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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 MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER 333-39339-03
-----------------------
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 APRIL 30, 1998
- ------------------------------------------------ ---------------------------------
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 MARCH 31, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 4
Consolidated Statements of Income
for the three months ended March 31, 1998
and March 31, 1997 5
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and
March 31, 1997 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
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PART I. FINANCIAL INFORMATION
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STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
--------------------- -------------------
1998 1997
--------------------- -------------------
ASSETS:
Cash and cash equivalents $ 332,849 $ 262,612
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 274,966 558,703
Property and equipment, net 1,381,035 1,327,532
Other assets 168,031 207,338
---------------- ---------------
TOTAL ASSETS $ 2,156,881 $ 11,313,669
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued liabilities $ 673,883 $ 760,257
Subordinated debt to affiliates, due on demand 829,000 9,543,337
---------------- ---------------
Total liabilities 1,502,883 10,303,594
Shareholders' equity:
Common stock, no par value -- --
Additional paid-in capital 6,200,000 5,700,000
Accumulated deficit (5,546,002) (4,689,925)
---------------- ---------------
Total shareholders' equity 653,998 1,010,075
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,156,881 $ 11,313,669
================ ===============
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
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STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
1998 1997
-------------------- ---------------------
REVENUES:
Interest income $ 10,038 $ --
Gain on sale of loans 792,497 31,186
Loan fee income 593,698 87,238
Other revenues 126,948 22,034
--------------- ----------------
Total revenues 1,523,181 140,458
--------------- ----------------
EXPENSES:
Interest 80,201 12,716
Salaries, wages and employee benefits 1,282,760 718,559
Management fee to Parent 150,000 195,000
Legal, audit, and professional fees 63,274 73,867
Rent and utilities 155,627 44,809
Telephone 104,533 30,234
Travel and entertainment 72,635 78,800
Business development costs 99,240 82,215
Other general and administrative expenses 332,970 220,803
---------------- ----------------
Total expenses 2,341,240 1,457,003
--------------- ----------------
Loss before income taxes (818,059) (1,316,545)
Provision (benefit) for income taxes 38,018 (1,135)
--------------- ----------------
NET LOSS $ (856,077) $ (1,315,410)
=============== ================
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
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STERLING LENDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
1998 1997
----------------------- ---------------------
OPERATING ACTIVITIES:
Net loss $ (856,077) $ (1,315,410)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 68,854 99,451
Provision for deferred income taxes 38,018 (1,135)
Decrease in deferred loan fees (368,274) --
Principal proceeds from loans sold 9,325,758 1,642,890
Loans originated with intent to sell -- (1,642,890)
Changes in operating assets and liabilities 198,652 127,879
------------------- ----------------
Net cash provided by (used in) operating activities 8,406,931 (1,089,215)
------------------- ----------------
INVESTING ACTIVITIES:
Purchase of property and equipment (122,357) (862,960)
------------------- ----------------
Net cash used in investing activities (122,357) (862,960)
------------------- ----------------
FINANCING ACTIVITIES:
Cash investment from Parent 500,000 2,000,000
Net cash paid on intercompany borrowings (8,714,337) (139,616)
------------------- ----------------
Net cash provided by (used in) financing activities (8,214,337) 1,860,384
------------------- ----------------
Net increase (decrease) in cash and cash equivalents 70,237 (91,791)
Cash and cash equivalents at beginning of year 262,612 125,799
------------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 332,849 $ 34,008
=================== ================
SEE NOTES TO UNAUDITED FINANCIAL STATEMENTS
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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. Reference should be made
to the financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, including the footnotes thereto.
The consolidated balance sheet as of March 31, 1998, and the consolidated
statements of income for the three-month periods ended March 31, 1998 and 1997,
and the consolidated statements of cash flows for the three-month periods ended
March 31, 1998 and 1997, 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, 1997, from which the
consolidated balance sheet as of that date is derived.
NOTE 2--CASH FLOW INFORMATION
For the three-month periods ended March 31, 1998 and 1997, the Company paid
interest of $80,201 and $12,716, respectively.
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.
NOTE 4--ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income". This Statement establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events during the period other than transactions with owners.
Comprehensive income is divided into net income and other comprehensive income.
Adoption of this Statement did not change total shareholders' equity as
previously reported. Net income and comprehensive income are the same for the
three months ended March 31, 1998 and 1997.
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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 affiliated 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 has grown significantly since
inception and now operates from 11 retail offices, mainly in the Southeast. Loan
originations have grown to approximately $5.0 million a month on average for the
three months ended March 31, 1998 from approximately $550,000 a month on average
for the three months ended March 31, 1997. Total loan originations for the three
months ended March 31, 1998 and 1997 were $15.1 million and $1.6 million,
respectively. Total loans sold for the three months ended March 31, 1998 and
1997 were $9.3 million and $1.6 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 in 1997 shared in the gain on sale of
loans when sold by EMC to outside parties. Beginning in 1998, the Company
receives 100% of the gain on sale of loans.
The Company is just a small part of the Parent Company's retail lending
strategy. In the first quarter of 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
THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Total revenues increased to $1.5 million for the three months ended
March 31, 1998 from $140,000 for the three months ended March 31, 1997. 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 $792,000 for the three months ended
March 31, 1998 from $31,000 for the three months ended March 31, 1997 and loan
fee income increased to $594,000 for the three months ended March 31, 1998 from
$87,000 for the three months ended March 31, 1997. 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 $15.1 million for the
three months ended March 31, 1998 from $1.6 million for the three months ended
March 31, 1997 mainly due to the expansion of additional retail offices. Loan
fees as a percentage of production approximated 6.5% for the three months ended
March 31, 1998 as compared to 5.3% for the three months ended March 31, 1997.
Gain on sale of loans approximated 8.5% for the three months ended March 31,
1998 as compared to 1.9% for the three months ended March 31, 1997.
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Total expenses increased to $2.3 million for the three months ended
March 31, 1998 from $1.5 million for the three months ended March 31, 1997.
Total expenses are comprised of interest expense, salaries, wages and employee
benefits, and other general and administrative expenses.
Interest expense increased to $80,000 for the three months ended March
31, 1998 from $13,000 for the three months ended March 31, 1997. The increase in
interest expense was due principally to increased borrowings from affiliated
companies to fund accumulated losses. Average monthly borrowings for the three
months ended March 31, 1998 approximated $831,000 as compared to approximately
$446,000 for the three months ended March 31, 1997.
Salaries, wages and employee benefits increased to $1.3 million for the
three months ended March 31, 1998 from $719,000 for the three months ended March
31, 1997. This is a result of increased personnel due to the significant
expansion since March 1997. The Company has expanded to 11 retail offices at
March 31, 1998 from 8 retail offices at March 31, 1997 and total personnel has
increased to 122 at March 31, 1998 from 82 at March 31, 1997.
Other general and administrative expenses increased to $978,000 for the
three months ended March 31, 1998 from $726,000 for the three months ended March
31, 1997. This is a result of the expansion of the Company in number of offices
and number of people since March 1997 as discussed above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H of Form 10-Q (the "Instruction").
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PART II. OTHER INFORMATION
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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
None
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
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