UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______ to ______
Commission file number 333-42623
THE THAXTON GROUP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0669498
-------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1524 PAGELAND HIGHWAY, LANCASTER, SOUTH CAROLINA 29720
------------------------------------------------------
(Address of principal executive offices)
803-285-4337
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 13, 2002
----- ---------------------------
Common Stock 6,871,855
THE THAXTON GROUP, INC.
FORM 10-Q
March 31, 2002
TABLE OF CONTENTS
-----------------
Item Page
No. ----
- ---
PART I
Financial Information
1. Financial Statements
Consolidated Balance Sheets at March 31, 2002 and December 31, 2001 2
Consolidated Statements of Income for the three months ended March 31, 2002 and 2001 3
Consolidated Statements of Stockholders' Equity for the year ended December 31, 2001 and
the quarter ended March 31, 2002 4
Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II
Other Information
1. Legal Proceedings 15
2. Changes in Securities and Use of Proceeds 15
3. Defaults Upon Senior Securities 15
4. Submission of Matters to a Vote of Security Holders 15
5. Other Information 15
6. Exhibits and Reports on Form 8-K 15
1
PART I
FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
March 31, 2002 & December 31, 2001
March 31, 2002 December 31,
(Unaudited) 2001
----------- ----
Assets
Cash $ 1,873,308 $ 4,096,359
Finance receivables, net 169,477,834 181,255,030
Premises and equipment, net 4,200,432 4,246,816
Accounts receivable 900,951 1,813,743
Accounts receivable from related parties 62,774 113,185
Repossessed automobiles 593,243 952,153
Deposit 6,759,291 6,710,692
Goodwill and other intangible assets 32,332,082 32,481,654
Deferred tax asset, net 2,752,000 2,752,000
Other assets 8,289,277 8,138,673
------------- -------------
Total assets $ 227,241,192 $ 242,560,305
============= =============
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable $ 2,185,753 $ 2,194,814
Notes payable 206,064,608 225,033,166
Accounts payable 1,872,217 1,361,490
Accounts payable to related parties 201,120 254,043
Income taxes payable 3,605,912 2,270,068
Employee savings plan 1,144,346 1,083,594
Other liabilities 3,389,048 4,078,594
------------- -------------
Total liabilities 218,463,004 236,275,769
------------- -------------
Stockholders' Equity
Preferred Stock $.01 parvalue:
Series A: 400,000 shares authorized; issued and outstanding 10,440 shares in 2002 and
2001; liquidation value $104,400 in 2002 and 2001 104 104
Series C: 50,000 shares authorized issued and outstanding in 2002 and 2001; liquidation
value $500,000 in 2002 and 2001 500 500
Series E: 800,000 shares authorized, issued and outstanding in 2002 and 2001; liquidation
value $8,000,000 in 2002 and 2001 8,000 8,000
Series F: 100,000 shares authorized; issued and outstanding 20,000 in March 2002 and
2001; liquidation value $200,000 in 2002 and 2001 200 200
Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding 6,871,855
in 2002; 6,859,355 shares in 2001 68,718 68,493
Additional paid-in-capital 8,876,374 8,831,599
Accumulated deficit (175,708) (2,624,360)
------------- -------------
Total stockholders' equity 8,778,188 6,284,536
------------- -------------
Total liabilities and stockholders' equity $ 227,241,192 $ 242,560,305
============= =============
See accompanying notes to consolidated financial statements.
2
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Quarters Ended March 31, 2002 and 2001
(Unaudited)
March 31, 2002 March 31, 2001
-------------- --------------
Interest and fee income $19,744,010 $18,529,310
Interest expense 3,691,870 5,634,820
----------- -----------
Net interest income 16,052,140 12,894,490
Provision for credit losses 3,670,268 2,974,833
----------- -----------
Net interest income after provision for credit losses 12,381,872 9,919,657
Other income:
Insurance premiums and commissions, net 3,757,272 3,559,576
Other income 1,565,035 1,199,380
----------- -----------
Total other income 5,322,307 4,758,956
----------- -----------
Operating expenses:
Compensation and employee benefits 8,468,507 7,828,456
Telephone, computers 542,092 598,807
Net occupancy 1,617,715 1,565,050
Reinsurance claims expense 289,726 225,647
Advertising 686,798 653,733
Collection expense 149,576 103,322
Travel 275,547 222,258
Professional fees 269,657 270,975
Office expense 579,374 612,524
Amortization expense 149,573 608,423
Other 746,659 963,938
----------- -----------
Total operating expenses 13,775,224 13,653,133
----------- -----------
Income before income tax expense 3,928,954 1,025,480
Income tax expense 1,335,844 453,662
----------- -----------
Net income 2,593,110 571,818
Dividends on preferred stock 144,457 171,347
----------- -----------
Net income applicable to common shareholders $ 2,448,653 $ 400,471
=========== ===========
Net income per common share--basic and diluted 0.36 0.06
See accompanying notes to consolidated financial statements.
3
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 2001 and Quarter Ended March 31, 2002
(Unaudited)
Additional Total
Common Preferred Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
----- ----- ------- -------- ------
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
Issued 22,500 shares of common stock for compensation 225 44,775 45,000
Dividends paid on preferred stock - - - (144,458) (144,458)
Net income - - - 2,593,110 2,593,110
-------- -------- ---------- ----------- ----------
Balance at March 31, 2002 $ 68,718 $ 8,804 $8,876,374 $ (175,708) $8,778,188
======== ======== ========== =========== ==========
See accompanying notes to consolidated financial statements.
4
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Quarters ended March 31, 2002 and 2001
March 31, 2002 March 31, 2001
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net income $ 2,593,110 $ 571,818
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 3,670,268 2,974,833
Depreciation and amortization 547,057 1,008,436
Deferred taxes 1,335,844 484,898
Increase in accounts receivable 1,025,977 359,325
Decrease in other assets 92,722 892,735
Issuance of common stock 45,000 -
Decrease in accrued interest payable and other liabilities (236,594) (566,540)
----------- -----------
Net cash provided by operating activities 9,073,384 5,725,505
----------- -----------
Cash flows from investing activities:
Net decrease in finance receivables 8,106,928 12,517,479
Net capital expenditures for premises and equipment (351,100) (110,499)
----------- -----------
Net cash provided by investing activities 7,755,828 12,406,980
----------- -----------
Cash flows from financing activities:
Dividends paid (144,457) (171,346)
Net decrease in notes payable (18,907,806) (20,336,579)
Issuance of preferred stock - 200,000
----------- -----------
Net cash used in financing activities (19,052,263) (20,307,925)
----------- -----------
Net decrease in cash (2,223,051) (2,175,440)
Cash at beginning of period 4,096,359 4,482,553
----------- -----------
Cash at end of period $ 1,873,308 $ 2,307,113
=========== ===========
See accompanying notes to consolidated financial statements.
5
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
March 31, 2002 and December 31, 2001
(Unaudited)
(1) Summary of Significant Accounting Policies
------------------------------------------
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina and operates, primarily through subsidiaries. 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 North and South 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., Soco Reinsurance, Inc. Through another wholly
owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes factoring
loans and collateralized commercial loans to small and medium sized businesses.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
Information with respect to March 31, 2002 and 2001, and the periods then ended,
have not been audited by the Company's independent auditors, but in the opinion
of management, reflect all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the operations of the
Company. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Company's Annual Report on
Form 10-K when reviewing interim financial statements. The results of operations
for the three months and quarter ended March 31, 2002 are not necessarily
indicative of results to be expected for the entire fiscal year.
(2) Finance Receivables
- ------------------------
Finance receivables consisted of the following at March 31, 2002 and 2001 and
December 31, 2001 and 2000:
March 31, December 31, March 31, December 31,
2002 2001 2001 2000
---- ---- ---- ----
Automobile sales contracts $ 24,044,618 $ 23,121,113 $ 29,963,465 $ 31,196,711
Direct loans 174,851,465 189,163,818 158,660,605 172,506,592
Mortgage loans 15,115,502 16,468,209 20,961,473 20,738,959
Premium finance contracts 6,548,817 8,618,497 8,540,975 7,527,689
Commercial loans 2,671,904 3,161,875 3,454,177 3,935,945
------------- ------------- ------------- -------------
Total finance receivables 223,232,306 240,533,512 221,580,695 235,905,896
Unearned interest (33,247,979) (36,703,784) (33,890,109) (36,841,017)
Unearned insurance premiums, net (1,299,956) (1,798,520) (1,603,104) (1,966,062)
Insurance loss reserve (9,153,209) (9,022,167) (6,568,807) (7,493,658)
Dealer holdback and bulk purchase discount (2,251,666) (2,036,818) (2,368,467) (2,406,165)
Allowance for credit losses (10,644,885) (12,012,169) (11,365,942) (11,630,555)
Deferred loan cost, net 2,016,883 2,294,976 2,251,337 2,375,207
------------- ------------ ------------ ------------
Finance receivables, net $ 169,477,834 $181,255,030 $168,035,603 $177,943,646
============= ============ ============ ============
6
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 $16,358,826 and $572,060,
respectively, at March 31, 2002.
At March 31, 2002, there were no significant concentrations of receivables in
any type of property or to one borrower. These receivables are pledged as
collateral for a line of credit agreement (see note 5).
Changes in the allowance for credit losses for the quarters ended March 31, 2002
and 2001, and the years ended December 31, 2001 and 2000, are as follows:
March 31, December 31, March 31, December 31,
2002 2001 2001 2000
---- ---- ---- ----
Beginning balance $12,012,169 $ 11,630,555 $11,630,555 $ 10,661,339
Valuation allowance for acquired loans - - - 838,017
Provision for credit losses 3,670,268 16,583,919 2,974,833 14,657,930
Charge-offs (5,556,959) (18,024,265) (3,683,076) (16,052,319)
Recoveries 519,407 1,821,960 443,630 1,525,588
----------- ------------ ----------- ------------
Net charge-offs (5,037,552) (16,202,305) (3,239,446) (14,526,731)
----------- ------------ ----------- ------------
Ending balance $10,644,885 $ 12,012,169 $11,365,942 $ 11,630,555
=========== ============ =========== ============
Our loan portfolio primarily consists of short term 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.
(3) Premises and Equipment
- ---------------------------
A summary of premises and equipment at March 31, 2002 and December 31, 2001
follows:
March 31, December 31,
2002 2001
---- ----
Leasehold improvements $ 2,314,756 $ 2,289,105
Furniture and fixtures 3,070,113 3,054,216
Equipment and automobiles 7,729,195 7,680,873
----------- -----------
Total cost 13,114,064 13,024,194
Accumulated depreciation 8,913,632 8,777,378
----------- -----------
Net premises and equipment $ 4,200,432 $ 4,246,816
=========== ===========
Depreciation expense was approximately $397,000 for the 1st quarter of 2002 and
$1,538,000 for the year ended December 31, 2001.
7
(4) Intangible Assets
- ----------------------
Intangible assets consisted of the following at March 31, 2002 and December 31,
2001:
March 31, December 31,
2002 2001
---- ----
Goodwill and purchase premium $37,683,318 $37,683,318
Insurance expirations 1,890,301 1,890,301
----------- -----------
Total cost 39,573,619 39,573,619
Less accumulated amortization 7,241,537 7,091,965
----------- -----------
Intangible assets, net $32,332,082 $32,481,654
=========== ===========
The Company acquired the majority of the intangibles in connection with the
acquisition of FirstPlus Consumer Finance. Amortization expense was
approximately $150,000 for the 1/st/ quarter of 2002 and $2,174,000 for the year
ended December 31, 2001.
Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which establishes financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes Accounting
Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No. 142,
goodwill and indefinite-lived intangible assets are no longer amortized but are
reviewed at least annually for impairment.
SFAS No. 142 requires that goodwill be tested for impairment at the reporting
unit level at adoption and at least annually thereafter, utilizing a two step
methodology. The initial step requires the Company to determine the fair value
of each reporting unit and compare it to the carrying value, including goodwill,
of such unit. If the fair value exceeds the carrying value, no impairment loss
would be recognized. However, if the carrying value of the reporting unit
exceeds its fair value, the goodwill of this unit may be impaired. The amount,
if any, of the impairment would then be measured in the second step.
(5) Notes Payable and Notes Payable to Affiliates
- --------------------------------------------------
At March 31, 2002 and 2001, and December 31, 2001 and 2000, notes payable
consisted of the following:
March 31, December 31, March 31, December 31,
2002 2001 2001 2000
---- ---- ---- ----
Senior Notes Payable/Lines of Credit $125,208,948 $151,234,760 $155,259,884 $178,278,386
Subordinated Notes payable to individuals with varying maturity
dates and rates ranging from 5 1/4% to 12% 78,600,098 71,542,844 54,455,650 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 2,255,562 2,553,301 2,605,623
------------ ------------ ------------ ------------
Total notes payable $206,064,608 $225,033,166 $212,268,835 $232,605,414
============ ============ ============ ============
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 $18.4 million outstanding as of March 31, 2002, and
a revolving credit line used to finance consumer receivables. Maximum borrowings
under the revolving credit line as of March 31, 2002 are limited to the lesser
of $144 million, or 85% of eligible consumer finance receivables as defined by
the agreement. Our maximum borrowing amount decreases on a quarterly basis and
decreases an additional $9 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.
8
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 published by Citibank, N.A., or any 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, we met all such requirements.
As of March 31, 2002, an additional $13.1 million was available under the terms
of the revolving credit line to borrow against existing collateral, with $37.2
million of total potential capacity available for borrowing against qualified
finance receivables generated in future periods. As of March 31, 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 our name. We are confident that we have
adequate availability under our primary credit facility to borrow adequate funds
to liquidate these notes, if required.
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 March 31, 2002, we had $75.7 million of these registered subordinated
notes outstanding and $5.1 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. We
anticipate that our cash inflow 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 cash outflows to fund anticipated growth in our
finance receivables, operating expenses, repayment of indebtedness, and planned
capital expenditures for the year ending December 31, 2002. We estimate our cash
outflow to be approximately $25 million for 2002.
(6) Earnings Per Share Information
- -----------------------------------
The following is a summary of the earnings per share calculation for the
quarters ended March 31, 2002 and 2001, and the years ended December 31, 2001
and 2000:
March 31, December 31, March 31, December 31,
2002 2001 2001 2000
---- ---- ---- ----
BASIC & DILUTED
Net income (loss) from continuing operations $2,593,110 $3,034,623 $ 571,818 $ (396,640)
Less: Dividends on preferred stock 144,457 729,497 171,347 723,886
---------- ---------- ---------- -----------
Net income (loss) applicable to common shareholders (numerator) 2,448,653 2,305,126 400,471 (1,120,526)
Average common shares outstanding (denominator) 6,857,480 6,875,893 6,940,605 6,974,508
Income (loss) per share from continuing operations - basic and diluted $ 0.36 $ 0.34 $ 0.06 $ (0.16)
========== ========== ========== ===========
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.
9
(7) Business Segments
- ----------------------
The Company now has 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 insurance operations consist of selling, on an
agency basis, various lines of automobile, property and casualty, life and
accident and health insurance. Revenue is generated through fees paid by the
insurance for which business is placed.
The following table summarizes certain financial information concerning the
Company's reportable operating segments for the quarter ended March 31, 2002 and
2001, and the year ended December 31, 2001:
March 31, 2002 Consumer
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total Revenue $ 23,942,351 $ 919,706 $ 204,260 $ 25,066,317
Net Interest Income 15,897,966 (834) 155,008 16,052,140
Provision for credit losses 3,648,329 4,339 17,600 3,670,268
Noninterest income 4,402,601 919,706 - 5,322,307
Insurance premiums and
commissions, net 2,885,860 871,412 - 3,757,272
Noninterest expenses 12,516,946 1,071,719 186,559 13,775,224
Depreciation and amortization 476,946 64,868 5,243 547,057
Net income 2,727,422 (152,013) 17,701 2,593,110
Balance Sheet Data
Total assets 222,818,684 1,956,886 2,465,622 227,241,192
Loans, net 166,805,930 - 2,671,904 169,477,834
Allowance for credit losses 10,644,885 - - 10,644,885
Intangibles 31,062,272 1,269,810 - 32,332,082
December 31, 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
10
March 31, 2001 Consumer
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total Revenue $ 21,813,902 $1,224,172 $ 250,192 $ 23,288,266
Net Interest Income 12,942,765 (204,665) 156,390 12,894,490
Provision for credit losses 2,962,732 2,101 10,000 2,974,833
Noninterest income 3,534,784 1,224,172 - 4,758,956
Insurance premiums and
commissions, net 2,653,518 906,058 - 3,559,576
Noninterest expenses 12,384,914 1,129,287 138,932 13,653,133
Depreciation and amortization
920,246 82,881 5,309 1,008,436
Net income 632,752 (72,455) 11,521 571,818
Balance Sheet Data
Total assets 221,766,896 3,594,287 3,324,555 228,685,738
Loans, net 164,716,426 - 3,319,177 168,035,603
Allowance for credit losses
11,230,942 - 135,000 11,365,942
Intangibles 32,821,493 1,421,636 - 34,243,129
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Thaxton Group, Inc. and its subsidiaries (the "Company") were organized in
July 1978 as C.L. Thaxton & Sons, Inc., and from that date until 1991 was
primarily engaged in making and servicing direct consumer loans ("Direct Loans")
and insurance premium finance loans ("Premium Finance Contracts") to persons
with limited credit histories, low incomes, or past credit problems ("Non-Prime
Borrowers"). In 1991, we made a strategic decision to diversify our portfolio by
actively seeking to finance credit-impaired borrowers' purchases of used
automobiles. Our management believed that the expertise it had developed in
extending and servicing installment credit to credit-impaired borrowers would
enable it to profitably finance used automobile purchases by borrowers having
similar credit profiles. The employment of additional senior and mid-level
management personnel with substantial used automobile lending experience
facilitated our entry into this segment of the consumer credit industry. Since
1991, we have evolved into a diversified consumer financial services company
engaged in the origination and servicing of loans made to credit-impaired
borrowers; used automobile lending through the purchase and servicing of used
automobile sales contracts ("Automobile Sales Contracts"); insurance premium
finance lending through the purchase of insurance premium finance contracts
("Premium Finance Contracts"); and selling insurance products on an agency
basis.
The Company operates its finance businesses in South Carolina, North Carolina,
Georgia, Tennessee, Virginia, Kentucky, Alabama, Mississippi, Ohio, Oklahoma and
Texas. It operates its insurance businesses in South Carolina and North
Carolina.
THE INDUSTRY
The segment of the consumer finance industry in which the Company operates,
which is commonly called the "non-prime credit market," provides financing to
non-prime borrowers. These consumers generally do not have access to the same
variety of sources of consumer credit as borrowers with long credit histories,
no defaults, and stable employment, because they do not meet the stringent
objective credit standards imposed by most traditional lenders. The Company,
like its competitors in the same segment of the consumer finance industry,
generally charges interest to Non-prime Borrowers at the maximum rate permitted
by law or, in states such as South Carolina where there are no legal maximum
rates, at competitive rates commensurate with the increased default risk and the
higher cost of servicing and administering a portfolio of loans to such
borrowers. By contrast, commercial banks, captive financing subsidiaries of
automobile manufacturers, and other traditional sources of consumer credit to
prime borrowers typically impose more stringent credit requirements and
generally charge lower interest rates.
The premium finance industry for personal lines of insurance is also highly
fragmented. Insurance companies that engage in direct writing of insurance
policies generally provide financing to their customers who need the service.
Numerous small independent finance companies such as the Company are engaged in
providing premium financing for personal lines of insurance purchased by
Non-prime Borrowers through independent insurance agents. Because the rates they
charge are highly regulated, these companies compete primarily on the basis of
efficiency in providing the financing and servicing the loans. A significant
number of independent insurance agents provide premium financing to their
customers either directly or through affiliated entities. As banks are allowed
to enter the insurance business, they also are increasingly engaging in the
premium finance business.
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Independent insurance agencies represent numerous insurance carriers, and
typically place a customer's business with the carrier whose combination of
features and price best match the customer's needs. In comparison, direct agents
represent only one carrier. Most carriers find use of independent agencies to be
a more cost effective method of selling their products than using a direct agent
force. Competition in the independent insurance agency business is intense.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers a broad range of
insurance products underwritten by reputable insurance companies.
NET INTEREST MARGIN
The following table presents important data relating to our net interest margin
for the quarters ended March 31, 2002 & 2001 and the years ended December 31,
2001 & 2000.
March 31, December 31, March 31, December 31,
2002 2001 2001 2000
---- ---- ---- ----
Average Net Finance Receivables (1) $190,911,203 $179,688,836 $186,062,762 $169,390,119
Average notes payable(1) 211,344,567 216,824,106 222,418,878 200,221,483
Interest and fee income (2) 19,744,010 74,326,406 18,529,310 65,614,280
Interest expense (3) 3,691,870 19,069,792 5,634,820 21,024,516
--------- ---------- --------- ----------
Net interest income 16,052,140 55,256,614 12,894,490 44,589,764
Average interest rate earned(1) 41.37% 41.36% 39.83% 38.74%
Average interest rate paid(1) 6.99% 8.80% 10.13% 10.50%
----- ----- ------ ------
Net interest rate spread 34.38% 32.56% 29.70% 28.24%
Net interest margin(4) 33.63% 30.75% 27.72% 26.32%
(1) Averages are computed using month-end balances during the year
presented
(2) Excludes interest and fee income earned by Thaxton Insurance.
(3) Excludes interest expense paid on Thaxton Insurance related debt.
(4) Net interest margin represents net interest income divided by
average Net Finance Receivables.
Results of Operations for the Three Months Ended March 31, 2002 and 2001
For the three months ended we incurred the normal liquidation of the loans we
added during the fourth quarter of the previous year. Our gross finance
receivables declined by $17,301,000 to $223,232,000 since December 31, 2001.
Comparatively in 2001 for the same period our gross receivables declined
$14,325,000 to $221,581,000. This is due to our normal business activity of our
customers paying off the loans they took out during the 4/th/ quarter of the
previous year.
Due to this increase in our receivables our interest income increased to
$19,744,000 for the current period from $18,529,000 for the same period last
year. Our interest expense decreased this year to $3,692,000 from $5,635,000 in
the prior period. The majority of our interest is variable, based on the Prime
Rate, due to the dramatic decrease in the prime rate from the 1/st/ quarter of
2001(9.00%) to the 1/st/ quarter of 2002(4.75%) our interest expense declined
substantially.
As to be expected with overall business growth our operating expenses also
increased from $13,653,000 in 2001 to $13,775,000 in 2002 or 1.0%. This increase
is related to normal growth of our business and an increase in salaries from the
prior year.
Due to our revenues growing and our interest expenses decreasing our pretax
income from continuing operations increased significantly from a $1,025,000 gain
in the 1/st/ quarter of 2001 to a $3,929,000 gain in 2002. This is mainly
attributable to the decrease in interest rates and the accounting change of not
amortizing goodwill, coupled with an increase in revenues from the addition of
our personal tax filing services just offered in the current quarter.
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CREDIT LOSS EXPERIENCE
The following table sets forth our allowance for credit losses and credit loss
experience at or over the periods presented.
March 31, December 31, March 31, December 31,
2002 2001 2001 2000
---- ---- ---- ----
Net finance receivables (1) $172,149,738 $190,105,324 $175,947,368 $185,638,256
Allowance for credit losses 10,644,885 12,012,169 11,365,942 11,630,555
Allowance for credit losses as a percentage of net finance
receivables (1) 6.18% 6.32% 6.46% 6.27%
Dealer reserves and discounts on bulk purchases 2,251,666 2,036,818 2,368,467 2,406,165
Dealer reserves and discounts on bulk purchases as percentage
of Net Automobile Sales Contracts at period end 11.22% 10.58% 9.35% 10.89%
Allowance for credit losses and dealer reserves and discount on
bulk purchases (2) 12,896,551 14,048,987 13,734,409 14,036,720
Allowance for credit losses and dealer reserves as a percentage
of finance receivables 7.49% 7.39% 7.81% 7.56%
Provision for credit losses 3,670,268 16,583,919 2,974,833 14,657,930
Charge-offs (net of recoveries) 5,037,552 16,202,305 3,239,446 14,526,731
Charge-offs (net of recoveries) as a percentage of average net
finance receivables (3) 10.55% 8.32% 7.36% 7.83%
(1) Net finance receivable balances are presented net of unearned finance
charges, net 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) March 31, 2002 and 2001 are annualized for comparison purpose.
The following table sets forth certain information concerning our finance
receivables at the end of the periods indicated:
March 31, December 31,
2002 2001
---- ----
Direct Finance Receivables Contractually past due 90 days or more $ 6,779,888 $ 7,373,910
Direct Finance Receivables outstanding 149,619,062 148,215,821
Direct Finance Receivables Contractually past due 90 days or more as a percentage of
Direct Finance receivables 4.53% 4.98%
Real Estate Secured Receivables Contractually past due 90 days or more 1,553,467 1,632,483
Real Estate Secured Receivables outstanding 14,515,770 15,731,657
Real Estate Secured Receivables Contractually past due 90 days or more as a percentage
of Real Estate Secured receivables 10.70% 10.38%
Vehicle Secured Receivables Contractually past due 60 days or more 1,666,620 1,090,032
Vehicle Secured Receivables outstanding 20,059,432 17,782,135
Vehicle Secured Receivables Contractually past due 60 days or more as a percentage of
Vehicle Secured receivables 8.31% 6.13%
Premium finance contracts contractually past due 60 days or more 722,195 679,091
Premium finance contracts outstanding 6,368,594 8,375,711
Premium finance contracts contractually past due 60 days or more as a percentage of
premium finance contracts 11.34% 8.11%
Finance receivable balances are presented net of unearned finance charges.
13
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 $18.4 million outstanding as of March 31, 2002, and
a revolving credit line used to finance consumer receivables. Maximum borrowings
under the revolving credit line as of March 31, 2002 are limited to the lesser
of $144 million, or 85% of eligible consumer finance receivables as defined by
the agreement. Our maximum borrowing amount decreases on a quarterly basis and
decreases an additional $9 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 published by Citibank, N.A., or any 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, we met all such requirements.
As of March 31, 2002, an additional $13.1 million was available under the terms
of the revolving credit line to borrow against existing collateral, with $37.2
million of total potential capacity available for borrowing against qualified
finance receivables generated in future periods. As of March 31, 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 our name. We are confident that we have
adequate availability under our primary credit facility to borrow adequate funds
to liquidate these notes, if required.
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 March 31, 2002, we had $75.7 million of these registered subordinated
notes outstanding and $5.1 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. We
anticipate that our cash inflow 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 cash outflows to fund anticipated growth in our
finance receivables, operating expenses, repayment of indebtedness, and planned
capital expenditures for the year ending December 31, 2002. We estimate our cash
outflow to be approximately $25 million for 2002.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's outstanding debt under the Revolving Credit Facility and Term Loan
was $125.2 million at March 31, 2002. Interest on borrowings under these
facilities is based on the prime rate. Based on the outstanding balance at March
31, 2002, a change of 1% in the prime interest rate would cause a change in
interest expense of approximately $1,252,000 on an annual basis.
The Company's outstanding receivables are not affected by external interest rate
changes. This is due to the fact that the Company, like most other Non-Prime
lending institutions, usually charges 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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: May 15, 2002 By:/s/ JAMES D. THAXTON
-----------------------
James D. Thaxton
President and Chief Executive Officer
Date: May 15, 2002 By:/s/ ALLAN F. ROSS
--------------------
Allan F. Ross
Vice President, Treasurer, Secretary, and
Chief Financial Officer
15