UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 333-42623
THE THAXTON GROUP, INC.
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(Exact name of registrant as specified 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)
Registrant's telephone number, including area code: 803-285-4337
Securities registered pursuant to Section 12(b) of the 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 Act:
Title of each class
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None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant, based upon the price at which the stock was
last sold, was approximately $1,023,070.
At March 20, 2002, there were 6,859,355 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
THE THAXTON GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
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Page
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Item
No.
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PART I
1. Description of Business 2
2. Description of Property 6
3. Legal Proceedings 6
4. Submission of Matters to a Vote of Security Holders 6
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 7
6. Selected Financial Data 7
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
7A. Quantitative and Qualitative Disclosures about Market Risk 15
8. Financial Statements 16
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34
PART III
10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act 35
11. Executive Compensation 36
12. Security Ownership of Certain Beneficial Owners and Management 36
13. Certain Relationships and Related Transactions 37
PART IV
14. Exhibits, Financial statement schedules and Reports on Form 8-K 39
1
PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Thaxton Group's (the Company) Annual Report on Form 10-K, specifically
certain of the statements set forth under Item 1 - Business, Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7A - Quantitative & Qualitative Disclosures about Market Risk,
and elsewhere in this Form 10-K contain forward-looking statements, identified
as such for purposes of the safe harbor provided in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on current
expectations, estimates, and projections about the Company's industry,
management's beliefs, and certain assumptions made by the Company's management.
Words such as anticipates, expects, intends, plans, believes, estimates, or
variations of such words and similar expressions, are intended to identify
forward-looking statements. Readers are cautioned that any forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties, and that actual results could differ materially from
those indicated by forward-looking statements. Important factors that could
cause actual results to differ materially from those indicated by
forward-looking statements include, but are not limited to, the following: (1)
that the information is of a preliminary nature and may be subject to further
and/or continuing review and adjustment; (2) changes in the financial industry
regulatory environment; (3) changes in the economy in areas served by the
Company and its subsidiaries; (4) the impact of competition; (5) the management
of the Company's operations; (6) changes in the market interest rate environment
and/or the Federal Reserve's monetary policies; and (7) the other risks and
uncertainties described from time to time in the Company's periodic reports
filed with the SEC. The Company disclaims any obligation to update any
forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
We are a diversified consumer financial services company engaged in the
origination and servicing of direct consumer loans made to credit-impaired
borrowers, used automobile lending through the purchase and servicing of used
automobile sales contracts, insurance premium finance lending through the
purchase of insurance premium finance contracts, selling insurance products on
an agency basis, and the factoring of accounts receivable and the origination
and servicing of small commercial loans to small and medium sized businesses. We
were organized in 1985.
Direct Consumer Lending. Making small loans to borrowers with impaired credit is
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our largest line of business in our Consumer Finance segment, comprising
approximately 81% of our total revenues in 2001. Direct loans are relied upon by
credit-impaired borrowers to meet short-term cash needs, finance purchases of
consumer goods or refinance existing indebtedness. The usual term of a direct
loan is 15 months. Interest rates on direct loans vary based on a number of
factors, the most important of which is the extent to which the borrower's state
of residence regulates interest rates. Some states in which we operate permit
consumer lenders to simply post a maximum rate of interest in filings with
regulatory authorities. In these states we typically post a maximum annual
interest rate of 69%. Other states where we have offices impose specific maximum
annual interest rates on direct loans that range from 10% to 36%. Other factors
that we consider in setting the interest rate on a particular direct loan are
credit profile of the borrower, the type and value of any collateral and
competitive market conditions.
Each applicant for a direct loan must pass a thorough credit review. This review
is conducted by the manager or personnel under his or her supervision in the
office where the application is taken. This review generally takes into account
the borrower's credit history, ability to pay, stability of residence,
employment history, income, discretionary income, debt service ratio and the
value of any collateral. We use an industry standard application analysis score
sheet to compile information on the factors described above. If a direct loan is
to be secured by real estate, we obtain an appraisal of the property, obtain a
title opinion from an attorney and verify filing of a mortgage or deed of trust
before disbursing funds to the borrower. A senior officer must approve any
direct loan to be secured by real estate. The principal competitive factors for
these types of loans are the interest rate charged and customer service.
In connection with making direct consumer loans we also offer, as agent, credit
life and credit accident and health insurance. Instead of filing financing
statements to perfect our security interest in the collateral on all direct
consumer loans secured by personal property other than an automobile, we
purchase non-filing insurance from an unaffiliated insurer. On these loans we
charge an amount approximately equal to the filing fees that we would have
charged to the customer if we had filed financing statements to perfect our
security interest. This amount is typically included in the amount of the loan.
We use this amount to pay premiums for non-filing insurance against losses
resulting from failure to file. Under our non-filing insurance arrangements,
approximately 90% of the premiums paid are refunded to us on a quarterly basis
and are netted against charge-offs for the period.
2
Used Automobile Sales Finance. Another line of business in our Consumer Finance
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segment is the financing of used automobile purchases, which comprised
approximately 11% of our total revenues in 2001. We purchase sales contracts
from independent automobile dealers who have been approved by the manager of an
individual finance office or a regional supervisor. Office managers and regional
supervisors periodically evaluate independent dealers in their market areas to
ensure that we purchase sales contracts only from reputable dealers carrying an
inventory of quality used automobiles. We enter into a non-exclusive agreement
with each dealer which sets forth the terms and conditions on which we will
purchase sales contracts. The dealer agreement generally provides that sales
contracts are sold to us without recourse to the dealer with respect to the
credit risk of the borrower. However, if the dealer breaches the terms of the
sales contract or a customer withholds payment because of a dispute with the
dealer regarding the quality of the automobile purchased, the dealer typically
is obligated to repurchase the sales contract on our demand for its net unpaid
balance. If the purchaser of the automobile recovers any amount from us as a
result of a claim against the dealer, the dealer agreement provides that the
dealer will reimburse us for any amount paid the customer and for any costs we
incur as a result of the claim.
The dealer agreement allows us to withhold a specified percentage of the
principal amount of each sales contract purchased. This dealer reserve
arrangement is designed to protect us from credit losses on sales contracts.
These dealer reserves, which range from 5% to 10% of the net amount of each
sales contract, are negotiated on a dealer-by-dealer basis and are subject to
change based upon the collection history on sales contracts we have purchased
from the dealer.
In purchasing used automobile sales contracts, underwriting standards are used
that take into account principally the degree of a proposed buyer's
creditworthiness and the market value of the vehicle being financed. The office
manager, or other office personnel under the manager's supervision, conducts the
credit evaluation review. This review generally takes into account factors
similar to those performed in our review of direct consumer loans. We generally
do not finance more than 100% of the average trade-in value of the automobile as
listed in the current edition of the National Association of Automobile Dealers
Official Used Car Guide.
From time to time we purchase used automobile sales contracts in bulk from
dealers who have originated and accumulated contracts over a period of time. By
doing so, we are able to obtain large volumes of sales contracts in a
cost-effective manner. For bulk purchases, our underwriting standards take into
account principally the borrowers' payment history and the collateral value of
the automobiles financed. These purchases are typically made at discounts
ranging from 25% to 50% of the financed portion of the contract. Generally no
dealer reserve arrangements are established with bulk purchases. In connection
with bulk purchases, we review all credit evaluation information collected by
the dealer and the servicing and collection history of the sales contracts.
We compete with others in used car financing primarily based on the price paid
for used automobile sales contracts, which is a function of the amount of the
dealer reserve and the reliability of service to participating dealers. We
generally do not compete based on the same type of used automobile to be
financed because our competition concentrates their financing activities on
late-model used automobiles purchased from franchised dealers rather than
older-model used automobiles purchased from independent dealers, which is the
target market of our used automobile sales financing activities. The size of our
average used automobiles sales contract is considerably smaller than that of
many other companies engaged in purchasing used automobiles sales contracts. We
believe this is due in large part to the fact that most of our competitors are
seeking to do business primarily with franchised dealers selling late-model,
lower mileage used automobiles, coming off leases or which were rental cars, for
significantly higher prices than the prices for automobiles offered for sale by
the independent dealers with whom we have relationships. The independent dealers
from whom we purchase used automobile sales contracts typically sell automobiles
that tend to be somewhat older, higher mileage vehicles. Because the costs of
servicing and collecting a portfolio of finance receivables increase with the
number of accounts included in the portfolio, we believe that many apparent
potential competitors will choose not to do business with independent dealers.
In connection with the origination of used automobile sales contracts, we offer,
as agent, credit life, and credit accident and health insurance. Borrowers under
sales contracts and direct loans secured by an automobile are required to obtain
comprehensive and collision insurance on the automobile that designates us as
loss payee. A loss payee is the person who receives insurance proceeds in the
event an automobile is damaged in a collision. If the borrower allows the
insurance to lapse during the term of the contract or loan, we will purchase a
vendor's single interest insurance policy, which insures us against a total loss
on the automobile. The cost of the premium will then be added to the borrower's
account balance. We also offer, as agent, limited physical damage insurance,
which satisfies the requirement that the borrower purchase comprehensive and
collision insurance.
Insurance Premium Finance. Also in our Consumer Finance segment we provide
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short-term financing of insurance premiums purchased indirectly through
independent insurance agents. Our insurance premium finance business made up
approximately 2% of our total revenues in 2001. The premiums are primarily for
personal lines of insurance that are typically too high for a credit-impaired
borrower to pay in six-month increments, such as automobile insurance. Financing
the premium allows the insured to pay it in smaller increments, usually monthly.
Most agents who refer premium finance business to us are located in North
Carolina, South Carolina, and Virginia. A small amount of our business involves
financing premiums for commercial lines of insurance for small businesses,
including property and casualty, business automobile, general liability, and
workers' compensation. A substantial amount of our
3
premium finance business is derived from customers of the 48 insurance offices
owned and operated by Thaxton RBE, Inc. ("RBE"), which is owned by Thaxton Group
CEO James D. Thaxton and members of his family.
When an individual purchases an insurance policy from an agent with whom we have
a relationship, the agent will offer the opportunity to enter into a premium
finance contract that allows the insured to make a down payment and finance the
balance of the premium. The typical term of a premium finance contract ranges
from three to eight months depending primarily upon the term of the underlying
insurance policy. The required down payment ranges from 20% to 50% of the
premium. We sometimes allow agencies to charge a smaller down payment. In those
instances, we have an arrangement where RBE reimburses our premium finance
company for any losses incurred in excess of 5% of the premium. We generally
impose the maximum finance charges and late fees that applicable state law
permits for premium finance contracts, which are extensively regulated in the
states where we engage in this business. All of the states in which we operate
permit assessment of a fee of up to $15 on each premium finance contract and a
maximum interest rate of 12% per annum. Because we are able to cancel the
insurance policy generally within a period of 23 to 28 days after the due date
of a delinquent payment and receive a refund of the unearned portion of the
premium, the creditworthiness of the insured is a less important factor than the
size of the down payment and an efficient and effective system for servicing and
collecting our portfolio of premium finance contracts.
Insurance Agency Activities. We sell, on an agency basis, various lines of
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automobile, property and casualty, life, accident, and health insurance. Our
insurance agency activities comprised approximately 4% of our total revenues in
2001. The insurance companies that we represent assume all underwriting risk on
most of the policies we sell. The insurance company that issues a policy we sell
pays us a commission based on a standard or negotiated schedule. We are eligible
for additional commission payments from some of the companies we represent if
the loss experience on the policies we sell for those companies falls below
specified levels and the total premiums on such policies exceed a specified
minimum. In 1998, we began selling a new program in North Carolina where we
assumed limited underwriting risk on non-standard automobile collision insurance
with minimum limits. In the fourth quarter of 1999, and throughout the first
half of 2000, we expanded the sale of this policy into Arizona, New Mexico, and
Colorado. This business was discontinued and sold to Thaxton Life Partners, Inc.
("TLP") on August 31, 2000.
Commercial Finance. In 1998, we began making commercial loans and offering
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factoring services to small business clients. Our commercial finance activities
made up approximately 1% of our total revenues in 2001. Our commercial loans
usually are secured, most often with real estate. In factoring, we advance funds
to the client based upon the balance of designated accounts receivable due from
their customers. The client then assigns or sells these receivables to us,
notifies its customers to send payment directly to us and we collect the
receivables and credit the amount advanced to the client. Generally, we advance
to our factoring client 80% to 95% of the dollar value of each receivable,
holding the difference in reserve. We charge a fee equal to one to four percent
of the amount advanced for this service and may also charge interest on any
uncollected balances. Almost all of our factoring contracts are with recourse,
which allows us to charge any uncollected receivables back to the client after a
period ranging from 60 to 90 days.
The Consumer Finance and Insurance Agency Industries
The segment of the consumer finance industry in which we operate is commonly
called the "non-prime credit market." Our borrowers of direct loans and
automobile sales contracts typically have limited credit histories, low incomes
or past credit problems. These borrowers generally do not have access to the
same sources of consumer credit as borrowers with long credit histories, no
defaults and stable employment because they do not meet the stringent objective
credit standards that most traditional lenders use. The non-prime credit market
for used automobile finance and loans is highly competitive and fragmented,
consisting of many national, regional and local competitors. New competitors are
able to enter this market with relative ease. Historically, commercial banks,
savings and loans, credit unions, financing arms of automobile manufacturers,
and other lenders providing traditional consumer financing have not consistently
served this segment of the consumer finance market. Several large bank holding
companies, in an effort to recapture some of the customers their bank
subsidiaries, have traditionally rejected on the basis of their rigid credit
scoring systems now serve the non-prime credit market through automobile finance
subsidiaries. We also face increasing competition from a number of companies,
including bank credit card companies, providing similar financing to individuals
that cannot qualify for traditional financing. Many of these competitors or
potential competitors have significantly greater resources than we do and have
pre-existing relationships with established networks of dealers. To the extent
that any of these lenders significantly expand their activities in the markets
where we operate or plan to operate, our profitability could be threatened.
Although the primary service-providers in the premium finance industry are
different than those who serve the non-prime credit market for direct loans and
used automobile finance, credit-impaired borrowers also are the primary
borrowers under premium finance contracts. Insurance companies that engage in
direct writing of insurance policies generally provide premium financing to
their customers who need the service. Numerous small independent finance
companies like us are engaged in providing premium financing for personal lines
of insurance purchased by credit-impaired borrowers through independent
insurance agents. Because the rates they charge are highly regulated, these
companies compete primarily on the basis of efficiency in providing the
financing and servicing the loans. A significant number of independent insurance
agents provide premium financing to their customers either directly or through
4
affiliated entities. As banks are allowed to enter the insurance business, they
also are increasingly engaging in the premium finance business.
Independent insurance agencies represent numerous insurance carriers and
typically place a customer's business with the carrier whose combination of
features and price best match the customer's needs. In comparison, direct agents
represent only one carrier. Most carriers find the use of independent agencies
to be a more cost-effective method of selling their products than using a direct
agent force. Competition among independent insurance agencies is intense.
Numerous other independent agencies operate in most of the markets where our
insurance offices are located. Direct agents for various insurance companies
located in some of our markets also compete with us. We compete primarily on the
basis of service and convenience. We attempt to develop and maintain long-term
customer relationships through low employee turnover and responsive service and
offer virtually all types of insurance products.
Banks and commercial finance companies dominate the commercial lending industry.
Many banks, however, do not offer factoring services, and most banks do not make
loans to the higher risk business clients that we finance. Most commercial
finance companies engage in lending to larger businesses or engage in lending to
specialized businesses. Our primary competition comes from independent factoring
companies who, like us, specialize in smaller, higher risk clients.
Regulation
Consumer finance companies and insurance agents are extensively supervised and
regulated under state and federal statutes and regulations. Depending upon the
nature of a particular transaction and the state of residence of the borrower or
the customer, we may be required to:
. 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 specified other terms and conditions of the
financing;
. Govern the sale and terms of insurance products; and o Define and
limit the right to repossess and sell collateral.
Federal and state laws also require us to provide various disclosures to
prospective borrowers, prohibit misleading advertising, protect against
discriminatory lending practices, and prohibit unfair credit practices. We
believe we comply in all material respects with applicable governmental
regulations. These requirements change frequently however, and we cannot be
certain that future changes or modifications in these laws will not have a
material adverse effect on our business with increased compliance costs or
prohibition or limitation of a profitable line of business.
EMPLOYEES
As of February 28, 2002, we employed 1,138 full-time employees and 65 part-time
employees, none of whom were covered by a collective bargaining agreement. Of
that total, 69 were located in the Company's headquarters in Lancaster, South
Carolina and 1,134 were located in our other offices. We generally consider our
relationships with our employees to be good.
5
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices are located in Lancaster, South Carolina in leased office
facilities of approximately 28,000 square feet. The lease expires in August
2012, and includes an option to renew for an additional five-year term. We lease
all of our branch office facilities. In some instances we lease these facilities
from related parties. These offices range in size from approximately 800 square
feet to 2,200 square feet. Since most of our business with automobile dealers is
conducted by facsimile machine and telephone, we do not believe that the
particular locations of our finance offices are critical to our business of
purchasing used automobile sales contracts or our premium finance operations.
Location is somewhat more important for our direct loan and insurance agency
operations. Other satisfactory locations are, however, generally available for
lease at comparable rates and for comparable terms in each of our markets.
We currently have a total of 218 finance offices and 14 insurance agency offices
in the following states.
Finance Offices
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South Carolina......................................................80
Texas...............................................................52
Mississippi.........................................................22
Georgia.............................................................23
Tennessee...........................................................12
Kentucky............................................................ 9
Ohio................................................................ 9
Oklahoma............................................................ 5
Alabama............................................................. 2
Virginia............................................................ 2
North Carolina...................................................... 2
Insurance Agency Offices
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South Carolina......................................................12
North Carolina...................................................... 2
ITEM 3. LEGAL PROCEEDINGS
We presently are not a party to any material pending legal.
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 2001.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Due to the relatively small number of shares held by non-affiliates, there is no
active trading market for our common stock, although trades in the stock occur
occasionally in the over-the-counter market. At March 20, 2002, there were 154
shareholders of record.
We have not paid any dividends on common stock during the last three fiscal
years and we have no plans to pay any cash dividends on common stock in the
foreseeable future. Our credit facilities restrict us from paying any cash
dividends on common stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
For the Year Ended
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December 31,
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2001 2000 1999 1998 1997
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(Dollars in thousands, except per share amounts)
Income Statement Data:
Interest and fee income ................................ $74,326 $65,614 $59,140 $15,088 $15,893
Interest expense ....................................... 19,070 21,024 17,272 4,934 5,023
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Net interest income .................................... 55,256 44,590 41,868 10,154 10,870
Provision for credit losses ............................ 16,584 14,658 11,938 4,047 6,580
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Net interest income after provision for credit losses .. 38,672 29,932 29,930 6,107 4,290
Insurance premiums and commissions, net ................ 18,554 17,764 12,805 6,591 5,470
Other income ........................................... 5,640 4,239 2,125 699 1,222
Operating expenses ..................................... 57,736 51,782 42,314 14,893 13,211
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Pretax income(loss) from continuing operations ......... 5,130 153 2,546 (1,496) (2,229)
Income tax expense(benefit) ............................ 2,095 550 1,258 (467) (724)
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Income (loss) from continuing operations ............... 3,035 (397) 1,288 (1,029) (1,505)
Discontinued operations net loss ....................... -- (3,415) (1,643) (55) --
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Net Income (loss) ...................................... $ 3,035 $(3,812) $ (355) $(1,084) $(1,505)
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Net income (loss) per common share ..................... $ 0.34 (0.65) (0.16) (0.35) (0.39)
Average common shares outstanding ...................... 6,876 6,975 6,494 3,803 3,913
At Year Ended
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December 31,
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2001 2000 1999 1998 1997
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(Dollars in thousands, except per share amounts)
Balance Sheet Data:
Finance receivables $240,534 $235,906 $213,170 $ 80,685 $ 67,558
Unearned income (1) (47,267) (46,332) (42,205) (14,104) (14,087)
Allowance for credit losses (12,012) (11,631) (10,661) (4,711) (4,809)
Finance receivables, net 181,255 177,943 160,304 61,870 48,662
Total assets 242,560 247,548 232,639 78,996 60,966
Total liabilities 236,275 243,789 222,836 66,067 54,997
Shareholders' equity 6,285 3,759 9,803 12,929 5,969
(1) Includes unearned finance charges, dealer reserves, and discounts on bulk
purchases.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a diversified consumer financial services company engaged in the
origination and servicing of loans made to credit-impaired borrowers, used
automobile lending through the purchase and servicing of used automobile sales
contracts, insurance premium finance lending through the purchase of insurance
premium finance contracts, selling insurance products on an agency basis, and
the factoring of accounts receivable and the origination and servicing of small
commercial loans to small and medium sized businesses. We were organized in
1985.
Recent Expansion Activities. We expanded our business significantly in 1999 and
2000, principally through acquisitions.
1999 Acquisition of FirstPlus Consumer Finance offices. In February 1999, we
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acquired 144 consumer finance offices formerly owned by FirstPlus Consumer
Finance, Inc. Originally, these offices were owned and operated by Thaxton
Investment Corporation. Thaxton Investment was formed for the purpose of
acquiring the FirstPlus Consumer Finance offices, and was wholly owned by James
D. Thaxton, who is our controlling shareholder, chairman, and chief executive
officer. On November 8th, Thaxton Investment was merged into us under the terms
of the Plan of Share Exchange Agreement dated as of September 30, 1999 among
Thaxton Group, Thaxton Investment, Thaxton Operating Company, and Mr. James D.
Thaxton. Mr. Thaxton, the sole shareholder of Thaxton Investment, transferred
all of his shares of common stock of Thaxton Investment to us in exchange for
3,223,000 shares of our common stock. At the time of the merger, our management
estimated that the aggregate fair market value of the common stock issued to Mr.
Thaxton at approximately $30,000,000. Because we had been under common ownership
and control with Thaxton Investment since February 1999, our acquisition of
Thaxton Investment was accounted for at historical cost in a manner similar to
pooling of interests accounting.
2000 Acquisition of Quick Credit. On August 18, 2000, we acquired all of the
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stock of Quick Credit Corporation, a consumer finance company with 25 branch
offices located in South Carolina. The purchase price was $12.75 million in
cash. This acquisition was accounted for as a purchase and resulted in goodwill
of approximately $3.8 million.
Discontinued Operations. We discontinued the operations of two of our businesses
in 2000.
Thaxton RBE. On March 1, 2000, we transferred all of the assets and liabilities
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of 32 insurance agency operations to a newly formed subsidiary, Thaxton RBE,
Inc. The purpose of the transfer was to place the insurance operations in a
separate entity to facilitate raising capital to fund the specialized
non-standard automobile insurance business of Thaxton RBE. Immediately after the
transfer, Thaxton Life Partners, Inc. acquired 90% of the equity of Thaxton RBE
for $2 million. Thaxton Life Partners, Inc., is owned by James D. Thaxton, C.L.
Thaxton, Sr., one of our directors, and other Thaxton family members.
During the third quarter of 2000, we decided to dispose of our remaining
interest and investment in Thaxton RBE as soon as suitable financing for Thaxton
RBE could be obtained. On August 31, 2000, Thaxton Life Partners arranged
independent financing for Thaxton RBE, purchased our remaining 10% interest in
Thaxton RBE and all amounts owed to us by Thaxton RBE were paid in full. We
recorded a loss, net of income tax benefit, from operations of Thaxton RBE of
$1,542,409 for the year ended December 31, 1999 and $374,683 for the year ended
December 31, 2000. For additional information about the effects of the
discontinued operations, see Note 13 to our consolidated financial statements
for the years ended December 31, 1999 and 2000.
Paragon. In December 2000, our board of directors adopted a plan to discontinue
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the operations of the mortgage banking business conducted by Paragon, Inc.
Paragon ceased operations in December of 2000, and its assets have either been
sold or are being held for ultimate sale or disposal. We recorded a loss, net of
income tax benefit, from the operations of Paragon of $100,355 for the year
ended December 31, 1999 and $3,040,226 for the year ended December 31, 2000. For
additional information about the effects of the discontinued operations, see
Note 13 to our consolidated financial statements for the years ended December
31, 1999 and 2000.
8
The following table sets forth certain information about the components of our
finance receivable portfolio.
Year Ended December 31,
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2001 2000 1999
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USED AUTOMOBILE SALES CONTRACTS
Total balance at year end, net (1) $ 17,782,135 $ 25,392,262 $ 26,870,193
Average account balance at year end 3,052 3,080 3,352
Interest and fee income for the year 4,841,125 7,244,212 7,928,282
Average interest rate earned 24.05% 26.69% 25.32%
Number of accounts at year end 5,827 8,243 8,017
REAL ESTATE SECURED LOANS
Total balance at year end, net (1) 28,322,046 28,042,391 22,783,924
Average account balance at year end 4,590 5,732 13,109
Interest and fee income for the year 2,782,002 2,854,375 2,397,719
Average interest rate earned 9.76% 11.32% 10.73%
Number of accounts at year end 6,170 4,892 1,738
DIRECT LOANS
Total balance at year end, net (1) 135,625,432 124,847,785 109,840,905
Average account balance at year end 640 649 642
Interest and fee income for the year 63,437,564 52,265,042 46,490,202
Average interest rate earned 47.60% 47.30% 47.47%
Number of accounts at year end 211,906 192,259 171,028
PREMIUM FINANCE CONTRACTS
Total balance at year end, net (1) 8,375,711 7,355,818 8,029,703
Average account balance at year end 417 511 548
Interest and fee income for the year 2,234,593 2,189,958 1,691,469
Average interest rate earned 25.57% 28.22% 25.65%
Number of accounts at year end 20,109 14,395 14,649
COMMERCIAL LOANS
Total balance at year end, net (1) 3,161,875 3,935,945 3,440,166
Average account balance at year end 85,456 95,999 114,672
Interest and fee income for the year 1,031,122 1,060,693 632,636
Average interest rate earned 29.01% 29.06% 25.04%
Number of accounts at year end 37 41 30
(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").
Over the past three years we have grown primarily through acquisitions, adding
approximately 175 offices. We have now begun the process of identifying our
branches that are more profitable than others, seeking to enhance the
performance of these branches and deciding whether to close or dispose of
branches that are only marginally profitable or operate at a loss. We will
continue to expand in areas that are under served in our areas of expertise but
will mainly focus on making our current business more profitable. We
periodically may make bulk purchases of contracts, if such purchases are deemed
beneficial to our competitive position and portfolio mix.
9
NET INTEREST MARGIN
The principal component of our profitability is our net interest spread, which
is the difference between interest earned on finance receivables and interest
expense paid on borrowed funds. Statutes in some states regulate the interest
rates that we may charge our borrowers while interest rates in other states are
unregulated and, consequently, competitive market conditions establish these
rates. Significant differences exist in the interest rates earned on the various
components of our finance receivable portfolio. The interest rate earned on used
automobile sales contracts generally is lower than the interest rates earned on
direct consumer loans due to competition from other lenders, superior
collateral, and longer terms. The interest rates earned on premium finance
contracts are state regulated and vary based on the type of underlying insurance
and the term of the contract.
Unlike our interest income, our interest expenses are sensitive to general
market fluctuations in interest rates. The interest rates paid to our primary
lender, FINOVA, are based upon a published prime rate plus set percentages.
Thus, general market fluctuations in interest rates directly impact our cost of
funds. Our general inability to increase the interest rates earned on finance
receivables may impair our ability to adjust to increases in the cost of funds
resulting from changes in market conditions. Accordingly, increases in market
interest rates generally will narrow our interest rate spread and lower our
profitability, while decreases in market interest rates generally will widen our
interest rates spreads and increase profitability.
The following table presents important data relating to our net interest margin
for the years ended December 31, 2001, 2000, and 1999.
2001 2000 1999
------------ ------------ ------------
Average net finance receivables (1) $179,688,836 $169,390,119 $162,784,651
Average notes payable(1) 216,824,106 200,221,483 191,663,621
Interest and fee income 74,326,406 65,614,280 59,140,308
Interest expense 19,069,792 21,024,576 17,272,674
------------ ------------ ------------
Net interest income 55,256,614 44,589,704 41,867,634
Average interest rate earned 41.36% 38.74% 36.33%
Average interest rate paid 8.80% 10.50% 9.01%
------------ ------------ ------------
Net interest rate spread 32.56% 28.24% 27.32%
Net interest margin(2) 30.75% 26.32% 25.72%
(1) Averages are computed using month-end balances during the year
presented
(2) Net interest margin represents net interest income divided by average
Net Finance Receivables.
RESULTS OF OPERATIONS
COMPARISON OF 2001 TO 2000.
Finance receivables grew slightly from 177,944,000 to 181,255,000, or 2%, from
December 31, 2000 to December 31, 2001. While this overall growth is relatively
small, the mix of our portfolio changed during the year. Our direct loan finance
receivables increased by $13 million due to the addition of new branches and
increased emphasis on this segment by management. Our automobile sales finance
receivables decreased by approximately $8 million due to a management decision
to liquidate portions of this portfolio.
Interest and fee income for the twelve months ended December 31, 2001 was
$74,326,000 compared to $65,614,000 for the twelve months ended December 31,
2000, a 13.3% increase. This increase occurred primarily because of an increase
in receivables due to the full year effect of the August 2000 acquisition of
Quick Credit, coupled with the change in the mix of our portfolio. Interest
expense decreased to $19,069,000 for the twelve months ended December 31, 2001
from $21,024,000 for the comparable period of 2000, a decrease of 9.3%. Even
though our average notes payable for the year increased, our overall interest
expense decreased due to the substantial decrease in interest rates during the
year. We expect to continue to see this decline through at least the first and
second quarters of 2002 when compared to the comparable period in 2001.
The allowance for credit losses increased to $12,012,000 at December 31, 2001
versus $11,631,000 at December 31, 2000, a 3% increase. Credit losses increased
to $18,024,000 for 2001 versus $16,052,000 for 2000, an increase of 12% and our
provision for credit losses increased comparably between years from $14,658,000
in 2000 to $16,584,000 in 2001, or a 13% increase.
Insurance premiums and commissions net of insurance cost increased to
$18,554,000 for the twelve months ended December 31, 2001 from $17,764,000 for
the comparable period of 2000, a 4.4% increase. This was primarily due to
increased sales of insurance products to borrowers, brought about by management
emphasis on this product line. Other income increased from $4,239,000 for the
twelve months ended December 31, 2000 to $5,640,000 for the comparable period in
2001 primarily due to law changes in Georgia, Tennessee, and Oklahoma that
allowed us to charge increased fees along with the opening of five additional
branches in those states.
10
Total operating expenses increased from $51,781,000 for the twelve months ended
December 31, 2000 to $57,737,000 for the comparable period of 2001, a 11.5%
increase. This was due to a full year of operating expense associated with Quick
Credit in 2001, compared to only 4 months during 2000, and normal growth.
For the twelve months ended December 31, 2001, we generated pretax income of
$5,130,000 and net income of $3,035,000, as compared to pretax income from
continuing operations of $153,000 and a net loss from continuing operations of
$397,000 for the comparable period of 2000.
COMPARISON OF 2000 TO 1999.
Finance receivables at December 31, 2000 were $177,944,000 versus $160,304,000
at December 31, 1999, an 11% increase. This was due in part to the acquisition
of $12 million in receivables in the acquisition of QuickCredit in August of
2000 and growth in our portfolio.
Interest and fee income for the twelve months ended December 31, 2000 was
$65,614,000 compared to $59,140,000 for the twelve months ended December 31,
1999, a 10.9% increase. The increase was attributable to an increase in
receivables due to the acquisition of Quick Credit and growth within the
portfolio. Interest expense increased to $21,025,000 for the twelve months ended
December 31, 2000 versus $17,273,000 for the comparable period of 1999, an
increase of 21.7%. This was due to an increase in notes payable along with an
increase in interest rates.
The allowance for credit losses increased to $11,631,000 at December 31, 2000
versus $10,661,000 at December 31, 1999, a 9% increase. Credit losses increased
to $16,052,000 for 2000 versus $13,461,000 for 1999, an increase of 19%. Our
provision for credit losses increased significantly between years, from
$11,938,000 in 1999 to $14,658,000 in 2000, or a 23% increase. This was due to
growth in the portfolio and the addition of Quick Credit.
Insurance premiums and commissions net of insurance cost increased to
$17,764,000 for the twelve months ended December 31, 2000 from $12,805,000 for
the comparable period of 1999, a 38.7% increase. This was primarily due to
increased sales of insurance products to borrowers, brought about by management
emphasis on this product line, and increased insurance commissions from the
Thaxton Insurance agency offices. Other income increased from $2,125,000 for the
twelve months ended December 31, 1999 to $4,239,000 for the comparable period of
2000 due to the addition of the related party management fee.
Total operating expenses increased from $42,315,000 for the twelve months ended
December 31, 1999 to $51,781,000 for the comparable period of 2000, a 22.4%
increase. This was due to a full year of expense for Thaxton Investment
Corporation in 2000 compared to 11 months in 1999, the acquisition of Quick
Credit, and normal growth.
For the twelve months ended December 31, 2000, we generated a pretax profit from
continuing operations of $153,360, and a net loss of $3,811,549 as compared to
pretax income from continuing operations of $2,545,272 and a net loss of
$355,190 for the comparable period of 1999.
11
CREDIT LOSS EXPERIENCE
Provisions for credit losses are charged to income in amounts sufficient to
maintain the allowance for loan losses at a level considered adequate to cover
the expected future losses of principal and interest in the existing finance
receivable portfolio. Credit loss experience, contractual delinquency of finance
receivables, the value of underlying collateral, and management's judgment are
factors used in assessing the overall adequacy of the allowance and resulting
provision for credit losses. Our reserve methodology is designed to provide an
allowance for credit losses that, at any point in time, is adequate to absorb
the charge-offs expected to be generated by the finance receivable portfolio,
based on events or losses that have occurred or are known to be inherent in the
portfolio. The model utilizes historical charge-off data to predict the
charge-offs likely to be generated in the future by the existing finance
receivable portfolio. The model takes into consideration overall loss levels, as
well as losses by originating office and by type, and develops historical loss
factors which are applied to the current portfolio. In addition, changes in
dealer and bulk purchase reserves are reviewed for each individual dealer and
bulk purchase, and additional reserves are established for any dealer or bulk
purchase if coverage is deemed to have declined below adequate levels. Our
charge-off policy is based on an account by account review of delinquent
receivables. Losses on finance receivables secured by automobiles are recognized
at the time the collateral is repossessed. Other finance receivables are charged
off when they become contractually past due 180 days, unless extenuating
circumstances exist leading management to believe 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 our dealer reserve arrangements, when a dealer assigns a used automobile
sales contract to us, we withhold a certain percentage of the principal amount
of the contract, usually between five and ten percent. The amounts withheld from
a particular dealer are recorded in a specific reserve account. Any losses
incurred on used automobile sales contracts purchased from that dealer are
charged against its specific reserve account. If at any time the balance of a
dealer's specific reserve account exceeds the amount derived by applying the
withheld percentage to the total amount of principal and interest due under all
outstanding used automobile sales contracts purchased from the dealer, the
dealer is entitled to receive distributions from the specific reserve account in
an amount equal to the excess. If we continue to purchase used automobile sales
contracts from a dealer, distributions of excess dealer reserves generally are
paid quarterly. If we do not continue to purchase used automobile sales
contracts from a dealer, distributions of excess dealer reserves are not paid
out until all used automobile sales contracts originated by that dealer have
been paid in full. The aggregate balance of all specific reserve accounts,
including unpaid excess dealer reserves, are reflected in the balance sheet as a
reduction of finance receivables. Our allowance for credit losses is charged
only to the extent that the loss on a used automobile sales contract exceeds the
originating dealer's specific reserve account at the time of the loss.
We periodically purchase used automobile sales contracts in bulk. In a bulk
purchase arrangement, we typically purchase a portfolio of used automobile sales
contracts from a dealer at a discount to par upon our management's review and
assessment of the portfolio. This discount is maintained in a separate account
against which losses on the bulk portfolio purchased are charged. To the extent
losses experienced are less than the discount, the remaining discount is
accreted into income.
The following table sets forth our allowance for credit losses and credit loss
experience at or over the periods presented.
2001 2000 1999
------------ ------------ -------------
Net finance receivables (1) $190,105,324 $185,638,256 $167,524,725
Allowance for credit losses 12,012,169 11,630,555 10,661,339
Allowance for credit losses as a percentage of net finance 6.32% 6.27% 6.36%
receivables (1)
Dealer reserves and discounts on bulk purchases 2,036,818 2,406,165 2,573,095
Dealer reserves and discounts on bulk purchases as percentage of
Net Automobile Sales Contracts at period end 10.58% 10.89% 9.57%
Allowance for credit losses and dealer reserves and discount on
bulk purchases (2) 14,048,987 14,036,720 13,234,434
Allowance for credit losses and dealer reserves as a percentage
of finance receivables 7.22% 7.56% 7.90%
Provision for credit losses 16,583,919 14,657,930 11,937,679
Charge-offs (net of recoveries) 16,202,305 14,526,731 12,263,478
Charge-offs (net of recoveries) as a percentage of average net finance
receivables (3) 8.32% 7.83% 7.32%
(1) Net finance receivable balances are presented net of unearned finance
charges, net of unearned insurance premiums, dealer holdbacks and bulk
purchase discounts, deferred loan costs, 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
12
The following table sets forth certain information concerning our finance
contracts at the end of the periods indicated:
2001 2000 1999
------------ ------------ ------------
Direct Finance Receivables Contractually past due 90 days or more $ 7,033,668 $ 6,478,101 $ 5,417,878
Direct Finance Receivables outstanding 135,625,432 124,847,785 109,840,905
Direct Finance Receivables Contractually past due 90 days or more as a percentage
of Direct Finance receivables 5.19% 5.19% 4.93%
Real Estate Secured Receivables Contractually past due 90 days or more 1,972,725 1,601,906 2,265,799
Real Estate Secured Receivables outstanding 28,322,046 28,042,391 22,783,924
Real Estate Secured Receivables Contractually past due 90 days or more as a
percentage of Real Estate Secured receivables 6.97% 5.71% 9.94%
Vehicle Secured Receivables Contractually past due 60 days or more 1,090,032 1,534,520 1,432,181
Vehicle Secured Receivables outstanding 17,782,135 25,392,262 26,870,193
Vehicle Secured Receivables Contractually past due 60 days or more as a
percentage of Vehicle Secured receivables 6.13% 6.04% 5.33%
Premium finance contracts contractually past due 60 days or more 679,091 917,508 499,801
Premium finance contracts outstanding 8,375,711 7,355,818 8,029,703
Premium finance contracts contractually past due 60 days or more as a percentage
of premium finance contracts 8.11% 12.47% 6.22%
Finance receivable balances are presented net of unearned finance charges
LIQUIDITY AND CAPITAL RESOURCES
We generally finance our operations through cash flow from operations,
borrowings under our credit facility with FINOVA Capital Corporation ("FINOVA")
and the sale to public investors of our subordinated notes.
Our credit facility with FINOVA, as amended on December 31, 2001, comprises a
term loan with a balance of $19.8 million outstanding, and a revolving credit
line used to finance consumer receivables. Maximum borrowings under the
revolving credit line as of December 31, 2001 are limited to the lesser of $157
million, or 85% of eligible consumer finance receivables as defined by the
agreement. Our maximum borrowing amount decreases on a quarterly basis beginning
March 31, 2002 and decreases $22 million in 2002, $16.5 million in 2003, $18
million in 2004, $18 million in 2005 and $9 million in 2006. James D. Thaxton is
the guarantor for both the term loan and the revolving loan.
Advances under the term loan accrue interest at the prime rate + 2%. Advances
under the revolving credit line accrue interest at the prime rate + 1%. The
prime rate is the prime rate published by Citibank, N.A., or other money center
bank as FINOVA may select. The credit facility matures in 2006. The interest
rates are adjusted monthly to reflect fluctuations in the designated prime rate.
Accrued interest on borrowings is payable monthly.
The term loan is payable in twenty-three equal monthly principal and interest
payments, which began on April 15, 2001, in the amount of $600,000, with the
remaining principal balance due one month thereafter.
Under the revolving credit facility, principal is due in full on the maturity
date and can be prepaid without penalty. Substantially all of our and our
subsidiaries' assets secure the revolving credit facility, which requires us to
comply with restrictive covenants, including financial condition covenants. As
of December 31, 2001, the Company met all such requirements.
As of February 28, 2002, an additional $12.1 million was available under the
terms of the revolving credit line to borrow against existing collateral, with
$45.0 million of total potential capacity available for borrowing against
qualified finance receivables generated in future periods. As of February 28,
2002, the interest rates for borrowings were 5.75% for the revolving credit
line, and 6.75% for the term loan.
In connection with the FirstPlus acquisition, the Company assumed $2.2 million
of subordinated notes issued by Voyager Insurance Co. In November 1999, those
notes were cancelled and re-issued in the name of the Company. The Company is
confident that it has adequate availability under it primary credit facility to
borrow adequate funds to liquidate these notes, if required.
13
In February 1998, we began offering subordinated notes in several states by
registering $50 million of subordinated notes with the Securities and Exchange
Commission ("SEC"). In May 2001, we registered an additional $75 million
offering of subordinated notes with the SEC. The notes are sold primarily to
individual investors. The maturity terms range from daily (demand) notes to
sixty-month notes. Interest rates vary based on the principal amounts and
maturity dates of the notes. Notes currently being offered carry interest rates
ranging from 5.25% to 8.0%. The notes are unsecured and issued under an
indenture which we entered into with The Bank of New York, as trustee, in
February 1998. The terms of the indenture do not require us to comply with any
financial covenants nor do they impose any material restrictions on the
operations of our business.
As of December 31, 2001, we had $65.0 million of these registered subordinated
notes outstanding and $6.5 million notes registered in predecessor state
registrations. To date, we have used the proceeds from the sale of these
notes to reduce, on a temporary basis, the amount of our revolving credit
facility with FINOVA. We intend to continue this note program by seeking to
register additional offerings of subordinated notes with the SEC. The sale of
subordinated notes is an important aspect of the financing of our business. It
enables us to reduce our overall borrowing costs, particularly during periods of
increasing interest rates. In addition, it allows us to hedge the interest rate
risk inherent in our variable rate senior credit facility, and to diversify our
sources of borrowed funds.
We plan to continue to reduce borrowings under our senior credit facility and
replace those borrowings with increasing levels of subordinated notes. For the
fiscal year ending December 31, 2002, we anticipate that our cash flow from
operations, borrowings under our senior credit facility and the proceeds from
the sale of subordinated notes will be more than adequate to meet our needs for
cash to fund anticipated growth in our finance receivables, operating expenses,
repayment of indebtedness and planned capital expenditures, estimated at
approximately $25 million for 2002.
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although we do not believe that inflation has a direct material adverse effect
on our financial condition or results of operations, increases in the inflation
rate generally are associated with increased interest rates. Because we borrow
funds on a floating rate basis and generally extend credit at fixed interest
rates, increased interest rates increases our cost of funds and could materially
impair our profitability. We intend to explore opportunities to fix or cap the
interest rates on all or a portion of our borrowings. We can, however, give no
assurance that fixed rate or capped rate financing will be available on terms
acceptable to us. Inflation also may affect our operating expenses. Other
general economic conditions in the United States could affect our business,
including economic factors affecting the ability of our customers or prospective
customers to purchase used automobiles and to obtain and repay loans.
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. SFAS No. 133, as amended by SFAS No.
137 and SFAS No. 138, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We adopted SFAS No. 133 effective January 1,
2001.
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, was issued in September 2000 and supersedes SFAS
No. 125. SFAS No. 140 establishes accounting and reporting requirements for the
transfers and servicing of financial assets and the extinguishments of
liabilities. The provisions of SFAS No. 140 are effective for transfers of
financial assets occurring after March 31, 2001, applied prospectively. We
expect that adopting the provisions of this statement will not have a material
impact on our consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued two Statements of
Financial Accounting Standards, No. 141, Business Combinations (SFAS No. 141),
and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141
addresses financial accounting and reporting for business combinations and
supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38,
Accounting for Pre-acquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of SFAS No. 141 are to be accounted for using
the purchase method. The provisions of SFAS No. 141 apply to all business
combinations initiated after September 30, 2001. Use of the pooling-of-interests
method for those business combinations is prohibited. The provisions of SFAS No.
141 also apply to all business combinations accounted for by the purchase method
for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. It addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. SFAS No.
142 also addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements. Under
SFAS No. 142, goodwill and intangible assets that have indefinite useful lives
will not be amortized but
14
rather will be tested at least annually for impairment. Intangible assets that
have finite useful lives will continue to be amortized over their useful lives,
but without the constraint of the 40-year maximum life required by SFAS No. 142.
The provisions of SFAS No. 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. We adopted the provisions of SFAS No.
142 effective January 1, 2002.
Financial Accounting Standards Board Statement No. 144, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in August 2001 and supersedes Statement No. 121. Statement No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The provisions of Statement No. 144 are effective for the financial
statements issued for fiscal years beginning after December 15, 2001. The
Company expects that adopting the provisions of this Statement will not have a
material impact on the consolidated financial statements of the Company.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our outstanding debt under the Revolving Credit Facility and Term Loan was
$151.2 million at December 31, 2001. Interest on borrowings under these
facilities is based on the prime rate. Based on the outstanding balance at
December 31, 2001, a change of 1% in the prime interest rate would cause a
change in interest expense of approximately $1,512,000 on an annual basis.
Our outstanding receivables are not affected by external interest rate changes.
This is due to the fact that we, like most other Non-Prime lending institutions,
usually charge the maximum rate allowable 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. This causes the
interest rate risk on our outstanding receivables to be minimal.
15
ITEM 8. FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000, AND 1999
(WITH INDEPENDENT AUDITORS' REPORTS THEREON)
16
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, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three year period ended December 31, 2001. 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 auditing standards generally accepted
in the United States of America. 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 as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Charlotte, North Carolina
March 8, 2002
17
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
December 31, 2001 and 2000
2001 2000
------------ ------------
Assets
- ------
Cash $ 4,096,359 $ 4,482,553
Finance receivables, net 181,255,030 177,943,646
Premises and equipment, net 4,246,816 5,011,856
Accounts receivable 1,813,743 1,353,053
Accounts receivable from related parties 113,185 801,584
Repossessed automobiles 952,153 291,057
Deposit 6,710,692 6,230,000
Goodwill and other intangible assets 32,481,654 34,812,558
Deferred tax asset, net 2,752,000 4,191,000
Other assets 8,138,673 5,449,640
Assets of discontinued operations -- 6,981,166
------------ ------------
Total assets $242,560,305 $247,548,113
============ ============
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable $ 2,194,814 $ 2,627,987
Notes payable 225,033,166 232,605,414
Accounts payable 3,631,558 2,153,584
Accounts payable to related parties 254,043 1,020,102
Employee savings plan 1,083,594 627,702
Other liabilities 4,078,594 4,377,271
Liabilities of discontinued operations -- 376,643
------------ ------------
Total liabilities 236,275,769 243,788,703
------------ ------------
Stockholders' Equity
Preferred Stock $.01 par value:
Series A: 1,400,000 shares authorized; issued and outstanding
10,440 shares in 2001 and 2000;
Liquidation value $104,400 in 2001 104 104
Series C: 50,000 shares authorized issued and outstanding
in 2001 and 2000; liquidation value $500,000 in 2001 and 2000 500 500
Series E: 800,000 shares authorized, issued and outstanding
in 2001 and 2000; liquidation value $8,000,000 in 2001 and 2000 8,000 8,000
Series F: 100,000 shares authorized; issued and outstanding 20,000
Shares in 2001; liquidation value $200,000 in 2001 200 --
Common stock, $.01 par value, 50,000,000 shares authorized; issued
and outstanding 6,849,355 shares in 2001; and 6,974,355 shares in 2000 68,493 69,743
Additional paid-in-capital 8,831,599 8,610,549
Accumulated deficit (2,624,360) (4,929,486)
------------ ------------
Total stockholders'equity 6,284,536 3,759,410
------------ ------------
Total liabilities and stockholders'equity $242,560,305 $247,548,113
============ ============
See accompanying notes to consolidated financial statements.
18
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
----------- ----------- -----------
Interest and fee income $74,326,406 $65,614,280 $59,140,308
Interest expense 19,069,792 21,024,576 17,272,674
----------- ----------- -----------
Net interest income 55,256,614 44,589,704 41,867,634
Provision for credit losses 16,583,919 14,657,930 11,937,679
----------- ----------- -----------
Net interest income after provision for credit losses 38,672,695 29,931,774 29,929,955
Other income:
Insurance premiums and commissions, net 18,553,690 17,763,558 12,805,434
Other income 5,640,032 4,239,161 2,124,524
----------- ----------- -----------
Total other income 24,193,722 22,002,719 14,929,958
----------- ----------- -----------
Operating expenses:
Compensation and employee benefits 29,917,431 28,391,768 23,549,805
Telephone, computers 2,414,989 2,134,435 2,072,725
Net occupancy 6,560,051 5,615,002 5,352,364
Reinsurance claims expense 4,569,834 2,962,259 1,933,575
Advertising 2,700,041 2,494,271 1,736,786
Collection expense 639,153 245,644 312,894
Travel 1,228,631 1,201,653 960,865
Professional fees 954,730 814,376 633,209
Office expense 2,583,984 2,553,694 1,919,713
Amortization expense 2,435,724 2,173,879 1,512,262
Other 3,732,226 3,194,152 2,330,443
----------- ----------- -----------
Total operating expenses 57,736,794 51,781,133 42,314,641
----------- ----------- -----------
Income from continuing operations before income tax expense 5,129,623 153,360 2,545,272
Income tax expense 2,095,000 550,000 1,257,698
----------- ----------- -----------
Net income (loss) from continuing operations 3,034,623 (396,640) 1,287,574
Discontinued operations (Note 13)
Loss from operations of discontinued Paragon division(less benefit from
income taxes of $1,226,000 in 2000 and $51,698 in 1999) -- (3,040,226) (100,355)
Loss from operations of discontinued non-standard division (less
benefit from income taxes of $193,000 in 2000 and $716,000 in 1999) -- (374,683) (1,542,409)
Net income(loss) 3,034,623 (3,811,549) (355,190)
Dividends on preferred stock 729,497 723,886 734,012
----------- ----------- -----------
Net income(loss) applicable to common shareholders $ 2,305,126 $(4,535,435) $(1,089,202)
=========== =========== ===========
Net income (loss) per common share--basic and diluted 0.34 (0.65) (0.16)
From continuing operations 0.34 (0.16) 0.09
From discontinued operations -- (0.49) (0.25)
See accompanying notes to consolidated financial statements.
19
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000, and 1999
Additional Total
Common Preferred Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
------- --------- ----------- ----------- -------------
Balance at December 31, 1998 $38,852 $10,813 $12,184,057 $ 695,150 $12,928,872
Purchase and retirement of 132,859 shares of common stock (1,329) -- (1,327,262) -- (1,328,591)
Repurchase of 14,574 shares of Series A Preferred Stock -- (146) (145,594) -- (145,740)
Repurchase of 56,276 shares of Series D Preferred Stock -- (563) (562,197) -- (562,760)
Issuance of 3,223,000 shares of common stock for purchase
of Thaxton Investment Corporation 32,230 -- (32,230) -- --
Dividends paid on preferred stock -- -- -- (734,012) (734,012)
Net loss -- -- -- (355,190) (355,190)
------- ------- ----------- ----------- -----------
Balance at December 31, 1999 69,753 10,104 10,116,774 (394,052) 9,802,579
Purchase and retirement of 974 shares of common stock (10) -- (7,725) -- (7,735)
Repurchase of 1,500 shares of Series A preferred stock -- (1,500) (1,498,500) -- (1,500,000)
Dividends paid on preferred stock -- -- -- (723,885) (723,885)
Net loss -- -- -- (3,811,549) (3,811,549)
------- ------- ----------- ----------- -----------
Balance at December 31, 2000 69,743 8,604 8,610,549 (4,929,486) 3,759,410
Cancelled 135,000 shares of common stock (1,350) 1,350 --
Issued 20,000 shares of Series F preferred stock 200 199,800 200,000
Issued 10,000 shares of common stock for compensation 100 19,900 20,000
Dividends paid on preferred stock (729,497) (729,497)
Net Income -- -- -- 3,034,623 3,034,623
------- ------- ----------- ----------- -----------
Balance at December 31, 2001 $68,493 $ 8,804 $ 8,831,599 $(2,624,360) $ 6,284,536
======= ======= =========== =========== ===========
See accompanying notes to consolidated financial statements.
20
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 3,034,623 $ (3,811,549) $ (355,190)
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for credit losses 16,583,919 14,657,930 11,937,679
Depreciation and amortization 4,065,895 5,308,745 3,415,392
Deferred taxes 645,000 (310,000) (709,934)
Increase in accounts receivable (329,951) (840,916) (4,325,344)
Decrease in other assets (333,899) (4,526,138) (4,716,880)
Increase (decrease) in accrued interest payable and other liabilities (396,578) 5,320,368 6,381,914
------------ ------------ ------------
Net cash provided by operating activities 23,269,009 15,798,440 11,627,637
------------ ------------ ------------
Cash flows from investing activities:
Net increase in finance receivables (14,194,855) (18,071,663) (15,050,941)
Capital expenditures for premises and equipment (793,091) (2,375,869) (1,595,729)
Proceeds from sale of Thaxton RBE -- 75,000 --
Cash paid for deposit with Voyager (480,692) (6,230,000) --
Acquisitions, net of acquired cash equivalents (104,820) (11,963,358) (42,424,498)
------------ ------------ ------------
Net cash used by investing activities (15,573,458) (38,565,890) (59,071,168)
------------ ------------ ------------
Cash flows from financing activities:
Notes payable to affiliates -- (491,072) (287,918)
Issuance (repurchase) of common stock 20,000 (7,735) (1,328,591)
Dividends paid (729,497) (723,886) (734,012)
Net increase(decrease) in notes payable (7,572,248) 25,936,592 51,757,792
Proceeds from sale of Thaxton RBE stock by Thaxton RBE -- 2,000,000 --
Issuance (repurchase) of preferred stock 200,000 (1,500,000) (708,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities (8,081,745) 25,213,899 48,698,771
------------ ------------ ------------
Net increase (decrease) in cash (386,194) 2,446,449 1,255,240
Cash at beginning of period 4,482,553 2,036,104 780,864
------------ ------------ ------------
Cash at end of period $ 4,096,359 $ 4,482,553 $ 2,036,104
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 19,502,965 20,507,875 16,825,179
Income taxes 976,155 924,404 2,011
Total Non-cash Activities
Investing: Non-cash portion of acquisitions (2,584,260)
Financing: Portion of Acquisition financed by note to seller 2,584,260
See accompanying notes to consolidated financial statements.
21
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 2001, 2000, and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina. The Company operates consumer finance branches in 11
states, primarily under the names of TICO Credit, Southern Finance, and
Covington Credit. The Company also operates insurance agency branches in South
and North Carolina. 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 wholly owned subsidiaries, TICO
Reinsurance, Ltd. ("TRL"), Fitch National Reinsurance, Ltd., and Soco
Reinsurance, Inc. Through a 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
accounting principles generally accepted in the United States of America,
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.
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. Net deferred loan costs are
amortized as an adjustment to yield over the life of the loan. For receivables
which are renewed, interest income is recognized using a method similar to the
interest method.
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.
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.
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.
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 subsidiaries, and are included in insurance
premiums and commissions in the accompanying consolidated statements of income.
Unearned insurance premiums are accreted to income over the life of the related
insurance contracts using a method similar to that used for the recognition of
finance charges. Insurance commissions earned by Thaxton Insurance are
recognized as services are performed in accordance with Thaxton Insurance's
contractual obligations with the underwriters, but not before protection is
placed with insurers.
22
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.
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.
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 preferred stock that is convertible to common
stock.
Intangible Assets: Intangible assets include goodwill, expiration lists, and
- -----------------
covenants not to compete related to acquisitions made by the Company. Goodwill
represents the excess of the cost over the fair value of net assets acquired at
the date of acquisition. Goodwill is amortized on a straight-line basis,
generally over a five to twenty year period. The expiration lists are amortized
over their estimated useful lives, generally fifteen to twenty years, on a
straight-line basis. Covenants not to compete are amortized according to the
purchase contract over five to six years on a straight-line basis.
Recoverability of recorded intangibles is periodically evaluated by using
undiscounted cash flows.
Fair Value of Financial Instruments: Substantially all financial assets of the
- -----------------------------------
Company are short term in nature. As such, the carrying values of these
financial assets approximate their fair value. The Senior Notes payable of the
Company are variable in rate, therefore fair value approximates carrying value.
The Company's subordinated notes payable are at payable at fixed rates, with
terms up to sixty months in maturity. In evaluating the fair value of the
subordinated notes it was calculated that the fair value approximated the
carrying value. This was due to the majority being short term in nature.
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.
Advertising: Advertising costs are expensed as incurred.
- ------------
Cash and Cash Equivalents: The Company considers cash on hand, cash due from
- -------------------------
banks, and interest-earning deposits, which are maintained in financial
institutions as cash and cash equivalents.
Deposit: The Company maintains a deposit with an AM Best rated "A" insurance
- -------
carrier to serve as security for insurance reserves of its wholly owned credit
insurance re-insurance subsidiaries. The deposit earns interest at the rate of
100 basis points above the 12-month Treasury Bill rate. The rate is fixed for 12
months, adjusted annually on November 1st.
Other Comprehensive Income: Comprehensive income is the change in the Company's
- --------------------------
equity during the period from transactions and other events and circumstances
from non-owner sources. Total comprehensive income is divided into net income
and other comprehensive income. There were no items of other comprehensive
income in 2001, 2000, or 1999.
Loans/Impairment: Finance receivables are classified as nonaccrual, and the
- ----------------
accrual of interest is discontinued, when the contractual payment of principal
and interest has become 180 days past due or when, in management's judgment,
principal or interest is not collectible in accordance with the terms of the
obligation. Typically loans are charged off when they become 180 days past due.
Cash receipts on non-accrual loans are applied to principal. Interest
recognition resumes when the loan returns to performing status. The Company
evaluates impairment of finance receivables on a collective basis by pools of
homogenous loans.
Reclassifications: Certain amounts in the 1999 and 2000 financial statements
- -----------------
have been reclassified in order to conform to the 2001 presentation.
23
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 144, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in August 2001 and supersedes Statement No. 121. Statement No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The provisions of Statement No. 144 are effective for the financial
statements issued for fiscal years beginning after December 15, 2001. The
Company expects that adopting the provisions of this Statement will not have a
material impact on the consolidated financial statements of the Company.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. It addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. SFAS No. 142 also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Under SFAS No. 142, goodwill and intangible assets that
have indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. Intangible assets that have finite useful lives
will continue to be amortized over their useful lives, but without the
constraint of the 40-year maximum life required by SFAS No. 142. The provisions
of SFAS No. 142 are required to be applied starting with fiscal years beginning
after December 15, 2001. The Company adopted the provisions of SFAS No. 142
effective January 1, 2002.
(2) Business Combinations
- --------------------------
Consumer Finance
On August 18, 2000, the Company acquired all of the stock of Quick Credit
Corporation, a consumer finance company with 25 branch offices located in South
Carolina. The purchase price was $12.75 million in cash. This acquisition was
accounted for as a purchase and resulted in goodwill of approximately $3.8
million which is being amortized over 15 years.
On February 1, 1999, the Company's CEO and majority shareholder purchased
approximately 144 consumer finance offices from FirstPlus Consumer Finance,
Inc., and operated those offices in Thaxton Investment Corporation ("TIC"), a
corporation set up for that purpose. The purchase price paid was $49.4 million,
including a cash payment of $46.5 million, with the balance in notes and amounts
payable to FirstPlus. The note payable arising from the purchase was paid in
full prior to December 31, 1999. This acquisition, which was accounted for as a
purchase, resulted in goodwill in the amount of $29.5 million, which is being
amortized over 20 years. At the time of the acquisition, Thaxton Investment
Corp. was a private corporation, with Mr. Thaxton as the sole shareholder. TIC
operated independently from the Company from February 1, 1999 through November
8, 1999. On November 8th, the Company acquired TIC in exchange for 3,223,000
shares of the Company's common stock. Because TIC and the Company had been under
common ownership and control since February, 1999, the Company's acquisition of
TIC was accounted for at historical cost in a manner similar to pooling of
interests accounting.
Insurance Agency
On March 1, 1999, the Company acquired all of the assets of four insurance
agencies, operating from nine branch locations, in Colorado and Arizona, for a
total purchase price of approximately $1.6 million. The purchase was allocated
to the assets acquired and liabilities assumed based upon their fair values at
the date of acquisition. The excess of the purchase price over the fair value of
net assets acquired of $1,488,000 has been recorded as goodwill and is being
amortized on a straight line basis over 20 years.
On July 1, 1999, the Company acquired all of the stock of U. S. Financial Group
Agency, Inc., ("USFG"), an insurance general agency located in Virginia. The
purchase price of $1.1 million included a cash payment of $300,000, and the
balance due in a 6% note payable maturing in July 2001. This acquisition
resulted in $1 million of goodwill and other intangible assets being recorded,
which are being amortized over 20 years.
On October 1, 1999, the Company acquired the assets of a business operating as
American United Insurance Agency. The purchase price of $1.5 million included a
cash payment of $900,000, and $600,000 of 8% notes maturing in December 2000.
The acquisition resulted in $1.4 million of goodwill and other intangible assets
being recorded, which are being amortized over 20 years.
The insurance agencies discussed above were sold during the year ended December
31, 2000. See Note 13.
24
(3) Finance Receivables
- ------------------------
Finance receivables consist of the following at December 31, 2001 and 2000:
2001 2000
------------ ------------
Automobile sales contracts $ 23,121,113 $ 31,196,711
Direct loans 176,573,429 163,337,432
Mortgage loans 29,058,598 29,908,119
Premium finance contracts 8,618,497 7,527,689
Commercial loans 3,161,875 3,935,945
------------ ------------
Total finance receivables 240,533,512 235,905,896
Unearned interest (36,703,784) (36,841,017)
Unearned insurance premiums, net (1,798,520) (1,966,062)
Insurance loss reserve (9,022,167) (7,493,658)
Dealer holdback and bulk purchase discount (2,036,818) (2,406,165)
Allowance for credit losses (12,012,169) (11,630,555)
Deferred loan cost, net 2,294,976 2,375,207
------------ ------------
Finance receivables, net $181,255,030 $177,943,646
============ ============
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. With holdback arrangements, an automobile dealer or other
retailer will assign receivables to us on a loan-by-loan basis, typically at
par. We 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 bulk purchase and holdback
receivables, net of unearned interest and insurance, and the related holdback
and discount amount outstanding were approximately $11,450,000 and $429,000,
respectively, at December 31, 2001, and $18,204,000 and $819,000, respectively,
at December 31, 2000.
At December 31, 2001, there were no significant concentrations of receivables in
any type of property or to any 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,
2001, 2000, and 1999 are as follows:
2001 2000 1999
------------ ------------ ------------
Beginning balance $ 11,630,555 $ 10,661,339 $ 4,710,829
Valuation allowance for acquired loans -- 838,017 6,276,309
Provision for credit losses 16,583,919 14,657,930 11,937,679
Charge-offs (18,024,265) (16,052,319) (13,461,390)
Recoveries 1,821,960 1,525,588 1,197,912
------------ ------------ ------------
Net charge-offs (16,202,305) (14,526,731) (12,263,478)
------------ ------------ ------------
Ending balance $ 12,012,169 $ 11,630,555 $ 10,661,339
============ ============ ============
Our loan portfolio primarily consists of short term fixed rate loans, the
majority of which are originated or renewed during the current year.
Accordingly, we estimate that fair value of the finance receivables is not
materially different from carrying value.
25
(4) Premises and Equipment
- ---------------------------
A summary of premises and equipment at December 31, 2001 and 2000 follows:
2001 2000
----------- -----------
Leasehold improvements $ 2,289,105 $ 2,159,214
Furniture and fixtures 3,054,216 2,721,965
Equipment and automobiles 7,680,873 7,658,183
----------- -----------
Total cost 13,024,194 12,539,362
Accumulated depreciation 8,777,378 7,527,506
----------- -----------
Net premises and equipment $ 4,246,816 $ 5,011,856
=========== ===========
Depreciation expense was approximately $1,630,000 in 2001, and $1,538,000 and
$1,374,000 in 2000 and 1999, respectively.
(5) Intangible Assets
- ----------------------
Intangible assets consist of the following at December 31, 2001 and 2000:
2001 2000
----------- -----------
Covenants not to compete $ -- $ 102,022
Goodwill and purchase premium 37,683,318 37,578,496
Insurance expirations 1,890,301 1,890,301
----------- -----------
Total cost 39,573,619 39,570,819
Less accumulated amortization 7,091,965 4,758,261
----------- -----------
Intangible assets, net $32,481,654 $34,812,558
=========== ===========
The Company acquired the majority of the intangibles in connection with our
acquisition of FirstPlus Consumer Finance. Amortization expense was
approximately $2,436,000 in 2001, and $2,174,000 and $1,512,000 in 2000 and
1999, 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 our option or replaced by other leases or acquisitions of other
properties. Total rental expense was approximately $3,411,000 in 2001,
$3,100,000 in 2000 and $2,193,000 in 1999. The future minimum lease payments
under noncancelable operating leases as of December 31, 2001, are as follows:
2002 $2,703,503
2003 1,845,666
2004 1,118,806
2005 601,217
2006 363,965
Thereafter 1,182,047
----------
Total minimum lease payments $7,815,204
==========
Related parties own six of the office buildings in which the Company conducts
business. These premises are leased to the Company for a total monthly rental of
approximately $3,500.
(7) Notes Payable and Notes Payable to Affiliates
- --------------------------------------------------
At December 31, 2001 and 2000, notes payable consist of the following:
2001 2000
------------ ------------
Senior Notes Payable/Lines of Credit $151,234,760 $178,278,386
Subordinated Notes payable to individuals with varying maturity dates and rates
ranging from 5 1/4% to 12% 71,542,844 51,721,405
Other subordinated notes payable to companies with varying maturity dates and
rates ranging from 4 1/4% to 10% 2,255,562 2,605,623
------------ ------------
Total notes payable $225,033,166 $232,605,414
============ ============
A schedule of maturities of long-term debt is as follows:
Year Ending
December 31, Amount
------------ ------------
2002 $ 23,185,043
2003 43,644,842
2004 30,332,639
2005 33,368,214
2006 94,492,428
Thereafter 10,000
------------
Total $225,033,166
============
Our credit facility with FINOVA, as amended on December 31, 2001, comprises a
term loan with a balance of $19.8 million outstanding, and a revolving credit
line used to finance consumer receivables. Maximum borrowings under the
revolving credit line as of December 31, 2001 are limited to the lesser of $157
million, or 85% of eligible consumer finance receivables as defined by the
agreement. Our maximum borrowing amount decreases on a quarterly basis beginning
March 31, 2002 and decreases $22 million in 2002, $16.5 million in 2003, $18
million in 2004, $18 million in 2005 and $9 million in 2006. James D. Thaxton is
the guarantor for both the term loan and the revolving loan.
Advances under the term loan accrue interest at the prime rate + 2%. Advances
under the revolving credit line accrue interest at the prime rate + 1%. The
prime rate is the prime rate published by Citibank, N.A., or other money center
bank as FINOVA may select. The credit facility matures in 2006. The interest
rates are adjusted monthly to reflect fluctuations in the designated prime rate.
Accrued interest on borrowings is payable monthly.
The term loan is payable in twenty-three equal monthly principal and interest
payments, which began on April 15, 2001, in the amount of $600,000, with the
remaining principal balance due one month thereafter.
Under the revolving credit facility, principal is due in full on the maturity
date and can be prepaid without penalty. Substantially all of our and our
subsidiaries' assets secure the revolving credit facility, which require us to
comply with restrictive covenants, including financial condition covenants. As
of December 31, 2001, the Company met all such requirements.
As of February 28, 2002, an additional $12.1 million was available under the
terms of the revolving credit line to borrow against existing collateral, with
$45.0 million of total potential capacity available for borrowing against
qualified finance receivables generated in future periods. As of February 28,
2002, the interest rates for borrowings were 5.75% for the revolving credit
line, and 6.75% for the term loan.
In connection with the FirstPlus acquisition, the Company assumed $2.2 million
of subordinated notes issued by Voyager Insurance Co. In November 1999, those
notes were cancelled and re-issued in the name of the Company. The Company is
confident that it has adequate availability under it primary credit facility to
borrow adequate funds to liquidate this note, if required.
We began selling subordinated notes to residents of South Carolina pursuant to a
registered intrastate offering in May 1997. In February 1998, we terminated our
intrastate offering and expanded the offering of subordinated notes to several
states by registering $50 million of subordinated notes with the Securities and
Exchange Commission("SEC"). In May 2001, we registered an additional $75 million
offering of subordinated notes with the SEC. The notes are sold primarily to
individual investors. The maturity terms range from daily (demand) notes to
sixty-month notes. Interest rates vary based on the principal amounts and
maturity dates of the notes. Notes currently being offered carry interest rates
ranging from 5.25% to 8.0%. The notes are unsecured and issued under an
indenture which we entered into with The Bank of New York as trustee, in
February 1998. The terms of the indenture do not require
27
us to comply with any financial covenants nor do they impose any material
restrictions on the operations of our business.
As of December 31, 2001, we had $65.0 million of these registered subordinated
notes outstanding and $6.5 million notes registered in predecessor state
registrations. To date, we have used the proceeds from the sale of these notes
to reduce, on a temporary basis, the amount of our revolving credit facility
with FINOVA. We intend to continue this note program by seeking to register
additional offerings of subordinated notes with the SEC. The sale of
subordinated notes is an important aspect of the financing of our business. It
enables us to reduce our overall borrowing costs, particularly during periods of
increasing interest rates. In addition, it allows us to hedge the interest rate
risk inherent in our variable rate senior credit facility, and to diversify our
sources of borrowed funds.
We plan to continue to reduce borrowings under our senior credit facility and
replace those borrowings with increasing levels of subordinated notes.
For the fiscal year ending December 31, 2002, we anticipate that our cash flow
from operations, borrowings under our senior credit facility and the proceeds
from the sale of subordinated notes will be more than adequate to meet our needs
for cash to fund anticipated growth in our finance receivables, operating
expenses, repayment of indebtedness and planned capital expenditures, estimated
at approximately $25 million for 2002.
(8) Benefits
- -------------
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. The Board of Directors canceled this
plan in January 1999.
An ongoing benefit to the employees is the Employee Savings Plan. This plan
allows employees to contribute and earn a rate of 10%, the balances as of 2001,
2000, and 1999 were approximately $1,084,000, $628,000 and $1,329,000,
respectively.
(9) Income Taxes
- -----------------
Income tax expense attributable to continuing operations consists of the
following:
Current Deferred Total
---------- --------- ----------
2001 Federal $1,390,000 $ 645,000 $2,035,000
State 60,000 -- 60,000
$1,450,000 $ 645,000 $2,095,000
========== ========= ==========
2000 Federal $ 640,000 $(310,000) $ 330,000
State 220,000 -- 220,000
$ 860,000 $(310,000) $ 550,000
========== ========= ==========
1999 Federal $1,010,133 $(709,934) $ 300,199
State 189,801 -- 189,801
$1,199,934 $(709,934) $ 490,000
========== ========= ==========
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:
2001 2000 1999
---------- -------- --------
Statutory rate applied to income before income tax expense $1,750,000 $ 52,000 $ 45,802
Increase (decrease) in income taxes resulting from:
Goodwill amortization 310,000 468,000 427,760
State taxes, less related federal benefit 71,000 7,000 4,120
Valuation allowance adjustment (69,000) (17,000) 38,321
Other 33,000 40,000 (26,003)
---------- -------- --------
Income taxes $2,095,000 $550,000 $490,000
========== ======== ========
28
The effective tax rate attributable to continuing operations was 41%, 358%, and
49% for the years ended December 31, 2001, 2000 and 1999, respectively. The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities at December 31, 2001, 2000, and 1999 are
presented below:
2001 2000 1999
----------- ----------- ----------
Deferred tax assets:
Loan loss reserves $ 3,620,000 $ 3,968,000 $3,091,466
Federal net operating loss carryforwards -- 969,000 898,103
State net operating loss carryforwards -- 69,000 86,427
Other 155,000 405,000 27,767
----------- ----------- ----------
Total gross deferred tax asset 3,775,000 5,411,000 4,103,763
Less valuation allowance -- 69,000 86,427
----------- ----------- ----------
Net deferred tax assets 3,775,000 5,432,000 4,017,336
----------- ----------- ----------
Deferred tax liabilities:
Prepaid insurance -- (67,000) (66,926)
Depreciable basis of fixed assets (245,000) (147,000) (165,323)
Deferred loan costs (566,000) (666,000) (381,670)
Intangible assets (172,000) (226,000) (251,355)
Other (40,000) (45,000) (65,007)
----------- ----------- ----------
Total gross deferred tax liability (1,023,000) (1,151,000) (930,281)
----------- ----------- ----------
Net deferred tax asset $ 2,752,000 $ 4,191,000 $3,087,055
=========== =========== ==========
The change in the valuation allowance for 2001 was a decrease of $69,000 and in
2000 was a decrease of $17,427 and in 1999 a decrease of $77,203. The valuation
allowance relates to certain state net operating loss carryforwards. It is
management's opinion that realization of the net deferred tax asset, net of
valuation allowance, is more likely than not based upon the Company's history of
taxable income and estimates of future taxable income. The company's income tax
returns for 1997 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. The Company repurchased and retired 14,574 shares of Series A
Preferred Stock in December 1999 at $15 per share, and 150,000 shares at $10 per
share during 2000 and no shares during 2001.
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.
In January 1999, 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
were $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 plus 1% through October 31, 2003 and
prime plus 6% thereafter. The stock is redeemable by the Company at any time at
a price of $10 per share.
In March 2001, the Company, through a private placement, issued 20,000 shares of
Cumulative Series F preferred stock for $10 per share, to C.L. Thaxton, a
director of the Company. The stock pays a dividend rate of 10% and is redeemable
by the Company at any time at a price of $10 per share.
29
(11) Earnings Per Share Information
- -----------------------------------
The following is a summary of the earnings per share calculation for the years
ended December 31, 2001, 2000, and 1999:
BASIC & DILUTED 2001 2000 1999
---------- ----------- ----------
Net income (loss) from continuing operations $3,034,623 $ (396,640) $1,287,574
Less: Dividends on preferred stock 729,497 723,886 734,012
---------- ----------- ----------
Net income (loss) applicable to common shareholders (numerator) 2,305,126 (1,120,526) 553,562
Average common shares outstanding (denominator) 6,875,893 6,974,508 6,494,438
Income (loss) per share from continuing operations - basic and diluted $ 0.34 $ (0.16) $ 0.09
========== =========== ==========
The earnings per share calculation does not include 10,440 shares of Preferred
Series A and 50,000 shares of Preferred Series C stock, which are convertible to
common shares, because the effect is anti-dilutive.
(12) Business Segments
- ----------------------
For the years ended December 31, 2000 and 1999 the Company previously reported
its results of operations in four primary segments; consumer finance, mortgage
banking, insurance agency, and insurance non-standard risk bearing. Due to the
discontinuation of the mortgage bank and non-standard risk bearing insurance
businesses we now have two primary segments. 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
were conducted through Paragon, a wholly-owned subsidiary acquired in November
1998. Paragon originated, closed, and funded predominantly B and C credit
quality mortgage loans, which were warehoused until they can be packaged and
sold to long term investors. Paragon received fee income from originating
mortgages and the loans were generally sold at a premium to the permanent
investor. This business has been discontinued. 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.
Insurance non-standard risk bearing consisted of selling non-standard automobile
insurance, through agencies, where the Company retained a portion of the
insurance risk, this business has also been discontinued.
The following tables summarize certain financial information concerning the
Company's reportable operating segments for the years ended December 31, 2001,
2000, and 1999:
2001 Consumer
----------
Income Statement Data Finance Insurance Other Total
----------- ---------- ---------- -----------
Total revenue $93,669,290 $3,819,716 $1,031,122 $98,520,128
Net interest income 55,201,218 (668,380) 723,776 55,256,614
Provision for credit losses 16,428,712 25,777 129,430 16,583,919
Noninterest income 20,374,036 3,819,686 -- 24,193,722
Insurance premiums and
commissions, net 15,291,211 3,262,479 -- 18,553,690
Noninterest expenses 53,309,207 3,933,597 493,990 57,736,794
Depreciation and
amortization 3,724,681 323,770 17,444 4,065,895
Net income (loss) 3,501,713 (533,325) 66,235 3,034,623
Balance Sheet Data
Total assets 237,387,631 2,211,886 2,960,788 242,560,305
Loans, net 178,270,562 -- 2,984,468 181,255,030
Allowance for credit
losses 11,834,762 -- 177,407 12,012,169
Intangibles 31,184,955 1,296,699 -- 32,481,654
30
Insurance Mortgage
------------- -------------
Total RBE Banking
----------- ------------- -------------
2000 Consumer Continuing (Discontinued (Discontinued
------------ ----------- ------------- -------------
Income Statement Data Finance Insurance Other Operations Operations) Operations) Total
------------ --------- --------- ----------- ------------- ------------- -----------
Total revenue $ 82,271,590 4,284,716 1,060,693 87,616,999 1,875,013 5,733,973 95,225,985
Net interest income 44,760,229 (841,657) 671,132 44,589,704 (91,038) 87,853 44,586,519
Provision for credit losses 14,517,240 - 140,690 14,657,930 3,265 1,278,938 15,940,133
Noninterest income 17,718,003 4,284,716 -- 22,002,719 1,875,013 4,424,051 28,301,783
Insurance premiums and
commissions, net 14,044,802 3,718,756 -- 17,763,558 1,836,695 -- 19,600,253
Noninterest expenses 46,444,164 4,885,507 451,462 51,781,133 2,478,255 8,778,129 63,037,517
Depreciation and
amortization 3,331,621 360,225 19,619 3,711,465 148,726 1,448,554 5,308,745
Net income (loss) (83,428) (365,339) 52,127 (396,640) (374,682) 3,040,226) (3,811,549)
Balance Sheet Data
Total assets 232,693,388 4,087,249 3,786,310 240,566,947 -- 6,981,166 247,548,113
Loans, net 174,132,701 -- 3,810,945 177,943,646 -- 5,558,974 183,502,620
Allowance for credit
losses 11,505,555 -- 125,000 11,630,555 -- 1,278,938 12,909,493
Intangibles 33,346,575 1,465,983 -- 34,812,558 -- -- 34,812,558
Insurance Mortgage
------------- -------------
Total RBE Banking
----------- ------------- -------------
2000 Consumer Continuing (Discontinued (Discontinued
------------ ----------- ------------- -------------
Income Statement Data Finance Insurance Other Operations Operations) Operations) Total
------------ --------- --------- ----------- ------------- ------------- -----------
Total revenue $ 69,402,195 4,035,734 632,337 74,070,266 5,661,959 8,663,736 88,395,961
Net interest income 41,690,365 (235,236) 412,505 41,867,634 97,314 284,236 42,249,184
Provision for credit losses 11,923,527 -- 14,152 11,937,679 -- -- 11,937,679
Noninterest income 11,212,957 3,717,300 (299) 14,929,958 5,107,965 7,411,921 27,449,844
Insurance premiums and
commissions, net 9,830,839 2,974,595 -- 12,805,434 3,850,792 -- 16,656,226
Noninterest expenses 38,598,582 3,289,358 426,701 42,314,641 7,920,837 7,724,933 57,960,411
Depreciation and
amortization 2,257,937 366,927 15,807 2,640,671 631,660 143,062 3,415,393
Net income (loss) 1,119,640 132,358 35,576 1,287,574 (1,542,409) (100,355) (355,190)
Balance Sheet Data
Total assets 197,377,942 8,865,785 3,928,911 210,172,638 8,984,793 13,481,351 232,638,782
Loans, net 156,863,386 -- 3,440,166 160,303,552 -- 11,400,639 171,704,191
Allowance for credit
losses 10,661,339 -- -- 10,661,339 -- -- 10,661,339
Intangibles 29,655,279 1,707,559 -- 31,362,838 6,780,230 1,367,965 39,511,033
31
(13) Discontinued Operations
- ----------------------------
At the end of 1998, and throughout 1999, the Company made a series of
acquisitions of agencies in Arizona, New Mexico, Nevada, Colorado and North
Carolina, as well as a general insurance agency in Virginia. At the same time,
the Company entered into a contract with American Bankers Insurance Group, Inc.
("ABIG"), where the Company would sell ABIG non-standard insurance policies in
these locations, but Thaxton Group would contractually retain the underwriting
risk, and retain any profit or loss from operations. This business ultimately
contained 30 non-standard automobile agency office locations, plus two insurance
general agencies (located in Virginia and South Carolina).
On March 1, 2000, the Company transferred all of the assets and liabilities of
these agency operations into a newly formed company named Thaxton RBE, Inc.
("Thaxton RBE"). The total amount of the assets transferred approximate $8
million, the majority of which were intangible. The purpose of the transfer was
to raise additional capital for Thaxton RBE, as it operations were in their
initial stages. As such, immediately subsequent to the formation and asset
transfer, Thaxton Life Partners, Inc. invested $2,000,000 in the capital stock
of RBE and obtained a 90% interest in that company as a result of the
investment. Thaxton Life Partners, Inc., is a company owned by James D. Thaxton
(Chairman and majority shareholder of Thaxton Group, Inc.); C. L. Thaxton, Sr.
(Director of Thaxton Group, Inc.); and other Thaxton family members. As a result
of those transactions, Thaxton Group, Inc. had a net receivable from Thaxton RBE
in the amount of $5 million at March 31, 2000.
During the third quarter of 2000, Thaxton Group made the decision to discontinue
operations and dispose of its interest and investment in Thaxton RBE as soon as
suitable financing for Thaxton RBE could be obtained. On August 31, 2000,
Thaxton Life Partners was able to arrange financing for Thaxton RBE independent
of Thaxton Group, Inc., and Thaxton Life Partners purchased the remaining 10%
interest in RBE from Thaxton Group. At the time of the sale, all amounts owed
Thaxton Group were paid in full. Thaxton Group has recognized no gain or loss on
the disposition of Thaxton RBE. The transaction has been accounted for in
accordance with Accounting Principles Board Opinion #30, ("APB 30"), "Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions."
In December 2000, the Board of Directors adopted a plan to discontinue
operations in the Mortgage Banking market place. Paragon ceased operations in
December of 2000, and its assets have been sold. The Company recorded a loss,
net of income tax benefit, from operations of Paragon of $100,355 for the year
ended December 31, 1999 and a loss of $3,040,226 for the year month ended
December 31, 2000.
The components of the assets and liabilities of discontinued operations in the
consolidated balance sheets as of December 31, 2001, 2000, and 1999 are as
follows:
Paragon Insurance RBE
------- -------------
December 31, December 31, December 31,
------------ ------------ -------------
2000 1999 1999
------------ ------------ -------------
(1)Assets
Accounts receivable ............. $ 8,526 $ 34,424 $ 1,484
Loans held for Sale .......... 6,837,912 11,400,639 --
Allowance for credit losses ..... (1,278,938) -- --
Premises and equipment, net ..... 72,040 311,627 1,514,869
Intangibles, net ................ -- 1,367,965 6,780,230
Other assets .................... 1,341,626 366,696 688,210
----------- ----------- ----------
Total assets of discontinued operations.. $ 6,981,166 $13,481,351 $8,984,793
=========== =========== ==========
Subordinated notes payable ...... -- -- 1,676,091
Accounts payable ................ 2,762 88,699 552,028
Other liabilities ............... 373,881 -- 103,828
----------- ----------- ----------
Total liabilities of discontinued operations $ 376,643 88,699 2,331,947
=========== =========== ==========
Paragon Insurance RBE
--------------------- -------------
2000 1999 1999
-------- -------- ------------
(2) Premises and Equipment
Leasehold improvements ................. $ 7,000 $ 7,420 $ 81,868
Furniture and fixtures ................. 126,368 194,101 254,389
Equipment and automobiles .............. 73,704 169,569 1,532,413
-------- -------- ----------
Total cost ..................... 207,072 371,090 1,868,670
Accumulated depreciation ............... 135,032 59,463 353,801
-------- -------- ----------
Net premises and equipment ..... $ 72,040 $311,627 $1,514,869
======== ======== ==========
32
Paragon Insurance RBE
------------------------- -------------
2000 1999 1999
---------- ---------- ----------
(3) Intangibles
Covenants not to compete ............... $ -- $ -- $ 165,423
Goodwill and purchase premium .......... 1,410,731 1,410,731 4,657,611
Insurance expirations .................. -- -- 2,746,287
---------- ---------- ----------
Total cost ..................... -- 1,410,731 7,569,321
Less accumulated amortization .......... 1,410,731 42,766 789,091
---------- ---------- ----------
Intangible assets, net ......... $ -- $1,367,965 $6,780,230
========== ========== ==========
In 2000 Paragon wrote down the entire amount of goodwill due to its impairment.
Paragon had a loss from operations of $771,649 net of an income tax benefit of
$397,517 in 2000. Paragon's loss on disposal during the phase out period was
$2,268,577 net of an income tax benefit of $828,483 in 2000. There was no gain
or loss on the disposal of RBE.
(14) Related Party Transactions
--------------------------
As discussed in Note 13, Thaxton Life Partners, Inc., a related party, invested
$2,000,000 in the capital stock of RBE and obtained a 90% interest in RBE as a
result of the investment. The acquisition of the 90% interest in RBE by Thaxton
Life Partners was funded primarily through the Company's repurchase of 150,000
shares of Series A Preferred stock from certain members of Thaxton Life
Partners. The proceeds received from the Company from the repurchase of the
Series A Preferred stock were used by Thaxton Life Partners to obtain the 90%
interest in RBE. On August 31, 2000, Thaxton Life Partners purchased the
remaining 10% interest in RBE from the Company. The Company recognized no gain
or loss on the disposal of RBE. As the Thaxton Group, Inc. and RBE are under
common ownership, there are various activities and transactions that occur
between the two entities to take advantage of economies of scale.
After the sale of the capital stock of RBE, the Company continued to perform
certain back-office and management roles, such as the accounting, human
resources, and information systems management functions, which were outsourced
by RBE to the Company during 2001. The Company billed RBE for these services
performed based on the amount of time spent by the Company's personnel
performing the services for RBE. During the year ended December 31, 2001, the
Company billed RBE approximately $1,050,000 for such services performed.
Furthermore, RBE and the Company continued to share common office space after
the disposition. As a result of these arrangements, the Company had a receivable
from RBE for approximately $51,000 and a payable to RBE of approximately
$250,000 at December 31, 2001.
The Company has also structured an arrangement with RBE whereby TICO Premium
Finance, the Company's insurance premium finance subsidiary, will originate
loans to certain RBE customers to finance their insurance policies underwritten
by RBE. In connection with this process, TICO Premium Finance agrees to accept a
down payment on the loan which is smaller than TICO Premium Finance typically
receives from borrowers when the insurance policy is underwritten by third party
insurance companies. In turn, TICO Premium Finance is reimbursed by RBE for any
losses on such loans originated to customers of RBE. By requiring a lower down
payment, RBE is able to generate a higher volume of business than it would be
able to if down payments typically received in the industry were required by
TICO Premium Finance. At 12/31/01, there were approximately $3.1 million in
outstanding premium finance receivables recorded by TICO Premium Finance that
relate to insurance policies underwritten by RBE. In addition, for the year
ended December 31, 2001, there were approximately $584,000 of reimbursements
from RBE to TICO Premium Finance for losses incurred by TICO Premium Finance.
TICO Premium Finance had a receivable from RBE of approximately $62,000 at
12/31/01 for additional reimbursements for losses incurred.
Thaxton Insurance Group agencies, the Company's standard insurance operations,
are acting as agents for non-standard policies underwritten by Thaxton RBE.
Thaxton Insurance Group acts as agent for certain RBE customers and recognizes
commissions on policies that are underwritten by RBE. During the year ended
December 31, 2001 there was approximately $51,000 of insurance commissions
recognized by Thaxton Insurance Group on non-standard insurance policies that
were issued through Thaxton Insurance Group as agent.
The employees of RBE are covered under the self-insured health insurance plan of
the Company. In addition, the Company purchased general liability insurance
during 2001 that covers both the employees of Thaxton Insurance Group and RBE.
The employees of RBE are eligible to participate in the Employee Savings Plan
benefit offered by the Company.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We did not change accounting firms and had no disagreements on accounting or
financial disclosure matters with our independent certified public accountants
to report under this Item.
34
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our directors and executive officers and their ages as of March 15, 2002 were as
follows:
NAME AGE POSITION
---- --- --------
James D. Thaxton.............................. 55 Chairman of the Board, President and Chief
Executive Officer
Robert L. Wilson.............................. 61 Executive Vice President, Chief
Operating Officer and Director
Allan F. Ross................................. 53 Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
C. L. Thaxton, Sr............................. 78 Director
JAMES D. THAXTON has served as our Chairman of the Board, President and Chief
Executive Officer since we were founded. Prior to joining us, 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 us in January 1991 and has served since July 1991, as
our 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 to October 1988, 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 us 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 been a director since we were 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. Our executive officers
are appointed by and serve at the discretion of the Board.
Our board of directors directly oversees executive compensation, and oversees
and approves salaries and incentive compensation for our executive officers and
other employees. The board of directors also directly oversees the selection of
our independent auditors and reviews the results and scope of the audit and
other services that the independent auditors provide. Directors do not receive
any compensation for their service as members of the board of directors. All
directors are reimbursed for their expenses reasonably in attending board
meetings.
35
ITEM 11. EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued to our executive
officers for the years ended December 31, 2001, 2000, and 1999.
SUMMARY COMPENSATION TABLE
ANNUAL
------
COMPENSATION
------------
NAME AND PRINCIPLE POSITION YEAR SALARY ($) BONUS ($)
--------------------------- ---- ---------- ---------
James D. Thaxton, 2001 125,693 184,083
President and Chief Executive Officer 2000 115,363 123,755
1999 113,880 92,757
Robert L. Wilson, 2001 170,902 217,036
Executive Vice President 2000 152,821 53,033
1999 125,280 5,102
Allan F. Ross 2001 110,149 --
Vice President, Chief Financial Officer, and Treasurer 2000 104,904 --
1999 97,385 --
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock as of March 20, 2002, for each person
known to us to own more than 5% of our outstanding common stock, each of our
executive officers and directors and our directors and executive officers as a
group.
NUMBER OF SHARES AND
NATURE OF BENEFICIAL PERCENTAGE OF COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK OUTSTANDING(1)
------------------------ --------------------- --------=-----------
James D. Thaxton 6,456,000 (1) 94.1%
C. L. Thaxton, Sr. 17,221 (2) *
Directors and officers as a group 6,471,555 94.4%
* Indicates less than one percent
(1) Includes 1,112,828 shares held by a family limited partnership as to
which Mr. Thaxton shares voting and investment power.
(2) 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.
The address of all of the beneficial owners of our common stock is 1524 Pageland
Highway, Lancaster, South Carolina 29720.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stock Transaction with Director
In January 1999, Mr. Perry L. Mungo divested his ownership interest in the
company and resigned from the board of directors. At his bequest, we repurchased
all of his common stock, totaling 29,200 shares, for $10 per share.
Thaxton Investment
On February 1, 1999, Mr. James D. Thaxton, our Chairman, President, Chief
Executive Officer, and controlling shareholder, organized Thaxton Investment.
Mr. Thaxton owned all of the issued and outstanding common stock of Thaxton
Investment. Thaxton Investment's board of directors and executive officers were,
with one exception, identical to ours. Prior to our acquisition of all of the
issued and outstanding common stock of Thaxton Investment, our executive
officers and other administrative personnel provided management services to
Thaxton Investment and charged a monthly management fee in the amount of $36,440
based upon time estimates of our personnel for work performed for the benefit of
Thaxton Investment. The management fee also included the reimbursement of other
direct costs incurred in the course of our provision of management services to
Thaxton Investment.
On November 8, 1999, we completed the acquisition of all of the outstanding
common stock of Thaxton Investment. Mr. Thaxton transferred all of his shares of
Thaxton Investment to us in exchange for 3,223,000 shares of our common stock.
Because we had been under common ownership and control with Thaxton Investment
since February 1999, our acquisition of Thaxton Investment was accounted for at
historical cost in a manner similar to pooling of interests accounting.
Acquisition and Subsequent Disposition of Thaxton RBE, Inc.
At the end of 1998, and throughout 1999, we made a series of acquisitions of
insurance agencies in Arizona, New Mexico, Nevada, Colorado, and North Carolina,
as well as a general insurance agency in Virginia. At the same time, we entered
into a contract with American Bankers Insurance Group, Inc., pursuant to which
we agreed to sell American Bankers non-standard insurance policies sold by these
agencies and to retain the underwriting risk, and any profit or loss from
operations. This business ultimately consisted of 30 non-standard automobile
agency office locations, plus two insurance general agencies in Virginia and
South Carolina.
On March 1, 2000, we transferred all of the assets and liabilities of these
agency operations to Thaxton RBE, a newly-formed subsidiary. The total amount of
the assets transferred was approximately $8 million, the majority of which were
intangible. The purpose of the transfer was to place the operations of Thaxton
RBE in a single entity to facilitate raising additional capital for Thaxton RBE
to fund its initial stage operations. Immediately subsequent to the formation
and asset transfer, Thaxton Life Partners, Inc. invested $2,000,000 in the
capital stock of Thaxton RBE and obtained a 90% interest in that company as a
result of the investment. Thaxton Life Partners, Inc., is owned by James D.
Thaxton, C.L. Thaxton, Sr., and other Thaxton family members.
During the third quarter of 2000, we decided to discontinue operations and
dispose of our interest and investment in Thaxton RBE as soon as suitable
financing for Thaxton RBE could be obtained. On August 31, 2000, Thaxton Life
Partners was able to arrange independent financing for Thaxton RBE, and Thaxton
Life Partners purchased the remaining 10% interest in Thaxton RBE from us. At
the time of the sale all amounts owed us were paid in full.
Thaxton Life Partners, Inc., a related party, invested $2,000,000 in the capital
stock of RBE and obtained a 90% interest in RBE as a result of the investment.
The acquisition of the 90% interest in RBE by Thaxton Life Partners was funded
primarily through our repurchase of 150,000 shares of Series A Preferred stock
from certain members of Thaxton Life Partners. The proceeds received from us
from the repurchase of the Series A Preferred stock were used by Thaxton Life
Partners to obtain the 90% interest in RBE. On August 31, 2000, Thaxton Life
Partners purchased the remaining 10% interest in RBE from us. We recognized no
gain or loss on the disposal of RBE. As the Thaxton Group, Inc. and RBE are
under common ownership, there are various activities and transactions that occur
between the two entities to take advantage of economies of scale.
After the sale of the capital stock of RBE, we continued to perform certain
back-office and management roles, such as the accounting, human resources, and
information systems management functions, which were outsourced by RBE to us
during 2001. We billed RBE for these services performed based on the amount of
time spent by our personnel performing the services for RBE. During the year
ended December 31, 2001, we billed RBE approximately $1,050,000 for these
services. Furthermore, we continued to share common office space with RBE after
the disposition. As a result of these arrangements, we had a receivable from RBE
for approximately $51,000 and a payable to RBE of approximately $250,000 at
December 31, 2001.
37
We have also structured an arrangement with RBE whereby TICO Premium Finance,
our insurance premium finance subsidiary, will originate loans to certain RBE
customers to finance their insurance policies underwritten by RBE. In connection
with this process, TICO Premium Finance agrees to accept a down payment on the
loan which is smaller than TICO Premium Finance typically receives from
borrowers when the insurance policy is underwritten by third party insurance
companies. In turn, TICO Premium Finance is reimbursed by RBE for any losses on
such loans originated to customers of RBE. By requiring a lower down payment,
RBE is able to generate a higher volume of business than it would be able to if
down payments typically received in the industry were required by TICO Premium
Finance. At December 31, 2001, there were approximately $3.1 million in
outstanding premium finance receivables recorded by TICO Premium Finance that
relate to insurance policies underwritten by RBE. In addition, for the year
ended December 31, 2001, there were approximately $584,000 of reimbursements
from RBE to TICO Premium Finance for losses incurred by TICO Premium Finance.
TICO Premium Finance had a receivable from RBE of approximately $62,000 at
December 31, 2001 for additional reimbursements for losses incurred.
Thaxton Insurance Group agencies, our standard insurance operations, are acting
as agents for non-standard policies underwritten by Thaxton RBE. Thaxton
Insurance Group acts as agent for certain RBE customers and recognizes
commissions on policies that are underwritten by RBE. During the year ended
December 31, 2001 there was approximately $51,000 of insurance commissions
recognized by Thaxton Insurance Group on non-standard insurance policies that
were issued through Thaxton Insurance Group, as agent.
The employees of RBE are covered under our self-insured health insurance plan.
In addition, we purchased general liability insurance during 2000 that covers
both the employees of Thaxton Insurance Group and RBE.
The employees of RBE are eligible to participate in our Employee Savings Plan
benefit plan.
38
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The exhibits and other documents filed as part of this report including
exhibits that are incorporated by reference herein are:
(1) Report of Independent auditors
Consolidated balance sheets as of December 31, 2001 and 2000
Consolidated statements of income for the years ended December 31, 2001,
2000, and 1999
Consolidated statements of stockholders'equity for years ended December 31,
2001, 2000, and 1999
Consolidated statements of cash flows for years ended December 31,
2001, 2000, and 1999
Notes to consolidated financial statements for years ended December 31,
2001, 2000, and 1999
Supplemental selected financial data(unaudited)
(2) No financial statement schedules are required to be filed as part of this
report.
(3) Exhibits
Exhibit No. Description
- ---------- -----------
3.1 Second Amended and Restated Articles of Incorporation of The Thaxton Group,
Inc. (1)
3.2 Amended and Restated Bylaws of the Thaxton Group, Inc. (2)
4.1 Form of Indenture, dated as of February 17, 1998, between the Company and
The Bank of New York, as Trustee (3)
4.2 Form of Subordinated Daily Note (4)
4.3 Form of Subordinated One Month Note (5)
4.4 Form of Subordinated Term Note for 6, 12, 36 and 60 Month Notes (6)
10.1 Third Amended and Restated Loan and Security Agreement dated April 4, 2001
among Finova Capital Corporation, The Thaxton Group, Inc., Thaxton
Operating Company, Thaxton Insurance Group, Inc., TICO Credit Company,
Inc., Eagle Premium Finance Co., Inc., Thaxton Commercial Lending, Inc.,
Paragon, Inc., TICO Premium Finance Company of South Carolina, Inc., TICO
Reinsurance, LTD., TICO Credit Company of Tennessee, Inc., TICO Credit
Company of North Carolina, Inc., TICO Credit Company of Alabama, Inc., TICO
Credit Company of Georgia, Inc., TICO Credit Company (DE), TICO Credit
Company (MS), TICO Credit Company (TN), Thaxton Investment Corporation, The
Modern Finance Company, Southern Management Corporation, Modern Financial
Services, Inc., Southern Finance of Tennessee, Inc., Covington Credit of
Texas, Inc., Covington Credit of Georgia, Inc., Southern Finance of
Tennessee, Inc., Fitch National Reinsurance, LTD., SOCO Reinsurance, LTD.,
Quick Credit Corporation, Covington Credit, Inc.(Oklahoma), Covington
Credit of Louisiana, Inc., Southern Financial Management, Inc.(7)
10.2 First Amended and Restated Schedule, dated December 31, 2001, to Third
Amended and Restated Loan and Security Agreement, among Finova Capital
Corporation, The Thaxton Group, Inc., Thaxton Operating Company, Thaxton
Insurance Group, Inc., TICO Credit Company, Inc., Eagle Premium Finance
Co., Inc., Thaxton Commercial Lending, Inc., Paragon, Inc., TICO Premium
Finance Company of South Carolina, Inc., TICO Reinsurance, LTD., TICO
Credit Company of Tennessee, Inc., TICO Credit Company of North Carolina,
Inc., TICO Credit Company of Alabama, Inc., TICO Credit Company of
Mississippi, Inc., TICO Credit Company of Georgia, Inc., TICO Credit
Company (DE), TICO Credit Company (MS), TICO Credit Company (TN), Thaxton
Investment Corporation, The Modern Finance Company, Southern Management
Corporation, Modern Financial Services, Inc., Southern Finance of South
Carolina, Inc., Covington Credit of Texas, Inc., Covington Credit of
Georgia, Inc., Southern Finance of Tennessee, Inc., Fitch National
Reinsurance, LTD., SOCO Reinsurance, LTD., Quick Credit Corporation,
Covington Credit, Inc.(Oklahoma), Covington Credit of Louisiana, Inc.,
Southern Financial Management, Inc.
10.3 Stock Purchase Agreement, dated August 31, 2000 between Thaxton Insurance
Group, Inc. and Thaxton Life Partners, Inc., (8)
21 Subsidiaries of The Thaxton Group, Inc.
(1) Incorpora ted by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
(2) Incorpora ted by reference to Exhibit 3.2 of the Company's Registration
Statement on Form SB-2 (Reg. No. 333-55022)(the "2001 Registration
Statement ").
(3) Incorporated by reference to Exhibit 4.1 of the 2001 Registration
Statement.
(4) Incorporated by reference to Exhibit 4.5 of the 2001 Registration
Statement.
(5) Incorporated by reference to Exhibit 4.6 of the 2001 Registration
Statement.
(6) Incorporated by reference to Exhibit 4.7 of the 2001 Registration
Statement.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 2000.
(8) Incorporated by reference to Exhibit 10.9 the Company's Registration
Statement on Form SB-2 (Reg. No. 333-42623)(the "1998 Registration
Statement) filed with Post-Effective Amendment No. 2 to the 1998
Registration Statement.
39
(B) REPORTS ON FORM 8-K
None
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE THAXTON GROUP, INC.
(Registrant)
Date: March 27, 2002 By:/s/ ALLAN F. ROSS
------------------------------------------
Allan F. Ross
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
/s/ JAMES D. THAXTON President, Chief Executive Officer March 27, 2002
- --------------------- and Chairman of the Board of Directors
James D. Thaxton
/s/ ALLAN F. ROSS Vice President, Chief Financial Officer March 27, 2002
- ----------------- (Principle Accounting and Financial
Allan F. Ross Officer) and Director
/s/ ROBERT L. WILSON Executive Vice President and Director March 27, 2002
- --------------------
Robert L. Wilson
/s/ C. L. THAXTON, SR. Director March 27, 2002
- ----------------------
C. L. Thaxton, Sr.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
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.
41