<PAGE>
Filed pursuant to Rule 424(b)(3)
Registration No. 333-42623
THE THAXTON GROUP, INC.
$ 50,000,000
AGGREGATE PRINCIPAL AMOUNT OF
SUBORDINATED TERM NOTES DUE
1,6, 12, 36 AND 60 MONTHS
AND
SUBORDINATED DAILY NOTES
This Prospectus relates to the offering of (i) Subordinated Term Notes
due 1, 6, 12, 36 and 60 months (in the aggregate, the "Term Notes"), and (ii)
Subordinated Daily Notes (the "Daily Notes") of The Thaxton Group, Inc. (the
"Company"). The Term Notes and the Daily Notes are individually referred to as a
"Security" and collectively referred to as the "Securities." The price of each
Security will be its original principal amount, with no discounts or deductions
for commissions. The total proceeds to the Company if all the Securities are
sold will be $50,000,000 before deducting offering expenses, estimated at
approximately $150,000. The offering commenced on February 17, 1998 and the
Company has sold Term Notes having an aggregate principal amount of $4,800,000.
There can be no assurance that the Company will receive any particular
additional amount of proceeds from the offering of the Securities. See "Use of
Proceeds."
The Company will determine, from time to time, the rates of interest
payable on the Term Notes. For one month Term Notes, the rates will be at least
equal to the rate established for the most recent auction average of United
States Treasury Bills with maturities of 13 weeks. For all other Term Notes, the
rates will be at least equal to the rate established for the most recent auction
average of United States Treasury Bills with maturities of 52 weeks. The rate of
interest at the time of purchase of a Term Note will be the rate payable
throughout the original term of the Term Note. The interest rate payable on the
Daily Notes will be determined by the Company and may fluctuate on a monthly
basis. Once adjusted, such interest rate will remain in effect until next
adjusted by the Company. The interest rate on the Daily Notes will be no less
than 3% below nor more than 5% percent above the rate established for the most
recent auction average of United States Treasury Bills with a maturity rate of
13 weeks. In no event will the interest rate on the Term Notes or the Daily
Notes be more than 12% or less than 2% per annum.
Examples of the initial annual interest rates for the Securities as of
July 1, 1998 are as follows: Daily Note - 6.25%; 1 Month Note - 6.25%; 6 Month
Note - 7.00%; 12 Month Note - 7.50%; 36 Month Note 8.00%; and 60 Month Note -
8.25%. At the time of purchase of a Security, the actual initial annual interest
rate may be more or less than these examples.
A schedule of the interest rates for each Security will be provided to
any potential investor at the offices of the Company and its affiliates where
the Securities will be sold. In addition, potential investors may call the
Company at 1-888-842-9866 during normal business hours to obtain information
about the current interest rates for the Securities.
All Securities offered hereby are subject to redemption by the Company
prior to maturity. The Securities are also redeemable by the holder prior to
maturity (with an interest forfeiture, which may be waived by the Company, in
the case of the one month Term Notes, and an interest rate reduction penalty, in
the case of the Term Notes). The Company, in its sole discretion, may require
the holder to give up to 30 days' prior written notice of intent to redeem prior
to maturity. The Securities will be subordinated to all existing and future
Senior Indebtedness of the Company as described herein. As of December 31, 1997,
the Company had approximately $47.9 million of Senior Indebtedness. See
"Description of Securities."
The Securities are being offered by the Company and will be sold at the
offices of the Company and its affiliated finance and insurance companies
operating under the names TICO Credit Company and Thaxton Insurance. No
underwriting discounts or commissions will be paid on sales of Securities by the
Company. The Company may, in the future, employ the services of one or more
broker-dealers to offer the Securities on a non-exclusive, "best efforts" basis.
Management anticipates that an agreement concerning the use of a broker-dealer
to assist with the distribution of the Securities would provide for the payment
of sales commissions ranging from 3% to 7% of the principal amount of the
Securities sold by the broker-dealer. The offering will be continuous in nature
and is expected to continue until February 17, 2000. See "Plan of Distribution."
There can be no assurance that any particular additional amount of the
Securities will be sold. The Securities will not be listed for trading on any
securities exchange and the Company does not expect that any active trading
market for the Securities will develop.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS DEPOSITS OR OBLIGATIONS OF AN
INSURED DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION ("FDIC").
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SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR IMPORTANT CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE SECURITIES.
NOTE: INVESTORS WHO PURCHASE ANY OF THE SECURITIES SHOULD RETAIN THIS PROSPECTUS
IN THEIR RECORDS FOR FUTURE REFERENCE IN CONNECTION WITH ANY RENEWALS OR
AUTOMATIC EXTENSIONS OF THE TERM NOTES. SEE "DESCRIPTION OF SECURITIES."
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 16, 1998.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION DISCUSSED UNDER "RISK FACTORS" WHICH BEGINS ON PAGE 6.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING
STATEMENTS REGARDING, AMONG OTHER ITEMS, (I) THE COMPANY'S BUSINESS AND
ACQUISITION STRATEGIES, (II) THE USE OF THE PROCEEDS OF THE OFFERING, (III) THE
COMPANY'S FINANCING PLANS, AND (IV) INDUSTRY AND OTHER TRENDS AFFECTING THE
COMPANY'S FINANCIAL CONDITION OR RESULTS OF OPERATIONS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED LARGELY ON MANAGEMENT'S EXPECTATIONS AND ARE SUBJECT TO A
NUMBER OF RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S
CONTROL. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF THE FACTORS DESCRIBED IN THIS PROSPECTUS, INCLUDING
GENERAL ECONOMIC CONDITIONS, PREVAILING INTEREST RATES, COMPETITIVE FACTORS, AND
THE ABILITY OF THE COMPANY TO CONTINUE ITS BUSINESS AND ACQUISITION STRATEGIES.
IN LIGHT OF THESE RISKS AND UNCERTAINTIES, FUTURE EVENTS AND ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD-LOOKING
INFORMATION CONTAINED IN THIS PROSPECTUS. SEE "RISK FACTORS," "USE OF PROCEEDS,"
"BUSINESS," AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
THE COMPANY
The Company is a diversified consumer financial services company. Its
primary line of business is purchasing and servicing retail installment
contracts generated from the sale of used automobiles by independent dealers
("Automobile Sales Contracts"). Finance receivables resulting from purchases of
Automobile Sales Contracts represented approximately 70% of the Company's total
finance receivables at December 31, 1997. The Company also makes and services
personal loans ("Direct Loans") to persons with limited credit histories, low
incomes, or past credit problems ("Non-prime Borrowers"). The Company presently
purchases Automobile Sales Contracts and/or makes Direct Loans in Georgia, North
Carolina, South Carolina, Tennessee, and Virginia under the name "TICO Credit
Company." Under the name "TICO Premium Finance Company" in North Carolina and
South Carolina and "Eagle Premium Finance Company" in Virginia, the Company
finances insurance premiums, primarily for personal lines of insurance purchased
by Non-prime Borrowers through independent agents ("Premium Finance Contracts").
The Company also sells, on an agency basis, various credit-related insurance
products in conjunction with the purchase of Automobile Sales Contracts or the
making of Direct Loans and, through its subsidiary Thaxton Insurance Group, Inc.
("Thaxton Insurance"), sells on an agency basis, various lines of property and
casualty, life, and accident and health insurance. The Company recently formed
CFT Financial Corp., a mortgage banking firm, and began originating residential
mortgage loans primarily for Non-Prime Borrowers in South Carolina and North
Carolina in January 1997, which are sold on a nonrecourse basis to various
investors.
The non-prime consumer credit industry is highly fragmented, consisting
of many national, regional, and local competitors. Many lenders, including most
lenders providing automobile financing, tend to avoid or do not consistently
serve borrowers with credit histories that do not meet the stringent, objective
credit review standards used by traditional lenders. Since 1985, the Company has
specialized in serving Non-prime Borrowers and has developed considerable
expertise in applying both objective and subjective credit evaluation procedures
and controlling processing and collection costs, which are significantly higher
on credit extended to Non-prime Borrowers.
The Company's business strategy is to continue to diversify by offering
a wider range of financial products and services. Although a significant portion
of the Company's growth in recent years has been attributable to the expansion
of its portfolio of Automobile Sales Contracts and the Company intends to
continue this strategy in selected markets, Direct Loan, Premium Finance
Contract and residential mortgage originations will be emphasized as well. In
addition, the Company intends to focus on the development and marketing of other
consumer finance and insurance products that offer cross-selling opportunities
among its customers. Management believes that these cross-selling opportunities
will enhance the Company's ability to successfully implement its diversification
strategy and retain existing customers.
2
<PAGE>
The Company's finance receivables bear interest at fixed rates, which
in some instances are subject to a legal maximum. Historically, these
receivables have been financed by incurring indebtedness with floating interest
rates. As a result, the Company's interest expense generally will increase
during periods of rising interest rates while its interest income remains
constant, thereby decreasing net interest rate spreads and adversely affecting
the Company's profitability. Management believes that by financing a portion of
these receivables with the fixed rate Securities offered by this Prospectus, the
Company will be able to better match its fixed rate receivables with fixed rate
debt and improve the Company's interest rate sensitivity and net interest rate
spreads.
The Company's executive offices are located at 1524 Pageland Highway,
Lancaster, South Carolina 29720, and its telephone number is (888) 842-9866. The
Company has a total of 25 finance offices, with 16 located in South Carolina,
two in North Carolina and Georgia, three in Virginia, and one in Tennessee, 20
insurance offices, with 12 located in South Carolina and eight in North
Carolina, and one residential mortgage office in North Carolina.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Subordinated Term Notes Due 1, 6, 12, 36 and 60 months
and Subordinated Daily Notes......................................... $ 50,000,000
Use of proceeds........................................................... Temporary repayment of
indebtedness under Revolving
Credit Facility.
Expected termination date of the offering................................. The Company expects the
offering will continue until
February 17, 2000 but reserves
the right at any time to suspend
or terminate the offering.
</TABLE>
<TABLE>
<CAPTION>
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YEARS ENDED DECEMBER 31,
1996 1997
(dollars in thousands)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income ....................................................................... $ 9,319 $ 10,870
Provision for credit losses ............................................................... 3,593 6,580
Net interest income after
provision for credit losses ........................................................... 5,726 4,290
Insurance commissions, net ................................................................ 5,893 5,470
Other income .............................................................................. 986 1,221
Operating expenses ........................................................................ 11,974 13,211
Income tax expense (benefit) .............................................................. 247 (724)
Net income (loss) ......................................................................... 384 (1,506)
Net income (loss) per common share ........................................................ 0.09 (0.39)
AT DECEMBER 31,
1996 1997
BALANCE SHEET DATA:
Finance receivables ....................................................................... $ 63,107 $ 67,558
Unearned income ........................................................................... (14,366) (14,087)
Allowance for credit losses ............................................................... (2,195) (4,809)
Finance receivables, net................` ................................................. 46,546 48,662
Total assets .............................................................................. 56,681 60,966
Total liabilities ......................................................................... 50,310 54,996
Shareholders' equity ...................................................................... 6,371 5,969
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</TABLE>
3
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SUMMARY OF TERMS OF SECURITIES
SUBORDINATED TERM NOTES DUE ONE MONTH
Minimum Investment $100
Interest Rate The Company will determine, from time to time, the
rate of interest payable on one month Term Notes,
which rate will be at least equal to the rate
established for the most recent auction average of
United States Treasury Bills with a maturity of 13
weeks, but no less than 2% per annum and no more
than 12% per annum.
Interest Payment Payable at maturity.
Automatic Extension Automatically extended for a new one-month term at
the then applicable interest rate, unless the
holder notifies the Company on or before the
maturity date that the holder does not wish to
extend the term.
Additions and Redemptions Holders of one month Term Notes may adjust the
original principal amount, without extending the
maturity, at any time by increases or decreases
resulting from additional purchases or partial
redemptions; provided, however, that partial
redemptions may not reduce the outstanding
principal amount below $100. Upon presentation of
a one month Term Note to the Company, the Company
will, for the Holder's convenience, record any
adjustments to the original principal amount, such
as additional purchases or partial redemptions.
Redemptions by the holder, in whole or in part,
prior to maturity will result in a forfeiture of
all accrued interest on the redeemed amount unless
the Company, in its sole discretion, elects to
waive the forfeiture in whole or in part. The
Company, in its sole discretion, may require the
holder to give up to 30 days' prior written notice
of a redemption. Redeemable, at the option of the
Company, without premium, at any time on 30 days'
notice.
Subordination Subordinated to all existing and future Senior
Indebtedness.
SUBORDINATED TERM NOTES DUE 6, 12, 36 AND 60 MONTHS
Minimum Investment $1,000
Interest Rate The Company will determine, from time to time, the
rate of interest payable on 6, 12, 36 or 60 month
Term Notes, which rate will be at least equal to
the rate established for the most recent auction
average of United States Treasury Bills with a
maturity of 52 weeks, but no less than 2% per
annum and no more than 12% per annum.
Interest Payment At the holder's option, either monthly, quarterly
or at maturity.
Automatic Extension Automatically extended for a new 6, 12, 36 or 60
month term at the then applicable interest rate,
unless the holder notifies the Company on or
before the maturity date that the holder does not
wish to extend the term. The Company will give the
holder 30 days notice in advance of maturity date
of the automatic extension provision.
4
<PAGE>
Redemption Redeemable at holder's option upon payment of
penalty equal to the difference between the amount
of interest actually accrued since the date of
issuance (or most recent extension date) and the
amount of interest that would have accrued had the
rate of interest been 3% less than the rate in
effect on the date of issuance (or most recent
extension date). The Company, in its sole
discretion, may require the holder to give 30
days' prior written notice of a redemption.
Redeemable at the option of the Company, without
premium, at any time upon 30 days notice.
Subordination Subordinated to all existing and future Senior
Indebtedness.
AUTOMATIC EXTENSION PROCEDURE Not later than 15 days prior to the maturity of a
Term Note, the Company will provide the holder
with an extension notice and a copy of the
Company's most recent quarterly report filed with
the Commission and, if not previously furnished to
the holder, a copy of the Company's most recent
annual report filed with the Commission. The
extension notice will advise the holder of the
maturity date of the holder's Term Note, the
principal amount due on maturity, the amount of
accrued interest to the maturity date and the
applicable interest rate upon an automatic
extension of the Term Note. The extension notice
will also inform the holder that, upon request,
the Company will promptly furnish the holder with
a copy of this Prospectus, as amended or
supplemented. Unless prior to the maturity of a
Term Note the Company receives notification of the
holder's intention to redeem the holder's Term
Note, it will be automatically extended as
described above under "Automatic Extension."
SUBORDINATED DAILY NOTES
Minimum Investment $50
Interest Rate As determined by the Company and adjusted monthly
effective on the first day of the month; no less
than 3% below or 5% above the most recent auction
average of United States Treasury Bill with 13
week maturities and in no event, less than 2% per
annum or more than 12% per annum. Holders of Daily
Notes will be notified promptly by first class
mail of any monthly adjustment in the interest
rate.
Interest Payment Accrued daily and compounded quarterly, payable
upon redemption.
Additions and Redemptions Holders of Daily Notes may adjust the original
principal amount at any time by increases or
decreases resulting from additional purchases or
partial redemptions; provided, however, that
partial redemptions may not reduce the outstanding
principal amount below $50. Upon presentation of a
Daily Note to the Company, the Company will, for
the holder's convenience, record any adjustments
to the original principal amount, such as
additional purchases or partial redemptions.
Holders of Daily Notes may redeem them, in whole
or in part, at any time, without penalty. The
Company, in its sole discretion, may require the
holder to give up to 30 days' prior written notice
of a redemption. Daily notes are redeemable, at
the option of the Company, without premium, at any
time on 30 days' notice.
Subordination Subordinated to all existing and future Senior
Indebtedness.
5
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY WILL CONSTITUTE GENERAL UNSECURED
OBLIGATIONS OF THE COMPANY. PERSONS CONSIDERING INVESTING IN THE SECURITIES
SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER OR NOT TO
PURCHASE THE SECURITIES:
SECURITIES NOT INSURED. The Securities are not obligations of an
insured depository institution such as a bank and are therefore not subject to
the protection of the FDIC or any insurance. Accordingly, if the funds used by
an investor to purchase the Securities are taken from a savings account in a
bank or savings and loan association or certificates of deposit issued by any
such institution, the investor should recognize that by purchasing the
Securities the investor is subjecting those funds to a significantly greater
degree of risk of loss.
TRANSFERABILITY OF THE SECURITIES LIMITED. There is no trading market
for the Securities and the Company does not expect one to develop. Potential
investors should not purchase the Securities with the expectation that a trading
market for the Securities will subsequently develop. The Securities are
non-negotiable. All transfers and assignments of the Securities must be made at
the offices of the Company.
SUBORDINATION TO SENIOR INDEBTEDNESS. Payment of the indebtedness
evidenced by the Securities is subordinate to the prior payment when due of the
principal of and interest on all Senior Indebtedness of the Company. Investors
should be aware that if the Company's becomes insolvent, they would be entitled
to receive payment on the Securities they hold only after all of the Company's
Senior Indebtedness is paid. Senior Indebtedness of the Company is broadly
defined to include all debt of the Company other than the Securities. See
"Description of Securities - General Provisions Applicable to all Securities -
Subordination." As of December 31, 1997, the principal amount of the Company's
Senior Indebtedness was approximately $47.9 million. The Company has the
unrestricted right to increase or decrease at any time the amount of Senior
Indebtedness to which the Securities will be subordinate. There can be no
assurance that the Company would have or be able to obtain sufficient funds to
pay off the Securities if the Company becomes insolvent or upon a dissolution,
winding up, liquidation, or reorganization of the Company.
FORFEITURE OF INTEREST FOR EARLY REDEMPTION OF ONE MONTH TERM NOTES.
Holders of one month Term Notes who elect to redeem them prior to maturity, in
whole or in part, will forfeit the entire amount of accrued interest on the
amount redeemed. The Company, in its sole discretion, may waive all or a portion
of the forfeiture, but there can be no assurance the Company will do so.
INTEREST RATE REDUCTION PENALTY FOR EARLY REDEMPTION OF 6, 12, 36 AND
60 MONTH SECURITIES. Holders of 6, 12, 36 and 60 month Term Notes who elect to
redeem them prior to maturity will forfeit an amount equal to the difference
between the amount of interest actually accrued on the 6, 12, 36 or 60 month
Term Note and the amount of interest that would have accrued on the Term Note
had the rate of interest been 3% less than the rate in effect at the date of
issuance (or most recent extension date). See "Description of Securities --
Redemption of Securities at Option of Holder."
POSSIBLE 30-DAY NOTICE REQUIREMENT FOR REDEMPTIONS BY HOLDERS AND
RELATED RISKS. Holders of the Securities have the right to redeem them, in whole
or in part, at any time. However, the Company, in its sole discretion, may
require holders of the Securities to provide the Company 30 day's prior written
notice, by first class mail, of any early redemption requested by the holder and
this requirement may be imposed by the Company at any time, including at the
time a holder otherwise requests early redemption of his Security. Management
believes that this 30-day notice requirement would most likely be imposed in
circumstances where a temporary increase in redemption requests by holders would
make it difficult for the Company to administratively process the requests on a
timely basis or if the aggregate dollar amount of requested early redemptions
exceeded the Company's ability to promptly fund the redemptions from available
cash or borrowing sources. If the Company should implement this notice
requirement, holders of Securities desiring to obtain early redemptions will be
delayed in doing so and, any such delay, depending upon the Company's financial
circumstances at that time, could increase the risk of a default by the Company
for failure to honor redemption requests upon the expiration of the 30-day
notice period. Interest would continue to accrue on the Securities until
redeemed by the Company.
6
<PAGE>
NEED TO RETAIN CUSTODY OF SECURITIES CERTIFICATES. Within ten days
after purchasing a Security, the purchaser will receive a Daily Note or Term
Note in certificated form that corresponds to the terms of the Security he
elected to purchase. In addition, holders of the Securities will receive monthly
statements from the Company that inform the holder of the issue date of his
Security, the principal amount, the interest rate, maturity date and the amount
of interest accrued through the most recent interest accrual date. This
information will also be continuously maintained in the Company's books and
records. However, because full redemption of a Security requires presentation to
the Company of the holder's Daily or Term Note in certificated form, purchasers
of the Securities are urged to keep their Security certificates in a safe place.
In the event a certificate is lost or destroyed, a holder desiring to redeem a
Security in full may be required to indemnify the Company before a redemption
payment is made.
IMPACT OF CREDIT LOSSES ON PROFITABILITY. The non-prime consumer credit
market is comprised of borrowers who are deemed to be relatively high credit
risks due to various factors. These factors include, among other things, the
manner in which they have handled previous credit, the absence or limited extent
of prior credit history, and limited financial resources. Consequently, Direct
Loans and Automobile Sales Contracts, relative to prime consumer loans and
retail installment contracts, involve a significantly higher probability of
default and greater servicing and collection costs. The Company's profitability
depends upon its ability to properly evaluate the creditworthiness of Non-prime
Borrowers, to maintain adequate security for Automobile Sales Contracts, and to
efficiently service and collect its portfolio of finance receivables. No
assurance is given that the credit performance of the Company's customers will
be satisfactory, or that the rate of future defaults and/or losses will not
exceed the Company's recent prior experience. Delinquency rates related to
consumer lending and automobile financing are significantly influenced by
general economic conditions, such as the rate of unemployment, and, if economic
conditions in the Company's markets should deteriorate, the Company anticipates
that its delinquency rates would likely increase.
RECENT MATERIAL ADVERSE TREND IN CREDIT LOSS EXPERIENCE. Based upon the
Company's loss experience during the quarters ended September 30 and December
31, 1997, management recorded a $2.4 million net increase in the Company's
allowance for credit losses resulting in a total allowance of approximately $4.8
million at December 31, 1997. This increase was due to a substantial increase in
net charge-offs of approximately $2.7 million for the six months ended December
31, 1997 compared to $1.3 million for the first six months of 1997. Accordingly,
the provision for credit losses charged against income for the last six months
of 1997 was $5.1 million and the increased provision resulted in a net loss of
$2.1 million and $1.5 million, respectively, for the six months and the year
ended December 31, 1997.
Given the intensely competitive conditions that currently exist in the
non-prime automobile sales finance markets where the Company operates, there can
be no assurance that this adverse trend will not continue. If this trend
continues, it would have a material adverse effect on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Material Adverse Trend in Credit Loss
Experience."
RISK ASSOCIATED WITH EXPANSION OF AUTOMOBILE SALES FINANCE OPERATIONS.
The Company's past growth has been due to, and its growth strategy depends in
part on, the opening of new finance offices that focus primarily on purchasing
Automobile Sales Contracts in markets not previously served by the Company. The
Company's future expansion of its finance office network depends primarily upon
the Company's ability to attract and retain qualified and experienced finance
office managers and the ability of such managers to develop relationships with
independent dealers serving those markets. The Company typically does not open a
new finance office until it has located and hired a qualified and experienced
individual to manage it. Although management believes the Company can attract
and retain qualified and experienced managers as it proceeds with expansion into
new markets, no assurance is given that it will be successful in doing so. In
addition, the success of the Company's automobile sales finance operations is
dependent upon the Company's ability to maintain credit quality and
administration as it seeks to increase the number of Automobile Sales Contracts
generated by existing and new finance offices. No assurance is given that it
will be successful in doing so.
NO MINIMUM NUMBER OF SECURITIES REQUIRED TO BE SOLD. In reviewing the
information set forth under the headings "Use of Proceeds," "Capitalization,"
and "Management's Discussion and Analysis of Financial Condition
7
<PAGE>
and Results of Operations -- Liquidity and Capital Resources," prospective
purchasers of the Securities should note that no minimum number of Securities is
required to be sold and no assurance is given that any particular amount of
Securities will be sold.
INCREASES IN INTEREST RATES. While the Company's finance receivables
bear interest at fixed rates, which in some instances are subject to a legal
maximum, the Company generally finances these receivables by incurring
indebtedness with floating interest rates. As a result, the Company's interest
expense generally will increase during periods of rising interest rates while
its interest income remains constant, thereby decreasing net interest rate
spreads and adversely affecting the Company's profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Profitability." Through this offering of fixed rate Securities, the Company
anticipates that it may be able to reduce some of its dependency on floating
interest rate borrowings and increase its net interest rate spreads. However,
there can be no assurance that this offering will result in the sale of any
particular amount of the Securities.
KEY MANAGEMENT. Although the Company has recently employed additional
management personnel experienced in various aspects of consumer finance, the
Company's success depends, in large part, on the continued service of its senior
management, including James D. Thaxton, Chairman of the Board, President, and
Chief Executive Officer, and Robert L. Wilson, Executive Vice President and
Chief Operating Officer. The Company maintains key employee insurance in the
amount of $1,000,000 on the life of Mr. Wilson but maintains no such insurance
on the life of Mr. Thaxton. Neither Mr. Thaxton nor Mr. Wilson is subject to an
employment agreement with the Company, although in December 1995, Mr. Wilson
received a grant of restricted Common Stock that vests over a ten-year period.
See "Management -- Executive Compensation." The loss of either Mr. Thaxton or
Mr. Wilson may have a material adverse effect on the Company's business.
COMPETITION. The business of acquiring and purchasing Automobile Sales
Contracts is highly fragmented and competitive. Historically, commercial banks,
savings institutions, credit unions, financing affiliates of automobile
manufacturers, and other lenders providing traditional consumer financing have
not consistently served the non-prime segment of the consumer finance market.
Recently, however, some bank holding companies have acquired consumer finance
companies in an effort to recapture some of the customers their bank
subsidiaries have rejected on the basis of rigid credit scoring systems. In
addition, there are numerous nontraditional consumer finance sources serving
this market. The Company believes that its primary competitor in the automobile
sales finance and consumer loan business is TransSouth Financial Corporation,
which operates in most of the Company's markets. The Company also competes with
numerous regional consumer finance companies. Many of these competitors or
potential competitors, including TransSouth Financial Corporation, have
significantly greater resources than the Company and have preexisting
relationships with independent dealers in the Company's markets. Any increased
competition from these or other sources of credit for Non-prime Borrowers may
limit the Company's ability to execute its business and growth strategy and
could have a material adverse effect on the Company. Such competition could
result in a reduction in the interest rates earned on Automobile Sales Contracts
and Direct Loans or in the dealer reserve the Company is able to obtain when it
purchases an Automobile Sales Contract. See "Business -- Competition" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
The premium finance business also is highly competitive. Because
interest rates are highly regulated, competition is based primarily on customer
service, response time, and down payment amounts. There are numerous independent
finance companies specializing in premium finance for personal lines of
insurance. In addition, many independent insurance agencies finance premiums for
their customers either directly or through an affiliate. Some bank holding
companies have subsidiaries that finance premiums on insurance sold by other
subsidiaries of the holding company as well as by independent agents. Any
increased competition from these or other providers of premium finance may limit
the Company's ability to execute its business and growth strategy and could have
a material adverse effect on the Company.
Competition in the independent insurance agency business is intense.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and maintain long-term customer relationships
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through low employee turnover and responsive service representatives and offers
a broad range of insurance products underwritten by reputable insurance
companies. Any increased competition from other providers of insurance products
may limit the Company's ability to execute its business and growth strategy and
could have a material adverse effect on the Company.
The origination of residential mortgages for Non-prime Borrowers is
highly competitive and there are numerous companies engaged in this business,
many of which have substantially greater resources and experience than the
Company. The Company intends to compete mainly on the basis of service to
customers in markets where it already has a presence with its consumer finance
and insurance offices. Increased competition from other providers of mortgage
products may limit the Company's ability to implement its residential mortgage
growth strategy and could have an adverse effect on the Company.
REGULATION. The Company's business is subject to various state and
federal laws which require licensing and qualification. These laws may regulate,
among other things, (i) the maximum interest rate that may be charged to
borrowers on Automobile Sales Contracts, Direct Loans, and Premium Finance
Contracts, (ii) the sale and type of insurance products offered by the insurers
for which the Company acts as agent, (iii) the Company's rights to repossess and
sell collateral, and (iv) virtually all aspects of the premium finance business.
An adverse change in these laws or the adoption of new laws could have a
material adverse effect on the Company's business by limiting the interest and
fee income the Company can generate on existing and additional finance
receivables, limiting the states in which the Company may operate, or
restricting the Company's ability to realize the value of collateral securing
its finance receivables. Moreover, a reduction in existing statutory maximum
interest rates or the imposition of statutory maximum interest rates below those
presently charged by the Company in unregulated jurisdictions would directly
impair the Company's profitability. In addition, an adverse change in the
maximum permissible interest rates that may be charged to borrowers in markets
into which the Company may consider expanding could reduce the attractiveness of
such markets, thereby limiting the expansion opportunities of the Company. The
Company is not aware of any such material pending legislation in the markets it
currently serves or in the markets it has targeted for expansion. An adverse
change in, modification to, or clarification of any of these laws or
regulations, or judicial interpretations as to whether and in what manner such
laws or regulations apply to Automobile Sales Contracts and Direct Loans
purchased or originated by the Company, also could result in potential liability
related to Automobile Sales Contracts previously purchased and could have a
material adverse effect on the Company's financial condition and results of
operations. In addition, due to the consumer-oriented nature of the industry in
which the Company operates and uncertainties with respect to the application of
various laws and regulations in certain circumstances, industry participants
frequently are named as defendants in litigation involving alleged violations of
federal and state consumer lending or other similar laws and regulations. See
"Business -- Regulation."
GEOGRAPHIC CONCENTRATION. The Company's finance and insurance offices
are located primarily in South Carolina. The Company's profitability may be
disproportionately affected by the general economic conditions of and regulatory
changes in South Carolina. The Company believes, but no assurance is given that,
such geographic concentration will decrease in the future as result of its
growth strategy, which includes the possibility of further expansion into
adjacent southeastern states. See "Business -- Business and Growth Strategy."
RISKS OF PREMIUM FINANCE BUSINESS. The collateral for Premium Finance
Contracts is the unearned portion of the premium paid to the insurance carrier.
The smaller the percentage that the customer's down payment represents of the
total premium due, the greater the Company's risk of loss is if inefficiencies
in servicing the loan result in the Company's failure to cancel the insurance
policy and seek a return of the unearned portion of the premium in a timely
manner or the insurance company files for bankruptcy. To reduce its risk of
loss, the Company generally requires a down payment of between 20% and 50% of
the premium financed. To reduce the risk of loss from the insolvency of an
insurance company, the Company has adopted a policy of insuring premiums only on
personal lines of insurance obtained from insurance companies with a rating of
C+ or better from A.M. Best & Company, except for policies issued by insurance
companies participating in state-guaranteed reinsurance facilities. Neither the
independent insurance agents who sell insurance to individuals for whom the
Company finances premiums nor the insurance companies have any liability under
the Premium Finance Contract to the Company in the event of a payment default.
See "Business -- Premium Finance Business."
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DEPENDENCE ON THE REVOLVING CREDIT FACILITY. The Company depends
primarily on borrowings under a revolving credit facility (the "Revolving Credit
Facility") extended by FINOVA Capital Corporation ("Finova") to finance
purchases of Automobile Sales Contracts, to fund the origination of Direct Loans
and Premium Finance Contracts, and to carry these receivables until they are
repaid and/or funded by the Company's other capital resources. The Company's
ability to obtain a successor facility or similar financing will depend upon,
among other things, the willingness of financial organizations to participate in
funding Non-prime Borrower credit organizations and the Company's financial
condition and results of operations. No assurance can be given that the Company
will continue to comply with the terms of such facilities or to extend the
commitment terms thereof. Although the Company believes that other financing
would be available, no assurance can be given that successor financing will be
available to the Company when needed and on similar terms. The Revolving Credit
Facility is a $100 million credit line which is used by the Company primarily to
purchase Automobile Sales Contracts and to originate Direct Loans and Premium
Finance Contracts. At December 31, 1997, borrowings of $46.7 million were
outstanding under the Revolving Credit Facility. The facility expires on August
31, 1999. See "Business --Financing" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations --Liquidity and Capital
Resources."
CONTROL BY EXISTING SHAREHOLDER. James D. Thaxton, the Company's Chief
Executive Officer, President, and Chairman of the Board, beneficially owns
approximately 82% of the outstanding shares of Common Stock. As a result, Mr.
Thaxton is able to elect all of the Company's directors, amend the Company's
articles of incorporation, effect a merger, sale of assets, or other business
acquisition or disposition, and otherwise effectively control the outcome of
other matters requiring shareholder approval. See "Principal and Management
Shareholders."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS. As part of its growth
strategy, the Company may pursue acquisitions of independent consumer finance
companies, insurance agencies, or related companies. The Company does not
currently have any agreement, proposal, understanding, or arrangement regarding
any particular material acquisition. With respect to any future acquisitions, no
assurance is given that the Company will be able to locate or acquire suitable
acquisition candidates, or that any businesses which are acquired can be
effectively and profitably integrated into the Company. In order to provide
funds for any acquisitions, the Company will likely need to incur, from time to
time, additional indebtedness and to issue, in public or private transactions,
equity and debt securities. The availability and terms of any such financing
will depend on market and other conditions, and no assurance is given that such
additional financing will be available on terms acceptable to the Company, if at
all. See "Business -- Business and Growth Strategy."
USE OF PROCEEDS
If all of the Securities offered hereby are sold, the net proceeds to
the Company are estimated to be approximately $49,850,000 (after payment of
offering expenses estimated at $150,000). The offering commenced on February 17,
1998, the Company has sold Term Notes having an aggregate principle amount of
$4.8 million, resulting in net proceeds of approximately $4.7 million (after
payment of expenses incurred to date of approximately $100,000). However, there
can be no assurance that the Company will receive any particular additional
amount of proceeds from the offering of the Securities. In addition, the Company
does not expect that it will ever have as much as $49,850,000 in net proceeds
available at any one time due to, among other factors, the maturities of the
Securities and the time period over which the offering will be conducted. Any
net proceeds available to the Company from sales of the Securities during the
offering will be principally used to temporarily repay indebtedness outstanding
under two tranches of its Revolving Credit Facility.
The Revolving Credit Facility is a $100 million credit line which is
used by the Company primarily to purchase Automobile Sales Contracts, originate
Direct Loans and Premium Finance Contracts, and provide working capital for the
Company's other lines of business. The Revolving Credit Facility consists of six
tranches and has a maturity date of August 31, 1999. The primary tranche is used
to finance consumer receivables and provides for advances of up to $100 million,
less any amounts advanced under the secondary tranches. One of the secondary
tranches ("Tranche B") also is used to finance consumer receivables and allows
the Company to borrow up to $10 million against a higher percentage of Net
Finance Receivables than under the primary tranche. The Company borrows against
Tranche B only when it has exhausted available borrowings under the primary
tranche. The Revolving Credit facility also provides a $5 million tranche
dedicated to non-consumer receivables, a $25 million
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tranche established to provide a mortgage loan warehouse facility, a $10 million
tranche which permits borrowings against insurance commissions, and a $7 million
tranche to finance future acquisitions. At December 31, 1997, $45.0 million was
outstanding under the primary tranche and $1.7 million was outstanding under
other tranches. The interest rate for borrowings is a defined prime rate
published by Citibank, N.A. (or other money center bank designated by the
lender) plus one percent per annum for the primary tranche, the non-consumer
receivable tranche, and the mortgage loan tranche, plus five percent per annum
for Tranche B and the acquisition tranche and plus two percent per annum for the
insurance commission tranche (9.50%, 13.50% and 10.5%, respectively, at December
31, 1997). The Company expects to continue using the Revolving Credit Facility
to fund the growth of its business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Liquidity and Capital Resources"
and "Business -- Business and Growth Strategy."
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DESCRIPTION OF SECURITIES
GENERAL
The Securities will be issued under an Indenture, dated as of February
17, 1998 (the "Indenture") between the Company and The Bank of New York. The
Securities will be subordinated, unsecured obligations of the Company. The
material terms, provisions and covenants contained in the Securities and the
Indenture are described below.
The Securities will be subordinate in right of payment to Senior
Indebtedness of the Company, as described below under "Subordination." The
Indenture does not limit the incurrence of Senior Indebtedness or any other
debt, secured or unsecured, of the Company or any subsidiary, nor does it
contain any terms which would afford protection to holders of the Securities
(individually a "Holder" and collectively the "Holders") in the event of a
recapitalization, a change in control, a highly leveraged transaction or a
restructuring involving the Company.
The Securities will be obligations of the Company only. Because the
Company does business through subsidiary corporations, its rights and the rights
of its creditors, including the Holders of the Securities, to participate in the
distribution of the assets of any of the Company's subsidiaries upon
liquidation, dissolution or reorganization of a subsidiary will be subject to
the prior claims of the subsidiaries' creditors, except to the extent that the
Company may itself be a creditor with recognized claims against the subsidiary.
The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act") as in effect on the date of the
Indenture. The Securities are subject to all such terms, and holders of the
Securities are referred to the Indenture and the Trust Indenture Act for a
statement of them. The statements under this caption relating to the Indenture,
a copy of which is filed as an exhibit to the Registration Statement, and the
Securities are summaries and do not purport to be complete. Such summaries make
use of certain terms defined in the Indenture and are qualified in their
entirety by express reference to the Indenture.
TERMS OF SUBORDINATED TERM NOTES DUE ONE MONTH
Each one month Term Note will be issued in the minimum principal amount
of $100 and will mature one month after date of issuance unless redeemed or
extended as provided therein. Holders of one month Term Notes may adjust the
original principal amount, without extending the maturity, at any time by
increases or decreases resulting from additional purchases or partial
redemptions; provided, however, that partial redemptions may not reduce the
outstanding principal amount below $100. Upon presentation of a one month Term
Note certificate to the Company, the Company will, for the Holder's convenience,
record on the certificate any adjustments to the original principal amount, such
as additional purchases or partial redemptions.
The Company will determine, from time to time, the rate of interest
payable on one month Term Notes, which rate will be at least equal to the rate
established for the most recent auction average of United States Treasury Bills
with a maturity of 13 weeks, but no less than 2% per annum and no more than 12%
per annum. The rate of interest at the time of purchase will be the rate of
interest payable throughout the original term of the one month Term Note.
Interest will be payable at maturity.
Not later than 15 days prior to the maturity of a one month Term Note,
the Company will give the Holder notice by first-class mail of the maturity
date. Each one month Term Note will be automatically extended for successive one
month terms at the rate(s) of interest then in effect for one-month Term Notes
unless, prior to maturity, the Company receives notification of the holder's
intention to redeem the Term Note. Except for a possible change in the rate of
interest, all of the terms and conditions applicable to the one month Term Note
when issued will also apply during each period of extension.
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TERMS OF SUBORDINATED TERM NOTES DUE 6, 12, 36 AND 60 MONTHS
Each 6, 12, 36 or 60 month Term Note will be issued in the minimum
principal amount of $1,000 and will mature 6, 12, 36 or 60 months after date of
issuance unless redeemed as provided therein. The Company will determine, from
time to time, the rates of interest payable on the 6, 12, 36 or 60 month Term
Notes, which rate will be at least equal to the rate established for the most
recent auction average of United States Treasury Bills with a maturity of 52
weeks but no less than 2% and nor more than 12% per annum. The rate of interest
at the time of purchase of a particular 6, 12, 36 or 60 month Term Note will be
the rate payable throughout the term of such Term Note. Interest will be
payable, at the Holder's option, either monthly, quarterly or at maturity
(compounded quarterly).
No later than 30 days prior to maturity of a 6, 12, 36 or 60 month Term
Note, the Company will give the Holder notice by first-class mail of the
maturity date. Each 6, 12, 36 or 60 month Term Note will be automatically
extended for successive 6, 12, 36 or 60 month terms, respectively, at the rates
of interest then in effect for 6, 12, 36 or 60 month Term Notes unless, prior to
maturity, the Company receives notification of the Holder's intention to redeem
the Term Note at maturity. Except for a possible change in the rate of interest,
all of the terms and conditions applicable to such Term Notes when issued will
also apply during each period of extension.
The Company will have the right, at its option, to call any of the 6,
12, 36 or 60 month Term Notes for redemption before maturity, at any time.
Interest on 6, 12, 36 or 60 month Term Notes called for redemption will continue
to accrue until the date of redemption and no premium shall be paid thereon. The
Company will give the Holder of a 6, 12, 36 or 60 month Term Note not less than
30 days' prior written notice by first class mail of each redemption,
specifying, among other things, the principal amount of the Term Note to be
redeemed and the redemption date. The principal amount of the Term Note
specified in such notice, together with interest accrued and unpaid thereon to
the date of redemption, will become due and payable on such redemption date.
PROCEDURE FOR AUTOMATIC EXTENSIONS OF TERM NOTES
Not later than 15 days prior to the maturity of a Term Note, the
Company will provide the holder with an extension notice and a copy of the
Company's most recent quarterly report filed with the Commission and, if not
previously furnished to the holder, a copy of the Company's most recent annual
report filed with the Commission. The extension notice will advise the holder of
the maturity date of this Term Note, the principal amount due on maturity, the
amount of accrued interest to the maturity date and the applicable interest rate
upon an automatic extension of the Term Note. The extension notice will also
inform the holder that, upon request, the Company will promptly furnish the
holder with a copy of this Prospectus, as amended or supplemented. Unless prior
to the maturity of a Term Note the Company receives notification of the holder's
intention to redeem his Term Note, it will be automatically extended as
described above."
TERMS OF SUBORDINATED DAILY NOTES
Daily Notes will be issued in the minimum original principal amount of
$50. Holders of Daily Notes may adjust the original principal amount at any time
by increases or decreases resulting from additional purchases or partial
redemptions; provided, however, that partial redemptions may not reduce the
outstanding principal amount below $50. Upon presentation of a Daily Note
certificate to the Company, the Company will, for the Holder's convenience,
record on the certificate any adjustments to the original principal amount, such
as additional purchases or partial redemptions.
If the holder redeems in full the obligation represented by a Daily
Note, such Daily Note must be surrendered by the Holder to the Company and the
indebtedness evidenced thereby shall be fully discharged by payment to the
Holder of the outstanding principal amount thereof, together with any accrued
but unpaid interest, as reflected on the books of the Company. The Company
retains the right to require the Holder to give the Company no less than thirty
(30) days' prior written notice, by first class mail, of a redemption requested
by the Holder, which notice shall specify the principal amount of the Daily Note
to be redeemed and the redemption date.
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The interest rate payable on the Daily Note will be determined by the
Company and may fluctuate on a monthly basis. Any adjustment to the interest
rate will be made by the Company on the first day of the month. The fluctuation
may reflect adjustments which are either increases or decreases in the rate of
interest payable. The interest rate, once adjusted, will be effective as of the
first day of each month and shall remain in effect until next adjusted by the
Company. The interest rate will be no less than 3% below nor more than 5% above
the rate established for the most recent auction average of United States
Treasury Bills with maturities of 13 weeks and in no event will the interest
rate be less than 2% per annum or more than 12% per annum. Interest will be
accrued daily and compounded quarterly. Holders of Daily Notes will be notified
by first-class mail of any monthly adjustments in the interest rate.
REDEMPTION OF SECURITIES AT OPTION OF HOLDER.
ONE MONTH TERM NOTES. The Holder of a one month Term Note will have the
right, at such Holder's option, to redeem the Note prior to maturity, in whole
or in part. Upon such early redemption, the holder will forfeit all accrued
interest on the principal amount redeemed unless the Company, in its sole
discretion, elects to waive all or a portion of the forfeited interest. In
addition, the Company retains the right to require the Holder of a one month
Term Note to give the Company up to 30 days' prior written notice, by first
class mail, of a redemption requested by the Holder, which notice shall specify
the principal amount of the Term Note to be redeemed and the redemption date.
SIX, 12, 36 OR 60 MONTH TERM NOTES. The Holder of a 6, 12, 36, or 60
month Term Note will have the right, at such Holder's option, to redeem the Note
prior to maturity. The Holder, upon such redemption prior to maturity, will
forfeit an amount equal to the difference between the amount of interest
actually accrued on the 6, 12, 36 or 60 month Term Note since the date of
issuance or most recent extension and the amount of interest that would have
accrued thereon had the rate of interest been 3% less than the rate in effect at
the date issuance or most recent extension. When necessary, forfeited interest
already paid to or for the account of the Holder will be deducted from the
amount redeemed. Holders of 6, 12, 36 or 60 month Term Notes will also have the
right to make partial redemptions prior to maturity, provided however, that a
partial redemption may not reduce the principal amount to less than $1,000. The
interest rate penalty for each redemption of a 6, 12, 36 or 60 month Term Note
will be calculated only upon the principal amount of the Term Note redeemed. 6,
12, 36 or 60 month Term Notes may be redeemed before maturity without interest
rate penalty upon the death of any Holder or if the Holder is determined to be
legally incompetent by a court or any other administrative body of competent
jurisdiction. The Company retains the right to require the Holder of a 6, 12, 36
or 60 month Term Note to give the Company no less than 30 days' prior written
notice, by first class mail, of a redemption requested by the Holder, which
notice shall specify the principal amount of the Term Note to be redeemed and
the redemption date.
DAILY NOTES. The Holder of a Daily Note will have the right, at such
Holder's option, to redeem the Daily Note at any time, in whole or in part,
without penalty. The Company retains the right, however, to require the Holder
of a Daily Note to give the Company up to 30 days' prior written notice, by
first class mail, of a redemption requested by the Holder, which notice shall
specify the principal amount of the Daily Note to be redeemed and the redemption
date.
POSSIBLE 30-DAY NOTICE REQUIREMENT FOR REDEMPTION BY HOLDERS. As noted
above, the Company, in its sole discretion, may at any time require holders of
any of the Securities to give the Company 30 days' prior written notice, by
first class mail, of a redemption request. If the Company elects to impose this
requirement, it expects to do so by informing holders of the Securities of the
requirement personally when they are present in the offices of the Company or
its affiliates where the Securities may be presented for redemption, by
appropriate signage in these offices and possibly by a letter mailed to holders
of the Securities. Interest will continue to accrue if the Company should impose
this notice requirement. See "Risk Factors -- Possible 30-Day Notice Requirement
for Redemption by Holders and Related Risks."
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GENERAL PROVISIONS APPLICABLE TO ALL SECURITIES
OPTIONAL REDEMPTION BY COMPANY. The Company will have the right, at its
option, to call any of the Securities for redemption, in whole or in part, at
any time. Interest on the Securities called for redemption will continue to
accrue until the date of redemption and no premium shall be paid thereon. The
Company will give the Holder not less than thirty (30) days' prior written
notice by first class mail of each redemption, specifying, among other things,
the principal amount of the Security to be redeemed and the redemption date. The
principal amount of the Security specified in such notice, together with
interest accrued and unpaid thereon to the date of redemption, will become due
and payable on such redemption date.
SUBORDINATION. The indebtedness evidenced by the Securities is
subordinate to the prior payment when due of the principal of and interest on
all Senior Indebtedness. Upon maturity of any Senior Indebtedness, payment in
full must be made on such Senior Indebtedness before any payment is made on or
in respect of the Securities. During the continuance of any default in payment
of principal of (or premium, if any) or interest or sinking fund on any Senior
Indebtedness, or any other event of default with respect to Senior Indebtedness
pursuant to which the holders thereof have accelerated the maturity thereof, no
direct or indirect payment may be made or agreed to be made by the Company on or
in respect of the Securities. Upon any distribution of assets of the Company in
any dissolution, winding up, liquidation or reorganization of the Company,
payment of the principal of and interest on the Securities will be subordinated,
to the extent and in the manner set forth in the Indenture, to the prior payment
in full of all Senior Indebtedness. The Indenture does not limit the Company's
ability to increase the amount of Senior Indebtedness or to incur any additional
indebtedness in the future that may affect the Company's ability to make
payments under the Securities. Except as described above, the obligation of the
Company to make payment of principal or interest on the Securities will not be
affected. The Holders of the Securities will be subrogated to the rights of the
holders of the Senior Indebtedness to the extent of payments made on Senior
Indebtedness out of the distributive share of the Securities. By reason of such
subordination, in the event of a distribution of assets of the Company upon
insolvency, certain general creditors of the Company may recover more, ratably,
than Holders of the Securities.
"Senior Indebtedness" means Indebtedness of the Company outstanding at
any time other than Indebtedness of the Company to a subsidiary for money
borrowed or advanced from any such subsidiary or Indebtedness which by its terms
is not superior in right of payment to the Securities. "Indebtedness" means the
principal of, and premium, if any, and interest on, (1) any debt of the Company
for borrowed money whether or not evidenced by a note, debenture, bond or
similar instrument (including indebtedness represented by a purchase money
obligation given in connection with the acquisition of any property or assets)
including securities; (2) any debt of others described in the preceding clause
(1) which the Company has guaranteed or for which it is otherwise liable; and
(3) any amendment, renewal, extension or refunding of any such debt. As of
December 31, 1997, the outstanding amount of Senior Indebtedness of the Company
was approximately $47.9 million.
DEFAULTS AND REMEDIES. The term "Event of Default" when used in
connection with the Securities generally means any one of the following: (i)
failure of the Company to pay interest when due, which failure continues for 30
days, or failure to pay principal of any of the Securities when due (whether or
not prohibited by the subordination provisions); and (ii) certain events of
bankruptcy, insolvency or reorganization involving the Company or certain of its
subsidiaries.
The Indenture provides that the Trustee will, within 90 days after the
occurrence of a default, mail to the Holders notice of all uncured defaults
known to it (the term "default" for this purpose shall only mean the happening
of any Event of Default specified above, excluding grace periods), provided
that, except in the case of default in the payment of principal of or interest
on any of the Securities, the Trustee shall be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of the Holders.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of not less than 25% in aggregate principal amount of any series of the
Securities then outstanding, by notice in writing to the Company (and to the
Trustee if given by the holders), may declare the principal of and all accrued
interest on all the Securities of such series to be due and payable immediately.
Such declaration may be rescinded by Holders of a majority in
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principal amount of such series of Securities if (1) the Company has paid or
deposited with the Trustee a sum sufficient to pay all overdue interest on such
series of Securities and principal of any Securities which have become due
otherwise than by such declaration of acceleration and (2) all existing Events
of Default have been cured or waived.
Defaults (except, unless theretofore cured, a default in payment of
principal of or interest on the Securities or a default with respect to a
provision which cannot be modified under the terms of the Indenture without the
consent of each Holder affected) may be waived by the Holders of a majority in
principal amount of a series of Securities (with respect to such series) upon
the conditions provided in the Indenture. The Indenture requires the Company to
file periodic reports with the Trustee as to the absence of defaults.
A director, officer, employee or shareholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder by accepting a Security waives and
releases all such liability. The waiver and release are part of the
consideration for the issuance of the Securities.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. The Company may
not consolidate with, merge into, or transfer or lease substantially all of its
assets to, any other corporation other than a Subsidiary, unless the successor
corporation assumes all obligations of the Company under the Indenture and the
Securities and certain other conditions are met. Thereafter all such obligations
of the Company will terminate and the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer or
lease is made will succeed to all rights and powers of the Company under the
Indenture.
SECURITIES NON-NEGOTIABLE. The Securities are non-negotiable and no
rights of ownership may be transferred by mere endorsement and delivery of the
Securities to a purchaser. All transfers and assignments of Securities may be
made only at the offices of the Company, upon presentation of the Security and
recordation of such transfer or assignment in the books of the Company. The
Securities are not transferable to any person who is not a resident of a state
where the offering of the Securities has not been registered under applicable
state securities laws unless an exemption from such registration is available.
MODIFICATION OF THE INDENTURE. The Indenture contains provisions
permitting the Company and the Trustee, without the consent of any Holder, to
supplement or amend the Indenture under certain specified circumstances,
including to cure any ambiguity, to correct or supplement any other provision
thereof, to evidence the succession of a successor to the Company or the
Trustee, to add to the covenants of the Company for the benefit of the Holders
or additional Events of Default, to secure the Securities, or to add any other
provisions with respect to matters or questions arising thereunder which the
Company and the Trustee deem necessary or desirable and which do not adversely
affect the interests of the Holders. Otherwise, the rights and obligations of
the Company and the rights of the Holders may be modified by the Company and the
Trustee only with the consent of the Holders of a majority in principal amount
of each series of Securities then outstanding. No reduction in the principal of
or the interest rate on the Securities or in the percentage of Holders required
for modification of the Indenture and no extension of the maturity of any
Securities or in the time of payment of interest will be effective against any
Holder without his consent.
THE COMPANY AS PAYING AGENT. All principal and interest payments shall
be made to the Holders by the Company and notice thereof shall be provided by
the Company to the Trustee.
SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture will be
discharged and cancelled upon payment of all the Securities or upon deposit with
the Trustee, within not more than one year prior to the maturity of all the
Securities, of funds sufficient for such payment or redemption.
THE TRUSTEE. The Trustee is The Bank of New York, a New York banking
corporation, whose principal corporate trust office is in New York City. Notice
to the Trustee should be directed to The Bank of New York, Towermarc Plaza,
10161 Centurion Parkway, Jacksonville, Florida 32256, Attention: Assistant
Treasurer.
16
<PAGE>
The Holders of a majority in principal amount of all outstanding series of
Securities have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, provided that
such direction would not conflict with any rule of law or with the Indenture,
would not be prejudicial to the rights of another Holder and would not subject
the Trustee to personal liability. The Indenture provides that in case an Event
of Default should occur and be known to the Trustee (and not be cured), the
Trustee will be required to use the degree of care of a prudent man in the
conduct of his own affairs in the exercise of its power. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders unless
they shall have offered to the Trustee security and indemnity satisfactory to
it.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data of the Company set forth below are qualified by
reference to, and should be read in conjunction with, the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
The balance sheet at December 31, 1996 and 1997 and the income data for the
years then ended are derived from the consolidated financial statements of the
Company accountants by KPMG Peat Marwick LLP, independent auditors, which are
included elsewhere in this Prospectus. The financial statements for 1996 have
been restated to include the effects of the acquisition of Thaxton Insurance
using the "as if" pooling of interests method of accounting. As such, all
periods prior to the acquisition have been restated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1997
-------------------------------------
<S> <C> <C>
INCOME STATEMENT DATA:
Interest and fee income........................................... $13,529 $15,893
Interest expense.................................................. 4,210 5,023
------- -------
Net interest income............................................... 9,319 10,870
Provision for credit losses....................................... 3,593 6,580
------- -------
Net interest income after provision for credit losses........... 5,726 4,290
Insurance commissions, net........................................ 5,893 5,470
Other income...................................................... 986 1,221
Operating expenses................................................ 11,974 13,211
Income tax expense (benefit)...................................... 247 (724)
------- -------
Net income (loss)................................................. $ 384 $ (1,506)
======= ===========
Net income (loss) per common share $ 0.09 $ (0.39)
Common shares outstanding......................................... 3,932 3,796
YEAR ENDED DECEMBER 31,
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1997
--------------------------------------
OPERATING DATA:
Average interest rate earned (1)..................... 30.92% 29.79%
Average interest rate paid .......................... 10.21 9.80
Net interest spread ................................. 20.71 19.99
Net interest margin (2).............................. 22.14 21.34
Allowance for credit losses as a
percentage of Net Finance
Receivables (3).................................... 4.35 8.82
Allowance for credit losses, dealer reserves and
discount on bulk purchases as a percentage of
17
<PAGE>
Net Finance Receivables (3)....................... 7.81 10.71
Net charge-offs as a percentage
of average Net Finance
Receivables ...................................... 5.06 7.47
</TABLE>
- --------------------
(1) Average interest rate earned represents interest and fee income for the
period divided by average Net Finance Receivables during the period.
(2) Net interest margin represents net interest income for the period
divided by average Net Finance Receivables during the period.
(3) Net finance receivable balances are presented net of unearned finance
charges only.
18
<PAGE>
<TABLE>
<CAPTION>
AT YEAR ENDED DECEMBER 31,
1996 1997
--------------------------------------------
<S> <C> <C>
BALANCE SHEET DATA:
Finance receivables............................. $63,107 $67,558
Unearned income (1)............................. (14,366) (14,087)
Allowance for credit losses..................... (2,195) (4,809)
Finance receivables, net........................ 46,546 48,662
Total assets.................................... 56,681 60,965
Total liabilities............................... 50,310 54,996
Shareholders' equity............................ 6,371 5,969
</TABLE>
- --------------------
(1) Includes unearned finance charges, dealer reserves on Automobile Sales
Contracts and discounts on bulk purchases. Dealer reserves and
discounts on bulk purchases totaled $1,787,000 and $1,028,575 at
December 31, 1996 and 1997, respectively. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Credit
Loss Experience."
19
<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, selling insurance products on an agency basis and
originating residential mortgage loans.
The following table sets forth certain information with regard to
growth in the Company's finance receivable portfolio.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997
---------------------------------------
<S> <C> <C>
AUTOMOBILE SALES CONTRACTS
Total balance at period end, net (1) $35,998,537 37,463,211
Average account balance at period end 3,699 3,247
Interest income for the period 8,361,396 9,900,934
Average interest rate earned 27.98% 25.59%
Number of accounts at period end 9,733 11,537
DIRECT LOANS
Total balance at period end, net (1) $9,896,100 12,302,995
Average account balance at period end 1,324 1,719
Interest income for the period 2,941,705 3,110,850
Average interest rate earned 30.01% 28.08%
Number of accounts at period end 7,475 7,159
PREMIUM FINANCE CONTRACTS
Total balance at period end, net (1) $2,846,451 3,860,936
Average account balance at period end 287 319
Interest income for the period 737,895 573,005
Average interest rate earned 17.52% 17.04%
Number of Accounts at Period end 9,931 12,108
</TABLE>
------------------
(1) Finance receivable balances are presented net of unearned
finance charges, dealer reserves on Automobile Sales Contracts
and discounts on bulk purchases.
20
<PAGE>
Management believes the best opportunities for continued growth in the
Company's Automobile Sales Contract and Direct Loan portfolios lie in the
opening of new finance offices in small to medium-sized markets in the states
where the Company presently operates and contiguous states that management
believes to be under served by its competitors. The Company opened two new
finance offices in 1996 and five in 1997. The Company estimates that the capital
expenditure necessary for opening each new finance office is approximately
$21,000. While there are certain risks associated with such expansion,
management believes that its ability to identify and retain finance office
management personnel having established relationships with local independent
dealers, its expertise in extending and servicing credit to Non-prime Borrowers,
and other factors will enable it to manage anticipated growth in its finance
office network and in its Automobile Sales Contract and Direct Loan portfolios.
The Company will seek to expand its Premium Finance Contract portfolio by
establishing and broadening relationships with insurance agencies having a
client base in need of premium financing. The Company also periodically may make
bulk purchases of Automobile Sales Contracts and Premium Finance Contracts if
such purchases are deemed beneficial to the Company's competitive position and
portfolio mix and will seek opportunities to expand its network of insurance
offices primarily through the acquisition of independent insurance agencies.
RECENT EXPANSION ACTIVITIES
During 1997, the Company opened finance offices in Anderson and
Florence, South Carolina; Cumming and Columbus, Georgia; and Christiansburg,
Virginia. These offices will be devoted almost exclusively to the purchase and
servicing of Automobile Sales Contracts, and Thaxton Insurance acquired
independent agencies in York, South Carolina and Winston-Salem, North Carolina.
NET INTEREST MARGIN
The following table sets forth certain data relating to the Company's net
interest margin.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1997
------------------- -------------------
<S> <C> <C>
Average Net Finance Receivables (1) $43,717,445 $ 53,058,041
Average notes payable (1) 37,611,963 45,739,084
Interest and fee income (2) 13,518,563 15,808,386
Interest expense (3) 3,841,683 4,484,600
--------- ---------
Net interest income $ 9,676,880 $ 11,323,786
========= ==========
Average interest rate earned (1) 30.92% 29.79%
Average interest rate paid (1) 10.21 9.80
----- ------
Net interest rate spread 20.71% 19.99%
====== ======
Net interest margin (4) 22.14% 21.34%
====== ======
</TABLE>
- ------------
(1) Averages are computed using month-end balances during the periods presented
and are annualized for periods of less than one year.
(2) Excludes interest and fee income earned by Thaxton Insurance.
(3) Excludes interest expense paid on Thaxton Insurance related debt.
(4) Net interest margin represents net interest income divided by average Net
Finance Receivables.
21
<PAGE>
The principal component of the Company's profitability is its net
interest spread, the difference between interest earned on finance receivables
and interest expense paid on borrowed funds. Statutes in some states regulate
the interest rates that the Company may charge its borrowers while interest
rates in other states are unregulated and consequently are established by
competitive market conditions. There are significant differences in the interest
rates earned on the various components of the Company's finance receivable
portfolio. The interest rates earned on Automobile Sales Contracts generally are
lower than the interest rates earned on Direct Loans due to competition from
other lenders, superior collateral, and longer terms. The interest rates earned
on Premium Finance Contracts are state regulated and vary based on the type of
underlying insurance and the term of the contract.
Unlike the Company's interest income, its interest expenses are
sensitive to general market fluctuations in interest rates. The interest rates
paid to the Company's primary lender are based upon a published prime rate plus
set percentages. Thus, general market fluctuations in interest rates directly
impact the Company's cost of funds. The Company intends to explore opportunities
to fix or cap the interest rates paid on all or a portion of its borrowings;
however, there can be no assurance that fixed rate financing or suitable
interest-rate hedge facilities will be available on terms acceptable to the
Company. The Company's general inability to increase the interest rates earned
on finance receivables may impair its ability to adjust to increases in the cost
of funds resulting from changes in market conditions. Accordingly, increases in
market interest rates generally will narrow the Company's interest rate spread
and lower its profitability while decreases in market interest rates generally
will widen the Company's interest rates spreads and increase profitability.
The decline in net interest rate spreads from 1995 to 1997 was
attributable primarily to the increased level of Automobile Sales Contracts in
the Company's finance receivable portfolio. The Company expects Automobile Sales
Contracts to be a principal component of future growth in its finance receivable
portfolio. If this growth in Automobile Sales Contracts occurs, the Company
expects that its net interest spread will continue to narrow. See "Liquidity and
Capital Resources."
RESULTS OF OPERATIONS
COMPARISON OF 1997 TO 1996. Finance receivables at December 31, 1997
were $67,558,269 versus $63,106,601 at December 31, 1996, a 7% increase. The
Company opened two branch offices in 1996 and five in 1997 devoted primarily to
the purchase and servicing of Automobile Sales Contracts, which generated an
increased volume of such contracts during 1997.
Unearned income at December 31, 1997 was $13,058,066 versus $12,578,514
at December 31 , 1996, a 4% increase which was directly related to the higher
volume of finance receivable originations during 1997. The provision for credit
losses established for the twelve months ended December 31, 1997 was $6,579,932
versus $3,593,399 for 1996, and the allowance for credit losses increased from
$2,195,000 at December 31, 1996 to $4,809,400 at December 31, 1997. The
allowance for credit losses as a percentage of Net Finance Receivables increased
from 4.4% at December 31, 1996 to 8.8% at December 31, 1997. The allowance for
credit losses required by the Company's reserve methodology increased
significantly from the end of 1996 to the end of 1997 due to a high charge-off
experience during the third and fourth quarters of 1997, which indicated a
higher level of potential losses in the portfolio, as well as the additional
allowance for loss required on the higher level of finance receivables
outstanding. See "Recent Material Adverse Trend in Credit Loss Experience."
The growth in finance receivables during the twelve months ended
December 31, 1997 versus the comparable period in 1996 resulted in higher levels
of interest and fee income. Interest and fee income for the twelve months ended
December 31, 1997 was $15,892,683, compared to $13,528,881 for the twelve months
ended December 31, 1996, a 17% increase. Interest expense also was higher,
increasing to $5,023,179 for the twelve months ended December 31, 1997 versus
$4,209,763 for the comparable period of 1996, a 19% increase. The increase in
interest expense was due to the higher levels of borrowings required to fund
finance receivable originations and the working capital requirements of the
Company.
22
<PAGE>
Net interest income for the twelve months ended December 31, 1997
increased to $10,869,504 from $9,319,118 for the comparable period of 1996, a
17% increase. The increase in net interest income was attributable to the higher
level of finance receivables.
Insurance commissions net of insurance cost decreased to $5,469,667 for
the twelve months ended December 31, 1997 from $5,893,606 for the comparable
period of 1996, due to reduced sales of insurance products to borrowers. Other
income increased from $985,763 for the twelve months ended December 31, 1996 to
$1,221,525 for the comparable period of 1997 due primarily to increased profit
sharing payments to the Company from various insurance carriers.
Total operating expenses increased from $11,974,280 for the twelve
months ended December 31, 1996 to $13,210,791 for the comparable period of 1997,
a 10% increase. The increase in expenses was due to opening new finance offices
in addition to a general increase in costs associated with administering a
larger finance receivable portfolio.
The Company generated a net loss for the twelve months ended December
31, 1997 of $1,506,333 as compared to net income of $384,184 for the comparable
period of 1996. The decrease in net income was due primarily to the
substantially increased provision for credit losses.
Stockholders' equity decreased from $6,371,305 at December 31, 1996 to
$5,969,317 at December 31, 1997 as a result of the Company's net loss from
operations during the period, partially offset by additional equity raised by
the Company. In December, the Company completed a public offering of its Series
A Preferred Stock. The offering, made to the Company's common stockholders,
allowed each common stockholder to exchange one share of common stock for one
share of preferred stock, subject to the requirement that for each share
exchanged, one additional share of preferred must be purchased for $10 in cash.
The offering resulted in the exchange of 89,007 shares of common stock for an
equal number of shares of preferred stock, and the sale of an additional 89,007
shares of preferred stock at $10 per share. After expenses, net proceeds to the
Company were $718,067. Also in December, an individual investor converted 27,076
shares of common stock into an equal number of shares of the Company's Series B
Preferred Stock, and an insurance company from which the Company had borrowed
$500,000 converted that note into a 50,000 shares of the Company's Series C
Preferred Stock.
CREDIT LOSS EXPERIENCE
Provisions for credit losses are charged to income in amounts
sufficient to maintain the allowance for credit losses at a level considered
adequate to cover the expected future losses of principal and interest in the
existing finance receivable portfolio. Credit loss experience, contractual
delinquency of finance receivables, the value of underlying collateral, and
management's judgment are factors used in assessing the overall adequacy of the
allowance and resulting provision for credit losses. The Company's reserve
methodology is designed to provide an allowance for credit losses that, at any
point in time, is adequate to absorb the charge-offs expected to be generated by
the finance receivable portfolio, based on events or losses that have occurred
or are known to be inherent in the portfolio. The model used by the Company
utilizes historical charge-off data to predict the charge-offs likely to be
generated in the future by the existing finance receivable portfolio. The model
stratifies losses by originating office and by type, and develops historical
loss factors which are applied to the current portfolio. In addition, changes in
dealer and bulk purchase reserves are analyzed for each individual dealer and
bulk purchase, and additional reserves are established for any dealer or bulk
purchase if coverage has declined below adequate levels. The Company's
charge-off policy is based on an account by account review of delinquent
receivables. Losses on finance receivables secured by automobiles are recognized
at the time the collateral is repossessed. Other finance receivables are charged
off when they become contractually past due 180 days, unless extenuating
circumstances exist leading management to believe such finance receivables will
be collectible. Finance receivables may be charged off prior to the normal
charge-off period if management deems them to be uncollectible.
Under the Company's dealer reserve arrangements, when a dealer assigns
an Automobile Sales Contract to the Company, the Company withholds a certain
percentage of the principal amount of the contract, usually between five and ten
percent (the "Discount Percentage"). The amounts withheld from a particular
dealer are recorded in a subsidiary ledger account (the "Specific Reserve
Account"). Any losses incurred on Automobile Sales Contracts
23
<PAGE>
purchased from that dealer are charged against its Specific Reserve Account. If
at any time the balance of a dealer's Specific Reserve Account exceeds the
amount derived by applying the Discount Percentage to the total amount of
principal and interest due under all outstanding Automobile Sales Contracts
purchased from such dealer (the "Excess Dealer Reserve"), the dealer is entitled
to receive distributions from the Specific Reserve Account in an amount equal to
the Excess Dealer Reserve. If the Company is continuing to purchase Automobile
Sales Contracts from a dealer, distributions of Excess Dealer Reserves generally
are paid quarterly. If the Company is not continuing to purchase Automobile
Sales Contracts from a dealer, distributions of Excess Dealer Reserves are not
paid out until all Automobile Sales Contracts originated by that dealer have
been paid in full. The aggregate balance of all Specific Reserve Accounts,
including unpaid Excess Dealer Reserves, are reflected in the balance sheet as a
reduction of finance receivables. The Company's allowance for credit losses is
charged only to the extent that the loss on an Automobile Sales Contract exceeds
the originating dealer's Specific Reserve Account at the time of the loss.
The Company periodically purchases Automobile Sales Contracts in bulk.
In a bulk purchase arrangement, the Company typically purchases a portfolio of
Automobile Sales Contracts from a dealer at a discount to par upon a review and
assessment of the portfolio by the Company's management. This discount is
maintained in a separate account against which losses on the bulk portfolio
purchased are charged. To the extent losses experienced are less than the
discount, the remaining discount is accreted into income.
RECENT MATERIAL ADVERSE TREND IN CREDIT LOSS EXPERIENCE
The Company's charge-offs as a percentage of average Net Finance
Receivables increased from 5.06% for the year ended December 31, 1996, to 7.47%
for the year ended December 31, 1997. This increase was attributed to a general
deterioration in loan performance experienced by the Company during the latter
part of 1996 and continuing into 1997. Management believes that its charge-off
experience was comparable to that experienced by other lenders in the non-prime
sector. In response to this increased loss experience, the Company made several
operational changes in the second half of 1997 which, over the long-term, are
expected to reduce the Company's charge-offs. These changes included tightening
its branch credit guidelines, reducing purchases of Automobile Sales Contracts
from certain dealers for which loss experience had been unsatisfactory,
splitting several offices to obtain improved collection by locating collection
personnel in closer geographic proximity to borrowers, and reorganizing the
Company's regional structure to place more experienced supervisory personnel in
charge of certain offices with higher than average credit loss experience.
Management believes these changes have resulted in fewer charge-offs than would
have been experienced without the changes. Additionally, in the fourth quarter
of 1997 the Company tightened its credit policies further by, among other
things, increasing qualifying ratios for credit approval of borrowers and
increasing required down payments on Automobile Sales Contracts financed by the
Company. These policy changes have resulted in slower growth of the Company's
Automobile Sales Contract portfolio, as the current credit market for Non-Prime
Borrowers is highly competitive. Management believes that over time these
changes will reduce charge-offs to acceptable levels.
The following table sets forth certain information respecting the
Company's allowance for credit losses and credit loss experience at or over the
periods presented.
<TABLE>
<CAPTION>
AT OF FOR THE YEARS ENDED DECEMBER 31,
1996 1997
---------------------------------------------
<S> <C> <C>
Net Finance Receivables (1) $ 50,447,410 $ 54,500,203
Allowance for credit losses 2,195,000 4,809,400
Allowance for credit losses as a percentage
of Net Finance Receivables (1) 4.35% 8.82%
Dealer reserves and discounts on bulk purchases $1,787,000 $1,028,575
Dealer reserves and discounts on bulk
Purchases as a percentage of Automobile
Sales Contracts 4.64% 2.67%
24
<PAGE>
<CAPTION>
AT OF FOR THE YEARS ENDED DECEMBER 31,
1996 1997
---------------------------------------------
<S> <C> <C>
Allowance for credit losses and dealer
reserves and discount on bulk purchases $ 3,942,000 $ 5,837,975
Allowance for credit losses and dealer
reserves and discount on bulk purchases
as a percentage of Net Finance Receivables 7.81% 10.71%
Provision for credit losses $ 3,593,399 $ 6,579,932
Charge-offs (net of recoveries) 2,210,441 3,965,532
Charge-offs (net of recoveries) as a
percentage of average net finance receivables 5.06% 7.47%
</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,
--------------------------------------------
1996 1997
--------------------------------------------
<S> <C> <C>
Automobile Sales Contracts and Direct Loans
contractually past due 90 days or more (1) $ 380,569 $ 551,363
Automobile Sales Contracts and Direct Loans (1) 45,894,637 49,766,206
Automobile Sales Contracts and Direct Loans contractually
past due 90 days or more as a percentage of
Automobile Sales Contracts and Direct Loans 0.83% 1.11%
</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,
-------------------------------------------
1996 1997
-------------------------------------------
<S> <C> <C>
Premium finance contracts contractually past due 60
days or more (1) $ 100,633 $ 89,331
Premium finance contracts outstanding (1) 2,846,451 3,860,936
Premium finance contracts contractually past due 60
days or more as a percentage of premium finance
contracts 3.5% 2.3%
</TABLE>
- ----------------------------
(1) Finance receivable balances are presented net of unearned finance charges.
The Company also incurs various expenses related to the collection of delinquent
accounts. These expenses consist of miscellaneous expenses paid to third parties
for activities related to collection on delinquent accounts and repossession of
collateral. The following table sets forth certain information concerning
collection expenses for the periods indicated.
25
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 1997
--------------------------------------------
<S> <C> <C>
Collection expenses $ 63,797 $ 94,462
Collection expenses as a percentage of
average Net Finance Receivables 0.15% 0.18%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generally finances its operations and new offices through
cash flow from operations and borrowings under the Revolving Credit Facility.
The Revolving Credit Facility, which provides for borrowings of up to $100
million, is extended by Finova Captial Corporation and matures on August 31,
1999. The facility consists of six tranches. The primary tranche is used to
finance consumer receivables and provides for advances of up to $100 million,
less any amounts advanced under the secondary tranches. Tranche B, one of the
secondary tranches, is also used to finance consumer receivables and allows the
Company to borrow up to $10 million against a higher percentage of Net Finance
Receivables than under the primary tranche. The Company borrows against Tranche
B only when it has exhausted available borrowings under the primary tranche. The
Revolving Credit facility also provides a $5 million tranche dedicated to
nonconsumer receivables, a $25 million tranche established to provide a mortgage
loan warehouse facility, a $10 million tranche which permits borrowings against
insurance commissions generated by Thaxton Insurance, and a $7 million tranche
to finance future acquisitions. As of December 31, 1997, $46.7 million was
outstanding under the Revolving Credit Facility, $45.0 million of which had been
advanced under the primary tranche and $1.7 million of which had been advanced
under secondary tranches. At December 31, 1997, there were no advances under
Tranche B. Under the terms of the Revolving Credit Facility, the Company's Net
Finance Receivables at December 31, 1997 would have allowed it to borrow an
additional $4.4 million against existing collateral, with $53.3 million of total
potential capacity available for borrowing against qualified finance receivables
generated by the Company in future periods. The interest rate for borrowings is
the prime rate published by Citibank, N.A. (or other money center bank
designated by Finova) plus one percent per annum for the primary tranche, the
nonconsumer receivable tranche, and the mortgage loan tranche, plus five percent
per annum for Tranche B and the acquisition tranche and plus two percent per
annum for the insurance commission tranche. The interest rate is adjusted
monthly to reflect fluctuations in the designated prime rate. Accrued interest
on borrowings is payable monthly. Principal is due in full on the maturity date
and can be prepaid without penalty. The Revolving Credit Facility is secured by
substantially all of the Company's assets and requires the Company to comply
with certain restrictive covenants, including covenants to maintain a certain
debt to equity ratio, tangible net worth, annual net income within prescribed
limits, and a covenant to limit annual distributions to common shareholders to
25% of net income.
In 1997, the Company began issuing subordinated term notes to
individual investors in an intrastate public offering registered with the State
of South Carolina. The registration of a similar offering was declared effective
by the U. S. Securities and Exchange Commission in March 1998, which will enable
the Company to offer notes in additional states. Maturity terms on these notes
range from daily to sixty months, and interest rates vary in accordance with
market rates. Notes currently being offered carry interest rates ranging from
6.25% to 9.5%. Approximately $3.5 million in notes were outstanding as of
December 31, 1997. Proceeds from the issuance of these notes generally are used
to repay borrowings under the Revolving Credit Facility.
Cash flows from financing activities during the years ended December
31, 1996 and 1997 were as follows:
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
---------------- ----------------
<S> <C> <C>
Revolving Credit Facility $ 7,983,666 $ 4,079,053
Other notes payable 1,466,185 1,303,226
Dividends paid on preferred stock (25,500) ---
Repurchase of Common Stock (76,560) (137,983)
Proceeds from issuance of Preferred Stock --- 718,067
Common Stock --- ---
---------------- ----------------
Total $9,347,791 $5,962,363
================ ================
</TABLE>
Management believes that the borrowings available under the Revolving Credit
Facility, in addition to cash expected to be generated from operations and the
sale of the Securities pursuant to this Prospectus, will provide the resources
necessary to fund the Company's liquidity and capital needs through 1999. See
"Use of Proceeds."
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although management does not believe that inflation has a direct
material adverse effect on the Company's financial condition or results of
operations, increases in the inflation rate generally are associated with
increased interest rates. Because the Company borrows funds on a floating rate
basis and generally extends credit at the maximum interest rates permitted by
law or market conditions, increased interest rates would increase the Company's
cost of funds and could materially impair the Company's profitability. Inflation
also can affect the Company's operating expenses. The Company's business could
be affected by other general economic conditions in the United States, including
economic factors affecting the ability of its customers or prospective customers
to purchase used automobiles and to obtain and repay loans.
27
<PAGE>
IMPACT OF YEAR 2000
The Company recognizes that there is a business risk in computerized
systems as it moves into the next century. If computer systems misinterpret the
date, items such as interest calculations on loans will be incorrect. This is
commonly called the "Year 2000 Problem." A number of computer systems used by
the Company in its day to day operations may be affected by this problem.
Management has established a project team which has identified affected systems
and is currently working to ensure that this event will not disrupt operations.
This project team reports regularly to senior management. The Company is also
working closely with outside computer vendors to ensure that all software
corrections and warranty commitments are obtained. The estimated cost to the
Company for these corrective actions, and the related hardware required to run
the upgraded software is estimated at approximately $1 million, the cost for
which is included in the Company's capital and operating budgets for 1998 and
1999. However, it should be noted that incomplete or untimely compliance would
have a material adverse impact on the Company, the dollar amount of which cannot
be accurately quantified at this time because of the inherent variables and
uncertainties involved.
ACCOUNTING MATTERS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" in June, 1997. The purpose of SFAS 130 is to address concerns over the
practice of reporting elements of comprehensive income directly in equity.
Number SFAS requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. This statement is effective for periods beginning after
December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. The Company will adopt
the provisions of this SFAS for fiscal year 1998.
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in June, 1997. This statement applies to all
public entities. The provisions of SFAS No.131 require certain disclosures
regarding material industry segments within an entity. The statement is
effective for periods beginning after December 15, 1997. The adoption of this
standard is not expected to have a material effect on the Company's financial
reporting.
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BUSINESS
GENERAL
The Company was organized in July 1978 as C. L. Thaxton & Sons, Inc.,
and from that date until 1991 was primarily engaged in making and servicing
direct consumer and insurance premium finance loans to Non-Prime Borrowers. In
1991, the Company made a strategic decision to begin diversifying its portfolio
by actively seeking to finance purchases of used automobiles by Non-Prime
Borrowers and has since evolved into a diversified consumer financial services
company. In October 1996, the Company acquired Thaxton Insurance and began
selling, on an agency basis, various lines of property and casualty, life, and
accident and health insurance. The Company also entered the mortgage brokerage
business during 1996.
THE INDUSTRY
The segment of the consumer finance industry in which the Company
operates, which is commonly called the "non-prime credit market," provides
financing to consumers with limited credit histories, low incomes, or past
credit problems. These consumers generally do not have access to the same
variety of sources of consumer credit as borrowers with long credit histories,
no defaults, and stable employment, because they do not meet the stringent
objective credit standards imposed by most traditional lenders. The Company,
like its competitors in the same segment of the consumer finance industry,
generally charges interest to Non-prime Borrowers at the maximum rate permitted
by law or, in states such as South Carolina where there are no legal maximum
rates, at competitive rates commensurate with the increased default risk and the
higher cost of servicing and administering a portfolio of loans to such
borrowers. By contrast, commercial banks, captive financing subsidiaries of
automobile manufacturers, and other traditional sources of consumer credit to
prime borrowers typically impose more stringent credit requirements and
generally charge lower interest rates.
The non-prime consumer credit market is highly fragmented, consisting
of many national, regional, and local competitors, is characterized by relative
ease of entry and, in the case of used automobile financing, by the recent
arrival of a number of well capitalized publicly-held companies. The Company
believes that most of these companies are concentrating their activities on
providing financing to Non-prime Borrowers with less extensive credit problems
who are purchasing late model used cars (coming off lease or former rental cars)
from franchised automobile dealers. By contrast, the Company concentrates on
providing financing to Non-prime Borrowers who have more extensive credit
problems and are purchasing lower-priced, older model automobiles from
independent dealers and making Direct Loans to Non-prime Borrowers to meet
short-term cash needs.
The premium finance industry for personal lines of insurance is also
highly fragmented. Insurance companies that engage in direct writing of
insurance policies generally provide financing to their customers who need the
service. Numerous small independent finance companies such as the Company are
engaged in providing premium financing for personal lines of insurance purchased
by Non-prime Borrowers through independent insurance agents. Because the rates
they charge are highly regulated, these companies compete primarily on the basis
of efficiency in providing the financing and servicing the loans. A significant
number of independent insurance agents provide premium financing to their
customers either directly or through affiliated entities. As banks are allowed
to enter the insurance business, they also are increasingly engaging in the
premium finance business.
Independent insurance agencies represent numerous insurance carriers,
and typically place a customer's business with the carrier whose combination of
features and price best match the customer's needs. In comparison, direct agents
represent only one carrier. Most carriers find use of independent agencies to be
a more cost effective method of selling their products than using a direct agent
force. Competition in the independent insurance agency business is intense.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and
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maintain long-term customer relationships through low employee turnover and
responsive service representatives and offers a broad range of insurance
products underwritten by reputable insurance companies.
BUSINESS AND GROWTH STRATEGY
In order to expand its business and improve operating results, the
Company intends to continue to pursue a business strategy based on its (i)
in-depth understanding of the consumer finance business, (ii) ability to
evaluate credit risks associated with the non-prime credit market, (iii)
substantial experience with automobile dealers' financing requirements for
Non-prime Borrowers, (iv) efficient and effective servicing and collection of
its finance receivables, and (v) diversification into additional financial
services activities. The principal components of the Company's business and
growth strategy include:
o COMMITMENT TO DIVERSIFICATION -- Unlike many of its competitors who
specialize in used automobile finance, the Company is a diversified
consumer financial services company and intends to continue to diversify.
Although management anticipates that some of the Company's growth over the
next 12 to 18 months will be in its portfolio of Automobile Sales
Contracts, Direct Loan, Premium Finance Contract origination, and the
origination of residential mortgage loans will be emphasized as well.
Moreover, management believes the acquisition of Thaxton Insurance in
October 1996 will provide significant opportunities to cross-sell the
Company's various financial products and services. The Company operates
finance offices in a number of markets where Thaxton Insurance operates,
and in many cases the profile of a Thaxton Insurance customer is similar to
that of a Non-prime Borrower. An incentive program designed to reward
employees who successfully pursue cross-selling opportunities was
implemented during the fourth quarter of 1996. The Company is actively
seeking to enter other financial services businesses.
o EXPERIENCED MANAGEMENT -- The management team in the Company's lending
operations, including its regional supervisors and office managers,
possesses extensive experience in consumer finance, most of which has
involved lending to Non-prime Borrowers. The Company believes that the
retention of this experienced management team is critical to the Company's
ability to maintain credit quality, supervise its operations, and further
expand its network of finance offices. The management team for the
Company's insurance agency activities also has extensive experience in
insurance agency operations.
o EXPANSION OF THE COMPANY'S OFFICE NETWORK -- The Company currently has a
total of 25 finance offices located in Georgia, North Carolina, South
Carolina, Tennessee, and Virginia. The Company currently plans to open at
least one additional finance offices in the second half 1998, either in the
states where the Company currently operates or in adjacent southeastern
states where the Company believes that its business strategy is likely to
be successful. In deciding where to open additional finance offices, the
Company intends to concentrate on smaller urban areas where the Company is
able to hire experienced personnel who not only have substantial experience
in the consumer finance industry but are also familiar with local market
conditions and have existing relationships with local dealers. When
management deems it to be advantageous to do so, the Company may choose to
expand its finance office network through the acquisition of other
independent finance companies. The Company will also seek opportunities to
expand its insurance office network through acquisition of additional
independent insurance agencies in markets management believes are
attractive.
o INCENTIVE COMPENSATION FOR FINANCE OFFICE MANAGEMENT -- The Company
rewards its finance office managers for business development by providing,
in addition to a base salary, incentive compensation arrangements that are
tied to the productivity of their respective offices. To ensure credit
quality is maintained, however, finance office managers must keep their
delinquent accounts within certain parameters and maintain a certain return
on receivables before they are eligible to receive the incentive
compensation.
o STRONG INDEPENDENT DEALER RELATIONSHIPS -- The Company emphasizes service
by providing independent dealers from whom it purchases Automobile Sales
Contracts with a timely, reliable, and consistent source of financing for
purchases of used automobiles by Non-prime Borrowers. In hiring managers
for existing and new finance
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offices, the Company seeks to identify and recruit individuals with
existing relationships with dealers in targeted areas.
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o SUPERVISION AND MONITORING OF FINANCE OFFICES -- The Company's senior
management has established policies based on many years of experience in
the non-prime credit market for close monitoring and supervision of all
aspects of finance office operations, which serves as a counterbalance to
the Company's otherwise decentralized operations. Each of the Company's
regional supervisors conduct unannounced visits to each finance office
within their region twice annually to conduct an extensive review of its
operations and all finance receivables recently originated. The
supervisors' findings and recommendations are reported to senior
management, and the supervisors are responsible for monitoring future
compliance by finance office managers with their recommendations.
o MANAGEMENT INFORMATION SYSTEMS -- The management information systems used
by the Company provide management with daily reports that contain critical
operational information from each finance office. This information includes
the daily volume of Automobile Sales Contracts purchased and Direct Loans
made and repossession activities. The Company's premium finance business
also is highly automated, using a separate management information system,
and the insurance agency operations utilize one of the most widely used
agency management systems available.
o NEW BUSINESS INITIATIVES - During the latter part of 1996, the Company
entered into several new business activities. The Company began selling, on
an agency basis, property and casualty, life, and accident and health
insurance, and conducts this business through a network of 20 insurance
offices located in North Carolina and South Carolina. The Company presently
is developing strategies to increase the volume of premiums generated by
these offices as well as improving the profitability of its insurance
agency operations. In addition, the Company began a mortgage brokerage
operation during the fourth quarter of 1996. All of the Company's insurance
offices are being utilized to take mortgage applications from both prime
and non-prime borrowers , which are reviewed for compliance with the
underwriting standards of correspondent lenders at a central location.
Presently, all mortgage loans are being funded by correspondent lenders,
which take ownership of the loan immediately upon closing. The Company
takes no interest rate risk, and has no liability to the correspondent
lenders in the event of a monetary default by the borrower. The Company
receives a fee for originating the mortgage.
AUTOMOBILE SALES CONTRACT PURCHASES
Set forth below is a description of the process that the Company
follows in connection with its purchase of an Automobile Sales Contract from an
independent dealer and the sale of ancillary insurance products.
DEALER SOLICITATION. The Company solicits business from independent
dealers through the business development efforts of the manager of each finance
office and regional supervisors. Dealers in the area are evaluated by the office
manager with a view to ensuring that the Company purchases Automobile Sales
Contracts from reputable dealers carrying an inventory of quality used
automobiles. A relationship with a dealer begins only after the soundness of the
dealer's business is determined by a credit investigation of the dealer,
inquiries with state regulatory agencies and inquiries of local civic and
community organizations. The Company seeks to form relationships with dealers
that have been independently operating for a sufficient period of time to have
established a base of repeat customers with a track record of paying their
obligations under Automobile Sales Contracts despite an otherwise non-prime
credit history. The Company tracks the monthly performance of borrowers'
accounts by dealer, allowing the Company to review and evaluate the quality of
the Automobile Sales Contracts purchased from each dealer. This procedure allows
the Company to terminate business dealings with a dealer quickly if the
Automobile Sales Contracts purchased from that dealer have a higher than average
rate of delinquency.
DEALER AGREEMENTS. The Company enters into a non-exclusive agreement
with each dealer (a "Dealer Agreement") which sets forth the terms and
conditions under which the Company will purchase Automobile Sales Contracts. The
Dealer Agreement provides that all Automobile Sales Contracts sold to the
Company are without recourse to the dealer with respect to the credit risk of
the borrower, except for Automobile Sales Contracts for vehicles sold to
relatives or employees of the dealer. A Dealer Agreement includes
representations and warranties of the dealer that relate generally to such
matters as whether the dealer has (i) filed an application for a certificate of
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title showing a first lien in favor of the Company, (ii) obtained the full down
payment specified in the Automobile Sales Contract either in cash or in the form
of cash and an allowance for a vehicle trade-in and (iii) complied with
applicable state and federal consumer credit protection laws relating to
Automobile Sales Contracts. If the dealer breaches the terms of the Dealer
Agreement with respect to any Automobile Sales Contract purchased by the Company
or if the dealer's customer withholds payment as required under any Automobile
Sales Contract because of a claim, defense, counterclaim, or setoff against the
dealer, the dealer is obligated to repurchase the Automobile Sales Contract on
demand by the Company for its net unpaid balance. If the purchaser of the
automobile recovers any amount from the Company as a result of a claim against
the dealer, the Dealer Agreement provides that the dealer will reimburse the
Company for any amounts paid the customer and for any costs incurred as a result
of such claim.
The Dealer Agreement allows the Company to withhold a specified
percentage of the principal amount of each Automobile Sales Contract purchased,
an arrangement designed to protect the Company from credit losses on Automobile
Sales Contracts. These dealer reserves, which range from five to 10% of the net
amount of each Automobile Sales Contract purchased, are negotiated on a
dealer-by-dealer basis and are subject to change based upon the collection
history of the Automobile Sales Contracts purchased from each dealer. See
"Management's Discussion and Analysis -- Credit Loss Experience."
ORIGINATION OF AUTOMOBILE SALES CONTRACTS. Automobile Sales Contracts
purchased by the Company are originated by dealers when they sell a used car at
retail to a customer. The dealer completes and the customer signs a retail
installment contract and security agreement (giving the dealer a security
interest in the vehicle financed) on a printed form provided by the Company,
which includes the extensive disclosures required by state and federal law
regarding such matters as the annual percentage rate, the finance charge, the
amount financed, the total amount of all scheduled payments, and the total sale
price. The contract also includes a section where the customer may indicate
whether he or she desires to purchase credit life and credit accident and health
insurance, the premiums for which are included in the amount financed if the
customer elects to purchase credit insurance. The printed form identifies the
Company as the intended assignee of the contract and the terms and conditions of
the assignment to the Company are printed on the back of the form. The form
specifically provides that the terms of the assignment are subject to the terms
of the Dealer Agreement between the Company and the dealer.
The maximum interest rates on Automobile Sales Contracts originated in
South Carolina are based upon the maximum rate filed by the originating dealer
with state regulatory authorities. Such rates are not subject to a statutory
maximum. The maximum interest rates on Automobile Sales Contracts originated in
North Carolina are subject to a statutory maximum based on the model year of the
vehicle. Rates on used automobile purchases range from 18% per annum on vehicles
one or two model years old to 29% per annum on vehicles more than four model
years old. Interest rates on Automobile Sales Contracts originated in Virginia,
Georgia, and Tennessee are not subject to regulation. The actual interest rate
on an Automobile Sales Contract is set within statutory limits, if applicable,
based upon the credit profile of the borrower, the make, model and condition of
the collateral and market conditions.
CREDIT EVALUATION AND APPROVAL PROCEDURES. The Company applies
underwriting standards in purchasing Automobile Sales Contracts that take into
account principally the degree of a proposed buyer's creditworthiness and the
collateral value of the vehicle being financed. If a borrower elects to finance
the purchase of an automobile through a dealer with whom the Company has an
established relationship, which is typically the case, the dealer will submit
the borrower's credit application to the Company for review and proposed
transaction terms. The office manager, or other office personnel under the
manager's supervision, conducts the credit evaluation review. This review
generally takes into account, among other things, the borrower's credit history,
ability to pay, stability of residence, employment history, income,
discretionary income, and debt service ratio, as well as the collateral value of
the vehicle. The borrower's credit history is assessed principally through the
evaluation of a credit bureau report which is obtained immediately after receipt
of an application from a dealer. The Company uses a standard application
analysis score sheet to conduct a credit evaluation that incorporates the
factors described above. Unless the borrower's total score falls below a
specified cutoff point, the office manager has the authority to approve the
purchase of the Automobile Sales Contract, up to his credit limit, with no
further review. If the borrower's total
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score falls below the specified cut-off point, the office manager must receive
approval from a regional supervisor before approving the application for credit.
Generally, the Company will not finance more than 100% of the average
trade-in value of the automobile as set forth in the current edition of the
National Association of Automobile Dealers Official Used Car Guide and requires
that a borrower make a down payment of at least 10% of the purchase price. In
certain limited instances when the borrower is unable to make a sufficiently
large down payment, the Company will agree to purchase the Automobile Sales
Contract but will issue to the dealer a "deferred certificate" for the
difference between the average trade-in value of the automobile and the portion
of the sale price not covered by the borrower's down payment. Only when the
borrower has paid the entire balance of the Automobile Sales Contract is the
Company obligated to pay to the dealer the amount of the deferred certificate.
AUTOMOBILE SALES CONTRACT PURCHASES. Upon consummation of the sale of
the automobile to the borrower, the dealer delivers all required documentation
to the Company's office. The required documentation includes the executed
Automobile Sales Contract, proof of title indicating the Company's lien, an
odometer statement confirming the vehicle's mileage, proof that the automobile
is insured with the Company designated as loss payee and any supporting
documentation the Company specified in its conditional approval of the purchase.
Only when compliance with these requirements is verified, does the Company remit
funds to the dealer.
BULK PURCHASES OF AUTOMOBILE SALES CONTRACTS. From time to time the
Company purchases Automobile Sales Contracts in bulk from dealers who have
originated and accumulated contracts over a period of time. By doing so, the
Company is able to obtain large volumes of Automobile Sales Contracts in a
cost-effective manner. The Company applies underwriting standards in purchasing
Automobile Sales Contracts that take into account principally the borrowers'
payment history and the collateral value of the automobiles financed. Such
purchases are typically made at discounts ranging from 25% to 50% of the
financed portion of the Automobile Sales Contracts. There generally are no
dealer reserve arrangements on bulk purchases. In connection with such bulk
purchases, the Company reviews all credit evaluation information collected by
the dealer and reviews the servicing and collection history of the Automobile
Sales Contracts and obtains the required supporting documents.
SALES OF INSURANCE PRODUCTS IN FINANCE OFFICES. In connection with the
origination of Automobile Sales Contracts, the Company offers, as agent, credit
life, and credit accident and health insurance. Borrowers under Automobile Sales
Contracts and Direct Loans secured by automobiles generally must obtain
comprehensive collision insurance on the automobile that designates the Company
as loss payee. If the borrower allows such insurance to lapse during the term of
the contract or loan, the Company will purchase a vendors' single interest
insurance policy, which insures the Company against a total loss on the
automobile, and add the cost of the premium to the borrower's account balance.
The Company also offers, as agent, limited physical damage insurance, which
satisfies the requirement that the borrower purchase comprehensive collision
insurance. Limited physical damage insurance is a modified form of collision
insurance that will pay the borrower or the Company the lesser of (i) the cost
of repairs, less a designated deductible amount, (ii) the actual cash value of
the automobile, less a designated deductible amount or (iii) the net unpaid
contract or loan balance, less any delinquent payments. The Company receives
commissions on the sales of insurance equal to 20% of the premiums on credit
life and credit accident and health insurance and 25% of the premiums on limited
physical damage coverage.
DIRECT LOANS PROGRAM
The Company has been in the business of making Direct Loans to
Non-prime Borrowers since 1985. Direct Loans are typically sought by such
borrowers to meet short-term cash needs, finance the purchase of consumer goods
or refinance existing indebtedness. Generally, less than 10% of Direct Loans are
secured by first or second liens on real property. The remainder are secured by
personal property or are unsecured. The typical original term on a Direct Loan
is 15 months. In South Carolina and Tennessee, where there is no limit on the
maximum interest rate the Company may charge on Direct Loans, the Company has a
posted maximum rate of 69% per annum, which it may not exceed until the Company
files a higher maximum rate with the state regulatory authorities. In North
Carolina, the Company generally charges the maximum interest rates permitted by
law for such loans, which range from 18% to 30% per annum, depending upon the
amount financed. The Company currently does not make Direct
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Loans in Georgia or Virginia. The actual interest rate on a Direct Loan is set
within statutory limits, if applicable, based upon the credit profile of the
borrower, the type and value of any collateral and market conditions.
The credit evaluation procedures employed by the Company in connection
with Direct Loans are, with the exception of loans secured by real estate,
similar to the credit evaluation procedures employed in connection with the
purchase of Automobile Sales Contracts. The value of the collateral, if any,
however, is a far less significant factor in the Company's credit evaluation of
a Direct Loan. Instead, the Company places its primary emphasis on the ratio of
the anticipated debt service to the borrower's disposable income. Direct Loans
not secured by real estate are approved by office managers. If the loan is to be
secured by real estate, the Company obtains an appraisal of the property,
obtains a title opinion from an attorney and verifies filing of a mortgage or
deed of trust before disbursement of funds to the borrower. The Company
generally will not loan an amount in excess of 50% of the appraised value of the
real estate or, in the case of a home equity loan, 50% of the borrower's equity
in the property. All applications for Direct Loans secured by real estate must
be approved by the Company's President or Executive Vice President.
In connection with making Direct Loans, the Company also offers, as
agent, credit life and credit accident and health insurance on terms and
conditions similar to those on which it sells such credit insurance in
conjunction with the purchase of Automobile Sales Contracts. On all Direct Loans
that are secured by personal property other than a used car, the Company, in
lieu of filing financing statements to perfect its security interest in the
collateral, purchases non-filing insurance from an unaffiliated insurer. The
Company charges its customers on such loans an amount approximately equal to the
filing fees that would have been charged to the customer if the Company had
filed financing statements to perfect its security interest, which amount is
typically included in the amount of the loan. The Company uses such amount to
pay premiums for non-filing insurance against losses resulting from failure to
file. Under the Company's non-filing insurance arrangements, approximately 90%
of the premiums paid are refunded to the Company on a quarterly basis and are
netted against charge-offs for the period.
SERVICING AND COLLECTION OF AUTOMOBILE SALES CONTRACTS AND DIRECT LOANS
The Company has a staff of experienced personnel to collect, account
for, and post all payments received using a computerized management information
system to track each borrower's account activity. The Company's computer system
provides office personnel with access to all information contained in the
customer's contract including the amount of the contract, maturity, interest
rate, vehicle and reference information and payment history. Customer service
personnel in each finance office also respond to borrower inquiries, investigate
delinquencies and communicate with borrowers to obtain timely payments, monitor
the insurance coverage of the automobile serving as collateral, and, when
necessary, repossess financed automobiles.
When an Automobile Sales Contract is purchased or a Direct Loan is
made, the finance office personnel follow procedures that are designed to ensure
that borrowers understand their obligations and the terms of the Automobile
Sales Contract or Direct Loan. Particular emphasis is placed on the amount and
due date of each payment, the Company's expectations regarding the timely
receipt of payments and maintenance of insurance coverage, and the Company's
delinquency and repossession policies. The Company provides payment coupon books
to borrowers to remind them of their monthly payment obligations.
Finance office personnel typically contact borrowers by telephone whose
payments are not received within one or two days after the due date of a
payment. A customer service representative in the office continues to contact
the delinquent borrower by telephone and, in some instances by mail, until
payment has been received. When a delinquent borrower brings his account
current, the Company places special emphasis on getting assurances from the
borrower that he or she will make the next payment on the due date. The Company
believes that early and frequent contact with delinquent borrowers reinforces
their recognition of their obligation and the Company's expectation for timely
payment. The Company's policy for payment deferments is to permit no more than
two in a twelve-month period on Direct Loans. Payment deferments on Automobile
Sales Contracts are granted only upon review by the office manager of the
Company's equity position and the borrower's needs.
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The Company's repossession policy on Automobile Sales Contracts and
Direct Loans secured by automobiles is administered on a case-by-case basis. The
Company's policy is to work with a delinquent borrower for a brief period to
permit the customer to keep the car and continue making payments to the Company.
However, should a borrower become seriously delinquent or should the office
personnel determine the borrower is not dealing in good faith, the Company
repossesses the borrower's car. In most instances, repossessions are handled by
the Company's employees. Most automobiles are repossessed 30-45 days after the
account initially becomes delinquent, although in some cases repossessions occur
in less than 30 days. Repossessed vehicles are generally sold by independent
dealers on a consignment basis for the Company or through wholesale automobile
auctions. See "Management's Discussion and Analysis -- Credit Loss Experience."
PREMIUM FINANCE
The Company is engaged in the business of providing short-term
financing of insurance premiums, primarily for personal lines of insurance such
as automobile insurance purchased by Non-prime Borrowers, indirectly through
independent insurance agents. Most agents who refer premium finance business to
the Company are located in North Carolina, South Carolina, and Virginia and
represent insurance companies that either have a rating of C+ or better from
A.M. Best & Company or participate in state-guaranteed reinsurance facilities. A
small amount of the Company's business involves financing premiums for
commercial lines of insurance for small businesses, including property and
casualty, business automobile, general liability, and workers' compensation. The
Company also periodically makes bulk purchases of Premium Finance Contracts. A
substantial amount of the Company's premium finance business is derived from
customers of the 20 insurance offices owned by Thaxton Insurance.
When an individual purchasing insurance through an agent with whom the
Company has an established relationship is unable to pay the full amount of the
premium, the agent will offer a Premium Finance Contract that allows the insured
to make a down payment and finance the balance of the premium. Because the
Company is able to cancel the insurance policy generally within a period of 23
to 28 days after the due date of a delinquent payment and receive a refund of
the unearned portion of the premium, the creditworthiness of the insured is a
less important factor than the size of the down payment and an efficient and
effective system for servicing and collecting the portfolio of Premium Finance
Contracts.
The typical term of a Premium Finance Contract ranges from three to
eight months depending primarily upon the term of the underlying insurance
policy, which in most cases is six months but in some cases may be as long as 12
months. The required down payment ranges from 20% to 50% of the premium
depending upon the state in which the insured resides, the term of the
underlying insurance contract, the identity of the referring agency and the
insured's financial circumstances. The smaller the down payment by the customer
on a Premium Finance Contract (and the resulting higher original principal
balance of the loan), the greater the Company's risk that the amount of the
unearned premium at the time of a payment default will not be sufficient to
cover the unpaid principal balance of the loan. Conversely, the higher the down
payment (and the resulting lower original principal balance of the loan), the
lower the Company's risk of loss in the event of a payment default. The Company
allows a down payment of 20% only on Premium Finance Contracts for policies sold
by certain "non-standard" insurance agencies operated by Thaxton Insurance in
North Carolina. At December 31, 1997, such Premium Finance Contracts represented
approximately $1.0 million, or 24%, of total Premium Finance Contracts
outstanding. Because the original principal balance of such Premium Finance
Contracts is larger than it would be if higher percentage down payments were
required, the Company's risk of loss is increased.
The Company generally imposes the maximum finance charges and late fees
permitted by law for Premium Finance Contracts, which are subject to extensive
regulation in the states where the Company engages in this business. All of the
states in which the Company operates permit assessment of a fee of up to $15 on
each Premium Finance Contract and a maximum interest rate of 12% per annum.
After the Premium Finance Contract is originated, the Company sends the insured
a payment coupon book to serve as a reminder of the payment due dates. Although
most payments are received by mail, in some instances payments are made directly
to the agent who wrote the underlying insurance contract and then forwarded to
the Company. If a payment is not received by the sixth day after the due date, a
late fee is added to the past due payment and a notice of intent to cancel the
underlying
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insurance policy is mailed to the insured. If payment is not received by the
10th day after the notice of intent to cancel is mailed (the 15th day in South
Carolina), the Company mails a notice of cancellation advising the insured that
the Company will cancel the underlying insurance policy in seven days unless
payment is received. If the insured fails to make payment by the seventh day,
using a power of attorney provided by the insured at the time the insurance was
purchased, the Company notifies the insurance company to cancel the underlying
insurance policy. Upon receipt of this notice the insurance company remits to
the Company the unearned portion of the premium, if any. The Company's
procedures for providing notices to borrowers are set up to provide a parallel
set of notices to the agent who wrote the underlying insurance policy.
INSURANCE AGENCY OPERATIONS
The Company sells, on an agency basis, various lines of automobile,
property and casualty, life, and accident and health insurance. The Company does
not assume any underwriting risk in connection with its insurance agency
activities. All underwriting risk is assumed by the insurance companies
represented by the Company. The Company is paid a commission by the insurance
company for which business is placed. On some policies, the Company is eligible
for additional commission payments (profit sharing) if the loss experience on
the business falls below specified levels.
COMPETITION
The non-prime consumer credit market for used automobile finance and
personal loans is highly competitive and fragmented. Historically, commercial
banks, savings and loans, credit unions, financing arms of automobile
manufacturers and other lenders providing traditional consumer financing have
not consistently served the non-prime segment of the consumer finance market.
Recently, however, several large bank holding companies have acquired used
automobile finance companies in an effort to recapture some of the customers
their bank subsidiaries have rejected on the basis of their rigid credit scoring
systems. The Company faces increasing competition from a number of companies
providing similar financing to individuals that cannot qualify for traditional
financing. These include a number of well-capitalized public companies which
have only recently entered the business of purchasing Automobile Sales Contracts
and are seeking to rapidly expand their business. Management believes that
currently its primary competitor is TransSouth Financial Corporation, a
financial services company, which operates in most of the markets where the
Company operates. The Company also competes with numerous small, regional
consumer finance companies. Many of these competitors or potential competitors,
including TransSouth Financial Corporation, have significantly greater resources
than the Company and have pre-existing relationships with established networks
of dealers. To the extent that any of such lenders significantly expand their
activities in the markets where the Company operates or plans to operate, the
Company could be materially adversely effected. The basis on which the Company
competes with others in used car financing is primarily the price paid for
Automobile Sales Contracts, which is a function of the amount of the dealer
reserve, and the reliability of service to participating dealers. The basis on
which the Company competes with others in making Direct Loans is the interest
rate charged and customer service.
The size of the Company's average Automobile Sales Contract is
considerably smaller than that of many other companies engaged in purchasing
Automobile Sales Contracts. The Company believes this is due in large part to
the fact that most of the Company's competitors are seeking to do business
primarily with franchised dealers selling late-model, lower mileage used
automobiles for significantly higher prices than the automobiles offered for
sale by the independent dealers with which the Company has relationships, which
tend to be somewhat older, higher mileage vehicles. Because the costs of
servicing and collecting a portfolio of finance receivables increases with the
number of accounts included in the portfolio, management believes that many
apparent potential competitors will choose not to do business with the type of
dealer targeted by the Company.
The premium finance business, particularly for personal lines of
insurance, also is highly fragmented and competitive. Because interest rates are
highly regulated, competition is primarily on the basis of customer service,
response time, and the required amount of down payment. There are numerous
independent finance companies specializing in premium finance for personal lines
of insurance. In addition, many independent insurance agencies finance premiums
for their customers either directly or through an affiliate. Some bank holding
companies
37
<PAGE>
have subsidiaries that finance premiums on insurance sold by other
subsidiaries of the holding company as well as by independent agents.
Competition among independent insurance agencies is intense. There are
numerous other independent agencies in most of the markets where the Company's
insurance offices are located. There are also direct agents for various
insurance companies located in some of the Company's markets. The Company
competes primarily on the basis of service and convenience. The Company attempts
to develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers virtually all types
of insurance products.
The origination of residential mortgages for Non-prime Borrowers is
highly competitive and the number of companies engaged in the business is
increasing rapidly. The Company has only recently begun originating residential
mortgages and currently expects to compete mainly on the basis of the service
that it provides to customers in markets where it already has a presence with
its finance and insurance offices.
REGULATION
Consumer finance companies are subject to extensive supervision and
regulation under state and federal statutes and regulations. Depending upon the
nature of the transactions entered into by the consumer finance company and the
states in which it does business, governmental statutes and regulations may
require the lender to obtain licenses and meet specified minimum qualifications,
limit the interest rates, fees and other charges for which the borrower may be
assessed, limit or prescribe certain other terms and conditions of the
financing, govern the sale and terms of related insurance products, and define
and limit the right to repossess and sell collateral.
The relevant federal statutes include the Truth In Lending Act, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Real Estate
Settlement Procedures Act ("RESPA"). These statutes generally are enforced
against consumer finance companies by the Federal Trade Commission and are
supplemented by regulations promulgated by this and other federal agencies. In
general, these laws require the Company to provide certain disclosures to
prospective borrowers, prohibit misleading advertising, protect against
discriminatory lending practices, and prohibit unfair credit practices. Among
the principal disclosure items under the Truth In Lending Act are the terms of
repayment, the final maturity, the total finance charge, and the annual
percentage rate charged on each loan. The Equal Credit Opportunity Act prohibits
creditors from discriminating against loan applicants on the basis of race,
color, sex, age, or marital status. Pursuant to Regulation B promulgated under
the Equal Credit Opportunity Act, creditors are required to make certain
disclosures regarding consumer rights and advise consumers whose credit
applications are not approved of the reasons for the rejection. The Fair Credit
Reporting Act requires the Company to provide certain information to consumers
whose credit applications are not approved on the basis of a report obtained
from a consumer credit reporting agency. Regulations promulgated by the Federal
Trade Commission limit the types of property a creditor may accept as collateral
to secure a consumer loan and provide for the preservation of the consumer's
claims and defenses when a consumer obligation such as an Automobile Sales
Contract is assigned to a subsequent holder. RESPA imposes specific disclosure
requirements, escrow account and borrower inquiry procedures, and kickback and
referral fee prohibitions upon lenders whose portfolio of receivables secured by
first or second liens on residential real property exceeds a specified dollar
amount.
The Company presently purchases Automobile Sales Contracts in Georgia,
North Carolina, South Carolina, Tennessee, and Virginia, originates Direct Loans
in South Carolina, North Carolina and Tennessee, and originates Premium Finance
Loans in North Carolina, South Carolina, and Virginia. Interest rates on Premium
Finance Contracts are subject to statutory ceilings in all three states. See
"Premium Finance." Interest rates on Automobile Sales Contracts are subject to
statutory ceilings only in North Carolina. See "Automobile Sales Contract
Purchases -- Origination of Automobile Sales Contracts." Direct Loans are
subject to statutory ceilings only in North Carolina and Tennessee. See "Direct
Loans Program." Each state regulates other aspects of the Company's business,
such as charges for insurance, forms of collateral, application of payments,
default charges, repossession, and disclosure matters, in varying degrees. Such
regulations may require the licensing of the Company or one or more of its
finance offices. The Company's finance offices also may be subject to periodic
examination by the division of state government charged with enforcing consumer
finance statutes and regulations. In some instances, state statutes and
38
<PAGE>
regulations impose more stringent disclosure and antidiscriminatory provisions
than comparable federal provisions and may impose specific statutory liabilities
upon and create causes of action against creditors who fail to comply with such
provisions.
The Company also is subject to state statutes and regulations governing
insurance agents in connection with sales of credit and other insurance. These
provisions may require that officers and employees involved in the sale of
insurance products be licensed, govern the commissions that may be paid to
agents in connection with the sale of credit insurance, and limit the premium
amount charged for insurance.
Management believes the Company operates in substantial compliance with
all applicable statutes and regulations relevant to its consumer finance and
insurance agency activities and that Automobile Sales Contracts purchased
individually or in bulk have been originated in compliance with these
provisions. Violations of the provisions described above may result in private
actions for damages, claims for refunds of payments made, certain fines and
penalties, injunctions against prohibited practices, the potential forfeiture of
rights to repayment of loans, and the revocation of licenses granted by state
regulatory authorities. Adverse changes in the statutes and regulations to which
the Company's business is subject, or in the enforcement or interpretation
thereof, could have a material adverse effect on the Company's business.
Moreover, a reduction in the existing statutory maximum rates or the imposition
of maximum rates below those presently charged by the Company in unregulated
jurisdictions would directly impair the Company's profitability.
EMPLOYEES
As of December 31, 1997, the Company employed 241 persons, none of whom
was covered by a collective bargaining agreement. Of that total, 33 were located
in the Company's headquarters in Lancaster, South Carolina and 208 were located
in the Company's other offices. Management generally considers its relationships
with its employees to be good.
PROPERTY
The Company's executive offices are located in Lancaster, South
Carolina in a leased office facility of approximately 12,000 square feet. The
lease expires in September 1999, but includes an option to renew for an
additional five-year term. The Company leases the facilities, in some instances
from affiliates, in which its branch offices are located. These offices range in
size from approximately 800 square feet to 2,200 square feet under leases
expiring from April 1998 to July 2004, most of which include renewal options for
periods ranging from two to five years. The monthly rental rates for such
offices range from $300 to $5,100 per month. Since most of the Company's
business with dealers is conducted by facsimile machine and telephone,
management does not believe that the particular locations of its finance offices
are critical to its business of purchasing Automobile Sales Contracts or its
premium finance operations. Location is somewhat more important for the
Company's Direct Loan and insurance agency operations. However, other
satisfactory locations are generally available for lease at comparable rates and
for comparable terms in each market served by the Company.
LEGAL PROCEEDINGS
The Company presently is not a party to any legal proceedings nor is
management aware of any material threatened litigation against the Company.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages as of
November 30, 1997 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C>
James D. Thaxton.................. 51 Chairman of the Board, President and Chief
Executive Officer
Robert L. Wilson.................. 57 Executive Vice President, Chief Operating
Officer and Director
Allan F. Ross..................... 49 Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
C.L. Thaxton, Sr.................. 74 Director
Jack W. Robinson*................. 67 Director
Perry L. Mungo*................... 60 Director
</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.
ALLAN F. ROSS joined the Company in March 1997, and has served as Vice
President and Corporate Controller since April, 1997, and as a Director,
Secretary, Treasurer and Chief Financial Officer since February 1998. From 1989
to 1997, Mr. Ross was the managing partner of a CPA and consulting practice.
From 1978 to 1989, Mr. Ross was Vice President and Financial Controls Director
of Barclays American Corporation. From 1974 to 1978, Mr. Ross was a practicing
CPA with Arthur Andersen & Company, and with Deloitte and Touche, LLP. He is a
certified public accountant.
C.L. THAXTON, SR. has served on the Board of Directors of the Company
since it was founded. Mr. Thaxton is a director of Thaxton Insurance, which he
founded in 1950 and is the manager of its Pageland office. Mr. Thaxton is the
father of James D. Thaxton.
JACK W. ROBINSON, who became a director in August 1995, is the
President, Chief Executive Officer and principal owner of MMC Holding, Inc.,
which through its principal subsidiary is engaged in mica mining.
40
<PAGE>
PERRY L. MUNGO, who became a director in August 1995, is the President,
Chief Executive Officer and principal owner of P.F. & P.L. Mungo, Inc., a
privately-owned industrial and commercial construction company.
All directors hold office until the next annual meeting of shareholders
or until their successors have been duly elected and qualified. The Company's
executive officers are appointed by and serve at the discretion of the Board of
Directors.
The Board of Directors has established a Compensation Committee which
makes recommendations concerning salaries and incentive compensation for
executive officers and other employees of the Company and administers the
Company's stock plans. The Board has also established an Audit Committee, which
recommends to the Board of Directors the selection of the Company's independent
auditors and reviews the results and scope of the audit and other services
provided by the independent auditors. Messrs. Robinson and Mungo are the members
of the Compensation and Audit Committees. Directors do not receive any
compensation from the Company for their service as members of the Board of
Directors. All directors are reimbursed for reasonable expenses incurred by them
in attending Board and Board committee meetings.
EXECUTIVE COMPENSATION
The table below shows the compensation paid or accrued by the Company,
for the year ended December 31, 1997, to or for the account of the Chief
Executive Officer and its only other executive officer whose total salary and
bonus exceeded $100,000 during 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- -----------------
RESTRICTED
YEAR SALARY BONUS STOCK
NAME AND PRINCIPAL POSITION ($) ($) ($) AWARD ($)
-------------------------------- ---------- ------------ ---------- -----------------
<S> <C> <C> <C>
James D. Thaxton, 1997 113,600 40,704 ---
President and Chief 1996 83,908 66,037 ---
Executive Officer 1995 74,513 10,100
Robert L. Wilson, 1997 125,000 133,106 ---
Executive Vice President 1996 131,507 127,747 ---
1995 123,076 32,985 900,000(1)
</TABLE>
(1) Upon the closing of the Company's initial public offering on December
29, 1995, Mr. Wilson was awarded 100,000 shares of restricted common
stock. Subject to his continued employment by the Company, the award
will vest in ten annual installments which commenced on the date of the
grant. At December 31, 1997, 20,000 shares had vested, 10,000 shares
had been voluntarily forfeited by Mr. Wilson, and 70,000 shares of the
award remained subject to restriction and, not withstanding such
restriction, had a market value of $612,500 on that date. Mr. Wilson is
entitled to vote and receive dividends on restricted shares.
41
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock at March 25, 1998 by: (i) the only
person who is the beneficial owner of more than five percent of the outstanding
common stock; (ii) each director; and (iii) directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
<S> <C>
NUMBER OF SHARES AND PERCENTAGE OF COMMON
NAME OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP STOCK OUTSTANDING
--------------------------------------- ---------------------------------- ---------------------
James D. Thaxton 3, 233,000 (2) 81.7%
Robert L. Wilson 90,000 2.3
C. L. Thaxton, Sr. 15,555 (3) *
Jack W. Robinson 85,477 (4) 2.2
Perry L. Mungo 29,000 *
Directors and officers
as a group(6) 3,453,032 87.2
</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 15,222 shares held of record by Mr. Thaxton's spouse,
Katherine D. Thaxton, as to which Mr. Thaxton shares voting and
investment power.
(4) Includes 4,150 shares held of record by Mr. Robinson's spouse,
Kathryn H. Robinson, as to which Mr. Robinson shares voting and
investment power.
CERTAIN TRANSACTIONS
ISSUANCE OF PREFERRED STOCK
On November 10, 1997, the Company entered into an agreement with Jack
W. Robinson and certain of his affiliates pursuant to which they exchanged
27,076 shares of Common Stock for an equal number of shares of the Company's
Series B Convertible Preferred Stock (the "Series B Preferred Stock"). The terms
of the Series B Preferred Stock are identical to the Company's Series A
Preferred Stock except that dividends thereon are payable, at the Company's
option, in additional shares of Series B Preferred Stock. On July 1, 1998, the
Company entered into a subsequent agreement with Jack W. Robinson and certain of
his affiliates pursuant to which they exchanged all of the shares of Series B
Preferred Stock, plus 29,200 shares of common stock for a total of 56,276 shares
of the Company's Series D Preferred Stock (the "Series D Preferred Stock"). The
terms of the Series D Preferred Stock are similar to the Series A Preferred
stock, except that they provide for an $0.80 annual dividend rate, and it is not
convertible into common stock.
ACQUISITION OF THAXTON INSURANCE
On October 31, 1996, the Company acquired Thaxton Insurance by
exchanging 300,000 shares of Common Stock for all of the outstanding capital
stock of Thaxton Insurance. At the time of the acquisition, Thaxton Insurance
operated 18 insurance offices in North and South Carolina. The number of shares
issued in the transaction was determined based upon a multiple of gross
commissions collected by Thaxton Insurance during the twelve-month period ended
December 31, 1995, which were approximately $3.7 million, and the market value
of the Company's shares issued in this transaction, taking into account the
transferability restrictions applicable thereto. The capital stock of Thaxton
Insurance was acquired from James D. Thaxton, William H. Thaxton, and Calvin L.
Thaxton, Jr. James D. Thaxton is an executive officer, a director, and the
majority shareholder of the Company. William H. Thaxton and Calvin L.
42
<PAGE>
Thaxton, Jr. are James D. Thaxton's brothers and all three are sons of Calvin L.
Thaxton, Sr., a director of the Company.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for
the Company by Moore & Van Allen, PLLC, Charlotte, North Carolina.
EXPERTS
The consolidated financial statements of The Thaxton Group, Inc. as of
December 31, 1997 and 1996 and for the years then ended have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
PLAN OF DISTRIBUTION
The Securities will be sold by officers and employees of the Company
and certain of its finance and insurance subsidiaries in reliance upon Rule
3a4-1 under the Securities Exchange Act of 1934 ("Rule 3a4-1"). Persons
associated with the Company and its affiliates who participate in the offering
of the Securities will limit their participation to activities permitted under
Rule 3a4-1 and no commissions or other direct or indirect compensation will be
paid to such persons in connection with the sale of the Securities. In addition,
the Company may in the future employ the services of one or more registered
broker-dealers to offer the Securities on a non-exclusive, "best efforts" basis.
Management anticipates that an agreement concerning the use of a broker-dealer
to assist with the distribution of the Securities would provide for the payment
of sales commissions ranging from 3% to 7% of the principal amount of the
Securities sold by the broker-dealer. The Company may also agree to indemnify
the broker-dealer against certain liabilities, including liabilities arising
under the Securities Act and to reimburse the broker-dealer for its costs and
expenses. The offering commenced on February 17, 1998, is continuous in nature
and is expected to continue for up to two years from that date.
The Securities may be marketed by the Company through the use of
newspaper advertisements, mailings of this Prospectus to the Company's insurance
and selected consumer finance customers, signs in the offices of the Company and
its finance and insurance subsidiaries and by providing copies of this
Prospectus to potential purchasers who inquire about purchasing the Securities.
The Securities will not be marketed by officers, directors or employees of the
Company and its finance and insurance subsidiaries by telephone or other oral
solicitation.
Daily Notes will not be offered or sold in South Carolina.
AVAILABLE INFORMATION
The Company files reports with the United States Securities and
Exchange Commission (the "Commission") Such reports, which include quarterly
reports on Form 10-Q and annual reports on Form 10-K, can be inspected and
copied at public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511 and
7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, filings made by the Company with the Commission through its
Electronic Data Gathering and Retrieval System ("EDGAR") are publicly available,
using the Company's name or stock trading symbol, "THAX," through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov.
43
<PAGE>
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
THE THAXTON GROUP, INC.
Independent auditors' report.............................................. F-2
Consolidated balance sheets as of December 31,
1997 and 1996........................................................... F-3
Consolidated statements of income for the
years ended December 31, 1997 and 1996.................................. F4
Consolidated statements of stockholders' equity
for the years ended December 31, 1997
and 1996................................................................ F-5
Consolidated statements of cash flows for the
years ended December 31, 1997 and 1996.................................. F-6
Notes to consolidated financial statements................................ F-7
F-1
<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, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Thaxton Group,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Greenville, South Carolina
March 25, 1998 KPMG Peat Marwick LLP
F-2
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
------------
<S> <C> <C>
1997 1996
---- ----
Assets
- ------
Cash ..................................................................... $ 1,162,793 421,465
Finance receivables, net ................................................. 48,662,228 46,546,087
Premises and equipment, net .............................................. 2,003,787 1,947,210
Accounts receivable ...................................................... 1,616,570 1,269,384
Repossessed automobiles .................................................. 744,030 1,166,495
Goodwill and other intangible assets ..................................... 3,894,956 3,463,814
Other assets ............................................................. 2,881,308 1,867,112
------------ ------------
Total assets ........................................................ 60,965,672 56,681,567
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Accrued interest payable ................................................. 420,863 387,237
Notes payable ............................................................ 51,071,066 46,345,883
Notes payable to affiliates .............................................. 1,015,358 743,621
Accounts payable ......................................................... 1,357,739 1,350,306
Employee savings plan .................................................... 1,045,533 1,098,457
Other liabilities ........................................................ 85,796 384,758
------------ ------------
Total liabilities ................................................... 54,996,355 50,310,262
------------ ------------
Stockholders' Equity
- --------------------
Preferred Stock $ .01 par value,
Series A: 400,000 shares authorized,
178,014 shares issued and outstanding in 1997 ........................... 1,780 --
Series B: 27,076 shares authorized, issued and
outstanding in 1997 ................................................... 271 --
Series C: 50,000 shares authorized, issued and
outstanding in 1997 ................................................... 500 --
Common stock, $ .01 par value; authorized 50,000,000 shares,
issued and outstanding 3,795,600 shares in 1997, 3,932,178
shares in 1996 ...................................................... 37,956 39,322
Additional paid-in-capital ............................................... 4,521,354 3,504,027
Deferred stock award ..................................................... (630,000) (720,000)
Retained earnings ........................................................ 2,037,456 3,547,956
------------ ------------
Total stockholders' equity .......................................... 5,969,317 6,371,305
------------ ------------
Total liabilities and stockholders' equity .......................... $ 60,965,672 56,681,567
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest and fee income ............................................. $ 15,892,683 13,528,881
Interest expense .................................................... 5,023,179 4,209,763
------------ ------------
Net interest income ............................................ 10,869,504 9,319,118
Provision for credit losses ......................................... 6,579,932 3,593,399
------------ ------------
Net interest income after provision for credit losses ............... 4,289,572 5,725,719
Other income:
Insurance premiums and commissions, net ........................ 5,469,667 5,893,606
Other income ................................................... 1,221,525 985,763
------------ ------------
Total other income ............................................. 6,691,192 6,879,369
------------ ------------
Operating expenses:
Compensation and employee benefits ............................. 6,799,738 5,602,895
Telephone, postage, and supplies ............................... 1,511,477 1,126,599
Net occupancy .................................................. 1,528,218 1,228,414
Reinsurance claims expense ..................................... 355,437 516,194
Insurance ...................................................... 128,916 193,670
Collection expense ............................................. 94,462 63,797
Travel ......................................................... 176,186 158,513
Professional fees .............................................. 260,410 175,821
Other .......................................................... 2,355,947 2,908,377
------------ ------------
Total operating expenses ....................................... 13,210,791 11,974,280
------------ ------------
Income (loss) before income tax expense ........................ (2,230,027) 630,808
Income tax expense (benefit) ........................................ (723,694) 246,624
------------ ------------
Net income (loss) .............................................. $ (1,506,333) 384,184
============ ============
Dividends on preferred stock ................................... $ 4,167 25,500
============ ============
Net income (loss) applicable to common shareholders ............ $ (1,510,500) 358,684
============ ============
Net income (loss) per common share -- basic and diluted ....... $ (0.39) 0.09
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Additional Deferred
Common Preferred Paid-in Stock
Stock Stock Capital Award
------ ----- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .................... $ 39,383 340,000 3,563,681 (810,000)
Employee stock grant ............................ 17 -- 16,828 --
Purchase and retirement of 7,786 shares of stock (78) -- (76,482) --
Conversion of 340,000 shares of preferred
stock to $340,000 of subordinated debt ..... -- (340,000) -- --
Dividends on preferred stock .................... -- -- -- --
Vesting of 10,000 shares of stock award ......... -- -- -- 90,000
Unrealized gain on securities available for sale -- -- -- --
Net income ...................................... -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1996 .................... 39,322 -- 3,504,027 (720,000)
---------- ---------- ---------- ----------
Purchase and retirement of 13,300 shares of stock (133) -- (137,850) --
Issuance of 2,007 shares of restricted stock .... 20 -- 22,057 --
Issuance of 797 shares of stock under Employee
stock purchase plan ........................... 8 -- 6,343 --
Forfeiture of deferred stock award .............. (100) -- (89,900) 90,000
Conversion of 89,007 shares of common stock
into 178,014 shares of Series A preferred stock (890) 1,780 717,177 --
Conversion of 27,100 shares of common stock
into 27,100 shares of Series B preferred stock (271) 271 -- --
Conversion of subordinated debt into
50,000 shares of Series C preferred stock ... -- 500 499,500 --
Dividends paid on preferred stock ............... -- -- -- --
Net loss ........................................ -- -- -- --
---------- ---------- ---------- ----------
Balance at December 31, 1997 .................... $ 37,956 2,551 4,521,354 (630,000)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
Unrealized Gain Total
(Loss) on Securities Retained Stockholders'
Available for Sale Earnings Equity
------------------ -------- ------
Balance at December 31, 1995 .................... (6,392) 3,189,272 6,315,944
Employee stock grant ............................ -- -- 16,845
Purchase and retirement of 7,786 shares of stock -- -- (76,560)
Conversion of 340,000 shares of preferred
stock to $340,000 of subordinated debt ..... -- -- (340,000)
Dividends on preferred stock .................... -- (25,500) (25,500)
Vesting of 10,000 shares of stock award ......... -- -- 90,000
Unrealized gain on securities available for sale 6,392 -- 6,392
Net income ...................................... -- 384,184 384,184
---------- ---------- ----------
Balance at December 31, 1996 .................... -- 3,547,956 6,371,305
---------- ---------- ----------
Purchase and retirement of 13,300 shares of stock -- -- (137,983)
Issuance of 2,007 shares of restricted stock .... -- -- 22,077
Issuance of 797 shares of stock under Employee
stock purchase plan ........................... -- -- 6,351
Forfeiture of deferred stock award .............. -- -- --
Conversion of 89,007 shares of common stock
into 178,014 shares of Series A preferred stock -- -- 718,067
Conversion of 27,100 shares of common stock
into 27,100 shares of Series B preferred stock -- -- --
Conversion of subordinated debt into
50,000 shares of Series C preferred stock ... -- -- 500,000
Dividends paid on preferred stock ............... -- (4,167) (4,167)
Net loss ........................................ -- (1,506,333) (1,506,333)
---------- ---------- ----------
Balance at December 31, 1997 .................... -- 2,037,456 5,969,317
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Cash flows from operating activities:
Net income $ (1,506,333) 384,184
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 6,579,932 3,593,399
Depreciation and amortization 958,192 756,791
Deferred taxes 6,705 (26,715)
Vesting of stock awards -- 90,000
Compensatory grant of stock to employees 28,428 16,845
Unrealized loss on securities available for sale -- 6,392
(Gain) loss on sale of premises and equipment (22,190) (25,301)
Gain on sale of investment (10,859) --
Increase in other assets (959,244) (2,026,919)
Increase (decrease) in accrued interest payable and other liabilities (200,353) 76,869
------------ ------------
Net cash provided by operating activities 4,874,278 2,845,545
------------ ------------
Cash flow from investing activities:
Net increase in finance receivables (8,696,073) (13,845,854)
Capital expenditures for premises and equipment (706,498) (1,295,387)
Proceeds from sale of premises and equipment 36,875 79,907
Proceeds from the sale of investments 24,481 --
Acquisitions, net of acquired cash equivalents (754,098) (752,973)
Purchase of securities -- (68,843)
Notes receivable (affiliate) -- 896,302
------------ ------------
Net cash used by investing activities (10,095,313) (14,986,848)
------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock 718,067 --
Repurchase of common stock (137,983) (76,560)
Dividends paid -- (25,500)
Net increase in line of credit 4,079,053 7,983,666
Net increase in notes payable 1,303,226 1,466,185
------------ ------------
Net cash provided by financing activities 5,962,363_ 9,347,791
------------ ------------
Net increase (decrease) in cash 741,328 (2,793,512)
Cash at beginning of period 421,465 3,214,977
------------ ------------
Cash at end of period $ 1,162,793 421,465
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,874,912 3,805,229
Income taxes 36,843 554,651
============ ============
Noncash financing activities:
Conversion of preferred stock to notes payable -- 340,000
Conversion of common stock to preferred stock 271 --
Conversion of subordinated debt to preferred stock 500,000 --
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
------------------------------------------
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina and operates branches in South Carolina, North Carolina,
Georgia, Virginia and Tennessee. The Company is a diversified consumer finance
company that is engaged primarily in purchasing and servicing retail installment
contracts purchased from independent used car dealers and making and servicing
personal loans to borrowers with limited credit histories, low incomes or past
credit problems. The Company also offers insurance premium financing to such
borrowers. A substantial amount of the Company's premium finance business has
been derived from customers of the independent insurance agencies owned by
Thaxton Insurance Group, Inc. ("Thaxton Insurance"), which was acquired by the
Company in 1996. The Company provides reinsurance through a wholly owned
subsidiary, TICO Reinsurance, Ltd. ("TRL"). Through a wholly owned subsidiary,
CFT Financial Corporation, the Company is also engaged in mortgage banking,
originating mortgage loans to individuals. The Company sells substantially all
mortgage loans it originates to independent third parties. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
Prior year consolidated financial statements have been restated to include the
balances of companies combined and accounted for as poolings-of-interests as
discussed in Note 2. Certain amounts for 1996 have been reclassified to conform
to the 1997 presentation. These reclassifications have no effect on
shareholders' equity or net income as previously reported.
The following is a description of the more significant accounting and reporting
policies which the Company follows in preparing and presenting its financial
statements.
(a) Interest and Fee Income
-----------------------
Interest income from finance receivables is recognized using
the interest (actuarial) method on an accrual basis. Accrual
of income on finance receivables continues until the
receivable is either paid off in full or is charged off. Fee
income consists primarily of late fees which are credited to
income when they become due from borrowers. For receivables
which are renewed, interest income is recognized using a
method similar to the interest method.
(b) Allowance for Credit Losses
---------------------------
Additions to the allowance for credit losses are based on
management's evaluation of the finance receivables portfolio
considering current economic conditions, overall portfolio
quality, charge-off experience, and such other factors which,
in management's judgment, deserve recognition in estimating
credit losses. Loans are charged-off when, in the opinion of
management, such loans are deemed to be uncollectible or six
months has elapsed since the date of the last payment,
whichever occurs first. While management uses the best
information available to make such evaluations, future
adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the
evaluations.
F-7
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(c) Non-file Insurance
------------------
Non-file insurance is written in lieu of recording and
perfecting the Company's security interest in the assets
pledged to secure certain loans. Non-file insurance premiums
are collected from the borrower on certain loans at inception
and renewal and are remitted directly to an unaffiliated
insurance company. Certain losses related to such loans, which
are not recoverable through life, accident and health, or
property insurance claims, are reimbursed through non-file
insurance claims subject to policy limitations. Any remaining
losses are charged to the allowance for credit losses.
(d) Premises and Equipment
----------------------
Premises and equipment are reported at cost less accumulated
depreciation which is computed using the straight-line method
for financial reporting and accelerated methods for tax
purposes. For financial reporting purposes the Company
depreciates furniture and equipment over 5 years, leasehold
improvements over the remaining term of the related lease, and
automobiles over 3 years. Maintenance and repairs are expensed
as incurred and improvements are capitalized.
(e) Insurance
---------
The Company remits a portion of credit life, accident and
health, property and auto insurance premiums written in
connection with certain loans to an unaffiliated insurance
company at the time of origination. Any portion of the
premiums remitted to this insurance company which are not
required to cover their administrative fees or to pay
reinsurance claims expense are returned to the Company through
its reinsurance subsidiary, TRL, and are included in insurance
premiums and commissions in the accompanying consolidated
statements of income. Unearned insurance commissions are
accreted to income over the life of the related insurance
contracts using a method similar to that used for the
recognition of finance charges. Insurance commissions earned
by Thaxton Insurance are recognized as services are performed
in accordance with Thaxton Insurance's contractual obligations
with the underwriters, but not before protection is placed
with insurers.
(f) Employee Savings Plan
---------------------
The Company offers a payroll deduction savings plan to all its
employees. The Company pays interest monthly at an annual rate
of 10% on the prior month's ending balance. Employees may
withdraw savings on demand.
(g) Income Taxes
------------
Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes (Statement 109), requires the
asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Under
F-8
<PAGE>
Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
F-9
<PAGE>
(1) Summary of Significant Accounting Policies, Continued
-----------------------------------------------------
(h) Earnings Per Share
------------------
The Company has adopted the provisions of SFAS 128, "Earning
per Share" ("EPS"), for the year ended December 31, 1997. The
presentation of primary and fully diluted EPS has been
replaced with basic and diluted EPS. Prior period EPS data has
been restated to reflect the adoption of SFAS 128. Basic
earnings per share are computed by dividing net income
applicable to common shareholders by the weighted average
number of common shares outstanding. Diluted earnings per
share are computed by dividing net income by the weighted
average number of shares of common stock and common stock
equivalents calculated based upon the average market price.
Common stock equivalents consist of stock options issued by
the Company, and are computed using the treasury stock method.
(i) Intangible Assets
-----------------
Intangible assets include goodwill, expiration lists, and
covenants not to compete related to the purchase of insurance
agencies. Goodwill represents the excess of the cost of
insurance agencies over the fair value of its assets at the
date of acquisition. Goodwill is amortized on a straight-line
basis over a fifteen to twenty year period. The expiration
lists are amortized over their estimated useful lives of
twenty years on a straight-line basis. Covenants not to
compete are amortized according to the purchase contract over
five to six years on a straight-line basis. Intangible assets
also include the premium paid to acquire Eagle Premium
Finance, which is being amortized on a straight-line basis
over ten years. Recoverability of recorded intangibles is
evaluated by using undiscounted cash flows.
(j) Stock Options
-------------
Effective January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires that
the fair value of employee stock-based compensation plans be
recorded as a component of compensation expense in the
statement of income or the impact of such fair value on net
income and earnings per share be disclosed on a pro forma
basis in a footnote to the financial statements if the Company
continues to use the intrinsic value method in accordance with
APB 25. The Company will continue such accounting under the
provisions of APB 25.
(k) Fair Value of Financial Instruments
-----------------------------------
All financial assets of the Company are short term in nature
and all liabilities are substantially at variable rates of
interest. As such, the carrying values of these financial
assets and liabilities approximate their fair value.
(l) Repossessed Assets
------------------
Repossessed assets are recorded at their estimated fair value
less costs to dispose. Any difference between the loan balance
and the fair value of the collateral on the date of
repossession is charged to the allowance for credit losses.
F-10
<PAGE>
F-11
<PAGE>
(2) Business Combinations
---------------------
The Company acquired all of the outstanding capital stock of Thaxton
Insurance on October 31, 1996 in exchange for 300,000 shares of the
Company's stock. Thaxton Insurance is incorporated under the laws of the
State of South Carolina and licensed as an insurance agency in the states
of North Carolina and South Carolina. This business combination was
accounted for under the "as if" pooling method as the companies were deemed
to be under common control. Accordingly, the consolidated financial
statements for periods prior to the combination have been restated to
include the assets, liabilities and equity and results of operation and
cash flows of Thaxton Insurance at their historical cost basis.
(3) Finance Receivables
-------------------
Finance receivables consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1997 1996
---- ----
Automobile Sales Contracts $ 48,098,657 47,603,138
Direct Loans 15,449,004 12,560,126
Premium Finance Contracts 4,010,608 2,943,337
-------------- --------------
Total finance receivables 67,558,269 63,106,601
Unearned interest (12,902,552) (12,445,781)
Unearned insurance premiums, net (155,514) (132,733)
Bulk purchase discount (359,945) (1,014,000)
Dealer hold back (668,630) (773,000)
Allowance for credit losses (4,809,400) (2,195,000)
-------------- --------------
Finance receivables, net $ 48,662,228 46,546,087
============== ==============
</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 $8,328,000 and $360,000, respectively, at
December 31, 1997 and approximately $7,371,000 and $1,014,000,
respectively, at December 31, 1996.
With holdback arrangements, an automobile dealer or other retailer will
assign receivables to the Company on a loan-by-loan basis, typically at
par. The Company will withhold a certain percentage of the proceeds,
generally 5% to 10%, as a dealer reserve to be used to cover any losses
which occur on these loans. The agreements are structured such that all
or a portion of these holdback amounts can be reclaimed by the dealer
based on the performance of the receivables. To the extent that losses
from these holdback receivables exceed the total remaining holdback
amount for a particular dealer, the allowance for credit losses will be
charged. The amount of holdback receivables, net of unearned interest and
insurance, and the related holdback amount outstanding were approximately
$31,593,000 and $669,000, respectively, at December 31, 1997 and
approximately $31,451,000 and $773,000, respectively, at December 31,
1996.
F-12
<PAGE>
(3) Finance Receivables (continued)
-------------------------------
At December 31, 1997, there were no significant concentrations of
receivables in any type of property or to one borrower.
These receivables are pledged as collateral for a line of credit
agreement (see note 7).
Changes in the allowance for credit losses for the years ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Beginning balance $ 2,195,000 783,200
Valuation allowance for acquired loans - 28,842
Provision for credit losses 6,579,932 3,593,399
Charge-offs (4,129,313) (2,526,231)
Recoveries 163,781 315,790
-------------- ---------------
Net charge-offs (3,965,532) (2,210,441)
--------------- ---------------
Ending balance $ 4,809,400 2,195,000
============== ===============
</TABLE>
The valuation allowance for acquired loans relates to the acquisition of
approximately $748,000 of receivables in 1996.
The Company's loan portfolio primarily consists of short term loans, the
majority of which are originated or renewed during the current year.
Accordingly, the Company estimates that fair value of the finance
receivables is not materially different from carrying value.
(4) Premises and Equipment
----------------------
A summary of premises and equipment at December 31, 1997 and 1996
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Leasehold improvements $ 591,596 504,328
Furniture and fixtures 558,566 477,158
Equipment and automobiles 2,719,773 2,762,214
------------- -------------
Total cost 3,869,935 3,743,700
Accumulated depreciation 1,866,148 1,796,490
------------- -------------
Net premises and equipment $ 2,003,787 1,947,210
============= =============
</TABLE>
Depreciation expense was approximately $617,000 and $521,000 in 1997
and 1996, respectively.
F-13
<PAGE>
(5) Intangible Assets
-----------------
Intangible assets consist of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Covenants not to compete $ 118,494 102,022
Goodwill 2,204,944 2,036,563
Insurance expirations 2,657,399 2,135,098
Purchase premium 403,446 348,938
------------- ------------
Total cost 5,384,283 4,622,621
Less accumulated amortization 1,489,327 1,158,807
------------- ---------
Intangible assets, net $ 3,894,956 3,463,814
============= =========
</TABLE>
The majority of the intangibles were acquired by the Company in
connection with its acquisition of Thaxton Insurance. Amortization
expense was approximately $341,000 and $236,000 in 1997 and 1996,
respectively.
(6) Leases
------
The Company conducts all of its operations from leased facilities. It is
expected that in the normal course of business, leases that expire will
be renewed at the Company's option or replaced by other leases or
acquisitions of other properties. Total rental expense was approximately
$662,000 in 1997 and $304,000 in 1996. The future minimum lease payments
under noncancelable operating leases as of December 31, 1997, are
as follows:
1998 $ 615,988
1999 504,750
2000 237,666
2001 98,519
2002 35,908
Thereafter 16,967
-----------
Total minimum lease payments $ 1,509,798
===========
Four of the office buildings in which the Company conducts business are
owned by related parties. These premises are leased to the Company for a
total monthly rental rate of $4,350.
(7) Notes Payable
-------------
At December 31, 1997 and 1996, notes payable consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Note payable to insurance company maturing in May, 1998
and bearing interest at prime plus 2% and is reset quarterly $ - 500,000
Note payable to insurance company payable within sixty days
after written demand by the lender. The note bears interest
at prime plus 2% and is reset monthly 250,000 250,000
Lines of credit 46,695,000 42,615,947
</TABLE>
F-14
<PAGE>
(7) Notes Payable, Continued
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
Note payable to finance company due in monthly installments
of $9,091 through July, 2003 including interest at 8.99%.
This note is secured by an aircraft purchased with the funds $477,545 540,600
Note payable to insurance agency due annually on July 1 in
installments of $78,022 through July 1997, including interest at
a rate of 9% and secured by agency purchased with funds and
various individual stockholders' assets - 71,578
Note payable to individual due annually on January 1 in installments
of $23,496 through January 2001, including interest at a rate of
8% and secured by agency purchased with funds and various
individual stockholders' assets 77,823 93,814
Note payable to individual due annually on June 1 in installments of
$40,000 through June 1998, including interest at a rate of 7%
and secured by stock purchased with funds and various individual
stockholders' assets 37,383 72,321
Note payable to individual due on January 1, 1997 plus interest
at a rate of 7%. Secured by agency purchased with funds
and various individual stockholders' assets - 60,000
Note payable to individual due in monthly installments of $3,607
through January 1999, including interest at a rate of 6% and
secured by agency purchased with funds and various individual
stockholders' assets 39,533 79,012
Note payable to individual due in monthly installments of
$9,478, through March 2001, including interest at a rate of
6% 333,205 423,449
Notes payable to individuals with varying maturity dates and
rates ranging from 51/4% - 12% 4,175,935 2,382,783
---------- ----------
$ 52,086,424 47,089,504
========== ==========
</TABLE>
A schedule of maturities of long-term debt is as follows:
Year Ending
December 31, Amount
------------ ------
1998 $ 2,379,185
1999 48,345,692
2000 738,490
2001 190,959
2002 332,216
Thereafter 99,882
------------
F-15
<PAGE>
Total $ 52,086,424
============
(7) Notes Payable, Continued
------------------------
At December 31, 1997, the Company maintained a line of credit agreement
with a commercial finance company for $100 million, maturing on August 31,
1999. At December 31, 1997, the Company's net finance receivables would
have allowed it to borrow an additional $4.4 million against existing
collateral. The outstanding balance under this line of credit was
$46,695,000 at December 31, 1997. There are six tranches under this
agreement, Tranche A, B, C, D, E and F. The total line of credit, amount of
credit line available at December 31, 1997, and interest rate for each
Tranche is summarized below:
Tranche A: $100,000,000; $54,986,500; 9.5% (Lender's prime rate + 1%)
Tranche B: $ 10,000,000; $10,000,000; 13.5% (Lender's prime rate + 5%)
Tranche C: $ 5,000,000; $ 4,779,000; 9.5% (Lender's prime rate + 1%)
Tranche D: $ 10,000,000; $ 8,539,500; 10.5% (Lender's prime rate + 2%)
Tranche E: $ 7,000,000; $ 7,000,000; 13.5% (Lender's prime rate + 5%)
Tranche F: $ 25,000,000; $25,000,000; 9.5% (Lender's prime rate + 1%)
The borrowing availability under certain Tranches is also limited by
amounts borrowed under other Tranches, outstanding receivables, insurance
premiums written, and in some cases, additional restrictions. As a result
of these additional restrictions, the Company had approximately $53 million
total potential borrowing capacity as of December 31, 1997.
The terms of the line of credit agreement provide that the finance
receivables are pledged as collateral for the amount outstanding. The
agreement requires the Company to maintain certain financial ratios at
established levels and comply with other non-financial requirements which
may be amended from time to time. Also, the Company may pay dividends up to
25% of the current year's net income. As of December 31, 1997, the Company
met all such ratios and requirements or obtained waivers for any instances
of non-compliance.
(8) Notes Payable to Affiliates
---------------------------
The Company had notes payable to affiliates of approximately $1,015,000 at
December 31, 1997 and $744,000 at December 31, 1996. During 1996, 340,000
shares of Preferred Stock B of Thaxton Insurance Group were converted to
$340,000 of notes payable.
(9) Benefits
--------
In 1995 the Board of Directors of the Company adopted the Thaxton Group,
Inc. 1995 Stock Incentive Plan (the "Incentive Plan"), under which 620,000
shares of common stock were available for grants to key employees of the
Company. Awards under the Incentive Plan may include, but are not limited
to, stock options, stock appreciation rights, restricted stock, performance
awards and other common stock and common stock-based awards. Stock options
granted under the Incentive Plan may be either incentive stock options or
non-qualified stock options. During 1996, the Company granted 20,000
options to employees under the Incentive Plan at an exercise price of $9.00
per share. The options vest and become exercisable in installments of 20%
of the shares on each of the first, second, third, fourth, and fifth
anniversary dates of the grant. Options to purchase 4,000 shares were
exercisable at December 31, 1997. All options granted in 1996 have a
contractual maturity of ten years. The grant date fair value of options
granted during 1996 was $3.90 per share as determined by using the
Black-Scholes option pricing model with the following assumptions: (1)
risk-free
F-16
<PAGE>
interest rate of 6.25%; (2) expected life of 5 years; (3) expected
volatility of 10.40%; and (4) no expected dividends. These options
were immaterial to the proforma net income or earnings per share in 1997
and 1996.
F-17
<PAGE>
(9) Benefits, Continued
-------------------
Under the Incentive Plan, the Company granted a restricted stock award of
100,000 shares of common stock to an executive officer of the Company. The stock
award became effective December 29, 1995 ("Vesting Date") with 10,000 shares
vesting at that time. The remaining shares become vested at the rate of 10,000
shares per year on the first through the ninth anniversaries of the Vesting Date
only if the executive officer is employed by the Company on the applicable
anniversary date. The Company will record compensation expense over the vesting
period based on the market value at the date of grant. In 1997, the amount to be
vested during 1997 was forfeited by the employee. This is reflected as a
reduction in additional paid-in capital capital and deferred stock award in the
statement of stockholders' equity.
During 1995 the Board of Directors of the Company also adopted the
Thaxton Group, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"),
under which 100,000 shares of common stock are available for purchase by
substantially all employees. The Stock Purchase Plan enables eligible employees
of the Company, through payroll deductions, to purchase at twelve-month
intervals specified in the Stock Purchase Plan, shares of common stock at a 15%
discount from the lower of the fair market value of the common stock on the
first day or the last day of the year. The Stock Purchase Plan allows for
employee contributions up to 3% of the participant's annual compensation and
limits the aggregate fair value of common stock that may be purchased by a
participant during any calendar year to $25,000. As of December 31, 1997, 797
shares were purchased under this Stock Purchase Plan.
(10) Income Taxes
------------
Income tax expense consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Current Deferred Total
------- -------- -----
1997:
Federal $ (727,994) 6,364 (721,630)
State (2,405) 341 (2,064)
------------- ---------- --------------
$ (730,399) 6,705 (723,694)
============= ========== ==============
1996:
Federal 234,067 (22,487) 211,580
State 39,272 (4,228) 35,044
------------ ---------- -------------
$ 273,339 (26,715) 246,624
============ ========== =============
</TABLE>
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>
<S> <C> <C>
1997 1996
---- ----
Statutory rate applied to net income before taxes $ (758,209) 214,475
Increase (decrease) in income resulting from:
Goodwill amortization 43,909 50,809
TRL nontaxable income (109,847) (79,132)
State taxes, less related federal benefit (83,045) 23,129
Valuation allowance adjustment 81,283 -
Other 102,215 37,343
---------- -------------
Income taxes $ (723,694) 246,624
=========== =============
</TABLE>
F-18
<PAGE>
(10) Income Taxes, Continued
-----------------------
The effective tax rate was (32.5%) and 39.1% for the years ended December
31, 1997 and 1996, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1997
and 1996 are presented below:
1997 1996
---- ----
Deferred tax assets:
Loan loss reserves $ 984,280 872,213
State net operating loss carryforwards 81,283 --
Unearned interest and fees -- 28,856
Other 100,454 34,016
----------- -----------
Total gross deferred tax assets 1,166,017 935,085
----------- -----------
Less valuation allowance (81,283) --
----------- -----------
Net deferred tax assets 1,084,734 935,085
----------- -----------
Deferred tax (liabilities)
Prepaid insurance (209,799) (300,525)
Depreciable basis of fixed assets (139,417) (92,144)
Deferred loan costs (250,279) (88,232)
Intangible Assets (232,115) (146,667)
Other (15,124) (4,705)
----------- -----------
Total gross deferred tax liability (846,734) (632,273)
----------- -----------
Net deferred tax asset $ 238,000 302,812
=========== ===========
The Company recorded deferred tax liabilities of $58,107 related to its 1997
acquisition of Auto-Cycle Insurance Agency, Inc. The balance of the change in
the net deferred tax asset, net of the change in the valuation allowance, is
reflected as a deferred income tax expense in the accompanying consolidated
statements of income.
There was no valuation allowance for deferred tax assets as of January 1, 1996.
The change in the valuation allowance for 1997 and 1996 was an increase of
$81,283 and $0, respectively. The valuation allowance relates to certain state
net operating loss carryforwards. It is management's opinion that realization of
the net deferred tax asset is more likely than not based upon the Company's
history of taxable income and estimates of future taxable income. The Company's
income tax returns for 1994 and subsequent years are subject to review by taxing
authorities.
(11) Preferred Stock
---------------
The Company issued three series of preferred stock during 1997. 400,000 shares
of 7.5% cumulative redeemable convertible Series A preferred stock were
authorized, and 178,014 were issued in a December 1997 public offering to
existing shareholders. The terms of the offering included the conversion of one
share of common stock plus $10 for two shares of Series A preferred stock. For a
five year conversion period commencing January 1, 1998, each share of preferred
stock can be converted into one share of common stock. The Company may redeem
all or a portion of the outstanding shares of Series A stock at any time after
December 31, 1999, for $15 per share.
In December 1997, the Company, through a private placement, issued 27,076 shares
of 7.5% cumulative redeemable convertible Series B preferred stock. The terms of
this transaction involved the exchange of one share of common stock for one
share of preferred stock. For a five year conversion period commencing January
1, 1998,
F-19
<PAGE>
each share of preferred stock can be converted into one share of common
stock. The Company may redeem all or a portion of the outstanding shares of
Series B stock at any time after December 31, 1999, for $15 per share.
In December, 1997, the Company converted a $500,000 subordinated note held by
one corporate investor into 50,000 shares of Series C cumulative redeemable
convertible preferred stock. The annual dividends attributable to this series
are $1 per share through December 31, 2000, and $1.80 per share, per annum,
thereafter. Each share of preferred stock can be converted into one share of
common stock after January 1, 1998. The Company may redeem all or a portion of
the outstanding shares of Series C stock at any time after December 31, 2000,
for $10 per share.
(12) Earnings Per Share Information
------------------------------
The Company has adopted the provisions of SFAS 128, "Earnings per Share"
("EPS"), for the year ended December 31, 1997. The presentation of primary and
fully diluted EPS has been replaced with a presentation of basic and diluted
EPS. Prior period EPS data has been restated to reflect the adoption of SFAS
128.
The following is a summary of the earnings per share calculation for the years
ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
1997 1996
---- ----
BASIC
Net income (loss) (1,506,333) 384,184
Less: Dividends on preferred stock $ 4,167 25,500
--------------------------------------------
Net income applicable to common shareholders (numerator) (1,510,500) 358,684
--------------------------------------------
Average common shares outstanding (denominator) 3,913,083 3,830,472
--------------------------------------------
Earnings (loss) per share -- basic $ (0.39) 0.09
============================================
DILUTED
Net income (loss) $ (1,506,333) 384,184
Less: Dividends on preferred stock 4,167 25,500
--------------------------------------------
Net income applicable to common shareholders (numerator) (1,510,500) 358,684
--------------------------------------------
Average common shares outstanding 3,913,083 3,830,472
Dilutive common stock assumed converted 234 -
--------------------------------------------
Average diluted shares outstanding (denominator) 3,913,317 3,830,472
--------------------------------------------
Earnings (loss) per share -- diluted $ (0.39) 0.09
============================================
</TABLE>
F-20
<PAGE>
TABLE OF CONTENTS
Prospectus Summary..................................2
Risk Factors........................................6
Use of Proceeds....................................10
Description of Securities..........................12
Selected Consolidated Financial Data...............18
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............20
Business...........................................29
Management.........................................39
Principal and Management Shareholders..............42
Certain Transactions...............................42
Legal Matters......................................43
Experts............................................43
Plan of Distribution...............................43
Available Information..............................43
Financial Statements..............................F-1
-------------------
NO OFFICER, EMPLOYEE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING OF SECURITIES COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE THAXTON GROUP, INC. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE
HAS NOT BEEN ANY CHANGE IN THE INFORMATION SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE THAXTON GROUP, INC.
THE THAXTON GROUP, INC.
$50,000,000
AGGREGATE PRINCIPAL AMOUNT
OF
SUBORDINATED TERM NOTES
DUE 1,6, 12, 36 AND 60 MONTHS
AND
SUBORDINATED DAILY NOTES
-----------------------------
PROSPECTUS
-----------------------------
September 16, 1998
<PAGE>
