiration
Date will constitute an agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF SENIOR NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD
68
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Senior Notes whose Senior Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Senior Notes, either make appropriate
arrangements to register ownership of the Senior Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal
described below (see "--Withdrawal of Tenders"), as the case may be, must be
guaranteed by an Eligible Institution (as defined below) unless the Senior Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act which is
a member of one of the recognized signature guarantee programs identified in the
Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Senior Notes listed therein, such Senior Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Senior Notes.
If the Letter of Transmittal or any Senior Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Senior Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Senior Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Senior
Notes not properly tendered or any Senior Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Senior Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Senior Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Senior Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Senior Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Senior Notes that
are not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Senior Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Senior Notes that remain outstanding subsequent
to the Expiration Date or, as set forth below under "--Conditions," to terminate
the Exchange Offer and, to the extent permitted by applicable law, purchase
Senior Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the Exchange Offer.
By tendering, each holder of Senior Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Senior Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(iv) such holder understands that a secondary resale transaction described in
clause (iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Senior Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for such holder's own account in
exchange for Senior Notes that were acquired as a result of market-making
activities or other trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such holder will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
RETURN OF SENIOR NOTES
If any tendered Senior Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Senior Notes are
withdrawn or are submitted for a greater principal amount than the holder
desires to exchange, such unaccepted, withdrawn or non- exchanged Senior Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Senior Notes tendered by book-entry
69
transfer into the Exchange Agent's account at the Depositary pursuant to the
book-entry transfer procedures described below, such Senior Notes will be
credited to an account maintained with the Depositary) as promptly as
practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Senior Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make
book-entry delivery of Senior Notes by causing the Depositary to transfer such
Senior Notes into the Exchange Agent's account at the Depositary in accordance
with the Depositary's procedures for transfer. However, although delivery of
Senior Notes may be effected through book-entry transfer at the Depositary, the
Letter of Transmittal or facsimile thereof, or an Agent's Message, with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at the address set
forth below under "--Exchange Agent" on or prior to the Expiration Date or
pursuant to the guaranteed delivery procedures described below.
DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH THE
DEPOSITARY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Senior Notes and (i) whose Senior
Notes are not immediately available or (ii) who cannot deliver their Senior
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution either an Agent's Message or a
properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company
(by facsimile transmission, mail or hand delivery) which
accompanies the Letter of Transmittal; and
(c) Such properly executed Letter of Transmittal (or facsimile
thereof) or Agent's Message, as well as the certificate(s)
representing all tendered Senior Notes in proper form for
transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five
New York Stock Exchange trading days after the Expiration
Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Senior Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth in "--The
Exchange Agent" on or prior to the Expiration Date. Any such notice of
withdrawal must specify the name of the person who tendered the Senior
Notes to be withdrawn, the aggregate face amount of Senior Notes to be
withdrawn, and (if certificates for such Senior Notes have been tendered)
the name of the registered holder of the Senior Notes as set forth on the
Senior Notes, if different from that of the person who tendered such
Senior Notes. If Senior Notes have been delivered or otherwise identified
to the Exchange Agent, then prior to the physical release of such Senior
Notes, the tendering holder must resubmit the serial numbers shown on the
particular Senior Notes to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case
of Senior Notes tendered for the account of an Eligible Institution. If
Senior Notes have been tendered pursuant to the procedures for book-entry
transfer set forth in "--Book Entry Transfer," the notice of withdrawal must
specify the name and number of the account at the Depositary to be credited with
the withdrawal of Senior Notes, in which case a notice of withdrawal will be
effective if delivered to the Exchange Agent by written, telegraphic, telex or
facsimile transmission. Withdrawals of tenders of Senior Notes may not be
rescinded. Senior Notes properly withdrawn will not be deemed validly tendered
for purposes of the Exchange Offer, but may be retendered at any subsequent time
on or prior to the Expiration Date by following any of the procedures described
above under "--Procedures for Tendering," "--Book-Entry Transfer" or
"--Guaranteed Delivery Procedures."
To withdraw a tender of Senior Notes in the Exchange Offer, a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Senior Notes to be withdrawn (the "Depositor"), (ii) identify the Senior
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Senior Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Senior Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sole discretion, whose
determination shall be final and binding on all parties. Any Senior Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Senior Notes so withdrawn are validly retendered. Properly withdrawn Senior
Notes may be retendered by following one of the procedures described above under
"The Exchange Offer--Procedures for Tendering" at any time prior to the
Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall
not be required to accept for exchange, or exchange the Exchange Notes for, any
Senior Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Senior Notes, if the Exchange Offer violates applicable law,
rules or regulations or an applicable interpretation of the staff of the
Commission.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Senior
Notes and return all tendered Senior Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Senior Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Senior Notes (see "-- Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Senior Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Senior Notes, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the waiver and the manner of disclosure to the
registered holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
SENIOR NOTES REGISTRATION RIGHTS
70
The Company, the Subsidiary Guarantors and the Initial Purchasers of
the Senior Notes enter into the Registration Rights Agreement dated September
23, 1997, pursuant to which the Company and the Subsidiary Guarantors agreed to
use their best efforts to file under the Securities Act, as soon as practicable,
but no later than November 7, 1997, a registration statement relating to the
Exchange Notes and the Exchange Offer. The Company and the Subsidiary Guarantors
also agreed to use their best efforts to cause such registration statement to
become effective under the Securities Act as soon as practicable, but no later
than January 21, 1998. The Company and the Subsidiary Guarantors further agreed
to use their best efforts to commence and complete the Exchange Offer promptly
after such registration statement becomes effective, hold the Exchange Offer
open for at least 30 days and exchange Exchange Notes for all Senior Notes that
have been tendered and not withdrawn on or prior to the expiration of the
Exchange Offer. The Exchange Offer will be deemed to be completed only if the
Exchange Notes received by holders other than restricted holders (as defined in
the Registration Rights Agreement) in the Exchange Offer for Senior Notes are,
upon receipt, transferable by each such holder without restriction under the
Securities Act and without material restrictions under the blue sky or
securities laws of a substantial majority of the States of the United States of
America, it being understood that broker-dealers receiving Exchange Securities
will be subject to certain prospectus delivery requirements with respect to
resale of the Exchange Securities. The Exchange Offer shall be deemed to be
completed upon the earlier to occur of (i) the Company and the Subsidiary
Guarantors having exchanged the Exchange Notes for all outstanding Senior Notes
pursuant to the Exchange Offer and (ii) the Company and the Subsidiary
Guarantors having exchanged, pursuant to the Exchange Offer, Exchange Notes for
all Senior Notes that have been properly tendered and not withdrawn before the
expiration of the Exchange Offer, which shall be on a date that is at least 30
days following the commencement of the Exchange Offer. The Company and the
Subsidiary Guarantors agreed (i) to include in the Registration Statement a
prospectus for use in any resales by any holder of Notes that is a broker-dealer
and (ii) to keep the Registration Statement effective for a period ending on the
earlier of the 180th day after the Exchange Offer has been completed or such
time as such broker-dealers no longer own any Notes.
If on or prior to the consummation of the Exchange Offer existing
Commission interpretations are changed such that the Exchange Notes received by
holders other than Restricted Holders in the Exchange Offer for Senior Notes are
not or would not be, upon receipt, transferable by each such holder without
restriction under the Securities Act, in lieu of conducting this Exchange Offer,
the Company and the Subsidiary Guarantors agreed to file under the Securities
Act as soon as practicable a "shelf" registration statement providing for the
registration of, and the sale on a continuous or delayed basis by the holders
of, all of the Senior Notes, pursuant to Rule 415 under the Securities Act
and/or any similar rule that may be adopted by the Commission (the "Resale
Registration"). The Company and the Subsidiary Guarantors agreed to use their
best efforts to cause the Resale Registration to become or be declared effective
no later than January 21, 1998, and to keep such Resale Registration
continuously effective for a period ending on the earlier of the second
anniversary of the Effective Time or such time as there are no longer any Senior
Notes outstanding. The Company and the Subsidiary Guarantors further agreed to
supplement or make amendments to the Resale Registration, as and when required
by the rules, regulations or instructions applicable to the registration form
used by the Company and the Subsidiary Guarantors for such Resale Registration
or by the Securities Act or rules and regulations thereunder for shelf
registration, and the Company and the Subsidiary Guarantors agreed to furnish to
the holders of theSenior Notes copies of any such supplement or amendment prior
to its being used and/or filed with the Commission.
The Registration Rights Agreement provides that in the event that (i)
the Company and the Subsidiary Guarantors have not filed this Registration
Statement (or, if applicable, the Resale Registration) on or before November 7,
1997, or (ii) this Registration Statement (or, if applicable, the Resale
Registration), has not become effective or been declared effective by the
Commission on or before the January 21, 1998, or (iii) the Exchange Offer has
not been completed within 30 business days after the initial effective date of
this Registration Statement (if the Exchange Offer is then required to be made)
or (iv) any registration statement required as described in the preceding two
paragraphs is filed and declared effective but shall thereafter cease to be
effective (except as specifically permitted under the Registration Rights
Agreement) without being succeeded immediately by an additional registration
statement filed and declared effective (each such event referred to in clauses
(i) through (iv), a "Registration Default"), then the per annum interest rate of
the Notes as set forth in the Notes shall increase by 0.5%, and the per annum
interest rate on the Notes will increase by an additional 0.25% for each
subsequent 90-day period during which any Registration Default remains in effect
up to a maximum additional interest rate of 2%, for the period from and
including the date of occurrence of the Registration Default until such time as
no Registration Default is in effect (after which the interest rate will be
restored to its initial rate). In the event that the interest rate of the Notes
is so increased, the Company is required to promptly notify the Trustee of such
increase, including any subsequent increase, and the beginning and ending dates
therefor.
Termination of Certain Rights
Generally, the rights of holders of Senior Notes to have their
Senior Notes registered or to receive other securities in exchange for their
Senior Notes will terminate upon the exchange of their Senior Notes for
Exchange Notes pursuant to the Exchange Offer; however, such holders will
retain certain other rights under the terms of the Registration Rights
Agreement as provided therein.
EXCHANGE AGENT
The Bankers Trust Company has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent addressed
as follows:
BY MAIL: BY OVERNIGHT DELIVERY:
BT Services Tennessee, Inc. BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust & Agency Group
P.O. Box 292737 Reorganization Unit
Nashville, TN 37229-2737 648 Grassmere Park Road
Nashville, TN 37211
BY HAND
Bankers Trust Company
Corporate Trust & Agency Group
Receipt & Delivery Window
123 Washington Street, 1st Floor
New York, NY 10006
FOR INFORMATION CALL:
(800) 735-7777
Confirm: (615) 835-3572
Facsimile: (615) 835-3701
71
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company and are estimated in the aggregate to be
approximately $81,500. Such expenses include registration fees, fees and
expenses of the Exchange Agent and the Trustee, accounting and legal fees and
printing costs, among others.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Senior
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
The Senior Notes that are not exchanged for the Exchange Notes
pursuant to the Exchange Offer will remain restricted securities. Accordingly,
such Senior Notes may be resold only (i) to a person whom the seller reasonably
believes is a qualified institutional buyer as defined in Rule 144A of the
Securities Act in a transaction meeting the requirements of Rule 144A of the
Securities Act, (ii) in a transaction meeting the requirements of Rule 144 under
the Securities Act, (iii) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act, (iv)
in accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as
a result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
APPRAISAL RIGHTS
HOLDERS OF NOTES WILL NOT HAVE DISSENTERS' RIGHTS OR APPRAISAL RIGHTS
IN CONNECTION WITH THE EXCHANGE OFFER.
72
DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes are to be issued under an Indenture, dated as of
September 23, 1997 (the "Indenture"), among the Company, the Subsidiary
Guarantors named therein and Bankers Trust Company, as trustee (the "Trustee").
The statements under this caption relating to the Exchange Notes, the Senior
Notes and the Indenture are summaries and do not purport to be complete, and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein.
The Indenture is by its terms subject to and governed by the Trust Indenture Act
of 1939, as amended. Where reference is made to particular provisions of the
Indenture or to defined terms not otherwise defined herein, such provisions or
defined terms are incorporated herein by reference. Copies of the Indenture will
be available at the corporate trust office of the Trustee. The definitions of
certain terms used in the following Description of Exchange Notes are set forth
below under "-- Certain Definitions."
GENERAL
The Exchange Notes, formally titled 10-3/4% Senior Notes due 2004,
Series B, will be limited in aggregate principal amount to $125.0 million and
will be issued pursuant to the Indenture. The terms of the Exchange Notes are
identical in all respects to the terms of the Senior Notes for which they may be
exchanged pursuant to this Exchange Offer, except that (i) the Exchange Offer
will have been registered under the Securities Act, and, therefore, the Exchange
Notes will not bear legends restricting the transfer thereof and (ii) the
holders of the Exchange Notes will generally not be entitled to registration
rights under the Registration Rights Agreement. The Exchange Notes will evidence
the same debt as the Senior Notes.
The Exchange Notes are jointly and severally unconditionally
guaranteed as to the payment of principal, premium, if any, and interest by the
existing and future Restricted Subsidiaries of the Company. See " -- Certain
Covenants -- Subsidiary Guarantees."
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on September 15, 2004. The Notes will bear
interest at a rate of 10.75% per annum from September 23, 1997 or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semi-annually on March 15 and September 15 of each year, commencing
March 15, 1998, to the Person in whose name the Exchange Note (or any
predecessor Note) is registered at the close of business on the preceding March
1 or September 1, respectively. The Notes will bear interest on overdue
principal and premium, if any, and, to the extent permitted by law, overdue
interest at such rate plus 2%. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months.
The interest rate on the Notes is subject to increase in certain
circumstances if the Company does not file a registration statement with the
Commission relating to an Exchange Offer of substantially identical publicly
registered notes for the Notes or if such registration statement does not become
effective or if such Exchange Offer is not commenced and consummated on a timely
basis, all as further described under "Exchange Offer; Registration Rights".
OPTIONAL REDEMPTION
The Notes are subject to redemption, at the option of the Company, in
whole or in part, at any time on or after September 15, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' notice mailed to each
Holder of Notes to be redeemed at such Holder's address appearing in the Note
Register, in amounts of $1,000 or an integral multiple of $1,000, at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued interest to but excluding the Redemption Date (subject to the right
of Holders of record on the relevant Regular Record Date to receive interest due
on an Interest Payment Date that is on or prior to the Redemption Date), if
redeemed during the 12-month period beginning September 15 of the years
indicated:
REDEMPTION
YEAR PRICE
2001......................................................... 105.375%
2002......................................................... 102.688%
2003 and thereafter.......................................... 100.000%
The Notes are subject to redemption prior to September 15, 2001 only in
the event that on or before September 15, 2000 the Company receives net proceeds
from the sale of its Common Stock in one or more Public Equity Offerings, in
which case the Company may, at its option, use all or a portion of any such net
proceeds to redeem Notes in a principal amount of at least $5.0 million and up
to an aggregate amount equal to 25% of the original principal amount of the
Notes, provided, however, that Notes in an amount equal to at least 75% of the
original principal amount of the Notes remain outstanding after each such
redemption. Any such redemption must occur on a Redemption Date within 75 days
of any such sale and upon not less than 30 nor more than 60 days' notice mailed
to each Holder of Notes to be redeemed at such Holder's address appearing in the
Note Register, in amounts of $1,000 or an integral multiple of $1,000, at a
redemption price of 110.75% of the principal amount of the Notes plus accrued
interest to but excluding the Redemption Date (subject to the right of Holders
of record on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date).
If less than all the Notes are to be redeemed, the Trustee shall
select, in such manner as it shall deem fair and appropriate, the particular
Notes to be redeemed or any portion thereof that is an integral multiple of
$1,000.
The Notes do not have the benefit of any sinking fund.
73
MANDATORY REDEMPTION
Except as set forth below under "-- Change of Control Offer," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON ADDITIONAL INDEBTEDNESS
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur, directly or indirectly, any Indebtedness, unless on the
date of such Incurrence and after giving effect thereto, (i) no Default or Event
of Default has occurred and is continuing or would result therefrom and (ii) the
Consolidated Leverage Ratio does not exceed 2.0 to 1.0.
Notwithstanding the foregoing, the Company and any Restricted
Subsidiary may Incur Permitted Indebtedness.
LIMITATION ON CII INDEBTEDNESS
CII shall not, and the Company shall not permit CII to, Incur or suffer
to exist any CII Senior Indebtedness that does not constitute Permitted
Warehouse Indebtedness. CII shall not, and the Company shall not permit CII to,
Incur any Indebtedness which by its terms is both (i) subordinated in right of
payment to any CII Senior Indebtedness and (ii) senior in right of payment to
CII's Subsidiary Guarantee.
LIMITATION ON RESTRICTED PAYMENTS
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, make any Restricted Payment, unless:
(a) no Default or Event of Default shall have occurred and be continuing
or would result from such Restricted Payment;
(b) after giving pro forma effect to such Restricted Payment, the Company
could Incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under the covenant set forth under " --
Limitation on Additional Indebtedness" above; and
(c) upon giving effect to such Restricted Payment, the aggregate of all
Restricted Payments declared or made after the Issue Date does not exceed
the sum of:
(i) 25% of cumulative Consolidated Net Income (or, in case
Consolidated Net Income shall be negative, less 100% of such deficit)
of the Company since the Issue Date through the last day of the last
full fiscal quarter ending immediately preceding the date of such
Restricted Payment for which quarterly or annual financial statements
are available (taken as a single accounting period); plus
(ii) 100% of the aggregate net proceeds received by the Company after
the Issue Date, including the fair market value of property other than
cash (determined in good faith by the Board of Directors as evidenced
by a resolution of the Board of Directors filed with the Trustee),
from contributions of capital or the issuance and sale (other than to
a Subsidiary) of Capital Stock (other than Disqualified Stock) of the
Company, options, warrants or other rights to acquire Capital Stock
(other than Disqualified Stock) of the Company and Indebtedness of the
Company that has been converted into or exchanged for Capital Stock
(other than Disqualified Stock and other than by or from a Subsidiary)
of the Company after the Issue Date, provided that any such net
proceeds received by the Company from an employee stock ownership plan
financed by loans from the Company or a Subsidiary of the Company
shall be included only to the extent such loans have been repaid with
cash on or prior to the date of determination; plus
(iii) $2.0 million.
Prior to the making of any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate setting forth the computations
by which the determinations required by clauses (b) and (c) above were made and
stating that no Default or Event of Default has occurred and is continuing or
will result from such Restricted Payment.
Notwithstanding the foregoing, so long as no Default or Event of
Default shall have occurred and is continuing or would result therefrom:
(i) the Company and any Restricted Subsidiary may pay any dividend on
Capital Stock of any class within 60 days after the declaration
thereof if, on the date when the dividend was declared, the Company or
such Restricted Subsidiary could have paid such dividend in accordance
with the foregoing provisions;
(ii) the Company may Refinance any Indebtedness with Refinancing
Indebtedness permitted by clause (v) of the definition of Permitted
Indebtedness or solely in exchange for or out of the net proceeds of
the substantially concurrent sale (other than from or to a Subsidiary
or from or to an employee stock ownership plan financed by loans from
the Company or a Subsidiary of the Company) of shares of Capital Stock
(other than Disqualified Stock) of the Company, provided that the
amount of net proceeds from such exchange or sale shall be excluded
from the calculation of the amount available for Restricted Payments
pursuant to clause (c) (ii) of the preceding paragraph;
(iii) the Company may purchase, redeem, acquire or retire any shares
of Capital Stock of the Company solely in exchange for or out of the
net proceeds of the substantially concurrent sale (other than from or
to a Subsidiary or from or to an employee stock ownership plan
financed by loans from the Company or a Subsidiary of the Company) of
shares of Capital Stock (other than Disqualified Stock) of the
Company; and
74
(iv) the Company may purchase or redeem any Indebtedness from Asset
Sale Proceeds to the extent permitted under " -- Limitation on Sales
of Assets".
Any payment made pursuant to clause (i) or (iii) of this paragraph
shall be a Restricted Payment for purposes of calculating aggregate Restricted
Payments pursuant to clause (c) of the previous paragraph.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary (i) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by the Company or any other
Restricted Subsidiary or pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary; (ii) to make loans or advances to
the Company or any other Restricted Subsidiary; or (iii) to transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, suffer to exist any such encumbrance or restriction:
(a) pursuant to any agreement in effect on the Issue Date as described in
a schedule to the Indenture;
(b) pursuant to an agreement relating to any Indebtedness Incurred by a
Person (other than a Restricted Subsidiary existing on the Issue Date or
any Restricted Subsidiary carrying on any of the businesses of any such
Restricted Subsidiary) prior to the date on which such Person became a
Restricted Subsidiary and outstanding on such date and not Incurred in
anticipation of becoming a Restricted Subsidiary, which encumbrance or
restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person so acquired;
(c) pursuant to an agreement effecting a renewal, extension, refunding or
refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (a) or (b) above, provided, however, that the provisions
contained in such renewal, extension, refunding or refinancing agreement
relating to such encumbrance or restriction are no more restrictive in
any material respect than the provisions contained in the agreement the
subject thereof, as determined in good faith by the Board of Directors
and evidenced by a resolution of the Board of Directors filed with the
Trustee;
(d) in the case of clause (iii) above, restrictions contained in any
security agreement (including a capital lease) securing Indebtedness of a
Restricted Subsidiary otherwise permitted under the Indenture, but only
to the extent such restrictions restrict the transfer of the property
subject to such security agreement;
(e) in the case of clause (iii) above, customary nonassignment provisions
entered into in the ordinary course of business consistent with past
practices in leases and other contracts to the extent such provisions
restrict the transfer or subletting of any such lease or the assignment
of rights under any such contract;
(f) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of
such Restricted Subsidiary, provided that consummation of such
transaction would not result in a Default or an Event of Default, that
such restriction terminates if such transaction is closed or abandoned
and that the closing or abandonment of such transaction occurs within one
year of the date such agreement was entered into; or
(g) such encumbrance or restriction is the result of applicable corporate
law or regulation relating to the payment of dividends or distributions.
LIMITATION ON LIENS
The Company may not, and may not permit any Restricted Subsidiary to,
Incur or suffer to exist any Lien of any kind (other than Permitted Liens) upon
any property or asset of the Company or any Restricted Subsidiary or any shares
of stock or debt of any Restricted Subsidiary which owns property or assets, now
owned or hereafter acquired, unless (i) if such Lien secures Indebtedness which
is pari passu with the Notes or, in the case of a Subsidiary Guarantor, such
Subsidiary Guarantor's Subsidiary Guarantee, then the Notes or such Subsidiary
Guarantee are secured on an equal and ratable basis with the obligations so
secured until such time as such obligation is no longer secured by a Lien or
(ii) if such Lien secures Indebtedness which is subordinated to the Exchange
Notes or, in the case of a Subsidiary Guarantor, such Subsidiary Guarantor's
Subsidiary Guarantee, any such Lien shall be subordinated to the Lien granted to
the Holders of the Notes or such Subsidiary Guarantee to the same extent as such
subordinated Indebtedness is subordinated to the Notes or such Subsidiary
Guarantee.
LIMITATION ON SALES OF ASSETS
The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Sale involving consideration or
assets having a fair market value in excess of $1.0 million unless:
(a) the Company or such Restricted Subsidiary receives consideration at
the time of such Asset Sale at least equal to the fair market value
(including as to the value of any non-cash consideration), as determined
in good faith by the Board of Directors and evidenced by a resolution
filed with the Trustee, of the shares and assets subject to such Asset
Sale and at least 85% (or 50% in the case of an Asset Sale relating to
the disposition of all or part of the Auto Loan Division) of the
consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or Temporary Cash Investments:
75
(b) an amount equal to 100% of the Asset Sale Proceeds from such Asset
Sale is applied by the Company (or such Restricted Subsidiary, as the
case may be):
(1) first, to the extent the Company elects, either to (A) acquire
Additional Assets, either directly or through a Restricted Subsidiary,
or (B) prepay, repay, redeem or purchase Indebtedness of the Company
that ranks pari passu with the Notes or of a Subsidiary Guarantor that
ranks pari passu with or senior to such Subsidiary Guarantor's
Subsidiary Guarantee, as the case may be (other than in either case
Indebtedness owed to the Company or an Affiliate of the Company), in
each case within 180 days from, or prior to, the later of the date of
such Asset Sale or the receipt of such Asset Sale Proceeds;
(2) second, to the extent of the balance of such Asset Sale Proceeds
after application in accordance with clause (1), to make an offer to
the Holders to purchase Notes pursuant to and subject to the
conditions contained in the Indenture;
(3) third, to the extent of the balance of such Asset Sale Proceeds
after application in accordance with clauses (1) and (2) to (A) the
acquisition by the Company or any Restricted Subsidiary of Additional
Assets or (B) the prepayment, repayment or purchase of Indebtedness
designated by the Company (other than any Disqualified Stock) of the
Company or any Restricted Subsidiary other than Indebtedness owed to
an Affiliate of the Company), in each case within 180 days from the
later of the receipt of such Asset Sale Proceeds and the date of the
offer referred to in clause (2) above is consummated; and
(4) fourth, to the extent of the balance of such Asset Sale Proceeds
after application in accordance with clauses (1), (2) and (3), to any
application not prohibited by the Indenture; provided, however, that
in connection with any prepayment, repayment or purchase of
Indebtedness pursuant to clause (1) or (3) above, the Company or such
Restricted Subsidiary shall retire such Indebtedness and shall cause
the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased
unless, in the case of clause (3), and to the extent that at the time
of such prepayment, repayment or purchase the Company would have been
able to Incur such Indebtedness pursuant to the covenant described
under "Limitation on Additional Indebtedness"; and (c) at the time of
such Asset Sale no Default shall have occurred and be continuing (or
would result therefrom).
Pending application of Asset Sale Proceeds pursuant to this covenant,
such Asset Sale Proceeds shall be invested in Temporary Cash Investments.
Notwithstanding the foregoing, the requirement contained in clause (a)
above that at least 85% of consideration received consist of cash or Temporary
Cash Investments shall not apply to any Asset Sale of warrants or Capital Stock
received in connection with the making of any mezzanine loan by the Company's
Small Business Loan division.
In the event of an Asset Sale that requires an offer to purchase the
Notes pursuant to clause (b)(2) above, the Company will be required to purchase
Notes tendered pursuant to an offer by the Company for the Notes at a purchase
price of 100% of their principal amount plus accrued but unpaid interest in
accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
Notes tendered pursuant to such offer is less than the Asset Sale Proceeds
allotted to the purchase thereof, the Company will be permitted to apply the
remaining Asset Sale Proceeds in accordance with clause (b)(3) above. The
Company shall not be required to make such an offer to purchase Notes pursuant
to this covenant if the Asset Sale Proceeds available therefor are less than
$5.0 million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to any subsequent
Asset Sale).
LIMITATION ON PREFERRED STOCK OF SUBSIDIARIES
The Company shall not permit any Restricted Subsidiary to issue any
Preferred Stock (except Preferred Stock to the Company or a Restricted
Subsidiary) or permit any Person (other than the Company or a Subsidiary) to
hold any such Preferred Stock unless the Company or such Restricted Subsidiary
would be entitled to incur or assume Indebtedness under the first paragraph of
the covenant described under " -- Limitation on Additional Indebtedness" in the
aggregate principal amount equal to the aggregate liquidation value of the
Preferred Stock to be issued.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with any Affiliate (including
entities in which the Company or any Restricted Subsidiary owns a minority
interest) or holder of 10% or more of the Company's Common Stock (an "Affiliate
Transaction"), other than transactions existing on the date hereof and described
elsewhere in this Memorandum, or extend, renew, waive or otherwise modify the
terms of any Affiliate Transaction entered into prior to the Issue Date if such
extension, renewal, waiver or other modification is more disadvantageous to the
Holders in any material respect than the original agreement as in effect on the
Issue Date unless (i) such Affiliate Transaction is between or among the Company
and its Wholly Owned Subsidiaries; or (ii) the terms of such Affiliate
Transaction are fair and reasonable to the Company or such Restricted
Subsidiary, as the case may be, and the terms of such Affiliate Transaction are
at least as favorable as the terms which could be obtained by the Company or
such Restricted Subsidiary, as the case may be, in a comparable transaction made
on an arm's-length basis between unaffiliated parties. In any Affiliate
Transaction involving an amount or having a value in excess of $1.0 million
which is not permitted under clause (i) above, the Company must obtain a
resolution of the Board of Directors certifying that such Affiliate Transaction
complies with clause (ii) above. In transactions with a value in excess of $3.0
million which are not permitted under clause (i) above, the Company must obtain
a written opinion as to the fairness of such a transaction from an independent
investment banking firm.
The foregoing provisions will not apply to (i) any Restricted Payment
that is not prohibited by the provisions described under " -- Limitation on
Restricted Payments" contained herein, (ii) any transaction, approved by the
Board of Directors of the Company, with an officer
76
or director of the Company or of any Subsidiary in his or her capacity as
officer or director entered into in the ordinary course of business, or (iii)
transactions permitted by the Indenture under the provision "Merger,
Consolidation or Sale of Assets".
PAYMENTS FOR CONSENT
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture, the Notes or any Subsidiary Guarantee unless such consideration is
offered to be paid or agreed to be paid to all Holders of the Notes which so
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
CHANGE OF CONTROL OFFER
Within 20 days of the occurrence of a Change of Control, the Company
shall notify the Trustee in writing of such occurrence and shall make an offer
to purchase (the "Change of Control Offer") the outstanding Notes at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest to the Change of Control Payment Date (as hereinafter defined) (such
applicable purchase price being hereinafter referred to as the "Change of
Control Purchase Price") in accordance with the procedures set forth in this
covenant.
Within 20 days of the occurrence of a Change of Control, the Company
also shall (i) cause a notice of the Change of Control Offer to be sent at least
once to the Dow Jones News Service or similar business news service in the
United States and (ii) send by first-class mail, postage prepaid, to the Trustee
and to each holder of the Notes, at the address appearing in the register
maintained by the Registrar of the Notes, a notice stating:
(i) that the Change of Control Offer is being made pursuant to this
covenant and that all Notes tendered will be accepted for payment, and
otherwise subject to the terms and conditions set forth herein;
(ii) the Change of Control Purchase Price and the purchase date (which
shall be a Business Day no earlier than 20 business days from the date
such notice is mailed (the "Change of Control Payment Date"));
(iii) that any Exchange Note not tendered will continue to accrue
interest;
(iv) that, unless the Company defaults in the payment of the Change of
Control Purchase Price, any Notes accepted for payment pursuant to the
Change of Control Offer shall cease to accrue interest after the
Change of Control Payment Date;
(v) that holders accepting the offer to have their Notes purchased
pursuant to a Change of Control Offer will be required to surrender
the Notes to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day preceding the
Change of Control Payment Date;
(vi) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the
third Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the
name of the holder, the principal amount of the Notes delivered for
purchase, and a statement that such holder is withdrawing his election
to have such Notes purchased;
(vii) that holders whose Notes are being purchased only in part will
be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered, provided that each Note
purchased and each such new Note issued shall be in an original
principal amount in denominations of $1,000 and integral multiples
thereof;
(viii) any other procedure that a holder must follow to accept a
Change of Control Offer or effect withdrawal of such acceptance; and
(ix) the name and address of the Paying Agent.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (i) accept for payment Notes or portions thereof tendered pursuant to
the Change of Control Offer, (ii) deposit with the Paying Agent money sufficient
to pay the purchase price of all Notes or portions thereof so tendered and (iii)
deliver or cause to be delivered to the Trustee Notes so accepted together with
an Officers' Certificate stating the Notes or portions thereof tendered to the
Company. The Paying Agent shall promptly mail to each holder of Notes so
accepted payment in an amount equal to the purchase price for such Notes, and
the Company shall execute and issue, and the Trustee shall promptly authenticate
and mail to such holder, a new Exchange Note equal in principal amount to any
unpurchased portion of the Notes surrendered; PROVIDED that each such new
Exchange Note shall be issued in an original principal amount in denominations
of $1,000 and integral multiples thereof.
The Indenture provides that, (A) if the Company or any Restricted
Subsidiary has issued any outstanding (i) Subordinated Obligations or (ii)
Preferred Stock, and the Company or any Restricted Subsidiary is required to
make a change of control offer or to make a distribution with respect to such
subordinated Indebtedness or Preferred Stock in the event of a Change of
Control, the Company shall not consummate any such offer or distribution with
respect to such subordinated Indebtedness or Preferred Stock until such time as
the Company shall have paid the Change of Control Purchase Price in full to the
holders of Notes that have accepted the Company's Change of Control Offer and
shall otherwise have consummated the Change of Control Offer made to holders of
the Notes and (B) the Company will not issue Subordinated Obligations or
Preferred Stock with change of control provisions requiring the payment of such
Subordinated Obligations or Preferred Stock prior to the payment of the Notes in
the event of a Change of Control under the Indenture.
77
In the event that a Change of Control occurs and the holders of Notes
exercise their right to require the Issuers to purchase Notes, if such purchase
constitutes a "tender offer" for purposes of Rule 14e-1 under the Exchange Act
at that time, the Issuers will comply with the requirements of Rule 14e-1 as
then in effect with respect to such repurchase.
MERGER, CONSOLIDATION OR SALE OF ASSETS
Neither the Company nor any Subsidiary Guarantor will consolidate with,
merge with or into, or transfer all or substantially all of its assets (as an
entirety or substantially as an entirety in one transaction or a series of
related transactions), to any Person unless (in the case of the Company or any
Subsidiary Guarantor): (i) the Company or such Subsidiary Guarantor, as the case
may be, shall be the continuing Person, or the Person (if other than the Company
or such Subsidiary Guarantor) formed by such consolidation or into which the
Company or such Subsidiary Guarantor, as the case may be, is merged or to which
the properties and assets of the Company or such Subsidiary Guarantor, as the
case may be, are transferred shall be a corporation organized and existing under
the laws of the United States or any State thereof or the District of Columbia
and shall expressly assume, by a supplemental indenture, executed and delivered
to the Trustee, in form satisfactory to the Trustee, all of the obligations of
the Company or such Subsidiary Guarantor, as the case may be, under the Notes
and the Indenture, and the obligations under the Indenture shall remain in full
force and effect; (ii) immediately before and immediately after giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis the Consolidated Net Worth of the Company
or the surviving entity, as the case may be, is at least equal to the
Consolidated Net Worth of the Company immediately before such transaction or
series of transactions; and (iv) immediately after giving effect to such
transaction on a pro forma basis the Company or such Person could incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) under the
covenant set forth under " -- Limitation on Additional Indebtedness".
In connection with any consolidation, merger or transfer of assets
contemplated by this provision, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger or transfer and the supplemental indenture in respect
thereto comply with this provision and that all conditions precedent herein
provided for relating to such transaction or transactions have been complied
with.
SEC REPORTS
Notwithstanding that the Company may not be required to remain subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the
Company shall file with the SEC and provide the Trustee and Noteholders with
such annual and quarterly reports and such information, documents and other
reports as are specified in Sections 13 and 15(d) of the Exchange Act and
applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
SUBSIDIARY GUARANTEES
The Notes will be guaranteed jointly and severally by each existing and
future Restricted Subsidiary of the Company other than any Restricted Subsidiary
that is a Securitization Special Purpose Subsidiary or a Small Business
Investment Company (the "Subsidiary Guarantors"). The Guarantees of each
Subsidiary Guarantor other than CII will constitute general unsecured
obligations of each such Subsidiary Guarantor and will rank pari passu in right
of payment with all existing and future unsubordinated indebtedness of each such
Subsidiary Guarantor and senior in right of payment to all existing and future
subordinated indebtedness of each such Subsidiary Guarantor. The Guarantee of
CII will constitute a senior subordinated obligation of CII, subordinated in
right of payment to all existing and future CII Senior Indebtedness (which, as
of June 30, 1997 totaled $16.1 million, all of which was secured), and will rank
pari passu in right of payment with the CII Senior Subordinated Notes and all
other future senior subordinated Indebtedness of CII (which, as of June 30, 1997
totaled $105.7 million) and senior in right of payment to all CII Subordinated
Debentures and all other future subordinated Indebtedness of CII (which as of
June 30, 1997 totaled $19.2 million). The Indenture contains a covenant that
restricts CII from Incurring any CII Senior Indebtedness other than CII Senior
Indebtedness consisting of Permitted Warehouse Indebtedness. See " -- Certain
Covenants -- Limitation on CII Indebtedness".
A Subsidiary Guarantor shall be released from all of its obligations
under its Guarantee if all or substantially all of its assets are sold or all of
its Capital Stock is sold, in each case in a transaction in compliance with the
covenant described under " -- Limitation on Sale of Assets", or the Subsidiary
Guarantor merges with or into or consolidates with, or transfers all or
substantially all of its assets to, the Company or another Subsidiary Guarantor
in a transaction in compliance with the covenant described under " -- Merger,
Consolidation or Sale of Assets", and such Subsidiary Guarantor has delivered to
the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent herein provided for relating to such transaction
have been complied with.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(a) failure to pay principal of (or premium, if any, on) any Exchange
Note when due;
(b) failure to pay any interest on any Exchange Note when due, continued
for 30 days;
(c) default in the payment of principal and interest on Notes required to
be purchased pursuant to an Offer to Purchase as described under " --
Certain Covenants -- Change of Control Offer" and " -- Certain Covenants
-- Limitation on Sales of Assets"when due and payable;
(d) failure to perform or comply with the provisions described under " --
Certain Covenants -- Merger, Consolidation or Sale of Assets";
78
(e) failure to perform any other covenant or agreement of the Company or
a Subsidiary Guarantor under the Indenture or the Notes continued for 30
days after written notice to the Company by the Trustee or Holders of at
least 25% in aggregate principal amount of Outstanding Notes;
(f) default under the terms of any instrument evidencing or securing Debt
for money borrowed by the Company or any Restricted Subsidiary having an
outstanding principal amount of $5.0 million individually or in the
aggregate which default results in the acceleration of the payment of all
or any portion of such indebtedness or constitutes the failure to pay all
or any portion of such indebtedness when due;
(g) the rendering of a final judgment or judgments (not subject to
appeal) against the Company or any Restricted Subsidiary in an amount in
excess of $5.0 million which remains undischarged or unstayed for a
period of 60 days after the date on which the right to appeal has
expired; and
(h) certain events of bankruptcy, insolvency or reorganization affecting
the Company or any Restricted Subsidiary.
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default (as defined) shall occur and be
continuing, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any of the
Holders, unless such Holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the Holders of a majority in aggregate principal amount of the Outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
If an Event of Default (other than an Event of Default described in
Clause (h) above) shall occur and be continuing, either the Trustee or the
Holders of at least 25% in aggregate principal amount of the Outstanding Notes
may accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(h) above occurs, the Outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any Holder. For information as to waiver of defaults, see " -- Modification and
Waiver".
No Holder of any Exchange Note has any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default (as defined) and unless also the Holders of at least
25% in aggregate principal amount of the Outstanding Notes shall have made
written request to the Trustee, and offered indemnity to the Trustee that is
satisfactory to the Trustee, to institute such proceeding as trustee, and the
Trustee shall not have received from the Holders of a majority in aggregate
principal amount of the Outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a Holder of an
Exchange Note for enforcement of payment of the principal of and premium, if
any, or interest on such Exchange Note on or after the respective due dates
expressed in such Exchange Note.
The Company is required to furnish to the Trustee quarterly a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to
receive payment of principal and interest on the Notes, (iv) rights, obligations
and immunities of the Trustee under the Indenture and (v) rights of the Holders
of the Notes as beneficiaries of the Indenture with respect to any property
deposited with the Trustee payable to all or any of them), if (x) the Company
will have paid or caused to be paid the principal of and interest on the Notes
as and when the same will have become due and payable or (y) all outstanding
Notes (except lost, stolen or destroyed Notes which have been replaced or paid)
have been delivered to the Trustee for cancellation.
DEFEASANCE
The Indenture provides that, at the option of the Company, (A) if
applicable, the Company will be discharged from any and all obligations in
respect of the Outstanding Notes and the Subsidiary Guarantors will be
discharged from any and all obligations in respect of the Subsidiary Guarantees
or (B) if applicable, the Company may omit to comply with certain restrictive
covenants, that such omission shall not be deemed to be an Event of Default
under the Indenture and the Notes, in either case (A) or (B) upon irrevocable
deposit with the Trustee, in trust, of money and/or U.S. government obligations
which will provide money in an amount sufficient in the opinion of a nationally
recognized firm of independent certified public accountants to pay the principal
of and premium, if any, and each installment of interest, if any, on the
Outstanding Notes. With respect to clause (B), the obligations under the
Indenture other than with respect to such covenants and the Events of Default
other than the Events of Default relating to such covenants above shall remain
in full force and effect. Such trust may only be established if, among other
things (i) with respect to clause (A), the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or there has been a
change in law, which in the Opinion of Counsel provides that Holders of the
Notes will not recognize gain or loss for U.S. federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to U.S.
federal income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit, defeasance and discharge had not
occurred; or, with respect to clause (B), the Company has delivered to the
Trustee an Opinion of Counsel to the effect that the Holders of the Notes will
not recognize gain or loss for U.S. federal income tax purposes as a result of
such deposit and defeasance and will be subject to U.S. federal income tax on
the same amount, in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred; (ii) such deposit,
defeasance and discharge will not result in a breach or violation of, or
constitute a default
79
under, any agreement or instrument to which the Company or any Restricted
Subsidiary is a party or by which the Company or any Restricted Subsidiary is
bound; (iii) no Event of Default or event that with the passing of time or the
giving of notice, or both, shall constitute an Event of Default shall have
occurred or be continuing; (iv) the Company has delivered to the Trustee an
Opinion of Counsel to the effect that such deposit shall not cause the Trustee
or the trust so created to be subject to the Investment Company Act of 1940; and
(v) certain other customary conditions precedent are satisfied.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the
Company, the Subsidiary Guarantors and the Trustee with the consent of the
Holders of a majority in aggregate principal amount of the Outstanding Notes;
PROVIDED, HOWEVER, that no such modification or amendment may, without the
consent of the Holder of each Outstanding Note affected thereby, (a) change the
Stated Maturity of the principal of, or any installment of interest on, any
Note, (b) reduce the principal amount of, (or the premium) or interest on, any
Note, (c) change the place or currency of payment of principal of (or premium),
or interest on, any Note, (d) impair the right to institute suit for the
enforcement of any payment on or with respect to any Note, (e) reduce the
above-stated percentage of Outstanding Notes necessary to modify or amend the
Indenture, (f) reduce the percentage of aggregate principal amount of
Outstanding Notes necessary for waiver of compliance with certain provisions of
the Indenture or for waiver of certain defaults, (g) modify any provisions of
the Indenture relating to the modification and amendment of the Indenture or the
waiver of past defaults or covenants, except as otherwise specified, or (h)
following the mailing of any offer to purchase Notes required to be made under
the Indenture, modify any such offer to purchase in a manner materially adverse
to the Holders thereof.
The Holders of a majority in aggregate principal amount of the
Outstanding Notes, on behalf of all Holders of Notes, may waive compliance by
the Company with certain restrictive provisions of the Indenture. Subject to
certain rights of the Trustee, as provided in the Indenture, the Holders of a
majority in aggregate principal amount of the Outstanding Notes, on behalf of
all Holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Exchange Note tendered pursuant to an offer to
purchase required to be made under the Indenture.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State
of New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it under the Indenture and use
the same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
The Indenture and the Trust Indenture Act contain limitations on the
rights of the Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claim as security or otherwise. The Trustee is
permitted to engage in other transactions with the Company or any Affiliate,
PROVIDED, HOWEVER, that if it acquires any conflicting interest (as defined in
the Trust Indenture Act), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
"ADDITIONAL ASSETS" means (i) any property or assets (other than
Indebtedness and Capital Stock) used or useful in a Related Business; (ii) the
Capital Stock of a Person primarily engaged in a Related Business that is or
becomes a Restricted Subsidiary as a result of or upon the acquisition of such
Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital
Stock constituting a minority interest in any Person primarily engaged in a
Related Business to the extent in compliance with the covenant described under "
- -- Certain Covenants -- Limitation on Restricted Payments".
"ADJUSTED INDEBTEDNESS," as of any date, means the aggregate amount of
all Indebtedness of the Company and its Restricted Subsidiaries other than: (i)
an amount of Indebtedness that is equal to the greater of (x) 85% of the
aggregate principal amount of Qualifying Mortgage Receivables and (y) the
aggregate amount of Permitted Mortgage Warehouse Indebtedness, provided that the
amount excluded pursuant to this clause (i) shall not in any event exceed the
sum of (A) the aggregate amount of Permitted Mortgage Warehouse Indebtedness
plus (B) the principal amount of all outstanding CII Notes; (ii) Permitted
Warehouse Indebtedness that is not Permitted Mortgage Warehouse Indebtedness;
(iii) Indebtedness of any Restricted Subsidiary that is a Small Business
Investment Company that is permitted by clause (vii) of the definition of
Permitted Indebtedness; and (iv) Hedging Obligations permitted by clause (viii)
of the definition of Permitted Indebtedness.
"ADJUSTED CONSOLIDATED NET WORTH," as of any date, means the
Consolidated Net Worth of the Company and its Restricted Subsidiaries excluding
therefrom any amounts which are attributable to any Restricted Subsidiary that
is not a Subsidiary Guarantor.
"AFFILIATE" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET SALE" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of the
definition as a "disposition") (but excluding (a) any merger, consolidation or
sale of assets of the Company subject to and permitted by the covenant described
under " -- Certain Covenants -- Merger, Consolidation or Sale of Assets," and
(b) sales, transfers or
80
dispositions (including by way of securitization) of Receivables (other than
Retained Interest Receivables) and sales of foreclosed assets, in each case in
the ordinary course of business) of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than director's qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary, (iii) any other
assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary or (iv) any
Retained Interest Receivables (other than, in the case of (i), (ii), (iii) and
(iv) above, a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly Owned Subsidiary).
"ASSET SALE PROCEEDS" means, with respect to any Asset Sale, (i) cash
received by the Company or any Restricted Subsidiary from such Asset Sale
(including cash received as consideration for the assumption of liabilities
incurred in connection with or in anticipation of such Asset Sale), after (a)
provision for all income or other taxes measured by or resulting from such Asset
Sale, (b) payment of all brokerage commissions, underwriting and other fees and
expenses related to such Asset Sale, (c) provision for minority interest holders
in any Restricted Subsidiary as a result of such Asset Sale and (d) deduction of
appropriate amounts to be provided by the Company or a Restricted Subsidiary as
a reserve, in accordance with GAAP, against any liabilities associated with the
assets sold or disposed of in such Asset Sale and retained by the Company or a
Restricted Subsidiary after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
the assets sold or disposed of in such Asset Sale, and (ii) promissory notes and
other non-cash consideration received by the Company or any Restricted
Subsidiary from such Asset Sale or other disposition upon the liquidation or
conversion of such notes or noncash consideration into cash.
"CAPITALIZED LEASE OBLIGATIONS" means Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such Indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"CAPITAL STOCK" means, with respect to any Person, any and all shares
or other equivalents (however designated) of capital stock, partnership
interests or any other participation, right or other interest in the nature of
an equity interest in such Person or any option, warrant or other security
convertible into any of the foregoing.
A "CHANGE OF CONTROL" will be deemed to have occurred at such time as
either (a) any Person or any Persons acting together that would constitute a
"group" (a "Group") for purposes of Section 13(d) of the Exchange Act, together
with any Affiliates thereof, other than Permitted Holders, shall beneficially
own (within the meaning of Rule 13d-3 under the Exchange Act) at least 50% of
the aggregate voting power of all classes of Voting Stock of the Company; (b)
any Person or Group other than Permitted Holders, together with any Affiliates
thereof, shall succeed in having a sufficient number of its nominees elected to
the Board of Directors of the Company such that such nominees, when added to any
existing director remaining on the Board of Directors of the Company after such
election who was a nominee of or is an Affiliate or Related Person of such
Person or Group, will constitute a majority of the Board of Directors of the
Company; or (c) all or substantially all of the assets of the Company are sold,
transferred, leased or otherwise disposed of, other than a sale or transfer to,
or lease by, Permitted Holders; provided that a securitization or sale of
Receivables in the ordinary course of business shall not be deemed to be a sale,
transfer or disposition of all or substantially all of the assets of the
Company.
"CII SENIOR INDEBTEDNESS" means bank notes and any and all other
indebtedness of CII other than (1) any Indebtedness as to which the terms of the
instrument creating or evidencing the same provide that such Indebtedness is not
superior in right of payment to, or is on a parity with or subordinate in right
of payment to, CII's Subsidiary Guarantee or any CII Note, (2) any Indebtedness
which is subordinated in right of payment in any respect to any other
Indebtedness of CII, (3) Indebtedness evidenced by the CII Notes, (4) any
Indebtedness owed to a Person when such Person is a Subsidiary or any other
Affiliate of CII, (5) any obligation of CII arising from Disqualified Capital
Stock of CII, (6) that portion of any Indebtedness which is Incurred in
violation of the Indenture, (7) Indebtedness which, when Incurred and without
respect to any election under Section 1111(b) of Title 11, United States Code,
is without recourse to CII, (8) any liability for federal, state, local or other
taxes owed or owing by CII, (9) any Indebtedness for the purchase of goods,
materials or services, or consisting of operating lease rental payments, in the
ordinary course of business or Indebtedness consisting of trade payables or
other current liabilities (other than current liabilities for money borrowed and
the current portion of long-term CII Senior Indebtedness), (10) Indebtedness of
or amounts owed by CII for compensation to employees or for services rendered
and (11) Indebtedness issued as a dividend on, or in redemption or exchange for,
Capital Stock of CII.
"COMMON STOCK" of any Person means all Capital Stock of such Person
that is generally entitled to (i) vote in the election of directors of such
Person or (ii) if such Person is not a corporation, vote or otherwise
participate in the selection of the governing body, partners, managers or others
that will control the management and policies of such Person.
"CONSOLIDATED LEVERAGE RATIO", as of any date of determination, means
the ratio of (i) Adjusted Indebtedness to (ii) Adjusted Consolidated Net Worth.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any
period, the aggregate of the Net Income of such Person and its Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person in which the Person in
question or any of its Subsidiaries has less than a 100% interest (which
interest does not cause the net income of such other Person to be consolidated
into the net income of the Person in question in accordance with GAAP) shall be
included only to the extent of the amount of dividends or distributions paid to
the Person in question or a Subsidiary of such Person, (b) the Net Income of any
Subsidiary of the Person in question that is subject to any restriction or
limitation on the payment of dividends or the making of other distributions
(other than pursuant to the Notes or the Indenture) shall be excluded to the
extent of such restriction or limitation, (c) (i) the Net Income of any Person
acquired in a pooling of interests transaction for any period to the date of
such acquisition and (ii) any net gain (but not loss) resulting from an Asset
Sale by the Person in question or any of its Subsidiaries other than in the
ordinary course of business shall be excluded and (d) extraordinary gains and
losses (including any related tax effects) shall be excluded.
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"CONSOLIDATED NET WORTH" means, with respect to any Person at any date,
the consolidated stockholder's equity of such Person less the amount of such
stockholder's equity attributable to Disqualified Capital Stock of such Person
and its Subsidiaries, as determined in accordance with GAAP.
"CURRENCY AGREEMENT" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement or arrangement to
which such Person is a party or a beneficiary.
"DEFAULT" means any event which is, or after notice or passage of time
both would be, an Event of Default.
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock of the Company or
any Restricted Subsidiary which, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable at the option of
the holder), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
maturity date of the Notes, for cash or securities constituting Indebtedness.
Without limitation of the foregoing, Disqualified Capital Stock shall be deemed
to include (i) any Preferred Stock of a Restricted Subsidiary and (ii) any
Preferred Stock of the Company, with respect to either of which, under the terms
of such Preferred Stock, by agreement or otherwise, such Restricted Subsidiary
or the Company is obligated to pay current dividends or distributions in cash
during the period prior to the maturity date of the Notes; PROVIDED, HOWEVER,
that Preferred Stock of the Company or any Restricted Subsidiary thereof that is
issued with the benefit of provisions requiring a change of control offer to be
made for such Preferred Stock in the event of a change of control of the Company
or Restricted Subsidiary, which provisions have substantially the same effect as
the provisions of the Indenture described under " -- Certain Covenants -- Change
of Control Offer", shall not be deemed to be Disqualified Capital Stock solely
by virtue of such provisions.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles consistently
applied as in effect on the date of the Indenture.
"GUARANTEE" means an obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) enter into for the purpose
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" shall mean any person Guaranteeing
any obligation.
"HEDGING OBLIGATIONS" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"HOLDERS" OR "NOTEHOLDERS" means the Person in whose name an Exchange
Note is registered on the Registrar's books.
"INCUR" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed Incurrence of
Indebtedness.
"INDEBTEDNESS" means (without duplication), with respect to any Person,
any indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property if and to the extent any of the foregoing indebtedness would appear as
a liability upon a balance sheet of such Person prepared in accordance with
GAAP, and shall also include, to the extent not otherwise included, (i) any
Capitalized Lease Obligations, (ii) obligations secured by a Lien to which the
property or assets owned or held by such Person are subject, whether or not the
obligation or obligations secured thereby shall have been assumed (provided,
however, that if such obligation or obligations shall not have been assumed, the
amount of such indebtedness shall be deemed to be the lesser of the principal
amount of the obligation or the fair market value of the pledged property or
assets), (iii) Guarantees of items of other Persons which would be included
within this definition for such other Persons (whether or not such items would
appear upon the balance sheet of the guarantor), (iv) all obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (provided that in the case of any such letters of
credit, the items for which such letters of credit provide credit support are
those of other Persons which would be included within this definition for such
other Persons), (v) Disqualified Capital Stock and (vi) obligations of any such
Person under any Hedging Obligations. Except in the case of Warehouse
Indebtedness (the amount of which shall be determined in accordance with the
definition thereof), the amount of Indebtedness of any Person at any date shall
be the outstanding balance at such date of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
PROVIDED (i) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the principal amount of such Indebtedness less
the remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP and (ii) that
Indebtedness shall not include any liability for federal, state, local or other
taxes. Notwithstanding any other provision of the foregoing definition, any
trade payable arising from the purchase of goods or materials or for services
obtained in the ordinary course of business which are not overdue or which are
being contested in good faith shall not be deemed to be "Indebtedness" of the
Company or any Restricted Subsidiary for purposes of this definition.
Furthermore, Guarantees of (or obligations with respect to letters of credit
supporting) Indebtedness otherwise included in the determination of such amount
shall not also be included. Notwithstanding the foregoing, any securities issued
in a securitization by a special purpose owner trust or other Person, including
without limitation, any Securitization Trust, formed by or on behalf of a Person
and to which Receivables have been sold or otherwise transferred by or on behalf
of such Person or its Restricted Subsidiaries shall
82
not be treated as Indebtedness of such Person or its Restricted Subsidiaries
under the Indenture, regardless of whether such securities are treated as
indebtedness for tax purposes.
"INTEREST RATE AGREEMENT" means any interest rate swap agreement,
interest rate cap agreement, repurchase agreement, futures contract or other
financial agreement or arrangement designed to protect the Company or any
Restricted Subsidiary against fluctuations in interest rates.
"INVESTMENT GRADE RATING" means a rating equal to or higher than Baa3
(or the equivalent) and BBB- (or the equivalent) by Moody's and S&P,
respectively.
"INVESTMENTS" means, directly or indirectly, any advance, account
receivable (other than an account receivable arising in the ordinary course of
business or acquired as part of the assets acquired by the Company in connection
with an acquisition of assets which is otherwise permitted by the terms of the
Indenture), loan or capital contribution to (by means of transfers of property
to others, payments for property or services for the account or use of others or
otherwise), the purchase of any stock, bonds, notes, debentures, partnership or
joint venture interests or other securities of, the acquisition, by purchase or
otherwise, of all or substantially all of the business or assets or stock or
other evidence of beneficial ownership of, any Person or the making of any
investment in any Person. Investments shall exclude (i) extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices and (ii) the repurchase of securities of any Person by such Person.
"ISSUE DATE" means the date on which the Notes are originally issued.
"LIEN" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, preference,
priority, or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any Capitalized Lease Obligation, conditional sales, or
other title retention agreement having substantially the same economic effect as
any of the foregoing).
"MOODY'S" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"NET INCOME" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither
the Company nor any of the Restricted Subsidiaries (other than the Person
incurring such Indebtedness) (a) provides a Guarantee or other credit
enhancement of any kind (including any undertaking, agreement or instruction
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
the primary obligor or otherwise); (ii) no default with respect to which would
permit, upon notice, lapse of time or both, any holder of any other Indebtedness
(other than the Notes) of the Company or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders or holders thereof have been notified in writing that they will not have
any recourse to the Capital Stock or assets of the Company or any of its
Restricted Subsidiaries (other than the Person Incurring such Indebtedness).
"PERMITTED HOLDER" means (i) the directors and executive officers of
the Company at the Issue Date; (ii) the members of the immediate family of any
person referred to in clause (i) above; (iii) any trust created for the benefit
of any person described in clause (i) or (ii) above or any of their estates; and
(iv) any corporation that is controlled by any Person described in clause (i),
(ii) or (iii) above.
"PERMITTED INDEBTEDNESS" means:
(i) Permitted Warehouse Indebtedness and Guarantees thereof by the
Company or any Restricted Subsidiary; provided, however, that to the
extent any such Indebtedness of the Company or a Restricted Subsidiary
ceases to constitute Permitted Warehouse Indebtedness, such
Indebtedness shall be deemed to be Incurred by the Company or such
Restricted Subsidiary, as the case may be, at the time such
Indebtedness ceases to constitute Permitted Warehouse Indebtedness;
(ii) Indebtedness of the Company or a Restricted Subsidiary owed to
and held by the Company or a Restricted Subsidiary; provided, however,
that any designation of such Restricted Subsidiary as an Unrestricted
Subsidiary, any subsequent issuance or transfer of any Capital Stock
which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or another Restricted Subsidiary) shall be
deemed, in each case, to constitute the Incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as the case
may be;
(iii) the Notes and the Subsidiary Guarantees;
(iv) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (i), (ii), (iii) or (vi) of this
definition) as described in a schedule to the Indenture;
(v) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to the first paragraph of the Limitation on Additional
Indebtedness covenant or pursuant to clause (iii) or (iv) of this
definition or this clause (v);
(vi) Indebtedness consisting of notes and debentures issued by CII
that are Incurred for the purpose of funding the origination or
purchase of Receivables;
83
(vii) Indebtedness of any Restricted Subsidiary that is a Small
Business Investment Company consisting of debentures or other
securities issued by such Small Business Investment Company to the SBA
pursuant to Section 303 of the Small Business Investment Act of 1958,
in an amount not to exceed three times the Consolidated Net Worth of
such Small Business Investment Company;
(viii) Hedging Obligations directly related to: (1) Indebtedness
permitted to be Incurred by the Company or any Restricted Subsidiary
pursuant to the Indenture; (2) Receivables held by the Company or its
Restricted Subsidiaries pending sale or securitization or that have
been sold pursuant to a Warehouse Facility; (3) Receivables with
respect to which the Company or any Restricted Subsidiary reasonably
expects to purchase or finance or acquire a security interest in or
accept as collateral; or (4) Retained Interest Receivables and other
assets owned or financed by the Company or any Restricted Subsidiary;
and
(ix) Indebtedness in an aggregate principal amount which, together
with the principal amount of all other Indebtedness of the Company and
its Restricted Subsidiaries Incurred pursuant to this clause (viii)
outstanding on the date of such Incurrence, does not exceed $10.0
million at any one time outstanding.
"PERMITTED INVESTMENT" means, for any Person, Investments made on or
after the Issue Date consisting of:
(i) Investments by the Company or a Restricted Subsidiary in the
Company or a Restricted Subsidiary;
(ii) Temporary Cash Investments;
(iii) any Investment by the Company or a Restricted Subsidiary in a
Person, if as a result of such Investment (a) such Person becomes a
Restricted Subsidiary, (b) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of
its assets to, or is liquidated into, the Company or a Restricted
Subsidiary or (c) such businesses or assets are owned by the Company
or a Restricted Subsidiary;
(iv) an Investment that is made by the Company or a Restricted
Subsidiary in the form of any stock, bonds, notes, debentures,
partnership or joint venture interests or other securities that are
issued by a third party to the Company or a Restricted Subsidiary
solely as partial consideration for the consummation of an Asset Sale
that is otherwise permitted under the covenant described under " --
Certain Covenants -- Limitation on Sales of Assets";
(v) Investments consisting of (a) purchases and acquisitions of
inventory, supplies, materials and equipment, or (b) licenses or
leases of intellectual property and other assets, in each case in the
ordinary course of business;
(vi) Investments consisting of loan and advances to employees for
reasonable travel, relocation and business expenses in the ordinary
course of business, extensions of trade credit in the ordinary course
of business, and prepaid expenses incurred in the ordinary course of
business;
(vii) Investments consisting of Receivables made in the ordinary
course of business and any Capital Stock or other consideration
received in connection therewith;
(viii) Investments consisting of Interest Rate Agreements and Currency
Agreements;
(ix) Investments consisting of Retained Interest Receivables;
(x) Investments consisting of loans to third parties for the
origination of Receivables in the ordinary course of business and any
warrants, Capital Stock or other consideration received in connection
therewith; and
(xi) Capital Stock of or in the form of a transfer of Receivables to a
Qualifying Securitization Subsidiary pursuant to a securitization of
such Receivables.
"PERMITTED LIENS" means, with respect to any Person,
(i) pledges or deposits by such Person under worker's compensation
laws, unemployment insurance laws or similar legislation, or good
faith deposits in connection with bids, tenders, contracts (other than
for the payment of Indebtedness) or leases to which such Person is a
party, or deposits or Liens to secure public or statutory obligations
of such Person or deposits of cash or United States government bonds
or Liens to secure surety, performance, appeal or other bonds with
respect to such Person, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case Incurred in the
ordinary course of business;
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested
in good faith by appropriate proceedings or Liens arising out of
judgments or awards against such Person with respect to which such
person shall then be proceeding with an appeal or other proceedings
for review;
(iii) Liens for taxes, assessments or other governmental charges not
yet subject to penalties for nonpayment or which are being contested
in good faith and by appropriate proceedings;
(iv) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person
in the ordinary course of its business; provided, however, that such
letters of credit do not constitute indebtedness;
(v) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of
real property;
84
or Liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or materially
impair their use in the operation of the business of such Person;
(vi) Liens securing Purchase Money Indebtedness; provided, however,
that the Lien may not extend to any other Property owned by such
Person or any of its Subsidiaries at the time the Lien is Incurred,
and the Indebtedness secured by the Lien may not be Incurred more than
180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full
operation of the property subject to the Lien;
(vii) Liens to secure Permitted Warehouse Indebtedness and Guarantees
thereof;
(viii) Liens existing on the Issue Date as described in a schedule to
the Indenture;
(ix) Liens on property or shares of Capital Stock of another Person at
the time such other Person becomes a Subsidiary of such Person;
provided, however, that such Liens are not created or Incurred in
connection with, or in contemplation of, such other Person becoming
such a Subsidiary; provided further, however, that such Lien may not
extend to any other property owned by such Person or any of its
Subsidiaries;
(x) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means
of a merger or consolidation with or into such Person or a Subsidiary
of such Person; provided, however, that such Liens are not created or
Incurred in connection with, or in contemplation of, such acquisition;
provided, further, however, that the Liens may not extend to any other
property owned by such Person or any of its Subsidiaries;
(xi) Liens securing Hedging Obligations so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted under the
Indenture to be, secured by a Lien on the same property securing such
Hedging Obligations and the related Indebtedness is not Incurred in
violation of the Indenture;
(xii) Liens to secure any Refinancing (or successive Refinancings) as
a whole, or in part, of any indebtedness secured by any Lien referred
to in the foregoing clauses (vi), (viii), (ix) and (x); provided,
however, that (a) such new Lien shall be limited to all or part of the
same property that secured the original Lien (plus improvements to or
on such property) and (b) the Indebtedness secured by such Lien at
such time is not increased to any amount greater than the sum of (1)
the outstanding principal amount or, if greater, committed amount of
the Indebtedness described under clauses (vi), (viii), (ix) or (x), as
the case may be, at the time the original Lien became a Permitted Lien
and (2) an amount necessary to pay any fees and expenses, including
premiums, related to such refinancing refunding, extension renewal or
replacement;
(xiii) Liens securing Capitalized Lease Obligations permitted to be
Incurred under the Indenture, PROVIDED that such Lien does not extend
to any property other than that subject to the underlying lease;
(xiv) Liens on Retained Interest Receivables (or on the Capital Stock
of any Restricted Subsidiary substantially all the assets of which are
Retained Interest Receivables); provided, however, that, unless a
Termination Event has occurred, (x) any such Liens may only encumber
Retained Interest Receivables in an amount not to exceed 75% of the
excess, if any, of (i) the total amount of Retained Interest
Receivables, determined on a consolidated basis in accordance with
GAAP, as of the time of creation of such Lien over (ii) an amount
equal to 150% of the aggregate amount of all unsecured and
unsubordinated Indebtedness of the Company and its Restricted
Subsidiaries as of the time of creation of such Lien; and (y) the
balance of Retained Interest Receivables not permitted to be
encumbered by the foregoing proviso (x) shall remain unencumbered by
any Lien;
(xv) any Lien in the form of "over-collateralization" of the senior
securities issued in, or subordination of or recourse to all or a
portion of Retained Interest Receivables of the Company or any
Subsidiary attributable to, a securitization of Receivables (or
similar arrangements), in each case to the extent reflected in the
book value of such Retained Interest Receivables, which Lien is in
favor of the holders of other securities issued by the trust or other
Person relating to such securitization; and
(xvi) Liens in favor of the Company or any Restricted Subsidiary.
"PERMITTED MORTGAGE WAREHOUSE INDEBTEDNESS" means Permitted Warehouse
Indebtedness for which the related Receivables are residential mortgage loans.
"PERMITTED WAREHOUSE INDEBTEDNESS" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets as
to which such Warehouse Indebtedness relates are or, prior to any funding under
the related Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale on the consolidated balance sheet of the Company in
accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be
Permitted Warehouse Indebtedness (a) in the case of a Purchase Facility, only to
the extent the holder of such Warehouse Indebtedness has no contractual recourse
to the Company and its Restricted Subsidiaries to satisfy claims in respect of
such Permitted Warehouse Indebtedness in excess of the realizable value of the
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, only to the extent of the lesser of (1) the amount advanced by the
lender with respect to the Receivables financed under such Warehouse Facility,
and (2) the principal amount of such Receivables and (iii) any such Indebtedness
has not been outstanding in excess of 364 days.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
85
"PREFERRED STOCK" means any Capital Stock of a Person, however
designated, which entitles the holder thereof to a preference with respect to
dividends, distributions or liquidation proceeds of such Person over the holders
of other Capital Stock issued by such Person.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"PURCHASE FACILITY" means any Warehouse Facility in the form of a
purchase and sale facility pursuant to which the Company or a Restricted
Subsidiary sells Receivables to a financial institution and retains a right of
first refusal upon the subsequent resale of such Receivables by such financial
institution.
"PURCHASE MONEY INDEBTEDNESS" means any Indebtedness incurred by a
Person to finance or refinance the cost of the construction or purchase of, or
repairs, improvements or additions to, an item of property the principal amount
of which Indebtedness does not exceed the sum of (i) 100% of such cost and (ii)
reasonable fees and expenses of such Person incurred in connection therewith.
"QUALIFYING MORTGAGE RECEIVABLE" means a residential mortgage loan on
an owner-occupied one-to-four family property which loan is, at the time of
determination, current or less than 90 days delinquent.
"QUALIFYING SECURITIZATION SUBSIDIARY" means any Subsidiary of the
Company that (i) does not engage in, and whose charter prohibits it from
engaging in, any activities other than a securitization of Receivables which
have been sold or otherwise transferred to such Subsidiary by the Company or
another Subsidiary of the Company in a transaction that constitutes a "true
sale" under GAAP, (ii) constitutes a "special purpose vehicle" under rating
agency guidelines, and (iii) does not have any Indebtedness other than
Non-Recourse Indebtedness.
"RATING AGENCIES" means Moody's and S&P.
"RECEIVABLES" means consumer and commercial loans, leases and
receivables purchased or originated by the Company or any Restricted Subsidiary;
provided, however, that for purposes of determining the amount of a Receivable
at any time, such amount shall be determined in accordance with GAAP,
consistently applied, as of the most recent practicable date.
"REFINANCE" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary, but only to the extent
that (i) the Refinancing Indebtedness is subordinated to the Notes or Subsidiary
Guarantee, as applicable, to at least the same extent as the Indebtedness being
Refinanced, if at all, (ii) the Refinancing Indebtedness is scheduled to mature
either (a) no earlier than the Indebtedness being Refinanced, or (b) after the
maturity date of the Notes, (iii) the portion, if any, of the Refinancing
Indebtedness that is scheduled to mature on or prior to the maturity date of the
Notes has a weighted average life to maturity at the time such Refinancing
Indebtedness is Incurred that is equal to or greater than the weighted average
life to maturity of the portion of the Indebtedness being Refinanced that is
scheduled to mature on or prior to the maturity date of the Notes, (iv) such
Refinancing Indebtedness is in an aggregate principal amount that is equal to or
less than the sum of (a) the aggregate principal amount then outstanding under
the Indebtedness being Refinanced, (b) the amount of accrued and unpaid
interest, if any, and premiums owed, if any, not in excess of preexisting
prepayment provisions on such Indebtedness being Refinanced and (c) the amount
of customary fees, expenses and costs related to the incurrence of such
Refinancing Indebtedness, and (v) such Refinancing Indebtedness is Incurred by
the same Person that initially Incurred the Indebtedness being Refinanced,
except that the Company may Incur Refinancing Indebtedness to Refinance
Indebtedness of any Wholly Owned Subsidiary of the Company.
"RELATED BUSINESS" means any consumer or commercial finance business or
any financial service business relating thereto, including, without limitation,
businesses of the Company in existence as of the Issue Date.
"RESTRICTED PAYMENT" with respect to any Person means any of the
following: (i) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any payment
in connection with any merger or consolidation involving such Person) (other
than (a) dividends or distributions payable solely in its Capital Stock (other
than Disqualified Capital Stock) or in options, warrants or other rights to
purchase Capital Stock (other than Disqualified Capital Stock), and (b) in the
case of a Subsidiary, dividends or distributions payable solely to the Company
or a Wholly Owned Subsidiary of the Company or pro rata dividends or
distributions), (ii) the purchase, redemption or other acquisition or retirement
for value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary (other than Capital Stock owned by the
Company or a Wholly Owned Subsidiary, excluding Disqualified Capital Stock),
(iii) the making of any principal payment on, or the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of,
any Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition), (iv) the making of any
Investment or Guarantee of any Investment in any Person other than a Permitted
Investment, (v) any designation of a Restricted Subsidiary as an Unrestricted
Subsidiary on the basis of the Investment by the Company therein or (vi) the
forgiveness of any Indebtedness of an Affiliate of the Company (other than a
Restricted Subsidiary) to the Company or a Restricted Subsidiary. For purposes
of determining the amount expended for Restricted Payments, cash distributed or
invested shall be valued at the face amount thereof and property other than cash
shall be valued at its fair market value.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company that is not
an Unrestricted Subsidiary.
86
"RETAINED INTEREST" means, over the life of a pool of Receivables that
have been sold or otherwise transferred by a person to a trust or other Person
in a securitization or sale, the direct or indirect rights retained by such
Person or its Restricted Subsidiaries at or subsequent to the closing of such
securitization or sale with respect to such pool, including any rights to
receive cash flows attributable to such pool and retained by such Person,
whether such rights are contractual, by virtue of such Person being a holder of
Capital Stock of such trust or other Person or otherwise.
"RETAINED INTEREST RECEIVABLES" of a Person means the direct or
indirect right to Retained Interest capitalized on such Person's or any of its
Restricted Subsidiaries' consolidated balance sheet (the amount of which shall
be determined in accordance with GAAP), including, without limitation,
subordinated and interest-only certificates and any such rights as a holder of
Capital Stock of a trust or other Person to which a "pool" of Receivables has
been sold or otherwise transferred in a securitization or sale.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw Hill,
Inc., or any successor to the rating agency business thereof.
"SEC" means the Securities and Exchange Commission.
"SECURITIZATION TRUST" means any Person (whether or not a Subsidiary of
the Company) established exclusively for the purpose of issuing securities in
connection with any securitization, the obligations of which are without
recourse to the Company or any Restricted Subsidiary.
"SMALL BUSINESS INVESTMENT COMPANY" means a small business investment
company within the meaning of Section 301 of the Small Business Investment Act
of 1958. As of the Issue Date, Reedy Rivers Ventures is the only Restricted
Subsidiary that is a Small Business Investment Company.
"SECURITIZATION SPECIAL PURPOSE SUBSIDIARY" means (i) a Restricted
Subsidiary formed in connection with a securitization (a) all the Capital Stock
of which (other than directors' qualifying shares) is owned by the Company or
one or more Restricted Subsidiaries, (b) that has no assets other than Retained
Interest Receivables created in such securitization and (c) that conducts no
business other than holding such Retained Interest Receivables or (ii) that is a
Qualifying Securitization Subsidiary.
"STATED MATURITY" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holders thereof upon the
happening of any contingency unless such contingency has occurred).
"SUBORDINATED OBLIGATION" means any Indebtedness of the Company or a
Subsidiary Guarantor (whether outstanding on the Issue Date or thereafter
Incurred) which is, by its terms pursuant to a written agreement, subordinate or
junior in right of payment to the Notes or such Subsidiary Guarantor's
Subsidiary Guarantee, as the case may be.
"SUBSIDIARY" of any specified Person means any corporation,
partnership, joint venture, association or other business entity, whether now
existing or hereafter organized or acquired, (i) in the case of a corporation,
of which more than 50% of the total voting power of the Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, officers or trustees thereof is held by such first-named Person or
any of its Subsidiaries; or (ii) in the case of a partnership, joint venture,
association or other business entity, with respect to which such first-named
Person or any of its Subsidiaries has the power to direct or cause the direction
of the management and policies of such entity by contract or otherwise or if in
accordance with GAAP such entity is consolidated with the first-named Person for
financial statement purposes.
"TEMPORARY CASH INVESTMENTS" means (i) Investments in marketable,
direct obligations issued or guaranteed by the United States of America, or of
any governmental agency or political subdivision thereof, maturing within 365
days of the date of purchase; (ii) Investments in certificates of deposit issued
by a bank organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500.0 million and rated at least A by S&P
and A-2 by Moody's, maturing within 365 days of purchase; or (iii) Investments
not exceeding 365 days in duration in money market funds that invest
substantially all of such funds' assets in the Investments described in the
preceding clauses (i) and (ii).
A "TERMINATION EVENT" shall be deemed to occur at any time (i) the
ratings assigned to the Notes by both of the Rating Agencies are Investment
Grade Ratings and (ii) no Default or Event of Default has occurred and is
continuing.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (a) the
Subsidiary to be so designated has total assets of $1,000 or less or (b) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under " -- Certain Covenants -- Limitation on
Restricted Payments." Notwithstanding the foregoing, no Subsidiary shall be
designated an Unrestricted Subsidiary, and any Unrestricted Subsidiary shall
cease to be an Unrestricted Subsidiary, if any Indebtedness of such Subsidiary
or any Subsidiary thereof shall not be Non-Recourse Indebtedness. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (i) the Company could incur $1.00 of additional Indebtedness under
the first paragraph of the covenant described under " -- Certain Covenants --
Limitation on Additional Indebtedness" and (ii) no Event of Default or Default
shall have occurred and be continuing or result therefrom. Any such designation
by the Board of Directors shall be evidenced by the Company to the Trustee by
promptly
87
filing with the Trustee a copy of the board resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"VOTING STOCK" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"WAREHOUSE FACILITY" means any funding arrangement with a financial
institution or other lender or purchaser to the extent such agreement is to
finance the purchase or origination of Receivables by the Company or a
Subsidiary of the Company, or the making of loans to a Person for the purpose of
financing the purchase or origination by such Person of consumer or commercial
loans, leases or receivables for resale or sale to the Company or any Subsidiary
of the Company, and in each case for the purpose of pooling such Receivables
prior to securitization or sale in the ordinary course of business, including
purchase and sale facilities pursuant to which the Company or a Subsidiary of
the Company sells Receivables to a financial institution and retains a right of
first refusal upon the subsequent resale of such Receivables by such financial
institution.
"WAREHOUSE INDEBTEDNESS" means the consideration received by the
Company or its Restricted Subsidiaries under a Warehouse Facility with respect
to Receivables until such time such Receivables are (i) securitized, (ii)
repurchased by the Company or its Restricted Subsidiaries or (iii) sold by the
counterparty under the Warehouse Facility to a Person who is not an Affiliate of
the Company.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
FORM, DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The Exchange Notes will initially be represented by one or more
Exchange Notes in registered global form (collectively, the "Global Notes")
unless the Company elects to issue some or all of the Exchange Notes in the form
of registered certificated form ("Certificated Notes"). The Global Notes will be
deposited on issuance with the Trustee as custodian for The Depository Trust
Company (the "Depositary"), in New York, New York, and registered in the name of
DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC as described below. Except as set forth below, the
Global Notes may be transferred, in whole and not in part, only to another
nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in
the Global Notes may not be exchanged for Exchange Notes in certificated form
except in the limited circumstances described below. See " -- Exchange of
Book-Entry Notes for Certificated Notes".
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks, trust
companies, clearing corporations and certain other organizations. Access to
DTC's system is also available to other entities such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interest and transfer of ownership interest of each
actual purchaser of each security held by or on behalf of DTC are recorded on
the records of the Participants and Indirect Participants. DTC has also advised
the Company that, pursuant to procedures established by it, (i) upon deposit of
the Global Notes, DTC will credit the accounts of Participants designated by the
Initial Purchasers with portions of the principal amount of the Global Notes and
(ii) ownership of such interests in the Global Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by DTC (with respect to the Participants) or by the Participants and the
Indirect Participants (with respect to other owners of beneficial interests in
the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Participants in such system, or indirectly through
organizations which are Participants in such system.. All interests in a Global
Note may be subject to the procedures and requirements of DTC. The laws of some
states require that certain persons take physical delivery in certificated form
of securities that they own. Consequently, the ability to transfer beneficial
interests in a Global Note to such persons will be limited to that extent.
Because DTC can act only on behalf of Participants, which in turn act on behalf
of Indirect Participants and certain banks, the ability of a person having
beneficial interests in a Global Note to pledge such interests to persons or
entities that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests. For certain other restrictions on the transferability
of the Exchange Notes, see " -- Exchange of Book-Entry Notes for Certificated
Notes," and " -- Exchange of Certificated Notes For Book-Entry Notes".
Except as described below, owners of interests in the Global Notes will
not have Exchange Notes registered in their names, will not receive physical
delivery of Exchange Notes in certificated form and will not be considered the
registered owners or holders thereof under the Indenture for any purpose.
Payments in respect of the Global Notes registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Trustee will treat
the persons in whose names the Exchange Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes
88
whatsoever. Consequently, neither the Trustee nor any agent thereof has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Notes or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised the Company that its current practice, upon receipt of any payment in
respect of securities such as the Exchange Notes, is to credit the accounts of
the relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the relevant security as shown on the records of DTC unless DTC has
reason to believe it will not receive payment on such payment date. Payments by
the Participants and the Indirect Participants to the beneficial owners of the
Exchange Notes will be governed by standing instructions and customary practices
and will be the responsibility of the Participants or the Indirect Participants
and will not be the responsibility of DTC, the Trustee or the Company. Neither
the Company nor the Trustee will be liable for any delay by DTC or any of its
Participants in identifying the beneficial owners of the Exchange Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from DTC or its nominee for all purposes.
Interests in the Global Notes will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Exchange Notes only at the direction of one or more
Participants to whose account with DTC interests in the Global Notes are
credited and only in respect to such portion of the principal amount of the
Exchange Notes as to which such Participant or Participants has or have given
such direction. However, if there is an Event of Default under the Indenture,
DTC reserves the right to exchange the Global Notes for Exchange Notes in
certificated form and to distribute such Exchange Notes to its Participants.
The information in this section concerning DTC and its book-entry
system has been obtained from sources that the Company believes to be reliable,
but the Company takes no responsibility for the accuracy thereof.
Any beneficial interest in one of the Global Notes that is transferred
to a person who takes delivery in the form of an interest in the other Global
Notes will, upon transfer, cease to be an interest in such Global Note and will
become an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer restrictions and other procedures applicable to
beneficial interest in such other Global Note for so long as it remains such an
interest.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for Exchange Notes in registered
certificated form if (i) DTC (a) notifies the Company that it is unwilling or
unable to continue as depositary for the Global Notes and the Company thereupon
fails to appoint a successor depositary within 90 days or (b) has ceased to be a
clearing agency registered under the Exchange Act, (ii) the Company in its sole
discretion elects to cause the issuance of the Exchange Notes in certificated
form or (iii) there shall have occurred and be continuing an Event of Default or
any event which after notice or lapse of time or both would be an Event of
Default with respect to the Exchange Notes.
89
DESCRIPTION OF OTHER INDEBTEDNESS
MORTGAGE LOAN DIVISION
The Mortgage Loan Division has three credit facilities as described
below.
(i) The Mortgage Loan Division has a $200.0 million warehouse facility
between Emergent Mortgage Corp. ("EMC") and First Union National Bank ("First
Union"). This facility has a maturity date of March 19, 1998 and provides for
interest on the outstanding amounts owed thereunder at a fluctuating rate of
interest equal to the Federal Funds Rate plus 1.875%. The aggregate borrowing
amount of $200.0 million is subject to certain borrowing base limitations, which
effectively limit such borrowings under the facility from 90% to 98% of eligible
loans (depending on the period of time that had elapsed since origination and
the relevant loan LTV). The facility is guaranteed by the Company. The proceeds
of the credit facility are to be used for originating and acquiring mortgage
loans and for general corporate purposes. Outstanding amounts owed under such
facility are secured by substantially all of the assets of EMC, both tangible
and intangible, including all of its loans receivable. The facility contains
standard events of default, standard non-financial covenants, and a number of
financial covenants, net worth covenants and a leverage ratio covenant that
adjusted total liabilities (as defined therein) divided by consolidated net
worth shall not be greater than 12.0 to 1.0 through October 31, 1997 and
thereafter shall not be greater than 9.0 to 1.0. It also contains typical
negative covenants, including a prohibition that, without the consent of the
lender, during any fiscal year, EMC cannot declare and pay any dividends or
distributions to its shareholders (i.e. the Company), in excess of 50% of the
cumulative net income as determined for the most recent four consecutive
completed fiscal quarters, on a cumulative rolling basis; and in all cases only
if, at the time of or after giving effect to such dividend or distribution,
there is no event of default. At June 30, 1997, an aggregate of $123.7 million
was outstanding under this facility, with an additional borrowing base
availability of $26.3 million.
(ii) The Mortgage Loan Division has a $175.0 million warehouse facility
between EMC and Prudential Securities Credit Corporation ("Prudential"). This
facility has a maturity date of September 30, 1997 and provides for interest on
the outstanding amounts owed thereunder at a fluctuating rate of interest equal
to LIBOR plus 1.45%. The aggregate borrowing amount of $175.0 million is subject
to certain borrowing base limitations which limits borrowings to a maximum of
95% of eligible loans (and may be less in certain instances). The facility is
guaranteed by the Company. The proceeds of the credit facility are to be used to
warehouse fixed rate, first- and second-lien 1-4 family residential mortgage
loans. Outstanding amounts owed under such facility are secured by substantially
all of the assets of EMC, both tangible and intangible, including all of its
loans receivable. The facility contains standard events of default and standard
non-financial covenants. The facility also contains a number of financial
covenants, including among others, covenants that (i) EMC's tangible net worth
(as defined therein) be not less than $15.0 million, (ii) its tangible net worth
plus subordinated debt maturing 180 days or more from the maturity date be not
less than $55.0 million and (iii) EMC's leverage ratio shall not exceed 6:1
(i.e. the ratio of EMC's total liabilities less subordinated debt to EMC's
tangible net worth minus subordinated debt). At June 30, 1997, no amounts were
outstanding under this facility. This facility is used to fund loans pending
their anticipated quarterly securitization, which typically occurs immediately
prior to quarter-end. Accordingly, amounts outstanding under this facility at
quarter-end are expected to be minimal.
(iii) The Mortgage Loan Division has a $20.0 million warehouse facility
between CII and First Union. This facility has a maturity date of September 30,
1997 and provides for interest on the outstanding amounts owed thereunder at a
fluctuating rate of interest equal to the lender's prime rate. The aggregate
borrowing amount of $20.0 million is subject to certain borrowing base
limitations, which effectively limit such borrowings under the facility so that
the aggregate principal balances of all Mortgage Loans delivered to the lender
as Eligible Mortgage Loans (as defined) cannot exceed 80% of the fair market
value of the properties (as defined) covered by such Mortgage Loans. The
facility is guaranteed by the Company. The proceeds of the credit facility are
to be used for originating and acquiring Mortgage Loans and for general
corporate purposes. Outstanding amounts owed under such facility are secured by
substantially all of the assets of CII, both tangible and intangible, including
all of its loans receivable. The facility contains standard events of default
and standard non-financial covenants. The facility also contains a number of
financial covenants, including among others, covenants regarding minimum net
worth and a covenant that CII's ratio of total liabilities to tangible net worth
not exceed 20.0 to 1. In addition, CII may not pay any dividends or
distributions during any period consisting of four fiscal quarters in excess of
50% of its net income as of the most recent quarter end for such four
consecutive fiscal quarters, without the prior consent of the lender; and in all
cases only if, at the time of or after giving effect to such dividend or
distribution, there is no event of default. At June 30, 1997, an aggregate of
$16.1 million was outstanding under this facility, with an additional borrowing
base availability of $3.9 million.
SMALL BUSINESS LOAN DIVISION
The Small Business Loan Division has three credit facilities as
described below.
(i) The Small Business Loan Division has a $25.0 million credit facility
between Emergent Business Capital, Inc. ("EBC") and NationsBank, N.A. This
facility has a maturity date of December 29, 2000 and provides for interest on
the outstanding amounts owed thereunder at a fluctuating rate of interest equal
to NationsBank prime rate as announced from time to time. The aggregate
borrowing amount of $25.0 million is subject to certain borrowing base
limitations, which effectively limit such borrowings under the facility to 100%
of the outstanding balance of the guaranteed portion of SBA 7(a) loans, 80% of
the outstanding balance of the unguaranteed portion of SBA 7(a) loans, 80% of
Asset-Based Small Business Loans, and 80% of certain other SBA loans. It is
secured by substantially all of the assets of EBC, both tangible and intangible,
including all of its loans receivable. The facility is guaranteed by the
Company. The proceeds of the credit facility are to be used for repayment of
debt and for general corporate purposes. The facility contains standard events
of default, standard non-financial covenants, and a number of financial
covenants, including among others, covenants regarding minimum net worth and
earnings, and a covenant that EBC's ratio of total liabilities to tangible net
worth is not to exceed 6 to 1. The facility also contains typical negative
covenants, including a prohibition against paying dividends or distributions. At
June 30, 1997, an aggregate of $17.3 million was outstanding under this
facility, with an additional borrowing base availability of $1.4 million.
(ii) The Small Business Loan Division has a $20.0 million credit facility
between Emergent Financial Corp. ("EFC") and NationsBank, N.A. This facility has
a maturity date of December 29, 2000 and provides for interest on the
outstanding amounts owed thereunder at a
90
fluctuating rate of interest equal to NationsBank prime rate as announced from
time to time. The aggregate borrowing amount of $20.0 million is subject to
certain borrowing base limitations, which effectively limits such borrowings
under the facility to 80% of EFC's Eligible Loans (as defined therein). It is
secured by substantially all of the assets of EFC, both tangible and intangible,
including all of its loans receivable. The facility is guaranteed by the Company
and CII. The proceeds of the credit facility are to be used for repayment of
debt and for general corporate purposes. The facility contains standard events
of default, standard non-financial covenants, and a number of financial
covenants, including among others, covenants regarding minimum net worth and a
covenant that the borrower's ratio of total liabilities to tangible net worth
not exceed 6 to 1. The facility also contains typical negative covenants,
including a prohibition against paying dividends or distributions without the
consent of the lender. At June 30, 1997, an aggregate of $10.3 million was
outstanding under this facility, with an additional borrowing base availability
of $958,000.
(iii) The Small Business Loan Division has a $5.0 million credit facility
between Emergent Commercial Mortgage, Inc. ("ECM"), and NationsBank, N.A. This
facility has a maturity date of December 29, 2000 and provides for interest on
the outstanding amounts owed thereunder at a fluctuating rate of interest equal
to NationsBank prime rate as announced from time to time. The aggregate
borrowing amount of $5.0 million is subject to certain borrowing base
limitations, which effectively limits such borrowings under the facility to 80%
of EFC's eligible loans. It is secured by substantially all of the assets of
ECM, both tangible and intangible, including all of its loans receivable. The
facility is guaranteed by the Company. The proceeds of the credit facility are
to be used for repayment of debt and for general corporate purposes. The
facility contains standard events of default, standard non-financial covenants,
and a number of financial covenants, including among others, a covenant
regarding minimum net worth and a covenant that the borrower's (as defined)
ratio of total liabilities to tangible net worth not exceed 6.0 to 1.0. The
facility also contains typical negative covenants, including with limitations a
prohibition against paying dividends or distributions without the consent of the
lender. At June 30, 1997, an aggregate of $868,000 was outstanding under this
facility, with an additional borrowing base availability of $455,000.
AUTO LOAN DIVISION
Each of the subsidiaries in the Auto Loan Division, The Loan Pro$, Inc.
("LPI") and Premier Financial Services, Inc.("PFS"), has a credit facility with
Bank America Business Credit, Inc. (the "Auto Loan Division Credit Facilities").
The LPI facility provides for borrowings of up to $4.0 million and has a
maturity date of December 19, 1997, and the PFS facility provides for borrowings
of up to $4.0 million and has a maturity date of December 31, 1997. Each
facility provides for interest on outstanding amounts thereunder at the Lender's
fluctuating reference rate plus 0.75%. Each facility is secured by substantially
all of the assets of the borrower, both tangible and intangible, including all
of its loans receivable. The LPI facility is guaranteed by the Company and the
PFS facility is guaranteed by CII and the Company. Each facility contains
standard events of default, standard non- financial covenants and a number of
financial covenants. At June 30, 1997 an aggregate of $6.1 million was
outstanding under these two facilities, with an aggregate additional borrowing
base availability of $360,000.
91
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Wyche, Burgess, Freeman & Parham, P.A., counsel to
the Company, the following discussion describes the material federal income tax
consequences expected to result to holders whose Senior Notes are exchanged for
Exchange Notes in the Exchange Offer. Such opinion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative rulings
and practice. There can be no assurance that the Internal Revenue Service (the
"Service") will not take a contrary view, and no ruling from the Service has
been or will be sought with respect to the Exchange Offer. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including, but not limited to,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, foreign corporations and persons who are not citizens or
residents of the United States) may be subject to special rules not discussed
below. EACH HOLDER OF SENIOR NOTES SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF EXCHANGING SENIOR NOTES FOR EXCHANGE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Senior Notes for Exchange Notes will be treated as a
"non-event" for federal income tax purposes because the Exchange Notes will not
be considered to differ materially in kind or extent from the Senior Notes. As a
result, no material federal income tax consequences will result to holders
exchanging Senior Notes for Exchange Notes.
92
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with the resales of Exchange Notes received in
exchange for Senior Notes where such Senior Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of up to 180 days after consummation of the Exchange Offer, it
will keep the Registration Statement effective, and include in the Registration
Statement a prospectus for use by such broker-dealers in resales.
The Company will not receive any proceeds from any sale of Exchange
Notes by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Senior Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act. The Company has agreed to reimburse the
holders of Senior Notes for reasonable attorneys fees in the event that a Resale
Registration Statement must be filed.
Each holder of the Senior Notes who wishes to exchange its Senior Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer -- Terms of
the Exchange Offer."
The Initial Purchasers and certain of their affiliates may in the
future engage in investment banking and commercial banking transactions with the
Company or the Subsidiary Guarantors in the ordinary course of business. First
Union National Bank, which is affiliated with the Initial Purchaser First Union
Capital Markets Corp., is a lender under certain warehouse facilities between
First Union National Bank, the Company and certain of the Subsidiary Guarantors,
in respect of which it receives customary fees. See "Description of Other
Indebtedness."
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tenders be
accepted from or on behalf of) holders of Senior Notes in any jurisdiction in
which the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Senior
Notes in such jurisdiction. In any jurisdiction the securities laws or blue sky
laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
93
LEGAL MATTERS
The validity of the Exchange Notes offered hereby, and the Guarantees,
will be passed upon for the Company by Wyche, Burgess, Freeman & Parham, P.A.,
Greenville, South Carolina. As of August 19, 1997, members and attorneys of
Wyche, Burgess, Freeman & Parham, P.A. beneficially owned a total of 403,765
shares of Company common stock.
EXPERTS
The consolidated financial statements of Emergent Group, Inc. as of and
for the year ended December 31, 1996 included and incorporated by reference in
this Prospectus have been audited by KPMG Peat Marwick LLP, independent
certified public accountants. Such financial statements have been included in
reliance upon the report of KPMG Peat Marwick LLP.
The consolidated financial statements of Emergent Group, Inc. as of
December 31, 1995 and for each of the years in the two year period ended
December 31, 1995, included and incorporated by reference in this Prospectus
have been audited by Elliott Davis & Co. LLP, independent certified public
accountants. Such financial statements have been included in reliance upon the
report of Elliott Davis & Co. LLP.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company with the Commission may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon the payment of fees at prescribed
rates.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This Joint Proxy Statement/Prospectus incorporates documents by
reference which are not presented herein or delivered herewith. The Company
will provide without charge to each person, including any beneficial owner,
to whom a copy of this Prospectus is delivered, upon the written or oral
request of any such person, a copy of any document incorporated by
reference herein (other than exhibits to such a document unless such exhibit is
specifically incorporated by reference into such documents). Requests for such
copies should be directed to: Emergent Group, Inc., 15 South Main Street, Suite
750, Greenville, South Carolina 29601, Attn: Chief Financial Officer, telephone
(864) 235-8056.
The following documents, heretofore filed by the Company with the
Commission pursuant to the Exchange Act, are incorporated by reference, except
as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the year ended December 31,
1996; and
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended March 31,
1997, and June 30, 1997.
All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1996 shall be deemed to be incorporated by
reference in this Prospectus and shall be part hereof from the date of filing of
such document. Any statement contained herein or in a document incorporated
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently-filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
94
INDEX TO FINANCIAL STATEMENTS
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996,
AND
THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
CONTENTS
PAGE
Independent Auditors' Report.................................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets..................................... F-3
Consolidated Statements of Income............................... F-5
Consolidated Statements of Shareholders' Equity................. F-6
Consolidated Statements of Cash Flows........................... F-7
Notes to Consolidated Financial Statements...................... F-9
F-1
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
EMERGENT GROUP, INC. AND SUBSIDIARIES
Greenville, South Carolina
We have audited the accompanying consolidated balance sheet of EMERGENT GROUP,
INC. AND SUBSIDIARIES as of December 31, 1996, and the related consolidated
statements of income, 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 EMERGENT GROUP, INC. AND SUBSIDIARIES as of and for the two years
ended December 31, 1995, were audited by other auditors whose report dated
January 31, 1996, expressed an unqualified opinion on those statements.
We conducted our audit 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 consolidated financial position of
EMERGENT GROUP, INC. AND SUBSIDIARIES as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
January 30, 1997
F-2
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
ASSETS
Cash and cash equivalents............................................................... $1,260 $1,276 $2,445
Restricted cash......................................................................... 912 5,319 3,176
Loans receivable:
Loans receivable........................................................................ 103,865 89,469 117,182
Mortgage loans held for sale............................................................ 22,593 100,063 192,881
Total loans receivable.................................................................. 126,458 189,532 310,063
Less allowance for credit losses on loans............................................... (1,874) (3,084) (4,621)
Less unearned discount, dealer reserves, and deferrals, net of deferred loan costs...... (610) (1,419) (3,803)
Net loans receivable.................................................................... 123,974 185,029 301,639
Other receivables:
Accrued interest receivable............................................................. 1,571 2,087 3,225
Other receivables....................................................................... 1,626 4,459 4,280
Total other receivables................................................................. 3,197 6,546 7,505
Investment in asset-backed securities, net of allowance for loss of $773 on
December 31, 1995 and $354 on December 31, 1996, and
$764 on June 30, 1997................................................................... 865 3,581 6,959
Interest-only strip security, net of allowance for loss of $848 on December 31, 1996 and
$5,450 on June 30, 1997................................................................. 2,054 4,315 18,942
Net property and equipment.............................................................. 3,370 7,177 10,348
Excess of cost over net assets of acquired businesses, net of accumulated amortization of
$597 on December 31, 1995, $781 on December 31, 1996 and $876 on June 30, 1997.......... 2,865 2,722 2,627
Real estate and personal property acquired through foreclosure.......................... 3,742 4,720 4,063
Other assets............................................................................ 2,692 3,464 7,284
Total assets............................................................................ $144,931 $224,149 $364,988
F-3
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to banks.................................................................. $31,633 $55,494 $174,353
Subordinated investor savings:
Notes payable to investors.............................................................. 82,132 97,987 105,730
Subordinated debentures................................................................. 16,185 16,115 19,160
Total subordinated investor savings..................................................... 98,317 114,102 124,890
Accounts payable and accrued liabilities................................................ 3,090 3,958 4,262
Remittances payable..................................................................... 1,188 3,519 2,544
Accrued interest payable................................................................ 622 597 1,784
Total other liabilities................................................................. 4,900 8,074 8,590
Total liabilities....................................................................... 134,850 177,670 307,833
Minority interest....................................................................... 196 (156) --
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.05 a share -- authorized 100,000,000 shares, issued
and outstanding 121,000 shares on December 31, 1995, 9,141,131 shares on
December 31, 1996, and 9,643,157 shares on June 30, 1997................................ 6 457 482
Class A common stock, par value $.05 a share -- authorized 6,666,667 shares in 1995 and
- -0- in 1996; issued and outstanding 6,276,474 shares in 1995 and - 0 - shares in 1996... 314 -- --
Capital in excess of par value.......................................................... 6,632 33,150 38,479
Retained earnings....................................................................... 2,933 13,028 18,194
Total shareholders' equity.............................................................. 9,885 46,635 57,155
Total liabilities and shareholders' equity.............................................. $144,931 $224,149 $364,988
See Notes to Consolidated Financial Statements which are an
integral part of these statements.
F-4
EMERGENT GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS,
EXCEPT SHARE DATA)
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
REVENUES:
Interest income........................................ $10,691 $15,193 $17,908 $8,375 $15,024
Servicing income....................................... 212 446 3,274 1,562 3,085
Gain on sale of loans.................................. 6,450 9,169 23,815 7,468 18,107
Management fees........................................ 320 570 514 257 257
Loan fee income........................................ 276 586 4,150 426 13,215
Other revenues......................................... 246 314 727 221 176
Total revenues......................................... 18,195 26,278 50,388 18,309 49,864
EXPENSES:
Interest............................................... 5,879 8,527 11,021 5,576 9,782
Provision for credit losses............................ 2,510 2,480 5,416 1,532 4,671
Salaries, wages and employee benefits.................. 4,001 5,691 13,663 4,321 18,761
Business development costs............................. 626 653 1,603 331 3,018
Other general and administrative expense............... 2,732 4,075 8,224 2,970 9,936
Total expenses......................................... 15,748 21,426 39,927 14,730 46,168
Income from continuing operations before income
taxes and minority interest............................ 2,447 4,852 10,461 3,579 3,696
Provision for income taxes............................. 609 190 718 121 (1,625)
Income from continuing operations before minority
interest............................................... 1,838 4,662 9,743 3,458 5,321
Minority interest in (earnings) loss of subsidiaries... (46) (81) 352 (22) (156)
Income from continuing operations...................... 1,792 4,581 10,095 3,436 5,165
Discontinued transportation and apparel manufacturing
segments:
Gain (loss) from operations, net of income tax......... (2,022) (1,573) -- -- --
Gain (loss) on disposal of segments.................... 2,568 (2,351) -- -- --
Net of income tax...................................... 546 (3,924) -- -- --
NET INCOME............................................. $2,338 $657 $10,095 $3,436 $5,165
Earnings (loss) per share of common stock:
Continuing operations.................................. $0.27 $0.69 $1.42 $0.51 $0.55
Discontinued operations................................ 0.08 (0.59) -- -- --
EARNINGS PER SHARE..................................... $0.35 $0.10 $1.42 $0.51 $0.55
Weighted average shares outstanding.................... 6,688,734 6,668,192 7,099,874 6,727,674 9,318,050
See Notes to Consolidated Financial Statements which are an
integral part of these statements.
F-5
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996
AND
THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
CLASS A CAPITAL
COMMON STOCK COMMON STOCK IN EXCESS OF RETAINED
SHARES ISSUED AMOUNT SHARES ISSUED AMOUNT PAR VALUE EARNINGS
Balance at December 31, 1993.............. 200,575 $10 9,803,438 $490 $6,924 $(62)
Net Income................................ -- -- -- -- -- 2,338
Balance at December 31, 1994.............. 200,575 10 9,803,438 490 6,924 2,276
Shares issued, formerly held by
subsidiary................................ -- -- 24,700 1 15 --
Shares purchased through tender
offer..................................... (19,377) (1) (467,288) (23) (535) --
Shares retired through reverse stock
split..................................... (121,204) (6) (6,242,275) (312) 309 --
Shares issued on exercise of stock
options................................... 506 -- 19,662 1 79 --
Two for one stock split in the form of
a stock dividend.......................... 60,500 3 3,138,237 157 (160) --
Net Income................................ -- -- -- -- -- 657
Balance at December 31, 1995.............. 121,000 6 6,276,474 314 6,632 2,933
Shares issued on exercise of stock
options................................... 2,026 -- 110,668 5 156 --
Conversion of Class A Common Stock to
Common Stock.............................. 6,387,142 319 (6,387,142) (319) -- --
Shares issued on exercise of stock
warrants.................................. 111,932 6 -- -- 288 --
Issuance of Common Stock.................. 2,519,031 126 -- -- 26,074 --
Net income................................ -- -- -- -- -- 10,095
Balance at December 31, 1996.............. 9,141,131 $457 -- $-- $33,150 $13,028
Shares issued on exercise of stock
options (unaudited)....................... 7,831 1 -- -- 20 --
Shares issued in purchase of subsidiary
(unaudited)............................... 494,195 24 -- -- 5,165 --
Contribution of equity interest in
partnership (unaudited)................... -- -- -- -- 144 --
Net Income (unaudited).................... -- -- -- -- -- 5,165
Balance at June 30, 1997 (unaudited)...... 9,643,157 $482 -- $-- $38,479 $18,193
F-6
TOTAL
Balance at December 31, 1993.............. $7,362
Net Income................................ 2,338
Balance at December 31, 1994.............. 9,700
Shares issued, formerly held by
subsidiary................................ 16
Shares purchased through tender
offer..................................... (559)
Shares retired through reverse stock
split..................................... (9)
Shares issued on exercise of stock
options................................... 80
Two for one stock split in the form of
a stock dividend.......................... --
Net Income................................ 657
Balance at December 31, 1995.............. 9,885
Shares issued on exercise of stock
options................................... 161
Conversion of Class A Common Stock to
Common Stock.............................. --
Shares issued on exercise of stock
warrants.................................. 294
Issuance of Common Stock.................. 26,200
Net income................................ 10,095
Balance at December 31, 1996.............. $46,635
Shares issued on exercise of stock
options (unaudited)....................... 21
Shares issued in purchase of subsidiary
(unaudited)............................... 5,189
Contribution of equity interest in
partnership (unaudited)................... 144
Net Income (unaudited).................... 5,165
Balance at June 30, 1997 (unaudited)...... $57,154
See Notes to Consolidated Financial Statements which are an
integral part of these statements.
F-7
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
OPERATING ACTIVITIES:
Net income..................................................... $2,338 $657 $10,095 $3,436 $5,165
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization.................................. 783 938 1,334 496 1,235
Provision for deferred income taxes............................ 343 41 (141) (33) (2,458)
Provision for credit losses.................................... 2,510 2,480 5,416 1,532 4,671
Loss on sale of investments.................................... 66 -- -- -- --
Loss on disposal of property and equipment..................... 5 44 26 -- 14
Net (increase) decrease in deferred loan costs................. -- (171) 145 202 39
Net increase (decrease) in unearned discount and other
deferrals...................................................... 453 (853) 665 835 2,346
Loans originated with intent to sell........................... (73,709) (173,985) (368,650) (137,940) (494,857)
Principal proceeds from loans sold............................. 85,693 144,861 271,858 173,343 175,767
Proceeds from securitization of loans.......................... -- 15,357 30,128 14,102 201,035
Payments to securitization certificate holders for credit
losses......................................................... -- -- (1,155) -- (723)
Increase in overcollateralization from excess spread........... -- -- -- -- (1,329)
Minority interest in earnings (loss) of subsidiaries........... 7 81 (352) 22 156
Changes in operating assets and liabilities
Increasing (decreasing) cash:
Restricted cash................................................ -- (912) (4,407) (2,318) 2,143
Interest only strip security................................... (1,460) (183) (3,109) (472) (14,627)
Accrued interest receivable.................................... (193) (644) (516) 104 (1,110)
Other assets................................................... (101) (964) (4,114) (86) (1,640)
Remittance due loan participants............................... 295 505 2,331 639 (975)
Accrued interest payable....................................... 30 103 (24) 70 1,186
Other liabilities.............................................. 913 877 865 (1,039) 189
Net cash provided by (used in) operating activities of
discontinued operations.............................. (1,253) 1,592 77 77 --
Net cash provided by (used in) operating
activities......................................... $16,720 $(10,176) $(59,528) $52,970 $(123,773)
F-8
EMERGENT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
FOR THE YEARS ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
INVESTING ACTIVITIES:
Loans originated for investment purposes...................... $(74,937) $(74,363) $(68,123) $(54,289) $(62,324)
Principal collections on loans not sold....................... 31,786 50,329 61,868 23,373 57,569
Principal collections on asset-backed securities.............. -- 177 933 421 337
Additional investment in subsidiary........................... -- (359) -- -- --
Purchase of investments....................................... -- (1,000) (135) (115) (83)
Increase in note receivable from former subsidiary............ -- (200) -- -- --
Reduction in goodwill of subsidiary........................... 85 -- -- -- --
Proceeds from sale of short-term investments.................. 581 614 -- -- --
Proceeds from sale of real estate and personal property
acquired through foreclosure.................................. 1,128 3,401 3,383 1,898 3,271
Proceeds from sale of property and equipment.................. -- -- 160 -- 5
Purchase of property and equipment............................ (479) (1,732) (4,894) (1,271) (4,136)
Rent received on real estate acquired through foreclosure..... 87 85 381 76 62
Improvements and related costs incurred on real estate
acquired through foreclosure.................................. (477) (205) (330) (189) (264)
Net cash provided by investing activities of discontinued
operations.................................................... 806 31 -- -- --
Net cash used in investing activities......................... $(41,420) $(23,222) $(6,757) $(30,096) $(5,563)
FINANCING ACTIVITIES:
Advances on notes payable to banks............................ 104,622 179,381 509,118 209,636 535,895
Payments on notes payable to banks............................ (91,839) (164,989) (485,257) (221,008) (417,036)
Net increase in notes payable to investors.................... 13,496 25,635 15,855 9,230 7,743
Net (decrease) increase in subordinated debentures............ (5,826) (4,812) (70) 526 3,046
Payments on long-term debt and capital leases................. (280) (279) -- -- --
Cash paid for stock purchased in tender offer................. -- (568) -- -- --
Proceeds from issuance of additional common stock............. -- 52 26,655 213 857
Other......................................................... (155) (40) -- -- --
Net cash provided by (used in) financing activities........... 20,018 34,380 66,301 (1,403) 130,505
Net increase (decrease) in cash and cash equivalents.......... (4,682) 982 16 21,471 1,169
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 4,960 278 1,260 1,260 1,276
CASH AND CASH EQUIVALENTS, END OF YEAR........................ $278 $1,260 $1,276 $22,731 $2,445
See Notes to Consolidated Financial Statements which are an
integral part of these statements.
F-9
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of June 30, 1997 and for the six-month
periods ended June 30, 1996 and 1997 are unaudited. These financial statements
are prepared in accordance with the Securities and Exchange Commission's ("SEC")
rules regarding interim financial statements and therefore do not contain all
disclosures required by generally accepted accounting principles for annual
financial statements. These financial statements as of June 30, 1997 and for the
six-month periods ended June 30, 1996 and 1997, in management's opinion, contain
all known adjustments which consist only of normal recurring adjustments
necessary to present fairly the financial position, results of operations and
cash flows of the Company.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, each of which is wholly-owned except The Loan Pro$, Inc.
("Loan Pro$") and Sterling Lending Corporation ("Sterling Lending") which are
each 80% owned. All significant intercompany items and transactions have been
eliminated in consolidation.
The Company and its subsidiaries are primarily engaged in the business of
originating, selling and servicing first and second residential mortgage loans,
commercial loans partially guaranteed by the United States Small Business
Administration ("SBA"), commercial loans collateralized by accounts receivable
and inventory, and loans collateralized by pre-owned automobiles. The funds for
these loans are obtained principally through the utilization of various lines of
credit with banks and the issuance of notes payable and subordinated debentures
to investors.
Substantially all of the Company's loans are made to non-prime borrowers. These
borrowers generally have limited access to credit or are otherwise considered to
be credit impaired by conventional lenders.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates. These estimates include, among other things,
anticipated prepayments on loans sold with servicing retained, valuation of real
estate owned, and determination of the allowance for credit losses.
Minority interest represents minority shareholders' proportionate share of the
equity and earnings of Loan Pro$ and Sterling Lending.
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.
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.
INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return.
The Company uses Statement of Financial Accounting Standards ("SFAS") No. 109,
ACCOUNTING FOR INCOME TAXES, which requires accounting for income taxes using
the asset and liability method. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities
F-10
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES -- Continued
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 enacted 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, amortization of intangibles and allowances for
credit losses.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
The Company foreclosed on, or repossessed, property used to collateralize loans
receivable in the amount of $3,362,000 in 1994, $3,955,000 in 1995, $4,452,000
in 1996, and $2,412,000 (unaudited) for the six months ended June 30, 1997.
The Company sold real estate held for sale by issuing loans to the buyers in the
amount of $611,000 in 1994, $689,000 in 1995, $40,000 in 1996, and $0
(unaudited) for the six months ended June 30, 1997.
The Company paid income taxes of $214,000 in 1994, $267,000 in 1995, $322,000 in
1996, and $30,000 and $566,000 (unaudited) for the six months ended June 30,
1996 and 1997, respectively. The Company paid interest of $5,967,000 in 1994,
$8,397,000 in 1995, $11,046,000 in 1996, and $5,506,000 and $8,596,000
(unaudited) for the six months ended June 30, 1996 and 1997, respectively.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is based on management's ongoing evaluation of
the serviced 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 current economic conditions, prior loan loss experience, the
composition of the serviced loan portfolio, and management's estimate of
anticipated credit losses, including obligations relating to loans securitized.
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
possible losses in the serviced 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.
ACCOUNTING FOR IMPAIRED LOANS
When an impaired loan is identified by the portfolio management department of
the Company to have risk characteristics that are unique to an individual
borrower, the Company assesses a specific allowance on a loan-by-loan basis each
month. The general allowance is calculated on a monthly basis using historical
statistics.
Effective January 1, 1995, the Company adopted SFAS 114, ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN. SFAS 114 requires that the allowance for credit losses
for impaired loans (as defined) be 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 adoption of
SFAS 114 had no effect on net income or shareholders' equity.
The Company's policy is to evaluate impaired loans based on the fair value of
the collateral, since all loans originated by the Company are collateral
dependent. Interest income from impaired loans is recorded using the cash
collection method.
F-11
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES -- Continued
REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
Real estate and personal property acquired through foreclosure represent
properties foreclosed upon or repossessed in the normal course of business and
is valued at the lower of cost or fair value, less selling costs. Costs related
to the development and improvement of the properties are capitalized whereas
those costs relating to holding the properties are charged to expense.
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
1994, 1995, 1996, and in the first six months of 1997.
INTEREST INCOME
Interest income on loans receivable is recognized using the interest method.
Accrual of interest is discontinued when a loan is over 90 days past due and the
collateral is determined to be inadequate or when foreclosure proceedings begin.
Loan fees and insurance commissions are amortized into income over the life of
the loan, using the interest method for loans originated for investment
purposes.
GAIN ON SALE OF LOANS
Mortgage loans consist principally of first and second residential mortgages and
are stated at the principal amount outstanding, if held for investment purposes.
Non-refundable loan fees and direct costs associated with the origination or
purchase of loans are deferred and netted against outstanding loan balances.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. Mortgage loans are sold servicing released and on a non-recourse basis,
with customary representations and warranties. In connection with the sale of
mortgage loans, the Company receives cash premiums generally ranging from 4% to
8% of the principal amount of the mortgage loan being sold.
Under the terms of the Company's strategic alliance mortgage banker agreements,
the Company provides funding and secondary marketing activities for its
strategic alliance partners ("Strategic Alliance Partner"). In exchange, the
Strategic Alliance Partners 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 Partner. The terms of these agreements range from 3 to 5
years. In the event the Strategic Alliance Partner terminates the agreement
early, the contract provides for a termination fee equal to, at a minimum, all
of the premium income shared by the Strategic Alliance Partner 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. For the year ended December 31, 1996, two Strategic
Alliance Partners terminated their agreements early. Accordingly, the Company
has recognized $7,337,000 in gain on sale of loans in 1996 relating to these
terminations.
Loans sold through securitizations with servicing retained are sold at or near
par with the Company retaining a participation in the cash flows. Excess
servicing receivable is calculated using prepayments, default, and interest rate
assumptions that market participants would use for similar instruments.
The Company sells participations representing the SBA-guaranteed portion of all
of its SBA Loans (the "SBA Loan Participations") in the secondary market. In
connection with such sales, the Company receives excess servicing revenue and
typically receives a cash premium of approximately 10% related to the guaranteed
portion being sold. In accordance with Emerging Issues Task Force ("EITF")
88-11, a portion of the cash premium received from the sale of the guaranteed
portion of the SBA loan is deferred as an unearned discount against the
remaining unguaranteed portion of the loan based on the relative fair values of
those portions to the total loan and the remainder is recognized as income at
the time of the sale. The resulting unearned discount is accreted into interest
income over the life of the loan using the interest method.
F-12
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES -- Continued
ADVERTISING EXPENSE
Advertising, promotional, and other business development costs are generally
expensed as incurred. External costs incurred in producing media advertising are
expensed the first time the advertising takes place. External costs relating to
direct mailing costs are expensed in the period in which the direct mailings are
sent. Advertising, promotional, and other business development costs of
$626,000, $653,000, $1,603,000, and $3,018,000 (unaudited) were included in the
Company's results of operations for 1994, 1995, 1996, and in the first six
months of 1997, respectively.
STARTUP COSTS
One-time, non-recurring, and incremental out-of-pocket expenditures directly
related to and incurred during the startup phase of geographic expansions are
expensed as incurred. Startup costs of $94,000, $250,000, $3,017,000, and
$4,942,000 (unaudited) were included in the Company's results of operations for
1994, 1995, 1996, and in the first six months of 1997, respectively.
REMITTANCES PAYABLE AND SERVICING FEE INCOME
The Company retains the servicing rights on SBA guaranteed loan participations
sold in the secondary market, for which it earns monthly a minimum of 1% of the
outstanding principal balance. The Company receives the payments from the
borrowers and records the portion relating to the sold participation as a
liability. The participation portion is remitted to Colson Services Corp., the
exclusive Fiscal and Transfer Agent for the guaranteed portion of SBA loans sold
in the secondary market, by the 3rd business day of the following month.
The Company also retains the servicing rights on its securitization
transactions. The Company receives the payments from the borrowers and records a
liability until the funds are remitted to the Trustee.
MANAGEMENT FEES
The Company serves as investment manager for a venture capital fund for which it
receives management fees. The Company recognizes the management fees on the
accrual basis.
INTEREST-ONLY AND RESIDUAL CERTIFICATES
The Company sells or securitizes a substantial portion of the loans that it
originates or purchases. The Company derives a substantial portion of its income
by recording a gain on sale when loans are securitized. In a securitization, the
Company receives as an investment the interest-only and residual certificates
created as a result of such securitization. The Company calculates the value of
its interest-only and residual certificates based upon their fair values. The
fair value of these assets is determined based on various economic factors,
including loan types, balances, interest rates, dates of origination, terms, and
geographic locations. The Company also uses reports on prepayment rates,
interest rates, collateral value, economic forecasts and historical default and
prepayment rates of the portfolio under review. The Company estimates the
expected cash flows that it will receive over the life of a portfolio of loans.
These expected cash flows constitute the excess of the interest rate payable by
the obligors of the loans over the interest rate passed through to the
purchasers of the related securities, less applicable recurring fees and credit
losses. The Company discounts the expected cash flows using an interest rate
that market participants would use for similar financial instruments. The
interest-only strip security is amortized on a loan by loan basis against
servicing income over the life of the loan using the interest method. SEE NOTE
4.
BORROWER COMMITMENT DEPOSITS
The Company generally receives a commitment deposit from its applicants for SBA
loans prior to closing. The commitment deposits are recorded as a liability when
received, and are reduced for any direct expenses incurred and paid to a third
party in making the loan. Any deposit in excess of these direct expenses is
refunded to the borrower at the time of, or subsequent to, the loan closing.
Borrower commitment deposits are included in accrued liabilities.
F-13
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. SIGNIFICANT ACCOUNTING POLICIES -- Continued
EARNINGS PER SHARE
The Company's shareholders approved a one-for-three reverse split of the
Company's Common and Class A Common Stock in June 1995. Effective January 29,
1996, the Company declared a two-for-one stock split effected in the form of a
100% stock dividend on the Common Stock and Class A Common Stock. The weighted
average number of shares of Common and Class A Common Stock have been restated
for all periods presented to reflect these stock splits.
In 1996, the Company's shareholders approved the conversion of all Class A
Common Stock to Common Stock on a one-for-one basis. Accordingly, at December
31, 1996, there was no Class A Common Stock outstanding.
Earnings per share are based on the weighted average number of common shares
outstanding during the year, adjusted for the assumed conversion of dilutive
stock options and warrants. In computing the per share effect of assumed
conversion, funds which would have been received from the exercise of options
and warrants are considered to have been used to purchase common shares at
current market prices, and the resulting net additional common shares are
included in the calculation of average common shares outstanding.
Earnings per share is computed on the weighted average number of shares of
Common Stock and Class A Common Stock and common stock equivalents outstanding
during each year.
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.
2. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
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,
1995, 1996, and June 30, 1997, the amounts maintained in the overnight
investments in reverse repurchase agreements, which are not insured by the FDIC,
totaled $791,000, $282,000, and $737,000 (unaudited), respectively. These
investments were collateralized by U.S. Government securities pledged by the
banks. The Company also maintains cash collateral and collection accounts with a
trustee in connection with its securitizations. These accounts are shown as
restricted cash, and are invested in overnight investments or short-term U.S.
Treasury securities.
F-14
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE
The following is a summary of loans receivable by type of loan, including
mortgage loans held for sale (in thousands):
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Mortgage Loans:
First mortgage residential property..................................................... $72,995 $107,246 $133,813
Second mortgage residential property.................................................... 6,683 28,090 99,075
Real estate loans on rental property.................................................... 3,867 894 4,171
Construction loans...................................................................... 2,934 5,038 5,107
Total mortgage loans.................................................................... 86,479 141,268 242,166
Commercial Loans:
Guaranteed portion of SBA loans......................................................... 11,045 9,662 9,376
Unguaranteed portion of SBA loans....................................................... 7,110 10,503 13,830
Commercial loans secured by real estate................................................. 1,782 2,253 1,654
Asset-Based commercial lending.......................................................... -- 6,967 14,631
Mezzanine lending....................................................................... -- -- 5,000
Total commercial loans.................................................................. 19,937 29,385 44,491
Automobile loans........................................................................ 17,673 13,915 17,680
Other loans............................................................................. 2,369 4,964 5,726
Total loans receivable.................................................................. $126,458 $189,532 $310,063
Notes receivable from related parties of $363,000, $1,069,000 at December 31,
1995 and 1996, respectively, are included in the above table. Notes receivable
from related parties included advances of $261,000 in 1995 and $736,000 in 1996,
and repayments of $67,000 in 1995 and $30,000 in 1996.
First mortgage residential loans generally have contractual maturities of 12 to
360 months with an average interest rate at December 31, 1995 and 1996 of
approximately 12%. Second mortgage residential loans generally have contractual
maturities of 12 to 360 months with an average interest rate at December 31,
1995 and 1996 of approximately 15%. Construction loans generally have
contractual maturities of 12 months with an average interest rate at December
31, 1995 and 1996 of approximately 12%. SBA loans range in maturity from 7 years
to 25 years depending on the use of proceeds. Interest rates on SBA loans are
variable, adjusted on the first day of each calendar quarter and are generally
prime plus 2.75%. The average interest rate at December 31, 1995 and 1996 for
SBA loans was 10% and 10.5%, respectively. Asset-Based commercial loans
generally are due on demand and have average interest rates, including fees, of
approximately 24%. Automobile loans have maturities generally not exceeding 60
months with fixed interest rates averaging 28% in 1995 and 27% in 1996. At
December 31, 1995, 1996, and June 30, 1997 approximately $3,950,000 (net of an
allowance for impaired loans of $73,000), $3,334,000 (net of an allowance for
impaired loans of $576,000), and $5,059,000 (unaudited) (net of an allowance for
impaired loans of $1,246,000) (unaudited), respectively, of loans receivable
were impaired. Impaired loans are considered to be those loans for which it is
probable that the Company will be unable to collect all amounts due according to
original contractual terms of the loan agreement, based on current information
and events.
Loans sold and serviced for others at December 31, 1995, 1996, and June 30, 1997
were approximately $88,077,000, $119,541,000, and $326,856,000 (unaudited)
respectively, and are not included in assets in the accompanying balance sheets.
At December 31, 1995, 1996, and June 30, 1997, mortgage loans totaling
$9,890,000, $56,901,000, and $52,785,000, (unaudited) respectively, had been
sold but not settled, and accordingly are included in the accompanying balance
sheet in mortgage loans held for sale. At December 31, 1995, 1996, and June 30,
1997, guaranteed portions of SBA loans totaling $5,400,000, $4,387,000, and
$6,811,000 (unaudited) respectively, had been sold but not settled, and
accordingly are included in the accompanying balance sheet in loans receivable.
F-15
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE -- Continued
The Company's portfolio of commercial loans receivable is diversified by
industry type. The Company's serviced commercial loan portfolio consisted of
loans to small businesses in the following industries (in thousands):
DECEMBER 31, 1996 JUNE 30, 1997
(UNAUDITED)
Limited service lodging........................................... $40,861 29.02% $51,312 30.20%
Services.......................................................... 23,869 16.95% 38,130 22.44%
Retail trade...................................................... 33,573 23.84% 35,482 20.88%
Manufacturing..................................................... 19,478 13.83% 21,844 12.86%
Wholesale distribution............................................ 10,527 7.48% 11,072 6.52%
Other............................................................. 12,501 8.88% 12,051 7.10%
$140,809 100.00% $169,891 100.00%
The Company's serviced loan portfolio at December 31, 1996, consisted of loans
to borrowers in the following states (in thousands):
MORTGAGE COMMERCIAL AUTO TOTAL PERCENT
South Carolina..................................................... $64,763 $24,169 $21,480 $110,412 35.72%
North Carolina..................................................... 29,279 5,399 195 34,873 11.28%
Florida............................................................ 4,410 24,415 39 28,864 9.34%
Colorado........................................................... 2,201 18,039 2 20,242 6.55%
Indiana............................................................ 7,210 -- 4 7,214 2.33%
Louisiana.......................................................... 5,088 3,608 8 8,704 2.82%
Kansas............................................................. -- 18,682 -- 18,682 6.04%
Georgia............................................................ 8,217 18,040 129 26,386 8.54%
Texas.............................................................. 42 5,353 13 5,408 1.75%
Michigan........................................................... 8,840 -- 2 8,842 2.86%
Tennessee.......................................................... 6,143 -- 34 6,177 2.00%
Other.............................................................. 10,038 23,104 127 33,269 10.77%
Total.............................................................. $146,231 $140,809 $22,033 $309,073 100.00%
The Company's serviced loan portfolio at June 30, 1997, consisted of loans to
borrowers in the following states (unaudited) (in thousands):
MORTGAGE COMMERCIAL AUTO TOTAL PERCENT
South Carolina..................................................... $119,165 $29,580 $21,832 $170,577 26.78%
Florida............................................................ 40,134 28,462 57 68,653 10.78%
North Carolina..................................................... 55,901 5,545 229 61,675 9.68%
Georgia............................................................ 34,019 24,142 223 58,384 9.17%
Colorado........................................................... 7,249 22,783 1 30,033 4.72%
Tennessee.......................................................... 22,625 3,712 17 26,354 4.14%
Michigan........................................................... 20,806 2,653 8 23,467 3.68%
Louisiana.......................................................... 19,493 3,705 5 23,203 3.64%
Indiana............................................................ 23,087 -- -- 23,087 3.62%
Virginia........................................................... 17,454 4,469 33 21,956 3.45%
Kansas............................................................. -- 17,588 -- 17,588 2.76%
Mississippi........................................................ 12,231 1,649 2 13,882 2.18%
Maryland........................................................... 12,636 76 11 12,723 2.00%
Other.............................................................. 59,672 25,527 138 85,337 13.40%
Total.............................................................. $444,472 $169,891 $22,556 $636,919 100.00%
F-16
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE -- Continued
An analysis of the allowance for credit losses is as follows (in thousands):
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1997
(UNAUDITED)
Balance at beginning of period.................................................. $952 $1,730 $2,647 $4,286
Provision for credit losses..................................................... 2,510 2,480 5,416 4,671
Provision netted against gain on securitizations................................ -- -- -- 4,767
Net charge offs................................................................. (1,732) (1,563) (3,777) (2,889)
Balance at end of period........................................................ $1,730 $2,647 $4,286 $10,835
The total allowance for credit losses and recourse obligations as shown on the
balance sheet is as follows (in thousands):
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Allowance for credit losses on loans......................................................... $1,874 $3,084 $4,621
Allowance for losses on interest-only strip security......................................... -- 848 5,450
Allowance for losses on asset-backed securities.............................................. 773 354 764
Total allowance for credit losses............................................................ $2,647 $4,286 $10,835
As of December 31, 1994, 1995, and 1996, loans totaling $1,433,000, $5,145,000,
and $4,922,000, respectively, were on non-accrual status. The associated
interest income not recognized on these non-accrual loans was approximately
$45,000 during 1994, $164,000 during 1995 and $593,000 during 1996.
4. INTEREST-ONLY STRIP SECURITY
The activity in the interest-only strip security is summarized as follows (in
thousands):
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
1994 1995 1996 1997
(UNAUDITED)
Gross balance, beginning of period................................................ $412 $1,872 $2,054 $5,163
Additional gain on sale of loans, before considering estimated losses and
transaction costs................................................................. 1,942 1,095 4,770 19,795
Amortization against servicing revenues........................................... (482) (913) (1,661) (566)
Gross balance, end of period...................................................... 1,872 2,054 5,163 24,392
Less allowance for losses interest-only strip security............................ -- -- (848) (5,450)
Interest-only strip security, net................................................. $1,872 $2,054 $4,315 $18,942
The weighted average interest rate inherent in the carrying value of the
interest-only strip security is 10% at December 31, 1996 and 12% (unaudited) at
June 30, 1997. During 1994, the Company changed its estimated normal servicing
rate for its SBA loans to more closely reflect the industry standard in
accordance with Emerging Issues Task Force Consensus 94-9. The effect of this
change was to increase 1994 income by approximately $490,000.
The carrying value of the interest-only strip security approximates fair value.
The allowance represents potential credit losses in the securitized pool, which
may be incurred by the Company as a result of its investment being subordinate
to the interests of the Class A certificate holders.
F-17
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INTEREST-ONLY STRIP SECURITY -- Continued
Beginning in the first quarter of 1997, the Company began securitizing a
substantial portion of its Mortgage Loans. The following sets forth facts and
assumptions used by the Company in arriving at the gain on sale relating to its
Mortgage Loan securitizations:
MARCH 1997 JUNE 1997
Loans securitized............................................................................ $77,526,090 $121,214,000
Average stated principal balance............................................................. 63,288 63,190
Weighted average original term to stated maturity............................................ 209 months 200 months
Weighted average coupon on loans............................................................. 11.01% 10.80%
Weighted average LTV......................................................................... 80.62 75.94
% of first mortgage loans.................................................................... 100.00 100.00
% secured by primary residence............................................................... 98.60 98.80
Weighted average pass-through rate to bondholders............................................ 7.40 7.06
Spread of pass-through rate over comparable treasury rate.................................... 0.89 0.78
Estimated annual losses...................................................................... 0.50 0.50
Annual servicing fee......................................................................... 0.50 0.50
Discount rate implicit in cash flow before overcollateralization............................. 26.00 22.00
Discount rate applied to cash flow after overcollateralization............................... 12.00 12.00
Discount rate applied to losses.............................................................. 0.00 0.00
Annual wrap fee and trustee fee.............................................................. 0.285 0.205
Initial overcollateralization (1)............................................................ 3.25 0.00
Final overcollateralization (1).............................................................. 6.50 3.75
Prepayment speed (2)......................................................................... 18 HEP 18 HEP
(1) Based on percentage of original principal balance, subject to step-down
provisions after 30 months.
(2) Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The variable the Company used in its securitization model to
indicate rate at prepayment was Home Equity Prepayment ("HEP"). For example 18
HEP assumes that the pool of loans prepays in the first month at a constant
prepayment rate of 1.8% and increases by an additional 1.8% each month
thereafter until the tenth month, where it remains at constant annual prepayment
rate equal to 18% (the "Prepayment Assumption"). HEP represents an assumed
annualized rate of prepayment relative to the then outstanding principal balance
on a pool of new mortgage loans.
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.
5. INVESTMENT IN ASSET-BACKED SECURITIES
In March 1997 and June 1997, the Company securitized $77,500,000 (unaudited) and
$121,200,000 (unaudited), respectively, of its Mortgage Loans. In June 1995 and
November 1996, the Company securitized $17,063,000 and $12,851,000,
respectively, of the unguaranteed portions of its SBA loans. In March of 1996,
the Company securitized $16,107,000 of its auto loans. The securitizations were
effected through a grantor trust (the "Trust"), the ownership of which was
represented by Class A, Class B, and Class R certificates. The Class A
certificates were purchased by investors, while the Company retained the Class B
and Class R certificates. The Company classifies its Class B and Class R
certificates as trading securities under SFAS 115, and they are carried at fair
market value. The Class B certificates and the overcollateralization component
of the Class R certificates are carried on the balance sheet as asset-backed
securities in the net amount of $865,000, $3,581,000, and $6,959,000 (unaudited)
at December 31, 1995, 1996, and June 30, 1997, respectively. This amount is net
of an allowance for credit losses of $773,000, $354,000, and $764,000
(unaudited) at December 31, 1995, 1996, and June 30, 1997, respectively. The
allowance represents potential credit losses in the securitized pool, which may
be incurred by the Company as a result of its investment being subordinate to
the interests of the Class A certificate holders. These certificates give the
holders thereof
F-18
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. INVESTMENT IN ASSET-BACKED SECURITIES -- Continued
the right to receive payments and other recoveries attributable to the mortgage
loans, unguaranteed portion of SBA loans, and auto loans held by the respective
Trust. In the event that payments received by the Trusts are not sufficient to
pay certain expenses of the Trusts and the required principal and interest
payments due on the Class A certificates, the Company, as holder of the Class B
and Class R certificates, would not be entitled to receive principal or interest
payments due thereon. Although securitizations provide liquidity, the Company
has utilized securitizations principally to provide a lower cost of funds and to
reduce interest rate risk. The Company serves as master servicer for the Trusts
and, accordingly, forwards payments received on account of the loans held by the
Trust to the trustee, which, in turn, pays the holders of the certificates in
accordance with the terms of and priorities set forth in the securitization
documents. Because the transfers of the loans to the Trusts constituted sales of
the underlying loans, no liability was created on the Company's Consolidated
Financial Statements. However, the Company has the obligation to repurchase
individual loans from the Trusts in the event that certain representations made
with respect to that transferred loan is breached or in the event of certain
defaults by the Company, as master servicer. In connection with the SBA and auto
loan securitizations, the Company received cash proceeds, net of securitization
costs, of $15,357,000 and $30,128,000 in 1995 and 1996, respectively. The 1996
SBA securitization transaction included a prefunding account of approximately
$4,649,000, for which additional loans could be placed into the Trust prior to
January 31, 1997. On January 23, 1997, loans totaling $4,626,000 were placed
into the trust, for which the Company received proceeds of $4,626,000 and a
retained interest in Class B certificates of $416,000. The Company received
proceeds of $196,408,000 (unaudited) in the first six months of 1997 relating to
its mortgage loan securitizations.
6. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment (in thousands):
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Land........................................................................................ $228 $279 $279
Buildings and leasehold improvements........................................................ 1,162 1,279 1,548
Equipment................................................................................... 264 4,345 6,565
Furniture and fixtures...................................................................... 2,673 2,766 4,216
Vehicles.................................................................................... -- 206 353
Total property and equipment................................................................ 4,327 8,875 12,961
Less accumulated depreciation............................................................... (957) (1,698) (2,613)
Net property and equipment.................................................................. $3,370 $7,177 $10,348
Depreciation expense was $694,000, $769,000, $901,000, and $947,000 (unaudited)
in 1994, 1995, 1996, and for the six months ended June 30, 1997, respectively.
7. REAL ESTATE AND PERSONAL PROPERTY ACQUIRED THROUGH FORECLOSURE
An analysis of real estate and personal property acquired through foreclosure is
as follows (in thousands):
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Balance at beginning of period.............................................................. $3,603 $3,742 $4,720
Loan foreclosures and improvements.......................................................... 4,160 4,782 2,676
Dispositions, net........................................................................... (4,021) (3,804) (3,333)
Balance at end of period.................................................................... $3,742 $4,720 $4,063
F-19
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. NOTES PAYABLE TO BANKS
Notes payable to banks are summarized as follows:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
(IN THOUSANDS)
A. Notes payable under revolving credit agreements, with interest at the fed funds rate +
1.875% (7.30% at June 30, 1997) maturing March 19, 1998................................... $6,892 $46,774 $139,827
B. Notes payable under lines of credit, with interest at the bank's prime rate plus 3/4%
(9.25% at June 30, 1997) maturing December 19, 1997....................................... 9,911 -- 6,140
C. Notes payable under lines of credit, with interest at the bank's prime rate (8.50% at
June 30, 1997) maturing December 29, 2000................................................. 14,830 8,720 28,386
$31,633 $55,494 $174,353
A. At June 30, 1997, under the terms of revolving credit agreements, the
mortgage lending subsidiaries of the Company may borrow up to a maximum of
$345,000,000, with $200,000,000 at the federal funds rate plus 1.875% payable
monthly, $125,000,000 at LIBOR plus 1.45% payable monthly, and $20,000,000 at
the bank's prime rate payable monthly. The $125,000,000 facility was
subsequently increased to $175,000,000 in July 1997. The notes are
collateralized by loans receivable. The agreements require, among other matters,
a specified debt to net worth ratio, a minimum tangible net worth and
limitations on the payment of dividends. Management believes the Company is in
substantial compliance with such restrictive covenants. The revolving credit
agreements mature on September 30, 1997 and March 19, 1998. At December 31, 1996
and June 30, 1997, $14,232,000 and $30,100,000 (unaudited), respectively, were
available under these lines of credit.
B. At December 31, 1996, under the terms of the lines of credit, the automobile
lending subsidiaries of the Company could borrow up to a maximum of $26,000,000
with interest at the bank's prime rate plus 0.75% payable monthly. Subsequent to
December 31, 1996, the maximum borrowings were limited to $6,500,000, then
increased to $8,000,000 in August 1997. The notes are collateralized by loans
receivable. The terms of the agreements state that advances under the lines of
credit cannot exceed 85% of the aggregate unpaid principal balance of
outstanding notes receivable, which are no more than sixty days past due. This
advance rate is reduced based on delinquency and loss levels. At December 31,
1996 and June 30, 1997, $9,778,000 and $360,000 (unaudited), respectively, were
available under these line of credits.
At December 31, 1996, the agreements required, among other matters, minimum debt
to tangible net worth ratios, minimum interest coverage ratios, minimum loss
reserves, maximum debt to borrowing base restrictions, and restrictions on the
payment of dividends. At December 31, 1996, one of the Company's automobile
lending subsidiaries exceeded the maximum delinquency levels permitted. In
addition the Company's automobile lending subsidiaries were also in violation of
the minimum interest coverage ratio. At December 31, 1996, the Bank had provided
a waiver to the Company's automobile lending subsidiaries for the above
violations, and subsequently amended the agreements to delete these covenants.
These agreements mature on December 19, 1997.
C. Under the terms of the lines of credit, the commercial lending subsidiaries
of the Company may borrow up to a maximum of $50,000,000 with interest at the
bank's prime rate. The lines are limited to 100% of the outstanding balance of
the guaranteed portion of SBA 7(a) loans, 80% of the outstanding balance of the
unguaranteed portion of SBA 7(a) loans, 80% of asset-based loans, and 80% of SBA
504 loans as defined in the loan agreements. The agreements require, among other
matters, minimum tangible net worth ratios, maximum ratios of total liabilities
to tangible net worth, minimum interest coverage ratios, limitations on the
amount of capital expenditures in any fiscal year, and restrictions on the
payment of dividends. Management believes the Company is in substantial
compliance with such restrictive covenants. At December 31, 1996 and June 30,
1997, $13,662,000 and $2,853,000 (unaudited), respectively, were available under
these lines of credit. These agreements mature on December 29, 2000.
F-20
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. NOTES PAYABLE TO BANKS -- Continued
Annual aggregate maturities of notes payable at December 31, 1996 are as follows
(in thousands):
1997................................................. $46,774
1998................................................. 8,720
$55,494
9. SUBORDINATED INVESTOR SAVINGS
Subordinated investor savings are summarized as follows:
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
(IN THOUSANDS)
A. Notes payable to investors............................................................ $82,132 $97,987 $105,730
B. Subordinated debentures............................................................... 16,185 16,115 19,160
$98,317 $114,102 $124,890
A) Notes payable to investors are issued by a subsidiary company, Carolina
Investors, Inc. ("CII"), in any denomination greater than $10,000 and are
registered under the South Carolina Uniform Securities Act. 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 7% to 9% at December 31, 1995, and
5% to 9% at December 31, 1996 and June 30, 1997. The notes are subordinated to
all bank debt, and are senior to the subordinated debentures.
B) 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 normally mature in one year from date of issuance and
have an interest rate ranging from 5% to 6% quarterly. The debentures are
subordinated to all bank debt and notes payable to investors.
At December 31, 1995, 1996, and June 30, 1997, notes payable to investors and
subordinated debentures include an aggregate of approximately $17,080,000,
$21,039,000, and $24,092,000 (unaudited), respectively, of individual
investments exceeding $100,000.
The investor savings at December 31, 1996 mature as follows (in thousands):
1997............................................................... $110,441
1998............................................................... 3,648
1999............................................................... 13
$114,102
10. LEASES
The Company leases various property and equipment, office space and automobiles
under operating leases.
F-21
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. LEASES -- Continued
The following is a schedule by year of future minimum rental payments for all
operating leases that have initial or remaining noncancellable terms in excess
of one year (in thousands):
1997................................................................ $1,689
1998................................................................ 1,433
1999................................................................ 1,144
2000................................................................ 892
2001................................................................ 615
2002................................................................ 15
$5,788
Total rental expense was approximately $974,000 in 1994, $901,000 in 1995, and
$843,000 in 1996.
11. MANAGEMENT AGREEMENTS
The Company manages a venture capital fund and a mezzanine level fund. The
Company receives management fees equal to two and one-half percent of the total
assets under management in each fund with a current aggregate minimum management
fee of $445,000 annually. The Company received management fees of $320,000,
$570,000, $514,000, and $257,000 (unaudited) from the managed funds during 1994,
1995, 1996, and for the six months ended June 30, 1997, respectively. The
Company may also receive incentive management fees of 15% and 20%, respectively,
from the managed funds of the net portfolio profits of each managed fund, as
defined.
The Company was the general partner of the mezzanine fund and, during 1995, made
a $1,000,000 investment into the partnership. The Company purchased the
remaining interests in this partnership, which has significant common principals
with the Company, on June 30, 1997.
12. SHAREHOLDERS' EQUITY
The Company has one class of capital stock: Common Stock.
On May 21, 1981, the shareholders approved a stock option plan and on May 22,
1984, the shareholders approved an increase in the number of shares of common
stock for which options 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 options are available for grant
under this stock option plan, and there are 89,342 unexercised options
outstanding at December 31, 1996, of which 8,672 are exercisable.
On June 9, 1995, the shareholders approved a stock option plan under which the
Board of Directors may issue option to purchase 566,668 shares of common stock.
Under the terms of the plan, the Company may grant options to key employees to
purchase up to a total of 566,668 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 five to 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 152,667 common stock options at December 31,
1996, and there are 391,636 unexercised options outstanding at December 31,
1996, of which 88,303 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
F-22
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SHAREHOLDERS' EQUITY -- Continued
26,673 common stock options at December 31, 1996, and there are 6,660
unexercised options outstanding at December 31, 1996, of which 1,998 are
exercisable.
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 which 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, 1996,
there were 10,500 options granted under this plan. 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 Company offered to buy from the shareholders up to 1,000,000 shares of
common stock for the period March 31, through May 8, 1995 at a price of $1.15
per share. As a result of this offer, the Company purchased 486,665.34 shares of
common stock at an aggregate cost of approximately $560,000.
On June 9, 1995 the shareholders of the Company approved a one-for-three reverse
split of the Common Stock. The certificates for previously issued common stock
were canceled and were forfeited by the holder in order for the holder to
receive replacement certificates for the after reverse split shares. The
shareholders also authorized the increase of post reverse split authorized
shares of common stock to 4,000,000 shares. The Company issued to all
shareholders certificates for one-third of their common shares as of June 9,
1995, upon the shareholder presenting their existing shares. No fractional
shares were issued as a result of the one-for-three reverse stock split. All
fractional shares were redeemed at an equivalent price of $1.25 per share.
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 shares.
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, as the Company's common stock was listed on the
NASDAQ Stock Market's National Market under the trading symbol, "EMER." 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.
F-23
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SHAREHOLDERS' EQUITY -- Continued
Activity in stock options is as follows:
YEARS ENDED DECEMBER 31,
1994 1995 1996
Options outstanding, beginning of year....................................... 133,333 140,000 339,000
Issued at:...................................................................Date of Grant
$1.0825 per share............................................................ 2-17-94..... 40,000 -- --
$l.32 per share.............................................................. 1-13-95..... -- 80,006 --
$4.625 per share............................................................. 10-31-95.... -- 124,000 --
$5.09 per share.............................................................. 10-31-95.... -- 32,000 --
$9.435 per share............................................................. 12-18-95.... -- 2,664 --
$10.38 per share............................................................. 12-18-95.... -- 666 --
$12.25 per share............................................................. 11-11-96.... -- -- 258,000
$11.25 per share............................................................. 12-15-96.... -- -- 3,330
Total Granted................................................................ 40,000 239,336 261,330
Exercised:
Expired or canceled.......................................................... (33,333) -- --
$1.0825 per share............................................................ -- (29,800) (74,197)
$1.32 per share.............................................................. -- (1,336) (29,335)
$4.625 per share............................................................. -- (3,200) (9,160)
$5.09 per share.............................................................. -- (6,000) --
Total exercised, expired or canceled......................................... (33,333) (40,336) (112,692)
Options outstanding, end of year............................................. 140,000 339,000 487,638
Exercisable, end of year..................................................... 56,000 83,532 98,973
Available for grant, end of year............................................. 82,667 440,671 179,340
At December 31, 1995, 121,742 warrants were outstanding; 111,932 of these
warrants were exercised during 1996 for $2.625 per share. The remaining warrants
expired as of December 31, 1996. No warrants are outstanding at December 31,
1996.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION." Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 1995 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:
1995 1996
(IN THOUSANDS,
EXCEPT
PER SHARE DATA)
Net income -- as reported.............................................................. $657 $10,095
Net income -- pro forma................................................................ 616 9,875
Earnings per share -- as reported...................................................... 0.10 1.42
Earnings per share -- pro forma........................................................ 0.09 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:
dividend yield of 0%, expected volatility of 45.0%; risk-free interest rate of
approximately 6.3%, and expected lives of 3 years. The proforma amounts
disclosed above may not be representative of the effects on reported net income
for future periods.
F-24
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. SHAREHOLDERS' EQUITY -- Continued
The Company implemented an Employee Stock Purchase Plan ("ESPP") in 1997. The
ESPP allows eligible employees the right to purchase common stock on a
semi-annual basis at 85% of the lower of the market price at the beginning or
ending of each six-month offering period. The ESPP operates on a calendar basis
beginning February 1, 1997. A liability will be recorded for ESPP withholdings
not yet applied towards the purchase of common stock. The Company's Board of
Directors and shareholders have approved the reservation of 200,000 shares to be
issued under the ESPP.
13. SALE OF SUBSIDIARY
In connection with the Company's strategic plan to focus its business efforts on
financial services, the Company divested its apparel segment operations, which
was comprised solely of the operations of Young Generations, Inc. ("YGI"). On
September 30, 1995, the Company sold all of the outstanding stock (the "stock
sale") of YGI to fifteen individuals (the "Buyers"), who were members of YGI's
management team. As a result, the loss on the sale of the stock and operating
results of the apparel segment have been classified as discontinued operations.
The results of operations for 1994 have been restated to exclude the Apparel
Manufacturing segment from continuing operations.
The Company sold the stock for $600,000 under a non-recourse promissory note
from the buyers. As a result of the sale, the Company wrote-off all amounts due
from YGI resulting in a charge of $3,580,300, net of income taxes of $67,700,
reported as a loss from discontinued operations. The Company remains
contingently liable for the guaranty of certain bank loans and trade accounts
payable which at June 30, 1997 totaled $384,000. In 1996 and 1997, the Company
loaned additional amounts to YGI, $750,000 of which remained outstanding at June
30, 1997. The Company does not anticipate loaning more than an additional
$50,000 to YGI in the future. Management does not anticipate any significant
charges to future earnings as a result of these guarantees and loans to YGI.
The apparel segment, which consists solely of the operations of YGI, had net
losses of $31,000 in 1994 and $1.3 million for the nine months ended September
30, 1995. The net loss in 1994 was decreased by the receipt of $1.25 million in
life insurance proceeds due to the death of YGI's president. YGI had revenues of
$12.2 million in 1994 and $7.3 million for the nine months ended September 30,
1995.
14. DISCONTINUED OPERATIONS
The Company's operations in the Apparel and Transportation segments were
discontinued during 1995. The sale of the apparel segment is discussed further
in Note 13. In July 1994 the Company sold an operating railroad for $940,000. In
connection with this sale, the Company received $20,000 cash, and a note
receivable of $920,000, payable in semi-annual payments over five years, with an
interest rate of 10%. In November 1994, the Company assigned the rights to
boxcars in a lease with a Class I railroad for $1,174,000 cash. The Company sold
additional railcars in June 1995 for $111,000 cash.
At December 31, 1995, the Company had remaining net assets in the transportation
segment of $77,000, the majority of which the Company sold during 1996.
The results of operations for 1994 have been restated to exclude these segments
from continuing operations.
Revenues applicable to the discontinued operations were:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Apparel manufacturing........................................................... $12,140 $7,263 $--
Transportation.................................................................. 1,407 390 --
F-25
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. DISCONTINUED OPERATIONS -- Continued
Income from operations and gain (loss) on disposal attributable to the
discontinued segments is reported net of income tax expense of:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Apparel manufacturing............................................................ $(158) $(22) $--
Transportation................................................................... 306 (53) --
Net assets of discontinued operations were comprised of the following:
DECEMBER 31,
1995 1996
(IN THOUSANDS)
Assets:
Property and equipment, net.................................................................. $153 $--
Other assets................................................................................. 80 --
233 --
Liabilities:
Other liabilities............................................................................ 156 --
Net assets of discontinued operations........................................................ $77 $--
Gain (loss) from operations, net of income tax, consists of the following:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Apparel manufacturing segment.................................................. $(1,949) $(1,253) $--
Transportation segment......................................................... (73) (320) --
$(2,022) $(1,573) $--
Gain (loss) on disposal of segments, net of income taxes, consists of the
following:
YEARS ENDED DECEMBER 31,
1994 1995 1996
(IN THOUSANDS)
Apparel manufacturing segment.................................................. $-- $(2,324) $--
Transportation segment......................................................... 2,568 (27) --
$2,568 $(2,351) $--
F-26
15. INCOME TAXES
Total income tax expense was allocated as follows (in thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
Income from continuing operations........................................... $609 $190 $718 $121 $(1,625)
Discontinued operations..................................................... 148 (75) -- -- --
$757 $(115) $718 $121 $(1,625)
F-27
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. INCOME TAXES -- Continued
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 and minority interest are as follows (in thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
Statutory Federal rate of 34% applied to
pre-tax income from continuing operations
before minority interest.................................................. $832 $1,650 $3,557 $1,220 $1,256
State income taxes, net of federal
income tax benefit........................................................ 311 3 350 36 81
Change in the beginning of the year balance
of the valuation allowance for deferred
tax assets allocated to income tax expense................................ (630) (1,566) (3,229) (1,181) (3,059)
Alternative Minimum Tax on proceeds from
life insurance............................................................ 25 -- -- -- --
Nondeductible expenses.................................................... 3 5 17 5 34
Amortization of excess cost over net assets
of acquired businesses.................................................... 69 62 64 22 33
Other, net................................................................ (1) 36 (41) 19 28
$609 $190 $718 $121 $(1,625)
Provision (benefit) for income taxes from continuing operations is comprised of
the following (in thousands):
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
1994 1995 1996 1996 1997
(UNAUDITED)
Current
Federal.................................................................... $117 $100 $199 $88 $260
State and local............................................................ 149 49 660 66 573
266 149 859 154 833
Deferred
Federal.................................................................... 242 27 (11) (22) (2,008)
State and local............................................................ 101 14 (130) (11) (450)
343 41 (141) (33) (2,458)
Total
Federal.................................................................... 359 127 188 66 (1,748)
State and local............................................................ 250 63 530 55 123
$609 $190 $718 $121 $(1,625)
F-28
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
15. 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
carryforwards. The tax effects of significant items comprising the Company's net
deferred tax asset are as follows (in thousands):
DECEMBER 31, JUNE 30,
1995 1996 1997
(UNAUDITED)
Deferred tax liabilities:
Differences between book and tax basis of property........................... $(269) $(372) $(547)
Deferred tax assets:
Differences between book and tax basis of deposit base intangibles........... 165 205 223
Allowance for credit losses.................................................. 1,202 1,672 4,226
Write-off of notes receivable................................................ 1,386 -- --
Alternative Minimum Tax Credit carryforward.................................. 367 568 848
Operating loss carryforward.................................................. 7,700 4,590 181
Unrealized gain on loans to be sold.......................................... 382 1,182 2,313
Total gross deferred tax assets.............................................. 11,202 8,217 7,244
Less valuation allowance..................................................... (10,737) (7,508) (4,449)
Net deferred tax asset....................................................... $196 $337 $2,795
The valuation allowance consists of Alternative Minimum Tax Credit
carryforwards, net operating loss carryforwards, and deductible temporary
differences primarily for Federal income tax purposes.
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.
As of June 30, 1997, the Company has available Federal net operating loss
("NOL") carryforwards of approximately $564,000 expiring in 1998 through 2001.
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Company or its subsidiaries.
16. OPERATIONS AND INDUSTRY SEGMENTS
The Financial Services segment was active in 1994, 1995 and 1996 in originating
selling and servicing first and second mortgage loans, commercial loans, and
pre-owned automobile loans.
The Apparel Manufacturing segment was active in 1994 in the design, manufacture
and marketing of dresses for children. The Company sold YGI, the sole component
of the segment as of September 30, 1995 and, as a result, the Apparel
Manufacturing segment is shown on the statements of income as discontinued
operations.
The Transportation segment was active in 1994 in boxcar leasing, short-line
railroad operations and railcar repair shop operations. The Company sold
Peninsula Terminal Company in July 1994 and assigned the rights to boxcars in
the lease with a Class I railroad in November 1994. The Company sold additional
railcars in 1995 and, as a result, the Transportation segment is shown on the
statements of income as discontinued operations.
The Company's customers include first and second residential mortgage borrowers
throughout the United States, commercial borrowers throughout the United States
and preowned automobile borrowers principally in South Carolina.
F-29
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the year ended December 31, 1996, are as
follows:
QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues:
Interest income.................................................... $4,324 $4,051 $4,219 $5,314
Servicing income................................................... 536 1,027 924 787
Gain on sale of loans.............................................. 3,018 4,450 7,870 8,478
Loan fee and other income.......................................... 404 498 1,557 2,931
Total revenues..................................................... 8,282 10,026 14,570 17,510
Expenses:
Interest........................................................... 2,741 2,837 2,603 2,840
Provision for credit losses........................................ 911 621 1,569 2,315
General and administrative......................................... 3,227 4,395 6,058 9,811
Total expenses..................................................... 6,879 7,853 10,230 14,966
Income before income taxes......................................... 1,403 2,173 4,340 2,544
Provision for income taxes......................................... (42) (77) (129) (470)
Minority interest in earnings of subsidiaries...................... (12) (10) 90 285
Net income......................................................... $1,349 $2,086 $4,301 $2,359
Earnings per share................................................. $.20 $.31 $.63 $.29
Weighted average shares outstanding................................ 6,735,996 6,785,457 6,777,439 8,100,302
F-30
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
17. SUPPLEMENTAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) -- Continued
The quarterly results of operations for the year ended December 31, 1995, are as
follows:
QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
Revenues:
Interest and servicing income...................................... $3,368 $3,939 $3,909 $4,423
Gain on sale of loans.............................................. 1,220 3,135 2,224 2,590
Loan fee and other income.......................................... 234 458 526 252
Total revenues..................................................... 4,822 7,532 6,659 7,265
Expenses:
Interest........................................................... 1,727 2,053 2,161 2,586
Provision for credit losses........................................ 489 751 380 860
General and administrative......................................... 2,109 2,405 2,620 3,285
Total expenses..................................................... 4,325 5,209 5,161 6,731
Income before income taxes......................................... 497 2,323 1,498 534
Provision for income taxes......................................... (4) (89) (87) (10)
Minority interest in earnings of subsidiaries...................... (8) (23) (35) (15)
Income from continuing operations.................................. 485 2,211 1,376 509
Discontinued transportation and apparel
manufacturing segments............................................. (316) (435) (2,728) (445)
Net income (loss).................................................. $169 $1,776 $(1,352) $64
Earnings (loss) per share:
Continuing operations.............................................. $.07 $.33 $.21 $.08
Discontinued operations............................................ (.05) (.06) (.41) (.07)
Earnings (loss) per share.......................................... $.02 $.27 $(.20) $.01
Weighted average shares outstanding................................ 6,699,266 6,690,608 6,705,140 6,705,140
18. TRANSACTIONS WITH RELATED PARTIES
The Company engaged in the following related party transactions:
The Company obtains legal services from a firm, certain members of which, when
considered in the aggregate, may be deemed to beneficially own 596,351 shares of
the Company's capital stock. Total charges for these services were $118,000 in
1994, $234,000 in 1995, and $756,000 in 1996. Approximately $17,000 in 1994, $0
in 1995, and $47,000 in 1996 of accounts payable are payable to this law firm.
The Company provided management services to a mezzanine level small business
investment company partnership fund with significant common shareholders for
which it received fees of $35,000 in 1994, $250,000 in 1995, and $175,000 in
1996.
Notes payable to investors and subordinated debentures include amounts due to
officers, directors and key employees of approximately $791,000, $873,000, and
$694,000, at December 31, 1994, 1995 and 1996, respectively. The Company also
has notes receivable from related parties. SEE NOTE 3.
F-31
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
19. 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 provides for employee and Company contributions, subject to certain
limitations. Company matching contributions are 35% of employee contributions to
a maximum of 6% of compensation for each employee. The Company plans to increase
its matching contribution to 50% in 1997. The Company's contributions under the
plan totaled approximately $95,000 in 1994, $76,000 in 1995, and $60,000 in
1996. In 1997, the plan was amended to allow employees who have completed 30
days of service to participate in the plan, and the matching contribution was
changed to 50%.
20. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the FASB issued SFAS 125 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." FASB's objective is to
develop consistent accounting standards for those transactions, including
determining when financial assets should be considered sold and removed from the
statement of financial position and when related revenues and expenses should be
recognized. The approach focuses on analyzing the components of financial asset
transfers and requires each party to a transfer to recognize the financial
assets it controls and liabilities it has incurred and remove assets when
control over them has been relinquished. The statement is not expected to have a
significant impact on the accounting practices of the Company and is generally
effective for transactions entered into after December 31, 1996. The Company
began applying the new rules prospectively to transactions beginning in the
first quarter of 1997.
21. CONTINGENCIES AND LOAN COMMITMENTS
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,
1996 related to these items is summarized below:
CONTRACT
AMOUNT
(IN THOUSANDS)
Loan commitments:
Approved loan commitments....................................................................... $111,361
Unadvanced portion of loans..................................................................... 18,070
Total loan commitments.......................................................................... $129,431
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
counterparty. Collateral held is primarily residential property. Interest rates
on loan commitments are a combination of fixed and variable.
Commitments outstanding at December 31, 1996 consist of adjustable rate
commercial loans and fixed rate residential mortgage loans of $45,680,000 and
$83,751,000, respectively, at rates ranging from 8% to 18%. Commitments to
originate loans generally expire within 30 days to 60 days.
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.
F-32
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
21. CONTINGENCIES AND LOAN COMMITMENTS -- Continued
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, 1996, the Company had no outstanding
forward commitment contracts.
The Company has accrued $51,000 for a former operating location to record the
potential liability for environmental contamination at this site. The Company
believes that the total cost for this environmental liability will not exceed
the amount accrued.
22. 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 SHORT-TERM INVESTMENTS
For these short-term instruments, the carrying amount is a reasonable estimate
of fair value.
RECEIVABLES
For residential mortgage loans, commercial loans and automobile loans fair value
is estimated using the market prices received on recent sales or securitizations
of these loans in the secondary market.
MORTGAGE LOANS HELD FOR SALE
Fair value for mortgage loans held for sale is determined using the anticipated
price to be derived from the sale of the mortgage loans in the secondary market.
INTEREST-ONLY STRIP SECURITY
Fair value of the interest-only strip security is determined based on the
discounted present value of the remaining excess estimated future cash flows
using estimated prepayment and default rates and discount rates anticipated in
similar instruments.
INVESTMENT IN ASSET-BACKED SECURITIES
Fair value of the investment in asset-backed securities approximates the
carrying amount. Fair value is determined based on the discounted present value
of the remaining estimated future cash flows attributable to the related
investment in asset-backed securities using estimated prepayment and default
rates and discount rates anticipated in similar instruments.
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.
F-33
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
22. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Continued
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 (in thousands):
1995 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Financial Assets:
Cash and cash equivalents..................................................... $1,260 $1,260 $1,276 $1,276
Restricted cash............................................................... 912 912 5,319 5,319
Loans receivable, net......................................................... 103,865 107,520 84,966 89,493
Mortgage loans held for sale.................................................. 22,593 23,526 100,063 104,066
Interest-only strip security, net............................................. 2,054 2,054 4,315 4,700
Investment in asset-backed securities, net.................................... 865 865 3,581 3,935
Financial Liabilities:
Notes payable to banks and other.............................................. $31,633 $31,633 $55,494 $55,494
Investor savings:
Notes due to investors........................................................ 82,132 82,132 97,987 97,987
Subordinated debentures....................................................... 16,185 16,185 16,115 16,115
Commitments to extend credit.................................................. 84,157 89,711 129,431 136,628
23. SUBSIDIARY GUARANTORS
In [November, 1997] the Company proposes to sell $125.0 million aggregate
principal amount of Exchange Notes due 2004. The Exchange Notes will constitute
unsecured indebtedness of the Company. The Exchange Notes will be 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 the Company's subsidiary Carolina Investors, Inc. ("CII"), the Subsidiary
Guarantees will 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 will be a senior subordinated obligation of CII,
subordinated in right of payment to all existing and future senior indebtedness
of CII (which, as of June 30, 1997, totaled $16.1 million, all of which was
secured), and will rank pari passu in right of payment with all existing and
future senior subordinated indebtedness of CII (which, as of June 30, 1997,
totaled $105.7 million) and senior in right of payment to all subordinated
indebtedness of CII (which, as of June 30, 1997, totaled $19.2 million).
The following consolidating condensed financial data illustrate the composition
of the combined Subsidiary Guarantors. The Company believes that providing the
condensed consolidating information is of material interest to potential
investors in the Exchange Notes and has not presented separate financial
statements for each of the Subsidiary Guarantors, because it was deemed that
such financial statements would not provide potential investors with any
material additional information.
Investments in subsidiaries are accounted for by the parent and Subsidiary
Guarantors on the equity method for the purposes of the consolidating financial
data. Earnings of subsidiaries are therefore reflected in the parent's and
Subsidiary Guarantor's investment accounts and earnings. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances and transactions. Certain sums in the following tables reflect
immaterial rounding differences.
F-34
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
The Subsidiary Guarantors will consist of the following subsidiaries of the
Company:
Emergent Mortgage Corp. (100% owned)
Carolina Investors, Inc. (100% owned)
Sterling Lending Corporation (80% owned)
Sterling Lending Insurance Agency, Inc. (100% owned)
Emergent Business Capital, Inc. (100% owned)
Emergent Commercial Mortgage, Inc. (100% owned)
Emergent Mortgage Corp. of Tennessee (100% owned)
Emergent Financial Corp. (100% owned)
Emergent Equity Advisors, Inc. (100% owned)
The Loan Pro$, Inc. (80% owned)
Premier Financial Services, Inc. (100% owned)
As of the date of this Offering Memorandum, the Subsidiary Guarantors conduct
all of the Company's operations other than its special purpose bankruptcy-remote
securitization subsidiaries and its mezzanine lending operations performed
through Reedy River Ventures Limited Partnership, a small business investment
company.
F-35
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATING STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents............................... $9 $1,600 $836 $-- $2,445
Restricted cash......................................... -- -- 3,176 -- 3,176
Loans receivable:
Loans receivable........................................ -- 112,182 5,000 -- 117,182
Mortgage loans held for sale............................ -- 192,881 -- -- 192,881
Notes receivable from affiliates........................ 3,000 16,564 11 (19,575) --
Total loans receivable.................................. 3,000 321,627 5,011 (19,575) 310,063
Less allowance for credit losses on loans............... -- (4,621) -- -- (4,621)
Less unearned discount, dealer reserves, and deferrals
net of deferred loan costs.............................. -- (3,803) -- -- (3,803)
Net loans receivable.................................... 3,000 313,203 5,011 (19,575) 301,639
Other Receivables:
Accrued interest receivable............................. -- 3,197 28 -- 3,225
Other receivables....................................... 59 4,221 -- -- 4,280
Total other receivables................................. 59 7,418 28 -- 7,505
Investment in subsidiaries.............................. 63,190 -- -- (63,190) --
Investment in asset-backed securities................... -- 4,027 3,696 -- 7,723
Less allowance for losses............................... -- (764) -- -- (764)
Net investment for asset-backed securities.............. -- 3,263 3,696 -- 6,959
Interest-only strip security............................ -- 24,392 -- -- 24,392
Less allowance for losses............................... -- (5,450) -- -- (5,450)
Net interest-only strip security........................ -- 18,942 -- -- 18,942
Net property and equipment.............................. 1,084 9,264 -- -- 10,348
Net excess of cost over net assets of acquired
businesses.............................................. 44 3,522 -- (939) 2,627
Real estate and personal property acquired through
foreclosure............................................. -- 4,063 -- -- 4,063
Other assets............................................ 469 6,466 349 -- 7,284
Total assets............................................ $67,855 $367,741 $13,096 $(83,704) $364,988
F-36
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable to banks.................................. $-- $174,353 $-- $-- $174,353
Subordinated investor savings:
Notes payable to investors.............................. -- 105,730 -- -- 105,730
Subordinated debentures................................. -- 19,160 -- -- 19,160
Total subordinated investor savings..................... -- 124,890 -- -- 124,890
Accounts payable and accrued liabilities................ 599 3,548 115 -- 4,262
Accrued interest payable................................ -- 1,784 -- -- 1,784
Remittances payable..................................... -- 2,146 398 -- 2,544
Due to affiliates....................................... 511 -- 6,474 (6,985) --
Total other liabilities................................. 1,110 7,478 6,987 (6,985) 8,590
Subordinated debt to affiliates......................... 9,590 -- 3,000 (12,590) --
Total liabilties........................................ 10,700 306,721 9,987 (19,575) 307,833
Minority interest....................................... -- -- -- -- --
Shareholders' equity:
Common stock............................................ 482 4,259 10 (4,269) 482
Preferred stock......................................... -- 1,621 -- (1,621) --
Capital in excess of par value.......................... 38,479 30,923 3,099 (34,022) 38,479
Retained earnings....................................... 18,194 24,217 -- (24,217) 18,194
Total shareholders' equity.............................. 57,155 61,020 3,109 (64,129) 57,155
Total liabilities and shareholders' equity.............. $67,855 $367,741 $13,096 $(83,704) $364,988
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
REVENUES:
Interest income......................................... $39 $15,197 $-- $(212) $15,024
Servicing Income........................................ -- 3,085 -- 3,085
Gain on sale of loans................................... -- 18,107 -- 18,107
Management fees......................................... 9 248 -- 257
Loan fee income......................................... -- 13,215 -- 13,215
Other revenues.......................................... 33 143 -- 176
Total revenues.......................................... 81 49,995 -- (212) 49,864
EXPENSES:
Interest................................................ 212 9,782 -- (212) 9,782
Provision for credit losses............................. -- 4,671 -- 4,671
Salaries, wages and employee benefits................... 1,555 17,206 -- 18,761
Business development costs.............................. -- 3,018 -- 3,018
Other general and administrative expense................ (1,799) 11,735 -- 9,936
Total expenses.......................................... (32) 46,412 -- (212) 46,168
Income before income taxes, minority interest, and
equity in undistributed earnings of subsidiaries........ 113 3,583 -- -- 3,696
Equity in undistributed earnings of subsidiaries........ 4,989 -- -- (4,989) --
Income before income taxes and minority interest........ 5,102 3,583 -- (4,989) 3,696
Provision (benefit) for income taxes:
Current................................................. (48) 880 -- -- 832
Deferred................................................ 2 (2,459) -- -- (2,457)
Total provision (benefit) for income taxes.............. (46) (1,579) -- -- (1,625)
Income before minority interest......................... 5,148 5,162 -- (4,989) 5,321
Minority interest in (earnings) loss of subsidiaries.... 17 (173) -- -- (156)
Net income.............................................. $5,165 $4,989 $-- $(4,989) $5,165
F-37
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
REVENUES:
Interest income......................................... $40 $8,604 $-- $(269) $8,375
Servicing Income........................................ -- 1,562 -- 1,562
Gain on sale of loans................................... -- 7,468 -- 7,468
Management fees......................................... 9 248 -- 257
Loan fee income......................................... -- 426 -- 426
Other revenues.......................................... (10) 231 -- 221
Total revenues.......................................... 39 18,539 -- (269) 18,309
EXPENSES:
Interest................................................ 269 5,576 -- (269) 5,576
Provision for credit losses............................. -- 1,532 -- 1,532
Salaries, wages and employee benefits................... 603 3,718 -- 4,321
Business development costs.............................. 4 327 -- 331
Other general and administrative expense................ (536) 3,506 -- 2,970
Total expenses.......................................... 340 14,659 -- (269) 14,730
Income before income taxes, minority interest, and
equity in undistributed earnings of subsidiaries........ (301) 3,880 -- -- 3,579
Equity in undistributed earnings of subsidiaries........ 3,757 -- -- (3,757) --
Income before income taxes and minority interest........ 3,456 3,880 -- (3,757) 3,579
Provision (benefit) for income taxes:
Current................................................. 1 153 -- -- 154
Deferred................................................ (3) (30) -- -- (33)
Total provision (benefit) for income taxes.............. (2) 123 -- -- 121
Income before minority interest......................... 3,458 3,757 -- (3,757) 3,458
Minority interest in (earnings) loss of subsidiaries.... (22) -- -- -- (22)
Net income.............................................. $3,436 $3,757 $-- $(3,757) $3,436
F-38
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
OPERATING ACTIVITIES:
Net Income.............................................. $5,165 $4,987 $-- $(4,987) $5,165
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiaries.......... (4,989) -- -- 4,989 --
Depreciation and amortization........................... 114 1,123 -- (2) 1,235
Provision for deferred income taxes..................... 2 (2,460) -- -- (2,458)
Provision for credit losses............................. -- 4,671 -- -- 4,671
Loss on disposal of property and equipment.............. 1 13 -- -- 14
Net (increase) decrease in deferred loan costs.......... -- 39 -- -- 39
Net increase (decrease) in unearned discount and
other deferrals......................................... -- 2,346 -- -- 2,346
Loans originated with intent to sell.................... -- (494,857) -- -- (494,857)
Principal proceeds from sold loans...................... -- 175,767 -- -- 175,767
Proceeds from securitization of loans................... -- 201,035 -- -- 201,035
Payments to securitization certificate holders for
credit losses........................................... -- (723) -- -- (723)
Increase in overcollateralization from excess
spread.................................................. -- -- (1,329) -- (1,329)
Minority interest in earnings (loss) of
subsidiaries............................................ (16) 172 -- -- 156
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash......................................... -- -- 2,143 -- 2,143
Interest only strip security............................ -- (14,627) -- -- (14,627)
Accrued interest receivable............................. (1) (1,109) -- -- (1,110)
Other assets............................................ 812 (2,452) -- -- (1,640)
Remittance due loan participants........................ -- (428) (547) -- (975)
Accrued interest payable................................ -- 1,186 -- -- 1,186
Other liabilities....................................... 54 135 -- -- 189
Intercompany transfers.................................. 2,945 (2,341) (604) -- --
Net cash provided by (used in) operating
activities.................................. 4,087 (127,523) (337) -- (123,773)
F-39
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATED STATEMENT OF CASH FLOWS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
INVESTING ACTIVITIES:
Loans originated for investment purposes................ $-- $(62,324) $-- $-- $(62,324)
Principal collections on loans not sold................. -- 57,569 -- -- 57,569
Principal collections on asset-backed securities........ -- -- 337 -- 337
Investment in subsidiary................................ (14,055) -- -- 14,055 --
Proceeds from sale of real estate and personal property
acquired through foreclosure............................ -- 3,271 -- -- 3,271
Proceeds from sale of property and equipment............ -- 5 -- -- 5
Purchase of property and equipment...................... (663) (3,473) -- -- (4,136)
Other................................................... -- (285) -- -- (285)
Net cash used in investing activities................... (14,718) (5,237) 337 14,055 (5,563)
FINANCING ACTIVITIES:
Advances on notes payable to banks...................... -- 535,895 -- -- 535,895
Payments on notes payable to banks...................... -- (417,036) -- -- (417,036)
Net increase in notes payable to investors.............. -- 7,743 -- -- 7,743
Net (decrease) increase in subordinated
debentures.............................................. -- 3,046 -- -- 3,046
Advances (to) from subsidiary........................... 9,591 (10,427) 836 -- --
Proceeds from issuance of additional common
stock................................................... 857 14,055 -- (14,055) 857
Net cash provided by (used in) financing
activities.............................................. 10,448 133,276 836 (14,055) 130,505
Net increase (decrease) in cash and cash
equivalents............................................. (183) 516 836 -- 1,169
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR....................................... 192 1,084 -- -- 1,276
CASH AND CASH EQUIVALENTS,
END OF YEAR............................................. $9 $1,600 $836 $-- $2,445
F-40
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
OPERATING ACTIVITIES:
Net Income.................................................. $3,436 $3,757 $-- $(3,757)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiaries.............. (3,757) -- -- 3,757
Depreciation and amortization............................... 18 478 -- --
Provision for deferred income taxes......................... (2) (31) -- --
Provision for credit losses................................. -- 1,532 -- --
Net (increase) decrease in deferred loan costs.............. -- 202 -- --
Net increase (decrease) in unearned discount and
other deferrals............................................. -- 835 -- --
Loans originated with intent to sell........................ -- (137,940) -- --
Principal proceeds from sold loans.......................... -- 173,343 -- --
Proceeds from securitization of loans....................... -- 14,102 -- --
Minority interest in earnings (loss) of
subsidiaries................................................ 22 -- -- --
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash............................................. -- -- (2,318) --
Interest only strip security................................ -- (472) -- --
Accrued interest receivable................................. 51 53 -- --
Other assets................................................ (624) 538 -- --
Remittance due loan participants............................ -- 639 -- --
Accrued interest payable.................................... 778 (708) -- --
Other liabilities........................................... (63) (976) -- --
Intercompany transfers...................................... (4,045) 2,148 1,897 --
Net cash provided by (used in) operating
activities of discontinued operations............ -- 77 -- --
Net cash provided by (used in) operating
activities..................................... (4,186) 57,577 (421) --
F-41
CONSOLIDATED
OPERATING ACTIVITIES:
Net Income.................................................. $3,436
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in undistributed income of subsidiaries.............. --
Depreciation and amortization............................... 496
Provision for deferred income taxes......................... (33)
Provision for credit losses................................. 1,532
Net (increase) decrease in deferred loan costs.............. 202
Net increase (decrease) in unearned discount and
other deferrals............................................. 835
Loans originated with intent to sell........................ (137,940)
Principal proceeds from sold loans.......................... 173,343
Proceeds from securitization of loans....................... 14,102
Minority interest in earnings (loss) of
subsidiaries................................................ 22
Changes in operating assets and liabilities
increasing (decreasing) cash:
Restricted cash............................................. (2,318)
Interest only strip security................................ (472)
Accrued interest receivable................................. 104
Other assets................................................ (86)
Remittance due loan participants............................ 639
Accrued interest payable.................................... 70
Other liabilities........................................... (1,039)
Intercompany transfers...................................... --
Net cash provided by (used in) operating
activities of discontinued operations............ 77
Net cash provided by (used in) operating
activities..................................... 52,970
F-42
EMERGENT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
23. SUBSIDIARY GUARANTORS -- Continued
CONSOLIDATED STATEMENT OF CASH FLOWS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
INVESTING ACTIVITIES:
Loans originated for investment purposes.................... $-- $(54,289) $-- $--
Principal collections on loans not sold..................... -- 23,373 -- --
Principal collections on asset-backed securities............ -- -- 421 --
Investment in subsidiary.................................... (6,898) -- -- 6,898
Proceeds from sale of real estate and personal property
acquired through foreclosure................................ -- 1,898 -- --
Purchase of property and equipment.......................... (83) (1,188) -- --
Other....................................................... -- (228) -- --
Net cash used in investing activities....................... (6,981) (30,434) 421 6,898
FINANCING ACTIVITIES:
Advances on notes payable to banks.......................... -- 209,635 -- --
Payments on notes payable to banks.......................... -- (221,007) -- --
Net increase in notes payable to investors.................. -- 9,230 -- --
Net (decrease) increase in subordinated
debentures.................................................. -- 526 -- --
Advances (to) from subsidiaries............................. 10,924 (10,924) -- --
Proceeds from issuance of additional common stock........... 213 6,898 -- (6,898)
Net cash provided by (used in) financing
activities.................................................. 11,137 (5,642) -- (6,898)
Net increase (decrease) in cash and cash equivalents........ (30) 21,501 -- --
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR........................................... 363 897 -- --
CASH AND CASH EQUIVALENTS,
END OF YEAR................................................. $333 $22,398 $-- $--
F-43
CONSOLIDATED
INVESTING ACTIVITIES:
Loans originated for investment purposes.................... $(54,289)
Principal collections on loans not sold..................... 23,373
Principal collections on asset-backed securities............ 421
Investment in subsidiary.................................... --
Proceeds from sale of real estate and personal property
acquired through foreclosure................................ 1,898
Purchase of property and equipment.......................... (1,271)
Other....................................................... (228)
Net cash used in investing activities....................... (30,096)
FINANCING ACTIVITIES:
Advances on notes payable to banks.......................... 209,635
Payments on notes payable to banks.......................... (221,007)
Net increase in notes payable to investors.................. 9,230
Net (decrease) increase in subordinated
debentures.................................................. 526
Advances (to) from subsidiaries............................. --
Proceeds from issuance of additional common stock........... 213
Net cash provided by (used in) financing
activities.................................................. (1,403)
Net increase (decrease) in cash and cash equivalents........ 21,471
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR........................................... 1,260
CASH AND CASH EQUIVALENTS,
END OF YEAR................................................. $22,731
EMERGENT GROUP, INC.
All tendered Senior Notes, executed Letters of Transmittal, and other
related documents should be directed to the Exchange Agent. Requests for
assistance and for additional copies of this Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange
Agent.
The Exchange Agent for the Exchange Offer is
BANKERS TRUST COMPANY
By Facsimile:
(212) 250-6392
Confirm by Telephone:
(212) 250-6161
By Overnight Delivery:
Bankers Trust Company
Four Albany Street
Attention: Corporate Trust and Agency Group
New York, New York 10015
By Hand Delivery:
Bankers Trust Company
Four Albany Street
Attention: Corporate Trust and Agency Group
New York, New York 10006
By Registered or Certified Mail:
Bankers Trust Company
Four Albany Street
Attention: Corporate Trust and Agency Group
New York, New York 10015
UNTIL FEBRUARY 16, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS OR AS REQUIRED BY THE TERMS OF THE EXCHANGE OFFER.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
SOUTH CAROLINA LAW
Reference is made to other sections in Chapter 8, Article 5 of Title 33
of the 1976 Code of Laws of South Carolina, as amended (the "South Carolina
Code"), which provides as follows:
SECTION 33-8-510. AUTHORITY TO INDEMNIFY.
(a) Except as provided in subsection (d), a corporation may
indemnify an individual made a party to a proceeding because he is or
was a director against liability incurred in the proceeding if: (1) he
conducted himself in good faith; and (2) he reasonably believed: (i) in
the case of conduct in his official capacity with the corporation, that
his conduct was in its best interest; and (ii) in all other cases, that
his conduct was at least not opposed to its best interest; and (3) in
the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit
plan for a purpose he reasonably believed to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies
the requirement of subsection (a)(2)(ii).
(c) The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent is not, of itself, determinative that the director did not
meet the standard of conduct described in this section.
(d) A corporation may not indemnify a director under this
section: (1) in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
corporation; or (2) in connection with any other proceeding charging
improper personal benefit to him, whether or not involving action in
his official capacity, in which he was adjudged liable on the basis
that personal benefit was improperly received by him.
(e) Indemnification permitted under this section in
connection with a proceeding by or in the right of the corporation is
limited to reasonable expenses incurred in connection with the
proceeding.
SECTION 33-8-520. MANDATORY INDEMNIFICATION. Unless limited by
its articles of incorporation, a corporation shall indemnify a director
who was wholly successful, on the merits or otherwise, in the defense
of any proceeding to which he was a party because he is or was a
director of the corporation against reasonable expenses incurred by him
in connection with the proceeding.
SECTION 33-8-530. ADVANCE FOR EXPENSES. (a) A corporation may
pay for or reimburse the reasonable expenses incurred by a director who
is a party to a proceeding in advance of final disposition of the
proceeding if: (1) the director furnishes the corporation a written
affirmation of his good faith belief that he has met the standard of
conduct described in Section 33-8-510; (2) the director furnishes the
corporation a written undertaking, executed personally or on his
behalf, to repay the advance if it is ultimately determined that he did
not meet the standard of conduct; and (3) a determination is made that
the facts then known to those making the determination would not
preclude indemnification under this subchapter.
(b) The undertaking required by subsection (a)(2) must be an
unlimited general obligation of the director but need not be secured
and may be accepted without reference to financial ability to make
repayment.
(c) Determinations and authorizations of payments under this
section must be made in the manner specified in Section 33-8-550.
SECTION 33-8-540. COURT-ORDERED INDEMNIFICATION. Unless a
corporation's articles of incorporation provide otherwise, a director
of the corporation who is a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another
court of competent jurisdiction. On receipt of an application, the
court after giving any notice the court considers necessary may order
1
indemnification if it determines: (1) the director is entitled to
mandatory indemnification under Section 33-8-520, in which case the
court also shall order the corporation to pay the director's reasonable
expenses incurred to obtain court-ordered indemnification; or (2) the
director is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances, whether or not he met the standard
of conduct set forth in Section 33-8-510 or was adjudged liable as
described in Section 33-8-510 (d), but if he was adjudged so liable his
indemnification is limited to reasonable expenses incurred.
SECTION 33-8-550. DETERMINATION AND AUTHORIZATION OF
INDEMNIFICATION. (a) A corporation may not indemnify a director under
Section 33-8-510 unless authorized in the specific case after a
determination has been made that indemnification of the director is
permissible in the circumstances because he has met the standard of
conduct set forth in Section 33-8-510.
(b) The determination must be made: (1) by the board of
directors by majority vote of a quorum consisting of directors not at
the time parties to the proceeding; (2) if a quorum cannot be obtained
under subdivision (1), by majority vote of a committee duly designated
by the board of directors (in which designation directors who are
parties may participate), consisting solely of two or more directors
not at the time parties to the proceeding; (3) by special legal
counsel: (i) selected by the board of directors or its committee in the
manner prescribed in item (1) or (2); or (ii) if a quorum of the board
of directors cannot be obtained under subdivision (1) and a committee
cannot be designated under subdivision (2), selected by majority vote
of the full board of directors (in which selection directors who are
parties may participate); or (4) by the shareholders, but shares owned
by or voted under the control of directors who are at the time parties
to the proceeding may not be voted on the determination.
(c) Authorization of indemnification and evaluation as to
reasonableness of expenses must be made in the same manner as the
determination that indemnification is permissible, except that, if the
determination is made by special legal counsel, authorization of
indemnification and evaluation as to the reasonableness of expenses
must be made by those entitled under subsection (b)(3) to select
counsel.
SECTION 33-8-560. INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND
AGENTS. Unless a corporation's articles of incorporation provide
otherwise: (1) an officer of the corporation who is not a director is
entitled to mandatory indemnification under Section 33-8-520, and is
entitled to apply for court-ordered indemnification under Section
33-8-540, in each case to the same extent as a director; (2) the
corporation may indemnify and advance expenses under this subchapter to
an officer, employee, or agent of the corporation who is not a director
to the same extent as to a director; and (3) a corporation also may
indemnify and advance expenses to an officer, employee, or agent who is
not a director to the extent, consistent with public policy that may be
provided by its articles of incorporation, bylaws, general or specific
action of its board of directors, or contract.
SECTION 33-8-570. INSURANCE. A corporation may purchase and
maintain insurance on behalf of an individual who is or was a director,
officer, employee, or agent of the corporation, or who while a
director, officer, employee, or agent of the corporation, is or was
serving at the request of the corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise, trust, employee benefit plan, or other enterprise,
against liability asserted against or incurred by him in that capacity
or arising from his status as a director, officer, employee, or agent,
whether or not the corporation would have power to indemnify him
against the same liability under Section 33-8-510 or 33-8-520.
Chapter 8, Article 5 of the South Carolina Code also permits a
corporation to purchase and maintain insurance on behalf of a person who is or
was an officer or director.
THE COMPANY
The Company maintains directors' and officers' liability insurance.
The Company's Bylaws provide that the Company shall, to the fullest extent
permitted by Section 33-13-180 of the South Carolina Code from time to
2
time, indemnify all persons whom it may indemnify pursuant thereto. The
Company's Bylaws further provide that the Company may purchase insurance to
effect such indemnification.
Reference is made to Chapter 2 of Title 33 of the 1976 Code of Laws of
South Carolina, as amended, respecting the limitation in a corporation's
articles of incorporation of the personal liability of a director for breach of
the director's fiduciary duty. Reference is made to the Company's Articles of
Amendment filed with the South Carolina Secretary of State on May 26, 1989 which
state:
A director of the corporation shall not be personally liable to the
corporation or any of its shareholders for monetary damages for breach
of fiduciary duty as a director, provided that this provision shall not
be deemed to eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involved gross negligence, intentional misconduct, or a knowing
violation of law, (iii) imposed under Section 33-8-330 of the South
Carolina Business Corporation Act of 1988 (improper distribution to
shareholder), or (iv) for any transaction from which the director
derived an improper personal benefit.
THE SUBSIDIARY GUARANTORS
The By-laws of Emergent Financial Corporation, Emergent Mortgage
Corporation of Tennessee, Emergent Equity Advisors, Inc., Carolina Investors,
Inc., Emergent Commercial Mortgage, Inc., Emergent Mortgage Corp., Sterling
Lending Corp., and Emergent Insurance Agency Corp. provide:
Every person who was or is a party to, or is threatened to be
made a party to, or is otherwise involved in, any action, suit, or
proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that he or a person of whom he is the legal
representative is or was a Director or Officer of the Corporation or is
or was serving at the request of the Corporation or for its benefit as
a director or officer of another corporation, or as its representative
in a partnership, joint venture, trust, or other enterprise, shall be
indemnified and held harmless to the fullest extent legally permissible
under and pursuant to the Act, against all expenses, liabilities, and
losses (including without limitation attorneys' fees, judgments, fines,
and amounts paid or to be paid in settlement) reasonably incurred or
suffered by him in connection therewith. Such right of indemnification
shall be a contract right that may be enforced in any manner desired by
such person. Such right of indemnification shall not be exclusive of
any other right which such Directors, Officers, or representatives may
have or hereafter acquire and, without limiting the generality of such
statement, they shall be entitled to their respective rights of
indemnification under any bylaw, agreement, vote of Shareholders,
insurance, provision of law, or otherwise, as well as their rights
under this Article.
The Board of Directors may from time to time adopt an
Indemnification Plan implementing the rights granted in Section 5.01.
This Indemnification Plan shall set forth in detail the mechanics of
how the indemnification rights granted in Section 5.01 shall be
exercised.
The Board of Directors may cause the Corporation to purchase
and maintain insurance on behalf of any person who is or was a Director
or Officer of the Corporation, or is or was serving at the request of
the Corporation as a Director or Officer of another corporation, or as
its representative in a partnership, joint venture, trust, or other
enterprise, against any liability asserted against such person and
incurred in any such capacity or arising out of such status, whether or
not the Corporation would have the power to indemnify such person.
. The Articles of Incorporation of Sterling Lending Insurance Agency,
Inc. provide:
The incorporators, officers, and directors of this Corporation
claim the benefits of limitation of
3
liability provided in the Louisiana Business Corporation Law,
including, but not limited to, the limitation of liability provided in
La.R.S. 12:24(c) to the fullest extent allowed by law as fully and
completely as though the provisions were set forth in these Articles.
Reference is made to Title 12, Chapter 1 of the Louisiana Business Corporation
Law which provides as follows:
SECTION 12:24C. The articles [of incorporation] may also
contain the following:
....
(4) A provision eliminating or limiting the personal
liability of a director or officer to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director or officer,
provided that such provision shall not eliminate or limit the liability of a
director or officer:
(a) For any breach of the director's or officer's duty of
loyalty to the corporation or its shareholders;
(b) For acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
(c) For liability under R.S. 12:92(D); or (d) For any
transaction from which the director or officer derived an
improper personal benefit. No such provision shall eliminate
or limi the liability of a director or officer for any act or
omission occurring prior to the date when such provision
becomes effective.
SECTION 12:92D. If any dividend shall be paid in violation of
this Chapter, or if any other unlawful distribution, payment or return
of assets be made to the shareholders, or if the corporation purchase
or redeem any of its own shares in violation of this Chapter, the
directors who knowingly, or without the exercise of reasonable care and
inquiry, voted in favor thereof shall be liable jointly and severally
to the corporation, or to creditors of the corporation, or to both, in
an amount equal to the amount of the unlawful distribution. An action
to enforce such liability must be brought within two years from the
date on which the distribution was made, and this time limit shall not
be subject to suspension on any ground, nor to interruption except by
timely suit.
The by-laws of Sterling Lending Insurance Agency, Inc. provide:
The Corporation shall indemnify and hold harmless each
director and officer now or hereafter serving the Corporation from and
against any and all claims and liabilities to which he may be or become
subject by reason of his now or hereafter being or having heretofore
been a director or officer of the Corporation and/or by reason of his
alleged acts of omissions as such director or officer, whether or not
he continues to be such officer or director at the time when any such
claim or liability is asserted, and shall reimburse each such director
and officer for all legal and other expenses reasonably incurred by him
in connection with defending any and all such claims or liabilities,
including amounts paid or agreed to be paid in connection with
reasonable settlements made before final adjudication with the approval
of the Board of Directors, whether or not he continues to be such
director or officer at the time such expenses are incurred; provided
however, that no director or officer shall be indemnified against any
claim or liability arising out of his own gross negligence or willful
misconduct or shall be indemnified against or reimbursed for any
expenses incurred in defending any or all such claims or liability or
in settling the same unless in the judgment of the directors or the
shareholders of the Corporation the director or officer should be
reimbursed. The foregoing right of indemnification shall not be
exclusive of other rights to which any director or officer may be
entitled as a matter of law.
The by-laws of Emergent Business Capital, Inc. provide:
The Corporation shall indemnify any individual made a party to
a proceeding because he is or was a director o the Corporation against
liability incurred in the proceeding to the fullest extent permitted by
4
law.
The Corporation shall pay for or reimburse the reasonable
expenses incurred by a director who is a party to a proceeding in
advance of final disposition of the proceeding to the fullest extent
permitted by law.
The board of directors may indemnify and advance expenses to
any officer, employee or agent of the corporation, who is not a
director of the corporation, to any extent, consistent with public
policy, as determined by the general or specific action of the board of
directors.
The articles and by-laws of The Loan Pro$, Inc. and Premier Financial
Services, Inc. do not have any provisions pertaining to indemnification of
directors and officers.
THE REGISTRATION RIGHTS AGREEMENT
Under the terms of the Registration Rights Agreement, the Company may
require, as a condition to including any Registrable Securities (as defined in
the Registration Rights Agreement) in any registration statement filed pursuant
to the Registration Rights Agreement and to entering into any underwriting
agreement with respect thereto, that the Company and the Subsidiary Guarantors
shall have received an undertaking reasonably satisfactory to it from the holder
of such Registrable Securities and from each underwriter named in any such
underwriting agreement, severally and not jointly, to indemnify and hold
harmless the Company and the Subsidiary Guarantors, each officer and director
thereof, each person controlling the Company or the Subsidiary Guarantors within
the meaning of the Securities Act, and all other holders of Registrable
Securities, against any losses, claims, damages or liabilities to which the
Company and the Subsidiary Guarantors or such other holders of Registrable
Securities may become subject, under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in such registration statement, or any preliminary,
final or summary prospectus contained therein or furnished by the Company and
the Subsidiary Guarantors to any such holder, agent or underwriter, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such holder
or underwriter expressly for use therein, PROVIDED, HOWEVER, that no such holder
shall be required to undertake liability to any person under Section 6(b) of the
Registration Rights Agreement for any amounts in excess of the dollar amount of
the proceeds to be received by such holder from the sale of such holder's
Registrable Securities pursuant to such registration.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
5
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
1.1 Purchase Agreement Relating to $125,000,000 10-3/4% Senior Notes due
2004, dated September 23, 1997, by and among the Company, the
Subsidiary Guarantors and the Initial Purchasers.
1.2 Registration Rights Agreement, dated as of September 23, 1997, by and
among the Company, the Subsidiary Guarantors and the Initial
Purchasers.
3.1 Restated and Amended Certificates of Incorporation of the Subsidiary
Guarantors. The Certificate of Incorporation of the Company is
incorporated by reference to previous filings with the Commission.
See "Incorporation of Certain Information by Reference."
3.2 Bylaws of the Subsidiary Guarantors. The Bylaws of the Company are
incorporated by reference to previous filings with the Commission.
See "Incorporation of Certain Information by Reference."
4.1 Indenture, dated as of September 23, 1997, by and among the Company,
the Subsidiary Guarantors and Bankers Trust Company.
5.1 Opinion of Wyche, Burgess, Freeman & Parham, P.A. re Legality.
8.1 Opinion of Wyche, Burgess, Freeman & Parham, P.A. re Tax Matters.
10.1 See Exhibits 1.1, 1.2 and 4.1. Other material contracts are
incorporated by reference to previous filings with the Commission.
See "Incorporation of Certain Information by Reference."
12.1 Statements re Computation of Ratios.
21.1 Listing of subsidiaries.
23.1 Consent of Wyche, Burgess, Freeman & Parham, P.A.: Contained in
Exhibit 5.1.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Elliott, Davis and Co., LLP.
24.1 Power of Attorney: Included on Signature Page.
25.1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule (electronic filing only).
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Letter to Clients.
99.4 Form of Letter to Registered Holders and DTC Participants.
99.5 Instructions to Registered Holders and DTC Participants.
(b) Certain Additional Financial Statement Schedules: Not applicable.
II-1
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT GROUP, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ JOHN M. STERLING, JR.* Chief Executive Officer & 11/11/97
John M. Sterling, Jr. and Chairman of the Board
/s/ KEITH B. GIDDENS* President, Chief Operating 11/11/97
Keith B. Giddens Officer and Director
/s/ KEVIN J. MAST* Vice President, Chief Financial 11/11/97
Kevin J. Mast Officer, Treasurer and Director
/s/ CLARENCE B. BAUKNIGHT* Director 11/11/97
Clarence B. Bauknight
/s/ TECUMSEH HOOPER, JR.* Director 11/11/97
Tecumseh Hooper, Jr.
/s/ BUCK MICKEL* Director 11/11/97
Buck Mickel
/s/ PORTER B. ROSE* Director 11/11/97
Porter B. Rose
/s/ J. ROBERT PHILPOTT* Director 11/11/97
J. Robert Philpott
/s/ LARRY G. BLACKWELL* Director 11/11/97
Larry G. Blackwell
*By Kevin J. Mast, Attorney in Fact
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT MORTGAGE CORP.
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President, Treasurer and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Keith B. Giddens* Chief Executive Officer, 11/11/97
Chairman and Director
Keith B. Giddens
/s/ Kevin J. Mast* Vice President, Treasurer, 11/11/97
Kevin J. Mast Assistant Secretary and Director
/s/ Dennis W. Canupp* President and 11/11/97
Dennis W. Canupp Director
/s/ J. Phil Cox* Senior Vice President, 11/11/97
J. Phil Cox Secretary, and Director
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
CAROLINA INVESTORS, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President, Treasurer
and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Earl E. Morris, Jr.* Chairman of the Board 11/11/97
- --------------------------
Earl E. Morris, Jr.
/s/ Keith B. Giddens* Chief Executive Officer, 11/11/97
- -------------------------- Vice Chairman and Director
Keith B. Giddens
/s/ Kevin J. Mast* Vice President, Treasurer, 11/11/97
- -------------------------- Assistant Secretary and Director
Kevin J.Mast
/s/ John M. Sterling, Jr.* Director 11/11/97
- --------------------------
John M. Sterling, Jr.
/s/ Robert S. Davis* Director 11/11/97
- --------------------------
Robert S. Davis
/s/ Dennis W. Canupp* Chief Operating 11/11/97
- -------------------------- Officer and Director
Dennis W. Canupp
/s/ Larry Owen* President and Director 11/11/97
- --------------------------
Larry Owen
/s/ J. Phil Cox* Secretary and Director 11/11/97
- --------------------------
J. Phil Cox
/s/ Don Bobo* Director 11/11/97
- --------------------------
Don Bobo
/s/ K.T. Ryan* Chief Financial Officer 11/11/97
- -------------------------- and Director
K.T. Ryan
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
STERLING LENDING CORPORATION
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ KEITH B. GIDDENS* Chairman of the Board
Keith B. Giddens
/s/ KEVIN J. MAST* Vice President, Treasurer, 11/11/97
Kevin J. Mast and Director
/s/ DENNIS W. CANUPP* Chief Executive Officer and 11/11/97
A. Dennis W. Canupp Director
/s/ J. P. COX* Secretary and Director 11/11/97
J. Phil Cox
/s/ W. Roger Clark* President and Director 11/11/97
W. ROGER CLARK
/s/ SLATER W. SWARTWOOD* Executive Vice President and 11/11/97
Slater W. Swartwood Director
/s/ JOHN KUNST* Chief Financial Officer and 11/11/97
John Kunst Director
/s/ GEORGE ROBERSON* Director 11/11/97
George Roberson
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
STERLING LENDING INSURANCE AGENCY, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ PATRIC J. DARVIE President and Director 11/11/97
Patric J. Darvie*
/s/ SLATER W. SWARTWOOD* Vice President and Director 11/11/97
Slater W. Swartwood
/s/ W. ROGER CLARK* Secretary, Treasurer, 11/11/97
W. Roger Clark and Director
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT BUSINESS CAPITAL, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ John M. Sterling, Jr.* Director
John M. Sterling, Jr.
/s/ Keith B. Giddens* Chief Executive Officer and 11/11/97
Keith B. Giddens Chairman of the Board
/s/ Kevin J. Mast* Executive Vice President, Chief Financial 11/11/97
Kevin J. Mast Officer, Secretary and Director
/s/ A. Scott Lining Senior Vice President, 11/11/97
A. Scott Lining Controller and Director
/s/ Robert S. Davis* Assistant Secretary 11/11/97
Robert S. Davis and Director
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT COMMERCIAL MORTGAGE, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Keith B. Giddens* Chief Executive Officer 11/11/97
Keith B. Giddens and Chairman of the Board
/s/ Kevin J. Mast* Executive Vice President, Chief Financial 11/11/97
Kevin J. Mast Officer, Secretary and Director
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT MORTGAGE CORP. OF TENNESSEE
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President
and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ KEITH B. GIDDENS* Chief Executive 11/11/97
Keith B. Giddens Officer and Director
/s/ KEVIN J. MAST* Vice President, 11/11/97
Kevin J. Mast Treasurer and Director
/s/ DENNIS W. CANUPP* President and Director 11/11/97
Dennis W. Canupp
/s/ J. PHIL COX* Senior Vice President, Secretary, 11/11/97
J. Phil Cox and Director
/s/ GEORGE F. ROBERSON* Director 11/11/97
George F. Roberson
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT FINANCIAL CORP.
By: /s/ Kevin J. Mast
Kevin J. Mast
Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ KEITH B. GIDDENS* Chief Executive 11/11/97
Keith B. Giddens Officer and Director
/s/ KEVIN J. MAST* Executive Vice President, Chief Financial 11/11/97
Kevin J. Mast Officer, Treasurer, Secretary and Director
/s/ CONNIE WARNE* President, Assistant Secretary 11/11/97
Connie Warne and Director
/s/ MONTE HARRELL* Controller and Director 11/11/97
Monte Harrell
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT EQUITY ADVISORS, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President, Chief Financial
Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ JOHN. M. STERLING, JR.* Chairman of the Board 11/11/97
John M. Sterling, Jr.
/s/ KEITH B. GIDDENS* Chief Executive Officer 11/11/97
Keith B. Giddens and Director
/s/ SAMUEL J. COUVILLION* Chief Operating Officer and 11/11/97
Samuel J. Couvillion and Director
/s/ KEVIN J. MAST* Treasurer and Director 11/11/97
Kevin J. Mast
/s/ CAPERS A. EASTERBY* President and Director 11/11/97
Capers A. Easterby
/s/ A. SCOTT LINING* Vice President, Controller, 11/11/97
A. Scott Lining and Director
/s/ ROBERT S. DAVIS* Director 11/11/97
Robert S. Davis
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
THE LOAN PRO$, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Executive Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ KEITH B. GIDDENS* Chief Executive Officer and 11/11/97
Keith B. Giddens Chairman of the Board
/s/ KEVIN J. MAST* Executive Vice President, 11/11/97
Kevin J. Mast Treasurer, Chief Financial Officer,
and Director
/s/ RON LONG* President and Director 11/11/97
Ron Long
/s/ CHRIS LONG* Vice President and Director 11/11/97
Chris Long
/s/ J. P. COX* Director 11/11/97
J. Phil Cox
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
PREMIER FINANCIAL SERVICES, INC.
By: /s/ Kevin J. Mast
Kevin J. Mast
Executive Vice President, Chief Financial
Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ KIMBERLEY BULLARD* President and Director 11/11/97
Kimberley Bullard
/s/ KENNETH BENTLEY* Vice President and Director 11/11/97
Kenneth Bentley
/s/ J. P. COX* Director 11/11/97
J. Phil Cox
/s/ KEITH B. GIDDENS* Chief Executive Officer and 11/11/97
Keith B. Giddens Chairman of the Board
/s/ KEVIN J. MAST* Exective Vice President, Chief Financial 11/11/97
Kevin J. Mast Officer, Treasurer and Director
*By Kevin J. Mast, Attorney in Fact.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Greenville, State of
South Carolina, on November 12, 1997.
EMERGENT INSURANCE AGENCY CORP.
By: /s/ Kevin J. Mast
Kevin J. Mast
Vice President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ KEITH B. GIDDENS* Chief Executive 11/11/97
Keith B. Giddens Chairman and Director
/s/ KEVIN J. MAST* Vice President, 11/11/97
Kevin J. Mast Treasurer and Director
/s/ DENNIS W. CANUPP* President and Director 11/11/97
Dennis W. Canupp
*By Kevin J. Mast, Attorney in Fact.
II-3