AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1997
REGISTRATION NO. 333-28719
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE THAXTON GROUP, INC.
(Name of registrant as specified in its charter)
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.)
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
(803) 285-4336
(Address and telephone number
of principal executive offices)
KENNETH H. JAMES
CHIEF FINANCIAL OFFICER
THE THAXTON GROUP, INC.
1524 PAGELAND HIGHWAY
LANCASTER, SOUTH CAROLINA 29721
(803) 285-4336
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
BARNEY STEWART III
MOORE & VAN ALLEN, PLLC
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA 28202-4003
Approximate date of proposed sale to the public: To commence as soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection without the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
CROSS REFERENCE SHEET
SHOWING THE LOCATION IN THE PROSPECTUS OF THE
RESPONSES TO THE ITEMS OF PART I OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 ITEM LOCATION IN THE PROSPECTUS
<S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus................... Outside front cover page; facing page
2. Inside Front and Outside Back Cover
Pages of Prospectus...................................... Available Information; Outside back cover page
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information.................................... Prospectus Summary; Risk Factors
4. Terms of the Transaction................................. Terms of the Offering; Material Differences Between the Common
Stock and the Series A Preferred Stock
5. PRO FORMA Financial Information.......................... Not Applicable
6. Material Contracts With the Company Being Acquired....... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters............ Not Applicable
8. Interests of Named Experts and Counsel................... Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification
For Securities Act Liabilities........................... Description of the Capital Stock
10. Information With Respect to S-3 Registrants.............. Not Applicable
11. Incorporation of Certain Information by Reference........ Not Applicable
12. Information With Respect to S-2 or S-3 Registrants....... Not Applicable
13. Incorporation of Certain Information by Reference........ Not Applicable
14. Information With Respect to Registrants Other Than
S-2 or S-3 Registrants................................... Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and Results
of Operations; Business; Market for the Common Stock and
Related Shareholder Matters; Financial Statements
15. Information With Respect to S-3 Companies................ Not Applicable
16. Information With Respect to S-2 or S-3 Companies......... Not Applicable
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies................................ Not Applicable
18. Information if Proxies, Consents or Authorizations Are to
be Solicited............................................. Not Applicable
19. Information if Proxies, Consents or Authorizations Are Not
to be Solicited............................................... Terms of the Offering; Principal and Management
Shareholders; Management; Certain Transactions
</TABLE>
<PAGE>
(A redherring appears on the left-hand side of this page, rotated 90 degrees.
Text follows.)
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.
SUBJECT TO COMPLETION, DATED JULY 30, 1997
326,840 SHARES
THE THAXTON GROUP, INC.
7.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Thaxton Group, Inc. (the "Company") is hereby extending an offer to
persons who owned shares of its common stock (the "Common Stock") at the close
of business on May 15, 1997 (other than James D. Thaxton, Jack W. Robinson
and their affiliates) to exchange up to 25% of their Common Stock for an
equal number of shares of the Company's Series A 7.5% Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock"), provided they concurrently
purchase an equal number of shares of Series A Preferred Stock at a price of $10
per share (the "Offering"). For example, a person who owned 100 shares of Common
Stock on May 15, 1997 may exchange 25 shares of Common Stock for 25 shares of
Series A Preferred Stock, provided that he concurrently purchases 25 shares of
Series A Preferred Stock at a price of $10 per share. The Offering will
terminate on _______, 1997 (the "Termination Date"). See "Terms of the
Offering."
Holders of Series A Preferred Stock may elect to convert their shares
of Series A Preferred Stock into an equal number of shares of the Common Stock
during a five-year period that begins on January 1, 1998. The Company 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."
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
<TABLE>
<CAPTION>
Price to Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share .............................. $10.00 $0 $10.00
Total .................................. $3,268,400 $0 $3,268,400
</TABLE>
(1) The Offering will be conducted exclusively by directors and officers
of the Company who will not receive any commissions or other
compensation 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.
Eligible shareholders may participate in the Offering by completing the
Exchange and Subscription Agreement which accompanies this Prospectus and
forwarding it, along with payment for the shares subscribed and certificates
representing the shares of Common Stock to be surrendered in the exchange, to
the exchange agent at the address specified thereon. Certificates for the
Series A Preferred Stock issued in the Offering will be delivered promptly
after the Termination Date. See "Terms of the Offering."
The date of this Prospectus is ________, 1997.
<PAGE>
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 expects to begin 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.
2
<PAGE>
The primary component of the Company's business strategy 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 Company also may seek to expand its network of
insurance offices, primarily through the acquisition of additional
independent insurance agencies.
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 hereby extending an offer to persons who owned shares of
the Common Stock at the close of business on May 15, 1997 to exchange up to
25% of their Common Stock for an equal number of shares of Series A
Preferred Stock, provided they concurrently purchase an equal number of
shares of Series A Preferred Stock at a price of $10 per share.
<TABLE>
<CAPTION>
<S> <C>
Series A Preferred Stock offered in the Offering.............................. 326,840 shares
Series A Preferred Stock to be outstanding after the Offering (maximum)....... 326,840 shares
Use of proceeds............................................................... Temporary repayment of debt
Termination Date of the Offering.............................................. ________, 1997
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- ------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income $2,707 $3,344 $4,265 $6,371 $9,677 $2,328 $2,644
Provision for credit losses 500 423 481 890 3,593 479 730
Net interest income after provision for 2,207 2,921 3,784 5,481 6,084 1,849 1,914
credit losses
Insurance commissions, net 197 268 376 676 2,145 294 1,313
Other income 4 8 9 30 136 1 228
Operating expenses 1,974 2,218 2,889 4,755 7,396 1,575 2,972
Income tax expense 195 366 464 511 303 214 169
Net income 239 613 816 921 666 355 314
Net income per share 0.08 0.19 0.26 0.29 0.18 0.09 0.08
Common Stock outstanding 3,148 3,148 3,148 3,777 3,932 3,777 3,926
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------------------------ ------------------
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 $52,683 $64,985
Unearned income (2,519) (3,069) (5,037) (10,824) (14,366) (11,599) (14,574)
Allowance for credit losses (352) (370) (424) (783) (2,195) (870) (2,285)
Finance receivables, net 8,052 10,485 16,989 36,293 46,546 40,214 48,126
Total assets 8,966 11,269 18,013 40,692 56,681 42,891 58,557
Total liabilities 7,834 9,341 15,339 33,514 50,410 35,339 52,013
Shareholders' equity 1,132 1,928 2,674 7,178 6,271 7,552 6,544
</TABLE>
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 PURCHASING 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 offering price for the Series A Preferred Stock and the ratio for its
conversion 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 offering price for the
Series A Preferred Stock may not bear a direct relationship to its market value
and no assurance is given that the Series A Preferred Stock can be resold at a
price derived from the offering price or at any other price. It is unlikely that
an active and liquid trading market for the Series A Preferred Stock will
develop during or 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 will exist for the Series A
Preferred Stock and the Common Stock during or 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. 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 UNDERWRITER; NO MINIMUM NUMBER OF SHARES REQUIRED TO BE SOLD.
The Series A Preferred Stock is being offered without involvement of an
underwriter acting on either a firm commitment or best efforts basis.
Consequently, no person has an obligation to purchase any of the shares offered
hereby. See "Terms of the Offering." 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," potential purchasers of the Series A Preferred Stock should note
that no minimum number of shares is required to be sold in the Offering and no
assurance is given that any particular number of shares will be sold.
INCREASES IN INTEREST RATES. While the Company's finance
receivables bear interest at fixed rates, which in some instances are subject to
a legal maximum, the Company generally finances these receivables by incurring
indebtedness with floating interest rates. As a result, the Company's interest
expense generally will increase during periods of rising interest rates while
its interest income remains constant, thereby decreasing net interest rate
spreads
4
<PAGE>
and adversely affecting the Company's profitability. See "Management's
Discussion and Analysis of Financial 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
5
<PAGE>
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 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."
6
<PAGE>
DEPENDENCE ON THE REVOLVING CREDIT FACILITY. The Company depends
primarily on borrowings under a revolving credit facility (the "Revolving Credit
Facility") extended by FINOVA Capital Corporation ("Finova") to finance
purchases of Automobile Sales Contracts, to fund the origination of Direct Loans
and Premium Finance Contracts, and to carry these receivables until they are
repaid and/or funded by the Company's other capital resources. The Company's
ability to obtain a successor facility or similar financing will depend upon,
among other things, the willingness of financial organizations to participate in
funding Non-prime Borrower credit organizations and the Company's financial
condition and results of operations. No assurance can be given that the Company
will continue to comply with the terms of such facilities or to extend the
commitment terms thereof. Although the Company believes that other financing
would be available, no assurance can be given that successor financing will be
available to the Company when needed and on similar terms. The Revolving Credit
Facility is an $80 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 March 31, 1997, borrowings of $41.2 million
were outstanding under the Revolving Credit Facility. The facility expires
on July 31, 1998. 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 debt 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 "Description of Capital Stock -- Preferred Stock." In
addition, the Revolving Credit Facility presently limits the payment of
dividends to 50% of the Company's net income for the year of payment. While
management does not anticipate that this limitation will impair the Company's
ability to pay dividends on the Series A Preferred Stock, it is currently
negotiating with Finova to modify this provision of the Revolving Credit
Facility such that it will restrict only dividends on the Common Stock. See
"Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE. Sales 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."
7
<PAGE>
TERMS OF THE OFFERING
ELIGIBILITY FOR AND TERMS OF THE OFFERING
Persons who beneficially owned shares of the Common Stock on May 15,
1997 ("Eligible Shareholders") are eligible to exchange up to 25% of their
shares of Common Stock for shares of Series A Preferred Stock on a one-for-one
basis, provided they concurrently submit a subscription to purchase an equal
number of shares of Series A Preferred Stock at a price of $10 per share. For
example, a shareholder who owned 100 shares on May 15, 1997 may exchange 25
shares of Common Stock for 25 shares of Series A Preferred Stock, provided he
also purchases 25 shares of Series A Preferred Stock at a price of $10 per
share. The Offering will commence on the date of this Prospectus and continue
through ________, 1997.
METHOD OF EXCHANGE
Eligible Shareholders must deliver the following to the Company if they
wish to participate in the Offering:
1. A completed Exchange and Subscription Agreement in the form
that accompanies this Prospectus.
2. A stock certificate representing the shares of Common Stock
to be surrendered in the exchange. If the certificate
delivered to the Company represents more shares of Common
Stock than are eligible to be exchanged, the Company will
promptly instruct its transfer agent to reissue a new
certificate representing the shares of Common Stock not being
tendered for exchange and forward it to the Eligible
Shareholder.
3. Payment for the shares of Series A Preferred Stock to be
purchased for cash.
These items should be delivered to First Union National Bank 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
PAYMENT METHOD
Prospective purchasers must submit full payment for the shares to be
purchased with a completed Exchange and Subscription Agreement. All checks or
other payment instruments for the purchase price of the shares should be made
payable to "THE THAXTON GROUP, INC." Subscription funds will not be placed in
escrow and, accordingly, will be available for immediate use by the Company as
subscriptions are accepted and shares are sold.
OFFERING PRICE OF THE SERIES A PREFERRED STOCK
The Company is hereby offering to sell to the public up to 163,420
shares of Series A Preferred Stock at a price of $10.00 per share and to issue
up to 163,420 shares of Series A Preferred Stock in exchange for an equal number
of shares of Common Stock. Each share of Series A Preferred Stock issued in the
Offering will be convertible, at the option of the holder, into one share of
Common Stock, subject to adjustment and time limitations. See "Description of
Capital Stock -- Preferred Stock." This price and conversion ratio was
determined by the Board of Directors of the Company without the benefit of
reference to any market 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 set this
price and conversion ratio following consideration of several factors, including
the Company's operating history and financial condition, its prospects following
the intended application of the estimated net 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, this price and
conversion ratio 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.
8
<PAGE>
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
involved in the Offering.
BACKGROUND AND REASONS FOR THE OFFERING
As of the date of this Prospectus, the Company commenced a concurrent
offering of up to 1,000,000 shares of the Series A Preferred Stock to the public
(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 concurrently extend an opportunity to
the Company's existing shareholders to participate in the Offering. The primary
factors considered in reaching this decision were (i) a desire to recognize the
continuing commitment to the Company demonstrated by the holders of its Common
Stock by allowing them to exchange a limited number of common shares for a more
senior security through the exchange component of the Offering and (ii) the
desire to raise additional capital with the sale of additional shares of Series
A Preferred Stock through the cash component of the Offering. Shareholder
approval of the Offering is not required.
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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Management believes that the transactions contemplated by the Offering
will result in a tax-free recapitalization of the Company for federal income tax
purposes. Accordingly, the exchange 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 exchange for
Common Stock will be equal to the shareholder's tax basis in the Common Stock
surrendered in the exchange.
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"). Indeed, such a ruling would likely not be
obtainable since the stated position of the IRS is to only issue favorable
rulings where the exchanging shareholders own in the aggregate less than one
percent of the common stock of the corporation after the recapitalization.
Therefore, although management believes that the Series A Preferred Stock
should not be subject to Section 306 treatment, 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).
9
<PAGE>
DESCRIPTION OF THE 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 or conversion rights or other
subscription 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 CONVERTIBLE PREFERRED STOCK. The Board of Directors has
adopted a resolution designating 1,400,000 shares of preferred stock "Series A
Convertible Preferred Stock." No shares of Series A Preferred Stock have been
issued prior to the date of this Prospectus. Up to 1,000,000 shares of Series A
Preferred Stock may be issued in the Offering. The balance of the Series A
Preferred Stock may be issued in the Exchange Offering. See "Market for the
Common Stock and Related Shareholder Matters - Exchange Offer for Holders of
Common Stock."
10
<PAGE>
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 will be entitled to receive, on a ratable and
pari passu basis with the holders of the Series B Preferred, 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 CONVERTIBLE PREFERRED STOCK. The Board of Directors has
adopted a resolution designating 40,000 shares of preferred stock "Series B
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
third quarter of 1997. See "Certain Transactions -- Issuance of Series B
Preferred Stock."
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 right to dividends on Series B Preferred Stock is
cumulative.
With respect to liquidation preferences, the Series B Preferred
is pari passu with the Series A Preferred and senior to the Common Stock and any
other series of preferred stock. Accordingly, upon the liquidation, dissolution,
or winding up of the Company, holders of the Series B Preferred will be entitled
to receive, on a ratable and pari passu basis with the holders of the Series A
Preferred, 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 and Series B Preferred
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 or
Series B Preferred may elect to exercise the conversion right as to all or a
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 or Series B Preferred 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 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 and 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 and Series B Preferred have no voting rights.
11
<PAGE>
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 will render 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
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.
12
<PAGE>
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.
13
<PAGE>
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 and 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 proceeds to the Company from the sale of up to 163,420 shares
of Series A Preferred Stock offered hereby for cash (at the offering price of
$10.00 per shares and after estimated expenses of the Offering) are estimated to
be $1,576,200. The Company intends to use the net cash proceeds of the Offering
to temporarily repay indebtedness outstanding under the Revolving Credit
Facility. The Revolving Credit Facility is an $80 million credit line which is
used by the Company primarily to purchase Automobile Sales Contracts and to
originate Direct Loans and Premium Finance Contracts. The Revolving Credit
Facility consists of two tranches. The primary tranche provides for advances of
up to $70 million and the secondary tranche provides for advances of up to $10
million during their respective terms, both of which expire on July 31, 1998,
subject to the limitation that advances under each tranche of the Revolving
Credit Facility may not exceed an amount equal to specified percentages of
finance receivables. At March 31, 1997, $41.2 million was outstanding under
the primary tranche and there were no borrowings under the secondary tranche.
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 the secondary
tranche (9.25% and 13.25%, respectively, at March 31, 1997). The Company expects
to continue using the Revolving Credit Facility to fund the growth of its
consumer finance 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 to 50% of the Company's net income for the year of payment. While
management does not anticipate that this limitation will impair the Company's
ability to pay dividends on the Series A Preferred Stock, it is currently
negotiating with Finova to modify this provision of the Revolving Credit
Facility such that it will restrict only dividends on the Common Stock.
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."
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997 on an actual basis and as adjusted to reflect the sale by the Company
of 163,420 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 163,420 shares of Common Stock for an equal number of shares of
Series A Preferred Stock. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL (MAXIMUM)
-------------- --------------
<S> <C> <C>
Revolving Credit Facility $41,200,000 $39,623,800
Short-term notes payable 5,447,386 5,447,386
Shareholders' equity:
Series A Preferred Stock, $.01 par value, no shares authorized,
issued or outstanding, actual; 326,840 shares authorized, issued,
and outstanding, as
adjusted --- 3,268
Common Stock, $.01 par value, 50,000,000 shares authorized,
3,926,382 shares issued and outstanding, actual;
3,762,962 shares issued and outstanding, as adjusted (1) 39,264 37,630
Additional paid-in capital 3,439,980 5,014,546
Deferred stock award (697,500) (697,500)
Retained earnings 3,762,231 3,762,231
--------------
--------------
Total shareholders' equity 6,543,975 8,120,175
--------------
==============
Total capitalization $53,191,361 $53,191,361
============== ==============
</TABLE>
---------------
(1) Does not include 155, 475 shares held by Thaxton Insurance, a wholly-owned
subsidiary of the Company.
15
<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 three months ended March 31, 1996 and
1997, and as of March 31, 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 three months ended March 31,
1997 are not necessarily indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- --------------------
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 $3,202 $3,701
Interest expense..................................... 645 738 1,115 2,653 874 1,057
------ ------ ------ ------ ------- ------ ------
3,842
Net interest income..................................2,707 3,344 4,265 6,371 9,677 2,328 2,644
Provision for credit losses.......................... 500 423 481 890 3,593 479 730
------ ------ ------ ------ ------- ------ ------
Net interest income after provision for credit 2,207 2,921 3,784 5,481 6,084 1,849 1,914
losses
Insurance commissions, net........................... 197 268 376 676 2,145 294 1,313
Other income......................................... 8 30 136 1 227
4 9
Operating expenses...................................1,974 2,218 2,889 4,755 7,396 1,575 2,971
Income tax expense................................... 195 366 464 511 214 169
------ ------ ------ ------ ------- ------ ------
303
Net income..........................................$ 239 $ 613 $ 816 $ 921 $ 666 $ 355 $ 314
====== ======= ======= ======= ======= ======= ========
Net income per share................................$ 0.08 $ 0.19 $ 0.26 $ 0.29 $ 0.18 $ 0.09 $ 0.08
Pro forma net income per share (4).................. -- -- -- -- $ 0.12 -- $ 0.07
Common shares outstanding............................3,148 3,148 3,148 3,777 3,932 3,777 3,926
THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
----------------------------------------------------- -------------------
OPERATING DATA:
Average interest rate earned (1)(2)..................43.52% 43.45% 39.24% 33.78% 30.92% 32.32% 29.83%
Average interest rate paid (2)....................... 9.27 9.10 9.74 11.32 10.21 10.48 9.57
Net interest spread (2)..............................34.25 34.35 29.50 22.46 20.71 21.84 20.26
Net interest margin (2)(3)...........................35.14 35.60 31.11 23.85 22.14 23.49 21.59
Allowance for credit losses as a
percentage of Net Finance
Receivables........................................ 4.17 3.41 2.44 2.05 4.35 2.06 4.39
Allowance for credit losses, dealer reserves
and
discount on bulk purchases as a percentage 5.36 6.24 6.07 4.91 7.81 4.87 7.60
of
Net Finance Receivables...........................
Net charge-offs as a percentage
of average Net Finance
Receivables (2)................................... 5.21 4.31 3.11 3.08 5.06 4.30 5.16
</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 three months ended March 31, 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) The pro forma net income per share data gives effect to the exchange
of 163,420 shares of Common Stock for an equal number of shares of
Series A Preferred Stock.
16
<PAGE>
<TABLE>
<CAPTION>
AT YEAR ENDED DECEMBER 31, AT MARCH 31,
---------------------------------------------------------- 1997
1992 1993 1994 1995 1996 AS ADJUSTED(1)
---------- ----------- ----------- ----------- ----------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables.........$10,923.....$13,924. $22,450 $47,900 $63,107 64,984
Unearned income (2)..........(2,519).....(3,069) (5,037) (10,823) (14,366) (14,573)
Allowance for credit (352) (370) (424) (783) (2,195) (2,285)
losses
Finance receivables, net......8,052......10,485. 16,989 36,294 46,546 48,126
Total assets..................8,966......11,269. 18,013 40,692 56,681 58,557
Total liabilities.............7,834.......9,341. 15,339 33,514 50,410 50,437
Shareholders' equity..........1,132.......1,928. 2,674 7,178 6,271 8,120
</TABLE>
- --------------------
(1) The as adjusted balance sheet information gives effect to the sale of
163,420 shares of Series A Preferred Stock at a price of $10 per share,
the receipt of $1,576,200 in net proceeds, the application of such
proceeds to pay down borrowings and the exchange of 163,420 shares of
Common Stock for an equal number of shares of Series A Preferred Stock,
as if each event had occurred on March 31, 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 $1,675,048 at March 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
17
<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>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------- MARCH 31,
1994 1995 1996 1997
--------------------------------------------- ------------
<S> <C> <C> <C> <C>
AUTOMOBILE SALES CONTRACTS
Total balance at period end, net (1) $8,823,559 $22,788,837 $35,998,537 $37,910,666
Average account balance at period end 2,317 3,436 3,699 3,638
Interest income for the period 1,990,268 5,031,402 8,361,396 2,402,067
Average interest rate earned (2) 31.10% 28.92% 27.98% 25.90 %
Number of accounts at period end 3,808 6,632 9,733 10,420
DIRECT LOANS
Total balance at period end, net (1) $7,107,446 $9,460,798 $9,896,100 $9,469,807
Average account balance at period end 1,175 1,405 1,324 1,253
Interest income for the period 2,305,296 2,248,168 2,941,705 696,549
Average interest rate earned (2) 34.66% 31.60% 30.01% 28.86 %
Number of accounts at period end 6,047 6,736 7,475 6,997
PREMIUM FINANCE CONTRACTS
Total balance at period end, net (1) $1,482,009 $4,827,067 $2,846,451 $3,031,076
Average account balance at period end 272 336 287 314
Interest income for the period 151,402 484,222 737,895 113,495
Average interest rate earned (2) 13.96% 15.35% 17.52% 15.76 %
Number of accounts at period end 5,442 14,378 9,931 9,640
</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
18
<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, THREE MONTHS ENDED MARCH 31,
------------------------------------------- ------------------------------
1994 1995 1996 1996 1997
------------------------------------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Average Net Finance Receivables (1) $13,712,742 $26,710,887 $43,717,445 $39,636,208 $49,626,047
Average notes payable (1) $11,447,977 $23,447,113 $37,611,963 $33,382,553 $42,710,080
Interest and fee income $ 5,380,470 $ 9,024,232 $13,518,563 $ 3,202,385 $ 3,700,561
Interest expense (2) 1,114,829 2,653,614 3,841,683 874,459 1,022,191
--------- --------- --------- ------- ---------
Net interest income $ 4,265,641 $ 6,370,618 $ 9,676,880 $ 2,327,926 $ 2,678,370
=========== ========= ========= ========= =========
Average interest rate earned (1) 39.24% 33.78% 30.92% 32.32% 29.83%
Average interest rate paid (1) 9.74 11.32 10.21 10.48 9.57
----- ----- ------- ----- ----
Net interest rate spread 29.50% 22.46% 20.71% 21.84% 20.26%
===== ===== ===== ===== =====
Net interest margin (3) 31.11% 23.85% 22.14% 23.49% 21.59%
===== ===== ===== ===== =====
</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 expense paid on Thaxton Insurance related debt.
(3) 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 March 31, 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 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
19
<PAGE>
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 THREE MONTHS ENDED MARCH 31, 1997 TO THREE MONTHS
ENDED MARCH 31, 1996. Finance receivables at March 31, 1997 were $64,984,733
versus $52,682,998 at March 31, 1996, a 23% increase. The primary component of
this increase was Automobile Sales Contracts, which increased from $33,438,769,
at March 31, 1996 to $39,585,713 at March 31, 1997, or 18%. The Company opened
two branch offices in 1996 and one in early 1997, which generated significant
additional volume of Automobile Sales Contracts in the first quarter of 1997.
Unearned income at March 31, 1997 was $12,898,136 versus
$10,411,782 at March 31, 1996, a 24% increase which was directly related to the
higher volume of Automobile Sales Contract originations during 1997. The
provision for credit losses established for the three months ended March 31,
1997 was $729,767 versus $478,614 for 1996, and the allowance for credit losses
increased from $870,076 at March 31, 1996 to $2,285,057 at March 31, 1997. The
increase in the provision is 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 2.06% at March 31, 1996 to 4.39% at March 31, 1997.
The growth in finance receivables during the three months ended
March 31, 1997 versus the comparable period in 1996 resulted in higher levels of
interest and fee income. Interest and fee income for the three months ended
March 31, 1997 was $3,700,561, versus $3,202,385 for the three months ended
March 31, 1996, a 16% increase. Interest expense also was higher, increasing to
$1,056,901 for the three months ended March 31, 1997 versus $874,459 for the
three months ended March 31, 1996, a 21% increase. The increase in interest
expense was due to the higher levels of borrowings needed to fund finance
receivable originations.
Net interest income for the three months ended March 31, 1997
increased to $2,643,660 from $2,327,925 for the comparable period of 1996, a 14%
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 14% decrease in net interest spread for the three months ended March
31, 1997 versus 1996.
Insurance commissions net of insurance cost increased to
$1,312,711 for the three months ended March 31, 1997 from $294,059 for 1996, due
to the higher levels of Automobiles 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 which was
acquired in October 1996. Other income increased from $1,300 at March 31, 1996
to $227,502 at March 31, 1997 due to the acquisition of Thaxton Insurance.
Operating expenses increased from $1,576,099 for the three months
ended March 31, 1996 to $2,971,137 for 1997, an 89% increase. The increase in
expenses was due to opening new offices and expenses generated by the insurance
agency operations, in addition to a general increase in costs associated with
administering a significantly larger finance receivable portfolio.
Net income decreased to $314,276 for the three months ended
March 31, 1997 from $354,618 for 1996. The decrease in net income was due to
the higher levels of net interest and insurance income being offset by
higher loss provisions and expenses.
Shareholders' equity decreased from $7,552,333 at March 31, 1996
to $6,543,975 at March 31, 1997, a 13% decrease, as a result of retained
earnings from after tax profits during the period, offset by the purchase of
20
<PAGE>
approximately 140,000 shares of the Company's Common Stock which was owned by
Thaxton Insurance at the time it was acquired by the Company.
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 $31,149,674 at December 31, 1995 to $47,603,138 at December
31, 1996, or 53%. 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 7.3%, to $12,560,126 at December
31, 1996 compared to $11,704,450 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.
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%.
21
<PAGE>
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 Company's 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.
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.
22
<PAGE>
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 Installment 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.
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.
23
<PAGE>
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 THREE MONTHS
AT OR FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ---------------------------
1994 1995 1996 1996 1997
--------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Net Finance Receivables (1) $17,413,014 $38,168,681 $50,447,410 $42,271,216 $52,086,596
Allowance for credit losses $ 424,425 $ 783,200 $ 2,195,000 $ 870,076 $ 2,285,057
Allowance for credit losses as a percentage of
Net Finance Receivables (1) 2.44% 2.05% 4.35% 2.06% 4.39%
Dealer reserves and discounts on bulk purchases $ 631,709 $ 1,091,979 $ 1,747,000 $ 1,187,180 $ 1,675,048
Dealer reserves and discounts on bulk
purchases as a percentage of Automobile
Sales Contracts 6.68% 4.91% 4.64% 4.67% 4.23%
Allowance for credit losses and dealer reserves and
discount on bulk purchases $ 1,056,134 $1,875,179 $ 3,942,000 $ 2,057,256 $ 3,960,105
Allowance for credit losses and dealer reserves and discount
on bulk purchases as a percentage of Net Finance Receivables
6.07% 4.91% 7.81% 4.87% 7.60%
Provision for credit losses $ 481,063 $ 890,337 $ 3,593,399 $ 478,614 $ 729,767
Charge-offs (net of recoveries) $ 426,624 $ 821,806 $ 2,210,441 $ 425,931 $ 639,709
Charge-offs (net of recoveries) as a percentage of average
net finance receivables 3.11% 3.08% 5.06% 4.30% 5.16%
</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 MARCH 31,
----------------------------------------------- -------------------------------
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 $ 304,663 $ 394,144
Automobile Sales Contracts and Direct Loans (1) $ 15,931,005 $ 32,249,635 $45,894,637 $36,229,145 $47,380,472
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% 0.84% 0.83%
</TABLE>
- -----------------
(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts
on bulk purchases.
The following table sets forth certain information concerning
Premium Finance Contracts at the end of the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
-------------------------------------- -------------------------------
1994 1995 1996 1996 1997
-------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Premium finance contracts contractually past due
60 days or more (1) $ 26,418 $ 99,537 $ 100,633 $ 124,150 $ 66,208
Premium finance contracts outstanding (1) $1,482,009 $4,827,067 $2,846,451 $5,390,978 $3,031,076
Premium finance contracts contractually past due 60
days or more as a percentage of premium finance
contracts 1.8% 2.1% 3.5% 2.30% 2.18%
</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 is extended by Finova and consists of
two tranches. The primary tranche provides for advances of up to $70 million and
the secondary tranche provides for advances of up to $10 million during their
respective terms, both of which expire on July 31, 1998, subject to the
limitation that advances under each tranche of the Revolving Credit Facility may
not exceed an amount equal to specified percentages of Net Finance Receivables.
The secondary tranche allows the Company to borrow amounts equal to a higher
percentage of Net Finance Receivables than under the primary tranche. The
Company borrows against the secondary tranche only when it has exhausted
available borrowings under the primary tranche. As of March 31, 1997, $41.2
million was outstanding under the
24
<PAGE>
Revolving Credit Facility, all of which had been advanced under the primary
tranche, and there was $38.8 million available for additional borrowing. 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 plus five percent per annum for the secondary tranche.
The Revolving Credit Facility agreement, amended on July 28, 1996, provides for
a lower fixed percentage over prime than did the previous agreement. 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 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.
25
<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 and recently entered the mortgage
brokerage business.
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 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 dealers' financing
requirements for Non-prime Borrowers, (iv) efficient and effective servicing and
collection
26
<PAGE>
of its finance receivables, and (v) diversification into additional financial
services activities. The principal components of the Company's business and
growth strategy include:
(bullet)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
result in significant opportunities to cross-sell finance products to
insurance customers and insurance products to finance customers. The
Company operates finance offices in a number of markets where Thaxton
Insurance operates insurance offices, 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.
(bullet)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 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.
(bullet)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.
(bullet)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.
(bullet)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 offices, the
Company seeks to identify and recruit individuals with existing
relationships with dealers in targeted areas.
(bullet)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.
27
<PAGE>
(bullet)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.
(bullet)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.
(bullet)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 is presently 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 lending operation during the fourth
quarter of 1996. The Company's insurance offices will be utilized to
take mortgage applications, which will be underwritten for credit
approval at a central location. The Company currently is originating
mortgages at two locations and plans to expand the program to other
locations during 1997. The Company expects to originate both prime and
sub-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 event of default by the borrower. The
Company receives a fee for originating the mortgage. The Company does
not presently service any mortgage loans. In the future, the Company may
fund the loans through a warehouse line of credit, which may involve
interest rate risk, may retain servicing rights, and may hold mortgage
loans in its own portfolio, which would subject the Company to credit
risk. The Company will not engage in any of these activities until
experienced management personnel and computer systems have been put into
place.
AUTOMOBILE SALES CONTRACT PURCHASES
Set forth below is a description of the process that the Company
follows in connection with its purchase of an Automobile Sales Contract from an
independent dealer and the sale of ancillary insurance products.
DEALER SOLICITATION. The Company solicits business from
independent dealers through the business development efforts of the manager of
each finance office and regional supervisors. Dealers in the area are evaluated
by the office manager with a view to ensuring that the Company purchases
Automobile Sales Contracts from reputable dealers carrying an inventory of
quality used automobiles. A relationship with a dealer begins only after the
soundness of the dealer's business is determined by a credit investigation of
the dealer, inquiries with state regulatory agencies and inquiries of local
civic and community organizations. The Company seeks to form relationships with
dealers that have been independently operating for a sufficient period of time
to have established a base of repeat customers with a track record of paying
their obligations under Automobile Sales Contracts despite an otherwise
non-prime credit history. The Company tracks the monthly performance of
borrowers' accounts by dealer, allowing the Company to review and evaluate the
quality of the Automobile Sales Contracts purchased from each dealer. This
procedure allows the Company to terminate business dealings with a dealer
quickly if the Automobile Sales Contracts purchased from that dealer have a
higher than average rate of delinquency.
DEALER AGREEMENTS. The Company enters into a non-exclusive
agreement with each dealer (a "Dealer Agreement") which sets forth the terms and
conditions under which the Company will purchase Automobile Sales
28
<PAGE>
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 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
29
<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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
Under the name TICO Premium Finance Company, 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 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.
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<PAGE>
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 two credit facilities
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 extended by Finova consists of two
tranches. The primary tranche provides for advances of up to $70 million and the
secondary tranche provides for advances of up to $10 million during their
respective terms, both of which expire on July 31, 1998, subject to the
limitation that advances under each tranche of the Revolving Credit Facility may
not exceed an amount equal to specified percentages of Net Finance Receivables.
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 plus five percent per annum for the secondary 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 of the Company's assets other
than its Thaxton Insurance stock 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 shareholders to 50% of net income.
While management does not anticipate that this dividend limitation will impair
the Company's ability to pay dividends on the Series A Preferred Stock, it is
currently negotiating with Finova to modify this provision of the Revolving
Credit Facility such that it will restrict only distributions made with respect
to the Common Stock.
Thaxton Insurance also maintains a credit facility with the
Finova (the "Insurance Facility"). The Insurance Facility is used to provide
operating liquidity and fund agency acquisitions and provides for borrowings of
up to $3 million through March 31, 1998. Funds borrowed under the Insurance
Facility bear interest at a rate equal to a designated prime rate plus three
percent per annum. Amounts outstanding may not exceed specified percentages of
net insurance commissions. The Insurance Facility is secured by substantially
all of the assets of Thaxton Insurance.
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<PAGE>
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 in short-term, subordinated notes
payable to be sold in an intrastate public offering. These notes are expected to
bear interest at rates substantially lower than those available under the
Revolving Credit Facility. This offering is expected to commence during the
latter half of 1997.
COMPETITION
The non-prime consumer credit market for used automobile finance
and personal loans is highly competitive and fragmented. Historically,
commercial banks, savings and loans, credit unions, financing arms of automobile
manufacturers and other lenders providing traditional consumer financing have
not consistently served the non-prime segment of the consumer finance market.
Recently, however, several large bank holding companies have acquired used
automobile finance companies in an effort to recapture some of the customers
their bank subsidiaries have rejected on the basis of their rigid credit scoring
systems. The Company faces increasing competition from a number of companies
providing similar financing to individuals that cannot qualify for traditional
financing. These include a number of well-capitalized public companies which
have only recently entered the business of purchasing Automobile Sales Contracts
and are seeking to rapidly expand their business. Management believes that
currently its primary competitor is TransSouth Financial Corporation, a
financial services company, which operates in most of the markets where the
Company operates. The Company also competes with numerous small, regional
consumer finance companies. Many of these competitors or potential competitors,
including TransSouth Financial Corporation, have significantly greater resources
than the Company and have pre-existing relationships with established networks
of dealers. To the extent that any of such lenders significantly expand their
activities in the markets where the Company operates or plans to operate, the
Company could be materially adversely effected. The basis on which the Company
competes with others in used car financing is primarily the price paid for
Automobile Sales Contracts, which is a function of the amount of the dealer
reserve, and the reliability of service to participating dealers. The basis on
which the Company competes with others in making Direct Loans is the interest
rate charged and customer service.
The size of the Company's average Automobile Sales Contract is
considerably smaller than that of many other companies engaged in purchasing
Automobile Sales Contracts. The Company believes this is due in large part to
the fact that most of the Company's competitors are seeking to do business
primarily with franchised dealers selling late-model, lower mileage used
automobiles for significantly higher prices than the automobiles offered for
sale by the independent dealers with which the Company has relationships, which
tend to be somewhat older, higher mileage vehicles. Because the costs of
servicing and collecting a portfolio of finance receivables increases with the
number of accounts included in the portfolio, Management believes that many
apparent potential competitors will choose not to do business with the type of
dealer targeted by the Company.
The premium finance business, particularly for personal lines of
insurance, also is highly fragmented and competitive. Because interest rates are
highly regulated, competition is primarily on the basis of customer service,
response time, and the required amount of down payment. There are numerous
independent finance companies specializing in premium finance for personal lines
of insurance. In addition, many independent insurance agencies finance premiums
for their customers either directly or through an affiliate. Some bank holding
companies have subsidiaries that finance premiums on insurance sold by other
subsidiaries of the holding company as well as by independent agents.
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<PAGE>
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.
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
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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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MARKET FOR THE COMMON STOCK AND
RELATED SHAREHOLDER MATTERS
MARKET AND DIVIDEND INFORMATION
Due to the relatively small number of shares held by persons who are
not affiliates of the Company, there is no active and liquid trading market for
the Common Stock. The Common Stock trades occasionally in the over-the-counter
market and is quoted in the OTC Bulletin Board Service operated by the NASD. At
March 14, 1997 there were 283 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."
CONCURRENT PUBLIC OFFERING OF THE SERIES A PREFERRED STOCK
On the date of this Prospectus, the Company commenced a public offering
of up to 1,000,000 shares of Series A Preferred Stock (the "Offering"). The
Public Offering is expected to remain open through December 31, 1997. There is
no minimum number of shares that must be sold in the Public Offering.
Accordingly, there can be no assurance given that any or all of the shares
offered therein will be sold. The Company has filed a registration statement on
Form SB-2 to register the shares being offered in the Public Offering. See
"Available Information."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of
March 11, 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......................... 56 Executive Vice President, Chief Operating
Officer and Director
Kenneth H. James......................... 44 Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
C.L. Thaxton, Sr......................... 73 Director
Jack W. Robinson*........................ 66 Director
Perry L. Mungo*.......................... 59 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.
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 Executive Officer 1995 74,513 10,100 ---
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.
38
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth certain information with respect
to the beneficial ownership of the Common Stock at May 30, 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
NUMBER OF SHARES AND COMMON
NAME OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP STOCK OUTSTANDING
- ----------------------------- --------------------------------- -------------------------
<S> <C> <C>
James D. Thaxton 3,148,000(2) 80.2%
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) 3,447,069 87.8
</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.
39
<PAGE>
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 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 third
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
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.
40
<PAGE>
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.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 326,840 shares of Series A Preferred Stock that may be issued or
sold in the Offering and the 1,000,000 shares of Series A Preferred Stock that
may be sold in the Public 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 in either offering
will be subject to the resale limitations of Rule 144 under the Securities Act.
The balance of the 1,326,840 shares will be eligible for sale in the public
market at any time during or after completion of the Offering.
As of the date of this Prospectus, there are 3,925,382 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, 1996 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
42
<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.
43
<PAGE>
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.
44
<PAGE>
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 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.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent auditors' report............................................... F-2
Consolidated balance sheets as of December 31,
1995 and 1996 and March 31, 1997 (unaudited)............................. F-3
Consolidated statements of income for the
years ended December 31, 1994, 1995 and 1996
and the three months ended March 31, 1996 and
1997 (unaudited)......................................................... F-4
Consolidated statements of stockholders' equity
for the years ended December 31, 1994, 1995
and 1996 and the three months ended March 31,
1996 and 1997 (unaudited)................................................ F-5
Consolidated statements of cash flows for the
years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997
(unaudited).............................................................. F-6
Notes to consolidated financial statements................................. F-7
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>
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996 1997
---------------------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Cash $ 1,828,484 $ 421,465 $ 311,494
Finance receivables, net 36,293,502 46,546,087 48,126,492
Premises and equipment, net 706,301 1,947,210 1,955,409
Accounts receivable 266,354 1,269,384 1,364,262
Repossessed automobiles 500,300 1,166,495 1,266,389
Goodwill and other intangible assets 337,307 3,463,814 3,840,729
Other assets 759,258 1,867,112 1,692,519
---------- ------------ ----------
Total assets $40,691,506 $56,681,567 $ 58,557,294
========== ============ ==========
Liabilities and Stockholders' Equity
Accrued interest payable $ 350,793 $ 387,237 $ 390,098
Notes payable 32,503,000 46,345,883 46,647,386
Notes payable to affiliates - 743,621 737,621
Accounts payable 231,122 1,350,306 854,787
Employee savings plan 100,858 1,098,457 1,215,453
Other liabilities 327,843 484,758 2,167,974
---------- ------------ ----------
Total liabilities 33,513,616 50,410,262 52,013,319
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 39,264
Additional paid-in-capital 5,168,561 3,504,027 3,439,980
Deferred stock award (810,000) (720,000) (697,500)
Retained earnings 2,781,557 3,447,956 3,762,231
------------ ------------ ------------
Total stockholders' equity 7,177,890 6,271,305 6,543,975
------------ ------------ ------------
Total liabilities and stockholders' equity $ 40,691,506 $ 56,681,567 $ 58,557,294
============ ============ ============
</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
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------- -------------------------
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 $ 3,202,385 $ 3,700,561
Interest expense 1,114,829 2,653,614 3,841,683 874,459 1,056,901
------------- ------------ ------------ ------------- ----------
Net interest income 4,265,641 6,370,618 9,676,880 2,327,926 2,643,660
Provision for credit losses 481,063 890,337 3,593,399 478,614 729,767
------------- ------------ ------------ ------------- ----------
Net interest income after
provision for credit losses 3,784,578 5,480,281 6,083,481 1,849,312 1,913,893
Other income:
Insurance premiums and commissions, net 375,720 676,766 2,145,423 294,059 1,312,711
Other income 9,061 30,082 136,141 1,300 227,502
------------- ------------ ------------ ------------- ----------
Total other income 384,781 706,848 2,281,564 295,359 1,540,213
Operating expenses:
Compensation and employee
benefits 1,719,612 2,682,129 3,748,303 830,616 1,356,348
Telephone, postage, and supplies 379,691 580,568 800,763 183,527 585,647
Net occupancy 307,839 457,245 739,144 141,455 296,965
Reinsurance claims expense 42,228 310,231 516,194 42,925 115,363
Insurance 103,427 120,979 193,670 47,115 43,311
Collection expense 91,472 135,002 242,985 26,962 29,293
Travel 54,309 98,368 149,389 21,291 36,632
Professional fees 47,569 162,897 175,821 18,867 123,655
Other 142,672 207,675 829,371 263,342 383,923
------------- ------------ ------------ ------------- ----------
Total operating expenses 2,888,819 4,755,094 7,395,640 1,576,100 2,971,137
------------- ------------ ------------ ------------- ----------
Income before income tax 1,280,540 1,432,035 969,405 568,571 482,969
expense
Income tax expense 464,188 510,966 303,006 213,953 168,693
------------- ------------ ------------ ------------- ----------
Net income $ 816,352 $ 921,069 $ 666,399 $ 354,618 $ 314,276
============= ============ ============ ============= ==========
Earnings per share $ 0.26 $ 0.29 $ 0.18 $ 0.09 $ .08
============= ============ ============ ============= ==========
Weighted average shares
outstanding 3,148,000 3,151,448 3,803,620 3,777,023 3,929,381
========= ========= ========= ========= =========
</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
THREE MONTHS ENDED MARCH 31, 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 stock ($.10) - - - - (70,000) (70,000)
Net income - - - - 816,352 816,352
----------- ------------ ------------- ------------------------- ---------------
Balance at December 31, 1994 31,480 700,000 64,720 - 1,877,988 2,674,188
Issued 418,057 shares of common stock in
public offering 4,181 - 3,205,952 - - 3,210,133
Dividends paid on preferred stock ($.025) - - - - (17,500) (17,500)
Conversion of 700,000 shares of preferred
stock to $700,000 of debt - (700,000) - - - (700,000)
Issuance of 100,000 shares as a restricted
stock award 1,000 - 899,000 (900,000) - -
Vesting of 10,000 shares of stock award - - - 90,000 - 90,000
Conversion of $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 2,500 shares of stock award -- -- -- 22,500 -- 22,500
Purchase and retirement of 8,600 shares of
stock (86) -- (92,447) -- -- (92,533)
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 -- -- -- -- 314,276 314,276
----------- ----------- -------------- ----------- ------------- ---------------
Balance at March 31, 1997 $ 39,264 -- $ 3,439,980 $ (697,500) $ 3,762,231 $ 6,543,975
=========== =========== ============== =========== ============= ===============
</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 THREE MONTHS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------------
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 $ 354,618 $ 314,276
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 481,063 890,337 3,593,399 472,382 729,767
Depreciation and amortization 133,040 235,795 444,829 85,563 194,334
Deferred taxes (43,380) (165,968) (21,091) (22,114) (19,400)
Vesting of stock awards - 90,000 90,000 22,500 22,500
Compensatory grant of stock
to employees - - 16,845 - 28,428
(Gain) loss on sale of premises and
equipment 8,000 (3,500) (21,363) - (6,456)
Gain on sale of investment - (11,222) - - -
Increase (decrease) in other assets (51,612) (371,612) (924,896) 260,579 (112,712)
Increase (decrease) in accrued interest 45,857 414,819 65,198 (269,068) 1,419,487
payable and other liabilities ----------- -------------- ------------ ------------- -----------
Net cash provided by operating activities 1,389,320 1,999,718 3,909,320 904,460 2,570,224
----------- -------------- ------------ ------------ -----------
Cash flow from investing activities:
Net increase in finance receivables (6,984,394) (18,750,407) (14,512,179) (4,708,676) (2,310,172)
Capital expenditures for premises and
equipment (204,466) (472,438) (1,187,923) (79,511) (120,141)
Proceeds from sale of premises and
equipment - 3,500 58,061 - 6,456
Proceeds from the sale of investments - 23,222 - - -
Acquisitions, net of acquired cash equivalents - (208,843) - - (459,308)
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) (4,788,187) (2,883,165)
------------ --------------- ------------- ------------- ------------
Cash flows from financing activities:
Proceeds from the issuance of common
stock - 3,210,133 - - -
Repurchase of common stock - - - - (92,533)
Dividends paid (52,500) (17,500) - - -
Net increase in line of credit 5,851,419 16,538,315 8,941,444 1,830,000 162,577
Proceeds from issuance of notes payable 82,672 - 1,567,440 284,291 132,926
Repayments of notes payable - (746,058) (274,589) - -
----------- --------------- ------------- ------------ -----------
Net cash provided by financing activities 5,881,591 18,984,890 10,234,295 2,114,291 202,970
----------- -------------- ------------ ------------ -----------
Net increase (decrease) in cash 82,051 1,579,642 (1,407,019) (1,769,436) (109,971)
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 $ 59,048 $ 311,494
=========== ============== ============ ============ ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,042,900 $2,469,372 $3,805,239 $922,449 $991,228
Income taxes 577,397 834,325 554,651 9,610 25,400
=========== ============== ============ ============ ===========
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 March 31, 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 acquisition has been
accounted for using the as if pooling method whereby 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:
1996 1995
----------- -----------
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
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 $294,000 at December 31, 1995, December 31, 1996 and March 31, 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 March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------------
1995 1996 1997
--------------- ------------------- -----------------
(unaudited)
<S> <C> <C> <C>
Automobile Sales Contracts $ 32,455,654 $ 47,603,138 $ 47,843,848
Direct Loans 10,398,470 12,560,126 11,991,241
Premium Finance Contracts 5,046,110 2,943,337 3,149,644
------------ ------------ ------------
Total finance receivables 47,900,234 63,106,601 64,984,733
Unearned interest (9,325,101) (12,445,781) (12,835,353)
Unearned insurance premiums, net (406,431) (132,733) (62,783)
Bulk purchase discount (416,000) (1,014,000) (890,071)
Dealer hold back (676,000) (773,000) (784,977)
Allowance for credit losses (783,200) (2,195,000) (2,285,057)
------------- ------------- -------------
Finance receivables, net $ 36,293,502 $ 46,546,087 $ 48,126,492
============ ============ ============
</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 $6,865,000 and $890,000, respectively, at
March 31, 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 $32,545,000 and $785,000,
respectively, at March 31, 1997.
At December 31, 1996 and March 31, 1997, there were no
significant concentrations of receivables in any type of property or to one
borrower.
These receivables are pledged as collateral for a line of credit
agreement.
F-10
<PAGE>
Changes in the allowance for credit losses for the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------ ------------------------------
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 34,193 --
Provision for credit losses 481,063 890,337 3,593,399 478,614 729,767
Charge-offs (499,997) (924,620) (2,526,231) (498,754) (688,490)
Recoveries 73,373 102,814 315,790 72,823 48,780
--------- ------- ------------ ------ ------
Net charge-offs (426,624) (821,806) (2,210,441) (425,931) (639,710)
--------- --------- ----------- --------- ---------
Ending balance $ 424,425 $783,200 $ 2,195,000 $ 870,076 $2,285,057
======= ======= ========== ========= ==========
</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>
The majority of the intangibles were acquired by the Company in
connection with its acquisition of Thaxton Insurance.
F-11
<PAGE>
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>
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' asset - 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 March 31, 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. 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
price model with the following assumptions: (1) risk-free interest rate of
6.25%, (2) expected life of 5 years; (3) expected volatility of 10.40%; and (4)
no expected dividends.
Under the Incentive Plan, the Company granted a restricted stock
award of 100,000 shares of common stock to an executive officer of the Company.
The stock award became effective December 29, 1995 ("Vesting Date") with 10,000
shares vesting at that time. The remaining shares become vested at the rate of
10,000 shares per year on the first through the ninth anniversaries of the
Vesting Date only if the executive officer is employed by the Company on the
applicable anniversary date. The Company will record compensation expense over
the vesting period based on the market value at the date of grant.
During 1995 the Board of Directors of the Company also adopted
the Thaxton Group, Inc. Employee Stock Purchase Plan (the "Stock Purchase
Plan"), under which 100,000 shares of common stock are available for purchase by
substantially all employees. The Stock Purchase Plan enables eligible employees
of the Company, through payroll deductions, to purchase at twelve-month
intervals specified in the Stock Purchase Plan, shares of common stock at a 15%
discount from the lower of the fair market value of the common stock on the
first day or the last day of the year. The Stock Purchase Plan allows for
employee contributions up to 3% of the participant's annual compensation and
limits the aggregate fair value of common stock that may be purchased by a
participant during any calendar year to $25,000. As of December 31, 1996 no
purchases had been made under this Stock Purchase Plan.
The Company has elected to follow APB 25 and related
interpretations in accounting for its stock based compensation benefit plans as
permitted under SFAS No. 123. In accordance with APB 25, no compensation expense
is recognized by the Company when stock options are granted because the exercise
price of the Company's stock option equals the market price of the underlying
stock on the date of grant. Had compensation cost for the Company's stock option
plans been determined consistent with SFAS No. 123, the Company's net income and
net income per share would not have been materially different than reported.
NOTE 10 - INCOME TAXES
Income taxes consist of the following:
CURRENT DEFERRED TOTAL
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
============ ============ ========
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>
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................................ 9
Description of the Capital Stock..................... 11
Certain Differences Between the Common Stock and
the Series A Preferred Stock....................... 14
Use of Proceeds...................................... 15
Dividend Policy...................................... 15
Capitalization....................................... 15
Selected Consolidated Financial Data................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................... 19
Business............................................. 27
Market for the Common Stock and Related
Shareholder Matters................................ 38
Management........................................... 39
Principal and Management Shareholders................ 41
Certain Transactions................................. 41
Shares Eligible for Future Sale...................... 42
Legal Matters........................................ 43
Experts.............................................. 43
Available Information................................ 43
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.
326,840 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
10.1 Amended and Restated Loan and Security Agreement dated March 27, 1995 between
Finova Capital Corporation and the Company (1)
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)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.7 Amended and Restated Schedule to Loan and Security Agreement dated February 23,
1996 between Finova Capital Corporation and the Company (2)
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)
10.13 Amended and Restated Schedule to Loan and Security Agreement dated July 29, 1996
between Finova Capital Corporation and the Company (3)
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
21 Subsidiaries of The Thaxton Group, Inc. (5)
23.1 Consent of KPMG Peat Marwick
23.2 Consent of Moore & Van Allen, PLLC (included in the opinion filed as Exhibit 5 to
this Registration Statement)
24 Power of Attorney (included on the Signature Page of this Registration Statement)
99.1 Form of Exchange and Subscription Agreement*
</TABLE>
- --------------
* Previously filed.
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Commission File No. 33-97130A.
(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 to 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 July 30, 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, July 30, 1997
- ---------------------------------
James D. Thaxton President and Chief Executive
Officer
/S/ ROBERT L. WILSON* Executive Vice President, Chief July 30, 1997
- --------------------------------- Operating Officer and Director
Robert L. Wilson
/S/ KENNETH H. JAMES Vice President, Chief Financial July 30, 1997
- --------------------------------- Officer, Secretary and Director
Kenneth H. James (Principal Accounting Officer)
/S/ C. L. THAXTON, SR.* Director July 30, 1997
- ---------------------------------
C.L. Thaxton, Sr.
/S/ JACK W. ROBINSON* Director July 30, 1997
- ---------------------------------
Jack W. Robinson
/S/ PERRY L. MUNGO* Director July 30, 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
10.1 Amended and Restated Loan and Security Agreement dated March 27, 1995
between Finova Capital Corporation and the Company(1)
10.2 Loan Agreement dated May 16, 1994 between the American Bankers Insurance
Company of Florida and the Company(1)
10.3 Security Agreement dated January 19, 1995 between the Company and Oakland
Auto Sales, including Guaranty by Thaxton Insurance Group, Inc.(1)
10.4 Form of Restricted Stock Award between the Company and Robert L Wilson
10.5 The Thaxton Group, Inc. 1995 Stock Incentive Plan(1)
10.6 The Thaxton Group, Inc. Employee Stock Purchase Plan(1)
10.7 Amended and Restated Schedule to Loan and Security Agreement dated
February 23, 1996 between Finova Capital Corporation and the Company(2)
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)
10.13 Amended and Restated Schedule to Loan and Security Agreement dated July
29, 1996 between Finova Capital Corporation and the Company(3)
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
21 Subsidiaries of The Thaxton Group, Inc. (5)
23.1 Consent of KPMG Peat Marwick
23.2 Consent of Moore & Van Allen, PLLC (included in the opinion filed as
Exhibit 5 to this Registration Statement)
24 Power of Attorney (included on the Signature Page of this Registration
Statement)
99.1 Form of Exchange and Subscription Agreement*
</TABLE>
II-5
<PAGE>
- -----------
* 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 4.2
-----------
Logo [eagle with wings spread]
NUMBER SHARES
THE THAXTON GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF SOUTH CAROLINA
SERIES A CONVERTIBLE
PREFERRED STOCK CUSIP_________
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES A CONVERTIBLE
PREFERRED STOCK, PAR VALUE $0.01 PER SHARE, OF
THE THAXTON GROUP, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon the surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be subject to all the provisions of the Articles of Incorporation and the
Bylaws of the Corporation, and all amendments thereto, to all of which the
holder, by acceptance hereof, assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Kenneth H. James /s/ James D. Thaxton
- -------------------- --------------------
Secretary and Treasurer President
SEAL OF THE THAXTON GROUP, INC.
Countersigned and Registered:
First Union National Bank
(Charlotte, North Carolina) Transfer Agent and Registrar
Authorized officer
<PAGE>
THE THAXTON GROUP, INC.
THE AUTHORIZED CAPITAL STOCK OF THE THAXTON GROUP, INC. INCLUDES COMMON
STOCK AND PREFERRED STOCK. UPON REQUEST THE CORPORATION WILL FURNISH TO ANY
SHAREHOLDER, WITHOUT CHARGE, INFORMATION AS TO THE NUMBER OF SHARES AUTHORIZED
AND OUTSTANDING WITH RESPECT TO EACH CLASS OF CAPITAL STOCK AND ANY SERIES
THEREOF AND A COPY OF THE PORTION OF THE ARTICLES OF INCORPORATION OR
RESOLUTIONS CONTAINING THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE
RIGHTS OF ALL SHARES OF ANY SUCH CLASS OR SERIES. ANY SUCH REQUEST SHOULD BE
ADDRESSED TO THE SECRETARY OF THE CORPORATION.
CONVERSION ENDORSEMENT
To The Thaxton Group, Inc.:
The undersigned registered owner of the shares of Series A Convertible
Preferred Stock (the "Preferred Stock") represented by this stock certificate
hereby irrevocably exercises the option to convert such shares, or portion
thereof below designated, into shares of Common Stock of The Thaxton Group, Inc.
in accordance with the terms of the Preferred Stock, and directs that the shares
issuable and deliverable upon the conversion, together with any check in payment
for fractional shares and any stock certificates representing any unconverted
shares of Preferred Stock, be issued and delivered to the registered holder
hereof unless a different name has been indicated below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto.
Dated:
Fill in for registration of shares: ________________________
Signature(s)
__________________________________________
__________________________________________
__________________________________________
Please print name and address (including zip code number)
SOCIAL SECURITY OR OTHER Number of shares to be converted
TAXPAYER IDENTIFICATION NUMBER (if less than all)
------------------------------
| |
------------------------------ --------------------------------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .....Custodian.....
TEN ENT -- as tenants joined by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors
survivorship and not as tenants in Act..........................
common (State)
Additional abbreviations may also be used through not in the above list.
<PAGE>
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
--------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- shares
of the Preferred Stock evidenced by this Certificate, and do hereby irrevocably
constitute and appoint
- ----------------------------------------------------------------- Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution.
Dated ___________________________
NOTICE: _______________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER
SIGNATURE(S) GUARANTEED: _______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.
Exhibit 4.4
-----------
Logo [eagle with wings spread]
NUMBER SHARES
THE THAXTON GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF SOUTH CAROLINA
SERIES B CONVERTIBLE
PREFERRED STOCK CUSIP_________
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF SERIES B CONVERTIBLE
PREFERRED STOCK, PAR VALUE $0.01 PER SHARE, OF
THE THAXTON GROUP, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon the surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be subject to all the provisions of the Articles of Incorporation and the
Bylaws of the Corporation, and all amendments thereto, to all of which the
holder, by acceptance hereof, assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Kenneth H. James /s/ James D. Thaxton
- -------------------- --------------------
Secretary and Treasurer President
SEAL OF THE THAXTON GROUP, INC.
Countersigned and Registered:
First Union National Bank
(Charlotte, North Carolina) Transfer Agent and Registrar
Authorized officer
<PAGE>
THE THAXTON GROUP, INC.
THE AUTHORIZED CAPITAL STOCK OF THE THAXTON GROUP, INC. INCLUDES COMMON
STOCK AND PREFERRED STOCK. UPON REQUEST THE CORPORATION WILL FURNISH TO ANY
SHAREHOLDER, WITHOUT CHARGE, INFORMATION AS TO THE NUMBER OF SHARES AUTHORIZED
AND OUTSTANDING WITH RESPECT TO EACH CLASS OF CAPITAL STOCK AND ANY SERIES
THEREOF AND A COPY OF THE PORTION OF THE ARTICLES OF INCORPORATION OR
RESOLUTIONS CONTAINING THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE
RIGHTS OF ALL SHARES OF ANY SUCH CLASS OR SERIES. ANY SUCH REQUEST SHOULD BE
ADDRESSED TO THE SECRETARY OF THE CORPORATION.
CONVERSION ENDORSEMENT
To The Thaxton Group, Inc.:
The undersigned registered owner of the shares of Series B Convertible
Preferred Stock (the "Preferred Stock") represented by this stock certificate
hereby irrevocably exercises the option to convert such shares, or portion
thereof below designated, into shares of Common Stock of The Thaxton Group, Inc.
in accordance with the terms of the Preferred Stock, and directs that the shares
issuable and deliverable upon the conversion, together with any check in payment
for fractional shares and any stock certificates representing any unconverted
shares of Preferred Stock, be issued and delivered to the registered holder
hereof unless a different name has been indicated below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto.
Dated:
Fill in for registration of shares: ________________________
Signature(s)
__________________________________________
__________________________________________
__________________________________________
Please print name and address (including zip code number)
SOCIAL SECURITY OR OTHER Number of shares to be converted
TAXPAYER IDENTIFICATION NUMBER (if less than all)
------------------------------
| |
------------------------------ --------------------------------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .....Custodian.....
TEN ENT -- as tenants joined by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors
survivorship and not as tenants in Act..........................
common (State)
Additional abbreviations may also be used through not in the above list.
<PAGE>
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
--------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- shares
of the Preferred Stock evidenced by this Certificate, and do hereby irrevocably
constitute and appoint
- ----------------------------------------------------------------- Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution.
Dated ___________________________
NOTICE: _______________________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER
SIGNATURE(S) GUARANTEED: _______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.
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
July 29, 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 326,840 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 geniuneness 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 under the caption "Legal Matters"
in the related Prospectus.
Very truly yours,
MOORE & VAN ALLEN, PLLC
Exhibit 10.17
SHARE EXCHANGE AGREEMENT
THIS AGREEMENT made as of the __________________ day of __________________,
1997 by and among THE THAXTON GROUP, INC., a South Carolina corporation (the
"Company"), and JACK W. ROBINSON, and ___________________, (collectively, the
"Purchasers").
R E C I T A L S:
A. As of the date hereof, the Purchasers colletively own 30,925 shares of
common stock of the Company ("Common Stock").
B. The Purchasers desire to exchange shares of Common Stock for an equal
number of shares of the Company's Series B Convertible Preferred Stock (the
"Series B Preferred Stock") and the Company desires to make the exchange
of such shares in accordance with the terms hereof.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. EXCHANGE OF STOCK. Subject to the terms and conditions contained
herein, and as of the date hereof, the Company hereby agrees to issue Thirty
Thousand Nine Hundred Twenty-five (30,925) shares of Series B Preferred Stock,
par value $.01 per share, of the Company (the "Shares"), to the Purchasers
upon receipt of Thirty Thousand Nine Hundred Twenty-five (30,925) shares of
Common Stock of the Company.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. In order to induce the
Purchasers to enter into this Agreement, the Company hereby represents and
warrants that:
(a) The Company has the legal right to execute and deliver this Agreement
and to carry out the transactions and perform its obligations hereunder. This
Agreement constitutes a valid, legal and binding obligation of the Company,
enforceable in accordance with its terms.
(b) The Company is a corporation, duly organized, validly existing and
in good standing under the laws of the State of South Carolina.
(c) The Shares represent Series B Preferred Stock.
3. REPRESENTATIONS DISCLAIMER. The Company shall not be deemed to have
made to the Purchasers any representation or warranty other than as expressly
made by the Company in paragraph 2 hereof.
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. In order to induce the
Company to enter into this Agreement the Purchasers hereby represent and
warrant to the Company that:
(a) The Purchasers have the legal right to execute and deliver this
Agreement and to carry out the transactions and perform their obligations
contemplated hereunder. This Agreement has been duly authorized by the
Purchasers and constitutes the legal, valid and binding obligations of the
Purchasers enforceable in accordance with its terms.
(b) The Purchasers are acquiring the Shares for investment and not with
a view to or for the resale in connection with the distribution thereof.
(c) The Purchasers are the true and lawful beneficial and record owner
of the shares of Common Stock listed opposite each of their names on Exhibit A
and have good and marketable title thereto, free and clear of mortgages,
pledges, liens, security interests or any other encumbrances.
5. INDEMNIFICATION. The parties hereto agree to indemnify and hold each
other harmless as follows:
(a) The Company agrees to indemnify and hold the Purchasers harmless at
all times after the date of this Agreement from and against any and all loss,
liability, damage or deficiency resulting from any misrepresentation, breach of
warranty or nonfulfillment of any covenants or agreements on the part of the
Company contained herein or in any other document or certificate furnished by
the Company pursuant hereto and any loss or damage resulting from any claims,
litigation, actions, suits, proceedings, judgments, reasonable attorneys' fees,
costs and expenses relating to or arising out of such misrepresentation, breach
or nonfulfillment.
(b) The Purchasers agree to indemnify and hold the Company harmless at
all times after the date of this Agreement from and against any and all loss,
liability, damage or deficiency resulting from any misrepresentation, breach
of warranty or nonfulfillment of any covenants or agreements on the part of the
Purchasers contained herein or any certificate or document furnished by the
Purchasers pursuant hereto and any loss or damage resulting from any such
claims, litigation, actions, suits, proceedings, judgments, reasonable
attorneys' fees, costs and expenses related to or arising out of such
misrepresentation, breach or nonfulfillment.
(c) Should any claim be made by a person not a party to this Agreement
with respect to any matter to which the foregoing indemnity relates, the
party against whom such claim is asserted (the "Indemnified Party"), within
a reasonable period of time, shall given written notice to the other party
(the "Indemnifying Party") of any such claim, and the Indemnifying Party
shall thereafter defend or settle any such claim, at its sole expense,
on its own behalf and with counsel of its selection. In such defense or
settlement of any claims, the Indemnified Party shall cooperate with and
assist the
-2-
<PAGE>
Indemnifying Party to the maximum extent reasonably possible. Any payment
resulting from such defense or settlement, together with the total expense
thereof, shall be binding on the Company and the Purchasers for the purposes
of this paragraph 5.
(d) Notwithstanding the foregoing, should any claim be made by a person
not a party to this Agreement with respect to any matter to which the
foregoing indemnity relates, the Indemnified Party, on not less than thirty
(30) days' notice to the Indemnifying Party, may make settlement of such
claims, and such settlement shall be binding on the Indemnifying Party and
the Indemnified Party for the purposes of this paragraph 5; PROVIDED, HOWEVER,
that if within said thirty (30) day period the Indemnifying Party shall have
requested the Indemnified Party not to settle such claim and to deny such
claim at the expense of the Indemnifying Party, the Indemnified Party will
promptly comply and the Indemnifying Party shall have the right to defend on
its own behalf with counsel of its selection. Any payment of settlement
resulting from such contest, together with the total expense thereof, shall be
binding on the Company and the Purchasers for the purposes of this paragraph 5.
6. DUE DILIGENCE ACKNOWLEDGMENT.
(a) The Purchasers acknowledge that they have had an opportunity to
review, for information purposes only, the business and financial information
contained in the Company's Registration Statement on Form SB-2 (Reg. No.
333-28713) (the "Form SB-2") and Registration Statement on Form S-4 (Reg. No.
333-28719) (the "Form S-4"), as filed with the Securities and Exchange
Commission (the "Commission").
(b) The Purchasers acknowledge that they have made their own independent
examination, investigation, analysis and evaluation of the Company, including
Purchasers' own estimate of the value of the Company's business.
(c) The Purchasers acknowledge that they have undertaken such due
diligence (including a review of the assets, liabilities, books, records
and contracts of the Company) as the Purchasers deem adequate, including
that described above in this paragraph 6.
7. CONDITION TO CLOSING. The obligations of the Company and the Purchasers
to consummate the transactions contemplated by this Agreement are subject to
the Form SB-2 and Form S-4 having been declared effective by the Commission.
8. CLOSING. The closing of the transactions contemplated by this Agreement
shall occur on a date and at a time mutually agreed upon by the parties within
60 days of the date on which the condition specified by paragraph 7 has been
satisfied.
9. FURTHER ASSURANCES. The Company and the Purchasers hereby covenant and
agree that at any time and from time to time that they will promptly execute
and deliver such further instruments and documents and take such further
action as is reasonably necessary in order to further carry out the intent
and purpose of this Agreement.
-3-
<PAGE>
10. NOTICES. All notices, requests and demands and other communications to
any party hereto shall be in writing and shall be deemed to have been duly given
as if delivered by hand or mailed, certified or registered, with postage
prepaid to the following address of each party or such other addresses as may
be hereafter designated in writing by such party to the other parties:
To the Company: The Thaxton Group, Inc.
1524 Pageland Highway
Lancaster, South Carolina 29721
Attn: Kenneth H. James
Chief Financial Officer
To the Purchasers: [______________________________
______________________________
______________________________]
11. EXPENSES. It is hereby agreed and understood that the parties hereto
shall bear and pay their own expenses relative to the consummation of the
transaction referred to in this Agreement.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of the parties hreto and their respective successors and
assigns.
13. APPLICABLE LAW. The Agreement shall be governed by, and construed in
accordance with, the laws of the State of South Carolina.
14. SEVERABILITY. 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, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. COUNTERPARTS. This Agreement may be executed in one or more counter-
parts, all of which together shall represent the same single agreement.
16. SURVIVAL OF REPRESENTATIONS AND INDEMNITY. The representations and
warranties and the indemnification provisions contained herein shall
survive the closing and the delivery of all the required documents hereunder.
17. ENTIRE AGREEMENT. This Agreement contains the entire agreement between
the parties hereto with respect to the transactions contemplated herein.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
THE THAXTON GROUP, INC.
By: ______________________
James D. Thaxton
President
ATTEST:
_______________________
Kenneth H. James
Secretary
[CORPORATE SEAL]
________________________
JACK W. ROBINSON
_________________________
[___________________]
_________________________
[___________________]
-5-
<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 reference to our firm under the
headings "Experts" and "Selected Consolidated Financial Data" in the Form S-4.
KPMG Peat Marwick LLP
Greenville, South Carolina
July 29, 1997
<PAGE>
