AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997
REGISTRATION NO. 333-28719
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE THAXTON GROUP, INC.
(Name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
SOUTH CAROLINA 6140 57-0669498
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
(803) 285-4336
(Address and telephone number of principal executive offices)
KENNETH H. JAMES
THE THAXTON GROUP, INC.
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
(803) 285-4336
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPY TO:
BARNEY STEWART III
MOORE & VAN ALLEN, PLLC
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA 28202-4003
Approximate date of proposed sale to the public: To commence as soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection without the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
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.
<PAGE>
CROSS REFERENCE SHEET
SHOWING THE LOCATION IN THE PROSPECTUS OF THE
RESPONSES TO THE ITEMS OF PART I OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 ITEM LOCATION IN THE PROSPECTUS
<S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus................... Outside front cover page; facing page
2. Inside Front and Outside Back Cover
Pages of Prospectus...................................... Available Information; Outside back cover page
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.................................... Prospectus Summary; Risk Factors
4. Terms of the Transaction................................. Terms of the Offering; Material Differences Between the
Common Stock and the Series A Preferred Stock
5. PRO FORMA Financial Information.......................... Not Applicable
6. Material Contracts With the Company Being Acquired....... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters............ Not Applicable
8. Interests of Named Experts and Counsel................... Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification
For Securities Act Liabilities........................... Description of the Capital Stock
10. Information With Respect to S-3 Registrants.............. Not Applicable
11. Incorporation of Certain Information by Reference........ Not Applicable
12. Information With Respect to S-2 or S-3 Registrants....... Not Applicable
13. Incorporation of Certain Information by Reference........ Not Applicable
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants................................... Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and Results
of Operations; Business; Market for the Common Stock and
Related Shareholder Matters; Financial Statements
15. Information With Respect to S-3 Companies................ Not Applicable
16. Information With Respect to S-2 or S-3 Companies......... Not Applicable
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies................................ Not Applicable
18. Information if Proxies, Consents or Authorizations Are to
be Solicited............................................. Not Applicable
19. Information if Proxies, Consents or Authorizations Are Not
to be Solicited............................................... Terms of the Offering; Principal and Management
Shareholders; Management; Certain Transactions
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 12, 1997
400,000 SHARES
THE THAXTON GROUP, INC.
7.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
This Prospectus relates to up to 400,000 shares of Series A 7.5%
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") issuable
upon the exercise of subscription rights (the "Rights") offered by The
Thaxton Group, Inc. (the "Company") to holders of its common stock (the "Common
Stock"). Subject to a maximum of 400,000 shares of Series A Preferred Stock
issuable upon exercise of the Rights, each Right entitles the holder of Common
Stock, for each share he owns, to purchase two shares of Series A Preferred
Stock by tendering to First Union National Bank (the "Depositary") one share of
Common Stock and $10 in cash. For example, the record holder of 100 shares of
Common Stock may purchase up to 200 shares of Series A Preferred Stock by
tendering 100 shares of Common Stock and $1,000 in cash to the Depositary. The
rights offering (the "Offering") will terminate at 5:00 p.m. Charlotte, North
Carolina time on December 12, 1997, unless extended by the Company (the
"Expiration Date"). James D. Thaxton, the Company's largest shareholder, has
informed the Company that he will tender 10,000 shares of Common Stock in the
Offering. All other officers and directors have informed the Company that they
will tender a total of 50,000 shares of Common Stock in the Offering. See "Terms
of the Offering."
Each share of Series A Preferred Stock will be convertible, at the
option of the holder, into one share of Common Stock at any time during the
five-year period beginning on January 1, 1998. The Company, at its option, may
redeem all or a portion of the Series A Preferred Stock at any time after
December 31, 1999 for $15 per share. See "Description of Capital Stock."
A shareholder desiring to participate in the Offering should either (1)
complete and sign the Letter of Transmittal accompanying this Prospectus in
accordance with the instructions thereon and mail or deliver it with
certificates representing the shares of Common Stock tendered upon exercise of
the Rights and the appropriate cash payment to the Depositary or (2) request his
broker, dealer, commercial bank, trust company, or other nominee to effect the
transaction for him. Letters of Transmittal delivered to the Depositary may be
withdrawn at any time prior to 5:00 p.m., Charlotte, North Carolina time, on the
Expiration Date, and, unless theretofore accepted by the Company as provided
therein, may also be withdrawn at any time after January 12, 1998. Payments and
certificates for shares of Common Stock delivered to the Depositary will be held
in escrow by the Depositary until the Expiration Date and acceptance of
subscriptions by the Company. In the event that Rights are exercised for more
than 400,000 shares of Series A Preferred Stock, shares of Series A Preferred
Stock will be allocated among participating shareholders as nearly as may be
PRO RATA, disregarding fractions, according to the number of shares subscribed
for by shareholders participating in the Offering. Excess cash payments and
certificates for excess shares of Common Stock tendered by participating
shareholders will be promptly returned by the Depositary to participating
shareholders in the event of an oversubscription. Certificates for shares of
Series A Preferred Stock will be delivered to participating shareholders
promptly after the Expiration Date.
THE SERIES A PREFERRED STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 4, FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS, INCLUDING THE
FACT THAT NO MINIMUM NUMBER OF RIGHTS IS REQUIRED TO BE EXERCISED IN THE
OFFERING AND NO ASSURANCE CAN BE GIVEN THAT ANY PARTICULAR NUMBER OF RIGHTS
WILL BE EXERCISED.
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.
<TABLE>
<CAPTION>
- ---------------------------------------------------------- ------------------ ------------------ -------------------
Price to Proceeds to
Public Commissions(1) Company(2)
- ---------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
Per Share........................................... $10.00 $0 $10.00
- ---------------------------------------------------------- ------------------ ------------------ -------------------
Total............................................... $2,000,000 $0 $2,000,000
- ---------------------------------------------------------- ------------------ ------------------ ===================
</TABLE>
(1) No commissions or other compensation will be paid for soliciting
participants in the Offering. See "Terms of the Offering -- Plan of
Distribution."
(2) Before deducting expenses, payable by the Company, estimated to be
$58,000. One-half, or 200,000, of the shares of Series A Preferred
Stock offered hereby are offered in exchange for an equal number of
shares of Common Stock. The remaining 200,000 shares of Series A
Preferred Stock offered hereby will be sold for cash.
The date of this Prospectus is November 12, 1997.
<PAGE>
"Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such State."
PROSPECTUS SUMMARY
THE FOLLOWING 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 4. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (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, THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING
INFORMATION CONTAINED IN THIS PROSPECTUS WILL IN FACT TRANSPIRE. 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"). 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
entered the mortgage brokerage business and began originating mortgage
loans for Non-prime Borrowers in selected markets during 1997.
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.
There are two primary components of the Company's business strategy.
The first is expansion of its portfolio of finance receivables. The Company
intends to execute this strategy by increasing the volume of Automobile
Sales Contracts purchased and Direct Loans originated by its existing
finance offices and by opening new finance offices. In deciding where to
open new finance offices, the Company will concentrate on smaller urban
areas where the Company generally is able to hire experienced managers who
are familiar with local market conditions and have existing relationships
with local independent dealers. The second component of the Company's
business strategy is diversification into other financial services
businesses. In the past 12 months the Company has entered the insurance
brokerage business by purchasing a multi-office insurance broker and
entered the mortgage banking business. The Company is
actively seeking to enter other financial services businesses by
acquisition or start-up. The Company believes that its large customer base
in the insurance brokerage and lending business offers significant
cross-selling opportunities.
2
<PAGE>
The Company's executive offices are located at 1524 Pageland Highway,
Lancaster, South Carolina 29721, and its telephone number is (803)
285-4336. The Company has a total of 23 finance offices, with 15 located in
South Carolina, three in Virginia, two each in North Carolina and Georgia,
and one in Tennessee, 19 insurance offices, with 12 located in South
Carolina and seven located in North Carolina, and two mortgage offices,
with one in North Carolina and the other in South Carolina. The Company
currently plans to open one additional finance office in 1997 and at least
two finance offices in 1998 either in the states where the Company
currently operates or in one or more adjacent southeastern states.
THE OFFERING
The Company is offering up to 400,000 shares of Series A Preferred Stock
issuable upon the exercise of Rights offered with this Prospectus
to holders of its Common Stock. Subject to a maximum of 400,000 shares of
Series A Preferred Stock issuable upon the exercise of the Rights, each
Right entitles the holder of Common Stock, for each share he owns, to
purchase two shares of Series A Preferred Stock by tendering to the
Depositary one share of Common Stock and $10 in cash. The Rights are not
transferable separately from the Common Stock. See "Terms of the Offering."
<TABLE>
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<S> <C>
Series A Preferred Stock offered in the Offering (maximum).................... 400,000 shares (1)
Series A Preferred Stock to be outstanding after the Offering (maximum)....... 400,000 shares (1)
Common Stock outstanding prior to the Offering................................ 3,919,983 shares
Common Stock outstanding after the Offering (maximum)......................... 3,719,983 shares (1)
Use of proceeds............................................................... Temporary repayment of debt
Expected termination date of the Offering..................................... December 12, 1997
</TABLE>
- -------------
(1) No minimum number of Rights is required to be exercised in the Offering and
there can be no assurance that any particular number of Rights will be
exercised.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ ---------------------
1994 1995 1996 1996 1997
- ---------------------------------- ---------- --------- --------- ---------- ----------
(dollars in thousands)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net interest income............. $4,319 $6,197 $9,319 $4,546 $5,374
Provision for credit losses..... 481 890 3,593 846 1,539
Net interest income after
provision for credit losses. 3,658 5,307 5,726 3,700 3,835
Insurance commissions, net...... 3,354 4,618 5,893 2,692 2,530
Other income.................... 361 579 986 555 650
Operating expenses.............. 6,246 8,767 11,974 5,693 6,099
Income tax expense.............. 464 664 247 471 329
Net income...................... 663 1,073 384 783 587
Net income per common share..... 0.20 0.31 0.09 0.19 0.15
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------
1994 1995 1996 1996 1997
- ---------------------------------- ---------- --------- --------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables............. $22,450 $47,900 $63,107 $57,691 $69,672
Unearned income................. (5,037) (10,823) (14,366) (13,100) (15,814)
Allowance for credit losses..... (424) (783) (2,195) (1,131) (2,390)
Finance receivables, net........ 16,989 36,294 46,546 43,460 51,468
Total assets.................... 21,577 46,760 56,681 51,690 62,708
Total liabilities............... 19,384 40,443 50,310 44,864 55,789
Shareholders' equity........... 2,373 6,316 6,371 6,826 6,919
RECENT DEVELOPMENTS
For certain information regarding the Company's results of operations for
the quarter and nine months ended September 30, 1997, see "Risk Factors--Third
Quarter Increase in Loss Experience; Anticipated Impact on Results of
Operations" and Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments."
3
<PAGE>
RISK FACTORS
IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE EXERCISING THE RIGHTS TO PURCHASE THE SERIES A PREFERRED STOCK.
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, the
Company's 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 maintained or that the rate of future defaults and/or losses
will be consistent with prior experience or at levels that will maintain the
Company's profitability. 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 is
delinquency rates would likely increase.
THIRD QUARTER LOSS EXPERIENCE; ANTICIPATED IMPACT ON RESULTS OF
OPERATIONS. Based upon the Company's loss experience during the quarter ended
September 30, 1997, management has recorded a significant increase in the
Company's allowance for credit losses resulting in an allowance of approximately
$3.4 million at September 30, 1997. This increase in the allowance for credit
losses was due to a substantial increase in net charge-offs to approximately
$1.3 million for the quarter ended September 30, 1997 compared to $1.3 million
for the first six months of 1997. Accordingly, management expects that the
provision for credit losses to be charged against income for the third quarter
will be approximately $2.4 million and that the increased provision will result
in a net loss of approximately $780,000 and $193,000, respectively, for
the quarter and the nine months ended September 30, 1997. Notwithstanding the
increase in the provision for credit losses and corresponding increase in the
allowance for credit losses to be made in the third quarter of 1997, no
assurance can be given that credit losses in excess of such reserves will not
occur in the future. A significant variation in the timing or magnitude of
credit losses on the Company's finance receivable portfolio in future periods
similar to that experienced during the quarter ended September 30, 1997 would
have a material adverse effect on the Company's profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Recent
Developments and "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 to a
large extent 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 expansion
strategy 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. Although the Company intends to remain a
diversified consumer financial services company, it is pursuing a growth
strategy that is focused primarily upon expanding its portfolio of Automobile
Sales Contracts. The Company's prospects of successfully executing this strategy
must be considered in light of the risks described above which are attendant to
expansion of its Automobile Sales Contract portfolio. See "Business -- Business
and Growth Strategy."
NO ACTIVE AND LIQUID TRADING MARKET; POSSIBLE VOLATILITY OF STOCK
PRICE. Prior to the Offering, there has been no market whatsoever for the Series
A Preferred Stock and no active and liquid trading market for the Common Stock.
The exercise price for the Rights and the ratio for conversion of the Series A
Preferred Stock into Common Stock was determined by the Board of Directors of
the Company based upon consideration of several factors, including the Company's
operating history and financial condition, its prospects following the intended
use of the proceeds of the Offering, the consumer financial services industry
in general, and various other factors. Accordingly, the exercise price of the
Rights may not bear a direct relationship to their market value and no assurance
is given that the Series A Preferred Stock can be resold at a price derived from
the exercise price or at any other price. It is unlikely that an active and
liquid trading market for the Series A Preferred Stock will develop after
the Offering. Therefore, investors should have a long-term investment intent
and consider the illiquid nature of the Series A Preferred Stock. The only
trading market that currently exists for the Common Stock, and the only
trading market that is likely to exist for the Series A Preferred Stock and
the Common Stock immediately after the Offering, will be the over-the-counter
market quoted in the OTC Bulletin Board Service operated by the National
Association of Securities Dealers, Inc. (the "NASD"). The trading markets for
securities quoted in the OTC Bulletin Board Service typically lack the depth,
liquidity, and orderliness required to maintain an active market in the trading
of such securities. The current illiquidity of the trading market for the
Common Stock is likely to become even more illiquid to the extent that
shareholders exercise the Rights and the number of outstanding shares of
Common Stock held by non-affiliates of the Company is thereby decreased. See
"Market Price for the Common Stock and Related Shareholder Matters." The
trading price of the Series A Preferred Stock and the Common Stock could be
subject to significant fluctuations in response to variations in the Company's
quarterly operating results, announcements by the Company, its competitors,
and others, general trends and regulatory developments in the consumer
financial services industry, and other factors, including the potential sale
of substantial amounts of the Common Stock to the public by existing
shareholders. See "Securities Eligible for Future Sale." In addition, in recent
years the stock market has experienced large price and volume fluctuations
which often have been unrelated to the operating performance of specific
companies or market segments.
NO MINIMUM NUMBER OF RIGHTS REQUIRED TO BE EXERCISED. In reviewing the
information set forth under the headings "Use of Proceeds," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," shareholders should note that no
minimum number of Rights are required to be exercised in the Offering and no
assurance is given that any particular number of Rights will be exercised.
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
4
<PAGE>
Condition and Results of Operations -- Profitability." The Company currently
does not hedge its interest rate exposure.
KEY MANAGEMENT. 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 used automobile
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, including a number of companies that have recently completed
initial public offerings of common stock, the proceeds from which are to be
used, at least in part, to fund expansion and support increased purchases of
Automobile Sales Contracts. 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 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.
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."
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
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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 June 30, 1997, borrowings of $45.4 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 80% 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. The Company recently
completed the acquisition of Thaxton Insurance, an affiliated insurance agency.
As part of its growth strategy, the Company may pursue acquisitions of other
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. Moreover, the issuance of equity
securities, or securities convertible into equity securities, in connection with
such acquisitions could cause the holdings of existing shareholders to be
diluted. See "Business -- Business and Growth Strategy."
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF OTHER SERIES OF
PREFERRED STOCK. The Company's Amended and Restated Articles of Incorporation
(the "Articles") and Bylaws contain various provisions that may make it more
difficult for a third party to acquire, or may discourage acquisition bids for,
the Company and could limit the price that certain investors might be willing to
pay in the future for shares of the Series A Preferred Stock and the Common
Stock. In addition, the Articles authorize the Board of Directors to designate
and issue up to 3,560,000 additional shares of preferred stock. The Board of
Directors is empowered to determine the price, rights, preferences, privileges,
and restrictions, including voting rights, of these shares without any further
vote or action by the shareholders of the Company. The rights of the holders of
Series A Preferred Stock and Common Stock may be subject to, and adversely
affected by, the rights of the holders of any preferred stock that is issued in
the future. The issuance of such preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire control of the outstanding voting stock of the Company. See "Description
of Capital Stock."
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS. The Company intends to
declare and pay cash dividends on the Series A Preferred Stock, at the annual
rate of 7.5%, on a quarterly basis. However, the ability of the Company to
declare and pay such dividends will depend upon its financial condition, cash
requirements, future prospects, and other factors deemed relevant by the Board
of Directors. See "Dividend Policy" and "Description of Capital Stock --
Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Sale of a substantial number of shares
of the Series A Preferred Stock or the Common Stock to the public following the
Offering, or the perception that such sales may occur, could adversely affect
the market price of the Series A Preferred Stock and the Common Stock. See
"Securities Eligible for Future Sale."
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TERMS OF THE OFFERING
GENERAL
Holders of the Common Stock are hereby granted Rights to purchase up to
400,000 shares of Series A Preferred Stock. Subject to the maximum of
400,000 shares of Series A Preferred Stock issuable upon exercise of Rights,
holders of Common Stock, for each share they own, may purchase two shares of
Series A Preferred Stock by tendering to the Depositary one share of Common
Stock and $10 in cash. For example, subject to proration in the event the
Offering is oversubscribed, a holder of 100 shares of Common Stock may purchase
up to 200 shares of Series A Preferred Stock by tendering 100 shares of Common
Stock and $1,000 in cash to the Depositary. The Offering will terminate at 5:00
p.m. Charlotte, North Carolina time on December 12, 1997. Subject to compliance
with applicable law, the Company reserves the right to extend the Expiration
Date by giving notice of such extension to the Depositary and making a public
announcement thereof.
EXERCISE OF RIGHTS
To exercise Rights, shareholders must deliver the following to
the Depositary:
1. A completed Letter of Transmittal in the form that accompanies
this Prospectus.
2. A stock certificate representing the shares of Common Stock
being tendered to exercise Rights. If the certificate(s)
delivered to the Depositary represent more shares of Common
Stock than are being tendered to exercise Rights, the Depositary
will promptly reissue a new certificate representing the shares
of Common Stock not being tendered promptly after the
Expiration Date.
3. Payment of the required amount of cash to exercise rights.
These items should be delivered to the Depositary at the address
specified below:
FIRST UNION NATIONAL BANK
SHAREHOLDER SERVICES ADMINISTRATION, 3C3
1525 WEST W.T. HARRIS BLVD.
CHARLOTTE, NC 28288-1153
ATTENTION: MYRON O. GRAY
CASH PAYMENT
Prospective purchasers must submit with a completed Letter of
Transmittal full payment of the cash required to exercise Rights. All checks
or other payment instruments for the required cash payment should be made
payable to "FIRST UNION NATIONAL BANK, AGENT FOR THE THAXTON GROUP, INC." Cash
payments received from shareholders will be placed in a noninterest-bearing
escrow account with the Depositary and, accordingly, will not be available for
use by the Company until immediately after the Expiration Date. If for any
reason the Offering is terminated, escrowed funds will be returned without
interest promptly after terminate the Offering.
EXERCISE PRICE OF THE RIGHTS
The Company is hereby offering to sell to the holders of its Common
Stock up to 400,000 shares of Series A Preferred Stock upon exercise of the
Rights. The exercise price of each Right consists of one share of Common Stock
and $10 in cash for two shares of Series A Preferred Stock. The exercise price
of the Rights and the dividend rate, redemption price, conversion ratio, and
other terms of the Series A Preferred Stock were determined by the Board of
Directors of the Company without the benefit of reference to anymarket
whatsoever for the Series A Preferred Stock, an active and liquid trading market
for the Common Stock, or a valuation conducted specifically for the purpose of
the Offering. The Board of Directors determined the exercise price of the Rights
and the terms of the Series A Preferred Stock following consideration of several
factors, including the Company's operating history and financial condition, its
prospects following the intended application of the estimated net cash proceeds
from the Offering, the prospects of the consumer financial services industry in
general, and other factors deemed relevant by the Board of Directors.
Consequently, the exercise price of the Rights
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should not be viewed as having been determined on the basis of the
Company's earnings, book value, or any other objective standard of worth.
OVERSUBSCRIPTION; PRORATION
In the event Rights are exercised for more than 400,000 shares, shares
of Series A Preferred Stock will be allocated among participating shareholders
as nearly as may be PRO RATA, disregarding fractions, in the proportion that
each such shareholders' subscription bears to the total of all subscriptions
submitted. For example, if subscriptions received prior to the Expiration Date
from all participating shareholders total 500,000 shares, a holder who submitted
a subscription for 5,000 shares (one percent of the total number of shares
subscribed) would be allocated 4,000 shares of Series A Preferred Stock (one
percent of the total number of shares available). In the event of an
oversubscription, excess cash payments and excess shares of Common Stock
tendered by participating shareholders will be promptly returned by the
Depositary after the Expiration Date, without interest, to participating
shareholders.
WITHDRAWAL RIGHTS
Letters of Transmittal may be withdrawn at anytime prior to the
Expiration Date and, unless theretofore accepted by the Company, may also be
withdrawn at anytime after 12:00 a.m., Charlotte, North Carolina time, on
January 12, 1998. For a withdrawal to be effective, a notice of withdrawal must
be in written, telegraphic, or facsimile transmission form and must be received
in a timely manner by the Depositary at the address set forth above under the
heading "--Exercise of Rights." Any such notice of withdrawal must specify the
name of the shareholder exercising the Rights, the name of the registered
holder, if different from that of the person who exercised such Rights, the
number of shares of Common Stock tendered, and the number of shares of Common
Stock to be withdrawn. If certificates for shares of Common Stock to be
withdrawn have been delivered or otherwise identified to the Depositary, then,
prior to the release of such certificates, the holder exercising the Rights
must also submit the serial number shown on the particular certificates for
shares of Common Stock to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by a member firm of a registered national
securities exchange, a member of the NASD or a commercial bank or trust company.
Neither the Company, the Depositary, nor any other person is obligated to give
notice of any defects or irregularities in any notice of withdrawal nor will
any of them incur any liability for failure to give any such notice. All
questions as to the form and validity (including the time of receipt) of
notices of withdrawal will be determined by the Company, in its sole discretion,
which determination shall be final and binding. Withdrawals may not be rescinded
and any shares of Common Stock withdrawn will thereafter be deemed not properly
tendered for purposes of the Offering unless such withdrawn shares are properly
retendered prior to the Expiration Date by again following the procedures
described above under the heading "- Exercise of Rights."
BACKGROUND AND REASONS FOR THE OFFERING
In connection with its deliberations regarding the Company's financing
alternatives, the Board of Directors determined that it would be appropriate
and in the best interest of the Company to extend an opportunity to the
Company's existing shareholders to participate in the Offering. The primary
factors considered in reaching this decision were (i) a desire to recognize
the continuing commitment to the Company demonstrated by the holders of its
Common Stock by allowing them to exchange a limited number of common shares
for a more senior security through the exchange component of the Offering and
(ii) the desire to raise additional capital with the sale of additional shares
of Series A Preferred Stock through the cash component of the Offering.
Shareholder approval of the rights offering is not required.
PLAN OF DISTRIBUTION
The Offering will be conducted by one or more of the Company's officers
and directors, none of whom will receive compensation in connection with any
offers or sales of the Series A Preferred Stock. There are no underwriters or
solicitors involved in the Offering.
ACCOUNTING TREATMENT OF THE OFFERING
The shares of Common Stock surrendered in the Offering will be treated
as having been repurchased by the Company for $10 per share and the shares of
Series A Preferred Stock issued in the Offering will be treated as having been
sold for $10 per share.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The Company has received an opinion from its counsel, Moore & Van
Allen, PLLC, to the effect that the Offering will result in a tax-free
recapitalization of the Company for federal income tax purposes (the "Opinion").
Accordingly, the surrender by a shareholder of shares of Common Stock for shares
of Series A Preferred Stock pursuant to the Offering will not result in the
recognition of taxable gain or loss for federal income tax purposes. The
shareholder's tax basis in the Series A Preferred Stock received in the Offering
will be equal to the shareholder's tax basis in the Common Stock surrendered in
the exchange, plus the cash paid to the Company.
The Opinion notes that it is possible that the Series A Preferred Stock
received in exchange for Common Stock will be "Section 306 stock." Subject to
certain exceptions, all or part of the amount received by a selling shareholder
pursuant to a sale, redemption, or other taxable disposition of Section 306
stock will be treated as ordinary income rather than as proceeds from the sale
of a capital asset. In general, preferred stock received in a tax-free exchange
for common stock is Section 306 stock and subject to ordinary income treatment.
However, the receipt and subsequent disposition of such stock will not be
treated as the receipt and disposition of Section 306 stock if it can be
established to the satisfaction of the U.S. Treasury Department that such
receipt and disposition did not have federal tax avoidance as a principal
purpose. While management believes that the Offering does not have federal tax
avoidance as a principal purpose, no ruling or opinion to such effect will be
sought from the Internal Revenue Service (the "IRS"). Therefore, there can be no
assurance that the IRS will not successfully assert that such stock should be
treated as Section 306 stock.
THE FOREGOING DISCUSSION IS NOT INTENDED TO BE AN EXHAUSTIVE DISCUSSION
OF ALL FEDERAL TAX ASPECTS OF THE OFFERING AND OWNERSHIP OF THE SERIES A
PREFERRED STOCK. BECAUSE CERTAIN TAX CONSEQUENCES OF PARTICIPATING IN THE
OFFERING MAY VARY DEPENDING UPON THE PARTICULAR CIRCUMSTANCES OF EACH
SHAREHOLDER AND OTHER FACTORS, EACH SHAREHOLDER IS URGED TO CONSULT THEIR OWN
TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES OF PARTICIPATING IN THE
OFFERING (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND
OTHER TAX LAWS).
MANAGEMENT PARTICIPATION
James D. Thaxton, C. L. Thaxton, Sr., and Perry L. Mungo have informed
the Company that they will tender 10,000, 40,000, and 10,000 shares of Common
Stock, respectively, in the Offering. All other officers and directors of the
Company have indicated that they will not participate in the Offering.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock, all which have a par value
of $.01 per share. The following description of the capital stock of the Company
discusses the material rights of holders of the Company's capital stock but does
not purport to be complete or to give full effect to provisions of South
Carolina statutory or common law and is subject in all respects to the
provisions of the Company's Articles and Bylaws and to the certificates of
designation for designated series of preferred stock, copies of which have been
filed as exhibits to the Company's Registration Statement on Form S-4. See
"Additional Information."
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of liquidation, dissolution, or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
liquidation rights of holders of preferred stock, if any, then outstanding. The
Common Stock has no preemptive, conversion, or subscription rights other than
the Rights. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors, without any further vote or action by the
shareholders, has authority under the Articles to issue preferred stock in one
or more series and to fix the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of shares of undesignated
preferred stock and to fix the number of shares constituting any series and the
designations of such series. The issuance of preferred stock may have the effect
of delaying, deferring, or preventing a change in control of the Company and
could adversely affect the voting power of the holders of Common Stock. The
Board of Directors has designated the following series of preferred stock
pursuant to its authority under the Articles:
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK. The Board of Directors
has adopted a resolution designating 1,400,000 shares of preferred stock "Series
A Redeemable Convertible Preferred Stock." No shares of Series A Preferred Stock
have been issued prior to the date of this Prospectus. Up to 400,000 shares of
Series A Preferred Stock may be issued in the Offering.
The holders of Series A Preferred Stock are entitled to receive, when
and as declared by the Board of Directors, dividends on a pro rata basis in cash
at the rate of $0.75 per share per annum. Such dividends are expected to be paid
quarterly. Dividends may be declared and paid upon shares of Common Stock in any
fiscal year of the Company only if dividends have been declared and paid to
holders of Series A Preferred Stock at this annual rate on a quarterly basis
during the year. The right to dividends on Series A Preferred Stock is
cumulative.
With respect to liquidation preferences, the Series A Preferred Stock
is pari passu with the Series B Preferred Stock and senior to the Common Stock.
Accordingly, upon the liquidation, dissolution, or winding up of the Company,
holders of the Series A Preferred Stock will be entitled to receive, on a
ratable and pari passu basis with the holders of the Series B Preferred Stock,
out of the assets of the Company legally available for distribution to its
shareholders and before any payment is made to holders of Common Stock, a
liquidation preference of $10 per share.
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK. The Board of Directors
has adopted a resolution designating 40,000 shares of preferred stock "Series B
Redeemable Convertible Preferred Stock" and has authorized the officers of the
Company to enter into an agreement with Jack W. Robinson and certain of his
affiliates to issue 30,925 shares of Series B Preferred Stock in exchange for an
equal number of shares of Common Stock. This transaction is expected to close
during the fourth quarter of 1997. See "Certain Transactions -- Issuance of
Series B Preferred Stock."
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The holders of Series B Preferred Stock are entitled to receive, when
and as declared by the Board of Directors, dividends on a pro rata basis in
additional shares of Series B Preferred Stock at the annual rate of 0.075 shares
per share of the Series B Preferred Stock outstanding. Dividends may be declared
and paid upon shares of Common Stock in any fiscal year of the Company only if
dividends have been declared and paid to holders of Series B Preferred Stock at
this rate during the year. The Board of Directors may, at any time, elect to
declare and pay dividends on all or a portion of the Series B Preferred Stock
in cash in lieu of shares of Series B Preferred Stock. The right to dividends
on Series B Preferred Stock is cumulative.
With respect to liquidation preferences, the Series B Preferred Stock,
is pari passu with the Series A Preferred Stock and senior to the Common Stock.
Accordingly, upon the liquidation, dissolution, or winding up of the Company,
holders of the Series B Preferred Stock will be entitled to receive, on a
ratable and pari passu basis with the holders of the Series A Preferred Stock,
out of the assets of the Company legally available for distribution to its
shareholders before any payment is made to holders of Common Stock, a
liquidation preference of $10 per share.
CONVERSION RIGHTS. Each share of Series A Preferred Stock and
Series B Preferred Stock is convertible, at the option of the holder during a
five-year period that commences on January 1, 1998 (the "Conversion Period"),
into one fully paid and nonassessable share of Common Stock. The holder of any
shares of Series A Preferred Stock or Series B Preferred Stock may elect to
exercise the conversion right as to all or a the portion of such shares by
delivering the relevant stock certificates and written notice of the election
to the Company at any time during the Conversion Period. The conversion ratio
of one share of Series A Preferred Stock or Series B Preferred Stock for
one share of Common Stock (the "Conversion Ratio") is subject to adjustment in
certain circumstances. If the Company subdivides or combines the outstanding
shares of Common Stock or issues a stock dividend with respect to the Common
Stock (a "Recapitalization Event"), the Conversion Ratio in effect immediately
prior to the Recapitalization Event will be adjusted such that each holder of
Series A Preferred Stock or Series B Preferred Stock will be entitled to
receive, upon conversion, the number of shares of Common Stock that would have
been held immediately after the Recapitalization Event had the conversion right
been exercised immediately prior to the Recapitalization Event.
REDEMPTION. The Company may redeem all or a portion of the Series A
Preferred Stock and the Series B Preferred Stock at any time after December 31,
1999 for $15 per share.
VOTING RIGHTS. Except as provided by law, the holders of the Series A
Preferred Stock and the Series B Preferred Stock have no voting rights.
EQUITY SECURITIES RESERVED FOR ISSUANCE
As of December 31, 1996, the Company had reserved 497,993 shares of
Common Stock for issuance under the 1995 Incentive Stock Plan and 99,203 shares
of Common Stock for issuance under the Employee Stock Purchase Plan.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of the Articles and Bylaws described below could
have the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management. In addition, the exculpation
provisions in the Articles with respect to directors and the indemnification
provisions in the Bylaws described below may discourage shareholders from
bringing a lawsuit against directors for breach of their fiduciary duty and also
may have the effect of reducing the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise have benefited the Company and its shareholders. A shareholder's
investment in the Company may be adversely affected to the extent that
litigation costs and damage awards against the Company's directors and officers
are paid by the Company pursuant to the indemnification provisions described
below.
SPECIAL MEETINGS OF SHAREHOLDERS. The Bylaws provide that special
meetings of the shareholders of the Company may be called only by the Chairman
of the Board of the Company, the President of the Company, a majority of the
directors or holders of at least 10% of the shares of the Common Stock issued
and outstanding. This provision renders it more difficult for shareholders
to take action opposed by the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as director as well as for other
shareholder proposals to be considered at shareholders' meetings. Notice of
shareholder proposals and director nominations must be timely given in writing
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to the Secretary of the Company prior to the meeting at which the matters are to
be acted upon or the directors are to be elected.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The Bylaws provide
that the Board of Directors will consist of between three and nine members, as
determined from time to time by the Board of Directors. The Company currently
has six directors. Further, subject to the rights of the holders of any series
of preferred stock then outstanding, the Bylaws authorize only the Board of
Directors to fill newly created directorships. Accordingly, this provision could
prevent a shareholder from obtaining majority representation on the Board of
Directors by enlarging the Board of Directors and filling the new directorships
with its own nominees. Subject to the rights of the holders of any series of
preferred stock then outstanding, the Bylaws also provide that directors of the
Company may be removed only by the affirmative vote of holders of a majority of
the outstanding shares of voting stock.
LIMITATION OF LIABILITY. The Articles eliminate, to the fullest extent
permitted by the South Carolina Business Corporation Act of 1988 (the "Business
Corporation Act"), the personal liability of each director to the Company or its
shareholders for monetary damages for breach of duty as a director. This
provision in the Articles does not change a director's duty of care, but it
eliminates monetary liability for certain violations of that duty, including
violations based on grossly negligent business decisions that may include
decisions relating to attempts to change control of the Company. The provision
does not affect the availability of equitable remedies for a breach of the duty
of care, such as an action to enjoin or rescind a transaction involving a breach
of fiduciary duty. In certain circumstances, however, equitable remedies may not
be available as a practical matter. Under the Business Corporation Act, the
limitation of liability provision is ineffective against liabilities for (i)
acts or omissions that the director knew or believed at the time of the breach
to be clearly in conflict with the best interests of the Company, (ii) unlawful
distributions as defined by the Business Corporation Act, or (iii) any
transaction from which the director derived an improper personal benefit. The
provision also in no way affects a director's liability under the federal
securities laws.
INDEMNIFICATION. The Bylaws provide that, in addition to the
indemnification of directors and officers otherwise provided by the Business
Corporation Act, the Company's current or former directors, officers and
employees will be indemnified against any and all liability and litigation
expenses, including reasonable attorneys' fees, arising out of their status or
activities as directors, officers and employees, except for liability or
litigation expense incurred on account of activities that were at the time known
or believed by such director, officer or employee to be clearly in conflict with
the best interests of the Company. The Bylaws also provide that this right to
indemnification is not exclusive of any other right now possessed or hereafter
acquired under any statute, agreement or otherwise.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock and the Series A
Preferred Stock is First Union National Bank, with its main office in Charlotte,
North Carolina.
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MATERIAL DIFFERENCES BETWEEN THE COMMON STOCK AND
THE SERIES A PREFERRED STOCK
GENERAL
The rights of holders of the Common Stock and the Series A Preferred
Stock are governed by the Business Corporation Act and the Articles and Bylaws.
The material differences between the rights of a holder of the Common Stock and
the rights of a holder of Series A Preferred Stock are summarized below. The
following summary does not, however, purport to be a complete discussion of, and
is qualified in its entirety by reference to, the Business Corporation Act, the
Articles and Bylaws, and the section of this Prospectus entitled "Description of
Capital Stock."
VOTING RIGHTS
The Common Stock is the Company's only class of voting stock. Each
outstanding share of the Common Stock is entitled to one vote on each matter
submitted to a vote at meeting of shareholders. Holders of Series A Preferred
Stock have voting rights only in situations where the Business Corporation Act
confers mandatory voting rights. Mandatory voting rights generally arise only
when amendments to the Articles are proposed that require shareholder approval
and affect the relative rights and preferences of the Series A Preferred Stock.
DIVIDENDS
Holders of both the Common Stock and the Series A Preferred Stock are
entitled to receive dividends when and as declared by the Board of Directors. To
date, the Company has not paid dividends on the Common Stock and it is the
intention of the Board of Directors to continue this policy with respect to the
Common Stock. It is currently policy of the Board of Directors to declare and
pay dividends on outstanding shares of the Series A Preferred Stock on a
quarterly basis at an annual rate of 7.5%. See "Dividend Policy." Dividends on
the Series A Preferred Stock are cumulative and are prior and in preference to
any declaration or payment of dividends on the Common Stock and are equal in
right of payment with the Series B Preferred Stock. The Articles authorize the
Board of Directors to designate and issue additional series of preferred stock
with dividend preferences superior to the Series A Preferred Stock and the
Common Stock without shareholder approval.
LIQUIDATION PREFERENCES
Upon any liquidation, dissolution, or winding up of the Company, no
distribution may be made to the holders of the Common Stock unless, prior
thereto, the holders of Series A Preferred Stock and the Series B Preferred
Stock each receive $10 per share. Following payment in full of this liquidation
preference, the holders of Series A Preferred Stock are entitled to no further
distributions from the assets of the Company. Subsequent to the payment of the
liquidation preferences on the Series A Preferred Stock and the Series B
Preferred Stock, the holders of the Common Stock are entitled to receive all
remaining assets of the Company on a PRO RATA basis. The Articles authorize
the Board of Directors to designate and issue additional series of preferred
stock with liquidation preferences superior to the Series A Preferred Stock and
the Common Stock without shareholder approval.
CONVERSION RIGHTS
Holders of Series A Preferred Stock may convert their shares into an
equal number of shares of Common Stock at any time during the five-year period
that begins on December 31, 1997. Holders of the Common Stock have no conversion
rights.
REDEMPTION RIGHTS
The Company may, but is not required to, redeem outstanding shares of
the Series A Preferred Stock at any time after December 31, 1999. The Company
has no redemption rights with respect to the Common Stock.
14
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of up to 400,000
shares of Series A Preferred Stock offered hereby are estimated to be
$1,942,000 if all of the Rights are exercised. There is, however, no minimum
number of Rights required to be exercised in the Offering and no assurance can
be given that any particular number of Rights will be exercised. The Company
intends to use the net cash proceeds of the Offering 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 a 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. At June
30, 1997, $44.6 million was outstanding under the primary tranche and $775,000
was outstanding under Tranche B. The interest rate for borrowings is a defined
prime rate plus one percent per annum for the primary tranche and plus five
percent per annum for Tranche B (9.50% and 13.50%, respectively, at June 30,
1997). The Company expects to continue using the Revolving Credit Facility to
fund the growth of its business after the completion of the Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Business and
Growth Strategy."
DIVIDEND POLICY
The Board of Directors intends to cause the Company to retain earnings
to support the growth and development of its business. Accordingly, the Board of
Directors does not anticipate that any dividends will be declared on the Common
Stock for the foreseeable future. It is the current policy of the Board of
Directors to declare and pay dividends on outstanding shares of the Series A
Preferred Stock on a quarterly basis at an annual rate of 7.5%. The ability of
the Company to declare and pay such dividends will depend upon its financial
condition, cash requirements, future prospects, requirements of covenants under
the Revolving Credit Facility, and other factors deemed relevant by the Board of
Directors. The Revolving Credit Facility presently limits the payment of
dividends on the Common Stock to 25% of the Company's net income for the year of
payment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources," "Business --
Financing," and "Description of Capital Stock -- Preferred Stock."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 on an actual basis and as adjusted to reflect the sale by the Company
of the maximum of 200,000 shares of Series A Preferred Stock in the Offering
for cash at a price of $10 per share, the application of the net proceeds
therefrom, and the exchange of the maximum of 200,000 shares of Common Stock
for an equal number of shares of Series A Preferred Stock. There is no minimum
number of Rights required to be exercised in the Offering and no assurance can
be given that any particular number of Rights will be exercised. See "Use of
Proceeds."
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL (MAXIMUM)
-------------- --------------
<S> <C> <C>
Revolving Credit Facility $45,350,000 $43,408,000
Short-term notes payable 7,021,911 7,021,911
Shareholders' equity:
Series A Preferred Stock, $.01 par value, no shares authorized,
issued or outstanding, actual; 400,000 shares authorized, issued,
and outstanding, as
adjusted --- 4,000
Common Stock, $.01 par value, 50,000,000 shares authorized,
3,924,382 shares issued and outstanding, actual;
3,724,382 shares issued and outstanding, as adjusted (1) 39,244 37,244
Additional paid-in capital 3,420,500 5,360,500
Deferred stock award (675,000) (675,000)
Retained earnings 4,134,696 4,134,696
-------------- --------------
Total shareholders' equity 6,919,440 8,861,440
-------------- --------------
Total capitalization $59,291,351 $59,291,351
============== ==============
</TABLE>
---------------
(1) Does not include 155, 475 shares held by Thaxton Insurance, a
wholly-owned subsidiary of the Company.
16
<PAGE>
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 data at December 31, 1995 and 1996 and the income
statement data for the years then ended, are derived from the consolidated
financial statements of the Company audited by KPMG Peat Marwick LLP,
independent auditors, which are included elsewhere in this Prospectus. Such
financial statements 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.
The balance sheet data at December 31, 1994 and the income statement data for
the year then ended are derived from consolidated financial statements of the
Company. The selected financial data presented below for the six months
ended June 30, 1996 and 1997, and as of June 30, 1997 are derived from the
unaudited consolidated financial statements of the Company included elsewhere in
this Prospectus. Such statements have been prepared in conformity with generally
accepted accounting principles and include all adjustments which are, in the
opinion of management, necessary to a fair presentation of the results for the
interim periods presented. All such adjustments are, in the opinion of
management, of a normal recurring nature. Results of operations for the six
months ended June 30, 1997 are not necessarily indicative of results to be
expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------- --------- ---------- --------------------
1994 1995 1996 1996 1997
---------- --------- ---------- ---------- ---------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and fee income..................$5,438 $9,182 $13,529 6,553 7,768
Interest expense......................... 1,299 2,985 4,210 2,007 2,394
Net interest income...................... 4,139 6,197 9,319 4,546 5,374
Provision for credit losses 481 890 3,593 846 1,539
Net interest income after provision .... 3,658 5,307 5,726 3,700 3,835
for credit losses
Insurance commissions, net............... 3,354 4,618 5,893 2,692 2,530
Other income............................. 361 579 986 555 650
Operating expenses....................... 6,246 8,767 11,974 5,693 6,099
Income tax expense....................... 464 664 247 471 329
Net income...............................$ 663 $ 1,073 $ 384 $ 783 $ 587
Net income per common share..............$ 0.20 $ 0.31 $ 0.09 $ 0.19 $0.15
Pro forma net income per share (1) .... -- -- $0.07 -- $0.13
Common shares outstanding................ 3,309 3,938 3,932 3,938 3,924
</TABLE>
- --------------------
(1) The pro forma net income per share data give effect to the issuance of
200,000 shares of Series A Preferred Stock for an equal number of
shares of Common Stock, 200,000 shares of Series A Preferred Stock for
cash, and assumes net cash proceeds of $1.9 million. Net income was
increased for the interest savings assumed on the net proceeds at an
annual rate of 9.50%, net of income tax expense at an annual rate of
37.5%. Net income was reduced for preferred dividends payable at the
annual rate of 7.5% to determine net income available for common
shareholders.
17
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1994 1995 1996 1996 1997
--------------------------------- --------------------
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Average interest rate earned (1)(2)....... 39.24% 33.78% 30.92% 32.18% 30.33%
Average interest rate paid (2)............ 9.74 11.32 10.21 10.26 9.73
Net interest spread (2)................... 29.50 22.46 20.71 21.92 20.60
Net interest margin (2)(3)................ 31.11 23.85 22.14 23.38 21.97
Allowance for credit losses as a
percentage of Net Finance
Receivables (4)........................... 2.44 2.05 4.35 2.19 4.28
Allowance for credit losses, dealer
reserves and discount on bulk purchases as
a percentage of Net Finance
Receivables (4)........................... 6.07 4.91 7.81 4.86 7.75
Net charge-offs as a percentage
of average Net Finance Receivables (2).. 3.11 3.08 5.06 3.20 5.26
</TABLE>
- --------------------
(1) Average interest rate earned represents interest and fee income for the
period divided by average Net Finance Receivables during the period.
(2) Percentages for the six months ended June 30, 1996 and 1997 are
computed using annualized operating data which do not necessarily
represent the comparable data for a full twelve-month period.
(3) Net interest margin represents net interest income for the period
divided by average Net Finance Receivables during the period.
(4) Net finance receivable balances are presented net of unearned finance
charges only.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1997
------------------------------------- --------------------------
1994 1995 1996 ACTUAL AS ADJUSTED(1)
----------- ------------ ------------ ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables........ $22,450 $47,900 $63,107 $69,672 $69,672
Unearned income (2)........ (5,037) (10,823) (14,366) (15,814) (15,814)
Allowance for credit losses (424) (783) (2,195) (2,390) ( 2,390)
Finance receivables, net... 16,989 36,294 46,546 51,468 51,468
Total assets.............. 21,757 46,760 56,681 62,708 62,708
Total liabilities......... 19,384 40,443 50,310 55,789 53,847
Shareholders' equity...... 2,373 6,316 6,371 6,919 8,861
</TABLE>
- --------------------
(1) Gives effect to the issuance of 200,000 shares of Series A Preferred
Stock for an equal number of shares of Common Stock, 200,000 shares of
Series A Preferred Stock for cash, and assumes the receipt of $1.9
million in net cash proceeds and the application of such proceeds to
pay down borrowings as if each event had occurred on June 30, 1997.
(2) Includes unearned finance charges, dealer reserves on Automobile Sales
Contracts and discounts on bulk purchases. Dealer reserves and
discounts on bulk purchases totaled $105,928, $327,807, $631,709,
$1,091,979, and $1,747,000 at December 31, 1992, 1993, 1994, 1995, and
1996 respectively, and $1,936,542 at June 30, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company's experienced a significant increase in credit losses
during the quarter ended September 30, 1997 resulting in net charge-offs of
approximately $1.3 million for the quarter compared to $1.3 million for the
first six months of 1997. The Company increased its provision for credit losses
to $2.4 million for the quarter ended September 30, 1997 compared to $577,414
for the same quarter of the prior year. In addition, based on the Company's
allowance for credit losses model, the allowance was increased to approximately
$3.4 million at September 30, 1997. As a result of the provision for credit
losses recorded for the third quarter, management expects the Company will incur
a net loss of approximately $780,000 and $193,000, respectively, for the quarter
and nine months ended September 30, 1997. The allowance for credit losses
predicted by the Company's reserve model increased significantly from the end of
the second quarter of 1997 to the end of the third quarter of 1997 due to three
factors. First, the Company experienced a high level of charge-offs during the
third quarter that were roughly equal to those experienced during the first
half of the year. When this data was included in the reserve model, the
historical loss factors utilized by the model increased significantly. Second,
losses on the relatively large number of repossessed vehicles disposed of during
the third quarter caused dealer and bulk purchase reserves to decline below
required levels for a number of individual dealers and bulk purchases. Third,
the finance receivable portfolio experienced moderate growth during the quarter,
resulting in a corresponding increase in the allowance to provide for losses
expected on the newly originated finance receivables.
The higher than expected loss experience during the quarter was
attributable primarily to two factors in addition to some degree of general
deterioration in loan performance during the quarter. First, during the second
quarter management decided to alter the Company's strategy for dealing with
repossessed vehicles. Specifically, in order to reduce the amount of time
repossessed vehicles are typically held for sale, the Company began selling the
vehicles sooner than it had in prior periods by lowering sales prices.
As a direct result of this change in strategy, the number of vehicles held for
sale was reduced from 525 at April 30, 1997 to 300 at August 30, 1997. While
this decision resulted in a temporary increase in charge-offs due to the loss
recognition associated with the sale of repossessed collateral, management
expects the new sales strategy to reduce interest and other carrying costs
associated with repossessed vehicles in future periods. The second factor
affecting charge-offs during the third quarter of 1997 was a decision made in
connection with an internal reorganization to reduce delinquency levels at
several offices where delinquencies had increased to higher than acceptable
levels. Management estimates that approximately $40,000 in charge-offs
attributable to the accelerated disposition of repossessed vehicles and $350,000
attributable to accelerated repossessions of automobiles was charged against the
Company's allowance for credit losses during the third quarter of 1997.
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, and selling insurance products on an agency basis.
The following table sets forth certain information with regard to
growth in the Company's finance receivable portfolio.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-----------------------------------------
1994 1995 1996 1997
---------------------------------------- --------------
AUTOMOBILE SALES CONTRACTS
<S> <C> <C> <C> <C>
Total balance at period end, net (1) $8,823,559 $22,788,837 $35,998,537 $40,499,181
Average account balance at period end 2,317 3,436 3,699 3,585
Interest income for the period 1,990,268 5,031,402 8,361,396 4,932,666
Average interest rate earned (2) 31.10 % 28.92 % 27.98 % 25.88 %
Number of accounts at period end 3,808 6,632 9,733 11,297
DIRECT LOANS
Total balance at period end, net (1) $7,107,446 $9,460,798 $9,896,100 $10,109,649
Average account balance at period end 1,175 1,405 1,324 1,454
Interest income for the period 2,305,296 2,248,168 2,941,705 1,463,215
Average interest rate earned (2) 34.66 % 31.60 % 30.01 % 30.05 %
Number of accounts at period end 6,047 6,736 7,475 6,955
PREMIUM FINANCE CONTRACTS
Total balance at period end, net (1) $1,482,009 $4,827,067 $2,846,451 $3,249,634
Average account balance at period end 272 336 287 309
Interest income for the period 151,402 484,222 737,895 246,534
Average interest rate earned (2) 13.96 % 15.35 % 17.52 % 16.25 %
Number of accounts at period end 5,442 14,378 9,931 10,532
</TABLE>
------------------
(1) Finance receivable balances are presented net of unearned
finance charges, dealer reserves on Automobile Sales Contracts
and discounts on bulk purchases.
(2) Averages are computed using beginning and ending balances for
the period presented and are annualized for periods of less than
one year.
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 plans to open at least two in 1997 and 1998. 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
19
<PAGE>
opportunities to expand its network of insurance offices primarily through the
acquisition of independent insurance agencies.
RECENT ACQUISITION AND EXPANSION ACTIVITIES
On October 31, 1996, the Company exchanged 300,000 shares of Common
Stock for all of the outstanding capital stock of Thaxton Insurance. At the time
of its acquisition, Thaxton Insurance had 19 insurance offices in North Carolina
and South Carolina. Thaxton Insurance continues to conduct business as a
wholly-owned subsidiary of the Company. See "Certain Transactions."
During 1996 the Company opened finance offices in Sumter, South
Carolina and Augusta, Georgia. The Augusta office was the Company's first in
Georgia. Both of the finance offices opened in 1996 are primarily devoted to the
purchase and servicing of Automobile Sales Contracts. The Company also opened a
mortgage lending office in Charlotte, North Carolina during the year. The
mortgage lending office is located in the same building as one of the Company's
insurance offices.
During 1997, the Company has opened finance offices in
Christiansburg, Virginia and Cumming, Georgia that 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.
PROFITABILITY
The following table sets forth certain data relating to the Company's
profitability.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Average Net Finance Receivables (1) $13,712,742 $26,710,887 $43,717,445 $40,701,351 $51,035,860
Average notes payable (1) $11,447,977 $23,447,113 $37,611,963 $34,918,435 $43,873,630
Interest and fee income (2) $ 5,380,470 $ 9,024,232 $13,518,563 $ 6,548,295 $ 7,740,263
Interest expense (3) 1,114,829 2,653,614 3,841,683 1,790,959 2,133,916
Net interest income $ 4,265,641 $ 6,370,618 $ 9,676,880 $4,757,335 $ 5,606,347
Average interest rate earned (1) 39.24% 33.78% 30.92% 32.18% 30,33%
Average interest rate paid (1) 9.74 11.32 10.21 10.26 9.73
Net interest rate spread 29.50% 22.46% 20.71% 21.92% 20.60%
Net interest margin (4) 31.11% 23.85% 22.14% 23.38% 21.97%
</TABLE>
- ------------
(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.
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. At June 30, 1997, approximately 13% of Net
Finance Receivables were subject to maximum interest rates imposed by statute
and substantially all of these receivables were earning interest at the maximum
rate. 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
20
<PAGE>
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 1994 to 1996 is
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 the 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 SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE
30, 1996. Finance receivables at June 30, 1997 were $69,672,416 versus
$57,690,575 at June 30, 1996, a 21% increase. The primary component of this
increase was Automobile Sales Contracts, which increased from $41,663,164 at
June 30, 1996 to $53,636,050 at June 30, 1997, or 29%. The Company opened two
finance offices in 1996 and one in early 1997, which generated significant
additional volume of Automobile Sales Contracts during the first half of 1997.
Unearned income at June 30, 1997 was $13,877,411 versus $11,878,210 at
June 30, 1996, a 17% increase which was directly related to the higher volume of
Automobile Sales Contract originations during the first half of 1997. The
provision for credit losses established for the six months ended June 30, 1997
was $1,538,832 versus $845,940 for the comparable period of 1996, and the
allowance for credit losses increased from $1,005,365 at June 30, 1996 to
$2,390,070 at June 30, 1997. The increase in the provision was due to
strengthening the Company's allowance for credit losses in response to higher
than expected loan losses and repossessions. The allowance for credit losses as
a percentage of Net Finance Receivables increased from 2.19% at June 30, 1996 to
4.28% at June 30, 1997.
The growth in finance receivables during the six months ended June 30,
1997 versus the comparable period in 1996 resulted in higher levels of interest
and fee income. Interest and fee income for the six months ended June 30, 1997
was $7,768,199, versus $6,553,457 for the six months ended June 30, 1996, a 19%
increase. Interest expense also was higher, increasing to $2,394,340 for the six
months ended June 30, 1997 versus $2,007,050 for the comparable period of 1996,
a 34% increase. The increase in interest expense was due to the higher levels of
borrowings needed to fund finance receivable originations and the working
capital requirements of Thaxton Insurance.
Net interest income for the six months ended June 30, 1997 increased to
$5,373,859 from $4,546,407 for the comparable period of 1996, an 18% increase.
The increase in net interest income is attributable to the higher levels of
finance receivables, the interest income and fees from which more than offset
the six percent decrease in net interest spread for the six months ended June
30, 1997 versus the comparable period of 1996.
Insurance premiums and commissions net of insurance cost decreased to
$2,529,800 for the six months ended June 30, 1997 from $2,692,098 for the
comparable period of 1996, due to reduced sales of insurance products to
borrowers. Other income increased from $554,636 for the six months ended June
30, 1996 to $649,552 for the comparable period of 1997 due to increased
profit-sharing payments to Thaxton Insurance from various insurance carriers.
Reinsurance claims and collections expenses remained fairly constant
for the six months ended June 30, 1997 compared to the six months ended
June 30, 1996, with reinsurance claims expense decreasing 4% and
collection expense increasing 5%.
Total operating expenses increased from $5,693,557 for the six months
ended June 30, 1996 to $6,098,467 for the comparable period of 1997, a 7 %
increase. The increase in operating expenses was due to opening new finance
offices and the additional expenses associated with insurance agency operations,
in addition to a general increase in costs associated with administering a
larger finance receivable portfolio.
21
<PAGE>
Net income decreased to $586,739 for the six months ended June 30, 1997
from $782,588 for the comparable period 1996. The decrease in net income was due
to the higher levels of net interest and insurance commission income being
offset by higher loss provisions and expenses.
Shareholders' equity increased from $6,371,305 at December 31, 1996 to
$6,919,440 at June 30, 1997 as a result of retained earnings from after tax
profits earned during the period.
COMPARISON OF 1996 TO 1995. Gross finance receivables at December 31,
1996 were $63,106,601 versus $47,900,234 at December 31, 1995, a 32% increase.
The primary component of this increase was Automobile Sales Contracts, which
increased from $32,455,654 at December 31, 1995 to $47,603,138 at December 31,
1996, or 47%. The Company opened four finance offices in 1995 and two in 1996,
all of which originated primarily Automobile Sales Contracts, generating a
significant additional volume of such contracts. Premium Finance Contracts
outstanding decreased from $5,046,110 at December 31, 1995 to $2,943,338 at
December 31, 1996, or 42%, due to the Company's decision to reduce origination
activities in Virginia. Direct loans increased 21%, to $12,560,126 at December
31, 1996 compared to $10,398,470 at December 31, 1995 due primarily to increased
loan demand at the Company's existing finance offices.
Unearned income at December 31, 1996 was $12,578,514 versus $9,731,532
at December 31, 1995, a 29% increase which was directly related to the higher
volume of Automobile Sales Contract originations during 1996. The provision for
credit losses established for the year ended December 31, 1996 was $3,593,399,
versus $890,337 for 1995. The increase in the provision for credit losses was
due to strengthening the Company's allowance for credit losses in response to
higher than expected loan losses and repossessions in the fourth quarter of
1996. The allowance for credit losses increased from $783,200 at December 31,
1995 to $2,195,000 at December 31, 1996. The allowance for credit losses as a
percentage of Net Finance Receivables increased from 2.1% at December 31, 1995
to 4.4% at December 31, 1996.
Cash levels decreased from $3,214,977 at December 31, 1995 to $421,465
at December 31, 1996. This decrease was due to the use of the proceeds of the
Company's public offering on December 29, 1995 to pay down the Revolving Credit
Facility on January 3, 1996.
The growth in finance receivables during the year ended December 31,
1996 versus the comparable period in 1995 resulted in higher levels of interest
and fee income. Interest and fee income for the year ended December 31, 1996 was
$13,528,881, versus $9,182,149 for the year ended December 31, 1995, a 47%
increase. Interest expense also was higher, increasing to $4,209,763 for the
year ended December 31, 1996 versus $2,985,056 for the year ended December 31,
1995, a 41% increase. The increase in interest expense was due to the higher
levels of borrowings needed to fund the larger finance receivable portfolio,
offset somewhat by reduced interest rates payable by the Company to its primary
lender under new agreements entered into in 1996.
Net interest income for the year ended December 31, 1996 increased to
$9,319,118 from $6,197,093 for 1995, a 50% increase. The increase in net
interest income is attributable to the higher levels of finance receivables, the
interest income and fees from which more than offset the 7.8% decrease in net
interest spread for the year ended December 31, 1996 versus 1995.
Insurance premiums and commissions net of insurance cost increased to
$5,893,606 for the year ended December 31, 1996 from $4,617,651 for 1995, a 28%
increase due to the higher levels of Automobile Sales Contract originations, the
triggering event for most sales of insurance products to borrowers, and
increased commissions generated on the sale of insurance policies by the agency.
Collection expense increased from $42,233 for the year ended December
31, 1995 to $63,797 for 1996, an increase of 85% due to growth in the
Company's finance receivables. Collection expense as a percentage of average
net finance receivables remained constant at 0.2%.
22
<PAGE>
Reinsurance claims expense increased from $310,231 for the year ended
December 31, 1995 to $516,194 for 1996, an increase of 66%. The increase was
primarily due to a 64% increase in finance receivables outstanding, which
resulted in a corresponding increase in credit insurance sold in connection with
the origination of those receivables.
Total operating expenses increased from $8,767,241 for the year ended
December 31, 1995 to $11,974,280 for 1996, a 36% increase. The increase in
expenses was due to opening new offices and expenses generated by the
insurance agency operations during the two months following the acquisition of
Thaxton Insurance, in addition to a general increase in costs associated with
administering a significantly larger finance receivable portfolio, with average
net loans outstanding increasing 63%.
Net income decreased to $384,184 for the year ended December 31, 1996
from $1,072,598 for 1995. The decrease in net income was due to higher levels of
net interest and insurance income, offset by a higher loss provision for credit
losses and expenses.
Shareholders' equity increased from $6,315,944 at December 31, 1995 to
$6,371,305 at December 31, 1996, as a result of retained earnings from after tax
profits during the period, partially offset by the conversion of 340,000 shares
of preferred stock to subordinated debt.
23
<PAGE>
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 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.
24
<PAGE>
The Company's charge-offs as a percentage of average Net Finance
Receivables increased from 3.08% for the year ended December 31, 1995 to 5.06%
for the year ended December 31, 1996. A comparable percentage increase was
incurred during the six months ended June 30, 1997 versus the same period of
1996. These increases are attributed to a general deterioration in loan
performance experienced by the Company during the latter part of 1996 and early
1997. The Company's credit policies have remained consistent, and management
believes that its charge-off experience is comparable to that experienced by
other lenders in the non-prime sector. In response to this increased loss
experience, in the second half of 1996 the Company made several operational
changes which, over the long-term, are expected to reduce the Company's
charge-offs. These changes included 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 intends to maintain current credit quality
standards, which may result in a slower portfolio growth in the current credit
market for non-prime borrowers, which is highly competitive.
The following table sets forth the Company's allowance for credit
losses at December 31, 1994, 1995, and 1996 and the credit loss experience over
the periods presented.
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
AT OR FOR THE YEARS ENDED ENDED JUNE 30,
DECEMBER 31,
----------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Net Finance Receivables (1) $17,413,014 $38,168,681 $50,447,410 $ 45,812,365 $55,795,005
Allowance for credit losses $ 424,425 $ 783,200 $ 2,195,000 $ 1,005,365 $2,390,070
Allowance for credit losses as a percentage
of Net Finance Receivables (1) 2.44 % 2.05 % 4.35% 2.19% 4.28 %
Dealer reserves and discounts on bulk $ 631,709 $1,091,979 $1,747,000 $ 1,221,475 $1,936,542
purchases
Dealer reserves and discounts on bulk
purchases as a percentage of Automobile
Sales Contracts 6.68 % 4.91 % 4.64% 3.91% 4.56 %
Allowance for credit losses and dealer
reserves and discount on bulk purchases $1,056,134 $1,875,179 $3,942,000 $ 2,226,840 $4,326,612
Allowance for credit losses and dealer
reserves and discount on bulk purchases
as a percentage of Net Finance 6.07 % 4.91 % 7.81 % 4.86 % 7.75 %
Receivables
Provision for credit losses $ 481,063 $ 890,337 $3,593,399 $ 845,940 $1,538,832
Charge-offs (net of recoveries) $ 426,624 $ 821,806 $2,210,441 $ 652,647 $1,343,762
Charge-offs (net of recoveries) as a
percentage of average net finance 3.11 % 3.08 % 5.06 % 3.20 % 5.26 %
receivables
</TABLE>
- -----------------
(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:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Automobile Sales Contracts and Direct
Loans contractually past due 90
days or more (1) $ 110,030 $ 179,831 $ 380,569 $ 296,072 $ 490,572
Automobile Sales Contracts and Direct
Loans (1) $15,931,005 $ 32,249,635 $45,894,637 $40,316,349 $50,608,830
Automobile Sales Contracts and Direct
Loans contractually past due 90
days or more as a percentage of
Automobile Sales Contracts and
Direct Loans 0.69 % 0.56 % 0.83 % 0.73 % 0.97 %
</TABLE>
- -----------------
(1) Finance receivable balances are presented net of unearned finance charges,
dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases.
25
<PAGE>
The following table sets forth certain information concerning Premium
Finance Contracts at the end of the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------------- ----------------------------
1994 1995 1996 1996 1997
---------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Premium finance contracts contractually
past due 60 days or more (1) $ 26,418 $ 99,537 $ 100,633 $ 123,063 $ 68,269
Premium finance contracts outstanding (1) $1,482,009 $4,827,067 $2,846,451 $4,302,579 $ 3,249,634
Premium finance contracts contractually
past due 60 days or more as a
percentage of premium finance contracts 1.8 % 2.1 % 3.5 % 2.90 % 2.10 %
</TABLE>
- ----------------------------
(1) Finance receivable balances are presented net of unearned finance charges
and discounts on bulk purchases.
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.
<TABLE>
<CAPTION>
For the Years ended For the Six Months
December 31, ended June 30,
-------------------------------- ----------------------
1994 1995 1996 1996 1997
-------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Collection expenses $ 29,980 $ 42,233 $ 63,797 $ 32,610 $ 34,264
Collection expenses as a percentage of average Net
Finance Receivables 0.22% 0.16% 0.15% 0.16% 0.13%
</TABLE>
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 was restructured on September 3, 1997 to
increase the maximum borrowings available thereunder from $80 million to $100
million, is extended by Finova 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 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. As of June 30, 1997, $45.4 million was
outstanding under the Revolving Credit Facility, $44.6 million of which had been
advanced under the primary tranche and $775,000 of which had been advanced under
Tranche B. Under the terms of the Revolving Credit Facility, the Company's Net
Finance Receivables at June 30, 1997 would have allowed it to borrow an
additional $5.1 million against existing collateral, with $38.8 million of total
potential borrowing capacity available under the $80 million limit in place on
such date. 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 and the plus five percent per annum
for Tranche B. Interest rates on borrowings under the other tranches range from
prime plus one percent per annum to prime plus five percent per annum. The
Revolving Credit Facility imposes several financial and other covenants which
may be amended from time to time, including leverage tests, dividend
restrictions, and minimum net worth requirements. The Company presently is in
compliance with each of these covenants and management does not believe they
will materially restrict implementation of the Company's its business or its
expansion strategy.
Cash flows from financing activities during the years ended December
31, 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1994 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
Revolving Credit Facility $5,851,419 $16,538,315 $ 8,941,444
Other notes payable 82,672 (746,058) 1,292,851
Dividends paid on preferred stock (52,500) (17,500) ---
Common Stock --- 3,210,133 ---
------------- ------------- ------------
Total $5,881,591 $18,984,890 $10,234,295
============= ============= ============
</TABLE>
Management believes that the recent increase in the maximum borrowings
available under the Revolving Credit Facility, in addition to cash expected to
be generated from operations and the Offering, will provide the resources
necessary to pursue the Company's business and growth strategy through 1997. The
Company is currently investigating several options for raising additional funds
to support growth in future years, including the sale of up $10 million in
short-term, subordinated notes payable. See "Business -- Financing."
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
26
<PAGE>
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.
ACCOUNTING MATTERS
The Company adopted Statement of Financial Accounting Standard ("SFAS")
Nos. 121 and 123 during 1996. The adoption of these standards had no material
impact on the Company's results of operations or financial position in 1996. In
addition, the Financial Accounting Standards Board had issued SFAS No. 125, as
amended by SFAS No. 127, which the Company will adopt in 1997. Based on the
Company's current operations, adoption of these standards is not expected to
have a material impact on the Company's financial statements.
27
<PAGE>
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 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 will 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. In 1995 total premiums written by carriers in the United States was
approximately $263 billion. Of that amount, approximately 54% was written by
independent agents.
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
28
<PAGE>
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 achieve its recent growth and operating results, the
Company has successfully implemented and 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 a significant portion of the Company's
growth over the next 12 to 18 months will be in its portfolio of Automobile
Sales Contracts, Direct Loan and Premium Finance Contract origination 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 Company has also recently hired
an experienced insurance professional to manage the independent insurance
agency operations, in addition to adding other management personnel in that
division of the business.
o EXPANSION OF THE COMPANY'S OFFICE NETWORK -- The Company currently has a
total of 22 finance offices located in Georgia, North Carolina, South
Carolina, Tennessee, and Virginia. The Company currently plans to open at
least two additional finance offices in 1997 and 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
29
<PAGE>
offices, the Company seeks to identify and recruit individuals with
existing relationships with dealers in targeted areas.
o FAVORABLE CREDIT LOSS EXPERIENCES - Although the Company's credit loss
experience increased in 1996 compared to historical levels, the Company
believes that over time its credit loss experience has been favorable due
to its efficient servicing and collection practices and the ability of
management to evaluate credit risks associated with the non-prime credit
market. The Company believes that its policy of servicing all aspects of
borrowers' accounts at the finance office which extends the credit,
including collections, accounts receivable tracking, and delinquency
resolution, has contributed to its favorable credit loss experience.
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
three 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. With the acquisition of
Thaxton Insurance the Company began selling on an agency basis property and
casualty, life, and accident and health insurance, through a network of 19
insurance offices located in North Carolina and South Carolina. The Company
presently is developing strategies to increase the volume of premiums
generated by those offices as well as improving the profitability of its
insurance agency operations. In addition, the Company also began a mortgage
brokerage operation during the fourth quarter of 1996. Certain of the
Company's insurance offices are being utilized to take mortgage
applications, which are reviewed for compliance with the underwriting
standards of correspondent lenders at a central location. The Company is
currently brokering mortgages at two locations and plans to expand the
program to other locations during the latter half of 1997. The Company
expects to originate both prime and non-prime mortgages. 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 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
30
<PAGE>
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
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
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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 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.
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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 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.
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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.
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 19 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, 1996, such Premium Finance Contracts represented
approximately $1.1 million, or 36%, of total Premium Finance Contracts
outstanding. Because the
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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 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
With the acquisition of Thaxton Insurance in October 1996, the Company
began selling on an agency basis various lines of automobile, property and
casualty, life, and accident and health insurance. Thaxton Insurance does not
assume any underwriting risk in connection with its insurance agency activities.
All underwriting risk is assumed by the insurance companies represented by
Thaxton Insurance. Thaxton Insurance is paid a commission by the insurance
company for which business is placed. On some policies, Thaxton Insurance is
eligible for additional commission payments (profit sharing) if the loss
experience on the business falls below specified levels. At December 31, 1996,
Thaxton Insurance had approximately 28,500 insurance customers.
FINANCING
The maintenance of sufficient capital resources to support its
operations is integral to the Company's business and growth strategy. The
Company's external capital resources presently consist of a credit facility
extended by Finova, a note secured by the Company's airplane, and unsecured
notes payable to two insurance companies and certain unrelated individuals. See
"Management's Discussion and Analysis -- Liquidity and Capital Resources."
The Revolving Credit Facility, which was restructured on September 3,
1997 to increase the maximum borrowings available thereunder from $80 million to
$100 million, is extended by Finova 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 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. 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 for the
insurance commission tranche. The interest rate is adjusted monthly to reflect
fluctuations in the designated prime rate. Accrued interest on borrowings is due
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
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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.
At March 14, 1997, the Company had approximately $1.0 million of
unsecured debt. This debt includes a note payable to American Bankers Insurance
Company of Florida in the amount of $500,000 which matures on May 16, 1998 and
bears interest at the prime rate reported in The Wall Street Journal plus two
percent, which is adjusted quarterly to reflect fluctuations in the prime rate.
The Company also has a note payable to Kramer-Wilson Company Insurance Services
in the amount of $250,000 which is callable upon 60 days notice and bears
interest at a designated prime rate plus two percent, adjusted monthly. The
balance of the Company's unsecured debt on such date consisted of notes payable
to certain unrelated individuals. These notes bear interest at rates ranging
from eight percent to 12% per annum payable on a quarterly or annual basis. In
addition, at December 31, 1996 the Company had a note payable to Green Tree
Financial Services Corporation in the amount of $540,600. This note bears
interest at 8.99% per annum, payable monthly, and is secured by an airplane
owned by the Company.
The Company has filed a registration statement with the State of South
Carolina covering up to $10 million of short-term, subordinated notes
which are being sold in an intrastate public offering. These notes bear interest
at rates substantially lower than those available under the Revolving Credit
Facility.
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
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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.
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.
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
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.
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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, 1996, the Company employed 198 persons, none of whom
was covered by a collective bargaining agreement. Of that total, 26 were located
in the Company's headquarters in Lancaster, South Carolina and 172 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, and are under
leases expiring on dates ranging from April 1997 to December 2001, 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.
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MARKET FOR THE COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
MARKET AND DIVIDEND INFORMATION
Due to the relatively small number of shares held by persons who are
not affiliates of the Company, there is no active and liquid trading market for
the Common Stock. The Common Stock trades occasionally in the over-the-counter
market and is quoted in the OTC Bulletin Board Service operated by the NASD. At
August 28, 1997 there were 276 holders of record of the Common Stock. The
following table presents high and low bid information for the Common Stock
during the periods indicated. These quotations reflect prices, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
HIGH LOW
First quarter 1996 $10.00 $9.13
Second quarter 1996 10.25 8.75
Third quarter 1996 10.25 9.00
Fourth quarter 1996 11.00 10.00
First Quarter 1997 11.00 9.00
Second Quarter 1997 10.00 9.00
Third quarter 1997 10.00 8.50
The Company has not paid any dividends on Common Stock during the past
two years. See "Dividend Policy."
RECENT PURCHASES OF THE COMMON STOCK BY THE COMPANY
The Company purchased 300 shares of Common Stock on August 20, 1997 at
a price of $9.50 per share and 600 shares of Common Stock on September 10, 1997
at a price of $10.00 per share. In both cases, the shares were purchased in
unsolicited transactions from a broker-dealer that makes a market in the Common
Stock. No other purchases of the Common Stock were made by the Company during
the 40 business days prior to the date of this Prospectus.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of
August 28, 1997 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James D. Thaxton......................... 50 Chairman of the Board, President and Chief
Executive Officer
Robert L. Wilson......................... 57 Executive Vice President, Chief Operating
Officer and a Director
Kenneth H. James......................... 44 Vice President, Chief Financial Officer,
Treasurer, Secretary, and a Director
C.L. Thaxton, Sr......................... 74 Director
Jack W. Robinson*........................ 67 Director
Perry L. Mungo*.......................... 60 Director
</TABLE>
* 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.
KENNETH H. JAMES joined the Company in August 1995. Prior thereto, he
was employed by General Electric Capital Mortgage Corporation since 1980,
holding the positions of First Vice President and Comptroller of the Mortgage
Insurance group. From 1979 to 1980 Mr. James was employed by the North Carolina
Department of Insurance as an Insurance Company Examiner. From 1975 to 1979 Mr.
James was employed by FCX, Inc., holding the positions of Assistant Controller,
Tax Manager and Internal Auditor.
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 became a director in August 1995. Since 1988, he has
served as the President, Chief Executive Officer and principal owner of MMC
Holding, Inc., which through its principal subsidiary is engaged in mica mining.
40
<PAGE>
PERRY L. MUNGO became a director in August 1995. Since 1983, he has
served as 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, 1996, to or for the account of the Chief
Executive Officer and its only other executive officer whose total salary and
bonus exceeded $100,000 during 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-----------------
---------- -- ------------ --- ----------
RESTRICTED
YEAR SALARY BONUS STOCK
NAME AND PRINCIPAL POSITION ($) ($) ($) AWARD ($)
-------------------------------- ---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
James D. Thaxton, 1996 83,908 66,037 ---
President and Chief 1995 74.513 10,100 ---
Executive Officer
Robert L. Wilson, 1996 130,507 127,747 ---
Executive Vice President 1995 123,076 32,985 900,000(1)
</TABLE>
---------------
(1) 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, 1996, 80,000 shares of the
award remained subject to restriction and, notwithstanding such
restriction, had a market value of approximately $880,000 on that date.
See "Market for the Common Stock and Related Shareholder Matters." Mr.
Wilson is entitled to vote and receive dividends on the restricted
shares.
41
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock at August 28, 1997 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.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON
NUMBER OF SHARES AND STOCK OUTSTANDING
NAME OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP
---------------------------------- ---------------------
---------------------------------------
<S> <C> <C>
James D. Thaxton 3,248,000(2) 82.8%
Robert L. Wilson 100,000 2.5
Kenneth H. James 1,111 *
C. L. Thaxton, Sr. 55,555(3) 1.4
Jack W. Robinson 113,403(4) 2.9
Perry L. Mungo 29,000 *
Directors and officers
as a group(6) 3,547,069 90.4
</TABLE>
---------------
(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 37,222 shares held of record by Mr. Thaxton's spouse,
Katherine D. Thaxton, as to which Mr. Thaxton shares voting and
investment power.
(4) Includes 4,400 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 SERIES B PREFERRED STOCK
The Company has entered into an agreement with Jack W. Robinson and
certain of his affiliates pursuant to which they will exchange 30,925 shares of
Common Stock for an equal number of shares of the Company's Series B Redeemable
Convertible Preferred Stock (the "Series B Preferred Stock"). The terms of the
Series B Preferred Stock are identical to the Series A Preferred Stock except
that dividends thereon are payable, at the Company's option, in additional
shares of Series B Preferred Stock. See "Description of Capital Stock --
Preferred Stock." The transaction will not be registered under the Securities
Act pursuant to the exemption provided by Section 4(2) thereof for transactions
not involving any public offering and is expected to close during the fourth
quarter of 1997.
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. Based upon the high and low bid information
available for the Common Stock on that date, the market value of the shares
issued in the acquisition was $3,150,000. See "Market for the Common Stock and
Related Shareholder Matters." 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
42
<PAGE>
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. The 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.
CONVERSION AND REPAYMENT OF SUBORDINATED DEBT
Concurrent with the closing of the Company's initial public offering of
Common Stock 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. Of
that number, 55,556, 18,333 and 37,222 shares were issued to Thaxton Insurance,
C. L. Thaxton, Sr., and Katherine D. Thaxton, respectively. James D. Thaxton
owned a one-third interest in Thaxton Insurance at the time of the conversion.
C. L. Thaxton, Sr. is a director of the Company and Katherine D. Thaxton is his
spouse. The Company also repaid $1.0 million of subordinated debt to Thaxton
Insurance on that date. The subordinated debt converted into Common Stock
represented notes payable that were to mature in August 1997 and April 1998. The
notes paid interest at an annual rate of ten percent, or the prime rate of a
specified bank plus one percent, whichever amount was greater.
SHARES ELIGIBLE FOR FUTURE SALE
The 400,000 shares of Series A Preferred Stock that may be issued in
the Offering will be freely tradeable without restriction or further
registration under the Securities Act, unless acquired by an "affiliate" of the
Company (as that term is defined under the Securities Act). Shares of Series A
Preferred Stock acquired by an affiliate will be subject to the resale
limitations of Rule 144 under the Securities Act.
As of the date of this Prospectus, there are 3,919,983 shares of Common
Stock outstanding. Included in this amount are 412,791 shares of restricted
securities that are presently eligible for resale under Rule 144. All of the
30,925 shares of Series B Preferred Stock will be restricted securities that
will become eligible for resale under Rule 144 one year from the date of
issuance. See "Certain Transactions."
In general, under Rule 144 a person who has beneficially owned for at
least one year securities privately acquired directly or indirectly from the
issuer or an affiliate of the issuer, and persons who are affiliates of the
issuer, are entitled to sell within any three-month period a number of
securities that does not exceed the greater of (i) one percent of the
outstanding shares or other units of that class outstanding or (ii) the average
weekly trading volume in that class during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain requirements
relating to the manner and notice of sale and the availability of current public
information about the Company.
Prior to this Offering, there has been no market for the Series A
Preferred Stock and no active and liquid trading market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public resales
of shares of either class or the availability of such shares for resale will
have on the market prices of these securities during and after completion of
this Offering. Sales of substantial amounts of the Series A Preferred Stock or
the Common Stock in the public markets during or following this Offering, or the
perception that such sales may occur, could adversely affect the market price of
these securities or the ability of the Company to raise additional capital
through sales of its equity securities.
43
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock 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, 1995 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.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4, including
amendments thereto (the Registration Statement), relating to the securities
offered hereby with the Securities and Exchange Commission (the "Commission").
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document to which reference is made are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement. For further information with
respect to the Company and the securities offered hereby, reference is made to
such Registration Statement, exhibits, and schedules. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
at 450 Fifth Street N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: Northeast Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048; and Midwest Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any
part of the Registration Statement, including the exhibits thereto, may be
obtained, upon payment of the prescribed fees, at such offices of the
Commission. In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering and Retrieval System
("EDGAR") are publicly available through the Commission's site on the Internet's
World Wide Web, located at HTTP:// WWW.SEC.GOV. The Registration Statement,
including all exhibits thereto, has been filed with the Commission via EDGAR.
The Company elects to file annual, quarterly, and current reports and
other information periodically with the Commission pursuant to Section 15(d) of
the Exchange Act. Such reports and other information are available for
inspection and copying at the Commission's Washington D.C. office and the
Northeast and Midwest Regional Offices.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
THE THAXTON GROUP, INC.
<S> <C>
Independent auditors' report.............................................................................. F-2
Consolidated balance sheets as of December 31,
1995 and 1996 and June 30, 1997 (unaudited)............................................................. F-3
Consolidated statements of income for the
years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and
1997 (unaudited)........................................................................................ F-4
Consolidated statements of stockholders' equity
for the years ended December 31, 1995
and 1996 and the six months ended June 30,
1996 and 1997 (unaudited)............................................................................... F-5
Consolidated statements of cash flows for the
years ended December 31, 1995 and 1996
and the six months ended June 30, 1996 and 1997
(unaudited)............................................................................................. F-6
Notes to consolidated financial statements................................................................ F-7
</TABLE>
F-1
<PAGE>
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, 1995 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, 1995 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 14, 1997 KPMG Peat Marwick LLP
F-2
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- JUNE 30,
1995 1996 1997
---------------- ---------------- --------------------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Cash $ 3,214,977 $ 421,465 $ 795,169
Finance receivables, net 36,293,502 46,546,087 51,468,393
Premises and equipment, net 1,184,844 1,947,210 1,961,699
Accounts receivable 1,371,313 1,269,384 1,651,859
Repossessed automobiles 500,300 1,166,495 810,011
Goodwill and other intangible assets 2,989,217 3,463,814 3,948,002
Other assets 1,205,333 1,867,112 2,073,004
------------- ----------- -------------
Total assets $46,759,486 $56,681,567 $ 62,708,137
=========== =========== =============
Liabilities and Stockholders' Equity
Accrued interest payable $ 408,854 $ 387,237 $ 379,427
Notes payable 36,898,376 46,345,883 51,634,290
Notes payable to affiliates 401,277 743,621 737,621
Accounts payable 1,583,880 1,350,306 945,284
Employee savings plan 818,115 1,098,457 1,255,746
Other liabilities 333,040 384,758 836,329
------------ ------------ ------------
Total liabilities 40,443,542 50,310,262 55,788,697
------------ ------------ ------------
Preferred Stock, $1.00 par value,
5,000,000 shares authorized,
340,000 shares outstanding in 1995,
no shares outstanding in 1996 and 1997 340,000 - -
Common stock, $ .01 par value; authorized
50,000,000 shares, issued and outstanding
3,938,284 shares in 1995, 3,932,178 shares in
1996 and 3,924,382 shares in 1997 39,383 39,322 39,244
Additional paid-in-capital 3,563,681 3,504,027 3,420,500
Deferred stock award (810,000) (720,000) (675,000)
Unrealized loss on marketable securities (6,392) - -
Retained earnings 3,189,272 3,547,956 4,134,696
--------- --------- ---------
Total stockholders' equity 6,315,944 6,371,305 6,919,440
--------- --------- ---------
Total liabilities and stockholders' equity $ 46,759,486 $ 56,681,567 $ 62,708,137
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------------------
1995 1996 1996 1997
---------------- --------------- -------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and fee income $9,182,149 $13,528,881 $6,553,457 $ 7,768,199
Interest expense 2,985,056 4,209,763 2,007,050 2,394,340
--------------- -------------- ------------- -------------
Net interest income 6,197,093 9,319,118 4,546,407 5,373,859
Provision for credit losses 890,337 3,593,399 845,940 1,538,832
--------------- -------------- ------------- -------------
Net interest income after
provision for credit losses 5,306,756 5,725,719 3,700,467 3,835,027
Other income:
Insurance premiums and
commissions, net 4,617,651 5,893,606 2,692,098 2,529,800
Other income 579,599 985,763 554,636 649,552
--------------- -------------- ------------- -------------
Total other income 5,197,250 6,879,369 3,246,734 3,179,352
Operating expenses:
Compensation and employee
benefits 4,659,148 5,602,895 2,743,228 3,022,796
Telephone, postage, and supplies 987,229 1,126,599 551,408 661,505
Net occupancy 1,071,612 1,228,414 595,523 714,864
Reinsurance claims expense 310,231 516,194 224,952 215,956
Insurance 120,979 193,670 87,705 137,292
Collection expense 42,233 63,797 32,610 34,264
Travel 115,442 158,513 66,314 60,265
Professional fees 162,897 175,821 56,462 86,407
Other 1,297,470 2,908,377 1,335,355 1,165,118
--------------- -------------- --------- -------------
Total operating expenses 8,767,241 11,974,280 5,693,557 6,098,467
--------------- -------------- --------- -------------
Income before income tax
expense 1,736,765 630,808 1,253,644 915,912
Income tax expense 664,167 246,624 471,056 329,173
--------------- -------------- ------------- -------------
Net income $1,072,598 $ 384,184 782,588 $ 586,739
========== ============ ============= =============
Dividends on preferred stock $ 60,000 $ 25,500 $ 17,000 $ -
============ ============= =========== ============
Net income applicable to common
shareholders $1,012,598 $ 358,684 $ 765,588 $ 586,739
========== ============ ========== =============
Net income per common share $ 0.31 $ 0.09 $ 0.19 $ 0.15
============= =========== ============= =============
Weighted average shares
outstanding 3,312,559 3,830,472 3,938,236 3,927,455
========= ============== ============= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL DEFERRED GAIN ON TOTAL
COMMON PREFERRED PAID-IN- STOCK MARKETABLE RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL AWARD SECURITIES EARNINGS EQUITY
----------- ------------ ------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Thaxton Group, Inc. $ 31,480 $ 700,000 $ 64,720 $ - $ $ 1,877,988 $ 2,674,188
Thaxton Insurance Group,
Inc. 400 748,332 - - 3,071 (463,315) 288,488
----------- ------------ ------------- ------------ ------------ ------------ -------------
Balance at December 31, 1994 31,880 1,448,332 64,720 - 1,414,673 2,962,676
3,071
Pooling adjustments 2,600 (658,332) (356,269) - - 762,001 (250,000)
----------- ------------ ------------- ------------ ------------ ------------ -------------
Restated Balance December
31, 1994 34,480 790,000 (291,549) - 3,071 2,176,674 2,712,676
Issued 334,724 shares of
common stock in public 3,348 - 2,456,785 - - - 2,460,133
offering
Dividends paid on preferred
stock ($.025) - - - - - (60,000) (60,000)
Conversion of 450,000
shares of preferred
stock to $450,000 of
subordinated debt - (450,000) - - - - (450,000)
Issuance of 100,00 shares
as a restricted stock
award 1,000 - 899,000 (900,000) - - -
Vesting of 10,000 shares of
stock award - - - 90,000 - - 90,000
Conversion of $500,000
subordinated debt into
55,556 shares of stock 555 - 499,445 - - - 500,000
Unrealized loss on
marketable securities - - - - (9,463) - (9,463)
Net income - - - - - 1,072,598 1,072,598
----------- ------------ ------------- ------------ ------------ ------------ -------------
Balance at December 31, 1995 39,383 340,000 3,563,681 (810,000) (6,392) 3,189,272 6,315,944
Employee stock grant 17 - 16,828 - - - 16,845
Purchase and retirement of
7,786 shares of stock (78) - (76,482) - - - (76,560)
Conversion of 340,000
shares of preferred
stock to $340,000 of
subordinated debt - (340,000) - - - - (340,000)
Dividends on preferred stock - - - - - (25,500) (25,500)
Vesting of 10,000 shares of
stock award - - - 90,000 - - 90,000
Unrealized gain on
marketable securities - - - - 6,392 - 6,392
Net income - - - - - 384,184 384,184
----------- ------------ ------------- ------------ ------------ ------------ -------------
Balance at December 31, 1996 39,322 - 3,504,027 (720,000) 3,547,956 6,371,305
Vesting of 5,000 shares of
stock award - - - 45,000 - - 45,000
Purchase and retirement of
10,600 shares of stock (106) - (111,927) - - - (112,033)
Issuance of 2,007 shares
of restricted stock 20 - 22,057 - - - 22,077
Issuances of 797 shares of
stock under Employee
stock purchase plan 8 - 6,343 - - - 6,351
Net income - - - - 586,739 586,739
=========== ============ ============= =========== ============ =========== =============
Balance at June 30, 1997 $ 39,244 - $ 3,420,500 $ (675,000) - $4,134,696 $6,919,440
=========== ============ ============= ============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- --------------------------------
1996 1997
1995 1996 (UNAUDITED) (UNAUDITED)
--------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,072,598 $ 384,184 $ 782,588 $ 586,739
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 890,337 3,593,399 845,940 1,538,832
Depreciation and amortization 608,929 756,791 332,426 452,444
Deferred taxes (93,868) (26,715) (22,098) (32,050)
Vesting of stock awards 90,000 90,000 45,000 45,000
Compensatory grant of stock to
employees - 16,845 16,845 28,428
Unrealized (gain) loss on
marketable securities (9,462) 6,392 6,392 -
(Gain) loss on sale of premises
and equipment (12,325) (25,301) (5,532) (16,530)
Gain on sale of investment (75,957) - - (10,859)
Increase (decrease) in other
assets 528,629 (2,026,919) (1,082,681) (761,359)
Increase (decrease) in accrued
interest payable and other
liabilities 1,396,601 76,869 (10,045) 228,078
---------- ---------- ----------- ----------
Net cash provided by operating
activities 4,395,481 2,845,545 908,835 2,058,723
---------- ---------- ---------- ----------
Cash flow from investing activities:
Net increase in finance receivables (20,195,250) (13,845,854) (8,012,393) (6,461,138)
Capital expenditures for premises
and equipment (628,435) (1,295,387) (228,221) (303,863)
Proceeds from sale of premises and
equipment 17,200 79,907 23,440 25,750
Proceeds from the sale of investments 283,698 - - 17,273
Acquisitions, net of acquired
cash equivalents (1,336,338) (752,973) (638,941) (133,415)
Purchase of securities (1,333,942) (68,843) (14,739) -
Notes receivable (affiliate) (810,907) 896,432 1,264,815 -
---------- ---------- ---------- -----------
Net cash used by investing
activities (24,003,974) (14,986,848) (7,606,039) (6,855,393)
------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of
common stock 2,460,133 - - -
Repurchase of common stock - (76,560) - (112,033)
Dividends paid (60,000) (25,500) - -
Net increase in line of credit 20,002,676 9,449,851 4,090,262 4,484,000
Proceeds from issuance of notes
payable - - - 798,407
---------- ---------- ----------- -----------
Net cash provided by financing
activities 22,402,809 9,347,791 4,090,262 5,170,374
---------- ---------- ---------- ----------
Net increase (decrease) in cash 2,794,316 (2,793,512) (2,606,942) 373,704
Cash at beginning of period 420,661 3,214,977 3,214,977 421,465
---------- ---------- ---------- ----------
Cash at end of period $3,214,977 $ 421,465 $ 608,035 $ 795,169
========== ========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period
for:
Interest $2,813,715 $3,805,229 $1,823,367 $2,083,934
Income taxes 844,658 554,651 216,810 22,000
========== ========== ========== ==========
Noncash financing activities:
Conversion of preferred stock to
notes payable 450,000 340,000 - -
Conversion of subordinated debt to
common stock 500,000 - - -
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1996 AND 1997 (UNAUDITED)
NOTE 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"). 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 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 1995 have been
reclassified to conform to the 1996 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.
(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.
F-7
<PAGE>
(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. Maintenance and repairs are
charged to expense 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
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (Statement 109),
requires a change from the deferred method of accounting for income taxes of APB
Opinion 11 to 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.
(h) EARNINGS PER SHARE
Earnings per share is calculated using the weighted average shares
outstanding of 3,312,559 and 3,830,472 for 1995 and 1996, respectively. Such
share amounts have been adjusted for the 10,025.48 for one stock split declared
by the board of directors on September 8, 1995. All share and per share data
have been retroactively adjusted for the stock split. The effect of common stock
equivalent shares applicable to stock option plans has not been included in the
calculation of net income per share because such effect is not materially
dilutive.
(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 life 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.
F-8
<PAGE>
(j) STOCK OPTIONS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard ("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.
(m) UNAUDITED INTERIM FINANCIAL INFORMATION
Information with respect to June 30, 1996 and 1997, and the periods
then ended, have not been audited by the Company's independent auditors, but in
the opinion of management, reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the operations of
the Company.
NOTE 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.
The financial statements were previously reported by combining the
assets, liabilities and stockholders' equity of the separate companies at the
date of acquisition at their historical cost basis. In addition, the results
of operations and cash flows of Thaxton Insurance were included in the
consolidated financial statements from the date of acquisition. Upon further
consideration, the Company determined that the periods prior to the the date
of acquisition should be restated under the "as if" pooling method. 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. Total assets and stockholders'
equity in 1995 were previously reported as $40,691,506 and $7,177,890,
respectively. Net income per common share and net income in 1995 were previously
reported as $0.29 and $921,069, respectively and $0.18 and $666,399,
respectively in 1996.
In accordance with poolings-of-interests accounting, the financial
statements of the Company have been restated to reflect the acquisition as if it
had been effective as of the earliest period presented. The respective
contributions of the pooled entities to consolidated total income, net interest
income after provision for loan losses and net income for the years ended
December 31, 1995 and 1996 were as follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
Total income:
The Thaxton Group, Inc. $ 9,731,080 15,800,127
Thaxton Insurance 4,648,319 4,608,123
=============== ==============
Combined $ 14,379,399 20,408,250
=============== ==============
Net interest income after provision for
credit losses:
The Thaxton Group, Inc. $ 5,480,281 6,083,481
Thaxton Insurance (173,525) (357,762)
=============== ==============
Combined $ 5,306,756 5,725,719
=============== ==============
Net income:
The Thaxton Group, Inc. $ 921,069 666,399
Thaxton Insurance 151,529 (272,215)
=============== ==============
Combined $ 1,072,598 $ 384,184
=============== ==============
</TABLE>
The Company's total income and net interest income after provision for
credit losses has been adjusted from amounts previously reported to reflect
certain reclassifications from noninterest income and expense to interest income
and expense, in accordance with accounting classifications followed by the
Company.
The Company acquired all of the outstanding capital stock of Eagle
Premium Finance (Eagle) on September 1, 1995 in a cash purchase. Eagle is a
one-office consumer finance company located in Norfolk, Virginia that
specializes in financing premiums for personal lines of automobile insurance. At
the date of purchase, Eagle had total finance receivables of approximately
$1,921,000 and the Company recorded an intangible asset of approximately
$350,000. The remaining intangible asset was approximately $337,000, $302,000,
and $284,966 at December 31, 1995, December 31, 1996 and June 30, 1997,
respectively, and is included in goodwill and other intangible assets in the
accompanying consolidated balance sheets.
NOTE 3 - FINANCE RECEIVABLES
Finance receivables consist of the following at December 31, 1995 and
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------
1995 1996 1997
-------------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Automobile Sales Contracts $ 32,455,654 $ 47,603,138 $ 53,636,050
Direct Loans 10,398,470 12,560,126 12,655,681
Premium Finance Contracts 5,046,110 2,943,337 3,380,685
--------- ---------- ---------
Total finance receivables 47,900,234 63,106,601 69,672,416
Unearned interest (9,325,101) (12,445,781) (13,775,488)
Unearned insurance premiums, net (406,431) (132,733) (101,923)
Bulk purchase discount (416,000) (1,014,000) (921,313)
Dealer hold back (676,000) (773,000) (1,015,229)
Allowance for credit losses (783,200) (2,195,000) (2,390,070)
------------- ------------- -------------
Finance receivables, net $ 36,293,502 $ 46,546,087 $ 51,468,393
============ ============ ============
</TABLE>
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
F-10
<PAGE>
$3,710,000 and $416,000, respectively, at December 31, 1995; approximately
$7,371,000 and $1,014,000, respectively, at December 31, 1996; and approximately
$7,769,780 and $921,313, respectively, at June 30, 1997.
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 $20,320,700 and $676,000, respectively, at December 31, 1995,
approximately $31,451,000 and $773,000, respectively, at December 31, 1996, and
approximately $33,571,649 and $1,015,229, respectively, at June 30, 1997.
At December 31, 1996 and June 30, 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.
F-11
<PAGE>
Changes in the allowance for credit losses for the years ended December
31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ --------------------------------
1995 1996 1996 1997
------------ -------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Beginning balance $424,425 $ 783,200 $ 783,200 $2,195,000
Valuation allowance for acquired loans 290,244 28,842 28,872 -
Provision for credit losses 890,337 3,593,399 845,940 1,538,832
Charge-offs (924,620) (2,526,231) (788,368) (1,436,203)
Recoveries 102,814 315,790 135,721 92,441
------- ----------- ------- --- ------
Net charge-offs (821,806) (2,210,441) (652,647) (1,343,762)
--------- ----------- --------- -----------
Ending balance $783,200 $ 2,195,000 $1,005,365 $2,390,070
======= ========== ========== ==========
</TABLE>
The valuation allowance for acquired loans relates to the acquisition
of approximately $3,425,000 and $748,000 of receivables in 1995 and 1996,
respectively.
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.
NOTE 4 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1995 and 1996
follows:
<TABLE>
<CAPTION>
1995 1996
---------------- -------------------
<S> <C> <C>
Leasehold improvements $ 444,096 $ 504,328
Furniture and fixtures 541,061 477,158
Equipment and automobiles 1,609,586 2,762,214
--------- ---------
Total cost 2,594,743 3,743,700
Accumulated depreciation 1,409,899 1,796,490
--------- ----------------
Net premises and equipment $ 1,184,844 $1,947,210
================ ===================
</TABLE>
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
-------------------- ---------------------
<S> <C> <C>
Covenants not to compete $ 47,995 $ 102,022
Goodwill 1,782,932 2,036,563
Insurance expirations 1,732,227 2,135,098
Purchase premium 348,938 348,938
------- -------
Total cost 3,912,092 4,622,621
Less accumulated amortization 922,875 1,158,807
------- ---------
Intangible assets, net $ 2,989,217 $3,463,814
=========== ==========
</TABLE>
F-12
<PAGE>
The majority of the intangibles were acquired by the Company in
connection with its acquisition of Thaxton Insurance.
Amortization expense was approximately $179,741 and $105,000 in 1995
and 1996, respectively.
NOTE 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 $440,000 in 1995 and
$304,000 in 1996.
The future minimum lease payments under noncancelable operating leases
as of December 31, 1996, are as follows:
1997 $446,559
1998 270,670
1999 178,358
2000 52,296
2001 30,100
--------
Total minimum lease payments $977,983
=======
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.
F-13
<PAGE>
NOTE 7 - NOTES PAYABLE
At December 31, 1995 and 1996, notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------------- -------------------
<S> <C> <C>
Note payable to insurance company maturing in May, 1998 and bearing
interest at prime plus 2% and is reset quarterly $ 300,000 $ 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
Lines of credit 34,632,281 42,615,947
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 - 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 137,248 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 93,814 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 104,973 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 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 116,182 79,012
Note payable to individual due in monthly installments of $9,478,
through March 2001, including interest at a rate of 6% - 423,449
Notes payable to individuals with varying maturity dates and rates
ranging from 8-12% 1,421,637 1,639,162
Note payable to individual due in 1996, plus interest at a rate of 12%
unsecured 32,241 -
---------- ----------
$ 36,898,376 $ 46,345,883
========== ==========
</TABLE>
F-14
<PAGE>
A schedule of maturities of long-term debt is as follows:
YEAR ENDING
DECEMBER 31 AMOUNT
- ------------------------------------------- ------------------------
1997 $ 1,256,603
1998 44,261,706
1999 315,870
2000 211,126
2001 140,129
Thereafter 160,449
Total $ 46,345,883
===========
At December 31, 1996, the Company maintained a line of credit agreement
with a commercial finance company for $80 million, maturing on July 31, 1998. At
December 31, 1996, the Company's net finance receivables would have allowed it
to borrow an additional $5.6 million against existing collateral, with
approximately $39 million of total potential borrowing capacity available under
the $80 million limit in place on such date. The outstanding balance under this
line of credit was $41,166,000 at December 31, 1996. There are two tranches
under this agreement, Tranche A and Tranche B. The total line of credit under
Tranche A is $70,000,000 of which $30,159,000 is available at December 31, 1996.
This tranche bears interest at the lender's prime rate plus 1% (9.25% at
December 31, 1996). The total line of credit under Tranche B is $10,000,000, of
which $8,675,000 is available at December 31, 1996. This tranche bears interest
at the lender's prime rate plus 5% (13.25% at December 31, 1996). Interest on
the outstanding line of credit balance is payable monthly.
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% (as amended on September
3, 1997) of the current year's net income. As of December 31, 1996, the Company
met all such ratios and requirements (see Note 11).
Thaxton Insurance maintains a line of credit agreement with the same
commercial finance company for $3 million maturing June 30, 1998. Of this
amount, approximately $1,686,000 was available at December 31, 1996. The
outstanding balance under this line of credit was $1,314,000 at December 31,
1996. Borrowings under this arrangement bear interest at the lender's prime rate
plus 3% (11.25% at December 31, 1996), payable monthly.
Thaxton Insurance also has a line of credit agreement with a commercial
bank whereby the Company can borrow up to $400,000. The principal is payable on
demand, and interest is payable quarterly at the bank's prime rate plus one
percent (9.25% at December 31, 1996). The amount outstanding as of December 31,
1996 was approximately $136,000. The line of credit is secured by certain real
estate, furniture, fixtures, equipment and investments owned by Thaxton
Insurance and individual shareholders. Thaxton Insurance also has a sweep
account with the bank. The bank requires Thaxton Insurance to maintain a $55,000
balance in the account. If the account drops below $55,000 the bank
automatically advances money from the line-of-credit to increase the account to
$55,000.
NOTE 8 - NOTES PAYABLE TO AFFILIATES
The Company had approximately $744,000 of notes payable to affiliates
at December 31, 1996. At December 31, 1995, the Company had notes payable to
affiliates of $401,277. During 1995, $500,000 of notes payable to affiliates
were converted to common stock and an additional $500,000 was repaid from
proceeds of the public stock offering.
During 1996, 340,000 shares of Preferred Stock B of Thaxton Insurance
Group were converted to $340,000 of notes payable.
F-15
<PAGE>
NOTE 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. None of
the options outstanding at December 31, 1996 were exercisable. 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.
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.
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, 1996 no
purchases had been made under this Stock Purchase Plan.
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock based compensation benefit plans as permitted under
SFAS No. 123. In accordance with APB 25, no compensation expense is recognized
by the Company when stock options are granted because the exercise price of the
Company's stock option equals the market price of the underlying stock on the
date of grant. Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net income and net income
per share would not have been materially different than reported.
NOTE 10 - INCOME TAXES
Income taxes consist of the following:
CURRENT DEFERRED TOTAL
1995:
Federal $ 652,927 $(88,504) $564,423
State 105,108 (5,364) 99,744
--------- ------ ------
$ 758,035 $(93,868) $664,167
======== ======= =======
1996:
Federal $ 234,067 $(22,487) $211,580
State 39,272 (4,228) 35,044
--------- ------ ------
$ 273,339 $(26,715) $246,624
======== ======= =======
F-16
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Statutory rate applied to net income before taxes $ 590,500 $ 214,475
Increase (decrease) in income resulting from:
Goodwill amortization 28,208 50,809
TRL nontaxable income (84,712) (79,132)
State taxes, less related federal benefit 65,832 23,129
Other 64,339 37,343
---------- ----------
Income taxes $ 664,167 $ 246,624
========== ==========
</TABLE>
The effective tax rate was 39.1% and 38.2% for the years ended December
31, 1996 and 1995, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1995 and
1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 361,416 $ 872,213
Intangibles 22,591
Unearned interest and fees 187,414 28,856
Other 94,380 34,016
----------- -----------
Total gross deferred tax assets 665,801 935,085
----------- -----------
Less valuation allowance - -
----------- ----------
Net deferred tax assets 665,801 935,085
----------- -----------
Deferred tax (liabilities)
Prepaid insurance (173,743) (300,525)
Depreciable basis of fixed assets (38,000) (92,144)
Deferred loan costs - (88,232)
Intangibles - (146,667)
Other - (4,705)
----------- ------------
Total gross deferred tax liability (211,743) (632,273)
------------ -----------
Net deferred tax asset $ 454,058 $ 302,812
=========== ===========
</TABLE>
The Company recorded deferred tax liabilities of $177,961 related to
its 1996 acquisition of Williams Agency, Inc. The balance of the change in the
net deferred tax asset is reflected as a deferred income tax benefit in the
accompanying consolidated statements of income.
There was no valuation allowance for deferred tax assets as of January
1, 1996 or 1995 and no net change in the allowance during 1996 or 1995. 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 1993 and
subsequent years are subject to review by taxing authorities.
F-17
<PAGE>
NOTE 11 - SUBSEQUENT EVENT (UNAUDITED)
During the quarter ended September 30, 1997, the Company experienced a
significant increase in finance receivable charge-offs. The net charge-offs for
the quarter were $1,296,370 compared to net charge-offs for the first six months
of 1997 of $1,343,762 and net charge-offs of $503,180 during the comparable
quarter of 1996. This increase in net charge-offs resulted in a significant
increase in the provision for credit losses to $2,346,980 for the quarter ended
September 30, 1997 as compared to provision for the first six months of 1997 and
the comparable quarter of 1996 of $1,538,832 and $577,414, respectively. As a
result, the allowance for credit losses was increased to $3,440,680 at September
30, 1997 or 5.86% of net finance receivables as compared to $2,390,020 or 4.28%
of net finance receivables at June 30, 1997.
As a result of the increase in the provision for credit losses, the
Company will incur a loss for the quarter ended September 30, 1997 and for the
nine months then ended. This loss will not result in any violations of the
financial covenants of the $80 million line of credit agreement, as amended,
discussed in Note 7.
F-18
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
-------------------
TABLE OF CONTENTS
Page
Prospectus Summary..................................2
Risk Factors........................................4
Terms of the Offering...............................8
Description of the Capital Stock...................11
Material Differences Between the Common Stock and
the Series A Preferred Stock.....................14
Use of Proceeds....................................15
Dividend Policy....................................15
Capitalization.....................................16
Selected Consolidated Financial Data...............17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.......................................19
Business...........................................28
Market for the Common Stock and Related
Shareholder Matters..............................39
Management.........................................40
Principal and Management Shareholders..............42
Certain Transactions...............................42
Shares Eligible for Future Sale....................43
Legal Matters......................................44
Experts............................................44
Available Information..............................44
Financial Statements..............................F-1
UNTIL DECEMBER 22, 1997 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
400,000 SHARES
THE THAXTON
GROUP, INC.
7.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
_________________
PROSPECTUS
_________________
NOVEMBER 12, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 must 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.
South Carolina law 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 Registrant'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 21. EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2 Stock Purchase Agreement, dated as of September 1, 1995 with Eagle
Premium Finance Company, Inc. (1)
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 Certificate of Designation, Preferences and Rights of the Series A Preferred Stock*
4.2 Form of Certificate for Series A Preferred Stock*
4.3 Certificate of Designation, Preferences, and Rights of the Series B
Preferred Stock*
4.4 Form of Certificate for Series B Preferred Stock*
5 Opinion of Moore & Van Allen, PLLC*
8 Tax opinion of Moore & Van Allen, PLLC*
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 (1)
10.5 The Thaxton Group, Inc. 1995 Stock Incentive Plan (1)
II-1
<PAGE>
Exhibit No. Description
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)
10.16 Promissory note payable by the Company to Kramer-Wilson Insurance
Services (5)
10.17 Form of Share Exchange Agreement by and between the Company and Jack W. Robinson
and affiliates*
10.18 First Amended and Restated Loan and Security Agreement dated September 3, 1997
between Finova Capital Corporation and the Company*
10.19 Schedule to First Amended and Restated Loan and Security Agreement*
10.20 Fourth Amended and Restated Promissory Note*
21 Subsidiaries of The Thaxton Group, Inc. (5)
23.1 Consent of KPMG Peat Marwick, LLP*
23.2 Consent of Moore & Van Allen, PLLC (included in the opinion filed as Exhibit 5 to
this Registration Statement)
24 Power of Attorney (included on the Signature Page of this Registration Statement)
99.1 Form of Depositary Agreement by and between the Company and First Union National
Bank*
99.2 Form of Letter of Transmittal*
</TABLE>
* Previously filed.
(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.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned hereby undertakes that it will:
(1) File, during any period in which it offers or sell securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information set forth in the
registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high
end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20 percent change in the maximum
aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material
information on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial BONA FIDE offering;
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering; and
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.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Charlotte, State of North Carolina, on November 12, 1997.
THE THAXTON GROUP, INC.
By: /S/ KENNETH H. JAMES
Kenneth H. James, Vice President, Chief Financial Officer and Secretary
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ JAMES D. THAXTON* Chairman of the Board of Directors, November 12, 1997
- ---------------------------------
James D. Thaxton President and Chief Executive
Officer
/S/ ROBERT L. WILSON* Executive Vice President, Chief November 12, 1997
- --------------------------------- Operating Officer and Director
Robert L. Wilson
/S/ KENNETH H. JAMES Vice President, Chief Financial November 12, 1997
- --------------------------------- Officer, Secretary and Director
Kenneth H. James (Principal Accounting Officer)
/S/ C. L. THAXTON, SR.* Director November 12, 1997
- ---------------------------------
C.L. Thaxton, Sr.
/S/ JACK W. ROBINSON* Director November 12, 1997
- ---------------------------------
Jack W. Robinson
/S/ PERRY L. MUNGO* Director November 12, 1997
- ---------------------------------
Perry L. Mungo
- ----------------------------
* By: /s/ Kenneth H. James
Attorney-in-fact
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
2 Stock Purchase Agreement, dated as of September 1, 1995 with Eagle
Premium Finance Company, Inc.(1)
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 Certificate of Designation, Preferences and Rights of the Series A
Preferred Stock*
4.2 Form of Certificate for Series A Preferred Stock*
4.3 Certificate of Designation, Preferences, and Rights of the Series B
Preferred Stock*
4.4 Form of Certificate for Series B Preferred Stock*
5 Opinion of Moore & Van Allen, PLLC*
8 Tax opinion of Moore & Van Allen, PLLC*
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(1)
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)
10.16 Promissory note payable by the Company to Kramer-Wilson Insurance
Services (5)
10.17 Form of Share Exchange Agreement by and between the Company and Jack W.
Robinson and affiliates*
10.18 First Amended and Restated Loan and Security Agreement dated September 3, 1997
between Finova Capital Corporation and the Company*
10.19 Schedule to First Amended and Restated Loan and Security Agreement*
10.20 Fourth Amended and Restated Promissory Note*
21 Subsidiaries of The Thaxton Group, Inc. (5)
23.1 Consent of KPMG Peat Marwick, LLP*
23.2 Consent of Moore & Van Allen, PLLC (included in the opinion filed as
II-5
<PAGE>
Exhibit 5 to this Registration Statement)
24 Power of Attorney (included on the Signature Page of this Registration
Statement)
99.1 Form of Depositary Agreement by and between the Company and First Union
National Bank*
99.2 Form of Letter of Transmittal*
</TABLE>
* Previously filed.
(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.
II-6
