Filed pursuant to Rule 424(b)(3)
Registration No. 333-42623
THE THAXTON GROUP, INC.
$50,000,000 OF DEBT SECURITIES
TERMS OF SECURITIES
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SUBORDINATED TERM NOTES
SUBORDINATED TERM NOTES DUE SIX, 12, 36 AND 60 SUBORDINATED
DUE ONE MONTH MONTHS DAILY NOTES
<S> <C> <C> <C>
Minimum Initial
Purchase $100 $1,000 $50
Interest Rate May vary. May vary. May vary.
Interest Payment Payable at maturity. Payable, at your option, Payable upon redemption.
monthly, quarterly or at
maturity.
Redemption by Holder Redeemable with forfeiture Redeemable with penalty, Redeemable without penalty.
of interest, unless waived. unless waived.
Redemption by Thaxton Redeemable upon 30 days' Redeemable upon 30 days' Redeemable upon 30 days'
Group notice. notice. notice.
Subordination Subordinated to all existing Subordinated to all existing Subordinated to all existing
and future senior debt of and future senior debt of and future senior debt of
Thaxton Group. Thaxton Group. Thaxton Group.
</TABLE>
If Thaxton Group sells all of the securities, it will receive $50,000,000 in
proceeds before deducting offering expenses, estimated at approximately
$400,000. Thaxton Group is, however, unable to provide you any assurance that
it will sell all or any particular portion of the remaining securities.
The offering commenced on February 17, 1998 and will continue until all
securities are sold or Thaxton Group suspends or terminates the offering. To
date Thaxton Group has sold securities in the aggregate principal amount of
$18.0 million.
Thaxton Group may elect to use one or more registered broker-dealers to assist
in selling the securities on a best efforts basis. It anticipates paying
commissions ranging from 0.25% to 5% of the sales price to the broker-dealers
who sell securities. In addition, Thaxton Group may also agree to reimburse
these broker-dealers for some of their costs and expenses. As a result,
expenses of the offering will increase, and the proceeds it receives will be
less than stated above.
Thaxton Group will use Carolinas First Investments, Inc., a registered
broker-dealer, to sell the securities and to assist Thaxton Group in managing
the offering. It will pay Carolinas First Investments, Inc. sales commissions
of 0.25% of the principal amount of the securities sold and a monthly
management fee of $6,250.
There is no public trading market for these securities. Thaxton Group does not
intend to list the securities on any securities exchange and does not expect
that any active trading market for the securities will develop.
---------------
YOU SHOULD READ "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF RISK
FACTORS THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE SECURITIES.
- ---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURES IN THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ---------------
THESE SECURITIES ARE NOT SAVINGS DEPOSITS OR OBLIGATIONS OF AN INSURED
DEPOSITORY INSTITUTION AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION.
---------------
The date of this prospectus is November 8, 1999.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Prospectus Summary ................................................................... 1
Risk Factors ......................................................................... 7
Use of Proceeds ...................................................................... 11
Description of Securities ............................................................ 11
Selected Consolidated Financial Data ................................................. 17
Management's Discussion and Analysis of Financial Condition and Results of Operations 19
Business ............................................................................. 29
Where You Can Find More Information .................................................. 34
Management ........................................................................... 35
Disclosure of Commission Position on Indemnification for Securities Act Liabilities .. 36
Principal and Management Shareholders ................................................ 37
Market for Common Equity and Related Stockholder Matters ............................. 37
Transactions with Related Parties .................................................... 38
Legal Matters ........................................................................ 38
Experts .............................................................................. 38
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . 39
Plan of Distribution ................................................................. 39
Index to Financial Statements ........................................................ F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. THIS
PROSPECTUS INCLUDES A DESCRIPTION OF THE TERMS OF THE SECURITIES WE ARE
OFFERING, AS WELL AS INFORMATION REGARDING OUR BUSINESS AND DETAILED FINANCIAL
DATA. WE ENCOURAGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY.
REFERENCES IN THIS PROSPECTUS TO "THAXTON," "WE," "US", "OUR" OR "COMPANY"
REFER TO THE COMBINED BUSINESS OF THE THAXTON GROUP, INC. AND ITS SUBSIDIARIES.
REFERENCES IN THIS PROSPECTUS TO "THAXTON GROUP" REFERS ONLY TO THE THAXTON
GROUP, INC., WHICH IS THE ISSUER OF THE SECURITIES. THE TERM "SECURITIES"
COLLECTIVELY REFERS TO THE SUBORDINATED TERM NOTES DUE ONE, SIX, 12, 36 AND 60
MONTHS AND THE SUBORDINATED DAILY NOTES THAT THAXTON GROUP IS OFFERING FOR SALE
WITH THIS PROSPECTUS.
THE OFFERING
Thaxton Group is offering $50.0 million aggregate principal amount of
subordinated terms notes due one, six, 12, 36 and 60 months and subordinated
daily notes. Before deciding to purchase any of the securities, you should read
the discussion in this prospectus summary that begins on page 4 under the
heading "Summary of Terms of Securities" and on page 11 of this prospectus
under the heading "Description of Securities." The offering is expected to
continue until all $50 million of the securities are sold, but Thaxton Group
reserves the right to suspend or terminate the offering at any time. The
proceeds of this offering will be used primarily to temporarily repay
outstanding debt under Thaxton's credit facilities.
Interest accrues on the securities at fixed rates based upon the term
lengths of the securities. Examples of the initial annual interest rates for
the securities as of November 1, 1999 are as follows: daily note -- 5.25%;
1-month term note -- 6.25%; 6-month term note -- 7.00%; 12-month term note --
7.50%; 36-month term note -- 7.75%; and 60-month term note -- 7.75%. The actual
initial annual interest rates may be more or less than these examples at the
time of your investment decision. Also, if you purchase more than $50,000 in
aggregate principal amount of the securities, you may receive a rate of
interest higher than any of the rates shown above. Maximum rates offered are
not expected to exceed 10.00%.
We will provide you a schedule of the current interest rates for each
security at the offices where the securities will be sold. In addition, you may
call us at 1-888-842-9866 during normal business hours to obtain the current
interest rates for the securities.
OVERVIEW OF THAXTON
We are a diversified consumer financial services company that:
o provides small consumer loans to borrowers with impaired credit;
o finances the purchase of used automobiles and insurance premiums for
borrowers with impaired credit;
o serves as an independent sales agent for a wide variety of property and
casualty, health and life insurance companies;
o originates residential mortgage loans and packages them for resale to
investors; and
o provides a limited number of commercial loans.
Our operations were not as diverse in the past as they are today. Thaxton
was organized in 1978 as C. L. Thaxton & Sons, Inc., and from that time until
1991, our operations were limited to making small consumer loans and financing
automobile insurance premiums. In 1991, we made a strategic decision to
diversify our loan portfolio by actively seeking to finance purchases of used
automobiles by credit-impaired
<PAGE>
borrowers. Since 1991, we have evolved into a diversified consumer financial
services company with a core consumer finance business complimented by
insurance agency activities and mortgage and commercial lending.
On or about November 8, 1999, Thaxton Group intends to acquire Thaxton
Investment Corporation ("Thaxton Investment"). Mr. James D. Thaxton, President,
Chairman and majority shareholder of Thaxton Group, established Thaxton
Investment in February 1999 to purchase the consumer finance operations of
FirstPlus Consumer Finance, Inc. As a result of that acquisition, Thaxton
Investment acquired 144 consumer finance offices in seven states, including 47
offices in Texas and 31 offices in South Carolina. Thaxton Investment's core
businesses are providing small consumer loans, real estate loans and used
automobile sales finance. You should read the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Pending Acquisition of Thaxton Investment" for more information about the terms
of the acquisition of Thaxton Investment.
The acquisition of Thaxton Investment will enable us to penetrate new
markets in the western United States, while strengthening our existing core
businesses in the southeastern United States. After the acquisition of Thaxton
Investment, we will operate our direct consumer loan program in Thaxton
Investment's existing consumer finance offices in Georgia, Kentucky,
Mississippi, Ohio, South Carolina and Texas and will conduct our used
automobile sales finance program in Thaxton Investment's offices in Kentucky,
Ohio and Texas.
OUR OFFICES
Our executive offices are located at 1524 Pageland Highway, Lancaster,
South Carolina 29720, and our telephone number is (888) 842-9866. We currently
have a total of 43 finance offices and 48 insurance agency offices located in
the following states:
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INSURANCE AGENCY
FINANCE OFFICES OFFICES
- ------------------------- ----------------------
<S> <C> <C> <C>
South Carolina 26 Arizona 19
North Carolina 8 South Carolina 14
Georgia 2 North Carolina 6
Virginia 2 Nevada 4
Mississippi 2 Colorado 4
Alabama 2 Montana 1
Tennessee 1
</TABLE>
Upon completion of the acquisition of Thaxton Investment, total finance
offices will increase to 187 with the addition of 47 offices located in Texas,
31 in South Carolina, 22 in Mississippi, 19 in Georgia, nine each in Kentucky
and Tennessee and seven in Ohio.
2
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Our consolidated financial information set forth below should be read in
conjunction with our consolidated financial statements and related notes
included in the back of this prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ------------------------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
-------------------------------------- ------------- ----------------------- ------------
1996 1997 1998 1998 (1) 1998 1999 1999 (1)
------------ ------------ ------------ ------------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
NET INTEREST INCOME ............. $ 9,319 $ 10,870 $ 10,690 $ 43,147 $ 5,109 $ 8,308 $ 25,577
Provision for credit losses ..... 3,593 6,580 4,047 11,919 1,967 1,851 5,546
Net interest income after
provision for credit losses 5,726 4,290 6,644 31,228 3,142 6,457 20,031
Insurance commissions, net ...... 5,893 5,470 6,591 13,543 2,853 5,061 7,995
Other income .................... 986 1,221 962 962 473 992 1,298
Operating expenses .............. 11,974 13,211 15,778 46,683 6,816 12,733 27,894
Income tax expense (benefit) 247 (724) (497) 217 (113) (130) 554
Net income (loss) ............... 384 (1,506) (1,084) (1,167) (235) (93) 876
Net income (loss) per
common share .................. 0.09 (0.39) (0.35) (0.20) (0.09) (0.01) 0.07
BALANCE SHEET DATA:
Finance receivables ............. $ 63,107 $ 67,558 $ 80,685 $ 84,739 $ 219,074
Unearned income ................. (14,366) (14,087) (14,104) (13,949) (43,358)
Allowance for credit losses ..... (2,195) (4,809) (4,711) (4,523) (10,244)
Finance receivables, net ........ 46,546 48,662 61,870 66,267 165,472
Total assets .................... 56,681 60,965 78,996 85,553 227,176
Total liabilities ............... 50,310 54,996 66,067 75,055 215,711
Shareholders' equity ............ 6,371 5,969 12,929 10,498 11,465
</TABLE>
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(1) For information regarding the unaudited PRO FORMA adjustments made to our
historical financial data, which give effect to the acquisition of Thaxton
Investment, see the "Unaudited PRO FORMA Consolidated Financial Data"
section in the back of this prospectus. You may also want to read the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Pending Acquisition of Thaxton
Investment" for more information about the terms of the acquisition of
Thaxton Investment.
COMPETITIVE WEAKNESSES AND RISKS
We discuss in this prospectus, particularly in the "Risk Factors" section,
our competitive weaknesses and the numerous uncertainties and contingencies
beyond our control that affect our business, including:
o our dependence on floating-rate debt to finance our fixed-rate
receivables, which means that in periods of increasing interest rates, our
profitability may decline and our ability to fulfill our obligations under
the securities may be impaired;
o the high credit and operating costs associated with operating in the
non-prime consumer credit market; and
o competition in the non-prime consumer credit market from bank credit card
and mortgage banking companies, which are offering new sources of credit
to our customers.
You should carefully consider the information in the "Risk Factors"
section in this prospectus as well as the other information and data included
in this prospectus before deciding whether to purchase any of the securities.
3
<PAGE>
SUMMARY OF TERMS OF SECURITIES
SUBORDINATED TERM NOTES DUE ONE MONTH
Minimum Investment $100
Interest Rate Thaxton Group will determine periodically
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 year
and no more than 12% per year. One month
term notes bear interest at a fixed rate
until maturity.
Interest Payment Payable at maturity and compounded daily.
Extension Procedure The procedure for extending one month
term notes is described below under
"Extension Procedure for Term Notes."
Additions and Redemptions by Holder You may adjust the original principal
amount of one month term notes without
extending the maturity at any time
through additional purchases or partial
redemptions. You may not, however, reduce
the outstanding principal amount below
$100. If you present a one month term
note to Thaxton Group, Thaxton Group
will, for your convenience, record any
adjustments to the original principal
amount, such as additional purchases or
partial redemptions. If you redeem, in
whole or in part, prior to maturity, you
will forfeit all accrued interest on the
redeemed amount, unless Thaxton Group, in
its sole discretion, waives the
forfeiture in whole or in part. Thaxton
Group, in its discretion, may require you
to give notice in writing up to 30 days
before a redemption.
Redemption by Thaxton Group Thaxton Group may redeem one month term
notes without premium at any time on 30
days' notice.
SUBORDINATED TERM NOTES DUE 6, 12, 36 AND 60 MONTHS
Minimum Investment $1,000
Interest Rate Thaxton Group will determine periodically
the rate of interest payable on six, 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 year and no more than 12% per
year. Six, 12, 36 and 60 month term notes
bear interest at a fixed rate until
maturity.
Interest Payment At your option, payable either monthly,
quarterly or at maturity and compounded
daily.
Extension Procedure The procedure for extending six, 12, 36
and 60 month term notes is described
below under "Extension Procedure for Term
Notes."
Redemption by Holder If you redeem, in whole or in part, prior
to maturity, you will be required to pay
a penalty equal to the
4
<PAGE>
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 currently in
effect, unless Thaxton Group, in its sole
discretion, waives the forfeiture in
whole or in part. Thaxton Group may
require you to give 30 days' prior
written notice of a redemption.
Redemption by Thaxton Group Thaxton Group may redeem six, 12, 36 and
60 month term notes without premium at
any time on 30 days' notice.
EXTENSION PROCEDURE
FOR TERM NOTES Not later than 15 days prior to the
maturity date of a term note, Thaxton
Group will provide you with an extension
notice and a copy of our most recent
quarterly report filed with the
Commission. If you have not previously
received a copy of our most recent annual
report filed with the Commission, Thaxton
Group will also furnish you with this
report. The extension notice will advise
you of:
o the maturity date,
o the principal amount due on maturity,
o the amount of accrued interest to the
maturity date,
o the applicable interest rate upon
extension and
o your right to receive, upon request,
a copy of this prospectus, as amended
or supplemented.
One, six, 12, 36 and 60 month term notes
will be extended for a new one, six, 12,
36 or 60 month term at the then
applicable interest rate, unless you
notify Thaxton Group in writing on or
before the maturity date that you do not
wish to extend the term.
Notwithstanding the foregoing, if you are
a resident of Ohio, you must sign a new
application to purchase securities,
which Thaxton Group will provide to you
along with the materials described
above, in order to extend the term of
your term note at the then applicable
interest rate. If Thaxton Group does not
receive a signed application on or
before the maturity date, the principal
outstanding on your term note, together
with all interest accrued through the
maturity date, will be paid to you.
SUBORDINATED DAILY NOTES
Minimum Investment $50
Interest Rate Thaxton Group will determine periodically
the rate of interest payable on daily
notes, which rate will be no less than 3%
below or 5% above the most recent auction
average of United States Treasury Bills
with 13 week maturities. Additionally,
the interest rate on daily
5
<PAGE>
notes will not be less than 2% per year
or more than 12% per year. Daily notes
bear interest at a fixed rate until
maturity.
Thaxton Group may adjust the interest
rate on daily notes on the first day of
the month. You will be notified promptly
by first class mail of any monthly
adjustment in the interest rate.
Interest Payment Payable upon redemption and compounded
daily.
Additions and Redemptions by Holder You may adjust the original principal
amount at any time through additional
purchases or partial redemptions. You may
not, however, reduce the outstanding
principal amount below $50. If you
present a daily note to Thaxton Group,
Thaxton Group will, for your convenience,
record any adjustments to the original
principal amount, such as additional
purchases or partial redemptions. You may
redeem daily notes, in whole or in part,
at any time, without penalty. Thaxton
Group, in its sole discretion, may
require you to give up to 30 days' prior
written notice of a redemption.
Redemption by Thaxton Group Thaxton Group may redeem daily notes
without premium at any time on 30 days'
notice.
RANKING OF SECURITIES
The securities:
o are general, unsecured obligations of Thaxton Group only; and
o rank subordinate in right of payment to all existing and future senior
debt of Thaxton Group.
At June 30, 1999, Thaxton Group had approximately $54 million of senior
debt outstanding, which may be increased at any time. In addition, at the same
date, Thaxton Investment had approximately $110 million of debt outstanding
that would rank effectively senior to the securities.
6
<PAGE>
RISK FACTORS
THE SECURITIES THAT WE ARE OFFERING WILL CONSTITUTE GENERAL UNSECURED
OBLIGATIONS OF THAXTON GROUP. BEFORE YOU INVEST IN THE SECURITIES, YOU SHOULD
CONSIDER CAREFULLY ALL OF THE INFORMATION CONTAINED IN THIS PROSPECTUS AND, IN
PARTICULAR, THE FOLLOWING RISK FACTORS:
UNINSURED SECURITIES -- IF YOU DECIDE TO INVEST IN THESE DEBT SECURITIES, YOU
MUST UNDERSTAND THAT THE PAYMENT OF PRINCIPAL AND INTEREST ON THESE DEBT
SECURITIES IS NOT GUARANTEED BY ANY GOVERNMENTAL OR PRIVATE INSURANCE FUND.
No governmental or private agency, including the FDIC, insures the
securities which represent our debt obligations to purchasers of the
securities. Consequently, an investment in our securities is not insured
against loss and the purchaser is dependent solely upon our earnings, our
working capital and other sources of funds, including proceeds from the
continuing sale of debt securities and our revolving credit facilities for
repayment of principal at maturity and the ongoing payment of interest on the
securities. In addition, no public or private entity guarantees the securities
or provides for the repayment if we do not have sufficient funds to make
principal and interest payments. If you purchase these securities with funds
taken from any insured depository institution, such as a bank or savings and
loan association, you should recognize that a greater degree of risk of loss of
the funds exists.
LIMITED LIQUIDITY -- THE LACK OF TRADING MARKET AND THE NON-NEGOTIABLE NATURE
OF THE SECURITIES WILL ADVERSELY AFFECT YOUR ABILITY TO LIQUIDATE AN INVESTMENT
IN THE SECURITIES.
No trading market for the securities currently exists, and we do not
expect one to develop. Potential investors should not purchase the securities
with the expectation that a trading market for them will develop in the future.
The securities are non-negotiable which means that the securities are not
transferable without our prior consent. All transfers and assignments of the
securities may be made only at our offices.
DEPENDENCE UPON DEBT FINANCING -- WE MAY BE UNABLE TO SUCCESSFULLY CONTINUE OUR
BUSINESS IN THE EVENT WE CANNOT EXTEND OUR CREDIT FACILITIES OR FIND
SATISFACTORY REPLACEMENT DEBT FINANCING, AND, AS A RESULT, OUR RESULTS OF
OPERATIONS, FINANCIAL CONDITION AND OUR ABILITY TO MAKE PAYMENTS ON THE
SECURITIES WOULD ALL BE MATERIALLY ADVERSELY AFFECTED.
We depend primarily on financing from FINOVA Capital Corporation
("FINOVA") to fund the making of loans, to finance purchases of used automobile
sales contracts and to carry these receivables until they are repaid and/or we
fund them with other capital resources. After the acquisition of Thaxton
Investment is completed, we will rely on financing under two credit facilities
with FINOVA: (1) a $100 million facility for Thaxton Group and its subsidiaries
in existence prior to the acquisition of Thaxton Investment and (2) a $150
million facility for Thaxton Investment and its subsidiaries. Each of these
facilities expires on July 31, 2004. At June 30, 1999, borrowings of
approximately $54 million were outstanding under Thaxton Group's credit
facility. At the same date, approximately $110 million of indebtedness was
outstanding under Thaxton Investment's credit facility. We are unable, however,
to give you assurance that we will be able to comply with the terms of these
facilities or be able to extend their commitment terms beyond their maturity
dates. In the event we are unable to obtain extensions, our ability to obtain
similar financing will depend upon, among other things, our financial condition
and results of operations. We cannot guarantee that successor financing will be
available when we would need it and on terms similar to those of our credit
facilities. To the extent we are unsuccessful in maintaining or replacing our
credit facilities, we may be unable to service our other debt, including the
securities. You should read "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" for a
description of our credit facilities.
7
<PAGE>
SUBORDINATION -- IN THE EVENT THAT THAXTON GROUP IS UNABLE TO MAKE PAYMENT ON
ITS DEBTS AS THEY BECOME DUE OR DECLARES BANKRUPTCY, REORGANIZES OR LIQUIDATES,
THAXTON GROUP IS REQUIRED TO PAY ALL AMOUNTS DUE ON ITS SENIOR DEBT BEFORE IT
IS ALLOWED TO PAY ANY AMOUNTS DUE ON THE SECURITIES. IN ADDITION, YOUR RIGHT TO
RECEIVE PAYMENTS ON THE SECURITIES COULD BE ADVERSELY AFFECTED IF THAXTON
INVESTMENT IS UNABLE TO PAY FUNDS TO THAXTON GROUP OR DECLARES BANKRUPTCY,
LIQUIDATES OR REORGANIZES.
The securities are second in right of repayment to all of Thaxton Group's
senior debt. Investors should be aware that if Thaxton Group becomes insolvent,
they would be entitled to receive payment on the securities they hold only
after all of Thaxton Group's senior debt is paid. Senior debt is broadly
defined as all of Thaxton Group's debt other than the securities. Thaxton Group
has the unrestricted right to increase or decrease the amount of senior debt at
any time. As of June 30, 1999, the principal amount of Thaxton Group's senior
debt outstanding was approximately $54 million. Thaxton Group can not provide
any assurance to investors that it would have or be able to obtain sufficient
funds to pay amounts due on the securities if it becomes insolvent or upon its
dissolution, winding up, liquidation or reorganization. You should read
"Description of Securities -- General Provisions Applicable to all Securities
- -- Subordination" for more information about this risk.
The acquisition of Thaxton Investment adds approximately $110 million of
debt that is effectively senior to the securities. Thaxton Investment is a
separate legal entity and has no obligation to pay any amounts due on the
securities or make any funds available to Thaxton Group for debt service.
Thaxton Group's ability to pay principal of and interest on the securities is
partially dependent upon the cash flow that it receives from Thaxton Investment
in the form of dividends, fees, loans or otherwise. Thaxton Investment's
agreement with FINOVA restricts its ability to make distributions to Thaxton
Group. Additionally, any right of Thaxton Group to receive any assets upon the
liquidation or reorganization of Thaxton Investment, and the consequent right
of the holders of the securities to participate in the distribution of those
assets, is effectively junior to the claims of FINOVA. See "Description of
Securities -- General Provisions Applicable to all Securities -- Subordination
Related to Corporate Structure."
IMPACT OF CREDIT LOSSES ON PROFITABILITY -- THE NON-PRIME CONSUMER CREDIT
MARKET IN WHICH WE OPERATE INVOLVES HIGH CREDIT COSTS WHICH COULD REDUCE OUR
PROFITABILITY AND AFFECT OUR ABILITY TO FULFILL OUR OBLIGATIONS TO PURCHASERS
OF THE SECURITIES.
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, our primary assets of non-prime consumer
loans and used automobile sales contracts, relative to other assets such as
prime consumer loans and retail installment contracts, involve a higher
probability of default and greater servicing and collection costs. Our
profitability depends upon our ability to properly evaluate the
creditworthiness of credit-impaired borrowers, to maintain adequate security
for used automobile sales contracts and to efficiently service and collect our
portfolio of finance receivables. We are unable to guarantee that the credit
performance of our customers will be satisfactory, or that the rate of future
defaults and/or losses will not exceed our 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. If
general economic conditions should worsen in the future, we anticipate that our
delinquency rates would likely increase.
INCREASES IN INTEREST RATES -- IN PERIODS OF INCREASING INTEREST RATES, OUR
DEPENDENCE ON DEBT WITH FLOATING INTEREST RATES TO FINANCE OUR PORTFOLIO OF
RECEIVABLES WHICH BEAR INTEREST INCOME AT FIXED INTEREST RATES MAY ADVERSELY
AFFECT OUR PROFITABILITY AND OUR ABILITY TO SERVICE OUR OBLIGATIONS FOR THE
SECURITIES.
Our profitability is adversely affected when interest rates rise. Our
finance receivables, which bear interest at fixed rates, including some of
which are limited to the maximum rates allowed under applicable
8
<PAGE>
law, have historically been financed by incurring indebtedness with floating
interest rates. During periods of rising interest rates, our interest expense
generally increases while our interest income remains constant. Thus, net
interest rate spreads decrease and our profitability is hurt. We believe that
by financing a portion of these receivables with the fixed rate securities in
this offering, we will be able to better match our fixed rate receivables with
fixed rate debt and improve our interest rate sensitivity and net interest rate
spreads. We cannot, however, give you any assurance that we will sell any
particular amount of the securities in this offering. You should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for more information.
REGULATORY RESTRICTIONS AND LICENSING REQUIREMENTS -- WE OPERATE IN AN INDUSTRY
IN WHICH FEDERAL AND STATE GOVERNMENTAL AUTHORITIES EXTENSIVELY REGULATE,
SUPERVISE AND LICENSE THE PARTICIPANTS; CHANGES IN THE REGULATORY ENVIRONMENT,
PARTICULARLY CHANGES RELATED TO THE MAXIMUM PERMISSIBLE INTEREST RATES THAT WE
CHARGE BORROWERS, COULD MATERIALLY HURT OUR BUSINESS AND COULD IMPAIR OUR
PROFITABILITY AND OUR ABILITY TO FULFILL OUR DEBT OBLIGATIONS.
Extensive federal and state laws, some of which require licensing and
qualification, apply to our business. These laws may regulate, among other
things,
o the maximum interest rate that may be charged to our borrowers;
o the sale and type of insurance products offered by the insurers for
which we act as agent; and
o our rights to repossess and sell collateral.
An adverse change in these laws or the adoption of new laws could have a
materially adverse effect on our business by limiting the interest and fee
income we can generate on existing and additional finance receivables, limiting
the states in which we may operate, or restricting our ability to realize the
value of collateral securing our finance receivables. See "Business --
Regulation."
Moreover, a reduction in existing statutory maximum interest rates or the
imposition of statutory maximum interest rates below those we presently charge
in unregulated jurisdictions would directly impair our profitability. In
addition, due to the consumer-oriented nature of the industry in which we
operate and uncertainties with respect to the application of various laws and
regulations in some 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. 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 our lines of business could result in potential liability
that would materially hurt our financial condition and results of operations.
As a result, our cash flow and ability to service our debt may be reduced.
DEPENDENCE ON KEY MANAGEMENT PERSONNEL -- THE SUCCESS OF OUR OPERATIONS DEPENDS
ON THE CONTINUED EMPLOYMENT OF KEY MEMBERS OF OUR SENIOR MANAGEMENT.
Although we have recently employed additional management personnel
experienced in various aspects of consumer finance, our success depends, in
large part, on the continued service of our 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
loss of either Mr. Thaxton or Mr. Wilson may have a material adverse effect on
our business. Additionally, we may be unable to find a capable replacement for
either of these members of our senior management. We maintain key employee
insurance in the amount of $1,000,000 on the life of Mr. Wilson but maintain no
such insurance on the life of Mr. Thaxton. Neither Mr. Thaxton nor Mr. Wilson
is a party to an employment agreement with us.
9
<PAGE>
COMPETITION -- INCREASED COMPETITION IN OUR LINES OF BUSINESS COULD MATERIALLY
THREATEN OUR ABILITY TO SERVICE OUR DEBT, INCLUDING THE SECURITIES.
The consumer finance business is highly fragmented and competitive.
Traditional consumer finance sources, who have generally ignored the non-prime
consumer market in the past, are now serving this market. In addition, numerous
nontraditional consumer finance sources are serving this market. Many of our
competitors or potential competitors have significantly greater resources than
we do. Increased competition from these sources or other sources of credit for
credit-impaired borrowers in the markets we serve could result in our inability
to attract new customers or retain our existing ones, which would have an
adverse effect on our revenue. This reduction in revenue may, in turn, weaken
our financial position and our ability to service our debt. See "Business --
The Consumer Finance and Insurance Agency Industries."
GEOGRAPHIC CONCENTRATION OF OUR BUSINESS PRIMARILY IN THE SOUTHEASTERN UNITED
STATES. -- BECAUSE WE CURRENTLY OPERATE OUR CONSUMER FINANCE AND INSURANCE
BUSINESS PRIMARILY IN THE SOUTHEASTERN UNITED STATES, A DOWNTURN IN THE ECONOMY
OR UNFAVORABLE REGULATORY CHANGES IN THIS REGION IS MORE LIKELY TO ADVERSELY
AFFECT OUR PROFITABILITY AND CASH FLOW THAT WOULD BE USED TO SATISFY OUR DEBT
OBLIGATIONS, INCLUDING THE SECURITIES, THAN IF OUR BUSINESS WAS MORE
GEOGRAPHICALLY DIVERSE.
CONTROL BY EXISTING SHAREHOLDER -- BECAUSE AN EXISTING SHAREHOLDER OF THAXTON
GROUP IS ABLE TO EFFECTIVELY CONTROL THE OUTCOME OF ALL MATTERS REQUIRING
SHAREHOLDER APPROVAL, INCLUDING THE ELECTION OF THAXTON GROUP'S BOARD OF
DIRECTORS, THE SUCCESS OF OUR BUSINESS AND YOUR POTENTIAL INVESTMENT IN THE
SECURITIES IS AT LEAST PARTIALLY TIED TO THE DECISIONS OF THE CONTROLLING
SHAREHOLDER.
James D. Thaxton, Chief Executive Officer, President, and Chairman of the
Board of Directors of Thaxton Group, beneficially owns approximately 86% of the
outstanding shares of the common stock of Thaxton Group. As a result, Mr.
Thaxton is able to elect all of its directors, amend its 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. If Mr. Thaxton makes a unfavorable decision for
Thaxton Group, our business and our ability to service our debt, including the
securities, could suffer. See "Principal and Management Shareholders."
THIS PROSPECTUS INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THUS USE
OF LANGUAGE SUCH AS "WILL LIKELY RESULT," "MAY," "ARE EXPECTED TO," "IS
ANTICIPATED," "ESTIMATE," "PROJECTED," "INTENDS TO" OR OTHER SIMILAR WORDS.
ALTHOUGH WE BELIEVE THAT OUR PLANS, INTENTIONS AND EXPECTATIONS REFLECTED IN
OR SUGGESTED BY ANY OF OUR FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN
GIVE NO ASSURANCE THAT THESE PLANS, INTENTIONS OR EXPECTATIONS WILL BE
ACHIEVED. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE FORWARD-LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS ARE
DISCUSSED HERE UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
10
<PAGE>
USE OF PROCEEDS
If Thaxton Group sells all of the securities that it is offering, the net
proceeds to Thaxton Group are estimated to be approximately $49,600,000 after
payment of offering expenses estimated at $400,000. The offering commenced on
February 17, 1998, and securities having an aggregate principal amount of $18.0
million have been sold to date. After payment of expenses incurred to date of
approximately $100,000, Thaxton Group has received net proceeds of
approximately $17.9 million. Thaxton Group can, however, give no assurance that
we will receive any particular amount of additional proceeds from the offering
of the securities. In addition, Thaxton Group does not expect to ever have as
much as $49,600,000 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 us from sales of
the securities during the offering will be used to temporarily repay
indebtedness outstanding under the revolving credit facilities described in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
DESCRIPTION OF SECURITIES
The securities will be issued under an indenture between Thaxton Group and
The Bank of New York, as trustee. 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 in effect on the date of the indenture.
THE FOLLOWING DESCRIPTION IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE
SECURITIES AND THE INDENTURE. IT DOES NOT RESTATE THE INDENTURE IN ITS
ENTIRETY. WE URGE YOU TO READ THE INDENTURE BECAUSE IT, AND NOT THIS
DESCRIPTION, DEFINES YOUR RIGHTS AS HOLDERS OF THE SECURITIES. WE HAVE FILED A
COPY OF THE INDENTURE AS AN EXHIBIT TO THE REGISTRATION STATEMENT WHICH
INCLUDES THIS PROSPECTUS.
BRIEF DESCRIPTION OF THE SECURITIES
The securities:
o are general, unsecured obligations of Thaxton Group only; and
o are subordinated in right of payment to all existing and future "senior
indebtedness" of Thaxton Group.
As of June 30, 1999, the outstanding amount of senior indebtedness of
Thaxton Group was approximately $54 million. As of the same date, approximately
$110 million of outstanding indebtedness of Thaxton Investment would be
effectively senior to the securities.
TERMS OF SUBORDINATED TERM NOTES DUE ONE MONTH
ADDITIONS/REDEMPTIONS. 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. 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. Partial redemptions may not, however, reduce the outstanding
principal amount below $100. Upon presentation of a one-month term note
certificate to Thaxton Group, it will, for the holder's convenience, record on
the certificate any adjustments to the original principal amount, such as
additional purchases or partial redemptions.
INTEREST. Thaxton Group 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 and will be compounded daily.
11
<PAGE>
TERMS OF SUBORDINATED TERM NOTES DUE SIX, 12, 36 AND 60 MONTHS
Each six, 12, 36 or 60-month term note will be issued in the minimum
principal amount of $1,000 and will mature six, 12, 36 or 60 months after date
of issuance unless redeemed prior to its maturity date. Thaxton Group will
determine, from time to time, the rates of interest payable on the six, 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 six, 12, 36
or 60-month term note will be the rate of interest payable throughout the term
of the term note. Interest will be payable, at the holder's option, either
monthly, quarterly or at maturity and will be compounded daily.
PROCEDURE FOR EXTENSIONS OF TERM NOTES
Not later than 15 days prior to the maturity of a term note, Thaxton Group
will provide the holder by first-class mail with an extension notice and a copy
of its most recent quarterly report filed with the Commission and, if not
previously furnished to the holder, a copy of its most recent annual report
filed with the Commission. The extension notice will advise the holder of the
maturity date of the term note, the principal amount due on maturity, the
amount of accrued interest to the maturity date and the applicable interest
rate upon an extension of the term note. The extension notice will also inform
the holder that, upon request, Thaxton Group will promptly furnish the holder
with a copy of this prospectus, as amended or supplemented.
Each one, six, 12, 36 or 60-month term note will be extended for
successive one, six, 12, 36 or 60-month terms, respectively, at the rates of
interest then in effect unless, prior to maturity, Thaxton Group receives
written notification of the holder's intention to redeem the term note at
maturity. Notwithstanding the foregoing, a holder of a term note who is a
resident of the State of Ohio must sign a new application to purchase
securities, which Thaxton Group will provide to the holder along with the
materials described above, in order to extend the term of the term note. If
Thaxton Group does not receive an executed application on or prior to the
maturity date, the principal outstanding on such term note, together with all
interest accrued through the maturity date, will be paid to the holder. Except
for a possible change in the rate of interest, all of the terms and conditions
applicable to the term notes when issued will also apply during each period of
extension.
TERMS OF SUBORDINATED DAILY NOTES
ADDITIONS/REDEMPTIONS. 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. Partial redemptions may not,
however, reduce the outstanding principal amount below $50. Upon presentation
of a daily note certificate to Thaxton Group, it will, for the holder's
convenience, record on the certificate any adjustments to the original
principal amount, such as additional purchases or partial redemptions.
INTEREST. Thaxton Group will determine the interest rate payable on daily
notes which may fluctuate on a monthly basis. Any adjustment to the interest
rate will be made 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 Thaxton Group makes another
adjustment. 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. Nevertheless, the interest rate
will not be less than 2% per annum or more than 12% per annum. Interest will be
accrued daily and compounded daily. Holders of daily notes will be notified by
first-class mail of any monthly adjustments in the interest rate.
12
<PAGE>
REDEMPTION OF SECURITIES AT OPTION OF HOLDER.
ONE-MONTH TERM NOTES. The holder of a one-month term note will have the
right, at the holder's option, to redeem the term note prior to maturity, in
whole or in part. Upon early redemption, the holder will forfeit all accrued
interest on the principal amount redeemed unless Thaxton Group, in its sole
discretion, elects to waive all or a portion of the forfeited interest. In
addition, Thaxton Group retains the right to require the holder of a one-month
term note to give it up to 30 days' prior written notice, by first class mail,
of a redemption request, 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 six, 12, 36, or
60-month term note will have the right, at the holder's option, to redeem the
note prior to maturity. If the holder redeems prior to maturity, the holder
will forfeit an amount equal to the difference between the amount of interest
actually accrued on the six, 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 on the term note had the rate of interest been 3% less than the rate in
effect at the date issuance or most recent extension unless Thaxton Group, in
its sole discretion, elects to waive all or a portion of the penalty. When
necessary, forfeited interest already paid to or for the account of the holder
will be deducted from the amount redeemed. Holders of six, 12, 36 or 60-month
term notes will also have the right to make partial redemptions prior to
maturity. A partial redemption may not, however, reduce the principal amount to
less than $1,000. The interest rate penalty for each redemption of a six, 12,
36 or 60- month term note will be calculated only upon the principal amount of
the term note redeemed. Six, 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. Thaxton Group retains the right
to require the holder of a six, 12, 36 or 60-month term note to give it no less
than 30 days' prior written notice, by first class mail, of a redemption
request, 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 the
holder's option, to redeem the daily note at any time, in whole or in part,
without penalty. If the holder redeems a daily note in full, the holder must
surrender the daily note to Thaxton Group. Thaxton Group shall fully discharge
the obligations under the daily note by payment to the holder of the
outstanding principal amount of the daily note, together with any accrued but
unpaid interest, as reflected on the books of Thaxton Group. Thaxton Group
retains the right, however, to require the holder of a daily note to give it up
to 30 days' prior written notice, by first class mail, of a redemption request,
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, Thaxton Group, in its sole discretion, may at any time require holders of
any of the securities to give it 30 days' prior written notice, by first class
mail, of a redemption request. If it 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 Thaxton Group or its
affiliates where the securities may be presented for redemption or by
appropriate signage in these offices. Thaxton Group may also give this notice by
mailing letters to holders of the securities. Interest will continue to accrue
if Thaxton Group should impose this notice requirement.
GENERAL PROVISIONS APPLICABLE TO ALL SECURITIES
OPTIONAL REDEMPTION BY THAXTON GROUP. Thaxton Group will have the right,
at its option, to redeem the securities, in whole or in part, at any time.
Interest on the redeemed securities will continue to accrue until the date of
redemption and no premium shall be paid on the redeemed securities. Thaxton
Group will give the holder not less than 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 the notice, together with interest accrued
and unpaid on the security to the date of redemption, will become due and
payable on the redemption date.
13
<PAGE>
SUBORDINATION. THE DISCUSSION THAT FOLLOWS IN THIS SUBSECTION IS A BRIEF
SUMMARY OF THE EFFECT OF THE SUBORDINATION OF THE SECURITIES. WE BELIEVE THAT
TO PROPERLY UNDERSTAND THIS EFFECT, YOU MUST UNDERSTAND THE PRECISE DEFINITION
OF THE TERMS "SENIOR INDEBTEDNESS" AND "INDEBTEDNESS." FOR THIS REASON, WE HAVE
USED WITHIN THIS SUBSECTION OF THE PROSPECTUS ONLY THESE TERMS AS THEY ARE
DEFINED IN THE INDENTURE FOR THE SECURITIES.
"Senior Indebtedness" means Indebtedness of Thaxton Group outstanding at
any time, other than
o Indebtedness of Thaxton Group to a subsidiary for money borrowed or
advanced from any such subsidiary; or
o 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 Thaxton Group 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 Thaxton
Group has guaranteed or for which it is otherwise liable; and
(3) any amendment, renewal, extension or refunding of any such debt.
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 the
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 for Senior Indebtedness which maturity has been
accelerated, Thaxton Group may not make or agree to make any direct or indirect
payment on the securities. Upon any distribution of assets of Thaxton Group in
any dissolution, winding up, liquidation or reorganization, payment of the
principal of and interest on the securities will be subordinated to the prior
payment in full of all Senior Indebtedness. The indenture does not limit
Thaxton Group's ability to increase the amount of Senior Indebtedness or to
incur any additional indebtedness in the future that may affect its ability to
make payments under the securities. Except as described above, the obligation
of Thaxton Group 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 come out of the distributive share of the securities. By
reason of this subordination, in the event of a distribution of assets of
Thaxton Group upon insolvency, some general creditors of Thaxton Group may
recover more, ratably, than holders of the securities.
SUBORDINATION RELATED TO CORPORATE STRUCTURE. The securities will be
obligations of Thaxton Group only. Thaxton Group does business through
subsidiary corporations, including Thaxton Investment upon its acquisition.
Thaxton Group's rights and the rights of its creditors, including the holders
of the securities, to participate in the distribution of the assets of any of
Thaxton Group's subsidiaries upon liquidation, dissolution or reorganization of
a subsidiary will be subject to the prior claims of the subsidiaries'
creditors. Thaxton Group may, however, itself be a creditor with recognized
claims against the subsidiary, and these claims may be equal in right of
payment to the claims of the subsidiaries' creditors.
DEFAULTS AND REMEDIES. The term "event of default" when used in connection
with the securities generally means any one of the following:
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<PAGE>
(1) failure of Thaxton Group 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
(2) some events of bankruptcy, insolvency or reorganization involving
Thaxton Group or some 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. Except in the case of default in the payment of principal of or
interest on any of the securities, the trustee shall, however, be protected in
withholding notice if it in good faith determines that the withholding of
notice is in the interest of the holders. The term "default" for this purpose
shall only mean the happening of any event of default described above,
excluding grace periods.
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 may declare the principal of and all accrued
interest on all of the securities of the series to be due and payable
immediately. The trustee shall notify Thaxton Group in writing of this
declaration, and, if the holders of the securities desire to make this
declaration, they must also notify the trustee in writing of the declaration of
acceleration. The holders of a majority in principal amount of the series of
securities may rescind the declaration if:
(1) Thaxton Group has paid or deposited with the trustee a sum sufficient
to pay all overdue interest on the series of securities and principal of
any securities which have become due except as the result of the
declaration of acceleration; and
(2) all existing events of default have been cured or waived.
Upon the occurrence of conditions specified in the indenture, the holders
of a majority in principal amount of a series of securities may waive all
defaults, except uncured defaults in payment of principal of or interest on the
securities or uncured defaults under a provision which cannot be modified under
the terms of the indenture without the consent of each holder affected. The
indenture requires Thaxton Group to file periodic reports with the trustee as
to the absence of defaults.
A director, officer, employee or shareholder of Thaxton Group shall not
have any liability for any of his or her obligations 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 of
this liability. The waiver and release are part of the consideration for the
issuance of the securities.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. Thaxton Group 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 Thaxton Group under the indenture and
the securities. To effectuate these types of transactions, other conditions are
required to be met as well. Thereafter all of the obligations under the
indenture will terminate and the successor corporation formed by a
consolidation or into which Thaxton Group is merged or to which a transfer or
lease is made will succeed to all rights and powers of Thaxton Group 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 Thaxton Group, upon presentation of the security
and recordation of the transfer or assignment in the books of Thaxton Group.
The securities are not transferable to any person who is a resident of a state
where the offering of the securities has not been registered under applicable
state securities laws, unless an exemption from registration is available.
MODIFICATION OF THE INDENTURE. The indenture contains provisions
permitting Thaxton Group and the trustee, without the consent of any holder,
15
<PAGE>
o to supplement or amend the indenture under specified circumstances,
including to cure any ambiguity;
o to correct or supplement any other provision in the indenture;
o to evidence the succession of a successor to Thaxton Group or the
trustee;
o to add to the covenants of Thaxton Group for the benefit of the holders
or additional events of default;
o to secure the securities; or
o to add any other provisions with respect to matters or questions arising
under the indenture which Thaxton Group and the trustee deem necessary or
desirable and which do not adversely affect the interests of the holders.
Otherwise, the rights and obligations of Thaxton Group and the rights of the
holders may be modified by Thaxton Group 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 or her
consent.
THE COMPANY AS PAYING AGENT. Thaxton Group shall make all principal and
interest payments to the holders, and Thaxton Group shall provide notice of the
payment to the trustee.
SATISFACTION AND DISCHARGE OF INDENTURE. The indenture will be discharged
and canceled upon payment of all the securities or upon deposit with the
trustee of funds sufficient for the payment or redemption of the securities,
within not more than one year prior to the maturity of all of the securities.
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.
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 this direction
o would not conflict with any rule of law or with the indenture;
o would not be prejudicial to the rights of another holder; and
o would not subject the trustee to personal liability.
The indenture provides that in case an uncured event of default should occur
and be known to the trustee, the trustee will be required to use the degree of
care of a prudent man in the conduct of its own affairs in the exercise of its
power. Subject to using this standard, 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.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial information
as of June 30, 1999 and for the six-month periods ended June 30, 1998 and 1999
and each of the three fiscal years in the period ended December 31, 1998, which
should be read in conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The selected consolidated financial information for the fiscal year ended
December 31, 1998 has been derived from our consolidated financial statements,
which were audited by Cherry, Bekaert & Holland, LLP, independent auditors. The
financial information for the fiscal year ended December 31, 1997 has been
derived from our consolidated financial statements, which were audited by KPMG
LLP, independent auditors. The financial information for the fiscal year ended
December 31, 1996 has been derived from our audited consolidated financial
statements, which were audited by KPMG LLP, independent auditors, but which are
not included with this prospectus. The financial information for the six-month
periods ended June 30, 1998 and 1999 and as of June 30, 1999 has been derived
from our unaudited financial statements. In the opinion of management, the
unaudited interim consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the consolidated financial position and consolidated results of
operations for these periods. The unaudited interim consolidated results of
operations are not necessarily indicative of the consolidated results of
operations for any other interim period or for any fiscal year as a whole.
The financial statements for the fiscal year ended December 31, 1996 have
been restated to include the effects of the acquisition of Thaxton Insurance
Group, Inc. This acquisition was accounted for at historical cost in a manner
similar to pooling of interests accounting. As such, all periods prior to the
acquisition have been restated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- --------------------------
1996 1997 1998 1998 1999
------------ ------------- ------------- ----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest and fee income ................ $ 13,529 $ 15,893 $ 15,728 $ 7,522 $ 11,513
Interest expense ....................... 4,210 5,023 5,037 2,413 3,205
-------- --------- --------- -------- --------
Net interest income .................... 9,319 10,870 10,690 5,109 8,308
Provision for credit losses ............ 3,593 6,580 4,047 1,967 1,851
-------- --------- --------- -------- --------
Net interest income after provision for
credit losses ......................... 5,726 4,290 6,644 3,142 6,457
Insurance commissions, net ............. 5,893 5,470 6,591 2,853 5,061
Other income ........................... 986 1,221 962 473 992
Operating expenses ..................... 11,974 13,211 15,778 6,816 12,733
Income tax expense (benefit) ........... 247 (724) (497) (113) (130)
-------- --------- --------- -------- --------
Net income (loss) ...................... $ 384 $ (1,506) $ (1,084) $ (235) $ (93)
======== ========= ========= ======== ========
Net income (loss) per common share ..... $ 0.09 $ (0.39) $ (0.35) $ (0.09) $ (0.12)
Average common shares outstanding ...... 3,932 3,913 3,803 3,788 3,779
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Average interest rate earned (1)(2) ......... 30.92% 29.79% 29.72% 29.11% 23.38%
Average interest rate paid (2) .............. 10.21 9.80 9.27 9.52 8.54
Net interest spread (2) ..................... 20.71 19.99 20.45 19.59 14.84
Net interest margin (2)(3) .................. 22.14 21.34 21.47 20.93 15.01
Allowance for credit losses as a
percentage of net finance
receivables (4) ............................ 4.35 8.82 8.39 9.04 6.83
Allowance for credit losses, dealer
reserves and discount on bulk
purchases as a percentage of net
finance receivables (4) .................... 7.81 10.71 10.60 11.05 8.64
Net charge-offs as a percentage
of average net finance
receivables (2) ............................ 5.06 7.47 7.64 7.57 6.09
</TABLE>
- --------
(1) Average interest rate earned represents interest and fee income for the
period divided by average net finance receivables during the period.
(2) Percentages for the six-months ended June 30, 1998 and 1999 are computed
using annualized operating data which do not necessarily represent the
comparable data for a full twelve-month period.
(3) Net interest margin represents net interest income for the period divided
by average net finance receivables during the period.
(4) Net finance receivable balances are presented net of unearned finance
charges only.
<TABLE>
<CAPTION>
AT YEAR ENDED DECEMBER 31, AT JUNE 30
------------------------------------------ ------------
1996 1997 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Finance receivables ................. $ 63,107 $ 67,558 $ 80,685 $ 84,739
Unearned income (1) ................. (14,366) (14,087) (14,104) (13,949)
Allowance for credit losses ......... (2,195) (4,809) (4,711) (4,523)
Finance receivables, net ............ 46,546 48,662 61,870 66,267
Total assets ........................ 56,681 60,965 78,996 85,553
Total liabilities ................... 50,310 54,996 66,067 75,055
Shareholders' equity ................ 6,371 5,969 12,929 10,498
</TABLE>
- --------
(1) Includes unearned finance charges, dealer reserves on used automobile sales
contracts and discounts on bulk purchases. Dealer reserves and discounts
on bulk purchases totaled $1,787,000, $1,028,575, and $1,241,633 at
December 31, 1996, 1997, and 1998, respectively, and $1,201,780 at June
30, 1999. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Credit Loss Experience."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEVELOPMENT OF OUR BUSINESS
HISTORICAL. Prior to 1991, we were primarily engaged in making and
servicing direct consumer and insurance premium finance loans to
credit-impaired borrowers. In 1991, we made a strategic decision to diversify
our portfolio by actively seeking to finance credit-impaired borrowers'
purchases of used automobiles. Our management believed that the expertise it
had developed in extending and servicing installment credit to credit-impaired
borrowers would enable it to profitably finance used automobile purchases by
borrowers having similar credit profiles. The employment of additional senior
and mid-level management personnel with substantial used automobile lending
experience facilitated our entry into this segment of the consumer credit
industry. Since 1991, we have evolved into a diversified consumer financial
services company engaged in the origination and servicing of loans made to
credit-impaired borrowers, used automobile lending through the purchase and
servicing of used automobile sales contracts, insurance premium finance lending
through the purchase of insurance premium finance contracts, selling insurance
products on an agency basis and originating residential mortgage loans.
RECENT EXPANSION ACTIVITIES. We have significantly grown our business in
1998 and 1999.
1998 ACQUISITIONS. Our business expanded in 1998 with the addition of our
commercial finance business and with the growth of our consumer finance,
insurance agency and mortgage brokerage businesses. A wholly-owned subsidiary,
Thaxton Commercial Lending, Inc. began our commercial finance business, which
consists of making factoring and secured commercial loans to small and
medium-sized businesses. We also increased the size of our consumer finance
business in 1998 with the opening of consumer finance offices in Charlotte,
North Carolina, Beaufort, South Carolina and the acquisition of Budget
Financial Service, Inc.'s consumer finance offices in Amory and Aberdeen,
Mississippi and in Vernon and Hamilton, Alabama. The territory within which we
sell insurance products on an agency basis was significantly enlarged in 1998
with Thaxton Insurance Group, Inc.'s acquisition of twenty-two non-standard
insurance agency offices located in three southwestern states -- Arizona,
Nevada, and New Mexico. Finally, the growth of our business in 1998 was
completed with the acquisition of Paragon, Inc. in November of that year.
Paragon, Inc. is a mortgage banking company engaged in the origination,
funding, and whole loan sale of primarily "B" and "C" credit quality
residential mortgages.
1999 ACQUISITIONS. In March 1999, Thaxton Insurance Group, Inc. acquired
four insurance agencies operating in both Arizona and Colorado. The acquired
insurance agencies sell non-standard auto insurance. With the addition of nine
branch offices from these acquisitions, Thaxton Insurance Group, Inc. now
operates 34 insurance agency branch offices within five states.
RECENT CREATION OF THAXTON INVESTMENT. The recent creation of Thaxton
Investment in February, 1999 has impacted our business. Until the acquisition
of Thaxton Investment is completed, our executive officers and other
administrative personnel have and will devote a substantial portion of their
management time to Thaxton Investment. We charge Thaxton Investment a monthly
management fee in the amount of $36,440 for these services. The management fee
is based upon time estimates of our personnel for anticipated work to be
performed for the benefit of Thaxton Investment, and includes the reimbursement
of other direct costs we incur.
PENDING ACQUISITION OF THAXTON INVESTMENT
The terms of the Plan of Share Exchange Agreement dated as of September
30, 1999 among Thaxton Group, Thaxton Investment, Thaxton Operating Company and
Mr. James D. Thaxton provide that, on or about November 8, 1999, Mr. Thaxton,
the sole shareholder of Thaxton Investment, will transfer all of his shares of
common stock of Thaxton Investment to Thaxton Group in exchange for 3,223,000
shares of common stock
19
<PAGE>
of Thaxton Group. Thaxton Group's management estimates that the aggregate fair
market value of the common stock of Thaxton Group to be issued to Mr. Thaxton
is approximately $30,000,000. Because Thaxton Investment and Thaxton Group have
been under common ownership and control since February 1999, Thaxton Group's
acquisition of Thaxton Investment will be accounted for at historical cost in a
manner similar to pooling of interests accounting. Thaxton Investment's
historical financial statements and the PRO FORMA financial statements of
Thaxton Group reflecting the acquisition of Thaxton Investment are included in
the back of this prospectus.
RESULTS OF OPERATIONS
COMPARISON OF SIX-MONTHS ENDED JUNE 30, 1999 TO SIX-MONTHS ENDED JUNE 30,
1998. Finance receivables at June 30, 1999 were $84,739,000 versus $65,127,000
at June 30, 1998, a 30% increase. Approximately 50% of the increase was due to
the acquisition of Paragon, our mortgage banking subsidiary, and the mortgage
receivables carried in its warehouse line. The remaining increase was due
primarily to growth in our consumer lending receivables.
Unearned income at June 30, 1999 was $12,747,000 versus $11,777,000 at
June 30, 1998, an 8% increase. The increase was directly related to the higher
receivable level. The provision for credit losses established for the
six-months ended June 30, 1999 was $1,851,000 versus $1,967,000 for the same
period in 1998, and the allowance for credit losses decreased to $4,523,000 at
June 30, 1999, from $4,821,000 at June 30, 1998. The reduction in the provision
was directly attributable to reduced credit losses, due primarily to our
programs during 1997 and 1998 to improve the quality of our loan portfolio.
Accordingly, the allowance for credit losses has not required a significant
increase in order to maintain its level in accordance with our allowance for
loan loss model.
Interest and fee income for the six-months ended June 30, 1999 was
$11,513,000 versus $7,522,000 for the six-months ended June 30, 1998, a 53%
increase. This increase is primarily due to our acquisition of Paragon, Inc. in
the fourth quarter of 1998, and the fees Paragon, Inc. earned in the course of
its mortgage banking operations. Interest expense increased to $3,205,000 for
the six-months ended June 30, 1999 versus $2,413,000 for the six-months ended
June 30, 1998, a increase of more than 33%. This increase was the direct result
of a higher level of average outstandings during 1999.
Insurance commissions net of insurance cost increased to $5,061,000 for
the six-months ended June 30, 1999 from $2,853,000 for the same period of 1998,
due primarily to the acquisition of an additional 27 non-standard auto
insurance agency offices during the fourth quarter of 1998, which more than
doubled the number locations selling insurance in Thaxton Insurance Group, Inc.
Operating expenses increased to $12,733,000 for the six-months ended June
30, 1999 from $6,816,000 for the comparable period of 1998, an 87% increase,
due to additional expenses incurred as a result of the 1998 acquisition of
insurance branch offices, consumer finance offices, and Paragon, Inc.
As a result of the above, the company recorded a net loss of $93,000 for
the six months ended June 30, 1999 versus a $225,000 net loss for the six
months ended June 30, 1998.
Stockholders' equity decreased from $12,930,000 at December 31, 1998 to
$10,498,000 at June 30, 1999, a 19% decrease, primarily as a result of Thaxton
Group's program to repurchase its common stock. During the six month period
ended June 30, 1999, Thaxton Group repurchased 127,712 shares of common stock,
13,974 shares of Series A preferred stock, and retired all of the shares of its
Series D preferred stock, for a total reduction in equity related to these
repurchases of $1,980,000.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1998 TO FISCAL YEAR ENDED
DECEMBER 31, 1997. Finance receivables at December 31, 1998 were $80,684,786
versus $67,558,269 at December 31, 1997, a 19% increase. This increase was the
partial result of our opening and acquisition of six new finance branch
20
<PAGE>
offices and the commencement of our commercial finance business during 1998.
Additionally, the acquisition of Paragon, Inc. and its portfolio of loans held
for sale of approximately $11 million at the end of 1998 contributed to this
increase.
Unearned income at December 31, 1998 was $12,862,542 versus $13,058,066 at
December 31, 1997, essentially no increase, even though receivables were
increased significantly. This was primarily attributable to three factors:
(1) the increase in interest bearing receivables which have no unearned
income associated with them, and which include mortgage loans held for
sale, commercial loans, and a growing number of consumer loans,
(2) the aging of the automobile sales finance portfolio as we attempted to
shift our emphasis away from automobile sales finance contracts and into
higher yielding consumer loans and
(3) the increased percentage of consumer loans in the portfolio, which have
on average, shorter maturities, and hence smaller unearned interest
balances at date of inception.
The allowance for credit losses remained relatively stable between years.
This allowance was $4,710,829 at December 31, 1998 versus $4,809,400 at
December 31, 1997, a 2% decline. Credit losses also remained relatively flat
between years. Net credit losses were $4,105,031 for 1998 as compared to
$3,965,532 for 1997. Credit losses expressed as a percentage of ending net
finance receivables declined from 7.4% in 1997 to 6.2% in 1998. After giving
effect to the shifting portfolio mix, the allowance for credit losses required
by our reserve methodology indicated the appropriateness of the ending reserve
balance for 1998.
Interest and fee income for the fiscal year ended December 31, 1998 was
$15,727,484, compared to $15,892,683 for the fiscal year ended December 31,
1997, a 1% decline. Interest expense remained essentially constant between
years, $5,037,289 for the fiscal year ended December 31, 1998 versus $5,023,179
for the comparable period of 1997. The static level of interest income and
interest expense followed the loan portfolio. Virtually all of the portfolio
growth occurred at the end of 1998, coinciding with the acquisition of Budget
Financial Service, Inc. and Paragon, Inc. in the autumn of 1998. For most of
1998, the level of average net finance receivables was slightly less than the
prior year. This was due to our strategic decision made in 1997 to tighten
credit guidelines for our automobile sales finance contract portfolio in order
to reverse the pattern of increasing credit losses which we had experienced
over the prior two years. Most of the growth in direct loans occurred in the
latter part of 1998, and its affect on interest income will be generated in
subsequent years.
Provision for credit losses declined significantly between years from
$6,579,932 in 1997 to $4,046,460 in 1998, a 39% decline. Credit losses had
increased from 1996 to 1997. As a result, a large provision for credit loss
expense in 1997 was required to build the allowance for credit loss to adequate
levels. In 1998, however, due to our tightened credit guidelines instituted
during 1997, credit losses declined as a percentage of the portfolio.
Accordingly, additional provision for loss expense was not required under our
reserve methodology.
Insurance premiums and commissions net of insurance cost increased to
$6,590,849 for the twelve months ended December 31, 1998 from $5,469,667 for
the comparable period of 1997, a 20% increase. This was primarily due to
increased sales of insurance products to borrowers, as the result of our
emphasis on this product line, and increased revenue and insurance commissions
from the Thaxton Insurance agency offices. Other income decreased from
$1,221,525 for the twelve months ended December 31, 1997 to $962,397 for the
comparable period of 1998. This increase was primarily the consequence of
profit sharing payments made to us from various insurance carriers in 1997,
which were above levels normally experienced.
Total operating expenses increased from $13,210,791 for the twelve months
ended December 31, 1997 to $15,777,486 for the comparable period of 1998, a 19%
increase. The increase in expenses was due, in large part, to the acquisition
in the late 1998 of Paragon, Inc., the four finance offices from Budget
Financial Service, Inc. and Thaxton Insurance Group, Inc.'s acquisition of the
insurance agency offices in Arizona,
21
<PAGE>
Nevada, and New Mexico. Additionally, a general increase occurred in other
operating costs associated with the start up of the commercial lending and
non-standard insurance agency programs and administering a larger finance
receivable portfolio.
We generated a net loss for the twelve months ended December 31, 1998 of
$1,084,017 as compared to a net loss of $1,506,333 for the comparable period of
1997, a 28% decrease. The decrease in net loss was attributed to improved
performance with respect to credit losses, and the corresponding decrease in
required provision for loan loss in order to maintain an adequate allowance for
credit loss.
Stockholders' equity increased from $5,969,317 at December 31, 1997 to
$12,928,872 at December 31, 1998. The increase was primarily the result of
Thaxton Group's private placement of $8.0 million of Series E Preferred Stock,
which a reduction in retained earnings caused by the year's net loss from
operations partially offset.
COMPARISON OF FISCAL YEAR ENDED DECEMBER 31, 1997 TO FISCAL YEAR ENDED
DECEMBER 31, 1996. Finance receivables at December 31, 1997 were $67,558,269
versus $63,106,601 at December 31, 1996, a 7% increase. Thaxton opened two
branch offices in 1996 and five in 1997 devoted primarily to the purchase and
servicing of used automobile sales contracts. These openings generated an
increased volume of the contracts during 1997.
Unearned income at December 31, 1997 was $13,058,066 versus $12,578,514 at
December 31, 1996, an increase of 4%. This increase 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 based on our 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, and the
additional allowance for loss required on the higher level of finance
receivables outstanding.
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 increased 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 our working capital requirements.
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. The decrease was the result of 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.
The increase in other income was due primarily to increased profit sharing
payments to us 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 opening of new finance offices and a general increase in costs
associated with administering a larger finance receivable portfolio caused the
increase in expenses.
22
<PAGE>
We 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 our net loss from operations
during the period. This decrease was partially offset by additional equity that
Thaxton Group raised. In December, Thaxton Group completed a public offering of
its Series A Preferred Stock. The offering, made to its 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
Thaxton Group were $718,067. Additionally, in December, an individual investor
converted 27,076 shares of common stock into an equal number of shares of
Thaxton Group's Series B Preferred Stock, and an insurance company from which
the Thaxton Group had borrowed $500,000 converted that note into a 50,000
shares of Thaxton Group'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. Our 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 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 takes into consideration overall loss
levels, as well as 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 reviewed for each
individual dealer and bulk purchase, and additional reserves are established
for any dealer or bulk purchase if coverage is deemed to have declined below
adequate levels. Our 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 the
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 our dealer reserve arrangements, when a dealer assigns a used
automobile sales contract to us, we withhold a percentage of the principal
amount of the contract, usually between five and ten percent. The amounts
withheld from a particular dealer are recorded in a specific reserve account.
Any losses incurred on used automobile sales contracts purchased from that
dealer are charged against its specific reserve account. If at any time the
balance of a dealer's specific reserve account exceeds the amount derived by
applying the withheld percentage to the total amount of principal and interest
due under all outstanding used automobile sales contracts purchased from the
dealer, the dealer is entitled to receive distributions from the specific
reserve account in an amount equal to the excess. If we continue to purchase
used automobile sales contracts from a dealer, distributions of excess dealer
reserves generally are paid quarterly. If we do not continue to purchase used
automobile sales contracts from a dealer, distributions of excess dealer
reserves are not paid out until all used 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. Our allowance for credit
losses is charged only to the extent that the loss on a used automobile sales
contract exceeds the originating dealer's specific reserve account at the time
of the loss.
23
<PAGE>
We periodically purchase used automobile sales contracts in bulk. In a
bulk purchase arrangement, we typically purchase a portfolio of used automobile
sales contracts from a dealer at a discount to par upon our management's review
and assessment of the portfolio. This discount is maintained in a separate
account against which losses on the bulk portfolio purchased are charged. To
the extent losses experienced are less than the discount, the remaining
discount is accreted into income.
The following table sets forth our allowance for credit losses and credit
loss experience at or over the periods presented. (1)
<TABLE>
<CAPTION>
AT OR FOR THE FISCAL YEARS ENDED AT OR FOR THE SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------------- ---------------------------------
1997 1998 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net finance receivables (1) ......................... $ 54,500,203 $ 56,130,791 $ 53,350,408 $ 53,447,251
Allowance for credit losses ......................... 4,809,400 4,710,829 4,820,600 4,523,074
Allowance for credit losses as a percentage of net
finance receivables (1) ............................ 8.82% 8.39% 9.04% 8.46%
Dealer reserves and discounts on bulk purchases ..... 1,028,575 1,241,633 1,073,444 1,201,780
Dealer reserves and discounts on bulk purchases
as percentage of net used automobile sales
contracts at period end ............................ 2.67% 3.46% 3.18% 3.73%
Allowance for credit losses and dealer reserves
and discount on bulk purchases ..................... 5,837,975 5,952,462 5,894,044 5,724,854
Allowance for credit losses and dealer reserves as
a percentage of finance receivables ................ 10.71% 10.60% 11.05% 10.71%
Provision for credit losses ......................... 6,579,932 4,046,460 1,967,000 1,851,000
Charge-offs (net of recoveries) ..................... 3,965,532 4,145,031 1,956,000 2,039,000
Charge-offs (net of recoveries) as a percentage of
average net finance receivables (1) ................ 7.47% 7.64% 7.57% 7.01%
</TABLE>
- --------
(1) Net finance receivable balances are presented net of unearned finance
charges, and exclude mortgage warehoused loans and commercial finance
receivables. Average net finance receivables are computed using month-end
balances
The following table sets forth important information concerning used
automobile sales contracts and direct consumer loans at the end of the periods
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
--------------------------------- ---------------------------------
1997 1998 1998 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Used automobile sales contracts and direct
consumers loans contractually past due 90 days
or more (1) ....................................... $ 551,363 $ 734,359 $ 475,292 $ 684,940
Used automobile sales contracts and direct
consumer loans (1) ................................ 49,766,206 52,166,963 47,910,807 55,302,139
Used automobile sales contracts and direct
consumer loans contractually past due 90 days
or more as a percentage of used automobile
sales contracts and direct consumer loans ......... 1.11% 1.41% 0.99% 1.24%
</TABLE>
- --------
(1) Finance receivable balances are presented net of unearned finance charges,
dealer reserves on used automobile sales contracts and discounts on bulk
purchases.
24
<PAGE>
The following table sets forth important information concerning our
premium finance contracts at the end of the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
------------------------------- -------------------------------
1997 1998 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Premium finance contracts contractually past due 60
days or more (1) ................................. $ 89,331 $ 119,345 $ 126,985 $ 89,600
Premium finance contracts outstanding (1) ......... 3,860,936 3,228,160 4,366,157 6,267,032
Premium finance contracts contractually past due 60
days or more as a percentage of premium finance
contracts ........................................ 2.3% 3.6% 2.91% 1.43%
</TABLE>
- --------
(1) Finance receivable balances are presented net of unearned finance charges
and discounts on bulk purchases.
LIQUIDITY AND CAPITAL RESOURCES
We generally finance our operations through cash flow from operations and
borrowings under credit facilities with FINOVA. Amendments to Thaxton Group's
and Thaxton Investment's existing credit facilities will take effect
immediately following the completion of the acquisition of Thaxton Investment.
Thaxton Group's amended credit facility consists of a $100 million revolving
credit facility for Thaxton Group and its subsidiaries in existence prior to
the acquisition of Thaxton Investment. Thaxton Investment's amended credit
facility consists of a $129 million revolving credit facility and a $21 million
term credit facility for Thaxton Investment and its subsidiaries. The revolving
credit facilities mature five years from their commencement date, while the
term facility matures ratably over five years. As the lead borrowers, Thaxton
Group and Thaxton Investment receive advances from FINOVA on behalf of their
subsidiaries. They may, in turn, disburse advanced funds to their subsidiaries.
In addition, under the terms of Thaxton Group's facility, Thaxton Group may
advance funds to Thaxton Investment.
The facilities consist of two primary tranches for Thaxton Group and
Thaxton Investment, respectively. The primary tranches, tranches A and B, are
used to finance consumer receivables. Tranche A advances accrue interest at the
prime rate + 1.25% for Thaxton Group and the prime rate + 1.00% for Thaxton
Investment. Tranche B advances accrue interest at the prime rate + 5.00% for
Thaxton Group and the prime rate + 3.50% for Thaxton Investment. For Thaxton
Investment, tranche B consists of the $21 million term loan described above.
The prime rate is the prime rate published by Citibank, N.A., or other money
center bank as FINOVA may select. The interest rates are adjusted monthly to
reflect fluctuations in the designated prime rate. Accrued interest on
borrowings is payable monthly. Under each facility, principal is due in full on
the maturity date and can be prepaid without penalty. Substantially all of
Thaxton Group's and its subsidiaries' assets secure their revolving credit
facility, which requires the borrowers to comply with restrictive covenants,
including financial condition covenants. The security and covenants for Thaxton
Investment's facility are substantially the same as those for Thaxton Group's
facility.
As of June 30, 1999, $54 million was outstanding under Thaxton Group's
revolving credit facility, $40 million of which had been advanced under the
primary tranche and $14 million of which had been advanced under secondary
tranches. As of June 30, 1999, there were no advances under Tranche B. Under
the terms of the revolving credit facility, Thaxton Group's net finance
receivables as of June 30, 1999 would have allowed it to borrow an additional
$9 million against existing collateral, with $38 million of total potential
capacity available for borrowing against qualified finance receivables
generated 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 non-consumer receivable
tranche, and the mortgage loan tranche, plus five percent per annum for Tranche
B and plus two percent per annum for the insurance commission tranche. As of
June 30, 1999, the interest rates for borrowings range from 8.75% for the
primary tranche to 12.75% for the secondary tranche.
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As of June, 30, 1999, $110 million was outstanding under Thaxton
Investment's existing revolving credit facility with FINOVA at rates ranging
between FINOVA's prime borrowing rate + 1% and FINOVA's prime borrowing rate +
3 1/2%. This facility provides for advances up to $150 million. Borrowing
availability is, however, limited to outstanding eligible receivables. As a
result, Thaxton Investment's eligible receivables as of June 30, 1999 would
have allowed it to borrow $2.6 million in excess of its outstanding
indebtedness as of that date.
Our cash flows from financing activities during the years ended December
31, 1997 and 1998 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1998
-------------- ---------------
<S> <C> <C>
Proceeds from the issuance of preferred stock ......... $ 718,067 $ 7,907,323
Notes payable to affiliates ........................... -- (236,368)
Repurchase of common stock ............................ (137,983) (1,075,732)
Dividends paid ........................................ -- (258,289)
Net increase in line of credit ........................ 4,079,053 255,000
Net increase in notes payable ......................... 1,303,226 5,754,188
Repurchase of preferred stock ......................... -- (30,000)
---------- ------------
Total ................................................. $5,962,363 $ 12,316,122
========== ============
</TABLE>
We believe that the maximum borrowings available under our revolving
credit facilities, in addition to cash expected to be generated from operations
and the sale of the securities, will provide the resources necessary to fund
our liquidity and capital needs through 1999.
NET INTEREST MARGIN
The principal component of our profitability is our net interest spread,
which is the difference between interest earned on finance receivables and
interest expense paid on borrowed funds. Statutes in some states regulate the
interest rates that we may charge our borrowers, while interest rates in other
states are unregulated and, consequently, competitive market conditions
establish these rates. Significant differences exist in the interest rates
earned on the various components of our finance receivable portfolio. The
interest rate earned on used automobile sales contracts generally is lower than
the interest rates earned on direct consumer 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 our interest income, our interest expenses are sensitive to general
market fluctuations in interest rates. The interest rates paid to our primary
lender, FINOVA, are based upon a published prime rate plus set percentages.
Thus, general market fluctuations in interest rates directly impact our cost of
funds. Our general inability to increase the interest rates earned on finance
receivables may impair our 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 our interest rate spread and lower our
profitability, while decreases in market interest rates generally will widen
our interest rates spreads and increase profitability.
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The following table presents important data relating to our net interest
margin.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------------- -----------------------------------
1997 1998 1998 1999
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Average net finance receivables (1) ......... $ 53,058,041 $ 52,919,907 $ 51,660,000 $ 66,984,731
Average notes payable (1) ................... 45,739,084 47,095,575 44,369,000 65,701,371
Interest and fee income (2) ................. 15,808,386 15,727,484 7,520,000 7,829,817
Interest expense (2) ........................ 4,484,600 4,366,757 2,113,000 2,886,099
Net interest income ......................... 11,323,786 11,360,727 5,407,000 4,943,718
Average interest rate earned (1) ............ 29.79% 29.72% 29.11% 23.38%
Average interest rate paid (1) .............. 9.80% 9.27% 9.52% 8.79%
Net interest rate spread .................... 19.99% 20.45% 19.59% 14.59%
Net interest margin (3) ..................... 21.34% 21.47% 20.93% 14.76%
</TABLE>
- --------
(1) Averages are computed using month-end balances during the year presented
(2) Excludes Thaxton Insurance Group, Inc. interest income and expense and
Paragon, Inc. loan fee income.
(3) Net interest margin represents net interest income divided by average net
finance receivables.
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although we do not believe that inflation directly has a material adverse
effect on our financial condition or results of operations, increases in the
inflation rate generally are associated with increased interest rates. Because
we borrow funds on a floating rate basis and generally extend credit at the
maximum interest rates permitted by law or market conditions, increased
interest rates would increase our cost of funds and could materially impair our
profitability. We intend to explore opportunities to fix or cap the interest
rates on all or a portion of our borrowings. We can, however, give no assurance
that fixed rate or capped rate financing will be available on terms acceptable
to us. Inflation also may affect our operating expenses. Other general economic
conditions in the United States could affect our business, including economic
factors affecting the ability of our customers or prospective customers to
purchase used automobiles and to obtain and repay loans.
IMPACT OF YEAR 2000
We recognize that a business risk in computerized systems exists as we
move 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." This problem may affect a number of computer
systems we use in our day-to-day operations. The issue is whether computer
systems will properly recognize date-sensitive information when the year
changes to 2000. Systems that do not properly recognize this information could
fail or generate erroneous data.
In the ordinary course of business, we have replaced a significant portion
of our non-compliant hardware and software with Year 2000 compliant systems. We
have minimal proprietary processing software. Reputable outside vendors wrote
and maintain virtually all of our key software, including our sub-systems,
payroll system, and general ledger. We have confirmed with licensors from which
we licensed software that all of this software is Year 2000 compliant. The
majority of vendor licensors have offered or provided us the results of their
Year 2000 testing.
With respect to our systems, networks, and licensed software, we have
established a project team which has identified affected systems and is
currently working to ensure that the advent of the Year 2000 will not
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<PAGE>
disrupt operations. This project team reports periodically to senior
management. We are also working closely with outside computer vendors to ensure
that all software corrections and warranty commitments are obtained. The
estimated cost to us for these corrective actions and the related hardware
required to run the upgraded software was originally estimated at approximately
$1 million. A significant portion of this budget has already been spent, much
of it on upgrading hardware throughout our branch network. The remaining
amounts to be incurred are included in our capital and operating budgets for
1999.
We have taken significant steps toward ensuring that the Year 2000 will
not adversely affect our ability to function. However, you should note that
incomplete or untimely Year 2000 compliance would have a material adverse
impact on our results of operations, the dollar amount of which cannot be
accurately quantified at this time because of the inherent variables and
uncertainties involved.
ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement addresses the accounting for derivative
instruments, including some types of derivative instruments imbedded in other
contracts, and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not anticipate the adoption of the provisions of SFAS No. 133 will
significantly impact our financial reporting.
For the year ended December 31, 1998, we have adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the presentation of
descriptive information about reportable segments consistent with information
our management uses to assess performance. Additionally, SFAS No. 131 requires
disclosure of certain information by geographic region. This disclosure is
presented in footnote 13 of our audited financial statements included in this
prospectus.
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BUSINESS
GENERAL
Before reading the following detailed description of our business, you
should read the "Prospectus Summary" section of this prospectus. It contains a
general overview of our business that is not repeated here in order to avoid
unnecessary redundancy. For a complete understanding of our business and
competitive strengths and weaknesses, you should also read the sections of this
prospectus entitled "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
LINES OF BUSINESS
DIRECT CONSUMER LENDING. Making small loans to borrowers with impaired
credit is our largest line of business. We have been in this business since
1985. Direct loans are relied upon by credit-impaired borrowers to meet
short-term cash needs, finance purchases of consumer goods or refinance
existing indebtedness. Almost all of our direct loans are unsecured. Only about
10% of these loans are secured, typically by first or second liens on real
property. The usual term of a direct loan is 15 months. Interest rates on
direct loans vary based on a number of factors, the most important of which is
the extent to which the borrower's state of residence regulates interest rates.
Some states in which we operate permit consumer lenders to simply post a
maximum rate of interest in filings with regulatory authorities. In these
states we typically post a maximum annual interest rate of 69%. Other states
where we have offices impose specific maximum annual interest rates on direct
loans that range from 10% to 36%. Other factors that we consider in setting the
interest rate on a particular direct loan are the credit profile of the
borrower, the type and value of any collateral and competitive market
conditions.
Each applicant for a direct loan must pass a thorough credit review. This
review is conducted by the manager or personnel under his or her supervision in
the office where the application is taken. This review generally takes into
account the borrower's credit history, ability to pay, stability of residence,
employment history, income, discretionary income, debt service ratio, and the
value of any collateral. We use an industry standard application analysis score
sheet to compile information on the factors described above. The most important
fact usually is the ratio of the borrower's anticipated debt service to
disposable income. Unless the borrower's total score falls below a specified
cutoff point, the office manager has the authority to approve the loan, up to
his or her credit limit, with no further review. If the borrower's total score
falls below a amount, the office manager must receive approval from a regional
supervisor before approving the borrower's application. If a direct loan is to
be secured by real estate, we obtain an appraisal of the property, obtain a
title opinion from an attorney and verify filing of a mortgage or deed of trust
before disbursement of funds to the borrower. We 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. An
executive officer must approve any direct loan to be secured by real estate.
The points on which we compete with others in making these types of loans is
the interest rate charged and customer service.
In connection with making direct consumer loans, we also offer, as agent,
credit life and credit accident and health insurance. Instead of filing
financing statements to perfect our security interest in the collateral on all
direct consumer loans secured by personal property other than an automobile, we
purchase non-filing insurance from an unaffiliated insurer. On these loans we
charge an amount approximately equal to the filing fees that we would have
charged to the customer if we had filed financing statements to perfect our
security interest. This amount is typically included in the amount of the loan.
We use this amount to pay premiums for non-filing insurance against losses
resulting from failure to file. Under our non-filing insurance arrangements,
approximately 90% of the premiums paid are refunded to us on a quarterly basis
and are netted against charge-offs for the period.
USED AUTOMOBILE SALES FINANCE. Another line of business for us is the
financing of used automobile purchases. We purchase sales contracts from
independent automobile dealers who have been approved by the
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<PAGE>
manager of an individual finance office or a regional supervisor. Office
managers and regional supervisors periodically evaluate independent dealers in
their market areas to ensure that we purchase sales contracts only from
reputable dealers carrying an inventory of quality used automobiles. We track
the monthly performance of purchased sales contracts on a dealer-by-dealer
basis, which allows us to review and evaluate the quality of sales contracts
purchased from each dealer. This procedure allows us to promptly terminate
purchases from a dealer whose sales contracts begin to demonstrate unacceptable
delinquency levels. We enter into a non-exclusive agreement with each dealer
which sets forth the terms and conditions on which we will purchase sales
contracts. The dealer agreement generally provides that sales contracts are
sold to us without recourse to the dealer with respect to the credit risk of
the borrower. If the dealer breaches the terms of the agreement or a customer
withholds payment because of a dispute with the dealer regarding the quality of
the automobile purchased, the dealer typically is obligated to repurchase the
sales contract on our demand for its net unpaid balance. If the purchaser of
the automobile recovers any amount from us as a result of a claim against the
dealer, the dealer agreement provides that the dealer will reimburse us for any
amount paid the customer and for any costs we incur as a result of the claim.
The dealer agreement allows us to withhold a specified percentage of the
principal amount of each sales contract purchased. This dealer reserve
arrangement is designed to protect us from credit losses on sales contracts.
These dealer reserves, which range from five to 10% of the net amount of each
sales contract, are negotiated on a dealer-by-dealer basis and are subject to
change based upon the collection history on sales contracts we have purchased
from the dealer. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Credit Loss Experience."
The maximum interest rates on used automobile sales contracts originated
in North Carolina are 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 used automobile sales contracts originated in Georgia, South Carolina,
Tennessee and Virginia are not regulated. The actual interest rate on a used
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.
In purchasing used automobile sales contracts, underwriting standards are
used that take into account principally the degree of a proposed buyer's
creditworthiness and the market value of the vehicle being financed. If a
borrower elects to finance the purchase of an automobile through a dealer with
whom we have an established relationship, which is typically the case, the
dealer will submit the borrower's credit application to us 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 similar factors as for our review of direct
consumer loans. We generally do not finance more than 100% of the average
trade-in value of the automobile as listed in the current edition of the
National Association of Automobile Dealers Official Used Car Guide. We also
require that a borrower make a down payment of at least 10% of the purchase
price. In cases where the borrower is unable to make a sufficiently large down
payment, we will purchase the sales contract but issue a "deferred certificate"
to the dealer for the difference between the average trade-in value of the
automobile and the portion of the sale price that the borrower's down payment
does not cover. Once the borrower has paid the entire balance of the sales
contract, we remit the amount of the deferred certificate to the dealer.
From time to time we purchase used automobile sales contracts in bulk from
dealers who have originated and accumulated contracts over a period of time. By
doing so, we are able to a obtain large volumes of sales contracts in a
cost-effective manner. For bulk purchases, our underwriting standards take into
account principally the borrowers' payment history and the collateral value of
the automobiles financed. These purchases are typically made at discounts
ranging from 25% to 50% of the financed portion of the contract. Generally no
dealer reserve arrangements are established with bulk purchases. In connection
with bulk purchases, we review all credit evaluation information collected by
the dealer and the servicing and collection history of the sales contracts.
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The basis on which we compete with others in used car financing is
primarily the price paid for used automobile sales contracts, which is a
function of the amount of the dealer reserve, and the reliability of service to
participating dealers. We generally do not compete for the same type of used
automobile to be financed because our competition concentrates their financing
activities on late-model used automobiles purchased from franchised dealers
rather than older-model used automobiles purchased from independent dealers,
which is the target market of our used automobile sales financing activities.
The size of our average used automobile sales contract is considerably smaller
than that of many other companies engaged in purchasing used automobile sales
contracts. We believe this is due in large part to the fact that most of our
competitors are seeking to do business primarily with franchised dealers
selling late-model, lower mileage used automobiles, coming off leases or which
were rental cars, for significantly higher prices than the prices for
automobiles offered for sale by the independent dealers with whom we have
relationships. The independent dealers from whom we purchase used automobile
sales contracts typically sell automobiles that tend to be somewhat older,
higher mileage vehicles. Because the costs of servicing and collecting a
portfolio of finance receivables increase with the number of accounts included
in the portfolio, we believe that many apparent potential competitors will
choose not to do business with independent dealers.
In connection with the origination of used automobile sales contracts, we
offer, as agent, credit life, and credit accident and health insurance.
Borrowers under sales contracts and direct loans secured by an automobile are
required to obtain comprehensive and collision insurance on the automobile that
designates us as loss payee. A loss payee is the person who receives insurance
proceeds in the event an automobile is damaged in a collision. If the borrower
allows the insurance to lapse during the term of the contract or loan, we will
purchase a vendors' single interest insurance policy, which insures us against
a total loss on the automobile. The cost of the premium will then be added to
the borrower's account balance. We also offer, as agent, limited physical
damage insurance, which satisfies the requirement that the borrower purchase
comprehensive and collision insurance.
INSURANCE PREMIUM FINANCE. The financing of insurance premiums is one of
our original lines of business. We provide short-term financing of insurance
premiums purchased indirectly through independent insurance agents. The
premiums are primarily for personal lines of insurance that are typically too
high for a credit-impaired borrower to pay in six-month increments, such as
automobile insurance. Financing the premium allows the insured to pay it in
smaller increments, usually monthly. Most agents who refer premium finance
business to us are located in North Carolina, South Carolina and Virginia. A
small amount of our business involves financing premiums for commercial lines
of insurance for small businesses, including property and casualty, business
automobile, general liability and workers' compensation. We also periodically
make bulk purchases of premium finance contracts. A substantial amount of our
premium finance business is derived from customers of the 48 insurance offices
operated by our subsidiary, Thaxton Insurance Group, Inc. See " -- Insurance
Agency Activities."
When an individual purchases an insurance policy from an agent with whom
we have a relationship, the agent will offer the opportunity to enter into a
premium finance contract that allows the insured to make a down payment and
finance the balance of the premium. The typical term of a premium finance
contract ranges from three to eight months depending primarily upon the term of
the underlying insurance policy. The required down payment ranges from 20% to
50% of the premium. We generally impose the maximum finance charges and late
fees that applicable state law permits for premium finance contracts, which are
extensively regulated in the states where we engage in this business. All of
the states in which we operate permit assessment of a fee of up to $15 on each
premium finance contract and a maximum interest rate of 12% per annum. Because
we are 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 our portfolio of premium finance
contracts.
INSURANCE AGENCY ACTIVITIES. We sell, on an agency basis, various lines of
automobile, property and casualty, life, and accident and health insurance. The
insurance companies that we represent assume all
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underwriting risk on most of the policies we sell. The insurance company that
issues a policy we sell pays us a commission based on a standard or negotiated
schedule. We are eligible for additional commission payments from some of the
companies we represent if the loss experience on the policies we sell for those
companies falls below specified levels and the total premiums on such policies
exceed a specified minimum. In 1998, we began selling a new program in North
Carolina where we assume limited underwriting risk on non-standard automobile
collision insurance with minimum limits. In the fourth quarter of 1999, we
anticipate expanding this program into Arizona, where we will assume risk on
minimum limit non-standard automobile liability and collision insurance.
We entered the general insurance agency business in July 1999 through an
acquisition. As a general agent, we act as an intermediary between insurance
companies and independent agents seeking to provide the most cost-effective
coverage for their customers. We have no contact with the insurance policy
holders and do not assume any underwriting risk in connection with our general
insurance agency activities. The insurance company that writes the policy sold
as a result of our involvement pays us a commission.
MORTGAGE BANKING OPERATIONS. As the result of an acquisition in November
1998, we began originating, closing, and funding mortgage loans primarily for
credit-impaired borrowers. We hold these loans until they can be packaged and
sold to long-term investors. We receive fee income from the borrower at the
time the mortgage loan is originated and generally sell the loan to an investor
at a premium ranging from one to five percent of the principal balance. The
amount of premium depends upon the credit quality of the borrower, the interest
rate and term of the loan and market conditions. Most of our employees engaged
in this business are located in nine offices in North Carolina and South
Carolina. Our current monthly loan production volume is approximately $10
million.
COMMERCIAL FINANCE. In 1998, we began making commercial loans and offering
factoring services to small business clients. Our commercial loans usually are
secured, most often with real estate. In factoring, we advance funds to the
client based upon the balance of designated accounts receivable due from their
customers. The client then assigns or sells these receivables to us, notifies
its customers to send payment directly to us and we collect the receivables and
credit the amount advanced to the client. We advance to our factoring client
80% to 95% of the dollar value of each receivable, holding the difference in
reserve. We charge a fee equal to one to four percent of the amount advanced
for this service and may also charge interest on any uncollected balances.
Almost all of our factoring contracts are with recourse, which allows us to
charge any uncollected receivables back to the client after a period ranging
from 60 to 90 days.
THE CONSUMER FINANCE AND INSURANCE AGENCY INDUSTRIES
The segment of the consumer finance industry in which we operate is
commonly called the "non-prime credit market." Our borrowers under direct loans
and automobile sales contracts typically have limited credit histories, low
incomes or past credit problems. These borrowers generally do not have access
to the same 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 that most traditional lenders use. The non-prime
credit market for used automobile finance and loans is highly competitive and
fragmented, consisting of many national, regional and local competitors. New
competitors are able to enter this market with relative ease. Historically,
commercial banks, savings and loans, credit unions, financing arms of
automobile manufacturers and other lenders providing traditional consumer
financing have not consistently served this segment of the consumer finance
market. Several large bank holding companies in an effort to recapture some of
the customers their bank subsidiaries have traditionally rejected on the basis
of their rigid credit scoring systems now serve the non-prime credit market
through automobile finance subsidiaries. We also face increasing competition
from a number of companies, including bank credit card companies, providing
similar financing to individuals that cannot qualify for traditional financing.
Many of these competitors or potential competitors have significantly greater
resources than we do and have pre-existing relationships with established
networks of dealers. To the extent that any of these lenders significantly
expand their activities in the markets where we operate or plan to operate, our
profitability could be threatened.
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Although the primary service-providers in the premium finance industry are
different than those who serve the non-prime credit market for direct loans and
used automobile finance, credit-impaired borrowers also are the primary
borrowers under premium finance contracts. Insurance companies that engage in
direct writing of insurance policies generally provide premium financing to
their customers who need the service. Numerous small independent finance
companies like us are engaged in providing premium financing for personal lines
of insurance purchased by credit-impaired 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 the use of independent
agencies to be a more cost-effective method of selling their products than
using a direct agent force. Competition among independent insurance agencies is
intense. Numerous other independent agencies operate in most of the markets
where our insurance offices are located. Direct agents for various insurance
companies located in some of our markets also compete with us. We compete
primarily on the basis of service and convenience. We attempt to develop and
maintain long-term customer relationships through low employee turnover and
responsive service representatives and offer virtually all types of insurance
products.
The mortgage banking industry is highly competitive, with many small
brokers originating loans. Independent brokers originate the majority of our
loans. We fund the loan and hold it for a number of days, group it with other
loans, and sell it to the ultimate investor. The origination of residential
mortgages for credit-impaired borrowers is highly competitive and the number of
companies engaged in the business is increasing rapidly. We compete mainly on
the basis of the service that we provide to customers in markets where we
already have a presence with our finance and insurance offices.
Banks and commercial finance companies dominate the commercial lending
industry. Many banks, however, do not offer factoring services, and most banks
do not make loans to the higher risk business client with whom we have found
our niche. Most commercial finance companies engage in lending to larger
businesses or engage in lending to specialized businesses. Our primary
competition comes from independent factoring companies who, like us, specialize
in smaller clients.
REGULATION
Consumer finance companies and insurance agents are extensively supervised
and regulated under state and federal statutes and regulations. Depending upon
the nature of a particular transaction and the state of residence of the
borrower or the customer, we may be required to:
o obtain licenses and meet specified minimum qualifications;
o limit the interest rates, fees and other charges for which the borrower
may be assessed;
o limit or prescribe specified other terms and conditions of the
financing;
o govern the sale and terms of insurance products; and
o define and limit the right to repossess and sell collateral.
Federal and state laws also require us to provide various disclosures to
prospective borrowers, prohibit misleading advertising, protect against
discriminatory lending practices and prohibit unfair credit practices. We
believe we comply in all material respects with applicable governmental
regulations. These requirements change frequently however, and we cannot be
certain that future changes or modifications in these laws will
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<PAGE>
not have a material adverse affect on our business either through increased
compliance costs or prohibition or limitation of a profitable line of business.
EMPLOYEES
As of June 30, 1999, we employed 1,170 persons in both Thaxton and Thaxton
Investment, none of whom was covered by a collective bargaining agreement. Of
that total, 44 were located in our headquarters in Lancaster, South Carolina
and 1,126 were located in our other offices. We generally consider our
relationships with our employees to be good.
PROPERTY
Our executive offices are located in Lancaster, South Carolina in a leased
office facility of approximately 15,000 square feet. The lease expires in
September 2004 and includes an option to renew for an additional five-year
term. We lease all of our branch office facilities. In some instances, we lease
these facilities from affiliates. These offices range in size from
approximately 800 square feet to 2,200 square feet. Since most of our business
with automobile dealers is conducted by facsimile machine and telephone, we do
not believe that the particular locations of our finance offices are critical
to our business of purchasing used automobile sales contracts or our premium
finance operations. Location is somewhat more important for our direct loan and
insurance agency operations. Other satisfactory locations are, however,
generally available for lease at comparable rates and for comparable terms in
each of our markets.
LEGAL PROCEEDINGS
We presently are not a party to any legal proceedings nor is our
management aware of any material threatened litigation against us.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement on Form SB-2 and an amendment to the
registration statement with the Commission, with respect to the registration of
the securities offered for sale with this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits to the registration statement. For further information pertaining to
Thaxton Group, the securities offered by this prospectus and related matters,
you should review the registration statement, including the exhibits filed as a
part of the registration statement. Each statement in this prospectus referring
to a document filed as an exhibit to the registration statement is qualified by
reference to the exhibit for a complete statement of its terms and conditions.
We file annual, quarterly and current reports, proxy statements and other
information with the Commission. So long as we are subject to the Commission's
reporting requirements, we will continue to furnish the reports and other
required information to the Commission. You may read and copy any reports,
statements and other information we file at the Commission's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
Please call the Commission at 1-800-SEC-0330 for further information on the
operations of the public reference room. The Commission also maintains an
internet site at http://www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the Commission. Our filings are available, using our name
or stock trading symbol, "THAX," on the Commission's internet site.
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Thaxton Group's directors and executive officers and their ages as of June
30, 1999 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- ----- -------------------------------------------
<S> <C> <C>
James D. Thaxton ........... 52 Chairman of the Board, President and Chief
Executive Officer
Robert L. Wilson ........... 59 Executive Vice President, Chief Operating
Officer and Director
Allan F. Ross .............. 51 Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
C.L. Thaxton, Sr. .......... 76 Director
</TABLE>
JAMES D. THAXTON has served as Chairman of the Board, President and Chief
Executive Officer of Thaxton Group since it was founded. Prior to joining
Thaxton Group, 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 Thaxton Group 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 Thaxton Group 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 Thaxton Group
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.
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. Thaxton Group'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 Thaxton Group and administers its
stock plans. The Board of Directors has also established an Audit Committee,
which recommends to the Board of Directors the selection of Thaxton Group's
independent auditors and reviews the results and scope of the audit and other
services that the independent auditors provide. Directors do not receive any
compensation from Thaxton Group for their service as members of the Board of
Directors. All directors are reimbursed for their expenses reasonably incurred
in attending Board and Board committee meetings.
35
<PAGE>
EXECUTIVE COMPENSATION
The table below shows the compensation paid or accrued by Thaxton Group,
for the year ended December 31, 1998, to or for the account of the Chief
Executive Officer and its only other executive officer whose total salary and
bonus exceeded $100,000 during 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
NAME AND PRINCIPAL POSITION YEAR ($) SALARY ($) BONUS ($)
- ----------------------------------------------- ---------- ------------ ----------
<S> <C> <C> <C>
James D. Thaxton, 1998 119,419 62,317
President and Chief Executive Officer 1997 113,600 40,704
Robert L. Wilson, 1998 135,444 --
Executive Vice President 1997 125,000 133,106
</TABLE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
No specific provision for indemnification of Thaxton Group's directors,
officers or controlling persons against liability under the Securities Act
exists in Thaxton Group's articles of incorporation or bylaws or in any
document to which Thaxton Group is a party. Thaxton Group's bylaws provide,
however, for indemnification of its officers and directors against liabilities
and reasonable expenses incurred in connection with any action, suit or
proceeding to which the person may be a party because he is or was a director
or officer of Thaxton Group or serving in a similar capacity at Thaxton Group's
request for another entity, to the fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Thaxton
Group pursuant to the foregoing provisions, or otherwise, Thaxton Group has
been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities,
other than the payment by Thaxton Group of expenses incurred or paid by a
director, officer or controlling person of Thaxton Group in the successful
defense of any action, suit or proceeding, is asserted by such director,
officer or controlling person in connection with the securities being
registered, Thaxton Group will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
36
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the outstanding common stock of Thaxton Group at December 31, 1998
by:
(1) the only person who is the beneficial owner of more than five
percent of the outstanding common stock;
(2) each director;
(3) each Named Executive Officer and
(4) directors and officers of Thaxton Group as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND PERCENTAGE OF COMMON
NAME OF BENEFICIAL OWNER NATURE OF BENEFICIAL OWNERSHIP STOCK OUTSTANDING
- ---------------------------- -------------------------------- ---------------------
<S> <C> <C>
James D. Thaxton ........... 3,233,000(2) 85.9%
Robert L. Wilson ........... -- --
Allan F. Ross .............. -- --
C. L. Thaxton, Sr. ......... 15,555(1)(3) *
Directors and officers
as a group ............... 3,248,555 86.3%
</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.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Due to the relatively small number of shares held by non-affiliates of
Thaxton Group, no active and liquid trading market for Thaxton Group's common
stock exists. The common stock does trade occasionally in the over-the-counter
market. At June 30, 1999, there were 164 shareholders of record based upon
information provided to Thaxton Group. The following table presents high and
low bid information for the common stock during the periods indicated. These
quotations reflect prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----------- ----------
<S> <C> <C>
First Quarter 1997 ........... $ 11.00 $ 9.00
Second Quarter 1997 .......... 10.00 9.00
Third Quarter 1997 ........... 10.00 8.50
Fourth Quarter 1997 .......... 9.25 8.75
First Quarter 1998 ........... 8.13 7.68
Second Quarter 1998 .......... 7.80 7.70
Third Quarter 1998 ........... 8.27 7.63
Fourth Quarter 1998 .......... 10.00 7.15
First Quarter 1999 ........... 10.00 10.00
Second Quarter 1999 .......... 10.00 10.00
</TABLE>
Thaxton Group has not paid any dividends on common stock during the last
two fiscal years and during the six-month period ended June 30, 1999. At the
present time, it has no plans to pay any cash dividends on common stock.
Thaxton Group's credit facility restricts it from paying any cash dividends in
excess of 25% of net income for the year.
37
<PAGE>
TRANSACTIONS WITH RELATED PARTIES
STOCK TRANSACTIONS WITH DIRECTORS
In December 1997, Thaxton Group, through a private placement, issued
27,076 shares of Series B Convertible Preferred Stock to Mr. Jack W. Robinson,
a Director of Thaxton Group at the time. The terms of this transaction involved
the exchange of one share of common stock for one share of preferred stock. In
July 1998, Thaxton Group, through a private placement, exchanged all of the
27,076 shares of outstanding Series B preferred stock, plus 29,200 shares of
common stock, for 56,276 shares of Series D Preferred Stock. The Series D
preferred stock pays annual dividends of $ 0.80 per share, and Thaxton Group
may redeem this stock at any time at $10 per share. In January 1999, Mr.
Robinson divested his ownership interest in Thaxton Group and resigned from the
Board of Directors. At his request, Thaxton Group repurchased his Series D
preferred stock, plus all of his remaining common stock at $10 per share.
In January 1999, Mr. Perry L. Mungo divested his ownership interest in
Thaxton Group and resigned from the Board of Directors. At his request, Thaxton
Group repurchased all of his remaining common stock, totaling 29,200 shares, at
$10 per share.
TRANSACTIONS WITH AND ACQUISITION OF THAXTON INVESTMENT
On February 1, 1999, Mr. James D. Thaxton, Chairman of the Board of
Directors, President, Chief Executive Officer and controlling shareholder of
Thaxton Group, organized Thaxton Investment. Mr. Thaxton owns all of the issued
and outstanding common stock of Thaxton Investment. Thaxton Investment's board
of directors and executive officers are, with one exception, identical to
Thaxton Group's. Prior to Thaxton Group's acquisition of all of the issued and
outstanding common stock of Thaxton Investment, our executive officers and
other administrative personnel have and will provide management services to
Thaxton Investment. Thaxton Investment is charged a monthly management fee in
the amount of $36,440 based upon time estimates of our personnel for work
performed for the benefit of Thaxton Investment. The management fee also
includes the reimbursement of other direct costs we have incurred in the course
of our provision of management services to Thaxton Investment.
On or about November 8, 1999, Thaxton Group will complete its acquisition
of all of the outstanding common stock of Thaxton Investment. Mr. Thaxton will
transfer all of his shares of Thaxton Investment to Thaxton Group in exchange
for 3,223,000 shares of common stock of Thaxton Group. You should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Pending Acquisition of Thaxton Investment" for more information.
LEGAL MATTERS
Moore & Van Allen, PLLC, Charlotte, North Carolina will pass upon the
validity of the securities offered for sale with this prospectus for Thaxton
Group.
EXPERTS
The consolidated financial statements of The Thaxton Group, Inc. as of
December 31, 1998 and for the year then ended have been included herein and in
the registration statement in reliance upon the report of Cherry, Bekaert &
Holland, LLP, independent certified public accountants, appearing elsewhere
herein, given on the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of The Thaxton Group, Inc. as of
December 31, 1997 and for the year then ended have been included herein and in
the registration statement in reliance upon the report of
38
<PAGE>
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of FirstPlus Consumer Finance, Inc.
as of December 31, 1998 and 1997 and for the years then ended have been
included herein and in the registration statement in reliance upon the report
of Elliott, Davis & Company, L.L.P., independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 14, 1998, Thaxton Group notified KPMG LLP that it was
terminating KPMG LLP's appointment as its independent accountants. Thaxton
Group's Board of Directors approved the termination and also approved the
engagement of Cherry, Bekaert & Holland, LLP as Thaxton Group's independent
accountants for the 1998 fiscal year. Thaxton Group filed Form 8-K with the
Commission in December 1998 disclosing this change of accountants.
PLAN OF DISTRIBUTION
Officers and employees of Thaxton Group and some of its finance and
insurance subsidiaries will sell the securities in reliance upon Rule 3a4-1
under the Exchange Act. Persons associated with Thaxton Group 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 these persons in
connection with the sale of the securities. In addition, Thaxton Group 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. Thaxton Group
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 0.25% to 5% of the principal amount of the securities
sold through the broker-dealer. Thaxton Group may also agree to indemnify the
broker-dealer against some liabilities, including liabilities arising under the
Securities Act, and to reimburse the broker-dealer for some of its costs and
expenses. The offering commenced on February 17, 1998, is continuous in nature
and is expected to continue until the securities are sold.
Thaxton Group will employ Carolinas First Investments, Inc., a registered
broker-dealer, to sell the securities and to assist Thaxton Group in managing
the offering. Under the terms of the sales agency agreement between Carolinas
First Investments, Inc. and Thaxton Group, Carolinas First Investments, Inc.
will receive sales commissions equaling 0.25% of the principal amount of the
securities sold and a monthly management fee of $6,250. Other terms of the
sales agency agreement are similar to those described above.
Thaxton Group may market the securities through the use of newspaper
advertisements, mailings of this prospectus to Thaxton Group's insurance and
selected consumer finance customers, signs in its offices and its finance and
insurance subsidiaries and by providing copies of this prospectus to potential
purchasers who inquire about purchasing the securities. Officers, directors or
employees of Thaxton Group and its finance and insurance subsidiaries will not
market the securities by telephone or other oral solicitation.
Daily notes will not be offered or sold in South Carolina.
39
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE THAXTON GROUP, INC.
Independent Auditors' Reports ............................................................ F-2
Consolidated balance sheets as of December 31, 1998 and 1997 ............................. F-4
Consolidated statements of income for the years ended December 31, 1998 and 1997 ......... F-5
Consolidated statements of stockholders' equity for the years ended December 31, 1998 and F-6
1997
Consolidated statements of cash flows for the years ended December 31, 1998 and 1997 ..... F-7
Notes to consolidated financial statements ............................................... F-8
Consolidated balance sheets as of June 30, 1999 (unaudited) and December 31, 1998 ........ F-21
Consolidated statements of income for the six-months ended June 30, 1999 and 1998 F-22
(unaudited)
Consolidated statements of cash flows for the six-months ended June 30, 1999 and 1998 F-24
(unaudited)
Notes to consolidated financial statements (unaudited) ................................... F-25
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants ....................................... F-29
Consolidated balance sheets as of December 31, 1998 and 1997 ............................. F-30
Consolidated statements of income and retained earnings for the years ended December 31,
1998 and 1997 ......................................................................... F-31
Consolidated statements of cash flows for the years ended December 31, 1998 and 1997 ..... F-32
Notes to consolidated financial statements ............................................... F-33
Condensed consolidated balance sheet of Thaxton Investment Corporation as of June 30, 1999
(unaudited) ............................................................................ F-39
Condensed consolidated income statements of Thaxton Investment Corporation for the
five-months ended June 30, 1999, of FirstPlus Consumer Finance, Inc. and
Subsidiaries for the one-month ended January 31, 1999 and for the six-months ended
June 30, 1998 (unaudited) .............................................................. F-40
Condensed consolidated statements of cash flows of Thaxton Investment Corporation for the
five-months ended June 30, 1999, of FirstPlus Consumer Finance, Inc. and Subsidiaries
for the one-month ended January 31, 1999 and for the six-months ended
June 30, 1998 (unaudited)............................................................... F-41
Notes to condensed consolidated financial statements (unaudited) ......................... F-42
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF THE THAXTON GROUP, INC.
Introduction ............................................................................. F-45
Unaudited PRO FORMA consolidated statement of operations for the year ended
December 31, 1998....................................................................... F-46
Unaudited PRO FORMA consolidated statement of operations for the six-months ended
June 30, 1999........................................................................... F-48
Unaudited PRO FORMA consolidated balance sheet at June 30, 1999 .......................... F-50
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Thaxton Group, Inc.
We have audited the accompanying consolidated balance sheet of The Thaxton
Group, Inc. and subsidiaries as of December 31, 1998 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Thaxton
Group, Inc. and subsidiaries as of December 31, 1998 and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
CHERRY, BEKAERT & HOLLAND, LLP
Charlotte, North Carolina
March 24, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Thaxton Group, Inc.
We have audited the accompanying consolidated balance sheet of The Thaxton
Group, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 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 the results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
KPMG LLP
March 25, 1998
F-3
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ---------------
<S> <C> <C>
ASSETS
Cash .............................................................................. $ 780,864 $ 1,162,793
Finance receivables, net .......................................................... 61,869,782 48,662,228
Premises and equipment, net ....................................................... 2,843,753 2,003,787
Accounts receivable ............................................................... 1,252,412 1,616,570
Repossessed automobiles ........................................................... 603,288 744,030
Goodwill and other intangible assets .............................................. 8,305,129 3,894,956
Other assets ...................................................................... 3,340,784 2,881,308
----------- -----------
Total assets ................................................................... $78,996,012 $60,965,672
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued interest payable .......................................................... $ 428,906 $ 420,863
Notes payable ..................................................................... 62,144,209 51,071,066
Notes payable to affiliates ....................................................... 778,990 1,015,358
Accounts payable .................................................................. 928,580 1,357,739
Employee savings plan ............................................................. 1,070,425 1,045,533
Other liabilities ................................................................. 716,030 85,796
----------- -----------
Total liabilities .............................................................. 66,067,140 54,996,355
----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock $.01 par value:
Series A: 400,000 shares authorized; issued and outstanding 175,014 shares
in 1998, 178,014 shares in 1997; liquidation value $1,750,140 in 1998 .......... 1,750 1,780
Series B: 40,000 shares authorized; issued and outstanding no shares in 1998,
27,076 shares in 1997 .......................................................... -- 271
Series C: 50,000 shares authorized issued and outstanding in 1998 and 1997;
liquidation value $500,000 in 1998 ............................................. 500 500
Series D: 56,276 shares authorized, issued and outstanding in 1998, no shares
in 1997; liquidation value $562,760 in 1998 .................................... 563 --
Series E: 800,000 shares authorized, issued and outstanding in 1998, no
shares in 1997; liquidation value $8,000,000 in 1998 ........................... 8,000 --
Common stock, $.01 par value, 50,000,000 shares authorized; issued and
outstanding 3,885,218 shares in 1998, 3,795,600 shares in 1997 .................. 38,852 37,956
Additional paid-in-capital ........................................................ 12,184,057 4,521,354
Deferred stock award .............................................................. -- (630,000)
Retained earnings ................................................................. 695,150 2,037,456
----------- -----------
Total stockholders' equity ..................................................... 12,928,872 5,969,317
----------- -----------
Total liabilities and stockholders' equity ..................................... $78,996,012 $60,965,672
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Interest and fee income ......................................... $ 15,727,484 $ 15,892,683
Interest expense ................................................ 5,037,289 5,023,179
------------ ------------
Net interest income ............................................. 10,690,195 10,869,504
Provision for credit losses ..................................... 4,046,460 6,579,932
------------ ------------
Net interest income after provision for credit losses ........... 6,643,735 4,289,572
Other income:
Insurance premiums and commissions, net ......................... 6,590,849 5,469,667
Other income .................................................... 962,398 1,221,525
------------ ------------
Total other income .............................................. 7,553,247 6,691,192
------------ ------------
Operating expenses:
Compensation and employee benefits ............................ 8,636,026 6,799,738
Telephone, postage, and supplies .............................. 1,960,292 1,511,477
Net occupancy ................................................. 1,460,174 1,528,218
Reinsurance claims expense .................................... 314,995 355,437
Insurance ..................................................... 414,304 128,916
Collection expense ............................................ 132,488 94,462
Travel ........................................................ 153,046 176,186
Professional fees ............................................. 452,152 260,410
Other ......................................................... 2,254,009 2,355,947
------------ ------------
Total operating expenses ........................................ 15,777,486 13,210,791
Income (loss) before income tax expense ......................... (1,580,504) (2,230,027)
Income tax expense (benefit) .................................... (496,487) (723,694)
------------ ------------
Net income (loss) ............................................... $ (1,084,017) $ (1,506,333)
============ ============
Dividends on preferred stock .................................... $ 258,289 $ 4,167
============ ============
Net income (loss) applicable to common shareholders ............. $ (1,342,306) $ (1,510,500)
============ ============
Net income (loss) per common share -- basic and diluted ......... $ (0.35) $ (0.39)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN
STOCK STOCK CAPITAL
---------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996 .......................................... $ 39,322 $ -- $ 3,504,027
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)
Conversion of 89,007 shares of common stock into 178,014 shares of
Series A preferred stock ............................................. (890) 1,780 717,177
Conversion of 27,076 shares of common stock into 27,076 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
-------- ------- ------------
Purchase and retirement of 114,761 shares of common stock ............. (1,148) -- (1,074,314)
Issuance of 800,000 shares of Series E Preferred Stock ................ -- 8,000 7,992,000
Issuance of 300,000 shares of restricted common Stock ................. 3,000 -- 1,497,000
Issuance of 3,580 shares of common stock under Employee stock
purchase plan ........................................................ 36 -- 26,590
Conversion of 29,200 shares of common stock and 27,076 shares of
Series B Preferred Stock into 56,276 of Series D Preferred Stock ..... (292) 292 --
Repurchase of 3,000 shares of Series A Preferred Stock ................ -- (30) (29,970)
Cancellation and forfeiture of Deferred Stock Award ................... (700) -- (629,300)
Costs associated with preferred stock issuance ........................ -- -- (119,303)
Dividends paid on preferred stock ..................................... -- -- --
Net loss .............................................................. -- -- --
-------- ------- ------------
Balance at December 31, 1998 .......................................... $ 38,852 $10,813 $ 12,184,057
======== ======= ============
<CAPTION>
DEFERRED TOTAL
STOCK RETAINED STOCKHOLDERS'
AWARD EARNINGS EQUITY
-------------- --------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996 .......................................... $ (720,000) $ 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 .................................... 90,000 -- --
Conversion of 89,007 shares of common stock into 178,014 shares of
Series A preferred stock ............................................. -- -- 718,067
Conversion of 27,076 shares of common stock into 27,076 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 .......................................... (630,000) 2,037,456 5,969,317
---------- ------------- ------------
Purchase and retirement of 114,761 shares of common stock ............. -- -- (1,075,462)
Issuance of 800,000 shares of Series E Preferred Stock ................ -- -- 8,000,000
Issuance of 300,000 shares of restricted common Stock ................. -- -- 1,500,000
Issuance of 3,580 shares of common stock under Employee stock
purchase plan ........................................................ 26,626
Conversion of 29,200 shares of common stock and 27,076 shares of
Series B Preferred Stock into 56,276 of Series D Preferred Stock ..... -- -- --
Repurchase of 3,000 shares of Series A Preferred Stock ................ -- -- (30,000)
Cancellation and forfeiture of Deferred Stock Award ................... 630,000 -- --
Costs associated with preferred stock issuance ........................ -- -- (119,303)
Dividends paid on preferred stock ..................................... -- (258,289) (258,289)
Net loss .............................................................. -- (1,084,017) (1,084,017)
---------- ------------- ------------
Balance at December 31, 1998 .......................................... $ -- $ 695,150 $ 12,928,872
========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................... $ (1,084,017) $ (1,506,333)
Adjustments to reconcile net income to net cash provided by operating
activities
Provision for credit losses .......................................... 4,046,460 6,579,932
Depreciation and amortization ........................................ 1,224,170 958,192
Deferred taxes ....................................................... (300,000) 6,705
Compensatory grant of stock to employees ............................. -- 28,428
Decrease (increase) in other assets .................................. 41,436 (992,293)
Increase (decrease) in accrued interest payable and other liabilities 156,506 (200,353)
------------- -------------
Net cash provided by operating activities ........................... 4,084,555 4,874,278
------------- -------------
Cash flows from investing activities:
Net increase in finance receivables .................................. (10,398,970) (8,696,073)
Capital expenditures for premises and equipment ...................... (1,490,452) (706,498)
Proceeds from sale of premises and equipment ......................... 79,316 36,875
Proceeds from sale of investments .................................... 46,935 24,481
Acquisitions, net of acquired cash equivalents ....................... (4,976,488) (754,098)
Purchase of securities ............................................... (42,947) --
------------- -------------
Net cash used by investing activities ............................... (16,782,606) (10,095,313)
------------- -------------
Cash flows from financing activities:
Proceeds from the issuance of preferred stock ........................ 7,907,323 718,067
Notes payable to affiliates .......................................... (236,368) --
Repurchase of common stock ........................................... (1,075,732) (137,983)
Dividends paid ....................................................... (258,289) --
Net increase in line of credit ....................................... 255,000 4,079,053
Net increase in notes payable ........................................ 5,754,188 1,303,226
Repurchase of preferred stock ........................................ (30,000) --
------------- -------------
Net cash provided by financing activities ........................... 12,316,122 5,962,363
------------- -------------
Net increase (decrease) in cash ........................................ (381,929) 741,328
Cash at beginning of period ............................................ 1,162,793 421,465
------------- -------------
Cash at end of period .................................................. $ 780,864 $ 1,162,793
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................................ 5,029,246 4,874,912
Income taxes ........................................................ -- 36,843
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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, primarily through subsidiaries,
finance branches in seven southeastern states, and insurance agency branches in
six states located in the southeast and southwest. The Company is a diversified
financial services company that is engaged primarily in consumer lending and
consumer automobile sales financing 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, Paragon, Inc., 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. Through another
wholly owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes
factoring loans and collateralized commercial loans to small and medium sized
businesses. 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.
The following is a description of the more significant accounting and
reporting policies, which the Company follows in preparing, and presenting its
financial statements.
(A) INTEREST AND FEE INCOME: Interest income from finance receivables is
recognized using the interest (actuarial) method on an accrual basis. Accrual
of income on finance receivables continues until the receivable is either paid
off in full or is charged off. Fee income consists primarily of late fees,
which are credited to income when they become due from borrowers. For
receivables which are renewed, interest income is recognized using a method
similar to the interest method.
(B) ALLOWANCE FOR CREDIT LOSSES: Additions to the allowance for credit
losses are based on management's evaluation of the finance receivables
portfolio considering current economic conditions, overall portfolio quality,
charge-off experience, and such other factors which, in management's judgment,
deserve recognition in estimating credit losses. Loans are charged-off when, in
the opinion of management, such loans are deemed to be uncollectible or six
months has elapsed since the date of the last payment, whichever occurs first.
While management uses the best information available to make such evaluations,
future adjustments to the allowance may be necessary if conditions differ
substantially from the assumptions used in making the evaluations.
(C) NON-FILE INSURANCE: Non-file insurance is written in lieu of recording
and perfecting the Company's security interest in the assets pledged to secure
certain loans. Non-file insurance premiums are collected from the borrower on
certain loans at inception and renewal and are remitted directly to an
unaffiliated insurance company. Certain losses related to such loans, which are
not recoverable through life, accident and health, or property insurance
claims, are reimbursed through non-file insurance claims subject to policy
limitations. Any remaining losses are charged to the allowance for credit
losses.
(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
F-8
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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, subject to a subordination agreement with the Company's primary lender.
(G) INCOME TAXES: Statement of Financial Accounting Standards ("SFAS") No.
109, Accounting for Income Taxes (Statement 109), requires the asset and
liability method of accounting for income taxes. Under the asset and liability
method of Statement 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
the enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(H) EARNINGS PER SHARE: The Company adopted the provisions of SFAS 128,
"Earning per Share" ("EPS") in 1997. The presentation of primary and fully
diluted EPS has been replaced with basic and diluted EPS. 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 acquisitions made by the
Company. Goodwill represents the excess of the cost over the fair value of net
assets acquired at the date of acquisition. Goodwill is amortized on a
straight-line basis, generally over a five to twenty year period. The
expiration lists are amortized over their estimated useful lives, generally
fifteen to 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. 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
F-9
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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. A small percentage of
subordinated notes payable are at fixed rates, with terms up to sixty months in
maturity. For these liabilities, an evaluation is made annually to assess the
appropriateness of the carrying 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.
(2) BUSINESS COMBINATIONS
On November 13, 1998, the Company acquired all of the outstanding capital
of stock of Paragon, Inc. ("Paragon"), a North Carolina corporation, for $1.6
million consisting of $100,000 in cash and 300,000 shares of the Company's
common stock. Stock issued in the acquisition was valued at $5 per share based
on market prices near the date of acquisition with consideration given to the
one year required holding period on the shares issued. Paragon operates as a
licensed mortgage banker through nine offices in North and South Carolina. The
purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values at the date of acquisition. The excess of the
purchase price over the fair value of net assets acquired of $1,630,000 has
been recorded as goodwill and is being amortized on a straight-line basis over
seven years.
On October 27, 1998, the Company acquired substantially all of the assets
of the finance operations in Alabama and Mississippi from Budget Financial
Services, Inc. ("Budget") for cash of $3 million. Budget operates in the
consumer finance business. The purchase was allocated to the assets acquired
and liabilities assumed based on their fair values at the date of acquisition.
The excess of the purchase price over the fair value of net assets acquired of
$1,273,000 has been recorded as goodwill and is being amortized on a
straight-line basis over five years.
During September and October 1998, the Company acquired substantially all
of the assets of two Arizona insurance agencies, Inter-Combined Agencies, Inc.
("ICA") and National Insurance Centers, Inc. ("NIC") for cash of $1.8 million.
ICA is in the business of acting as agent for property and casualty insurance.
NIC is in the business of acting as agent for non-standard automobile
insurance. The purchase price in each of these acquisitions was allocated to
the assets acquired and liabilities assumed based on their fair values at the
date of acquisition. The combined excess of the purchase price over the fair
value of net assets acquired of $1,371,000 has been recorded as goodwill and is
being amortized on a straight-line basis over fifteen years.
The acquisitions were accounted for under the purchase method of
accounting. Accordingly, the results of operations of the acquired businesses
are included in the accompanying financial statements from the dates of
acquisition. The following table presents unaudited pro forma combined results
of operations as if the acquisitions had occurred at the beginning of each year
presented. Such pro forma amounts are not necessarily indicative of what the
actual consolidated results of operations might have been if the acquisitions
had occurred at the beginning of 1997.
F-10
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) BUSINESS COMBINATIONS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Total revenues ................................ $ 34,200,000 $ 33,900,000
Net income (loss) ............................. $ (1,900,000) $ (1,800,000)
Basic and Diluted earnings per share .......... $ (.50) $ (.46)
</TABLE>
(3) FINANCE RECEIVABLES
Finance receivables consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Automobile Sales Contracts ..................... $ 37,124,775 48,098,657
Direct Loans ................................... 27,852,566 15,449,004
Mortgage Loans ................................. 11,096,383 --
Premium Finance Contracts ...................... 3,343,320 4,010,608
Commercial Loans ............................... 1,267,742 --
Total finance receivables ...................... 80,684,786 67,558,269
Unearned interest .............................. (11,914,393) (12,902,552)
Unearned insurance premiums, net ............... (275,476) (155,514)
Valuation discount for acquired loans .......... (672,673) --
Bulk purchase discount ......................... (601,973) (359,945)
Dealer hold back ............................... (639,660) (668,630)
Allowance for credit losses .................... (4,710,829) (4,809,400)
Finance receivables, net ....................... $ 61,869,782 48,662,228
============= ===========
</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 $5,659,000 and $602,000, respectively,
at December 31, 1998 and approximately $8,328,000 and $360,000, respectively,
at December 31, 1997.
With holdback arrangements, an automobile dealer or other retailer will
assign receivables to the Company on a loan-by-loan basis, typically at par.
The Company will withhold a certain percentage of the proceeds, generally 5% to
10%, as a dealer reserve to be used to cover any losses which occur on these
loans. The agreements are structured such that all or a portion of these
holdback amounts can be reclaimed by the dealer based on the performance of the
receivables. To the extent that losses from these holdback receivables exceed
the total remaining holdback amount for a particular dealer, the allowance for
credit losses will be charged. The amount of holdback receivables, net of
unearned interest and insurance, and the related holdback amount outstanding
were approximately $24,463,738 and $640,000, respectively, at December 31, 1998
and approximately $31,593,000 and $669,000, respectively, at December 31, 1997.
F-11
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) FINANCE RECEIVABLES -- (CONTINUED)
The valuation discount for acquired loans relates to our acquisition of
four finance offices from Budget. The amount of finance receivables, net of
unearned interest and insurance, and related valuation discount at December 31,
1998, were $2,564,085 and $672,673.
At December 31, 1998, 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Beginning balance .................... $ 4,809,400 $ 2,195,000
Provision for credit losses .......... 4,046,460 6,579,932
Charge-offs .......................... (4,307,260) (4,129,313)
Recoveries ........................... 162,229 163,781
------------ ------------
Net charge-offs ...................... (4,145,031) (3,965,532)
Ending balance ....................... $ 4,710,829 $ 4,809,400
============ ============
</TABLE>
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, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Leasehold improvements .............. $ 712,709 $ 591,596
Furniture and fixtures .............. 806,668 558,566
Equipment and automobiles ........... 3,871,999 2,719,773
---------- ----------
Total cost .......................... 5,391,376 3,869,935
Accumulated depreciation ............ 2,547,623 1,866,148
---------- ----------
Net premises and equipment .......... $2,843,753 $2,003,787
========== ==========
</TABLE>
Depreciation expense was approximately $721,000 and $617,000 in 1998 and
1997, respectively.
F-12
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Covenants not to compete ............... $ 118,495 $ 118,494
Goodwill and purchase premium .......... 7,051,516 2,608,390
Insurance expirations .................. 3,114,363 2,657,399
---------- ----------
Total cost ............................. 10,284,374 5,384,283
Less accumulated amortization .......... 1,979,245 1,489,327
---------- ----------
Intangible assets, net ................. $8,305,129 $3,894,956
========== ==========
</TABLE>
The majority of the intangibles were acquired by the Company in connection
with its acquisition of Thaxton Insurance, the acquisition of Paragon, and the
acquisition of four finance offices from Budget. Amortization expense was
approximately $503,000 and $341,000 in 1998 and 1997, 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 $801,000 in 1998 and
$662,000 in 1997. The future minimum lease payments under noncancelable
operating leases as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999 ................................. $ 819,873
2000 ................................. 562,912
2001 ................................. 322,756
2002 ................................. 185,668
2003 ................................. 74,263
Thereafter ........................... 6,251
----------
Total minimum lease payments ......... $1,971,723
==========
</TABLE>
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 of approximately $4,700.
F-13
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) NOTES PAYABLE AND NOTES PAYABLE TO AFFILIATES
At December 31, 1998 and 1997, notes payable consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Lines of Credit ............................................................. $46,950,000 $46,695,000
Warehouse credit lines for mortgage loans at various rates and maturities ... 3,638,220 --
Notes payable to individuals with varying maturity dates and rates ranging
from 5 1/4% to 12% ........................................................ 10,281,246 3,160,577
Note payable to finance company collateralized by an aircraft, due in monthly
installments of $9,091 through July 2003 including interest at 8.99% ...... 408,583 477,545
Other ....................................................................... 866,160 737,944
----------- -----------
Total notes payable ......................................................... $62,144,209 $51,071,066
=========== ===========
Note payable to affiliates, with varying maturity dates and rates ranging
from 6.25% to 10% ......................................................... $ 778,990 $ 1,015,358
=========== ===========
</TABLE>
A schedule of maturities of long-term debt is as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -------------------------
<S> <C>
1999 ............... $11,042,241
2000 ............... 1,257,986
2001 ............... 2,513,734
2002 ............... 1,053,297
2003 ............... 47,014,369
Thereafter ......... 41,572
-----------
Total .............. $62,923,199
===========
</TABLE>
At December 31, 1998, the Company maintained a line of credit agreement
with a commercial finance company for $92 million, maturing on October 31,
2003. At December 31, 1998, the Company's net finance receivables would have
allowed it to borrow an additional $8.3 million against existing collateral.
The outstanding balance under this line of credit was $46,950,000 at December
31, 1998. There are five tranches under this agreement, Tranche A, B, C, D and
F. The total line of credit, amount of credit line available at December 31,
1998, and interest rate for each Tranche is summarized below:
<TABLE>
<S> <C> <C> <C> <C>
Tranche A: $ 92,000,000; $ 54,833,000; 8.75% (Lender's prime rate + 1%)
Tranche B: $ 10,000,000; $ 10,000,000; 12.75% (Lender's prime rate + 5%)
Tranche C: $ 5,000,000; $ 3,829,000; 8.75% (Lender's prime rate + 1%)
Tranche D: $ 10,000,000; $ 8,585,000; 9.75% (Lender's prime rate + 2%)
Tranche F: $ 25,000,000; $ 17,803,000; 8.75% (Lender's prime rate + 1%)
</TABLE>
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 $45 million total
potential borrowing capacity as of December 31, 1998.
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
F-14
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) NOTES PAYABLE AND NOTES PAYABLE TO AFFILIATES -- (CONTINUED)
time. Also, the Company may pay dividends up to 25% of the current year's net
income. As of December 31, 1998, the Company met all such ratios and
requirements or obtained waivers for any instances of non-compliance.
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, and the Company now
offers notes under this federal registration. 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
5.25% to 8.0%. Approximately $11.1 million in notes were outstanding as of
December 31, 1998 and are reflected as notes payable to individuals and notes
payable to affiliates.
(8) 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. 10,000 of
these options have since been canceled. The remaining 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, 1998. All options granted in 1996
have a contractual maturity of ten years. The grant date fair value of options
granted during 1996 was $3.90 per share as determined by using the
Black-Scholes option pricing model with the following assumptions: (1)
risk-free interest rate of 6.25%; (2) expected life of 5 years; (3) expected
volatility of 10.40%; and (4) no expected dividends. These options were
immaterial to the proforma net income or earnings per share in 1998 and 1997.
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, 1998, 4,377
shares were purchased under this Stock Purchase Plan. This plan was canceled by
the Board of Directors in January, 1999.
Upon the closing of the Company's initial public offering on December 29,
1995, a Senior Executive was awarded 100,000 shares of restricted common stock.
Subject to his continued employment by the Company, the award was scheduled to
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 executive, and 70,000 shares of the award remained subject to
restriction. In 1998, the executive voluntarily agreed to forfeit any remaining
rights or interest in these shares, and the Company repurchased his outstanding
20,000 shares at a price of $10 per share.
F-15
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------------- -------------- --------------
<S> <C> <C> <C> <C>
1998 Federal $ (196,487) $ (300,000) $ (496,487)
State -- -- --
---------- ---------- ----------
$ (196,487) $ (300,000) $ (496,487)
========== ========== ==========
1997 Federal $ (727,994) $ 6,364 $ (721,630)
State (2,405) 341 (2,064)
---------- ---------- ----------
$ (730,399) $ 6,705 $ (723,694)
========== ========== ==========
</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 income
before income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Statutory rate applied to income before income tax expense .......... $ (537,371) $ (758,209)
Increase (decrease) in income taxes resulting from:
Goodwill amortization ............................................. 43,904 43,909
TICO Reinsurance Ltd. nontaxable income ........................... (93,160) (109,847)
State taxes, less related federal benefit ......................... (82,347) (83,045)
Valuation allowance adjustment .................................... 82,347 81,283
Other ............................................................. 90,140 102,215
---------- ----------
Income taxes ........................................................ $ (496,487) $ (723,694)
========== ==========
</TABLE>
F-16
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) INCOME TAXES -- (CONTINUED)
The effective tax rate was 31.4% and 32.5% for the years ended December
31, 1998 and 1997, respectively. The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and liabilities at
December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves ............................... $1,090,357 $ 984,280
Federal net operating loss carryforwards ......... 311,078 --
State net operating loss carryforwards ........... 163,630 81,283
Other ............................................ 54,819 100,454
---------- ----------
Total gross deferred tax asset .................... 1,619,884 1,166,017
Less valuation allowance .......................... 163,630 81,283
---------- ----------
Net deferred tax assets ........................... 1,456,254 1,084,734
---------- ----------
Deferred tax liabilities:
Prepaid insurance ................................ (123,112) (209,799)
Depreciable basis of fixed assets ................ (162,417) (139,417)
Deferred loan costs .............................. (313,971) (250,279)
Intangible assets ................................ (266,486) (232,115)
Other ............................................ (52,268) (15,124)
---------- ----------
Total gross deferred tax liability ................ (918,254) (846,734)
---------- ----------
Net deferred tax asset ............................ $ 538,000 $ 238,000
========== ==========
</TABLE>
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.
The change in the valuation allowance for 1998 and 1997 was an increase of
$82,347 and $81,283, 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.
(10) PREFERRED STOCK
The Company issued three series of preferred stock during 1997, and two
additional series of preferred stock in 1998. 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. The Company repurchased and retired 3,000 shares
of Series A Preferred Stock in December 1998.
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
F-17
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) PREFERRED STOCK -- (CONTINUED)
share of common stock for one share of preferred stock.. In July 1998, the
Company, through a private placement, exchanged all of the 27,076 shares of
outstanding Series B Preferred stock, plus 29,200 shares of common stock, for
56,276 shares of Cumulative Series D preferred stock. The Series D preferred
stock pays annual dividends of $ .80 per share, and is redeemable at any time
by the company at $10 per share. Subsequent to year end, all of the shares of
Series D Preferred Stock were repurchased by the Company, and retired.
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.
In December 1998, the Company, through a private placement, issued 800,000
shares of Cumulative Series E preferred stock for $10 per share. The stock pays
a variable rate dividend rate of prime minus 1% through October 31, 2003, and
prime plus 3% thereafter. The stock is redeemable by the Company at any time at
price of $10 per share.
(11) EARNINGS PER SHARE INFORMATION
The following is a summary of the earnings per share calculation for the
years ended December 31, 1998 and 1997:
BASIC
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net income (loss) ................................................. $ (1,084,017) $ (1,506,333)
Less: Dividends on preferred stock ................................ 258,289 4,167
------------ ------------
Net income applicable to common shareholders (numerator) .......... (1,342,306) (1,510,500)
Average common shares outstanding (denominator) ................... 3,802,759 3,913,083
Earnings (loss) per share -- basic ................................ $ (0.35) $ (0.39)
============ ============
DILUTED
Net income (loss) ................................................. $ (1,084,017) $ (1,506,333)
Less: Dividends on preferred stock ................................ 258,289 4,167
------------ ------------
Net income applicable to common shareholders (numerator) .......... (1,342,306) (1,510,500)
------------ ------------
Average common shares outstanding ................................. 3,802,759 3,913,083
Dilutive common stock assumed converted ........................... 234
------------
Average diluted shares outstanding (denominator) .................. 3,802,759 3,913,317
------------ ------------
Earnings (loss) per share -- diluted .............................. $ (0.35) $ (0.39)
============ ============
</TABLE>
F-18
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) SUBSEQUENT EVENTS
On February 1, 1999, the Company's CEO and majority shareholder purchased
approximately 144 consumer finance offices from FirstPlus Consumer Finance,
Inc., and operates those offices in Thaxton Investment Corporation ("TIC"), a
corporation set up for that purpose. Thaxton Investment Corp. is a private
corporation, and Mr. Thaxton is the sole shareholder. The Company provides
management services to TIC, and charges TIC a reasonable fee for those
services. TIC operates in seven states, four of which the Company also operates
finance branch offices within. Additionally, some of TIC's finance offices do
business using the "TICO" business name.
The Company has embarked on a program of repurchasing and retiring shares
of its stock. Since December 1998, approximately 121 thousand shares of stock,
or approximately 3% of the outstanding shares, have been repurchased. The
shares are being repurchased at $10 per share.
(13) BUSINESS SEGMENTS
For the year ended December 31, 1998, the Company has adopted Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires the
presentation of descriptive information about reportable segments consistent
with that used by management of the Company to assess performance.
Additionally, SFAS No. 131 requires disclosure of certain information by
geographic region.
The Company reports its results of operations in three primary segments;
consumer finance, mortgage banking and insurance. The consumer finance segment
provides financing to consumers with limited credit histories, low incomes or
past credit problems. Revenues in the consumer finance business are derived
primarily from interest and fees on loans, and the sale of credit related
insurance products to its customers. The Company's mortgage banking operations
are conducted through Paragon, a wholly-owned subsidiary acquired in November
1998. Paragon originates, closes and funds predominantly B and C credit quality
mortgage loans, which are warehoused until they can be packaged and sold to
long term investors. Paragon receives fee income from originating mortgages and
loans are generally sold at a premium to the permanent investor. The Company's
insurance operations consist of selling, on an agency basis, various lines of
automobile, property and casualty, life and accident and health insurance.
Revenue is generated through fees paid by the insurance for which business is
placed.
F-19
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) BUSINESS SEGMENTS -- (CONTINUED)
The following table summarizes certain financial information concerning
the Company's reportable operating segments for the years ended December 31,
1998 and 1997:
<TABLE>
<CAPTION>
CONSUMER MORTGAGE
1998 FINANCE BANKING INSURANCE OTHER TOTAL
- --------------------------------------------- -------------- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue ............................... 16,182,000 917,000 6,013,000 169,000 23,281,000
Net interest income ......................... 9,745,000 814,000 131,000 10,690,000
Provision for credit losses ................. 4,046,000 4,046,000
Noninterest income .......................... 1,257,000 278,000 6,013,000 5,000 7,553,000
Insurance premiums and commissions, net ..... 1,142,000 5,449,000 6,591,000
Non interest expenses ....................... 7,457,000 1,178,000 7,008,000 134,000 15,777,000
Depreciation and amortization ............... 626,000 32,000 566,000 1,224,000
Net income .................................. (8,000) (85,000) (953,000) (38,000) (1,084,000)
BALANCE SHEET DATA
Total assets ................................ 55,871,000 12,967,000 9,017,000 1,141,000 78,996,000
Loans, net of unearned income ............... 54,536,000 10,784,000 1,261,000 66,581,000
Allowance for credit losses ................. 4,711,000 4,711,000
Intangibles ................................. 1,641,000 1,601,000 5,063,000 8,305,000
</TABLE>
<TABLE>
<CAPTION>
1997
- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue ............................... 16,219,000 518,000 5,847,000 22,584,000
Net interest income ......................... 10,870,000 10,870,000
Provision for credit losses ................. 6,580,000 6,580,000
Noninterest income .......................... 326,000 518,000 5,847,000 -- 6,691,000
Insurance premiums and commissions, net ..... 920,000 -- 4,550,000 -- 5,470,000
Non interest expenses ....................... 6,963,000 589,000 5,659,000 13,211,000
Depreciation and amortization ............... 498,000 18,000 442,000 -- 958,000
Net income .................................. (1,105,000) (44,000) (357,000) (1,506,000)
BALANCE SHEET DATA
Total assets ................................ 53,602,000 107,000 7,257,000 60,966,000
Loans, net of unearned income ............... 53,471,000 53,471,000
Allowance for credit losses ................. 4,809,000 4,809,000
Intangible Assets ........................... 294,000 14,000 3,587,000 3,895,000
</TABLE>
F-20
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED BALANCE SHEET
(IN $000'S)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash ........................................................................... $ 990 $ 781
Finance receivables, net ....................................................... 66,267 61,870
Premises and equipment, net .................................................... 2,885 2,844
Accounts receivable ............................................................ 1,932 1,252
Repossessed automobiles ........................................................ 304 603
Goodwill and other intangible assets ........................................... 9,228 8,305
Other assets ................................................................... 3,947 3,342
-------- --------
Total assets ................................................................ $ 85,553 $ 78,997
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued interest payable ....................................................... $ 433 $ 429
Notes payable .................................................................. 70,432 62,144
Notes payable to affiliates .................................................... 775 779
Accounts payable ............................................................... 1,881 929
Employee savings plan .......................................................... 1,197 1,070
Other liabilities .............................................................. 337 716
-------- --------
Total liabilities ........................................................... 75,055 66,067
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stock $ .01 par value,
Series A: 400,000 shares authorized, issued and outstanding 161,040 Shares at
June 30, 1999, 175,014 shares issued and outstanding At December 31, 1998 .... 1 2
Series C: 50,000 shares authorized, issued and outstanding at June 30, 1999 and
December 31, 1998 ............................................................ 1 1
Series D: 56,276 shares authorized and issued; no shares outstanding June 30,
1999, 56,276 shares outstanding December 31, 1998 ............................ -- 1
Series E: 800,000 shares authorized, issued and outstanding at June 30, 1999 and
December 31, 1998 ............................................................ 8 8
Common stock, $ .01 par value; authorized 50,000,000 shares; issued and
outstanding 3,757,506 shares at June 30,1999; 3,885,218 shares at December 31,
1998 ......................................................................... 38 39
Additional paid-in-capital ..................................................... 10,205 12,184
Retained earnings .............................................................. 245 695
-------- --------
Total stockholders' equity .................................................. 10,498 12,930
-------- --------
Total liabilities and stockholders' equity .................................. $ 85,553 $ 78,997
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN $000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Interest and fee income ............................................ $ 11,513 $ 7,522
Interest expense ................................................... 3,205 2,413
---------- ---------
Net interest income .............................................. 8,308 5,109
Provision for credit losses ........................................ 1,851 1,967
---------- ---------
Net interest income after provision for credit losses .............. 6,457 3,142
---------- ---------
Other income:
Insurance premiums and commissions, net .......................... 5,061 2,853
Other income ..................................................... 992 473
---------- ---------
Total other income ................................................. 6,053 3,326
---------- ---------
Operating expenses:
Compensation and employee benefits ............................... 7,393 3,371
Telephone, postage, and supplies ................................. 1,306 830
Net occupancy .................................................... 1,138 810
Reinsurance claims expense ....................................... 343 127
Insurance ........................................................ 187 66
Collection expense ............................................... 54 80
Travel ........................................................... 182 64
Professional fees ................................................ 215 115
Other ............................................................ 1,915 1,353
---------- ---------
Total operating expenses ......................................... 12,733 6,816
---------- ---------
Income (loss) before income tax expense .......................... (223) (348)
Income tax expense (benefit) ....................................... (130) (113)
---------- ---------
Net income (loss) ................................................ (93) (235)
---------- ---------
Dividends on preferred stock ..................................... 357 105
---------- ---------
Net income (loss) applicable to common shareholders .............. $ (450) $ (340)
========== =========
Net income (loss) per common share -- basic and diluted .......... $ (0.12) $ (0.09)
========== =========
Weighted average shares outstanding -- basic and diluted ......... 3,779,177 3,787,892
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN $000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1999 1998
------------ ---------------
<S> <C> <C>
Interest and fee income ............................................ $ 6,033 $ 3,840
Interest expense ................................................... 1,697 1,335
--------- ---------
Net interest income .............................................. 4,336 2,505
Provision for credit losses ........................................ 965 934
--------- ---------
Net interest income after provision for credit losses .............. 3,371 1,571
--------- ---------
Other income:
Insurance premiums and commissions, net .......................... 2,608 1,468
Other income ..................................................... 564 249
--------- ---------
Total other income ................................................. 3,172 1,717
--------- ---------
Operating expenses:
Compensation and employee benefits ............................... 3,868 1,556
Telephone, postage, and supplies ................................. 778 443
Net occupancy .................................................... 750 453
Reinsurance claims expense ....................................... 156 58
Insurance ........................................................ 153 27
Collection expense ............................................... 27 43
Travel ........................................................... 144 31
Professional fees ................................................ 132 83
Other ............................................................ 780 622
--------- ---------
Total operating expenses ......................................... 6,788 3,316
--------- ---------
Income (loss) before income tax expense .......................... (245) (28)
Income tax expense (benefit) ....................................... (137) (9)
--------- ------------
Net income (loss) ................................................ (108) (19)
--------- -----------
Dividends on preferred stock ..................................... 178 51
--------- -----------
Net income (loss) applicable to common shareholders .............. $ (286) $ (70)
========= ===========
Net income (loss) per common share -- basic and diluted .......... $ (0.08) $ (0.02)
========= ===========
Weighted average shares outstanding -- basic and diluted ......... 3,757,844 3,781,846
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN $000'S)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities .......... $ 2,267,000 $ 1,370,000
Cash flows from investing activities .......... (8,005,000) 1,646,000
Cash flows from financing activities .......... 5,947,000 (3,141,000)
------------ ------------
Net increase (decrease) in cash ............... 209,000 (125,000)
Cash at beginning of period ................... 781,000 1,163,000
------------ ------------
Cash at end of Period ......................... $ 990,000 $ 1,038,000
============ ============
</TABLE>
F-24
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999 AND 1998
(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, primarily through subsidiaries,
finance branches in seven southeastern states, and insurance agency branches in
six states located in the southeast and southwest. The Company is a diversified
financial services company that is engaged primarily in consumer lending and
consumer automobile sales financing 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, Paragon, Inc., 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. Through another
wholly owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes
factoring loans and collateralized commercial loans to small and medium sized
businesses. 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.
Information with respect to June 30, 1999 and 1998, and the periods then
ended, have not been audited by the Company's independent auditors, but in the
opinion of management, reflect all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the operations of
the Company. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Company's Annual Report
on Form 10-KSB when reviewing interim financial statements. The results of
operations for the six months and quarter ended June 30, 1999 are not
necessarily indicative of results to be expected for the entire fiscal year.
F-25
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(2) FINANCE RECEIVABLES
Finance receivables consist of the following at June 30, 1999 and December
31, 1998:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Automobile Sales Contracts .................... $ 33,937,000 $ 37,125,000
Mortgage loans ................................ 7,734,000 11,096,000
Commercial loans .............................. 2,983,000 1,268,000
Direct Loans .................................. 33,525,000 27,853,000
Premium Finance Contracts ..................... 6,560,000 3,343,000
============= =============
Total finance receivables ..................... 84,739,000 80,685,000
Unearned interest ............................. (12,112,000) (11,914,000)
Unearned insurance premiums, net .............. (134,000) (275,000)
Valuation discount for acquired loans ......... (501,000) (673,000)
Bulk purchase discount ........................ (196,000) (602,000)
Dealer hold back .............................. (1,006,000) (640,000)
Allowance for credit losses ................... (4,523,000) (4,711,000)
============= =============
Finance receivables, net ...................... $ 66,267,000 $ 61,870,000
============= =============
</TABLE>
Mortgage Loans are held for sale in a warehouse arrangement, and
outstanding balances will fluctuate depending upon monthly origination volume
and the timing of sales to outside investors. Consumer loans include bulk
purchases of receivables, auto dealer receivables under holdback arrangements,
and small consumer loan receivables. With bulk purchase arrangements, the
Company typically purchases a group of receivables from an auto dealer or other
retailer at a discount to par based on management's review and assessment of
the portfolio to be purchased. This discount amount is then maintained in an
unearned income account to which losses on these loans are charged. To the
extent that losses from a bulk purchase exceed the purchase discount, the
allowance for credit losses will be charged. To the extent losses experienced
are less than the purchase discount, the remaining discount is accreted into
income. The amount of bulk purchased receivables, net of unearned interest and
insurance, and the related purchase discount outstanding were approximately
$3,370,000 and $196,000, respectively, at June 30, 1999 and approximately
$5,659,000 and $602,000, respectively, at December 31, 1998.
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 $22,189,000 and $1,021,000, respectively, at June 30, 1999
and approximately $24,464,000 and $640,000, respectively, at December 31, 1998.
The valuation discount for acquired loans relates to our acquisition of
four finance offices from Budget Financial Services, Inc. ("Budget"). The
amount of finance receivables, net of unearned interest and insurance, and
related valuation discount was approximately $1,834,000 and $501,000 at June
30, 1999; and $2,564,000 and $673,000 at December 31, 1998.
F-26
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(2) FINANCE RECEIVABLES -- (CONTINUED)
At June 30, 1999 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 3).
Changes in the allowance for credit losses for the three months ended June
30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Beginning balance .................... $ 4,711,000 $ 4,810,000
Provision for credit losses .......... 1,851,000 1,967,000
Charge-offs .......................... (2,188,000) (2,043,000)
Recoveries ........................... 149,000 87,000
------------ ------------
Net charge-offs ...................... (2,039,000) (1,956,000)
------------ ------------
Ending balance ....................... $ 4,523,000 $ 4,821,000
</TABLE>
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.
(3) NOTES PAYABLE
At June 30, 1999 the Company maintained a line of credit agreement with a
commercial finance company for $92 million, maturing on October 31, 2003. At
June 30, 1999 the Company's net finance receivables would have allowed it to
borrow an additional $8.5 million against existing collateral. The outstanding
balance under this line of credit was $62,018,000 at June 30, 1999. There are
five tranches under this agreement, Tranche A, B, C, D and F. The total line of
credit, amount of credit line available at June 30, 1999 and interest rate for
each Tranche is summarized below:
<TABLE>
<S> <C> <C> <C> <C>
Tranche A: $92,000,000; $51,873,000; 8.75% (Lender's prime rate + 1%)
Tranche B: $10,000,000; $10,000,000; 12.75% (Lender's prime rate + 5%)
Tranche C: $ 5,000,000; $ 2,558,000; 8.75% (Lender's prime rate + 1%)
Tranche D: $10,000,000; $ 8,014,000; 9.75% (Lender's prime rate + 2%)
Tranche F: $25,000,000; $15,536,000; 8.75% (Lender's prime rate + 1%)
</TABLE>
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 $38 million total
potential borrowing capacity, and actual borrowing capacity of approximately
$8.5 million as of June 30, 1999.
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 June 30, 1999, the Company met all such ratios and
requirements or obtained waivers for any instances of non-compliance.
F-27
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(4) BUSINESS COMBINATIONS
On June 28, 1999, the Company acquired U.S. Financial Group Agency, Inc.
(U.S. Financial), a wholesale insurance agency, located in Richmond, Virginia.
U. S. Financial places non-standard personal automobile insurance risks written
by agents located in Virginia. The purchase price of the acquisition was
$1,075,290, consisting of cash of $301,320 and a 4.25%, 24-month note for
$782,940. The acquisition was accounted for using purchase accounting,
resulting in intangible assets consisting of insurance expirations, and
goodwill, totaling $1,084,260. Intangible assets will be amortized over 15
years.
(5) BUSINESS SEGMENTS
For the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 requires the
presentation of descriptive information about reportable segments consistent
with that used by management of the Company to assess performance.
Additionally, SFAS No. 131 requires disclosure of certain information by
geographic region.
The Company reports its results of operations in three primary segments;
consumer finance, mortgage banking and insurance. The consumer finance segment
provides financing to consumers with limited credit histories, low incomes or
past credit problems. Revenues in the consumer finance business are derived
primarily from interest and fees on loans, and the sale of credit related
insurance products to its customers. The Company's mortgage banking operations
are conducted through Paragon, a wholly-owned subsidiary acquired in November
1998. Paragon originates, closes and funds predominantly B and C credit quality
mortgage loans, which are warehoused until they can be packaged and sold to
long term investors. Paragon receives fee income from originating mortgages and
loans are generally sold at a premium to the permanent investor. The Company's
insurance operations consist of selling, on an agency basis, various lines of
automobile, property and casualty, life and accident and health insurance.
Revenue is generated through fees paid by the insurance for which business is
placed.
The following table summarizes certain financial information concerning
the Company's reportable operating segments for the six months ended June 30,
1999 and 1998:
<TABLE>
<CAPTION>
CONSUMER MORTGAGE
FINANCE BANKING INSURANCE OTHER (1) TOTAL
-------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1999
- --------
Total Revenue ......... $ 8,741,000 $ 3,895,000 $ 4,753,000 $ 177,000 $17,566,000
Net Income ............ 469,000 243,000 (685,000) (120,000) (93,000)
Total Assets .......... 69,146,000 2,179,000 10,911,000 3,317,000 85,553,000
1998
- --------
Total Revenue ......... $ 7,715,000 $ 189,000 $ 2,944,000 -- $10,848,000
Net Income ............ (16,000) 75,000 (294,000) -- (235,000)
Total Assets .......... 52,418,000 85,000 6,732,000 -- 59,235,000
</TABLE>
- --------
(1) Other includes Tico Reinsurance Limited, a credit life reinsurance company,
and Thaxton Commercial Lending Inc.
F-28
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FIRSTPLUS CONSUMER FINANCE, INC.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of FIRSTPLUS
CONSUMER FINANCE, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and
the related consolidated statements of income and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 consolidated 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FIRSTPLUS
CONSUMER FINANCE, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.
March 19, 1999
F-29
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................................... $ 5,990,252 $ 3,503,009
Finance receivables, net (see Note 2) ........................................ 111,473,990 82,539,077
Premises and equipment less accumulated depreciation of $3,571,910 in 1998
and $2,877,719 in 1997 (see Note 3) ........................................ 3,096,554 2,576,171
Goodwill (see Note 4) ........................................................ 7,193,467 1,337,408
Deferred tax asset (see Note 7) .............................................. 1,827,793 1,278,557
Prepaid and other assets ..................................................... 1,996,679 1,696,318
------------- ------------
Total Assets ................................................................. $ 131,578,735 $ 92,930,540
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Term debt and notes payable (see Note 5) ..................................... $ 73,439,655 $ 47,723,441
Subordinated investment certificates and notes payable (see Note 6) .......... 24,110,017 22,129,877
Note payable to parent company (see Note 10) ................................. 9,889,717 3,643,784
Accounts payable and other accrued liabilities ............................... 5,635,507 5,214,716
Insurance underwriting premiums payable ...................................... 807,109 548,594
Insurance loss reserve ....................................................... 860,616 285,143
------------- ------------
Total Liabilities ............................................................ 114,742,621 79,545,555
------------- ------------
Common stock, $1 par value: 1,000 1,000
Authorized shares -- 1,000 .................................................
Outstanding shares -- 1,000 ................................................
Additional paid-in capital ................................................... 1,520,211 1,520,211
Retained earnings ............................................................ 15,314,903 11,863,774
------------- ------------
Total stockholder's equity ................................................... 16,836,114 13,384,985
------------- ------------
Total Liabilities and Stockholder's Equity ................................... $ 131,578,735 $ 92,930,540
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES
Interest and fee income (see Note 1) ............................. $ 43,932,269 $ 32,134,980
Earned insurance premiums ........................................ 8,064,668 5,875,566
------------ ------------
Total revenues ................................................. 51,996,937 38,010,546
------------ ------------
EXPENSES
Interest on notes payable (see Notes 5 and 6) .................... 6,552,996 4,598,496
Provision for credit losses (see Note 2) ......................... 7,872,090 6,147,733
Provision for credit insurance losses ............................ 1,113,097 810,828
Salaries and employee benefits ................................... 18,743,055 14,543,025
Occupancy, net (see Note 8) ...................................... 6,469,989 4,561,266
Equipment costs, depreciation and maintenance .................... 833,341 779,470
Other operating .................................................. 5,073,568 1,914,884
------------ ------------
Total expenses ................................................. 46,658,136 33,355,702
------------ ------------
NET INCOME BEFORE INCOME TAXES .................................... 5,338,801 4,654,844
PROVISION FOR FEDERAL AND STATE INCOME TAXES (see Note 7) ......... 1,887,672 1,553,046
------------ ------------
Net income ..................................................... 3,451,129 3,101,798
RETAINED EARNINGS AT BEGINNING OF YEAR ............................ 11,863,774 8,761,976
------------ ------------
RETAINED EARNINGS AT END OF YEAR .................................. $ 15,314,903 $ 11,863,774
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................................ $ 3,451,129 $ 3,101,798
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit and insurance losses ............................ 8,985,187 6,147,733
Depreciation ......................................................... 628,852 574,429
Amortization of intangible asset ..................................... 1,692,825 134,180
Changes in operating assets and liabilities
Prepaid and other assets ............................................ (300,362) 1,490,944
Deferred tax asset .................................................. (549,236) (82,361)
Accounts payable and other accrued liabilities ...................... (208,293) 506,007
------------- -------------
Net cash provided by operating activities ......................... 13,700,102 11,869,730
------------- -------------
INVESTING ACTIVITIES
Increase in finance receivables, net .................................. (17,623,667) (14,122,842)
Increase in goodwill and loan premium from acquisitions ............... (7,548,884) (1,337,408)
Purchase of premises and equipment, net ............................... (999,649) (615,175)
Net assets acquired from branch acquisitions .......................... (19,332,921) (7,151,297)
------------- -------------
Net cash used in investing activities ............................. (45,505,121) (23,226,722)
------------- -------------
FINANCING ACTIVITIES
Net proceeds from term debt, subordinate debentures, and notes payable 34,292,262 13,819,314
------------- -------------
Net cash provided by financing activities ......................... 34,292,262 13,819,314
------------- -------------
Net increase in cash and cash equivalents ......................... 2,487,243 2,462,322
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .......................... 3,503,009 1,040,687
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................ $ 5,990,252 $ 3,503,009
============= =============
CASH PAID FOR
Interest .............................................................. $ 6,453,253 $ 4,512,281
============= =============
Income taxes .......................................................... $ 2,977,558 $ 857,812
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of FIRSTPLUS
Consumer Finance, Inc. (the Company) and its wholly owned subsidiaries:
National Loans, Inc, The Modern Finance Company, Southern Management
Corporation and FIRSTPLUS Consumer Finance of Kentucky. The Company is a
consumer finance company based in Dallas, Texas whose principal business is
originating direct consumer finance loans and purchasing retail installment
contracts from selected dealers and merchants. The Company operates finance
branches in Georgia, Mississippi, Ohio, South Carolina, Tennessee and Texas.
All significant intercompany accounts and transactions have been eliminated.
The Company is a wholly-owned subsidiary of FIRSTPLUS Financial Group,
Inc. (FPFG) of Dallas, Texas. The Company's direct subsidiaries resulted from
either a merger transaction between FPFG and the respective subsidiary or an
asset purchase by the Company. In the case of a merger between FPFG and the
respective direct subsidiary, the former shareholders of the direct subsidiary
exchanged all of the outstanding common stock for shares of FPFG. Following the
exchange of stock, which was accounted for as a pooling of interests, the
direct subsidiary became an indirect wholly-owned subsidiary of FPFG and a
direct subsidiary of the Company.
USE OF ESTIMATES
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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FINANCE RECEIVABLES
Finance receivables are reported at the principal balance outstanding, net
of unearned interest, the allowance for loan losses and charge-offs. Interest
included in the principal amount of pre-computed finance receivables is
recognized as revenue under the following methods by subsidiary:
NATIONAL LOANS -- interest actuarial.
MODERN FINANCE COMPANY -- rule of 78s collection.
SOUTHERN MANAGEMENT -- rule of 78s collection.
FIRSTPLUS CONSUMER FINANCE OF KENTUCKY -- rule of 78s accrual.
Other finance receivables are written on a simple interest basis, and
interest is recognized on an accrual basis.
Fees received for the origination of loans are deferred and amortized to
interest revenue over the average contractual lives of the loans using the
interest method. Unamortized amounts are recognized in income at the time the
loans are paid in full.
ALLOWANCE FOR CREDIT LOSSES
Unpaid finance receivable balances are charged to the allowance for credit
losses when considered to be uncollectible or if the cost of collection becomes
prohibitive. In addition, unpaid consumer loan receivable
F-33
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
balances are charged off against the allowance for credit losses no later than
upon six consecutive months of no payment. Recoveries on loans previously
charged off are credited to the allowance when received. The allowance for
credit losses is maintained at 1.25 percent to 10 percent of the net
outstanding loan balances, depending on the type of receivable. These
percentages are based on past loss experience, economic conditions, composition
of the loan portfolio and, in management's judgment, are sufficient to maintain
the allowance at a level that adequately provides for potential loan losses.
While management uses the best information available to make evaluations,
future adjustments to the allowance may be necessary if conditions differ
substantially from the assumptions used in making the calculations.
INSURANCE PREMIUMS
Insurance premiums for credit life, accident and health, involuntary
unemployment, and property insurance written in connection with certain loans,
net of refunds and applicable advance insurance commissions retained by the
Company, are remitted monthly to an insurance company. All commissions are
credited to unearned insurance commissions and accreted to income over the life
of the related insurance contracts, using a method similar to that used for the
recognition of interest income.
PREMISES AND EQUIPMENT
Asset cost is reported net of accumulated depreciation. Depreciation and
amortization of property, equipment, and leasehold improvements are computed on
the straight-line method over the estimated useful lives of the related assets.
These assets are reviewed for impairment when events indicate the carrying
amount may not be recoverable. Maintenance and repairs are charged to
operations as incurred. Additions and betterments are capitalized.
STATEMENT OF CASH FLOWS
Cash in excess of daily requirements is invested in overnight repurchase
funds. These amounts are deemed to be cash equivalents for purposes of the
consolidated statement of cash flows.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under SFAS 109, deferred tax assets and liabilities are recognized for the
expected future tax consequences of events that have been recognized in the
consolidated financial statements or tax return. 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 realized or settled. Additionally, the Company participates in a tax
sharing agreement whereby it is included in the consolidated federal tax
returns of FPFG but pays taxes to FPFG based on its separate taxable income.
Income tax expense is the sum of the current year income tax due or refundable
and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
F-34
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
BUSINESS COMBINATION AND OTHER ACQUISITIONS
In April 1998, the Company completed the acquisition of substantially all
of the assets of nine branches of ABC Credit Corporation for approximately
$13.7 million. The branches are located in Kentucky. The excess of the purchase
price over net assets acquired was approximately $2.8 million which is being
amortized over ten years. During 1998, the Company purchased substantially all
of the net assets of twenty-five additional consumer loan offices for
approximately $11.9 million. The excess of the purchase price over net assets
acquired was approximately $3.5 million which is being amortized over periods
ranging from 3 to 10 years. The acquisitions were accounted for under the
purchase method of accounting and the results of operations of the acquired
locations are included in the consolidated financial statements from the date
of acquisition.
NOTE 2 -- FINANCE RECEIVABLES
The Company's finance receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Direct consumer loans ................................................... $ 108,686,752 $ 87,995,631
Retail contracts ........................................................ 40,111,036 18,705,366
Interest receivable ..................................................... 411,743 136,879
------------- ------------
149,209,531 106,837,876
Less:
Unearned interest revenue, insurance commissions and premiums ......... 31,150,539 19,955,494
Allowance for credit losses ........................................... 6,585,002 4,343,305
------------- ------------
Net consumer loans receivable ........................................ $ 111,473,990 $ 82,539,077
============= ============
</TABLE>
A majority of consumer loans are made for periods of up to five years and
are either unsecured or collateralized by personal property such as automobiles
and appliances. Certain consumer loans are collateralized by first or second
mortgages on real estate and are made for periods of up to 15 years.
An analysis of the Company's allowance for credit losses is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Balance, January 1 ........................ $ 4,349,190 $ 3,120,059
Provision charged against income .......... 7,872,090 6,147,733
Provision from purchase of loans .......... 2,597,728 947,131
Loans receivable charged off, net ......... (8,234,006) (5,865,733)
------------ ------------
Balance, December 31 ...................... $ 6,585,002 $ 4,349,190
============ ============
</TABLE>
In addition to the above allowance for credit losses, the Company
withholds certain percentage of proceeds remitted to automobile dealerships and
other durable good retailers for loans purchased. These dealer reserves and
holdbacks are allocated between the dealer and the Company, and the amounts
allocated are remitted back to the dealer and recognized by the Company upon
full payment of the respective dealers' aggregate loans. At December 31, 1998
and 1997, the dealer reserves and holdbacks amounted to approximately
$1,233,000 and $2,239,000, respectively.
F-35
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- PREMISES AND EQUIPMENT
Premises and equipment is stated at cost less accumulated depreciation and
is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Land and land improvements ................... $ 189,720 $ 189,720
Buildings and leasehold improvements ......... 1,363,173 1,314,609
Furniture and fixtures ....................... 634,389 2,927,947
Office machines and equipment ................ 4,481,182 1,021,614
----------- ------------
6,668,464 5,453,890
Less accumulated depreciation ................ 3,571,910 (2,877,719)
----------- ------------
$ 3,096,554 $ 2,576,171
=========== ============
</TABLE>
NOTE 4 -- GOODWILL
The Company from time to time enters into agreements to acquire loan
portfolios and/or net assets of other companies. The excess of the purchase
price over the net assets acquired results in an intangible asset and is
amortized over periods ranging from 3 to 10 years. The acquisitions are
accounted for under the purchase method of accounting and the results of
operations of the acquired operations are included in the consolidated
financial statements from the date of acquisition. At December 31, 1998 and
1997, the intangible asset amounted to $7,193,467 and $1,337,408, respectively.
NOTE 5 -- TERM DEBT AND NOTES PAYABLE
The Company has entered into line-of-credit agreements secured by certain
assets of the Company. As of December 31, 1998 and 1997, $73,136,066 and
$47,373,466 was advanced of the $95,000,000 and $57,750,000 available under
these agreements. The agreements are for periods up to two years and interest
is charged at an adjusted rate of prime or Libor. Pursuant to events outlined
in Note 11, Subsequent Event, the line-of-credit agreements of the Company were
repaid after December 31, 1998.
The Company entered into a $632,000 five-year mortgage agreement with a
bank in 1995 with interest at 8.25 percent. At December 31, 1998 and 1997 the
outstanding balance is $303,589 and $349,975, respectively. The mortgage
agreement requires monthly principal and interest payments of $6,132 until
August, 2000, at which time the remaining balance is due and payable. As
allowed by the agreement, two voluntary principal payments of $100,000 have
been made. The mortgage agreement is secured by the Company's downtown Columbus
facility.
The aggregate amount of future maturities under term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------
<S> <C>
1999 ................... $ 36,738
2000 ................... 266,851
--------
$303,589
========
</TABLE>
F-36
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- SUBORDINATED INVESTMENT CERTIFICATES AND NOTES PAYABLE
Subordinated Investment Certificates and Notes Payable consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Subordinate debentures, with interest at a rate of prime plus .25 percent,
payable through 1999 ................................................... $ 2,200,000 $ 2,257,385
Money market certificates with maturities of 6 to 84 months .............. 21,910,017 19,872,492
------------ ------------
$ 24,110,017 $ 22,129,877
============ ============
</TABLE>
The average weighted interest rate on all money market certificates
outstanding at December 31, 1998 and 1997 is approximately 7%. The certificates
mature according to the terms stated above, or at the option of the holder for
like period thereafter, subject to 60 days' notice for payment.
The maturities of the subordinated investment certificates due in the next
five years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ---------------------------------
<S> <C>
1999 .......................... $ 9,026,017
2000 .......................... 4,044,825
2001 .......................... 5,115,450
2002 .......................... 2,497,625
2003 .......................... 748,250
Thereafter .................... 477,850
------------
$ 21,910,017
============
</TABLE>
The certificates are subordinated to indebtedness to banks and other
financial institutions.
NOTE 7 -- INCOME TAXES
Deferred income taxes are primarily the result of reporting the allowance
for loan loss and the accrual of certain expenses differently for income tax
purposes than for financial reporting purposes. The types of temporary
differences and their related tax effects that give rise to the net deferred
income tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Allowance for credit losses ......... $ 1,346,000 $ 1,156,863
Goodwill ............................ 387,351 --
Other assets ........................ 94,442 121,694
----------- -----------
1,827,793 1,278,557
Valuation Allowance ................. -- --
----------- -----------
Net deferred tax asset .............. $ 1,827,793 $ 1,278,557
=========== ===========
</TABLE>
F-37
<PAGE>
FIRSTPLUS CONSUMER FINANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES -- (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Current ............................ $ 2,352,475 $ 1,861,938
Deferred -- other .................. (464,803) (308,892)
----------- -----------
Provision for income taxes ......... $ 1,887,672 $ 1,553,046
=========== ===========
</TABLE>
Differences between the statutory federal income tax rate and the
Company's effective tax rate result from the nondeductibility of certain
business expenses.
NOTE 8 -- COMMITMENTS
The Company occupies space under leases with original terms from one to
four years. Net rental expense for the year ended December 31, 1998 and 1997
was $1,687,283 and 1,189,300, respectively.
Future minimum rental payments under leases as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999 ........................ $ 1,523,574
2000 ........................ 1,114,517
2001 ........................ 791,510
2002 ........................ 585,074
2003 and thereafter ......... 1,231,421
-----------
$ 5,246,096
===========
</TABLE>
NOTE 9 -- RETIREMENT PLAN
The Company's employees had the option to participate in the defined
contribution employee benefit plan of FPFG. The Company's contributions to the
FPFG plan are discretionary and allocated to participants based on length of
service and base salary. During 1998, the Company did not make any
contributions to the plan.
NOTE 10 -- TRANSACTIONS WITH PARENT
During 1998 the Company purchased approximately $.5 million in mortgage
loans and retail installment contracts secured by real estate from FPFG.
Additionally, payroll and, from time to time, other expense items for the
Company are processed and funded by FPFG. In connection with these services at
December 31, 1998 the Company owed approximately $9,889,717 to FPFG. Pursuant
to events outlined in Note 11, Subsequent Event, advances from FPFG were
repaid.
NOTE 11 -- SUBSEQUENT EVENT
On February 1, 1999, The Thaxton Investment Corporation (TIC) purchased
all shares of the Company's subsidiaries stock and the net assets of the
Company pursuant to a stock purchase agreement between TIC and FPFG. The
purchase by TIC was facilitated by the use of a leveraged buyout in which TIC
obtained a significant amount of the funds necessary to purchase the Company's
common stock by pledging the Company's assets in exchange for a loan to TIC.
F-38
<PAGE>
THAXTON INVESTMENT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1999
<TABLE>
<CAPTION>
($ IN 000'S)
-------------
<S> <C>
ASSETS
Cash and cash equivalents ...................................... $ 5,992
Finance receivables, net ....................................... 99,205
Premises and equipment, net .................................... 2,524
Goodwill ....................................................... 29,107
Prepaid and other assets ....................................... 5,045
--------
Total Assets ................................................... $141,873
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Term debt and notes payable .................................... $110,372
Subordinated investment certificates and notes payable ......... 23,858
Accounts payable and other liabilites .......................... 6,426
--------
Total Liabilities .............................................. 140,656
--------
Common stock ................................................... 250
Retained earnings .............................................. 967
--------
Total stockholder's equity ..................................... 1,217
--------
Total Liabilities and Stockholder's Equity ..................... $141,873
========
</TABLE>
See notes to financial statements
F-39
<PAGE>
THAXTON INVESTMENT CORPORATION
(AND FIRSTPLUS CONSUMER FINANCE, INC. -- PREDECESSOR CORPORATION)
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
($ IN 000'S)
<TABLE>
<CAPTION>
THAXTON FIRSTPLUS CONSUMER
INVESTMENT FINANCE, INC.
CORPORATION (PREDECESSOR CORPORATION)
--------------- -----------------------------------
FOR THE FIVE FOR THE ONE FOR THE SIX
MONTHS ENDED MONTH ENDED MONTHS ENDED
JUNE 30, 1999 JANUARY 31, 1999 JUNE 30, 1998
--------------- ------------------ --------------
<S> <C> <C> <C>
Interest and fee income ....................................... $19,301 $4,061 $20,951
Interest expense .............................................. 5,066 631 3,026
------- ------ -------
Net interest income ........................................... 14,235 3,430 17,925
Provision for credit losses ................................... 2,995 700 2,868
------- ------ -------
Net interest income after provision for credit losses ......... 11,240 2,730 15,057
Insurance commissions, net .................................... 2,532 402 2,439
Other income .................................................. 260 46 57
------- ------ -------
Total other income ............................................ 2,792 448 2,496
Compensation and employee benefits ............................ 7,183 1,630 8,687
Other expense ................................................. 5,439 927 5,271
------- ------ -------
Total operating expenses ...................................... 12,622 2,557 13,958
Income before income taxes .................................... 1,410 621 3,595
Income tax expense ............................................ 443 195 1,222
------- ------ -------
Net income .................................................... $ 967 $ 426 $ 2,373
======= ====== =======
</TABLE>
See notes to financial statements
F-40
<PAGE>
THAXTON INVESTMENT CORPORATION
(AND FIRSTPLUS CONSUMER FINANCE, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
($ IN 000'S)
<TABLE>
<CAPTION>
THAXTON FIRSTPLUS CONSUMER
INVESTMENT FINANCE INC.
CORPORATION (PREDECESSOR CORPORATION)
--------------- -----------------------------------
FOR THE FIVE FOR THE ONE FOR THE SIX
MONTHS ENDED MONTH ENDED MONTHS ENDED
JUNE 30, 1999 JANUARY 31, 1999 JUNE 30, 1998
--------------- ------------------ --------------
<S> <C> <C> <C>
Net cash provided by operating activities .................... $ 5,303 $ 8,441 $ 9,728
Net cash provided by (used in) investing activities .......... 6,299 2,258 (38,523)
Net cash provided by (used in) financing activities .......... (13,637) (8,662) 31,253
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents ......... (2,035) 2,037 2,458
Cash and cash equivalents at beginning of period ............. 8,027 5,990 3,503
--------- -------- ---------
Cash and cash equivalents at end of period ................... $ 5,992 $ 8,027 $ 5,961
========= ======== =========
</TABLE>
See notes to financial statements
F-41
<PAGE>
THAXTON INVESTMENT CORP.
(FIRSTPLUS CONSUMER FINANCE, INC. -- PREDECESSOR CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS ORGANIZATION
BUSINESS ORGANIZATION
Prior to February 1, 1999, FIRSTPLUS Consumer Finance, Inc. ("FPCF")
operated as a consumer finance company with approximately 144 branches in the
states of South Carolina, Georgia, Ohio, Tennessee, Mississippi, Kentucky, and
Texas. FPCF operated as a wholly owned subsidiary of FIRSTPLUS Financial Group,
Inc. On February 1, 1999, the assets and liabilities of FCPF, including four
corporate operating subsidiaries, were purchased by Thaxton Investment Corp.
("TIC"). TIC is wholly owned by James D. Thaxton, and was formed for the
express purpose of operating this business. The acquisition was accounted for
under the purchase method of accounting. Accordingly, the results of operations
are included in the accompanying condensed consolidated financial statements
from the date of acquisition. The purchase price of $49.4 million in cash and
notes has been allocated to assets acquired and liabilities assumed based upon
their fair values at the date of acquisition. The excess of the purchase price
over the fair value of net assets acquired of approximately $29.6 million has
been recorded as goodwill and is being amortized over 20 years. The financial
statements are presented to show operations of comparable business units over
the periods.
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The financial statements for the six month period ended June 30, 1998
reflect the historical financial statements of FPCF. The financial statements
for the six month period ended June 30, 1999 reflect the historical financial
sstatements fo FPCF for the one month period ended January 31, 1999 and the
historical financial statements of TIC for the five months ended June 30, 1999,
its period of operation subsequent to the purchase of FPCF on February 1, 1999.
The principal business of both FPCF and TIC is originating direct consumer
finance loans and purchasing retail installment contracts from selected dealers
and merchants. The Companies operate finance branches in Georgia, Mississippi,
Ohio, South Carolina, Tennessee and Texas. All significant intercompany
accounts and transactions have been eliminated.
USE OF ESTIMATES
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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Information with respect to the June 30, 1999 and 1998 financial
statements have not been audited by independent auditors, but in the opinion of
management reflect all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the operations of the
businesses. Users of financial information produced for interim periods are
encouraged to refore to the footnotes contained in the annual reports of the
companies, on forms 10-K and 10-KSB when reviewing interim statements. The
results of operations for the six months are not necessarily indicative of
results to be expected for the entire fiscal year.
F-42
<PAGE>
THAXTON INVESTMENT CORP.
(FIRSTPLUS CONSUMER FINANCE, INC. -- PREDECESSOR CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS
ORGANIZATION -- (CONTINUED)
FINANCE RECEIVABLES
Finance receivables are reported at the principal balances outstanding,
net of unearned interest and insurance income, the allowance for credit losses,
and charge offs. Interest included in the principal amount of pre-computed
finance receivables is recognized as revenue primarily using the interest
actuarial accrual method. Prior to its acquisition by TIC, certain subsidiaries
utilized other methods of recognizing interest revenue, which produced results
not materially different than those that would have resulted from using the
interest actuarial accrual method.
Other finance receivables are written on a simple interest basis, and
interest is recognized on an accrual basis.
Fees received for the origination of loans are deferred and amortized to
interest revenue over the average contractual lives of the loans using the
interest method. Unamortized amounts are recognized in income at the time the
loans are paid in full.
STATEMENT OF CASH FLOWS
For FPCF, cash in excess of daily requirements is invested in overnight
repurchase funds. These amounts are deemed to be cash equivalents for purposes
of the consolidated statement of cash flows. TIC utilizes cash in excess of
daily requirements to pay down borrowings from its credit facility.
Because of limitations imposed in its credit insurance re-insurance
arrangements, certain cash balances are restricted in nature, and cannot be
readily accessed by the company. As of June 30, 1999, $3.5 million of cash was
restricted.
INCOME TAXES
Both TIC and FPCF account for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
Under SFAS 109, deferred tax assets and liabilities are recognized for the
expected future tax consequences of events that have been recognized in the
consolidated financial statements or tax return. 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 realized or settled. Additionally, FPCF participated in a tax sharing
agreement whereby it was included in the consolidated federal tax returns of
its former parent company, but paid taxes to that parent based on its separate
taxable income. Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
F-43
<PAGE>
THAXTON INVESTMENT CORP.
(FIRSTPLUS CONSUMER FINANCE, INC. -- PREDECESSOR CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 2 -- FINANCE RECEIVABLES
Finance receivables are reported at the principal balance outstanding, net
of unearned interest, the allowance for loan losses and charge-offs. TIC's
finance receivables consist of the following at June 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Direct consumer loans ................................................... $86,241,000
Real estate loans ....................................................... 27,444,000
Sales finance and vehicle secured loans ................................. 20,648,000
-----------
134,333,000
Less:
Unearned interest revenue, insurance commissions and premiums ......... 29,407,000
Allowance for credit losses ........................................... 5,721,000
-----------
Net consumer loans receivable ......................................... $99,205,000
===========
</TABLE>
NOTE 3 -- TERM DEBT AND NOTES PAYABLE
At June 30, 1999, TIC maintained a line of credit agreement with a
commercial finance company for $150 million, maturing on October 31, 2003. At
June 30, 1999, $110 million was outstanding under this credit line, at rates
ranging between lenders' prime borrowing rate + 1%, and lender's prime
borrowing rate + 3 1/2%.
The borrowing availability is limited by outstanding receivables and other
restrictions. As a result of these limitations, TIC had $2.6 million additional
available borrowing capacity under this credit facility at June 30, 1999.
F-44
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF THE THAXTON GROUP, INC.
The following unaudited PRO FORMA consolidated condensed statements of
operations for the year ended December 31, 1998 and for the six-month period
ended June 30, 1999 give effect to the acquisition of Thaxton Investment as if
it occurred on January 1, 1998. The following unaudited PRO FORMA consolidated
condensed balance sheet at June 30, 1999 gives effect to the acquisition of
Thaxton Investment as if it occurred on June 30, 1999.
The unaudited PRO FORMA consolidated financial data and accompanying notes
should be read in conjunction with the consolidated financial statements and
related notes of Thaxton Group and the consolidated financial statements and
related notes of Thaxton Investment, all of which are included elsewhere in
this prospectus. Management believes that the assumptions used in the following
statements provide a reasonable basis upon which to present the unaudited PRO
FORMA financial data. The unaudited PRO FORMA consolidated financial data is
provided for informational purposes only and should not be construed to be
indicative of Thaxton's financial condition, results from operations or
covenant compliance had the transaction described above been consummated on the
dates assumed, and is not intended to project Thaxton Group's financial
condition on any future date or Thaxton Group's results of operation for any
future period.
F-45
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
THAXTON PRO FORMA TOTAL
ACTUAL INVESTMENT ADJUSTMENTS PRO FORMA
------------- ------------ ----------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest and fee income ......................................... $ 15,727 $43,932 $ 59,659
Interest expense ................................................ 5,037 6,553 4,922(1) 16,512
--------- ------- ------- ---------
Net interest income ........................................... 10,690 37,379 (4,922) 43,147
Provision for credit losses ..................................... 4,047 7,872 -- 11,919
--------- ------- -------- ---------
Net interest income after provision for credit losses ......... 6,643 29,507 (4,922) 31,228
Insurance commissions, net ...................................... 6,591 6,952 13,543
Other income .................................................... 962 -- -- 962
--------- ------- -------- ---------
Total Other Income ............................................ 7,553 6,952 -- 14,505
Compensation and employee benefits .............................. 8,636 18,743 27,379
Net occupancy ................................................... 1,460 6,470 7,930
Other ........................................................... 5,681 5,907 (214)(2) 11,374
--------- ------- -------- ---------
Total operating expenses ...................................... 15,777 31,120 (214) 46,683
Income (loss) before income tax expense (benefit) ............... (1,581) 5,339 (4,708) (950)
Income tax expense(benefit) ..................................... (497) 1,888 (1,174)(3) 217
--------- ------- -------- ---------
Net income (loss) ............................................... $ (1,084) $ 3,451 $ (3,534) $ (1,167)
========= ======= =========== =========
Dividends on preferred stock .................................... $ 258 $ 258
========= =========
Net income (loss) applicable to common shareholders ............. $ (1,342) $ (1,425)
========= =========
Net income (loss) per common share .............................. $ (0.35) $ (0.20)
========= =========
</TABLE>
F-46
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(1) Reflects the additional interest expense and cost of borrowings that would
have been incurred by Thaxton Group, to finance the acquisition of
FirstPlus Consumer Finance, Inc.
(2) Reflects the amortization over an assumed life of 20 years of the excess
cost over net assets acquired incurred as a result of the acquisition of
FirstPlus Consumer Finance, Inc.
(3) Reflects the tax benefit or cost associated with the application of the PRO
FORMA adjustments.
F-47
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX-MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
THAXTON PRO FORMA TOTAL
ACTUAL INVESTMENT ADJUSTMENTS PRO FORMA
----------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Interest and fee income ........................................ $ 11,513 $23,362 $ 34,875
Interest expense ............................................... 3,205 5,697 396(1) 9,298
-------- ------- ----- --------
Net interest income ........................................... 8,308 17,665 (396) 25,577
Provision for credit losses .................................... 1,851 3,695 -- 5,546
-------- ------- ------ --------
Net interest income after provision for credit losses ......... 6,457 13,970 (396) 20,031
Insurance commissions, net ..................................... 5,061 2,934 7,995
Other income ................................................... 992 306 -- 1,298
-------- ------- ------ --------
Total Other Income ............................................ 6,053 3,240 -- 9,293
Compensation and employee benefits ............................. 7,393 8,813 16,206
Net occupancy .................................................. 1,138 1,329 2,467
Other .......................................................... 4,202 5,037 (18)(2) 9,221
-------- ------- ------ --------
Total operating expenses ...................................... 12,733 15,179 (18) 27,894
Income (loss) before income tax expense (benefit) .............. (223) 2,031 (378) 1,430
Income tax expense(benefit) .................................... (130) 638 46 (3) 554
-------- ------- --------- --------
Net income (loss) .............................................. $ (93) $ 1,393 $ (424) $ 876
======== ======= ========= ========
Dividends on preferred stock ................................... $ 357 $ 357
======== ========
Net income (loss) applicable to common shareholders ............ $ (450) $ 519
======== ========
Net income (loss) per common share ............................. $ (0.12) $ 0.07
========= ========
</TABLE>
F-48
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX-MONTHS ENDED JUNE 30, 1999
(1) Reflects one month of additional interest expense and cost of borrowings
(for January 1999) that would have been incurred by Thaxton Group to
finance the acquisition of FirstPlus Consumer Finance, Inc. All additional
costs of borrowing incurred after February 1, 1999, are included in the
historical results of operations for Thaxton Investment.
(2) Reflects the amortization over an assumed life of 20 years of the excess
cost over net assets acquired incurred as a result of the acquisition of
FirstPlus Consumer Finance, Inc. Amortization incurred after February 1,
1999 is included in the historical results of operations for Thaxton
Investment.
(3) Reflects the tax benefit or cost associated with the application of the PRO
FORMA adjustments.
F-49
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT JUNE 30, 1999
<TABLE>
<CAPTION>
THAXTON PRO FORMA TOTAL
ACTUAL INVESTMENT ADJUSTMENTS PRO FORMA
---------- ------------ ----------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Cash ................................................ $ 990 $ 5,992 $ 6,982
Finance receivables, net ............................ 66,267 49,205 165,472
Premises and equipment, net ......................... 2,885 2,524 5,409
Accounts receivable ................................. 1,932 2,542 (250) (1) 4,224
Repossessed automobiles ............................. 304 -- 304
Goodwill and other intangible assets ................ 9,228 29,107 38,335
Other assets ........................................ 3,947 2,503 6,450
------- -------- ---------
Total assets ....................................... $85,553 $141,873 (250) $ 227,176
======= ======== ==== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accrued interest payable ............................ $ 433 $ 145 $ 578
Notes payable ....................................... 70,432 134,230 204,662
Notes payable to affiliates ......................... 775 -- 775
Accounts payable .................................... 1,881 4,067 5,948
Employee savings plan ............................... 1,197 -- 1,197
Other liabilities ................................... 337 2,219 2,551
------- -------- ---------
Total liabilities .................................. 75,055 140,658 215,711
------- -------- ---------
STOCKHOLDERS' EQUITY
Preferred stock $0.01 par value
Series A ........................................... 1 1
Series C ........................................... 1 1
Series E ........................................... 8 8
Common stock $0.01 par value ........................ 38 250 (218) (2) 70
Additional paid-in-capital .......................... 10,205 -- (32) (3) 10,173
Retained Earnings ................................... 245 967 1,212
------- -------- ---------
Total Stockholders' Equity ......................... 10,498 1,217 (250) 11,465
------- -------- ---- ---------
Total liabilities and Stockholders' Equity ......... $85,553 $141,873 (250) $ 227,176
======= ======== ==== =========
</TABLE>
F-50
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AT JUNE 30, 1999
(1) Reflects reclassification of note receivable from affiliate, James D.
Thaxton, majority shareholder and Chief Executive Officer of Thaxton
Group, as a reduction of shareholders equity. In February 1999, Mr.
Thaxton utilized the proceeds of this note to purchase $250,000 of common
stock of Thaxton Investment.
(2) Reflects the elimination of the common stock of Thaxton Investment and the
issuance of 3,223,000 shares of Thaxton Group stock recorded at $.01 per
share par value.
(3) Reflects the reclassification of the $250,000 note receivable from
affiliate, net of the issuance of 3,223,000 shares of $.01 par value
Thaxton Group stock.
F-51
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 THAXTON GROUP. 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 THAXTON GROUP.
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
----------------
NOVEMBER 8, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
