AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-28719
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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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<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. [ ]
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=======================================================================================================================
CALCULATION OF REGISTRATION FEE
- ----------------------------------------- ----------------- ------------------- ------------------------ --------------
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Title of each class of securities to be Amount to be Proposed maximum Proposed maximum Amount of
registered registered offering price aggregate offering registration
per unit price fee
- ----------------------------------------- ----------------- ------------------- ------------------------ --------------
Subscription Rights (1) 3,926,382 $0 $0 $0
- ----------------------------------------- ----------------- ------------------- ------------------------ --------------
Series A Convertible Preferred Stock, 73,160 shares $10.00 $731,600 $222
$.01 par value (2)
========================================= ================= =================== ======================== ==============
</TABLE>
(1) Pursuant to Rule 457(g), no separate registration fee is payable
because the rights are being registered in the same registration
statement as the securities to be offered pursuant thereto.
(2) The initial filing of this Registration Statement covered 326,840
shares of Series A Preferred Stock. This Amendment increases the number
of shares to be offered to 400,000.
(3) Estimated solely for purposes of calculating the registration fee.
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
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FORM S-4 ITEM LOCATION IN THE PROSPECTUS
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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
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<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 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 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 _____________, 1997,
unless extended by the Company (the "Expiration Date"). James D. Thaxton, the
Company's largest shareholder, has informed the Company that he will not
participate in the Offering unless it is undersubscribed immediately prior to
the Expiration Date. Jack W. Robinson, the Company's second largest shareholder,
has informed the Company that he will not participate 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 _________, 1997. 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.
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.
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- ---------------------------------------------------------- ------------------ ------------------ -------------------
Price to Proceeds to
Public Commissions(1) Company(2)
- ---------------------------------------------------------- ------------------ ------------------ -------------------
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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 ________, 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 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 brokerage and 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 22 finance offices, with 15 located in
South Carolina, two in North Carolina, three in Virginia and one each in
Tennessee and Georgia, 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 two additional finance offices 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
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."
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Series A Preferred Stock offered in the Offering.............................. 400,000 shares
Series A Preferred Stock to be outstanding after the Offering (maximum)....... 400,000 shares
Use of proceeds............................................................... Temporary repayment of debt
Expected termination date of the Offering..................................... ___________, 1997
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
- ---------------------------------- ---------- --------- --------- ---------- --------- ---------- ----------
(dollars in thousands)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net interest income............. $2,707 $3,344 $4,265 $6,371 $9,677 $4,757 $5,374
Provision for credit losses..... 500 423 481 890 3,593 846 1,539
Net interest income after
provision for credit losses. 2,207 2,921 3,784 5,481 6,084 3,911 3,835
Insurance commissions, net...... 197 268 376 676 2,145 514 2,530
Other income.................... 4 8 9 30 136 1 650
Operating expenses.............. 1,974 2,218 2,889 4,755 7,396 3,174 6,099
Income tax expense.............. 195 366 464 511 303 470 329
Net income...................... 239 613 816 921 666 782 587
Net income per share............ 0.08 0.19 0.26 0.29 0.18 0.21 0.15
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------------------------
1992 1993 1994 1995 1996 1996 1997
- ---------------------------------- ---------- --------- --------- ---------- --------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables............. $10,923 $13,924 $22,450 $47,900 $63,107 $57,691 $69,672
Unearned income................. (2,519) (3,069) (5,037) (10,824) (14,366) (13,100) (15,814)
Allowance for credit losses..... (352) (370) (424) (783) (2,195) (1,131) (2,390)
Finance receivables, net........ 8,052 10,485 16,989 36,293 46,546 43,460 51,468
Total assets.................... 8,966 11,269 18,013 40,692 56,681 46,450 62,708
Total liabilities............... 7,834 9,341 15,339 33,514 50,410 38,431 55,889
Shareholders' equity........... 1,132 1,928 2,674 7,178 6,271 8,019 6,819
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 PREFERRED STOCK.
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 heading "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.
POOR CREDITWORTHINESS OF BORROWERS. 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 their prior credit history, or their 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, that the Company's systems and controls
will continue to be adequate, or that the rate of future defaults and/or losses
will be consistent with prior experience or at levels that will
5
<PAGE>
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 its delinquency rates would likely increase. Management believes the
Company's current allowances for credit losses and dealer reserves are adequate
to absorb anticipated credit losses. Nevertheless, no assurance is given that
the Company has adequately provided for such credit risks or that credit losses
in excess of these 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 would have a material adverse effect on the Company's
profitability. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Credit Loss Experience."
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 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 ________, 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.
James D. Thaxton, the Company's largest shareholder, has informed the Company
that he will not participate in the Offering unless it is undersubscribed
immediately prior to the Expiration Date. Jack W. Robinson, the Company's
second largest shareholder, has informed the Company that he will not
participate in the Offering. See "Principal and Management Shareholders."
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.
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
CORPORATE TRUST - REORG. DEPARTMENT, 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 each Right 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
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
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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) 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, 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
___________, 1997. 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
The Company contemplates commencing an offering of up to 1,000,000
shares of the Series A Preferred Stock to the public after the completion of
this offering (the "Public Offering"). In connection with its deliberations
regarding the Public Offering, 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 this rights 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 rights
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).
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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 balance of the
Series A Preferred Stock may be sold in the Public Offering. See "Market for
the Common Stock and Related Shareholder Matters -- Public Offering of the
Series A Preferred Stock."
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 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
and any other series of preferred stock that hereafter may be designated.
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 or any
other series of preferred stock that hereafter may be designated, 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
and any stock other series of preferred 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 or any other series of preferred
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 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 Common Stock without shareholder
approval. No additional series of preferred stock with dividend preferences
superior to those of the Series A Preferred Stock may be issued without the
approval of a majority of the holders of outstanding shares of Series A
Preferred Stock.
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 Common Stock without
shareholder approval. No additional series of preferred stock with liquidation
preferences superior to those of the Series A Preferred Stock may be issued
without approval by a majority of the holders of outstanding shares of Series
A Preferred Stock.
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. Holders of the
Common Stock have no redemption rights.
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. 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 50% 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 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 200,000 shares of Common Stock for an equal number of shares of
Series A Preferred Stock. 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 4,034,696 4,034,696
-------------- --------------
Total shareholders' equity 6,819,440 8,761,440
-------------- --------------
Total capitalization $59,191,351 $59,191,351
============== ==============
</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 income statement data for the years ended December 31, 1994,
1995, and 1996 and the balance sheet data at December 31, 1995 and 1996, 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. The income statement data for the years ended December 31, 1992
and 1993 and the balance sheet data at December 31, 1992, 1993, and 1994 are
derived from consolidated financial statements of the Company which also have
been audited by KPMG Peat Marwick LLP but are not included herein. 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,
---------- --------- ---------- --------- ---------- --------------------
1992 1993 1994 1995 1996 1996 1997
---------- --------- ---------- --------- ---------- ---------- ---------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and fee income..................$3,352 $4,082 $5,380 $9,024 $13,519 6,548 7,768
Interest expense......................... 645 738 1,115 2,653 3,842 1,791 2,394
Net interest income...................... 2,707 3,344 4,265 6,371 9,677 4,757 5,374
Provision for credit losses 500 423 481 890 3,593 846 1,539
Net interest income after provision .... 2,207 2,921 3,784 5,481 6,084 3,911 3,835
for credit losses
Insurance commissions, net............... 197 268 376 676 2,145 514 2,530
Other income............................. 4 8 9 30 136 1 650
Operating expenses....................... 1,974 2,218 2,889 4,755 7,396 3,174 6,099
Income tax expense....................... 195 366 464 511 303 472 329
Net income...............................$ 239 $ 613 $ 816 $ 921 $ 666 $ 782 $ 587
Net income per share.....................$ 0.08 $ 0.19 $ 0.26 $ 0.29 $ 0.18 $ 0.21 $0.15
Pro forma net income per share (1) .... -- -- -- -- $0.13 -- $0.13
Common shares outstanding................ 3,148 3,148 3,148 3,777 3,932 3,777 3,927
</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,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
------------------------------------------------------ --------------------
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Average interest rate earned (1)(2)....... 43.52% 43.45% 39.24% 33.78% 30.92% 32.18% 30.33%
Average interest rate paid (2)............ 9.27 9.10 9.74 11.32 10.21 10.26 9.73
Net interest spread (2)................... 34.25 34.35 29.50 22.46 20.71 21.92 20.60
Net interest margin (2)(3)................ 35.14 35.60 31.11 23.85 22.14 23.38 21.97
Allowance for credit losses as a
percentage of Net Finance
Receivables (4)........................... 4.17 3.41 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)........................... 5.36 6.24 6.07 4.91 7.81 4.86 7.75
Net charge-offs as a percentage
of average Net Finance Receivables (2)... 5.21 4.31 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
------------------------------------------------------------- --------------------------
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
---------- ------------ ----------- ------------ ------------ ------------ -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables........ $10,923 $13,924 $22,450 $47,900 $63,107 $69,672 $69,672
Unearned income (2)........ (2,519) (3,069) (5,037) (10,823) (14,366) (15,814) (15,814)
Allowance for credit losses (352) (370) (424) (783) (2,195) (2,390) ( 2,390)
Finance receivables, net... 8,052 10,485 16,989 36,294 46,546 51,468 51,468
Total assets.............. 8,966 11,269 18,013 40,692 56,681 62,708 62,708
Total liabilities......... 7,834 9,341 15,339 33,514 50,410 55,889 53,947
Shareholders' equity...... 1,132 1,928 2,674 7,178 6,271 6,819 8,761
</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
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 the first quarter of 1997, the Company opened a finance office
in Christiansburg, Virginia 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 $6,548,294 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 $1,790,959 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 $4,757,335 for the comparable period of 1996, a 13% 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 increased to
$2,529,800 for the six months ended June 30, 1997 from $513,715 for the
comparable period of 1996, due to the higher levels of Automobile Sales
Contract originations, the triggering event for most sales of insurance products
to borrowers, and commissions generated on the sale of insurance policies by
Thaxton Insurance. Other income increased from $1,300 for the six months ended
June 30, 1996 to $649,552 for the comparable period of 1997 due to the
acquisition of Thaxton Insurance.
Total operating expenses increased from $3,173,513 for the six months
ended June 30, 1996 to $6,098,467 for the comparable period of 1997, an 92%
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 $781,841 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 $6,271,305 at December 31, 1996 to
$6,819,440 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 $1,828,484 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 following balance sheet amounts increased primarily due to the
consolidation of Thaxton Insurance with the Company: premises and equipment,
accounts receivable, goodwill and intangibles, notes payable to affiliates,
accounts payable, and employee savings.
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
$13,518,563, versus $9,024,232 for the year ended December 31, 1995, a 50%
increase. Interest expense also was higher, increasing to $3,841,683 for the
year ended December 31, 1996 versus $2,653,614 for the year ended December 31,
1995, a 45% 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
$9,676,880 from $6,370,618 for 1995, a 52% 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
$2,145,423 for the year ended December 31, 1996 from $676,766 for 1995, a 217%
increase due to the higher levels of Automobile Sales Contract originations, the
triggering event for most sales of insurance products to borrowers, and
commissions generated on the sale of insurance policies by the insurance agency
operations during the two months of 1996 following the acquisition of Thaxton
Insurance.
Collection expense increased from $135,002 for the year ended December
31, 1995 to $242,985 for 1996, an increase of 80%. Collection expense increased
due to increases in the number of delinquent accounts and vehicles repossessed.
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 the large increase in loan volume, which resulted in a
corresponding increase in credit insurance sold on those loans.
Total operating expenses increased from $4,755,094 for the year ended
December 31, 1995 to $7,395,640 for 1996, a 56% 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 $666,399 for the year ended December 31, 1996
from $921,069 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 decreased from $7,177,890 at December 31, 1995 to
$6,271,305 at December 31, 1996, as a result of retained earnings from after tax
profits during the period, offset by the purchase of approximately 140,000
shares of the Common Stock which was owned by Thaxton Insurance at the
time of the acquisition of Thaxton Insurance.
COMPARISON OF 1995 TO 1994. Gross finance receivables at December 31,
1995 were $47,900,234 versus $22,450,280 at December 31, 1994, a 113% increase.
The primary component of this increase was Automobile Sales Contracts, which
increased from $11,879,474 at December 31, 1994 to $32,455,654 at December 31,
1995, or 173%. The Company opened four finance offices in 1995, which generated
a significant volume of Automobile Sales Contracts. Premium Finance Contracts
were up 226%, primarily due to the purchase of Eagle Premium Finance Company in
September 1995.
Unearned income at December 31, 1995 was $9,731,532 versus $4,405,266
at December 31, 1994, a 121% increase which was directly related to the higher
volume of Automobile Sales Contract originations during 1995. The provision for
credit losses established for the year ended December 31, 1995 was $890,337,
versus $481,063 for 1994, an 85% increase. The percentage increase in the
provision for credit losses was less than the percentage increase in Net Finance
Receivables because the primary component of the increase in Net Finance
Receivables was Automobile Sales Contracts, which generally result in lower
charge-offs than Direct Loans due to dealer reserves and the relative importance
of automobiles versus other assets used by Non-prime Borrowers to collateralize
their short-term debts. The allowance for credit losses as a percentage of Net
Finance Receivables decreased from 2.4% at December 31, 1994 to 2.1% at December
31, 1995.
Cash levels increased from $248,842 at December 31, 1994 to $1,828,484
at December 31, 1995. This increase was due to the receipt of the proceeds of
the Company's public offering on December 29, 1995. The excess cash was used to
pay down the Revolving Credit Facility on January 3, 1996.
Notes payable to affiliates decreased from $1,046,058 at December 31,
1994 to zero at December 31, 1995, due to repayment of affiliated indebtedness
and conversion of affiliated indebtedness to equity. See "Certain Transactions
- -- Conversion and Repayment of Subordinated Debt."
The growth in finance receivables during the year ended December 31,
1995 versus the comparable period in 1994 resulted in higher levels of interest
and fee income. Interest and fee income for the year ended December 31, 1995 was
$9,024,232, versus $5,380,470 for the year ended December 31, 1994, a 68%
increase. Interest expense also was higher, increasing to $2,653,614 for the
year ended December 31, 1995 versus $1,114,829 for the year ended December 31,
1994, a 138% increase. The increase in interest expense was due to the higher
levels of borrowings needed to fund finance receivable originations and a higher
cost of funds due to increases in the prime rate and in the contract rate in
excess of the prime rate paid to the Company's primary lender.
Net interest income for the year ended December 31, 1995 increased to
$6,370,618 from $4,265,641 for 1994, a 49% 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 24% decrease in net
interest spread for 1995 versus 1994.
23
<PAGE>
Insurance commissions net of insurance cost increased to $676,766 for
the year ended December 31, 1995 from $375,720 for 1994, a 80% increase
primarily due to the higher levels of Automobile Sales Contract originations,
the triggering event for most sales of insurance products to borrowers.
Operating expenses increased from $2,888,819 for the year ended
December 31, 1994 to $4,755,094 for 1995, a 64% increase. The increase in
expenses was due to opening new offices and expenses associated with the
Company's initial public offering, including one additional executive officer,
in addition to a general increase in costs associated with administering a
significantly larger finance receivable portfolio.
Net income increased to $921,069 for the year ended December 31, 1995
from $816,352 for 1994. The increase in net income was due to higher levels of
net interest and insurance income, partially offset by higher loss provisions
and expenses.
Shareholders' equity increased from $2,674,188 at December 31, 1994 to
$7,177,890 at December 31, 1995, a 168% increase, as a result of the proceeds of
the initial public offering, conversion of subordinated debt to equity, and
retained earnings from after tax profits during the period, offset in part by
the conversion of $700,000 in preferred stock to debt during the second quarter
of 1995. The Company completed a "best efforts" initial public offering on
December 29, 1995. The Company offered for sale up to 1,400,000 shares, with a
minimum of 350,000 shares, at a price of $9 per share. The offering resulted in
the sale of 418,057 shares, including 138,890 shares purchased by Thaxton
Insurance. The proceeds of the offering, net of expenses, were $3,210,133.
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 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. This increase was due to a general
deterioration in loan performance experienced throughout the non-prime lending
industry in 1996. 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 are expected to return charge-offs to levels
comparable with past periods. 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.
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 $ 470,143 $ 424,261 $ 515,314
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 % 1.02 % 1.05 % 1.02 %
</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.
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, and there was $38.8 million available for additional borrowing 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, including leverage tests, dividend restrictions, and
minimum net worth requirements. The Company does not believe these covenants
will materially restrict 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 50% 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 Management'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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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
The Company has not paid any dividends on Common Stock during the past
two years. See "Dividend Policy."
PUBLIC OFFERING OF THE SERIES A PREFERRED STOCK
The Company contemplates commencing the Public Offering of up to
1,000,000 shares of Series A Preferred Stock during the fourth quarter of 1997.
The Public Offering is expected to be conducted on a "best efforts" basis by
the company and possibly by a limited number of broker/dealers. The Company
anticipates continuing the Public Offering through December 31, 1997. The Public
Offering is not expected to be conditioned upon the sale of a minimum number of
shares. Accordingly, there can be no assurance given that any or all of the
shares offered therein will be sold.
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 3,922,683 shares of Common
Stock outstanding. Included in this amount are 300,000 shares issued in
connection with the acquisition of Thaxton Insurance, all of which are
"restricted securities" (as that term is defined under the Securities Act) that
will become eligible for resale under Rule 144 on October 31, 1997 and 112,791
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 each of the years in the three-year period
ended December 31, 1996 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.
The financial statements of Thaxton Insurance Group, Inc. as of and for
the year ended December 31, 1995, 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. The Company also has filed
a Registration Statement on Form SB-2 relating to the Public Offering (the "Form
SB-2"). Copies of the Registration Statement and the Form SB-2 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, 1994, 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, 1994, 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, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997
(unaudited)............................................................................................. F-6
Notes to consolidated financial statements................................................................ F-7
THAXTON INSURANCE GROUP, INC.
Independent auditors' report.............................................................................. F-17
Balance sheet as of December 31, 1995..................................................................... F-18
Statement of operations for the year ended
December 31, 1995....................................................................................... F-20
Statement of stockholders' equity
for the year ended December 31, 1995.................................................................... F-21
Statement of cash flows for the year ended
December 31, 1995....................................................................................... F-22
Notes to financial statements............................................................................. F-24
</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 each
of the years in the three-year period ended December 31, 1996. 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 each of the years in the three-year period ended
December 31, 1996, 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)
Assets
<S> <C> <C> <C>
Cash $ 1,828,484 $ 421,465 $ 795,169
Finance receivables, net 36,293,502 46,546,087 51,468,393
Premises and equipment, net 706,301 1,947,210 1,961,699
Accounts receivable 266,354 1,269,384 1,651,859
Repossessed automobiles 500,300 1,166,495 810,011
Goodwill and other intangible assets 337,307 3,463,814 3,948,002
Other assets 759,258 1,867,112 2,073,004
------------ ----------- -------------
Total assets $40,691,506 $56,681,567 $ 62,708,137
=========== =========== =============
Liabilities and Stockholders' Equity
Accrued interest payable $ 350,793 $ 387,237 $ 379,427
Notes payable 32,503,000 46,345,883 51,634,290
Notes payable to affiliates - 743,621 737,621
Accounts payable 231,122 1,350,306 945,284
Employee savings plan 100,858 1,098,457 1,255,746
Other liabilities 327,843 484,758 936,329
------- --------- ----------
Total liabilities 33,513,616 50,410,262 55,888,697
Common stock, $ .01 par value; authorized
50,000,000 shares, issued and outstanding
3,777,173 shares in 1995, 3,932,178 shares in
1996 and 3,926,382 shares in 1997 37,772 39,322 39,244
Additional paid-in-capital 5,168,561 3,504,027 3,420,500
Deferred stock award (810,000) (720,000) (675,000)
Retained earnings 2,781,557 3,447,956 4,034,696
Total stockholders' equity 7,177,890 6,271,305 6,819,440
Total liabilities and stockholders' equity $ 40,691,506 $ 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, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------- -----------------------------------
1994 1995 1996 1996 1997
------------- ------------- -------------- --------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest and fee income $5,380,470 $9,024,232 $ 13,518,563 $6,548,294 $ 7,768,199
Interest expense 1,114,829 2,653,614 3,841,683 1,790,959 2,394,340
----------- ----------- ------------ ------------ -------------
Net interest income 4,265,641 6,370,618 9,676,880 4,757,335 5,373,859
Provision for credit losses 481,063 890,337 3,593,399 845,940 1,538,832
----------- ----------- ------------ ------------ -------------
Net interest income after
provision for credit losses 3,784,578 5,480,281 6,083,481 3,911,395 3,835,027
Other income:
Insurance premiums and
commissions, net 375,720 676,766 2,145,423 513,715 2,529,800
Other income 9,061 30,082 136,141 1,300 649,552
----------- ----------- ------------ ------------ -------------
Total other income 384,781 706,848 2,281,564 515,015 3,179,352
Operating expenses:
Compensation and employee
benefits 1,719,612 2,682,129 3,748,303 1,691,782 3,022,796
Telephone, postage, and supplies 379,691 580,568 800,763 352,199 661,505
Net occupancy 307,839 457,245 739,144 288,886 714,864
Reinsurance claims expense 42,228 310,231 516,194 224,952 215,956
Insurance 103,427 120,979 193,670 87,705 137,292
Collection expense 91,472 135,002 242,985 94,418 82,393
Travel 54,309 98,368 149,389 59,517 60,265
Professional fees 47,569 162,897 175,821 56,462 86,407
Other 142,672 207,675 829,371 317,592 1,116,989
----------- ----------- ------------ ------- -------------
Total operating expenses 2,888,819 4,755,094 7,395,640 3,173,513 6,098,467
----------- ----------- ------------ ------------ -------------
Income before income tax 1,280,540 1,432,035 969,405 1,252,997 915,912
expense
Income tax expense 464,188 510,966 303,006 471,056 329,173
----------- ----------- ------------ ------------ -------------
Net income $ 816,352 $ 921,069 $ 666,399 $ 781,841 $ 586,739
=========== =========== ============ ============ =============
Earnings per share $ 0.26 $ 0.29 $ 0.18 $ 0.21 $ 0.15
=========== =========== ============ ============ =============
Weighted average shares
outstanding 3,148,000 3,151,448 3,803,620 3,777,125 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, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED TOTAL
COMMON PREFERRED PAID-IN- STOCK RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL AWARD EARNINGS EQUITY
------------ ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 31,480 $ 700,000 $ 64,720 $ - $1,131,636 $1,927,836
Dividends paid on preferred - - - - (70,000) (70,000)
stock ($.10)
Net income - - - - 816,352 816,352
------------ ------------- -------------- -------------- -------------- -------------
Balance at December 31, 1994 31,480 700,000 64,720 - 1,877,988 2,674,188
Issued 418,057 shares of
common stock in public
offering 4,181 - 3,205,952 - - 3,210,133
Dividends paid on preferred
stock ($.025) - - - - (17,500) (17,500)
Conversion of 700,000
shares of preferred
stock to $700,000 of - (700,000) - - - (700,000)
debt
Issuance of 100,000 shares
as a restricted stock 1,000 - 899,000 (900,000) - -
award
Vesting of 10,000 shares of
stock award - - - 90,000 - 90,000
Conversion of $1,000,000
subordinated debt into
111,111 shares of stock 1,111 - 998,889 - - 1,000,000
Net income - - - - 921,069 921,069
------------ ------------- -------------- -------------- -------------- -------------
Balance at December 31, 1995 37,772 - 5,168,561 (810,000) 2,781,557 7,177,890
Issuance of 300,000 shares
to purchase Thaxton
Insurance Group 3,000 - (356,269) - - (353,269)
Employee stock grant 17 - 16,828 - - 16,845
Purchase and retirement of
146,675 shares of stock (1,467) - (1,325,093) - - (1,326,560)
Vesting of 10,000 shares of
stock award - - - 90,000 - 90,000
Net income - - - - 666,399 666,399
------------ ------------- -------------- -------------- -------------- -------------
Balance at December 31, 1996 39,322 - 3,504,027 (720,000) 3,447,956 6,271,305
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) $4,034,696 $6,819,440
============ ============= ============== ============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------------------
1996 1997
1994 1995 1996 (UNAUDITED) (UNAUDITED)
------------- -------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 816,352 $ 921,069 $ 666,399 $ 781,841 $ 586,739
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 481,063 890,337 3,593,399 845,940 1,538,832
Depreciation and amortization 133,040 235,795 444,829 167,499 452,444
Deferred taxes (43,380) (165,968) (21,091) (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
(Gain) loss on sale of premises
and equipment 8,000 (3,500) (21,363) (1,594) (16,530)
Gain on sale of investment - (11,222) - - (10,859)
Increase (decrease) in other
assets (51,612) (371,612) (924,896) 40,212 (761,359)
Increase (decrease) in accrued
interest payable and other 45,857 414,819 65,198 (62,402) 228,078
liabilities ---------- ---------- ---------- ----------- ----------
Net cash provided by operating
activities 1,389,320 1,999,718 3,909,320 1,811,243 2,058,723
---------- ---------- ---------- ---------- ----------
Cash flow from investing activities:
Net increase in finance
receivables (6,984,394) (18,750,407) (14,512,179) (8,012,393) (6,461,138)
Capital expenditures for premises
and equipment (204,466) (472,438) (1,187,923) (196,588) (303,863)
Proceeds from sale of premises and
equipment - 3,500 58,061 1,594 25,750
Proceeds from the sale of investments - 23,222 - - 17,273
Acquisitions, net of acquired
cash equivalents - (208,843) - (86,481) (133,415)
Cash acquired in acquisition of
Thaxton Insurance Group - - 91,407 - -
---------- ---------- ---------- ---------- -----------
Net cash used by investing
activities (7,188,860) (19,404,966) (15,550,634) (8,293,868) (6,855,393)
----------- ------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of
common stock - 3,210,133 - 8,345 -
Repurchase of common stock - - - - (112,033)
Dividends paid (52,500) (17,500) - - -
Net increase in line of credit 5,851,419 16,538,315 8,941,444 4,497,000 4,484,000
Proceeds from issuance of notes
payable 82,672 - 1,567,440 480,246 798,407
Repayments of notes payable - (746,058) (274,589) - -
---------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities 5,881,591 18,984,890 10,234,295 4,985,591 5,170,374
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash 82,051 1,579,642 (1,407,019) (1,497,034) 373,704
Cash at beginning of period 166,791 248,842 1,828,484 1,828,484 421,465
---------- ---------- ---------- ---------- ----------
Cash at end of period $ 248,842 $1,828,484 $ 421,465 $ 331,450 $ 795,169
========== ========== ========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $1,042,900 $2,469,372 $3,805,239 $1,823,367 $2,083,934
Income taxes 577,397 834,325 554,651 216,810 22,000
========== ========== ========== ========== ==========
Noncash financing activities:
Issuance of common stock to effect
acquisition - - 353,269 - -
Common stock acquired in
acquisition of Thaxton Insurance - - 1,326,560 - -
Conversion of preferred stock to
notes payable - 700,000 - - -
Conversion of subordinated debt to
common stock - 1,000,000 - - -
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
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.
Reclassifications of certain amounts in the 1995 and 1994 consolidated
financial statements have been made to conform with the financial statement
presentation for 1996. The reclassifications have no effect on net income or
shareholders' equity 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 the 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 3,148,000, 3,151,448 and 3,803,620 for 1994, 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 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
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 was considered to be under common control by the
majority shareholder of the Company. As a result, the assets and liabilities of
Thaxton Insurance were transferred to the Company at the carrying value as of
the date of acquisition. On the date of acquisition, Thaxton Insurance had total
assets of $6,219,000, net intangibles of $3,207,000, total debt of $4,352,000,
and a stockholders' deficit of $353,269. Thaxton Insurance is incorporated under
the laws of the State of South Carolina and licensed as an insurance agency in
the states of North and South Carolina. Thaxton Insurance operates a general
insurance division with offices in North and South Carolina.
The following table reflects unaudited pro forma combined results of
operations of the Company and Thaxton Insurance on the basis that the
acquisition had taken place at the beginning of the fiscal periods presented:
<TABLE>
<CAPTION>
1996 1995
--------------- --------------
<S> <C> <C>
Interest and fee income and other income $20,409,300 $14,379,400
Net income 657,482 1,051,518
Earnings per share 0.17 0.32
Shares used in computation 3,931,391 3,304,773
</TABLE>
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.
F-9
<PAGE>
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 $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-10
<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,
--------------------------------------------------- --------------------------------
1994 1995 1996 1996 1997
----------------- ----------- --------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 369,986 $424,425 $ 783,200 $ 783,200 $2,195,000
Valuation allowance for acquired loans - 290,244 28,842 28,872 -
Provision for credit losses 481,063 890,337 3,593,399 845,940 1,538,832
Charge-offs (499,997) (924,620) (2,526,231) (788,368) (1,436,203)
Recoveries 102,814 315,790 135,721 92,441
---- ------- ----------- ------- --- ------
73,373
Net charge-offs (426,624) (821,806) (2,210,441) (652,647) (1,343,762)
--------- --------- ----------- --------- -----------
Ending balance $ 424,425 $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 $ 274,992 $ 504,328
Furniture and fixtures 271,308 477,158
Equipment and automobiles 939,531 2,762,214
---------- ---------
Total cost 1,485,831 3,743,700
Accumulated depreciation 779,530 1,796,490
---------- ---------
Net premises and equipment $ 706,301 $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 $ - $ 102,022
Goodwill - 2,036,563
Insurance expirations - 2,135,098
Purchase premium 348,938 348,938
------- -------
Total cost 348,938 4,622,621
Less accumulated amortization 11,631 1,158,807
------- ---------
Intangible assets, net $337,307 $3,463,814
======== ==========
</TABLE>
F-11
<PAGE>
The majority of the intangibles were acquired by the Company in
connection with its acquisition of Thaxton Insurance.
Amortization expense was approximately $12,000 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 $125,000 in 1994,
$170,000 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-12
<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 32,203,000 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 - 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
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 - 72,321
Note payable to individual due on January 1, 1997 plus interest at a rate of 7%.
Secured by agency purchased with funds and various
individual stockholders' assets - 60,000
Note payable to individual due in monthly installments of $3,607 through January
1999, including interest at a rate of 6% and secured by agency purchased with
funds and various individual stockholders' assets - 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% 1,639,162
$ 32,503,000 $ 46,345,883
========== ==========
</TABLE>
F-13
<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. Of
this amount, approximately $39 million was available at December 31, 1996. 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. Also, the Company may pay
dividends up to 50% of the current year's net income. As of December 31, 1996,
the Company met all such ratios and requirements.
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 no notes payable to
affiliates as $1,000,000 of notes were converted to common stock during 1995 and
an additional $1,000,000 was repaid from proceeds of the public stock offering.
At the time of the acquisition of Thaxton Insurance Group, 340,000
shares of Preferred Stock B of Thaxton Insurance Group were converted to
$340,000 of notes payable. These notes are included in notes payable to
affiliates at December 31, 1996.
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,
F-14
<PAGE>
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:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
<S> <C> <C> <C>
1994:
Federal 441,991 (37,680) 404,311
State 65,577 (5,700) 59,877
---------- ------ ------
$ 507,568 $(43,380) $464,188
========= ======= =======
1995:
Federal 592,100 (142,580) 449,520
State 84,834 (23,388) 61,446
---------- ------- ------
676,934 (165,968) 510,966
========== ======== =======
1996:
Federal $ 276,991 $(17,753) $259,238
State 47,106 (3,338) 43,768
---------- ------ ------
324,097 (21,091) 303,006
========== ======= =======
</TABLE>
F-15
<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>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to net income before taxes $ 435,383 $ 486,892 $ 329,597
Increase (decrease) in income resulting from:
Goodwill amortization - 3,955 19,745
TRL nontaxable income (29,860) (84,712) (79,132)
State taxes, less related federal benefit 39,518 40,554 28,887
Other 19,147 64,277 3,909
---------- ---------- ----------
Income taxes $ 464,188 $ 510,966 $ 303,006
========== ========== ===============
</TABLE>
The effective tax rate was 36.2%, 35.7% and 31.3% for the years ended
December 31, 1994, 1995 and 1996, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1995 and
1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
--------------- -----------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 341,416 $ 872,213
Intangibles 22,591 -
Unearned interest and fees 187,414 28,856
Other 78,380 34,016
----------- -----------
Total gross deferred tax assets 629,801 935,085
----------- -----------
Less valuation allowance - -
----------- ----------
Net deferred tax assets 629,801 935,085
----------- -----------
Deferred tax (liabilities)
Prepaid insurance (173,743) (300,525)
Depreciable basis of fixed assets - (92,144)
Deferred loan costs - (88,232)
Intangibles - (146,667)
Other - (4,705)
----------- ------------
Total gross deferred tax liability (173,743) (632,273)
----------- ------------
Net deferred tax asset $ 456,058 $ 302,812
=========== ===========
</TABLE>
The Company recorded deferred tax liabilities of $174,337 related to
its 1996 acquisition of Thaxton Insurance Group, 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, 1995 or 1996 and no net change in the allowance during 1995 or 1996. 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-16
<PAGE>
Independent Auditors' Report
The Board of Directors
Thaxton Insurance Group, Inc.:
We have audited the accompanying balance sheet of Thaxton Insurance Group, Inc.
(the Company) as of December 31, 1995, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Thaxton Insurance Group, Inc.
as of December 31, 1995, and the results of its operations and its cash flow for
the year then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Charlotte, North Carolina
June 21, 1996
F-17
<PAGE>
THAXTON INSURANCE GROUP, INC.
Balance Sheet
December 31, 1995
<TABLE>
<CAPTION>
Assets
1995
Current Assets:
<S> <C>
Cash $ 200,505
Securities available-for-sale 1,267,588
Investment in Siau Agency, Inc. 24,156
Accounts receivable (less allowance for doubtful accounts
of $50,478) 797,233
Commissions receivable 203,595
Interest receivable 17,083
Prepaid expenses 70,655
Accounts receivable - affiliate 97,434
Note receivable - affiliate 1,185,988
Notes receivable - stockholders 27,933
Auto inventory 108,409
Other receivables 82,203
------
Total Current Assets 4,082,782
Property and Equipment:
Furniture, fixtures and equipment (less accumulated
depreciation of $630,369) 478,543
-------
Intangible Assets, Net of Amortization:
Covenants not to compete 12,665
Goodwill 1,337,008
Insurance expirations 1,302,237
---------
2,651,910
Other Assets:
Note receivable - stockholders 99,900
Cash surrender value - life insurance 4,845
Total Other Assets 104,745
Total Assets $7,317,98
=========
</TABLE>
See accompanying notes to the financial statements.
F-18
<PAGE>
THAXTON INSURANCE GROUP, INC.
Balance Sheet
December 31, 1995
<TABLE>
<CAPTION>
Liabilities And Stockholders' Equity
1995
<S> <C>
Current Liabilities:
Current portion of long-term debt $ 167,749
Notes payable to individuals 385,901
Lease payable 22,263
Lines of credit 216,957
Accounts payable 213,003
Premiums payable 900,126
Interest payable 58,061
Employee savings plan payable 717,257
Accrued payroll and bonuses 145,366
Other current liabilities 5,197
Current income taxes 70,000
-----------
Total Current Liabilities 2,901,880
---------
Non-current Liabilities:
Long-Term debt, less current portion 376,709
Line of credit 2,212,324
Notes payable to affiliates 401,277
Notes payable to individuals 1,035,736
Deferred tax liability 2,000
------------
Total Non-current Liabilities 4,028,046
Stockholders' Equity:
Preferred Stock A (no par value, 2,000 shares
authorized, 1,531 shares issued and 408,332
outstanding
Preferred Stock B ($1 par value, 5,000,000
shares authorized, 340,000 shares issued and
outstanding 340,000
Common stock ($1 par value, 400 shares
authorized and issued, 300 shares outstanding) 400
Accumulated deficit (353,186)
Treasury stock (100 shares at cost) (1,100)
Net unrealized loss on available for sale
securities (6,392)
------------
Total Stockholders' Equity 368,054
------------
Total Liabilities and Stockholders' Equity $7,317,980
==========
</TABLE>
F-19
<PAGE>
THAXTON INSURANCE GROUP, INC.
Statement of Operations
For the year ended December 31, 1995
<TABLE>
<CAPTION>
1995
<S> <C>
Revenues
Commissions income $4,340,172
Auto sales, net 83,063
Interest income 157,917
Other 67,167
--------------
4,648,319
--------------
Expenses
Salaries and employee benefits 2,259,532
Commission expense 293,512
Depreciation 205,393
Amortization 167,741
Office expense 772,737
Interest expense 331,442
Legal and professional 38,363
Bad debts expense 54,689
Advertising 78,355
Other 141,825
--------------
4,342,139
--------------
Net Income Before Taxes 304,730
Income Tax Expense 153,201
--------------
Net Income $ 151,529
==============
</TABLE>
See accompanying notes to the financial statements.
F-20
<PAGE>
THAXTON INSURANCE GROUP, INC.
Statement of Stockholders' Equity
For the year ended December 31, 1995
<TABLE>
<CAPTION>
Preferred Common Treasury Accumulated Net Total
Stock Stock Stock Deficit Unrealized Shareholders'
Gain (loss) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 748,332 400 (1,100) (462,215) 3,071 288,488
Unrealized loss on securities
available for sale (9,463) (9,463)
Dividends Paid - - (42,500) - (42,500)
Net income - - 151,529 - 151,529
------------ ------------ ----------- --------------- ------------------ --------------
Balance, December 31, 1995 $ 748,332 400 (1,100) (353,186) (6,392) 388,064
============ ============ =========== =============== ================== ==============
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
THAXTON INSURANCE GROUP, INC.
Statement of Cash Flows
For the year ended December 31, 1995
<TABLE>
<S> <C>
Net income $ 151,529
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 373,134
Gain on sale of fixed assets (8,825)
Loss on Siau 6,234
Gain on sale of investments (70,969)
Deferred income taxes 72,100
Provisions for doubtful accounts 57,379
Increase (decrease) in operating assets and liabilities:
Accounts receivable (234,668)
Prepaids and other assets (107,328)
Premiums payable 112,963
Auto inventory (108,409)
Employee savings plan payable 580,171
Accounts payable and accrued liabilities 222,312
---------------
Net cash provided by operating activities 1,045,623
---------------
Investing activities:
Purchase of available for sale securities (1,333,942)
Sale of available for sale securities 260,476
Purchase of property and equipment (155,997)
Sale of property and equipment 13,700
Notes receivable-affiliate (851,444)
Investment in affiliate 250,000
Purchase of agency (1,676,178)
Sale of agency assets 700,951
---------------
Net cash used in investing activities (2,792,434)
---------------
Financing activities:
Proceeds from lines of credit, net 2,087,827
Proceeds from debt, net (269,830)
Dividends paid (42,500)
---------------
Net cash provided by financing activities 1,775,497
---------------
Net increase in cash 28,686
Cash, beginning of year 171,819
---------------
Cash, end of year 200,505
===============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 344,343
===============
Taxes $ 10,333
===============
</TABLE>
F-22
<PAGE>
During 1995, Thaxton Insurance Group, Inc., acquired an insurance agency located
in North Carolina. (See note 4 for transaction description).
F-23
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
December 31, 1995
1. Summary of Significant Accounting Policies
a. Business Activity
Thaxton Insurance Group, Inc. is incorporated under the laws
of the State of South Carolina and licensed as an insurance
agency in the States of North and South Carolina. The Company
operates a general insurance division and a third party
administrator division with offices in North and South
Carolina.
b. Revenue Recognition
Revenue consists principally of insurance commissions (net of
split or shared commissions) and, fees in lieu of commissions
for insurance placement services fees. For agency
transactions, insurance commissions (including commission
adjustments and commissions on premiums billed directly by
underwriters) and fees in lieu of commissions for insurance
placement services are recognized as services are performed in
accordance with the Company's contractual obligations with the
underwriters, but not before protection is placed with
insurers.
Fee income for services other than placement of insurance
coverages is recognized as those services are provided.
c. Fiduciary Funds and Liabilities
In its capacity as an insurance agent, the Company collects
premiums from insureds and, after deducting its commissions,
remits the premiums to the respective insurance underwriters;
the Company collects claims or refunds from underwriters on
behalf of insureds. Unremitted insurance premiums, claims, and
refunds are held in a fiduciary capacity.
d. Property and Equipment
Furniture, fixtures and equipment are stated at cost.
Depreciation is calculated using the straight-line method over
the estimated useful lives of the related assets, which range
up to five years on office equipment and automobiles and seven
years on furniture and fixtures.
(Continued)
F-24
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes To Financial Statements
Leasehold improvements are capitalized and amortized over the
shorter of the life of the asset or the lease term.
Maintenance and repair costs are charged to operations when
incurred.
e. Intangible Assets
Goodwill represents the excess of the cost of insurance
agencies acquired over the fair value of its net assets at
date of acquisition. Goodwill is amortized on a straightline
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. The covenant not to compete is
amortized according to the purchase contract over six years on
a straight-line basis.
f. Income Taxes
The Company computes its income taxes in accordance with the
provisions of SFAS 109. Under SFAS 109, deferred tax
liabilities are recognized on all taxable temporary
differences (reversing differences where tax deductions
initially exceed financial statement expense, or income is
reported for financial statement purposes prior to being
reported for tax purposes). In addition, deferred tax assets
are recognized on all deductible temporary differences
(reversing differences where financial statement expense
initially exceeds tax deductions, or income is reported for
tax purposes prior to being reported for financial statement
purposes) and operating losses and tax credit carryforwards.
Valuation allowances are established to reduce deferred tax
assets if it is determined to be "more likely than not" that
all or some portion of the potential deferred tax assets will
not be realized. Under SFAS 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.
g. Disclosures About the Fair Value of Financial Instruments
Cash, Receivables (Accounts, Commissions, Interest and Other),
Receivables from Affiliates and Stockholders, Payables (lease
accounts, premiums, interest, employee savings plan), Notes
Payable to Banks, Line of Credit, Due to Affiliated Company,
and Accrued Expenses - The carrying amount approximates fair
value because of the short maturity of these instruments.
Securities Available-for-Sale - The fair values of the
Company's securities available-for-sale are based on quoted
market prices.
(Continued)
F-25
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
Long-Term Debt - The fair values of each of the Company's
long-term debt instruments are based on the amount of future
cash flows associated with each instrument discounted using
the Company's current borrowing rate for similar debt
instruments of comparable maturity. The carrying amount of the
debt at December 31, 1995 approximates market.
h. Managements' Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
2. Investment
The investment in Siau Agency, Inc., which Thaxton Insurance Group,
Inc. owns 33% interest, is carried on the equity method.
3. Marketable Investment Securities
Marketable investment securities at December 31, 1995 consist of
corporate debt and equity securities. The Company adopted the
provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities
(Statement 115) at December 31, 1994. Under Statement 115, the Company,
at the time of purchase, classifies its debt and marketable equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability
and intent to hold the security until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1995 all securities were
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until
realized.
(Continued)
F-26
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
A decline in the market value of any available-for-sale security below
cost that is deemed other than temporary results in a charge to
earnings resulting in the establishment of a new cost basis for the
security.
The company's investment in Common stock of other entities, which is
stated at market value, is as follows at December 31, 1995:
<TABLE>
<CAPTION>
Market Unrealized Unrealized
Cost Value holding gains holding losses
<S> <C> <C> <C> <C>
Available for sale securities:
Common Stock $1,273,980 1,267,588 672 7,064
</TABLE>
The Company owns 138,890 shares of The Thaxton Group, Inc., common
stock, a public company and a related party, with a cost and market
value of $1,250,006 at December 31, 1995. This represents 3.68% of the
shares outstanding at December 31, 1995.
4. Acquisition
In March 1995, the Company acquired certain assets of an insurance
agency. In addition, on the same date the company sold the receivables
for $700,951 to The Thaxton Group, Inc. an affiliated company. The
resulting goodwill is being amortized over 15 years using the straight
line method. The following summarizes the fair value of assets
acquired, liabilities assumed and cash paid in the transaction:
<TABLE>
<S> <C>
Assets acquired:
Receivables $700,951
Goodwill 975,227
Net cash paid $1,676,178
</TABLE>
5. Note Receivable - Affiliate
Thaxton Insurance Group, Inc. holds a $1,185,988 note receivable due
from The Thaxton Group, Inc., an affiliate, as of December 31, 1995.
Interest is payable quarterly at a rate of 10% and the principal was
collected in full on January 2, 1996.
(Continued)
F-27
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
6. Property and Equipment
The composition of furniture, fixtures and equipment at December 31,
1995 is as follows:
<TABLE>
<CAPTION>
1995
<S> <C>
Office equipment $551,595
Furniture and fixtures 269,753
Automobiles 118,460
Leasehold improvements 169,104
----------
Total cost 1,108,912
Less accumulated depreciation (630,369)
----------
Furniture, fixtures and equipment, net $478,543
========
</TABLE>
Depreciation expense for the year ended December 31, 1995 totaled $205,393.
7. Intangible Assets
The composition of intangible assets at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
1995
<S> <C>
Covenants not to compete $47,995
Goodwill 1,782,932
Insurance expirations 1,732,227
---------
Total cost 3,563,154
Less accumulated amortization (911,244)
---------
Intangible assets, net $2,651,91
=========
</TABLE>
The Company assesses the recoverability of these intangible assets by
determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. Amortization expense for the year
ended December 3 1, 1995 totaled $167,741.
(Continued)
F-28
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
8. Notes Payable
At December 31, 1995, notes payable consisted of the following:
<TABLE>
<CAPTION>
1995
<S> <C>
Note payable to Morris Brothers Agency of Charlotte, Inc., 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
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
Note payable to individuals due annually on June 1 in installments of $50,000
through June 1998, including interest at a rate of 7% and secured by stock
purchased with funds and various individual stockholders' assets. 104,973
Note payable to individual due in installments of $100,000 on January 1, 1996
and $60,000 on January 1, 1997 plus interest at a rate of 7%. Secured by agency
purchased with funds and various individual stockholders' assets. 60,000
Note payable to individual due in monthly installments of $3,067 through January
1999, including interest at a rate of 6% and secured by agency purchased with
funds and various individual stockholders' assets. 116,182
Note payable in 1996, interest at a rate of 12%, unsecured. 32,241
---------
Total notes payable 544,458
Less current maturities (167,749)
---------
$376,709
=========
</TABLE>
(Continued)
F-29
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
A schedule of maturities of long-term debt is as follows:
Year Ending
December 31 Amount
1996 $167,749
1997 221,986
1998 94,171
1999 18,652
2000 20,142
Thereafter 21,758
--------
$544,458
========
Thaxton Insurance Group, Inc. borrows from various individuals and affiliates.
The notes are unsecured and pay 10% interest annually. Their maturity varies
from one to three years.
Maturity
Date Rate 1995
Individuals Various 10% $1,421,637
==========
Affiliates Various 10% 401,277
==========
Thaxton Insurance Group, Inc. has a line of credit agreement with First Citizens
Bank whereby the Company can borrow up to $400,000. The principal is payable on
demand, and interest (9.5% at December 31, 1995) is payable quarterly at First
Citizens prime rate plus one percent. The amount outstanding as of December 31,
1995 and 1994 is $216,957 and $341,454, respectively. The line of credit is
secured by certain real estate, furniture, fixtures, equipment and investments
owned by the Company and individual shareholders. The line of credit expires on
December 31, 1996. Thaxton Insurance Group, Inc. also has a sweep account with
First Citizens Bank. The bank requires Thaxton Insurance Group, Inc. 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.
Thaxton Insurance Group, Inc. has a line of credit with FINOVA Capital
Corporation whereby the Company can borrow up to $3,000,000. The principal is
payable upon expiration of the agreement and interest is payable monthly at
prime plus three percent (11.75% at December 31, 1995). The amount outstanding
as of December 31, 1995 is $2,212,324. The note is secured by certain
receivables, furniture, fixtures, equipment, intangibles, cash, and investments
owned by the Company and individual guarantors. The line of credit expires on
March 31, 1999.
(Continued)
F-30
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
9. Self Insurance
Thaxton Insurance Group, Inc. self insures medical expenses of eligible
employees and their dependents up to a maximum of $20,000 per year. The
Company has a secondary carrier which assumes coverage after the
$20,000 maximum is met by the employees and their dependents.
10. Employee Savings Plan Payable
Thaxton Insurance Group, Inc. has an employee savings plan for eligible
employees. Contributions to the plan are made through payroll
deductions. The contributions are treated as a loan to the Company and
in return the Company pays the employee 10% interest on their savings.
The employees may withdraw their savings on demand.
11. Commitments and Contingencies
Thaxton Insurance Group, Inc. has noncancellable lease contracts for
office space, equipment, and automobiles that expire at various dates
through 1999, which leases generally include escalation clauses for
increases in lessors' operating expenses and increased real estate
taxes. Future minimum rental payments required under such operating
leases amount to $470,611, of which $212,045 is payable in 1996,
$133,466 in 1997, $72,120 in 1998, and $52,980 in 1999. Rental expenses
for all such leases amounted to $281,724 in 1995.
Thaxton Insurance Group, Inc. also has two non-cancelable capital
leases which expire in 1996. The balance due on these leases amounts to
$22,263.
(Continued)
F-31
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
12. Income Taxes
The expected income tax expense differs from the reported income tax
expense. The significant reconciling items are goodwill amortization
and separate return limitations for acquired companies not filing as
part of the consolidated group.
<TABLE>
<CAPTION>
1995
<S> <C>
Deferred tax assets:
Loan loss reserves $ 20,000
Other 16,000
------
Total gross deferred tax assets 36,000
Deferred tax liabilities:
Depreciable basis of fixed assets $ (38,000)
-----------
Net deferred tax liability $ (2,000)
============
</TABLE>
The valuation allowance as of January 1, 1995 was $1,200. The net
change in the valuation allowance during 1995 was a decrease of $1,200.
It is management's opinion that realization of the deferred tax assets
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 return for 1992 and subsequent years are
Subject to review by the taxing authorities.
(Continued)
F-32
<PAGE>
THAXTON INSURANCE GROUP, INC.
Notes to Financial Statements
13. Related Party Transactions
James D. Thaxton, President and Chief Executive Officer (CEO) of
Thaxton Insurance Group, Inc., is also Chairman of the Board and CEO of
The Thaxton Group, Inc., an affiliate of the Company. James D. Thaxton
is also the majority shareholder in both companies. The Thaxton Group,
Inc. is a diversified consumer finance company operating in South and
North Carolina, Tennessee and Virginia under the name TICO Credit
Company and is engaged primarily in purchasing and servicing retail
installment contracts originated by independent used automobile dealers
and making and servicing personal loans. In addition, the Thaxton
Insurance Group, Inc. refers customers for insurance premium financing
to The Thaxton Group, Inc.
At December 31, 1995, the Thaxton Insurance Group, Inc. had notes
payable to various Thaxton family members of $401,277. In addition,
notes receivable from The Thaxton Group, Inc., an affiliate, were
$1,185,988 as of December 31, 1995. The notes receivable were
subsequently paid on January 2, 1996.
The Company also shares executive offices with the Group with monthly
utilities, occupancy, and certain administrative expenses allocated
between the Group and the Company.
14. Subsequent Event
On October 31, 1996, all of the Company's common stock was acquired by
The Thaxton Group, Inc. ("Thaxton Group") in exchange for 300,000
shares of Thaxton Group common stock.
F-32
<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 ___________, 1997 (25 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% CONVERTIBLE PREFERRED STOCK
_________________
PROSPECTUS
_________________
_________, 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 KPMG Peat Marwick, LLP
23.3 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 September 5, 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, September 5, 1997
- ---------------------------------
James D. Thaxton President and Chief Executive
Officer
/S/ ROBERT L. WILSON* Executive Vice President, Chief September 5, 1997
- --------------------------------- Operating Officer and Director
Robert L. Wilson
/S/ KENNETH H. JAMES Vice President, Chief Financial September 5, 1997
- --------------------------------- Officer, Secretary and Director
Kenneth H. James (Principal Accounting Officer)
/S/ C. L. THAXTON, SR.* Director September 5, 1997
- ---------------------------------
C.L. Thaxton, Sr.
/S/ JACK W. ROBINSON* Director September 5, 1997
- ---------------------------------
Jack W. Robinson
/S/ PERRY L. MUNGO* Director September 5, 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 KPMG Peat Marwick, LLP
23.3 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 DepositaryAgreement 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
<PAGE>
Exhibit 5
MOORE & VAN ALLEN, PLLC
ATTORNEYS AT LAW
NATIONSBANK CORPORATE CENTER
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA 28202-4003
(704)331-1000
September 4, 1997
The Thaxton Group, Inc.
1524 Pageland Highway
Lancaster, South Carolina 29721
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We are acting as counsel for The Thaxton Group, Inc., a South Carolina
corporation (the "Company"), in connection with the registration by the Company
under the Securities Act of 1933, as amended, on Form S-4 (the "Registration
Statement") of 400,000 shares (the "Shares") of the Company's preferred stock,
par value $0.01 per share. The Shares will be offered and sold to certain
existing shareholders by the Company.
We have examined the originals or photocopies or certified copies of
such records of the Company, certificates of officers of the Company and public
officials and other documents as we have deemed relevant and appropriate as the
basis for the opinion hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all original
documents submitted to us, the conformity to the originals of all documents
submitted to us as certified copies or photocopies and the authenticity of the
originals of such documents.
Based upon such examination, and relying upon statements of fact
contained in the documents which we have examined, we are of the opinion that
the Shares have been duly authorized and will be validly issued, fully paid and
non-assessable when issued, delivered and paid for as contemplated by the
Registration Statement.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the related Prospectus.
Very truly yours,
MOORE & VAN ALLEN, PLLC
<PAGE>
MOORE & VAN ALLEN, PLLC
ATTORNEYS AT LAW
NATIONSBANK CORPORATE CENTER
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA 28202-4003
(704) 331-1000
September 4, 1997
The Thaxton Group, Inc.
1524 Pageland Highway
Lancaster, South Carolina 29721
Ladies and Gentlemen:
We have served as special counsel to The Thaxton Group, Inc. (the
"Company") in connection with the offering as described in the Company's
Registation Statmeent on Form S-4 (Reg. No. 333-28719) (the "Registration
Statement") of up to 400,000 of Series A 7.5% Cumulative Covertible Preferred
Stock issuable upon the exercise of subscription rights (the "Rights") to
holders of record of the Company's common stock. Capitalized terms whcih are
used but not defined herein have the meanings ascribed to such terms in the
Registration Statement.
You have requested our opinion as to certain Federal tax aspects of the
issuance of shares of Series A Preferred Stock in two-share increments to
participating stockholders who tender therefor one share of Common Stock and
$10.00 cash, as described in the Registration Statement.
DESCRIPTION OF THE TRANSACTION
The Company has distributed to the holders of record of its Common
Stock certain subscription Rights. One Right has been granted for each
outstanding share of Common Stock. Each Right entitles the holder to purchase
two shares of Series A Preferred Stock by tendering one share of Common Stock
and $10.00 cash to the Company. In the event of an oversubscription, shares of
Series A Preferred Stock will be allocated on a pro rata basis among
participating shareholders. James D. Thaxton, the Company's largest shareholder,
has indicated to the Company that he will participate in the Offering only to
the extent, if any, that the Offering is undersubscribed.
The Company's accountants have indicated that for financial accounting
purposes the transaction will be treated as if the Company had repurchased each
participating share of Common Stock for $10.00 and issued each share of Series A
Preferred Stock for $10.00.
<PAGE>
The Thaxton Group, Inc.
September 4, 1997
ASSUMPTIONS
The Company has represented to us, and we have assumed for purposes of
this opinion, the following facts and circumstances:
(1) That the fair market value each share of Series A Preferred Stock
received in exchange for a share of Common Stock is equal to the fair market
value of the share of Common Stock surrendered in the exchange;
(2) That the Company has a bona fide business purpose for engaging in
the transactions described in the Registration Statement;
(3) That the offering described in the Registration Statement is an
isolated transaction and is not part of a plan to increase periodically the
proportionate interest of any shareholder in the assets or earnings and profits
of the Company; and
(4) That the proposed transaction is consummated in accordance with the
Registration Statement.
OPINION
Subject to the assumptions set forth herein, and qualified as set forth
in the discussion below, we are of the opinion that:
(1) The receipt by a participating shareholder of shares of Series A
Preferred Stock in exchange for shares of Common Stock and cash as described in
the Registration Statement will constitute a "recapitalization" described in
section 368(a)(1)(E) of the Code;
(2) No gain or loss will be recognized to the Company upon the receipt
of cash and Common Stock in exchange for the issuance of Series A Preferred
Stock; and
(3) No gain or loss will be recognized to the shareholders of the
Company upon the receipt of Series A Preferred Stock in exchange for Common
Stock and cash.
DISCUSSION
Section 368(a)(1)(E) of the Code provides that a tax-free
reorganization includes a "recapitalization." Neither the Code nor regulations
thereunder define the term "recapitalization." The United States Supreme Court
has stated in general terms that a "recapitalization" involves a "reshuffling of
a capital structure within the framework of an existing corporation." HELVERING
V. SOUTHWEST CONSOLIDATED CORP., 315 U.S. 194, 202 (1942).
<PAGE>
The Thaxton Group, Inc.
September 4, 1997
Rev. Rul 86-25, 1986-1 C.B. 202 articulated the Internal Revenue Service's
position that "a transaction that effects a reshuffling of a corporation's
capital structure will be respected as a recapitalization exchange ... so long
as it has a bona fide business purpose and is an isolated transaction and not
part of a plan to increase periodically the proportionate interest of a
shareholder in the assets or earnings and profits of a corporation."
Section 368 is not an elective provision of the Code. If the
requirements are met for reorganization treatment pursuant to section 368, the
transaction will be treated as a reorganization notwithstanding a contrary
treatment for financial accounting purposes. So long as the receipt by the
Company of Common Stock and cash is considered to be an integrated transaction
with the issuance of Series A Preferred Stock, the transaction should qualify as
a "recapitalization" within the meaning of Section 368(a)(1)(E) and Treas. Reg.
ss.1-368-2(e) promulgated thereunder, which Regulation specifically sanctions
the issuance of preferred stock for common in a recapitalization.
In Gen. Counsel Memorandum 39261 (1984) the Service considered whether
a transaction in which a shareholder first exchanged 15 shares of common stock
for cash, and then exchanged 15 shares of common stock for preferred stock,
pursuant to an offer that permitted shareholders to elect whether to exchange
for cash or stock, should be treated as a recapitalization or as a separate
redemption for cash, followed by an exchange for stock. The Memorandum concluded
that the exchange of common stock for preferred and cash should be treated as a
single transaction since both events were "clearly part of an overall or
integrated plan." Similarly, the receipt of common stock and cash by the Company
in exchange for preferred stock is part of an overall or integrated plan as
described in the Registration Statement.
Accordingly, we believe that a court would more likely than not hold
that the transactions described in the Registration Statement are part of an
integrated recapitalization, regardless of their treatment for financial
accounting purposes.
We call to your attention the possibility that the Series A Preferred
Stock may be treated as "section 306 stock" by the IRS. Generally, the sale or
redemption of section 306 stock will result in the recognition by the
stockholder of ordinary income as opposed to capital gain. Normally, preferred
stock received in exchange for common stock in a tax-free recapitalization will
be section 306 stock if, using the IRS' "cash equivalency test," the issuance of
cash to the stockholder instead of preferred stock would have resulted in a
dividend. Because the determination of whether the issuance would have resulted
in a dividend depends upon many factual determinations, some of which will vary
among stockholders, no opinion is given as to whether the Series A Preferred
Stock will be "section 306 stock." We note further that if it can be established
to the satisfaction of the Treasury under Code section 306(b)(4) that the
acquisition and disposition of the stock did not have as a principal purpose the
avoidance of federal income tax, the sale or disposition of the stock will not
be subjected to ordinary income treatment. Prior to 1989, the IRS ruled on a
number of occasions that the issuance of preferred
<PAGE>
The Thaxton Group, Inc.
September 4, 1997
stock in a recapitalization by a publicly held corporation did not have as a
principal purpose the avoidance of federal income tax. However, in 1989 the IRS
indicated that the proper application of section 306(b)(4) was under "intensive
study" and revoked its prior favorable rulings. Therefore, although it does not
appear that avoidance of federal income tax is a principal purpose of the
Offering, it is unlikely that a favorable ruling to that effect would be
obtainable from the IRS.
CONCLUSION
This opinion is given to the Company in connection with the
transactions described in the Registration Statement and may not be relied upon
by any other party or for any other purpose.
Where we have rendered a legal opinion in this letter, we have
concluded that it is more likely than not that the tax treatment opined upon
would be upheld in litigation if such tax treatment were challenged by the IRS.
No legal opinion expressed herein is binding upon the IRS and there can be no
guarantee that the IRS will not challenge or successfully litigate any tax issue
discussed herein. In rendering this opinion we are assuming no obligation to
keep the Company or any other party apprised of any changes in law or
regulations subsequent to the date hereof.
The opinions expressed in this letter are based solely upon the
information, representations and assumptions set forth herein. No views are
expressed with respect to any state and local tax consequences, any federal tax
consequences other than those set forth above, including without limitation any
determination as to whether the Series A Preferred Stock will constitute
"Section 306 stock," or any other federal or state laws not explicitly referred
to and discussed.
Very truly yours,
MOORE & VAN ALLEN, PLLC
(GRAPHIC APPEARS HERE WITH THE FOLLOWING LETTERS)
FINOVA(R)
FINANCIAL INNOVATORS
FIRST AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THE THAXTON GROUP, INC.
THAXTON INSURANCE GROUP, INC.
Co-Borrowers
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
Address
(THE THAXTON GROUP, INC.)
(THAXTON INSURANCE GROUP, INC.)
57-0669498
Borrowers Fed ID Tax Nos.
$100,000,000.00
Amount of Loan
SEPTEMBER 3, 1997
Date
REDISCOUNT FINANCE
<PAGE>
TABLE OF CONTENTS
1. DEFINITIONS 6
1.1 ACCOUNT DEBTOR 6
1.2 AGREEMENT 6
1.3 BULK PURCHASE RESERVES 6
1.4 BUSINESS DAY 6
1.5 CAPTIVE VEHICLE RECEIVABLE 6
1.6 CHARGE OFFS 6
1.7 CRR ADVANCE RATE 6
1.8 CODE 6
1.9 COLLATERAL 6
1.10 COLLATERAL RECOVERY RATE 6
1.11 COMMONLY CONTROLLED ENTITY 6
1.12 DEALER RESERVE 6
1.13. DEBT SERVICE COVERAGE RATIO 6
1.14 DEFAULT 6
1.15. DIRECT LOAN MORTGAGE RECEIVABLE 6
1.16 DIRECT LOAN RECEIVABLE 6
1.17 DISTRIBUTIONS 7
1.18 ELIGIBLE RECEIVABLES 7
1.19 ERISA 7
1.20 GAAP 7
1.21 GUARANTOR 7
1.22 GUARANTY AGREEMENT 7
1.23 GOVERNING RATE 7
1.24 INCLUDED REBATE PERCENTAGE 7
1.25 INCLUDED REBATES 7
1.26 INDEBTEDNESS 8
1.27 INSURANCE PREMIUM RECEIVABLE 8
1.28 LEVERAGE RATIO 8
1.29 LOAN DOCUMENTS 8
1.30 MAXIMUM RATE 8
1.31. MORTGAGE WAREHOUSE RECEIVABLE 8
1.32 NET COMMISSION INCOME 8
1.33 NET INCOME 8
1.34 NON CONSUMER RECEIVABLE 8
1.35 NONPAYMENT NET RECEIVABLE REDUCTIONS 8
1.36 NOTE 8
1.37 PLAN 8
1.38 RECEIVABLES 8
1.39 REQUEST FOR ADVANCE 8
1.40 SCHEDULE 9
1.41 SUBORDINATED DEBT 9
1.42 TANGIBLE NET WORTH 9
1.43 TRANCHE "A" CREDIT FACILITY 9
1.44 TRANCHE "B" CREDIT FACILITY 9
1.45. TRANCHE "C" CREDIT FACILITY 9
1.46 TRANCHE "D" CREDIT FACILITY 9
1.47. TRANCHE "E" CREDIT FACILITY 9
1.48. TRANCHE "F" CREDIT FACILITY 9
1.49 VEHICLE RECEIVABLE 9
2. LOAN 9
<PAGE>
2.1 AMOUNT OF LOAN 9
2.2 INTEREST RATE 10
2.3 PAYMENTS 10
2.4 PAYMENT DUE ON A NON-BUSINESS DAY 11
2.5 MANDATORY PAYMENTS 11
2.6 VOLUNTARY PREPAYMENTS 11
2.7 MAXIMUM INTEREST; CONTROLLING AGREEMENT 11
2.8 INTEREST AFTER DEFAULT 12
2.9 STATEMENT OF ACCOUNT 12
2.10 APPLICATION OF PAYMENTS 12
2.11 UNUSED CREDIT LINE FEE 12
2.12 TRANCHE "A" CREDIT FACILITY 12
2.13 TRANCHE "B" CREDIT FACILITY 12
2.14 TRANCHE "C" CREDIT FACILITY 13
2.15 TRANCHE "D" CREDIT FACILITY 13
2.16 TRANCHE "E" CREDIT FACILITY 13
2.17 TRANCHE "F" CREDIT FACILITY 13
2.18 APPLICATION OF PAYMENTS 13
2.19 ADVANCES TO LEAD BORROWER 13
2.20 APPOINTMENT OF AGENT 13
3. SECURITY 14
3.1. SECURITY INTEREST 14
3.2. FINANCING STATEMENTS AND FURTHER ASSURANCES 15
3.3. PLEDGE OF RECEIVABLES 15
3.4. FAILURE TO DELIVER 15
3.5. NOTICE OF COLLATERAL ASSIGNMENT 15
3.6. LOCATION OF RECEIVABLES 15
3.7. RECORDS AND INSPECTIONS 16
3.8. ADDITIONAL DOCUMENTS 16
3.9. COLLECTION 16
3.10. BLOCKED ACCOUNTS 16
3.11. PROTECTION OF RECEIVABLE RECORDS 16
3.12. USE OF COLLECTIONS AND MODIFICATION OF
RECEIVABLES 16
3.13. USE OF PROCEEDS 17
3.14. RETURN OF COLLATERAL 17
3.15. LENDER'S PAYMENT OF CLAIMS 17
3.16. CROSS COLLATERALIZATION 17
4. CONDITIONS OF CLOSING; SUBSEQUENT ADVANCES 17
4.1. INITIAL ADVANCE 17
4.2. SUBSEQUENT ADVANCES 18
4.3. ORAL REQUEST FOR ADVANCE 18
4.4. ALL ADVANCES TO CONSTITUTE ONE LOAN 18
4.5. ADVANCES 19
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS
AND GUARANTOR 19
5.1. REPRESENTATIONS AND WARRANTIES 19
5.2. WARRANTIES AND REPRESENTATIONS AS TO
ELIGIBLE RECEIVABLES 21
6. COVENANTS AND OTHER AGREEMENTS 21
6.1. AFFIRMATIVE COVENANTS 21
6.2. NEGATIVE COVENANTS 22
6.3. JOINT NEGATIVE COVENANTS 23
6.4. REPORTING REQUIREMENTS AND ACCOUNTING
PRACTICES 23
<PAGE>
6.5. ACCOUNT DEBTORS' ADDRESSES 23
6.6. FINANCIAL REPORTS 23
6.7. FINANCIAL STATEMENTS OF GUARANTORS 23
6.8. NOTICE OF CHANGES 23
6.9. DELIVERY OF RECEIVABLE DOCUMENTS;
REPORTING 24
7. EVENTS OF DEFAULT AND REMEDIES 24
7.1. EVENTS OF DEFAULT 24
7.2. ACCELERATION OF THE INDEBTEDNESS 25
7.3. LOUISIANA CONFESSION OF JUDGMENT 25
7.4. REMEDIES 25
7.5. NO WAIVER 26
7.6. APPLICATION OF PROCEEDS 27
7.7. APPOINTMENT OF LENDER AS
ATTORNEY-IN-FACT 27
8. EXPENSES AND INDEMNITIES 27
8.1. REIMBURSEMENT FOR EXPENSES 27
8.2. LENDER'S EXPENSES AND ATTORNEY'S FEES 27
8.3. GENERAL INDEMNIFICATION 28
9. MISCELLANEOUS 28
9.1. NOTICES 28
9.2. PARTICIPATIONS 28
9.3. SURVIVAL OF AGREEMENTS 28
9.4. NO OBLIGATION BEYOND MATURITY 28
9.5. PRIOR AGREEMENTS SUPERSEDED 28
9.6. PARTIES BOUND 28
9.7. NUMBER AND GENDER 28
9.8. NO THIRD PARTY BENEFICIARY 28
9.9. EXECUTION IN COUNTERPARTS 28
9.10. SEVERABILITY OF PROVISIONS 29
9.11. HEADINGS 29
9.12. SCHEDULES AND EXHIBITS 29
9.13. FURTHER INSTRUMENTS 29
9.14. GOVERNING LAW 29
9.15. JURISDICTION AND VENUE 29
9.16. WAIVER 29
9.17. WAIVER OF RIGHT TO TRIAL BY JURY 29
9.18. BINDING ARBITRATION (LIMITED) 30
9.19. ADVICE OF COUNSEL 30
9.20. TIME OF ESSENCE 30
<PAGE>
(GRAPHIC APPEARS HERE WITH THE FOLLOWING LETTERS)
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
FIRST AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BORROWER: THE THAXTON GROUP, INC.
THAXTON INSURANCE GROUP, INC.
ADDRESS: 1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
DATE: SEPTEMBER 3, 1997
THIS FIRST AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("AGREEMENT") is
entered into on the above date between FINOVA CAPITAL CORPORATION, a Delaware
corporation ("Lender"), whose corporate address is 1850 N. Central Avenue,
Phoenix, Arizona 85077 and whose Rediscount Finance Office address is 13355 Noel
Road, Suite 800, Dallas, Texas 75240 and the borrowers named above (collectively
referred to herein as the "Borrowers" and singularly as "Borrower"), all of
whose chief executive offices are located at the above addresses (collectively
referred to herein as "Borrowers' Address"). Each Borrower shall be separately
defined as set forth in the Schedule. All representations, warranties,
covenants, agreements, undertaking or other obligations of Borrowers as set
forth in this Agreement and all other Loan Documents are made by each Borrower
as if separately set forth for each Borrower in this Agreement and the other
Loan Documents. All financial covenants and ratios set forth herein shall be
applied to the Borrowers in the aggregate, except as specifically identified as
being applicable to any one Borrower or group of Borrowers.
This First Amended and Restated Loan and Security Agreement and the documents
executed in conjunction herewith (defined herein collectively as the "Loan
Documents") are an amendment and restatement of that certain Loan and Security
Agreement and the documents executed in conjunction therewith, as amended, dated
March 27, 1995, by and between C.L. Thaxton & Sons, Inc. (now known as "The
Thaxton Group, Inc.") and Lender and of that certain Loan and Security Agreement
and the documents executed in conjunction therewith, as amended, dated March 27,
1995, by and between Thaxton Insurance Group, Inc. ("TIG") and Lender
(collectively referred to herein as the "Prior Agreements"). The Loan Documents
are an extension and renewal of the prior agreements and the indebtedness
evidenced thereby and not an extinguishment of such indebtedness. The terms and
provisions of this Agreement and the other Loan Documents executed in
conjunction herewith shall supersede and control over the term and provisions of
the Prior Agreements.
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All references to "Borrower" in this Agreement and all other Loan
Documents, shall include The Thaxton Group, Inc., and Thaxton Insurance Group,
Inc., jointly and severally, except for those provisions that specifically
identify a Borrower separately.
1. DEFINITIONS
1.1. ACCOUNT DEBTOR . The term "Account Debtor" shall mean any person or
persons that are an obligor in any contractual arrangement with Borrower or any
co-signor in respect of any Receivable.
1.2. AGREEMENT . The term "Agreement" shall mean this First Amended and
Restated Loan and Security Agreement between FINOVA and the Borrower and any
amendment, modifications or extension hereof.
1.3. BULK PURCHASE RESERVES . The term "Bulk Purchase Reserves" shall mean
the unearned purchase discount of a group (more than one) of Receivables that
are purchased by Borrower with respect to such Receivables.
1.4. BUSINESS DAY . The term "Business Day" shall mean a day, other than a
Saturday or Sunday, on which commercial banks are open for business to the
public in Phoenix, Arizona and New York, New York.
1.5. CAPTIVE VEHICLE RECEIVABLE . The term "Captive Vehicle Receivable" shall
mean a Receivable that the proceeds of such Receivable were used to purchase a
motor vehicle and such Receivable is secured by such motor vehicle purchased by
Borrower from any entity affiliated, directly or indirectly, with Borrower.
CAPTIVE VEHICLE RECEIVABLES SHALL BE DEEMED "CATEGORY FOUR RECEIVABLES" HEREIN.
1.6. CHARGE OFFS . The term "Charge Offs" shall mean the amount due
(including the principal balance plus all earned fees and charges) pursuant to a
Receivable on the date that Borrower charges off such Receivable as
uncollectible, pursuant to Borrower's policies and/or procedures.
1.7. CRR ADVANCE RATE . The term "CRR Advance Rate" shall mean, on any date
of determination, the Collateral Recovery Rate percentage less fifteen
percentage points (.15).
1.8. CODE . The term "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
1.9. COLLATERAL . The term "Collateral" shall have the meaning set forth in
Section 3.1. hereof.
1.10. COLLATERAL RECOVERY RATE . The term "Collateral Recovery Rate" shall
mean, for twelve (12) calendar months immediately preceding any date of
determination, (i) the total cash collected from all Receivables (including but
not limited to all cash proceeds from charge off recoveries), divided by (ii)
the sum of (a) the Included Rebates plus (b) the total cash collected from all
Receivables (excluding all cash proceeds from charge off recoveries) plus (c)
the aggregate of all Charge Offs for that period.
1.11. COMMONLY CONTROLLED ENTITY . The term "Commonly Controlled Entity"
shall mean an entity, whether or not incorporated, which is under common control
with Borrower within the meaning of Section 414(b) or (c) of the Code.
1.12. DEALER RESERVE . The term "Dealer Reserve" shall mean the amount due to
a dealer with respect to a Receivable wherein the Borrower is or will become
obligated to such dealer in conjunction with the purchase or transfer of such
Receivable, through an agreement in writing, containing a "reserve" or other
liability arrangement between the dealer and Borrower.
1.13. DEBT SERVICE COVERAGE RATIO . The term "Debt Service Coverage Ratio"
shall mean the ratio determined by (i) the sum of Net Income, interest expense,
depreciation and amortization expense, compared to (ii) the sum of interest
expense and principal payments with respect to the Indebtedness of the
applicable Borrower.
1.14. DEFAULT . The term "Default" shall mean an event which with the passage
of time or notice or both would constitute an Event of Default (as defined in
Section 8.1).
1.15. DIRECT LOAN MORTGAGE RECEIVABLE . The term "Direct Loan Mortgage
Receivable" shall be defined a Receivable originated by Tico Credit (an
operating division of TTG) wherein the Account Debtor is a consumer and the
collateral securing such Receivable is residential real estate. DIRECT LOAN
MORTGAGE RECEIVABLES SHALL BE DEEMED "CATEGORY SEVEN RECEIVABLES" HEREIN.
1.16. DIRECT LOAN RECEIVABLE . The term "Direct Loan Receivable" shall mean
any Receivable of Borrower, excluding all Insurance Premium Receivables, Vehicle
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Receivables, Captive Vehicle Receivables, Mortgage Warehouse Receivables and
Non-Consumer Receivables. DIRECT LOAN RECEIVABLES SHALL BE DEEMED "CATEGORY ONE
RECEIVABLES" HEREIN.
1.17. DISTRIBUTIONS . The term "Distributions" shall mean, during the period
of determination, any dividends or other distribution of earnings to Borrower's
shareholders or equity holders.
1.18. ELIGIBLE RECEIVABLES . The term "Eligible Receivables" shall mean those
Receivables of Borrower that are acceptable to Lender, in its reasonable
discretion, and, in each case, that meet, at a minimum, all of the following
requirements: (i) arise from the extension of credit, the sale and delivery of
goods or the rendering of services in the ordinary course of Borrower's business
or arise from the extension of credit, the sale and delivery of goods or the
rendering of services in the ordinary course of the entity which has sold such
Receivable to Borrower; (ii) represent a valid and binding obligation
enforceable in accordance with its terms for the amount outstanding thereof
without offset, counterclaim or defense (whether actual or alleged); (iii)
comply in all respects with all applicable laws and regulations, including, but
not limited to, truth in lending and credit disclosure laws and regulations;
(iv) all amounts and information appearing thereon or furnished to Lender in
connection therewith are true and correct and undisputed by the Account Debtor
thereon or any guarantor thereof; (v) Borrower and the Account Debtor are not
engaged in any litigation regarding nonpayment of the Receivable; (vi) to the
best knowledge of Borrower neither the Account Debtor thereon nor any guarantor
thereof is subject to any receivership, insolvency or bankruptcy proceeding, is
insolvent or has failed to meet its debts as they mature; (vii) Borrower has
good and sufficient right to pledge, assign and deliver the Receivables free
from all liens, claims, encumbrances or security interests whatsoever; (viii)
neither the Account Debtor thereon nor any guarantor thereof is employed by,
related to or affiliated with Borrower; (ix) to the best knowledge of Borrower
no condition exists that materially or adversely affects the value of the
Receivables or jeopardizes any security therefor; (x) if the Receivables arise
from the sale of goods, such goods have been delivered and accepted by the
Account Debtor and are still subject to the lawful possession and control of the
Account Debtor and have not been otherwise returned to or repossessed by
Borrower; (xi) is not a renewal or extension of any Receivable previously
ineligible hereunder; (xii) the original principal amount thereof does not
exceed the Maximum Amount of an Eligible Receivable set forth in the Schedule
for the applicable Receivable Category (SCHEDULE SECTION 1.18.A.) and the
original term thereof does not exceed the Maximum Term of an Eligible Receivable
set forth in the Schedule for the applicable Receivable Category (SCHEDULE
SECTION 1.18.B.); (xiii) meets the Eligibility Test and has been reported to
Lender in compliance with the Aging Procedures set forth in the Schedule for the
applicable Receivable Category (SCHEDULE SECTION 1.18.D.); (xiv) is not
evidenced by a judgment or has not been reduced to judgment; (xv) is not an open
account; (xvi) is evidenced by a written payment agreement, bearing interest or
containing a time price differential, which has been executed by the Account
Debtor; (xvii) the Account Debtor thereunder is a legal resident of the United
States; (xviii) payments under the Receivable are to be made in United States
dollars; and (xix) the number of days between contractual payment dates of a
Receivable does not exceed thirty-one (31) days.
1.19. ERISA . The term "ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time.
1.20. GAAP . The term "GAAP" shall mean generally accepted accounting
principles and other standards as promulgated by the American Institute of
Certified Public Accountants.
1.21. GUARANTOR . The term "Guarantor" shall mean any person or persons who
execute a validity guaranty agreement in favor of Lender with respect to
Borrower's Indebtedness to Lender (SCHEDULE SECTION 1.18).
1.22. GUARANTY AGREEMENT . The term "Guaranty Agreement" shall mean that
certain validity guaranty agreement executed by the Guarantor, in a form and
substance approved by Lender.
1.23. GOVERNING RATE . The term "Governing Rate" shall mean the "Prime" rate
publicly announced by Citibank N.A., New York, New York (or such other "money
center" bank as Lender, in its sole discretion, may select from time to time,
but shall not be more than the highest rate of the five largest banks in the
Continental United States as their respective corporate base, reference, prime
or similar benchmark rate), provided however, that such rate may not be the
lowest rate charged to such bank's customers.
1.24. INCLUDED REBATE PERCENTAGE . The term "Included Rebate Percentage"
shall mean, for any period of determination, the percentage determined by (i)
the aggregate of all Charge Offs for that period, divided by (ii) the Nonpayment
Net Receivable Reductions for that period.
1.25. INCLUDED REBATES . The term "Included Rebates" shall mean, for any
period of determination, (i) the aggregate of all rebates of interest for that
period, multiplied by (ii) the Included Rebate Percentage.
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1.26. INDEBTEDNESS . The term "Indebtedness" shall mean all amounts advanced
hereunder by Lender to Borrower together with all other amounts owing or
becoming owing to Lender by Borrower, direct or indirect, absolute or
contingent, now or hereafter existing, whether pursuant to the terms of this
Agreement or any document or instrument evidencing or securing the transaction
contemplated hereby.
1.27. INSURANCE PREMIUM RECEIVABLE . The term "Insurance Premium Receivable"
shall mean a Receivable that evidences the financing of the payment of insurance
premiums. INSURANCE PREMIUM RECEIVABLES SHALL BE DEEMED "CATEGORY TWO
RECEIVABLES" HEREIN.
1.28. LEVERAGE RATIO . The term "Leverage Ratio" shall mean, at any date of
determination, the remainder of the total liabilities of Borrower, including the
outstanding balance of the Indebtedness, less the outstanding balance of all
Subordinated Debt divided by the sum of the amount of Borrower's Tangible Net
Worth plus the outstanding balance of all Subordinated Debt plus the outstanding
balance of that portion of the Indebtedness outstanding pursuant to the Tranche
"B" Credit Facility.
1.29. LOAN DOCUMENTS . The term "Loan Documents" shall mean this Agreement,
the Note, the Schedule, the Guaranty, Subordination Agreements, Agency and
Custodian Agreements and all other documents executed in connection with this
Agreement, together with any and all renewals, amendments, restatements or
replacements of such documents.
1.30. MAXIMUM RATE . The term "Maximum Rate" shall mean the highest lawful
and nonusurious rate of interest applicable to the Note made and delivered by
Borrower to Lender in connection herewith, that at any time or from time to time
may be contracted for, taken, reserved, charged, or received on the Note and the
Indebtedness under the laws of the United States and the laws of such states as
may be applicable thereto, that are in effect or, to the extent allowed by such
laws, that may be hereafter in effect and that allow a higher maximum
nonusurious and lawful interest rate than would any applicable laws now allow.
1.31. MORTGAGE WAREHOUSE RECEIVABLE . The term "Mortgage Warehouse
Receivable" shall be defined a Receivable generated by a division or subsidiary
of TTG, subject to the prior written approval of Lender, that prior to the
advance to or for the benefit of such subsidiary such subsidiary is made a
co-borrower hereunder ("Mortgage Entity"), wherein the Account Debtor is a
consumer and the collateral securing such Receivable is residential real estate.
MORTGAGE WAREHOUSE RECEIVABLES SHALL BE DEEMED "CATEGORY SIX RECEIVABLES"
HEREIN.
1.32. NET COMMISSION INCOME . The term "Net Commission Income" shall mean the
gross commissions or fees received and/or billed by TIG as a result of the sale
of insurance products or policies less commissions payable to the writing agent.
1.33. NET INCOME . The term "Net Income" shall mean with respect to any
fiscal period, the net earnings of Borrower (excluding all extraordinary gains
or nonrecurring income) before provision for income taxes for such fiscal period
of Borrower, all as reflected on the financial statements of Borrower supplied
to Lender pursuant to Sections 6.6(A) and 6.6(B) hereof.
1.34. NON CONSUMER RECEIVABLE . The term "Non-Consumer Receivable" shall mean
a Receivable wherein the Account Debtor is a business entity, corporate or
otherwise, the proceeds of such Receivable were used for commercial purposes,
and not for consumer purposes, such Receivable is generated as a vehicle floor
plan receivable secured by such Account Debtor's vehicle inventory, and
additionally secured by equity in real estate collateral, or other commercial
Receivables granted pursuant to Borrower credit granting guidelines.
NON-CONSUMER RECEIVABLES SHALL BE DEEMED "CATEGORY FIVE RECEIVABLES" HEREIN.
1.35. NONPAYMENT NET RECEIVABLE REDUCTIONS . The term "Nonpayment Net
Receivable Reductions" shall mean, for any period of determination, the sum of
(i) the aggregate of all Charge Offs for that period, plus (ii) the aggregate of
all net refinanced balances of a Receivable for that period.
1.36. NOTE . The term "Note" shall mean the promissory note of even date
herewith, and all renewals, extensions, or modifications executed by Borrower
and payable to the order of Lender.
1.37. PLAN . The term "Plan" shall mean any pension plan that is covered by
Title IV of ERISA and with respect to which Borrower or a Commonly Controlled
Entity is an "Employer" as defined in section 3(5) of ERISA.
1.38. RECEIVABLES . The term "Receivables" shall mean all accounts of
Borrower and any other right of Borrower to receive payment, including, without
limitation, all loans, extensions of credit or Borrower's right to payment for
goods sold or services rendered by Borrower.
1.39. REQUEST FOR ADVANCE . The term "Request for Advance" shall mean a
written request for an advance in the form of Exhibit "A" attached hereto and
made a part hereof.
1.40. SCHEDULE . The term "Schedule" shall mean the schedule executed in
conjunction with this Agreement
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of even date herewith, as may be amended from time to time, upon written
agreement of Lender and Borrower.
1.41. SUBORDINATED DEBT . The term "Subordinated Debt" shall mean the
aggregate amount of any indebtedness of Borrower to persons other than Lender
that by its terms is subordinated in all respects, including, but not limited
to, the right of payment, to the prior payment in full of the Indebtedness. A
subordination and standstill agreement, in a form and substance satisfactory to
Lender, shall be entered into by all holders of Subordinated Debt.
1.42. TANGIBLE NET WORTH . The term "Tangible Net Worth" shall mean, at any
time of determination, the shareholder's equity of Borrower determined in
accordance with GAAP minus the aggregate amount of all intangible assets and all
assets consisting of obligations due to Borrower from shareholders, directors,
officers, or any affiliate of Borrower or any Guarantor hereunder plus , to the
extent subtracted as an intangible herein, all goodwill (net of amortization) of
Borrower arising from the acquisition (or merger) with a Mortgage Entity and
goodwill (net of amortization) of TIG arising from any of its acquisitions.
1.43. TRANCHE "A" CREDIT FACILITY . The term "Tranche `A' Credit Facility"
shall mean that certain portion of the availability of the Loan as determined
pursuant to the provisions of Section 2.16 hereof.
1.44. TRANCHE "B" CREDIT FACILITY . The term "Tranche `B' Credit Facility"
shall mean that certain portion of the availability of the Loan as determined
pursuant to the provisions of Section 2.17 hereof.
1.45. TRANCHE "C" CREDIT FACILITY . The term "Tranche `C' Credit Facility"
shall mean that certain portion of the availability of the Loan as determined
pursuant to the provisions of Section 2.18 hereof.
1.46. TRANCHE "D" CREDIT FACILITY . The term "Tranche `D' Credit Facility"
shall mean that certain portion of the availability of the Loan as determined
pursuant to the provisions of Section 2.19 hereof.
1.47. TRANCHE "E" CREDIT FACILITY . The term "Tranche `E' Credit Facility"
shall mean that certain portion of the availability of the Loan as determined
pursuant to the provisions of Section 2.20 hereof.
1.48. TRANCHE "F" CREDIT FACILITY . The term "Tranche `F' Credit Facility"
shall mean that certain portion of the availability of the Loan as determined
pursuant to the provisions of Section 2.21 hereof.
1.49. VEHICLE RECEIVABLE . The term "Vehicle Receivable" shall mean a
Receivable that the proceeds of such Receivable were used to purchase a motor
vehicle and such Receivable is secured by such motor vehicle purchased by
Borrower from unaffiliated third parties. VEHICLE RECEIVABLES SHALL BE DEEMED
"CATEGORY THREE RECEIVABLES" HEREIN.
2. LOAN
2.1. AMOUNT OF LOAN . Subject to the terms, covenants and conditions
hereinafter set forth, Lender agrees upon the Borrower's request from time to
time, until the Maturity Date, to make advances to Borrower (collectively, the
"Loan"), in an aggregate amount not to exceed at any time outstanding the lesser
of the following:
(i) the Amount of Revolving Credit Line (SCHEDULE SECTION 2.1.A.), and
(ii) the sum of
(a) the lessor of (1) the sum of the Amount of the Tranche "A" Credit
Facility plus the Amount of the Tranche "B" Credit Facility (SCHEDULE
SECTION 2.1.A.) and (2) the Availability on Tranche `A' and Tranche `B'
Eligible Receivables (SCHEDULE SECTION 2.1.B.),
(b) the lessor of (1) the Amount of the Tranche `C' Credit Facility
(SCHEDULE SECTION 2.1.A.), and (2) the Availability on Tranche `C'
Eligible Receivables (SCHEDULE SECTION 2.1.B.),
(c) the lessor of (1) the Amount of the Tranche `D' Credit Facility
(SCHEDULE SECTION 2.1.A.), and (2) the Availability on Tranche `D'
(SCHEDULE SECTION 2.1.B.),
(d) the lessor of (1) the Amount of the Tranche `F' Credit Facility
(SCHEDULE SECTION 2.1.A.), and (2) the Availability on Tranche `F'
Eligible Receivables (SCHEDULE SECTION 2.1.B.),.
Within the limits of this Section 2.1, Borrower may borrow, repay and
reborrow the advances. The Loan is a renewal and extension, and not an
extinguishment, of the indebtedness due to Lender by Borrower as of the date
hereof. The Loan shall be evidenced by the Note.
In addition to the availability set forth above, Lender shall advance to
Borrower an amount equal to the Amount of the Tranche "E" Credit Facility. This
advance shall be evidenced by the Note. Upon repayment of the advance of the
Tranche "E" as set forth in Section 2.16 hereof, such repayment shall not be
reborrowed by Borrower.
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2.2. INTEREST RATE . INTEREST RATE. The outstanding principal balance of the
Indebtedness allocated hereunder to the Tranche "A" Credit Facility shall bear
interest at the Tranche "A" Credit Facility Stated Interest Rate (SCHEDULE
SECTION 2.2). The portion of the outstanding principal balance of the
Indebtedness allocated hereunder to the Tranche "B" Credit Facility shall bear
interest at the Tranche "B" Credit Facility Stated Interest Rate (SCHEDULE
SECTION 2.2). If the aggregate outstanding balance of the Indebtedness allocated
to the Tranche "A" Credit Facility is or becomes more than the Tranche "A"
Credit Facility Availability, then in that event, the amount of the balance in
excess of the Tranche "A" Credit Facility Availability shall be allocated to the
Tranche "B" Credit Facility hereunder. Each request for advance hereunder shall
set for the most current availability calculation for the Tranche "A" and the
Tranche "B" availability and he portion of such requested advance that is to be
allocated to increase the outstanding balance of either the Tranche "A" Credit
Facility and/or the Tranche "B" Credit Facility.
The outstanding principal balance of the Indebtedness advanced pursuant to
the Tranche "C" Credit Facility shall bear interest at the Tranche "C" Credit
Facility Stated Interest Rate (SCHEDULE SECTION 2.2).
The outstanding principal balance of the Indebtedness advanced pursuant to
the Tranche "D" Credit Facility shall bear interest at the Tranche "D" Credit
Facility Stated Interest Rate (SCHEDULE SECTION 2.2).
The outstanding principal balance of the Indebtedness advanced pursuant to
the Tranche "E" Credit Facility shall bear interest at the Tranche "E" Credit
Facility Stated Interest Rate (SCHEDULE SECTION 2.2).
The outstanding principal balance of the Indebtedness advanced pursuant to
the Tranche "F" Credit Facility shall bear interest at the Tranche "F" Credit
Facility Stated Interest Rate (SCHEDULE SECTION 2.2).
If Lender is ever prevented from charging or collecting interest at the rates
set forth in Tranche "A" Credit Facility Stated Interest Rate Section (i), the
Tranche "B" Credit Facility Stated Interest Rate Section (i), Tranche "C" Credit
Facility Stated Interest Rate Section (i), Tranche "D" Credit Facility Stated
Interest Rate Section (i), Tranche "E" Credit Facility Stated Interest Rate
Section (i) and/or Tranche "F" Credit Facility Stated Interest Rate Section (i)
because interest at such rates when applied to the outstanding balance of the
Indebtedness would exceed interest at the Maximum Rate, then such restricted
rate or rates shall continue to be the Maximum Rate until Lender has charged and
collected the full amount of interest chargeable and collectible had interest at
the rate set forth in such Stated Interest Rate Sections (i) always been
lawfully chargeable and collectible. As the Governing Rate changes, the rate set
forth in each Stated Interest Rate Section (i) shall be increased and decreased
(subject to the Maximum Rate) on the first day of each calendar month to
correspond with the change in the Governing Rate then in effect and shall remain
fixed at such rate until the first day of the next succeeding calendar month,
notwithstanding fluctuations in the Governing Rate during the month. All changes
in the Governing Rate shall be made without notice to Borrower. The monthly
interest due on the principal balance of the Indebtedness shall be computed for
the actual number of days elapsed during the month in question on the basis of a
year consisting of three hundred sixty (360) days. The applicable monthly
interest due shall be calculated by determining the average daily principal
balance outstanding allocated to each Tranche for each day of the month in
question. The daily rate shall be equal to 1/360th times the Stated Interest
Rate (but shall not exceed the Maximum Rate).
If the Stated Interest Rate calculation, as set forth in SCHEDULE SECTION
2.2, causes a change in a Stated Interest Rate Section (i), such increased or
decreased (subject to the Maximum Rate) shall be determined on the first (1st)
day of each calendar month together with any change in the Governing Rate, if
any, and shall remain in effect and shall remain fixed at such rate until the
first day of the next succeeding calendar month, notwithstanding fluctuations in
the Stated Interest Rate calculation or Governing Rate during the month. If the
Stated Interest Rate calculation is determined based upon the outstanding
balance of the Indebtedness, only for the purpose of determining the Stated
Interest Rate on the first (1st) day of each calendar month, the outstanding
balance of the Indebtedness shall be the average daily outstanding balance of
the Indebtedness for the calendar month immediately preceding the date of
determination.
2.3. PAYMENTS . All payments made by mail or other physical delivery methods
to Lender shall be payable at FINOVA Capital Corporation, File No. 96425, P. O.
Box 668100, Charlotte, NC 28266-8100. All payments made by wire transfer or
other method of electronic transfer methods to Lender shall be payable to FINOVA
Capital Corporation, (INSERT WIRING INSTRUCTIONS) All payments received pursuant
to this Agreement by wire transfer or other electronic transfer method, where
immediate credit occurs, shall be applied to Borrower's Indebtedness on the
Business Day of actual receipt of such payment by Lender's depository bank,
payments received by any other method shall be applied to Borrower's
Indebtedness three (3) Business Days after the actual receipt of such payment by
Lender's depository bank if such payment is credited to Lender's account. The
Indebtedness shall be due and payable as follows:
A. Accrued but unpaid interest for each calendar month during the term hereof
shall be due and payable, in
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arrears, on or before the fifteenth (15th) day of the immediately succeeding
calendar month.
B. Costs, fees and expenses payable pursuant to this Agreement shall be due
and payable by Borrower to Lender or to such other person(s) designated by
Lender in writing on demand; and
C. The entire outstanding balance of the Indebtedness shall be due and
payable, if not prepaid, on the Maturity Date (SCHEDULE SECTION 2.3.).
2.4. PAYMENT DUE ON A NON-BUSINESS DAY . If any payment of the Indebtedness
falls due on a day other than a Business Day, then such due date shall be
extended to the next succeeding Business Day.
2.5. MANDATORY PAYMENTS . Provided that Borrower is not otherwise in Default
hereunder, if at any time the amount advanced by Lender to Borrower exceeds the
maximum amount of the Loan allowed pursuant to Section 2.1, Borrower shall
immediately and without notice, repay to Lender an amount sufficient to
eliminate such excess, or, at Lender's option, assign and deliver additional
Eligible Receivables sufficient for such purpose. In the event Borrower sells,
transfers, assigns or otherwise disposes of all or any portion of its
Receivables, other than in the ordinary course of business, Borrower shall apply
all proceeds of any such sale, transfer, assignment or other disposition to
reduce the outstanding balance of the Indebtedness.
2.6. VOLUNTARY PREPAYMENTS . Borrower may, at its option, voluntarily prepay
the Indebtedness in full at any time and request a termination of Lender's
security interest in the collateral, provided, however, that Borrower has given
Lender ninety (90) days written notice of any such intention to prepay the
Indebtedness in full, Borrower requests Lender to terminate its security
interest in the Collateral and as liquidated damages, not as a penalty, pays to
Lender the amount of liquidated damages ("Liquidated Damages") (SCHEDULE SECTION
2.6). Borrower may not make such prepayment prior to the expiration of such
ninety (90) day period. Upon written notice of prepayment of the Indebtedness in
full, the commitment by Lender to advance funds to Borrower and all the
obligations of Lender shall terminate on the expiration of said ninety (90) day
notice period, and the entire amount of the Indebtedness shall be due and
payable on such date.
2.7. MAXIMUM INTEREST; CONTROLLING AGREEMENT . The contracted for rate of
interest of the Loan without limitation, shall consist of the following: (i) the
Stated Interest Rate, calculated and applied to the principal balance of the
Note in accordance with the provisions of the Note and this Agreement; (ii)
interest after event of default or due date, calculated and applied to the
amounts due under the Note in accordance with the provisions thereof; and (iii)
all Additional Sums (as herein defined), if any. Borrower agrees to pay an
effective contracted for rate of interest which is the sum of the
above-referenced elements.
All fees, charges, goods, things in action or any other sums or things of
value (other than amounts described in the immediately previous paragraph), paid
or payable by Borrower (collectively, the "Additional Sums"), whether pursuant
to the Note, this Agreement or any other documents or instruments in any way
pertaining to this lending transaction, or otherwise with respect to this
lending transaction, that under any applicable law may be deemed to be interest
with respect to this lending transaction, for the purpose of any applicable law
that may limit the maximum amount of interest to be charged with respect to this
lending transaction, shall be payable by Borrower as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of the Additional
Sums.
It is the intent of the parties to comply with the usury law ("Applicable
Usury Law") applicable pursuant to the terms of the preceding paragraph or such
other usury law which is applicable if the law chosen by the parties is not
applicable. Accordingly, it is agreed that notwithstanding any provisions to the
contrary in the Loan Documents, or in any of the documents securing payment
hereof or otherwise relating hereto, in no event shall the Loan Documents or
such documents require the payment or permit the collection of interest in
excess of the maximum contract rate permitted by the Applicable Usury Law. In
the event (a) any such excess of interest otherwise would be contracted for,
charged or received from Borrower or otherwise in connection with the loan
evidenced hereby, or (b) the maturity of the indebtedness evidenced by the Loan
Documents is accelerated in whole or in part, or (c) all or part of the
principal or interest of the Loan Documents shall be prepaid, so that under any
of such circumstances the amount of interest contracted for, charged or received
in connection with the loan evidenced hereby, would exceed the maximum contract
rate permitted by the Applicable Usury Law, then in any such event (1) the
provisions of this paragraph shall govern and control, (2) neither Borrower nor
any other person or entity now or hereafter liable for the payment hereof will
be obligated to pay the amount of such interest to the extent that it is in
excess of the maximum contract rate permitted by the Applicable Usury Law, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount hereof or refunded to Borrower,
at Lender's option, and (4) the effective rate of interest will be automatically
reduced to the maximum amount of interest permitted by the Applicable Usury Law.
It is further agreed, without limiting
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the generality of the foregoing, that to the extent permitted by the Applicable
Usury Law; (x) all calculations of interest which are made for the purpose of
determining whether such rate would exceed the maximum contract rate permitted
by the Applicable Usury Law shall be made by amortizing, prorating, allocating
and spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received from
Borrower or otherwise in connection with such loan; and (y) in the event that
the effective rate of interest on the loan should at any time exceed the maximum
contract rate allowed under the Applicable Usury Law, such excess interest that
would otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law shall be paid to Lender from time to time, if and when the
effective interest rate on the loan otherwise falls below the maximum amount
permitted by the Applicable Usury Law, to the extent that interest paid to the
date of calculation does not exceed the maximum contract rate permitted by the
Applicable Usury Law, until the entire amount of interest which would have
otherwise been collected had there been no ceiling imposed by the Applicable
Usury Law has been paid in full. Borrower further agrees that should the maximum
contract rate permitted by the Applicable Usury Law be increased at any time
hereafter because of a change in the law, then to the extent not prohibited by
the Applicable Usury Law, such increases shall apply to all indebtedness
evidenced hereby regardless of when incurred; but, again to the extent not
prohibited by the Applicable Usury Law, should the maximum contract rate
permitted by the Applicable Usury Law be decreased because of a change in the
law, such decreases shall not apply to the indebtedness evidenced hereby
regardless of when incurred.
2.8. INTEREST AFTER DEFAULT . Upon the occurrence and during the continuation
of an Event of Default, Borrower shall pay Lender interest on the daily
outstanding balance of Borrower's loan account at a rate per annum which is two
percent (2.0%) in excess of the rate which would otherwise be applicable thereto
pursuant to the Schedule (SCHEDULE SECTION 2.2).
2.9. STATEMENT OF ACCOUNT . Lender shall provide Borrower, each month, with a
statement of Borrower's account, prepared from Lender's records, which shall
conclusively be deemed correct and accepted by Borrower, unless Borrower gives
Lender a written statement of exceptions within ten (10) days after receipt of
such statement.
2.10. APPLICATION OF PAYMENTS . The amount of all payments or amounts
received by Lender with respect to the Indebtedness shall be applied to the
extent applicable under this Agreement: (i) first, to accrued interest through
the date of such payment, including any Interest After Default; (ii) then, to
any late fees, overdue risk assessments, examination fees and expenses,
collection fees and expenses and any other fees and expenses due to Lender
hereunder; and (iii) last, the remaining balance, if any, to the unpaid
principal balance of the Indebtedness; provided, however, while a Default exists
under the Loan Documents, each payment hereunder shall be applied to amounts
owed to Lender by Borrower as Lender it is sole discretion may determine. In
calculating interest and applying payments as set forth above; (a) interest
shall be calculated and collected through the date a payment is actually applied
by Lender under the terms of this Agreement; (b) interest on the outstanding
balance shall be charged during any grace period permitted hereunder; (c) at the
end of each month, all accrued and unpaid interest and other charges provided
for hereunder shall be added to the principal balance of the Loan; and (d) to
the extent that Borrower makes a payment or Lender receives any payment or
proceeds of the Collateral for Borrower's benefit that is subsequently
invalidated, set aside or required to be repaid to any other person or entity,
then, to such extent, the obligations intended to be satisfied shall be revived
and continue as if such payment or proceeds had not been received by Lender and
Lender may adjust the outstanding balance of the Indebtedness as Lender, in its
sole discretion, deems appropriate under the circumstances.
2.11. UNUSED CREDIT LINE FEE . Borrower hereby agrees to pay to Lender
monthly, on the fifteenth (15th) day of each month during the term hereof, for
the immediately preceding month, an amount equal to the monthly Unused Credit
Line Fee (SCHEDULE SECTION 2.11)
2.12. TRANCHE "A" CREDIT FACILITY The "Tranche `A' Credit Facility" shall be
that portion of the outstanding balance of the Indebtedness as designated by
Borrower as allocated to Tranche "A" Credit Facility, pursuant to the most
current Request for Advance Form received by Lender, up to and including an
amount, on any date of determination, equal to the "Tranche `A' Credit Facility
Availability" (SCHEDULE SECTION 2.1.B.), but shall not exceed the Amount of the
Tranche "A" Credit Facility (SCHEDULE SECTION 2.1.A.).
2.13. TRANCHE "B" CREDIT FACILITY . The "Tranche `B' Credit Facility" shall
be that portion of the outstanding balance of the Indebtedness as designated by
Borrower as allocated to Tranche "B" Credit Facility, pursuant to the most
current Request for Advance Form received by Lender, up to and including an
amount, on any date of determination, equal to the "Tranche `B' Credit Facility
Availability" (SCHEDULE SECTION 2.1.B.), but shall not exceed the Amount of the
Tranche "B" Credit Facility (SCHEDULE SECTION 2.1.A.).
2.14. TRANCHE "C" CREDIT FACILITY . The "Tranche `C' Credit Facility" shall
be that portion of the outstanding balance of the Indebtedness, as designated by
Borrower as advanced pursuant to Tranche `C' Credit
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Facility, pursuant to the most current Request for Advance Form received by
Lender, up to and including an amount, on any date of determination, equal to
the "Tranche `C' Credit Facility Availability" (SCHEDULE SECTION 2.1.B.), but
shall not exceed the Amount of the Tranche `C' Credit Facility (SCHEDULE SECTION
2.1.A.).
2.15. TRANCHE "D" CREDIT FACILITY . The "Tranche `D' Credit Facility" shall
be that portion of the outstanding balance of the Indebtedness, as designated by
Borrower as advanced pursuant to Tranche `D' Credit Facility, pursuant to the
most current Request for Advance Form received by Lender, up to and including an
amount, on any date of determination, equal to the "Tranche `D' Credit Facility
Availability" (SCHEDULE SECTION 2.1.B.), but shall not exceed the Amount of the
Tranche `D' Credit Facility (SCHEDULE SECTION 2.1.A.).
2.16. TRANCHE "E" CREDIT FACILITY . The "Tranche `E' Credit Facility" shall
be that portion of the outstanding balance of the Indebtedness, as advanced for
the purchase of the operating assets of a Mortgage Entity, not to exceed the
Amount of the Tranche `E' Credit Facility (SCHEDULE SECTION 2.1.A.).
The Tranche "E" advance shall be repaid as follows: (e) six (6) months of
interest only monthly payments (f) beginning in the seventh month after the
Tranche "E" advance, monthly principal payments of One Hundred Forty Five
Thousand Eight Hundred Thirty-Three and 33/100 Dollars ($145,833.33) and (g)
with the balance of the Tranche "E" advance due thirty-six (36) months from the
date of original Tranche "E" advance.
The Tranche "E" advance is conditioned upon (h) that Borrower has complied
with all other conditions to an advance as set forth in the Agreement and (i)
that the proceeds of such Tranche "E" advance are used to fund the acquisition
of all of the operating assets of a Mortgage Entity, provided that Lender has
given its prior written consent.
2.17. TRANCHE "F" CREDIT FACILITY . The "Tranche `F' Credit Facility" shall
be that portion of the outstanding balance of the Indebtedness, as designated by
Borrower as advanced pursuant to Tranche `F' Credit Facility, pursuant to the
most current Request for Advance Form received by Lender, up to and including an
amount, on any date of determination, equal to the "Tranche `F' Credit Facility
Availability" (SCHEDULE SECTION 2.1.B.), but shall not exceed the Amount of the
Tranche `F' Credit Facility (SCHEDULE SECTION 2.1.A.).
2.18. APPLICATION OF PAYMENTS . All payments and collections shall be deemed
to be comprised of a pro rata remittance or payment made by each Borrower, based
upon the proportion that the Eligible Receivables of each Borrower bears to the
aggregate of all Eligible Receivables of the Borrowers, as of the date on which
such remittance or payment is received by Lender. In the event such remittance
or payment shall be made by the Lead Borrower, acting as agent or trustee for
the other Borrowers, each Borrower shall be deemed to have made their
proportionate amount of such remittance or payment to Lender by and through such
agent or trustee.
2.19. ADVANCES TO LEAD BORROWER . Borrower does hereby irrevocably agree that
in the event Lender makes advances to Lead Borrower, as agent or trustee for
each of Borrower, as contemplated in Section 2.20, each such advance shall be
deemed to be made to each Borrower based upon a proportion that each Borrower's
Eligible Receivables bear to the aggregate of all Eligible Receivables of
Borrower, notwithstanding any subsequent disbursement of said advance by the
Lead Borrower, acting as agent or trustee for the Borrowers. In the event that
the actual advances, direct or indirect, received by Lead Borrower or any other
Borrower or the balance due to Lender as shown in the records of any Borrower
shall be disproportionate when compared to the proportion of the Eligible
Receivables of each Borrower, whether by way of subsequent disbursements by Lead
Borrower, acting as agent or trustee, by way of Lender electing to make advances
to each Borrower, as contemplated in Section 2.20 or otherwise, such
disproportionalities shall be deemed to have occurred by virtue of loans made
between and among Borrowers.
2.20. APPOINTMENT OF AGENT . Lender agrees that, in the sole discretion of
Lender, Borrower may, by written notice to Lender, designate a Lead Borrower to
receive advances from Lender, make payments to Lender, communicate with Lender
and generally represent the interests of the Borrowers with respect to the
subject matter of this Agreement; notwithstanding the foregoing, Lender may, at
its sole discretion and upon notice to each of the Borrowers, make advances
directly to each of the Borrowers, require that payments due hereunder be made
to Lender by each of the Borrowers, require each of the Borrowers to communicate
directly with Lender, for its own account, and generally deal independently and
separately with each of the Borrowers. Until so notified by Lender, each of the
Borrowers hereby agree that any and all funds advanced by Lender pursuant to the
terms of this Agreement, shall be advanced to the Lead Borrower and may be
deposited or transferred into the general corporate account of Lead Borrower, as
agent and/or trustee for Borrowers. Lead Borrower hereby agrees to keep detailed
and accurate records of all such disbursements made to any other Borrowers. Lead
Borrower hereby agrees to keep detailed and accurate records of all loans and
dealings between or among Lead Borrower and the other Borrowers. Borrowers agree
to furnish copies of such records to Lender upon request. Each Borrower, other
than the Lead Borrower hereby irrevocably makes, constitutes, designates and
appoints Lead Borrower as its
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agent and/or trustee with full power to receive all notices, request all
Advances hereunder and to deal generally with Lead Borrower as agent and/or
trustee for the Borrowers is hereby granted full power and authority to bind the
Borrowers in respect of any term, condition, covenant or undertaking embraced in
this Agreement. Lender may, without liability or responsibility to the Borrowers
rely upon the instructions or other communications of Lead Borrower on behalf of
each of the Borrowers in connection with any notifications, requests or
communications required or permitted to be given hereunder with the same force
and effect as if actually given by each Borrower; each Borrower hereby agrees to
indemnify and hold Lender harmless from and against any liability, claim, suit,
action, penalty, fine or damage arising out of or incurred in connection with
Lender's reliance upon communications from Lead Borrower on behalf of the
Borrowers. It is specifically understood and agreed that any Advance made
hereunder by Lender to Lead Borrower shall be considered and treated as an
Advance to the Borrowers and each Borrower shall be jointly and severally liable
therefor.
3. SECURITY
3.1. SECURITY INTEREST . To secure the prompt payment to Lender of the
Indebtedness and any and all other obligations now existing or hereinafter
arising owed by Borrower to Lender, Borrower hereby irrevocably grants to Lender
a first and continuing security interest in the following property and interests
in property of Borrower, whether now owned or existing or hereafter acquired or
arising and wheresoever located (collectively the "Collateral"):
A. All Receivables and all accounts, chattel paper, instruments, contract
rights and general intangibles, all of Borrower's right, remedies, security,
liens, guaranties, or other contracts of suretyship with respect thereto, all
deposits or other security or support for the obligation of any Account Debtor
thereunder and credit and other insurance acquired by Account Debtor or the
Borrower in connection therewith.;
B. All furniture, equipment, machinery, fixtures and general intangibles,
including but not limited to customer lists and records, tax refunds and
insurance premium refunds.
C. All Inventory, new or used, including, but not limited to parts and
accessories;
D. All bank accounts of Borrower;
E. All monies, securities and property, now or hereafter held, received by,
or entrusted to, in the possession or under the control of Lender or a bailee of
Lender;
F. All right, title and interest of the Borrower in and to the Receivables,
participation agreements, participation certificates, or other instruments or
agreements which evidence the Receivables;
G. All right, title and interest of the Borrower in and to all Consumer
Notes, Consumer Mortgages, deeds of trust, security agreements, chattel
mortgages, assignments of rent and other security instruments whether now or
hereafter owned, acquired or held by the Borrower which secure (or constitute
collateral for any note, instrument or agreement securing) any of the Consumer
Notes or other instruments or agreements which evidence any of the Receivables;
H. All right, title and interest of the Borrower in and to all Financing
Statements perfecting the security interest of any of the foregoing;
I. All right, title and interest of the Borrower in and to all Guaranties and
other instruments by which the persons or entities executing the same guarantee,
among other things, the payment or performance of the Receivables;
J. All right, title and interest of the Borrower in and to all title
insurance policies, title insurance binders, commitments or reports insuring or
relating to the foregoing;
K. All right, title and interest of the Borrower in and to all surveys,
bonds, hazard and liability insurance policies, participation agreements and any
other agreement, instrument or document pertaining to, affecting, obtained by
the Borrower in connection with, or arising out of, the Receivables;
L. All right, title and interest of the Borrower in and to all commitments
and other agreements to purchase any Receivables;
M. All right, title and interest of the Borrower in and to all collections
on, and proceeds of or from, any and all of the foregoing (hereafter
collectively called "Collections");
N. All files, surveys, certificates, correspondence, appraisals, computer
programs, tapes, discs, cards, accounting records, and other records,
information, and data of the Borrower relating to the Receivables (including all
information, data, programs, tapes, discs and cards necessary to administer and
service such Receivables);
O. All contract rights, accounts, rights to payment of money, refunds,
including tax, premium and commission refunds, and general intangibles, relating
to such documents and contracts described in 3.1 above and as to all such
Collateral described in section 3.1 including this subparagraph J. whether now
existing or hereafter at any time acquired or arising;
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Consumer Loans: The mortgage loans made to consumers who are customers of the
Debtor, evidenced by a promissory note or other similar instrument evidencing
indebtedness (the "Consumer Note") and made payable to the Debtor and secured by
a Consumer Mortgage.
Consumer Mortgage: A mortgage or other security deed in land and interests in
real property, structures, improvements, fixtures and buildings located on or
used in connection with real property or rights and interests in real property
which secures a Consumer Loan.
P. All books and records (including, without limitation, customer lists,
credit files, tapes, ledger cards, computer software and hardware, electronic
data processing software, computer printouts and other computer materials and
records) of Borrower evidencing or containing information regarding any of the
foregoing.
Q. All accessions to, substitutions for and all replacements, products and
proceeds of the foregoing, including, without limitation, proceeds of insurance
policies (including but not limited to claims paid and premium refunds);
3.2. FINANCING STATEMENTS AND FURTHER ASSURANCES . Borrower hereby agrees to
execute UCC-1 Financing Statements, in the form and substance of Exhibit "B"
hereto, and any other instruments or documents reasonably necessary to evidence,
preserve or protect Lender's security interest in the Collateral. Borrower
agrees that financing statements shall be filed covering all of Borrower's
locations (SCHEDULE SECTION 3.2.).
Upon Lender's request, Borrower agrees to deliver to Lender, at such places
as Lender may reasonably designate, schedules executed by Borrower, listing the
Receivables and fully and correctly specifying in adequate detail the aggregate
unmatured unpaid face amount of each Receivable and the amount of the deferred
installments thereof falling due each month. These schedules shall be in form
and tenor satisfactory to or supplied by Lender. All schedules delivered and
Collateral pledged to Lender shall be assigned to Lender pursuant to the
"Schedule of Receivables and Assignment" in the form and substance of Exhibit
"E" attached hereto. Borrower further warrants and agrees that in each case
where the terms of any Receivable require the Borrower or the Account Debtor
named in such Receivable to place or carry fire insurance or other insurance in
respect of the merchandise or property to which such Receivable relates, the
Borrower shall or shall cause the Account Debtor to maintain such insurance
until the full amount of such Receivable is collected and if not, Lender, at its
option, may place and maintain such insurance, charging the cost thereof to
Borrower.
3.3. PLEDGE OF RECEIVABLES . Borrower hereby agrees to pledge all Receivables
and, if so requested by Lender, Borrower shall deliver to Lender all documents
evidencing Receivables of Borrower, no less often than on the twentieth (20th)
day of each calendar month during the term of this Agreement, together with the
Schedule of Receivables and Assignment, as set forth in Section 3.2 hereof.
3.4. FAILURE TO DELIVER . Failure to deliver physical possession of any
instruments, documents or writings in respect of any Receivable to Lender shall
not invalidate Lender's security interest therein. To the extent that possession
may be required by applicable law for the perfection of Lender's security
interest, the original chattel paper and instruments representing the
Receivables shall be deemed to be held by Lender, although kept by the Borrower
as the custodial agent of Lender.
3.5. NOTICE OF COLLATERAL ASSIGNMENT . All contracts, documents or
instruments representing or evidencing a Receivable or other Collateral shall
contain (by way of stamp or other method satisfactory to Lender) the following
language: "PLEDGED TO FINOVA CAPITAL CORPORATION AS COLLATERAL".
3.6. LOCATION OF RECEIVABLES . Borrower shall, at any reasonable time and at
Borrower's own expense, upon Lender's request, physically deliver to Lender all
Receivables (including any instruments, documents or writings in respect of any
Receivable together with all instruments, documents or writings in respect of
any collateral securing each Receivable) assigned to Lender to any reasonable
place or places designated by Lender. All Receivables shall, regardless of their
location, be deemed to be under Lender's dominion and control (with files so
labeled) and deemed to be in Lender's possession. Notwithstanding the foregoing
to the contrary, except upon an Event of Default and at Lender's request for
Borrower to deliver physical possession of the foregoing, a custodian or
custodians shall retain possession, for and on behalf of Lender pursuant certain
Agency and Custodial Agreements, (i) all instruments, documents or writings in
respect to Direct Loan Receivables (Category One) and Insurance Premium
Receivables (Category Two), (ii) all instruments, documents or writings in
respect of any collateral securing such Receivables and all evidences of title
of any vehicle securing a Vehicle Receivable (Category Three) or a Captive
Vehicle Receivable (Category Four) and (iii) all instruments, documents and
writings in respect to any collateral securing such Receivable and the original
mortgage or deed of trust instrument or other security instrument together with
an assignment of such to Lender securing a Direct Loan Mortgage Receivable
(Category Seven).
3.7. RECORDS AND INSPECTIONS . Borrower shall at all times keep complete and
accurate records pertaining
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to the Collateral, which records shall be current on a daily basis and located
only at the locations (SCHEDULE SECTION 3.2.). Lender by or through any of its
officers, agents, employees, attorneys or accountants, shall have the right to
enter any such locations, at any reasonable time or times during regular
business hours, for so long as Lender may desire, to inspect the Collateral and
to inspect, audit and make extractions or copies from the books, records,
journals, orders, receipts, correspondence or other data relating to the
Collateral or this Agreement.
3.8. ADDITIONAL DOCUMENTS . Borrower hereby agrees to execute any additional
documents or financing statements which Lender deems necessary in its reasonable
discretion in order to evidence Lender's security interest in the Collateral.
Borrower shall not allow any financing statement or notice of assignment of
accounts receivable, other than those executed in connection with this
Agreement, to be on file in any public office covering any Collateral, proceeds
thereof or other matters subject to the security interest granted to Lender.
3.9. COLLECTION . Borrower agrees at its own expense to promptly and
diligently collect each installment of all Receivables in trust for the
exclusive account of Lender, to hold Lender harmless from any and all loss,
damage, penalty, liability, fine or expense arising from such collection by
Borrower or its agents and to faithfully account therefor to Lender. Upon the
occurrence of a Default, Lender expressly retains the unqualified right at any
time it so elects to take over the collection of the Receivables or other
Collateral.
3.10. BLOCKED ACCOUNTS . Upon the occurrence of a Default or an Event of
Default, at Lender's request, any checks, notes, drafts or any other payment
upon and/or proceeds of the Collateral received by Borrower (or any
subsidiaries, divisions, affiliates, proprietorships, shareholders, directors,
officers, employees, agents or those persons acting for or in concert with
Borrower), shall no later than the next Business Day following receipt thereof,
be delivered to Lender, at Lender's address set forth above, for application on
account of the Indebtedness and shall be reflected in the Statement of Account
as provided in Section 2.9 herein, until such time as Lender has established a
depository account at a bank for the deposit of such payments, made arrangements
for such deposits to be transferred to Lender daily and thereafter established a
lock-box arrangement or otherwise. Borrower shall (i) deposit or cause all
Items, as defined below, to be deposited in the special account so established
by Lender or transfer all Items to Lender for application on account of the
Indebtedness and to be reflected in the Statement of Account as provided in
Section 2.9 herein and (ii) maintain copies of all checks or other items of
payment and deposit slips related thereto, together with a collection report in
a form satisfactory to Lender. All cash payments, checks, drafts, or similar
items of payment upon and/or proceeds of the Receivables (collectively "Items")
by or for the account of Borrower shall be the sole and exclusive property of
Lender immediately upon the earlier of the receipt of such Items by Lender or
the receipt of such Items by Borrower; provided, however, that no such item
received by Lender shall constitute payment to Lender and be applied to reduce
the Indebtedness until the later of: (i) three (3) Business Days from collection
of such Item by Lender's depository bank, or (ii) such Item being actually
collected by Lender's depository bank and such collection being credited to
Lender's account. Notwithstanding anything to the contrary herein, all such
items of payment shall be deemed not received if the same is subsequently
dishonored or not duly credited to Lender's depository account for any reason
whatsoever.
3.11. PROTECTION OF RECEIVABLE RECORDS . Borrower hereby agrees to take the
following protective actions to prevent destruction of Borrower's Collateral and
records pertaining to such Collateral: (i) if Borrower maintains its Collateral
records on a manual system such records shall be kept in a fire proof cabinet or
on no less than a monthly basis, a record of all payments on Receivables and all
other matters relating to the Collateral shall be placed in an off site safety
deposit box (and Lender shall have access to such safety deposit box); or (ii)
if the Collateral records are computerized, Borrower agrees to create a tape or
diskette "back-up" of the computerized information and upon the request of
Lender, provide Lender with a tape or diskette copy of such "back-up"
information.
3.12. USE OF COLLECTIONS AND MODIFICATION OF RECEIVABLES . Provided that
Lender has not required that Borrower remit all collections or proceeds of
Collateral to Lender, Borrower may use or dispose of the funds received on the
Receivables in the ordinary course of business (including returned or
repossessed goods), collect or compromise accounts or obligations and accept
returned goods or make repossessions, as Borrower shall determine based upon its
reasonable discretion.
3.13. USE OF PROCEEDS . Borrower shall use the proceeds of the Loan in the
ordinary course of business, solely in its operations for ordinary and necessary
costs and expenses, including payments to Lender hereunder.
3.14. RETURN OF COLLATERAL . Upon the payment in full or renewal of any
Receivable to which the written documents evidencing such Receivable are held by
Lender, Borrower shall submit all requests for the return of such documents
pursuant to the "Request For Return of Collateral" form, a copy of which is
attached hereto as Exhibit "C".
3.15. LENDER'S PAYMENT OF CLAIMS . Lender may, in its sole discretion,
discharge or obtain the release
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of any security interest, lien, claim or encumbrance asserted by any person
against the Collateral. All sums paid by Lender in respect thereof shall be
payable, on demand, by Borrower to Lender and shall be a part of the
Indebtedness.
3.16. CROSS COLLATERALIZATION . Each Borrower agrees that the Collateral of
each Borrower pledged hereunder shall secure all of the obligations of the
Borrowers to Lender hereunder. Upon and after an Event of Default by any
Borrower, Lender may pursue all rights and remedies it may have against all or
any part of the Collateral regardless of the status of legal title to such
Collateral. Each Borrower hereby acknowledges that this Cross Collateralization
of their Collateral is in consideration of Lender's extending the credit
hereunder and mutually beneficial to each Borrower.
4. CONDITIONS OF CLOSING; SUBSEQUENT ADVANCES
4.1. INITIAL ADVANCE . The obligation of Lender to make the initial advance
hereunder is subject to the fulfillment, to the satisfaction of Lender and its
counsel, of each of the following conditions prior to the initial advance
hereunder:
A. Loan Documents. Lender shall have received each of the following Loan
Documents: (i) this Loan and Security Agreement executed by the respective
parties; (ii) Schedule to Loan and Security Agreement executed by the respective
parties; (iii) the Note executed by Borrower; (iv) Validity Guaranty Agreement
executed by the respective Guarantor; (v) if applicable, Agency and Custodial
Agreement executed by Borrower, Lender and a custodian acceptable to both
Borrower and Lender; (vi) if applicable, such Blocked Account or Dominion
Account agreements as it shall determine; and (vii) such other documents,
instruments and agreements in connection herewith as Lender shall require,
executed, certified and/or acknowledged by such parties as Lender shall
designate;
B. Terminations by Existing Lender. Borrower's existing lender(s) shall have
executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interests in the Collateral
in form and substance satisfactory to Lender in its sole discretion;
C. Charter Documents. Lender shall have received copies of Borrower's By-laws
and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
D. Good Standing. Lender shall have received a certificate of corporate
status with respect to Borrower and each corporate Guarantor, dated within ten
(10) days of the Closing Date, by the Secretary of State of the state of
incorporation of Borrower and such Guarantor, which certificate shall indicate
that Borrower and such Guarantor are in good standing in such state;
E. Foreign Qualification. Lender shall have received certificates of
corporate status with respect to Borrower and each corporate Guarantor, each
dated within ten (10) days of the Closing Date, issued by the Secretary of State
of each state in which such party's failure to be duly qualified or licensed
would have a material adverse effect on its financial condition or assets,
indicating that such party is in good standing;
F. Authorizing Resolutions and Incumbency. Lender shall have received a
certificate from the Secretary of Borrower and each corporate Guarantor
attesting to (i) the adoption of resolutions of each respective Board of
Directors authorizing the borrowing of money from Lender or the guaranty of the
Indebtedness, as the case may be, and execution and delivery of this Agreement
and the other Loan Documents to which Borrower and Guarantor are a party, and
authorizing specific officers of Borrower and Guarantor to execute same, and
(ii) the authenticity of original specimen signatures of such officers;
G. Initial Availability Report. Lender shall have received an initial
Availability Report from Borrower executed by an authorized corporate office of
Borrower;
H. Property Insurance. If applicable, Lender shall have received the
insurance certificates and certified copies of policies required herein, along
with a Lender's Loss Payable Endorsement naming Lender as sole loss payee, all
in form and substance satisfactory to Lender and its counsel;
I. Searches; Certificates of Title. Lender shall have received searches
reflecting the filing of its financing statements and other filings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been duly executed in a
manner sufficient to perfect all of the security interests granted to Lender;
J. Landlord and Mortgagee Waivers. If applicable, Lender shall have received
landlord and mortgagee waivers from the lessors and mortgagees of all locations
where any Collateral is located;
K. Fees. Borrower shall have paid all fees payable by it on ---- the Closing
Date pursuant to this Agreement;
L. Opinion of Counsel. Lender shall have received an opinion of Borrower's
counsel covering such matters as Lender shall determine in its sole discretion,
provided however, Borrower may provide such opinion letter to Lender on or
before October 3, 1997 and if such is not
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received by Lender by October 3, 1997 such failure shall be an Event of Default
hereunder;
M. Solvency Certificate. If requested by Lender, a signed certificate of the
Borrower's duly elected Chief Financial Officer concerning the solvency and
financial condition of Borrower, on Lender's standard form;
N. Blocked and Pledged Accounts. If applicable, the Blocked Account and/or
Pledged Account referred to in Sections 3.10 hereof shall have been established
to the satisfaction of Lender in its sole discretion; and
O. Other Matters. All other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance satisfactory to Lender
and its counsel.
4.2. SUBSEQUENT ADVANCES . The obligation of Lender to make any advance
hereunder (including the initial advance) shall be subject to the further
conditions precedent that, on and as of the date of such advance: (a) the
representations and warranties of Borrower set forth in this Agreement shall be
accurate, before and after giving effect to such advance or issuance and to the
application of any proceeds thereof; (b) no Default or Event of Default has
occurred and is continuing, or would result from such advance or issuance or
from the application of any proceeds thereof; (c) no material adverse change has
occurred in the Borrower's business, operations, financial condition, or assets
or in the prospect of repayment of the Indebtedness; (d) Lender shall have
received such other approvals, opinions or documents as Lender shall reasonably
request; and (e) Borrower shall submit to Lender a completed Request for Advance
Report in the form and substance of Exhibit "A" attached hereto, on the date
such advance is requested or shall have complied with the provisions concerning
oral advances hereunder as set forth in Section 4.3 hereof.
4.3. ORAL REQUEST FOR ADVANCE . All oral requests for advances shall be made
only by an authorized agent of Borrower designated by or acting under the
authority of a resolution of the Board of Directors of Borrower, a duly
certified or executed copy of which shall be furnished to Lender prior to any
oral request. Lender shall be entitled to rely upon such authorization until
written notice to the contrary is received by Lender. Borrower covenants and
agrees to furnish to Lender written confirmation of any such oral request within
two (2) days after such oral request, in a form set forth on Exhibit "A"
attached hereto and incorporated herein, but any such loan or advance shall be
deemed to be made under and entitled to the benefits of this Agreement and any
other documents or instruments executed in connection herewith irrespective of
any failure by Borrower to furnish such written confirmation. Any loan or
advance shall be conclusively presumed to have been made under the terms of this
Agreement, to or for the benefit of Borrower, when made pursuant to the terms of
any written agreement executed in connection herewith; or in accordance with
such requests and directions; or when an advance is deposited to the credit of
the account of any person or persons, corporation or corporations comprising
Borrower, regardless of the fact that persons other than those authorized
hereunder may have authority to draw against such account or regardless of the
fact that the advance was not made or deposited for the benefit of all persons
or corporations comprising Borrower.
4.4. ALL ADVANCES TO CONSTITUTE ONE LOAN . All evidences of credit, loans and
advances made by Lender to Borrower under this Agreement and any other documents
or instruments executed in connection herewith shall constitute one loan, and
all indebtedness and obligations of Borrower to Lender under this Agreement and
all other such documents and instruments shall constitute one general obligation
secured by Lender's security interest in all of the Collateral and by all other
security interests, liens, claims and encumbrances heretofore, now, or at any
time or times hereafter granted by Borrower to Lender. Borrower agrees that all
of the rights of Lender set forth in this Agreement shall apply to any
modification of or supplement to this Agreement and any other such documents and
instruments.
4.5. ADVANCES . Lender shall have the right in Lender's discretion, subject
to availability hereunder on behalf of and without notice to Borrower, to make
and use advances to pay Lender for any amounts due to Lender pursuant to this
Agreement or otherwise, to cure any default hereunder, notwithstanding the
expiration of any applicable cure period.
5. REPRESENTATIONS AND WARRANTIES OF BORROWERS AND GUARANTOR.
5.1. REPRESENTATIONS AND WARRANTIES . Borrower and Guarantor hereby
continuously represent and warrant to Lender as follows:
A. Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation, is duly qualified to
do business and is in good standing as a foreign corporation in all states where
such qualification is required, has all necessary corporate power and authority
to enter into this Agreement and each of the documents and instruments relating
hereto and to perform all of its obligations hereunder and thereunder.
B. Borrower operates its business only under the assumed names (SCHEDULE
SECTION 5.1.) and has not
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used any other assumed name for the operation of its business activities for the
previous seven (7) years.
C. Borrower has all requisite corporate right and power and is duly
authorized and empowered to enter into, execute, deliver and perform this
Agreement and all documents and instruments relating hereto and this Agreement
and all documents and instruments relating hereto are the legal, valid and
binding obligations of Borrower and are enforceable against Borrower in
accordance with their terms.
D. Each Guarantor is competent to enter into this Agreement and the Guaranty
and to perform all of Guarantor's obligations thereunder.
E. The execution, delivery and performance by Borrower of this Agreement does
not and shall not (i) violate any provision of any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award presently in effect
having applicability to Borrower; (ii) violate any provision of its Articles of
Incorporation or Bylaws; or (iii) result in a breach of or constitute a default
under any indenture or loan or credit agreement or any other agreement, lease or
instrument to which Borrower is a party or by which it or any of its assets or
properties may be bound or affected; and Borrower is not in default of any such
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award or any such indenture, agreement, lease or instrument.
F. No consent, approval, license, exemption of or filing or registration
with, giving of notice to, or other authorization of or by, any court,
administrative agency or other governmental authority is or shall be required in
connection with the execution, delivery or performance by Borrower for the valid
consummation of the transactions contemplated by this Agreement.
G. No event has occurred and is continuing which constitutes a Default or an
Event of Default, as defined in this Agreement. There is no action, suit,
proceeding or investigation pending or threatened against or affecting Borrower
before or by any court, administrative agency or other governmental authority
that brings into question the validity of the transactions contemplated hereby,
or that might result in any material adverse change in the businesses, assets,
properties or financial conditions of Borrower or Guarantor.
H. Borrower and/or Guarantor are not in default in the payment of any taxes
levied or assessed against either of them or any of their assets or properties,
except for taxes being contested in good faith and by appropriate proceedings.
I. Borrower and Guarantor have good and marketable title to their assets and
properties as reflected in their financial statements furnished to Lender.
J. Each of the financial statements furnished to Lender by the Borrower and
Guarantor was prepared in accordance with GAAP and fairly and accurately
reflects their financial condition as of the date thereof; and each hereby
certifies that there have been no material adverse changes in their condition,
financial or otherwise, since the date of such statements, and there are no
contingent liabilities not provided for or disclosed in such statements.
K. Neither this Agreement, any Availability Report or any statement or
document referred to herein or delivered to Lender by Borrower and/or Guarantor
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements made herein or therein not misleading.
L. Borrower has good, indefeasible and merchantable title to and ownership of
the Collateral, free and clear of all liens, claims, security interests and
encumbrances, except those of Lender and except where such liens, claims,
charges, security interests and encumbrances are removed contemporaneously with
the execution of this Agreement or are subordinate to those of Lender, in a form
and substance acceptable to Lender.
M. All books, records and documents relating to the Collateral are and shall
be genuine and in all respects what they purport to be; the original amount and
the unpaid balance of each Receivable shown on the books and records of Borrower
and in the schedules represented as owing by each Account Debtor is and shall be
the correct amount actually owing or to be owing by such Account Debtor at
maturity; each Account Debtor liable upon the Receivables has and shall have
capacity to contract; Borrower has no knowledge of any fact which would impair
the validity or collectibility of any of the Receivables; and the payments shown
to have been made by each Account Debtor on the books and records of Borrower
shall reflect the amounts of and dates on which said payments were actually
made.
N. Borrower has places of business only at the locations (SCHEDULE SECTION
3.2.). Borrower shall not begin or do business (either directly or through
subsidiaries) at other locations or cease to do business at any of the above
locations or at Borrower's principal place of business without first notifying
Lender.
O. The present value of all benefits vested under all Plans of Borrower or
any Commonly Controlled Entity (based on the assumptions used to fund the Plans)
did not, as of the last annual valuation date (which in case of any Plan was not
earlier than December 31, 1982) exceed the
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value of the assets of the Plans applicable to such vested benefits.
P. The liability to which Borrower or any Commonly Controlled Entity would
become subject under Sections 4063 or 4064 of ERISA if Borrower or any Commonly
Controlled Entity were to withdraw from all Multi-employer Plans or if such
Multi- employer Plans were to be terminated as of the valuation date most
closely preceding the date hereof, is not in excess of One Thousand Dollars
($1,000.00);
Q. Borrower is not engaged nor shall it engage, principally or as one of its
important activities, in a business of extending credit for the purpose of
"purchasing" or "carrying" any "margin stock" within the respective meanings of
each of the quoted terms under Regulations G or X of the Board of Governors of
the Federal Reserve System as now and from time to time hereafter in effect. No
part of the proceeds of any advances hereunder shall be used for "purchasing" or
"carrying" "margin stock" as so defined or for any purpose which violates, or
which would be inconsistent with, the provisions of the Regulations of such
Board of Governors. If requested by Lender, Borrower shall furnish to Lender a
statement in conformity with the requirement of Federal Reserve Form G-3
referred to in said Regulation G to the foregoing effect. All of the outstanding
securities of Borrower have been offered, issued, sold and delivered in
compliance with, or are exempt from, all federal and state laws and rules and
regulations of federal and state regulatory bodies governing the offering,
issuance, sale and delivery of securities.
R. Borrower is not an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
S. Each of the Exhibits and Schedules to this Agreement contain true,
complete and correct information.
T. To the best of Borrower's knowledge, the land and improvements owned or
leased by Borrower for use in its business operations are free of dangerous
levels of contaminates, oils, asbestos, radon, PCB's, hazardous substances or
waste as defined by federal, state or local environmental laws, regulations or
administrative orders or other materials, the removal of which is required or
the maintenance of which is prohibited, regulated or penalized by any federal,
state or local governmental authority.
U. Borrower is solvent, generally able to pay its obligations as they become
due, has sufficient capital to carry on its business and transactions and all
businesses and transactions in which it intends to engage, and the current value
of Borrower's assets, at fair saleable valuation, exceeds the sum of its
liabilities. Borrower shall not be rendered insolvent by the execution and
delivery of the Loan Documents and the consummation of the transactions
contemplated thereby and the capital remaining in Borrower is not now and shall
not foreseeably become unreasonably small to permit Borrower to carry on its
business and transactions and all businesses and transactions in which it is
about to engage. Borrower does not intend to, nor does it reasonably believe it
shall, incur debts beyond its ability to repay the same as they mature.
V. Lender has a perfected security interest in favor of Lender in all of
Borrower's right, title and interest in the Collateral, prior and superior to
any other security interest or lien, except any statutory or constitutional lien
for taxes not yet due and payable.
W. There are no material actions, suits or proceedings pending, or threatened
against or affecting the assets of Borrower or the consummation of the
transactions contemplated hereby, at law, or in equity, or before or by any
governmental authority or instrumentality or before any arbitrator of any kind.
Neither Borrower nor Guarantor is subject to any judgment, order, writ,
injunction or decree of any court or governmental agency. There is not a
reasonable likelihood of an adverse determination of any pending proceeding
which would, individually or in the aggregate, have a material adverse effect on
the business operations or financial condition of Borrower or Guarantor.
5.2. WARRANTIES AND REPRESENTATIONS AS TO ELIGIBLE RECEIVABLES . With respect
to Eligible Receivables, Borrower and Guarantor continuously warrant and
represent to Lender that during the term of this Agreement and so long as any of
the Indebtedness remains unpaid: (i) in determining which Receivables are
"Eligible Receivables," Lender may rely upon all statements or representations
made by Borrower; and (ii) those Receivables designated as Eligible Receivables
meet each requirement set forth below at the time any request for advance is
provided to Lender.
A. The Eligible Receivables are genuine; are in all respects what they
purport to be; and are evidenced by at least one executed original instrument,
agreement, contract or document which has been or shall be delivered to Lender;
B. The Eligible Receivables represent undisputed, bona fide transactions
completed in accordance with the terms and provisions contained in any documents
related thereto;
C. The amounts of the face value shown on any schedule of Receivables
provided to Lender, and/or all invoices or statements delivered to Lender with
respect to any Eligible Receivables, are actually and absolutely owing to
Borrower and are not contingent for any reason;
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D. No set-offs, counterclaims or disputes as to payments or liability thereon
exist or have been asserted with respect thereto and Borrower has not made any
agreement with any Account Debtor thereunder for any deduction therefrom, except
a discount or allowance allowed by Borrower in the ordinary course of its
business for prompt payment, all of which discounts or allowances are reflected
in the calculation of the outstanding amount of the Receivable;
E. No facts, events or occurrences exist that, in any way, impair the
validity or enforcement thereof or tend to reduce the amount payable thereunder
from the amount of the Receivable shown on any schedule, or on all contracts,
invoices or statements delivered to Lender with respect thereto;
F. All Account Debtors in connection with Eligible Receivables: (i) had the
capacity to contract at the time any contract or other document giving rise to
the Receivable was executed; and (ii) generally have the ability to pay their
debts as become due;
G. Within Borrower's knowledge, no proceedings or actions are threatened or
pending against any Account Debtor that might result in any material adverse
change in the Account Debtor's financial condition;
H. The Eligible Receivables have not been assigned or pledged to any other
person or entity;
I. The goods giving rise to the Eligible Receivables are not, and were not at
the time of the sale, rental and/or lease thereof, subject to any lien, claim,
encumbrance or security interest except those of Lender, those removed or
terminated prior to the date hereof or those subordinated to Lender's security
interest, by a subordination and standstill agreement acceptable to Lender;
J. The End of Month Delinquency set forth in Section 12 of the Availability
Report shall be delivered to Lender by Borrower hereunder as determined pursuant
to the Aging Procedures and Eligibility Test (SCHEDULE SECTION 1.12.D.).
6. COVENANTS AND OTHER AGREEMENTS
6.1 AFFIRMATIVE COVENANTS . During the term of this Agreement and so long as
any of the Indebtedness remains unpaid, Borrower and Guarantor agree and
covenant, jointly and severally, that they shall:
A. Pay or cause to be paid currently all of their expenses, including all
payments on their obligations whenever due, as well as all payments of any and
all taxes of whatever nature when due. This provision shall not apply to taxes
or expenses which are due, but which are challenged in good faith.
B. Maintain, preserve, and protect the Collateral, including, but not limited
to, keeping documents, instruments or other written records otherwise evidencing
the Collateral in a fire proof cabinet.
C. Furnish to Lender written notice as to the occurrence of any Default or
Event of Default hereunder.
D. Furnish to Lender notice of: (i) any development related to the business,
financial condition, properties or assets of Borrower or Guarantor, that would
have or has a materially adverse affect on such business, financial condition,
properties or assets, or ability to perform their obligations under this
Agreement and (ii) any material and adverse litigation or investigation to which
either of them may be a party.
E. Carry on and conduct their business in the same manner and in the same
fields of enterprise as they are presently engaged, and Borrower shall preserve
its corporate existence, licenses or qualifications as a domestic corporation in
the jurisdiction of its incorporation and as a foreign corporation in every
jurisdiction in which the character of its assets or properties or the nature of
the business transacted by it at any time makes qualification as a foreign
corporation necessary, and to maintain all other material corporate rights and
franchises, provided, however, nothing herein shall be construed to prevent
Borrower from closing any retail location in the good faith exercise of its
business judgment.
F. Comply, and cause each affiliate to comply, with all statutes,
governmental rules and regulations applicable to them.
G. Permit and authorize Lender, without notifying Borrower or Guarantor, to
make such inquiries through business credit or other credit reporting services
concerning Borrower or Guarantor as Lender shall deem appropriate.
6.2 NEGATIVE COVENANTS . During the term of this Agreement and until the
Indebtedness secured hereby has been paid in full, Borrower and Guarantor
covenant and agree that they shall not, without Lender's prior written consent,
which consent shall not be unreasonably withheld, do any of the following:
A. Incur or permit to exist any mortgage, pledge, title retention lien or
other lien, encumbrance or security interest with respect to the Collateral now
owned or hereafter acquired by Borrower, except liens in favor of Lender.
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B. Delegate, transfer or assign any of their obligations or liabilities under
this Agreement, or any part thereof, to any other person or entity.
C. Be a party to or participate in: (i) any merger or consolidation; (ii) any
purchase or other acquisition of all or substantially all of the assets or
properties or shares of any class of, or any partnership or joint venture
interest in, any other corporation or entity with an aggregate purchase price
for any acquisition in excess of One Million Dollars ($1,000,000.00), without
Lender's prior written consent; (iii) any sale, transfer, conveyance or lease of
all or substantially all of Borrower's assets or properties; or (iv) any sale or
assignment with or without recourse of any Receivables. With respect to any
acquisition with a purchase price in excess of One Million Dollars
($1,000,000.00), Lender shall have the right, but not the obligation to perform
its own audit of the assets or entity to be acquired by Borrower.
D. Cause or take any of the following actions with respect to Borrower: (i)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
Borrower's outstanding securities; or (ii) purchase or acquire, directly or
indirectly, any shares of capital stock, evidences of indebtedness or other
securities of any person or entity. Notwithstanding the foregoing to the
contrary, TTG may repurchase up to Twelve Thousand (12,000) shares of TTG's
securities during each fiscal year, provided a Default is not then in existence
at the time of such purchase by TTG.
E. Amend, supplement or otherwise modify Borrower's Articles of Incorporation
or Bylaws which would have a material adverse affect on the condition and
operations, prospects or financial condition of the Borrower.
F. Incur, assume or suffer to exist any debt (including capitalized leases)
other than (i) the Indebtedness, (ii) accounts payable incurred in the ordinary
course of business, (iii) Subordinated Debt, (iv) mortgage warehouse credit
facilities with Centura Bank and Associates Commercial Corporation, d/b/a/ First
Collateral Services, provided such secured creditor and Lender have executed an
intercreditor agreement, in a form and substance acceptable to Lender or (iv)
other Debt consented to in writing by Lender.
G. Directly or indirectly make loans to, invest in, extend credit to, or
guaranty the debt of any person or entity, other than in the ordinary course of
Borrower's business.
H. Amend, modify, or otherwise change in any respect any material agreement,
instrument, or arrangement (written or oral) by which Borrower, or any of its
assets, are bound.
I. Allow Borrower to be owned and controlled directly or indirectly by any
person or entity other than the shareholders and senior management that own and
control Borrower as of the date hereof.
J. Permit, allow or take any action to pledge or otherwise hypothecate any
stock or other securities that evidence Guarantor's ownership of borrower to
secure any obligation or debt of Guarantor.
K. Permit Guarantor to hold directly less than fifty-one (51%) of the
outstanding stock and securities of TTG.
L. Allow the Debt Service Coverage Ratio of TIG to be less than the Minimum
TIG Debt Service Coverage Ratio (SCHEDULE SECTION 6.2.A.).
M. Allow the Net Commission Income of TIG to be less than the Minimum Net
Commission Income (SCHEDULE SECTION 6.2.B.).
N. Allow the Debt Service Coverage Ratio of Mortgage Entity to be less than
the Minimum Mortgage Entity's Debt Service Coverage Ratio (SCHEDULE SECTION
6.2.C.).
O. Allow more than twenty percent (20%) of TIG's Net Commission Income,
during any twelve (12) month reporting period, to be billed to a single
insurance carrier.
6.3. JOINT NEGATIVE COVENANTS . During the term of this Agreement until the
Indebtedness secured hereby has been paid in full, all Borrowers, as defined in
(SCHEDULE SECTION 1.A.) jointly covenant and agree that they shall not, allow or
permit any of the following, which covenants shall be applied in the aggregate
by combining each element of such financial covenants for each Borrower:
A. Permit the aggregate Leverage Ratio to be more than the Leverage Ratio
Limit (SCHEDULE SECTION 6.3.A.).
B. Permit the aggregate Net Income to be less than the Minimum Net Income
Requirement (SCHEDULE SECTION 6.3.B.).
C. Make or allow Distributions, in the aggregate, to exceed, without Lender's
prior written consent, which consent shall not be unreasonably withheld, the
Distributions Limitation (SCHEDULE SECTION 6.3.C.); provided, however, that no
Distribution shall be made if a Default or an Event of Default shall exist.
D. Permit the Tangible Net Worth plus the outstanding balance of all
Subordinated Debt to be less than the Minimum Tangible Net Worth plus the
Subordinated Debt (SCHEDULE SECTION 6.3.D.).
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6.4. REPORTING REQUIREMENTS AND ACCOUNTING PRACTICES . Borrower shall
maintain (i) a modern system of accounting in accordance with GAAP or other
systems of accounting acceptable to Lender and (ii) standard operating
procedures applicable to all of its locations with respect to the handling and
disposition of cash receipts and other proceeds of Collateral on a daily basis,
including the depositing thereof, aging of account receivables, record keeping
and such other matters as Lender may reasonably request. For the purpose of
determining compliance with the covenants and representations in the Loan
Documents, Lender shall have the right to recast any financial statement or
report presented to Lender by or on behalf of Borrower to comply with GAAP.
6.5. ACCOUNT DEBTORS' ADDRESSES . Borrower agrees to furnish to Lender from
time to time, promptly upon request, a list of all Account Debtors' names and
their most current addresses. Borrower agrees that Lender may from time to time,
consistent with standard or generally accepted auditing practices, verify the
validity, amount and any other matters relating to the Receivables by means of
mail, telephone or otherwise, in the name of Borrower and upon the occurrence of
an Event of Default in the name of Lender or such other name as Lender may
choose.
6.6. FINANCIAL REPORTS . Borrower shall furnish to Lender the following
financial statements and reports, in a form satisfactory to Lender:
A. As soon as practicable and in any event mailed within twenty (20) days
after the end of each fiscal month: (i) "Availability Report," in the form and
substance of Exhibit "D" attached hereto; (ii) Statement of Accounts Receivable
showing the detailed aging of each Receivable according to the procedures
(SCHEDULE SECTION 1.12.D.); (iii) a monthly Profit and Loss Statement and
Balance Sheet, certified by Borrower's chief financial officer or equivalent
duly elected officer of Borrower; and (iv) Schedule of Receivables and
Assignment in the form and substance of Exhibit "E" attached hereto.
B. Within ninety (90) days after the end of each of Borrower's fiscal years,
annual financial statements, or consolidated statements, as the case may be, of
Borrower prepared in accordance with GAAP, consistently applied and certified by
its chief financial officer or equivalent duly elected officer. The financial
statements shall be prepared by and under the method acceptable to Lender and
shall consist of a balance sheet as of the end of such fiscal year and
comparative statements of earnings, cash flows, and change in stockholders'
equity for such fiscal year (SCHEDULE SECTION 6.5.).
C. With reasonable promptness, such other financial data as Lender may
reasonably request, including but not limited to tax returns, business plans and
reports.
Together with each delivery of financial statements required by subsections
A, B and C above, Borrower shall deliver to Lender and shall cause each of its
subsidiaries to deliver to Lender, if requested by Lender, a certificate in form
satisfactory to Lender, certifying that no Default or Event of Default exists
under this Agreement as of the date of such certificate, or if a Default or an
Event of Default exists, specifying the nature and period of existence thereof
and what action Borrower proposes to take with respect thereto.
6.7. FINANCIAL STATEMENTS OF GUARANTORS . Each of the Guarantors (SCHEDULE
SECTION 1.15.) shall furnish to Lender annual personal financial statements in
form reasonably satisfactory to Lender and certified by such Guarantor and a
copy of each Guarantor's personal Federal Income Tax Return (including all
schedules thereto and amendments thereof) filed during the term hereof, within
thirty (30) days of the filing of the same.
6.8. NOTICE OF CHANGES . Borrower shall promptly notify Lender in writing of
any change of its officers, directors or key employees; change of location of
its principal offices, change of location of any of its principal assets; any
acquisition, disposition or reorganization of any corporate subsidiary,
affiliate or parent of Borrower; change of Borrower's name; death or withdrawal
of any partner (if Borrower is a partnership); any sale or purchase out of the
regular course of Borrower's business; litigation of which Borrower or a
Guarantor is a party; and any other material change in the business or financial
affairs of Borrower.
6.9. DELIVERY OF RECEIVABLE DOCUMENTS; REPORTING . Borrower hereby agrees to
deliver all Receivable documentation evidencing such Receivables (the original
contract or agreement that evidences Account Debtor's primary payment obligation
to Borrower ("Payment Agreement") and, if requested by Lender for such to be
delivered to Lender, a certificate of title or application therefore in the name
of Account Debtor, with the Borrower as the only secured party, of the
collateral that secures such payment obligation to Lender ["Certificate of
Title"]), no less often than on the twentieth (20th) day of each calendar month
during the term of this Agreement. If such request for delivery has been made by
Lender and the evidence of title of the collateral securing a pledged Receivable
is not delivered to Lender with the original Receivable documentation, Borrower
shall deliver evidence that such original title has been applied for in the name
of the respective Account Debtor with Borrower as the only secured party ("White
Slip"), in a form and substance satisfactory to Lender, and such evidence of
title shall be delivered to Lender not later than fifteen (15)
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days after such evidence of title is received by Borrower. Any Receivable for
which Borrower has not delivered the original Payment Obligation and, if
delivery has been requested by Lender, the Certificate of Title or White Slip,
such Receivables shall not be an Eligible Receivable hereunder. If the delivery
of the certificates of title has been requested by Lender, Borrower will deliver
monthly, with the delivery of the documentation evidencing the Receivables
above, a "Vehicle Title Exception Report", in the form and substance of the
Exhibit "F" attached hereto, listing all Certificates of Titles which have not
been received by Lender or are due from the appropriate state motor vehicle
department.
7. EVENTS OF DEFAULT AND REMEDIES
7.1. EVENTS OF DEFAULT . The occurrence of any one or more of the following
events shall constitute an "Event of Default":
A. If any payment of principal or interest or any other amount due Lender is
not paid within five (5) days after the same shall be due and payable.
B. If Borrower or Guarantor fails or neglects to perform, keep or observe any
of the terms, provisions, conditions or covenants, contained in this Agreement,
any of the other Loan Documents or any other agreement or document executed in
connection with the transactions contemplated by this Agreement or if any
representation, warranty or certification made by Borrower herein or in any
certificate or other writing delivered pursuant hereto shall prove to be untrue
in any material respect as of the date upon which the same was made or at any
time thereafter, and the same is not cured to Lender's satisfaction within ten
(10) days after Lender has given written notice to Borrower identifying such
default.
C. If the validity or enforceability of any lien, charge, security interest,
mortgage, pledge or other encumbrance granted to Lender to secure the
Indebtedness shall be impaired in any respect or to any degree, for any reason,
or if any other lien, charge, security interest, mortgage, pledge or other
encumbrance shall be created or imposed upon the Collateral unless such lien,
charge, security interest, mortgage, pledge or other encumbrance is subordinate
to that of Lender, pursuant to a subordination and standstill agreement in a
form and substance acceptable to Lender.
D. If any judgment against Borrower not covered by insurance in an amount in
excess of Twenty-Five Thousand Dollars ($25,000.00), or any attachment or other
levy against the properties or assets of Borrower with respect to a claim for
any amount in excess of Twenty-Five Thousand Dollars ($25,000.00), remains
unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period
of thirty (30) days.
E. Default in the payment of any sum due under any instrument of indebtedness
for borrowed money owed by Borrower or any Guarantor to any person, or any other
default under such instrument of indebtedness for borrowed money that permits
such indebtedness for borrowed money to become due prior to its stated maturity
or permits the holders of such indebtedness for borrowed money to elect a
majority of the board of directors or manage the business of Borrower or any
Guarantor.
F. If a court or governmental authority of competent jurisdiction shall enter
an order, judgment or decree appointing, with or without Borrower's or
Guarantor's consent or acquiescence, a receiver, custodian, liquidator, trustee
or other officer with similar powers of Borrower or Guarantor or of the whole or
any substantial part of its properties or assets, or approving a petition filed
against Borrower or Guarantor seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the federal
bankruptcy laws or any other applicable law, and such order, judgment or decree
shall remain unvacated, unstayed or not set aside for an aggregate of thirty
(30) days (whether or not consecutive) from the date of the entry thereof or if
any petition seeking such relief shall be filed against Borrower or Guarantor
and such petition shall not be dismissed within thirty (30) days.
G. An event shall occur which shall have a material adverse affect on the
condition and operations, prospects or financial condition of the Borrower or
Guarantor.
H. If either Borrower or Guarantor shall: (i) be generally not paying their
respective debts as they become due; (ii) file a petition in bankruptcy or a
petition to take advantage of any insolvency act or other act for the relief or
aid of debtors; (iii) make an assignment for the benefit of their creditors;
(iv) consent to or acquiesce in the appointment of a receiver, custodian,
liquidator, trustee or other officer with similar powers of either of their
properties or assets; (v) file a petition or answer seeking reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the federal bankruptcy laws or any other applicable law; (vi) be
adjudicated insolvent or be liquidated; (vii) admit in writing either of their
inability to pay debts as they become due; (viii) voluntarily suspend
transaction of usual business; or (ix) take any action, corporate or otherwise,
for the purpose of any of the foregoing.
I. Any of the following shall occur: (i) entry of a court order that enjoins,
restrains or in any way prevents Borrower from conducting all or any material
part of its business affairs in the ordinary course of business or (ii)
withdrawal or suspension of any license or authority
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required for the conduct of any material part of Borrower's business.
J. If any Guarantor gives notice of termination or terminates his liability
pursuant to the Guaranty Agreement executed in conjunction with this Agreement.
K. The breach of terms or conditions of any Agency and Custodian Agreement
executed in conjunction with this Agreement.
7.2. ACCELERATION OF THE INDEBTEDNESS . Upon and after an Event of Default,
the outstanding principal balance together with all accrued but unpaid interest
on the Indebtedness and all other sums due and payable by Borrower to Lender
may, at the option of Lender and without demand, presentment, notice of
dishonor, notice of intent to demand or accelerate payment, diligence in
collecting, grace, notice and protest or a legal process of any kind, all of
which are hereby expressly waived, be declared, and immediately shall become due
and payable.
7.3. LOUISIANA CONFESSION OF JUDGMENT . In the event that Borrower is
domiciled in, or Collateral is located in, Louisiana, and to the extent of such
domicile or location where Louisiana law is applicable to this Agreement:
A. Borrower hereby CONFESSES JUDGMENT, up to the full amount of principal,
interest and attorney's fees and for any sums that Lender may advance during the
life of this Agreement for the payment of premiums of insurance, taxes and
assessments or for the protection and preservation of this Agreement as
authorized elsewhere in this Agreement, and does by these presents, consent,
agree and stipulate that, in the event of any payment of principal or interest
due hereunder not being promptly and fully paid when the same becomes due and
payable, or in the event of failure to comply with any of the obligations set
forth herein, the Indebtedness shall, at the option of Lender become due and
payable, and it shall be lawful for Lender, without making a demand and without
notice or putting in default, the same being hereby expressly waived, to cause
all and singular the Collateral herein secured to be seized and sold by
executory process issued by any competent court or to proceed with enforcement
of its security interest in any other manner provided by law; and
B. Borrower hereby expressly waives: (a) the benefit of appraisement, as
provided in Articles 2332, 2336, 2723, and 2724, Louisiana Code of Civil
Procedure, and all other laws conferring the same; (b) the demand and three (3)
days delay according by Articles 2639 and 2721, Louisiana Code of Civil
Procedure, and all other laws conferring the same; (c) the notice of seizure
required by Articles 2293 and 2721, Louisiana Code of Civil Procedure, and all
other laws conferring the same; (d) the three (3) days delay provided by
Articles 2331 and 2722, Louisiana Code of Civil Procedure, and all other laws
conferring the same; and (e) the benefit of the other provisions of Articles
2331, 2722 and 2723, Louisiana Code of Civil Procedure, and all other Articles
not specifically mentioned above; and Borrower expressly agrees to the immediate
seizure of the Collateral in the event of suit thereon.
7.4. REMEDIES . Upon and after an Event of Default, Lender shall have the
following rights and remedies, which individual remedies shall be non-exclusive,
cumulative and in addition to each and every other remedy set forth in the Loan
Documents or in this Agreement:
A. All of the rights and remedies of a secured party under the Uniform
Commercial Code as enacted in the State of Arizona, as amended, or other
applicable law.
B. The right, to the fullest extent permissible by law, to: (i) enter upon
the premises of Borrower, or any other place or places where the Collateral is
located and kept, without any obligation to pay rent to Borrower, through
self-help and without judicial process, without first obtaining a final judgment
or giving Borrower notice and opportunity for a hearing on the validity of
Lender's claim, and remove the Collateral therefrom to the premises of Lender or
any agent of Lender, for such time as Lender may desire, in order to effectively
collect and liquidate the Collateral; and/or (ii) require Borrower to assemble
the Collateral and make it available to Lender at a place to be designated by
Lender, in Lender's reasonable discretion.
C. The right to sell or otherwise dispose of any or all Collateral in its
then condition at public or private sale or sales, in lots or in bulk, for cash
or on credit, all as Lender, in its discretion, may deem advisable; provided
that such sales may be adjourned from time to time with or without notice. The
requirement of reasonable notice to Borrower of the time and place of any public
sale of the Collateral or of the time after which any private sale either by
Lender or at its option, a broker, or any other intended disposition thereof is
to be made, shall be met if such notice is mailed, postage prepaid, to Borrower
at the address of Borrower designated herein at least ten (10) Business Days
before the date of any public sale or at least ten (10) Business Days before the
time after which any private sale or other disposition is to be made unless
applicable law requires otherwise.
Lender shall have the right to conduct such sales on Borrower's premises or
elsewhere and shall have the right to use Borrower's premises without charge for
such sales for such time or times as Lender may see fit. Lender is hereby
granted a license or other right to use, without charge, Borrower's labels,
copyrights, rights of use of any name, trade secrets, trade names, trademarks
and advertising matter, or any property of a similar nature, as
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it pertains to the Collateral, in advertising for sale and selling any
Collateral and Borrower's rights under all licenses and all franchise agreements
shall inure to Lender's benefit. Lender agrees to hold Borrower harmless from
any liability arising out of Lender's use of Borrower's premises, labels,
copyrights, rights of use of any name, trade secrets, trade names, trademarks
and advertising matter, or any property of a similar nature as it pertains to
advertising for sale, marshaling or selling the Collateral.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or part of the Collateral at public or, if permitted
by law, private sale and, in lieu of actual payment of such purchase price, may
set off the amount of such price against the Indebtedness owing by Borrower to
Lender. The proceeds realized from the sale of any Collateral shall be applied
first to reasonable costs and expenses, attorney's fees, expert witness fees
incurred by Lender for collection and for acquisition, completion, protection,
removal, storage, sale and delivery of the Collateral; second to all payments,
other than principal and interest, due under this Agreement; third to interest
due upon any of the Indebtedness; fourth to the principal balance owing on the
Indebtedness; and fifth the remainder, if any, to Borrower, its successors or
assigns, or to whomsoever may be lawfully entitled to receive the same. If any
deficiency shall arise, Borrower shall remain liable to Lender therefor.
D. In the event that Borrower is domiciled in, or Collateral is located in,
Louisiana, and to the extent of such domicile or location where Louisiana law is
applicable to this Agreement, the right to cause all and singular the
hereinabove described Collateral to be seized and sold under executory process
without appraisement, appraisement being hereby expressly waived, as an entirety
or in parcels, as Lender may determine, to the highest bidder for cash.
E. The right to appoint or seek appointment of a receiver, custodian or
trustee of Borrower or any of its properties or assets pursuant to court order.
F. The right to cease all advances hereunder.
G. All other rights and remedies that Lender may have at law or in equity.
7.5. NO WAIVER . No delay, failure or omission of Lender to
exercise any right upon the occurrence of any Default or Event of Default shall
impair any such right or shall be construed to be a waiver of any such Default
or Event of Default or an acquiescence therein. Lender may, from time to time,
in a writing waive compliance by the other parties with any of the terms of this
Agreement and its rights and remedies upon any Default or Event of Default, and,
Borrower agrees that no waiver by Lender shall ever be legally effective unless
such waiver shall be acknowledged and agreed in writing by Lender. No waiver of
any Default or Event of Default shall impair any right or remedy of Lender not
specifically waived. No single, partial or full exercise of any right of Lender
shall preclude any other or further exercise thereof. No modification or
amendment of or supplement to this Agreement or any other written agreement
between the parties hereto shall be valid or effective (or serve as a basis of
reliance by way of estoppel) unless the same is in writing and signed by the
party against whom it is sought to be enforced. The acceptance by Lender at any
time and from to time of a partial payment or partial performance of any of
Borrower's obligations set forth herein shall not be deemed a waiver, reduction,
modification or release from any Default or Event of Default then existing. No
waiver by Lender of any Default or Event of Default shall be deemed to be a
waiver of any other existing or any subsequent Default or Event of Default.
7.6. APPLICATION OF PROCEEDS . After an Event of Default shall have occurred
and is continuing, all amounts received by Lender on account of any Indebtedness
and realized by Lender with respect to the Collateral, including any sums which
may be held by Lender, or the proceeds of any thereof, shall be applied in the
same manner as proceeds of Collateral as set forth in Section 7.4.C. hereof.
7.7. APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT . Borrower irrevocably
designates, makes, constitutes and appoints Lender (and all persons reasonably
designated by Lender), with full power of substitution, as Borrower's true and
lawful attorney-in-fact (and not agent-in-fact) and Lender, or Lender's agent,
may, without notice to Borrower, and at such time or times thereafter as Lender
or said agent, in its discretion, may determine, in Borrower's or Lender's name,
at no duty or obligation on Lender, do the following:
A. All acts and things necessary to fulfill Borrower's administrative duties
pursuant to this Agreement, including, but not limited to, the execution of
financing statements;
B. Upon the occurrence of any Default, all acts and things necessary to
fulfill Borrower's obligations under this Agreement and the Loan Documents,
except as set forth in Section 7.7.C below, at the cost and expense of Borrower.
C. In addition to, but not in limitation of the foregoing, at any time or
times upon the occurrence of an Event of Default, Lender shall have the right:
(i) to enter upon Borrower's premises and to receive and open all mail directed
to Borrower and remove all payments to Borrower
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on the Receivables; however, Lender shall turn over to Borrower all of such mail
not relating to Receivables; (ii) in the name of Borrower, to notify the Post
Office authorities to change the address for the delivery of mail addressed to
Borrower to such address as Lender may designate (notwithstanding the foregoing,
for the purposes of notice and service of process to or upon Borrower as set
forth in this Agreement, Lender's rights to change the address for the delivery
of mail shall not give Lender the right to change the address for notice and
service of process to or upon Borrower in this Agreement); (iii) demand,
collect, receive for and give renewals, extensions, discharges and releases of
any Receivable; (iv) institute and prosecute legal and equitable proceedings to
realize upon the Receivables; (v) settle, compromise, compound or adjust claims
in respect of any Receivable or any legal proceedings brought in respect
thereof; (vi) generally, sell in whole or in part for cash, credit or property
to others or to itself at any public or private sale, assign, make any agreement
with respect to or otherwise deal with any of the Receivables as fully and
completely as though Lender were the absolute owner thereof for all purposes,
except to the extent limited by any applicable laws and subject to any
requirements of notice to Borrower or other persons under applicable laws; (vii)
take possession and control in any manner and in any place of any cash or
non-cash items of payment or proceeds of Receivables; (viii) endorse the name of
Borrower upon any notes, acceptances, checks, drafts, money orders, chattel
paper or other evidences of payment of Receivables that may come into Lender's
possession; and (ix) sign Borrower's name on any instruments or documents
relating to any of the Collateral, or on drafts against Account Debtors; .
The appointment of Lender as attorney-in-fact for Borrower is coupled with an
interest and is irrevocable.
8. EXPENSES AND INDEMNITIES
8.1. REIMBURSEMENT FOR EXPENSES . Upon the occurrence of a Default, except as
set forth in the SCHEDULE SECTION 8.1., Borrower agrees to reimburse Lender,
upon demand, for all reasonable out-of-pocket expenses (including costs of
establishing and maintaining accounts or arrangements set forth in Section 3.10,
attorney's fees, expert witness fees and legal expenses) incurred in connection
with the evaluation of collateral, preservation of collateral, or collection of
the indebtedness.
8.2. LENDER'S EXPENSES AND ATTORNEY'S FEES . UPON AND AFTER AN EVENT OF
DEFAULT, LENDER SHALL BE ENTITLED TO RECOVER FROM BORROWER AND GUARANTORS ALL OF
LENDER'S ATTORNEY'S FEES AND REASONABLE COSTS AND EXPENSES INCURRED IN THE
EXERCISE OF LENDER'S RIGHTS SET FORTH IN THIS AGREEMENT, AND ALL DAMAGES
SUSTAINED BY LENDER BY REASON OF MISREPRESENTATION, BREACH OF WARRANTY OR BREACH
OF COVENANT OF BORROWER HEREIN, EXPRESSED OR IMPLIED, WHETHER CAUSED BY THE ACTS
OR DEFAULTS OF BORROWER, ACCOUNT DEBTORS OR OTHERS; INCLUDING WITHOUT
LIMITATION, ALL ATTORNEY'S FEES ARISING FROM SUCH SERVICES, EXPERT WITNESS FEES
AND ANY EXPENSES, COSTS AND CHARGES RELATING THERETO, AND ALL OF THE FOREGOING
SHALL CONSTITUTE PART OF THE INDEBTEDNESS SECURED BY THE COLLATERAL AND SHALL BE
PAYABLE ON DEMAND.
8.3. GENERAL INDEMNIFICATION . Borrower hereby agrees to indemnify and hold
Lender harmless from and against any and all claims, liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements (collectively "Claim" or "Claims") of any kind or nature
whatsoever, asserted by any party other than Borrower, or with respect to
Borrower only as otherwise provided in this Agreement or pursuant to applicable
law regarding Lender's obligations to Borrower, which may be imposed on,
incurred by or asserted against Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender) in any way relating to or arising out of the Loan Documents or
any action taken or omitted by Lender, or any of its officers, directors,
employees or agents (including accountants, attorneys or other professionals
hired by Lender) under the Loan Documents, except to the extent such indemnified
matters are finally found by a court to be caused by Lender's gross negligence
or wilful misconduct.
9. MISCELLANEOUS
9.1. NOTICES . All notices, demands, billings, requests and other written
communications hereunder shall be deemed to have been properly given: (i) upon
personal delivery; (ii) on the third Business Day following the day sent, if
sent by registered or certified mail; (iii) on the next Business Day following
the day sent, if sent by overnight express courier; or (iv) on the day sent or
if such day is not a Business Day on the next Business Day after the day sent if
sent by telecopy providing the receiving party has acknowledged receipt by
return telecopy, in each case, to Lender, Borrower or Guarantors at its address
and/or telecopy number as set forth in this Agreement or SCHEDULE SECTION 9.1,
or at such other address and/or telecopy number as either party may designate
for such purpose in a written notice given to the other party.
Lender shall have the right, on or after initial funding pursuant to the
terms of this Agreement, to issue a press release or other brochure announcing
the consummation of the Loan Documents and to distribute that information
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to third parties in the normal course of Lender's business, at no cost to
Borrower.
9.2. PARTICIPATIONS . Borrower and Guarantors acknowledge and agree that
Lender may from time to time sell or offer to sell interests in the Indebtedness
and the Loan Documents to one or more participants. Borrower and Guarantors
authorize Lender to disseminate any information it has pertaining to the
Indebtedness, including without limitation, complete and current credit
information on Borrower and any of its principals and Guarantors, to any such
participant or prospective participant.
9.3. SURVIVAL OF AGREEMENTS . All of the various representations, warranties,
covenants and agreements of Borrower (including without limitation, any
agreements to pay costs and expenses and to indemnify Lender) in the Loan
Documents shall survive the execution and delivery of the Loan Documents and the
performance under such Loan Documents, and shall further survive until one (1)
year and one (1) month after all of the Indebtedness is paid in full to Lender
and all of Lender's obligations to Borrower under the Loan Documents are
terminated.
9.4. NO OBLIGATION BEYOND MATURITY . Borrower agrees and acknowledges that
upon the Maturity Date, Lender shall have no obligation to renew, extend, modify
or rearrange the Loan and shall have the right to require all amounts due and
owing under the Loan to be paid in full upon such date.
9.5. PRIOR AGREEMENTS SUPERSEDED . This Agreement constitutes the sole and
only agreement of the parties hereto and supersedes any prior understandings or
written or oral agreements between the parties respecting the subject matter of
this Agreement. No provision of this Agreement or other document or instrument
relating hereto may be modified, waived or terminated except by instrument in
writing executed by the party against whom a modification, waiver or termination
is sought to be enforced.
9.6. PARTIES BOUND . This Agreement shall be binding on and
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, legal representatives, successors and assigns, except
as otherwise expressly provided for herein. Borrower and Guarantor shall not
assign any of their respective rights or obligations pursuant this Agreement.
9.7. NUMBER AND GENDER . Whenever used herein, the singular number shall
include the plural and the plural the singular, and the use of any gender shall
be applicable to all genders. The duties, covenants, obligations and warranties
of Borrower in this Agreement shall be joint and several obligations of Borrower
and of each Borrower if more than one.
9.8. NO THIRD PARTY BENEFICIARY . This Agreement is for the sole benefit of
Lender and Borrower and is not for the benefit of any third party.
9.9. EXECUTION IN COUNTERPARTS . This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original, and all
of which taken together shall constitute but one and the same instrument.
9.10. SEVERABILITY OF PROVISIONS . Any provision which is determined to be
unconscionable, against public policy or any provision of this Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
9.11. HEADINGS . The Article and Section headings used in this Agreement are
for convenience only and shall not affect the construction of this Agreement.
9.12. SCHEDULES AND EXHIBITS . Any and all exhibits hereto are hereby
expressly incorporated by reference as though fully set forth at that point
verbatim. All terms and provisions as defined or set forth in Article 1 and in
any Schedule are hereby incorporated into and made a part of this Agreement.
Each reference in this Agreement and the Schedule hereto to any information or
definitions contained in Article 1 or the Schedule shall mean and refer to the
information or definitions as set forth in Article 1 and the Schedule unless the
context specifically requires otherwise. Any terms used in Article 1 and in the
Schedule which are not defined shall have the meanings ascribed to such terms,
as of the date of this Agreement, by the Uniform Commercial Code as enacted in
the State of Arizona to the extent the same are defined therein.
9.13. FURTHER INSTRUMENTS . Borrower and Guarantors shall from time to time
execute and deliver, and shall cause each of Borrower's subsidiaries to execute
and deliver, all such amendments, supplements and other modifications hereto and
to the other Loan Documents and all such financing statements or continuation
statements, instruments of further assurance and any other instruments, and
shall take such other actions, as Lender reasonably requests and deems necessary
or advisable in furtherance of the agreements contained herein.
9.14. GOVERNING LAW . THIS AGREEMENT HAS BEEN EXECUTED AND DELIVERED BY
BORROWER AND GUARANTOR AND ACCEPTED BY LENDER IN MARICOPA COUNTY, ARIZONA AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
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WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) OF
THE STATE OF ARIZONA.
9.15. JURISDICTION AND VENUE . TO INDUCE THE LENDER TO ENTER INTO THIS
AGREEMENT, BORROWER, GUARANTORS AND LENDER IRREVOCABLY AGREE THAT, SUBJECT TO
THE LENDER'S ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT,
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR
THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE COUNTY OF
MARICOPA, STATE OF ARIZONA. BORROWER, GUARANTORS AND LENDER HEREBY CONSENT AND
SUBMIT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN
SAID COUNTY AND STATE AND WAIVE PERSONAL SERVICE OF ANY AND ALL PROCESS UPON
BORROWER, AND AGREE THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED
MAIL DIRECTED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE SECTION 9.15 AND
SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT THEREOF.
9.16. WAIVER . EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT AND TO THE
EXTENT NOT PROHIBITED BY APPLICABLE LAW, BORROWER AND EACH GUARANTOR HEREBY
WAIVES (i) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT, PROTEST,
DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, AND ONE OR MORE
EXTENSIONS OR RENEWALS OF ANY OR ALL ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS,
INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY THE LENDER ON
WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS
WHATEVER THE LENDER MAY DO IN THIS REGARD; (ii) ALL RIGHTS TO NOTICE AND HEARING
PRIOR TO THE LENDER'S TAKING POSSESSION OR CONTROL OF, OR THE LENDER'S REPLEVIN,
ATTACHMENT OR LEVY ON OR OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT
BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO EXERCISE ANY OF THE
LENDER'S REMEDIES; AND (iii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT OR
EXEMPTION LAWS.
9.17. WAIVER OF RIGHT TO TRIAL BY JURY . LENDER, BORROWER AND GUARANTORS
HEREBY COVENANT AND AGREE THAT IN ANY SUIT, ACTION OR PROCEEDING IN RESPECT OF
ANY MATTER ARISING OUT OF THIS AGREEMENT, THE DOCUMENTS EXECUTED IN CONNECTION
HEREWITH, ANY WRITTEN AGREEMENT BETWEEN THE PARTIES HERETO, WHETHER NOW EXISTING
OR HEREAFTER ARISING OR IN ANY WAY RELATED TO, CONNECTED WITH OR INCIDENTAL TO
THE DEALINGS OF THE PARTIES HERETO OR TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE, TRIAL SHALL BE TO A
COURT OF COMPETENT JURISDICTION AND NOT TO A JURY; LENDER, BORROWER AND EACH
GUARANTOR HEREBY EXPRESSLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY. ANY
PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
9.18. BINDING ARBITRATION (LIMITED) . ANY CONTROVERSY OR CLAIM ARISING
HEREUNDER, EXCEPT FOR BORROWER'S OR GUARANTOR'S FAILURE OR REFUSAL TO MAKE ANY
PAYMENT DUE TO LENDER PURSUANT TO THE LOAN DOCUMENTS OR A CONTROVERSY OR CLAIM
INVOLVING LENDER'S SECURITY INTEREST IN THE COLLATERAL OR POSSESSION OF THE
COLLATERAL, SHALL BE DETERMINED IN ARBITRATION UNDER THE COMMERCIAL ARBITRATION
RULES OF THE AMERICAN ARBITRATION ASSOCIATION IN MARICOPA COUNTY, ARIZONA.
LENDER, BORROWER AND GUARANTOR SHALL BE BOUND BY ANY ARBITRATION AWARD AND AGREE
THAT JUDGMENT UPON THE AWARD RENDERED MAY BE ENTERED IN ANY COURT HAVING
JURISDICTION THEREOF FOR THE PURPOSE OF ENTERING AND FORCING ANY SUCH AWARD.
9.19. ADVICE OF COUNSEL . BORROWER AND EACH GUARANTOR ACKNOWLEDGES THAT THEY
HAVE BEEN REPRESENTED AND ADVISED BY INDEPENDENT LEGAL COUNSEL WITH RESPECT TO
THE NEGOTIATION, EXECUTION AND ACCEPTANCE OF THIS AGREEMENT AND THE TRANSACTION
GOVERNED BY THIS AGREEMENT AND SPECIFICALLY WITH RESPECT TO THE PROVISIONS
CONTAINED IN SECTIONS 8.3, 9.14, 9.15, 9.16, 9.17, 9.18 and 9.20 HEREOF AND HAS
RELIED UPON THE ADVICE OF ITS INDEPENDENT LEGAL COUNSEL IN AGREEING TO THE TERMS
AND CONDITIONS HEREIN AND IN EXECUTING AND DELIVERING THIS AGREEMENT, AND THAT
THEY HAVE FREELY AND VOLUNTARILY ENTERED INTO THIS AGREEMENT AS THE PRODUCT OF
ARMS' LENGTH NEGOTIATIONS.
9.20. TIME OF ESSENCE Time is of the essence for the performance the
obligations set forth in this Agreement and the Loan Documents.
-30-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first set forth above.
BORROWER:
The Thaxton Group, Inc.
By:
James D. Thaxton, President (Date)
Taxpayer Identification No.: 57-0669498
Thaxton Insurance Group, Inc.
By:
James D. Thaxton, President (Date)
Tax Payer Identification No.: 57-0926039
GUARANTOR (Validity):
James D. Thaxton
###-##-####
Social Security No.
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By:
Cash Rohrbough, Vice President (Date)
Tax Payer Identification No.: 94-1278569
-31-
<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
REQUEST FOR ADVANCE FORM
(IN THE FORM AS ATTACHED HERETO)
EXHIBIT "A" - Page 1
<PAGE>
SAMPLE FINANCING STATEMENT
To be filed with the Secretary of State
of the State of
FINANCING STATEMENT
This Financing Statement is presented to a Filing Officer for filing
pursuant to the Uniform Commercial Code.
1. The name and address of the Debtor ("Debtor") is:
Taxpayer Identification
Number:
2. The name and address of the Secured Party ("Secured Party") is:
FINOVA Capital Corporation
1850 N. Central Avenue
Phoenix, Arizona 85077
Attn: Vice President - Law Department
3. Debtor hereby grants a security interest to Secured Party in,
and this Financing Statement covers, the following types of
collateral whether now owned or hereafter acquired and wherever
located ("Collateral"):
A. All Receivables and all accounts, chattel paper,
instruments, contract rights and general intangibles, all of
Debtor's right, remedies, security, liens, guaranties, or other
contracts of suretyship with respect thereto, all deposits or
other security or support for the obligation of any Account
Debtor thereunder and credit and other insurance acquired by
Account Debtor or the Debtor in connection therewith.;
B. All furniture, equipment, machinery, fixtures and
general intangibles, including but not limited to customer
lists and records, tax refunds and insurance premium refunds.
C. All Inventory, new or used, including, but not limited
to parts and accessories;
D. All bank accounts of Debtor;
E. All monies, securities and property, now or hereafter
held, received by, or entrusted to, in the possession or under
the control of Lender or a bailee of Lender;
F. All right, title and interest of the Debtor in and to
the Receivables, participation agreements, participation
certificates, or other instruments or agreements which evidence
the Receivables;
G. All right, title and interest of the Debtor in and to
all Consumer Notes, Consumer Mortgages, deeds of trust,
security agreements, chattel mortgages, assignments of rent and
other security instruments whether now or hereafter owned,
acquired or held by the Debtor which secure (or constitute
collateral for any note, instrument or agreement securing) any
of the Consumer Notes or other instruments or agreements which
evidence any of the Receivables;
EXHIBIT "B" - Page 1
<PAGE>
H. All right, title and interest of the Debtor in and to
all Financing Statements perfecting the security interest of
any of the foregoing;
I. All right, title and interest of the Debtor in and to
all Guaranties and other instruments by which the persons or
entities executing the same guarantee, among other things, the
payment or performance of the Receivables;
J. All right, title and interest of the Debtor in and to
all title insurance policies, title insurance binders,
commitments or reports insuring or relating to the foregoing;
K. All right, title and interest of the Debtor in and to
all surveys, bonds, hazard and liability insurance policies,
participation agreements and any other agreement, instrument or
document pertaining to, affecting, obtained by the Debtor in
connection with, or arising out of, the Receivables;
L. All right, title and interest of the Debtor in and to
all commitments and other agreements to purchase any
Receivables;
M. All right, title and interest of the Debtor in and to
all collections on, and proceeds of or from, any and all of the
foregoing (hereafter collectively called "Collections");
N. All files, surveys, certificates, correspondence,
appraisals, computer programs, tapes, discs, cards, accounting
records, and other records, information, and data of the Debtor
relating to the Receivables (including all information, data,
programs, tapes, discs and cards necessary to administer and
service such Receivables);
O. All contract rights, accounts, rights to payment of
money, refunds, including tax, premium and commission refunds,
and general intangibles, relating to such documents and
contracts described in 3.1 above and as to all such Collateral
described in section 3.1 including this subparagraph J. whether
now existing or hereafter at any time acquired or arising;
Consumer Loans: The mortgage loans made to consumers who are customers
of the Debtor, evidenced by a promissory note or other similar
instrument evidencing indebtedness (the "Consumer Note") and made
payable to the Debtor and secured by a Consumer Mortgage.
Consumer Mortgage: A mortgage or other security deed in land and
interests in real property, structures, improvements, fixtures and
buildings located on or used in connection with real property or rights
and interests in real property which secures a Consumer Loan.
P. All books and records (including, without limitation,
customer lists, credit files, tapes, ledger cards, computer
software and hardware, electronic data processing software,
computer printouts and other computer materials and records) of
Debtor evidencing or containing information regarding any of
the foregoing.
Q. All accessions to, substitutions for and all
replacements, products and proceeds of the foregoing,
including, without limitation, proceeds of insurance policies
(including but not limited to claims paid and premium refunds);
This Financing Statements covers all of the foregoing, whether located
at those locations set forth on Exhibit "A" attached hereto and fully
incorporated herein for all purposes; or elsewhere.
EXHIBIT "B" -Page 2
<PAGE>
SECURED PARTY: DEBTOR:
FINOVA CAPITAL CORPORATION
By:
By:
(Signature) (Signature)
(Printed Name and Title) (Printed Name and Title)
EXHIBIT "B" - Page 3
<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
REQUEST FOR RETURN OF COLLATERAL
To: FINOVA Capital Corporation
13355 Noel Road
Suite 800
Dallas, Texas 75240
From: [Insert Borrower's Name and Address]
By: (Authorized Agent)
Please return the collateral you are holding on the following accounts which
have been paid-out or renewed during the period from to ;
INSTRUCTIONS: Please list accounts in NUMERICAL ORDER and designate the reason
for request (P/O - Paid Out; R - Renewed; L Legal; C/O - Charge-off). Send this
form to FINOVA; a copy shall be returned to you along with collateral requested.
EXHIBIT "C" - Page 1
<PAGE>
<TABLE>
<CAPTION>
- ------------------- --------------------- ------------ --------------------- ----------------------------------------------------
BORROWER LOAN/ACCOUNT DATE OF REASON FOR NAME OF ACCOUNT DEBTOR
BRANCH NUMBER LOAN REQUEST
OFFICE
<S> <C> <C> <C> <C>
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</TABLE>
The Collateral for the above loans and/or accounts is being returned to you.
Date Collateral Requested:
Date Collateral Mailed:
FINOVA Representative Responsible for Return of Collateral:
(Signature) (Date)
FINOVA Managing Account Executive Authorization for Return:
(Signature) (Date)
<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
AVAILABILITY REPORT
(In the form attached hereto)
EXHIBIT "D" - Page 1
<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
AVAILABILITY REPORT
(IN THE FORM ATTACHED HERETO)
SCHEDULE OF RECEIVABLES AND ASSIGNMENT
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assignor hereby assigns, transfers,
sets over, and delivers in pledge to FINOVA CAPITAL CORPORATION, (hereinafter
called the "Assignee"), its successors or assigns, each and every of the
Accounts, Notes, Security Agreements, Conditional Sale Contracts, Lease
Agreements, Chattel Mortgages, Deeds of Trust, Contracts, Drafts, Acceptances,
and other lien instruments, obligations, claims, chooses-in-action and
receivables (hereinafter collectively designated as "Receivables") identified by
account no. through no. , inclusive, made/purchased during the period from
through , inclusive, and totaling $ as evidenced by the individual
notes/instruments and listing of the receivables assigned herein which is
attached hereto with the same force and effect as if each account was
individually listed and set forth hereon in detail, together with all right,
title and interest of the undersigned in and to the same and in and to the
merchandise, equipment and property described in the Receivables or thereto
appertaining, and together with all monies owing or to become due thereon, and
any and all notes, drafts, acceptances, evidences of indebtedness, contracts,
mortgages, deeds of trust, liens, security, collateral, guaranties, rights,
remedies and powers thereto relating or appertaining, and all proceeds of any of
the foregoing, with full right and irrevocable power and authority in said
assignee, and its assigns for sole benefit and use of said assignee and its
assigns, at any and all times to collect, enforce, sue on, sell, transfer,
assign, pledge, compromise and discharge the same, or otherwise deal therewith
as the absolute property of the Assignee and its assigns. The term "Receivables"
wherever used herein shall be deemed to also include any other receivables
assigned to or acquired by Assignee in substitution or replacement of any of the
original receivables or in addition thereto. All capitalized terms used, but not
defined herein, shall have the respective meanings ascribed to such terms in
that certain Loan and Security Agreement by and among FINOVA Capital
Corporation, and assignor dated , 199 (the "Loan Agreement"). Reference is made
to the Loan Agreement for a statement of additional terms, conditions and
provisions with respect to the Receivables.
And for value received, the undersigned hereby represents, covenants,
and warrants to FINOVA Capital Corporation, it successors and assigns, that said
receivables are genuine and in all respects what they purport to be; that the
undersigned has no knowledge of any fact which would impair the validity of any
said receivable; that said receivables are valid and subsisting and that the
undersigned has good right to pledge and transfer the same; that the amounts
owing thereon are not disputed by the Account Debtor; that the payment thereof
is not contingent on the fulfillment of any warranties or conditions past or
future; and that there is now owing by the Account Debtor named in each such
receivable the total amount of unpaid balance as shown above and that the amount
thereof is not subject to any dispute or counterclaims; and that the undersigned
hereby warrants and represents that the Receivables assigned hereunder are
Eligible Receivables as of the date hereof, as defined in the Loan Agreement.
The undersigned further covenants and warrants that no prior transfer or
assignment of any said receivables has been made.
[Borrower's Name]
Date:
By:
Name:
Title:
EXHIBIT "E" - Page 1
<PAGE>
LISTING OF ASSIGNED RECEIVABLES
(ATTACHMENT TO SCHEDULE OF RECEIVABLES AND ASSIGNMENT)
<TABLE>
<CAPTION>
- -------------------- --------------------- ------------------ ------------------ ---------------- ---------------- ----------------
ACCOUNT ADDRESS TELEPHONE RENEWAL(R) TOTAL OF TERM PAYMENT
NAME NUMBER NEW LOAN(N) PAYMENTS
<S> <C> <C> <C> <C> <C> <C>
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</TABLE>
[Borrower's Name]
Date:
By:
Name:
Title:
EXHIBIT "E" - Page 2
<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
CONTRACT AND TITLE EXCEPTION REPORT
Borrower's Name:
Report Date:
<TABLE>
<CAPTION>
------------------------------------------------------------------- -----------------------------------------
*TITLE KEY: CONTRACT KEY:
------------------------------------------------------------------- -----------------------------------------
<S> <C>
S/R (State Registration Receipt) = copy of State Registration Yes = contract is on file with
Receipt attached. FINOVA
------------------------------------------------------------------- -----------------------------------------
Application - copy of State Application and Assigned Title No = contract is not on file with
attached. FINOVA
------------------------------------------------------------------- -----------------------------------------
No - No Title or evidence of Title attached
------------------------------------------------------------------- -----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------- ------------------------------------------ ------------------------ ---------------- ------------- ------------
Contract Date of Proof Of Contract
Account # Account Debtor's Name Balance Contract Title* (Y/N)
<S> <C> <C> <C> <C> <C>
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</TABLE>
EXHIBIT "F" - Page 1
<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
Rediscount Finance
SCHEDULE TO
FIRST AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BORROWER: THE THAXTON GROUP, INC.
THAXTON INSURANCE GROUP, INC.
ADDRESS: 1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
DATE: SEPTEMBER 3, 1997
This Schedule to First Amended and Restated Loan and Security Agreement
(" Schedule") is executed in conjunction with a certain First Amended and
Restated Loan and Security Agreement ("Agreement"), dated of even date herewith
by and between FINOVA Capital Corporation, as Lender, and the above Borrowers.
All references to Section numbers herein refer to Sections in the Agreement.
1.A BORROWERS
The "Borrower(s)" herein shall be defined as follows:
The Thaxton Group, Inc. "TTG" or "Lead Borrower"
Thaxton Insurance Group, Inc. "TIG"
1.18.A. MAXIMUM AMOUNT OF AN ELIGIBLE RECEIVABLE (SECTION 1.18).
The term "Maximum Amount of an Eligible Receivable"
shall mean for each Receivable Category as set forth
below:
CATEGORY ONE (DIRECT LOAN RECEIVABLE) - the sum of
Seven Thousand Five Hundred Dollars ($7,500.00)
remaining due thereon at any date of determination.
-1-
<PAGE>
CATEGORY THREE (VEHICLE RECEIVABLE), CATEGORY FOUR
(CAPTIVE VEHICLE RECEIVABLE) AND CATEGORY SEVEN
(DIRECT LOAN MORTGAGE RECEIVABLE) - the sum of Twenty
Thousand Dollars ($20,000.00) remaining due thereon
at any date of determination.
CATEGORY FIVE (NON-CONSUMER RECEIVABLE) - the sum of
Two Hundred Thousand Dollars ($200,000.00) remaining
due thereon at date of determination.
1.18.B. MAXIMUM TERM OF AN ELIGIBLE RECEIVABLE (SECTION 1.18).
The "Maximum Term of an Eligible Receivable" shall be
for each Receivable Category as set forth below:
CATEGORY ONE (DIRECT LOAN RECEIVABLE), CATEGORY THREE
(VEHICLE RECEIVABLE) AND CATEGORY FOUR (CAPTIVE
VEHICLE RECEIVABLE) - the period of Forty-Eight (48)
months remaining until the due date of such Eligible
Receivable at any date of determination.
CATEGORY TWO (INSURANCE PREMIUM RECEIVABLE) - the
period of Twelve (12) months remaining until the due
date of such Eligible Receivable at any date of
determination.
CATEGORY SEVEN (DIRECT LOAN MORTGAGE RECEIVABLE) -
the period of sixty (60) months remaining until the
due date of such Eligible Receivable at any date of
determination.
1.18.C. RECEIVABLE LIMITATIONS - EXPANDED (SECTION 1.18).
Notwithstanding the provisions of Section 1.18, up to
Ten percent (10%) of the aggregate dollar amount of
Eligible Receivables may be composed of Category One
Receivables (Direct Loan Receivables), Category Three
(Vehicle Receivables), Category Four Receivables
(Captive Vehicle Receivables) and/or Category Seven
Receivables (Direct Loan Mortgage Receivables) which
exceed the Maximum Amount of an Eligible Receivable
and the Maximum Term of an Eligible Receivable
applicable to Category One Receivables (Direct Loan
Receivables), Category Three (Vehicle Receivables),
Category Four Receivables (Captive Vehicle
Receivables) and/ or Category Seven (Direct Loan
Mortgage Receivables), provided said Receivables
satisfy all other requirements of this Section 1.18.
and the balance remaining due on any such Receivable
does not exceed Thirty Thousand Dollars ($30,000.00)
and the term remaining until the due date of such
Receivable does not exceed Sixty (60) months, at any
date of determination.
1.18.D. AGING PROCEDURES AND ELIGIBILITY TEST (SECTION 1.18).
AGING PROCEDURES FOR A CONTRACTUAL AGING FOR THE FOLLOWING RECEIVABLE
CATEGORIES:
CATEGORY ONE (DIRECT LOAN RECEIVABLES) AND CATEGORY SEVEN (DIRECT LOAN MORTGAGE
RECEIVABLES)
1. No payment missed or due = Current.
2. 1 to 30 days past due = "30 day Account".
3. 31 to 60 days past due = "60 day Account".
-2-
<PAGE>
4. 61 to 90 days past due = "90 day Account".
5. 91 or more days past due = "90 + day Account"
CATEGORY TWO (INSURANCE PREMIUM RECEIVABLES)
1. No payment missed or due = Current.
2. 1 to 30 days past due = "30 day NC Account".
(Financing contract not canceled)
3. 31 or more days past due = "30+ day NC Account".
(Financing contract not canceled)
4. 1 to 30 days past due = "30 day Canceled Account".
(Financing contract canceled)
5. 31 to 60 days past due = "60 day Canceled Account".
(Finance contract canceled)
6. 61 or more days past due = "60 + day Canceled Account".
(Finance contract canceled)
For the purposes of the Loan Documents the cancellation of an insurance
receivable shall be immediately effective upon the effective cancellation date
of the associated insurance policy.
CATEGORY THREE (VEHICLE RECEIVABLES) AND CATEGORY FOUR (CAPTIVE VEHICLE
RECEIVABLES)
1. No payment missed or due = Current.
2. 1 to 30 days past due = "30 day Account".
3. 31 to 60 days past due = "60 day Account".
4. 61 or more days past due = "60 + day Account".
CATEGORY FIVE (NON-CONSUMER RECEIVABLES)
1. No payment missed or due = Current.
2. 1 to 30 days past due = "30 day Account".
3. 31 or more days past due = "30 + day Account".
ELIGIBILITY TEST:
The term "Eligibility Test" shall mean the test to determine the eligibility of
a Receivable for the purposes of Section 1.18 hereof, that test, being as
follows for each Receivable Category:
CATEGORY ONE (DIRECT LOAN RECEIVABLES)
(1) No payment due on said Receivable remains unpaid more
than ninety (90) days from the specific date on which
such payment was due pursuant to the terms of said
Receivable;
(2) If the initial advance of said Receivable was greater
than One Thousand Dollars ($1,000.00), the payment of
said Receivable shall be secured by collateral; and
-3-
<PAGE>
(3) If said Receivable is purchased from a third party
wherein the Borrower is or will become obligated to
such third party in conjunction with the purchase of
such Receivable through a "reserve" or other
liability arrangement, all of such third party's
rights in and to the "reserve" or other liability
shall subordinated to Lender in all respects, except
as set forth below, in a form and substance
satisfactory to Lender. This provision shall not
restrict Borrower from making a payment to a third
party for a reserve or other liability arrangement,
or a part thereof, provided such payment is then
contractually due to such third party, pursuant to a
written agreement executed at or prior to the time
the respective Receivable was purchased by Borrower,
and an Event of Default does not then exist.
CATEGORY TWO (INSURANCE PREMIUM RECEIVABLES)
(1) No payment due on said Receivable remains unpaid more
than (i) thirty (30) days for Category Two
Receivables that the contractual obligation
evidencing such Receivable has not been canceled
according to the terms of such Receivable and (ii)
sixty (60) days Category Two Receivables that the
contractual obligation evidencing such Receivable has
been canceled according to the terms of such
Receivable, from the specific date on which such
payment was due pursuant to the terms of said
Receivable.
(2) The insurance company issuing the insurance policy of
which said Receivable evidences the financing of the
payment of the premiums with respect to such
insurance policy meets one of the following criteria:
(i) rated "C+" or better pursuant to the current
edition of "Best's Key Rating Guide -
Property and Casualty" as published by the
A.M. Best Company ("A.M. Best"); or
(ii) a member of a state reinsurance facility or
shared pool.
(3) No more than twenty percent (20%) of the aggregate
outstanding balance of all Category Two Receivables
can evidence the financing of the payment of premiums
for insurance policies for any one insurance company
is not one of the following:
(i) rated "A-" or better by A.M. Best; or
(ii) a member of a state insurance facility or
shared pool.
CATEGORY THREE (VEHICLE RECEIVABLES) AND FOUR (CAPTIVE VEHICLE RECEIVABLES)
(1) No payment due on said Receivable remains unpaid more
than sixty (60) days from the specific date on which
such payment was due pursuant to the terms of said
Receivable.
(2) If said Receivable is purchased from a third party
wherein the Borrower is or will become obligated to
such third party in conjunction with the purchase of
such Receivable through a "reserve" or other
liability arrangement, all of such third party's
rights in and to the "reserve" or other liability
shall subordinated to Lender in all respects, except
as set forth below, in a form and substance
satisfactory to Lender. This provision shall not
restrict Borrower from making a payment or payments
to a third party for a reserve or other liability
arrangement, or a part thereof, provided such payment
is then contractually due to such third party,
pursuant to a written agreement executed at or prior
to the time the respective Receivable was purchased
by Borrower, and an Event of Default does not then
exist.
CATEGORY FIVE RECEIVABLES (NON-CONSUMER RECEIVABLES)
No payment due on said Receivable remains unpaid more
than thirty (30) days from the specific date on which
such payment was due pursuant to the terms of said
Receivable.
A CONDITION OF THE INITIAL ADVANCE PURSUANT TO
TRANCHE "C" IS THAT LENDER HAS GIVEN PRIOR WRITTEN
APPROVAL OF THE MANAGEMENT WRITTEN POLICES AND
PROCEDURES AND CREDIT GRANTING GUIDELINES FOR
CATEGORY FIVE RECEIVABLES.
-4-
<PAGE>
CATEGORY SIX RECEIVABLES (MORTGAGE WAREHOUSE RECEIVABLES)
Such Receivable shall only be eligible hereunder before the
sixty-first (61st) day after the origination date of such
Receivable.
CATEGORY SEVEN RECEIVABLES (DIRECT LOAN RECEIVABLES)
(1) No payment due on said Receivable remains unpaid more
than ninety (90) days from the specific date on which
such payment was due pursuant to the terms of said
Receivable;
(2) On the date of origination of such Receivable, the
percentage determined by dividing the outstanding
principal balance of such Receivable by the fair
market value of the real estate collateral securing
such Receivable shall not exceed eighty percent
(80%).
1.21. GUARANTOR (WHETHER ONE OR MORE) (SECTION 1.21).
James D. Thaxton (Validity and Support Agreement).
2.1.A. AMOUNT OF REVOLVING CREDIT LINE, AMOUNT OF THE TRANCHE 'A' CREDIT
FACILITY, AMOUNT OF THE TRANCHE 'B' CREDIT FACILITY, AMOUNT OF THE TRANCHE 'C'
CREDIT FACILITY, AMOUNT OF THE TRANCHE 'D' CREDIT FACILITY, AMOUNT OF THE
TRANCHE 'E' CREDIT FACILITY AND AMOUNT OF THE TRANCHE 'F' CREDIT FACILITY
The "Amount of the Revolving Credit Line" is One
Hundred Million Dollars ($100,000,000.00).
The "Amount of the Tranche 'A' Credit Facility" is
One Hundred Million Dollars ($100,000,000.00).
The "Amount of the Tranche 'B' Credit Facility" is
Ten Million Dollars ($10,000,000.00).
The "Amount of the Tranche 'C' Credit Facility" is
Five Million Dollars ($5,000,000.00).
The "Amount of the Tranche 'D' Credit Facility" is
Ten Million Dollars ($10,000,000.00).
The "Amount of the Tranche 'E' Credit Facility" is
Seven Million Dollars ($7,000,000.00).
The "Amount of the Tranche 'F' Credit Facility" is
Twenty Five Million ($25,000,000.00).
2.1.B. AVAILABILITY ON ELIGIBLE RECEIVABLES (SECTION 2.1):
1. The "Availability on Tranche 'A' and Tranche
'B' Eligible Receivables" shall be the sum
of the following:
(1) with respect to the Tranche "A"
Credit Facility, an amount equal to
the sum of (a) eighty-five percent
(85%) of the aggregate unmatured and
unpaid amount due to Borrower from
the Account Debtor named thereon,
excluding all unearned finance
charges, Bulk Purchase Reserves and
Dealer Discounts pursuant to the
Category One, Category Two, Category
Three and Category Seven Eligible
Receivables plus (b) the lesser of
(1) fifty percent (50%) of the
aggregate unmatured and unpaid
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<PAGE>
amount due to Borrower from the
Account Debtor named thereon,
including all unearned finance
charges and other unearned fees and
charges and Dealer Discounts
pursuant to the Category Four
Eligible Receivables, (2) one
hundred percent (100%) of the
aggregate of the original cost paid
by Borrower's affiliate to acquire
the vehicles that secures such
Receivables and (3) One Million
Dollars ($1,000,000.00).
(ii) with respect to the Tranche "B"
Credit Facility, an amount equal to
the lesser of
(a) one hundred percent (100%) of
the aggregate unmatured and unpaid
amount due to Borrower from the
Account Debtor named thereon,
excluding all unearned finance
charges, Bulk Purchase Reserves and
Dealer Discounts pursuant to the
Category One, Category Two, Category
Three and Category Seven Eligible
Receivables less the amount of the
availability for the Tranche "A"
pursuant to Schedule Section
2.1.B.(i) hereinabove; or
(b) one hundred percent (100%) of
the aggregate unmatured and unpaid
amount due to Borrower from the
Account Debtor named thereon,
including all unearned finance
charges, Bulk Purchase Reserves and
Dealer Discounts pursuant to the
Category One, Category Two, Category
Three and Category Seven Eligible
Receivables multiplied by the CRR
Advance Rate, less the amount of the
availability for the Tranche "A"
pursuant to Schedule Section 2.1.B.
(i) hereinabove.
2. The "Availability on Tranche 'C' Eligible
Receivables" shall the eighty-five percent
(85%) of the unmatured and unpaid amount due
to Borrower from the Account Debtor named
thereon, excluding all unearned finance
charges, all other unearned fees and charges
and Dealer Discounts and Dealer Reserves
pursuant to Category Five Eligible
Receivables.
3. "Availability on Tranche 'D'" shall the
fifty percent (50%) of the aggregate Net
Commission Income billed by Borrower in the
twelve (12) calendar months immediately
preceding any date of determination.
4. "Availability on Tranche 'F' Eligible
Receivables" shall be ninety-five percent
(95%) of the unmatured and unpaid amount due
to Borrower from the Account Debtor named
thereon, excluding all unearned finance
charges and all other unearned fees and
charges pursuant to Category Six Eligible
Receivables.
2.2. STATED INTEREST RATE (SECTION 2.2).
TRANCHE "A" CREDIT FACILITY STATED INTEREST RATE
The "Tranche "A" Credit Facility Stated
Interest Rate" shall be lesser of (i) the Governing
Rate plus One percent (1.00%) per annum; or (ii) the
Maximum Rate.
TRANCHE "B" CREDIT FACILITY STATED INTEREST RATE
The "Tranche "B" Credit Facility Stated
Interest Rate" shall be lesser of (i) the Governing
Rate plus Five percent (5.00%) per annum; or (ii) the
Maximum Rate.
TRANCHE "C" CREDIT FACILITY STATED INTEREST RATE
The "Tranche "C" Credit Facility Stated
Interest Rate" shall be lesser of (i) the Governing
Rate plus One percent (1.00%) per annum; or (ii) the
Maximum Rate.
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<PAGE>
TRANCHE "D" CREDIT FACILITY STATED INTEREST RATE
The "Tranche "D" Credit Facility Stated
Interest Rate" shall be lesser of (i) the Governing
Rate plus Two percent (2.00%) per annum; or (ii) the
Maximum Rate.
TRANCHE "E" CREDIT FACILITY STATED INTEREST RATE
The "Tranche "E" Credit Facility Stated
Interest Rate" shall be lesser of (i) the Governing
Rate plus Five percent (5.00%) per annum; or (ii) the
Maximum Rate.
TRANCHE "F" CREDIT FACILITY STATED INTEREST RATE
The "Tranche "F" Credit Facility Stated
Interest Rate" shall be lesser of (i) the Governing
Rate plus One percent (1.00%) per annum; or (ii) the
Maximum Rate.
2.3. MATURITY DATE (SECTION 2.3.C).
The primary term of this Agreement shall expire on
August 31, 1999. If Borrower desires to extend the
primary term or any term thereafter of this
Agreement, Borrower shall give Lender notice of its
intent to extend the term no earlier than one hundred
and eighty (180) days and no later than one hundred
and fifty (150) days prior to any expiration date of
this Agreement. Upon the receipt by Lender of
Borrower's notice to extend the term of this
Agreement, if Lender desires to renew and extend the
term of this Agreement, Lender shall give Borrower
notice of Lender's intent to extend the term of this
Agreement, within sixty (60) days of Lender's receipt
of Borrower's notice to extend. If Lender does not
give Borrower notice of Lender's intent to extend the
term of this Agreement within the sixty (60) days
period, then it shall be deemed that Lender does not
intend to renew and extend the term of this
Agreement. Notwithstanding the foregoing, the
Borrower's obligation pursuant to this Agreement
shall remain in full force and effect until the
Indebtedness due and owing to Lender has been paid in
full.
2.6. VOLUNTARY PREPAYMENTS (SECTION 2.6).
The amount of "Liquidated Damages" shall be, if
Borrower notifies the Lender of Borrower's intention
to pay the Indebtedness in full and requests a
termination of Borrower security interest in the
Collateral hereunder (i) on or before August 31,
1998, the amount of "Liquidated Damages" shall be the
amount of Eight Hundred Thousand Dollars
($800,000.00), or (ii) if after August 31, 1998, but
on or before February 28, 1999, the amount of
"Liquidated Damages" shall be the amount of Four
Hundred Thousand Dollars ($400,000.00).
2.15 UNUSED CREDIT LINE FEE (SECTION 2.15)
The "Unused Credit Line Fee " shall be an amount equal to (i)
the outstanding balance of the Indebtedness subtracted from
Eighty Million Dollars ($80,000,000.00) multiplied by (ii)
one-eighth percent (0.125%) per annum (0.0104% per month)."
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<PAGE>
3.2. BUSINESS LOCATIONS OF BORROWER (SECTIONS 3.2, 3.6 AND 5.1.N.).
All locations as set forth on a list of locations
attached hereto.
4.4. ANNUAL FINANCIAL STATEMENTS (SECTION 4.4).
Annual audited financial statements to be prepared by
an independent certified public accountant,
satisfactory to Lender.
5.1. BORROWER'S TRADENAMES (WHETHER ONE OR MORE)(SECTION 5.1.B.)
TICO Credit Company
Eagle Premium Finance Company
TICO Premium Finance Company
Carolina Mortgage
6.2.A. MINIMUM TIG DEBT SERVICE COVERAGE (SECTION 6.2.L.)
The Minimum TIG Debt Service Coverage Ratio shall be
1.25 to 1.00, to be determined on a calendar month
basis.
6.2.B. MINIMUM NET COMMISSION INCOME (SECTION 6.2.M.)
The Minimum Net Commission Income shall be Three
Million Five Hundred Thousand Dollars ($3,500,000.00)
for any twelve (12) calendar month period immediately
preceding any date of determination.
6.2.C. MINIMUM MORTGAGE ENTITY DEBT SERVICE COVERAGE (SECTION 6.2.L.)
The Minimum Mortgage Entity Debt Service Coverage
Ratio shall be 1.50 to 1.0., to be determined for
each calendar quarter, beginning with the calendar
quarter ending December 31, 1997.
6.3.A.. LEVERAGE RATIO LIMIT (SECTION 6.3.A).
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<PAGE>
The term "Leverage Ratio Limit" shall mean 10.00 to
1.00 until December 31, 1998 and thereafter shall
mean 7.00 to 1.00.
6.3.B. MINIMUM NET INCOME (SECTION 6.3.B).
The Minimum Net Income shall be One Dollar ($1.00)
for any fiscal year of Borrower.
6.3.C. DISTRIBUTIONS LIMITATION (SECTION 6.3.C).
The Maximum Distributions shall not exceed
twenty-five percent (25%) of Net Income of the fiscal
year of Borrower based upon Borrower's annual audited
financial, provided that regularly scheduled
dividends on preferred stock shall not be a
distribution for the purposes of this negative
covenant.
6.3.D. MINIMUM TANGIBLE NET WORTH PLUS SUBORDINATED DEBT (SECTION 6.3.D.).
The Minimum Tangible Net Worth plus the outstanding
balance of all Subordinated Debt plus the outstanding
balance Tranche "B" shall not be less than Five
Million Dollars ($5,000,000.00) during the term
hereof.
8.1. REIMBURSEMENT OF EXPENSES (SECTION 8.1).
Borrower's shall reimburse Lender for Lender expenses
incurred in Lender's attorneys fees and expenses
incurred in the negotiation, preparation and
execution of this Schedule and the other Loan
Documents executed in conjunction therewith.
9.1. NOTICES (SECTION 9.1).
Lender: FINOVA Capital Corporation
(copy each office below with all notices)
CORPORATE FINANCE OFFICE:
FINOVA Capital Corporation
355 South Grand Avenue, Suite 2400
Los Angeles, CA 90071
Attn: John J. Bonano, Senior Vice President
Telephone: (213) 253-1600
Telecopy No.: (213) 625-0268
CORPORATE OFFICE:
FINOVA Capital Corporation
1850 N. Central Avenue
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<PAGE>
Phoenix, AZ 85077
Attn: Joseph R. D'Amore, Senior Counsel
Telephone: (602) 207-4900
Telecopy No.: (602) 207-5543
REDISCOUNT FINANCE OFFICE:
FINOVA Capital Corporation
13355 Noel Road, Suite 800
Dallas, TX 75240
Attn: Cash Rohrbough
Telephone: (214) 458-5600
Telecopy No.: (214) 458-5650
Borrower: The Thaxton Group, Inc.
Thaxton Insurance Group, Inc.
1524 Pageland Highway
Lancaster, South Carolina 29721
Telephone: (803) 285-4336
Telecopy No.: (803) 286-5770
Guarantor: James D. Thaxton
413 E. Pigg
Pageant, South Carolina 29728
Telephone: (803) 416-5110
Telecopy No.: (803) 286-5770
9.15. AGENT FOR SERVICE OF PROCESS (SECTION 9.15).
James D. Thaxton, whose address is 1524 Pageland Highway,
Lancaster, South Carolina 29721.
(Agent)
IN WITNESS WHEREOF, the parties have executed this Schedule on the day and
year first set forth above.
LENDER:
FINOVA CAPITAL CORPORATION,
a Delaware corporation
By:
Cash Rohrbough, Vice President (Date)
BORROWER:
THE THAXTON GROUP, INC.
a South Carolina corporation
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<PAGE>
By:
James D. Thaxton, President (Date)
THAXTON INSURANCE GROUP, INC.
a South Carolina corporation
By:
James D. Thaxton, President (Date)
GUARANTOR (Validity):
James D. Thaxton
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<PAGE>
FINOVA(R)
FINANCIAL INNOVATORS
REDISCOUNT FINANCE
FOURTH AMENDED AND RESTATED
PROMISSORY NOTE
$100,000,000.00 PHOENIX, ARIZONA SEPTEMBER 3, 1997
FOR VALUE RECEIVED, the undersigned ("MAKER"), hereby unconditionally
promises to pay to the order of FINOVA CAPITAL CORPORATION, a Delaware
corporation ("HOLDER"), at HOLDER's branch address at 13355 Noel Road, Suite
800, Dallas, Texas 75240, or at such other place as HOLDER may designate in
writing, the principal sum of One Hundred Million Dollars ($100,000,000.00) or
so much thereof as shall be advanced or readvanced, with interest thereon at the
Stated Interest Rate calculated on the average daily balance outstanding, as
follows:
1. DEFINITIONS. When used herein, the following terms have the meanings
given in this paragraph:
A. Loan Agreement. The term "Loan Agreement" shall mean that certain
First Amended and Restated Loan and Security Agreement of even date herewith,
entered into by and between FINOVA CAPITAL CORPORATION, as Lender, and MAKER, as
Borrower, and all amendments, substitutions, renewals and extensions thereof.
All terms used herein which are not expressly defined herein shall have the
meanings ascribed to them in the Loan Agreement.
B. Maximum Rate. The term "Maximum Rate" shall mean the highest lawful
rate of interest applicable to this NOTE. In determining the Maximum Rate, due
regard shall be given to all payments, fees, charges, deposits, balances and
agreements which may constitute interest or be deducted from principal when
calculating interest.
2. PAYMENT. The principal and interest of this NOTE are payable as
follows:
A. Accrued but unpaid interest for each calendar month during
the term hereof shall be due and payable monthly, in arrears, on the fifteenth
(15th) day of the immediately succeeding calendar month commencing September 15,
1997. All outstanding principal together with all accrued and unpaid interest
shall be due and payable, if not sooner paid on August 31, 1999. All payments
received hereunder shall be applied as set forth in the Loan Agreement.
B. Notwithstanding the foregoing, principal shall be
immediately due and payable without written notice and demand from Lender in
such amounts so that the outstanding balance hereunder does not, at anytime,
exceed the amount of the Loan as determined pursuant to Section 2.1 of the Loan
Agreement. The amount of such payments shall be determined by HOLDER pursuant to
the terms of the Loan Agreement and based upon the principal balance of this
NOTE then outstanding as determined pursuant to the Loan Agreement and as shown
on the books and records of HOLDER, maintained in accordance with its usual
practice, the entries of which being conclusive evidence of the existence and
amounts as therein recorded.
C. All of the principal hereunder may be prepaid in full at
any time; however, such voluntary prepayments shall be subject to the voluntary
prepayment provisions set forth in Article 2.6 of the Loan Agreement.
3. PRINCIPAL BALANCE. The unpaid principal balance of this NOTE at
any time shall be the total amounts loaned or advanced hereunder by HOLDER, less
the amount of payments or prepayments of principal made hereon by or for the
account of MAKER. It is contemplated that by reason of payments or prepayments
hereon there may be times when no indebtedness is owing hereunder; but
notwithstanding such occurrences, this NOTE shall remain valid and shall be in
force and effect as to loans or advances made pursuant to and under the terms of
this NOTE
<PAGE>
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subsequent to each such occurrence. All loans or advances and all payments or
prepayments made hereunder on account of principal or interest may be evidenced
by HOLDER, or any subsequent holder, maintaining in accordance with its usual
practice an account or accounts evidencing the indebtedness of MAKER resulting
from all loans or advances and all payments or prepayments hereunder from time
to time in the amounts of principal and interest payable and paid from time to
time hereunder, in which event, in any legal action or proceeding in respect of
this NOTE, subject to Section 2.8 of the Loan Agreement, the entries made in
such account or accounts shall be conclusive evidence of the existence and
amounts of the obligations of MAKER therein recorded. In the event that the
unpaid principal amount hereof, at any time and for any reason, exceeds the
maximum amount hereinabove specified, MAKER covenants and agrees to pay the
excess principal amount immediately without notice or demand; such excess
principal amount shall in all respects be deemed to be included among the loans
or advances made pursuant to the other terms of this NOTE and shall bear
interest at the rate hereinabove stated.
4. ADVANCES. This Promissory Note is the "Note" referred to in the
Loan Agreement and the Holder is entitled to all the rights, remedies and
benefits of the Lender thereunder. Reference is hereby made to the Loan
Agreement for the terms and conditions under which this Note is to be made and
to be repaid.
5. DEFAULT, REMEDIES. Upon the occurrence of any one or more of the
Events of Default set forth in the Loan Agreement, at the option of the holder
of this NOTE, the entire unpaid principal balance and accrued and unpaid
interest hereon shall at once become due and payable without notice or demand
and the Holder may foreclose and enforce all liens and security interests
securing this NOTE.
If this NOTE is not paid when due, whether at maturity or by
acceleration, or if it is collected through a bankruptcy, probate, or other
judicial proceeding, whether before or after maturity, MAKER agrees to pay
attorney's fees, together with all actual expenses of collection and
litigation and costs of court incurred by the Holder, whether or not suit is
actually filed or not.
6. WAIVER. MAKER and all other makers, signers, sureties,
guarantors and endorsers of this NOTE waive demand, presentment, notice of
dishonor, notice of intent to demand or accelerate payment hereof, diligence in
the collecting, grace, notice and protest, and agree to one or more extensions
for any period or periods of time and partial payments, before or after
maturity, without prejudice to HOLDER.
7. SECURITY. This NOTE is secured by certain security interests
as set forth in the Loan Agreement.
8. CONTROLLING AGREEMENT. The contracted for rate of interest of
the Loan without limitation, shall consist of the following: (i) the Stated
Interest Rate, calculated and applied to the principal balance of the Note in
accordance with the provisions of this Note and the Loan Agreement; (ii)
interest after event of default or due date, calculated and applied to the
amounts due under this Note in accordance with the provisions thereof; and (iii)
all Additional Sums (as herein defined), if any. Borrower agrees to pay an
effective contracted for rate of interest which is the sum of the
above-referenced elements.
All fees, charges, goods, things in action or any other sums or
things of value (other than amounts described in the immediately previous
paragraph), paid or payable by Borrower (collectively, the "Additional Sums"),
whether pursuant to this Note, the Loan Agreement or any other documents or
instruments in any way pertaining to this lending transaction, or otherwise with
respect to this lending transaction, that under any applicable law may be deemed
to be interest with respect to this lending transaction, for the purpose of any
applicable law that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower as, and shall
be deemed to be, additional interest and for such purposes only, the agreed upon
and "contracted for rate of interest" of this lending transaction shall be
deemed to be increased by the rate of interest resulting from the inclusion of
the Additional Sums.
It is the intent of the parties to comply with the usury law
("Applicable Usury Law") applicable pursuant to the terms of the preceding
paragraph or such other usury law which is applicable if the law chosen by the
parties is not applicable. Accordingly, it is agreed that notwithstanding any
provisions to the contrary in this NOTE, or in any of the documents securing
payment hereof or otherwise relating hereto, in no event shall this NOTE or such
documents require the payment or permit the collection of interest in excess of
the maximum contract rate permitted by the Applicable Usury Law. In the event
(a) any such excess of interest otherwise would be contracted for, charged or
received from
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<PAGE>
Maker or otherwise in connection with the loan evidenced hereby,
or (b) the maturity of the indebtedness evidenced by this NOTE is accelerated in
whole or in part, or (c) all or part of the principal or interest of this NOTE
shall be prepaid, so that under any of such circumstances the amount of interest
contracted for, shared or received in connection with the loan evidenced hereby,
would exceed the maximum contract rate permitted by the Applicable Usury Law,
then in any such event (1) the provisions of this paragraph shall govern and
control, (2) neither Maker nor any other person or entity now or hereafter
liable for the payment hereof will be obligated to pay the amount of such
interest to the extent that it is in excess of the maximum contract rate
permitted by the Applicable Usury Law, (3) any such excess which may have been
collected shall be either applied as a credit against the then unpaid principal
amount hereof or refunded to Maker, at Holder's option, and (4) the effective
rate of interest will be automatically reduced to the maximum amount of interest
permitted by the Applicable Usury Law. It is further agreed, without limiting
the generality of the foregoing, that to the extent permitted by the Applicable
Usury Law; (x) all calculations of interest which are made for the purpose of
determining whether such rate would exceed the maximum contract rate permitted
by the Applicable Usury Law shall be made by amortizing, prorating, allocating
and spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received from Maker
or otherwise in connection with such loan; and (y) in the event that the
effective rate of interest on the loan should at any time exceed the maximum
contract rate allowed under the Applicable Usury Law, such excess interest that
would otherwise have been collected had there been no ceiling imposed by the
Applicable Usury Law shall be paid to Holder from time to time, if and when the
effective interest rate on the loan otherwise falls below the maximum amount
permitted by the Applicable Usury Law, to the extent that interest paid to the
date of calculation does not exceed the maximum contract rate permitted by the
Applicable Usury Law, until the entire amount of interest which would have
otherwise been collected had there been no ceiling imposed by the Applicable
Usury Law has been paid in full. Maker further agrees that should the maximum
contract rate permitted by the Applicable Usury Law be increased at any time
hereafter because of a change in the law, then to the extent not prohibited by
the Applicable Usury Law, such increases shall apply to all indebtedness
evidenced hereby regardless of when incurred; but, again to the extent not
prohibited by the Applicable Usury Law, should the maximum contract rate
permitted by the Applicable Usury Law be decreased because of a change in the
law, such decreases shall not apply to the indebtedness evidenced hereby
regardless of when incurred.
9. APPLICABLE LAW. This NOTE shall be construed in accordance with
the laws of the State of Arizona and the laws of the United States applicable to
transactions in the State of Arizona.
10. NO WAIVER. No delay on the part of the HOLDER in the exercise of
any power or right under this NOTE, or under the LOAN AGREEMENT or any other
instrument executed in connection herewith, shall operate as a waiver thereof,
nor shall a single or partial exercise of any power or right preclude other or
further exercise thereof or exercise of any other power or right. Enforcement by
HOLDER of any security for the payment hereof shall not constitute any election
by it of remedies so as to preclude the exercise of any other remedy available
to it.
11. SUCCESSORS, ASSIGNS. The term "HOLDER" shall include all of
HOLDER's successors and assigns to whom the benefits of this NOTE shall inure.
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<PAGE>
12. RENEWAL AND EXTENSION. This Fourth Amended and Restated Promissory
Note is executed in conjunction with that certain First Amended and Restated
Loan and Security, dated of even date herewith, by and between HOLDER, MAKER and
Guarantors. This Fourth Amended and Restated Promissory Note is renewal and
extension of and not an extinguishment of that Promissory Note, dated October
28, 1993, that certain Second Amended and Restated Promissory Note, dated March
27, 1995, and that certain Third Amended and Restated Promissory Note, dated
July 29, 1996, executed by MAKER in favor of HOLDER. This Fourth Amended and
Restated Promissory Note is secured by liens granted to HOLDER on certain
collateral and such obligations and liens, mortgages, deeds of trust or security
interests are not extinguished by this Fourth Amended and Restated Promissory
Note but are hereby renewed and extended.
MAKER:
THE THAXTON GROUP, INC.,
A SOUTH CAROLINA
CORPORATION
BY:
JAMES D. THAXTON, PRESIDENT
THAXTON INSURANCE GROUP, INC.,
A SOUTH CAROLINA
CORPORATION
BY:
JAMES D. THAXTON, PRESIDENT
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<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
The Thaxton Group, Inc.
We consent to the use of our report dated March 14, 1997 related to the audit of
the consolidated balance sheets of The Thaxton Group, Inc. as of December 31,
1995 and 1996 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1996, included herein and to the references to our firm under the
headings "Experts" and "Selected Consolidated Financial Data" in the Form S-4.
KPMG Peat Marwick LLP
Greenville, South Carolina
September 3, 1997
EXHIBIT 23.2
The Board of Directors
Thaxton Insurance Group, Inc.
We consent to incorporation by reference in the registration statement (No.
333-28713) on Form S-4 of Thaxton Insurance Group, Inc. of our report June 21,
1996, relating to the balance sheet of Thaxton Insurance Group, Inc. as of
December 31, 1995, and the related statement of operations, stockholders'
equity, and cash flows for the year then ended.
KPMG PEAT MARWICK LLP
Charlotte, North Carolina
September 3, 1997
<PAGE>
Exhibit 99.1
DEPOSITARY AGREEMENT
THIS DEPOSITARY AGREEMENT, dated as of ____________, 1997, (this
"Agreement"), is by and between THE THAXTON GROUP, INC., a South Carolina
corporation ("Thaxton"), and FIRST UNION NATIONAL BANK, a national banking
association with its main office in Charlotte, North Carolina ("First Union").
BACKGROUND
A. Thaxton has granted subscription rights ("Rights") to the holders of
its common stock, $.01 par value (the "Common Stock"), which entitle the holders
to purchase up to 400,000 shares of Thaxton's Series A Cumulative Convertible
Preferred Stock, $.01 par value (the "Preferred Stock"), by tendering one share
of Common Stock and $10.00 in cash for two shares of the Preferred Stock (the
"Rights Offering"). One Right was granted for and has attached to each
outstanding share of Common Stock.
B. The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the United States Securities and Exchange
Commission (the "Commission") to register the shares of Preferred Stock to be
issued in the Rights Offering. A copy of the Registration Statement, as amended,
including a prospectus dated September __, 1997 (the "Prospectus"), is attached
hereto as Exhibit A.
C. Holders of Rights who wish to participate in the Rights Offering
("Participants") will be required to submit a transmittal letter in the form
attached hereto as Exhibit B (the "Transmittal Letter") to First Union,
accompanied by the appropriate number of shares of Common Stock and payment of
the cash component of the purchase price for the number of shares of Preferred
Stock they desire to purchase.
D. First Union has agreed to accept all cash payments submitted by
Participants and to hold and disburse such funds in accordance with the terms of
this Agreement. First Union also has agreed to accept and process all
certificates representing shares of Common Stock tendered in the Rights
Offering, to issue certificates representing shares of Common Stock not used by
Participants in exercising the Rights, and to issue certificates representing
the shares of Preferred Stock purchased upon exercise of the Rights.
STATEMENT OF AGREEMENT
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
for themselves, their successors and assigns, hereby agree as follows:
1. Definitions. The following terms shall have the following meanings
when used herein:
<PAGE>
"Cash Investment" shall mean a dollar amount equal to one-half
of the number of shares of Preferred Stock to be purchased by any Participant
multiplied by $10.00.
"Cash Investment Instrument" shall mean a check, money order
or similar instrument, made payable to "First Union National Bank, Agent for The
Thaxton Group, Inc." submitted in full payment of any Participant's Cash
Investment.
"Closing Notice" shall mean any writing delivered by Thaxton
to First Union notifying First Union of the effective time of the closing of the
Rights Offering.
"Commission" shall have the meaning set forth in the section
of this Agreement titled "Background."
"Escrow Funds" shall mean the total Cash Investments deposited
with First Union.
"Rights Offering" shall have the meaning set forth in the
section of this Agreement titled "Background."
"Participant" shall have the meaning set forth in the section
of this Agreement titled "Background."
"Preferred Stock" shall have the meaning set forth in the
section of this Agreement titled "Background."
"Pro Rata Basis," with respect to the allocation among
Participants of shares of Preferred Stock in the event Rights are validly
exercised to purchase more than 400,000 shares the Preferred Stock, shall mean
the proportion that the number of shares of Preferred Stock subscribed for by
each Participant bears to the total number of shares of Preferred Stock
subscribed for by all Participants.
"Prospectus" shall have the meaning set forth in the section
of this Agreement titled "Background."
"Registration Statement" shall have the meaning set forth in
the section of this Agreement titled "Background."
"Subscription Accounting" shall mean an accounting of all
subscriptions for shares of Preferred Stock received and accepted by Thaxton as
of the date of such accounting, indicating for each subscription (i) the
Participant's name, social security number and address; (ii) the number of
shares allocated to such Participant; (iii) the date of receipt by First Union
of (A) the Cash Investment Instrument and (B) the shares of Common Stock
tendered by such Participant; (iv) notations of any failure to deliver shares of
Common Stock or nonpayment of the Cash Investment Instrument submitted with such
subscription; (v) any withdrawal of such
2
<PAGE>
subscription by the Participant; and (vi) any rejection of such subscription by
Thaxton, or other termination, for whatever reason, of such subscription.
"Transmittal Letter" shall have the meaning set forth in the section of
this Agreement titled "Background."
2. Appointment of and Acceptance by First Union. Thaxton hereby
appoints First Union to serve as the depositary for the Rights Offering,
pursuant to which First Union shall serve as (i) escrow agent hereunder with
respect to Cash Investments submitted by Participants and (ii) exchange agent
for the purpose of receipt and examination of certificates representing the
shares of Common Stock tendered with any Transmittal Letter, the issuance of
shares of Preferred Stock issuable upon exercise of the Rights, and the
reissuance of shares of Common Stock not used by Participants to exercise the
Rights.
3. Deposits of Escrow Funds.
a. Upon receipt by First Union of any Cash Investment
Instrument, First Union shall deposit the Cash Investment Instrument
into the following escrow account:
First Union National Bank
Charlotte, North Carolina
ABA # _________
Attn: Corporate Trust Department
For: The Thaxton Group, Inc. Escrow Account
Notify: _____________(704) __________
Each such deposit shall be accompanied by a Transmittal
Letter. All funds so deposited shall remain the property of the
Participants according to their respective interests and shall not be
subject to any lien or charge by First Union or by judgment or
creditors' claims against Thaxton until Thaxton shall become entitled
to receive such funds in accordance with Section 4.a hereof.
b. Thaxton understands and agrees that all Cash Investment
Instruments received by First Union hereunder are subject to collection
requirements of presentment and final payment, and that the funds
represented thereby cannot be drawn upon or disbursed until such time
as final payment has been made and is no longer subject to dishonor.
Upon receipt, First Union shall process each Cash Investment Instrument
for collection, and the proceeds thereof shall be held as part of the
Escrow Funds until disbursed in accordance with Section 4 hereof. If,
upon presentment for payment, any Cash Investment Instrument is
dishonored, First Union's sole obligation shall be to notify Thaxton of
such dishonor and to return such Cash Investment Instrument to Thaxton
to take whatever action it deems necessary. Notwithstanding the
foregoing, if for any reason any Cash Investment Instrument is
uncollectible after payment of the funds represented thereby has been
made by First Union, Thaxton shall immediately reimburse First Union
upon receipt from First Union of written notice thereof.
3
<PAGE>
4. Disbursement of Escrow Funds
a. Completion of the Rights Offering. Subject to the
provisions of Section 10 hereof, First Union shall pay to Thaxton the
liquidated value of the Escrow Funds, by certified or bank check or by
wire transfer, no later than five (5) business days following receipt
of the following documents:
(1) A Closing Notice;
(2) Subscription Accounting; and
(3) Such other certificates, notices or other
documents as First Union shall reasonably
require.
Notwithstanding the foregoing, First Union shall not be
obligated to disburse the Escrow Funds to Thaxton if First Union has
grounds to believe that any of the certifications set forth herein or
in the documents described above are incorrect or incomplete.
After the disbursement of Escrow Funds to Thaxton pursuant to
this Section 4.a, this Agreement shall terminate. In the event First
Union receives any additional funds with respect to shares of Preferred
Stock after such termination, First Union shall pay such additional
funds to Thaxton by certified or bank check or wire transfer, no later
than five (5) business days after receipt.
b. Rejection of Any Transmittal Letter or Termination of the
Rights Offering. No later than five (5) business days after receipt by
First Union of written notice (i) from Thaxton that Thaxton intends to
reject a Participant's Transmittal Letter, (ii) from Thaxton that there
will be no closing of the sale of shares of Preferred Stock to
Participants, or (iii) from the Commission or any other federal or
state regulatory authority that a stop order has been issued with
respect to the Registration Statement and has remained in effect for at
least twenty (20) days, First Union shall pay to the applicable
Participant(s), by certified or bank check and by first class mail, the
amount of the Cash Investment paid by each Participant, and shall
return or reissue a certificate representing the shares of Common Stock
submitted by the applicable Participant(s) in order to participate in
the Rights Offering.
c. Expiration of the Rights Offering Period. Notwithstanding
anything to the contrary contained herein, if First Union shall not
have received a Closing Notice on or before __________, 1997, First
Union shall, on the next business day after such date and without
further instruction or direction from Thaxton, return to each
Participant, by certified or bank check and by first class mail, the
Cash Investment made by such Participant.
4
<PAGE>
5. Suspension of Performance or Disbursement of Escrow Funds Into
Court. If, at any time, there shall exist any dispute between Thaxton, First
Union, any Participant or any other person with respect to the holding or
disposition of any portion of the Escrow Funds, issuance or delivery of
certificates representing shares of Common Stock or Preferred Stock, or any
other obligation of First Union hereunder, or if at any time First Union is
unable to determine, to First Union's sole satisfaction, the proper disposition
of any portion of the Escrow Funds or First Union's proper actions with respect
to its obligations hereunder, or if Thaxton has not within thirty (30) days of
the furnishing by First Union of a notice of resignation pursuant to Section 7
hereof, appointed a successor to act hereunder, then First Union may, in its
sole discretion, take either or both or the following actions:
a. suspend the performance of any of its obligations under
this Agreement until such dispute or uncertainty shall be resolved to
the sole satisfaction of First Union or until a successor to First
Union shall have been appointed (as the case may be); and/or
b. petition (by means of an interpleader action or any other
appropriate method) any court of competent jurisdiction in Charlotte,
North Carolina, for instructions with respect to such dispute or
uncertainty, and release to such court all Escrow Funds and
certificates for Common Stock tendered by Participants for holding and
disposition in accordance with the instructions of such court.
First Union shall have no liability to Thaxton, any Participant or any
other person with respect to any such suspension of performance or disbursement
into court, specifically including any liability or claimed liability that may
arise, or be alleged to have arisen, out of or as a result of any delay in the
disbursement of funds held in the Escrow Funds or any delay in or with respect
to any other action required or requested of First Union.
6. Investment of Escrow Funds. First Union shall hold the Escrow Funds
in a noninterest-bearing deposit account.
7. Exchange Agent Services.
a. Prior to or upon delivery of the Closing Notice, Thaxton
shall deposit certificates with First Union representing the shares of
Preferred Stock to be issued to Participants upon exercise of the
Rights.
b. First Union shall provide exchange agent services in
accordance with this Agreement, and in that regard shall:
(1) Receive and log certificates for shares of Common
Stock tendered by Participants.
(2) Examine the certificates for shares of Common
Stock tendered by Participants, Letters of Transmittal and
other accompanying documents for compliance with the Letter of
Transmittal instructions.
5
<PAGE>
(3) In each case where a Letter of Transmittal or
other document has been improperly executed or completed or,
for any other reason, is not in proper form, or some other
irregularity in connection with the delivery of the
certificate exists, First Union will take such action as it
considers best suited to notify the Participant of such
irregularity and to attempt to resolve the same. Determination
of all questions as to the proper completion or execution of a
Letter of Transmittal or as to the proper form for transfer of
the certificates representing Common Stock tendered by
Participants or as to any other irregularity in connection
with the Rights Offering shall be made by First Union,
together with officers or counsel for Thaxton, and any
determination made by Thaxton shall be final and binding.
(4) With respect to shares of Common Stock which are
properly tendered, calculate the number of shares of Preferred
Stock to be issued to each Participant and, as promptly as
practicable subsequent to the closing of the Rights Offering,
issue certificates for such shares to the Participant in
accordance with any Special Payment and Delivery Instruction
properly provided on the Letter of Transmittal and mail via
first class mail.
(5) In the event Rights are validly exercised to
purchase more than 400,000 shares of Preferred Stock, perform
the calculations necessary to (i) allocate the shares of
Preferred Stock on a Pro Rata Basis, (ii) calculate the
portion of Cash Investment that is to be refunded to each
Participant; and (iii) calculate the number of tendered shares
of Common Stock to be reissued to each Participant.
(6) Prepare and mail, prior to January 31, 1998,
Internal Revenue Service ("IRS") Form 1099-B or substitute
Form 1099-B to each Participant in accordance with IRS
regulations. First Union will comply with IRS regulations with
regard to due diligence in obtaining a certified Tax
Identification Number ("TIN") from Participants and will
deduct 31% on payments (i) to Participants who have not
supplied their correct TIN and the required certification and
(ii) to Participants who have been instructed by the IRS to
deduct such tax from their payments. First Union will forward
all withheld funds to the IRS in accordance with all
applicable IRS regulations.
(7) Prepare and file all required magnetic media
information returns with the IRS reflecting all payments made
in connection with the Rights Offering.
(8) Cancel each certificate for Common Stock properly
tendered in the Rights Offering and reissue to Participants
certificates for shares of Common Stock not used to exercise
the Rights or which are not used by the application of the
proration provisions of the Rights Offering if the Rights
Offering is oversubscribed.
6
<PAGE>
8. Resignation and Removal of First Union. First Union may resign from
the performance of its duties hereunder at any time by giving ten (10) days'
prior written notice to Thaxton or may be removed, with or without cause, by
Thaxton, at any time by the giving of ten (10) days' prior written notice to
First Union. Such resignation or removal shall take effect upon the appointment
of a successor as provided below. Upon any such notice of resignation or
removal, Thaxton shall appoint a successor hereunder. Upon the acceptance in
writing of any appointment by a successor, such successor shall thereupon
succeed to and become vested with all the rights, powers, privileges, and duties
of First Union hereunder, and First Union shall be discharged from its duties
and obligations under this Agreement, but shall not be discharged from any
liability for actions taken hereunder prior to such succession. After First
Union's resignation or removal, the provisions of this Agreement shall inure to
its benefit as to any actions taken or omitted to be taken by it under this
Agreement.
7
<PAGE>
9. Liability of First Union. First Union shall have no liability or
obligation with respect to the Escrow Funds except for First Union's willful
misconduct or gross negligence. First Union's sole responsibility shall be for
the safekeeping, investment and disbursement of the Escrow Funds in accordance
with the terms of this Agreement. First Union shall have no implied duties or
obligations and shall not be charged with knowledge or notice of any fact or
circumstance not specifically set forth herein. First Union may rely upon any
instrument, not only as to its due execution, validity and effectiveness, but
also as to the truth and accuracy of any information contained therein which
First Union shall in good faith believe to be genuine, to have been signed or
presented by the person or parties purporting to sign the same and to conform to
the provisions of this Agreement. In no event shall First Union be liable for
incidental, indirect, special, consequential or punitive damages. First Union
shall not be obligated to take any legal action or commence any proceeding in
connection with the Escrow Funds or any account in which Escrow Funds are
deposited or this Agreement, or to appear in, prosecute or defend any such legal
action or proceeding. Without limiting the generality of the foregoing, First
Union shall not be responsible for or required to enforce any of the terms or
conditions of any Transmittal Letter submitted by any Participant or any other
agreement between Thaxton and/or any Participant. First Union shall not be
responsible or liable in any manner for the performance by Thaxton or any
Participant of their respective obligations under the Prospectus or any
Transmittal Letter nor shall First Union be responsible or liable in any manner
for the failure of Thaxton or any third party (including any Participant) to
honor any of the provisions of this Agreement. First Union may consult legal
counsel selected by it in the event of any dispute or question as to the
construction of any of the provisions hereof or of any other agreement or of its
duties hereunder, and shall incur no liability and shall be fully protected from
any liability whatsoever in acting in accordance with the opinion or instruction
of such counsel. Thaxton shall promptly pay, upon demand, the reasonable fees
and expenses of any such counsel.
10. Indemnification of First Union. From and at all times after the
date of this Agreement, Thaxton shall, to the fullest extent permitted by law
and to the extent provided herein, indemnify and hold harmless First Union and
each director, officer, employee, attorney, First Union and affiliate of First
Union (collectively, the "Indemnified Parties") against any and all actions,
claims (whether or not valid), losses, damages, liabilities, costs and expenses
of any kind or nature whatsoever (including without limitations reasonable
attorneys' fees, costs and expenses) incurred by or asserted against any of the
Indemnified Parties from and after the date hereof, whether direct, indirect or
consequential as a result of or arising from or in any way relating to any
claim, demand, suit action or proceeding (including any inquiry or
investigation) by any person, whether threatened or initiated, asserting a claim
for any legal or equitable remedy against any person under any statute or
regulation, including, but not limited to, any federal or state securities laws,
or under any common law or equitable cause or otherwise, arising from or in
connection with the negotiation, preparation, execution, performance or failure
of performance of this Agreement or any transactions contemplated herein,
whether or not any such Indemnified Party is a party to any such action,
proceeding, suit or the target of any such inquiry or investigation; provided,
however, that no Indemnified Party shall have the right to be indemnified
hereunder for any liability finally determined by a court of competent
jurisdiction, subject to no further appeal, to have resulted solely from the
gross negligence or willful
8
<PAGE>
misconduct of such Indemnified Party. If any such action or claim shall be
brought or asserted against any Indemnified Party, such Indemnified Party shall
promptly notify Thaxton in writing, and Thaxton shall assume the defense
thereof, including the employment of counsel and the payment of all expenses.
Such Indemnified Party shall, in its sole discretion, have the right to employ
separate counsel in any such action and to participate in the defense thereof,
and the fees and expenses of such counsel shall be paid by such Indemnified
Party unless (a) Thaxton agrees to pay such fees and expenses, or (b) Thaxton
shall fail to assume the defense of such action or proceeding or shall fail, in
the reasonable discretion of such Indemnified Party, to employ counsel
satisfactory to the Indemnified Party in any such action or proceeding, or (c)
that named parties to any such action or proceeding (including any impleaded
parties) include both Indemnified Party and Thaxton, and Indemnified Party shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
Thaxton. All such fees and expenses payable by Thaxton pursuant to the foregoing
sentence shall be paid from time to time as incurred, both in advance of and
after the final disposition of such action or claim. The obligations of Thaxton
under this Section 9 shall survive any termination of this Agreement and the
resignation or removal of First Union.
11. Compensation to First Union.
a. Fees and Expenses. Thaxton shall compensate First Union for
its services hereunder in accordance with Exhibit C attached hereto
and, in addition, shall reimburse First Union for all of its reasonable
out-of-pocket expenses, including attorneys' fees, travel expenses,
telephone and facsimile transmission costs, postage (including express
mail and overnight delivery charges), copying charges and the like. All
of the compensation and reimbursement obligations shall be payable by
Thaxton upon demand by First Union. The obligations of Thaxton under
this Section 10 shall survive any termination of this Agreement and the
resignation or removal of First Union.
b. Disbursements from Escrow Funds to Pay First Union. First
Union is authorized to and may disburse from time to time, to itself or
to any Indemnified Party from the Escrow Funds (to the extent of
Thaxton's rights thereto), the amount of any compensation and
reimbursement of out-of-pocket expenses due and payable hereunder
(including any amount to which First Union or any Indemnified Party is
entitled to seek indemnification pursuant to Section 9 hereof.) First
Union shall notify Thaxton of any disbursement from the Escrow Funds to
itself or to any Indemnified Party in respect of any compensation or
reimbursement hereunder and shall furnish to Thaxton copies of all
related invoices and other statements.
c. Security and Offset. Thaxton hereby grants to First Union
and the other Indemnified Parties a security interest in and lien upon
the Escrow Funds (to the extent of Thaxton's rights thereto) to secure
all obligations hereunder, and First Union and the Indemnified Parties
shall have the right to offset the amount of any compensation or
reimbursement due any of them hereunder (including any claim for
indemnification pursuant to Section 9 hereof) against the Escrow Funds
(to the extent of Thaxton's rights thereto). If for any reason the
Escrow Funds available to First Union and the Indemnified
9
<PAGE>
Parties pursuant to such security interest or right or offset are
insufficient to cover such compensation and reimbursement, Thaxton
shall promptly pay such amounts to First Union and the Indemnified
Parties upon receipt of an itemized invoice.
12. Representations and Warranties; Legal Opinions. Thaxton makes the
following representations and warranties to First Union:
a. Thaxton is a corporation duly organized, validly existing,
and in good standing under the laws of the State of South Carolina, and
has full power and authority to execute and deliver this Agreement and
to perform its obligations hereunder;
b. This Agreement has been duly approved by all necessary
action of Thaxton, has been executed by duly authorized officers of
Thaxton, and constitutes a valid and binding agreement of Thaxton,
enforceable in accordance with its terms.
c. The execution, delivery and performance by Thaxton of this
Agreement will not violate, conflict with, or cause a default under the
articles of incorporation or bylaws of Thaxton, any applicable law or
regulation, any court order or administrative ruling or decree to which
Thaxton is a party or any of its property is subject, or any agreement,
contract, indenture, or other binding arrangement to which Thaxton is a
party or any of its property is subject. The execution, delivery and
performance of this Agreement is consistent with the terms of the
Rights Offering as described in the Prospectus.
d. No party other than the parties hereto have and the
prospective Participants have, or shall have, any lien, claim or
security interest in the Escrow Funds or any part thereof. No financing
statement under the Uniform Commercial Code is on file in any
jurisdiction claiming a security interest in or describing (whether
specifically or generally) the Escrow Funds or any part thereof.
e. Thaxton hereby acknowledges and agrees that the status of
First Union is that of escrow and exchange agent only for the limited
purposes set forth herein, and hereby represents and covenants that no
representation or implication shall be made that First Union has
investigated the desirability or advisability of investment in the
Preferred Stock or has approved, endorsed or passed upon the merits of
the investment therein and that the name of First Union has not and
shall not be used in any manner in connection with the offer or sale of
the Preferred Stock other than to state that First Union has agreed to
serve as depositary for the limited purposes set forth herein.
f. All of the representations and warranties of Thaxton
contained herein are true and complete as of the date hereof and will
be true and complete at the time of any disbursement from the Escrow
Funds.
13. Consent to Jurisdiction and Venue. In the event that any party
hereto commences a lawsuit or other proceeding relating to or arising from this
Agreement, the parties hereto agree
10
<PAGE>
that the United States District Court for the Western District of North Carolina
shall have the sole and exclusive jurisdiction over any such proceeding. If all
such courts lack federal subject matter jurisdiction, the parties agree that the
Superior Court Division of the General Court of Justice of Mecklenburg County,
North Carolina shall have sole and exclusive jurisdiction. Any of these courts
shall be proper venue for any such lawsuit or judicial proceeding and the
parties hereto waive any objection to such venue. The parties hereto consent to
and agree to submit to the jurisdiction of any of the courts specified herein
and agree to accept service or process to vest personal jurisdiction over them
in any of these courts.
14. Notice. All notices and other communications hereunder shall be in
writing and shall be deemed to have been validly served, given or delivered five
(5) days after deposit in the United States mails, by certified mail with return
receipt requested and postage prepaid, when delivered personally, one (1) day
after delivery to any overnight courier, or when transmitted by facsimile
transmission facilities, and addressed to the party to be notified as follows:
If to Thaxton at: The Thaxton Group, Inc.
1524 Pageland Highway
Lancaster, South Carolina 29721
ATTENTION: Kenneth H. James
Facsimile Number: (803)286-5770
With a Copy to: Barney Stewart III, Esq.
Moore & Van Allen, PLLC
NationsBank Corporate Center
100 North Tryon Street, Floor 47
Charlotte, North Carolina 28202-4003
Facsimile Number: (704)331-1159
If to First Union at: First Union National Bank, as First Union
Corporate Trust -- Reorg. Department, 3C3
1525 W.T. Harris Blvd.
Charlotte, NC 28288-1153
ATTENTION: Myron O. Gray
Facsimile Number: (704) _________
or to such other address as each party may designate for itself by like notice.
15. Amendment or Waiver. This Agreement may be changed, waived,
discharged, or terminated only by a writing signed by Thaxton and First Union.
No delay or omission by any party in exercising any right with respect hereto
shall operate as a waiver. A waiver on any one occasion shall not be construed
as a bar to, or waiver of, any right or remedy on any future occasion.
16. Severability. To the extent any provision of this Agreement is
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
17. Governing Law. This Agreement shall be construed and interpreted in
accordance with the internal laws of the State of North Carolina without giving
effect to the conflict of laws principles thereof.
18. Entire Agreement. This Agreement constitutes the entire agreement
between the parties.
19. Binding Effect. All of the terms of this Agreement, as amended from
time to time, shall be binding upon, inure to the benefit of and be enforceable
by the respective heirs, successors and assigns of Thaxton and First Union.
20. Execution in Counterparts. This Agreement may be executed in two or
more counterparts, which when so executed shall constitute one and the same
agreement.
21. Termination. Upon the first to occur of (i) the disbursement of all
amounts in the Escrow Funds and issuance of all shares of Preferred Stock
issuable upon exercise of the Rights or (ii) deposit of all Escrow Funds into
court pursuant to Section 5 hereof, this Agreement shall terminate and First
Union shall have no further obligation or liability whatsoever with respect to
this Agreement or the Escrow Funds.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal as of the date first above written.
THE THAXTON GROUP, INC.
By:
James D. Thaxton, President
ATTEST:
Kenneth H. James, Secretary
FIRST UNION NATIONAL BANK,
By:
Title:
12
<PAGE>
Exhibit A
Registration Statement
<PAGE>
Exhibit B
Form of Transmittal Letter
<PAGE>
Exhibit C
Fees Payable to First Union
Exhibit 99.2
LETTER OF TRANSMITTAL
OF
THE THAXTON GROUP, INC.
(To accompanying certificate(s) representing shares of
The Thaxton Group, Inc.
Common Stock, $.01 par value (the "Common Stock")
and cash tendered pursuant to the exercise of Rights described in
the Prospectus of The Thaxton Group, Inc. dated ________, 1997)
--------------
TO: FIRST UNION NATIONAL BANK
(the "Depositary")
Corporate Trust Client Services
1525 West W.T. Harris Blvd.
Charlotte, North Carolina 28288-1153
For further information call
(800) 829-8432
--------------
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
Ladies and Gentlemen:
Pursuant to a prospectus, dated as of ___________, 1997 (the
"Prospectus"), of The Thaxton Group, Inc. (the "Company"), the Company is
offering to the holders of its outstanding common stock (the "Common Stock")
rights ("Rights") to purchase up to 400,000 shares of the Company's Series A
Cumulative Convertible Preferred Stock (the "Preferred Stock"). Subject to a
maximum of 400,000 shares issuable upon the exercise of Rights, each Right will
entitle a shareholder, for each share of Common Stock he or she owns, to
purchase two shares of Preferred Stock by tendering to the Depositary one share
of Common Stock and $10 in cash. The undersigned hereby exercises Rights by
surrendering to the Depositary the certificate(s) listed below of Common Stock
(the "Certificates") and tendering an amount in cash, payable to the Depositary,
equal to the number of shares of Common Stock listed below as "Total Number
Shares Being Tendered to Exercise Rights" multiplied by $10 (the "Cash
Investment"), for the purchase of shares of Preferred Stock in accordance with
the Prospectus.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
BOX A:
SURRENDERED CERTIFICATES
CERTIFICATE(S) FOR COMMON STOCK ENCLOSED
(ATTACH A SEPARATE SCHEDULE IF NECESSARY)
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
- ---------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------- ------------------------------------- -------------------------------
<S> <C> <C>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE NUMBER(S) NUMBER OF SHARES
(PLEASE FILL IN EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S))
- ----------------------------------------------------- ------------------------------------- -------------------------------
- ----------------------------------------------------- ------------------------------------- -------------------------------
- ----------------------------------------------------- ------------------------------------- -------------------------------
- ----------------------------------------------------- ------------------------------------- -------------------------------
- ------------------------------------------------------------------------------------------- -------------------------------
TOTAL NUMBER OF SHARES REPRESENTED BY LISTED CERTIFICATES
- ------------------------------------------------------------------------------------------- -------------------------------
- ------------------------------------------------------------------------------------------- -------------------------------
LESS: SHARES REPRESENTED BY LISTED CERTIFICATES NOT BEING TENDERED
- ------------------------------------------------------------------------------------------- -------------------------------
- ------------------------------------------------------------------------------------------- -------------------------------
TOTAL NUMBER OF SHARES BEING TENDERED TO EXERCISE RIGHTS
- ------------------------------------------------------------------------------------------- -------------------------------
NOTE: If the name or address indicated above is not correct, please indicate any necessary changes.
---------------------------------------------------------------------------------------
CASH INVESTMENT $
(number of shares of Common Stock being tendered to exercise Rights multiplied by $10)
---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Except as otherwise requested in special instructions in Boxes B or C,
the undersigned requests that the shares of Preferred Stock to which the
undersigned is entitled be issued in the name(s) of and mailed to the
address(es) set forth in Box A.
The undersigned hereby irrevocably constitutes and appoints the
Depositary the true and lawful attorney-in-fact of the undersigned with respect
to the Certificates with full power of substitution (such power of attorney
being deemed to be an irrevocable power coupled with an interest) to deliver
such Certificates on the account books maintained by the Depositary and to
deliver as the undersigned's agent the shares of Preferred Stock to which the
undersigned is entitled upon the surrender of the Certificates and payment of
the Cash Investment.
All authority herein conferred or agreed to be conferred shall survive
the death or incapacity of the undersigned, and any obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
estates, successors and assigns of the undersigned. The undersigned hereby
represents and warrants that the undersigned has full power and authority to
submit and exchange the Certificates submitted hereby free and clear of all
liens and encumbrances and not subject to any adverse claim, unless otherwise
noted hereon. The undersigned will, upon requests, execute and deliver any
additional documents necessary or desirable to complete the exchange of such
Certificates.
<TABLE>
<CAPTION>
- -------------------------------------------------------- -------------------------------------------------------
BOX B: BOX C:
<S> <C>
SPECIAL ISSUANCE SPECIAL DELIVERY INSTRUCTIONS
INSTRUCTIONS
To be completed ONLY if the shares of To be completed ONLY if the shares of
Preferred Stock should be issued in the name of Preferred Stock to be issued should be sent to
someone other than as set forth in Box A. someone other than as set forth in Box A or to an
address other than as set forth in Box A.
Issue to: Mail or deliver shares of Preferred Stock to:
Name ___________________________________________ Name: ___________________________________________
(PLEASE PRINT) (PLEASE PRINT)
Address: _______________________________________ Address: ________________________________________
________________________________________________ _________________________________________________
________________________________________________ _________________________________________________
(INCLUDE ZIP CODE) (INCLUDE ZIP CODE)
(TAX IDENTIFICATION OR SOCIAL
SECURITY NO.)
(SEE ACCOMPANYING SUBSTITUTE
FORM W-9)
- -------------------------------------------------------- -------------------------------------------------------
</TABLE>
2
<PAGE>
- --------------------------------------------------------------------------------
BOX D
SIGN HERE
(SEE INSTRUCTIONS 4 AND 5)
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURE OF SHAREHOLDER)
Date: , 1997
(Must be signed by the registered holder(s) exactly as name(s)
appear(s) on Certificate(s) or by persons authorized to become registered
holder(s) by Certificates and documents transmitted herewith. If signature is by
trustee, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or other acting in a fiduciary or representative capacity, please
provide the following information. See Instruction 5.)
Name(s) ________________________________________________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone No. (____) _____________________________________________
Tax Identification or Social Security No. ______________________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOX E
MEDALLION SIGNATURE GUARANTEE
(SEE INSTRUCTION 3)
To be completed ONLY if required by Instruction 3.
The undersigned hereby guarantees the signature(s) which appear(s) on
this Letter of Transmittal and the Certificates and any stock power surrendered
pursuant to this Letter of Transmittal.
- --------------------------------------------------------------------------------
(NAME OF FIRM ISSUING GUARANTEE)
- --------------------------------------------------------------------------------
(SIGNATURE OF OFFICER)
- --------------------------------------------------------------------------------
(TITLE OF OFFICER SIGNING THIS GUARANTEE)
- --------------------------------------------------------------------------------
(ADDRESS OF GUARANTEEING FIRM)
- --------------------------------------------------------------------------------
3
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THIS LETTER OF TRANSMITTAL
1. USE OF LETTER OF TRANSMITTAL. This Letter of Transmittal, properly
completed and duly executed, together with the surrendered Certificates, the
Cash Investment, and any documents required by this Letter of Transmittal,
should be sent by mail or delivered by hand to the Depositary, in each case at
the address set forth on the front page of the Letter of Transmittal, in order
to make an effective tender. Until all necessary steps have been taken to tender
the Certificates and the Cash Investment, no shares of Preferred Stock will be
issued. The method of delivery of all instruments documents is at the option and
risk of the undersigned and the delivery will be deemed made only when actually
received. If delivery is by mail, registered mail, with return receipt
requested, properly insured, is recommended. A return envelope is enclosed for
your convenience.
2. SPECIAL ISSUANCE AND SPECIAL DELIVERY INSTRUCTIONS. If the shares of
Preferred Stock are to be issued to someone other than the person(s) named in
Box A of this Letter of Transmittal or mailed to an address or addresses other
than as shown in Box A, Boxes B and/or C on this Letter of Transmittal should be
completed.
3. MEDALLION GUARANTEE OF SIGNATURES. No signature guarantee on this
Letter of Transmittal is required (i) if this Letter of Transmittal is signed by
the registered holder of the Certificates surrendered herewith, unless such
holder has completed Box B or (ii) if such Certificates are surrendered for the
account of an eligible guarantor institution pursuant to Rule 17Ad-15
promulgated under the Securities Exchange Act of 1934, as amended (an "Eligible
Institution"). IN ALL OTHER CASES, ALL SIGNATURES ON THIS LETTER OF TRANSMITTAL
MUST BE GUARANTEED WITH A MEDALLION SIGNATURE GUARANTEE BY AN ELIGIBLE
INSTITUTION IN BOX E. See Instruction 4. Public notaries cannot execute
acceptable guarantees of signatures.
4. SIGNATURES ON THIS LETTER OF TRANSMITTAL, STOCK POWERS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
holder(s) of the Certificates surrendered hereby, the signature(s) in Box D must
correspond with the name(s) as written on the face of the Certificates without
alteration, enlargement or any change whatsoever.
If any of the Certificates surrendered hereby are owned of record by
two or more joint owners, all such owners must sign this Letter of Transmittal.
If any surrendered Certificates are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate copies of this Letter of Transmittal as there are different
registrations of Certificates.
When this Letter of Transmittal is signed in Box D by the registered
holder(s) of Certificates listed and transmitted hereby, no endorsements of
Certificates or separate stock powers are required. If this Letter of
Transmittal is signed by a person other than the registered holder(s) of the
Certificates listed, the Certificate must be endorsed or accompanied by
appropriate stock powers, in either case exactly as the name(s) of the
registered holder(s) appear on the Certificate. Signatures on such Certificates
or stock power must be guaranteed by an Eligible Institution in Box E.
5. SUPPORTING EVIDENCE. In case any Letter of Transmittal, certificate
endorsement, or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee or in any other fiduciary or representative
capacity, or by an officer of a corporation on behalf of the corporation, such
persons should so indicate when signing and there should be submitted with this
Letter of Transmittal, surrendered Certificates and/or stock power documentary
evidence of appointment and authority to act in such capacity (including court
orders and corporate resolutions where necessary), as well as evidence of the
authority of the person making such execution to transfer Certificates. Such
documentary evidence of authority must be in a form satisfactory to the
Depositary.
6. MUTILATED, LOST OR DESTROYED CERTIFICATES. If the Certificates which
a registered holder wants to surrender have been mutilated, lost, stolen or
destroyed, that fact should be indicated on the face of this Letter of
Transmittal which should be delivered to the Depositary after being otherwise
properly completed and duly executed. In such event, the Depositary will forward
additional documentation necessary to be completed in order to effectively
surrender such mutilated, lost, or destroyed Certificates.
4
<PAGE>
7. VALIDITY OF SURRENDER, IRREGULARITIES. All questions as to validity,
form, and legibility of and surrender of Certificates will be determined by the
Depositary after consultation with the Company and such determination shall be
final and binding. The Company reserves the right to waive any irregularities or
defects in the surrender of any Certificates, and its interpretation of the
terms and conditions of this Letter of Transmittal with respect to such
irregularities or defects shall be final and binding. A valid surrender will not
be deemed to have been made until all irregularities have been cured or waived.
8. PARTIAL TENDERS. If fewer than all of the shares of Common Stock
evidenced by any Certificate listed in Box A are to be tendered, fill in the
number of shares that are not to be tendered on the line of Box A entitled
"Less: Shares Represented by Listed Certificates NOT Being Tendered." In such
case, a new certificate for that number of shares of Common Stock will be issued
and sent to the registered holder(s), unless otherwise specified in Box B or Box
C, as soon as practicable.
9. PRORATION. In the event Rights are validly exercised to purchase
more than 400,000 shares of Preferred Stock, the Depositary, as soon as
practicable after the Expiration Date, will return to the tendering shareholder
the amount of his or her excess Cash Investment and a certificate for shares of
Common Stock representing the number of such shares, after application of the
proration provisions described in the Prospectus, not used to purchase shares of
Preferred Stock. Cash refunds by the Depositary will be made to the person(s)
making Cash Investments and share certificates for Common Stock not used to
purchase Preferred Stock will be issued to the registered holder(s) named in Box
A and sent to such holder(s) at the address set forth in Box A.
10. 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 ___________, 1997. 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. Any such notice of withdrawal must specify the name of the
shareholder exercising the Right, 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
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office, branch or agency in the United States. Neither the
Company, the Depositary, nor any other person shall be obligated to give notice
of any defects or irregularities in any notice of withdrawal nor shall 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 under the heading "- Exercise of Rights."
11. GUARANTEED DELIVERY. If a shareholder desires to tender shares of
Common Stock and such shareholder's certificates cannot be delivered to the
Depositary prior to the Expirtaion Date or if time will not permit all required
documents to reach the Depositary prior to the Expiration Date, such shares may
nevertheless be tendered, provided that all of the following conditions are
satisfied:
a. such tender is made by or through an Eligible Instituion;
b. the Depositary receives by hand, mail, telegram or
facsimile transmissions, prior to the Expiration Date, a properly
completed and duly executed Notice of Guaranteed Delivery
substantially in the form of the Depositary has provided, including
(where required) a signature guarantee by an Eligible Institution; and
c. the certificates for all tendered shares, in proper form
for transfer, together with a properly completed and duly executed
Letter of Transmittal (or a manually signed facsimile thereof) and any
required signature guarantees or other documents required by the
Letter of Transmittal, are received by the Depositary within three
trading days after the date of receipt by the Depositary of such
Notice of Guaranteed Delivery.
5
<PAGE>
If any tendered shares of Common Stock are not purchased, or if less
than all shares evidenced by a shareholder's certificates are tendered,
certificates for unpurchased shares will be returned as promptly as practicable
after the expiration or termination of the offering without expense to such
shareholder.
12. INQUIRIES. Questions and requests for assistance with respect to
the surrender of Certificates, Cash Investments and this Letter of Transmittal,
as well as requests for additional copies hereof, may be directed to the
Depositary at the address provided on page 1 hereof, or by telephone at (800)
829-8432.
6
<PAGE>
YOU ARE URGED TO COMPLETE AND RETURN THIS LETTER OF TRANSMITTAL
PROMPTLY.
IMPORTANT TAX INFORMATION
Under current federal income tax law, a person whose Certificates are
surrendered for exchange is required to provide the Depositary (as payor) with
the person's correct taxpayer identification number ("TIN") on Substitute Form
W-9 or otherwise establish a basis for exemption from backup withholding. If
such person is an individual, the TIN is such person's social security number.
If the Depositary is not provided with the correct taxpayer identification
number, the holder may be subject to a $50 penalty imposed by the Internal
Revenue Service. In addition, delivery of such holder's Certificates may be
subject to backup withholding.
Certain holders of Certificates (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirement. Exempt holders of Certificates should
indicate their exempt status on Substitute Form W-9. A foreign individual may
qualify as an exempt recipient by submitting to the Depositary a properly
completed Internal Revenue Service Form W-8 (which the Depositary will provide
upon request) signed under penalty of perjury, attesting to the exemption status
of the holder of Certificates. See the enclosed Substitute Form W-9 for
additional instructions.
If (i) the holder does not furnish the Depositary with a TIN in the
required manner, (ii) the IRS notifies the Depositary the TIN provided is
incorrect, or (iii) the holder is required but fails to certify it is not
subject to backup withholding, backup withholding will apply. If backup
withholding applies, the Depositary is required to withhold 31% of any payment
made to the holder of Certificates or other payee. Backup withholding is not an
additional federal income tax. Rather, the federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments that are made to a holder
with respect to a Certificate, the holder is required to notify the Depositary
of his correct TIN by completing Part 1 of the Substitute Form W-9 below,
certifying that the TIN provided is correct (or that such TIN has been or will
be applied for), that the holder is not subject to backup withholding for
reasons stated therein, and that any other information provided in the
Substitute Form W-9 is correct.
WHAT NUMBER TO GIVE THE DEPOSITARY
The holder is required to give the Depositary the TIN (e.g., social
security number or employer identification number) of the registered holder of
the Certificates. If the Certificates are held in more than one name or are not
held in the name of the actual owner, consult the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9 for
additional details regarding which number to report.
7
