UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(MARK ONE)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______ to ______
Commission file number 333-28719
THE THAXTON GROUP, INC.
(Name of small business issuer in its charter)
SOUTH CAROLINA 57-0669498
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1524 PAGELAND HIGHWAY, LANCASTER, SOUTH CAROLINA 29720
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(Address of principal executive
offices)
Issuer's telephone number: 803-285-4337
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the exchange Act:
Title of each class
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None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes _X_ No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year. $23,280,731
At March 25, 1999, there were 3,763,836 shares of common stock outstanding. The
aggregate market value of the shares held by non-affiliates of the registrant,
based upon the price at which the stock was sold on March 17, 1999, is
approximately $3,329,180.
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
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THE THAXTON GROUP, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
Item
No. Page
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PART I
<S> <C>
1. Description of Business 2
2. Description of Property 8
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for Common Equity and Related Stockholder Matters 9
6. Management's Discussion and Analysis 10
7. Financial Statements 17
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
PART III
9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act 36
10. Executive Compensation 37
11. Security Ownership of Certain Beneficial Owners and Management 37
12. Certain Relationships and Related Transactions 38
13. Exhibits and Reports on Form 8-K 39
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Thaxton Group, Inc. and its subsidiaries (the "Company") were organized in
July 1978 as C.L. Thaxton & Sons, Inc., and from that date until 1991 was
primarily engaged in making and servicing direct consumer loans ("Direct Loans")
and insurance premium finance loans ("Premium Finance Contracts") to persons
with limited credit histories, low incomes, or past credit problems ("Non-Prime
Borrowers"). In 1991, the Company made a strategic decision to begin
diversifying its portfolio by actively seeking to finance purchases of used
automobiles ("Automobile Sales Contracts") by Non-Prime Borrowers and has since
evolved into a diversified consumer financial services company. The Company also
sells credit related insurance products and, through its subsidiary, Thaxton
Insurance Group, Inc. ("Thaxton Insurance"), on an agency basis, various lines
of property and casualty, life, and accident and health insurance. The Company
also entered the mortgage brokerage business during 1996, and in 1998 acquired
Paragon, Inc., ("Paragon") a mortgage banking company engaged in the
origination, funding, and whole loan sale of primarily "B" and "C" credit
quality residential mortgages. In 1998 the Company also began making factoring
and commercial loans to smaller sized businesses through a wholly owned
subsidiary, Thaxton Commercial Lending, Inc. ("Commercial").
THE INDUSTRY
The segment of the consumer finance industry in which the Company operates,
which is commonly called the "non-prime credit market," provides financing to
consumers with limited credit histories, low incomes, or past credit problems.
These consumers generally do not have access to the same variety of sources of
consumer credit as borrowers with long credit histories, no defaults, and stable
employment, because they do not meet the stringent objective credit standards
imposed by most traditional lenders. The Company, like its competitors in the
same segment of the consumer finance industry, generally charges interest to
Non-prime Borrowers at the maximum rate permitted by law or, in states such as
South Carolina where there are no legal maximum rates, at competitive rates
commensurate with the increased default risk and the higher cost of servicing
and administering a portfolio of loans to such borrowers. By contrast,
commercial banks, captive financing subsidiaries of automobile manufacturers,
and other traditional sources of consumer credit to prime borrowers typically
impose more stringent credit requirements and generally charge lower interest
rates.
The non-prime consumer credit market is highly fragmented, consisting of many
national, regional, and local competitors, is characterized by relative ease of
entry. Management believes that most of these companies are concentrating their
activities on providing financing to Non-prime Borrowers with less extensive
credit problems who are purchasing late model used cars (coming off lease or
former rental cars) from franchised automobile dealers. By contrast, the Company
concentrates on providing financing to Non-prime Borrowers who have more
extensive credit problems and are purchasing lower-priced, older model
automobiles from independent dealers and making direct loans to Non-prime
Borrowers to meet short-term cash needs.
The premium finance industry for personal lines of insurance is also highly
fragmented. Insurance companies that engage in direct writing of insurance
policies generally provide financing to their customers who need the service.
Numerous small independent finance companies such as the Company are engaged in
providing premium financing for personal lines of insurance purchased by
Non-prime Borrowers through independent insurance agents. Because the rates they
charge are highly regulated, these companies compete primarily on the basis of
efficiency in providing the financing and servicing the loans. A significant
number of independent insurance agents provide premium financing to their
customers either directly or through affiliated entities. As banks are allowed
to enter the insurance business, they also are increasingly engaging in the
premium finance business.
Independent insurance agencies represent numerous insurance carriers, and
typically place a customer's business with the carrier whose combination of
features and price best match the customer's needs. In comparison, direct agents
represent only one carrier. Most carriers find use of independent agencies to be
a more cost effective method of selling their products than using a direct agent
force. Competition in the independent insurance agency business is intense.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers a broad range of
insurance products underwritten by reputable insurance companies.
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AUTOMOBILE SALES CONTRACT PURCHASES
Set forth below is a description of the process that the Company follows in
connection with its purchase of an Automobile Sales Contract from an independent
dealer and the sale of ancillary insurance products.
DEALER SOLICITATION. The Company solicits business from independent dealers
through the business development efforts of the manager of each finance office
and regional supervisors. Dealers in the area are evaluated by the office
manager with a view to ensuring that the Company purchases Automobile Sales
Contracts from reputable dealers carrying an inventory of quality used
automobiles. A relationship with a dealer begins only after the soundness of the
dealer's business is determined by a credit investigation of the dealer,
inquiries with state regulatory agencies and inquiries of local civic and
community organizations. The Company seeks to form relationships with dealers
that have been independently operating for a sufficient period of time to have
established a base of repeat customers with a track record of paying their
obligations under Automobile Sales Contracts despite an otherwise non-prime
credit history. The Company tracks the monthly performance of borrowers'
accounts by dealer, allowing the Company to review and evaluate the quality of
the Automobile Sales Contracts purchased from each dealer. This procedure allows
the Company to terminate business dealings with a dealer quickly if the
Automobile Sales Contracts purchased from that dealer have a higher than average
rate of delinquency.
DEALER AGREEMENTS. The Company enters into a non-exclusive agreement with each
dealer (a "Dealer Agreement") which sets forth the terms and conditions under
which the Company will purchase Automobile Sales Contracts. The Dealer Agreement
provides that all Automobile Sales Contracts sold to the Company are without
recourse to the dealer with respect to the credit risk of the borrower, except
for Automobile Sales Contracts for vehicles sold to relatives or employees of
the dealer. A Dealer Agreement includes representations and warranties of the
dealer that relate generally to such matters as whether the dealer has (i) filed
an application for a certificate of title showing a first lien in favor of the
Company, (ii) obtained the full down payment specified in the Automobile Sales
Contract either in cash or in the form of cash and an allowance for a vehicle
trade-in and (iii) complied with applicable state and federal consumer credit
protection laws relating to Automobile Sales Contracts. If the dealer breaches
the terms of the Dealer Agreement with respect to any Automobile Sales Contract
purchased by the Company or if the dealer's customer withholds payment as
required under any Automobile Sales Contract because of a claim, defense,
counterclaim, or setoff against the dealer, the dealer is obligated to
repurchase the Automobile Sales Contract on demand by the Company for its net
unpaid balance. If the purchaser of the automobile recovers any amount from the
Company as a result of a claim against the dealer, the Dealer Agreement provides
that the dealer will reimburse the Company for any amounts paid the customer and
for any costs incurred as a result of such claim.
The Dealer Agreement allows the Company to withhold a specified percentage of
the principal amount of each Automobile Sales Contract purchased, an arrangement
designed to protect the Company from credit losses on Automobile Sales
Contracts. These dealer reserves, which range from five to 10% of the net amount
of each Automobile Sales Contract purchased, are negotiated on a
dealer-by-dealer basis and are subject to change based upon the collection
history of the Automobile Sales Contracts purchased from each dealer. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
ORIGINATION OF AUTOMOBILE SALES CONTRACTS. Automobile Sales Contracts purchased
by the Company are originated by dealers when they sell a used car at retail to
a customer. The dealer completes and the customer signs a retail installment
contract and security agreement (giving the dealer a security interest in the
vehicle financed) on a printed form provided by the Company, which includes the
extensive disclosures required by state and federal law regarding such matters
as the annual percentage rate, the finance charge, the amount financed, the
total amount of all scheduled payments, and the total sale price. The contract
also includes a section where the customer may indicate whether he or she
desires to purchase credit life and credit accident and health insurance, the
premiums for which are included in the amount financed if the customer elects to
purchase credit insurance. The printed form identifies the Company as the
intended assignee of the contract and the terms and conditions of the assignment
to the Company are printed on the back of the form. The form specifically
provides that the terms of the assignment are subject to the terms of the Dealer
Agreement between the Company and the dealer.
The maximum interest rates on Automobile Sales Contracts originated in South
Carolina are based upon the maximum rate filed by the originating dealer with
state regulatory authorities. Such rates are not subject to a statutory maximum.
The maximum interest rates on Automobile Sales Contracts originated in North
Carolina are subject to a statutory maximum based on the model year of the
vehicle. Rates on used automobile purchases range from 18% per annum on vehicles
one or two model years old to 29% per annum on vehicles more than four model
years old. Interest rates on Automobile Sales Contracts originated in Virginia,
Georgia, and Tennessee are not subject to regulation. The actual interest rate
on an Automobile Sales Contract is set within statutory limits, if
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applicable, based upon the borrower's credit profile, the collateral, and market
conditions.
CREDIT EVALUATION AND APPROVAL PROCEDURES. The Company applies underwriting
standards in purchasing Automobile Sales Contracts that take into account
principally the degree of a proposed buyer's creditworthiness and the collateral
value of the vehicle being financed. If a borrower elects to finance the
purchase of an automobile through a dealer with whom the Company has an
established relationship, which is typically the case, the dealer will submit
the borrower's credit application to the Company for review and proposed
transaction terms. The office manager, or other office personnel under the
manager's supervision, conducts the credit evaluation review. This review
generally takes into account, among other things, the borrower's credit history,
ability to pay, stability of residence, employment history, income,
discretionary income, and debt service ratio, as well as the collateral value of
the vehicle. The borrower's credit history is assessed principally through the
evaluation of a credit bureau report which is obtained immediately after receipt
of an application from a dealer. The Company uses a standard application
analysis score sheet to conduct a credit evaluation that incorporates the
factors described above. Unless the borrower's total score falls below a
specified cut-off point, the office manager has the authority to approve the
purchase of the Automobile Sales Contract, up to his credit limit, with no
further review. If the borrower's total score falls below the specified cut-off
point, the office manager must receive approval from a regional supervisor
before approving the application for credit.
Generally, the Company will not finance more than 100% of the average trade-in
value of the automobile as set forth in the current edition of the National
Association of Automobile Dealers Official Used Car Guide and requires that a
borrower make a down payment of at least 10% of the purchase price. In certain
limited instances when the borrower is unable to make a sufficiently large down
payment, the Company will agree to purchase the Automobile Sales Contract but
will issue to the dealer a "deferred certificate" for the difference between the
average trade-in value of the automobile and the portion of the sale price not
covered by the borrower's down payment. Only when the borrower has paid the
entire balance of the Automobile Sales Contract is the Company obligated to pay
to the dealer the amount of the deferred certificate.
AUTOMOBILE SALES CONTRACT PURCHASES. Upon consummation of the sale of the
automobile to the borrower, the dealer delivers all required documentation to
the Company's office. The required documentation includes the executed
Automobile Sales Contract, proof of title indicating the Company's lien, an
odometer statement confirming the vehicle's mileage, proof that the automobile
is insured with the Company designated as loss payee and any supporting
documentation the Company specified in its conditional approval of the purchase.
Only when compliance with these requirements is verified, does the Company remit
funds to the dealer.
BULK PURCHASES OF AUTOMOBILE SALES CONTRACTS. From time to time the Company
purchases Automobile Sales Contracts in bulk from dealers who have originated
and accumulated contracts over a period of time. By doing so, the Company is
able to obtain large volumes of Automobile Sales Contracts in a cost-effective
manner. The Company applies underwriting standards in purchasing Automobile
Sales Contracts that take into account principally the borrowers' payment
history and the collateral value of the automobiles financed. Such purchases are
typically made at discounts ranging from 25% to 50% of the financed portion of
the Automobile Sales Contracts. There generally are no dealer reserve
arrangements on bulk purchases. In connection with such bulk purchases, the
Company reviews all credit evaluation information collected by the dealer and
reviews the servicing and collection history of the Automobile Sales Contracts
and obtains the required supporting documents.
SALES OF INSURANCE PRODUCTS IN FINANCE OFFICES. In connection with the
origination of Automobile Sales Contracts, the Company offers, as agent, credit
life, and credit accident and health insurance. Borrowers under Automobile Sales
Contracts and Direct Loans secured by automobiles generally must obtain
comprehensive collision insurance on the automobile that designates the Company
as loss payee. If the borrower allows such insurance to lapse during the term of
the contract or loan, the Company will purchase a vendors' single interest
insurance policy, which insures the Company against a total loss on the
automobile, and add the cost of the premium to the borrower's account balance.
The Company also offers, as agent, limited physical damage insurance, which
satisfies the requirement that the borrower purchase comprehensive collision
insurance. Limited physical damage insurance is a modified form of collision
insurance that will pay the borrower or the Company the lesser of (i) the cost
of repairs, less a designated deductible amount, (ii) the actual cash value of
the automobile, less a designated deductible amount or (iii) the net unpaid
contract or loan balance, less any delinquent payments. The Company receives
commissions on the sales of insurance equal to 20% of the premiums on credit
life and credit accident and health insurance and 25% of the premiums on limited
physical damage coverage.
DIRECT LOANS PROGRAM
The Company has been in the business of making Direct Loans to Non-prime
Borrowers since 1985. Direct Loans are typically sought by such borrowers to
meet short-term cash needs, finance the purchase of consumer goods or refinance
existing indebtedness. Generally, less than 10% of Direct Loans are secured by
first or second liens on real property. The remainder are secured by personal
<PAGE>
property or are unsecured. The typical original term on a Direct Loan is 15
months. In South Carolina and Tennessee, where there is no limit on the maximum
interest rate the Company may charge on Direct Loans, the Company has a posted
maximum rate of 69% per annum, which it may not exceed until the Company files a
higher maximum rate with the state regulatory authorities. In North Carolina,
the Company generally charges the maximum interest rates permitted by law for
such loans, which range from 18% to 30% per annum, depending upon the amount
financed. The Company currently does not make Direct Loans in Georgia or
Virginia. The actual interest rate on a Direct Loan is set within statutory
limits, if applicable, based upon the credit profile of the borrower, the type
and value of any collateral and market conditions.
The credit evaluation procedures employed by the Company in connection with
Direct Loans are, with the exception of loans secured by real estate, similar to
the credit evaluation procedures employed in connection with the purchase of
Automobile Sales Contracts. The value of the collateral, if any, however, is a
far less significant factor in the Company's credit evaluation of a Direct Loan.
Instead, the Company places its primary emphasis on the ratio of the anticipated
debt service to the borrower's disposable income. Office managers approve Direct
Loans not secured by real estate. If the loan is to be secured by real estate,
the Company obtains an appraisal of the property, obtains a title opinion from
an attorney and verifies filing of a mortgage or deed of trust before
disbursement of funds to the borrower. The Company generally will not loan an
amount in excess of 50% of the appraised value of the real estate or, in the
case of a home equity loan, 50% of the borrower's equity in the property. All
applications for Direct Loans secured by real estate must be approved by the
Company's President or Executive Vice President
In connection with making Direct Loans, the Company also offers, as agent,
credit life and credit accident and health insurance on terms and conditions
similar to those on which it sells such credit insurance in conjunction with the
purchase of Automobile Sales Contracts. On all Direct Loans that are secured by
personal property other than a used car, the Company, in lieu of filing
financing statements to perfect its security interest in the collateral,
purchases non-filing insurance from an unaffiliated insurer. The Company charges
its customers on such loans an amount approximately equal to the filing fees
that would have been charged to the customer if the Company had filed financing
statements to perfect its security interest, which amount is typically included
in the amount of the loan. The Company uses such amount to pay premiums for
non-filing insurance against losses resulting from failure to file. Under the
Company's non-filing insurance arrangements, approximately 90% of the premiums
paid are refunded to the Company on a quarterly basis and are netted against
charge-offs for the period.
SERVICING AND COLLECTION OF AUTOMOBILE SALES CONTRACTS AND DIRECT LOANS
The Company has a staff of experienced personnel to collect, account for, and
post all payments received using a computerized management information system to
track each borrower's account activity. The Company's computer system provides
office personnel with access to all information contained in the customer's
contract including the amount of the contract, maturity, interest rate, vehicle
and reference information and payment history. Customer service personnel in
each finance office also respond to borrower inquiries, investigate
delinquencies and communicate with borrowers to obtain timely payments, monitor
the insurance coverage of the automobile serving as collateral, and, when
necessary, repossess financed automobiles.
When an Automobile Sales Contract is purchased or a Direct Loan is made, the
finance office personnel follow procedures that are designed to ensure that
borrowers understand their obligations and the terms of the Automobile Sales
Contract or Direct Loan. Particular emphasis is placed on the amount and due
date of each payment, the Company's expectations regarding the timely receipt of
payments and maintenance of insurance coverage, and the Company's delinquency
and repossession policies. The Company provides payment coupon books to
borrowers to remind them of their monthly payment obligations. Finance office
personnel typically contact borrowers by telephone whose payments are not
received within one or two days after the due date of a payment. A customer
service representative in the office continues to contact the delinquent
borrower by telephone and, in some instances by mail, until payment has been
received. When a delinquent borrower brings his account current, the Company
places special emphasis on getting assurances from the borrower that he or she
will make the next payment on the due date. The Company believes that early and
frequent contact with delinquent borrowers reinforces their recognition of their
obligation and the Company's expectation for timely payment. The Company's
policy for payment deferments is to permit no more than two in a twelve-month
period on Direct Loans. Payment deferments on Automobile Sales Contracts are
granted only upon review by the office manager of the Company's equity position
and the borrower's needs.
The Company's repossession policy on Automobile Sales Contracts and Direct Loans
secured by automobiles is administered on a case-by-case basis. The Company's
policy is to work with a delinquent borrower for a brief period to permit the
customer to keep the car and continue making payments to the Company. However,
should a borrower become seriously delinquent or should the office personnel
determine the borrower is not dealing in good faith, the Company repossesses the
borrower's car. In most instances, the Company's employees handle repossessions.
Most automobiles are repossessed 30-45 days after the account initially becomes
delinquent, although in some cases repossessions occur in less than 30 days.
Repossessed vehicles are generally sold by independent
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dealers on a consignment basis or through wholesale automobile auctions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Loss Experience."
PREMIUM FINANCE
The Company is engaged in the business of providing short-term financing of
insurance premiums, primarily for personal lines of insurance such as automobile
insurance purchased by Non-prime Borrowers, indirectly through independent
insurance agents. Most agents who refer premium finance business to the Company
are located in North Carolina, South Carolina, and Virginia and represent
insurance companies that either have a rating of C+ or better from A.M. Best &
Company or participate in state-guaranteed reinsurance facilities. A small
amount of the Company's business involves financing premiums for commercial
lines of insurance for small businesses, including property and casualty,
business automobile, general liability, and workers' compensation. The Company
also periodically makes bulk purchases of Premium Finance Contracts. A
substantial amount of the Company's premium finance business is derived from
customers of the 20 insurance offices owned by Thaxton Insurance.
When an individual purchasing insurance through an agent with whom the Company
has an established relationship is unable to pay the full amount of the premium,
the agent will offer a Premium Finance Contract that allows the insured to make
a down payment and finance the balance of the premium. Because the Company is
able to cancel the insurance policy generally within a period of 23 to 28 days
after the due date of a delinquent payment and receive a refund of the unearned
portion of the premium, the creditworthiness of the insured is a less important
factor than the size of the down payment and an efficient and effective system
for servicing and collecting the portfolio of Premium Finance Contracts.
The typical term of a Premium Finance Contract ranges from three to eight months
depending primarily upon the term of the underlying insurance policy, which in
most cases is six months but in some cases may be as long as 12 months. The
required down payment ranges from 20% to 50% of the premium depending upon the
state in which the insured resides, the term of the underlying insurance
contract, the identity of the referring agency and the insured's financial
circumstances. The smaller the down payment by the customer on a Premium Finance
Contract (and the resulting higher original principal balance of the loan), the
greater the Company's risk that the amount of the unearned premium at the time
of a payment default will not be sufficient to cover the unpaid principal
balance of the loan. Conversely, the higher the down payment (and the resulting
lower original principal balance of the loan), the lower the Company's risk of
loss in the event of a payment default.
The Company generally imposes the maximum finance charges and late fees
permitted by law for its personal lines Premium Finance Contracts, which are
subject to extensive regulation in the states where the Company engages in this
business. All of the states in which the Company operates permit assessment of a
fee of up to $15 on each Premium Finance Contract and a maximum interest rate of
12% per annum. The Company also engages, on a limited basis, in premium
financing for businesses (Commercial Premium Finance Contracts), where higher
interest rates are charged. After the Premium Finance Contract is originated,
the Company sends the insured a payment coupon book to serve as a reminder of
the payment due dates. Although most payments are received by mail, in some
instances payments are made directly to the agent who wrote the underlying
insurance contract and then forwarded to the Company. If a payment is not
received by the sixth day after the due date, a late fee is added to the past
due payment and a notice of intent to cancel the underlying insurance policy is
mailed to the insured. If payment is not received by the 10th day after the
notice of intent to cancel is mailed (the 15th day in South Carolina), the
Company mails a notice of cancellation advising the insured that the Company
will cancel the underlying insurance policy in seven days unless payment is
received. If the insured fails to make payment by the seventh day, using a power
of attorney provided by the insured at the time the insurance was purchased, the
Company notifies the insurance company to cancel the underlying insurance
policy. Upon receipt of this notice the insurance company remits to the Company
the unearned portion of the premium, if any. The Company's procedures for
providing notices to borrowers are set up to provide a parallel set of notices
to the agent who wrote the underlying insurance policy.
INSURANCE AGENCY OPERATIONS
The Company sells, on an agency basis, various lines of automobile, property and
casualty, life, and accident and health insurance. The Company does not assume
any underwriting risk in connection with its insurance agency activities. All
underwriting risk is assumed by the insurance companies represented by the
Company. The Company is paid a commission by the insurance company for which
business is placed. On some policies, the Company is eligible for additional
commission payments (profit sharing) if the loss experience on the business
falls below specified levels.
MORTGAGE BANKING OPERATIONS
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In November, 1998, the Company acquired Paragon, a mortgage banking operation.
Paragon originates, closes, and funds predominately B and C credit quality
mortgage loans. The loans are held by Paragon until they can be packaged and
sold to long term investors. Paragon receives fee income from the mortgagee, and
loans are generally sold at a premium ranging from 1% to 5% to the permanent
investor. The amount of premium is dependent upon the credit quality of the
customer, the attributes of the particular loan, and market conditions. At
December 31, 1998, Paragon employed approximately 100 employees located
primarily in nine offices throughout North and South Carolina, and had
approximately $6 million in monthly production volume.
COMPETITION
The non-prime consumer credit market for used automobile finance and personal
loans is highly competitive and fragmented. Historically, commercial banks,
savings and loans, credit unions, financing arms of automobile manufacturers and
other lenders providing traditional consumer financing have not consistently
served the non-prime segment of the consumer finance market. The Company faces
increasing competition from a number of companies providing similar financing to
individuals that cannot qualify for traditional financing. The Company competes
with numerous small, regional consumer finance companies. The basis on which the
Company competes with others in used car financing is primarily the price paid
for Automobile Sales Contracts, which is a function of the amount of the dealer
reserve, and the reliability of service to participating dealers. The basis on
which the Company competes with others in making Direct Loans is the interest
rate charged and customer service.
The size of the Company's average Automobile Sales Contract is considerably
smaller than that of many other companies engaged in purchasing Automobile Sales
Contracts. The Company believes this is due in large part to the fact that most
of the Company's competitors are seeking to do business primarily with
franchised dealers selling late-model, lower mileage used automobiles for
significantly higher prices than the automobiles offered for sale by the
independent dealers with which the Company has relationships, which tend to be
somewhat older, higher mileage vehicles. Because the costs of servicing and
collecting a portfolio of finance receivables increases with the number of
accounts included in the portfolio, management believes that many apparent
potential competitors will choose not to do business with the type of dealer
targeted by the Company.
The premium finance business, particularly for personal lines of insurance, also
is highly fragmented and competitive. Because interest rates are highly
regulated, competition is primarily on the basis of customer service, response
time, and the required amount of down payment. There are numerous independent
finance companies specializing in premium finance for personal lines of
insurance. In addition, many independent insurance agencies finance premiums for
their customers either directly or through an affiliate. Some bank holding
companies have subsidiaries that finance premiums on insurance sold by other
subsidiaries of the holding company as well as by independent agents.
Competition among independent insurance agencies is intense. There are numerous
other independent agencies in most of the markets where the Company's insurance
offices are located. There are also direct agents for various insurance
companies located in some of the Company's markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers virtually all types
of insurance products.
The origination of residential mortgages for Non-prime Borrowers is highly
competitive and the number of companies engaged in the business is increasing
rapidly. The basis on which the Company competes with others in the Mortgage
business is in the level of service provided to the borrower, the speed at which
the loan can be closed and funded, and the interest rate offered.
REGULATION
Consumer finance companies and mortgage banking companies are subject to
extensive supervision and regulation under state and federal statutes and
regulations. Depending upon the nature of the transactions entered into by the
company and the states in which it does business, governmental statutes and
regulations may require the lender to obtain licenses and meet specified minimum
qualifications, limit the interest rates, fees and other charges for which the
borrower may be assessed, limit or prescribe certain other terms and conditions
of the financing, govern the sale and terms of related insurance products, and
define and limit the right to repossess or foreclose and sell collateral.
The relevant federal statutes include the Truth In Lending Act, the Equal Credit
Opportunity Act, the Fair Credit Reporting Act, and the Real Estate Settlement
Procedures Act ("RESPA"). These statutes generally are enforced against consumer
finance companies by the Federal Trade Commission and are supplemented by
regulations promulgated by this and other federal agencies. In general, these
laws require the Company to provide certain disclosures to prospective
borrowers, prohibit misleading advertising, protect against discriminatory
lending practices, and prohibit unfair credit practices. Among the principal
disclosure items under the Truth In
<PAGE>
Lending Act are the terms of repayment, the final maturity, the total finance
charge, and the annual percentage rate charged on each loan. The Equal Credit
Opportunity Act prohibits creditors from discriminating against loan applicants
on the basis of race, color, sex, age, or marital status. Pursuant to Regulation
B promulgated under the Equal Credit Opportunity Act, creditors are required to
make certain disclosures regarding consumer rights and advise consumers whose
credit applications are not approved of the reasons for the rejection. The Fair
Credit Reporting Act requires the Company to provide certain information to
consumers whose credit applications are not approved on the basis of a report
obtained from a consumer credit reporting agency. Regulations promulgated by the
Federal Trade Commission limit the types of property a creditor may accept as
collateral to secure a consumer loan and provide for the preservation of the
consumer's claims and defenses when a consumer obligation such as an Automobile
Sales Contract is assigned to a subsequent holder. RESPA imposes specific
disclosure requirements, escrow account and borrower inquiry procedures, and
kickback and referral fee prohibitions upon lenders whose portfolio of
receivables secured by first or second liens on residential real property
exceeds a specified dollar amount.
The Company presently purchases Automobile Sales Contracts in Georgia, North
Carolina, South Carolina, Tennessee, and Virginia; originates Direct Loans in
Alabama, Georgia, Mississippi, North Carolina, South Carolina and Tennessee; and
originates Premium Finance Loans in North Carolina, South Carolina, and
Virginia. Interest rates on Premium Finance Contracts are subject to statutory
ceilings in all three states. See --"Premium Finance." Interest rates on
Automobile Sales Contracts are subject to statutory ceilings only in North
Carolina. See --"Automobile Sales Contract Purchases." Direct Loans are subject
to statutory ceilings in Georgia, North Carolina, Tennessee and Virginia. See
- --"Direct Loans Program." Each state regulates other aspects of the Company's
business, such as charges for insurance, forms of collateral, application of
payments, default charges, repossession, and disclosure matters, in varying
degrees. Such regulations may require the licensing of the Company or one or
more of its finance offices. The Company's finance offices also may be subject
to periodic examination by the division of state government charged with
enforcing consumer finance statutes and regulations. In some instances, state
statutes and regulations impose more stringent disclosure and antidiscriminatory
provisions than comparable federal provisions and may impose specific statutory
liabilities upon and create causes of action against creditors who fail to
comply with such provisions.
The Company also is subject to state statutes and regulations governing
insurance agents in connection with sales of credit and other insurance. These
provisions may require that officers and employees involved in the sale of
insurance products be licensed, govern the commissions that may be paid to
agents in connection with the sale of credit insurance, and limit the premium
amount charged for insurance.
Management believes the Company operates in substantial compliance with all
applicable statutes and regulations relevant to its consumer finance and
insurance agency activities and that Automobile Sales Contracts purchased
individually or in bulk have been originated in compliance with these
provisions. Violations of the provisions described above may result in private
actions for damages, claims for refunds of payments made, certain fines and
penalties, injunctions against prohibited practices, the potential forfeiture of
rights to repayment of loans, and the revocation of licenses granted by state
regulatory authorities. Adverse changes in the statutes and regulations to which
the Company's business is subject, or in the enforcement or interpretation
thereof, could have a material adverse effect on the Company's business.
Moreover, a reduction in the existing statutory maximum rates or the imposition
of maximum rates below those presently charged by the Company in unregulated
jurisdictions would directly impair the Company's profitability.
EMPLOYEES
As of December 31, 1998, the Company employed 401 persons, none of whom was
covered by a collective bargaining agreement. Of that total, 35 were located in
the Company's headquarters in Lancaster, South Carolina and 366 were located in
the Company's other offices. The Company generally considers its relationships
with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located in Lancaster, South Carolina in a
leased office facility of approximately 12,000 square feet. The lease expires in
September 1999, but includes an option to renew for an additional five-year
term. The Company leases the facilities, in some instances from affiliates, in
which its branch offices are located. These offices range in size from
approximately 800 square feet to 2,200 square feet, and are under leases
expiring on dates ranging from April 1999 to August 2004, most of which include
renewal options for periods ranging from two to five years. The monthly rental
rates for such offices range from $300 to $8,607 per month. Since most of the
Company's business with dealers is conducted by facsimile machine and telephone,
the Company does not believe that the particular locations of its finance
offices are critical to its business of purchasing Automobile Sales Contracts or
its premium finance operations. Location is somewhat more important for the
Company's Direct Loan and insurance agency operations. However, other
satisfactory locations are generally available for lease at comparable rates and
for comparable terms in
<PAGE>
each locality served by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any material legal proceedings nor is it
aware of any material threatened litigation against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of 1998.
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Due to the relatively small number of shares held by non-affiliates of the
Company, there is no active and liquid trading market for the Company's common
stock. The common stock does trade occasionally in the over-the-counter market
and is quoted in the OTC Bulletin Board service operated by the National
Association of Securities Dealers, Inc. At March 17, 1999, there were 188
shareholders of record based upon information provided to the Company. The
following table presents high and low bid information for the common stock
during the periods indicated. These quotations reflect prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
High Low
---- ---
First Quarter 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
The Company has not paid any dividends on common stock during the past two
years. At the present time, there are no plans to pay any cash dividends on
common stock. The Revolving Credit Facility restricts the Company from paying
any cash dividends in excess of 25% of net income for the year.
In July 1998, the Company, through a private placement with Jack W. Robinson, a
director of the Company at that time, exchanged all of the outstanding 27,076
shares held by Mr. Robinson of Series B Preferred stock, plus 29,200 shares of
common stock held by Mr. Robinson, for 56,276 shares of Series D Cumulative
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. Mr.
Robinson resigned as a director of the Company in December, 1998, and in January
1999, the Company repurchased all of the common and preferred shares held by Mr.
Robinson at $10 per share.
In December 1998, the Company, through a private placement, sold 800,000 shares
of Series E Cumulative Preferred Stock for $10 per share to FINOVA Capital
Corporation, the Company's primary lender. The stock pays a variable rate
dividend of prime minus 1% through October 31, 2003, and prime plus 3%
thereafter. The preferred stock is redeemable by the Company at any time at a
price of $10 per share. As part of the agreement governing the issuance of
stock, the Company reduced its overall credit line with FINOVA from $100,000,000
to $92,000,000. Although the company has no obligation to redeem the stock at
any time, under the terms of the agreement, FINOVA has the right, at its option,
to ask Mr. James D. Thaxton, CEO and majority shareholder in the Company, to
repurchase the stock.
Neither of these transactions were registered under the Securities Act of 1933,
as amended (the "Act"), pursuant to the exemption from such registration
provided by Section 4 (2) of the Act for transactions not involving any public
offering.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
HISTORICAL DEVELOPMENT, GROWTH AND TRENDS
Prior to 1991, the Company primarily was engaged in making and servicing direct
consumer and insurance premium finance loans to Non-prime Borrowers. In 1991,
the Company made a strategic decision to begin diversifying its portfolio by
actively seeking to finance purchases of used automobiles by Non-prime
Borrowers. Management believed that the expertise it had developed in extending
and servicing installment credit to Non-prime Borrowers would enable it to
profitably finance used automobile purchases by borrowers having similar credit
profiles. The Company facilitated its entry into this segment of the consumer
credit industry by engaging additional senior and mid-level management personnel
with substantial used automobile lending experience. Since 1991, the Company has
evolved into a diversified consumer financial services company engaged in used
automobile lending through the purchase and servicing of Automobile Sales
Contracts, the origination and servicing of Direct Loans and Premium Finance
Contracts, selling insurance products on an agency basis and originating
residential mortgage loans. Additionally, in 1998 the Company entered the
commercial lending business, and engages in factoring and secured commercial
lending for small and medium size businesses.
During 1998, the Company opened consumer lending finance offices in Charlotte,
NC, and Beaufort, SC. Additionally, the Company acquired four consumer finance
offices formerly owned by Budget Financial Service, Inc., ("Budget"). The
offices are located in Amory and Aberdeen, Mississippi, and in Vernon and
Hamilton, Alabama.
The Company acquired all of the outstanding capital stock of Paragon in
November, 1998, in exchange for 300,000 shares of the Company's stock plus
$100,000 in cash. Paragon is incorporated under the laws of the State of North
Carolina and operates as a licensed mortgage banker through nine offices in the
states of North Carolina and South Carolina.
Thaxton Insurance acquired twenty-two non-standard insurance agency offices
located in three southwestern states -- Arizona, Nevada, and New Mexico.
The following table sets forth certain information with regard to growth in the
Company's finance receivable portfolio.
<TABLE>
Year Ended December 31,
-----------------------
<S> <C> <C>
1998 1997
---- ----
AUTOMOBILE SALES CONTRACTS
Total balance at year end, net (1) $27,774,997 $37,463,211
Average account balance at year end 3,190 3,247
Interest income for the year 8,112,770 9,900,934
Average interest rate earned 24.71% 25.59%
Number of accounts at year end 8,708 11,537
DIRECT LOANS
Total balance at year end, net (1) $24,391,966 $12,302,995
Average account balance at year end 2,821 1,719
Interest income for the year 4,378,825 3,110,850
Average interest rate earned 27.45% 28.08%
Number of accounts at year end 9,367 7,159
PREMIUM FINANCE CONTRACTS
Total balance at year end, net (1) $3,228,160 $3,860,936
Average account balance at year end 296 319
Interest income for the year 733,477 573,005
Average interest rate earned 18.49% 17.04%
Number of accounts at year end 11,288 12,108
</TABLE>
(1) Finance receivable balances are presented net of unearned finance charges,
dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases ("Net Finance Receivables").
Management believes the best opportunities for continued growth in the
Company's Automobile Sales Contract and Direct Loan portfolios lie in the
opening or acquisition of new finance offices in small to medium-sized markets
in the states where the Company presently operates and contiguous states that
management believes to be under served by its competitors. The Company opened
five new finance offices in 1997 and added six additional offices in 1998 (two
offices were opened, and four were added through acquisition). While there are
certain risks associated with such expansion, management believes that its
ability to identify and retain finance office management personnel having
established relationships with local independent dealers, its expertise in
extending and servicing credit to Non-prime Borrowers, and other factors will
enable it to manage anticipated growth in its finance office network and in its
Automobile Sales Contract and Direct Loan portfolios. The Company will seek to
expand its Premium Finance Contract portfolio by establishing and broadening
relationships with insurance agencies having a client base in need of premium
financing. The Company also periodically may make bulk purchases of Automobile
Sales Contracts and Premium Finance Contracts if such purchases are deemed
beneficial to the Company's competitive position and portfolio mix and will
seek opportunities to expand its network of insurance offices primarily through
the acquisition of independent insurance agencies.
In January 1999, Thaxton Investment Corporation ("Thaxton Investment") was
organized by James D. Thaxton. Thaxton Investment's board of directors and
executive officers are, with one exception, identical. With 100% financing
provided by the Company's primary lender, Thaxton Investment acquired the
consumer finance operations of First Plus Consumer Finance, Inc., consisting of
144 Direct Loan offices in 7 states, including 31 offices in South Carolina.
While Thaxton Investment is a separate legal entity from the Company, the
Company's exectuve officers and other administrative personnel of the Company
will devote a substantial portion of their management time in future periods to
Thaxton Investment. Thaxton Investment will be charged a monthly management fee
to compensate the Company for the time and resources utilized by Thaxton
Investment. The management fee was based upon time estimates of Company
personnel for anticipated work to be performed for the benefit of Thaxton
Investment, and included the reimbursement of other direct costs anticipated to
be incurred by the Company. It is estimated that the Company's pretax income
will increase by approximately $370 thousand as a result of this fee.
NET INTEREST MARGIN
The following table sets forth certain data relating to the Company's net
interest margin for the years ended December 31, 1998 and 1997.
<TABLE>
1998 1997
---- ----
<S> <C> <C> <C>
Average Net Finance Receivables(1) $52,919,907 $53,058,041
Average notes payable(1) 47,095,575 45,739,084
Interest and fee income (2) 15,727,484 15,808,386
Interest expense (3) 4,366,757 4,484,600
--------- ---------
Net interest income 11,360,727 11,323,786
Average interest rate earned(1) 29.72% 29.79%
Average interest rate paid(1) 9.27% 9.80%
----- -----
Net interest rate spread 20.45% 19.99%
Net interest margin(4) 21.47% 21.34%
</TABLE>
(1) Averages are computed using month-end balances during the year presented
(2) Excludes interest and fee income earned by Thaxton Insurance.
(3) Excludes interest expense paid on Thaxton Insurance related debt.
(4) Net interest margin represents net interest income divided by average Net
Finance Receivables.
The principal component of the Company's profitability is its net interest
spread, the difference between interest earned on finance receivables and
interest expense paid on borrowed funds. Statutes in some states regulate the
interest rates that the Company may charge its borrowers while interest rates in
other states are unregulated and consequently are established by competitive
market conditions. There are significant differences in the interest rates
earned on the various components of the Company's finance receivable portfolio.
The interest rate earned on Automobile Sales Contracts generally is lower than
the interest rates earned on Direct Loans due to competition from other lenders,
superior collateral and longer terms. The interest rates earned on Premium
Finance Contracts are state regulated and vary based on the type of underlying
insurance and the term of the contract.
<PAGE>
Unlike the Company's interest income, its interest expenses are sensitive to
general market fluctuations in interest rates. The interest rate paid to the
Company's primary lender is based upon a published prime rate plus a set
percentage. Thus, general market fluctuations in interest rates directly impact
the Company's cost of funds. The Company's general inability to increase the
interest rates earned on finance receivables may impair its ability to adjust to
increases in the cost of funds resulting from changes in market conditions.
Accordingly, increases in market interest rates generally will narrow the
Company's interest rate spread and lower its profitability while decreases in
market interest rates generally will widen the Company's interest rates spreads
and increase profitability.
RESULTS OF OPERATIONS
COMPARISON OF 1998 TO 1997. Finance receivables at December 31, 1998 were
$80,684,786 versus $67,558,269 at December 31, 1997, a 19% increase. The Company
opened or acquired six new finance branch offices and also began offering
commercial loans during 1998. Additionally, the acquisition of Paragon, a
mortgage banking company, with 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 flat between years, even though receivables were
increased significantly. This is primarily attributable to three factors: (1)
The increase in interest bearing receivables which have no unearned income
associated with them, and include the mortgage loans held for sale, the
commercial loans, and a growing number of consumer loans; (2) The aging of the
automobile sales finance portfolio as the company attempts to shift its 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,
$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, $4,105,031
for 1998 versus $3,965,532 for 1997, and 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 the Company's reserve methodology indicated appropriateness
of the ending reserve balance for 1998.
Interest and fee income for the twelve months ended December 31, 1998 was
$15,727,484, compared to $15,892,683 for the twelve months ended December 31,
1997, a 1% decline. Interest expense remained essentially constant between
years, $5,037,289 for the twelve months ended December 31, 1998 versus
$5,023,179 for the comparable period of 1997. The static level of interest
income and interest expense follows the portfolio. Virtually all of the
portfolio growth occurred at the end of 1998, coinciding with the acquisition of
Budget and Paragon in the autumn of 1998. For most of 1998, the level of average
net finance receivables was actually slightly less than the prior year. This was
due to a strategic decision by the Company, begun in 1997, to tighten credit
guidelines for its automobile sales finance contract portfolio in order to
reverse the pattern of increasing credit losses which the Company 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, or a 39% decline. Credit losses had
been increasing in 1996 and 1997, and 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 the Company's tightened credit guidelines instituted
during 1997, credit losses were held in check, and in fact declined as a
percentage of the portfolio. Accordingly, additional provision for loss expense
was not required under the Company's 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, brought about by management 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 due
primarily to profit sharing payments to the Company 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 latter part of 1998 of Paragon, the four finance offices from Budget, and
the acquisition of the insurance agency offices in Arizona, Nevada, and New
Mexico by Thaxton Insurance. Additionally, there was a general increase 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.
<PAGE>
The Company 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 is 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 primarily as a result of the Company's private
placement of $8 million of Series E Preferred Stock, partially offset by a
reduction in retained earnings caused by the year's net loss from operations.
CREDIT LOSS EXPERIENCE
Provisions for credit losses are charged to income in amounts sufficient to
maintain the allowance for credit losses at a level considered adequate to cover
the expected future losses of principal and interest in the existing finance
receivable portfolio. Credit loss experience, contractual delinquency of finance
receivables, the value of underlying collateral, and management's judgment are
factors used in assessing the overall adequacy of the allowance and resulting
provision for credit losses. The Company's reserve methodology is designed to
provide an allowance for credit losses that, at any point in time, is adequate
to absorb the charge-offs expected to be generated by the finance receivable
portfolio, based on events or losses that have occurred or are known to be
inherent in the portfolio. The model used by the Company utilizes historical
charge-off data to predict the charge-offs likely to be generated in the future
by the existing finance receivable portfolio. The model 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. The Company's charge-off policy is based on an account by
account review of delinquent receivables. Losses on finance receivables secured
by automobiles are recognized at the time the collateral is repossessed. Other
finance receivables are charged off when they become contractually past due 180
days, unless extenuating circumstances exist leading management to believe such
finance receivables will be collectible. Finance receivables may be charged off
prior to the normal charge-off period if management deems them to be
uncollectible.
Under the Company's dealer reserve arrangements, when a dealer assigns an
Automobile Sales Contract to the Company, the Company withholds a certain
percentage of the principal amount of the contract, usually between five and ten
percent (the "Discount Percentage"). The amounts withheld from a particular
dealer are recorded in a subsidiary ledger account (the "Specific Reserve
Account"). Any losses incurred on Automobile Sales Contracts purchased from that
dealer are charged against its Specific Reserve Account. If at any time the
balance of a dealer's Specific Reserve Account exceeds the amount derived by
applying the Discount Percentage to the total amount of principal and interest
due under all outstanding Automobile Sales Contracts purchased from such dealer
(the "Excess Dealer Reserve"), the dealer is entitled to receive distributions
from the Specific Reserve Account in an amount equal to the Excess Dealer
Reserve. If the Company is continuing to purchase Automobile Sales Contracts
from a dealer, distributions of Excess Dealer Reserves generally are paid
quarterly. If the Company is not continuing to purchase Automobile Sales
Contracts from a dealer, distributions of Excess Dealer Reserves are not paid
out until all Automobile Sales Contracts originated by that dealer have been
paid in full. The aggregate balance of all Specific Reserve Accounts, including
unpaid Excess Dealer Reserves, are reflected in the balance sheet as a reduction
of finance receivables. The Company's allowance for credit losses is charged
only to the extent that the loss on an Automobile Sales Contract exceeds the
originating dealer's Specific Reserve Account at the time of the loss.
The Company periodically purchases Automobile Sales Contracts in bulk. In a bulk
purchase arrangement, the Company typically purchases a portfolio of Automobile
Sales Contracts from a dealer at a discount to par upon a review and assessment
of the portfolio by the Company's management. This discount is maintained in a
separate account against which losses on the bulk portfolio purchased are
charged. To the extent losses experienced are less than the discount, the
remaining discount is accreted into income.
<PAGE>
The following table sets forth the Company's allowance for credit losses at
December 31, 1998 and 1997, and the credit loss experience over the periods
presented for its finance receivables. (1)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Net finance receivables(1) $56,130,791 $54,500,203
Allowance for credit losses 4,710,829 4,809,400
Allowance for credit losses as a percentage of
net finance receivables(1) 8.39% 8.82%
Dealer reserves and discounts on bulk purchases $1,241,633 $1,028,575
Dealer reserves and discounts on bulk purchases as
percentage of Net Automobile Sales Contracts at
period end 3.46% 2.67%
Allowance for credit losses and dealer reserves and
discount on bulk purchases (2) $5,952,462 $5,837,975
Allowance for credit losses and dealer reserves
as a percentage of finance receivables 10.60% 10.71%
Provision for credit losses $4,046,460 $6,579,932
Charge-offs (net of recoveries) 4,145,031 3,965,532
Charge-offs (net of recoveries) as a percentage of 7.64% 7.47%
average net finance receivables (3)
</TABLE>
(1) Net finance receivable balances are presented net of unearned finance
charges, and exclude mortgage warehoused loans and commercial finance
receivables.
(2) Excludes valuation discount for acquired loans
(3) Average net receivables computed using month end balances
The following table sets forth certain information concerning Automobile Sales
Contracts and Direct Loans at the end of the periods indicated:
<TABLE>
At December 31,
---------------
<S> <C> <C>
1998 1997
---- ----
Automobile Sales Contracts and Direct Loans $734,359 $551,363
contractually past due 90 days or more (1)
Automobile Sales Contracts and Direct Loans (1) 52,166,963 49,766,206
Automobile Sales Contracts and Direct Loans 1.41% 1.11%
contractually past due 90 days or more as a
percentage of Automobile Sales Contracts and Direct
Loans
</TABLE>
(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts on
bulk purchases.
<PAGE>
The following table sets forth certain information concerning Premium Finance
Contracts at the end of the periods indicated:
<TABLE>
<CAPTION>
At December 31,
---------------
1998 1997
---- ----
<S> <C> <C> <C>
Premium finance contracts contractually past due 60 $119,345 $89,331
days or more(1)
Premium finance contracts outstanding(1) 3,228,160 3,860,936
Premium finance contracts contractually past due 60
days or more as a percentage of premium finance 3.6% 2.3%
contracts
</TABLE>
(1) Finance receivable balances are presented net of unearned finance charges.
LIQUIDITY AND CAPITAL RESOURCES
The Company generally finances its operations and new offices through cash flow
from operations and borrowings under the revolving credit facility extended by
FINOVA Capital Corporation ( the "Revolving Credit Facility"). The Revolving
Credit Facility, which provides for borrowings of up to $92 million, matures on
October 31, 2003. The facility consists of five tranches. The primary tranche is
used to finance consumer receivables and provides for advances of up to $92
million, less any amounts advanced under the secondary tranches. Tranche B, one
of the secondary tranches, is also used to finance consumer receivables and
allows the Company to borrow up to $10 million against a higher percentage of
Net Finance Receivables than under the primary tranche. The Company borrows
against Tranche B only when it has exhausted available borrowings under the
primary tranche. The Revolving Credit facility also provides a $5 million
tranche dedicated to non-consumer receivables, a $25 million tranche established
to provide a mortgage loan warehouse facility, and a $10 million tranche which
permits borrowings against insurance commissions. As of December 31, 1998, $47.0
million was outstanding under the Revolving Credit Facility, $37.2 million of
which had been advanced under the primary tranche and $9.8 million of which had
been advanced under secondary tranches. At December 31, 1998, there were no
advances under Tranche B. Under the terms of the Revolving Credit Facility, the
Company's Net Finance Receivables at December 31, 1998 would have allowed it to
borrow an additional $8.3 million against existing collateral, with $45 million
of total potential capacity available for borrowing against qualified finance
receivables generated by the Company in future periods. The interest rate for
borrowings is the prime rate published by Citibank, N.A. (or other money center
bank designated by the lender) plus one percent per annum for the primary
tranche, the non-consumer receivable tranche, and the mortgage loan tranche,
plus five percent per annum for Tranche B and plus two percent per annum for the
insurance commission tranche. The interest rate is adjusted monthly to reflect
fluctuations in the designated prime rate. Accrued interest on borrowings is
payable monthly. Principal is due in full on the maturity date and can be
prepaid without penalty. The Revolving Credit Facility is secured by
substantially all of the Company's assets and requires the Company to comply
with certain restrictive covenants, including covenants to maintain a certain
debt to equity ratio, tangible net worth, annual net income within prescribed
limits, and a covenant to limit annual distributions to common stockholders to
25% of net income.
In 1997, the Company began issuing subordinated term notes to individual
investors in an intrastate public offering registered with the State of South
Carolina. The registration of a similar offering was declared effective by the
U.S. Securities and Exchange Commission in March 1998, 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. Proceeds from the issuance of these notes generally are used
to repay borrowings under the Revolving Credit Facility.
Cash flows from financing activities during the years ended December 31, 1998
and 1997 were as follows:
1998 1997
------------ ------------
Proceeds from the issuance of preferred stock $ 7,907,323 $ 718,067
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
------------ ------------
<PAGE>
Total
$ 17,842,097 $ 5,962,363
============ ============
Management believes that the maximum borrowings available under the Revolving
Credit Facility, in addition to cash expected to be generated from operations
and the sale of subordinated notes, will provide the resources necessary to fund
the Company's liquidity and capital needs through 1999.
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company does not believe that inflation directly has a material
adverse effect on its financial condition or results of operations, increases in
the inflation rate generally are associated with increased interest rates.
Because the Company borrows funds on a floating rate basis and generally extends
credit at the maximum interest rates permitted by law or market conditions,
increased interest rates would increase the Company's cost of funds and could
materially impair the Company's profitability. The Company intends to explore
opportunities to fix or cap the interest rates on all or a portion of its
borrowings; however, there can be no assurance that fixed rate or capped rate
financing will be available on terms acceptable to the Company. Inflation also
can affect the Company's operating expenses. The Company's business could be
affected by other general economic conditions in the United States, including
economic factors affecting the ability of its customers or prospective customers
to purchase used automobiles and to obtain and repay loans.
IMPACT OF YEAR 2000
The Company recognizes that there is a business risk in computerized systems 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." A number of computer systems used by the Company
in its day to day operations may be affected by this problem. The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could fail or generate erroneous data.
In the ordinary course of business, the Company has replaced a significant
portion of its non-compliant hardware and software with Year 2000 compliant
systems. The Company has minimal proprietary processing software -- virtually
all key sub-systems, payroll system, and general ledger were written, and are
maintained by reputable outside vendors. The Company has confirmed with
licensors from which it licenses software that all such software is Year 2000
compliant. The majority of vendor licensors have offered or provided the Company
the results of their Year 2000 testing.
With respect to our systems, networks, and licensed software, management has
established a project team which has identified affected systems and is
currently working to ensure that the advent of the year 2000 will not disrupt
operations. This project team reports periodically to senior management. The
company is also working closely with outside computer vendors to ensure that all
software corrections and warranty commitments are obtained. The estimated cost
to the Company for these corrective actions, and the related hardware required
to run the upgraded software 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 the Company's capital and operating budgets for 1999.
The Company has taken significant steps toward insuring that the Year 2000 will
not adversely affect our ability to function. However, it should be noted that
incomplete or untimely compliance would have a material adverse impact on the
Company, the dollar amount of which cannot be accurately quantified at this time
because of the inherent variables and uncertainties involved.
ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This statement addresses the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts, and hedging activities. The Statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. Management
does not anticipate the adoption of the provisions of SFAS No. 133 will
significantly impact the Company's financial reporting.
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,
<PAGE>
SFAS No. 131 requires disclosure of certain information by geographic region.
This disclosure is presented in footnote 13 of the Company's Audited Financial
Statements included in this report.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(WITH INDEPENDENT AUDITORS' REPORTS THEREON)
<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. The financial
statements of The Thaxton Group, Inc. and subsidiaries as of December 31, 1997,
were audited by other auditors whose report dated March 25, 1998, expressed an
unqualified opinion on those statements.
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
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<S> <C> <C>
1998 1997
---- ----
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 in 1997
1,750 1,780
Series B: 40,000 shares authorized, issued and outstanding
no shares in 1998 and 27,076 shares in 1997
-- 271
Series C: 50,000 shares authorized, issued and
outstanding in 1998 and 1997
500 500
Series D: 56,276 shares authorized, issued and outstanding
56,276 shares in 1998 and no shares in 1997 563 ---
Series E: 800,000 shares authorized, issued and outstanding
800,000 shares in 1998 and no shares in 1997 8,000 ---
Common stock, $.01 par value; authorized 50,000,000 shares, 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>
<PAGE>
See accompanying notes to consolidated financial statements
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Years Ended December 31, 1998 and 1997
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Interest and fee $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.
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional Deferred Total
Common Preferred Paid-in Stock Retained Stockholders'
Stock Stock Capital Award Earnings Equity
----------- ----------- ----------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 39,322 -- 3,504,027 (720,000) 3,547,956 6,371,305
Purchase and retirement of 13,300 shares of stock (133) -- (137,850) -- -- (137,983)
Issuance of 2,007 shares of restricted stock 20 -- 22,057 -- -- 22,077
Issuance of 797 shares of stock under Employee
stock purchase plan 8 -- 6,343 -- -- 6,351
Forfeiture of deferred stock award (100) -- (89,900) 90,000 -- --
Conversion of 89,007 shares of common stock
into 178,014 shares of Series A preferred stock (890) 1,780 717,177 -- -- 718,067
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 -- -- 500,000
Dividends paid on preferred stock -- -- -- -- (4,167) (4,167)
Net loss (1,506,333) (1,506,333)
----------- ------------ ------------ ----------- ------------ ------------
Balance at December 31, 1997 37,956 2,551 4,521,354 (630,000) 2,037,456 5,969,317
----------- ------------ ------------ ----------- ------------ ------------
Purchase and retirement of 114,761 shares
of common stock (1,148) -- (1,074,314) -- -- (1,075,462)
Issuance of 800,000 shares of
Series E Preferred Stock -- 8,000 7,992,000 -- -- 8,000,000
Issuance of 300,000 shares of restricted common
Stock 3,000 -- 1,497,000 -- -- 1,500,000
Issuance of 3,580 shares of common stock under
Employee stock purchase plan 36 -- 26,590 -- -- 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 (292) 292 -- -- -- --
Repurchase of 3,000 shares of Series A
Preferred Stock (30) (29,970) -- -- (30,000)
Cancellation and forfeiture of Deferred Stock Award (700) -- (629,300) 630,000 -- --
Costs associated with preferred stock issuance -- -- (119,303) -- -- (119,303)
Dividends paid on preferred stock -- -- -- -- (258,289) (258,289)
Net loss -- -- -- -- (1,084,017) (1,084,017)
-------------------------------------------------------------------------------
Balance at December 31, 1998 $ 38.852 10,813 12,184,057 -- 695,150 12,928,872
============ ============ ============ ========== ============ ============
</TABLE>
<PAGE>
See accompanying notes to consolidated financial statements
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Cash flows from operating activites:
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.
<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 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
<PAGE>
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 acquisition 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 fifteen to twenty year period. The expiration lists are
amortized over their estimated useful lives, generally 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 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
<PAGE>
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.
1998 1997
---- ----
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)
(3) FINANCE RECEIVABLES
Finance receivables consist of the following at December 31, 1998 and 1997:
1998 1997
---- ----
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 (260,743) (359,945)
Dealer hold back (980,890) (668,630)
Allowance for credit losses (4,710,829) (4,809,400)
----------- -----------
Finance receivables, net $61,869,782 48,662,228
=========== ===========
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,
<PAGE>
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.
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:
1998 1997
---- ----
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
========== =========
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:
1998 1997
---- ----
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
========== =========
Depreciation expense was approximately $721,000 and $617,000 in 1998 and 1997,
respectively.
<PAGE>
(5) INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and 1997:
1998 1997
---- ----
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
========== =========
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:
1999 $ 819,873
2000 562,912
2001 322,756
2002 185,668
2003 74,263
Thereafter 6,251
----------
Total minimum lease payments $1,971,722
==========
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.
<PAGE>
(7) NOTES PAYABLE AND NOTES PAYABLE TO AFFILIATES
At December 31, 1998 and 1997, notes payable consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
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:
Year Ending
December 31, Amount
------------ ------
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
===========
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:
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%)
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 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.
<PAGE>
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 cancelled 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 cancelled 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.
(9) INCOME TAXES
Income tax expense consists of the following:
Current Deferred Total
------- -------- -----
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)
========== ===== =========
<PAGE>
A reconciliation of the Company's income tax provision and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
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>
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>
<S> <C> <C>
1998 1997
---- ----
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
<PAGE>
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 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:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
BASIC
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>
<PAGE>
(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.
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
Finance Banking Insurance Other Total
1998
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Total revenue 16,217,000 903,000 6,185,000 137,000 23,442,000
Net interest income 10,467,000 94,000 10,561,000
Provision for credit losses 4,173,000 36,000 4,209,000
Noninterest income 1,262,000 6,185,000 268,000 7,715,000
Insurance premiums and
commissions, net 1,126,000 5,449,000 16,000 6,591,000
Non interest expenses 7,591,000 884,000 7,008,000 294,000 15,777,000
Depreciation and
amortization 568,000 32,000 566,000 1,166,000
Net income (46,000) (85,000) (622,000) (953,000) (1,084,000)
BALANCE SHEET DATA
Total assets 57,361,000 12,609,000 9,017,000 8,000 78,996,000
Loans, net of unearned
income 55,867,000 10,714,000 66,581,000
Allowance for credit losses 4,711,000 4,711,000
Intangibles 1,611,000 1,601,000 5,093,000 8,305,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consumer Mortgage Insurance Other Total
Finance Banking
1997
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Total revenue 16,094,000 518,000 5,847,000 124,000 22,583,000
Net interest income 10,719,000 (454,000) 85,000 10,350,000
Provision for credit losses 6,549,000 31,000 6,580,000
Noninterest income 246,000 6,445,000 - 6,691,000
Insurance premiums and 920,000 - 4,549,000 - 5,469,000
commissions, net
Non interest expenses 6,785,000 589,000 5,659,000 177,000 13,210,000
Depreciation and 498,000 18,000 442,000 - 958,000
amortization
Net income (1,029,000) (44,000) (357,000) (77,000) (1,507,000)
BALANCE SHEET DATA
Total assets 53,082,000 107,000 7,257,000 984,000 61,430,000
Loans, net of unearned 48,941,000 322,000 49,263,000
income
Allowance for credit losses 4,110,000 99,000 4,209,000
Intangible Assets 160,000 14,000 3,587,000 266,000 4,027,000
</TABLE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
(A) On December 14, 1998, The Thaxton Group, Inc. ("The Company") notified KPMG
Peat Marwick, LLP ("KPMG") that it was terminating KPMG's appointment as the
Company's independent accountants. That termination was approved by the
Company's Board of Directors, which also approved the engagement of Cherry
Bekaert & Holland, LLP ("CB&H") as the Company's independent accountants for the
1998 fiscal year. The Company filed form 8-K with the Securities and Exchange
Commission in December 1998 disclosing this change of accountants.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's directors and executive officers and their ages as of March
25, 1999 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C>
James D. Thaxton...................... 52 Chairman of the Board, President and Chief
Executive Officer
Robert L. Wilson...................... 58 Executive Vice President, Chief
Operating Officer and Director
Allan F. Ross......................... 50 Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
C. L. Thaxton, Sr..................... 75 Director
</TABLE>
JAMES D. THAXTON has served as Chairman of the Board, President and Chief
Executive Officer of the Company since it was founded. Prior to joining the
Company, Mr. Thaxton was an insurance agent at C.L. Frates & Company in Oklahoma
City, Oklahoma from 1974 to 1976. From 1972 to 1973, he was employed as an
underwriter by United States Fidelity and Guaranty. James D. Thaxton is the son
of C.L. Thaxton, Sr.
ROBERT L. WILSON joined the Company in January 1991 and has served since July
1991, as its Executive Vice President, Chief Operating Officer and a director.
From October 1988 until July 1990, Mr. Wilson served as Operations Manager of
MANH - Financial Services Corp. For more than 25 years prior thereto, Mr. Wilson
served in various positions with American Credit Corporation and its successor,
Barclays American Corporation, including as Southeastern Regional Manager and
Executive Vice President of Barclays American Credit Division.
ALLAN F. ROSS joined the Company in March 1997, and has served as Vice President
and Corporate Controller since April 1997, and as a Director, Secretary,
Treasurer and Chief Financial Officer since February 1998. From 1989 to 1997,
Mr. Ross was the managing partner of a CPA and consulting practice. From 1978 to
1989, Mr. Ross was Vice President and Financial Controls Director of Barclays
American Corporation. From 1974 to 1978, Mr. Ross was a practicing CPA with
Arthur Andersen & Company, and with Deloitte and Touche, LLP. He is a certified
public accountant.
C.L. THAXTON, SR. has served on the Board of Directors of the Company since it
was founded. Mr. Thaxton is a director of Thaxton Insurance, which he founded in
1950 and is the manager of its Pageland branch 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. The Company's executive
officers are appointed by and serve at the discretion of the Board.
The Board of Directors has established a Compensation Committee which makes
recommendations concerning salaries and incentive compensation for executive
officers and other employees of the Company and administers the Company's stock
plans. The Board has also established an Audit Committee, which recommends to
the Board of Directors the selection of the Company's independent auditors and
reviews the results and scope of the audit and other services provided by the
independent auditors. Directors do not receive any compensation from the Company
for their service as members of the Board of Directors. All directors are
reimbursed for reasonable expenses incurred by them in attending Board and Board
committee meetings.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The table below shows the compensation paid or accrued by the Company, 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 $100,000 during 1998 (together, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------- AWARDS
------
RESTRICTED
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS STOCK AWARD
($) ($) ($)
--- --- ---
<S> <C> <C> <C>
James D. Thaxton, President 1998 119,419 62,317
and Chief Executive Officer 1997 113,600 40,704 --
Robert L. Wilson, Executive (1) 1998 135,444 -
Vice President 1997 125,000 133,106 --
</TABLE>
(1) Upon the closing of the Company's initial public offering on December
29, 1995, Mr. Wilson was awarded 100,000 shares of restricted common stock.
Subject to his continued employment by the Company, the award 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 Mr. Wilson, and 70,000 shares of the award
remained subject to restriction. In 1998, Mr. Wilson 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the common stock at March 25, 1999 by: (i) the only
person who is the beneficial owner of more than five percent of the outstanding
common stock; (ii) each director; and (iii) directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
NATURE OF BENEFICIAL PERCENTAGE OF COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK OUTSTANDING(1)
------------------------ --------- --------------------
<S> <C> <C>
James D. Thaxton 3,233,000(2) 85.9%
C. L. Thaxton, Sr. 15,555(3) *
Directors and officers 3,248,555 86.3%
as a group
</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.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK TRANSACTIONS WITH DIRECTORS
In December 1997, the Company, through a private placement, issued 27,076 shares
of 7.5% cumulative redeemable convertible Series B preferred stock to Jack
Robinson, a Director of the Company 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, 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. In January 1999, Mr.
Robinson resigned from the Board of Directors. At his request, the Company
repurchased his Series D preferred stock, plus all of his remaining common stock
at $10 per share.
In January 1999, Mr. Perry Mungo resigned from the Board of Directors and, at
his request, the Company repurchased all of his remaining common stock (29,200
shares) at $10 per share.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3.1 Second Amended and Restated Articles of Incorporation of The Thaxton
Group, Inc.
3.2 Bylaws of the Thaxton Group, Inc. (1)
4.1 Form of Indenture, dated as of February 17, 1998, between the Company and
The Bank of New York, as Trustee (5)
4.2 Form of Subordinated Daily Note (included as Exhibit A to Form of
Indenture)
4.3 Form of Subordinated One Month Note (included as Exhibit B to Form of
Indenture)
4.4 Form of Subordinated Term Note for 6, 12, 36 and 60 Month Notes (included
as Exhibit C to Form of Indenture)
10.1 The Thaxton Group, Inc. 1995 Stock Incentive Plan (1)
10.2 The Thaxton Group, Inc. Employee Stock Purchase Plan (1)
10.3 Incentive Stock Option Agreement between James A. Cantley and the Company
(2)
10.4 Loan Agreement dated March 18, 1996 between the American Bankers
Insurance Co. of Florida and the Company (2)
10.5 First Amended and Restated Loan and Security Agreement dated September 3,
1997 between Finova Capital Corporation and the Company (4)
10.6 Schedule to First Amended and Restated Loan and Security Agreement (4)
22 Subsidiaries of The Thaxton Group, Inc. (3)
23 Independent Auditors Report
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Commission File No. 33-97130-A.
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995.
(3) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-4, Commission File No. 333-28719
(5) Incorporated by reference to the Company's Registration Statement on Form
SB-2, Commission File No. 333-42623
(B) REPORTS ON FORM 8-K
On December 21, 1998, the Company filed a Current Report on Form 8-K to report
a change in its certifying accountants.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE THAXTON GROUP, INC.
-----------------------
(Registrant)
Date: April 13, 1999 By:/s/ ALLAN F. ROSS
--------------------
Allan F. Ross
Vice President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE CAPACITY DATE
/s/ JAMES D. THAXTON President, Chief Executive Officer April 13, 1999
- --------------------- and Chairman of the Board of Directors
James D. Thaxton
/s/ ALLAN F. ROSS Vice President, Chief Financial Officer April 13, 1999
- ----------------- (Principle Accounting and Financial
Allan F. Ross Officer) and Director
/s/ ROBERT L. WILSON Executive Vice President and Director April 13, 1999
- --------------------
Robert L. Wilson
/s/ C. L. THAXTON, SR. Director April 13, 1999
- ----------------------
C. L. Thaxton, Sr.
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy statement has been sent to security holders. An annual
report will be furnished to security holders subsequent to the filing of the
annual report on this Form.
Exhibit 3.1
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
SECOND RESTATED ARTICLES OF INCORPORATION
OF
THE THAXTON GROUP, INC.
ARTICLE 1
The name of the Corporation is The Thaxton Group, Inc.
ARTICLE 2
The address of the registered office of the Corporation is 1542 Pageland
Highway, Lancaster, South Carolina 29721, and the name of the registered agent
at such address is James D. Thaxton.
ARTICLE 3
The purpose for which the Corporation is organized is to engage in any
lawful business.
ARTICLE 4
The period of duration of the Corporation shall be perpetual.
ARTICLE 5
The aggregate number of shares which the Corporation shall have
authority to issue is Fifty-five Million (55,000,000), divided into Fifty
Million (50,000,000) Common Shares and Five Million (5,000,000) Preferred
Shares, all of which shall have a par value of $0.01. The preferences,
limitations and relative rights of each class of shares are as follows:
Common Shares
-------------
The Common Shares shall be entitled to one vote per share
and to all other rights of shareholders subject to any rights
granted to the Preferred Shares.
<PAGE>
Preferred Shares
----------------
The Preferred Shares may be issued in one or more classes
or series with such designations, preferences, limitations, and
relative rights as the Board of Directors may determine from time
to time in accordance with applicable law. The following series
have been designated by the Board of Directors:
Series A Convertible Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series A Convertible Preferred Stock, with a par value of $0.01
per share (the "Series A Preferred Stock"), and the number of shares
constituting such series shall be one million four hundred thousand (1,400,000).
Section 2. Dividends. The holders of shares of Series A Preferred Stock
shall be entitled to receive dividends, when, as, and if declared by the Board
of Directors or a duly authorized committee thereof, out of funds legally
available for the payment of dividends. Dividends shall be paid in respect of
each share of Series A Preferred Stock outstanding at the rate of seventy-five
cents ($0.75) per share per annum, payable in cash quarterly commencing on March
31, 1998 and thereafter on the last day of June, September, December and March
of each year that any shares of Series A Preferred Stock are outstanding;
provided, however, that dividends in respect of each share of Series A Preferred
Stock issued at any time during the year ending December 31, 1997 or any
calendar quarter thereafter, shall be payable in cash at such annual rate, pro
rated from the date of issuance, on December 31, 1997 or the last day of such
quarter, as applicable. Such dividends are prior and in preference to any
declaration or payment of any distribution (as defined below) on the common
stock of the Company (the "Common Stock"), but shall be paid pro rata and
concurrently with any payment of dividends to holders of Series B Convertible
Preferred Stock (the "Series B Preferred Stock"). Such dividends shall accrue on
each share of Series A Preferred Stock from day to day from the date of initial
issuance thereof whether or not earned or declared so that if such dividends
with respect to any previous dividend period at the rate provided for herein
have not been paid or declared and set apart for all shares of Series A
Preferred Stock at the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any distribution shall be paid
on, or declared and set apart for the Common Stock. For purposes of this Section
2, unless the context otherwise requires, "distribution" shall mean the transfer
of cash or property without consideration, whether by way of dividend or
otherwise, payable other than in Common Stock, for the purchase or redemption of
shares of the Company's Common Stock (other than redemption as set forth in
Section 5) for cash or property, including any such transfer, purchase, or
redemption by a subsidiary of the Company.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution,
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior to the Series A Preferred Stock unless, prior
thereto, the holders of shares of Series A Preferred Stock shall have received
$10 per share plus any accrued but unpaid dividends. Following the payment of
the full amount of such liquidation preference, no additional distributions
shall be made to the holders of shares of Series A Preferred Stock. If, upon any
liquidation, dissolution, or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable
<PAGE>
among the holders of shares of Series A Preferred Stock or any capital stock
ranking on a par with the Series A Preferred Stock upon liquidation,
dissolution, or winding up of the Company, shall be insufficient to pay in full
the preferential amounts to which such stock would be entitled, then such
assets, or the proceeds thereof, shall be distributable among such holders
ratably in accordance with the respective amounts which would be payable on such
shares if all amounts payable thereon were payable in full.
Section 4. Conversion Rights, Antidilution Provisions.
A. Following the Trigger Date (as defined in subparagraph I of this
Section 4), shares of the Series A Preferred Stock shall be convertible, in
whole or in part, at the option of the holder, into Common Stock, at any time or
from time to time, subject to the following terms and conditions. The Series A
Preferred Stock shall not be convertible into any shares of Common Stock unless
and until the Trigger Date has occurred.
B. The shares of the Series A Preferred Stock shall be convertible at
the principal executive offices of the Company, and at such other office or
offices, if any, as the Board of Directors may designate, into fully paid and
nonassessable shares of Common Stock of the Company, at an initial conversion
rate of one (1) share of Common Stock for each share of Series A Preferred
Stock, subject to adjustment as described in this Section 4.
C. In order to convert shares of the Series A Preferred Stock into
Common Stock, the holder thereof shall surrender, after the Trigger Date, at any
office hereinabove mentioned the certificate or certificates therefor, duly
endorsed or assigned to the Company or in blank, and give written notice to the
Company at such office that such holder elects to convert such shares. Shares of
the Series A Preferred Stock shall be deemed to have been converted immediately
prior to the close of business on the day of the surrender of such shares for
conversion in accordance with the foregoing provisions, and the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office a certificate or
certificates for the number of full shares of Common Stock issuable upon such
conversion, together with payment in lieu of any fraction of a share, as
hereinafter provided, to the person or persons entitled to receive the same.
D. If at any time the Company shall subdivide or combine its outstanding
shares of Common Stock into a different number of shares of Common Stock, each
share of Series A Preferred Stock shall thereafter be convertible into the same
number of shares of Common Stock to which the holder of such shares of Series A
Preferred Stock would thereafter have been entitled had such shares of Series A
Preferred Stock been converted into Common Stock immediately prior to the
effective date of such subdivision or combination.
E. If there occurs any capital reorganization or any reclassification of
the capital stock of the Company or consolidation or merger of the Company with
or into another Company or entity, each share of Series A Preferred Stock shall
thereafter be convertible into, in lieu of Common Stock, the same kind and
amounts of securities or other assets, or both, which were issuable or
distributable to the holders of shares of outstanding Common Stock of the
Company
<PAGE>
upon such reorganization, reclassification, consolidation, or merger in respect
of that number of shares of Common Stock into which such share of Series A
Preferred Stock would have been converted had such share of Series A Preferred
Stock been converted into Common Stock immediately prior to such reorganization,
reclassification, consolidation, or merger.
F. Upon any event described in subparagraphs D and E of this Section 4,
the Company shall promptly mail to each holder of Series A Preferred Stock a
notice which shall describe such event and the change in the number of shares or
other assets or securities issuable upon the conversion of Series A Preferred
Stock, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
G. The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the Series A Preferred Stock, the full
number of shares of Common Stock then issuable upon the conversion of all shares
of Series A Preferred Stock then outstanding and shall take all such action and
obtain all such permits or orders as may be necessary to enable the Company
lawfully to issue such Common Stock upon such conversion.
H. If a share of Series A Preferred Stock is called for redemption the
holder may convert it into a share of Common Stock in accordance with subsection
B of this Section 4 at any time before the fifth (5th) day prior to the
Redemption Date by complying with the conversion requirements of subsection C of
this Section 4.
I. No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be issuable, the
Company shall pay a cash adjustment in respect of such fraction.
J. As used herein, the term "Trigger Date" means December 31, 1997.
Section 5. Redemption.
A. At any time after December 31, 1999, the Company may, at its option,
redeem all or part of the outstanding shares of the Series A Preferred Stock at
the redemption price set forth in subparagraph B below, provided that the
Company shall give written notice by mail, postage prepaid, to the holders of
the Series A Preferred Stock to be redeemed at least 30 but not more than 60
days prior to the date specified for redemption (the "Redemption Date"). Such
notice shall be addressed to each such shareholder at the address of such
shareholder appearing on the books of the Company or given by such holder to the
Company for the purpose of notice, or if no such address appears or if so given,
at the place where the principal office of the Company is located. Such notice
shall state (1) the Redemption Date, (2) the Redemption Price (hereinafter
defined), (3) the number of shares of Series A Preferred Stock to be redeemed,
(4) that holders who wish to convert the shares of Series A Preferred Stock
called for redemption must satisfy the requirements of Section 4 hereof, and (5)
that the shares of Series A Preferred Stock called for redemption must be
surrendered to the Company on or before the Redemption Date, at the place
designated in the notice. On or after the Redemption Date, each holder of shares
of Series A Preferred Stock called for redemption that surrenders the
certificate evidencing such shares to the Company for redemption at the place
designated in such notice shall thereupon be entitled to
<PAGE>
receive payment of the Redemption Price. If less than all of the outstanding
shares of Series A Preferred Stock are to be redeemed, then the Company shall
redeem a pro rata portion from each holder of Series A Preferred Stock according
to the respective number of shares of Series A Preferred Stock held by such
holder.
B. The Series A Preferred Stock may be redeemed at a cash price equal to
Fifteen Dollars ($15.00) per share, together with all declared and unpaid
dividends to and including the Redemption Date (the "Redemption Price").
C. From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
holders of shares shall continue) the holders of the shares of the Series A
Preferred Stock called for redemption, who shall not have converted such shares
into Common Stock in accordance with Section 4 hereof, shall cease to have any
rights as shareholders of the Company except the right to receive, without
interest, the Redemption Price thereof upon surrender of certificates
representing the shares of Series A Preferred Stock and such shares shall not
thereafter be transferred (except with the consent of Company) on the books of
the Company and shall not be deemed outstanding for any purpose whatsoever.
D. There shall be no redemption of any shares of Series A Preferred
Stock of the Company where such action would be in violation of applicable law.
Section 6. Voting Rights. Except as otherwise required by law, the
holders of the Series A Preferred Stock shall not be entitled to vote at any
annual or special meeting of shareholders of the Company nor may they act by
written consent in lieu of such meetings.
Section 7. Exchange. Certificates representing shares of the Series A
Preferred Stock and, if converted in accordance with the terms and conditions
hereof, after conversion thereof into Common Stock, certificates representing
such shares, shall be exchangeable, at the option of the holder, for a new
certificate or certificates of the same or different denominations representing
in the aggregate the same number of shares of Series A Preferred Stock or shares
of Common Stock, as the case may be.
Section 8. Shares to be Retired. All shares of Series A Preferred Stock
which are converted into Common Stock shall revert to the status of authorized
but unissued shares of preferred stock of the Company but shall not thereafter
be reissued as shares of Series A Preferred Stock.
Series B Convertible Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series B Convertible Preferred Stock, with a par value of $0.01
per share (the "Series B Preferred Stock"), and the number of shares
constituting such series shall be forty thousand (40,000).
Section 2. Dividends. The holders of shares of Series B Preferred Stock
shall be entitled to receive dividends, when, as, and if declared by the Board
of Directors or a duly authorized committee thereof, out of funds legally
available for the payment of dividends.
<PAGE>
A. Dividends on the Series B Preferred Stock shall be paid in respect of
each share of Series B Preferred Stock outstanding in shares of Series B
Preferred Stock at the annual rate of 0.075 shares of Series B Preferred Stock
per share, payable quarterly commencing on March 31, 1998 and thereafter on the
last day of June, September, December and March of each year that any shares of
Series B Preferred Stock are outstanding; provided, however, that dividends in
respect of each share of Series B Preferred Stock issued at any time during the
year ending December 31, 1997 shall be payable in shares of Series B Preferred
stock at such annual rate, pro rated from the date of issuance, on December 31,
1997. Fractional shares of Series B Preferred Stock may be issued in connection
with the payment of a dividend, and any such fractional shares shall be rounded
down to the nearest one-hundredth (1/100) of a share.
B. The Board of Directors may, at any time, elect to declare and pay
dividends on all or a portion of the outstanding Series B Preferred Stock in
cash, to the extent legally permissible, in lieu of shares of Series B Preferred
Stock. Upon such election, dividends shall be paid in respect of each share of
Series B Preferred Stock at the rate of seventy-five cents ($0.75) per share per
annum, payable in cash quarterly commencing on March 31, 1998 and thereafter on
the last day of June, September, December and March of each year that any shares
of Series B Preferred Stock are outstanding; provided, however, that dividends
in respect of each share of Series B Preferred Stock issued at any time during
the year ending December 31, 1997 or any calendar quarter thereafter, shall be
payable in cash at such annual rate, pro rated from the date of issuance, on
December 31, 1997 or the last day of such quarter, as applicable.
C. Dividends on the Series B Preferred Stock are prior and in preference
to any declaration or payment of any distribution (as defined below) on the
common stock of the Company (the "Common Stock"), but shall be paid pro rata and
concurrently with any payment of dividends to holders of Series A Convertible
Preferred Stock (the "Series A Preferred Stock"). Such dividends shall accrue on
each share of Series B Preferred Stock from day to day from the date of initial
issuance thereof whether or not earned or declared so that if such dividends
with respect to any previous dividend period at the rate provided for herein
have not been paid or declared and set apart for all shares of Series B
Preferred Stock at the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any distribution shall be paid
on, or declared and set apart for the Common Stock. For purposes of this Section
2, unless the context otherwise requires, "distribution" shall mean the transfer
of cash or property without consideration, whether by way of dividend or
otherwise, payable other than in Common Stock, for the purchase or redemption of
shares of Common Stock (other than redemption as set forth in Section 5) for
cash or property, including any such transfer, purchase, or redemption by a
subsidiary of the Company.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution,
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior to the Series B Preferred Stock unless, prior
thereto, the holders of shares of Series B Preferred Stock shall have received
$10 per share plus any accrued but unpaid dividends. Following the payment of
the full amount of such liquidation preference, no additional distributions
shall be made to the holders of shares of Series B Preferred Stock. If, upon any
liquidation, dissolution, or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of shares of
Series B Preferred Stock or any capital stock ranking on a par
<PAGE>
with the Series B Preferred Stock upon liquidation, dissolution, or winding up
of the Company, shall be insufficient to pay in full the preferential amounts to
which such stock would be entitled, then such assets, or the proceeds thereof,
shall be distributable among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were payable in full.
Section 4. Conversion Rights, Antidilution Provisions.
A. Following the Trigger Date (as defined in subparagraph I of this
Section 4), shares of the Series B Preferred Stock shall be convertible, in
whole or in part, at the option of the holder, into Common Stock, at any time or
from time to time, subject to the following terms and conditions. The Series B
Preferred Stock shall not be convertible into any shares of Common Stock unless
and until the Trigger Date has occurred.
B. The shares of the Series B Preferred Stock shall be convertible at
the principal executive offices of the Company, and at such other office or
offices, if any, as the Board of Directors may designate, into fully paid and
nonassessable shares of Common Stock of the Company, at an initial conversion
rate of one (1) share of Common Stock for each share of Series B Preferred
Stock, subject to adjustment as described in this Section 4.
C. In order to convert shares of the Series B Preferred Stock into
Common Stock, the holder thereof shall surrender, after the Trigger Date, at any
office hereinabove mentioned the certificate or certificates therefor, duly
endorsed or assigned to the Company or in blank, and give written notice to the
Company at such office that such holder elects to convert such shares. Shares of
the Series B Preferred Stock shall be deemed to have been converted immediately
prior to the close of business on the day of the surrender of such shares for
conversion in accordance with the foregoing provisions, and the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office a certificate or
certificates for the number of full shares of Common Stock issuable upon such
conversion, together with payment in lieu of any fraction of a share, as
hereinafter provided, to the person or persons entitled to receive the same.
D. If at any time the Company shall subdivide or combine its outstanding
shares of Common Stock into a different number of shares of Common Stock, each
share of Series B Preferred Stock shall thereafter be convertible into the same
number of shares of Common Stock to which the holder of such shares of Series B
Preferred Stock would thereafter have been entitled had such shares of Series B
Preferred Stock been converted into Common Stock immediately prior to the
effective date of such subdivision or combination.
E. If there occurs any capital reorganization or any reclassification of
the capital stock of the Company or consolidation or merger of the Company with
or into another Company or entity, each share of Series B Preferred Stock shall
thereafter be convertible into, in lieu of Common Stock, the same kind and
amounts of securities or other assets, or both, which were issuable or
distributable to the holders of shares of outstanding Common Stock of the
Company upon such reorganization, reclassification, consolidation, or merger in
respect of that number of
<PAGE>
shares of Common Stock into which such share of Series B Preferred Stock would
have been converted had such share of Series B Preferred Stock been converted
into Common Stock immediately prior to such reorganization, reclassification,
consolidation, or merger.
F. Upon any event described in subparagraphs D and E of this Section 4,
the Company shall promptly mail to each holder of Series B Preferred Stock a
notice which shall describe such event and the change in the number of shares or
other assets or securities issuable upon the conversion of Series B Preferred
Stock, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
G. The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the Series B Preferred Stock, the full
number of shares of Common Stock then issuable upon the conversion of all shares
of Series B Preferred Stock then outstanding and shall take all such action and
obtain all such permits or orders as may be necessary to enable the Company
lawfully to issue such Common Stock upon such conversion.
H. If a share of Series B Preferred Stock is called for redemption the
holder may convert it into a share of Common Stock in accordance with subsection
B of this Section 4 at any time before the fifth (5th) day prior to the
Redemption Date by complying with the conversion requirements of subsection C of
this Section 4.
I. No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be issuable, the
Company shall pay a cash adjustment in respect of such fraction.
J. As used herein, the term "Trigger Date" means December 31, 1997.
Section 5. Redemption.
A. At any time after December 31, 1999, the Company may, at its option,
redeem all or part of the outstanding shares of the Series A Preferred Stock at
the redemption price set forth in subparagraph B below, provided that the
Company shall give written notice by mail, postage prepaid, to the holders of
the Series A Preferred Stock to be redeemed at least 30 but not more than 60
days prior to the date specified for redemption (the "Redemption Date"). Such
notice shall be addressed to each such shareholder at the address of such
shareholder appearing on the books of the Company or given by such holder to the
Company for the purpose of notice, or if no such address appears or if so given,
at the place where the principal office of the Company is located. Such notice
shall state (1) the Redemption Date, (2) the Redemption Price (hereinafter
defined), (3) the number of shares of Series A Preferred Stock to be redeemed,
(4) that holders who wish to convert the shares of Series A Preferred Stock
called for redemption must satisfy the requirements of Section 4 hereof, and (5)
that the shares of Series A Preferred Stock called for redemption must be
surrendered to the Company on or before the Redemption Date, at the place
designated in the notice. On or after the Redemption Date, each holder of shares
of Series A Preferred Stock called for redemption that surrenders the
certificate evidencing such shares to the Company for redemption at the place
designated in such notice shall thereupon be entitled to
<PAGE>
receive payment of the Redemption Price. If less than all of the outstanding
shares of Series A Preferred Stock are to be redeemed, then the Company shall
redeem a pro rata portion from each holder of Series A Preferred Stock according
to the respective number of shares of Series A Preferred Stock held by such
holder.
B. The Series A Preferred Stock may be redeemed at a cash price equal to
Fifteen Dollars ($15.00) per share, together with all declared and unpaid
dividends to and including the Redemption Date (the "Redemption Price").
C. From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
holders of shares shall continue) the holders of the shares of the Series A
Preferred Stock called for redemption, who shall not have converted such shares
into Common Stock in accordance with Section 4 hereof, shall cease to have any
rights as shareholders of the Company except the right to receive, without
interest, the Redemption Price thereof upon surrender of certificates
representing the shares of Series A Preferred Stock and such shares shall not
thereafter be transferred (except with the consent of Company) on the books of
the Company and shall not be deemed outstanding for any purpose whatsoever.
D. There shall be no redemption of any shares of Series A Preferred
Stock of the Company where such action would be in violation of applicable law.
Section 6. Voting Rights. Except as otherwise required by law, the
holders of the Series A Preferred Stock shall not be entitled to vote at any
annual or special meeting of shareholders of the Company nor may they act by
written consent in lieu of such meetings.
Section 7. Exchange. Certificates representing shares of the Series A
Preferred Stock and, if converted in accordance with the terms and conditions
hereof, after conversion thereof into Common Stock, certificates representing
such shares, shall be exchangeable, at the option of the holder, for a new
certificate or certificates of the same or different denominations representing
in the aggregate the same number of shares of Series A Preferred Stock or shares
of Common Stock, as the case may be.
Section 8. Shares to be Retired. All shares of Series A Preferred Stock
which are converted into Common Stock shall revert to the status of authorized
but unissued shares of preferred stock of the Company but shall not thereafter
be reissued as shares of Series A Preferred Stock.
Series B Convertible Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series B Convertible Preferred Stock, with a par value of $0.01
per share (the "Series B Preferred Stock"), and the number of shares
constituting such series shall be forty thousand (40,000).
Section 2. Dividends. The holders of shares of Series B Preferred Stock
shall be entitled to receive dividends, when, as, and if declared by the Board
of Directors or a duly authorized committee thereof, out of funds legally
available for the payment of dividends.
<PAGE>
A. Dividends on the Series B Preferred Stock shall be paid in respect of
each share of Series B Preferred Stock outstanding in shares of Series B
Preferred Stock at the annual rate of 0.075 shares of Series B Preferred Stock
per share, payable quarterly commencing on March 31, 1998 and thereafter on the
last day of June, September, December and March of each year that any shares of
Series B Preferred Stock are outstanding; provided, however, that dividends in
respect of each share of Series B Preferred Stock issued at any time during the
year ending December 31, 1997 shall be payable in shares of Series B Preferred
stock at such annual rate, pro rated from the date of issuance, on December 31,
1997. Fractional shares of Series B Preferred Stock may be issued in connection
with the payment of a dividend, and any such fractional shares shall be rounded
down to the nearest one-hundredth (1/100) of a share.
B. The Board of Directors may, at any time, elect to declare and pay
dividends on all or a portion of the outstanding Series B Preferred Stock in
cash, to the extent legally permissible, in lieu of shares of Series B Preferred
Stock. Upon such election, dividends shall be paid in respect of each share of
Series B Preferred Stock at the rate of seventy-five cents ($0.75) per share per
annum, payable in cash quarterly commencing on March 31, 1998 and thereafter on
the last day of June, September, December and March of each year that any shares
of Series B Preferred Stock are outstanding; provided, however, that dividends
in respect of each share of Series B Preferred Stock issued at any time during
the year ending December 31, 1997 or any calendar quarter thereafter, shall be
payable in cash at such annual rate, pro rated from the date of issuance, on
December 31, 1997 or the last day of such quarter, as applicable.
C. Dividends on the Series B Preferred Stock are prior and in preference
to any declaration or payment of any distribution (as defined below) on the
common stock of the Company (the "Common Stock"), but shall be paid pro rata and
concurrently with any payment of dividends to holders of Series A Convertible
Preferred Stock (the "Series A Preferred Stock"). Such dividends shall accrue on
each share of Series B Preferred Stock from day to day from the date of initial
issuance thereof whether or not earned or declared so that if such dividends
with respect to any previous dividend period at the rate provided for herein
have not been paid or declared and set apart for all shares of Series B
Preferred Stock at the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any distribution shall be paid
on, or declared and set apart for the Common Stock. For purposes of this Section
2, unless the context otherwise requires, "distribution" shall mean the transfer
of cash or property without consideration, whether by way of dividend or
otherwise, payable other than in Common Stock, for the purchase or redemption of
shares of Common Stock (other than redemption as set forth in Section 5) for
cash or property, including any such transfer, purchase, or redemption by a
subsidiary of the Company.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution,
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior to the Series B Preferred Stock unless, prior
thereto, the holders of shares of Series B Preferred Stock shall have received
$10 per share plus any accrued but unpaid dividends. Following the payment of
the full amount of such liquidation preference, no additional distributions
shall be made to the holders of shares of Series B Preferred Stock. If, upon any
liquidation, dissolution, or winding up of the Company, the assets of the
Company, or proceeds thereof, distributable among the holders of shares of
Series B Preferred Stock or any capital stock ranking on a par
<PAGE>
with the Series B Preferred Stock upon liquidation, dissolution, or winding up
of the Company, shall be insufficient to pay in full the preferential amounts to
which such stock would be entitled, then such assets, or the proceeds thereof,
shall be distributable among such holders ratably in accordance with the
respective amounts which would be payable on such shares if all amounts payable
thereon were payable in full.
Section 4. Conversion Rights, Antidilution Provisions.
A. Following the Trigger Date (as defined in subparagraph I of this
Section 4), shares of the Series B Preferred Stock shall be convertible, in
whole or in part, at the option of the holder, into Common Stock, at any time or
from time to time, subject to the following terms and conditions. The Series B
Preferred Stock shall not be convertible into any shares of Common Stock unless
and until the Trigger Date has occurred.
B. The shares of the Series B Preferred Stock shall be convertible at
the principal executive offices of the Company, and at such other office or
offices, if any, as the Board of Directors may designate, into fully paid and
nonassessable shares of Common Stock of the Company, at an initial conversion
rate of one (1) share of Common Stock for each share of Series B Preferred
Stock, subject to adjustment as described in this Section 4.
C. In order to convert shares of the Series B Preferred Stock into
Common Stock, the holder thereof shall surrender, after the Trigger Date, at any
office hereinabove mentioned the certificate or certificates therefor, duly
endorsed or assigned to the Company or in blank, and give written notice to the
Company at such office that such holder elects to convert such shares. Shares of
the Series B Preferred Stock shall be deemed to have been converted immediately
prior to the close of business on the day of the surrender of such shares for
conversion in accordance with the foregoing provisions, and the person or
persons entitled to receive the Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
at such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office a certificate or
certificates for the number of full shares of Common Stock issuable upon such
conversion, together with payment in lieu of any fraction of a share, as
hereinafter provided, to the person or persons entitled to receive the same.
D. If at any time the Company shall subdivide or combine its outstanding
shares of Common Stock into a different number of shares of Common Stock, each
share of Series B Preferred Stock shall thereafter be convertible into the same
number of shares of Common Stock to which the holder of such shares of Series B
Preferred Stock would thereafter have been entitled had such shares of Series B
Preferred Stock been converted into Common Stock immediately prior to the
effective date of such subdivision or combination.
E. If there occurs any capital reorganization or any reclassification of
the capital stock of the Company or consolidation or merger of the Company with
or into another Company or entity, each share of Series B Preferred Stock shall
thereafter be convertible into, in lieu of Common Stock, the same kind and
amounts of securities or other assets, or both, which were issuable or
distributable to the holders of shares of outstanding Common Stock of the
Company upon such reorganization, reclassification, consolidation, or merger in
respect of that number of
<PAGE>
shares of Common Stock into which such share of Series B Preferred Stock would
have been converted had such share of Series B Preferred Stock been converted
into Common Stock immediately prior to such reorganization, reclassification,
consolidation, or merger.
F. Upon any event described in subparagraphs D and E of this Section 4,
the Company shall promptly mail to each holder of Series B Preferred Stock a
notice which shall describe such event and the change in the number of shares or
other assets or securities issuable upon the conversion of Series B Preferred
Stock, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
G. The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the Series B Preferred Stock, the full
number of shares of Common Stock then issuable upon the conversion of all shares
of Series B Preferred Stock then outstanding and shall take all such action and
obtain all such permits or orders as may be necessary to enable the Company
lawfully to issue such Common Stock upon such conversion.
H. If a share of Series B Preferred Stock is called for redemption the
holder may convert it into a share of Common Stock in accordance with subsection
B of this Section 4 at any time before the fifth (5th) day prior to the
Redemption Date by complying with the conversion requirements of subsection C of
this Section 4.
I. No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be issuable, the
Company shall pay a cash adjustment in respect of such fraction.
J. As used herein, the term "Trigger Date" means December 31, 1997.
Section 5. Redemption.
A. At any time after December 31, 1999, the Company may, at its option,
redeem all or part of the outstanding shares of the Series B Preferred Stock at
the redemption price set forth in subparagraph B below, provided that the
Company shall give written notice by mail, postage prepaid, to the holders of
the Series B Preferred Stock to be redeemed at least 30 but not more than 60
days prior to the date specified for redemption (the "Redemption Date"). Such
notice shall be addressed to each such shareholder at the address of such
shareholder appearing on the books of the Company or given by such holder to the
Company for the purpose of notice, or if no such address appears or if so given,
at the place where the principal office of the Company is located. Such notice
shall state (1) the Redemption Date, (2) the Redemption Price (hereinafter
defined), (3) the number of shares of Series B Preferred Stock to be redeemed,
(4) that holders who wish to convert the shares of Series B Preferred Stock
called for redemption must satisfy the requirements of Section 4 hereof, and (5)
that the shares of Series B Preferred Stock called for redemption must be
surrendered to the Company on or before the Redemption Date, at the place
designated in the notice. On or after the Redemption Date, each holder of shares
of Series B Preferred Stock called for redemption that surrenders the
certificate evidencing such shares to the Company for redemption at the place
designated in such notice shall thereupon be entitled to receive payment of the
Redemption Price. If less than all of the outstanding shares of Series B
<PAGE>
Preferred Stock are to be redeemed, then the Company shall redeem a pro rata
portion from each holder of Series B Preferred Stock according to the respective
number of shares of Series B Preferred Stock held by such holder.
B. The Series B Preferred Stock may be redeemed at a cash price equal to
Fifteen Dollars ($15.00) per share, together with all declared and unpaid
dividends to and including the Redemption Date (the "Redemption Price").
C. From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
holders of shares shall continue) the holders of the shares of the Series B
Preferred Stock called for redemption, who shall not have converted such shares
into Common Stock in accordance with Section 4 hereof, shall cease to have any
rights as shareholders of the Company except the right to receive, without
interest, the Redemption Price thereof upon surrender of certificates
representing the shares of Series B Preferred Stock and such shares shall not
thereafter be transferred (except with the consent of Company) on the books of
the Company and shall not be deemed outstanding for any purpose whatsoever.
D. There shall be no redemption of any shares of Series B Preferred
Stock of the Company where such action would be in violation of applicable law.
Section 6. Voting Rights. Except as otherwise required by law, the
holders of the Series B Preferred Stock shall not be entitled to vote at any
annual or special meeting of shareholders of the Company nor may they act by
written consent in lieu of such meetings.
Section 7. Exchange. Certificates representing shares of the Series B
Preferred Stock and, if converted in accordance with the terms and conditions
hereof, after conversion thereof into Common Stock, certificates representing
such shares, shall be exchangeable, at the option of the holder, for a new
certificate or certificates of the same or different denominations representing
in the aggregate the same number of shares of Series B Preferred Stock or shares
of Common Stock, as the case may be.
Section 8. Shares to be Retired. All shares of Series B Preferred Stock
which are converted into Common Stock shall revert to the status of authorized
but unissued shares of preferred stock of the Company but shall not thereafter
be reissued as shares of Series B Preferred Stock.
Series C Convertible Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series C Convertible Preferred Stock, with a par value of $0.01
per share (the "Series C Preferred Stock"), and the number of shares
constituting such series shall be fifty thousand (50,000).
Section 2. Dividends. The holders of shares of Series C Preferred Stock
shall be entitled to receive dividends, when, as, and if declared by the Board
of Directors or a duly authorized committee thereof, out of funds legally
available for the payment of dividends. Through December 31, 2000, dividends
shall be paid in respect of each share of Series C
<PAGE>
Preferred Stock outstanding at the rate of one dollar ($1.00) per share per
annum, and thereafter at the rate of one dollar and eighty cents ($1.80) per
share per annum, payable in cash quarterly commencing on March 31, 1998 and
thereafter on the last day of June, September, December and March of each year
that any shares of Series C Preferred Stock are outstanding; provided, however,
that dividends in respect of each share of Series C Preferred Stock issued at
any time during the year ending December 31, 1997 or any calendar quarter
thereafter, shall be payable in cash at such annual rate, pro rated from the
date of issuance, on December 31, 1997 or the last day of such quarter, as
applicable. Such dividends are prior and in preference to any declaration or
payment of any distribution (as defined below) on the common stock of the
Company (the "Common Stock"), but shall be paid pro rata and concurrently with
any payment of dividends to holders of Series A Convertible Preferred Stock
("the Series A Preferred Stock") and Series B Convertible Preferred Stock (the
"Series B Preferred Stock"). Such dividends are cumulative and shall accrue on
each share of Series C Preferred Stock from day to day from the date of initial
issuance thereof whether or not earned or declared so that if such dividends
with respect to any previous dividend period at the rate provided for herein
have not been paid or declared and set apart for all shares of Series C
Preferred Stock at the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any distribution shall be paid
on, or declared and set apart for the Common Stock. For purposes of this Section
2, unless the context otherwise requires, "distribution" shall mean the transfer
of cash or property without consideration, whether by way of dividend or
otherwise, payable other than in Common Stock, for the purchase or redemption of
shares of the Company's Common Stock (other than redemption as set forth in
Section 5) for cash or property, including any such transfer, purchase, or
redemption by a subsidiary of the Company.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution,
or winding up of the Company, no distribution shall be made to the holders of
shares of Common Stock or shares of any other class or series of stock ranking
junior to the Series C Preferred Stock unless, prior thereto, the holders of
shares of Series C Preferred Stock shall have received $10 per share plus any
accrued but unpaid dividends. Following the payment of the full amount of such
liquidation preference, no additional distributions shall be made to the holders
of shares of Series C Preferred Stock. If, upon any liquidation, dissolution, or
winding up of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of shares of Series C Preferred Stock or any
capital stock ranking on a par with the Series C Preferred Stock upon
liquidation, dissolution, or winding up of the Company, shall be insufficient to
pay in full the preferential amounts to which such stock would be entitled, then
such assets, or the proceeds thereof, shall be distributable among such holders
ratably in accordance with the respective amounts which would be payable on such
shares if all amounts payable thereon were payable in full.
Section 4. Conversion Rights, Antidilution Provisions.
A. Shares of the Series C Preferred Stock shall be convertible, in whole
or in part, at the option of the holder, into Common Stock, at any time or from
time to time, subject to the following terms and conditions.
B. The shares of the Series C Preferred Stock shall be convertible at
the principal executive offices of the Company, and at such other office or
offices, if any, as the Board of
<PAGE>
Directors may designate, into fully paid and nonassessable shares of Common
Stock of the Company, at an initial conversion rate of one (1) share of Common
Stock for each share of Series C Preferred Stock, subject to adjustment as
described in this Section 4.
C. In order to convert shares of the Series C Preferred Stock into
Common Stock, the holder thereof shall surrender, at any office hereinabove
mentioned the certificate or certificates therefor, duly endorsed or assigned to
the Company or in blank, and give written notice to the Company at such office
that such holder elects to convert such shares. Shares of the Series C Preferred
Stock shall be deemed to have been converted immediately prior to the close of
business on the day of the surrender of such shares for conversion in accordance
with the foregoing provisions, and the person or persons entitled to receive the
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such Common Stock at such time. As promptly as
practicable on or after the conversion date, the Company shall issue and shall
deliver at such office a certificate or certificates for the number of full
shares of Common Stock issuable upon such conversion, together with payment in
lieu of any fraction of a share, as hereinafter provided, to the person or
persons entitled to receive the same.
D. If at any time the Company shall subdivide or combine its outstanding
shares of Common Stock into a different number of shares of Common Stock, each
share of Series C Preferred Stock shall thereafter be convertible into the same
number of shares of Common Stock to which the holder of such shares of Series C
Preferred Stock would thereafter have been entitled had such shares of Series C
Preferred Stock been converted into Common Stock immediately prior to the
effective date of such subdivision or combination.
E. If there occurs any capital reorganization or any reclassification of
the capital stock of the Company or consolidation or merger of the Company with
or into another Company or entity, each share of Series C Preferred Stock shall
thereafter be convertible into, in lieu of Common Stock, the same kind and
amounts of securities or other assets, or both, which were issuable or
distributable to the holders of shares of outstanding Common Stock of the
Company upon such reorganization, reclassification, consolidation, or merger in
respect of that number of shares of Common Stock into which such share of Series
C Preferred Stock would have been converted had such share of Series C Preferred
Stock been converted into Common Stock immediately prior to such reorganization,
reclassification, consolidation, or merger.
F. Upon any event described in subparagraphs D and E of this Section 4,
the Company shall promptly mail to each holder of Series C Preferred Stock a
notice which shall describe such event and the change in the number of shares or
other assets or securities issuable upon the conversion of Series C Preferred
Stock, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
G. The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the Series C Preferred Stock, the full
number of shares of Common Stock then issuable upon the conversion of all shares
of Series C Preferred Stock then outstanding and shall take all such action and
obtain all such permits or orders as may be necessary to enable the Company
lawfully to issue such Common Stock upon such conversion.
<PAGE>
H. If a share of Series C Preferred Stock is called for redemption the
holder may convert it into a share of Common Stock in accordance with subsection
B of this Section 4 at any time before the fifth (5th) day prior to the
Redemption Date by complying with the conversion requirements of subsection C of
this Section 4.
I. No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be issuable, the
Company shall pay a cash adjustment in respect of such fraction.
Section 5. Redemption.
A. At any time after December 31, 2000, the Company may, at its option,
redeem all or part of the outstanding shares of the Series C Preferred Stock at
the redemption price set forth in subparagraph B below, provided that the
Company shall give written notice by mail, postage prepaid, to the holders of
the Series C Preferred Stock to be redeemed at least 30 but not more than 60
days prior to the date specified for redemption (the "Redemption Date"). Such
notice shall be addressed to each such shareholder at the address of such
shareholder appearing on the books of the Company or given by such holder to the
Company for the purpose of notice, or if no such address appears or if so given,
at the place where the principal office of the Company is located. Such notice
shall state (1) the Redemption Date, (2) the Redemption Price (hereinafter
defined), (3) the number of shares of Series C Preferred Stock to be redeemed,
(4) that holders who wish to convert the shares of Series C Preferred Stock
called for redemption must satisfy the requirements of Section 4 hereof, and (5)
that the shares of Series C Preferred Stock called for redemption must be
surrendered to the Company on or before the Redemption Date, at the place
designated in the notice. On or after the Redemption Date, each holder of shares
of Series C Preferred Stock called for redemption that surrenders the
certificate evidencing such shares to the Company for redemption at the place
designated in such notice shall thereupon be entitled to receive payment of the
Redemption Price. If less than all of the outstanding shares of Series C
Preferred Stock are to be redeemed, then the Company shall redeem a pro rata
portion from each holder of Series C Preferred Stock according to the respective
number of shares of Series C Preferred Stock held by such holder.
B. The Series C Preferred Stock may be redeemed at a cash price equal to
Ten Dollars ($10.00) per share, together with all declared, unpaid and/or
accrued dividends to and including the Redemption Date (the "Redemption Price").
C. From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
holders of shares shall continue) the holders of the shares of the Series C
Preferred Stock called for redemption, who shall not have converted such shares
into Common Stock in accordance with Section 4 hereof, shall cease to have any
rights as shareholders of the Company except the right to receive, without
interest, the Redemption Price thereof upon surrender of certificates
representing the shares of Series C Preferred Stock and such shares shall not
thereafter be transferred (except with the consent of Company) on the books of
the Company and shall not be deemed outstanding for any purpose whatsoever.
<PAGE>
D. There shall be no redemption of any shares of Series C Preferred
Stock of the Company where such action would be in violation of applicable law.
Section 6. Voting Rights. Except as otherwise required by law, the
holders of the Series C Preferred Stock shall not be entitled to vote at any
annual or special meeting of shareholders of the Company nor may they act by
written consent in lieu of such meetings.
Section 7. Exchange. Certificates representing shares of the Series C
Preferred Stock and, if converted in accordance with the terms and conditions
hereof, after conversion thereof into Common Stock, certificates representing
such shares, shall be exchangeable, at the option of the holder, for a new
certificate or certificates of the same or different denominations representing
in the aggregate the same number of shares of Series C Preferred Stock or shares
of Common Stock, as the case may be.
Section 8. Shares to be Retired. All shares of Series C Preferred Stock
which are converted into Common Stock shall revert to the status of authorized
but unissued shares of preferred stock of the Company but shall not thereafter
be reissued as shares of Series C Preferred Stock.
Series D Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series D Preferred Stock, with a par value of $0.01 per share (the
"Series D Preferred Stock"), and the number of shares constituting such series
shall be Fifty-Six Thousand Two Hundred Seventy-Six (56,276).
Section 2. Dividends. The holders of shares of Series D Preferred Stock
shall be entitled to receive dividends, when, as, and if declared by the Board
of Directors or a duly authorized committee thereof, out of funds legally
available for the payment of dividends. Dividends shall be paid in respect of
each share of Series D Preferred Stock outstanding at the rate of eighty cents
($0.80) per share per annum, payable in cash quarterly commencing on September
30, 1998 and thereafter on the last day of March, June, September, and December
of each year that any shares of Series D Preferred Stock are outstanding;
provided, however, that dividends in respect of each share of Series D Preferred
Stock issued at any time during any calendar quarter thereafter shall be payable
in cash at such annual rate, pro rated from the date of issuance, on the last
day of such quarter. Such dividends are prior and in preference to any
declaration or payment of any distribution (as defined below) on the common
stock of the Company (the "Common Stock"), but shall be paid pro rata and
concurrently with any payment of dividends to holders of the Series A
Convertible Preferred Stock, the Series B Convertible Preferred Stock and the
Series C Convertible Preferred Stock. Such dividends are cumulative and shall
accrue on each share of Series D Preferred Stock from day to day from the date
of initial issuance thereof whether or not earned or declared so that if such
dividends with respect to any previous dividend period at the rate provided for
herein have not been paid or declared and set apart for all shares of Series D
Preferred Stock at the time outstanding, the deficiency shall be fully paid on,
or declared and set apart for, such shares before any distribution shall be paid
on, or declared and set apart for the Common Stock. For purposes of this Section
2, unless the context otherwise requires, "distribution" shall mean the transfer
of cash or property without
<PAGE>
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock, for the purchase or redemption of shares of the Company's Common
Stock (other than redemption as set forth in Section 4) for cash or property,
including any such transfer, purchase, or redemption by a subsidiary of the
Company.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution,
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior to the Series D Preferred Stock unless, prior
thereto, the holders of shares of Series D Preferred Stock shall have received
Ten Dollars ($10.00) per share plus any accrued but unpaid dividends. Following
the payment of the full amount of such liquidation preference, no additional
distributions shall be made to the holders of shares of Series D Preferred
Stock. If, upon any liquidation, dissolution, or winding up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
shares of Series D Preferred Stock or any capital stock ranking on a par with
the Series D Preferred Stock upon liquidation, dissolution, or winding up of the
Company, shall be insufficient to pay in full the preferential amounts to which
such stock would be entitled, then such assets, or the proceeds thereof, shall
be distributable among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were payable in full.
Section 4. Redemption.
A. At any time, the Company may, at its option, redeem all or part of
the outstanding shares of the Series D Preferred Stock at the redemption price
set forth in subparagraph B below, provided that the Company shall give written
notice by mail, postage prepaid, to the holders of the Series D Preferred Stock
to be redeemed at least thirty (30) but not more than sixty (60) days prior to
the date specified for redemption (the "Redemption Date"). Such notice shall be
addressed to each such shareholder at the address of such shareholder appearing
on the books of the Company or given by such holder to the Company for the
purpose of notice, or if no such address appears or if so given, at the place
where the principal office of the Company is located. Such notice shall state
(1) the Redemption Date, (2) the Redemption Price (hereinafter defined), (3) the
number of shares of Series D Preferred Stock to be redeemed and (4) that the
shares of Series D Preferred Stock called for redemption must be surrendered to
the Company on or before the Redemption Date, at the place designated in the
notice. On or after the Redemption Date, each holder of shares of Series D
Preferred Stock called for redemption that surrenders the certificate evidencing
such shares to the Company for redemption at the place designated in such notice
shall thereupon be entitled to receive payment of the Redemption Price. If less
than all of the outstanding shares of Series D Preferred Stock are to be
redeemed, then the Company shall redeem a pro rata portion from each holder of
Series D Preferred Stock according to the respective number of shares of Series
D Preferred Stock held by such holder.
B. The Series D Preferred Stock may be redeemed at a cash price equal to
Ten Dollars ($10.00) per share, together with all declared and unpaid dividends
to and including the Redemption Date (the "Redemption Price").
C. From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
holders of shares shall continue) the holders of the shares of the Series D
Preferred Stock called for redemption
<PAGE>
shall cease to have any rights as shareholders of the Company except the right
to receive, without interest, the Redemption Price thereof upon surrender of
certificates representing the shares of Series D Preferred Stock and such shares
shall not thereafter be transferred (except with the consent of Company) on the
books of the Company and shall not be deemed outstanding for any purpose
whatsoever.
D. There shall be no redemption of any shares of Series D Preferred
Stock of the Company where such action would be in violation of applicable law.
Section 5. Voting Rights. Except as otherwise required by law, the
holders of the Series D Preferred Stock shall not be entitled to vote at any
annual or special meeting of shareholders of the Company nor may they act by
written consent in lieu of such meetings.
Series E Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series E Preferred Stock, with a par value of $0.01 per share (the
"Series E Preferred Stock"), and the number of shares constituting such series
shall be Eight Hundred Thousand (800,000).
Section 2. Dividends. The holders of shares of Series E Preferred Stock
shall be entitled to receive dividends, when, as, and if declared by the Board
of Directors or a duly authorized committee thereof, out of funds legally
available for the payment of dividends. Dividends shall be paid in respect of
each share of Series E Preferred Stock outstanding at the prime rate published
by Citibank, N.A. (or other money center bank designated by Finova Capital
Corporation ("Finova")) on the first Business Day of any month during which any
shares of Series E Preferred Stock are outstanding, less one percent (1.0%) per
share per annum if the Dividend Payment Date (as hereafter defined) is prior to
October 31, 2003, or plus three percent (3.00%) per share per annum if the
Dividend Payment Date (as hereafter defined) is on or following October 31, 2003
(the initial dividend rate and the subsequent dividend rate herein referred to
as the "Dividend Rate"), payable in cash monthly commencing on December 15, 1998
and thereafter on the same day of each month (or, if such day is not a Business
Day (as defined below), the immediately following Business Day) (the "Dividend
Payment Date") of each year that any shares of Series E Preferred Stock are
outstanding; provided, however, that dividends in respect of each share of
Series E Preferred Stock issued at any time during any month shall be payable in
cash at the Dividend Rate, pro rated from the date of issuance, on the Dividend
Payment Date immediately following the date of issuance. Such dividends are
prior and in preference to any declaration or payment of any distribution (as
defined below) on the common stock of the Company (the "Common Stock"), but
shall be paid pro rata and concurrently with any payment of dividends to holders
of the Series A Convertible Preferred Stock, the Series B Convertible Preferred
Stock, the Series C Convertible Preferred Stock and the Series D Preferred
Stock. Such dividends are cumulative and shall accrue on each share of Series E
Preferred Stock from day to day from the date of initial issuance thereof
whether or not earned or declared so that if such dividends with respect to any
previous dividend period at the rate provided for herein have not been paid or
declared and set apart for all shares of Series E Preferred Stock at the time
outstanding, the deficiency shall be fully paid on, or declared and set apart
for, such shares before any distribution shall be paid on, or declared and set
apart for the Common Stock. "Business Day" shall mean a day other than a
Saturday, Sunday or other day on which the Company is
<PAGE>
required to close. For purposes of this Section 2, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
Common Stock, for the purchase or redemption of shares of the Company's Common
Stock (other than redemption as set forth in Section 4) for cash or property,
including any such transfer, purchase, or redemption by a subsidiary of the
Company.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution,
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior to the Series E Preferred Stock unless, prior
thereto, the holders of shares of Series E Preferred Stock shall have received
Ten Dollars ($10.00) per share plus any accrued but unpaid dividends. For
purposes of this Section 3, the Series E Preferred Stock ranks senior to the
Common Stock, the Series A Convertible Preferred Stock, the Series B Convertible
Preferred Stock, the Series C Convertible Preferred Stock and the Series D
Preferred Stock. Following the payment of the full amount of such liquidation
preference, no additional distributions shall be made to the holders of shares
of Series E Preferred Stock. If, upon any liquidation, dissolution, or winding
up of the Company, the assets of the Company, or proceeds thereof, distributable
among the holders of shares of Series E Preferred Stock or any capital stock
ranking on par with the Series E Preferred Stock upon liquidation, dissolution,
or winding up of the Company, shall be insufficient to pay in full the
preferential amounts to which such stock would be entitled, then such assets, or
the proceeds thereof, shall be distributable among such holders ratably in
accordance with the respective amounts which would be payable on such shares if
all amounts payable thereon were payable in full.
Section 4. Redemption
A. At any time, the Company may, at its option, redeem all or part of
the outstanding shares of the Series E Preferred Stock at the redemption price
set forth in subparagraph B below, provided that the Company shall give written
notice by mail, postage prepaid, to the holders of the Series E Preferred Stock
to be redeemed at least thirty (30) but not more than sixty (60) days prior to
the date specified for redemption (the "Redemption Date"). Such notice shall be
addressed to each such shareholder at the address of such shareholder appearing
on the books of the Company or given by such holder to the Company for the
purpose of notice, or if no such address appears or if so given, at the place
where the principal office of the Company is located. Such notice shall state
(1) the Redemption Date, (2) the Redemption Price (hereinafter defined), (3) the
number of shares of Series E Preferred Stock to be redeemed and (4) that the
shares of Series E Preferred Stock called for redemption must be surrendered to
the Company on or before the Redemption Date, at the place designated in the
notice. On or after the Redemption Date, each holder of shares of Series E
Preferred Stock called for redemption that surrenders the certificate evidencing
such shares to the Company for redemption at the place designated in such notice
shall thereupon be entitled to receive payment of the Redemption Price. If less
than all of the outstanding shares of Series E Preferred Stock are to be
redeemed, then the Company shall redeem a pro rata portion from each holder of
Series E Preferred Stock according to the respective number of shares of Series
E Preferred Stock held by such holder.
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B. The Series E Preferred Stock may be redeemed at a cash price equal to
Ten Dollars ($10.00) per share, together with all declared and unpaid dividends
to and including the Redemption Date (the "Redemption Price").
C. From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
holders of shares shall continue) the holders of the shares of the Series E
Preferred Stock called for redemption shall cease to have any rights as
shareholders of the Company except the right to receive, without interest, the
Redemption Price thereof upon surrender of certificates representing the shares
of Series E Preferred Stock and such shares shall not thereafter be transferred
(except with the consent of Company) on the books of the Company and shall not
be deemed outstanding for any purpose whatsoever.
D. There shall be no redemption of any shares of Series E Preferred
Stock of the Company where such action would be in violation of applicable law.
Section 5. Voting Rights. Except as otherwise required by law, the
holders of the Series E Preferred Stock shall not be entitled to vote at any
annual or special meeting of shareholders of the Company nor may they act by
written consent in lieu of such meetings.
ARTICLE 6
Except as may otherwise be provided herein, the shareholders of the
Corporation shall have no preemptive right to acquire additional or treasury
shares of the Corporation.
ARTICLE 7
To the fullest extent permitted by Section 33-2-102(e) of the South
Carolina Business Corporation Act of 1988, as the same exists or may hereafter
be amended, or other law, a director of the Corporation shall not be personally
liable to the Corporation, its shareholders or otherwise for monetary damages
for breach of fiduciary duty as a director. Any repeal or modification of this
Article 7 shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
ARTICLE 8
Title 35, Chapter 2, Article 1 of the Code of Laws of South Carolina
1976, as the same exists or may hereafter be amended, which addresses certain
control share acquisitions, shall not be applicable to the Corporation.
ARTICLE 9
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Title 35, Chapter 2, Article 2 of the Code of Laws of South Carolina
1976, as the same exists or may hereafter be amended, which addresses certain
business combinations, shall not be applicable to the Corporation.
ARTICLE 10
Pursuant to Section 33-7-280(b) of the South Carolina Business
Corporation Act of 1988, as the same exists or may hereafter be amended,
shareholders of the Corporation shall not have the right to cumulate their votes
for directors.
ARTICLE 11
Amendment of these Articles of Incorporation shall require approval by:
(1) a majority of the votes entitled to be cast on the amendment, regardless of
the class or voting group to which the shares belong and (2) a majority of the
votes entitled to be cast on the amendment within each voting group entitled to
vote as a separate voting group on the amendment.
Exhibit 23
Independent Auditors' Report
The Board of Directors
The Thaxton Group, Inc.
We have audited the accompanying consolidated balance sheets of The Thaxton
Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Thaxton Group,
Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
March 25, 1998
