AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 30, 2002
REGISTRATION NO. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE THAXTON GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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SOUTH CAROLINA 6141 57-0669498
(STATE OR OTHER
JURISDICTION OF (PRIMARY STANDARD (I.R.S.
INCORPORATION OR INDUSTRIAL CLASSIFICATION EMPLOYER IDENTIFICATION
ORGANIZATION) CODE NUMBER) NO.)
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THE THAXTON GROUP, INC.
1524 PAGELAND HIGHWAY
LANCASTER, SC 29720
(803) 285-4337
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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ALLAN F. ROSS
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY
THE THAXTON GROUP, INC.
1524 PAGELAND HIGHWAY
LANCASTER, SC 29720
(803) 285-4337
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
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COPY TO:
BARNEY STEWART III
THOMAS H. O'DONNELL, JR.
MOORE & VAN ALLEN PLLC
100 NORTH TRYON STREET, SUITE 4700
CHARLOTTE, NORTH CAROLINA 28202-4003
(704) 331-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO TO BE PRICE OFFERING REGISTRATION
BE REGISTERED REGISTERED PER SHARE PRICE FEE
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Subordinated Notes......... $125,000,000 100% $125,000,000 $11,500
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Total...................... $ 125,000,000 100% $ 125,000,000 $ 11,500
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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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), MAY DETERMINE.
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THE THAXTON GROUP, INC.
$125,000,000 OF SUBORDINATED NOTES
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We are offering up to $125,000,000 of subordinated term notes due 1, 6, 12,
36 and 60 months and subordinated daily notes. These notes will not be secured
by any collateral and our obligations under the notes will not be guaranteed by
any of our subsidiaries. These notes are subordinated in right of payment to
all of our existing and future senior debt. As of October 16, 2002, we had
$124.1 million of debt that would have ranked senior in right of payment to the
notes. All of our senior debt is secured. The amount of debt ranking senior to
the notes may be increased at any time.
TERMS OF NOTES
SUBORDINATED TERM SUBORDINATED TERM NOTES
SUBORDINATED DAILY NOTES NOTES DUE 1 MONTH DUE 6, 12, 36 AND 60 MONTHS
-------------------------- -------------------------- ---------------------------------
Minimum Initial Purchase $50 $100 $1,000
Interest Payment Payable upon redemption Payable at maturity Payable, at your option,
monthly, quarterly or at maturity
Redemption by Holder Redeemable without penalty Redeemable prior to Redeemable prior to maturity
maturity with forfeiture with partial interest forfeiture,
of interest, unless waived unless waived
Redemption by Redeemable upon Not redeemable before Redeemable upon
Thaxton Group 30 days Notice maturity 30 days notice
INTEREST RATES
The table below sets forth the interest rates on our daily notes and term
notes as of the date of this prospectus based on the dollar amount of the note
you purchase. We may periodically change one or more of these rates. If we
change any of the rates, the new rates, and their effective date, will be set
forth in a supplement to this prospectus.
INTEREST RATES
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DOLLAR AMOUNT OF
NOTE PURCHASE DAILY NOTE 1 MONTH NOTE 6 MONTH NOTE 12 MONTH NOTE 36 MONTH NOTE 60 MONTH NOTE
---------------- ---------- ------------ ------------ ------------- ------------- -------------
Any amount between the minimum investment
amount and $50,000...................... 6.50% 6.50% 7.25% 7.75% 7.75% 7.75%
Any amount over $50,000 but less than
$100,000................................ 6.75 6.75 8.00 8.00 8.00 8.00
Any amount over $100,000 but less than
$500,000................................ 7.00 7.00 8.00 8.00 8.00 8.00
Any amount over $500,000................. 7.50 7.50 8.00 8.00 8.00 8.00
AUTOMATIC RENEWAL OF TERM NOTES
We will send you a renewal notice 15 days before the maturity date of a 1
month note and 30 days before the maturity date of a 6, 12, 36 and 60 month
note. The renewal notice will include information about your note and a copy of
any applicable amendment or supplement to this prospectus. Your term note will
be automatically renewed for an identical term at the then applicable interest
rate, unless you notify us by the maturity date that you desire to redeem your
term note. To redeem your note, you may advise us by letter that you desire to
redeem, you may call us at 1 (888) 842 9866, or you may contact an employee at
the office where you purchased your note.
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AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
"RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF SOME OF THE RISKS THAT
YOU SHOULD CONSIDER BEFORE INVESTING IN THE NOTES.
PER NOTE TOTAL
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Total public offering price..... 100.00% $125,000,000
Sales commissions............... 0.25% $ 312,500
Proceeds, before expenses, to us 99.75% $124,687,500
Our officers and employees will sell most of the notes, without
compensation, in reliance on Rule 3a4-1 under the Securities Exchange Act of
1934, as amended. Carolinas First Investments, Inc. will serve as an
underwriter on a "best efforts" basis in a few states and assist us in managing
the offering. Carolinas First Investments is not required to sell any specific
principal amount of the notes, but will use its best efforts to sell the notes.
Carolinas First Investments will receive a sales commission of .25% of the
principal amount of the notes it sells and a monthly management fee of $6,250.
The preceding table includes an estimate of the total amount of the sales
commissions and fees Carolinas First Investments will receive over the life of
the offering.
The notes may be purchased by completing a note purchase agreement and
furnishing us the funds required for the amount of the note you desire to
purchase.
This offering will commence on the date of this prospectus and will continue
until the later of two years or until all of the notes are sold, unless we
terminate this offering sooner.
There is no public trading market for these notes. We do not intend to list
the notes on any securities exchange or other trading market.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE NOTES OR PASSED ON THE ADEQUACY
OR ACCURACY OF THE DISCLOSURES IN THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE NOTES WILL NOT BE SECURED AND ARE NOT SAVINGS DEPOSITS OR OBLIGATIONS OF
AN INSURED DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
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THE DATE OF THIS PROSPECTUS IS , 2002.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................................................................... 1
Risk Factors......................................................................... 6
Use of Proceeds...................................................................... 10
Description of Notes................................................................. 11
Selected Consolidated Financial Data................................................. 17
Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Business............................................................................. 29
Management........................................................................... 34
Security Ownership of Certain Beneficial Owners and Management....................... 36
Transactions with Related Parties.................................................... 36
Plan of Distribution................................................................. 38
Legal Matters........................................................................ 38
Experts.............................................................................. 39
Where You Can Find More Information.................................................. 39
Index to Financial Statements........................................................ F-1
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this "shelf" registration process, we may offer and sell notes with an
aggregate principal amount of up to $125,000,000. This prospectus describes the
terms of the notes. From time to time, we may add, update or change the terms
of the notes or the information about the terms of the offering. Any addition,
update or change in the terms of the notes or the information about the terms
of the offering will be set forth in a prospectus supplement. Any statement in
this prospectus will be modified or superseded by any inconsistent statement
contained in the prospectus supplement. You should read both this prospectus
and any prospectus supplement together with additional information described
under the heading "Where You Can Find More Information About Thaxton." Except
as otherwise indicated, all references in this prospectus and any prospectus
supplement to the "Company," "we," "us," "our," or "Thaxton" means The Thaxton
Group, Inc. and its subsidiaries.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION OR TO MAKE
ANY ADDITIONAL REPRESENTATIONS. WE ARE NOT OFFERING THE NOTES (1) IN ANY STATE
WHERE THE OFFER IS PROHIBITED, (2) WHERE THE PERSON MAKING THE OFFER IS NOT
QUALIFIED TO DO SO, OR (3) TO ANY PERSON WHO CANNOT LEGALLY BE OFFERED THE
NOTES. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS.
You should not consider any information in this prospectus to be legal,
business or tax advice. You should consult your own attorney, business advisor
and tax advisor for legal, business and tax advice regarding an investment in
the notes.
i
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. THIS
PROSPECTUS INCLUDES A DESCRIPTION OF THE TERMS OF THE NOTES WE ARE OFFERING, AS
WELL AS INFORMATION REGARDING OUR BUSINESS AND DETAILED FINANCIAL INFORMATION.
WE ENCOURAGE YOU TO READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL
STATEMENTS AND RELATED NOTES, CAREFULLY.
THAXTON GROUP, INC.
We are a diversified consumer financial services company that:
. provides small consumer loans to borrowers with impaired credit;
. finances the purchase of used automobiles and insurance premiums for
borrowers with impaired credit;
. serves as an independent sales agent for a wide variety of property and
casualty, health and life insurance companies; and
. provides a limited number of commercial loans.
In February 1999, we acquired the consumer finance operations of FirstPlus
Consumer Finance, Inc., including 144 consumer finance offices in seven states,
47 of which are located in Texas and 31 of which are located in South Carolina.
The core business of these offices is to provide small consumer loans, real
estate loans and used automobile financing loans to credit impaired borrowers.
Our executive offices are located at 1524 Pageland Highway, Lancaster, South
Carolina 29720, and our telephone number is 1 (888) 842-9866. We currently have
a total of 219 finance offices and 14 insurance agency offices located
principally in South Carolina, Texas, Mississippi, Georgia and Tennessee.
THE OFFERING
We are offering up to $125 million of subordinated terms notes due 1, 6, 12,
36 and 60 months and subordinated daily notes. We expect the offering to
continue until the later of two years or until all $125 million of the notes
are sold, unless we terminate the offering sooner. The proceeds of this
offering will be used primarily to repay outstanding debt under our credit
facilities.
The interest rates on the notes as of the date of this prospectus are set
forth in a table on the cover page of this prospectus and on page 10. The
interest rates vary based on the dollar amount of the note you purchase. We may
change one or more of the interest rates periodically. Any change in the
interest rates will be set forth in a supplement to this prospectus.
The notes may be purchased by completing a note purchase agreement and
furnishing us the funds required for the amount of a note you desire to
purchase. You may call us at 1-888-842-9866 during normal business hours to
obtain information about our offices where the notes are sold or to obtain
information about the notes by mail.
1
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary historical financial information for, and as of the
end of, each of the fiscal years in the five-year period ended December 31,
2001 was derived from our audited consolidated financial statements. The
summary historical financial data for, and as of the end of, the six months
ended June 30, 2001 and June 30, 2002 was derived from our unaudited
consolidated financial statements. You should read the following summary in
conjunction with our consolidated financial statements and the notes thereto
included elsewhere in this prospectus, and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
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1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
INCOME STATEMENT DATA:
Net interest income.......... $ 10,870 $ 10,154 $ 41,868 $ 44,590 $ 55,256 $ 26,309 $ 31,053
Provision for credit losses.. 6,580 4,047 11,938 14,658 16,584 6,609 8,372
Net interest income after
provision for credit losses 4,290 6,107 29,930 29,932 38,672 19,700 22,681
Insurance commissions, net... 5,470 6,591 12,805 17,764 18,554 6,899 7,832
Other income................. 1,222 699 2,125 4,239 5,640 2,308 2,182
Operating expenses........... 13,211 14,894 42,314 51,782 57,736 27,315 27,453
Income tax expense (benefit). (724) (467) 1,258 550 2,095 751 1,783
Net income (loss)--continuing
operations................. (1,506) (1,028) 1,288 (397) 3,035 840 3,459
Net income (loss) per common
share-continuing
operations................. (0.39) (0.34) 0.09 (0.16) 0.34 0.07 0.46
BALANCE SHEET DATA:
Finance receivables.......... $ 67,558 $ 73,609 $213,170 $235,906 $240,534 $228,032 $227,739
Unearned income.............. (14,087) (13,299) (42,205) (46,331) (47,267) (43,621) (44,379)
Allowance for credit losses.. (4,809) (4,711) (10,661) (11,631) (12,012) (11,290) (11,140)
Finance receivables, net..... 48,662 55,599 160,304 177,944 181,255 173,121 172,220
Total assets................. 60,965 78,996 234,935 247,548 242,560 230,960 233,973
Total liabilities............ 54,996 66,067 225,132 243,789 236,275 226,501 224,482
Shareholders' equity......... 5,969 12,929 9,803 3,759 6,285 4,459 9,491
2
SUMMARY OF TERMS OF NOTES
SUBORDINATED DAILY NOTES
Minimum Investment $50
Interest Rate See the table on the cover page of this prospectus entitled "Interest Rates" for
interest rates payable on daily notes. The interest rates vary depending upon the
dollar amount of the daily note you purchase. Daily notes bear interest at a
fixed rate as of the date of issuance, but the rate may be adjusted as explained
below prior to redemption.
We may adjust the interest rate on daily notes on the first day of the month.
Any adjustments will be reflected in a supplement to this prospectus. You will
be notified promptly by first class mail of any monthly adjustment in the
interest rate. The notice will include with it a copy of any amendments or
supplements to this prospectus.
Interest Payment Payable upon redemption and compounded daily.
Increases or Decreases of You may adjust the original principal amount at any time by increasing or
Principal Amount by Holder decreasing the principal amount of your note. You may not, however, reduce
the outstanding principal amount below $50. If you present a daily note to us,
we will record any adjustments to the original principal amount, such as
increases or decreases in principal amount. You may redeem daily notes, in
whole or in part, at any time, without penalty.
SUBORDINATED TERM NOTES DUE 1 MONTH
Minimum Investment $100
Interest Rate See the table on the cover page of this prospectus entitled "Interest Rates"
for interest rates payable on 1 month notes. The interest rates vary depending
upon the total dollar amount of a 1 month note that you purchase. When you
purchase a 1 month note, the interest rate is fixed until maturity.
Interest Payment Payable at maturity and compounded daily.
Automatic Renewal Procedure The automatic procedure for renewing 1 month notes is described below
under "Automatic Renewal of Term Notes."
Increases or Decreases of You may adjust the original principal amount of a 1 month note without
Principal Amount by Holder extending the maturity at any time by increasing or decreasing the principal
amount. You may not, however, reduce the outstanding principal amount
below $100. If you present a 1 month note to us, we will record any
adjustments to the original principal amount, such as increases or decreases
in principal amount. If you redeem a 1 month note, in whole or in part, prior
to maturity, you will forfeit all accrued interest on the redeemed amount,
unless we, in our sole discretion, waive the forfeiture in whole or in part.
Redemption by Thaxton Group Not redeemable prior to maturity.
3
SUBORDINATED TERM NOTES DUE 6, 12, 36 AND 60 MONTHS
Minimum Investment $1,000
Interest Rate See the table on the cover page of this prospectus entitled "Interest
Rates" for interest rates payable on 6, 12, 36 and 60 month notes. The
interest rates vary depending upon the total dollar amount of the note
that you purchase. When you purchase one of these notes, the interest
rate is fixed until maturity.
Interest Payment At your option, payable either monthly, quarterly or at maturity and
compounded daily.
Automatic Renewal Procedure The automatic procedure for renewing 6, 12, 36 and 60 month notes is
described below under "Automatic Renewal of Term Notes."
Redemption by Holder If you redeem, in whole or in part, prior to maturity, you will forfeit
part of your accrued interest equal to the difference between the
amount of interest actually accrued since the date of issuance, or most
recent renewal date, and the amount of interest that would have
accrued had the rate of interest been 3% less than the rate in effect at
the time of your initial purchase or any renewal, unless we, in our sole
discretion, waive the forfeiture in whole or in part.
Redemption by Thaxton Group We may redeem 6, 12, 36 and 60 month notes without premium at
any time on 30 days notice.
AUTOMATIC RENEWAL OF TERM NOTES NOT LATER THAN 15 DAYS BEFORE THE MATURITY DATE OF A 1 MONTH NOTE,
AND 30 DAYS BEFORE THE MATURITY DATE OF A 6, 12, 36 AND 60 MONTH
NOTE, WE WILL SEND YOU A RENEWAL NOTICE. IF WE HAVE AMENDED
THIS PROSPECTUS OR SUPPLEMENTED IT TO REFLECT A CHANGE IN THE
INTEREST RATES APPLICABLE UPON THE RENEWAL OF THE NOTES, THE NOTICE
WILL INCLUDE WITH IT ANY APPLICABLE AMENDMENT OR SUPPLEMENT TO
THIS PROSPECTUS. THIS NOTICE WILL ALSO ADVISE YOU OF:
. THE MATURITY DATE OF THE NOTE;
. THE DOLLAR AMOUNT OF YOUR NOTE AT MATURITY;
. THE APPLICABLE INTEREST RATE UPON RENEWAL;
. THE NEW MATURITY DATE IF YOUR NOTE IS RENEWED; AND
. THE TIME WITHIN WHICH YOU MUST NOTIFY US THAT YOU WISH TO
REDEEM YOUR TERM NOTE.
1 MONTH NOTES WILL BE AUTOMATICALLY RENEWED FOR A NEW ONE MONTH
TERM AT THE THEN APPLICABLE INTEREST RATE, UNLESS YOU NOTIFY US
WITHIN 10 DAYS AFTER THE MATURITY DATE THAT YOU DESIRE TO REDEEM.
6, 12, 36 AND 60 MONTH NOTES WILL BE AUTOMATICALLY RENEWED FOR A
NEW 6, 12, 36 OR 60 MONTH TERM AT THE THEN APPLICABLE INTEREST
RATE, UNLESS YOU NOTIFY US BY THE MATURITY DATE THAT YOU DESIRE TO
REDEEM.
YOU MAY NOTIFY US OF YOUR DESIRE TO REDEEM BY LETTER, BY CALLING US
AT 1 (888) 842 9866, OR BY ADVISING ONE OF OUR EMPLOYEES AT THE
OFFICE WHERE YOU PURCHASED YOUR TERM NOTE THAT YOU WISH TO
REDEEM IT. IF YOU REDEEM YOUR NOTE, WE WILL PROMPTLY ISSUE YOU A
CHECK FOR THE PRINCIPAL AMOUNT OF YOUR NOTE, PLUS ACCRUED INTEREST
THROUGH MATURITY.
4
IF YOU DECIDE NOT TO REDEEM A TERM NOTE AND IT IS AUTOMATICALLY
RENEWED FOR A NEW TERM, YOU WILL BE CREDITED WITH THE FULL AMOUNT
OF THE ACCRUED INTEREST ON THE TERM NOTE BEFORE YOU RENEWED IT.
THIS ACCRUED INTEREST WILL NOT BE SUBJECT TO FORFEITURE IF YOU LATER
DECIDE TO REDEEM YOUR RENEWED TERM NOTE PRIOR TO ITS MATURITY.
OHIO RESIDENTS IF YOU ARE A RESIDENT OF OHIO, YOU MUST ALSO SIGN A NEW NOTE
PURCHASE AGREEMENT TO RENEW A NOTE, WHICH WE WILL PROVIDE TO YOU
ALONG WITH ANY APPLICABLE AMENDMENT OR SUPPLEMENT TO THIS
PROSPECTUS. IF WE DO NOT RECEIVE A SIGNED NOTE PURCHASE AGREEMENT
ON OR BEFORE THE MATURITY DATE, THE PRINCIPAL OUTSTANDING ON YOUR
TERM NOTE, TOGETHER WITH ALL INTEREST ACCRUED THROUGH THE MATURITY
DATE, WILL BE PAID TO YOU PROMPTLY.
SECURITY AND RANKING OF NOTES
THE NOTES:
. are general, unsecured obligations of The Thaxton Group, Inc. only; and
. rank subordinate in right of payment to all existing and future senior
debt of The Thaxton Group, Inc.
Our subsidiaries are under no obligation with respect to the notes. The
notes will not be secured by any collateral, and our obligations under the
notes will not be guaranteed by any of our subsidiaries. As of October 16,
2002, The Thaxton Group, Inc. had approximately $124.1 million of debt
outstanding that would have ranked senior to the notes in right of payment. The
amount of senior debt outstanding may be increased at any time.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our consolidated ratios of earnings to fixed
charges for the periods indicated.
DECEMBER 31, JUNE 30,
-------------------------- --------
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- --------
Ratio of earnings to fixed charges 0.56* 0.70* 1.15 1.01 1.27 1.72
- --------
* The dollar amount of the deficiency as of December 31, 1997 and December 31,
1998 was approximately $2.2 million and $1.5 million, respectively.
5
RISK FACTORS
THE PURCHASE OF THE NOTES INVOLVES A HIGH DEGREE OF RISK. BEFORE YOU INVEST
IN THE NOTES, YOU SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION CONTAINED IN
THIS PROSPECTUS AND, IN PARTICULAR, THE FOLLOWING RISK FACTORS. AN INVESTMENT
IN THE NOTES SHOULD BE MADE ONLY BY PERSONS WHO CAN AFFORD AN INVESTMENT WITH A
HIGH DEGREE OF RISK AND IS SUITABLE ONLY FOR PERSONS ABLE TO SUSTAIN THE LOSS
OF THEIR ENTIRE INVESTMENT.
RISKS RELATED TO REPAYMENT OF PRINCIPAL AND INTEREST OF THE NOTES
THE PAYMENT OF PRINCIPAL AND INTEREST ON THESE NOTES IS NOT INSURED BY ANY
GOVERNMENTAL OR PRIVATE INSURANCE FUND OR GUARANTEED BY ANY OF OUR SUBSIDIARIES.
No governmental or private agency, including the Federal Depository
Insurance Company or FDIC, insures the notes. In addition, the notes are not
secured by any collateral and our obligations under the notes will not be
guaranteed by any of our subsidiaries. Consequently, an investment in the notes
is not insured or guaranteed against loss and the purchaser is dependent solely
upon our earnings, our working capital and other sources of funds, including
proceeds from the continuing sale of notes and our revolving credit facility
for repayment of principal at maturity and the ongoing payment of interest on
the notes.
RISES IN INTEREST RATES IMPAIR OUR ABILITY TO REPAY THE NOTES BY REDUCING OUR
PROFITABILITY.
We depend on debt with floating interest rates to finance our portfolio of
receivables, which earn interest income at fixed interest rates. Higher
interest rates may adversely affect our profitability and our ability to
service our obligations for the notes. Our finance receivables bear interest at
fixed rates, including some which are limited to the maximum rates allowed
under applicable law. During periods of rising interest rates, our interest
expense generally increases while our interest income remains constant. Thus,
net interest rate spreads decrease and our profitability is reduced.
WE DEPEND ON OUR DEBT FINANCING ARRANGEMENT WITH FINOVA CAPITAL CORPORATION TO
PROVIDE CAPITAL AND LIQUIDITY FOR OUR BUSINESS.
As of October 16, 2002, we had approximately $122.9 million of indebtedness
outstanding under our debt financing arrangement with FINOVA. We may be unable
to successfully continue our business if we cannot extend our credit facility
at the completion of our contract with FINOVA, or if we cannot find
satisfactory replacement debt financing. Additionally, our credit facility with
FINOVA requires us to maintain certain financial ratios, and to comply with
certain covenants in order to remain in good standing with FINOVA. We cannot
assure you that we will be able to comply with the terms of our credit facility
or be able to extend the term of the commitment beyond its current maturity
dates. In the event we are unable to obtain an extension, our ability to obtain
similar financing will depend upon, among other things, our financial condition
and results of operations. We cannot guarantee that successor financing will be
available when we would need it and on terms similar to those of our credit
facility with FINOVA. To the extent we are unsuccessful in maintaining or
replacing our credit facility, we may be unable to service our other debt,
including the notes.
YOUR NOTES ARE SUBORDINATE TO OUR SENIOR DEBT, WHICH MAY ADVERSELY AFFECT OUR
ABILITY TO REPAY YOUR NOTE.
In the event that we are unable to pay our debts as they become due or we
declare bankruptcy, reorganize or liquidate, we are required to pay all amounts
due on our senior debt before we pay any amounts due on the notes. Senior debt
means all of our debt other than the notes. We may increase or decrease the
amount of our senior debt at any time. As of October 16, 2002, we had $124.1
million of senior debt outstanding. We cannot assure you that we will be able
to pay amounts due on the notes if we become insolvent or dissolve, wind up,
liquidate or reorganize.
6
In addition, your right to receive payments on the notes could be adversely
affected if we do not receive funds from our subsidiaries. If any of our
subsidiaries are unable to provide us with funds or declares bankruptcy,
liquidates or reorganizes, we may not be able to meet our payment obligations
under the notes when interest becomes due on the notes or when the notes mature.
INCREASED CREDIT LOSSES WILL REDUCE OUR PROFITABILITY, AND IMPAIR OUR ABILITY
TO REPAY THE NOTES.
The non-prime consumer credit market is comprised of borrowers who are
deemed to be relatively high credit risks due to various factors. These factors
include, among other things, the manner in which they have handled previous
credit, the absence or limited extent of prior credit history, and their
limited financial resources. Consequently, our primary assets of non-prime
consumer loans and used automobile sales contracts, relative to other assets
such as prime consumer loans and retail installment contracts, involve a higher
probability of default and greater servicing and collection costs. Our
profitability depends upon our ability to properly evaluate the
creditworthiness of credit-impaired borrowers, to maintain adequate security
for used automobile sales contracts and to efficiently service and collect our
portfolio of finance receivables. We are unable to assure purchasers of the
notes that the credit performance of our customers will be satisfactory, or
that the rate of future defaults and/or losses will not exceed our recent prior
experience. Delinquency rates related to consumer lending and automobile
financing are significantly influenced by general economic conditions, such as
the rate of unemployment. If general economic conditions should worsen in the
future, we anticipate that our delinquency rates would likely increase.
COMPETITION MAY COMPEL US TO REDUCE INTERESTS RATES TO OUR CUSTOMERS, WHICH
WOULD REDUCE OUR PROFITABILITY.
The consumer finance business is highly fragmented and competitive.
Traditional consumer finance sources, many of whom have generally ignored the
non-prime consumer market in the past, are now serving this market. In
addition, numerous non-traditional consumer finance sources are serving this
market. Many of our competitors or potential competitors have significantly
greater resources than we do. Increased competition from these sources or other
sources of credit for credit-impaired borrowers in the markets we serve could
impair our ability to attract new customers or retain our existing ones. This
would have an adverse effect on our income and profitability. A reduction in
income and profitability would weaken our financial position and our ability to
service our debt.
THE INDENTURE UNDER WHICH THE NOTES WILL BE ISSUED DOES NOT LIMIT OUR ABILITY
TO BORROW MONEY, PAY DIVIDENDS OR MAKE OTHER DISTRIBUTIONS THAT MAY DIMINISH
OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
The indenture under which the notes will be issued does not limit our
ability to engage in numerous transactions that may diminish our ability to
make payments on the notes. For example, the indenture does not restrict our
ability to borrow money, pay dividends or make other distributions that could
negatively affect our financial condition and our ability to pay principal and
interest on the notes.
RISKS RELATED TO REDEMPTION OF THE NOTES
YOU MAY LOSE SOME OF THE INTEREST ACCRUED ON YOUR 6, 12, 36 AND 60 MONTH NOTES,
OR ALL OF THE INTEREST ON YOUR 1 MONTH NOTE, IF YOU DECIDE TO REDEEM ONE OF
THESE NOTES PRIOR TO MATURITY.
Our 1 month notes accrue interest at an adjustable annual rate and you may
redeem your 1 month note prior to maturity. If you choose to redeem your 1
month note prior to maturity, you may have to forfeit all interest accrued
since the date the note was issued or, in the case of a renewal of the note,
from the date of the most recent renewal. We may waive this requirement in our
sole discretion. You may therefore lose some or all of the interest accrued on
your 1 month note if you redeem it prior to maturity.
7
Our 6, 12, 36 and 60 month notes accrue interest at an annual rate through
maturity and you may redeem your 6, 12, 36 or 60 month note prior to maturity.
If you choose to redeem a 6, 12, 36 and 60 month note prior to maturity, you
may forfeit part of your accrued interest rate. The interest rate forfeiture
would be equal to the difference between the amount of interest accrued on the
note since the date of issuance--or, in the case of a renewal, since the date
of the most recent renewal--and the amount of interest that would have accrued
on the note if the interest rate on the note was 3% less than the rate of
interest actually accrued. We may waive this interest rate forfeiture in our
sole discretion. You may therefore lose some or all of the interest accrued on
your 6, 12, 36 and 60 month note if you redeem it prior to maturity.
YOU MAY LOSE INTEREST IF YOU FAIL TO NOTIFY US THAT YOU INTEND TO REDEEM YOUR
NOTE ON A TIMELY BASIS.
If you hold a 1 month note, we will send you written notice 15 days prior to
the maturity date that your note will be automatically renewed unless you
notify us within 10 days after the maturity date that you desire to redeem your
note. When you receive this renewal notice, you should contact us promptly if
you desire to redeem your note. If you notify us of your desire to redeem your
1 month note more than 10 days after the maturity date, you will not earn
interest after the maturity date.
If you hold a 6, 12, 36 or 60 month note, we will send you a written notice
30 days prior to the maturity date that your note will be automatically renewed
unless you notify us by the maturity date that you desire to redeem your note.
When you receive this renewal notice, you should contact us promptly if you
desire to redeem your note. If you notify us of your desire to redeem your 6,
12, 36 or 60 month note after the maturity date, you will lose a portion of the
interest you will earn after the maturity date.
IF YOU FAIL TO SURRENDER YOUR NOTE CERTIFICATE WHEN YOU REDEEM YOUR NOTE IN
FULL, YOU MAY BE REQUIRED TO INDEMNIFY US FOR ANY LOSS WE MAY INCUR LATER.
If you decide to redeem your note in full, you must deliver your note
certificate to us at that time. You should keep your note certificate in a safe
place to avoid any delay in receiving the amount we owe you upon redemption of
your note. If you lose your note certificate, we may require you to indemnify
us for any loss we may incur if your note certificate is later presented to us
by another person.
IF WE REDEEM THE DAILY NOTES AND THE 6, 12, 36, AND 60 MONTH NOTES PRIOR TO
THEIR MATURITY, YOU WILL LOSE THE INTEREST YOU OTHERWISE WOULD HAVE RECEIVED
AFTER THE REDEMPTION DATE.
We have the right to redeem a daily note or any 6, 12, 36 and 60 month note
at any time upon 30 days written notice. If we decide to redeem your note, you
will receive payment of the principal amount of your note, plus accrued
interest through the redemption date, but you will not receive any interest
that otherwise would have accrued after the redemption date.
JAMES D. THAXTON CONTROLS OUR COMPANY.
James D. Thaxton, our chief executive officer, president, and chairman of
the board of directors, beneficially owns more than 90% of the outstanding
shares of our common stock. As a result, Mr. Thaxton is able to elect all of
our directors, amend our articles of incorporation, effect a merger, sale of
assets, or other business acquisition or disposition, and otherwise effectively
control the outcome of other matters requiring shareholder approval. Our
business and our ability to service our debt, including the notes, could suffer
from an unfavorable decision by Mr. Thaxton.
BECAUSE NO TRADING MARKET FOR THE NOTES EXISTS, AND WE DO NOT EXPECT ONE TO
DEVELOP, YOU MAY ONLY LIQUIDATE YOUR INVESTMENT BY PAYMENT FROM US.
The notes are non-negotiable, which means that the notes are not
transferable without our prior consent. All transfers and assignments of the
notes may be made only at our offices.
8
OTHER RISKS RELATED TO THE NOTES AND THE COMPANY
BECAUSE NO RATING AGENCY HAS REVIEWED OUR NOTES, PURCHASERS MAY NOT KNOW
WHETHER THEY ARE SUITABLE INVESTMENTS.
No independent rating agency has reviewed the terms of the notes or our
financial condition to determine whether the notes are suitable investments for
any purchaser.
WHEN YOU PURCHASE A NOTE FROM US, WE DO NOT EVALUATE THE SUITABILITY OF THE
PURCHASE FOR YOU AS A BROKER-DEALER IS REQUIRED TO DO.
When you purchase a note from us you will not have the benefit of a review
of the suitability of the purchase based on your individual financial
circumstances as you would have if you purchased one of our notes from a
broker-dealer that is a member of the National Association of Securities
Dealers, Inc.
9
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and any related amendments or supplements include "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "1933 Act") and Section 21E of the Securities Exchange
Act of 1934, as amended (the "1934 Act"). Forward-looking statements are not
historical facts, but only predictions and can generally be identified by the
use of statements that include words such as "believes," "will likely result,"
"may," "are expected to," "is anticipated," "estimate," "projected," "intends
to" or other similar words. Similarly, statements that describe our objectives,
plans or goals are also forward-looking statements. We intend these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Litigation Securities
Reform Act of 1995. Although we believe that our current plans, intentions and
expectations reflected in or suggested by any of our forward-looking statements
are reasonable, we can provide no guarantee or future performance and can give
no assurance that these plans, intentions or expectations will be achieved.
Actual results could differ materially from those projected in forward-looking
statements. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this prospectus are
discussed under "Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
The total principal amount of notes we expect to issue in this offering is
$125 million. We anticipate that approximately $65 million will be issued for
cash and $60 million will be issued as renewals of subordinated notes issued in
this offering and in our prior offerings of subordinated notes. After payment
of commissions and expenses estimated to be approximately $1.2 million over the
duration of this offering, we expect to receive net cash proceeds of
approximately $63.8 million. We do not expect to have $63.8 million in net cash
proceeds available at any one time due to, among other factors, the maturities
of the notes and the time period over which the offering will be conducted. Any
net cash proceeds available to us from sales of the notes will be used
primarily to repay indebtedness outstanding under our credit facility with
FINOVA. We cannot assure you that we will receive any cash proceeds from this
offering.
Our credit facility with FINOVA, as amended on December 31, 2001, comprises
a term loan with a balance of $7.7 million outstanding as of October 16, 2002,
and a revolving credit line used to finance consumer receivables. Maximum
borrowings under the revolving credit line as of October 16, 2002 are limited
to the lesser of $138 million, or 85% of eligible consumer finance receivables
as defined by the agreement. Our maximum borrowing amount decreases on a
quarterly basis totalling $3 million in 2002, $16.5 million in 2003, $18
million in 2004, $18 million in 2005 and $9 million in 2006. James D. Thaxton
is the guarantor for both the term loan and the revolving credit line.
Advances under the term loan accrue interest at the prime rate plus 2%.
Advances under the revolving credit line accrue interest at the prime rate plus
1%. The prime rate is the prime rate published by Citibank, N.A., or other
money center bank as FINOVA may select. The credit facility matures in 2006.
The interest rates are adjusted monthly to reflect fluctuations in the
designated prime rate. Accrued interest on borrowings is payable monthly.
10
DESCRIPTION OF NOTES
The notes will be issued under an indenture between The Thaxton Group, Inc.
and The Bank of New York, as trustee. The terms of the notes include those
stated in the indenture and those made part of the indenture by reference to
the Trust Indenture Act of 1939, as in effect on the date of the indenture.
The following description is a summary of the material provisions of the
notes and the indenture. It does not restate the indenture in its entirety.
This summary is qualified in its entirety by reference to the forms of notes,
the series resolutions and the indenture, each of which has been filed as an
exhibit to the registration statement that includes this prospectus. We urge
you to read each of the forms of notes, the series resolution and the entire
indenture because these documents, and not this description, define your rights
as holders of the notes.
BRIEF DESCRIPTION OF THE NOTES
The notes:
. are general, unsecured obligations of Thaxton Group only; and
. are subordinated in right of payment to all existing and future senior
indebtedness of Thaxton Group.
Our subsidiaries have no obligation to pay amounts owed under the notes and
have not guaranteed our payment obligations under the notes. As of October 16,
2002, we had approximately $124.1 million of outstanding indebtedness that
would have ranked senior in right of payment to the notes.
TERMS OF DAILY NOTES
Each daily note will be issued in the minimum principal amount of $50. The
initial interest rates payable on daily notes are set forth on the cover of
this prospectus. They vary based on the dollar amount of the note that is
purchased. We may change the interest rates on a monthly basis. Any change in
the interest rates will be made at least 30 days in advance of the effective
date of the change. The changes may reflect either increases or decreases in
the rate of interest payable. The interest rate, once it is changed, will be
effective as of the first day of a month and shall remain in effect until we
make another change. Interest will accrue and compound daily. Holders of daily
notes will be notified by first-class mail of any monthly change in the
interest rates. This notice will be sent 15 days prior to the effective date of
the change and will include a copy of this prospectus, as amended or
supplemented.
Holders of daily notes may increase or decrease the principal amount at any
time by additional purchases or partial redemptions. Partial redemptions may
not, however, reduce the outstanding principal amount below $50. Upon
presentation of a daily note certificate to us, we will, for the holder's
convenience, record on the certificate any adjustments to the original
principal amount, such as increases or decreases in principal amount.
The holder of a daily note will have the right, at the holder's option, to
redeem the daily note at any time, in whole or in part, without the forfeiture
of any interest. If the holder redeems a daily note in full, the holder must
surrender the daily note to us. We will fully discharge the obligations under
the daily note by payment to the holder of the outstanding principal amount of
the daily note, together with any accrued but unpaid interest, as reflected on
our books.
TERMS OF 1 MONTH NOTES
Each 1 month note will be issued in the minimum principal amount of $100 and
will mature one month after the date of issuance unless redeemed by you prior
to maturity. The interest rates on 1 month notes are set forth on the cover
page of this prospectus. They vary depending on the dollar amount you purchase.
The rate of interest at the time of purchase will be the rate of interest
payable throughout the term of the 1 month note. Holders of 1 month notes will
be notified by first-class mail of any monthly change in the interest rates.
This notice will be
11
sent 15 days prior to the effective date of the change and will include a copy
of this prospectus, as amended or supplemented. Interest will be payable at
maturity and will be compounded daily. Holders of 1 month notes may adjust the
original principal amount, without renewing the maturity, at any time by
increasing or decreasing the principal amount of a 1 month note. Partial
redemptions may not, however, reduce the outstanding principal amount below
$100. Upon presentation of a 1 month note certificate to us, we will, for the
holder's convenience, record on the certificate any adjustments to the original
principal amount, such as increases or decreases in principal amount. Upon
early redemption by the holder, the holder will forfeit all accrued interest on
the principal amount redeemed unless we, in our sole discretion, elect to pay
all or a portion of the interest.
TERMS OF NOTES DUE 6, 12, 36 AND 60 MONTHS
Each 6, 12, 36 or 60 month term note will be issued in the minimum principal
amount of $1,000 and will mature 6, 12, 36 or 60 months after date of issuance
unless redeemed prior to its maturity date. The interest rates on 6, 12, 36 and
60 month notes are set forth on the cover page of this prospectus. They vary
depending on the dollar amount you purchase. The rate of interest at the time
of purchase of a particular 6, 12, 36 or 60 month term note will be the rate of
interest payable throughout the term of the note. Holders of 6, 12, 36 or 60
month notes will be notified by first-class mail of any monthly change in the
interest rates. This notice will be sent 15 days prior to the effective date of
the change and will include a copy of this prospectus, as amended or
supplemented. Interest will be payable, at the holder's option, either monthly,
quarterly or at maturity and will be compounded daily.
The holder of a 6, 12, 36, or 60 month term note will have the right, at the
holder's option, to redeem the note prior to maturity. If the holder redeems
prior to maturity, the holder will forfeit an amount equal to the difference
between the amount of interest actually accrued on the 6, 12, 36 or 60 month
note since the date of issuance or most recent renewal and the amount of
interest that would have accrued on the note had the rate of interest been 3%
less than the rate in effect at the date of issuance or most recent renewal
unless we, in our sole discretion, elect to waive all or a portion of the
forfeiture. When necessary, interest forfeitures will be deducted from the
amount redeemed. Holders of 6, 12, 36 or 60 month notes will also have the
right to make partial redemptions prior to maturity. A partial redemption may
not, however, reduce the principal amount to less than $1,000. The interest
rate forfeiture for each redemption of a 6, 12, 36 or 60 month note will be
calculated only upon the principal amount redeemed.
To illustrate how the interest forfeiture provision applicable to 6, 12, 36
and 60 month notes works, assume that you purchased a 6 month note for $1,000,
due on December 31, 2002, with an interest rate of 6.50% and elected to receive
your accrued interest at maturity. Assume also that this note was automatically
renewed for an additional 6-month term ending June 30, 2003 at an interest rate
of 6.00%. You decide to redeem the renewed note on March 31, 2003. The
information below shows the principal and accrued interest you would receive on
your note at March 31, 2003.
Original principal investment............................................................. $1,000.00
Interest earned, June 30, 2002 through December 31, 2002, at 6.5% compounded daily........ 33.31
---------
Principal balance of renewed note......................................................... 1,033.31
Accrued interest on renewed note, January 1, 2003 through March 31, 2003, at 6.0%
compounded daily........................................................................ 15.58
Less: interest forfeiture--interest accrued January 1, 2003 through March 31, 2003 at rate
of 3.0% compounded daily................................................................ (7.73)
---------
Balance of redeemed note.................................................................. $1,041.16
=========
The amount of the interest forfeiture is calculated by reducing the 6%
interest rate that applied to your renewed note by 3%, resulting in an interest
rate applicable to the renewed note of 3% from the date of renewal (January 1,
2003) through the redemption date (March 31, 2003). Unless we, in our sole
discretion, elect to waive the interest forfeiture, you would receive the total
amount indicated above upon the early redemption of your renewed 6 month note.
12
Six, 12, 36 or 60 month notes may be redeemed before maturity without an
interest rate forfeiture upon the death of any holder or if the holder is
determined to be legally incompetent by a court or any other administrative
body of competent jurisdiction.
AUTOMATIC RENEWAL OF 1 MONTH AND OTHER TERM NOTES
NOT LATER THAN 15 DAYS BEFORE THE MATURITY OF A 1 MONTH NOTE AND 30 DAYS
BEFORE THE MATURITY OF A 6, 12, 36 AND 60 MONTH NOTE, WE WILL SEND THE HOLDER A
RENEWAL NOTICE BY FIRST-CLASS MAIL. THE RENEWAL NOTICE WILL ADVISE THE HOLDER
OF THE MATURITY DATE OF THE NOTE, THE DOLLAR AMOUNT OF THE NOTE AT MATURITY,
THE APPLICABLE INTEREST RATE UPON A RENEWAL OF THE NOTE, THE NEW MATURITY DATE
OF THE NOTE IF IT IS RENEWED, AND THE TIME WITHIN WHICH YOU MUST NOTIFY US
WHETHER YOU WISH TO REDEEM THE NOTE. THE RENEWAL NOTICE WILL ALSO INCLUDE A
COPY OF THIS PROSPECTUS AS AMENDED OR SUPPLEMENTED.
A 1 MONTH NOTE WILL BE AUTOMATICALLY RENEWED FOR AN ADDITIONAL 1 MONTH TERM,
AT THE INTEREST THEN IN EFFECT FOR 1 MONTH NOTES, UNLESS THE HOLDER NOTIFIES US
WITHIN 10 DAYS AFTER THE MATURITY DATE OF HIS INTENTION TO REDEEM THE NOTE.
EACH 6, 12, 36 OR 60-MONTH NOTE WILL BE AUTOMATICALLY RENEWED FOR SUCCESSIVE 6,
12, 36 OR 60 MONTH TERMS, RESPECTIVELY, AT THE RATES OF INTEREST THEN IN
EFFECT, UNLESS THE HOLDER NOTIFIES US BY THE MATURITY DATE OF HIS INTENTION TO
REDEEM THE NOTE AT MATURITY. EXCEPT FOR A POSSIBLE CHANGE IN THE INTEREST RATE,
ALL OF THE TERMS AND CONDITIONS APPLICABLE TO THE NOTES WHEN ISSUED WILL ALSO
APPLY DURING EACH PERIOD OF RENEWAL, INCLUDING THE POSSIBLE FORFEITURE OF
INTEREST THAT ACCRUES FROM THE RENEWAL DATE TO THE NEW MATURITY DATE IF THE
HOLDER REDEEMS THE NOTE PRIOR TO THE NEW MATURITY DATE.
IF A HOLDER OF A NOTE DECIDES NOT TO REDEEM IT AND HIS NOTE IS AUTOMATICALLY
RENEWED FOR A NEW TERM, THE HOLDER WILL BE CREDITED WITH THE FULL AMOUNT OF THE
ACCRUED INTEREST ON THE INITIAL TERM OF THE NOTE. THIS ACCRUED INTEREST WILL
NOT BE SUBJECT TO ANY FORFEITURE IF THE HOLDER LATER DECIDES TO REDEEM HIS
RENEWED NOTE PRIOR TO ITS NEW MATURITY DATE.
HOLDERS WILL NOT BE PROVIDED WITH ANY FORM OF REDEMPTION NOTICE FOR THEIR
USE AT THE TIME THEY FIRST PURCHASE A TERM NOTE, AND, EXCEPT IN THE CASE OF
OHIO RESIDENTS, THEY WILL NOT BE ASKED TO SIGN A SEPARATE PURCHASE AGREEMENT TO
RENEW A NOTE.
OHIO RESIDENTS. A HOLDER OF A NOTE WHO IS A RESIDENT OF THE STATE OF OHIO
MUST SIGN A NEW NOTE PURCHASE AGREEMENT, WHICH WE WILL PROVIDE TO THE HOLDER
ALONG WITH A COPY OF THIS PROSPECTUS, AS AMENDED OR SUPPLEMENTED, IN ORDER TO
RENEW THE TERM OF THE NOTE. IF WE DO NOT RECEIVE AN EXECUTED NOTE PURCHASE
AGREEMENT, WITHIN THE REDEMPTION PERIODS SET FORTH ABOVE, THE PRINCIPAL
OUTSTANDING ON THE NOTE, TOGETHER WITH ALL INTEREST ACCRUED THROUGH THE
MATURITY DATE, WILL BE PAID PROMPTLY TO THE HOLDER.
GENERAL PROVISIONS APPLICABLE TO THE NOTES
PROCEDURE FOR REDEMPTION BY HOLDERS. Holders may redeem a daily or 1, 6,
12, 36 or 60 month note by letter addressed to The Thaxton Group, Inc., 1524
Pageland Highway, Lancaster, South Carolina 29720, by calling us at 1 (888)
842-9866, or by advising one of our employees at the office where the note was
purchased that they desire to redeem it. If a note is being redeemed in full,
the note certificate must be delivered to us for cancellation. We will maintain
book entries of any partial redemptions. We will promptly issue a check to the
holder for the amount due on a note upon full or partial redemption.
OPTIONAL REDEMPTION BY US. Except for the 1 month notes, which are not
redeemable by us, we will have the right, at our option, to redeem daily notes
and 6, 12, 36, or 60 month notes, in whole or in part, at any time. Interest on
the redeemed notes will continue to accrue until the date of redemption and no
premium shall be paid on the redeemed notes. We will give the holder at least
30 days prior written notice by first class mail of each redemption specifying,
among other things, the principal amount of the notes to be redeemed and the
redemption date. The principal amount of the notes specified in the notice,
together with interest accrued and unpaid on those notes to the date of
redemption, will become due and payable on the redemption date.
13
SUBORDINATION. The indebtedness evidenced by the notes is subordinate to
the prior payment when due of the principal and interest on all of our senior
indebtedness, which includes any debt we have incurred or guaranteed other than:
. debt owed to one of our subsidiaries for money we borrow from, or was
advanced by, a subsidiary; or
. other debt that by its terms is not senior in right of payment to the
notes.
Upon maturity of any senior indebtedness, payment in full must be made on
the senior indebtedness before any payment is made on or in respect of the
notes. During the continuance of any default in payment of principal of, or
premium, if any, or interest or sinking fund on any senior indebtedness, or any
other event of default for senior indebtedness which maturity has been
accelerated, we may not make or agree to make any direct or indirect payment on
the notes. Upon any distribution of our assets in any dissolution, winding up,
liquidation or reorganization, payment of the principal of and interest on the
notes will be subordinated to the prior payment in full of all senior
indebtedness. The holders of the notes will be subrogated to the rights of the
holders of the senior indebtedness to the extent of payments made on senior
indebtedness come out of the distributive share of the notes. Because of this
subordination, in the event of a distribution of our assets upon insolvency,
some of our general creditors may recover more, ratably, than holders of the
notes.
SUBORDINATION RELATED TO CORPORATE STRUCTURE. The notes will only be our
obligations, and not the obligations of our subsidiaries. We do business
through subsidiary corporations. Our rights and the rights of our creditors,
including the holders of the notes, to participate in the distribution of the
assets of any of our subsidiaries upon liquidation, dissolution or
reorganization of a subsidiary will be subject to the prior claims of the
subsidiaries' creditors. We may, however, be a creditor with recognized claims
against the subsidiary, and these claims may be equal in right of payment to
the claims of the subsidiaries' creditors.
NO RESTRICTIVE COVENANTS. The indenture does not limit our ability to
increase the amount of senior indebtedness, incur any additional indebtedness,
issue additional securities, pay dividends or make other distributions that may
negatively affect our ability to make payments on the notes. The indenture does
not require us to maintain any asset ratio or create or maintain any reserves.
The notes will not have the benefit of a sinking fund.
DEFAULTS, REMEDIES AND LIMITS ON LIABILITY. The term "event of default"
when used in connection with the notes generally means any one of the following:
(1) failure to pay interest when due, which failure continues for 30 days,
or failure to pay principal of any of the notes when due, whether or not
prohibited by the subordination provisions; and
(2) some events of bankruptcy, insolvency or reorganization involving us or
some of our subsidiaries.
The indenture provides that the trustee will, within 90 days after the
occurrence of a default, mail to the holders notice of all uncured defaults
known to it. Except in the case of default in the payment of principal of or
interest on any of the notes, the trustee will be protected in withholding
notice if it in good faith determines that the withholding of notice is in the
interest of the holders. The term "default" for this purpose shall only mean
the happening of any event of default described above, excluding grace periods.
If an event of default occurs and is continuing, the trustee or the holders
of not less than 25% in aggregate principal amount of any series of the notes
then outstanding may declare the principal of and all accrued interest on all
of the notes of the series to be due and payable immediately. The trustee will
notify us in writing of this declaration, and, if the holders of the notes
desire to make this declaration, they must also notify the trustee in writing
of the declaration of acceleration. The holders of a majority in principal
amount of the series of notes may rescind the declaration if:
. We have paid or deposited with the trustee a sum sufficient to pay all
overdue interest on the series of notes and principal of any notes which
have become due except as the result of the declaration of acceleration;
and
14
. all existing events of default have been cured or waived.
Upon the occurrence of conditions specified in the indenture, the holders of
a majority in principal amount of a series of notes may waive all defaults,
except uncured defaults in payment of principal of or interest on the notes or
uncured defaults under a provision which cannot be modified under the terms of
the indenture without the consent of each holder affected. The indenture
requires us to file periodic reports with the trustee as to the absence of
defaults.
NO LIABILITY OF DIRECTORS, OFFICERS OR SHAREHOLDERS. None of our directors,
officers, employees or shareholders will have any liability for our obligations
under the notes or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder by accepting a note waives and
releases all of this liability. The waiver and release are part of the
consideration for the issuance of the notes.
INDEMNIFICATION. Our charter and bylaws contain no specific provision for
indemnification of our directors, officers or controlling persons against
liability under the 1933 Act. Our bylaws provide, however, for indemnification
of our officers and directors against liabilities and reasonable expenses
incurred in connection with any action, suit or proceeding to which the person
may be a party because he is or was a director or officer of The Thaxton Group
or serving in a similar capacity at our request for another entity, to the
fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to our directors, officers and controlling persons pursuant to our
bylaws, or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities,
other than the payment by us of expenses incurred or paid by one of our
directors, officers or controlling persons in the successful defense of any
action, suit or proceeding, is asserted by a director, officer or controlling
person in connection with the notes being registered, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. We may not
consolidate with, merge into, or transfer or lease substantially all of our
assets to, any other corporation other than a subsidiary, unless the successor
corporation assumes all of our obligations under the indenture and the notes.
To effectuate these types of transactions, other conditions are required to be
met as well. Thereafter all of the obligations under the indenture will
terminate and the successor corporation formed by a consolidation or into which
we merge or to which a transfer or lease is made will succeed to all of our
rights and powers under the indenture.
NOTES NON-NEGOTIABLE. The notes are non-negotiable and no rights of
ownership may be transferred by mere endorsement and delivery of the notes to a
purchaser. All transfers and assignments of notes may be made only at our
offices, upon presentation of the notes and recordation of the transfer or
assignment in our books. The notes are not transferable to any person who is a
resident of a state where the offering of the notes has not been registered
under applicable state securities laws, unless an exemption from registration
is available.
STATEMENTS AS TO COMPLIANCE. The indenture includes a provision that we
will certify to the trustee that (i) we have fulfilled all of our obligations
under the indenture, or, if there has been a default in the fulfillment of any
obligation, specifying each default and the nature and status thereof, and (ii)
no event has occurred and is continuing which is, or after notice or lapse of
time would become, an Event of Default, or, if an event has occurred and is
continuing, specifying each event and the nature and status thereof.
15
MODIFICATION OF THE INDENTURE. The indenture contains provisions permitting
us and the trustee, without the consent of any holder:
. to supplement or amend the indenture under specified circumstances,
including to cure any ambiguity;
. to correct or supplement any other provision in the indenture;
. to evidence the succession of a successor us or the trustee;
. to add to our covenants for the benefit of the holders or additional
events of default;
. to secure the notes; or
. to add any other provisions with respect to matters or questions arising
under the indenture which we and the trustee deem necessary or desirable
and which do not adversely affect the interests of the holders.
Otherwise, our rights and obligations and the rights of the holders may be
modified by us and the trustee only with the consent of the holders of a
majority in principal amount of each series of notes then outstanding. No
reduction in the principal of or the interest rate on the notes or in the
percentage of holders required for modification of the indenture and no
extension of the maturity of any notes or in the time of payment of interest
will be effective against any holder without his or her consent.
THAXTON GROUP AS PAYING AGENT. We will make all principal and interest
payments to the holders, and we will provide notice of the payment to the
trustee.
SATISFACTION AND DISCHARGE OF INDENTURE. The indenture will be discharged
and canceled upon payment of all the notes or upon deposit with the trustee of
funds sufficient for the payment or redemption of the notes, within not more
than one year prior to the maturity of all of the notes.
THE TRUSTEE. The trustee is The Bank of New York, a New York banking
corporation, whose principal corporate trust office is in New York City. Notice
to the trustee should be directed to The Bank of New York, Towermarc Plaza,
10161 Centurion Parkway, Jacksonville, Florida 32256, Attention: Assistant
Treasurer.
The holders of a majority in principal amount of all outstanding series of
notes have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, provided that
this direction:
. would not conflict with any rule of law or with the indenture;
. would not be prejudicial to the rights of another holder; and
. would not subject the trustee to personal liability.
The indenture provides that in case an uncured event of default should occur
and be known to the trustee, the trustee will be required to use the degree of
care of a prudent man in the conduct of its own affairs in the exercise of its
power. Subject to using this standard, the trustee will be under no obligation
to exercise any of its rights or powers under the indenture at the request of
any of the holders unless they shall have offered to the trustee security and
indemnity satisfactory to it.
16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data for, and as of
the end of, the fiscal years ended December 31, 1997 through 2001 was derived
from our consolidated financial statements, which were audited by Cherry,
Bekaert & Holland, L.L.P. The selected historical financial data for, and as of
the end of, the six months ended June 30, 2001 and June 30, 2002 was derived
from our unaudited consolidated financial statements. You should read the
following information in conjunction with our consolidated financial statements
and the notes thereto included elsewhere in this prospectus, and the
information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ---------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
INCOME STATEMENT DATA:
Interest and fee income............ $15,893 $15,088 $59,140 $65,614 $74,326 $36,116 $38,366
Interest expense................... 5,023 4,934 17,272 21,024 19,070 9,807 7,313
------- ------- ------- ------- ------- ------- -------
Net interest income................ 10,870 10,154 41,868 44,590 55,256 26,309 31,053
Provision for credit losses........ 6,580 4,047 11,938 14,658 16,584 6,609 8,372
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for credit losses................ 4,290 6,107 29,930 29,932 38,672 19,700 22,681
Insurance commissions, net......... 5,470 6,591 12,805 17,764 18,554 6,899 7,832
Other income....................... 1,222 699 2,125 4,239 5,640 2,308 2,182
Operating expenses................. 13,211 14,894 42,314 51,782 57,736 27,315 27,453
Income tax expense (benefit)....... (724) (467) 1,258 550 2,095 751 1,783
------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations....................... (1,506) (1,028) 1,288 (397) 3,035 840 3,459
Discontinued operations net loss... -- (55) (1,643) (3,415) -- -- --
Net income (loss).................. $(1,506) $(1,084) $ (355) $(3,812) $ 3,035 $ 840 $ 3,459
======= ======= ======= ======= ======= ======= =======
Net Income (loss) per common
share............................ $ (0.39) $ (0.35) $ (0.16) $ (0.65) $ 0.34 $ 0.07 $ 0.46
Average common shares
outstanding...................... 3,873 3,803 6,476 6,975 6,876 6,899 6,864
AT YEAR ENDED DECEMBER 31, AT JUNE 30,
------------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
BALANCE SHEET DATA:
Finance receivables........ $ 67,558 $ 73,609 $213,170 $235,906 $240,534 $228,032 $227,739
Unearned income(1)......... (14,087) (13,299) (42,205) (46,331) (47,267) (43,621) (44,379)
Allowance for credit losses (4,809) (4,711) (10,661) (11,631) (12,012) (11,290) (11,140)
Finance receivables, net... 48,662 55,599 160,304 177,944 181,255 173,121 172,220
Total assets............... 60,965 78,996 234,935 247,548 242,560 230,960 233,973
Total liabilities.......... 54,996 66,067 225,132 243,789 236,275 226,501 224,482
Shareholders' equity....... 5,969 12,929 9,803 3,759 6,285 4,459 9,491
- --------
(1) Includes unearned finance charges, dealer reserves on used automobile sales
contracts and discounts on bulk purchases. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Credit Loss
Experience."
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a diversified consumer financial services company. The primary
divisions of our business include:
. origination and servicing of direct consumer loans made to
credit-impaired borrowers,
. used automobile lending through the purchase and servicing of used
automobile sales contracts,
. insurance premium finance lending through the purchase of insurance
premium finance contracts,
. selling insurance products on an agency basis, and the factoring of
accounts receivable and
. the origination and servicing of small commercial loans to small- and
medium-sized businesses.
RECENT EXPANSION ACTIVITIES
Over the past three years, we have added approximately 175 branch offices
and have begun the process of identifying the offices that are more profitable
than others, seeking to enhance the performance of each office and determining
whether to close or dispose of offices that are marginally profitable or
operate at a loss. While we continue to expand existing operations and consider
acquisition opportunities, our business strategy focuses primarily on making
our current business more profitable. As part of this strategy, we periodically
make bulk purchases of loan contracts to improve our competitive position and
portfolio mix.
ACQUISITIONS. In November 1999, we acquired all of the outstanding shares
of Thaxton Investment Corporation ("Thaxton Investment"), a corporation
controlled by Mr. James D. Thaxton, for 3,223,000 shares of our common stock.
At that time, Thaxton Investment owned and operated 144 consumer finance
offices in six states. Thaxton Investment had acquired these offices from
FirstPlus Consumer Finance, Inc. in February 1999. When we acquired Thaxton
Investment, the estimated aggregate fair market value of the common stock
issued to Mr. Thaxton was approximately $30 million. Because we had been under
common ownership and control with Thaxton Investment since February 1999, our
acquisition of Thaxton Investment was accounted for at historical cost in a
manner similar to pooling of interests accounting.
On August 18, 2000, we acquired all of the stock of Quick Credit
Corporation, a consumer finance company with 25 branch offices located in South
Carolina, for $12.75 million in cash. This acquisition was accounted for as a
purchase and resulted in goodwill of approximately $3.8 million.
DISCONTINUED OPERATIONS. We discontinued the operations of two of our
businesses in 2000. On March 1, 2000, we transferred all of the assets and
liabilities of 32 insurance agency operations to a newly formed entity, Thaxton
RBE, Inc. The purpose of the transfer was to place the insurance operations in
a separate entity to facilitate raising capital to fund the specialized
non-standard automobile insurance business of Thaxton RBE. Immediately after
the transfer, Thaxton Life Partners, Inc. acquired 90% of the equity of Thaxton
RBE for $2 million in cash. During the third quarter of 2000, Thaxton Life
Partners purchased our remaining 10% interest in Thaxton RBE and all amounts
owed to us by Thaxton RBE were paid in full. We recorded a loss, net of income
tax benefit, from operations of Thaxton RBE of approximately $1.5 million for
the year ended December 31, 1999 and $374,683 for the year ended December 31,
2000. For additional information about the effects of the discontinued
operations, see Note 13 to our consolidated financial statements contained
elsewhere in this prospectus.
In December 2000, we adopted a plan to discontinue the operations of the
mortgage banking business conducted by Paragon, Inc. Paragon ceased operations
in December of 2000, and its assets have been sold. We recorded a loss, net of
income tax benefit, from the operations of Paragon of $100,355 for the year
ended December 31, 1999 and approximately $3 million for the year ended
December 31, 2000. For additional information about the effects of the
discontinued operations, see Note 13 to our consolidated financial statements
as filed in our 2000 Form 10-KSB which was filed on April 9th, 2001.
18
SOURCES OF INCOME
We derive revenues and our resulting income from direct consumer lending,
used automobile sales finance, insurance premium finance, the sale of insurance
products on an agency basis and commercial finance. For purposes of the
following discussion, "revenues" means the sum of our interest and fee income,
insurance commissions, net and other income.
DIRECT CONSUMER LENDING. We make small loans to borrowers with impaired
credit. In connection with these loans, our income consists of interest and
fees paid by the borrowers. Our interest income is based on the interest rates
we charge borrowers for loans. Interest rates vary from loan to loan based on
several factors, including the extent to which interest rates are regulated in
the state where the loan is originated. Substantially all of the fee income we
derive from these loans consists of late fees. Interest and fee income from our
direct consumer lending business comprised approximately 81% of our total
revenues in 2001.
USED AUTOMOBILE SALES FINANCE. We finance used automobile purchases by
individuals with impaired credit by purchasing sales contracts from independent
automobile dealers. Our income in this line of business also consists of
interest and fees charged to borrowers. Like our direct consumer loans,
interest rates charged on automobile sales contracts vary from contract to
contract based on several factors, including the extent to which the interest
rates are regulated in the state where the contract is originated.
Substantially all of the fee income we generate consists of late fees. Interest
and fee income from our used automobile sales finance business comprised
approximately 11% of our total revenues in 2001.
INSURANCE PREMIUM FINANCE. We provide short-term financing of insurance
premiums for customers of independent insurance agents. The premiums are
primarily for personal lines of insurance that are typically too high for a
credit-impaired borrower to pay in six-month increments, such as automobile
insurance. A smaller amount of this business involves financing premiums for
commercial lines of insurance for small businesses. Substantially all of our
premium finance business is currently derived from customers of the 48
insurance offices owned and operated by Thaxton Life Partners, Inc. which is
owned by James D. Thaxton and members of his family.
Our income from our premium finance business consists of interest charges
and fees, both of which are extensively regulated in the states where we
operate. The fee income we derive consists primarily of an origination fee of
up to $15 on each contract and late fees as permitted under applicable state
law. Our insurance premium finance business made up approximately 2% of our
total revenues in 2001.
INSURANCE AGENCY ACTIVITIES. We sell, on an agency basis, various lines of
automobile, property and casualty, life, accident and health insurance. Our
income from the sale of these products consists of commissions paid by the
insurance companies that issue the policies we sell. The commission rates are
based on a standard or negotiated schedule. Our insurance agency activities
comprised approximately 4% of our total revenues in 2001.
COMMERCIAL FINANCE. We offer commercial loans and factoring services to
small business clients. We derive interest and fee income from these financing
activities. The interest rates we charge are typically negotiated with
commercial borrowers because the interest rates are generally not regulated by
state laws. In factoring the accounts receivable, we typically charge a fee of
1% to 4% of the amount we advance. We may also charge interest on uncollected
balances. Approximately 1% of our total revenues in 2001 was derived from our
commercial finance activities.
Over the next 12 months, we plan to grow our direct consumer lending
portfolio by about five percent, grow our automobile sales finance portfolio by
about two percent and maintain our insurance premium finance portfolio at
approximately its level at December 31, 2001. We do not intend to make any new
loans secured by real estate in the future and expect that our existing
portfolio of these loans will either be sold or liquidated over time as the
loans are paid off.
19
FINANCE RECEIVABLES
Our finance receivables are comprised of direct loans, used automobile sales
contracts, real estate secured loans, premium finance contracts and commercial
loans. Our financial performance depends in part on the growth of our
outstanding loan receivables and the maintenance of loan quality. The following
table sets forth certain information about the components of our finance
receivables as of the end of the period presented.
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------------- ENDED JUNE 30,
1999 2000 2001 2002
------------ ------------ ------------ --------------
UNAUDITED
DIRECT LOANS
Total balance, net(1)........ $109,840,905 $134,016,945 $148,214,621 $146,779,718
Average account balance...... 642 684 683 721
Interest and fee income...... 46,490,202 52,265,042 63,437,564 33,717,248
Average interest rate earned. 47.47% 43.68% 42.80% 45.99%
Number of accounts........... 171,028 195,837 216,981 203,526
USED AUTOMOBILE SALES CONTRACTS
Total balance, net(1)........ 26,870,193 25,392,262 17,782,135 15,789,754
Average account balance...... 3,352 3,080 3,052 3,281
Interest and fee income...... 7,928,282 7,244,212 4,841,125 2,054,764
Average interest rate earned. 25.32% 26.69% 24.05% 24.22%
Number of accounts........... 8,017 8,243 5,827 4,812
REAL ESTATE SECURED LOANS
Total balance, net(1)........ 22,783,924 18,873,231 15,732,857 14,046,312
Average account balance...... 13,109 14,363 14,368 9,339
Interest and fee income...... 2,397,719 2,854,375 2,782,002 1,358,211
Average interest rate earned. 10.73% 17.79% 17.48% 18.36%
Number of accounts........... 1,738 1,314 1,095 1,504
PREMIUM FINANCE CONTRACTS
Total balance, net(1)........ 8,029,703 7,355,818 8,375,711 4,640,351
Average account balance...... 548 511 417 307
Interest and fee income...... 1,691,469 2,189,958 2,234,593 871,829
Average interest rate earned. 25.65% 28.22% 25.57% 28.28%
Number of accounts........... 14,649 14,395 20,109 15,096
COMMERCIAL LOANS
Total balance, net(1)........ 3,440,166 3,935,945 3,161,875 2,103,608
Average account balance...... 114,672 95,999 85,456 67,858
Interest and fee income...... 632,636 1,060,693 1,031,122 364,181
Average interest rate earned. 25.04% 29.06% 29.01% 28.95%
Number of accounts........... 30 41 37 31
- --------
(1) Finance receivable balances are presented net of unearned finance charges,
dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases ("Net Finance Receivables").
NET INTEREST MARGIN
The principal component of our profitability is our net interest margin,
which is the difference between interest earned on finance receivables and
interest expense paid on borrowed funds. Statutes in some states regulate the
interest rates that we may charge our borrowers while in other states
competitive market conditions establish the interest rates borrowers may be
charged. Significant differences exist in the interest rates earned on the
various components of our finance receivable portfolio. The interest rates
earned on used automobile sales
20
contracts and real estate secured loans generally are lower than the interest
rates earned on direct consumer loans due to competition from other lenders,
superior collateral and longer terms. The interest rates earned on premium
finance contracts are state regulated and vary based on the type of underlying
insurance and the term of the contract.
Unlike our interest income, our interest expense is sensitive to general
market fluctuations in interest rates. The interest rates paid to our primary
lender, Finova, are based upon a published prime rate plus set percentages.
Thus, general market fluctuations in interest rates directly impact our cost of
funds. Our general inability to increase the interest rates earned on finance
receivables may impair our ability to adjust to increases in the cost of funds
resulting from changes in market conditions. Accordingly, increases in market
interest rates generally will narrow our interest rate spread and lower our
profitability, while decreases in market interest rates generally will widen
our interest rates spreads and increase our profitability.
The following table presents important data relating to our net interest
margin for the six-months ended June 30, 2002 and 2001 and years ended December
31, 2001, 2000, and 1999.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1999 2000 2001 2001 2002
------------ ------------ ------------ ------------ ------------
UNAUDITED
Average net finance
receivables(1)............ $162,784,651 $169,390,119 $179,688,836 $176,659,438 $190,230,844
Average notes payable(1).... 191,663,621 200,221,483 216,824,106 216,637,138 209,690,553
Interest and fee income..... 59,140,308 65,614,280 74,326,406 36,116,289 38,366,233
Interest expense............ 17,272,674 21,024,576 19,069,792 9,806,699 7,313,429
------------ ------------ ------------ ------------ ------------
Net interest income......... 41,867,634 44,589,704 55,256,614 26,309,590 31,052,804
Average interest rate earned 36.33% 38.74% 41.36% 40.89% 40.33%
Average interest rate paid.. 9.01% 10.50% 8.80% 9.05% 6.98%
------------ ------------ ------------ ------------ ------------
Net interest rate spread.... 27.32% 28.24% 32.56% 31.84% 33.35%
Net interest margin(2)...... 25.72% 26.32% 30.75% 29.79% 32.65%
- --------
(1) Averages are computed using month-end balances during the year presented.
(2) Net interest margin represents net interest income divided by average Net
Finance Receivables.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
During the first six months of 2002, many of the loans we made during the
fourth quarter of 2001 were paid off by our borrowers. This is a normal cycle
in our business. As a result, our aggregate gross finance receivables decreased
by $12,794,000 to $227,739,000. We experienced a similar decrease in our gross
receivables of $7,874,000 to $228,032,000 during the comparable period in 2001.
Most of the decrease this year occurred in our automobile and real estate
receivables. We experienced some gains in our shorter term direct loan
receivables.
The decline in our automobile and real estate receivables, which generally
carry lower interest rates than our direct loans, caused our overall interest
and fee income to increase to $38,366,000 during the most recent period from
$36,116,000 for the same period last year.
Because the prime rate was lower during the first six months of this year
compared to the same period last year, the interest rate on our credit facility
was lower. This significantly decreased our interest expense this year to
$7,313,000 from $9,807,000 for the same period last year.
Costs associated with our normal business growth caused our operating
expenses to increase 5.1% from $27,315,000 during the first six months of 2001
to $28,703,000 during the same period in 2002. The major component of these
expenses is personnel expense.
21
The increase in our operating expenses was offset by our adoption of SFAS
142 accounting for Goodwill. Under SFAS No. 142, goodwill and indefinite-lived
intangible assets are no longer amortized but are reviewed at least annually
for impairment. The effect of not amortizing goodwill will be an expense
savings of approximately $2.4 million for the full year, and was approximately
$1.2 million for the six months ended June 30, 2002.
The substantial decrease in interest expense and the accounting change to
not amortize goodwill caused our net income to increase significantly from
$841,000 in the first six months of 2001 to $3,653,000 in the same period in
2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Our aggregate finance receivables grew slightly during 2001. Finance
receivables grew 2% from 177,944,000 on December 31, 2000 to 181,255,000 on
December 31, 2001. In addition, the mix of our portfolio changed during 2001.
Our direct loan finance receivables increased by $13 million due to the
addition of new branches and increased emphasis on the growth and quality of
this division by management. Our automobile sales finance receivables decreased
by approximately $8 million due to a management decision to liquidate portions
of this portfolio. Due to the profitability of our direct loan finance
receivables, we plan to continue to grow this category of our business.
Interest and fee income grew 13.3% during 2001 primarily because of an
increase in receivables as a result of the full year effect of the August 2000
acquisition of Quick Credit and the change in the mix of our portfolio.
Interest and fee income was $74,326,000 in 2001 compared to $65,614,000 in
2000. Interest expense decreased 9.3% to $19,069,000 in 2001 from $21,024,000
in 2000. Even though our average notes payable for the year increased, our
overall interest expense decreased due to the substantial decrease in interest
rates during the year. As we increase our direct loan finance receivables, we
expect our interest income to increase in future periods. If the prime interest
rate continues to decline, we expect our interest expense to decrease.
We increased our allowance for credit losses by 3% to $12,012,000 at
December 31, 2001 versus $11,631,000 at December 31, 2000 due to the 12%
increase in credit losses experienced during 2001. Credit losses increased to
$18,024,000 for 2001 versus $16,052,000 for 2000 and our provision for credit
losses increased comparably between years from $14,658,000 in 2000 to
$16,584,000 in 2001, or a 13% increase. As our finance receivables portfolio
expands, we expect our credit losses will increase as well, and the weakening
economy may cause an additional increase in credit losses.
Insurance commissions, net of insurance cost, increased by 4.4% during 2001
primarily due to increased sales of insurance products to borrowers. Insurance
commissions, net of insurance costs, were $18,554,000 in 2001 versus
$17,764,000 in 2000. Other income increased from $4,239,000 in 2000 to
$5,640,000 in 2001 primarily due to law changes in Georgia, Tennessee and
Oklahoma that allowed us to charge increased fees to borrowers and the opening
of five additional branches in those states.
Total operating expenses increased 11.5% during 2001 due primarily to an
increase in normal operating expenses and the full year of operating expenses
associated with Quick Credit. Operating expenses were $57,737,000 during 2001
versus $51,781,000 during 2000. We only incurred 4 months of operating expenses
in 2002 due to the Quick Credit acquisition. We do not expect to continue to
see comparable increases in our operating expenses in the future. However, we
have experienced and expect to continue to experience nominal increases in
operating expenses associated with normal growth.
We generated pretax income of $5,130,000 and net income of $3,035,000 in
2001 compared to pretax income from continuing operations of $153,000 and a net
loss from continuing operations of $397,000 in 2000.
Our net income, after payment of preferred stock dividends, increased our
stockholders' equity to $9,686,000 from $6,285,000 at December 31, 2001.
22
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our aggregate finance receivables grew 11% in 2000 to $177,944,000 compared
to $160,304,000 in 1999. This significant increase was due in part to the
acquisition of $12 million in receivables in the acquisition of QuickCredit in
August of 2000.
Interest and fee income grew 10.9% during 2000 due to the increase in
receivables from the acquisition of Quick Credit and growth within the
portfolio. Interest and fee income in 2000 was $65,614,000 compared to
$59,140,000 in 1999. Interest expense increased 21.7% to $21,025,000 in 2000
from $17,273,000 in 1999. This was due to an increase in notes payable along
with an increase in interest rates.
We increased our allowance for credit losses by 9% to $11,631,000 at
December 31, 2000 versus $10,661,000 at December 31, 1999. Credit losses
increased to $16,052,000 for 2000 versus $13,461,000 for 1999, an increase of
19%. Our provision for credit losses increased significantly between years,
from $11,938,000 in 1999 to $14,658,000 in 2000, a 23% increase. This was due
to growth in the portfolio and the addition of Quick Credit.
Insurance commissions, net of insurance cost, increased 38.7% during 2000
due primarily to increased sales of insurance products to borrowers and
increased insurance commissions from the Thaxton Insurance agency offices.
Insurance commissions, net of insurance cost, were $17,764,000 during 2000
versus $12,805,000 during 1999. Other income increased from $2,125,000 in 1999
to $4,239,000 in 2000 due to the addition of the related party management fee
described elsewhere in this prospectus under the heading "Transactions with
Related Parties."
Total operating expenses increased 22.4% during 2000 due to a full year of
expense for Thaxton Investment Corporation in 2000 compared to 11 months in
1999 and the acquisition of Quick Credit. Operating expenses were $42,315,000
in 1999 compared to $51,781,000 in 2000.
We generated a pretax profit from continuing operations of $153,360 and a
net loss of $3,811,549 in 2000 compared to pretax income from continuing
operations of $2,545,272 and a net loss of $355,190 in 1999.
CREDIT LOSS EXPERIENCE AND PROVISIONS FOR CREDIT LOSSES
Provisions for credit losses are charged to income in amounts sufficient to
maintain this allowance at a level considered adequate to cover the probable
losses inherent in our existing finance receivable portfolio as of June 30,
2002. Credit loss experience, contractual delinquency of finance receivables,
the value of underlying collateral, and management's judgment are factors used
in assessing the overall adequacy of the allowance and resulting provision for
credit losses. Our reserve methodology is designed to provide an allowance for
credit losses that, at any point in time, is adequate to absorb the charge-offs
expected to be generated by the finance receivable portfolio, based on events
or losses that have occurred or are known to be inherent in the portfolio. The
model utilizes historical charge-off data to predict the charge-offs likely to
be generated in the future by the existing finance receivable portfolio. The
model takes into consideration overall loss levels, as well as losses by
originating office and by type, and develops historical loss factors that are
applied to the current portfolio. In addition, changes in dealer and bulk
purchase reserves are reviewed for each individual dealer and bulk purchase,
and additional reserves are established for any dealer or bulk purchase if
coverage is deemed to have declined below adequate levels. Our charge-off
policy is based on an account by account review of delinquent receivables.
Losses on finance receivables secured by automobiles are recognized at the time
the collateral is repossessed. Other finance receivables are charged off when
they become contractually past due 180 days, unless extenuating circumstances
exist leading management to believe such finance receivables will be
collectible. Finance receivables may be charged off prior to the normal
charge-off period if management deems them to be uncollectible.
Under our dealer reserve arrangements, when a dealer assigns a used
automobile sales contract to us, we withhold a certain percentage of the
principal amount of the contract, usually between five and ten percent. The
23
amounts withheld from a particular dealer are recorded in a specific reserve
account. Any losses incurred on used automobile sales contracts purchased from
that dealer are charged against its specific reserve account. If at any time
the balance of a dealer's specific reserve account exceeds the amount derived
by applying the withheld percentage to the total amount of principal and
interest due under all outstanding used automobile sales contracts purchased
from the dealer, the dealer is entitled to receive distributions from the
specific reserve account in an amount equal to the excess. If we continue to
purchase used automobile sales contracts from a dealer, distributions of excess
dealer reserves generally are paid quarterly. If we do not continue to purchase
used automobile sales contracts from a dealer, distributions of excess dealer
reserves are not paid out until all used automobile sales contracts originated
by that dealer have been paid in full. The aggregate balance of all specific
reserve accounts, including unpaid excess dealer reserves, are reflected in the
balance sheet as a reduction of finance receivables. Our allowance for credit
losses is charged only to the extent that the loss on a used automobile sales
contract exceeds the originating dealer's specific reserve account at the time
of the loss.
We periodically purchase used automobile sales contracts in bulk. In a bulk
purchase arrangement, we typically purchase a portfolio of used automobile
sales contracts from a dealer at a discount to par upon our management's review
and assessment of the portfolio. This discount is maintained in a separate
account against which losses on the bulk portfolio purchased are charged. To
the extent losses experienced are less than the discount, the remaining
discount is accreted into income.
The following table sets forth our allowance for credit losses and credit
loss experience at or over the periods presented.
UNAUDITED UNAUDITED
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2001 2000 1999
------------ ------------ ------------ ------------ ------------
Net finance receivables(1)...... $174,618,146 $180,623,735 $190,105,324 $185,638,256 $167,524,725
Allowance for credit losses..... 11,139,966 11,289,585 12,012,169 11,630,555 10,661,339
Allowance for credit losses as a
percentage of net finance
receivables(1)................ 6.38% 6.25% 6.32% 6.27% 6.36%
Dealer reserves and discounts
on bulk purchases............. 2,250,005 2,373,297 2,036,818 2,406,165 2,573,095
Dealer reserves and discounts
on bulk purchases as
percentage of Net
Automobile Sales Contracts
at period end................. 14.25% 8.42% 10.58% 10.89% 9.57%
Allowance for credit losses and
dealer reserves and discount
on bulk purchases(2).......... 13,389,971 13,662,882 14,048,987 14,036,720 13,234,434
Allowance for credit losses and
dealer reserves as a
percentage of finance
receivables................... 7.67% 7.56% 7.39% 7.56% 7.90%
Provision for credit losses..... 8,371,672 6,609,308 16,583,919 14,657,930 11,937,679
Charge-offs (net of
recoveries)................... 9,243,875 6,950,278 16,202,305 14,526,731 12,263,478
Charge-offs (net of recoveries)
as a percentage of average net
finance receivables(3)........ 10.58% 7.70% 8.32% 7.83% 7.32%
- --------
(1) Net finance receivable balances are presented net of unearned finance
charges, net of unearned insurance premiums, dealer holdbacks and bulk
purchase discounts, deferred loan costs, and exclude mortgage warehoused
loans and commercial finance receivables.
(2) Excludes valuation discount for acquired loans.
24
(3) Average net receivables computed using month end balances. June 30, 2002
and June 30, 2001 are annualized for comparison purposes.
The following table sets forth certain information concerning our finance
contracts at the end of the periods presented.
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31,
2002 2001 2001 2000
------------ ------------ ------------ ------------
UNAUDITED
Direct Finance Receivables Contractually past
due 90 days or more.......................... $ 7,217,087 $ 5,895,627 $ 7,373,910 $ 6,478,101
Direct Finance Receivables outstanding......... 146,779,718 127,376,708 148,214,621 134,016,945
Direct Finance Receivables Contractually past
due 90 days or more as a percentage of Direct
Finance receivables.......................... 4.92% 4.63% 4.98% 4.83%
Real Estate Secured Receivables Contractually
past due 90 days or more..................... 1,205,086 1,254,569 1,632,483 1,601,906
Real Estate Secured Receivables outstanding.... 14,046,312 17,803,095 15,732,857 18,873,231
Real Estate Secured Receivables Contractually
past due 90 days or more as a percentage of
Real Estate Secured receivables.............. 8.58% 7.05% 10.38% 8.49%
Vehicle Secured Receivables Contractually past
due 60 days or more.......................... 1,426,630 1,531,350 1,090,032 1,534,520
Vehicle Secured Receivables outstanding........ 15,789,754 28,182,493 17,782,135 25,392,262
Vehicle Secured Receivables Contractually past
due 60 days or more as a percentage of
Vehicle Secured receivables.................. 9.04% 5.43% 6.13% 6.04%
Premium finance contracts contractually past
due 60 days or more.......................... 542,049 574,537 679,091 917,508
Premium finance contracts outstanding.......... 4,640,351 9,403,259 8,375,711 7,355,818
Premium finance contracts contractually past
due 60 days or more as a percentage of
premium finance contracts.................... 11.68% 6.10% 8.11% 12.47%
Finance receivable balances are presented net of unearned finance charges.
LIQUIDITY AND CAPITAL RESOURCES
We generally finance our operations through cash flow from operations,
borrowings under our credit facility with Finova and the sale to public
investors of our subordinated notes. As of December 31, 2001 and June 30, 2002,
we had $151.2 and $122.7, respectively, outstanding under our credit facility.
Our credit facility with Finova includes a term loan and a revolving credit
line used to finance receivables. Advances under the term loan accrue interest
at the prime rate plus 2%, or 6.75%, as of June 30, 2002. Advances under the
revolving credit line accrue interest at the prime rate plus 1%, or 5.75%, as
of June 30, 2002. The prime rate is the prime rate published by Citibank, N.A.,
or other money center bank as Finova may select. The interest rates are
adjusted monthly to reflect fluctuations in the designated prime rate. Accrued
interest on borrowings is payable monthly.
The term loan is payable in twenty-three equal monthly principal and
interest payments of $600,000, which began on April 15, 2001, with the
remaining principal balance due on March 31, 2003. The outstanding balance
under the term loan was $11.9 million as of June 30, 2002, which reflects a
$7.9 million reduction since December 31, 2001. The revolving credit line
matures on July 31, 2006. Under the revolving credit line, principal is due in
full on the maturity date and can be prepaid without penalty.
25
Substantially all of our and our subsidiaries' assets secure the term loan
and the revolving credit facility, which requires us to comply with restrictive
covenants, including financial condition covenants. As of December 31, 2001,
the Company met all such requirements. James D. Thaxton guarantees both the
term loan and the revolving loan.
The maximum amount we could borrow under the revolving credit line was $165
million on December 31, 2001. As of June 30, 2002, the maximum amount we could
borrow under the revolving credit line was $149 million and an additional $30
million was available for borrowing against existing collateral, with $45.0
million of total potential capacity available for borrowing against qualified
finance receivables generated in future periods.
Beginning in 2002, the maximum borrowing amount under our revolving credit
line decreases on a quarterly basis. The annual decreases will be $22 million
in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005 and $9
million in 2006.
We also fund our liquidity needs through the sale of subordinated notes. In
February 1998, we began offering subordinated notes in several states by
registering $50 million of subordinated notes with the Securities and Exchange
Commission ("SEC"). In May 2001, we registered an additional $75 million
offering of subordinated notes with the SEC. The notes are sold primarily to
individual investors. The maturity terms range from daily (demand) notes to
sixty-month notes. Interest rates vary based on the principal amounts and
maturity dates of the notes. Notes currently being offered carry interest rates
ranging from 5.25% to 8.0%. The notes are unsecured and issued under an
indenture which we entered into with The Bank of New York, as trustee, in
February 1998. The terms of the indenture do not require us to comply with any
financial covenants nor do they impose any material restrictions on the
operations of our business.
As of December 31, 2001, we had $65.0 million of these registered
subordinated notes outstanding and $6.5 million of outstanding subordinated
notes registered in predecessor state registrations. As of June 30, 2002, we
had $81.0 million of these registered subordinated notes outstanding and $4.3
million of notes outstanding registered in predecessor state registrations. To
date, we have used the proceeds from the sale of these notes to reduce, on a
temporary basis, the amount of our revolving credit facility with Finova. We
intend to continue this note program by seeking to register additional
offerings of subordinated notes with the SEC. The sale of subordinated notes is
an important aspect of the financing of our business. It enables us to reduce
our overall borrowing costs, particularly during periods of increasing interest
rates. In addition, it allows us to hedge the interest rate risk inherent in
our variable rate senior credit facility and to diversify our sources of
borrowed funds.
We plan to continue to reduce borrowings under our senior credit facility
and replace those borrowings with increasing levels of subordinated notes.
Although the maximum borrowing amount under our revolving credit facility will
be decreasing, we anticipate that our cash flow from operations, the available
borrowing amount under our senior credit facility from time to time and the
proceeds from the sale of subordinated notes will be more than adequate to meet
our cash outflows to fund anticipated growth in our finance receivables,
operating expenses, repayment of indebtedness and planned capital expenditures
for the year ending December 31, 2002. We estimate our cash outflow to be
approximately $25 million for 2002.
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although we do not believe that inflation directly has a material adverse
effect on our financial condition or results of operations, increases in the
inflation rate generally are associated with increased interest rates. Because
we borrow funds on a floating rate basis and generally extend credit at fixed
interest rates, increased interest rates would increase our cost of funds and
could materially impair our profitability. We intend to explore opportunities
to fix or cap the interest rates on all or a portion of our borrowings. We can,
however, give no assurance that fixed rate or capped rate financing will be
available on terms acceptable to us. Inflation also may affect our operating
expenses. Other general economic conditions in the United States could affect
our business, including economic factors affecting the ability of our customers
or prospective customers to purchase used automobiles and to obtain and repay
loans.
26
RECENT AND PROPOSED ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards, No. 144 (SFAS No. 144),
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, was issued in August 2001 and supersedes Statement No. 121.
Statement No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The provisions of Statement No.
144 are effective for the financial statements issued for fiscal years
beginning after December 15, 2001. We have adopted SFAS No. 144 and expect that
the provisions of this Statement will not have a material impact on our
consolidated financial statements.
We also adopted Statements of Financial Accounting Standards, No. 142 (SFAS
No. 142), "Goodwill and Other Intangible Assets," which establishes financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets."
Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no
longer amortized but are reviewed at least annually for impairment. SFAS No.
142 requires that goodwill be tested for impairment at the reporting unit level
at adoption and at least annually thereafter, utilizing a two-step methodology.
The initial step requires we to determine the fair value of each reporting unit
and compare it to the carrying value, including goodwill, of such unit. If the
fair value exceeds the carrying value, no impairment loss would be recognized.
However, if the carrying value of the reporting unit exceeds its fair value,
the goodwill of this unit may be impaired. The amount, if any, of the
impairment would then be measured in the second step. After testing the
valuation of the reporting units it was found that all reporting units fair
values exceeded their carrying value, thus, there is no need to test for
impairment. The effect of not amortizing goodwill will be an expense savings of
approximately $2.4 million for the full year, and approximately $1.2 million
for the six months ended June 30, 2002.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with accounting
principles generally accepted in the United States of America and conform to
general practices within the finance company industry. The significant
accounting policies used in the preparation of the consolidated financial
statements are discussed in Note 1 to the consolidated financial statements.
Certain critical accounting policies require our management to make
estimates and assumptions, which affect the reported amounts of assets,
liabilities, income and expenses. As a result, changes in these estimates and
assumptions could significantly affect our financial position and results of
operations. We consider our policies regarding the allowance and resulting
provision for loan losses to be our most critical accounting policy due to the
significant degree of management judgment that is applied in establishing the
allowance and the provision. We have developed policies and procedures for
assessing the adequacy of the allowance for loan losses, which take into
consideration various assumptions and estimates with respect to the loan
portfolio. The assumptions and estimates used by management may be
significantly affected in the future by changes in economic conditions, among
other factors.
QUANTITATIVE AND QUALITATIVE ANALYSIS ABOUT MARKET RISK
Our outstanding debt under the revolving credit line and term loan was
$151.2 million at December 31, 2001 and $122.7 million at June 30, 2002.
Interest on borrowings under these facilities is based on the prime rate.
Because our profitability depends on our net interest margin, changes in the
prime rate will affect on our profitability. Increases in the prime rate would
adversely affect our profitability. Based on the outstanding balance at June
30, 2002, a change of 1% in the prime interest rate would cause a change in
interest expense of approximately $1,227,000 on an annual basis. Based on the
outstanding balance at December 31, 2001, a change of 1% in the prime interest
rate would have caused a change in interest expense of approximately $1.5
million on an annual basis.
Our outstanding receivables are not affected by external interest rate
changes because we usually charge rates typically fixed at the maximum rate
allowable by law or, in states where there are no legal maximum rates,
27
at competitive rates commensurate with the increased default risk and the
higher cost of servicing and administering a portfolio of loans to credit
impaired borrowers. This causes the interest rate risk on our outstanding
receivables to be minimal.
Interest rates being charged by competitors, even those outside our markets,
also influence the interest rates we are able to charge customers. A decrease
in the interest rates being charged by others in the market could impact our
ability to attract new customers and/or retain the customers we currently
serve. Similarly, new market entrants and the resulting increased competition
for customers in our market could adversely affect our profitability.
Additionally, changes in the maximum interest rate allowable by law would
affect our profitability. A decrease in the maximum rate would cause the
interest rates we are able to charge to be commensurately decreased and, as a
result, our interest rate margin would be reduced. A legally imposed maximum
interest rate adopted by a state where we operate that previously did not have
a limit could also impair our profitability because we may be required to
reduce our interest rates to fall within the legal limit.
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BUSINESS
We are a diversified consumer financial services company engaged in the
origination and servicing of direct consumer loans made to credit-impaired
borrowers, used automobile lending through the purchase and servicing of used
automobile sales contracts, insurance premium finance lending through the
purchase of insurance premium finance contracts, selling insurance products on
an agency basis, and the factoring of accounts receivable and the origination
and servicing of small commercial loans to small and medium sized businesses.
For purposes of the following discussion, "revenues" means the sum of our
interest and fee income, insurance commissions, net and other income. We were
organized in 1985.
DIRECT CONSUMER LENDING. Making small loans to borrowers with impaired
credit is our largest line of business in our Consumer Finance division,
comprising approximately 81% of our total revenues in 2001. Direct loans are
relied upon by credit-impaired borrowers to meet short-term cash needs, finance
purchases of consumer goods or refinance existing indebtedness. The usual term
of a direct loan is 15 months. Interest rates on direct loans vary based on a
number of factors, the most important of which is the extent to which the
borrower's state of residence regulates interest rates. Some states in which we
operate permit consumer lenders to simply post a maximum rate of interest in
filings with regulatory authorities. In these states we typically post a
maximum annual interest rate of 69%. Other states where we have offices impose
specific maximum annual interest rates on direct loans that range from 10% to
36%. Other factors that we consider in setting the interest rate on a
particular direct loan are credit profile of the borrower, the type and value
of any collateral and competitive market conditions.
Each applicant for a direct loan must pass a thorough credit review. This
review is conducted by the manager or personnel under his or her supervision in
the office where the application is taken. This review generally takes into
account the borrower's credit history, ability to pay, stability of residence,
employment history, income, discretionary income, debt service ratio and the
value of any collateral. We use an industry standard application analysis score
sheet to compile information on the factors described above. If a direct loan
is to be secured by real estate, we obtain an appraisal of the property, obtain
a title opinion from an attorney and verify filing of a mortgage or deed of
trust before disbursing funds to the borrower. A senior officer must approve
any direct loan to be secured by real estate. The principal competitive factors
for these types of loans are the interest rate charged and customer service.
In connection with making direct consumer loans we also offer, as agent,
credit life and credit accident and health insurance. Instead of filing
financing statements to perfect our security interest in the collateral on all
direct consumer loans secured by personal property other than an automobile, we
purchase non-filing insurance from an unaffiliated insurer. On these loans we
charge an amount approximately equal to the filing fees that we would have
charged to the customer if we had filed financing statements to perfect our
security interest. This amount is typically included in the amount of the loan.
We use this amount to pay premiums for non-filing insurance against losses
resulting from failure to file. Under our non-filing insurance arrangements,
approximately 90% of the premiums paid are refunded to us on a quarterly basis
and are netted against charge-offs for the period.
USED AUTOMOBILE SALES FINANCE. Another line of business in our Consumer
Finance division is the financing of used automobile purchases, which comprised
approximately 11% of our total revenues in 2001. We purchase sales contracts
from independent automobile dealers who have been approved by the manager of an
individual finance office or a regional supervisor. Office managers and
regional supervisors periodically evaluate independent dealers in their market
areas to ensure that we purchase sales contracts only from reputable dealers
carrying an inventory of quality used automobiles. We enter into a
non-exclusive agreement with each dealer which sets forth the terms and
conditions on which we will purchase sales contracts. The dealer agreement
generally provides that sales contracts are sold to us without recourse to the
dealer with respect to the credit risk of the borrower. However, if the dealer
breaches the terms of the sales contract or a customer withholds payment
because of a dispute with the dealer regarding the quality of the automobile
purchased, the dealer typically is obligated to repurchase the sales contract
on our demand for its net unpaid balance. If the purchaser of the automobile
recovers any amount from us as a result of a claim against the dealer, the
dealer agreement provides that the dealer will reimburse us for any amount paid
the customer and for any costs we incur as a result of the claim.
29
The dealer agreement allows us to withhold a specified percentage of the
principal amount of each sales contract purchased. This dealer reserve
arrangement is designed to protect us from credit losses on sales contracts.
These dealer reserves, which range from 5% to 10% of the net amount of each
sales contract, are negotiated on a dealer-by-dealer basis and are subject to
change based upon the collection history on sales contracts we have purchased
from the dealer.
In purchasing used automobile sales contracts, underwriting standards are
used that take into account principally the degree of a proposed buyer's
creditworthiness and the market value of the vehicle being financed. The office
manager, or other office personnel under the manager's supervision, conducts
the credit evaluation review. This review generally takes into account factors
similar to those performed in our review of direct consumer loans. We generally
do not finance more than 100% of the average trade-in value of the automobile
as listed in the current edition of the National Association of Automobile
Dealers Official Used Car Guide.
From time to time we purchase used automobile sales contracts in bulk from
dealers who have originated and accumulated contracts over a period of time. By
doing so, we are able to obtain large volumes of sales contracts in a
cost-effective manner. For bulk purchases, our underwriting standards take into
account principally the borrowers' payment history and the collateral value of
the automobiles financed. These purchases are typically made at discounts
ranging from 25% to 50% of the financed portion of the contract. Generally no
dealer reserve arrangements are established with bulk purchases. In connection
with bulk purchases, we review all credit evaluation information collected by
the dealer and the servicing and collection history of the sales contracts.
We compete with others in used car financing primarily based on the price
paid for used automobile sales contracts, which is a function of the amount of
the dealer reserve and the reliability of service to participating dealers. We
generally do not compete based on the same type of used automobile to be
financed because our competition concentrates their financing activities on
late-model used automobiles purchased from franchised dealers rather than
older-model used automobiles purchased from independent dealers, which is the
target market of our used automobile sales financing activities. The size of
our average used automobiles sales contract is considerably smaller than that
of many other companies engaged in purchasing used automobiles sales contracts.
We believe this is due in large part to the fact that most of our competitors
are seeking to do business primarily with franchised dealers selling
late-model, lower mileage used automobiles, coming off leases or which were
rental cars, for significantly higher prices than the prices for automobiles
offered for sale by the independent dealers with whom we have relationships.
The independent dealers from whom we purchase used automobile sales contracts
typically sell automobiles that tend to be somewhat older, higher mileage
vehicles. Because the costs of servicing and collecting a portfolio of finance
receivables increase with the number of accounts included in the portfolio, we
believe that many apparent potential competitors will choose not to do business
with independent dealers.
In connection with the origination of used automobile sales contracts, we
offer, as agent, credit life, and credit accident and health insurance.
Borrowers under sales contracts and direct loans secured by an automobile are
required to obtain comprehensive and collision insurance on the automobile that
designates us as loss payee. A loss payee is the person who receives insurance
proceeds in the event an automobile is damaged in a collision. If the borrower
allows the insurance to lapse during the term of the contract or loan, we will
purchase a vendor's single interest insurance policy, which insures us against
a total loss on the automobile. The cost of the premium will then be added to
the borrower's account balance. We also offer, as agent, limited physical
damage insurance, which satisfies the requirement that the borrower purchase
comprehensive and collision insurance.
INSURANCE PREMIUM FINANCE. Also in our Consumer Finance division we provide
short-term financing of insurance premiums purchased indirectly through
independent insurance agents. Our insurance premium finance business made up
approximately 2% of our total revenues in 2001. The premiums are primarily for
personal lines of insurance that are typically too high for a credit-impaired
borrower to pay in six-month increments, such as automobile insurance.
Financing the premium allows the insured to pay it in smaller increments,
usually monthly. Most agents who refer premium finance business to us are
located in North Carolina, South Carolina, and Virginia. A small amount of our
business involves financing premiums for commercial lines of insurance for
30
small businesses, including property and casualty, business automobile, general
liability, and workers' compensation. Substantially all of our premium finance
business is currently derived from customers of the 48 insurance offices owned
and operated by Thaxton RBE, Inc. ("RBE"), which is owned by Thaxton Group CEO
James D. Thaxton and members of his family.
When an individual purchases an insurance policy from an agent with whom we
have a relationship, the agent will offer the opportunity to enter into a
premium finance contract that allows the insured to make a down payment and
finance the balance of the premium. The typical term of a premium finance
contract ranges from three to eight months depending primarily upon the term of
the underlying insurance policy. The required down payment ranges from 20% to
50% of the premium. We sometimes allow agencies to charge a smaller down
payment. In those instances, we have an arrangement where RBE reimburses our
premium finance company for any losses incurred in excess of 5% of the premium.
We generally impose the maximum finance charges and late fees that applicable
state law permits for premium finance contracts, which are extensively
regulated in the states where we engage in this business. All of the states in
which we operate we charge the maximum interest rate permitted by law. Because
we are able to cancel the insurance policy generally within a period of 23 to
28 days after the due date of a delinquent payment and receive a refund of the
unearned portion of the premium, the creditworthiness of the insured is a less
important factor than the size of the down payment and an efficient and
effective system for servicing and collecting our portfolio of premium finance
contracts.
INSURANCE AGENCY ACTIVITIES. We sell, on an agency basis, various lines of
automobile, property and casualty, life, accident, and health insurance. Our
insurance agency activities comprised approximately 4% of our total revenues in
2001. The insurance companies that we represent assume all underwriting risk on
most of the policies we sell. The insurance company that issues a policy we
sell pays us a commission based on a standard or negotiated schedule. We are
eligible for additional commission payments from some of the companies we
represent if the loss experience on the policies we sell for those companies
falls below specified levels and the total premiums on such policies exceed a
specified minimum. In 1998, we began selling a new automobile insurance policy
in North Carolina where we assumed limited underwriting risk on non-standard
automobile collision insurance with minimum limits. In the fourth quarter of
1999, and throughout the first half of 2000, we expanded the sale of this
policy into Arizona, New Mexico, and Colorado. This business was discontinued
and sold to Thaxton Life Partners, Inc. on August 31, 2000.
COMMERCIAL FINANCE. In 1998, we began making commercial loans and offering
factoring services to small business clients. Our commercial finance activities
made up approximately 1% of our total revenues in 2001. Our commercial loans
usually are secured, most often with real estate. In factoring, we advance
funds to the client based upon the balance of designated accounts receivable
due from their customers. The client then assigns or sells these receivables to
us, notifies its customers to send payment directly to us and we collect the
receivables and credit the amount advanced to the client. Generally, we advance
to our factoring client 80% to 95% of the dollar value of each receivable,
holding the difference in reserve. We charge a fee equal to one to four percent
of the amount advanced for this service and may also charge interest on any
uncollected balances. Almost all of our factoring contracts are with recourse,
which allows us to charge any uncollected receivables back to the client after
a period ranging from 60 to 90 days.
THE CONSUMER FINANCE AND INSURANCE AGENCY INDUSTRIES
The segment of the consumer finance industry in which we operate is commonly
called the "non-prime credit market." Our direct loan borrowers and borrowers
under automobile sales contracts typically have limited credit histories, low
incomes or past credit problems. These borrowers generally do not have access
to the same sources of consumer credit as borrowers with long credit histories,
no defaults and stable employment because they do not meet the stringent
objective credit standards that most traditional lenders use. The non-prime
credit market for direct loans and used automobile finance is highly
competitive and fragmented, consisting of many national, regional and local
competitors. New competitors are able to enter this market with relative ease.
Historically, commercial banks, savings and loans, credit unions, financing
arms of automobile manufacturers,
31
and other lenders providing traditional consumer financing have not
consistently served this consumer finance market. Several large bank holding
companies, in an effort to recapture some of the customers their bank
subsidiaries have traditionally rejected on the basis of their rigid credit
scoring systems, now serve the non-prime credit market through automobile
finance subsidiaries. We also face increasing competition from a number of
companies, including bank credit card companies, providing similar financing to
individuals that cannot qualify for traditional financing. Many of these
competitors or potential competitors have significantly greater resources than
we do and have pre-existing relationships with established networks of dealers.
To the extent that any of these lenders significantly expand their activities
in the markets where we operate or plan to operate, our profitability could be
threatened.
Although the primary service-providers in the premium finance industry are
different than those who serve the non-prime credit market for direct loans and
used automobile finance, credit-impaired borrowers also are the primary
borrowers under premium finance contracts. Insurance companies that engage in
direct writing of insurance policies generally provide premium financing to
their customers who need the service. Numerous small independent finance
companies like us are engaged in providing premium financing for personal lines
of insurance purchased by credit-impaired borrowers through independent
insurance agents. Because the rates they charge are highly regulated, these
companies compete primarily on the basis of efficiency in providing the
financing and servicing the loans. A significant number of independent
insurance agents provide premium financing to their customers either directly
or through affiliated entities. As banks are allowed to enter the insurance
business, they also are increasingly engaging in the premium finance business.
Independent insurance agencies represent numerous insurance carriers and
typically place a customer's business with the carrier whose combination of
features and price best match the customer's needs. In comparison, direct
agents represent only one carrier. Most carriers find the use of independent
agencies to be a more cost-effective method of selling their products than
using a direct agent force. Competition among independent insurance agencies is
intense. Numerous other independent agencies operate in most of the markets
where our insurance offices are located. Direct agents for various insurance
companies located in some of our markets also compete with us. We compete
primarily on the basis of service and convenience. We attempt to develop and
maintain long-term customer relationships through low employee turnover and
responsive service and offer virtually all types of insurance products.
Banks and commercial finance companies dominate the commercial lending
industry. Many banks, however, do not offer factoring services, and most banks
do not make loans to the higher risk business clients that we finance. Most
commercial finance companies engage in lending to larger businesses or engage
in lending to specialized businesses. Our primary competition comes from
independent factoring companies who, like us, specialize in smaller, higher
risk clients.
REGULATION
Consumer finance companies and insurance agents are extensively supervised
and regulated under state and federal statutes and regulations. Depending upon
the nature of a particular transaction and the state of residence of the
borrower or the customer, we may be required to:
. Obtain licenses and meet specified minimum qualifications;
. Limit the interest rates, fees, and other charges for which the borrower
may be assessed;
. Limit or prescribe specified other terms and conditions of the financing;
. Govern the sale and terms of insurance products; and
. Define and limit the right to repossess and sell collateral.
Federal and state laws also require us to provide various disclosures to
prospective borrowers, prohibit misleading advertising, protect against
discriminatory lending practices, and prohibit unfair credit practices. We
32
believe we comply in all material respects with applicable governmental
regulations. These requirements change frequently however, and we cannot be
certain that future changes or modifications in these laws will not have a
material adverse effect on our business by increasing our compliance costs or
requiring us to limit or discontinue of a profitable line of business.
EMPLOYEES
As of October 16, 2002, we employed 922 full-time employees and 92 part-time
employees, none of whom were covered by a collective bargaining agreement. Of
that total, 77 were located in the Company's headquarters in Lancaster, South
Carolina and 937 were located in our other offices. We generally consider our
relationships with our employees to be good.
PROPERTY
Our executive offices are located in Lancaster, South Carolina in leased
office facilities of approximately 28,000 square feet. The lease expires in
August 2012, and includes an option to renew for an additional five-year term.
We lease all of our branch office facilities. In some instances we lease these
facilities from related parties. These offices range in size from approximately
800 square feet to 2,200 square feet. Since most of our business with
automobile dealers is conducted by facsimile machine and telephone, we do not
believe that the particular locations of our finance offices are critical to
our business of purchasing used automobile sales contracts or our premium
finance operations. Location is somewhat more important for our direct loan and
insurance agency operations. Other satisfactory locations are, however,
generally available for lease at comparable rates and for comparable terms in
each of our markets.
As of October 16, 2002 we had a total of 219 finance offices and 14
insurance agency offices in the following states.
FINANCE OFFICES INSURANCE AGENCY OFFICES
--------------- ------------------------
South Carolina. 80 South Carolina..... 12
Texas.......... 52 North Carolina..... 2
Mississippi.... 22
Georgia........ 23
Tennessee...... 12
Kentucky....... 9
Ohio........... 9
Oklahoma....... 6
Alabama........ 2
Virginia....... 2
North Carolina. 2
LEGAL PROCEEDINGS
We presently are not a party to any material legal proceedings nor is our
management aware of any material threatened litigation against us.
33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers and their ages as of October 16, 2002
were as follows.
NAME AGE POSITION
---- --- --------
James D. Thaxton.. 55 Chairman of the board, president
and chief executive officer
Robert L. Wilson.. 62 Executive vice president, chief
operating officer and director
Allan F. Ross..... 54 Vice president, chief financial
officer, treasurer, secretary and
director
C. L. Thaxton, Sr. 79 Director
James D. Thaxton has served as our Chairman of the Board, President and
Chief Executive Officer since we were founded. Prior to joining us, Mr. Thaxton
was an insurance agent at C.L. Frates & Company in Oklahoma City, Oklahoma from
1974 to 1976. From 1972 to 1973, he was employed as an underwriter by United
States Fidelity and Guaranty. James D. Thaxton is the son of C.L. Thaxton, Sr.
Robert L. Wilson joined us in January 1991 and has served since July 1991,
as our Executive Vice President, Chief Operating Officer and a director. From
October 1988 until July 1990, Mr. Wilson served as Operations Manager of
MANH--Financial Services Corp. For more than 25 years prior to October 1988,
Mr. Wilson served in various positions with American Credit Corporation and its
successor, Barclays American Corporation, including as Southeastern Regional
Manager and Executive Vice President of Barclays American Credit Division.
Allan F. Ross joined us in March 1997, and has served as Vice President and
Corporate Controller since April 1997, and as a Director, Secretary, Treasurer
and Chief Financial Officer since February 1998. From 1989 to 1997, Mr. Ross
was the managing partner of a CPA and consulting practice. From 1978 to 1989,
Mr. Ross was Vice President and Financial Controls Director of Barclays
American Corporation. From 1974 to 1978, Mr. Ross was a practicing CPA with
Arthur Andersen & Company, and with Deloitte and Touche, LLP. He is a certified
public accountant.
C.L. Thaxton, Sr. has been a director since we were founded. Mr. Thaxton is
a director of Thaxton Insurance, which he founded in 1950 and is the manager of
its Pageland branch office. Mr. Thaxton is the father of James D. Thaxton.
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Our executive
officers are appointed by and serve at the discretion of the Board.
Our board of directors directly oversees executive compensation, and
oversees and approves salaries and incentive compensation for our executive
officers and other employees. The board of directors also directly oversees the
selection of our independent auditors and reviews the results and scope of the
audit and other services that the independent auditors provide. Directors do
not receive any compensation for their service as members of the board of
directors. All directors are reimbursed for their reasonable expenses in
attending board meetings.
34
EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued to our executive
officers for the years ended December 31, 2001, 2000, and 1999.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)
- --------------------------- ---- ---------- ---------
James D. Thaxton,......................................... 2001 125,693 184,083
President and chief executive officer 2000 115,363 123,755
1999 113,880 92,757
Robert L. Wilson,......................................... 2001 170,902 217,036
Executive vice president 2000 152,821 53,033
1999 125,280 5,102
Allan F. Ross............................................. 2001 110,149 --
Vice president, chief financial officer, and treasurer 2000 104,904 --
1999 97,385 --
35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock as of October 16, 2002, for each
person known to us to own more than 5% of our outstanding common stock, each of
our executive officers and directors and our directors and executive officers
as a group. The address of all of the beneficial owners of our common stock
listed below is 1524 Pageland Highway, Lancaster, South Carolina 29720.
NUMBER OF SHARES AND NATURE OF PERCENTAGE OF COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING(1)
- ------------------------ ------------------------------ --------------------------
James D. Thaxton................. 6,456,000(1) 94.0%
C. L. Thaxton, Sr................ 17,621(2) *
Directors and officers as a group 6,473,621 94.2%
- --------
* Indicates less than one percent
(1) Includes 1,112,828 shares held by a family limited partnership as to which
Mr. Thaxton shares voting and investment power.
(2) Includes 15,222 shares held of record by Mr. Thaxton's spouse, Katherine D.
Thaxton.
TRANSACTIONS WITH RELATED PARTIES
STOCK TRANSACTION WITH DIRECTOR
In January 1999, Mr. Perry L. Mungo divested his ownership interest in the
company and resigned from the board of directors. At his request, we
repurchased all of his common stock, totaling 29,200 shares, for $10 per share.
THAXTON INVESTMENT
On February 1, 1999, Mr. James D. Thaxton, our chairman of the board,
president, chief executive officer and controlling shareholder, organized
Thaxton Investment Corporation and owned all of the common stock. Thaxton
Investment's board of directors and executive officers were, with one
exception, identical to ours. Prior to our acquisition of all of the common
stock of Thaxton Investment, our executive officers and other administrative
personnel provided management services to Thaxton Investment and charged a
monthly management fee in the amount of $36,440 based upon time estimates of
our personnel for work performed for the benefit of Thaxton Investment. The
management fee also included the reimbursement of other direct costs incurred
in the course of our provision of management services to Thaxton Investment.
On November 8, 1999, we completed the acquisition of all of the common stock
of Thaxton Investment. Mr. Thaxton transferred all of his shares of Thaxton
Investment to us in exchange for 3,223,000 shares of our common stock. Because
we had been under common ownership and control with Thaxton Investment since
February 1999, our acquisition of Thaxton Investment was accounted for at
historical cost in a manner similar to pooling of interests accounting.
ACQUISITION AND SUBSEQUENT DISPOSITION OF THAXTON RBE, INC.
At the end of 1998, and throughout 1999, we made a series of acquisitions of
insurance agencies in Arizona, New Mexico, Nevada, Colorado and North Carolina,
as well as a general insurance agency in Virginia. At the same time, we entered
into a contract with American Bankers Insurance Group, Inc., pursuant to which
we agreed that these agencies would sell American Bankers non-standard
insurance policies and we would retain the underwriting risk, and any profit or
loss from operations. This business ultimately consisted of 30 non-standard
automobile agency office locations, plus two insurance general agencies in
Virginia and South Carolina.
36
On March 1, 2000, we transferred all of the assets and liabilities of these
agency operations to Thaxton RBE, a newly-formed subsidiary. The total amount
of the assets transferred was approximately $8 million, the majority of which
were intangible. The purpose of the transfer was to place the operations of
Thaxton RBE in a single entity to facilitate raising additional capital for
Thaxton RBE to fund its initial stage operations. Immediately subsequent to the
formation and asset transfer, Thaxton Life Partners, Inc. invested $2,000,000
in the capital stock of Thaxton RBE and obtained a 90% interest in that company
as a result of the investment. Thaxton Life Partners, Inc., is owned by James
D. Thaxton, C. L. Thaxton, Sr. and other Thaxton family members. As a result of
these transactions, we had a net receivable from Thaxton RBE in the amount of
$5 million at August 31, 2000.
During the third quarter of 2000, we decided to discontinue operations and
dispose of our interest and investment in Thaxton RBE as soon as suitable
financing for Thaxton RBE could be obtained. On August 31, 2000, Thaxton Life
Partners was able to arrange independent financing for Thaxton RBE, and Thaxton
Life Partners purchased the remaining 10% interest in RBE from us. At the time
of the sale, all amounts owed us were paid in full.
Thaxton Life Partners, Inc., a related party, invested $2,000,000 in the
capital stock of RBE and obtained a 90% interest in RBE as a result of the
investment. The acquisition of the 90% interest in RBE by Thaxton Life Partners
was funded primarily through our repurchase of 150,000 shares of Series A
preferred stock from certain members of Thaxton Life Partners. The proceeds
received from us from the repurchase of the Series A preferred stock were used
by Thaxton Life Partners to obtain the 90% interest in RBE. On August 31, 2000,
Thaxton Life Partners purchased the remaining 10% interest in RBE from us. We
recognized no gain or loss on the disposal of RBE. As we and RBE are under
common ownership, there are various activities and transactions that occur
between the two of us to take advantage of economies of scale.
After the sale of the capital stock of RBE, the Company continued to perform
certain back-office and management roles, such as the accounting, human
resources, and information systems management functions, which were outsourced
by RBE to the Company during 2001. The Company billed RBE for these services
performed based on the amount of time spent by the Company's personnel
performing the services for RBE. During the year ended December 31, 2001, the
Company billed RBE approximately $1,050,000 for such services performed.
Furthermore, RBE and the Company continued to share common office space after
the disposition. As a result of these arrangements, the Company had a
receivable from RBE for approximately $51,000 and a payable to RBE of
approximately $250,000 at December 31, 2001.
The Company has also structured an arrangement with RBE whereby TICO Premium
Finance, the Company's insurance premium finance subsidiary, will originate
loans to certain RBE customers to finance their insurance policies underwritten
by RBE. In connection with this process, TICO Premium Finance agrees to accept
a down payment on the loan which is smaller than TICO Premium Finance typically
receives from borrowers when the insurance policy is underwritten by third
party insurance companies. In turn, TICO Premium Finance is reimbursed by RBE
for any losses on such loans originated to customers of RBE. By requiring a
lower down payment, RBE is able to generate a higher volume of business than it
would be able to if down payments typically received in the industry were
required by TICO Premium Finance. At December 31, 2001, there were
approximately $3.1 million in outstanding premium finance receivables recorded
by TICO Premium Finance that relate to insurance policies underwritten by RBE.
In addition, for the year ended December 31, 2001, there were approximately
$584,000 of reimbursements from RBE to TICO Premium Finance for losses incurred
by TICO Premium Finance. TICO Premium Finance had a receivable from RBE of
approximately $62,000 at December 31, 2001 for additional reimbursements for
losses incurred.
Thaxton Insurance Group agencies, the Company's standard insurance
operations, are acting as agents for non-standard policies underwritten by
Thaxton RBE. Thaxton Insurance Group acts as agent for certain RBE customers
and recognizes commissions on policies that are underwritten by RBE. During the
year ended December 31, 2001 there was approximately $51,000 of insurance
commissions recognized by Thaxton Insurance Group on non-standard insurance
policies that were issued through Thaxton Insurance Group as agent.
37
The employees of RBE are covered under the self-insured health insurance
plan of the Company. In addition, the Company purchased general liability
insurance during 2001 that covers both the employees of Thaxton Insurance Group
and RBE.
The employees of RBE are eligible to participate in the Employee Savings
Plan benefit offered by the Company.
PLAN OF DISTRIBUTION
This offering will commence on the date of this prospectus, and will
continue until the later of two years or until all of the notes are sold,
unless we terminate this offering sooner.
Our officers and employees and those of some of our finance and insurance
subsidiaries will sell the notes in states where they are permitted to do so
without registration as a broker-dealer and in reliance upon Rule 3a4-1 under
the 1934 Act. Persons associated with us and our affiliates who participate in
the offering of the notes will limit their participation to activities
permitted under Rule 3a4-1, and no commissions or other direct or indirect
compensation will be paid to these persons in connection with the sale of the
notes.
We have engaged Carolinas First Investments, Inc., a registered
broker-dealer, as an underwriter to sell the notes on a "best efforts" basis in
some states and to assist us in managing the offering. As a "best efforts"
underwriter, Carolinas First Investments is not required to sell any particular
principal amount of notes, but will use its best efforts to sell notes. Under
the terms of our sales agency agreement with Carolinas First Investments,
Carolinas First Investments will receive sales commissions of 0.25% of the
principal amount of the notes sold by Carolinas First Investments, plus a
monthly management fee of $6,250 and reimbursement of expenses incurred in
managing the offering. In addition, we have agreed to indemnify Carolinas First
Investments against some specified liabilities, including liabilities under the
1933 Act.
We may also employ the services of one or more other broker-dealers to sell
the notes on a non-exclusive, "best efforts" basis. We anticipate that any
broker-dealer we retain to assist with the distribution of the notes would
receive sales commissions ranging from 0.25% to 5% of the principal amount of
the notes sold through the broker-dealer and possibly reimbursement of certain
of the broker-dealer's costs and expenses. We may also agree to indemnify the
broker-dealer against some liabilities, including liabilities arising under the
1933 Act.
We may market the notes through the use of newspaper advertisements,
mailings of this prospectus to our insurance and selected consumer finance
customers, signs in our offices and in the offices of some of our finance and
insurance subsidiaries and by providing copies of this prospectus to potential
purchasers who inquire about purchasing the notes. Our officers, directors or
employees will not market the notes by mass mailings, telephone calls or other
personal solicitation.
Daily notes will not be offered or sold in South Carolina.
LEGAL MATTERS
Moore & Van Allen PLLC, Charlotte, North Carolina will pass upon the
validity of the notes offered for sale with this prospectus.
38
EXPERTS
The consolidated financial statements of The Thaxton Group, Inc. as of
December 31, 2001, 2000 and 1999, and for the years then ended have been
included herein and in the registration statement in reliance upon the report
of Cherry, Bekaert & Holland, LLP, independent certified public accountants,
appearing elsewhere herein, given on the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement on Form S-1 with the SEC with respect to
the registration of the notes offered for sale with this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits to the registration statement. For
further information pertaining to The Thaxton Group, Inc. the notes offered by
this prospectus and related matters, you should review the registration
statement, including the exhibits filed as a part of the registration
statement. Each statement in this prospectus referring to a document filed as
an exhibit to the registration statement is qualified by reference to the
exhibit for a complete statement of its terms and conditions.
We file annual, quarterly and current reports, and other information with
the SEC. So long as we are subject to the SEC's reporting requirements, we will
continue to furnish the reports and other required information to the SEC. You
may read and copy any reports and other information we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Please call the SEC at 1-800-SEC-0330 for further information on the
operations of the public reference room. The SEC also maintains an internet
site at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC. Our filings are available, using our name or common stock symbol,
"THAX," on the SEC's internet site.
39
INDEX TO FINANCIAL STATEMENTS
PAGE
----
The Thaxton Group, Inc.
Independent Auditors' Reports........................................................................ F-2
Consolidated balance sheets as of December 31, 2000 and 2001 and June 30, 2002....................... F-3
Consolidated statements of income for the years ended December 31, 1999, 2000 and 2001 and six months
ended June 30, 2002................................................................................ F-4
Consolidated statements of stockholders' equity for the years ended December 31, 1999, 2000 and 2001
and six months ended June 30, 2002................................................................. F-5
Consolidated statements of cash flows for the years ended December 31, 1999, 2000 and 2001 and six
months ended June 30, 2002......................................................................... F-6
Notes to consolidated financial statements........................................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS
THE THAXTON GROUP, INC.
We have audited the accompanying consolidated balance sheets of The Thaxton
Group, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three year period ended December 31, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Thaxton
Group, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results
of their operations and their cash flows for each of the years in the three
year period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ CHERRY, BEKAERT & HOLLAND, L.L.P.
Charlotte, North Carolina
March 8, 2002
F-2
THE THAXTON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------- JUNE 30
2000 2001 2002
- ------------ ------------ ------------
(UNAUDITED)
ASSETS
Cash........................................................... $ 4,482,553 $ 4,096,359 $ 3,809,514
Finance receivables, net....................................... 177,943,646 181,255,030 172,219,777
Premises and equipment, net.................................... 5,011,856 4,246,816 4,390,064
Accounts receivable............................................ 1,353,053 1,813,743 1,217,440
Accounts receivable from related parties....................... 801,584 113,185 58,138
Repossessed automobiles........................................ 291,057 952,153 703,545
Deposit........................................................ 6,230,000 6,710,692 7,809,028
Goodwill and other intangible assets........................... 34,812,558 32,481,654 32,377,219
Deferred tax asset............................................. 4,191,000 2,752,000 2,910,000
Other assets................................................... 5,449,640 8,138,673 8,478,323
Assets of discontinued operations.............................. 6,981,166 -- --
------------ ------------ ------------
Total assets............................................ $247,548,113 $242,560,305 $233,973,048
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest payable....................................... $ 2,627,987 $ 2,194,814 $ 2,167,372
Notes payable.................................................. 232,605,414 225,033,166 210,300,362
Accounts payable............................................... 2,153,584 3,631,558 4,863,845
Accounts payable to related parties............................ 1,020,102 254,043 1,505,923
Employee savings plan.......................................... 627,702 1,083,594 1,122,621
Other liabilities.............................................. 4,377,271 4,078,594 4,521,805
Liabilities of discontinued operations......................... 376,643 -- --
------------ ------------ ------------
Total liabilities....................................... 243,788,703 236,275,769 224,481,928
------------ ------------ ------------
Stockholders' Equity
Preferred Stock $.01 par value:
Series A: 1,400,000 shares authorized; issued and
outstanding 10,440 shares in 2001 and 2000;
Liquidation value $104,400 in 2001........................ 104 104 104
Series C: 50,000 shares authorized issued and outstanding
in 2001 and 2000; liquidation value $500,000 in 2001
and 2000.................................................. 500 500 500
Series E: 800,000 shares authorized, issued and outstanding
in 2001 and 2000; liquidation value $8,000,000 in 2001
and 2000.................................................. 8,000 8,000 8,000
Series F: 100,000 shares authorized; issued and outstanding
20,000
Shares in 2001; liquidation value $200,000 in 2001.......... -- 200 200
Common stock, $.01 par value, 50,000,000 shares authorized;
issued and outstanding 6,849,355 shares in 2001; and
6,974,355 shares in 2000..................................... 69,743 68,493 68,711
Additional paid-in-capital..................................... 8,610,549 8,831,599 8,869,586
Accumulated deficit............................................ (4,929,486) (2,624,360) 544,019
------------ ------------ ------------
Total stockholders' equity..................................... 3,759,410 6,284,536 9,491,120
------------ ------------ ------------
Total liabilities and stockholders' equity..................... $247,548,113 $242,560,305 $233,973,048
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------
1999 2000 2001 2001 2002
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Interest and fee income....................... $59,140,308 $65,614,280 $74,326,406 $36,116,289 $38,366,233
Interest expense.............................. 17,272,674 21,024,576 19,069,792 9,806,699 7,313,429
----------- ----------- ----------- ----------- -----------
Net interest income........................... 41,867,634 44,589,704 55,256,614 26,309,590 31,052,804
Provision for credit losses................... 11,937,679 14,657,930 16,583,919 6,609,308 8,371,672
----------- ----------- ----------- ----------- -----------
Net interest income after provision for credit
losses....................................... 29,929,955 29,931,774 38,672,695 19,700,282 22,681,132
Other income:
Insurance premiums and commissions, net....... 12,805,434 17,763,558 18,553,690 6,898,823 7,831,912
Other income.................................. 2,124,524 4,239,161 5,640,032 2,307,772 2,181,659
----------- ----------- ----------- ----------- -----------
Total other income............................ 14,929,958 22,002,719 24,193,722 9,206,595 10,013,571
----------- ----------- ----------- ----------- -----------
Operating expenses:
Compensation and employee benefits........ 23,549,805 28,391,768 29,917,431 15,607,999 16,386,188
Telephone, computers...................... 2,072,725 2,134,435 2,414,989 1,156,983 1,106,511
Net occupancy............................. 5,352,364 5,615,002 6,560,051 3,174,396 3,260,061
Reinsurance claims expense................ 1,933,575 2,962,259 4,569,834 644,946 932,421
Advertising............................... 1,736,786 2,494,271 2,700,041 1,488,273 1,511,918
Collection expense........................ 312,894 245,644 639,153 329,291 308,902
Travel.................................... 960,865 1,201,653 1,228,631 548,196 563,568
Professional fees......................... 633,209 814,376 954,730 529,843 619,446
Office expense............................ 1,919,713 2,553,694 2,583,984 1,233,720 1,142,389
Amortization expense...................... 1,512,262 2,173,879 2,435,724 1,215,060 300,324
Other..................................... 2,330,443 3,194,152 3,732,226 1,386,168 1,321,406
----------- ----------- ----------- ----------- -----------
Total operating expenses............... 42,314,641 51,781,133 57,736,794 27,314,875 27,453,134
----------- ----------- ----------- ----------- -----------
Income from continuing operations before
income tax expense........................... 2,545,272 153,360 5,129,623 1,592,002 5,241,569
Income tax expense............................ 1,257,698 550,000 2,095,000 751,281 1,782,997
----------- ----------- ----------- ----------- -----------
Net income (loss) from continuing operations.. 1,287,574 (396,640) 3,034,623 840,721 3,458,572
Discontinued operations (Note 13).............
Loss from operations of discontinued Paragon
division(less benefit from income taxes of
$1,226,000 in 2000 and $51,698 in 1999)...... (100,355) (3,040,226) -- -- --
Loss from operations of discontinued non-
standard division (less benefit from income
taxes of $193,000 in 2000 and $716,000 in
1999)........................................ (1,542,409) (374,683) -- -- --
Net income(loss).............................. (355,190) (3,811,549) 3,034,623 840,721 3,458,572
Dividends on preferred stock.................. 734,012 723,886 729,497 360,915 290,193
----------- ----------- ----------- ----------- -----------
Net income(loss) applicable to common
shareholders................................. $(1,089,202) $(4,535,435) $ 2,305,126 $ 479,806 $ 3,168,379
=========== =========== =========== =========== ===========
Net income (loss) per common share--basic and
diluted...................................... $ (0.16) $ (0.65) $ 0.34 $ 0.07 $ 0.46
From continuing operations................ 0.09 (0.16) 0.34 0.07 0.46
From discontinued operations.............. (0.25) (0.49) -- -- --
See accompanying notes to consolidated financial statements.
F-4
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON PREFERRED PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
------- --------- ----------- ----------- -------------
Balance at December 31, 1998................ $38,852 $10,813 $12,184,057 $ 695,150 $12,928,872
Purchase and retirement of 132,859 shares of
common stock.............................. (1,329) -- (1,327,262) -- (1,328,591)
Repurchase of 14,574 shares of Series A
Preferred Stock........................... -- (146) (145,594) -- (145,740)
Repurchase of 56,276 shares of Series D
Preferred Stock........................... -- (563) (562,197) -- (562,760)
Issuance of 3,223,000 shares of common stock
for purchase of Thaxton Investment
Corporation............................... 32,230 -- (32,230) -- --
Dividends paid on preferred stock........... -- -- -- (734,012) (734,012)
Net loss.................................... -- -- -- (355,190) (355,190)
------- ------- ----------- ----------- -----------
Balance at December 31, 1999................ 69,753 10,104 10,116,774 (394,052) 9,802,579
Purchase and retirement of 974 shares of
common stock.............................. (10) -- (7,725) -- (7,735)
Repurchase of 1,500 shares of Series A
preferred stock........................... -- (1,500) (1,498,500) -- (1,500,000)
Dividends paid on preferred stock........... -- -- -- (723,885) (723,885)
Net loss.................................... -- -- -- (3,811,549) (3,811,549)
------- ------- ----------- ----------- -----------
Balance at December 31, 2000................ 69,743 8,604 8,610,549 (4,929,486) 3,759,410
Cancelled 135,000 shares of common stock.... (1,350) 1,350 --
Issued 20,000 shares of Series F preferred
stock..................................... 200 199,800 200,000
Issued 10,000 shares of common stock for
compensation.............................. 100 19,900 20,000
Dividends paid on preferred stock........... (729,497) (729,497)
Net Income.................................. -- -- -- 3,034,623 3,034,623
------- ------- ----------- ----------- -----------
Balance at December 31, 2001................ 68,493 8,804 8,831,599 (2,624,360) 6,284,536
(Unaudited)
Issued 22,500 shares of common stock as
compensation.............................. 225 -- 44,775 -- 45,000
Repurchase of common stock.................. (7) (6,788) (6,795)
Dividends paid on preferred stock........... -- -- -- (290,193) (290,193)
Net income.................................. -- -- -- 3,458,572 3,458,572
------- ------- ----------- ----------- -----------
Balance at June 30, 2002 (unaudited)........ $68,711 $ 8,804 $ 8,869,586 $ 544,019 $ 9,491,120
======= ======= =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- --------------------------
1999 2000 2001 2001 2002
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................ $ (355,190) $ (3,811,549) $ 3,034,623 $ 840,721 $ 3,458,572
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses................ 11,937,679 14,657,930 16,583,919 6,609,308 8,371,672
Depreciation and amortization.............. 3,415,392 5,308,745 4,065,895 2,016,421 1,107,403
Deferred taxes............................. (709,934) (310,000) 645,000 751,281 1,782,997
Increase in accounts receivable............ (4,325,344) (840,916) (329,951) 690,643 651,350
Non-cash compensation expense.............. -- -- -- -- 45,000
Decrease in other assets................... (4,716,880) (4,526,138) (333,899) 194,846 (956,615)
Increase (decrease) in accrued interest
payable and other liabilities............. 6,381,914 5,320,368 (396,578) 2,212,315 415,770
------------ ------------ ------------ ------------ ------------
Net cash provided by operating activities.... 11,627,637 15,798,440 23,269,009 13,315,535 14,876,149
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Net increase in finance receivables........ (15,050,941) (18,071,663) (14,194,855) 3,913,895 663,581
Capital expenditures for premises and
equipment................................. (1,595,729) (2,375,869) (793,091) (248,142) (950,327)
Proceeds from sale of Thaxton RBE.......... -- 75,000 -- -- --
Cash paid for deposit with Voyager......... -- (6,230,000) (480,692) (289,226) (1,098,336)
Acquisitions, net of acquired cash
equivalents............................... (42,424,498) (11,963,358) (104,820) -- --
------------ ------------ ------------ ------------ ------------
Net cash used by investing activities........ (59,071,168) (38,565,890) (15,573,458) 3,376,527 (1,385,082)
Cash flows from financing activities:
Notes payable to affiliates................ (287,918) (491,072) -- -- 1,251,880
Issuance (repurchase) of common stock...... (1,328,591) (7,735) 20,000 20,000 (6,795)
Dividends paid............................. (734,012) (723,886) (729,497) (360,915) (290,193)
Net increase(decrease) in notes payable.... 51,757,792 25,936,592 (7,572,248) (19,698,196) (14,732,804)
Proceeds from sale of Thaxton RBE stock
by Thaxton RBE............................ -- 2,000,000 -- -- --
Issuance (repurchase) of preferred stock... (708,500) (1,500,000) 200,000 200,000 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities.................................. 48,698,771 25,213,899 (8,081,745) (19,839,111) (13,777,912)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash.............. 1,255,240 2,446,449 (386,194) (3,147,049) (286,845)
Cash at beginning of period.................. 780,864 2,036,104 4,482,553 4,482,553 4,096,359
------------ ------------ ------------ ------------ ------------
Cash at end of period........................ $ 2,036,104 $ 4,482,553 $ 4,096,359 $ 1,335,504 $ 3,809,514
============ ============ ============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest................................. 16,825,179 20,507,875 19,502,965 9,806,699 7,313,429
Income taxes............................. 2,011 924,404 976,155 44,521 1,779,020
Total Non-cash Activities
Investing: Non-cash portion of
acquisitions................................ (2,584,260) -- -- -- --
Financing: Portion of Acquisition financed by
note to seller.............................. 2,584,260 -- -- -- --
See accompanying notes to consolidated financial statements.
F-6
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000, AND 1999 AND
SIX MONTHS ENDED JUNE 30, 2002--(UNAUDITED)
(1)__SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of
the state of South Carolina. The Company operates, primarily through
subsidiaries, consumer finance branches in 11 states, primarily under the names
of TICO Credit, Southern Finance, and Covington Credit. The Company also
operates insurance agency branches in North and South Carolina. The Company is
a diversified financial services company that is engaged primarily in consumer
lending and consumer automobile sales financing to borrowers with limited
credit histories, low incomes or past credit problems. The Company also offers
insurance premium financing to such borrowers. Substantially all of the
Company's premium finance business has been derived from customers of the
insurance agencies owned by one of our subsidiaries, Thaxton Insurance Group,
Inc. ("Thaxton Insurance"), which was acquired by the Company in 1996. The
Company provides reinsurance through wholly owned subsidiaries, TICO
Reinsurance, Ltd. ("TRL"), Fitch National Reinsurance, Ltd., and Soco
Reinsurance, Inc. Through a wholly owned subsidiary, Thaxton Commercial
Lending, Inc., the Company makes factoring loans and collateralized commercial
loans to small and medium sized businesses. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
the amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
Information with respect to June 30, 2002 and 2001, and the periods then
ended, has not been audited by the Company's independent auditors, but in the
opinion of management, reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the operations of
the Company. The results of operations for the six months ended June 30, 2002
are not necessarily indicative of results to be expected for the entire fiscal
year.
The following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting its
financial statements.
INTEREST AND FEE INCOME: Interest income from finance receivables is
recognized using the interest (actuarial) method on an accrual basis. Accrual
of income on finance receivables continues until the receivable is either paid
off in full or is charged-off. Fee income consists primarily of late fees which
are credited to income when they become due from borrowers. Net deferred loan
costs are amortized as an adjustment to yield over the life of the loan. For
receivables which are renewed, interest income is recognized using a method
similar to the interest method.
ALLOWANCE FOR CREDIT LOSSES: Additions to the allowance for credit losses
are based on management's evaluation of the finance receivables portfolio
considering current economic conditions, overall portfolio quality, charge-off
experience, and such other factors which, in management's judgment, deserve
recognition in estimating credit losses. Loans are charged-off when, in the
opinion of management, such loans are deemed to be uncollectible or six months
has elapsed since the date of the last payment, whichever occurs first. While
management uses the best information available to make such evaluations, future
adjustments to the allowance may be necessary if conditions differ
substantially from the assumptions used in making the evaluations.
F-7
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NON-FILE INSURANCE: Non-file insurance is written in lieu of recording and
perfecting the Company's security interest in the assets pledged to secure
certain loans. Non-file insurance premiums are collected from the borrower on
certain loans at inception and renewal and are remitted directly to an
unaffiliated insurance company. Certain losses related to such loans, which are
not recoverable through life, accident and health, or property insurance
claims, are reimbursed through non-file insurance claims subject to policy
limitations. Any remaining losses are charged to the allowance for credit
losses.
PREMISES AND EQUIPMENT: Premises and equipment are reported at cost less
accumulated depreciation which is computed using the straight-line method for
financial reporting and accelerated methods for tax purposes. For financial
reporting purposes the Company depreciates furniture and equipment over 5
years, leasehold improvements over the remaining term of the related lease, and
automobiles over 3 years. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
INSURANCE: The Company remits a portion of credit life, accident and
health, property and auto insurance premiums written in connection with certain
loans to an unaffiliated insurance company at the time of origination. Any
portion of the premiums remitted to this insurance company which are not
required to cover their administrative fees or to pay reinsurance claims
expense are returned to the Company through its reinsurance subsidiaries, and
are included in insurance premiums and commissions in the accompanying
consolidated statements of income. Unearned insurance premiums are accreted to
income over the life of the related insurance contracts using a method similar
to that used for the recognition of finance charges. Insurance commissions
earned by Thaxton Insurance are recognized as services are performed in
accordance with Thaxton Insurance's contractual obligations with the
underwriters, but not before protection is placed with insurers.
EMPLOYEE SAVINGS PLAN: The Company offers a payroll deduction savings plan
to all its employees. The Company pays interest monthly at an annual rate of
10% on the prior month's ending balance. Employees may withdraw savings on
demand, subject to a subordination agreement with the Company's primary lender.
INCOME TAXES: Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes (Statement 109), requires the asset and liability
method of accounting for income taxes. 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
the enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
EARNINGS PER SHARE: The Company adopted the provisions of SFAS 128,
"Earning per Share" ("EPS") in 1997. The presentation of primary and fully
diluted EPS has been replaced with basic and diluted EPS. Basic earnings per
share are computed by dividing net income applicable to common shareholders by
the weighted average number of common shares outstanding. Diluted earnings per
share are computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents calculated based upon the
average market price. Common stock equivalents consist of preferred stock that
is convertible to common stock.
INTANGIBLE ASSETS: Intangible assets include goodwill, expiration lists,
and covenants not to compete related to acquisitions made by the Company.
Goodwill represents the excess of the cost over the fair value of net assets
acquired at the date of acquisition. Goodwill is amortized on a straight-line
basis, generally over a five to twenty year period. The expiration lists are
amortized over their estimated useful lives, generally fifteen to
F-8
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
twenty years, on a straight-line basis. Covenants not to compete are amortized
according to the purchase contract over five to six years on a straight-line
basis. Recoverability of recorded intangibles is periodically evaluated by
using undiscounted cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Substantially all financial assets of
the Company are short term in nature. As such, the carrying values of these
financial assets approximate their fair value. The senior notes payable of the
Company are variable in rate, therefore fair value approximates carrying value.
The Company's subordinated notes payable are at payable at fixed rates, with
terms up to sixty months in maturity. In evaluating the fair value of the
subordinated notes, the Company determined that the fair value approximated the
carrying value primarily because the majority of the notes are short term in
nature.
REPOSSESSED ASSETS: Repossessed assets are recorded at their estimated fair
value less costs to dispose. Any difference between the loan balance and the
fair value of the collateral on the date of repossession is charged to the
allowance for credit losses.
ADVERTISING: Advertising costs are expensed as incurred.
CASH AND CASH EQUIVALENTS: The Company considers cash on hand, cash due
from banks, and interest-earning deposits, which are maintained in financial
institutions as cash and cash equivalents.
DEPOSIT: The Company maintains a deposit with an AM Best rated "A"
insurance carrier to serve as security for insurance reserves of its wholly
owned credit insurance re-insurance subsidiaries. The deposit earns interest at
the rate of 100 basis points above the 12-month Treasury Bill rate. The rate is
fixed for 12 months, adjusted annually on November 1st.
OTHER COMPREHENSIVE INCOME: Comprehensive income is the change in the
Company's equity during the period from transactions and other events and
circumstances from non-owner sources. Total comprehensive income is divided
into net income and other comprehensive income. There were no items of other
comprehensive income in 2001, 2000, or 1999.
LOANS/IMPAIRMENT: Finance receivables are classified as nonaccrual, and the
accrual of interest is discontinued, when the contractual payment of principal
and interest has become 180 days past due or when, in management's judgment,
principal or interest is not collectible in accordance with the terms of the
obligation. Typically loans are charged off when they become 180 days past due.
Cash receipts on non-accrual loans are applied to principal. Interest
recognition resumes when the loan returns to performing status. The Company
evaluates impairment of finance receivables on a collective basis by pools of
homogenous loans.
RECLASSIFICATIONS: Certain amounts in the 1999 and 2000 financial
statements have been reclassified in order to conform to the 2001 presentation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 144, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
was issued in August 2001 and supersedes Statement No. 121. Statement No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. The provisions of Statement No. 144 are effective for the
financial statements issued for fiscal years beginning after December 15, 2001.
The Company expects that adopting the provisions of this Statement will not
have a material impact on the consolidated financial statements of the Company.
F-9
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes Accounting
Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No. 142,
goodwill and indefinite-lived intangible assets are no longer amortized but are
reviewed at least annually for impairment.
SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level at adoption and at least annually thereafter, utilizing a
two-step methodology. The initial step requires the Company to determine the
fair value of each reporting unit and compare it to the carrying value,
including goodwill, of such unit. If the fair value exceeds the carrying value,
no impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of this unit may be
impaired. The amount, if any, of the impairment would then be measured in the
second step. After testing the valuation of the reporting units it was found
that all reporting units fair values exceeded their carrying value, thus, there
is no need to test for impairment. The effect of not amortizing goodwill will
be an expense savings of approximately $2.4 million for the full year, and
approximately $1.2 million for the six months ended June 30, 2002.
(2)__BUSINESS COMBINATIONS
CONSUMER FINANCE
On August 18, 2000, the Company acquired all of the stock of Quick Credit
Corporation, a consumer finance company with 25 branch offices located in South
Carolina. The purchase price was $12.75 million in cash. This acquisition was
accounted for as a purchase and resulted in goodwill of approximately $3.8
million which is being amortized over 15 years.
On February 1, 1999, the Company's CEO and majority shareholder purchased
approximately 144 consumer finance offices from FirstPlus Consumer Finance,
Inc., and operated those offices in Thaxton Investment Corporation ("TIC"), a
corporation set up for that purpose. The purchase price paid was $49.4 million,
including a cash payment of $46.5 million, with the balance in notes and
amounts payable to FirstPlus. The note payable arising from the purchase was
paid in full prior to December 31, 1999. This acquisition, which was accounted
for as a purchase, resulted in goodwill in the amount of $29.5 million, which
is being amortized over 20 years. At the time of the acquisition, Thaxton
Investment Corp. was a private corporation, with Mr. Thaxton as the sole
shareholder. TIC operated independently from the Company from February 1, 1999
through November 8, 1999. On November 8th, the Company acquired TIC in exchange
for 3,223,000 shares of the Company's common stock. Because TIC and the Company
had been under common ownership and control since February, 1999, the Company's
acquisition of TIC was accounted for at historical cost in a manner similar to
pooling of interests accounting.
INSURANCE AGENCY
On March 1, 1999, the Company acquired all of the assets of four insurance
agencies, operating from nine branch locations, in Colorado and Arizona, for a
total purchase price of approximately $1.6 million. The purchase was allocated
to the assets acquired and liabilities assumed based upon their fair values at
the date of acquisition. The excess of the purchase price over the fair value
of net assets acquired of $1,488,000 has been recorded as goodwill and is being
amortized on a straight line basis over 20 years.
On July 1, 1999, the Company acquired all of the stock of U. S. Financial
Group Agency, Inc., ("USFG"), an insurance general agency located in Virginia.
The purchase price of $1.1 million included a cash payment of $300,000, and the
balance due in a 6% note payable maturing in July 2001. This acquisition
resulted in $1 million of goodwill and other intangible assets being recorded,
which are being amortized over 20 years.
F-10
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 1, 1999, the Company acquired the assets of a business operating
as American United Insurance Agency. The purchase price of $1.5 million
included a cash payment of $900,000, and $600,000 of 8% notes maturing in
December 2000. The acquisition resulted in $1.4 million of goodwill and other
intangible assets being recorded, which are being amortized over 20 years.
The insurance agencies discussed above were sold during the year ended
December 31, 2000. See Note 13.
(3)__FINANCE RECEIVABLES
Finance receivables consist of the following at December 31, 2001 and 2000
and June 30, 2002:
DECEMBER 31,
-------------------------- JUNE 30,
2000 2001 2002
------------ ------------ ------------
(UNAUDITED)
Automobile sales contracts................ $ 31,196,711 $ 23,121,113 $ 21,389,986
Direct loans.............................. 172,506,592 189,163,818 185,416,695
Mortgage loans............................ 20,738,959 16,468,209 14,046,312
Premium finance contracts................. 7,527,689 8,618,497 4,782,630
Commercial loans.......................... 3,935,945 3,161,875 2,103,608
------------ ------------ ------------
Total Finance Receivables.............. 235,905,896 240,533,512 227,739,231
Unearned interest......................... (36,841,017) (36,703,784) (34,341,640)
Unearned insurance premiums, net.......... (1,966,062) (1,798,520) (1,092,331)
Insurance loss reserve.................... (7,493,658) (9,022,167) (9,207,565)
Dealer holdback and bulk purchase discount (2,406,165) (2,036,818) (2,250,005)
Allowance for credit losses............... (11,630,555) (12,012,169) (11,139,966)
Deferred loan cost, net................... 2,375,207 2,294,976 2,512,053
------------ ------------ ------------
Finance receivables, net............... $177,943,646 $181,255,030 $172,219,777
============ ============ ============
Consumer loans include bulk purchases of receivables, auto dealer
receivables under holdback arrangements, and small consumer loan receivables.
With bulk purchase arrangements, the Company typically purchases a group of
receivables from an auto dealer or other retailer at a discount to par based on
management's review and assessment of the portfolio to be purchased. This
discount amount is then maintained in an unearned income account to which
losses on these loans are charged. To the extent that losses from a bulk
purchase exceed the purchase discount, the allowance for credit losses will be
charged. To the extent losses experienced are less than the purchase discount,
the remaining discount is accreted into income. With holdback arrangements, an
automobile dealer or other retailer will assign receivables to us on a
loan-by-loan basis, typically at par. We will withhold a certain percentage of
the proceeds, generally 5% to 10%, as a dealer reserve to be used to cover any
losses which occur on these loans. The agreements are structured such that all
or a portion of these holdback amounts can be reclaimed by the dealer based on
the performance of the receivables. To the extent that losses from these
holdback receivables exceed the total remaining holdback amount for a
particular dealer, the allowance for credit losses will be charged. The amount
of bulk purchase and holdback receivables, net of unearned interest and
insurance, and the related holdback and discount amount outstanding were
approximately $11,450,000 and $429,000, respectively, at December 31, 2001, and
$18,204,000 and $819,000, respectively, at December 31, 2000 and $15,675,000
and $435,000, respectively, at June 30, 2002.
At December 31, 2001 and June 30, 2002, there were no significant
concentrations of receivables in any type of property or to one borrower. These
receivables secure the Company's senior credit facility (see Note 7).
F-11
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Changes in the allowance for credit losses for the years ended December 31,
2001, 2000, and 1999 and the six months ended June 30, 2002 and 2001 are as
follows:
DECEMBER 31, JUNE 30,
---------------------------------------- -------------------------
1999 2000 2001 2001 2002
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
Beginning balance............... $ 4,710,829 $ 10,661,339 $ 11,630,555 $11,630,555 $ 12,012,169
Valuation allowance for acquired
loans......................... 6,276,309 838,017 -- -- --
Provision for credit losses..... 11,937,679 14,657,930 16,583,919 6,609,308 8,371,672
Charge-offs..................... (13,461,390) (16,052,319) (18,024,265) (7,914,695) (10,197,365)
Recoveries...................... 1,197,912 1,525,588 1,821,960 964,417 953,490
------------ ------------ ------------ ----------- ------------
Net charge-offs................. (12,263,478) (14,526,731) (16,202,305) (6,950,278) (9,243,875)
------------ ------------ ------------ ----------- ------------
Ending balance.................. $ 10,661,339 $ 11,630,555 $ 12,012,169 $11,289,585 $ 11,139,966
============ ============ ============ =========== ============
Our loan portfolio primarily consists of short term fixed rate loans, the
majority of which are originated or renewed during the current year.
Accordingly, we estimate that fair value of the finance receivables is not
materially different from carrying value.
(4)__PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2001 and 2000 and at
June 30, 2002 follows:
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
----------- ----------- -----------
(UNAUDITED)
Leasehold improvements................ $ 2,159,214 $ 2,289,105 $ 2,338,316
Furniture and fixtures................ 2,721,965 3,054,216 3,061,586
Equipment and automobiles............. 7,658,183 7,680,873 7,809,547
----------- ----------- -----------
Total cost..................... 12,539,362 13,024,194 13,209,449
Accumulated depreciation.............. 7,527,506 8,777,378 8,819,385
----------- ----------- -----------
Net premises and equipment..... $ 5,011,856 $ 4,246,816 $ 4,390,064
=========== =========== ===========
Depreciation expense was approximately $1,374,000, $1,538,000 and $1,630,000
for the years ended December 31, 1999, 2000 and 2001, respectively.
Depreciation expense was approximately $807,000 for the six months ended June
30, 2002, compared to $801,000 for the six-months ended June 30, 2001.
(5)__INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 2001 and 2000 and
at June 30, 2002:
DECEMBER 31,
----------------------- JUNE 30,
2000 2001 2002
----------- ----------- -----------
(UNAUDITED)
Covenants not to compete.......... $ 102,022 $ -- $ --
Goodwill and purchase premium..... 37,578,496 37,683,318 37,683,318
Insurance expirations............. 1,890,301 1,890,301 2,030,601
----------- ----------- -----------
Total cost................. 39,570,819 39,573,619 39,713,919
Less accumulated amortization..... 4,758,261 7,091,965 7,336,700
----------- ----------- -----------
Intangible assets, net..... $34,812,558 $32,481,654 $32,377,219
=========== =========== ===========
F-12
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company acquired the majority of the intangibles in connection with our
acquisition of FirstPlus Consumer Finance. Amortization expense was
approximately $1,512,000, $2,174,000 and $2,436,000 for the years ended
December 31, 1999, 2000 and 2001, respectively. Amortization expense was
approximately $300,000 for the six-months ended June 30, 2002, compared to
$1,215,000 for the six-months ended June 30, 2001.
(6)__LEASES
The Company conducts all of its operations from leased facilities. It is
expected that in the normal course of business, leases that expire will be
renewed at our option or replaced by other leases or acquisitions of other
properties. Total rental expense was approximately $2,193,000 in 1999,
$3,100,000 in 2000 and $3,411,000 in 2001. The future minimum lease payments
under noncancelable operating leases as of December 31, 2001, are as follows:
2002........................ $2,703,503
2003........................ 1,845,666
2004........................ 1,118,806
2005........................ 601,217
2006........................ 363,965
Thereafter.................. 1,182,047
----------
Total minimum lease payments $7,815,204
==========
Related parties own six of the office buildings in which the Company
conducts business. These premises are leased to the Company for a total monthly
rental of approximately $3,500.
(7)__NOTES PAYABLE AND NOTES PAYABLE TO AFFILIATES
At December 31, 2001 and 2000 and at June 30, 2002, notes payable consist of
the following:
DECEMBER 31,
------------------------- JUNE 30,
2000 2001 2002
------------ ------------ ------------
(UNAUDITED)
Senior notes payable/lines of credit........................... $178,278,386 $151,234,760 $122,674,001
Subordinated notes payable to individuals with varying maturity
dates and rates ranging from 51/4% to 12%.................... 51,721,405 71,542,844 85,294,719
Other subordinated notes payable to companies with varying
maturity dates and rates ranging from 41/4% to 10%........... 2,605,623 2,255,562 2,331,642
------------ ------------ ------------
Total notes payable............................................ $232,605,414 $225,033,166 $210,300,362
============ ============ ============
A schedule of maturities of long-term debt is as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------------
2002....... $ 23,185,043
2003....... 43,644,842
2004....... 30,332,639
2005....... 33,368,214
2006....... 94,492,428
Thereafter. 10,000
------------
Total...... $225,033,166
============
F-13
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Our credit facility with Finova includes a term loan and a revolving credit
line used to finance receivables. Advances under the term loan accrue interest
at the prime rate plus 2%, or 6.75%, as of June 30, 2002. Advances under the
revolving credit line accrue interest at the prime rate plus 1%, or 5.75%, as
of June 30, 2002. The prime rate is the prime rate published by Citibank, N.A.,
or other money center bank as Finova may select. The interest rates are
adjusted monthly to reflect fluctuations in the designated prime rate. Accrued
interest on borrowings is payable monthly.
The term loan is payable in twenty-three equal monthly principal and
interest payments of $600,000, which began on April 15, 2001, with the
remaining principal balance due on March 31, 2003. The outstanding balance
under the term loan was $11.9 million as of June 30, 2002, which reflects a
$7.9 million reduction since December 31, 2001. The revolving credit line
matures on July 31, 2006. Under the revolving credit line, principal is due in
full on the maturity date and can be prepaid without penalty.
Substantially all of our and our subsidiaries' assets secure the term loan
and the revolving credit facility, which requires us to comply with restrictive
covenants, including financial condition covenants. As of December 31, 2001,
the Company met all such requirements. James D. Thaxton guarantees both the
term loan and the revolving loan.
The maximum amount we could borrow under the revolving credit line was $157
million on December 31, 2001. As of June 30, 2002, the maximum amount we could
borrow under the revolving credit line was $141 million and an additional $12.9
million was available for borrowing against existing collateral, with $30.1
million of total potential capacity available for borrowing against qualified
finance receivables generated in future periods.
Beginning in 2002, the maximum borrowing amount under our revolving credit
line decreases on a quarterly basis. The annual decreases will be $22 million
in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005 and $9
million in 2006.
We also fund our liquidity needs through the sale of subordinated notes. In
February 1998, we began offering subordinated notes in several states by
registering $50 million of subordinated notes with the Securities and Exchange
Commission ("SEC"). In May 2001, we registered an additional $75 million
offering of subordinated notes with the SEC. The notes are sold primarily to
individual investors. The maturity terms range from daily (demand) notes to
sixty-month notes. Interest rates vary based on the principal amounts and
maturity dates of the notes. Notes currently being offered carry interest rates
ranging from 5.25% to 8.0%. The notes are unsecured and issued under an
indenture which we entered into with The Bank of New York, as trustee, in
February 1998. The terms of the indenture do not require us to comply with any
financial covenants nor do they impose any material restrictions on the
operations of our business.
As of December 31, 2001, we had $65.0 million of these registered
subordinated notes outstanding and $6.5 million of outstanding subordinated
notes registered in predecessor state registrations. As of June 30, 2002, we
had $81.0 million of these registered subordinated notes outstanding and $4.3
million of notes outstanding registered in predecessor state registrations. To
date, we have used the proceeds from the sale of these notes to reduce, on a
temporary basis, the amount of our revolving credit facility with Finova. We
intend to continue this note program by seeking to register additional
offerings of subordinated notes with the SEC. The sale of subordinated notes is
an important aspect of the financing of our business. It enables us to reduce
our overall borrowing costs, particularly during periods of increasing interest
rates. In addition, it allows us to hedge the interest rate risk inherent in
our variable rate senior credit facility and to diversify our sources of
borrowed funds.
F-14
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8)__BENEFITS
During 1995 the Board of Directors of the Company also adopted the Thaxton
Group, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"), under
which 100,000 shares of common stock are available for purchase by
substantially all employees. The Stock Purchase Plan enables eligible employees
of the Company, through payroll deductions, to purchase at twelve-month
intervals specified in the Stock Purchase Plan, shares of common stock at a 15%
discount from the lower of the fair market value of the common stock on the
first day or the last day of the year. The Stock Purchase Plan allows for
employee contributions up to 3% of the participant's annual compensation and
limits the aggregate fair value of common stock that may be purchased by a
participant during any calendar year to $25,000. As of December 31, 1998, 4,377
shares were purchased under this Stock Purchase Plan. The Board of Directors
canceled this plan in January 1999.
An ongoing benefit to the employees is the Employee Savings Plan. This plan
allows employees to contribute and earn an annual rate of 10%. The balances as
of December 31, 2000 and 2001 were approximately $628,000 and $1,084,000,
respectively and were approximately $1,123,000 as of June 30, 2002. There is no
restriction on the source or amount of funds an employee may contribute to the
plan and employees may withdraw their contributions at any time.
(9)__INCOME TAXES
Income tax expense attributable to continuing operations consists of the
following for the years ended December 31, 1999, 2000 and 2001 and the six
months ended June 30, 2001 and 2002:
CURRENT DEFERRED TOTAL
---------- --------- ----------
June 30, 2002 (unaudited)
Federal............... $1,374,997 $ 158,000 $1,532,997
State................. 250,000 -- 250,000
$1,624,997 $ 158,000 $1,782,997
========== ========= ==========
June 30, 2001 (unaudited)
Federal............... $ -- $ 720,000 $ 720,000
State................. 31,281 -- 31,281
$ 31,281 $ 720,000 $ 751,281
========== ========= ==========
December 31, 2001
Federal............... $1,390,000 $ 645,000 $2,035,000
State................. 60,000 -- 60,000
$1,450,000 $ 645,000 $2,095,000
========== ========= ==========
December 31, 2000
Federal............... $ 640,000 $(310,000) $ 330,000
State................. 220,000 -- 220,000
$ 860,000 $(310,000) $ 550,000
========== ========= ==========
December 31, 1999
Federal............... $1,010,133 $(709,934) $ 300,199
State................. 189,801 -- 189,801
$1,199,934 $(709,934) $ 490,000
========== ========= ==========
F-15
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the Company's income tax provision and the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes is as follows for the years ended December 31, 1999, 2000
and 2001 and the six months ended June 30, 2001 and 2002:
DECEMBER 31, JUNE 30,
------------------------------ -------------------
1999 2000 2001 2001 2002
-------- -------- ---------- -------- ----------
(UNAUDITED)
Statutory rate applied to income before income tax
expense......................................... $ 45,802 $ 52,000 $1,750,000 $540,600 $1,782,133
Increase (decrease) in income taxes resulting from:
Goodwill amortization.......................... 427,760 468,000 310,000 153,000 153,000
State taxes, less related federal benefit...... 4,120 7,000 71,000 1,000 241,750
Valuation allowance adjustment................. 38,321 (17,000) (69,000) -- --
Other.......................................... (26,003) 40,000 33,000 56,681 (393,886)
-------- -------- ---------- -------- ----------
Income taxes...................................... $490,000 $550,000 $2,095,000 $751,281 $1,782,997
======== ======== ========== ======== ==========
The effective tax rate attributable to continuing operations was 49%, 358%,
and 41% for the years ended December 31, 1999, 2000 and 2001, respectively, and
47% and 34% for the six-months ended June 30, 2001 and 2002, respectively. The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and liabilities at December 31, 1999, 2000, and 2001
and June 30, 2001 and 2002 are presented below:
DECEMBER 31, JUNE 30,
------------------------------------ -----------
1999 2000 2001 2002
---------- ----------- ----------- -----------
(UNAUDITED)
Deferred tax assets:
Loan loss reserves....................... $3,091,466 $ 3,968,000 $ 3,620,000 $ 4,345,000
Federal net operating loss carryforwards. 898,103 969,000 -- --
State net operating loss carryforwards... 86,427 69,000 -- --
Other.................................... 27,767 405,000 155,000 --
---------- ----------- ----------- -----------
Total gross deferred tax asset.............. 4,103,763 5,411,000 3,775,000 4,345,000
Less valuation allowance.................... 86,427 69,000 -- --
---------- ----------- ----------- -----------
Net deferred tax assets..................... 4,017,336 5,432,000 3,775,000 4,345,000
---------- ----------- ----------- -----------
Deferred tax liabilities:
Prepaid insurance........................ (66,926) (67,000) -- --
Depreciable basis of fixed assets........ (165,323) (147,000) (245,000) (245,000)
Deferred loan costs...................... (381,670) (666,000) (566,000) (980,000)
Intangible assets........................ (251,355) (226,000) (172,000) (170,000)
Other.................................... (65,007) (45,000) (40,000) (40,000)
---------- ----------- ----------- -----------
Total gross deferred tax liability.......... (930,281) (1,151,000) (1,023,000) (1,435,000)
---------- ----------- ----------- -----------
Net deferred tax asset...................... $3,087,055 $ 4,191,000 $ 2,752,000 $ 2,910,000
========== =========== =========== ===========
The change in the valuation allowance for 1999 was a decrease of $77,203 and
in 2000 was a decrease of $17,427 and in 2001 a decrease of $69,000. The
valuation allowance relates to certain state net operating loss carryforwards.
It is management's opinion that realization of the net deferred tax asset, net
of valuation allowance, is more likely than not based upon the Company's
history of taxable income and estimates of future taxable income. The company's
income tax returns for 1997 and subsequent years are subject to review by
taxing authorities.
F-16
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10)__PREFERRED STOCK
The Company issued three series of preferred stock during 1997 and two
additional series of preferred stock in 1998. 400,000 shares of 7.5% cumulative
redeemable convertible Series A preferred stock were authorized, and 178,014
were issued in a December 1997 public offering to existing shareholders. The
terms of the offering included the conversion of one share of common stock plus
$10 for two shares of Series A preferred stock. For a five year conversion
period commencing January 1, 1998, each share of preferred stock can be
converted into one share of common stock. The Company may redeem all or a
portion of the outstanding shares of Series A stock at any time after December
31, 1999. The Company repurchased and retired 14,574 shares of Series A
Preferred Stock in December 1999 at $15 per share, and 150,000 shares at $10
per share during 2000 and no shares during 2001.
In December 1997, the Company, through a private placement, issued 27,076
shares of 7.5% cumulative redeemable convertible Series B preferred stock. The
terms of this transaction involved the exchange of one share of common stock
for one share of preferred stock. In July 1998, the Company, through a private
placement, exchanged all of the 27,076 shares of outstanding Series B Preferred
stock, plus 29,200 shares of common stock, for 56,276 shares of Cumulative
Series D preferred stock. The Series D preferred stock pays annual dividends of
$.80 per share, and is redeemable at any time by the company at $10 per share.
In January 1999, all of the shares of Series D Preferred Stock were repurchased
by the Company, and retired.
In December 1997, the Company converted a $500,000 subordinated note held by
one corporate investor into 50,000 shares of Series C cumulative redeemable
convertible preferred stock. The annual dividends attributable to this series
were $1 per share through December 31, 2000, and $1.80 per share, per annum,
thereafter. Each share of preferred stock can be converted into one share of
common stock after January 1, 1998. The Company may redeem all or a portion of
the outstanding shares of Series C stock at any time after December 31, 2000,
for $10 per share. In August 2002, a non-affiliated corporation which is
controlled by Jim Thaxton purchased the 50,000 shares of Series C Preferred
Stock from that investor for $10 per share, and is now the owner of record.
In December 1998, the Company, through a private placement, issued 800,000
shares of Cumulative Series E preferred stock for $10 per share. The stock pays
a variable rate dividend rate of prime plus 1% through October 31, 2003 and
prime plus 6% thereafter. The stock is redeemable by the Company at any time at
a price of $10 per share.
In March 2001, the Company, through a private placement, issued 20,000
shares of Cumulative Series F preferred stock for $10 per share, to C.L.
Thaxton, a director of the Company. The stock pays a dividend rate of 10% and
is redeemable by the Company at any time at a price of $10 per share.
F-17
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11)__EARNINGS PER SHARE INFORMATION
The following is a summary of the earnings per share calculation for the
years ended December 31, 1999, 2000, and 2001 and the six months ended June 30,
2001 and 2002:
DECEMBER 31, JUNE 30,
---------------------------------- ---------------------
1999 2000 2001 2001 2002
---------- ----------- ---------- ---------- ----------
BASIC & DILUTED (UNAUDITED)
Net income (loss) from continuing
operations........................... $1,287,574 $ (396,640) $3,034,623 $ 840,721 $3,458,572
Less: Dividends on preferred stock.. 734,012 723,886 729,497 360,915 290,193
---------- ----------- ---------- ---------- ----------
Net income (loss) applicable to common
shareholders (numerator)............. 553,562 (1,120,526) 2,305,126 479,806 3,168,379
Average common shares outstanding
(denominator)........................ 6,494,438 6,974,508 6,875,893 6,898,641 6,863,533
Income (loss) per share from continuing
operations--basic and diluted........ $ 0.09 $ (0.16) $ 0.34 $ 0.07 $ 0.46
========== =========== ========== ========== ==========
The earnings per share calculation does not include 10,440 shares of
Preferred Series A and 50,000 shares of Preferred Series C stock, which are
convertible to common shares, because the effect is anti-dilutive.
(12)__BUSINESS DIVISIONS
For the years ended December 31, 2000 and 1999 the Company previously
reported its results of operations in four primary divisions; consumer finance,
mortgage banking, insurance agency, and insurance non-standard risk bearing.
Due to the discontinuation of the mortgage bank and non-standard risk bearing
insurance businesses we now have two primary divisions. The consumer finance
division provides financing to consumers with limited credit histories, low
incomes or past credit problems. Income in the consumer finance business are
derived primarily from interest and fees on loans, and the sale of credit
related insurance products to its customers. The Company's mortgage banking
operations were conducted through Paragon, a wholly-owned subsidiary acquired
in November 1998. Paragon originated, closed, and funded predominantly B and C
credit quality mortgage loans, which were warehoused until they can be packaged
and sold to long term investors. Paragon received fee income from originating
mortgages and the loans were generally sold at a premium to the permanent
investor. This business has been discontinued. The Company's insurance
operations consist of selling, on an agency basis, various lines of automobile,
property and casualty, life and accident and health insurance. Revenue is
generated through fees paid by the insurance for which business is placed.
Insurance non-standard risk bearing consisted of selling non-standard
automobile insurance, through agencies, where the Company retained a portion of
the insurance risk, this business has also been discontinued.
F-18
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize certain financial information concerning the
Company's reportable operating divisions for the six months ended June 30, 2002
and 2001, and the years ended December 31, 1999, 2000, and 2001:
JUNE 30, 2002 (UNAUDITED) CONSUMER
INCOME STATEMENT DATA FINANCE INSURANCE OTHER TOTAL
- ------------------------- ----------- --------- --------- ------------
Total Revenue.......................... 47,229,658 2,035,965 364,181 $ 49,629,804
Net Interest Income.................... 30,688,623 -- 364,181 31,052,804
Provision for credit losses............ 8,336,472 -- 35,200 8,371,672
Noninterest income..................... 7,977,606 2,035,965 -- 10,013,571
Insurance premiums and commissions, net 5,899,464 1,932,448 -- 7,831,912
Noninterest expenses................... 24,893,051 2,208,452 351,631 27,453,134
Depreciation and amortization.......... 967,413 129,635 10,355 1,107,403
Net income............................. 3,564,130 (113,841) 8,283 3,458,572
Balance Sheet Data
Total assets........................... 229,774,606 2,279,914 1,918,528 233,973,048
Loans, net............................. 170,329,576 -- 1,890,201 172,219,777
Allowance for credit losses............ 10,926,559 -- 213,407 11,139,966
Intangibles............................ 30,994,776 1,382,443 -- 32,377,219
JUNE 30, 2001 (UNAUDITED) CONSUMER
INCOME STATEMENT DATA FINANCE INSURANCE OTHER TOTAL
- ------------------------- ------------ ---------- ---------- ------------
Total Revenue.......................... $ 42,330,306 $2,474,891 $ 517,687 $ 45,322,884
Net Interest Income.................... 26,332,843 (371,423) 348,170 26,309,590
Provision for credit losses............ 6,561,570 7,738 40,000 6,609,308
Noninterest income..................... 6,731,704 2,474,891 -- 9,206,595
Insurance premiums and commissions, net 4,974,164 1,924,659 -- 6,898,823
Noninterest expenses................... 24,770,315 2,252,121 292,439 27,314,875
Depreciation and amortization.......... 1,842,801 163,001 10,619 2,016,421
Net income............................. 902,049 (98,111) 36,783 840,721
Balance Sheet Data
Total assets........................... 224,034,767 3,339,748 3,585,316 230,959,831
Loans, net............................. 169,519,413 -- 3,601,478 173,120,891
Allowance for credit losses............ 11,124,585 -- 165,000 11,289,585
Intangibles............................ 32,275,640 1,379,990 -- 33,655,630
F-19
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 2001 CONSUMER
INCOME STATEMENT DATA FINANCE INSURANCE OTHER TOTAL
- --------------------- ------------ ---------- ---------- ------------
Total revenue.......................... $ 93,669,290 $3,819,716 $1,031,122 $ 98,520,128
Net interest income.................... 55,201,218 (668,380) 723,776 55,256,614
Provision for credit losses............ 16,428,712 25,777 129,430 16,583,919
Noninterest income..................... 20,374,036 3,819,686 -- 24,193,722
Insurance premiums and commissions, net 15,291,211 3,262,479 -- 18,553,690
Noninterest expenses................... 53,309,207 3,933,597 493,990 57,736,794
Depreciation and amortization.......... 3,724,681 323,770 17,444 4,065,895
Net income (loss)...................... 3,501,713 (533,325) 66,235 3,034,623
Balance Sheet Data
Total assets........................... 237,387,631 2,211,886 2,960,788 242,560,305
Loans, net............................. 178,270,562 -- 2,984,468 181,255,030
Allowance for credit losses............ 11,834,762 -- 177,407 12,012,169
Intangibles............................ 31,184,955 1,296,699 -- 32,481,654
INSURANCE MORTGAGE
DECEMBER 31, 2000 TOTAL RBE BANKING
INCOME STATEMENT CONSUMER CONTINUING (DISCONTINUED (DISCONTINUED
DATA FINANCE INSURANCE OTHER OPERATIONS OPERATIONS) OPERATIONS) TOTAL
- ----------------- ------------ --------- --------- ----------- ------------- ------------- -----------
Total revenue....... $ 82,271,590 4,284,716 1,060,693 87,616,999 1,875,013 5,733,973 95,225,985
Net interest
income............. 44,760,229 (841,657) 671,132 44,589,704 (91,038) 87,853 44,586,519
Provision for credit
losses............. 14,517,240 -- 140,690 14,657,930 3,265 1,278,938 15,940,133
Noninterest
income............. 17,718,003 4,284,716 -- 22,002,719 1,875,013 4,424,051 28,301,783
Insurance premiums
and commissions,
net................ 14,044,802 3,718,756 -- 17,763,558 1,836,695 -- 19,600,253
Noninterest
expenses........... 46,444,164 4,885,507 451,462 51,781,133 2,478,255 8,778,129 63,037,517
Depreciation and
amortization....... 3,331,621 360,225 19,619 3,711,465 148,726 1,448,554 5,308,745
Net income (loss)... (83,428) (365,339) 52,127 (396,640) (374,682) (3,040,226) (3,811,549)
Balance Sheet Data
Total assets........ 232,693,388 4,087,249 3,786,310 240,566,947 -- 6,981,166 247,548,113
Loans, net.......... 174,132,701 -- 3,810,945 177,943,646 -- 5,558,974 183,502,620
Allowance for credit
losses............. 11,505,555 -- 125,000 11,630,555 -- 1,278,938 12,909,493
Intangibles......... 33,346,575 1,465,983 -- 34,812,558 -- -- 34,812,558
F-20
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INSURANCE MORTGAGE
DECEMBER 31, 1999 TOTAL RBE BANKING
INCOME STATEMENT CONSUMER CONTINUING (DISCONTINUED (DISCONTINUED
DATA FINANCE INSURANCE OTHER OPERATIONS OPERATIONS) OPERATIONS) TOTAL
- ----------------- ------------ --------- --------- ----------- ------------- ------------- -----------
Total revenue....... $ 69,402,195 4,035,734 632,337 74,070,266 5,661,959 8,663,736 88,395,961
Net interest
income............. 41,690,365 (235,236) 412,505 41,867,634 97,314 284,236 42,249,184
Provision for credit
losses............. 11,923,527 -- 14,152 11,937,679 -- -- 11,937,679
Noninterest
income............. 11,212,957 3,717,300 (299) 14,929,958 5,107,965 7,411,921 27,449,844
Insurance premiums
and commissions,
net................ 9,830,839 2,974,595 -- 12,805,434 3,850,792 -- 16,656,226
Noninterest
expenses........... 38,598,582 3,289,358 426,701 42,314,641 7,920,837 7,724,933 57,960,411
Depreciation and
amortization....... 2,257,937 366,927 15,807 2,640,671 631,660 143,062 3,415,393
Net income (loss)... 1,119,640 132,358 35,576 1,287,574 (1,542,409) (100,355) (355,190)
Balance Sheet Data
Total assets........ 197,377,942 8,865,785 3,928,911 210,172,638 8,984,793 13,481,351 232,638,782
Loans, net.......... 156,863,386 -- 3,440,166 160,303,552 -- 11,400,639 171,704,191
Allowance for credit
losses............. 10,661,339 -- -- 10,661,339 -- -- 10,661,339
Intangibles......... 29,655,279 1,707,559 -- 31,362,838 6,780,230 1,367,965 39,511,033
(13)__DISCONTINUED OPERATIONS
At the end of 1998, and throughout 1999, the Company made a series of
acquisitions of agencies in Arizona, New Mexico, Nevada, Colorado and North
Carolina, as well as a general insurance agency in Virginia. At the same time,
the Company entered into a contract with American Bankers Insurance Group, Inc.
("ABIG"), where the Company would sell ABIG non-standard insurance policies in
these locations, but Thaxton Group would contractually retain the underwriting
risk, and retain any profit or loss from operations. This business ultimately
contained 30 non-standard automobile agency office locations, plus two
insurance general agencies (located in Virginia and South Carolina).
On March 1, 2000, the Company transferred all of the assets and liabilities
of these agency operations into a newly formed company named Thaxton RBE, Inc.
("RBE"). The total amount of the assets transferred was approximately $8
million, the majority of which were intangible. The purpose of the transfer was
to raise additional capital for RBE, as it operations were in their initial
stages. As such, immediately subsequent to the formation and asset transfer,
Thaxton Life Partners, Inc. invested $2,000,000 in the capital stock of RBE and
obtained a 90% interest in that company as a result of the investment. Thaxton
Life Partners, Inc., is a company owned by James D. Thaxton (Chairman and
majority shareholder of Thaxton Group, Inc.); C. L. Thaxton, Sr. (Director of
Thaxton Group, Inc.); and other Thaxton family members. As a result of these
transactions, Thaxton Group, Inc. had a net receivable from RBE in the amount
of $5 million at March 31, 2000.
During the third quarter of 2000, Thaxton Group made the decision to
discontinue operations and dispose of its interest and investment in RBE as
soon as suitable financing for RBE could be obtained. On August 31, 2000,
Thaxton Life Partners was able to arrange financing for RBE independent of
Thaxton Group, Inc., and Thaxton Life Partners purchased the remaining 10%
interest in RBE from Thaxton Group. At the time of the sale, all
F-21
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
amounts owed Thaxton Group were paid in full. Thaxton Group has recognized no
gain or loss on the disposition of RBE. The transaction has been accounted for
in accordance with Accounting Principles Board Opinion #30, ("APB 30"),
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."
In December 2000, the Board of Directors adopted a plan to discontinue
operations in the mortgage banking market place. Paragon ceased operations in
December of 2000, and its assets have been sold. The Company recorded a loss,
net of income tax benefit, from operations of Paragon of $100,355 for the year
ended December 31, 1999 and a loss of $3,040,226 for the year month ended
December 31, 2000.
The components of the assets and liabilities of discontinued operations in
the consolidated balance sheets as of December 31, 2000, and 1999 are as
follows. All of the operations identified below were discontinued prior to
December 31, 2000.
INSURANCE RBE PARAGON
------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1999 2000
------------- ------------ ------------
(1) Assets
Accounts receivable.................. $ 1,484 $ 34,424 $ 8,526
Loans held for Sale.................. -- 11,400,639 6,837,912
Allowance for credit losses.......... -- -- (1,278,938)
Premises and equipment, net.......... 1,514,869 311,627 72,040
Intangibles, net..................... 6,780,230 1,367,965 --
Other assets......................... 688,210 366,696 1,341,626
---------- ----------- -----------
Total assets of discontinued operations..... $8,984,793 $13,481,351 $ 6,981,166
========== =========== ===========
Liabilities
Subordinated notes payable........... 1,676,091 -- --
Accounts payable..................... 552,028 88,699 2,762
Other liabilities.................... 103,828 -- 373,881
---------- ----------- -----------
Total liabilities of discontinued operations $2,331,947 $ 88,699 $ 376,643
========== =========== ===========
(2) Premises and Equipment
Leasehold improvements................... $ 81,868 $ 7,420 $ 7,000
Furniture and fixtures................... 254,389 194,101 126,368
Equipment and automobiles................ 1,532,413 169,569 73,704
---------- ----------- -----------
Total cost........................... 1,868,670 371,090 207,072
Accumulated depreciation................. 353,801 59,463 135,032
---------- ----------- -----------
Net premises and equipment........... $1,514,869 $ 311,627 $ 72,040
========== =========== ===========
(3) Intangibles
Covenants not to compete................. $ 165,423 $ -- $ --
Goodwill and purchase premium............ 4,657,611 1,410,731 1,410,731
Insurance expirations.................... 2,746,287 -- --
---------- ----------- -----------
Total cost........................... 7,569,321 1,410,731 --
Less accumulated amortization............ 789,091 42,766 1,410,731
---------- ----------- -----------
Intangible assets, net............... $6,780,230 $ 1,367,965 $ --
========== =========== ===========
F-22
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 2000 Paragon wrote down the entire amount of goodwill due to its
impairment. Paragon had a loss from operations of $771,649 net of an income tax
benefit of $397,517 in 2000. Paragon's loss on disposal during the phase out
period was $2,268,577 net of an income tax benefit of $828,483 in 2000. There
was no gain or loss on the disposal of RBE.
(14)__RELATED PARTY TRANSACTIONS
As discussed in Note 13, Thaxton Life Partners, Inc., a related party,
invested $2,000,000 in the capital stock of RBE and obtained a 90% interest in
RBE as a result of the investment. The acquisition of the 90% interest in RBE
by Thaxton Life Partners was funded primarily through the Company's repurchase
of 150,000 shares of Series A Preferred stock from certain members of the
Thaxton family. The proceeds were used by Thaxton Life Partners to obtain the
90% interest in RBE. On August 31, 2000, Thaxton Life Partners purchased the
remaining 10% interest in RBE from the Company. The Company recognized no gain
or loss on the disposal of RBE. As the Thaxton Group, Inc. and RBE are under
common ownership, there are various activities and transactions that occur
between the two entities to take advantage of economies of scale.
After the sale of the capital stock of RBE, the Company continued to perform
certain back-office and management roles, such as the accounting, human
resources, and information systems management functions, which were outsourced
by RBE to the Company during 2001. The Company billed RBE for these services
performed based on the amount of time spent by the Company's personnel
performing the services for RBE. During the year ended December 31, 2001, the
Company billed RBE approximately $1,050,000 for these services. RBE and the
Company continued to share common office space after the disposition. As a
result of these arrangements, the Company had a receivable from RBE
approximately $51,000 and a payable to RBE of approximately $250,000 at
December 31, 2001 and a $1,506,000 payable to RBE at June 30, 2002.
The Company has also structured an arrangement with RBE whereby TICO Premium
Finance, the Company's insurance premium finance subsidiary, will originate
loans to certain RBE customers to finance their insurance policies underwritten
by RBE. In connection with this process, TICO Premium Finance agrees to accept
a down payment on the loan which is smaller than TICO Premium Finance typically
receives from borrowers when the insurance policy is underwritten by third
party insurance companies. In turn, TICO Premium Finance is reimbursed by RBE
for any losses on such loans originated to customers of RBE. By requiring a
lower down payment, RBE is able to generate a higher volume of business than it
would be able to if down payments typically received in the industry were
required by TICO Premium Finance. At December 31, 2001, there were
approximately $3.1 million in outstanding premium finance receivables recorded
by TICO Premium Finance that relate to insurance policies underwritten by RBE.
In addition, for the year ended December 31, 2001, there were approximately
$584,000 of reimbursements from RBE to TICO Premium Finance for losses incurred
by TICO Premium Finance. TICO Premium Finance had a receivable from RBE of
approximately $62,000 at December 31, 2001 for additional reimbursements for
losses incurred. At June 30, 2002, there were approximately $3.7 million
outstanding premium finance receivables recorded that relate to insurance
policies written by RBE. For the six months ended June 30, 2002, there were
approximately $331,805 of reimbursements from RBE to TICO Premium Finance for
losses incurred by TICO Premium Finance. TICO Premium Finance had a receivable
from RBE of approximately $58,138 at June 30, 2002 for additional
reimbursements for losses incurred.
Thaxton Insurance Group agencies, the Company's standard insurance
operations, are acting as agents for non-standard policies underwritten by RBE.
Thaxton Insurance Group acts as agent for certain RBE customers and recognizes
commissions on policies that are underwritten by RBE. During the year ended
December 31, 2001, there was approximately $51,000 of insurance commissions
recognized by Thaxton Insurance Group on non-standard insurance policies that
were issued through Thaxton Insurance Group as agent. During the six
F-23
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
months ended June 30, 2002, there was approximately $114,000 of insurance
commissions recognized by Thaxton Insurance Group on non-standard insurance
policies that were issued through Thaxton Insurance Group as agent.
The employees of RBE are covered under the self-insured health insurance
plan of the Company. In addition, the Company purchased general liability
insurance during 2001 that covers both the employees of Thaxton Insurance Group
and RBE.
The employees of RBE are eligible to participate in the Employee Savings
Plan benefit offered by the Company.
F-24
NO OFFICER, EMPLOYEE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING OF THE NOTES COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING
BEEN AUTHORIZED BY THE THAXTON GROUP, INC. NEITHER DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE THAXTON GROUP, INC.
UNTIL , 2002 (25 DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT) ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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.
THE THAXTON GROUP, INC.
$125,000,000
OF
SUBORDINATED NOTES
-----------------
PROSPECTUS
-----------------
, 2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bylaws provide for indemnification of its officers and directors against
liabilities and reasonable expenses incurred in connection with any action,
suit or proceeding to which such person may be a party because he is or was a
director or officer of The Thaxton Group, Inc. or serving in a similar capacity
at our request for another entity, to the fullest extent permitted by the laws
of South Carolina. Under the laws of South Carolina, unless limited by its
articles of incorporation, a corporation shall indemnify a director or officer
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 or officer
of such corporation, against reasonable expenses incurred by him in connection
with the proceeding. South Carolina law also provides that a corporation may
indemnify a director or officer if he acted in good faith and in a manner he
reasonably believed to be, with respect to conduct in his official capacity, in
the best interests of the corporation, and, in all other cases, in a manner not
opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, he had no reason to believe his conduct was
unlawful. With respect to suits by or in the right of The Thaxton Group, Inc.,
such a person may be indemnified if he acted in good faith and, in the case of
conduct within his official capacity, he reasonably believed his conduct to be
in our best interest, and in all other cases, he shall not have been adjudged
to be liable to us.
The South Carolina Business Corporation Act of 1988 also permits certain
corporations, including us, by a provision in its articles of incorporation, to
limit or eliminate the personal liability of its directors for monetary damages
for breach of fiduciary duty as a director, except with respect to any breach
of the director's duty of loyalty to the corporation or its shareholders, or
acts or omissions not in good faith or which involve gross negligence,
intentional misconduct or a knowing violation of law, or which occurred prior
to the time such provision became effective, or with respect to transactions in
which the director received an improper personal benefit, or for approving an
unlawful distribution. Our Second Amended and Restated Articles of
Incorporation include such a provision. As a result of the inclusion of such
provision, our shareholders may be unable to recover monetary damages against
directors for action taken by them which constitute negligence or which are in
violation of their fiduciary duty of due care, although they are not precluded
from obtaining injunctive or other equitable relief with respect to such
actions. Such provision is not effective to eliminate or limit statutory
liabilities arising under federal law, including liabilities under federal
securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred in connection
with the offering of the securities.
Securities and Exchange Commission filing fee $ 11,500
NASD filing fee.............................. 8,000
Printing expenses............................ 50,000*
Legal fees and expenses...................... 200,000*
Accounting fees and expenses................. 160,000*
Blue Sky filing fees......................... 10,000*
Selling agent management fee and expenses.... 195,000*
Trustee's fees and expenses.................. 25,000*
Miscellaneous expenses....................... 9,750*
Total........................................ $669,250*
- --------
* Estimated
II-1
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In November 8, 1999, Thaxton Group acquired Thaxton Investment by exchanging
3,223,000 shares of The Thaxton Group's common stock for all of the outstanding
common stock of Thaxton Investment. The capital stock of Thaxton Investment was
acquired from James D. Thaxton. The transaction was not registered under the
Securities Act of 1933, as amended, pursuant to the exemption provided by
Section 4(2) thereof for transactions not involving any public offering.
ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------
1 Form of Selling Agent Agreement between The Thaxton Group, Inc. and Carolinas First
Investments, Inc.
3.1 Second Amended and Restated Articles of Incorporation of The Thaxton Group, Inc.(1)
3.2 Bylaws of The Thaxton Group, Inc.(2)
4.1 Indenture, dated as of February 17, 1998, between The Thaxton Group, Inc. and The Bank of New
York, as Trustee (the "Indenture").
4.2 Form of Subordinated Daily Note (included as Exhibit A to Indenture).
4.3 Form of Subordinated One Month Note (included as Exhibit B to Indenture).
4.4 Form of Subordinated Term Note for 6, 12, 36 and 60 Month Notes (included as Exhibit C to
Indenture).
4.5 Form D2 Subordinated Daily Note.
4.6 Form M2 Subordinated Term Note for 1 Month Note.
4.7 Form T2 Subordinated Term Note for 6, 12, 36, and 60 Month Note.
4.8 Series Resolutions of the Board of Directors of The Thaxton Group, Inc. dated ,2002.
5 Form of Opinion of Moore & Van Allen, PLLC.
10.1 Third Amended and Restated Loan and Security Agreement dated April 4, 2001 among Finova
Capital Corporation, The Thaxton Group, Inc., Thaxton Operating Company, Thaxton Insurance
Group, Inc., TICO Credit Company, Inc., Eagle Premium Finance Co., Inc., Thaxton
Commercial Lending, Inc., Paragon, Inc., TICO Premium finance Company of South Carolina,
Inc., TICO Reinsurance, LTD., TICO Credit Company of Tennessee, Inc., TICO Credit
Company of North Carolina, Inc., TICO Credit Company of Alabama, Inc., TICO Credit
Company of Georgia, Inc., TICO Credit Company (DE), TICO Credit Company (MS), TICO
Credit Company (TN), Thaxton Investment Corporation, The Modern Finance Company,
Southern Management Corporation, Modern Financial Services, Inc., Southern Finance of
Tennessee, Inc., Covington Credit of Texas, Inc., Covington Credit of Georgia, Inc., Southern
Finance of Tennessee, Inc., Fitch National Reinsurance, LTD., SOCO Reinsurance, LTD.,
Quick Credit Corporation, Covington Credit, Inc. (Oklahoma), Covington Credit of Louisiana,
Inc., Southern Financial Management, Inc.(3)
10.2 First Amended and Restated Schedule, dated December 31, 2001, to Third Amended and Restated
Loan and Security Agreement, among Finova Capital Corporation, The Thaxton Group, Inc.,
Thaxton Operating Company, Thaxton Insurance Group, Inc., TICO Credit Company, Inc.,
Eagle Premium Finance Co., Inc., Thaxton Commercial Lending, Inc., Paragon, Inc., TICO
Premium finance Company of South Carolina, Inc., TICO Reinsurance, LTD., TICO Credit
Company of Tennessee, Inc., TICO Credit Company of North Carolina, Inc., TICO Credit
Company of Alabama, Inc., TICO Credit Company of Georgia, Inc., TICO Credit Company
(DE), TICO Credit Company (MS), TICO Credit Company (TN), Thaxton Investment
II-2
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
Corporation, The Modern Finance Company, Southern Management Corporation, Modern
Financial Services, Inc., Southern Finance of Tennessee, Inc., Covington Credit of Texas, Inc.,
Covington Credit of Georgia, Inc., Southern Finance of Tennessee, Inc., Fitch National
Reinsurance, LTD., SOCO Reinsurance, LTD., Quick Credit Corporation, Covington Credit,
Inc. (Oklahoma), Covington Credit of Louisiana, Inc., Southern Financial Management, Inc.(4)
10.3 Form of Note Purchase Agreement.
10.4 Form of Renewal Notice for 1 Month Note.
10.5 Form of Renewal Notice for 6, 12, 36 and 60 Month Notes.
12 Statement regarding Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of The Thaxton Group, Inc.(4)
23.1 Consent of Moore & Van Allen, PLLC (included in Exhibit 5 to this registration statement).
23.2 Consent of Cherry, Bekaert & Holland, LLP.
24 Power of Attorney (included in signature page).
25 Form T-1, Statement of Eligibility and Qualification of Trustee.(5)
- --------
(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998 (the "1998 Annual Report") (Commission
File No. 000-27086).
(2) Incorporated by reference to Exhibit 3.2 of the Company's 2001 Registration
Statement on Form SB-2 (the "2001 Registration Statement") (Reg. No.
333-55022).
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2000 (the "2000 Annual Report") (Commission
File No. 000-27086).
(4) Incorporated by reference to the Company's Annual Report on Form 10-K405
for the year ended December 31, 2001 (the "2001 Annual Report") (Commission
File No. 000-27086).
(5) Incorporated by reference to Exhibit 25 of the Company's 1998 Registration
Statement on Form SB-2 filed with Pre-Effective Amendment No. 2 to the 1998
Registration Statement (the "1998 Registration Statement") (Reg. No.
333-42623).
ITEM 28. UNDERTAKINGS
The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales of the securities
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 in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the 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% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(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;
II-3
(2) That, for the purpose of determining 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; and
(3) To remove from registration by means of a post-effective amendment
any of the securities that remain unsold at the termination of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(5) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(6) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
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.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form S-1 and authorized this registration statement
to be signed on its behalf by the undersigned, thereunto in the City of
Lancaster, State of South Carolina on October 28, 2002.
THE THAXTON GROUP, INC.
By: /s/ ALLAN F. ROSS
-----------------------------
ALLAN F. ROSS
VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, AND
SECRETARY
POWER OF ATTORNEY
Each of the undersigned directors and officers of the above named
Registrant, by his execution hereof, hereby constitutes and appoints Allan F.
Ross, and each of them, with full power of substitution, as his true and lawful
attorneys-in-fact and agents, to do any and all acts and things for him, and in
his name, place and stead, to execute and sign any and all pre-effective and
post-effective amendments to such Registration Statement and any additional
registration statement pursuant to Rule 462(b) under the Securities Act of
1933, and file the same, together with all exhibits and schedules thereto and
all other documents in connection therewith, with the Commission and with such
state securities authorities as may be appropriate, granting unto said
attorney-in-fact, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully and to all intents and purposes as the undersigned might or could do in
person, and hereby ratifying and confirming all the acts of said
attorney-in-fact and agent, which he may lawfully do in the premises or cause
to be done by virtue hereof.
In accordance with the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----------------------------- ----------------
/s/ JAMES D. THAXTON Chairman of the Board of October 28, 2002
- ----------------------------- Directors, President and
JAMES D. THAXTON Chief Executive Officer
(Principal Executive
Officer)
/s/ ROBERT L. WILSON Executive Vice President, October 28, 2002
- ----------------------------- Chief Operating Officer and
ROBERT L. WILSON Director
/s/ ALLAN F. ROSS Vice President, Chief October 28, 2002
- ----------------------------- Financial Officer,
ALLAN F. ROSS Secretary and Director
(Principal Financial and
Accounting Officer)
/s/ C. L. THAXTON, SR. Director October 28, 2002
- -----------------------------
C.L. THAXTON, SR.
II-5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
1 Form of Selling Agent Agreement between The Thaxton Group, Inc. and Carolinas First
Investments, Inc.
3.1 Second Amended and Restated Articles of Incorporation of The Thaxton Group, Inc.(1)
3.2 Bylaws of The Thaxton Group, Inc.(2)
4.1 Indenture, dated as of February 17, 1998, between The Thaxton Group, Inc. and The Bank of New
York, as Trustee (the "Indenture").
4.2 Form of Subordinated Daily Note (included as Exhibit A to Indenture).
4.3 Form of Subordinated One Month Note (included as Exhibit B to Indenture).
4.4 Form of Subordinated Term Note for 6, 12, 36 and 60 Month Notes (included as Exhibit C to
Indenture).
4.5 Form D2 Subordinated Daily Note.
4.6 Form M2 Subordinated Term Note for 1 Month Note.
4.7 Form T2 Subordinated Term Note for 6, 12, 36, and 60 Month Note.
4.8 Series Resolutions of the Board of Directors of The Thaxton Group, Inc. dated ,2002.
5 Form of Opinion of Moore & Van Allen, PLLC.
10.1 Third Amended and Restated Loan and Security Agreement dated April 4, 2001 among Finova
Capital Corporation, The Thaxton Group, Inc., Thaxton Operating Company, Thaxton Insurance
Group, Inc., TICO Credit Company, Inc., Eagle Premium Finance Co., Inc., Thaxton
Commercial Lending, Inc., Paragon, Inc., TICO Premium finance Company of South Carolina,
Inc., TICO Reinsurance, LTD., TICO Credit Company of Tennessee, Inc., TICO Credit
Company of North Carolina, Inc., TICO Credit Company of Alabama, Inc., TICO Credit
Company of Georgia, Inc., TICO Credit Company (DE), TICO Credit Company (MS), TICO
Credit Company (TN), Thaxton Investment Corporation, The Modern Finance Company,
Southern Management Corporation, Modern Financial Services, Inc., Southern Finance of
Tennessee, Inc., Covington Credit of Texas, Inc., Covington Credit of Georgia, Inc., Southern
Finance of Tennessee, Inc., Fitch National Reinsurance, LTD., SOCO Reinsurance, LTD.,
Quick Credit Corporation, Covington Credit, Inc. (Oklahoma), Covington Credit of Louisiana,
Inc., Southern Financial Management, Inc.(3)
10.2 First Amended and Restated Schedule, dated December 31, 2001, to Third Amended and Restated
Loan and Security Agreement, among Finova Capital Corporation, The Thaxton Group, Inc.,
Thaxton Operating Company, Thaxton Insurance Group, Inc., TICO Credit Company, Inc.,
Eagle Premium Finance Co., Inc., Thaxton Commercial Lending, Inc., Paragon, Inc., TICO
Premium finance Company of South Carolina, Inc., TICO Reinsurance, LTD., TICO Credit
Company of Tennessee, Inc., TICO Credit Company of North Carolina, Inc., TICO Credit
Company of Alabama, Inc., TICO Credit Company of Georgia, Inc., TICO Credit Company
(DE), TICO Credit Company (MS), TICO Credit Company (TN), Thaxton Investment
Corporation, The Modern Finance Company, Southern Management Corporation, Modern
Financial Services, Inc., Southern Finance of Tennessee, Inc., Covington Credit of Texas, Inc.,
Covington Credit of Georgia, Inc., Southern Finance of Tennessee, Inc., Fitch National
Reinsurance, LTD., SOCO Reinsurance, LTD., Quick Credit Corporation, Covington Credit,
Inc. (Oklahoma), Covington Credit of Louisiana, Inc., Southern Financial Management, Inc.(4)
10.3 Form of Note Purchase Agreement.
10.4 Form of Renewal Notice for 1 Month Note.
II-6
EXHIBIT NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------
10.5 Form of Renewal Notice for 6, 12, 36 and 60 Month Notes.
12 Statement regarding Computation of Ratio of Earnings to Fixed Charges.
21 Subsidiaries of The Thaxton Group, Inc.(4)
23.1 Consent of Moore & Van Allen, PLLC (included in Exhibit 5 to this registration statement).
23.2 Consent of Cherry, Bekaert & Holland, LLP.
24 Power of Attorney (included in signature page).
25 Form T-1, Statement of Eligibility and Qualification of Trustee.(5)
- --------
(1) Incorporated by reference to the 1998 Annual Report.
(2) Incorporated by reference to Exhibit 3.2 of the 2001 Registration Statement.
(3) Incorporated by reference to the 2000 Annual Report.
(4) Incorporated by reference to the 2001 Annual Report.
(5) Incorporated by reference to Exhibit 25 of the 1998 Registration Statement.
II-7