UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31,1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________________ to
_______________________
Commission File No. 333-39339-03
STERLING LENDING CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-1042033
- ------------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
15 South Main Street Suite 750 Greenville, South Carolina 29601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 864-235-8056
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which registered
- --------------------------------- -------------------------------------------
None None
Securities registered under Section 12(g) of the Act:
Title of Each Class
- --------------------------------------------------------------------------------
None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE
None.
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K (as modified by prior no-action release to unrelated
parties) and is therefore filing this form with the reduced disclosure format.
PART I
Item 1. BUSINESS
GENERAL
Sterling Lending Corporation ("the Company"), a South
Carolina corporation and a majority-owned subsidiary of Emergent Group,
Inc. ("The Parent"), is a financial services company that is primarily
engaged in the business of originating residential mortgage loans. The
funds for these loans are obtained principally through affililated
companies. Emergent Mortgage Corporation, Inc. ("EMC"), an affiliated
company, purchases the loans at closing. Due to the fact that the
Company serves as an originating source for EMC, it is not subject to
credit risk or interest rate risk. The Company earns origination fees
from the borrower at the time the loan is closed, and also shares with
EMC in the gain on sale when the loan is sold to outside parties. The
Company makes substantially all of its loans 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.
The Company has one subsidiary, Sterling Insurance
Agency, a Louisiana corporation. The Company, which began operations on
August 1, 1996, operates from 13 traditional "bricks and mortar"
approach retail offices in Louisiana, Florida, Mississippi, Georgia,
Tennessee, and North Carolina. The Company's loan originations have
grown from $1.2 million for the five months ended December 31, 1996 to
$41.5 million for the year ended December 31, 1997. Although the Company
has expanded rapidly, it continues to represent a small portion of the
Parent Company's loan originations. Also, the Company has incurred
losses of approximately $4.7 million since inception, due mainly to the
significant start-up costs associated with such rapid expansion. In
1998, the Parent Company has determined to pursue the divestiture of the
Company to focus on its Homegold(R) retail strategy.
EMPLOYEES
At December 31, 1997, the Company employed a total of 98
full-time equivalent employees. The Company believes that its relations with its
employees are good.
Item 2. PROPERTIES
The Company's headquarters are located at 8591 United Plaza
Boulevard, United V, Suite 200, Baton Rouge, LA 70809 and are leased. At
December 31, 1997, the Company leased 13 offices. None of the leases, considered
separately, is believed to be material to the Company's operations. The Company
believes that its leased locations are suitable and adequate for their intended
purposes.
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiary 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 its subsidiary that, if determined adversely, would have a materially adverse
effect on the operations, profitability or financial condition of the Company or
its subsidiary.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K
(the "Instruction").
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's equity securities are not publicly
traded. The Parent owns 80% of the Company's common stock and each of
two minority shareholders owns 10% of the Company's common stock. The
Company has not paid and does not expect in the immediate future to pay,
dividends.
Item 6. SELECTED FINANCIAL DATA
Omitted pursuant to the Instruction.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion should be read in conjunction with the
Consolidated Financial Statements and notes of the Company appearing elsewhere
in this report.
Forward-Looking Information
Certain statements in the financial discussion and analysis by
management 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 are many and
include: lower origination volume due to market conditions, higher losses due to
economic downturn or lower real estate values, loss of key employees, adverse
consequences of changes in interest rate environment, deterioration of
creditworthiness of borrowers and risk of default, general economic conditions
in the Company's markets, including inflation, recession, interest rates and
other economic factors, loss of funding sources, loss of ability to sell loans,
general lending risks, dependence on Federal programs, impact of competition,
regulation of lending activities, and changes in the regulatory environment.
General
The Company, which began its operations in August 1996, is
still in the start-up phase of operations. Because of this, the Company has
generated significant losses since inception. The Company did not start
originating loans until October 1996 and therefore had little activity in 1996.
The Company has grown significantly since inception and now operates from ten
retail offices, mainly in the Southeast. Loan originations have grown from
approximately $500,000 a month in late 1996 to approximately $5.0 million a
month by the end of 1997. Total loan originations in 1997 and 1996 were $41.5
million and $1.2 million, respectively. Total loans sold in 1997 and 1996 were
$32.2 million and $1.2 million, respectively. As the Company operates mainly as
an originating source for EMC, the Company receives all of the origination fee
income when produced and shares in the gain on sale of loans when sold by EMC to
outside parties.
The Company is just a small part of the Parent Company's
retail lending strategy. In early 1998, the Parent Company announced plans to
pursue the divestiture of the Company in order to narrow its focus and
concentrate on its larger retail lending operation.
Results of Operations
Year Ended December 31, 1997, Compared to Five Months Ended December 31, 1996
Total revenues increased to $3.6 million in 1997 from $107,000
in 1996. The higher level of revenues resulted principally from increases in
gain on sale of loans and loan fee income.
Gain on sale of loans increased to $1.4 million in 1997 from
$16,000 in 1996 and loan fee income increased to $2.1 million in 1997 from
$72,000 in 1996. The increase in gain on sale of loans and loan fee income
resulted from increased loan originations and the corresponding loan sales. Loan
originations increased to $41.5 million from $1.2 million mainly due to a full
year of operation in 1997 and expansion of additional retail offices. Loan fees
as a percentage of production approximated 6.0% for both years. Gain on sale of
loans approximated 4.4% in 1997 and 1.4% in 1996.
Total expenses increased to $7.3 million in 1997 from $1.0
million in 1996. Total expenses are comprised of interest expense, salaries,
wages and employee benefits, and other general and administrative expenses.
Interest expense increased to $193,000 in 1997 from $21,000 in
1996. The increase in interest expense was due principally to increased
borrowings from affiliated companies to fund the increased loan originations
discussed above. Average monthly borrowings in 1997 approximated $2.6 million as
compared to approximately $565,000 in 1996.
Salaries, wages and employee benefits increased to $3.6
million in 1997 from $511,000 in 1996. This is a result of increased personnel
due to the significant expansion incurred in the start-up phase of the Company.
The Company has expanded to 13 retail offices and total personnel has increased
to 98 at December 31, 1997 as compared to 25 at December 31, 1996.
Other general and administrative expenses increased to $3.6
million in 1997 from $501,000 in 1996. This is a result of a full year of
operations in 1997 and the significant expansion associated with the start-up
phase of the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth herein commencing on
page F-1 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to the Instruction.
Item 11. EXECUTIVE COMPENSATION
Omitted pursuant to the Instruction.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Omitted pursuant to the Instruction.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to the Instruction.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of Report.
1. FINANCIAL STATEMENTS:
The Financial Statements are listed in the index to
Consolidated Financial Statements on page F-1 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
3. EXHIBITS:
The exhibits are listed on the Exhibit Index attached
hereto.
STERLING LENDING CORPORATION AND SUBSIDIARY
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Financial Statements
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Contents
Independent Auditors' Report........................................F-2
Consolidated Balance Sheets.........................................F-3
Consolidated Statements of Income...................................F-4
Consolidated Statements of Shareholder's Equity.....................F-5
Consolidated Statements of Cash Flows...............................F-6
Notes to Consolidated Financial Statements..........................F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sterling Lending Corporation and subsidiary
Greenville, South Carolina
We have audited the accompanying consolidated balance sheets of Sterling Lending
Corporation and subsidiary, a majority-owned subsidiary of Emergent Group, Inc.,
as of December 31, 1997 and 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for the year ended December 31, 1997
and the period from August 1, 1996 (date of inception) through December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of Sterling Lending
Corporation and subsidiary, a majority-owned subsidiary of Emergent Group, Inc.,
as of December 31, 1997 and 1996, and the results of their operations and their
cash flows for the periods then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Greenville, SC
February 27, 1998
F-2
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Balance Sheets
December 31, 1997 and 1996
December 31,
------------------------------------
1997 1996
---------------- ---------------
ASSETS
Cash and cash equivalents $ 262,612 $ 125,799
Mortgage loans held for sale 9,325,758 --
Less net deferred loan fees (368,274) --
---------------- ---------------
Net mortgage loans held for sale 8,957,484 --
Other receivables 558,703 62,534
Property and equipment, net 1,327,532 361,578
Other assets 207,338 302,251
---------------- ---------------
Total assets $ 11,313,669 $ 852,162
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 760,257 $ 81,976
Subordinated debt to affiliates, due on demand 9,543,337 634,616
---------------- ---------------
Total liabilities 10,303,594 716,592
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 5,700,000 1,000,000
Accumulated deficit (4,689,925) (864,430)
---------------- ---------------
Total shareholders' equity 1,010,075 135,570
---------------- ---------------
Total liabilities and shareholders' equity $ 11,313,669 $ 852,162
================ ===============
See accompanying Notes to Consolidated Financial Statements,
which are an integral part of these statements
F-3
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Income
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Periods Ended December 31,
-----------------------------
1997 1996
------------ -------------
REVENUES:
Interest income $ 50,091 $ 19,397
Gain on sale of loans 1,419,421 16,282
Loan fee income 2,137,048 71,852
Other revenues 10,768 --
------------ -------------
Total revenues 3,617,328 107,531
------------ -------------
EXPENSES:
Interest 192,904 21,496
Salaries, wages and employee benefits 3,590,559 510,923
Management fee to Parent 780,000 125,000
Legal, audit, and professional fees 632,321 74,639
Rent and utilities 452,454 36,694
Telephone 310,119 19,430
Travel and entertainment 280,544 36,680
Business development costs 255,497 28,747
Other general and administrative expenses 847,005 179,751
------------ -------------
Total expenses 7,341,403 1,033,360
------------ -------------
Loss before income taxes (3,724,075) (925,829)
Provision (benefit) for income taxes 101,420 (61,399)
------------ -------------
Net loss $(3,825,495) $ (864,430)
============ =============
See accompanying Notes to Consolidated Financial Statements,
which are an integral part of these statements
F-4
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Shareholders' Equity
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Common Additional Accumulated
Stock Paid-in Deficit Total
Capital
----------------- ----------------- -------------------- -------------------
Initial cash investment by Parent $ -- $ 1,000,000 $ -- $ 1,000,000
Net loss from inception to
December 31, 1996 -- -- (864,430) (864,430)
----------------- ----------------- -------------------- -------------------
Balance at December 31, 1996 -- 1,000,000 (864,430) 135,570
Cash investment by Parent -- 4,700,000 -- 4,700,000
Net loss -- -- (3,825,495) (3,825,495)
----------------- ----------------- -------------------- -------------------
Balance at December 31, 1997 $ -- $ 5,700,000 $ (4,689,925) $ 1,010,075
================= ================= ==================== ===================
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements.
F-5
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Consolidated Statements of Cash Flows
Year Ended December 31, 1997 and Period from August 1, 1996 (date of
inception) through December 31, 1996
Periods Ended December 31,
------------------------------------------------
1997 1996
----------------------- ---------------------
OPERATING ACTIVITIES:
Net loss $ (3,825,495) $ (864,430)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 374,620 103,701
Provision for deferred income taxes 331,348 1,135
Increase in deferred loan fees 368,274 --
Principal proceeds from loans sold and securitized 32,181,128 1,195,255
Loans originated with intent to sell (41,506,886) (1,195,255)
Changes in operating assets and liabilities (201,691) (372,485)
----------------------- ---------------------
Net cash used in operating activities (12,278,702) (1,132,079)
----------------------- ---------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,193,206) (376,738)
----------------------- ---------------------
Net cash used in investing activities (1,193,206) (376,738)
----------------------- ---------------------
FINANCING ACTIVITIES:
Cash investment from Parent 4,700,000 1,000,000
Net cash received on intercompany borrowings 8,908,721 634,616
----------------------- ---------------------
Net cash provided by financing activities 13,608,721 1,634,616
----------------------- ---------------------
Net increase in cash and cash equivalents 136,813 125,799
Cash and cash equivalents at beginning of year 125,799 --
----------------------- ---------------------
Cash and cash equivalents at end of year $ 262,612 $ 125,799
======================= =====================
See accompanying Notes to Consolidated Financial Statements, which are an
integral part of these statements.
F-6
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting and Reporting Policies
Organization and Business Activity
Sterling Lending Corporation ("Sterling Lending" or "the Company") is an 80%
owned subsidiary of Emergent Group, Inc. ("Parent Company"). Sterling Lending
was organized on March 6, 1996 as Emergent Lending Corp., and the name was
changed to Sterling Lending Corporation on July 24, 1996. Operations began
August 1, 1996.
Sterling Lending is primarily engaged in the business of originating residential
mortgage loans. The funds for these loans are obtained principally through
Emergent Mortgage Corp., who purchases the loans at closing. Due to the fact
that the Company serves as an originating source for Emergent Mortgage Corp., it
is not subject to credit risk or interest rate risk. The Company earns
origination fees from the borrower at the time the loan is closed, and also
shares in the gain on sale with Emergent Mortgage Corp. when it is sold to
outside parties.
Substantially all of the Company's mortgage 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 such as
thrift institutions and commercial banks.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Sterling Lending and Sterling Insurance Agency ("Sterling Insurance") (100%
owned) (collectively known as the "Company"). All significant intercompany
balances and transactions between Sterling Lending and its subsidiary have been
eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents include amounts
invested in overnight reverse repurchase agreements. Such agreements are
collateralized by U.S. Government securities pledged by the banks.
F-7
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 1. Summary of Significant Accounting and Reporting Policies (continued)
Mortgage Loans Held for Sale
Mortgage loans held for sale consist primarily of first and second residential
mortgages on one to four family residences located throughout the United States.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. There was no allowance for market losses on mortgage loans held for sale
at December 31, 1997 and 1996. Non-refundable loan fees and direct costs
associated with the origination or purchase of loans are deferred and netted
against outstanding loan balances.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment and collateral liquidation a
secondary source of repayment. The Company determines the need for collateral on
a case-by-case or product-by-product basis. Factors considered include the
current and prospective creditworthiness of the customer, terms of the
instrument and economic conditions.
Interest income on loans receivable is recorded on an accrual basis as earned.
Accrual of interest is generally 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 deferred insurance premiums are amortized into
income using the interest method over the life of the loan.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets. Estimated lives are 3 to 7 years
for furniture, fixtures and equipment. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful life of the
improvement or the terms of the respective lease. Additions to property and
equipment and major replacements or improvements are capitalized at cost.
Maintenance, repairs and minor replacements are expensed when incurred.
Impairment of Long-Lived Assets
Long-lived assets held and used by the Company are reviewed for impairment
whenever management believes events or changes in circumstances indicate that
the carrying value of an asset may not be fully recoverable. No impairment loss
was recognized in 1997 or 1996.
F-8
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 1. Summary of Significant Accounting and Reporting 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.
Income Taxes
The Company is included in the consolidated Federal income tax return of its
Parent Company. The tax sharing agreement with the Parent Company provides for
the Company to compute its taxes on a separate return basis, and allows the
Company to reduce its taxes to the extent of available net operating loss (NOL)
carryforwards of its Parent Company. 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 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 result primarily from differences in
financial and income tax reporting of depreciation. At December 31, 1997 and
1996, the Company had a net deferred tax liability of $332,483 and $1,135,
respectively, which is included in accrued liabilities in the accompanying
consolidated balance sheet.
Note 2. Mortgage Loans Held for Sale
The following is a summary of mortgage loans held for sale by type of loan at
December 31, 1997.
First mortgage residential property $ 8,391,144
Second mortgage residential property 934,614
================
Total $ 9,325,758
================
First mortgage residential loans generally have contractual maturities of 12 to
360 months with average interest rates of approximately 11%. Second mortgage
residential loans have contractual maturities of 12 to 360 months with average
interest rates of approximately 15%.
The Company currently originates loans in six states. The following is a summary
of mortgage loans held for sale by state at December 31, 1997.
F-9
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 2. Mortgage Loans Held for Sale (continued)
Loan Percentage
Balance of total
------------------- ------------------
Florida $ 4,033,515 43.2%
Louisiana 2,181,330 23.4%
Mississippi 1,509,854 16.2%
Georgia 797,758 8.6%
Tennessee 568,904 6.1%
North Carolina 234,397 2.5%
------------------- ------------------
Total $ 9,325,758 100.0%
=================== ==================
There was no allowance for loan losses recorded at December 31, 1997 as the
mortgage loans are held for sale and recorded at lower of aggregate cost or
market value.
Note 3. Property and Equipment
Property and equipment at December 31, 1997 and 1996 consists of the following:
December 31,
-----------------------------
1997 1996
------------- -------------
Office equipment and computers $ 648,116 $ 165,938
Leasehold improvements 16,394 729
Furniture, fixtures and equipment 905,434 210,071
------------- -------------
1,569,944 376,738
Less accumulated depreciation and amortization 242,412 15,160
------------- -------------
Property and equipment, net $ 1,327,532 $ 361,578
============= =============
Depreciation expense in 1997 and 1996 was $227,252 and $15,160, respectively.
Note 4. Subordinated Debt to Affiliates
From time to time, the Company borrows money from the Parent Company and other
affiliated companies as subordinated debt which is payable on demand.
Subordinated debt to affiliates at December 31, 1997 consists of $4,750,000 to
the Parent Company and $4,793,337 to Carolina Investors, Inc. ("CII"), an
affiliate of the Company, both with interest payable based on the Wall Street
Journal Prime Rate + 2%, (10.50% at December 31, 1997). Subordinated debt to
affiliates at December 31, 1996 consists of $624,871 to Emergent Mortgage
Corporation and $9,745 to CII, both with interest payable based on the Wall
Street Journal Prime Rate + 2%. Interest expense on these borrowings in 1997 and
1996 was $192,343 and $21,496, respectively.
F-10
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 5. Income Taxes
Income tax expense (benefit) for the periods ended December 31, 1997 and 1996,
consists of the following:
Periods Ended December 31,
-------------------------------
1997 1996
-------------- -------------
Current:
Federal $ (46,698) $ (18,501)
State and local (183,230) (44,033)
-------------- -------------
Total current (229,928) (62,534)
Deferred:
Federal 297,107 324
State and local 34,241 811
-------------- -------------
Total deferred 331,348 1,135
Total:
Federal 250,409 (18,177)
State and local (148,989) (43,222)
-------------- -------------
Total income tax expense (benefit) $ 101,420 $ (61,399)
============== =============
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of significant
items comprising the Company's net deferred tax liability are as follows:
December 31,
----------------------------
1997 1996
------------ ------------
Deferred tax assets:
Amortization of organizational costs $ 65,740 $ --
Net operating loss carryforward 1,767,687 301,204
Other 3,218 --
------------ ------------
Total deferred tax assets 1,836,645 301,204
Less: valuation allowance (1,767,687) (301,204)
------------ ------------
Net deferred tax assets 68,958 --
Deferred tax liabilities:
Differences between book and tax basis of property (39,042) (1,135)
Deferred loan costs (76,000) --
Difference between book and tax basis of the interest-only
strip security associated with the Company's investment in
the Real Estate Investment Trust (286,399) --
------------ ------------
Total deferred tax liabilities (401,441) (1,135)
------------ ------------
Net deferred tax liability $ (332,483) $ (1,135)
============ ============
F-11
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 5. Income Taxes (continued)
The net deferred tax liability is included in accounts payable and accrued
liabilities on the balance sheet.
Income tax expense differs from tax benefit computed by applying the statutory
Federal income tax rate, 34%, to loss before income taxes. The reasons for these
differences for the periods ended December 31, 1997 and December 31, 1996 are as
follows:
Periods Ended December 31,
----------------------------------------
1997 1996
------------------ -----------------
Tax benefit at statutory Federal rate of 34% $ (1,266,185) $ (314,782)
Differences resulting from:
Nondeductible expense 9,400 51
Increase in valuation allowance 1,466,483 301,204
State income taxes, net of federal income tax benefit (98,333) (28,526)
Other (9,945) (19,346)
------------------ -----------------
$ 101,420 $ (61,399)
================== =================
There are no known significant pending assessments from taxing authorities
regarding taxation issues at the Parent Company or its subsidiaries.
Note 6. Statement of Cash Flows
The following information relates to the Statements of Cash Flows for the
periods ended December 31, 1997 and 1996:
Periods Ended December 31,
---------------------------------------
1997 1996
----------------- ------------------
Changes in operating assets and liabilities
increasing (decreasing) cash:
Other receivables (496,169) (62,534)
Other assets (52,455) (390,792)
Accounts payable and accrued liabilities 346,933 80,841
----------------- ------------------
$ (201,691) $ (372,485)
----------------- ------------------
Supplemental disclosures of cash flow information:
Interest paid $ 192,904 $ 21,496
----------------- ------------------
Income taxes paid $ -- $ --
================= ==================
F-12
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 7. Retirement Plan
The Company participates in the Parent Company's Matched Savings Plan under
Section 401(k) of the Internal Revenue Code. To be eligible, employees must be
at least 21 years old, have completed at least 30 days of service, and be
considered full-time employees. Under this plan, the Company contributes a
matching contribution of 50% of employee contributions to a maximum of 6% of
compensation for each employee. The Company's contribution to the plan totaled
$55,724 for the year ended December 31, 1997. No contributions were made to the
plan in 1996.
Note 8. Related Parties
The Company was charged management fees of $780,000 and $125,000 in 1997 and
1996, respectively, by the Parent Company for support services, including
accounting and management information systems. The amount charged is determined
at the discretion of the Parent Company's management based on budgeted loan
volume and payroll costs for each of the Parent Company's subsidiaries.
Additionally, the Company obtains legal services from a firm considered to be a
related party. Total charges for these services were $1,658 and $39 in 1997 and
1996, respectively.
Note 9. Operating Leases
The Company leases office space, and office equipment under operating leases.
Future minimum lease payments are as follows:
1998 $ 553,659
1999 527,781
2000 482,122
2001 422,024
2002 55,739
--------------------
2,041,325
====================
Total rent expense was $448,480 and $36,694 in 1997 and 1996, respectively.
Note 10. Dependency on Parent
Due to the Company being in its early stages of operations, loan volumes have
not reached a profitable level as of December 31, 1997. As a result, the Company
is dependent on its Parent Company or affiliated companies for funding of its
operations either through capital contributions or additional subordinated debt
to affiliates.
F-13
Sterling Lending Corporation and Subsidiary
(A majority-owned subsidiary of Emergent Group, Inc.)
Notes to Consolidated Financial Statements (continued)
Note 11. Contingencies and Loan Commitments
In the normal course of business, the Company makes commitments to extend credit
that are not presented in the accompanying financial statements. Commitments
outstanding at December 31, 1997 aggregated approximately $709,000. There were
no commitments outstanding at December 31, 1996.
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 its business or financial condition taken as a whole.
In September 1997, the Parent Company made an offering of $125 million of Senior
Notes due 2004. The purpose of the offering was to provide the Parent Company's
group of companies with additional funds with which to continue to expand its
business, particularly its residential mortgage loan business. Most of the
Parent Company's subsidiaries, including SLC, guarantee payment of the Senior
Notes.
Note 12. Subsequent Event
On January 29, 1998, the Parent Company engaged an investment advisor to seek a
strategic acquirer of the Company.
F-14
EXHIBIT INDEX
3.1-- Articles of Incorporation dated Februsry 29, 1996.
3.2-- Bylaws.
3.3-- Articles of Amendment dated July 7, 1996.
3.4-- Articles of Amendment dated June 1, 1997.
10.1-- Emergent Group, Inc. Stock Option Plan: Incorporated by
reference to Exhibit 10.1 of Emergent's Group Inc.'s
Registration Statement on Form S-1, Commission File
No. 333-01393.
10.2-- 1995 Officer and Employee Stock Option Plan: Incorporated
by reference to Exhibit 10.1 of Emergent Group, Inc.'s 1995
Notice of Annual Meeting and Proxy Statement, Commission
File No. 0-8909.
10.3-- 1995 Restricted Stock Agreement Plan: Incorporated by
reference to Exhibit 10.4 of Emergent's Group Inc.'s
Registration Statement on Form S-1, Commission File
No. 333-01393.
10.4-- Emergent Group, Inc. Employee Stock Purchase Plan:
Incorporated by reference to Exhibit 99.1 of
Emergent Group, Inc.'s registration statement
on Form S-8, Commission File No. 333-20179.
27.1-- Financial Data Schedule (For SEC Use Only).
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
STERLING LENDING CORPORATION
------------------------------------
Registrant
April 13, 1998 \s\ Dennis W. Canupp
- ------------------------------------- ------------------------------------
(Date) Dennis W. Canupp, Director
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
\s\ Dennis W. Canupp \s\ Kevin J. Mast
- ------------------------------------- ------------------------------------
Dennis W. Canupp, Director Kevin J. Mast, Director
and Chief Executive Officer and Treasurer
\s\ Keith B. Giddens \s\ W. Roger Clark, Sr.
- ------------------------------------- ------------------------------------
Keith B. Giddens, Chairman of W. Roger Clark, Sr., Director
the Board of Directors and Vice and President
President
April 13, 1998
- ---------------------------------------
(Date)