AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1998
REGISTRATION NO. 333-42623
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE THAXTON GROUP, INC.
(Name of small business issuer in its charter)
SOUTH CAROLINA 6140
(State or other (Primary Standard
jurisdiction of Industrial 57-0669498
incorporation or Classification Code (I.R.S. Employer
organization) Number) Identification No.)
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
(803) 285-4336
(Address and telephone number
of principal executive offices)
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ALLAN F. ROSS
CHIEF FINANCIAL OFFICER
THE THAXTON GROUP, INC.
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29720
(803) 285-4336
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
BARNEY STEWART III
BRIAN T. ATKINSON
MOORE & VAN ALLEN, PLLC
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA 28202-4003
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this registration statement becomes effective.
--------------------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
THE THAXTON GROUP, INC.
$ 50,000,000
AGGREGATE PRINCIPAL AMOUNT OF
SUBORDINATED TERM NOTES DUE
1,6, 12, 36 AND 60 MONTHS
AND
SUBORDINATED DAILY NOTES
This Prospectus relates to the offering of (i) Subordinated Term Notes due
1, 6, 12, 36 and 60 months (in the aggregate, the "Term Notes"), and (ii)
Subordinated Daily Notes (the "Daily Notes") of The Thaxton Group, Inc. (the
"Company"). The Term Notes and the Daily Notes are individually referred to as a
"Security" and collectively referred to as the "Securities." The price of each
Security will be its original principal amount, with no discounts or deductions
for commissions. The total proceeds to the Company if all the Securities are
sold will be $50,000,000 before deducting offering expenses, estimated at
approximately $150,000. The offering commenced on February 17, 1998 and the
Company has sold Term Notes having an aggregate principal amount of $4.8
million. There can be no assurance that the Company will receive any particular
additional amount of proceeds from the offering of the Securities. See "Use of
Proceeds."
The Company will determine, from time to time, the rates of interest
payable on the Term Notes. For one month Term Notes, the rates will be at least
equal to the rate established for the most recent auction average of United
States Treasury Bills with maturities of 13 weeks. For all other Term Notes, the
rates will be at least equal to the rate established for the most recent auction
average of United States Treasury Bills with maturities of 52 weeks. The rate of
interest at the time of purchase of a Term Note will be the rate payable
throughout the original term of the Term Note. The interest rate payable on the
Daily Notes will be determined by the Company and may fluctuate on a monthly
basis. Once adjusted, such interest rate will remain in effect until next
adjusted by the Company. The interest rate on the Daily Notes will be no less
than 3% below nor more than 5% percent above the rate established for the most
recent auction average of United States Treasury Bills with a maturity rate of
13 weeks. In no event will the interest rate on the Term Notes or the Daily
Notes be more than 12% or less than 2% per annum.
Examples of the initial annual interest rates for the Securities as of
July 1, 1998 are as follows: Daily Note - 6.25%; 1 Month Note - 6.25%; 6 Month
Note - 7.00%; 12 Month Note - 7.50%; 36 Month Note 8.00%; and 60 Month Note -
8.25%. At the time of purchase of a Security, the actual initial annual interest
rate may be more or less than these examples.
A schedule of the interest rates for each Security will be provided to any
potential investor at the offices of the Company and its affiliates where the
Securities will be sold. In addition, potential investors may call the Company
at 1-888-842-9866 during normal business hours to obtain information about the
current interest rates for the Securities.
All Securities offered hereby are subject to redemption by the Company
prior to maturity. The Securities are also redeemable by the holder prior to
maturity (with an interest forfeiture, which may be waived by the Company, in
the case of the one month Term Notes, and an interest rate reduction penalty, in
the case of the Term Notes). The Company, in its sole discretion, may require
the holder to give up to 30 days' prior written notice of intent to redeem prior
to maturity. The Securities will be subordinated to all existing and future
Senior Indebtedness of the Company as described herein. As of December 31, 1997,
the Company had approximately $47.9 million of Senior Indebtedness. See
"Description of Securities."
The Securities are being offered by the Company and will be sold at the
offices of the Company and its affiliated finance and insurance companies
operating under the names TICO Credit Company and Thaxton Insurance. In
addition, a limited amount of the Securities may be offered by Maxwell
Investments, Inc., as a selling agent. No underwriting discounts or commissions
will be paid in connection with the offering of the Securities. The offering
will be continuous in nature and is expected to continue until February 17,
2000. See "Plan of Distribution." There can be no assurance that any particular
additional amount of the Securities will be sold. The Securities will not be
listed for trading on any securities exchange and the Company does not expect
that any active trading market for the Securities will develop.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS DEPOSITS OR OBLIGATIONS OF AN
INSURED DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC").
- ------------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR IMPORTANT CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE SECURITIES.
NOTE: INVESTORS WHO PURCHASE ANY OF THE SECURITIES SHOULD RETAIN THIS
PROSPECTUS IN THEIR RECORDS FOR FUTURE REFERENCE IN CONNECTION WITH ANY
RENEWALS OR AUTOMATIC EXTENSIONS OF THE TERM NOTES. SEE "DESCRIPTION OF
SECURITIES."
THE DATE OF THIS PROSPECTUS IS AUGUST __, 1998.
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE INFORMATION DISCUSSED UNDER "RISK FACTORS" WHICH
BEGINS ON PAGE 6. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT, INCLUDING STATEMENTS REGARDING, AMONG OTHER ITEMS, (I) THE
COMPANY'S BUSINESS AND ACQUISITION STRATEGIES, (II) THE USE OF THE PROCEEDS
OF THE OFFERING, (III) THE COMPANY'S FINANCING PLANS, AND (IV) INDUSTRY AND
OTHER TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR RESULTS OF
OPERATIONS. THESE FORWARD-LOOKING STATEMENTS ARE BASED LARGELY ON
MANAGEMENT'S EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF THE FACTORS DESCRIBED IN THIS PROSPECTUS, INCLUDING GENERAL
ECONOMIC CONDITIONS, PREVAILING INTEREST RATES, COMPETITIVE FACTORS, AND THE
ABILITY OF THE COMPANY TO CONTINUE ITS BUSINESS AND ACQUISITION STRATEGIES.
IN LIGHT OF THESE RISKS AND UNCERTAINTIES, FUTURE EVENTS AND ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING
INFORMATION CONTAINED IN THIS PROSPECTUS. SEE "RISK FACTORS," "USE OF
PROCEEDS," "BUSINESS," AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
THE COMPANY
The Company is a diversified consumer financial services company. Its
primary line of business is purchasing and servicing retail installment
contracts generated from the sale of used automobiles by independent dealers
("Automobile Sales Contracts"). Finance receivables resulting from purchases
of Automobile Sales Contracts represented approximately 70% of the Company's
total finance receivables at December 31, 1997. The Company also makes and
services personal loans ("Direct Loans") to persons with limited credit
histories, low incomes, or past credit problems ("Non-prime Borrowers"). The
Company presently purchases Automobile Sales Contracts and/or makes Direct
Loans in Georgia, North Carolina, South Carolina, Tennessee, and Virginia
under the name "TICO Credit Company." Under the name "TICO Premium Finance
Company" in North Carolina and South Carolina and "Eagle Premium Finance
Company" in Virginia, the Company finances insurance premiums, primarily for
personal lines of insurance purchased by Non-prime Borrowers through
independent agents ("Premium Finance Contracts"). The Company also sells, on
an agency basis, various credit-related insurance products in conjunction
with the purchase of Automobile Sales Contracts or the making of Direct Loans
and, through its subsidiary Thaxton Insurance Group, Inc. ("Thaxton
Insurance"), sells on an agency basis, various lines of property and
casualty, life, and accident and health insurance. The Company recently
formed CFT Financial Corp., a mortgage banking firm, and began originating
residential mortgage loans primarily for Non-Prime Borrowers in South
Carolina and North Carolina in January 1997, which are sold on a nonrecourse
basis to various investors.
The non-prime consumer credit industry is highly fragmented, consisting
of many national, regional, and local competitors. Many lenders, including
most lenders providing automobile financing, tend to avoid or do not
consistently serve borrowers with credit histories that do not meet the
stringent, objective credit review standards used by traditional lenders.
Since 1985, the Company has specialized in serving Non-prime Borrowers and
has developed considerable expertise in applying both objective and
subjective credit evaluation procedures and controlling processing and
collection costs, which are significantly higher on credit extended to
Non-prime Borrowers.
The Company's business strategy is to continue to diversify by offering a
wider range of financial products and services. Although a significant portion
of the Company's growth in recent years has been attributable to the expansion
of its portfolio of Automobile Sales Contracts and the Company intends to
continue this strategy in selected markets, Direct Loan, Premium Finance
Contract and residential mortgage originations will be emphasized as well. In
addition, the Company intends to focus on the development and marketing of other
consumer finance and insurance products that offer cross-selling opportunities
among its customers. Management believes that these cross-selling opportunities
will enhance the Company's ability to successfully implement its diversification
strategy and retain existing customers.
3
The Company's finance receivables bear interest at fixed rates, which
in some instances are subject to a legal maximum. Historically, these
receivables have been financed by incurring indebtedness with floating
interest rates. As a result, the Company's interest expense generally will
increase during periods of rising interest rates while its interest income
remains constant, thereby decreasing net interest rate spreads and adversely
affecting the Company's profitability. Management believes that by financing
a portion of these receivables with the fixed rate Securities offered by this
Prospectus, the Company will be able to better match its fixed rate
receivables with fixed rate debt and improve the Company's interest rate
sensitivity and net interest rate spreads.
The Company's executive offices are located at 1524 Pageland Highway,
Lancaster, South Carolina 29720, and its telephone number is (888) 842-9866. The
Company has a total of 25 finance offices, with 16 located in South Carolina,
two in North Carolina and Georgia, three in Virginia, and one in Tennessee, 20
insurance offices, with 12 located in South Carolina and eight in North
Carolina, and one residential mortgage office in North Carolina.
THE OFFERING
Subordinated Term Notes Due 1, 6, 12, 36 and 60 months
and Subordinated Daily Notes................. $ 50,000,000
Use of proceeds................................... Temporary repayment of
indebtedness under
Revolving Credit
Facility.
Expected termination date of the offering......... The Company expects the
offering will continue
until February 17,
2000 but reserves the
right at any time to
suspend or terminate
the offering.
. YEARS ENDED DECEMBER 31,
1996 1997
(dollars in thousands)
INCOME STATEMENT DATA:
Net interest income............. $9,319 $10,870
Provision for credit losses. 3,593 6,580
Net interest income after
provision for credit losses 5,726 4,290
Insurance commissions, net...... 5,893 5,470
Other income.................... 986 1,221
Operating expenses.............. 11,974 13,211
Income tax expense (benefit) 247 (724)
Net income (loss)............... 384 (1,506)
Net income (loss) per common share 0.09 (0.39)
AT DECEMBER 31,
1996 1997
BALANCE SHEET DATA:
Finance receivables............. $63,107 $67,558
Unearned income................. (14,366) (14,087)
Allowance for credit losses..... (2,195) (4,809)
Finance receivables, net........ 46,546 48,662
Total assets.................... 56,681 60,966
Total liabilities............... 50,310 54,996
Shareholders' equity............ 6,371 5,969
4
SUMMARY OF TERMS OF SECURITIES
SUBORDINATED TERM NOTES DUE ONE MONTH
Minimum Investment $100
Interest Rate The Company will determine, from time to time, the
rate of interest payable on one month Term Notes,
which rate will be at least equal to the rate
established for the most recent auction average of
United States Treasury Bills with a maturity of 13
weeks, but no less than 2% per annum and no more
than 12% per annum.
Interest Payment Payable at maturity.
Automatic Extension Automatically extended for a new
one-month term at the then applicable interest
rate, unless the holder notifies the Company on or
before the maturity date that the holder does not
wish to extend the term.
Additions and Redemptions Holders of one month Term Notes may adjust the
original principal amount, without extending the
maturity, at any time by increases or decreases
resulting from additional purchases or partial
redemptions; provided, however, that partial
redemptions may not reduce the outstanding
principal amount below $100. Upon presentation of
a one month Term Note to the Company, the Company
will, for the Holder's convenience, record any
adjustments to the original principal amount, such
as additional purchases or partial redemptions.
Redemptions by the holder, in whole or in part,
prior to maturity will result in a forfeiture of
all accrued interest on the redeemed amount unless
the Company, in its sole discretion, elects to
waive the forfeiture in whole or in part. The
Company, in its sole discretion, may require the
holder to give up to 30 days' prior written notice
of a redemption. Redeemable, at the option of the
Company, without premium, at any time on 30 days'
notice.
Subordination Subordinated to all existing and future Senior
Indebtedness.
SUBORDINATED TERM NOTES DUE 6, 12, 36 AND 60 MONTHS
Minimum Investment $1,000
Interest Rate The Company will determine, from time to time, the
rate of interest payable on 6, 12, 36 or 60 month
Term Notes, which rate will be at least equal to
the rate established for the most recent auction
average of United States Treasury Bills with a
maturity of 52 weeks, but no less than 2% per
annum and no more than 12% per annum.
Interest Payment At the holder's option, either monthly, quarterly
or at maturity.
Automatic Extension Automatically extended for a new 6, 12, 36 or 60
month term at the then applicable interest rate,
unless the holder notifies the Company on or
before the maturity date that the holder does not
wish to extend the term. The Company will give the
holder 30 days notice in advance of maturity date
of the automatic extension provision.
5
Redemption Redeemable at holder's option upon payment of
penalty equal to the difference between the amount
of interest actually accrued since the date of
issuance (or most recent extension date) and the
amount of interest that would have accrued had the
rate of interest been 3% less than the rate in
effect on the date of issuance (or most recent
extension date). The Company, in its sole
discretion, may require the holder to give 30
days' prior written notice of a redemption.
Redeemable at the option of the Company, without
premium, at any time upon 30 days notice.
Subordination Subordinated to all existing and future Senior
Indebtedness.
AUTOMATIC EXTENSION PROCEDURE Not later than 15 days prior to the maturity of a
Term Note, the Company will provide the holder
with an extension notice and a copy of the
Company's most recent quarterly report filed with
the Commission and, if not previously furnished to
the holder, a copy of the Company's most recent
annual report filed with the Commission. The
extension notice will advise the holder of the
maturity date of the holder's Term Note, the
principal amount due on maturity, the amount of
accrued interest to the maturity date and the
applicable interest rate upon an automatic
extension of the Term Note. The extension notice
will also inform the holder that, upon request,
the Company will promptly furnish the holder with
a copy of this Prospectus, as amended or
supplemented. Unless prior to the maturity of a
Term Note the Company receives notification of the
holder's intention to redeem the holder's Term
Note, it will be automatically extended as
described above under "Automatic Extension."
SUBORDINATED DAILY NOTES
Minimum Investment $50
Interest Rate As determined by the Company and adjusted monthly
effective on the first day of the month; no less
than 3% below or 5% above the most recent auction
average of United States Treasury Bill with 13
week maturities and in no event, less than 2% per
annum or more than 12% per annum. Holders of Daily
Notes will be notified promptly by first class
mail of any monthly adjustment in the interest
rate.
Interest Payment Accrued daily and compounded quarterly, payable
upon redemption
Additions and Redemptions Holders of Daily Notes may adjust the original
principal amount at any time by increases or
decreases resulting from additional purchases or
partial redemptions; provided, however, that
partial redemptions may not reduce the outstanding
principal amount below $50. Upon presentation of a
Daily Note to the Company, the Company will, for
the holder's convenience, record any adjustments
to the original principal amount, such as
additional purchases or partial redemptions.
Holders of Daily Notes may redeem them, in whole
or in part, at any time, without penalty. The
Company, in its sole discretion, may require the
holder to give up to 30 days' prior written notice
of a redemption. Daily notes are redeemable, at
the option of the Company, without premium, at any
time on 30 days' notice.
Subordination Subordinated to all existing and future Senior
Indebtedness.
6
RISK FACTORS
THE SECURITIES OFFERED HEREBY WILL CONSTITUTE GENERAL UNSECURED
OBLIGATIONS OF THE COMPANY. PERSONS CONSIDERING INVESTING IN THE SECURITIES
SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER OR NOT TO
PURCHASE THE SECURITIES:
SECURITIES NOT INSURED. The Securities are not obligations of an insured
depository institution such as a bank and are therefore not subject to the
protection of the FDIC or any insurance. Accordingly, if the funds used by an
investor to purchase the Securities are taken from a savings account in a bank
or savings and loan association or certificates of deposit issued by any such
institution, the investor should recognize that by purchasing the Securities the
investor is subjecting those funds to a significantly greater degree of risk of
loss.
TRANSFERABILITY OF THE SECURITIES LIMITED. There is no trading market for
the Securities and the Company does not expect one to develop. Potential
investors should not purchase the Securities with the expectation that a trading
market for the Securities will subsequently develop. The Securities are
non-negotiable. All transfers and assignments of the Securities must be made at
the offices of the Company.
SUBORDINATION TO SENIOR INDEBTEDNESS. Payment of the indebtedness
evidenced by the Securities is subordinate to the prior payment when due of the
principal of and interest on all Senior Indebtedness of the Company. Investors
should be aware that if the Company's becomes insolvent, they would be entitled
to receive payment on the Securities they hold only after all of the Company's
Senior Indebtedness is paid. Senior Indebtedness of the Company is broadly
defined to include all debt of the Company other than the Securities. See
"Description of Securities - General Provisions Applicable to all Securities -
Subordination." As of December 31, 1997, the principal amount of the Company's
Senior Indebtedness was approximately $47.9 million. The Company has the
unrestricted right to increase or decrease at any time the amount of Senior
Indebtedness to which the Securities will be subordinate. There can be no
assurance that the Company would have or be able to obtain sufficient funds to
pay off the Securities if the Company becomes insolvent or upon a dissolution,
winding up, liquidation, or reorganization of the Company.
FORFEITURE OF INTEREST FOR EARLY REDEMPTION OF ONE MONTH TERM NOTES.
Holders of one month Term Notes who elect to redeem them prior to maturity, in
whole or in part, will forfeit the entire amount of accrued interest on the
amount redeemed. The Company, in its sole discretion, may waive all or a portion
of the forfeiture, but there can be no assurance the Company will do so.
INTEREST RATE REDUCTION PENALTY FOR EARLY REDEMPTION OF 6, 12, 36 AND 60
MONTH SECURITIES. Holders of 6, 12, 36 and 60 month Term Notes who elect to
redeem them prior to maturity will forfeit an amount equal to the difference
between the amount of interest actually accrued on the 6, 12, 36 or 60 month
Term Note and the amount of interest that would have accrued on the Term Note
had the rate of interest been 3% less than the rate in effect at the date of
issuance (or most recent extension date). See "Description of Securities --
Redemption of Securities at Option of Holder."
POSSIBLE 30-DAY NOTICE REQUIREMENT FOR REDEMPTIONS BY HOLDERS AND RELATED
RISKS. Holders of the Securities have the right to redeem them, in whole or in
part, at any time. However, the Company, in its sole discretion, may require
holders of the Securities to provide the Company 30 day's prior written notice,
by first class mail, of any early redemption requested by the holder and this
requirement may be imposed by the Company at any time, including at the time a
holder otherwise requests early redemption of his Security. Management believes
that this 30-day notice requirement would most likely be imposed in
circumstances where a temporary increase in redemption requests by holders would
make it difficult for the Company to administratively process the requests on a
timely basis or if the aggregate dollar amount of requested early redemptions
exceeded the Company's ability to promptly fund the redemptions from available
cash or borrowing sources. If the Company should implement this notice
requirement, holders of Securities desiring to obtain early redemptions will be
delayed in doing so and, any such delay, depending upon the Company's financial
circumstances at that time, could increase the risk of a default by the Company
for failure to honor redemption requests upon the expiration of the 30-day
notice period. Interest would continue to accrue on the Securities until
redeemed by the Company.
7
NEED TO RETAIN CUSTODY OF SECURITIES CERTIFICATES. Within ten days after
purchasing a Security, the purchaser will receive a Daily Note or Term Note in
certificated form that corresponds to the terms of the Security he elected to
purchase. In addition, holders of the Securities will receive monthly statements
from the Company that inform the holder of the issue date of his Security, the
principal amount, the interest rate, maturity date and the amount of interest
accrued through the most recent interest accrual date. This information will
also be continuously maintained in the Company's books and records. However,
because full redemption of a Security requires presentation to the Company of
the holder's Daily or Term Note in certificated form, purchasers of the
Securities are urged to keep their Security certificates in a safe place. In the
event a certificate is lost or destroyed, a holder desiring to redeem a Security
in full may be required to indemnify the Company before a redemption payment is
made.
IMPACT OF CREDIT LOSSES ON PROFITABILITY. 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 limited financial resources. Consequently, Direct
Loans and Automobile Sales Contracts, relative to prime consumer loans and
retail installment contracts, involve a significantly higher probability of
default and greater servicing and collection costs. The Company's profitability
depends upon its ability to properly evaluate the creditworthiness of Non-prime
Borrowers, to maintain adequate security for Automobile Sales Contracts, and to
efficiently service and collect its portfolio of finance receivables. No
assurance is given that the credit performance of the Company's customers will
be satisfactory, or that the rate of future defaults and/or losses will not
exceed the Company's 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, and, if economic
conditions in the Company's markets should deteriorate, the Company anticipates
that its delinquency rates would likely increase.
RECENT MATERIAL ADVERSE TREND IN CREDIT LOSS EXPERIENCE. Based upon the
Company's loss experience during the quarters ended September 30 and December
31, 1997, management recorded a $2.4 million net increase in the Company's
allowance for credit losses resulting in a total allowance of approximately $4.8
million at December 31, 1997. This increase was due to a substantial increase in
net charge-offs of approximately $2.7 million for the six months ended December
31, 1997 compared to $1.3 million for the first six months of 1997. Accordingly,
the provision for credit losses charged against income for the last six months
of 1997 was $5.1 million and the increased provision resulted in a net loss of
$2.1 million and $1.5 million, respectively, for the six months and the year
ended December 31, 1997.
Given the intensely competitive conditions that currently exist in the
non-prime automobile sales finance markets where the Company operates, there can
be no assurance that this adverse trend will not continue. If this trend
continues, it would have a material adverse effect on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Recent Material Adverse Trend in Credit Loss
Experience."
RISK ASSOCIATED WITH EXPANSION OF AUTOMOBILE SALES FINANCE OPERATIONS. The
Company's past growth has been due to, and its growth strategy depends in part
on, the opening of new finance offices that focus primarily on purchasing
Automobile Sales Contracts in markets not previously served by the Company. The
Company's future expansion of its finance office network depends primarily upon
the Company's ability to attract and retain qualified and experienced finance
office managers and the ability of such managers to develop relationships with
independent dealers serving those markets. The Company typically does not open a
new finance office until it has located and hired a qualified and experienced
individual to manage it. Although management believes the Company can attract
and retain qualified and experienced managers as it proceeds with expansion into
new markets, no assurance is given that it will be successful in doing so. In
addition, the success of the Company's automobile sales finance operations is
dependent upon the Company's ability to maintain credit quality and
administration as it seeks to increase the number of Automobile Sales Contracts
generated by existing and new finance offices. No assurance is given that it
will be successful in doing so.
NO MINIMUM NUMBER OF SECURITIES REQUIRED TO BE SOLD. In reviewing the
information set forth under the headings "Use of Proceeds," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition
8
and Results of Operations -- Liquidity and Capital Resources," prospective
purchasers of the Securities should note that no minimum number of Securities is
required to be sold and no assurance is given that any particular amount of
Securities will be sold.
INCREASES IN INTEREST RATES. While the Company's finance receivables bear
interest at fixed rates, which in some instances are subject to a legal maximum,
the Company generally finances these receivables by incurring indebtedness with
floating interest rates. As a result, the Company's interest expense generally
will increase during periods of rising interest rates while its interest income
remains constant, thereby decreasing net interest rate spreads and adversely
affecting the Company's profitability. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Profitability." Through this
offering of fixed rate Securities, the Company anticipates that it may be able
to reduce some of its dependency on floating interest rate borrowings and
increase its net interest rate spreads. However, there can be no assurance that
this offering will result in the sale of any particular amount of the
Securities.
KEY MANAGEMENT. Although the Company has recently employed additional
management personnel experienced in various aspects of consumer finance, the
Company's success depends, in large part, on the continued service of its
senior management, including James D. Thaxton, Chairman of the Board,
President, and Chief Executive Officer, and Robert L. Wilson, Executive Vice
President and Chief Operating Officer. The Company maintains key employee
insurance in the amount of $1,000,000 on the life of Mr. Wilson but maintains
no such insurance on the life of Mr. Thaxton. Neither Mr. Thaxton nor Mr.
Wilson is subject to an employment agreement with the Company, although in
December 1995, Mr. Wilson received a grant of restricted Common Stock that
vests over a ten-year period. See "Management -- Executive Compensation."
The loss of either Mr. Thaxton or Mr. Wilson may have a material adverse
effect on the Company's business.
COMPETITION. The business of acquiring and purchasing Automobile Sales
Contracts is highly fragmented and competitive. Historically, commercial banks,
savings institutions, credit unions, financing affiliates of automobile
manufacturers, and other lenders providing traditional consumer financing have
not consistently served the non-prime segment of the consumer finance market.
Recently, however, some bank holding companies have acquired consumer finance
companies in an effort to recapture some of the customers their bank
subsidiaries have rejected on the basis of rigid credit scoring systems. In
addition, there are numerous nontraditional consumer finance sources serving
this market. The Company believes that its primary competitor in the automobile
sales finance and consumer loan business is TransSouth Financial Corporation,
which operates in most of the Company's markets. The Company also competes with
numerous regional consumer finance companies. Many of these competitors or
potential competitors, including TransSouth Financial Corporation, have
significantly greater resources than the Company and have preexisting
relationships with independent dealers in the Company's markets. Any increased
competition from these or other sources of credit for Non-prime Borrowers may
limit the Company's ability to execute its business and growth strategy and
could have a material adverse effect on the Company. Such competition could
result in a reduction in the interest rates earned on Automobile Sales Contracts
and Direct Loans or in the dealer reserve the Company is able to obtain when it
purchases an Automobile Sales Contract. See "Business -- Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
The premium finance business also is highly competitive. Because interest
rates are highly regulated, competition is based primarily on customer service,
response time, and down payment amounts. There are numerous independent finance
companies specializing in premium finance for personal lines of insurance. In
addition, many independent insurance agencies finance premiums for their
customers either directly or through an affiliate. Some bank holding companies
have subsidiaries that finance premiums on insurance sold by other subsidiaries
of the holding company as well as by independent agents. Any increased
competition from these or other providers of premium finance may limit the
Company's ability to execute its business and growth strategy and could have a
material adverse effect on the Company.
Competition in the independent insurance agency business is intense. There
are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and maintain long-term customer relationships
9
through low employee turnover and responsive service representatives and offers
a broad range of insurance products underwritten by reputable insurance
companies. Any increased competition from other providers of insurance products
may limit the Company's ability to execute its business and growth strategy and
could have a material adverse effect on the Company.
The origination of residential mortgages for Non-prime Borrowers is highly
competitive and there are numerous companies engaged in this business, many of
which have substantially greater resources and experience than the Company. The
Company intends to compete mainly on the basis of service to customers in
markets where it already has a presence with its consumer finance and insurance
offices. Increased competition from other providers of mortgage products may
limit the Company's ability to implement its residential mortgage growth
strategy and could have an adverse effect on the Company.
REGULATION. The Company's business is subject to various state and federal
laws which require licensing and qualification. These laws may regulate, among
other things, (i) the maximum interest rate that may be charged to borrowers on
Automobile Sales Contracts, Direct Loans, and Premium Finance Contracts, (ii)
the sale and type of insurance products offered by the insurers for which the
Company acts as agent, (iii) the Company's rights to repossess and sell
collateral, and (iv) virtually all aspects of the premium finance business. An
adverse change in these laws or the adoption of new laws could have a material
adverse effect on the Company's business by limiting the interest and fee income
the Company can generate on existing and additional finance receivables,
limiting the states in which the Company may operate, or restricting the
Company's ability to realize the value of collateral securing its finance
receivables. Moreover, a reduction in existing statutory maximum interest rates
or the imposition of statutory maximum interest rates below those presently
charged by the Company in unregulated jurisdictions would directly impair the
Company's profitability. In addition, an adverse change in the maximum
permissible interest rates that may be charged to borrowers in markets into
which the Company may consider expanding could reduce the attractiveness of such
markets, thereby limiting the expansion opportunities of the Company. The
Company is not aware of any such material pending legislation in the markets it
currently serves or in the markets it has targeted for expansion. An adverse
change in, modification to, or clarification of any of these laws or
regulations, or judicial interpretations as to whether and in what manner such
laws or regulations apply to Automobile Sales Contracts and Direct Loans
purchased or originated by the Company, also could result in potential liability
related to Automobile Sales Contracts previously purchased and could have a
material adverse effect on the Company's financial condition and results of
operations. In addition, due to the consumer-oriented nature of the industry in
which the Company operates and uncertainties with respect to the application of
various laws and regulations in certain circumstances, industry participants
frequently are named as defendants in litigation involving alleged violations of
federal and state consumer lending or other similar laws and regulations. See
"Business -- Regulation."
GEOGRAPHIC CONCENTRATION. The Company's finance and insurance offices are
located primarily in South Carolina. The Company's profitability may be
disproportionately affected by the general economic conditions of and regulatory
changes in South Carolina. The Company believes, but no assurance is given that,
such geographic concentration will decrease in the future as result of its
growth strategy, which includes the possibility of further expansion into
adjacent southeastern states. See "Business -- Business and Growth Strategy."
RISKS OF PREMIUM FINANCE BUSINESS. The collateral for Premium Finance
Contracts is the unearned portion of the premium paid to the insurance carrier.
The smaller the percentage that the customer's down payment represents of the
total premium due, the greater the Company's risk of loss is if inefficiencies
in servicing the loan result in the Company's failure to cancel the insurance
policy and seek a return of the unearned portion of the premium in a timely
manner or the insurance company files for bankruptcy. To reduce its risk of
loss, the Company generally requires a down payment of between 20% and 50% of
the premium financed. To reduce the risk of loss from the insolvency of an
insurance company, the Company has adopted a policy of insuring premiums only on
personal lines of insurance obtained from insurance companies with a rating of
C+ or better from A.M. Best & Company, except for policies issued by insurance
companies participating in state-guaranteed reinsurance facilities. Neither the
independent insurance agents who sell insurance to individuals for whom the
Company finances premiums nor the insurance companies have any liability under
the Premium Finance Contract to the Company in the event of a payment default.
See "Business -- Premium Finance Business."
10
DEPENDENCE ON THE REVOLVING CREDIT FACILITY. The Company depends primarily
on borrowings under a revolving credit facility (the "Revolving Credit
Facility") extended by FINOVA Capital Corporation ("Finova") to finance
purchases of Automobile Sales Contracts, to fund the origination of Direct Loans
and Premium Finance Contracts, and to carry these receivables until they are
repaid and/or funded by the Company's other capital resources. The Company's
ability to obtain a successor facility or similar financing will depend upon,
among other things, the willingness of financial organizations to participate in
funding Non-prime Borrower credit organizations and the Company's financial
condition and results of operations. No assurance can be given that the Company
will continue to comply with the terms of such facilities or to extend the
commitment terms thereof. Although the Company believes that other financing
would be available, no assurance can be given that successor financing will be
available to the Company when needed and on similar terms. The Revolving Credit
Facility is a $100 million credit line which is used by the Company primarily to
purchase Automobile Sales Contracts and to originate Direct Loans and Premium
Finance Contracts. At December 31, 1997, borrowings of $46.7 million were
outstanding under the Revolving Credit Facility. The facility expires on August
31, 1999. See "Business -- Financing" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
CONTROL BY EXISTING SHAREHOLDER. James D. Thaxton, the Company's Chief
Executive Officer, President, and Chairman of the Board, beneficially owns
approximately 82% of the outstanding shares of Common Stock. As a result,
Mr. Thaxton is able to elect all of the Company's directors, amend the
Company's 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. See "Principal
and Management Shareholders."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS. As part of its growth
strategy, the Company may pursue acquisitions of independent consumer finance
companies, insurance agencies, or related companies. The Company does not
currently have any agreement, proposal, understanding, or arrangement regarding
any particular material acquisition. With respect to any future acquisitions, no
assurance is given that the Company will be able to locate or acquire suitable
acquisition candidates, or that any businesses which are acquired can be
effectively and profitably integrated into the Company. In order to provide
funds for any acquisitions, the Company will likely need to incur, from time to
time, additional indebtedness and to issue, in public or private transactions,
equity and debt securities. The availability and terms of any such financing
will depend on market and other conditions, and no assurance is given that such
additional financing will be available on terms acceptable to the Company, if at
all. See "Business --Business and Growth Strategy."
USE OF PROCEEDS
If all of the Securities offered hereby are sold, the net proceeds to the
Company are estimated to be approximately $49,850,000 (after payment of offering
expenses estimated at $150,000). The offering commenced on February 17, 1998,
the Company has sold Term Notes having an aggregate principle amount of $4.8
million, resulting in net proceeds of approximately $4.7 million (after payment
of expenses incurred date of approximately $100,000). However, there can be no
assurance that the Company will receive any particular additional amount of
proceeds from the offering of the Securities. In addition, the Company does not
expect that it will ever have as much as $49,850,000 in net proceeds available
at any one time due to, among other factors, the maturities of the Securities
and the time period over which the offering will be conducted. Any net proceeds
available to the Company from sales of the Securities during the offering will
be principally used to temporarily repay indebtedness outstanding under two
tranches of its Revolving Credit Facility.
The Revolving Credit Facility is a $100 million credit line which is used
by the Company primarily to purchase Automobile Sales Contracts, originate
Direct Loans and Premium Finance Contracts, and provide working capital for the
Company's other lines of business. The Revolving Credit Facility consists of six
tranches and has a maturity date of August 31, 1999. The primary tranche is used
to finance consumer receivables and provides for advances of up to $100 million,
less any amounts advanced under the secondary tranches. One of the secondary
tranches ("Tranche B") also is used to finance consumer receivables and allows
the Company to borrow up to $10 million against a higher percentage of Net
Finance Receivables than under the primary tranche. The Company borrows against
Tranche B only when it has exhausted available borrowings under the primary
tranche. The Revolving Credit facility also provides a $5 million tranche
dedicated to non-consumer receivables, a $25 million
11
tranche established to provide a mortgage loan warehouse facility, a $10 million
tranche which permits borrowings against insurance commissions, and a $7 million
tranche to finance future acquisitions. At December 31, 1997, $45.0 million was
outstanding under the primary tranche and $1.7 million was outstanding under
other tranches. The interest rate for borrowings is a defined prime rate
published by Citibank, N.A. (or other money center bank designated by the
lender) plus one percent per annum for the primary tranche, the non-consumer
receivable tranche, and the mortgage loan tranche, plus five percent per annum
for Tranche B and the acquisition tranche and plus two percent per annum for the
insurance commission tranche (9.50%, 13.50% and 10.5%, respectively, at December
31, 1997). The Company expects to continue using the Revolving Credit Facility
to fund the growth of its business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Business and Growth Strategy."
12
DESCRIPTION OF SECURITIES
GENERAL
The Securities will be issued under an Indenture, dated as of February 17,
1998 (the "Indenture") between the Company and The Bank of New York. The
Securities will be subordinated, unsecured obligations of the Company. The
material terms, provisions and covenants contained in the Securities and the
Indenture are described below.
The Securities will be subordinate in right of payment to Senior
Indebtedness of the Company, as described below under "Subordination." The
Indenture does not limit the incurrence of Senior Indebtedness or any other
debt, secured or unsecured, of the Company or any subsidiary, nor does it
contain any terms which would afford protection to holders of the Securities
(individually a "Holder" and collectively the "Holders") in the event of a
recapitalization, a change in control, a highly leveraged transaction or a
restructuring involving the Company.
The Securities will be obligations of the Company only. Because the
Company does business through subsidiary corporations, its rights and the rights
of its creditors, including the Holders of the Securities, to participate in the
distribution of the assets of any of the Company's subsidiaries upon
liquidation, dissolution or reorganization of a subsidiary will be subject to
the prior claims of the subsidiaries' creditors, except to the extent that the
Company may itself be a creditor with recognized claims against the subsidiary.
The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act") as in effect on the date of the
Indenture. The Securities are subject to all such terms, and holders of the
Securities are referred to the Indenture and the Trust Indenture Act for a
statement of them. The statements under this caption relating to the Indenture,
a copy of which is filed as an exhibit to the Registration Statement, and the
Securities are summaries and do not purport to be complete. Such summaries make
use of certain terms defined in the Indenture and are qualified in their
entirety by express reference to the Indenture.
TERMS OF SUBORDINATED TERM NOTES DUE ONE MONTH
Each one month Term Note will be issued in the minimum principal amount of
$100 and will mature one month after date of issuance unless redeemed or
extended as provided therein. Holders of one month Term Notes may adjust the
original principal amount, without extending the maturity, at any time by
increases or decreases resulting from additional purchases or partial
redemptions; provided, however, that partial redemptions may not reduce the
outstanding principal amount below $100. Upon presentation of a one month Term
Note certificate to the Company, the Company will, for the Holder's convenience,
record on the certificate any adjustments to the original principal amount, such
as additional purchases or partial redemptions.
The Company will determine, from time to time, the rate of interest
payable on one month Term Notes, which rate will be at least equal to the rate
established for the most recent auction average of United States Treasury Bills
with a maturity of 13 weeks, but no less than 2% per annum and no more than 12%
per annum. The rate of interest at the time of purchase will be the rate of
interest payable throughout the original term of the one month Term Note.
Interest will be payable at maturity.
Not later than 15 days prior to the maturity of a one month Term Note, the
Company will give the Holder notice by first-class mail of the maturity date.
Each one month Term Note will be automatically extended for successive one month
terms at the rate(s) of interest then in effect for one-month Term Notes unless,
prior to maturity, the Company receives notification of the holder's intention
to redeem the Term Note. Except for a possible change in the rate of interest,
all of the terms and conditions applicable to the one month Term Note when
issued will also apply during each period of extension.
13
TERMS OF SUBORDINATED TERM 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 as provided therein. The Company will determine, from
time to time, the rates of interest payable on the 6, 12, 36 or 60 month Term
Notes, which rate will be at least equal to the rate established for the most
recent auction average of United States Treasury Bills with a maturity of 52
weeks but no less than 2% and nor more than 12% per annum. The rate of interest
at the time of purchase of a particular 6, 12, 36 or 60 month Term Note will be
the rate payable throughout the term of such Term Note. Interest will be
payable, at the Holder's option, either monthly, quarterly or at maturity
(compounded quarterly).
No later than 30 days prior to maturity of a 6, 12, 36 or 60 month Term
Note, the Company will give the Holder notice by first-class mail of the
maturity date. Each 6, 12, 36 or 60 month Term Note will be automatically
extended for successive 6, 12, 36 or 60 month terms, respectively, at the rates
of interest then in effect for 6, 12, 36 or 60 month Term Notes unless, prior to
maturity, the Company receives notification of the Holder's intention to redeem
the Term Note at maturity. Except for a possible change in the rate of interest,
all of the terms and conditions applicable to such Term Notes when issued will
also apply during each period of extension.
The Company will have the right, at its option, to call any of the 6, 12,
36 or 60 month Term Notes for redemption before maturity, at any time. Interest
on 6, 12, 36 or 60 month Term Notes called for redemption will continue to
accrue until the date of redemption and no premium shall be paid thereon. The
Company will give the Holder of a 6, 12, 36 or 60 month Term Note not less than
30 days' prior written notice by first class mail of each redemption,
specifying, among other things, the principal amount of the Term Note to be
redeemed and the redemption date. The principal amount of the Term Note
specified in such notice, together with interest accrued and unpaid thereon to
the date of redemption, will become due and payable on such redemption date.
PROCEDURE FOR AUTOMATIC EXTENSIONS OF TERM NOTES
Not later than 15 days prior to the maturity of a Term Note, the Company
will provide the holder with an extension notice and a copy of the Company's
most recent quarterly report filed with the Commission and, if not previously
furnished to the holder, a copy of the Company's most recent annual report filed
with the Commission. The extension notice will advise the holder of the maturity
date of this Term Note, the principal amount due on maturity, the amount of
accrued interest to the maturity date and the applicable interest rate upon an
automatic extension of the Term Note. The extension notice will also inform the
holder that, upon request, the Company will promptly furnish the holder with a
copy of this Prospectus, as amended or supplemented. Unless prior to the
maturity of a Term Note the Company receives notification of the holder's
intention to redeem his Term Note, it will be automatically extended as
described above."
TERMS OF SUBORDINATED DAILY NOTES
Daily Notes will be issued in the minimum original principal amount of
$50. Holders of Daily Notes may adjust the original principal amount at any time
by increases or decreases resulting from additional purchases or partial
redemptions; provided, however, that partial redemptions may not reduce the
outstanding principal amount below $50. Upon presentation of a Daily Note
certificate to the Company, the Company will, for the Holder's convenience,
record on the certificate any adjustments to the original principal amount, such
as additional purchases or partial redemptions.
If the holder redeems in full the obligation represented by a Daily Note,
such Daily Note must be surrendered by the Holder to the Company and the
indebtedness evidenced thereby shall be fully discharged by payment to the
Holder of the outstanding principal amount thereof, together with any accrued
but unpaid interest, as reflected on the books of the Company. The Company
retains the right to require the Holder to give the Company no less than thirty
(30) days' prior written notice, by first class mail, of a redemption requested
by the Holder, which notice shall specify the principal amount of the Daily Note
to be redeemed and the redemption date.
14
The interest rate payable on the Daily Note will be determined by the
Company and may fluctuate on a monthly basis. Any adjustment to the interest
rate will be made by the Company on the first day of the month. The fluctuation
may reflect adjustments which are either increases or decreases in the rate of
interest payable. The interest rate, once adjusted, will be effective as of the
first day of each month and shall remain in effect until next adjusted by the
Company. The interest rate will be no less than 3% below nor more than 5% above
the rate established for the most recent auction average of United States
Treasury Bills with maturities of 13 weeks and in no event will the interest
rate be less than 2% per annum or more than 12% per annum. Interest will be
accrued daily and compounded quarterly. Holders of Daily Notes will be notified
by first-class mail of any monthly adjustments in the interest rate.
REDEMPTION OF SECURITIES AT OPTION OF HOLDER.
ONE MONTH TERM NOTES. The Holder of a one month Term Note will have the
right, at such Holder's option, to redeem the Note prior to maturity, in whole
or in part. Upon such early redemption, the holder will forfeit all accrued
interest on the principal amount redeemed unless the Company, in its sole
discretion, elects to waive all or a portion of the forfeited interest. In
addition, the Company retains the right to require the Holder of a one month
Term Note to give the Company up to 30 days' prior written notice, by first
class mail, of a redemption requested by the Holder, which notice shall specify
the principal amount of the Term Note to be redeemed and the redemption date.
SIX, 12, 36 OR 60 MONTH TERM NOTES. The Holder of a 6, 12, 36, or 60 month
Term Note will have the right, at such Holder's option, to redeem the Note prior
to maturity. The Holder, upon such redemption prior to maturity, will forfeit an
amount equal to the difference between the amount of interest actually accrued
on the 6, 12, 36 or 60 month Term Note since the date of issuance or most recent
extension and the amount of interest that would have accrued thereon had the
rate of interest been 3% less than the rate in effect at the date issuance or
most recent extension. When necessary, forfeited interest already paid to or for
the account of the Holder will be deducted from the amount redeemed. Holders of
6, 12, 36 or 60 month Term Notes will also have the right to make partial
redemptions prior to maturity, provided however, that a partial redemption may
not reduce the principal amount to less than $1,000. The interest rate penalty
for each redemption of a 6, 12, 36 or 60 month Term Note will be calculated only
upon the principal amount of the Term Note redeemed. 6, 12, 36 or 60 month Term
Notes may be redeemed before maturity without interest rate penalty 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. The Company
retains the right to require the Holder of a 6, 12, 36 or 60 month Term Note to
give the Company no less than 30 days' prior written notice, by first class
mail, of a redemption requested by the Holder, which notice shall specify the
principal amount of the Term Note to be redeemed and the redemption date.
DAILY NOTES. The Holder of a Daily Note will have the right, at such
Holder's option, to redeem the Daily Note at any time, in whole or in part,
without penalty. The Company retains the right, however, to require the Holder
of a Daily Note to give the Company up to 30 days' prior written notice, by
first class mail, of a redemption requested by the Holder, which notice shall
specify the principal amount of the Daily Note to be redeemed and the redemption
date.
POSSIBLE 30-DAY NOTICE REQUIREMENT FOR REDEMPTION BY HOLDERS. As noted
above, the Company, in its sole discretion, may at any time require holders of
any of the Securities to give the Company 30 days' prior written notice, by
first class mail, of a redemption request. If the Company elects to impose this
requirement, it expects to do so by informing holders of the Securities of the
requirement personally when they are present in the offices of the Company or
its affiliates where the Securities may be presented for redemption, by
appropriate signage in these offices and possibly by a letter mailed to holders
of the Securities. Interest will continue to accrue if the Company should impose
this notice requirement. See "Risk Factors -- Possible 30-Day Notice Requirement
for Redemption by Holders and Related Risks."
15
GENERAL PROVISIONS APPLICABLE TO ALL SECURITIES
OPTIONAL REDEMPTION BY COMPANY. The Company will have the right, at its
option, to call any of the Securities for redemption, in whole or in part, at
any time. Interest on the Securities called for redemption will continue to
accrue until the date of redemption and no premium shall be paid thereon. The
Company will give the Holder not less than thirty (30) days' prior written
notice by first class mail of each redemption, specifying, among other things,
the principal amount of the Security to be redeemed and the redemption date. The
principal amount of the Security specified in such notice, together with
interest accrued and unpaid thereon to the date of redemption, will become due
and payable on such redemption date.
SUBORDINATION. The indebtedness evidenced by the Securities is subordinate
to the prior payment when due of the principal of and interest on all Senior
Indebtedness. Upon maturity of any Senior Indebtedness, payment in full must be
made on such Senior Indebtedness before any payment is made on or in respect of
the Securities. 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 with respect to Senior Indebtedness pursuant to which
the holders thereof have accelerated the maturity thereof, no direct or indirect
payment may be made or agreed to be made by the Company on or in respect of the
Securities. Upon any distribution of assets of the Company in any dissolution,
winding up, liquidation or reorganization of the Company, payment of the
principal of and interest on the Securities will be subordinated, to the extent
and in the manner set forth in the Indenture, to the prior payment in full of
all Senior Indebtedness. The Indenture does not limit the Company's ability to
increase the amount of Senior Indebtedness or to incur any additional
indebtedness in the future that may affect the Company's ability to make
payments under the Securities. Except as described above, the obligation of the
Company to make payment of principal or interest on the Securities will not be
affected. The Holders of the Securities will be subrogated to the rights of the
holders of the Senior Indebtedness to the extent of payments made on Senior
Indebtedness out of the distributive share of the Securities. By reason of such
subordination, in the event of a distribution of assets of the Company upon
insolvency, certain general creditors of the Company may recover more, ratably,
than Holders of the Securities.
"Senior Indebtedness" means Indebtedness of the Company outstanding at any
time other than Indebtedness of the Company to a subsidiary for money borrowed
or advanced from any such subsidiary or Indebtedness which by its terms is not
superior in right of payment to the Securities. "Indebtedness" means the
principal of, and premium, if any, and interest on, (1) any debt of the Company
for borrowed money whether or not evidenced by a note, debenture, bond or
similar instrument (including indebtedness represented by a purchase money
obligation given in connection with the acquisition of any property or assets)
including securities; (2) any debt of others described in the preceding clause
(1) which the Company has guaranteed or for which it is otherwise liable; and
(3) any amendment, renewal, extension or refunding of any such debt. As of
December 31, 1997, the outstanding amount of Senior Indebtedness of the Company
was approximately $47.9 million.
DEFAULTS AND REMEDIES. The term "Event of Default" when used in connection
with the Securities generally means any one of the following: (i) failure of the
Company to pay interest when due, which failure continues for 30 days, or
failure to pay principal of any of the Securities when due (whether or not
prohibited by the subordination provisions); and (ii) certain events of
bankruptcy, insolvency or reorganization involving the Company or certain of its
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 (the term "default" for this purpose shall only mean the happening
of any Event of Default specified above, excluding grace periods), provided
that, except in the case of default in the payment of principal of or interest
on any of the Securities, the Trustee shall be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of the Holders.
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
Securities then outstanding, by notice in writing to the Company (and to the
Trustee if given by the holders), may declare the principal of and all accrued
interest on all the Securities of such series to be due and payable immediately.
Such declaration may be rescinded by Holders of a majority in
16
principal amount of such series of Securities if (1) the Company has paid or
deposited with the Trustee a sum sufficient to pay all overdue interest on such
series of Securities and principal of any Securities which have become due
otherwise than by such declaration of acceleration and (2) all existing Events
of Default have been cured or waived.
Defaults (except, unless theretofore cured, a default in payment of
principal of or interest on the Securities or a default with respect to a
provision which cannot be modified under the terms of the Indenture without the
consent of each Holder affected) may be waived by the Holders of a majority in
principal amount of a series of Securities (with respect to such series) upon
the conditions provided in the Indenture. The Indenture requires the Company to
file periodic reports with the Trustee as to the absence of defaults.
A director, officer, employee or shareholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. The Company may not
consolidate with, merge into, or transfer or lease substantially all of its
assets to, any other corporation other than a Subsidiary, unless the successor
corporation assumes all obligations of the Company under the Indenture and the
Securities and certain other conditions are met. Thereafter all such obligations
of the Company will terminate and the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer or
lease is made will succeed to all rights and powers of the Company under the
Indenture.
SECURITIES NON-NEGOTIABLE. The Securities are non-negotiable and no rights
of ownership may be transferred by mere endorsement and delivery of the
Securities to a purchaser. All transfers and assignments of Securities may be
made only at the offices of the Company, upon presentation of the Security and
recordation of such transfer or assignment in the books of the Company. The
Securities are not transferable to any person who is not a resident of a state
where the offering of the Securities has not been registered under applicable
state securities laws unless an exemption from such registration is available.
MODIFICATION OF THE INDENTURE. The Indenture contains provisions
permitting the Company and the Trustee, without the consent of any Holder, to
supplement or amend the Indenture under certain specified circumstances,
including to cure any ambiguity, to correct or supplement any other provision
thereof, to evidence the succession of a successor to the Company or the
Trustee, to add to the covenants of the Company for the benefit of the Holders
or additional Events of Default, to secure the Securities, or to add any other
provisions with respect to matters or questions arising thereunder which the
Company and the Trustee deem necessary or desirable and which do not adversely
affect the interests of the Holders. Otherwise, the rights and obligations of
the Company and the rights of the Holders may be modified by the Company and the
Trustee only with the consent of the Holders of a majority in principal amount
of each series of Securities then outstanding. No reduction in the principal of
or the interest rate on the Securities or in the percentage of Holders required
for modification of the Indenture and no extension of the maturity of any
Securities or in the time of payment of interest will be effective against any
Holder without his consent.
THE COMPANY AS PAYING AGENT. All principal and interest payments shall be
made to the Holders by the Company and notice thereof shall be provided by the
Company to the Trustee.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture will be discharged
and cancelled upon payment of all the Securities or upon deposit with the
Trustee, within not more than one year prior to the maturity of all the
Securities, of funds sufficient for such payment or redemption.
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.
17
The Holders of a majority in principal amount of all outstanding series of
Securities have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, provided that
such 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 Event
of Default should occur and be known to the Trustee (and not be cured), the
Trustee will be required to use the degree of care of a prudent man in the
conduct of his own affairs in the exercise of its power. Subject to such
provisions, 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.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data of the Company set forth below are qualified by
reference to, and should be read in conjunction with, the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The balance sheet at December 31, 1996 and 1997 and the income data for the
years then ended are derived from the consolidated financial statements of the
Company accountants by KPMG Peat Marwick LLP, independent auditors, which are
included elsewhere in this Prospectus. The financial statements for 1996 have
been restated to include the effects of the acquisition of Thaxton Insurance
using the "as if" pooling of interests method of accounting. As such, all
periods prior to the acquisition have been restated.
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1996 1997
--------------------------
INCOME STATEMENT DATA:
Interest and fee income............. $13,529 $15,893
Interest expense.................... 4,210 5,023
------- -------
Net interest income................. 9,319 10,870
Provision for credit losses......... 3,593 6,580
------- -------
Net interest income after
provision for credit losses.... 5,726 4,290
Insurance commissions, net.......... 5,893 5,470
Other income........................ 986 1,221
Operating expenses.................. 11,974 13,211
Income tax expense (benefit)........ 247 (724)
------- -------
Net income (loss)................... $ 384 $ (1,506)
======= ===========
Net income (loss) per common share.. $ 0.09 $ (0.39)
Common shares outstanding........... 3,932 3,796
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1996 1997
--------------------------
OPERATING DATA:
Average interest rate earned (1).... 30.92% 29.79%
Average interest rate paid ......... 10.21 9.80
Net interest spread ................ 20.71 19.99
Net interest margin (2)............. 22.14 21.34
Allowance for credit losses as a
percentage of Net Finance
Receivables (3)................... 4.35 8.82
Allowance for credit losses, dealer
reserves and discount on bulk
purchases as a percentage of
18
Net Finance Receivables (3)...... 7.81 10.71
Net charge-offs as a percentage
of average Net Finance
Receivables ..................... 5.06 7.47
- --------------------
(1) Average interest rate earned represents interest and fee income for the
period divided by average Net Finance Receivables during the period.
(2) Net interest margin represents net interest income for the period divided
by average Net Finance Receivables during the period.
(3) Net finance receivable balances are presented net of unearned finance
charges only.
19
AT YEAR ENDED DECEMBER 31,
1996 1997
-------------------------------
BALANCE SHEET DATA:
Finance receivables.............. $63,107 $67,558
Unearned income (1).............. (14,366) (14,087)
Allowance for credit
losses........................... (2,195) (4,809)
Finance receivables, net......... 46,546 48,662
Total assets..................... 56,681 60,965
Total liabilities................ 50,310 54,996
Shareholders' equity............. 6,371 5,969
- --------------------
(1) Includes unearned finance charges, dealer reserves on Automobile Sales
Contracts and discounts on bulk purchases. Dealer reserves and discounts
on bulk purchases totaled $1,787,000 and $1,028,575 at December 31, 1996
and 1997, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Credit Loss Experience."
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORICAL DEVELOPMENT AND GROWTH
Prior to 1991, the Company primarily was engaged in making and servicing
direct consumer and insurance premium finance loans to Non-prime Borrowers. In
1991, the Company made a strategic decision to begin diversifying its portfolio
by actively seeking to finance purchases of used automobiles by Non-prime
Borrowers. Management believed that the expertise it had developed in extending
and servicing installment credit to Non-prime Borrowers would enable it to
profitably finance used automobile purchases by borrowers having similar credit
profiles. The Company facilitated its entry into this segment of the consumer
credit industry by engaging additional senior and mid-level management personnel
with substantial used automobile lending experience. Since 1991, the Company has
evolved into a diversified consumer financial services company engaged in used
automobile lending through the purchase and servicing of Automobile Sales
Contracts, the origination and servicing of Direct Loans and Premium Finance
Contracts, selling insurance products on an agency basis and originating
residential mortgage loans.
The following table sets forth certain information with regard to growth
in the Company's finance receivable portfolio.
YEAR ENDED DECEMBER 31,
1996 1997
--------------------------
AUTOMOBILE SALES CONTRACTS
Total balance at period
end, net (1) $35,998,537 37,463,211
Average account balance
at period end 3,699 3,247
Interest income for the
period 8,361,396 9,900,934
Average interest rate earned 27.98% 25.59%
Number of accounts at
period end 9,733 11,537
DIRECT LOANS
Total balance at period
end, net (1) $9,896,100 12,302,995
Average account balance
at period end 1,324 1,719
Interest income for the
period 2,941,705 3,110,850
Average interest rate
earned 30.01% 28.08%
Number of accounts at
period end 7,475 7,159
PREMIUM FINANCE CONTRACTS
Total balance at period
end, net (1) $2,846,451 3,860,936
Average account balance
at period end 287 319
Interest income for the
period 737,895 573,005
Average interest rate
earned 17.52% 17.04%
Number of Accounts at
Period end 9,931 12,108
------------------
(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts
on bulk purchases.
21
Management believes the best opportunities for continued growth in the
Company's Automobile Sales Contract and Direct Loan portfolios lie in the
opening of new finance offices in small to medium-sized markets in the states
where the Company presently operates and contiguous states that management
believes to be under served by its competitors. The Company opened two new
finance offices in 1996 and five in 1997. The Company estimates that the capital
expenditure necessary for opening each new finance office is approximately
$21,000. While there are certain risks associated with such expansion,
management believes that its ability to identify and retain finance office
management personnel having established relationships with local independent
dealers, its expertise in extending and servicing credit to Non-prime Borrowers,
and other factors will enable it to manage anticipated growth in its finance
office network and in its Automobile Sales Contract and Direct Loan portfolios.
The Company will seek to expand its Premium Finance Contract portfolio by
establishing and broadening relationships with insurance agencies having a
client base in need of premium financing. The Company also periodically may make
bulk purchases of Automobile Sales Contracts and Premium Finance Contracts if
such purchases are deemed beneficial to the Company's competitive position and
portfolio mix and will seek opportunities to expand its network of insurance
offices primarily through the acquisition of independent insurance agencies.
RECENT EXPANSION ACTIVITIES
During 1997, the Company opened finance offices in Anderson and Florence,
South Carolina; Cumming and Columbus, Georgia; and Christiansburg, Virginia.
These offices will be devoted almost exclusively to the purchase and servicing
of Automobile Sales Contracts, and Thaxton Insurance acquired independent
agencies in York, South Carolina and Winston-Salem, North Carolina.
NET INTEREST MARGIN
The following table sets forth certain data relating to the Company's net
interest margin.
FOR THE
YEAR ENDED DECEMBER 31,
1996 1997
----------- ------------
Average Net Finance
Receivables (1) $43,717,445 $53,058,041
Average notes payable (1) 37,611,963 45,739,084
Interest and fee income (2) 13,518,563 15,808,386
Interest expense (3) 3,841,683 4,484,600
----------- ------------
Net interest income $ 9,676,880 $11,323,786
=========== ===========
Average interest rate earned
(1) 30.92% 29.79%
Average interest rate paid (1) 10.21 9.80
----- ------
Net interest rate spread 20.71% 19.99%
===== ======
Net interest margin (4) 22.14% 21.34%
===== ======
- ------------
(1) Averages are computed using month-end balances during the periods presented
and are annualized for periods of less than one year.
(2) Excludes interest and fee income earned by Thaxton Insurance.
(3) Excludes interest expense paid on Thaxton Insurance related debt.
(4) Net interest margin represents net interest income divided by average Net
Finance Receivables.
22
The principal component of the Company's profitability is its net interest
spread, the difference between interest earned on finance receivables and
interest expense paid on borrowed funds. Statutes in some states regulate the
interest rates that the Company may charge its borrowers while interest rates in
other states are unregulated and consequently are established by competitive
market conditions. There are significant differences in the interest rates
earned on the various components of the Company's finance receivable portfolio.
The interest rates earned on Automobile Sales Contracts generally are lower than
the interest rates earned on Direct 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 the Company's interest income, its interest expenses are sensitive
to general market fluctuations in interest rates. The interest rates paid to the
Company's primary lender are based upon a published prime rate plus set
percentages. Thus, general market fluctuations in interest rates directly impact
the Company's cost of funds. The Company intends to explore opportunities to fix
or cap the interest rates paid on all or a portion of its borrowings; however,
there can be no assurance that fixed rate financing or suitable interest-rate
hedge facilities will be available on terms acceptable to the Company. The
Company's general inability to increase the interest rates earned on finance
receivables may impair its 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 the Company's interest rate spread and
lower its profitability while decreases in market interest rates generally will
widen the Company's interest rates spreads and increase profitability.
The decline in net interest rate spreads from 1995 to 1997 was
attributable primarily to the increased level of Automobile Sales Contracts in
the Company's finance receivable portfolio. The Company expects Automobile Sales
Contracts to be a principal component of future growth in its finance receivable
portfolio. If this growth in Automobile Sales Contracts occurs, the Company
expects that its net interest spread will continue to narrow. See "Liquidity and
Capital Resources."
RESULTS OF OPERATIONS
COMPARISON OF 1997 TO 1996. Finance receivables at December 31, 1997 were
$67,558,269 versus $63,106,601 at December 31, 1996, a 7% increase. The Company
opened two branch offices in 1996 and five in 1997 devoted primarily to the
purchase and servicing of Automobile Sales Contracts, which generated an
increased volume of such contracts during 1997.
Unearned income at December 31, 1997 was $13,058,066 versus $12,578,514 at
December 31 , 1996, a 4% increase which was directly related to the higher
volume of finance receivable originations during 1997. The provision for credit
losses established for the twelve months ended December 31, 1997 was $6,579,932
versus $3,593,399 for 1996, and the allowance for credit losses increased from
$2,195,000 at December 31, 1996 to $4,809,400 at December 31, 1997. The
allowance for credit losses as a percentage of Net Finance Receivables increased
from 4.4% at December 31, 1996 to 8.8% at December 31, 1997. The allowance for
credit losses required by the Company's reserve methodology increased
significantly from the end of 1996 to the end of 1997 due to a high charge-off
experience during the third and fourth quarters of 1997, which indicated a
higher level of potential losses in the portfolio, as well as the additional
allowance for loss required on the higher level of finance receivables
outstanding. See "Recent Material Adverse Trend in Credit Loss Experience."
The growth in finance receivables during the twelve months ended December
31, 1997 versus the comparable period in 1996 resulted in higher levels of
interest and fee income. Interest and fee income for the twelve months ended
December 31, 1997 was $15,892,683, compared to $13,528,881 for the twelve months
ended December 31, 1996, a 17% increase. Interest expense also was higher,
increasing to $5,023,179 for the twelve months ended December 31, 1997 versus
$4,209,763 for the comparable period of 1996, a 19% increase. The increase in
interest expense was due to the higher levels of borrowings required to fund
finance receivable originations and the working capital requirements of the
Company.
23
Net interest income for the twelve months ended December 31, 1997
increased to $10,869,504 from $9,319,118 for the comparable period of 1996, a
17% increase. The increase in net interest income was attributable to the higher
level of finance receivables.
Insurance commissions net of insurance cost decreased to $5,469,667 for
the twelve months ended December 31, 1997 from $5,893,606 for the comparable
period of 1996, due to reduced sales of insurance products to borrowers. Other
income increased from $985,763 for the twelve months ended December 31, 1996 to
$1,221,525 for the comparable period of 1997 due primarily to increased profit
sharing payments to the Company from various insurance carriers.
Total operating expenses increased from $11,974,280 for the twelve months
ended December 31, 1996 to $13,210,791 for the comparable period of 1997, a 10%
increase. The increase in expenses was due to opening new finance offices in
addition to a general increase in costs associated with administering a larger
finance receivable portfolio.
The Company generated a net loss for the twelve months ended December 31,
1997 of $1,506,333 as compared to net income of $384,184 for the comparable
period of 1996. The decrease in net income was due primarily to the
substantially increased provision for credit losses.
Stockholders' equity decreased from $6,371,305 at December 31, 1996 to
$5,969,317 at December 31, 1997 as a result of the Company's net loss from
operations during the period, partially offset by additional equity raised by
the Company. In December, the Company completed a public offering of its Series
A Preferred Stock. The offering, made to the Company's common stockholders,
allowed each common stockholder to exchange one share of common stock for one
share of preferred stock, subject to the requirement that for each share
exchanged, one additional share of preferred must be purchased for $10 in cash.
The offering resulted in the exchange of 89,007 shares of common stock for an
equal number of shares of preferred stock, and the sale of an additional 89,007
shares of preferred stock at $10 per share. After expenses, net proceeds to the
Company were $718,067. Also in December, an individual investor converted 27,076
shares of common stock into an equal number of shares of the Company's Series B
Preferred Stock, and an insurance company from which the Company had borrowed
$500,000 converted that note into a 50,000 shares of the Company's Series C
Preferred Stock.
CREDIT LOSS EXPERIENCE
Provisions for credit losses are charged to income in amounts sufficient
to maintain the allowance for credit losses at a level considered adequate to
cover the expected future losses of principal and interest in the existing
finance receivable portfolio. 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. The Company's 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 used by the Company 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 stratifies
losses by originating office and by type, and develops historical loss factors
which are applied to the current portfolio. In addition, changes in dealer and
bulk purchase reserves are analyzed for each individual dealer and bulk
purchase, and additional reserves are established for any dealer or bulk
purchase if coverage has declined below adequate levels. The Company's
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 the Company's dealer reserve arrangements, when a dealer assigns an
Automobile Sales Contract to the Company, the Company withholds a certain
percentage of the principal amount of the contract, usually between five and ten
percent (the "Discount Percentage"). The amounts withheld from a particular
dealer are recorded in a subsidiary ledger account (the "Specific Reserve
Account"). Any losses incurred on Automobile Sales Contracts
24
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 Discount Percentage to the total amount of
principal and interest due under all outstanding Automobile Sales Contracts
purchased from such dealer (the "Excess Dealer Reserve"), the dealer is entitled
to receive distributions from the Specific Reserve Account in an amount equal to
the Excess Dealer Reserve. If the Company is continuing to purchase Automobile
Sales Contracts from a dealer, distributions of Excess Dealer Reserves generally
are paid quarterly. If the Company is not continuing to purchase Automobile
Sales Contracts from a dealer, distributions of Excess Dealer Reserves are not
paid out until all 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. The Company's allowance for credit losses is
charged only to the extent that the loss on an Automobile Sales Contract exceeds
the originating dealer's Specific Reserve Account at the time of the loss.
The Company periodically purchases Automobile Sales Contracts in bulk. In
a bulk purchase arrangement, the Company typically purchases a portfolio of
Automobile Sales Contracts from a dealer at a discount to par upon a review and
assessment of the portfolio by the Company's management. 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.
RECENT MATERIAL ADVERSE TREND IN CREDIT LOSS EXPERIENCE
The Company's charge-offs as a percentage of average Net Finance
Receivables increased from 5.06% for the year ended December 31, 1996, to 7.47%
for the year ended December 31, 1997. This increase was attributed to a general
deterioration in loan performance experienced by the Company during the latter
part of 1996 and continuing into 1997. Management believes that its charge-off
experience was comparable to that experienced by other lenders in the non-prime
sector. In response to this increased loss experience, the Company made several
operational changes in the second half of 1997 which, over the long-term, are
expected to reduce the Company's charge-offs. These changes included tightening
its branch credit guidelines, reducing purchases of Automobile Sales Contracts
from certain dealers for which loss experience had been unsatisfactory,
splitting several offices to obtain improved collection by locating collection
personnel in closer geographic proximity to borrowers, and reorganizing the
Company's regional structure to place more experienced supervisory personnel in
charge of certain offices with higher than average credit loss experience.
Management believes these changes have resulted in fewer charge-offs than would
have been experienced without the changes. Additionally, in the fourth quarter
of 1997 the Company tightened its credit policies further by, among other
things, increasing qualifying ratios for credit approval of borrowers and
increasing required down payments on Automobile Sales Contracts financed by the
Company. These policy changes have resulted in slower growth of the Company's
Automobile Sales Contract portfolio, as the current credit market for Non-Prime
Borrowers is highly competitive. Management believes that over time these
changes will reduce charge-offs to acceptable levels.
The following table sets forth certain information respecting the
Company's allowance for credit losses and credit loss experience at or over the
periods presented.
AT OF FOR THE YEARS ENDED DECEMBER 31,
1996 1997
------------------------------
Net Finance Receivables (1) $ 50,447,410 $ 54,500,203
Allowance for credit losses 2,195,000 4,809,400
Allowance for credit losses as
a percentage of Net Finance
Receivables (1) 4.35% 8.82%
Dealer reserves and discounts
on bulk purchases $1,787,000 $1,028,575
Dealer reserves and discounts
on bulk
Purchases as a percentage of
Automobile
Sales Contracts 4.64% 2.67%
25
AT OF FOR THE YEARS ENDED DECEMBER 31,
1996 1997
------------------------------
Allowance for credit losses
and dealer reserves and
discount on bulk purchases $ 3,942,000 $ 5,837,975
Allowance for credit losses
and dealer reserves and
discount on bulk purchases
as a percentage of Net
Finance Receivables 7.81% 10.71%
Provision for credit losses $ 3,593,399 $ 6,579,932
Charge-offs (net of recoveries) 2,210,441 3,965,532
Charge-offs (net of
recoveries) as a percentage
of average net finance
receivables 5.06% 7.47%
- -----------------
(1) Net finance receivable balances are presented net of unearned finance
charges only.
The following table sets forth certain information concerning Automobile
Sales Contracts and Direct Loans at the end of the periods indicated:
AT DECEMBER 31,
------------------------------
1996 1997
------------------------------
Automobile Sales Contracts and Direct
Loans contractually past due 90
days or more (1) $ 380,569 $ 551,363
Automobile Sales Contracts and Direct
Loans (1) 45,894,637 49,766,206
Automobile Sales Contracts and Direct
Loans contractually past due 90 days or
more as a percentage of Automobile Sales
Contracts and Direct Loans 0.83% 1.11%
- -----------------
(1)Finance receivable balances are presented net of unearned finance charges,
dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases.
The following table sets forth certain information concerning Premium
Finance Contracts at the end of the periods indicated:
AT DECEMBER 31,
------------------------------
1996 1997
------------------------------
Premium finance contracts
contractually past due 60 days or
more (1) $ 100,633 $ 89,331
Premium finance contracts
outstanding (1) 2,846,451 3,860,936
Premium finance contracts
contractually past due 60 days or
more as a percentage of premium
finance contracts 3.5% 2.3%
- ----------------------------
(1) Finance receivable balances are presented net of unearned finance charges.
The Company also incurs various expenses related to the collection of delinquent
accounts. These expenses consist of miscellaneous expenses paid to third parties
for activities related to collection on delinquent accounts and repossession of
collateral. The following table sets forth certain information concerning
collection expenses for the periods indicated.
26
FOR THE YEARS ENDED DECEMBER 31,
1996 1997
------------------------------
Collection expenses $ 63,797 $ 94,462
Collection expenses as a
percentage of average Net
Finance Receivables 0.15% 0.18%
LIQUIDITY AND CAPITAL RESOURCES
The Company generally finances its operations and new offices through cash
flow from operations and borrowings under the Revolving Credit Facility. The
Revolving Credit Facility, which provides for borrowings of up to $100 million,
is extended by Finova Captial Corporation and matures on August 31, 1999. The
facility consists of six tranches. The primary tranche is used to finance
consumer receivables and provides for advances of up to $100 million, less any
amounts advanced under the secondary tranches. Tranche B, one of the secondary
tranches, is also used to finance consumer receivables and allows the Company to
borrow up to $10 million against a higher percentage of Net Finance Receivables
than under the primary tranche. The Company borrows against Tranche B only when
it has exhausted available borrowings under the primary tranche. The Revolving
Credit facility also provides a $5 million tranche dedicated to nonconsumer
receivables, a $25 million tranche established to provide a mortgage loan
warehouse facility, a $10 million tranche which permits borrowings against
insurance commissions generated by Thaxton Insurance, and a $7 million tranche
to finance future acquisitions. As of December 31, 1997, $46.7 million was
outstanding under the Revolving Credit Facility, $45.0 million of which had been
advanced under the primary tranche and $1.7 million of which had been advanced
under secondary tranches. At December 31, 1997, there were no advances under
Tranche B. Under the terms of the Revolving Credit Facility, the Company's Net
Finance Receivables at December 31, 1997 would have allowed it to borrow an
additional $4.4 million against existing collateral, with $53.3 million of total
potential capacity available for borrowing against qualified finance receivables
generated by the Company in future periods. The interest rate for borrowings is
the prime rate published by Citibank, N.A. (or other money center bank
designated by Finova) plus one percent per annum for the primary tranche, the
nonconsumer receivable tranche, and the mortgage loan tranche, plus five percent
per annum for Tranche B and the acquisition tranche and plus two percent per
annum for the insurance commission tranche. The interest rate is adjusted
monthly to reflect fluctuations in the designated prime rate. Accrued interest
on borrowings is payable monthly. Principal is due in full on the maturity date
and can be prepaid without penalty. The Revolving Credit Facility is secured by
substantially all of the Company's assets and requires the Company to comply
with certain restrictive covenants, including covenants to maintain a certain
debt to equity ratio, tangible net worth, annual net income within prescribed
limits, and a covenant to limit annual distributions to common shareholders to
25% of net income.
In 1997, the Company began issuing subordinated term notes to individual
investors in an intrastate public offering registered with the State of South
Carolina. The registration of a similar offering was declared effective by the
U. S. Securities and Exchange Commission in March 1998, which will enable the
Company to offer notes in additional states. Maturity terms on these notes range
from daily to sixty months, and interest rates vary in accordance with market
rates. Notes currently being offered carry interest rates ranging from 6.25% to
9.5%. Approximately $3.5 million in notes were outstanding as of December 31,
1997. Proceeds from the issuance of these notes generally are used to repay
borrowings under the Revolving Credit Facility.
Cash flows from financing activities during the years ended December 31,
1996 and 1997 were as follows:
27
DECEMBER 31,
1996 1997
---------- -----------
Revolving Credit Facility $ 7,983,666 $ 4,079,053
Other notes payable 1,466,185 1,303,226
Dividends paid on preferred
stock (25,500) ---
Repurchase of Common Stock (76,560) (137,983)
Proceeds from issuance of
Preferred Stock --- 718,067
Common Stock --- ---
---------- -----------
Total $9,347,791 $5,962,363
========== ===========
Management believes that the borrowings available under the Revolving Credit
Facility, in addition to cash expected to be generated from operations and the
sale of the Securities pursuant to this Prospectus, will provide the resources
necessary to fund the Company's liquidity and capital needs through 1999. See
"Use of Proceeds."
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although management does not believe that inflation has a direct material
adverse effect on the Company's financial condition or results of operations,
increases in the inflation rate generally are associated with increased interest
rates. Because the Company borrows funds on a floating rate basis and generally
extends credit at the maximum interest rates permitted by law or market
conditions, increased interest rates would increase the Company's cost of funds
and could materially impair the Company's profitability. Inflation also can
affect the Company's operating expenses. The Company's business could be
affected by other general economic conditions in the United States, including
economic factors affecting the ability of its customers or prospective customers
to purchase used automobiles and to obtain and repay loans.
28
IMPACT OF YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as it moves into the next century. If computer systems misinterpret the
date, items such as interest calculations on loans will be incorrect. This is
commonly called the "Year 2000 Problem." A number of computer systems used by
the Company in its day to day operations may be affected by this problem.
Management has established a project team which has identified affected systems
and is currently working to ensure that this event will not disrupt operations.
This project team reports regularly to senior management. The Company is also
working closely with outside computer vendors to ensure that all software
corrections and warranty commitments are obtained. The estimated cost to the
Company for these corrective actions, and the related hardware required to run
the upgraded software is estimated at approximately $1 million, the cost for
which is included in the Company's capital and operating budgets for 1998 and
1999. However, it should be noted that incomplete or untimely compliance would
have a material adverse impact on the Company, the dollar amount of which cannot
be accurately quantified at this time because of the inherent variables and
uncertainties involved.
ACCOUNTING MATTERS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" in June, 1997. The purpose of SFAS 130 is to address concerns over the
practice of reporting elements of comprehensive income directly in equity.
Number SFAS requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. This statement is effective for periods beginning after
December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. The Company will adopt
the provisions of this SFAS for fiscal year 1998.
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in June, 1997. This statement applies to all
public entities. The provisions of SFAS No.131 require certain disclosures
regarding material industry segments within an entity. The statement is
effective for periods beginning after December 15, 1997. The adoption of this
standard is not expected to have a material effect on the Company's financial
reporting.
29
BUSINESS
GENERAL
The Company was organized in July 1978 as C. L. Thaxton & Sons, Inc., and
from that date until 1991 was primarily engaged in making and servicing direct
consumer and insurance premium finance loans to Non-Prime Borrowers. In 1991,
the Company made a strategic decision to begin diversifying its portfolio by
actively seeking to finance purchases of used automobiles by Non-Prime Borrowers
and has since evolved into a diversified consumer financial services company. In
October 1996, the Company acquired Thaxton Insurance and began selling, on an
agency basis, various lines of property and casualty, life, and accident and
health insurance. The Company also entered the mortgage brokerage business
during 1996.
THE INDUSTRY
The segment of the consumer finance industry in which the Company
operates, which is commonly called the "non-prime credit market," provides
financing to consumers with limited credit histories, low incomes, or past
credit problems. These consumers generally do not have access to the same
variety of 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 imposed by most traditional lenders. The Company,
like its competitors in the same segment of the consumer finance industry,
generally charges interest to Non-prime Borrowers at the maximum rate permitted
by law or, in states such as South Carolina where there are no legal maximum
rates, at competitive rates commensurate with the increased default risk and the
higher cost of servicing and administering a portfolio of loans to such
borrowers. By contrast, commercial banks, captive financing subsidiaries of
automobile manufacturers, and other traditional sources of consumer credit to
prime borrowers typically impose more stringent credit requirements and
generally charge lower interest rates.
The non-prime consumer credit market is highly fragmented, consisting of
many national, regional, and local competitors, is characterized by relative
ease of entry and, in the case of used automobile financing, by the recent
arrival of a number of well capitalized publicly-held companies. The Company
believes that most of these companies are concentrating their activities on
providing financing to Non-prime Borrowers with less extensive credit problems
who are purchasing late model used cars (coming off lease or former rental cars)
from franchised automobile dealers. By contrast, the Company concentrates on
providing financing to Non-prime Borrowers who have more extensive credit
problems and are purchasing lower-priced, older model automobiles from
independent dealers and making Direct Loans to Non-prime Borrowers to meet
short-term cash needs.
The premium finance industry for personal lines of insurance is also
highly fragmented. Insurance companies that engage in direct writing of
insurance policies generally provide financing to their customers who need the
service. Numerous small independent finance companies such as the Company are
engaged in providing premium financing for personal lines of insurance purchased
by Non-prime 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 use of independent agencies to be
a more cost effective method of selling their products than using a direct agent
force. Competition in the independent insurance agency business is intense.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and
30
maintain long-term customer relationships through low employee turnover and
responsive service representatives and offers a broad range of insurance
products underwritten by reputable insurance companies.
BUSINESS AND GROWTH STRATEGY
In order to expand its business and improve operating results, the Company
intends to continue to pursue a business strategy based on its (i) in-depth
understanding of the consumer finance business, (ii) ability to evaluate credit
risks associated with the non-prime credit market, (iii) substantial experience
with automobile dealers' financing requirements for Non-prime Borrowers, (iv)
efficient and effective servicing and collection of its finance receivables, and
(v) diversification into additional financial services activities. The principal
components of the Company's business and growth strategy include:
o COMMITMENT TO DIVERSIFICATION -- Unlike many of its competitors who
specialize in used automobile finance, the Company is a diversified consumer
financial services company and intends to continue to diversify. Although
management anticipates that some of the Company's growth over the next 12 to
18 months will be in its portfolio of Automobile Sales Contracts, Direct
Loan, Premium Finance Contract origination, and the origination of
residential mortgage loans will be emphasized as well. Moreover, management
believes the acquisition of Thaxton Insurance in October 1996 will provide
significant opportunities to cross-sell the Company's various financial
products and services. The Company operates finance offices in a number of
markets where Thaxton Insurance operates, and in many cases the profile of a
Thaxton Insurance customer is similar to that of a Non-prime Borrower. An
incentive program designed to reward employees who successfully pursue
cross-selling opportunities was implemented during the fourth quarter of
1996. The Company is actively seeking to enter other financial services
businesses.
o EXPERIENCED MANAGEMENT -- The management team in the Company's lending
operations, including its regional supervisors and office managers, possesses
extensive experience in consumer finance, most of which has involved lending
to Non-prime Borrowers. The Company believes that the retention of this
experienced management team is critical to the Company's ability to maintain
credit quality, supervise its operations, and further expand its network of
finance offices. The management team for the Company's insurance agency
activities also has extensive experience in insurance agency operations.
o EXPANSION OF THE COMPANY'S OFFICE NETWORK -- The Company currently has a
total of 25 finance offices located in Georgia, North Carolina, South
Carolina, Tennessee, and Virginia. The Company currently plans to open at
least one additional finance offices in the second half 1998, either in the
states where the Company currently operates or in adjacent southeastern
states where the Company believes that its business strategy is likely to be
successful. In deciding where to open additional finance offices, the Company
intends to concentrate on smaller urban areas where the Company is able to
hire experienced personnel who not only have substantial experience in the
consumer finance industry but are also familiar with local market conditions
and have existing relationships with local dealers. When management deems it
to be advantageous to do so, the Company may choose to expand its finance
office network through the acquisition of other independent finance
companies. The Company will also seek opportunities to expand its insurance
office network through acquisition of additional independent insurance
agencies in markets management believes are attractive.
o INCENTIVE COMPENSATION FOR FINANCE OFFICE MANAGEMENT -- The Company rewards
its finance office managers for business development by providing, in
addition to a base salary, incentive compensation arrangements that are tied
to the productivity of their respective offices. To ensure credit quality is
maintained, however, finance office managers must keep their delinquent
accounts within certain parameters and maintain a certain return on
receivables before they are eligible to receive the incentive compensation.
o STRONG INDEPENDENT DEALER RELATIONSHIPS -- The Company emphasizes service by
providing independent dealers from whom it purchases Automobile Sales
Contracts with a timely, reliable, and consistent source of financing for
purchases of used automobiles by Non-prime Borrowers. In hiring managers for
existing and new finance
31
offices, the Company seeks to identify and recruit individuals with existing
relationships with dealers in targeted areas.
32
o SUPERVISION AND MONITORING OF FINANCE OFFICES -- The Company's senior
management has established policies based on many years of experience in the
non-prime credit market for close monitoring and supervision of all aspects
of finance office operations, which serves as a counterbalance to the
Company's otherwise decentralized operations. Each of the Company's regional
supervisors conduct unannounced visits to each finance office within their
region twice annually to conduct an extensive review of its operations and
all finance receivables recently originated. The supervisors' findings and
recommendations are reported to senior management, and the supervisors are
responsible for monitoring future compliance by finance office managers with
their recommendations.
o MANAGEMENT INFORMATION SYSTEMS -- The management information systems used by
the Company provide management with daily reports that contain critical
operational information from each finance office. This information includes
the daily volume of Automobile Sales Contracts purchased and Direct Loans
made and repossession activities. The Company's premium finance business also
is highly automated, using a separate management information system, and the
insurance agency operations utilize one of the most widely used agency
management systems available.
o NEW BUSINESS INITIATIVES - During the latter part of 1996, the Company
entered into several new business activities. The Company began selling, on
an agency basis, property and casualty, life, and accident and health
insurance, and conducts this business through a network of 20 insurance
offices located in North Carolina and South Carolina. The Company presently
is developing strategies to increase the volume of premiums generated by
these offices as well as improving the profitability of its insurance agency
operations. In addition, the Company began a mortgage brokerage operation
during the fourth quarter of 1996. All of the Company's insurance offices are
being utilized to take mortgage applications from both prime and non-prime
borrowers , which are reviewed for compliance with the underwriting standards
of correspondent lenders at a central location. Presently, all mortgage loans
are being funded by correspondent lenders, which take ownership of the loan
immediately upon closing. The Company takes no interest rate risk, and has no
liability to the correspondent lenders in the event of a monetary default by
the borrower. The Company receives a fee for originating the mortgage.
AUTOMOBILE SALES CONTRACT PURCHASES
Set forth below is a description of the process that the Company follows
in connection with its purchase of an Automobile Sales Contract from an
independent dealer and the sale of ancillary insurance products.
DEALER SOLICITATION. The Company solicits business from independent
dealers through the business development efforts of the manager of each finance
office and regional supervisors. Dealers in the area are evaluated by the office
manager with a view to ensuring that the Company purchases Automobile Sales
Contracts from reputable dealers carrying an inventory of quality used
automobiles. A relationship with a dealer begins only after the soundness of the
dealer's business is determined by a credit investigation of the dealer,
inquiries with state regulatory agencies and inquiries of local civic and
community organizations. The Company seeks to form relationships with dealers
that have been independently operating for a sufficient period of time to have
established a base of repeat customers with a track record of paying their
obligations under Automobile Sales Contracts despite an otherwise non-prime
credit history. The Company tracks the monthly performance of borrowers'
accounts by dealer, allowing the Company to review and evaluate the quality of
the Automobile Sales Contracts purchased from each dealer. This procedure allows
the Company to terminate business dealings with a dealer quickly if the
Automobile Sales Contracts purchased from that dealer have a higher than average
rate of delinquency.
DEALER AGREEMENTS. The Company enters into a non-exclusive agreement with
each dealer (a "Dealer Agreement") which sets forth the terms and conditions
under which the Company will purchase Automobile Sales Contracts. The Dealer
Agreement provides that all Automobile Sales Contracts sold to the Company are
without recourse to the dealer with respect to the credit risk of the borrower,
except for Automobile Sales Contracts for vehicles sold to relatives or
employees of the dealer. A Dealer Agreement includes representations and
warranties of the dealer that relate generally to such matters as whether the
dealer has (i) filed an application for a certificate of
33
title showing a first lien in favor of the Company, (ii) obtained the full down
payment specified in the Automobile Sales Contract either in cash or in the form
of cash and an allowance for a vehicle trade-in and (iii) complied with
applicable state and federal consumer credit protection laws relating to
Automobile Sales Contracts. If the dealer breaches the terms of the Dealer
Agreement with respect to any Automobile Sales Contract purchased by the Company
or if the dealer's customer withholds payment as required under any Automobile
Sales Contract because of a claim, defense, counterclaim, or setoff against the
dealer, the dealer is obligated to repurchase the Automobile Sales Contract on
demand by the Company for its net unpaid balance. If the purchaser of the
automobile recovers any amount from the Company as a result of a claim against
the dealer, the Dealer Agreement provides that the dealer will reimburse the
Company for any amounts paid the customer and for any costs incurred as a result
of such claim.
The Dealer Agreement allows the Company to withhold a specified percentage
of the principal amount of each Automobile Sales Contract purchased, an
arrangement designed to protect the Company from credit losses on Automobile
Sales Contracts. These dealer reserves, which range from five to 10% of the net
amount of each Automobile Sales Contract purchased, are negotiated on a
dealer-by-dealer basis and are subject to change based upon the collection
history of the Automobile Sales Contracts purchased from each dealer. See
"Management's Discussion and Analysis -- Credit Loss Experience."
ORIGINATION OF AUTOMOBILE SALES CONTRACTS. Automobile Sales Contracts
purchased by the Company are originated by dealers when they sell a used car at
retail to a customer. The dealer completes and the customer signs a retail
installment contract and security agreement (giving the dealer a security
interest in the vehicle financed) on a printed form provided by the Company,
which includes the extensive disclosures required by state and federal law
regarding such matters as the annual percentage rate, the finance charge, the
amount financed, the total amount of all scheduled payments, and the total sale
price. The contract also includes a section where the customer may indicate
whether he or she desires to purchase credit life and credit accident and health
insurance, the premiums for which are included in the amount financed if the
customer elects to purchase credit insurance. The printed form identifies the
Company as the intended assignee of the contract and the terms and conditions of
the assignment to the Company are printed on the back of the form. The form
specifically provides that the terms of the assignment are subject to the terms
of the Dealer Agreement between the Company and the dealer.
The maximum interest rates on Automobile Sales Contracts originated in
South Carolina are based upon the maximum rate filed by the originating dealer
with state regulatory authorities. Such rates are not subject to a statutory
maximum. The maximum interest rates on Automobile Sales Contracts originated in
North Carolina are subject to a statutory maximum based on the model year of the
vehicle. Rates on used automobile purchases range from 18% per annum on vehicles
one or two model years old to 29% per annum on vehicles more than four model
years old. Interest rates on Automobile Sales Contracts originated in Virginia,
Georgia, and Tennessee are not subject to regulation. The actual interest rate
on an Automobile Sales Contract is set within statutory limits, if applicable,
based upon the credit profile of the borrower, the make, model and condition of
the collateral and market conditions.
CREDIT EVALUATION AND APPROVAL PROCEDURES. The Company applies
underwriting standards in purchasing Automobile Sales Contracts that take into
account principally the degree of a proposed buyer's creditworthiness and the
collateral value of the vehicle being financed. If a borrower elects to finance
the purchase of an automobile through a dealer with whom the Company has an
established relationship, which is typically the case, the dealer will submit
the borrower's credit application to the Company for review and proposed
transaction terms. The office manager, or other office personnel under the
manager's supervision, conducts the credit evaluation review. This review
generally takes into account, among other things, the borrower's credit history,
ability to pay, stability of residence, employment history, income,
discretionary income, and debt service ratio, as well as the collateral value of
the vehicle. The borrower's credit history is assessed principally through the
evaluation of a credit bureau report which is obtained immediately after receipt
of an application from a dealer. The Company uses a standard application
analysis score sheet to conduct a credit evaluation that incorporates the
factors described above. Unless the borrower's total score falls below a
specified cutoff point, the office manager has the authority to approve the
purchase of the Automobile Sales Contract, up to his credit limit, with no
further review. If the borrower's total
34
score falls below the specified cut-off point, the office manager must receive
approval from a regional supervisor before approving the application for credit.
Generally, the Company will not finance more than 100% of the average
trade-in value of the automobile as set forth in the current edition of the
National Association of Automobile Dealers Official Used Car Guide and requires
that a borrower make a down payment of at least 10% of the purchase price. In
certain limited instances when the borrower is unable to make a sufficiently
large down payment, the Company will agree to purchase the Automobile Sales
Contract but will issue to the dealer a "deferred certificate" for the
difference between the average trade-in value of the automobile and the portion
of the sale price not covered by the borrower's down payment. Only when the
borrower has paid the entire balance of the Automobile Sales Contract is the
Company obligated to pay to the dealer the amount of the deferred certificate.
AUTOMOBILE SALES CONTRACT PURCHASES. Upon consummation of the sale of the
automobile to the borrower, the dealer delivers all required documentation to
the Company's office. The required documentation includes the executed
Automobile Sales Contract, proof of title indicating the Company's lien, an
odometer statement confirming the vehicle's mileage, proof that the automobile
is insured with the Company designated as loss payee and any supporting
documentation the Company specified in its conditional approval of the purchase.
Only when compliance with these requirements is verified, does the Company remit
funds to the dealer.
BULK PURCHASES OF AUTOMOBILE SALES CONTRACTS. From time to time the
Company purchases Automobile Sales Contracts in bulk from dealers who have
originated and accumulated contracts over a period of time. By doing so, the
Company is able to obtain large volumes of Automobile Sales Contracts in a
cost-effective manner. The Company applies underwriting standards in purchasing
Automobile Sales Contracts that take into account principally the borrowers'
payment history and the collateral value of the automobiles financed. Such
purchases are typically made at discounts ranging from 25% to 50% of the
financed portion of the Automobile Sales Contracts. There generally are no
dealer reserve arrangements on bulk purchases. In connection with such bulk
purchases, the Company reviews all credit evaluation information collected by
the dealer and reviews the servicing and collection history of the Automobile
Sales Contracts and obtains the required supporting documents.
SALES OF INSURANCE PRODUCTS IN FINANCE OFFICES. In connection with the
origination of Automobile Sales Contracts, the Company offers, as agent, credit
life, and credit accident and health insurance. Borrowers under Automobile Sales
Contracts and Direct Loans secured by automobiles generally must obtain
comprehensive collision insurance on the automobile that designates the Company
as loss payee. If the borrower allows such insurance to lapse during the term of
the contract or loan, the Company will purchase a vendors' single interest
insurance policy, which insures the Company against a total loss on the
automobile, and add the cost of the premium to the borrower's account balance.
The Company also offers, as agent, limited physical damage insurance, which
satisfies the requirement that the borrower purchase comprehensive collision
insurance. Limited physical damage insurance is a modified form of collision
insurance that will pay the borrower or the Company the lesser of (i) the cost
of repairs, less a designated deductible amount, (ii) the actual cash value of
the automobile, less a designated deductible amount or (iii) the net unpaid
contract or loan balance, less any delinquent payments. The Company receives
commissions on the sales of insurance equal to 20% of the premiums on credit
life and credit accident and health insurance and 25% of the premiums on limited
physical damage coverage.
DIRECT LOANS PROGRAM
The Company has been in the business of making Direct Loans to Non-prime
Borrowers since 1985. Direct Loans are typically sought by such borrowers to
meet short-term cash needs, finance the purchase of consumer goods or refinance
existing indebtedness. Generally, less than 10% of Direct Loans are secured by
first or second liens on real property. The remainder are secured by personal
property or are unsecured. The typical original term on a Direct Loan is 15
months. In South Carolina and Tennessee, where there is no limit on the maximum
interest rate the Company may charge on Direct Loans, the Company has a posted
maximum rate of 69% per annum, which it may not exceed until the Company files a
higher maximum rate with the state regulatory authorities. In North Carolina,
the Company generally charges the maximum interest rates permitted by law for
such loans, which range from 18% to 30% per annum, depending upon the amount
financed. The Company currently does not make Direct
35
Loans in Georgia or Virginia. The actual interest rate on a Direct Loan is set
within statutory limits, if applicable, based upon the credit profile of the
borrower, the type and value of any collateral and market conditions.
The credit evaluation procedures employed by the Company in connection
with Direct Loans are, with the exception of loans secured by real estate,
similar to the credit evaluation procedures employed in connection with the
purchase of Automobile Sales Contracts. The value of the collateral, if any,
however, is a far less significant factor in the Company's credit evaluation of
a Direct Loan. Instead, the Company places its primary emphasis on the ratio of
the anticipated debt service to the borrower's disposable income. Direct Loans
not secured by real estate are approved by office managers. If the loan is to be
secured by real estate, the Company obtains an appraisal of the property,
obtains a title opinion from an attorney and verifies filing of a mortgage or
deed of trust before disbursement of funds to the borrower. The Company
generally will not loan an amount in excess of 50% of the appraised value of the
real estate or, in the case of a home equity loan, 50% of the borrower's equity
in the property. All applications for Direct Loans secured by real estate must
be approved by the Company's President or Executive Vice President.
In connection with making Direct Loans, the Company also offers, as agent,
credit life and credit accident and health insurance on terms and conditions
similar to those on which it sells such credit insurance in conjunction with the
purchase of Automobile Sales Contracts. On all Direct Loans that are secured by
personal property other than a used car, the Company, in lieu of filing
financing statements to perfect its security interest in the collateral,
purchases non-filing insurance from an unaffiliated insurer. The Company charges
its customers on such loans an amount approximately equal to the filing fees
that would have been charged to the customer if the Company had filed financing
statements to perfect its security interest, which amount is typically included
in the amount of the loan. The Company uses such amount to pay premiums for
non-filing insurance against losses resulting from failure to file. Under the
Company's non-filing insurance arrangements, approximately 90% of the premiums
paid are refunded to the Company on a quarterly basis and are netted against
charge-offs for the period.
SERVICING AND COLLECTION OF AUTOMOBILE SALES CONTRACTS AND DIRECT LOANS
The Company has a staff of experienced personnel to collect, account for,
and post all payments received using a computerized management information
system to track each borrower's account activity. The Company's computer system
provides office personnel with access to all information contained in the
customer's contract including the amount of the contract, maturity, interest
rate, vehicle and reference information and payment history. Customer service
personnel in each finance office also respond to borrower inquiries, investigate
delinquencies and communicate with borrowers to obtain timely payments, monitor
the insurance coverage of the automobile serving as collateral, and, when
necessary, repossess financed automobiles.
When an Automobile Sales Contract is purchased or a Direct Loan is made,
the finance office personnel follow procedures that are designed to ensure that
borrowers understand their obligations and the terms of the Automobile Sales
Contract or Direct Loan. Particular emphasis is placed on the amount and due
date of each payment, the Company's expectations regarding the timely receipt of
payments and maintenance of insurance coverage, and the Company's delinquency
and repossession policies. The Company provides payment coupon books to
borrowers to remind them of their monthly payment obligations.
Finance office personnel typically contact borrowers by telephone whose
payments are not received within one or two days after the due date of a
payment. A customer service representative in the office continues to contact
the delinquent borrower by telephone and, in some instances by mail, until
payment has been received. When a delinquent borrower brings his account
current, the Company places special emphasis on getting assurances from the
borrower that he or she will make the next payment on the due date. The Company
believes that early and frequent contact with delinquent borrowers reinforces
their recognition of their obligation and the Company's expectation for timely
payment. The Company's policy for payment deferments is to permit no more than
two in a twelve-month period on Direct Loans. Payment deferments on Automobile
Sales Contracts are granted only upon review by the office manager of the
Company's equity position and the borrower's needs.
36
The Company's repossession policy on Automobile Sales Contracts and Direct
Loans secured by automobiles is administered on a case-by-case basis. The
Company's policy is to work with a delinquent borrower for a brief period to
permit the customer to keep the car and continue making payments to the Company.
However, should a borrower become seriously delinquent or should the office
personnel determine the borrower is not dealing in good faith, the Company
repossesses the borrower's car. In most instances, repossessions are handled by
the Company's employees. Most automobiles are repossessed 30-45 days after the
account initially becomes delinquent, although in some cases repossessions occur
in less than 30 days. Repossessed vehicles are generally sold by independent
dealers on a consignment basis for the Company or through wholesale automobile
auctions. See "Management's Discussion and Analysis --Credit Loss Experience."
PREMIUM FINANCE
The Company is engaged in the business of providing short-term financing
of insurance premiums, primarily for personal lines of insurance such as
automobile insurance purchased by Non-prime Borrowers, indirectly through
independent insurance agents. Most agents who refer premium finance business to
the Company are located in North Carolina, South Carolina, and Virginia and
represent insurance companies that either have a rating of C+ or better from
A.M. Best & Company or participate in state-guaranteed reinsurance facilities. A
small amount of the Company's business involves financing premiums for
commercial lines of insurance for small businesses, including property and
casualty, business automobile, general liability, and workers' compensation. The
Company also periodically makes bulk purchases of Premium Finance Contracts. A
substantial amount of the Company's premium finance business is derived from
customers of the 20 insurance offices owned by Thaxton Insurance.
When an individual purchasing insurance through an agent with whom the
Company has an established relationship is unable to pay the full amount of the
premium, the agent will offer a Premium Finance Contract that allows the insured
to make a down payment and finance the balance of the premium. Because the
Company is 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 the portfolio of Premium Finance
Contracts.
The typical term of a Premium Finance Contract ranges from three to eight
months depending primarily upon the term of the underlying insurance policy,
which in most cases is six months but in some cases may be as long as 12 months.
The required down payment ranges from 20% to 50% of the premium depending upon
the state in which the insured resides, the term of the underlying insurance
contract, the identity of the referring agency and the insured's financial
circumstances. The smaller the down payment by the customer on a Premium Finance
Contract (and the resulting higher original principal balance of the loan), the
greater the Company's risk that the amount of the unearned premium at the time
of a payment default will not be sufficient to cover the unpaid principal
balance of the loan. Conversely, the higher the down payment (and the resulting
lower original principal balance of the loan), the lower the Company's risk of
loss in the event of a payment default. The Company allows a down payment of 20%
only on Premium Finance Contracts for policies sold by certain "non-standard"
insurance agencies operated by Thaxton Insurance in North Carolina. At December
31, 1997, such Premium Finance Contracts represented approximately $1.0 million,
or 24%, of total Premium Finance Contracts outstanding. Because the original
principal balance of such Premium Finance Contracts is larger than it would be
if higher percentage down payments were required, the Company's risk of loss is
increased.
The Company generally imposes the maximum finance charges and late fees
permitted by law for Premium Finance Contracts, which are subject to extensive
regulation in the states where the Company engages in this business. All of the
states in which the Company operates permit assessment of a fee of up to $15 on
each Premium Finance Contract and a maximum interest rate of 12% per annum.
After the Premium Finance Contract is originated, the Company sends the insured
a payment coupon book to serve as a reminder of the payment due dates. Although
most payments are received by mail, in some instances payments are made directly
to the agent who wrote the underlying insurance contract and then forwarded to
the Company. If a payment is not received by the sixth day after the due date, a
late fee is added to the past due payment and a notice of intent to cancel the
underlying
37
insurance policy is mailed to the insured. If payment is not received by the
10th day after the notice of intent to cancel is mailed (the 15th day in South
Carolina), the Company mails a notice of cancellation advising the insured that
the Company will cancel the underlying insurance policy in seven days unless
payment is received. If the insured fails to make payment by the seventh day,
using a power of attorney provided by the insured at the time the insurance was
purchased, the Company notifies the insurance company to cancel the underlying
insurance policy. Upon receipt of this notice the insurance company remits to
the Company the unearned portion of the premium, if any. The Company's
procedures for providing notices to borrowers are set up to provide a parallel
set of notices to the agent who wrote the underlying insurance policy.
INSURANCE AGENCY OPERATIONS
The Company sells, on an agency basis, various lines of automobile,
property and casualty, life, and accident and health insurance. The Company does
not assume any underwriting risk in connection with its insurance agency
activities. All underwriting risk is assumed by the insurance companies
represented by the Company. The Company is paid a commission by the insurance
company for which business is placed. On some policies, the Company is eligible
for additional commission payments (profit sharing) if the loss experience on
the business falls below specified levels.
COMPETITION
The non-prime consumer credit market for used automobile finance and
personal loans is highly competitive and fragmented. Historically, commercial
banks, savings and loans, credit unions, financing arms of automobile
manufacturers and other lenders providing traditional consumer financing have
not consistently served the non-prime segment of the consumer finance market.
Recently, however, several large bank holding companies have acquired used
automobile finance companies in an effort to recapture some of the customers
their bank subsidiaries have rejected on the basis of their rigid credit scoring
systems. The Company faces increasing competition from a number of companies
providing similar financing to individuals that cannot qualify for traditional
financing. These include a number of well-capitalized public companies which
have only recently entered the business of purchasing Automobile Sales Contracts
and are seeking to rapidly expand their business. Management believes that
currently its primary competitor is TransSouth Financial Corporation, a
financial services company, which operates in most of the markets where the
Company operates. The Company also competes with numerous small, regional
consumer finance companies. Many of these competitors or potential competitors,
including TransSouth Financial Corporation, have significantly greater resources
than the Company and have pre-existing relationships with established networks
of dealers. To the extent that any of such lenders significantly expand their
activities in the markets where the Company operates or plans to operate, the
Company could be materially adversely effected. The basis on which the Company
competes with others in used car financing is primarily the price paid for
Automobile Sales Contracts, which is a function of the amount of the dealer
reserve, and the reliability of service to participating dealers. The basis on
which the Company competes with others in making Direct Loans is the interest
rate charged and customer service.
The size of the Company's average Automobile Sales Contract is
considerably smaller than that of many other companies engaged in purchasing
Automobile Sales Contracts. The Company believes this is due in large part to
the fact that most of the Company's competitors are seeking to do business
primarily with franchised dealers selling late-model, lower mileage used
automobiles for significantly higher prices than the automobiles offered for
sale by the independent dealers with which the Company has relationships, which
tend to be somewhat older, higher mileage vehicles. Because the costs of
servicing and collecting a portfolio of finance receivables increases with the
number of accounts included in the portfolio, management believes that many
apparent potential competitors will choose not to do business with the type of
dealer targeted by the Company.
The premium finance business, particularly for personal lines of
insurance, also is highly fragmented and competitive. Because interest rates are
highly regulated, competition is primarily on the basis of customer service,
response time, and the required amount of down payment. There are numerous
independent finance companies specializing in premium finance for personal lines
of insurance. In addition, many independent insurance agencies finance premiums
for their customers either directly or through an affiliate. Some bank holding
companies have
38
subsidiaries that finance premiums on insurance sold by other subsidiaries of
the holding company as well as by independent agents.
Competition among independent insurance agencies is intense. There are
numerous other independent agencies in most of the markets where the Company's
insurance offices are located. There are also direct agents for various
insurance companies located in some of the Company's markets. The Company
competes primarily on the basis of service and convenience. The Company attempts
to develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers virtually all types
of insurance products.
The origination of residential mortgages for Non-prime Borrowers is highly
competitive and the number of companies engaged in the business is increasing
rapidly. The Company has only recently begun originating residential mortgages
and currently expects to compete mainly on the basis of the service that it
provides to customers in markets where it already has a presence with its
finance and insurance offices.
REGULATION
Consumer finance companies are subject to extensive supervision and
regulation under state and federal statutes and regulations. Depending upon the
nature of the transactions entered into by the consumer finance company and the
states in which it does business, governmental statutes and regulations may
require the lender 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 certain other terms and conditions of the
financing, govern the sale and terms of related insurance products, and define
and limit the right to repossess and sell collateral.
The relevant federal statutes include the Truth In Lending Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, and the Real Estate
Settlement Procedures Act ("RESPA"). These statutes generally are enforced
against consumer finance companies by the Federal Trade Commission and are
supplemented by regulations promulgated by this and other federal agencies. In
general, these laws require the Company to provide certain disclosures to
prospective borrowers, prohibit misleading advertising, protect against
discriminatory lending practices, and prohibit unfair credit practices. Among
the principal disclosure items under the Truth In Lending Act are the terms of
repayment, the final maturity, the total finance charge, and the annual
percentage rate charged on each loan. The Equal Credit Opportunity Act prohibits
creditors from discriminating against loan applicants on the basis of race,
color, sex, age, or marital status. Pursuant to Regulation B promulgated under
the Equal Credit Opportunity Act, creditors are required to make certain
disclosures regarding consumer rights and advise consumers whose credit
applications are not approved of the reasons for the rejection. The Fair Credit
Reporting Act requires the Company to provide certain information to consumers
whose credit applications are not approved on the basis of a report obtained
from a consumer credit reporting agency. Regulations promulgated by the Federal
Trade Commission limit the types of property a creditor may accept as collateral
to secure a consumer loan and provide for the preservation of the consumer's
claims and defenses when a consumer obligation such as an Automobile Sales
Contract is assigned to a subsequent holder. RESPA imposes specific disclosure
requirements, escrow account and borrower inquiry procedures, and kickback and
referral fee prohibitions upon lenders whose portfolio of receivables secured by
first or second liens on residential real property exceeds a specified dollar
amount.
The Company presently purchases Automobile Sales Contracts in Georgia,
North Carolina, South Carolina, Tennessee, and Virginia, originates Direct Loans
in South Carolina, North Carolina and Tennessee, and originates Premium Finance
Loans in North Carolina, South Carolina, and Virginia. Interest rates on Premium
Finance Contracts are subject to statutory ceilings in all three states. See
"Premium Finance." Interest rates on Automobile Sales Contracts are subject to
statutory ceilings only in North Carolina. See "Automobile Sales Contract
Purchases -- Origination of Automobile Sales Contracts." Direct Loans are
subject to statutory ceilings only in North Carolina and Tennessee. See "Direct
Loans Program." Each state regulates other aspects of the Company's business,
such as charges for insurance, forms of collateral, application of payments,
default charges, repossession, and disclosure matters, in varying degrees. Such
regulations may require the licensing of the Company or one or more of its
finance offices. The Company's finance offices also may be subject to periodic
examination by the division of state government charged with enforcing consumer
finance statutes and regulations. In some instances, state statutes and
39
regulations impose more stringent disclosure and antidiscriminatory provisions
than comparable federal provisions and may impose specific statutory liabilities
upon and create causes of action against creditors who fail to comply with such
provisions.
The Company also is subject to state statutes and regulations governing
insurance agents in connection with sales of credit and other insurance. These
provisions may require that officers and employees involved in the sale of
insurance products be licensed, govern the commissions that may be paid to
agents in connection with the sale of credit insurance, and limit the premium
amount charged for insurance.
Management believes the Company operates in substantial compliance with
all applicable statutes and regulations relevant to its consumer finance and
insurance agency activities and that Automobile Sales Contracts purchased
individually or in bulk have been originated in compliance with these
provisions. Violations of the provisions described above may result in private
actions for damages, claims for refunds of payments made, certain fines and
penalties, injunctions against prohibited practices, the potential forfeiture of
rights to repayment of loans, and the revocation of licenses granted by state
regulatory authorities. Adverse changes in the statutes and regulations to which
the Company's business is subject, or in the enforcement or interpretation
thereof, could have a material adverse effect on the Company's business.
Moreover, a reduction in the existing statutory maximum rates or the imposition
of maximum rates below those presently charged by the Company in unregulated
jurisdictions would directly impair the Company's profitability.
EMPLOYEES
As of December 31, 1997, the Company employed 241 persons, none of whom
was covered by a collective bargaining agreement. Of that total, 33 were located
in the Company's headquarters in Lancaster, South Carolina and 208 were located
in the Company's other offices. Management generally considers its relationships
with its employees to be good.
PROPERTY
The Company's executive offices are located in Lancaster, South Carolina
in a leased office facility of approximately 12,000 square feet. The lease
expires in September 1999, but includes an option to renew for an additional
five-year term. The Company leases the facilities, in some instances from
affiliates, in which its branch offices are located. These offices range in size
from approximately 800 square feet to 2,200 square feet under leases expiring
from April 1998 to July 2004, most of which include renewal options for periods
ranging from two to five years. The monthly rental rates for such offices range
from $300 to $5,100 per month. Since most of the Company's business with dealers
is conducted by facsimile machine and telephone, management does not believe
that the particular locations of its finance offices are critical to its
business of purchasing Automobile Sales Contracts or its premium finance
operations. Location is somewhat more important for the Company's Direct Loan
and insurance agency operations. However, other satisfactory locations are
generally available for lease at comparable rates and for comparable terms in
each market served by the Company.
LEGAL PROCEEDINGS
The Company presently is not a party to any legal proceedings nor is
management aware of any material threatened litigation against the Company.
40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of
November 30, 1997 were as follows:
NAME AGE POSITION
---- --- --------
James D. Thaxton........51 Chairman of the Board,
President and Chief Executive
Officer
Robert L. Wilson........57 Executive Vice President,
Chief Operating Officer and
Director
Allan F. Ross...........49 Vice President, Chief
Financial Officer, Treasurer,
Secretary and Director
C.L. Thaxton, Sr........74 Director
Jack W. Robinson*.......67 Director
Perry L. Mungo*.........60 Director
*Denotes members of Audit and Compensation Committees.
JAMES D. THAXTON has served as Chairman of the Board, President and
Chief Executive Officer of the Company since it was founded. Prior to
joining the Company, 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 the Company in January 1991 and has served since
July 1991, as its 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 thereto,
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 the Company 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 served on the Board of Directors of the Company
since it was founded. Mr. Thaxton is a director of Thaxton Insurance, which
he founded in 1950 and is the manager of its Pageland office. Mr. Thaxton is
the father of James D. Thaxton.
JACK W. ROBINSON, who became a director in August 1995, is the President,
Chief Executive Officer and principal owner of MMC Holding, Inc., which through
its principal subsidiary is engaged in mica mining.
41
PERRY L. MUNGO, who became a director in August 1995, is the President,
Chief Executive Officer and principal owner of P.F. & P.L. Mungo, Inc., a
privately-owned industrial and commercial construction company.
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. The Company's
executive officers are appointed by and serve at the discretion of the Board of
Directors.
The Board of Directors has established a Compensation Committee which
makes recommendations concerning salaries and incentive compensation for
executive officers and other employees of the Company and administers the
Company's stock plans. The Board has also established an Audit Committee, which
recommends to the Board of Directors the selection of the Company's independent
auditors and reviews the results and scope of the audit and other services
provided by the independent auditors. Messrs. Robinson and Mungo are the members
of the Compensation and Audit Committees. Directors do not receive any
compensation from the Company for their service as members of the Board of
Directors. All directors are reimbursed for reasonable expenses incurred by them
in attending Board and Board committee meetings.
EXECUTIVE COMPENSATION
The table below shows the compensation paid or accrued by the Company, for
the year ended December 31, 1997, to or for the account of the Chief Executive
Officer and its only other executive officer whose total salary and bonus
exceeded $100,000 during 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
` ----------------------------- ------------
RESTRICTED
NAME AND PRINCIPAL YEAR SALARY BONUS STOCK
POSITION ($) ($) ($) AWARD ($)
----------------------- -------- --------- -------- ------------
James D. Thaxton,
President and 1997 113,600 40,704 ---
Chief Executive 1996 83,908 66,037 ---
Officer 1995 74,513 10,100 ---
Robert L. Wilson, 1997 125,000 133,106 ---
Executive Vice 1996 131,507 127,747 ---
President 1995 123,076 32,985 900,000(1)
(1) Upon the closing of the Company's initial public offering on December 29,
1995, Mr. Wilson was awarded 100,000 shares of restricted common stock.
Subject to his continued employment by the Company, the award will vest in
ten annual installments which commenced on the date of the grant. At
December 31, 1997, 20,000 shares had vested, 10,000 shares had been
voluntarily forfeited by Mr. Wilson, and 70,000 shares of the award
remained subject to restriction and, not withstanding such restriction,
had a market value of $612,500 on that date. Mr. Wilson is entitled to
vote and receive dividends on restricted shares.
42
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock at March 25, 1998 by: (i) the only
person who is the beneficial owner of more than five percent of the outstanding
common stock; (ii) each director; and (iii) directors and officers of the
Company as a group.
PERCENTAGE OF
NUMBER OF SHARES AND COMMON
NATURE OF BENEFICIAL STOCK
NAME OF BENEFICIAL OWNER OWNERSHIP OUTSTANDING
---------------------------- ------------------------ ---------------
James D. Thaxton 3, 233,000 (2) 81.7%
Robert L. Wilson 90,000 2.3
C. L. Thaxton, Sr. 15,555 (3) *
Jack W. Robinson 85,477 (4) 2.2
Perry L. Mungo 29,000 *
Directors and officers
as a group(6) 3,453,032 87.2
---------------
(1) An asterisk (*) indicates less than one percent.
(2) Includes 1,112,828 shares held by a family limited partnership as
to which Mr. Thaxton shares voting and investment power.
(3) Includes 15,222 shares held of record by Mr. Thaxton's spouse,
Katherine D. Thaxton, as to which Mr. Thaxton shares voting and
investment power.
(4) Includes 4,150 shares held of record by Mr. Robinson's spouse,
Kathryn H. Robinson, as to which Mr. Robinson shares voting and
investment power.
CERTAIN TRANSACTIONS
ISSUANCE OF PREFERRED STOCK
On November 10, 1997 the Company entered into an agreement with Jack W.
Robinson and certain of his affiliates pursuant to which they exchanged 27,076
shares of Common Stock for an equal number of shares of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred Stock"). The terms of the
Series B Preferred Stock are identical to the Company's Series A Preferred Stock
except that dividends thereon are payable, at the Company's option, in
additional shares of Series B Preferred Stock. On July 1, 1998, the Company
entered into a subsequent agreement with Jack W. Robinson and certain of his
affiliates pursuant to which they exchanged all of the shares of Series B
Preferred Stock, plus 29,200 shares of common stock for a total of 56,276 shares
of the Company's Series D Preferred Stock (the "Series D Preferred Stock"). The
terms of the Series D Preferred Stock are similar to the Series A Preferred
Stock, except that they provide for an $0.80 annual dividend rate, and it is not
convertible into Common Stock.
ACQUISITION OF THAXTON INSURANCE
On October 31, 1996, the Company acquired Thaxton Insurance by exchanging
300,000 shares of Common Stock for all of the outstanding capital stock of
Thaxton Insurance. At the time of the acquisition, Thaxton Insurance operated 18
insurance offices in North and South Carolina. The number of shares issued in
the transaction was determined based upon a multiple of gross commissions
collected by Thaxton Insurance during the twelve-month period ended December 31,
1995, which were approximately $3.7 million, and the market value of the
Company's shares issued in this transaction, taking into account the
transferability restrictions applicable thereto. The capital stock of Thaxton
Insurance was acquired from James D. Thaxton, William H. Thaxton, and Calvin L.
Thaxton, Jr. James D. Thaxton is an executive officer, a director, and the
majority shareholder of the Company. William H. Thaxton and Calvin L. Thaxton,
Jr. are James D. Thaxton's brothers and all three are sons of Calvin L. Thaxton,
Sr., a director of the Company.
43
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Moore & Van Allen, PLLC, Charlotte, North Carolina.
EXPERTS
The consolidated financial statements of The Thaxton Group, Inc. as of
December 31, 1997 and 1996 and for the years then ended have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
PLAN OF DISTRIBUTION
The Securities will be sold by officers and employees of the Company and
certain of its finance and insurance subsidiaries in reliance upon Rule 3a4-1
under the Securities Exchange Act of 1934 ("Rule 3a4-1"). Persons associated
with the Company and its affiliates who participate in the offering of the
Securities will limit their participation to activities permitted under Rule
3a4-1 and no commissions or other direct or indirect compensation will be paid
to such persons in connection with the sale of the Securities. In addition, a
limited amount of the Securities may be sold by Maxwell Investments, Inc.
("Maxwell Investments"), a member of the National Association of Securities
Dealers, Inc., as a selling agent. James T. Garrett, Jr., an officer of a
mortgage lending subsidiary of the Company, is also a registered representative
with Maxwell Investments and is expected to be the only person associated with
Maxwell Investments that may participate in the offering and sale of Securities
on behalf of that firm. Rule 3a4-1 is not applicable to Maxwell Investments'
participation in the offering or any sales of the Securities by Mr. Garrett on
behalf of that firm. The offering will commence immediately, will be continuous
in nature and is expected to continue for up to two years from the date of this
Prospectus.
The Securities may be marketed by the Company through the use of newspaper
advertisements, mailings of this Prospectus to the Company's insurance and
selected consumer finance customers, signs in the offices of the Company and its
finance and insurance subsidiaries and by providing copies of this Prospectus to
potential purchasers who inquire about purchasing the Securities. The Securities
will not be marketed by officers, directors or employees of the Company and its
finance and insurance subsidiaries by telephone or other oral solicitation.
Daily Notes will not be offered or sold in South Carolina.
AVAILABLE INFORMATION
The Company files reports with the United States Securities and Exchange
Commission (the "Commission") Such reports, which include quarterly reports on
Form 10-Q and annual reports on Form 10-K, can be inspected and copied at public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60621-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
filings made by the Company with the Commission through its Electronic Data
Gathering and Retrieval System ("EDGAR") are publicly available, using the
Company's name or stock trading symbol, "THAX," through the Commission's site on
the Internet's World Wide Web, located at http://www.sec.gov.
44
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THE THAXTON GROUP, INC.
Independent auditors' report............................................ F-2
Consolidated balance sheets as of December 31,
1997 and 1996......................................................... F-3
Consolidated statements of income for the
years ended December 31, 1997 and 1996................................ F4
Consolidated statements of stockholders' equity
for the years ended December 31, 1997
and 1996.............................................................. F-5
Consolidated statements of cash flows for the
years ended December 31, 1997 and 1996................................ 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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 at December 31, 1997 and 1996, and the results of their
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Greenville, South Carolina
March 25, 1998 KPMG Peat Marwick LLP
F-2
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
December 31,
------------
1997 1996
---- ----
Assets
Cash $ 1,162,793 421,465
Finance receivables, net 48,662,228 46,546,087
Premises and equipment, net 2,003,787 1,947,210
Accounts receivable 1,616,570 1,269,384
Repossessed automobiles 744,030 1,166,495
Goodwill and other intangible assets 3,894,956 3,463,814
Other assets 2,881,308 1,867,112
------------ ------------
Total assets 60,965,672 56,681,567
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable 420,863 387,237
Notes payable 51,071,066 46,345,883
Notes payable to affiliates 1,015,358 743,621
Accounts payable 1,357,739 1,350,306
Employee savings plan 1,045,533 1,098,457
Other liabilities 85,796 384,758
Total liabilities 54,996,355 50,310,262
------------ ------------
Stockholders' Equity
Preferred Stock $ .01 par value,
Series A: 400,000 shares authorized,
178,014 shares issued and outstanding in 1997 1,780 --
Series B: 27,076 shares authorized, issued and
outstanding in 1997 271 --
Series C: 50,000 shares authorized, issued and
outstanding in 1997 500 --
Common stock, $ .01 par value; authorized 50,000,000 shares,
issued and outstanding 3,795,600 shares in 1997,
3,932,178 shares in 1996 37,956 39,322
Additional paid-in-capital 4,521,354 3,504,027
Deferred stock award (630,000) (720,000)
Retained earnings 2,037,456 3,547,956
------------ ------------
Total stockholders' equity 5,969,317 6,371,305
------------ ------------
Total liabilities and stockholders' equity $ 60,965,672 56,681,567
============ ==========
See accompanying notes to consolidated financial statements.
F-3
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
Interest and fee income $ 15,892,683 13,528,881
Interest expense 5,023,179 4,209,763
------------ ------------
Net interest income 10,869,504 9,319,118
Provision for credit losses 6,579,932 3,593,399
------------ ------------
Net interest income after provision for credit losses 4,289,572 5,725,719
Other income:
Insurance premiums and commissions, net 5,469,667 5,893,606
Other income 1,221,525 985,763
------------ ------------
Total other income 6,691,192 6,879,369
------------ ------------
Operating expenses:
Compensation and employee benefits 6,799,738 5,602,895
Telephone, postage, and supplies 1,511,477 1,126,599
Net occupancy 1,528,218 1,228,414
Reinsurance claims expense 355,437 516,194
Insurance 128,916 193,670
Collection expense 94,462 63,797
Travel 176,186 158,513
Professional fees 260,410 175,821
Other 2,355,947 2,908,377
------------ ------------
Total operating expenses 13,210,791 11,974,280
------------ ------------
Income (loss) before income tax expense (2,230,027) 630,808
Income tax expense (benefit) (723,694) 246,624
------------ ------------
Net income (loss) $ (1,506,333) 384,184
============ ============
Dividends on preferred stock $ 4,167 25,500
============ ============
Net income (loss) applicable to common shareholders $ (1,510,500) 358,684
============ ============
Net income (loss) per common share -- basic and diluted $ (0.39) 0.09
============ ============
See accompanying notes to consolidated financial statements.
F-4
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996
Additional Deferred Unrealized Gain
Common Preferred Paid-in Stock (Loss) on Securities
Stock Stock Capital Award Available for Sale
----- ----- ------- ----- ------------------
Balance at December 31, 1995 $ 39,383 340,000 3,563,681 (810,000) (6,392)
Employee stock grant 17 -- 16,828 -- --
Purchase and retirement of 7,786 shares of stock (78) -- (76,482) -- --
Conversion of 340,000 shares of preferred
stock to $340,000 of subordinated debt -- (340,000) -- -- --
Dividends on preferred stock -- -- -- -- --
Vesting of 10,000 shares of stock award -- -- -- 90,000 --
Unrealized gain on securities available for sale -- -- -- -- 6,392
Net income -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 39,322 -- 3,504,027 (720,000) --
---------- ---------- ---------- ---------- ----------
Purchase and retirement of 13,300 shares of stock (133) -- (137,850) -- --
Issuance of 2,007 shares of restricted stock 20 -- 22,057 -- --
Issuance of 797 shares of stock under Employee
stock purchase plan 8 -- 6,343 -- --
Forfeiture of deferred stock award (100) -- (89,900) 90,000 --
Conversion of 89,007 shares of common stock
into 178,014 shares of Series A preferred stock (890) 1,780 717,177 -- --
Conversion of 27,100 shares of common stock
into 27,100 shares of Series B preferred stock (271) 271 -- -- --
Conversion of subordinated debt into
50,000 shares of Series C preferred stock -- 500 499,500 -- --
Dividends paid on preferred stock -- -- -- -- --
Net loss -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 $ 37,956 2,551 4,521,354 (630,000) --
========== ========== ========== ========== ==========
Total
Retained Stockholders'
Earnings Equity
-------- -------------
Balance at December 31, 1995 3,189,272 6,315,944
Employee stock grant -- 16,845
Purchase and retirement of 7,786 shares of stock -- (76,560)
Conversion of 340,000 shares of preferred
stock to $340,000 of subordinated debt -- (340,000)
Dividends on preferred stock (25,500) (25,500)
Vesting of 10,000 shares of stock award -- 90,000
Unrealized gain on securities available for sale -- 6,392
Net income 384,184 384,184
---------- ----------
Balance at December 31, 1996 3,547,956 6,371,305
---------- ----------
Purchase and retirement of 13,300 shares of stock -- (137,983)
Issuance of 2,007 shares of restricted stock -- 22,077
Issuance of 797 shares of stock under Employee
stock purchase plan -- 6,351
Forfeiture of deferred stock award -- --
Conversion of 89,007 shares of common stock
into 178,014 shares of Series A preferred stock -- 718,067
Conversion of 27,100 shares of common stock
into 27,100 shares of Series B preferred stock -- --
Conversion of subordinated debt into
50,000 shares of Series C preferred stock -- 500,000
Dividends paid on preferred stock (4,167) (4,167)
Net loss (1,506,333) (1,506,333)
---------- ----------
Balance at December 31, 1997 2,037,456 5,969,317
========== ==========
See accompanying notes to consolidated financial statements.
F-5
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
Cash flows from operating activities:
Net income $ (1,506,333) 384,184
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 6,579,932 3,593,399
Depreciation and amortization 958,192 756,791
Deferred taxes 6,705 (26,715)
Vesting of stock awards -- 90,000
Compensatory grant of stock to employees 28,428 16,845
Unrealized loss on securities available for sale -- 6,392
(Gain) loss on sale of premises and equipment (22,190) (25,301)
Gain on sale of investment (10,859) --
Increase in other assets (959,244) (2,026,919)
Increase (decrease) in accrued interest payable and other liabilities (200,353) 76,869
------------ ------------
Net cash provided by operating activities 4,874,278 2,845,545
------------ ------------
Cash flow from investing activities:
Net increase in finance receivables (8,696,073) (13,845,854)
Capital expenditures for premises and equipment (706,498) (1,295,387)
Proceeds from sale of premises and equipment 36,875 79,907
Proceeds from the sale of investments 24,481 --
Acquisitions, net of acquired cash equivalents (754,098) (752,973)
Purchase of securities -- (68,843)
Notes receivable (affiliate) -- 896,302
------------ ------------
Net cash used by investing activities (10,095,313) (14,986,848)
------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock 718,067 --
Repurchase of common stock (137,983) (76,560)
Dividends paid -- (25,500)
Net increase in line of credit 4,079,053 7,983,666
Net increase in notes payable 1,303,226 1,466,185
------------ ------------
Net cash provided by financing activities 5,962,363 9,347,791
------------ ------------
Net increase (decrease) in cash 741,328 (2,793,512)
Cash at beginning of period 421,465 3,214,977
------------ ------------
Cash at end of period $ 1,162,793 421,465
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,874,912 3,805,229
Income taxes 36,843 554,651
============ ============
Noncash financing activities:
Conversion of preferred stock to notes payable -- 340,000
Conversion of common stock to preferred stock 271 --
Conversion of subordinated debt to preferred stock 500,000 --
============ ============
See accompanying notes to consolidated financial statements.
F-6
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina and operates branches in South Carolina, North Carolina,
Georgia, Virginia and Tennessee. The Company is a diversified consumer finance
company that is engaged primarily in purchasing and servicing retail installment
contracts purchased from independent used car dealers and making and servicing
personal loans to borrowers with limited credit histories, low incomes or past
credit problems. The Company also offers insurance premium financing to such
borrowers. A substantial amount of the Company's premium finance business has
been derived from customers of the independent insurance agencies owned by
Thaxton Insurance Group, Inc. ("Thaxton Insurance"), which was acquired by the
Company in 1996. The Company provides reinsurance through a wholly owned
subsidiary, TICO Reinsurance, Ltd. ("TRL"). Through a wholly owned subsidiary,
CFT Financial Corporation, the Company is also engaged in mortgage banking,
originating mortgage loans to individuals. The Company sells substantially all
mortgage loans it originates to independent third parties. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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.
Prior year consolidated financial statements have been restated to include the
balances of companies combined and accounted for as poolings-of-interests as
discussed in Note 2. Certain amounts for 1996 have been reclassified to conform
to the 1997 presentation. These reclassifications have no effect on
shareholders' equity or net income as previously reported.
The following is a description of the more significant accounting and reporting
policies which the Company follows in preparing and presenting its financial
statements.
(a) 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. For receivables which are renewed, interest income is
recognized using a method similar to the interest method.
(b) 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
(1) Summary of Significant Accounting Policies, Continued
(c) 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.
(d) 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.
(e) 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 subsidiary, TRL, and are included in
insurance premiums and commissions in the accompanying consolidated
statements of income. Unearned insurance commissions 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.
(f) 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.
(g) 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.
F-8
(1) Summary of Significant Accounting Policies, Continued
(h) Earnings Per Share
The Company has adopted the provisions of SFAS 128, "Earning per
Share" ("EPS"), for the year ended December 31, 1997. The
presentation of primary and fully diluted EPS has been replaced with
basic and diluted EPS. Prior period EPS data has been restated to
reflect the adoption of SFAS 128. 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 stock options issued by the Company,
and are computed using the treasury stock method.
(i) Intangible Assets
Intangible assets include goodwill, expiration lists, and covenants
not to compete related to the purchase of insurance agencies.
Goodwill represents the excess of the cost of insurance agencies
over the fair value of its assets at the date of acquisition.
Goodwill is amortized on a straight-line basis over a fifteen to
twenty year period. The expiration lists are amortized over their
estimated useful lives of 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. Intangible
assets also include the premium paid to acquire Eagle Premium
Finance, which is being amortized on a straight-line basis over ten
years. Recoverability of recorded intangibles is evaluated by using
undiscounted cash flows.
(j) Stock Options
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires that the
fair value of employee stock-based compensation plans be recorded as
a component of compensation expense in the statement of income or
the impact of such fair value on net income and earnings per share
be disclosed on a pro forma basis in a footnote to the financial
statements if the Company continues to use the intrinsic value
method in accordance with APB 25. The Company will continue such
accounting under the provisions of APB 25.
(k) Fair Value of Financial Instruments
All financial assets of the Company are short term in nature and all
liabilities are substantially at variable rates of interest. As
such, the carrying values of these financial assets and liabilities
approximate their fair value.
(l) 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.
F-9
(2) Business Combinations
The Company acquired all of the outstanding capital stock of Thaxton
Insurance on October 31, 1996 in exchange for 300,000 shares of the Company's
stock. Thaxton Insurance is incorporated under the laws of the State of South
Carolina and licensed as an insurance agency in the states of North Carolina
and South Carolina. This business combination was accounted for under the "as
if" pooling method as the companies were deemed to be under common control.
Accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the assets, liabilities and equity
and results of operation and cash flows of Thaxton Insurance at their
historical cost basis.
(3) Finance Receivables
Finance receivables consist of the following at December 31, 1997 and 1996:
December 31,
1997 1996
---- ----
Automobile Sales Contracts $ 48,098,657 47,603,138
Direct Loans 15,449,004 12,560,126
Premium Finance Contracts 4,010,608 2,943,337
------------ ------------
Total finance receivables 67,558,269 63,106,601
Unearned interest (12,902,552) (12,445,781)
Unearned insurance premiums, net (155,514) (132,733)
Bulk purchase discount (359,945) (1,014,000)
Dealer hold back (668,630) (773,000)
Allowance for credit losses (4,809,400) (2,195,000)
------------ ------------
Finance receivables, net $ 48,662,228 46,546,087
============ ============
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. The amount of bulk purchased receivables, net of
unearned interest and insurance, and the related purchase discount
outstanding were approximately $8,328,000 and $360,000, respectively, at
December 31, 1997 and approximately $7,371,000 and $1,014,000,
respectively, at December 31, 1996.
With holdback arrangements, an automobile dealer or other retailer will
assign receivables to the Company on a loan-by-loan basis, typically at
par. The Company 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 holdback receivables, net of unearned interest and insurance, and
the related holdback amount outstanding were approximately $31,593,000 and
$669,000, respectively, at December 31, 1997 and approximately $31,451,000
and $773,000, respectively, at December 31, 1996.
F-10
(3) Finance Receivables (continued)
At December 31, 1997, there were no significant concentrations of
receivables in any type of property or to one borrower.
These receivables are pledged as collateral for a line of credit agreement
(see note 7).
Changes in the allowance for credit losses for the years ended December 31,
1997 and 1996 are as follows:
1997 1996
---- ----
Beginning balance $ 2,195,000 783,200
Valuation allowance for acquired loans -- 28,842
Provision for credit losses 6,579,932 3,593,399
Charge-offs (4,129,313) (2,526,231)
Recoveries 163,781 315,790
----------- -----------
Net charge-offs (3,965,532) (2,210,441)
----------- -----------
Ending balance $ 4,809,400 2,195,000
=========== ===========
The valuation allowance for acquired loans relates to the acquisition of
approximately $748,000 of receivables in 1996.
The Company's loan portfolio primarily consists of short term loans, the
majority of which are originated or renewed during the current year.
Accordingly, the Company estimates 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, 1997 and 1996
follows:
1997 1996
---- ----
Leasehold improvements $ 591,596 504,328
Furniture and fixtures 558,566 477,158
Equipment and automobiles 2,719,773 2,762,214
--------- ---------
Total cost 3,869,935 3,743,700
Accumulated depreciation 1,866,148 1,796,490
--------- ---------
Net premises and equipment $ 2,003,787 1,947,210
========== =========
Depreciation expense was approximately $617,000 and $521,000 in 1997 and
1996, respectively.
F-11
(5) Intangible Assets
Intangible assets consist of the following at December 31, 1997 and
1996:
1997 1996
---- ----
Covenants not to compete $ 118,494 102,022
Goodwill 2,204,944 2,036,563
Insurance expirations 2,657,399 2,135,098
Purchase premium 403,446 348,938
--------- ---------
Total cost 5,384,283 4,622,621
Less accumulated amortization 1,489,327 1,158,807
--------- ---------
Intangible assets, net $3,894,956 3,463,814
========= =========
The majority of the intangibles were acquired by the Company in connection
with its acquisition of Thaxton Insurance. Amortization expense was
approximately $341,000 and $236,000 in 1997 and 1996, respectively.
(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 the Company's option or replaced by other leases or acquisitions
of other properties. Total rental expense was approximately $662,000 in
1997 and $304,000 in 1996. The future minimum lease payments under
noncancelable operating leases as of December 31, 1997, are as follows:
1998 $615,988
1999 504,750
2000 237,666
2001 98,519
2002 35,908
Thereafter 16,967
----------
Total minimum lease payments $1,509,798
==========
Four of the office buildings in which the Company conducts business are
owned by related parties. These premises are leased to the Company for a
total monthly rental rate of $4,350.
(7) Notes Payable
At December 31, 1997 and 1996, notes payable consist of the following:
1997 1996
---- ----
Note payable to insurance company maturing in May, 1998 and
bearing interest at prime plus 2% and is reset quarterly $ -- 500,000
Note payable to insurance company payable within sixty days
after written demand by the lender. The note bears interest
at prime plus 2% and is reset monthly 250,000 250,000
Lines of credit 46,695,000 42,615,947
F-12
(7) Notes Payable, Continued
1997 1996
---- ----
Note payable to finance company due in monthly installments
of $9,091 through July, 2003 including interest at 8.99%
This note is secured by an aircraft purchased with the
funds $ 477,545 540,600
Note payable to insurance agency due annually on July 1 in
installments of $78,022 through July 1997, including
interest at a rate of 9% and secured by agency purchased
with funds and various individual stockholders' assets -- 71,578
Note payable to individual due annually on January 1 in
installments of $23,496 through January 2001, including
interest at a rate of 8% and secured by agency purchased
with funds and various individual stockholders' assets 77,823 93,814
Note payable to individual due annually on June 1 in
installments of $40,000 through June 1998, including
interest at a rate of 7% and secured by stock purchased
with funds and various individual stockholders' assets 37,383 72,321
Note payable to individual due on January 1, 1997 plus interest
at a rate of 7%. Secured by agency purchased with funds
and various individual stockholders' assets -- 60,000
Note payable to individual due in monthly installments of
$3,607 through January 1999, including interest at a rate of
6% and secured by agency purchased with funds and
various individual stockholders' assets 39,533 79,012
Note payable to individual due in monthly installments of
$9,478, through March 2001, including interest at a rate of
6% 333,205 423,449
Notes payable to individuals with varying maturity dates and
rates ranging from 5 1/4% - 12% 4,175,935 2,382,783
--------- ---------
$52,086,424 47,089,504
=========== ==========
A schedule of maturities of long-term debt is as follows:
Year Ending
December 31, Amount
------------ ------
1998 $ 2,379,185
1999 48,345,692
2000 738,490
2001 190,959
2002 332,216
Thereafter 99,882
------------
Total $ 52,086,424
============
F-13
(7) Notes Payable, Continued
At December 31, 1997, the Company maintained a line of credit agreement with
a commercial finance company for $100 million, maturing on August 31, 1999.
At December 31, 1997, the Company's net finance receivables would have
allowed it to borrow an additional $4.4 million against existing collateral.
The outstanding balance under this line of credit was $46,695,000 at December
31, 1997. There are six tranches under this agreement, Tranche A, B, C, D, E
and F. The total line of credit, amount of credit line available at December
31, 1997, and interest rate for each Tranche is summarized below:
Tranche A: $100,000,000; $54,986,500; 9.5% (Lender's prime rate + 1%)
Tranche B: $ 10,000,000; $10,000,000; 13.5% (Lender's prime rate + 5%)
Tranche C: $ 5,000,000; $ 4,779,000; 9.5% (Lender's prime rate + 1%)
Tranche D: $ 10,000,000; $ 8,539,500; 10.5% (Lender's prime rate + 2%)
Tranche E: $ 7,000,000; $ 7,000,000; 13.5% (Lender's prime rate + 5%)
Tranche F: $ 25,000,000; $25,000,000; 9.5% (Lender's prime rate + 1%)
The borrowing availability under certain Tranches is also limited by amounts
borrowed under other Tranches, outstanding receivables, insurance premiums
written, and in some cases, additional restrictions. As a result of these
additional restrictions, the Company had approximately $53 million total
potential borrowing capacity as of December 31, 1997.
The terms of the line of credit agreement provide that the finance
receivables are pledged as collateral for the amount outstanding. The
agreement requires the Company to maintain certain financial ratios at
established levels and comply with other non-financial requirements which may
be amended from time to time. Also, the Company may pay dividends up to 25%
of the current year's net income. As of December 31, 1997, the Company met
all such ratios and requirements or obtained waivers for any instances of
non-compliance.
(8) Notes Payable to Affiliates
The Company had notes payable to affiliates of approximately $1,015,000 at
December 31, 1997 and $744,000 at December 31, 1996. During 1996, 340,000
shares of Preferred Stock B of Thaxton Insurance Group were converted to
$340,000 of notes payable.
(9) Benefits
In 1995 the Board of Directors of the Company adopted the Thaxton Group, Inc.
1995 Stock Incentive Plan (the "Incentive Plan"), under which 620,000 shares
of common stock were available for grants to key employees of the Company.
Awards under the Incentive Plan may include, but are not limited to, stock
options, stock appreciation rights, restricted stock, performance awards and
other common stock and common stock-based awards. Stock options granted under
the Incentive Plan may be either incentive stock options or non-qualified
stock options. During 1996, the Company granted 20,000 options to employees
under the Incentive Plan at an exercise price of $9.00 per share. The options
vest and become exercisable in installments of 20% of the shares on each of
the first, second, third, fourth, and fifth anniversary dates of the grant.
Options to purchase 4,000 shares were exercisable at December 31, 1997. All
options granted in 1996 have a contractual maturity of ten years. The grant
date fair value of options granted during 1996 was $3.90 per share as
determined by using the Black-Scholes option pricing model with the following
assumptions: (1) risk-free interest rate of 6.25%; (2) expected life of 5
years; (3) expected volatility of 10.40%; and (4) no expected dividends.
These options were immaterial to the proforma net income or earnings per
share in 1997 and 1996.
F-14
(9) Benefits, Continued
Under the Incentive Plan, the Company granted a restricted stock award of
100,000 shares of common stock to an executive officer of the Company. The stock
award became effective December 29, 1995 ("Vesting Date") with 10,000 shares
vesting at that time. The remaining shares become vested at the rate of 10,000
shares per year on the first through the ninth anniversaries of the Vesting Date
only if the executive officer is employed by the Company on the applicable
anniversary date. The Company will record compensation expense over the vesting
period based on the market value at the date of grant. In 1997, the amount to be
vested during 1997 was forfeited by the employee. This is reflected as a
reduction in additional paid-in capital capital and deferred stock award in the
statement of stockholders' equity.
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, 1997, 797 shares were
purchased under this Stock Purchase Plan.
(10) Income Taxes
Income tax expense consists of the following:
Current Deferred Total
1997:
Federal $ (727,994) 6,364 (721,630)
State (2,405) 341 (2,064)
---------- -------- ----------
$ (730,399) 6,705 (723,694)
========== ======== ==========
1996:
Federal 234,067 (22,487) 211,580
State 39,272 (4,228) 35,044
--------- -------- ---------
$ 273,339 (26,715) 246,624
========= ======== =========
A reconciliation of the Company's income tax provision and the amount computed
by applying the statutory federal income tax rate of 34% to net income before
income taxes is as follows:
1997 1996
Statutory rate applied to net income
before taxes $(758,209) 214,475
Increase (decrease) in income
resulting from:
Goodwill amortization 43,909 50,809
TRL nontaxable income (109,847) (79,132)
State taxes, less related federal benefit (83,045) 23,129
Valuation allowance adjustment 81,283 -
Other 102,215 37,343
-------- ---------
Income taxes $(723,694) 246,624
========= =========
F-15
(10) Income Taxes, Continued
The effective tax rate was (32.5%) and 39.1% for the years ended December 31,
1997 and 1996, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1997
and 1996 are presented below:
1997 1996
Deferred tax assets:
Loan loss reserves $ 984,280 872,213
State net operating loss carryforwards 81,283 -
Unearned interest and fees - 28,856
Other 100,454 34,016
------- --------
Total gross deferred tax assets 1,166,017 935,085
--------- --------
Less valuation allowance (81,283) -
-------- ----
Net deferred tax assets 1,084,734 935,085
--------- --------
Deferred tax (liabilities)
Prepaid insurance (209,799) (300,525)
Depreciable basis of fixed assets (139,417) (92,144)
Deferred loan costs (250,279) (88,232)
Intangible Assets (232,115) (146,667)
Other (15,124) (4,705)
-------- ---------
Total gross deferred tax liability (846,734) (632,273)
-------- --------
Net deferred tax asset $ 238,000 302,812
======= ========
The Company recorded deferred tax liabilities of $58,107 related to its 1997
acquisition of Auto-Cycle Insurance Agency, Inc. The balance of the change in
the net deferred tax asset, net of the change in the valuation allowance, is
reflected as a deferred income tax expense in the accompanying consolidated
statements of income.
There was no valuation allowance for deferred tax assets as of January 1, 1996.
The change in the valuation allowance for 1997 and 1996 was an increase of
$81,283 and $0, respectively. The valuation allowance relates to certain state
net operating loss carryforwards. It is management's opinion that realization of
the net deferred tax asset 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 1994 and subsequent years are subject to review by taxing
authorities.
(11) Preferred Stock
The Company issued three series of preferred stock during 1997. 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, for $15 per share.
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. For a five year conversion period commencing January
1, 1998,
F-16
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 B stock at any time after December 31, 1999, for $15 per share.
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
are $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.
(12) Earnings Per Share Information
The Company has adopted the provisions of SFAS 128, "Earnings per Share"
("EPS"), for the year ended December 31, 1997. The presentation of primary and
fully diluted EPS has been replaced with a presentation of basic and diluted
EPS. Prior period EPS data has been restated to reflect the adoption of SFAS
128.
The following is a summary of the earnings per share calculation for the years
ended December 31, 1997 and 1996:
1997 1996
---- ----
BASIC
Net income (loss) $(1,506,333) 384,184
Less: Dividends on preferred stock 4,167 25,500
-----------------------------
Net income applicable to common
shareholders (numerator) (1,510,500) 358,684
-----------------------------
Average common shares outstanding
(denominator) 3,913,083 3,830,472
-----------------------------
Earnings (loss) per share -- basic $ (0.39) 0.09
=============================
DILUTED
Net income (loss) $(1,506,333) 384,184
Less: Dividends on preferred stock 4,167 25,500
-----------------------------
Net income applicable to common
shareholders (numerator) (1,510,500) 358,684
-----------------------------
Average common shares outstanding 3,913,083 3,830,472
Dilutive common stock assumed converted 234 --
-----------------------------
Average diluted shares outstanding
(denominator) 3,913,317 3,830,472
-----------------------------
Earnings (loss) per share -- diluted $ (0.39) 0.09
=============================
F-17
TABLE OF CONTENTS
Prospectus Summary ........................................................ 2
Risk Factors .............................................................. 6
Use of Proceeds ........................................................... 10
Description of Securities ................................................. 12
Selected Consolidated Financial Data ...................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................. 20
Business .................................................................. 29
Management ................................................................ 39
Principal and Management Shareholders ..................................... 42
Certain Transactions ...................................................... 42
Legal Matters ............................................................. 43
Experts ................................................................... 43
Plan of Distribution ...................................................... 43
Available Information ..................................................... 43
Financial Statements ...................................................... F-1
-----------------------------
NO OFFICER, EMPLOYEE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY August 18,
1998 INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING OF SECURITIES 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 THE 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.
-----------------------------
THE THAXTON GROUP, INC.
$50,000,000
AGGREGATE PRINCIPAL AMOUNT
OF
SUBORDINATED TERM NOTES
DUE 1,6, 12, 36 AND 60 MONTHS
AND
SUBORDINATED DAILY NOTES
-----------------------------
PROSPECTUS
-----------------------------
August__, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company 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 Company or serving in a similar
capacity at the Company's 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 Company, 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 the
Company's best interest, and in all other cases, he shall not have been adjudged
to be liable to the Company.
The South Carolina Business Corporation Act of 1988 also permits certain
corporations (including the Company), 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 of 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. The Company's Amended and Restated Articles
of Incorporation include such a provision. As a result of the inclusion of such
provision, shareholders of the Company 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....................$14,750
NASD filing fee.................................................. $5,500
Printing expenses................................................ 25,000*
Legal fees and expenses.......................................... 40,000
Accounting fees and expenses..................................... 12,500*
Blue Sky filing fees............................................. 4,300
Trustee's fees and expenses...................................... 43,000*
Miscellaneous expenses........................................... 4,950*
--------
Total $150,000*
========
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On December 29, 1995, $1.0 million of subordinated debt held by affiliates
of the Company was converted into 111,111 shares of Common Stock. This
transaction was not registered under the Securities Act pursuant to the
exemption provided by Section 4(2) thereof for transactions not involving any
public offering.
On October 31, 1996, the Company acquired Thaxton Insurance by exchanging
300,000 shares of Common Stock for all of the outstanding capital stock of
Thaxton Insurance. The capital stock of Thaxton Insurance was acquired from
James D. Thaxton, C.L. Thaxton, Sr., and William H. Thaxton. This transaction
was not registered under the Securities Act pursuant to the exemption provided
by Section 4(2) thereof for transactions not involving any public offering.
On July 1, 1997, the Company began offering and selling only to residents
of the State of South Carolina up to $10 million in Subordinated Term Notes due
1, 6, 12, 36 and 60 months, with interest rates ranging from 5.5% to 8.25% per
annum (the "SC Term Notes"). Through November 30, 1997, the Company had sold
$1,566,137 in aggregate principal amount of SC Term Notes. Offers and sales of
the SC Term Notes were not registered under the Securities Act pursuant to the
exemption provided by Section 3(a)(11) thereunder.
On November 10, 1997 the Company entered into an agreement with Jack W.
Robinson and certain of his affiliates pursuant to which they exchanged 27,076
shares of Common Stock for an equal number of shares of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred Stock"). The terms of the
Series B Preferred Stock are identical to the Company's Series A Preferred Stock
except that dividends thereon are payable, at the Company's option, in
additional shares of Series B Preferred Stock. On July 1, 1998, the Company
entered into a subsequent agreement with Jack W. Robinson and certain of his
affiliates pursuant to which they exchanged all of the shares of Series B
Preferred Stock, plus 29,200 shares of common stock for a total of 56,276 shares
of the Company's Series D Preferred Stock (the "Series D Preferred Stock"). The
terms of the Series D Preferred Stock are similar to the Series A Preferred
Stock, except that they provide for an $0.80 annual dividend rate, and it is not
convertible into Common Stock. These transactions were not registered under the
Securities Act pursuant to the exemption provided by Section 4(2) thereof for
transactions not involving any public offering.
ITEM 27. EXHIBITS
1 Form of Selling Agent Agreement between the Company and Maxwell
Investments, Inc. (7)
3.1 Amended and Restated Articles of Incorporation of The Thaxton Group,
Inc.(1)
3.2 Bylaws of the Thaxton Group, Inc.(1)
4.1 Form of Indenture, dated as of February 17, 1998, between the Company and
The Bank of New York, as Trustee(7)
4.2 Form of Subordinated Daily Note (included as Exhibit A to Form of
Indenture)
4.3 Form of Subordinated One Month Note (included as Exhibit B to Form of
Indenture)
4.4 Form of Subordinated Term Note for 6, 12, 36 and 60 Month Notes (included
as Exhibit C to Form of Indenture)
5 Opinion of Moore & Van Allen, PLLC(7)
10.2 Loan Agreement dated May 16, 1994 between the American Bankers Insurance
Company of Florida and the Company(1)
10.3 Security Agreement dated January 19, 1995 between the Company and Oakland
Auto Sales, including Guaranty by Thaxton Insurance Group, Inc.(1)
10.4 Form of Restricted Stock Award between the Company and Robert L Wilson
10.5 The Thaxton Group, Inc. 1995 Stock Incentive Plan(1)
10.6 The Thaxton Group, Inc. Employee Stock Purchase Plan(1)
10.8 Incentive Stock Option Agreement between Kenneth H. James and the
Company (2)
10.11 Incentive Stock Option Agreement between James A. Cantley and the
Company(2)
10.12 Loan Agreement dated March 18, 1996 between the American Bankers
Insurance Company of Florida and the Company(2)
10.14 Aircraft Sales Agreement between Corporate Aircraft Marketing and The
Company dated July 16, 1996(3)
10.15 Share Exchange Agreement by and among The Thaxton Group, Inc., Thaxton
Insurance Group, Inc., James D. Thaxton, William H. Thaxton and Calvin L.
Thaxton, Jr.(4)
10.17 Form of Stock Purchase Agreement by and between the Company and Jack W.
Robinson and affiliates (6)
10.18 First Amended and Restated Loan and Security Agreement dated September 3,
1997 between Finova Capital Corporation and the Company (6)
10.19 Schedule to First Amended and Restated Loan and Security Agreement (6)
10.20 Share Exchange Agreement, dated July 1, 1998, between the Company and
certain affiliates of Jack W. Robinson
22 Subsidiaries of The Thaxton Group, Inc. (5)
24.1 Consent of KPMG Peat Marwick, LLP
24.2 Consent of Moore & Van Allen, PLLC (included in Exhibit 5 to this
Registration Statement)(7)
25 Power of Attorney (included on the Signature Page of this Registration
Statement)
26 Form T-1, Statement of Eligibility of Trustee(7)
- --------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Commission File No. 33-97130-A.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1996.
(4) Incorporated by reference the Company's Current Report on Form 8-K dated
October 31, 1996.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-4, Commission File No. 333-28719
(7) Previously filed.
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; 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;
(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 file a post-effective amendment to remove from registration any
of the securities that remain unsold at the termination of the
offering.
(4) 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.
(5) 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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of
the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer 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.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto in the City of Lancaster, State of South Carolina on
August 21, 1998.
THE THAXTON GROUP, INC.
By: /s/ Allan F. Ross
----------------------------------------------
Allan F. Ross, Vice President, Chief Financial
Officer, and Secretary
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Allan F. Ross as his or her
attorney-in-fact, with power of substitution, for him in any and all capacities,
to sign any amendments or supplements to this Registration Statement or any
other instruments he deems necessary or appropriate, and to file the same, with
the exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact of his substitute or substitutes may do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the 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 August 21, 1998
- --------------------- Directors, President and
James D. Thaxton Chief Executive Officer
/s/ Robert L. Wilson Executive Vice President, August 21, 1998
- --------------------- Chief Operating Officer
Robert L. Wilson and Director
/s/ Allan F. Ross Vice President, Chief August 21, 1998
- --------------------- Financial Officer,
Allan F. Ross Secretary and Director
(Principal Accounting
Officer)
/s/ C. L. Thaxton, Sr. Director August 21, 1998
- ----------------------
C.L. Thaxton, Sr.
/s/ Jack W. Robinson Director August 21, 1998
- ----------------------
Jack W. Robinson
/s/ Perry L. Mungo Director August 21, 1998
- -----------------------
Perry L. Mungo