SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 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 Number 333-39339-03
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STERLING LENDING CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 57-1042033
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 17526
Greenville, South Carolina 29606
(Address of principal executive offices)
Registrant's telephone number, including area code: 864-235-8056
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes _ No _X_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each Class: Outstanding at September 30, 1997
- ------------------------------------------------ --------------------------------------
None None
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and Form 10-QSB, as modified by grants of no-action relief to
unrelated third parties, and is therefore filing this form with the reduced
disclosure format.
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STERLING LENDING CORPORATION AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 4
Consolidated Statements of Income
for the nine months and three months ended September 30, 1997
and September 30, 1996 5
Consolidated Statements of Cash Flows
for the nine months and three months ended September 30, 1997 and
September 30, 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
2
PART I. FINANCIAL INFORMATION
3
STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
--------------------- -------------------
1997 1996
--------------------- -------------------
ASSETS:
Cash and cash equivalents $ 65,073 $ 125,799
Other receivables -- 62,534
Property and equipment, net 1,388,513 361,578
Other assets 109,095 302,251
--------------------
------------------
Total assets $ 1,562,681 $ 852,162
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities $ 169,830 $ 81,976
Subordinated debt to affiliates, due on demand 631,000 634,616
----------------- ----------------
Total liabilities 800,830 716,592
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 5,200,000 1,000,000
Accumulated deficit (4,438,149) (864,430)
----------------- ----------------
Total shareholders' equity 761,851 135,570
----------------- ----------------
Total liabilities and shareholders' equity $ 1,562,681 $ 852,162
================= ================
See Notes to Unaudited Financial Statements
4
STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------------- -----------------------------------
1997 1996 1997 1996
---------------- -------------- ----------------- --------------
REVENUES:
Gain on sale of loans $ 498,874 $ -- $ 307,315 $ --
Loan fee income 1,177,469 -- 447,600 --
Other revenues 136,873 -- 71,447 --
------------- ------------ ---------------- ---------------
Total revenues 1,813,216 -- 826,362 --
------------- ------------ ---------------- ---------------
EXPENSES:
Interest 62,118 -- 24,395 --
Salaries, wages and employee benefits 2,692,173 138,125 1,057,987 138,125
Management fee to Parent 585,000 50,000 195,000 50,000
Legal, audit, and professional fees 476,843 11,623 213,157 11,623
Rent and utilities 291,997 12,517 126,226 12,517
Telephone 220,688 2,419 82,740 2,419
Travel and entertainment 203,344 14,446 66,401 14,446
Business development costs 202,315 -- 28,432 --
Other general and administrative expenses 653,592 50,934 185,654 50,934
------------- ------------ ---------------- ---------------
Total expenses 5,388,070 280,064 1,979,992 280,064
------------- ------------ ---------------- ---------------
Loss before income taxes (3,574,854) (280,064) (1,153,630) (280,064)
Provision (benefit) for income taxes (1,135) -- -- --
------------- ------------ --------------- ---------------
Net loss $ (3,573,719) $ (280,064) $ (1,153,630) $ (280,064)
============= ============ ============== ===============
See Notes to Unaudited Financial Statements
5
STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ----------------- ------------------ ----------------
OPERATING ACTIVITIES:
Net loss $ (3,573,719) $ (280,064) $ (1,153,630) $ (280,064)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 308,924 25,962 84,005 25,962
Provision for deferred income taxes (1,135) -- -- --
Principal proceeds from loans sold
and securitized 26,340,071 -- 14,646,351 --
Loans originated with intent to sell (26,340,071) -- (14,646,351) --
Changes in operating assets and 197,311 (500,421) (4,811) (500,421)
liabilities
------------------- ----------------- ------------------ ----------------
Net cash used in operating
activities (3,068,619) (754,523) (1,074,436) (754,523)
------------------- ----------------- ------------------ ----------------
INVESTING ACTIVITIES:
Purchase of property and equipment (1,188,491) (194,083) (44,897) (194,083)
------------------- ----------------- ------------------ ----------------
Net cash used in investing
activities (1,188,491) (194,083) (44,897) (194,083)
------------------- ----------------- ------------------ ----------------
FINANCING ACTIVITIES:
Cash investment from Parent 4,200,000 1,000,000 1,600,000 1,000,000
Net cash received on intercompany
borrowings (3,616) -- (527,000) --
------------------- ----------------- ------------------ ----------------
Net cash provided by
financing activities 4,196,384 1,000,000 1,073,000 1,000,000
------------------- ----------------- ------------------ ----------------
Net increase in cash and cash
equivalents (60,726) 51,394 (46,333) 51,394
Cash and cash equivalents at beginning of
year 125,799 -- 111,406 --
------------------ ---------------- ------------------- ----------------
Cash and cash equivalents at end of year $ 65,073 $ 51,394 $ 65,073 $ 51,394
=================== ================ ================== ================
See Notes to Unaudited Financial Statements
6
STERLING LENDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1--ORGANIZATION AND BASIS OF PREPARATION
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.
The accompanying consolidated financial statements include the accounts of
Sterling Lending and Sterling Insurance Agency (100% owned) and are prepared in
accordance with the SEC's rules regarding interim financial statements, and
therefore do not contain all disclosures required by generally accepted
accounting principles for annual financial statements.
The consolidated balance sheet as of September 30, 1997, and the consolidated
statements of income for the nine-month and three-month periods ended September
30, 1997 and 1996, and the consolidated statements of cash flows for the
nine-month and three-month periods ended September 30, 1997 and 1996, are
unaudited and in the opinion of management contain all known adjustments, which
consist of only normal recurring adjustments necessary to present fairly the
financial position results of operations, and cash flows of the Company. All
significant intercompany balances and transactions between Sterling Lending and
its subsidiary have been eliminated in consolidation.
KPMG Peat Marwick LLP previously examined and reported on the Company's
financial statements for the year ended December 31, 1996, from which the
consolidated balance sheet as of that date is derived.
NOTE 2--CASH FLOW INFORMATION
For the nine-month period ended September 30, 1997, the Company paid interest of
$62,118. No interest was paid for the nine-month period ended September 30,
1996.
For the three-month period ended September 30, 1997, the Company paid interest
of $24,395. No interest was paid for the three-month period ended September 30,
1996.
NOTE 3--CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments readily convertible to known
amounts of cash or having a maturity of three months or less to be cash
equivalents.
The Company maintains its primary checking account with one bank. The amounts
maintained in the checking account are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to $100,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company appearing elsewhere herein.
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, adverse consequences of changes
in interest rate environment, uncreditworthiness of borrowers and risk of
default, limited operating history of retail lending operations, termination of
strategic alliance agreements and mortgage banker relationships, 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,
loss of operating loss carryforwards, impact of competition, regulation of
lending activities, changes in the regulatory environment, and dependence on key
executives.
General
Sterling Lending Corporation ("Sterling Lending"), 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 to sub-prime borrowers. The funds for these loans are obtained
principally through affililated companies. HomeGold, Inc. (formerly Emergent
Mortgage Corporation, Inc.) ("EMC"), an affiliated company, purchases the loans
at closing. 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 as of September 30, 1997, operated from
nine retail offices, mainly in the Southeast. Loan originations have grown to
approximately $4.0-5.0 million a month by September 30, 1997. Total loan
originations for the nine months and three months ended September 30, 1997 were
$26.3 million and $14.6 million, respectively. Total loans sold for the nine
months and three months ended 1997 were $26.3 million and $14.6 million,
respectively. As the Company operates mainly as an originating source for EMC,
the Company receives 100% of the origination fee income when produced and shares
in the gain on sale of loans when sold by EMC to outside parties.
Results of Operations
Nine Months Ended September 30, 1997, Compared to Nine Months Ended September
30, 1996
Total revenues were $1.8 million for the nine months ended September
30, 1997. No revenues were generated during the nine months ended September 30,
1996, as the Company did not begin originating loans until October 1996. Total
revenues mainly include gain on sale of loans and loan fee income.
Gain on sale of loans and loan fee income for the nine months ended
September 30, 1997 were $499,000 and $1.2 million, respectively. Loan
originations were $26.3 million for the nine months ended September 30, 1997.
Loan fees as a percentage of production approximated 6.1% for the nine months
ended September 30, 1997. Gain on sale of loans approximated 2.7% for the nine
months ended September 30, 1997.
Total expenses increased to $5.4 million for the nine months ended
September 30, 1997 from $280,000 for the nine months ended September 30, 1996.
Total expenses are comprised of interest expense, salaries, wages and employee
benefits, and other general and administrative expenses.
8
Interest expense was $62,000 for the nine months ended September 30,
1997. Interest expense results mainly from borrowings from affiliated companies
to fund accumulated losses. The Company did not need to borrow funds for the
nine months ended September 30, 1996, and therefore incurred no interest
expense. Average monthly borrowings for the nine months ended September 30, 1997
approximated $768,000.
Salaries, wages and employee benefits increased to $2.7 million for the
nine months ended September 30, 1997 from $138,000 for the nine months ended
September 30, 1996. This is a result of increased personnel due to the
significant expansion occurring since 1996. The Company has expanded to nine
retail offices at September 30, 1997 from one retail office at September 30,
1996 and total personnel has increased to 94 at September 30, 1997 from
approximately 20 at September 30, 1996.
Other general and administrative expenses increased to $2.6 million for
the nine months ended September 30, 1997 from $142,000 for the nine months ended
September 30, 1996. This is a result of the expansion of the Company in number
of offices and number of people since September 1996 as discussed above.
Three Months Ended September 30, 1997, Compared to Three Months Ended September
30, 1996
Total revenues were $826,000 for the three months ended September 30,
1997. No revenues were generated during the three months ended September 30,
1996, as the Company did not begin originating loans until October 1996. Total
revenues mainly include gain on sale of loans and loan fee income.
Gain on sale of loans and loan fee income for the three months ended
September 30, 1997 were $307,000 and 448,000, respectively. Loan originations
were $14.6 million for the three months ended September 30, 1997. Loan fees as a
percentage of production approximated 6.1% for the three months ended September
30, 1997. Gain on sale of loans approximated 3.4% for the three months ended
September 30, 1997.
Total expenses increased to $2.0 million for the three months ended
September 30, 1997 from $280,000 for the three months ended September 30, 1996.
Total expenses are comprised of interest expense, salaries, wages and employee
benefits, and other general and administrative expenses.
Interest expense was $24,000 for the three months ended September 30,
1997. Interest expense results mainly from borrowings from affiliated companies
to fund accumulated losses. The Company did not need to borrow funds for the
three months ended September 30, 1996, and therefore incurred no interest
expense. Average monthly borrowings for the three months ended September 30,
1997 approximated $752,000.
Salaries, wages and employee benefits increased to $1.1 million for the
three months ended September 30, 1997 from $138,000 for the three months ended
September 30, 1996. This is a result of increased personnel due to the
significant expansion incurred since 1996. The Company has expanded to nine
retail offices at September 30, 1997 from one retail office at September 30,
1996 and total personnel has increased to 94 at September 30, 1997 from
approximately 20 at September 30, 1996.
Other general and administrative expenses increased to $898,000 for the
three months ended September 30, 1997 from $142,000 for the three months ended
September 30, 1996. This is a result of the expansion of the Company in number
of offices and number of people since September 1996 as discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q (the "Instruction").
9
PART II. OTHER INFORMATION
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Omitted pursuant to the Instruction.
Item 3. Defaults Upon Senior Securities
Omitted pursuant to the Instruction.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to the Instruction.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1 Articles of Incorporation of the Company
dated February 29, 1996: Incorporated by
reference to the Company's annual report on
Form 10-K for the fiscal year ended December
31, 1997 (the "10-K").
3.2 Bylaws of the Company: Incorporated by
reference to the 10-K.
3.3 Articles of Amendment dated July 7, 1996:
Incorporated by reference to the 10-K.
3.4 Articles of Amendment dated June 1, 1997:
Incorporated by reference to the 10-K.
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STERLING LENDING CORPORATION
Date: May 13, 1998
By: \s\ Dennis W. Canupp
---------------------------------------
Dennis W. Canupp,
Chief Executive Officer
Date: May 13, 1998
By: \s\ Kevin J. Mast
---------------------------------------
Kevin J. Mast,
Vice President, Chief Financial
Officer and Treasurer
11