UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
( ) 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 000-27086
THE THAXTON GROUP, INC.
-----------------------
(Name of small business issuer 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 29270
-----------------------------------------------------
(Address of principal executive offices)
Issuers telephone number: 803-285-4337
Indicate by check mark whether the issuer (1) has filed all reports required to
by 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 issuer was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
OUTSTANDING AT
CLASS AUGUST 9, 1999
----- --------------
COMMON STOCK 3,755,104
1
THE THAXTON GROUP, INC.
FORM 10-QSB
JUNE 30, 1999
TABLE OF CONTENTS
PAGE NO.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999 and 3
December 31, 1998
Consolidated Statements of Income for the six months 4
ended June 30, 1999 and 1998
Consolidated Statements of Income for the three months
ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I
ITEM 1. FINANCIAL STATEMENTS
The Thaxton Group, Inc.
Consolidated Balance Sheet
(in $000's)
June 30, December 31,
1999 1998
(Unaudited)
Assets
- ------
Cash $ 990 $ 781
Finance receivables, net 66,267 61,870
Premises and equipment, net 2,885 2,844
Accounts receivable 1,932 1,252
Repossessed automobiles 304 603
Goodwill and other intangible assets 9,228 8,305
Other assets 3,947 3,342
--------------------- ---------------------
Total assets $ 85,553 $ 78,997
===================== =====================
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Accrued interest payable $ 433 $ 429
Notes payable 70,432 62,144
Notes payable to affiliates 775 779
Accounts payable 1,881 929
Employee savings plan 1,197 1,070
Other liabilities 337 716
--------------------- ---------------------
Total liabilities 75,055 66,067
--------------------- ---------------------
Stockholders' Equity
- --------------------
Preferred Stock $ .01 par value,
Series A: 400,000 shares authorized, issued and outstanding 161,040
Shares at June 30, 1999, 175,014 shares issued and outstanding
At December 31, 1998 1 2
Series C: 50,000 shares authorized, issued and outstanding at
June 30, 1999 and December 31, 1998 1 1
Series D: 56,276 shares authorized and issued; no shares outstanding
June 30, 1999, 56,276 shares outstanding December 31, 1998 - 1
Series E: 800,000 shares authorized, issued and
outstanding at June 30, 1999 and December 31, 1998 8 8
Common stock, $ .01 par value; authorized 50,000,000 shares;
issued and outstanding 3,757,506 shares at June 30,1999;
3,885,218 shares at December 31, 1998 38 39
Additional paid-in-capital 10,205 12,184
Retained earnings 245 695
--------------------- ---------------------
Total stockholders' equity 10,498 12,930
--------------------- ---------------------
Total liabilities and stockholders' equity $ 85,553 $ 78,997
===================== =====================
See accompanying notes to consolidated financial statements.
3
The Thaxton Group, Inc.
Consolidated Statements of Income (Unaudited)
(in $000's except per share data)
Six Months ended June 30,
1999 1998
---- ----
Interest and fee income $ 11,513 $ 7,522
Interest expense 3,205 2,413
-------------- --------------
Net interest income 8,308 5,109
Provision for credit losses 1,851 1,967
-------------- ----------------
Net interest income after provision for credit losses 6,457 3,142
Other income: -------------- ----------------
Insurance premiums and commissions, net 5,061 2,853
Other income 992 473
-------------- ----------------
Total other income 6,053 3,326
-------------- ----------------
Operating expenses:
Compensation and employee benefits 7,393 3,371
Telephone, postage, and supplies 1,306 830
Net occupancy 1,138 810
Reinsurance claims expense 343 127
Insurance 187 66
Collection expense 54 80
Travel 182 64
Professional fees 215 115
Other 1,915 1,353
-------------- ----------------
Total operating expenses 12,733 6,816
-------------- ----------------
Income (loss) before income tax expense (223) (348)
Income tax expense (benefit) (130) (113)
-------------- ----------------
Net income (loss) (93) (235)
-------------- ----------------
Dividends on preferred stock 357 105
-------------- ----------------
Net income (loss) applicable to common shareholders $ (450) $ (340)
============== ================
Net income (loss) per common share-- basic and diluted $ (0.12) $ (0.09)
============== ================
Weighted average shares outstanding - basic and diluted 3,779,177 3,787,892
============== ================
See accompanying notes to consolidated financial statements.
4
The Thaxton Group, Inc.
Consolidated Statements of Income (Unaudited)
(in $000's except per share data)
Three Months Ended June 30,
1999 1998
Interest and fee income $ 6,033 $ 3,840
Interest expense 1,697 1,335
-------------- ----------------
Net interest income 4,336 2,505
Provision for credit losses 965 934
-------------- ----------------
Net interest income after provision for credit losses 3,371 1,571
-------------- ----------------
Other income:
Insurance premiums and commissions, net 2,608 1,468
Other income 564 249
-------------- ----------------
Total other income 3,172 1,717
-------------- ----------------
Operating expenses:
Compensation and employee benefits 3,868 1,556
Telephone, postage, and supplies 778 443
Net occupancy 750 453
Reinsurance claims expense 156 58
Insurance 153 27
Collection expense 27 43
Travel 144 31
Professional fees 132 83
Other 780 622
-------------- ----------------
Total operating expenses 6,788 3,316
-------------- ----------------
Income (loss) before income tax expense (245) (28)
Income tax expense (benefit) (137) (9)
-------------- ----------------
Net income (loss) (108) (19)
-------------- ----------------
Dividends on preferred stock 178 51
-------------- ----------------
Net income (loss) applicable to common shareholders $ (286) $ (70)
============== ================
Net income (loss) per common share-- basic and diluted $ (0.08) $ (0.02)
============== ================
Weighted average shares outstanding - basic and diluted 3,757,844 3,781,846
============== ================
See accompanying notes to consolidated financial statements.
5
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and 1998
(in $000's)
1999 1998
----------------- ----------------
Cash flows from operating activities $ 2,267,000 $ 1,370,000
Cash flows from investing activities (8,005,000) 1,646,000
Cash flows from financing activities 5,947,000 (3,141,000)
----------------- ----------------
Net increase (decrease) in cash 209,000 (125,000)
Cash at beginning of period 781,000 1,163,000
----------------- ----------------
Cash at end of Period $ 990,000 $ 1,038,000
================= ================
6
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina and operates, primarily through subsidiaries, finance
branches in seven southeastern states, and insurance agency branches in six
states located in the southeast and southwest. The Company is a diversified
financial services company that is engaged primarily in consumer lending and
consumer automobile sales financing to borrowers with limited credit histories,
low incomes or past credit problems. The Company also offers insurance premium
financing to such borrowers. A substantial amount of the Company's premium
finance business has been derived from customers of the independent insurance
agencies owned by Thaxton Insurance Group, Inc. ("Thaxton Insurance"), which was
acquired by the Company in 1996. The Company provides reinsurance through a
wholly owned subsidiary, TICO Reinsurance, Ltd. ("TRL"). Through a wholly owned
subsidiary, Paragon, Inc., the Company is also engaged in mortgage banking
originating mortgage loans to individuals. The Company sells substantially all
mortgage loans it originates to independent third parties. Through another
wholly owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes
factoring loans and collateralized commercial loans to small and medium sized
businesses. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
Information with respect to June 30, 1999 and 1998, and the periods then ended,
have not been audited by the Company's independent auditors, but in the opinion
of management, reflect all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the operations of the
Company. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Company's Annual Report on
Form 10-KSB when reviewing interim financial statements. The results of
operations for the six months and quarter ended June 30, 1999 are not
necessarily indicative of results to be expected for the entire fiscal year.
7
(2) FINANCE RECEIVABLES
-------------------
Finance receivables consist of the following at June 30, 1999 and December 31,
1998:
June 30, December 31,
1999 1998
---- ----
Automobile Sales Contracts $ 33,937,000 $ 37,125,000
Mortgage loans 7,734,000 11,096,000
Commercial loans 2,983,000 1,268,000
Direct Loans 33,525,000 27,853,000
Premium Finance Contracts 6,560,000 3,343,000
================== ================
Total finance receivables 84,739,000 80,685,000
Unearned interest (12,112,000) (11,914,000)
Unearned insurance premiums, net (134,000) (275,000)
Valuation discount for acquired loans (501,000) (673,000)
Bulk purchase discount (196,000) (602,000)
Dealer hold back (1,006,000) (640,000)
Allowance for credit losses (4,523,000) (4,711,000)
================== ================
Finance receivables, net $ 66,268,000 $ 61,870,000
================== ================
Mortgage Loans are held for sale in a warehouse arrangement, and outstanding
balances will fluctuate depending upon monthly origination volume and the timing
of sales to outside investors. Consumer loans include bulk purchases of
receivables, auto dealer receivables under holdback arrangements, and small
consumer loan receivables. With bulk purchase arrangements, the Company
typically purchases a group of receivables from an auto dealer or other retailer
at a discount to par based on management's review and assessment of the
portfolio to be purchased. This discount amount is then maintained in an
unearned income account to which losses on these loans are charged. To the
extent that losses from a bulk purchase exceed the purchase discount, the
allowance for credit losses will be charged. To the extent losses experienced
are less than the purchase discount, the remaining discount is accreted into
income. The amount of bulk purchased receivables, net of unearned interest and
insurance, and the related purchase discount outstanding were approximately
$3,370,000 and $196,000, respectively, at June 30, 1999 and approximately
$5,659,000 and $602,000, respectively, at December 31, 1998.
With holdback arrangements, an automobile dealer or other retailer will assign
receivables to the Company on a loan-by-loan basis, typically at par. The
Company will withhold a certain percentage of the proceeds, generally 5% to 10%,
as a dealer reserve to be used to cover any losses, which occur on these loans.
The agreements are structured such that all or a portion of these holdback
amounts can be reclaimed by the dealer based on the performance of the
receivables. To the extent that losses from these holdback receivables exceed
the total remaining holdback amount for a particular dealer, the allowance for
credit losses will be charged. The amount of holdback receivables, net of
unearned interest and insurance, and the related holdback amount outstanding
were approximately $22,189,000 and $1,021,000, respectively, at June 30, 1999
and approximately $24,464,000 and $640,000, respectively, at December 31, 1998.
The valuation discount for acquired loans relates to our acquisition of four
finance offices from Budget Financial Services, Inc. ("Budget"). The amount of
finance receivables, net of unearned interest and insurance, and related
valuation discount was approximately $1,834,000 and $501,000 at June 30, 1999;
and $2,564,000 and $673,000 at December 31, 1998.
At June 30, 1999 there were no significant concentrations of receivables in any
type of property or to one borrower.
These receivables are pledged as collateral for a line of credit agreement (see
note 3).
8
Changes in the allowance for credit losses for the three months ended June 30,
1999 and 1998 are as follows:
1999 1998
-------------- ---------------
Beginning balance $ 4,711,000 $ 4,810,000
Provision for credit losses 1,851,000 1,967,000
Charge-offs (2,188,000) (2,043,000)
Recoveries 149,000 87,000
-------------- ---------------
Net charge-offs (2,039,000) (1,956,000)
-------------- ---------------
Ending balance $ 4,523,000 $ 4,821,000
The Company's loan portfolio primarily consists of short-term loans, the
majority of which are originated or renewed during the current year.
Accordingly, the Company estimates that fair value of the finance receivables is
not materially different from carrying value.
(3) NOTES PAYABLE
At June 30, 1999 the Company maintained a line of credit agreement with a
commercial finance company for $92 million, maturing on October 31, 2003. At
June 30, 1999 the Company's net finance receivables would have allowed it to
borrow an additional $8.5 million against existing collateral. The outstanding
balance under this line of credit was $62,018,000 at June 30, 1999. There are
five tranches under this agreement, Tranche A, B, C, D and F. The total line of
credit, amount of credit line available at June 30, 1999 and interest rate for
each Tranche is summarized below:
Tranche A: $ 92,000,000; $51,873,000; 8.75% (Lender's prime rate + 1%)
Tranche B: $ 10,000,000; $10,000,000; 12.75% (Lender's prime rate + 5%)
Tranche C: $ 5,000,000; $ 2,558,000; 8.75% (Lender's prime rate + 1%)
Tranche D: $ 10,000,000; $ 8,014,000; 9.75% (Lender's prime rate + 2%)
Tranche F: $ 25,000,000; $15,536,000; 8.75% (Lender's prime rate + 1%)
The borrowing availability under certain Tranches is also limited by amounts
borrowed under other Tranches, outstanding receivables, insurance premiums
written, and in some cases, additional restrictions. As a result of these
additional restrictions, the Company had approximately $38 million total
potential borrowing capacity, and actual borrowing capacity of approximately
$8.5 million as of June 30, 1999.
The terms of the line of credit agreement provide that the finance receivables
are pledged as collateral for the amount outstanding. The agreement requires the
Company to maintain certain financial ratios at established levels and comply
with other non-financial requirements which may be amended from time to time.
Also, the Company may pay dividends up to 25% of the current year's net income.
As of June 30, 1999, the Company met all such ratios and requirements or
obtained waivers for any instances of non-compliance.
(4) BUSINESS COMBINATIONS
On June 28, 1999, the Company acquired U.S. Financial Group Agency, Inc. (U.S.
Financial), a wholesale insurance agency, located in Richmond, Virginia, U.S.
Financial places non-standard personal automobile insurance risks written by
agents located in Virginia. The purchase price of the acquisition was
$1,075,290, consisting of cash of $301,320 and a 4.25%, 24-month note for
$782,940. The acquisition was accounted for using purchase accounting, resulting
in intangible assets consisting of insurance expirations, and goodwill,
totaling $1,084,260. Intangible assets will be amortized over 15 years.
9
(5) BUSINESS SEGMENTS
For the year ended December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires the presentation of
descriptive information about reportable segments consistent with that used by
management of the Company to assess performance. Additionally, SFAS No. 131
requires disclosure of certain information by geographic region.
The Company reports its results of operations in three primary segments;
consumer finance, mortgage banking and insurance. The consumer finance segment
provides financing to consumers with limited credit histories, low incomes or
past credit problems. Revenues in the consumer finance business are derived
primarily from interest and fees on loans, and the sale of credit related
insurance products to its customers. The Company's mortgage banking operations
are conducted through Paragon, a wholly-owned subsidiary acquired in November
1998. Paragon originates, closes and funds predominantly B and C credit quality
mortgage loans, which are warehoused until they can be packaged and sold to long
term investors. Paragon receives fee income from originating mortgages and loans
are generally sold at a premium to the permanent investor. The Company's
insurance operations consist of selling, on an agency basis, various lines of
automobile, property and casualty, life and accident and health insurance.
Revenue is generated through fees paid by the insurance for which business is
placed.
The following table summarizes certain financial information concerning the
Company's reportable operating segments for the six months ended June 30, 1999
and 1998:
Consumer Mortgage
Finance Banking Insurance Other (1) Total
------------------------------------------------------------------------------------------------
1999
Total Revenue $ 8,741,000 $ 3,895,000 $ 4,753,000 $ 177,000 $ 17,566,000
Net Income 469,000 243,000 (685,000) (120,000) (93,000)
Total Assets 69,146,000 2,179,000 10,911,000 3,317,000 85,553,000
Consumer Mortgage
Finance Banking Insurance Other (1) Total
------------------------------------------------------------------------------------------------
1998
Total Revenue $ 7,715,000 $ 189,000 $ 2,944,000 - $ 10,848,000
Net Income (16,000) 75,000 (294,000) - (235,000)
Total Assets 52,418,000 85,000 6,732,000 - 59,235,000
(1) Other includes Tico Reinsurance Limited, a credit life reinsurance company,
and Thaxton Commercial Lending Inc.
10
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, the Company made a strategic decision to begin
diversifying its portfolio by actively seeking to finance purchases of used
automobiles ("Automobile Sales Contracts") by Non-Prime Borrowers and has since
evolved into a diversified consumer financial services company. The Company also
sells credit related insurance products and, through its subsidiary, Thaxton
Insurance Group, Inc. ("Thaxton Insurance"), on an agency basis, various lines
of property and casualty, life, and accident and health insurance. The Company
also entered the mortgage brokerage business during 1996, and in 1998 acquired
Paragon, Inc., ("Paragon") a mortgage banking company engaged in the
origination, funding, and whole loan sale of primarily "B" and "C" credit
quality residential mortgages. In 1998 the Company also began making factoring
and commercial loans to smaller sized businesses through a wholly owned
subsidiary, Thaxton Commercial Lending, Inc. ("Commercial").
THE INDUSTRY
The segment of the consumer finance industry in which the Company operates,
which is commonly called the "non-prime credit market," provides financing to
consumers with limited credit histories, low incomes, or past credit problems.
These consumers generally do not have access to the same variety of sources of
consumer credit as borrowers with long credit histories, no defaults, and stable
employment, because they do not meet the stringent objective credit standards
imposed by most traditional lenders. The Company, like its competitors in the
same segment of the consumer finance industry, generally charges interest to
Non-prime Borrowers at the maximum rate permitted by law or, in states such as
South Carolina where there are no legal maximum rates, at competitive rates
commensurate with the increased default risk and the higher cost of servicing
and administering a portfolio of loans to such borrowers. By contrast,
commercial banks, captive financing subsidiaries of automobile manufacturers,
and other traditional sources of consumer credit to prime borrowers typically
impose more stringent credit requirements and generally charge lower interest
rates.
The non-prime consumer credit market is highly fragmented, consisting of many
national, regional, and local competitors, and is characterized by relative ease
of entry. Management believes that most of these companies are concentrating
their activities on providing financing to Non-prime Borrowers with less
extensive credit problems who are purchasing late model used cars (coming off
lease or former rental cars) from franchised automobile dealers. By contrast,
the Company concentrates on providing financing to Non-prime Borrowers who have
more extensive credit problems and are purchasing lower-priced, older model
automobiles from independent dealers and making direct loans to Non-prime
Borrowers to meet short-term cash needs.
The premium finance industry for personal lines of insurance is also highly
fragmented. Insurance companies that engage in direct writing of insurance
policies generally provide financing to their customers who need the service.
Numerous small independent finance companies such as the Company are engaged in
providing premium financing for personal lines of insurance purchased by
Non-prime Borrowers through independent insurance agents. Because the rates they
charge are highly regulated, these companies compete primarily on the basis of
efficiency in providing the financing and servicing the loans. A significant
number of independent insurance agents provide premium financing to their
customers either directly or through affiliated entities. As banks are allowed
to enter the insurance business, they also are increasingly engaging in the
premium finance business.
Independent insurance agencies represent numerous insurance carriers, and
typically place a customer's business with the carrier whose combination of
features and price best match the customer's needs. In comparison, direct agents
represent only one carrier. Most carriers find use of independent agencies to be
a more cost-effective method of selling their products than using a direct agent
force. Competition in the independent insurance agency business is intense.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers operating in some of these markets. The Company competes
primarily on the basis of service and convenience. The Company attempts to
develop and maintain long-term customer relationships through low employee
turnover and responsive service representatives and offers a broad range of
insurance products underwritten by reputable insurance companies.
11
NET INTEREST MARGIN
The following table sets forth certain data relating to the Company's net
interest margin for the six months and three months ended June 30, 1999 and
1998.
For the Six Months For the Three Months
Ended June 30 Ended June 30
1999 1998 1999 1998
----------------- -------------- --------------- --------------
Average Net Finance Receivables (1) $ 66,985,000 $ 51,660,000 $ 68,121,000 $ 51,359,000
Average notes payable 65,701,000 44,369,000 68,222,000 43,947,000
Interest and fee income (2) 7,830,000 7,520,000 4,163,000 3,838,000
Interest expense (2) 2,804,000 2,113,000 1,622,000 1,066,000
Net interest income 5,026,000 5,407,000 2,501,000 2,772,000
Average interest rate earned (1) 23.38% 29.11% 24.44% 29.89%
Average intereat rate paid (1) 8.54% 9.52% 9.74% 9.70%
Net interest spread 14.84% 19.59% 14.70% 20.19%
Net interest margin (3) 15.01% 20.93% 14.69% 21.59%
(1) Averages are computed using month-end balances during the periods presented.
(2) Excludes Thaxton Insurance Group interest income, expense and Paragon
Lending loan fee income.
(3) Net interest margin represents net interest income divided by average Net
Finance Receivables.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Finance Receivables at June 30, 1999 were $84,739,000 versus $65,127,000 at June
30, 1998 a 30% increase. Approximately 50% of the increase is due to the
acquisition of Paragon, Inc., and the mortgage receivables carried in its
warehouse line. The remaining increase is due primarily to growth in our
consumer lending receivables.
Unearned income at June 30, 1999 was $12,747,000 versus $11,777,000 at June 30,
1998, a 8% increase which was directly related to the higher receivable level.
The provision for credit losses established for the six months ended June 30,
1999 was $1,851,000 versus $1,967,000 for the same period in 1998, and the
allowance for credit losses decreased to $4,523,000 at June 30, 1999, from
$4,821,000 at June 30, 1998. The reduction in the provision is directly
attributable to reduced credit losses, due primarily to the Company's programs
during 1997 and 1998 to improve the quality of its loan portfolio. Accordingly,
the allowance for credit losses has not required a significant increase in order
to maintain its level in accordance with the Company's allowance for loan loss
model.
Interest and fee income for the six months ended June 30, 1999 was $11,514,000,
versus $7,522,000 for the six months ended June 30, 1998, a 53% increase. This
increase is primarily due to our acquisition of Paragon, Inc. in the fourth
quarter of 1998, and the fees earned by Paragon in the course of its mortgage
banking operations. Interest expense increased to $3,285,000 for the six months
ended June 30, 1999 versus $2,413,000 for the six months ended June 30, 1998, a
increase of 36%, the direct result of a higher level of average
outstandings during 1999.
Insurance commissions net of insurance cost increased to $5,061,000 for the six
months ended June 30, 1999 from $2,853,000 for the same period of 1998, due
primarily to the acquisition of an additional 27 non-standard auto insurance
agency offices during the fourth quarter of 1998, which more than doubled the
number locations selling insurance in Thaxton Insurance Group.
Operating expenses increased to $12,653,000 for the six months ended June 30,
1999 from $6,816,000 for the comparable period of 1998, a 85% increase, due to
additional expenses incurred as a result of the 1998 acquisition of insurance
branch offices, consumer finance offices, and Paragon, Inc., the Company's
mortgage banking subsidiary.
As a result of the above, the company recognized a $93,000 loss for the six
months ended June 30, 1999 versus a $235,000 loss for the six months ended June
30, 1998.
12
Stockholders' equity decreased from $12,930 at December 31, 1998 to $10,570 at
June 30, 1999, a 18% decrease, primarily as a result of the Company's program to
repurchase its common stock. During the quarter ended June 30, 1999, the Company
repurchased 480 shares of common stock , and 600 shares of Series A preferred
stock, for a total reduction in related to these repurchases of $10,800.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Interest and fee income for the three months ended June 30, 1999 was $6,053,000,
versus $3,840,000 for the three months ended June 30, 1998, a 57% increase. This
increase is primarily due to our acquisition of Paragon, Inc. in the fourth
quarter of 1998, and the fees earned by Paragon in the course of its mortgage
banking operations. Interest expense increased to $1,777,000 for the three
months ended June 30, 1999 versus $1,335,000 for the three months ended June 30,
1998, a 33% increase, the direct result of a higher level of average
outstandings during 1999.
Insurance commissions net of insurance cost increased to $2,608,000 for the
three months ended June 30, 1999 from $1,468,000 for the three months ended June
30, 1998, primarily due to the acquisition of an additional 27 non-standard auto
insurance agency offices during the fourth quarter of 1998, which more than
doubled the number of locations selling insurance in Thaxton Insurance Group.
Operating expenses increased to $6,708,000 for the three months ended June 30,
1999 from $3,284,000 for the comparable period of 1998, a 101% increase, due to
additional expenses incurred as a result of the 1998 acquisition of insurance
branch offices, consumer finance offices, and Paragon Inc. the Company's
mortgage banking subsidiary.
As a result of the above, the company recognized a $108,000 net loss for the
three months ended June 30, 1999, versus a net loss of $19,000 for 1998.
CREDIT LOSS EXPERIENCE
The following table sets forth the Company's allowance for credit losses at June
30, 1999, and 1998 and the credit loss experience over the periods presented.
At or for the six months Ended At or for the three months Ended
June 30, June 30,
-------------------------------------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Net finance receivables (1) $ 66,267,000 $ 53,350,000 $ 66,267,000 $ 53,350,000
Allowance for credit losses 4,523,000 4,820,000 4,523,000 4,820,000
Allowance for credit losses as a percentage of net finance
receivables (1) 6.83% 9.04% 6.83% 9.04%
Dealer reserves and discounts on bulk purchases 1,202,000 1,073,000 1,201,000 1,073,000
Dealer reserves and discounts on bulk purchases as percentage
of Automobile sales Contracts as period end(2) 3.73% 3.18% 3.73% 3.18%
Allowance for credit losses and dealer reserves and discount on
bulk purchases as a percentage of net finance receivables (1) 8.64% 11.05% 8.64% 11.05%
Provision for loan losses 1,851,000 1,967,000 965,000 934,000
Charge-offs (net of recoveries) 2,039,000 1,956,000 1,242,000 875,000
Charge-offs (net of recoveries) as a percentage of average net
finance receivables (1) 6.09% 7.57% 7.42% 6.81%
- ---------------------
(1) Finance Receivable balances are presented net of unearned finance charges.
Averages are computed using month-end balances of Net Finance Receivables
during the period presented.
(2) Percentages are computed using Automobile Sales Contracts, net of unearned
finance charges only.
13
The following table presents an allocation of the Company's reserves and
allowances for credit losses, by type of receivable. The allowance for credit
losses has been allocated on an approximate basis between Direct Loans and
Premium Finance Contracts because losses on Automobile Sales Contracts are
charged against dealer reserves if the originating dealer's Specific Reserve
Account is adequate to cover the loss. The entire allowance is, however,
available to absorb losses occurring on any type of finance receivable. The
allocation is not indicative of future losses.
At June 30,
----------------------------------------
1999 1998
--------------- ----------------
Dealer reserves and discounts on bulk purchases on
Automobile Sales Contracts $ 1,202,000 $ 1,073,000
Allowance for credit losses
Direct Loans 4,244,000 4,594,000
Premium Finance Contracts 279,000 227,000
--------------- ----------------
Subtotal 4,523,000 4,821,000
--------------- ----------------
Total 5,725,000 5,894,000
=============== ================
The following table sets forth certain information concerning Automobile Sales
Contracts and Direct Loans at the end of the periods indicated:
At June 30,
-------------------------------------------
1999 1998
---------------- ---------------
Automobile Sales Contracts and Direct Loans contractually
past due 90 days or more (1) $ 685,000 $ 475,000
Automobile Sales Contracts and Direct Loans(1) 65,273,000 47,911,000
Automobile Sales Contracts and Direct Loans
contractually past due 90 days or more as
a percentage of Automobile Sales Contracts and Direct Loans 1.05% 0.99%
(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts on
bulk purchases.
The following table sets forth certain information concerning Premium Finance
Contracts at the end of the periods indicated:
At June 30,
-------------------------------------------
1999 1998
---------------- ---------------
Premium finance contracts contractually past due 60 days
or more (1) $ 1,000 $ 127,000
Premium finance contracts outstanding (1) 6,267,000 4,366,000
Premium finance contracts contractually past due 60 days
or more as a percentage of premium finance contracts 0.01% 2.91%
- -------------------------------------------
(1) Finance receivable balances are presented net of unearned finance charges
and discounts on bulk purchases.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company generally finances its operations and new offices through cash flow
from operations and borrowings under the Revolving Credit Facility. The
Revolving Credit Facility is extended by Finova and consists of six tranches.
The primary tranche provide for advances of up to $100 million and the
secondary tranches provides for advances from $5 million to $25 million during
their respective terms, all of which expire on October 31, 2003 subject to the
limitation that advances under each tranche of the Revolving Credit Facility may
not exceed an amount equal to specified percentages of Net Finance Receivables.
As of June 30, 1999, $62 million was outstanding under the Revolving Credit
Facility and there was $8.5 million available for additional borrowing. The
interest rate for borrowings is the prime rate published by Citibank, N.A. (or
other money center bank designated by Finova) plus one percent per annum for the
primary tranche and ranges from plus one to five percent per annum for the
secondary tranches. The Revolving Credit Facility agreement, amended on
September 3, 1997, provides for a lower fixed percentage over prime for certain
secondary tranches than did the previous agreement. The Revolving Credit
Facility imposes several financial and other covenants, including leverage
tests, dividend restrictions, and minimum net worth requirements. The Company
does not believe these covenants will materially limit its business or its
expansion strategy.
Management believes that the maximum borrowings available under the Revolving
Credit Facility, in addition to cash expected to be generated from operations
and the sale of subordinated notes, will provide the resources necessary to fund
the Company's liquidity and capital needs through the for seeable future.
IMPACT OF YEAR 2000
The Company recognizes that there is a business risk in computerized systems as
we move into the next century. If computer systems misinterpret the date, items
such as interest calculations on loans will be incorrect. This is commonly
called the "Year 2000 Problem." A number of computer systems used by the Company
in its day to day operations may be affected by this problem. The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 2000. Systems that do not properly recognize such
information could fail or generate erroneous data.
In the ordinary course of business, the Company has replaced a significant
portion of its non-compliant hardware and software with Year 2000 compliant
systems. The Company has minimal proprietary processing software virtually all
key sub-systems, payroll system, and general ledger were written, and are
maintained by reputable outside vendors. The Company has confirmed with
licensors from which it licenses software that all such software is Year 2000
compliant. The majority of vendor licensors have offered or provided the Company
the results of their Year 2000 testing.
With respect to our systems, networks, and licensed software, management has
established a project team, which has identified affected systems and is
currently working to ensure that the advent of the year 2000 will not disrupt
operations. This project team reports periodically to senior management. The
company is also working closely with outside computer vendors to ensure that all
software corrections and warranty commitments are obtained. The estimated cost
to the Company for these corrective actions, and the related hardware required
to run the upgraded software was originally estimated at approximately $1
million. A significant portion of this budget has already been spent, much of it
on upgrading hardware throughout our branch network. The remaining amounts to be
incurred are included in the Company's capital and operating budgets for the
remainder of 1999.
The Company has taken significant steps toward insuring that the Year 2000 will
not adversely affect our ability to function. However, it should be noted that
incomplete or untimely compliance would have a material adverse impact on the
Company, the dollar amount of which cannot be accurately quantified at this time
because of the inherent variables and uncertainties involved.
RECENT ACQUISITION BY AFFILIATE
On February 1, 1999, the Company's CEO and majority shareholder purchased
approximately 144 consumer finance offices from FirstPlus Consumer Finance,
Inc., and operates those offices in Thaxton Investment Corporation ("TIC"), a
corporation set up for that purpose. Thaxton Investment Corp. is a private
corporation, and Mr. Thaxton is the sole shareholder. The Company provides
management services to TIC, and charges TIC a reasonable fee for those services.
TIC operates in seven states, four of which the Company also operates finance
branch offices within. Additionally, some of TIC's finance offices do business
using the "TICO" business name.
15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS
--------
Exhibit 27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
-------------------
There were no reports filed on Form 8-K during the quarter ended June
30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE THAXTON GROUP, INC.
-----------------------
(Registrant)
Date: May 14, 1999 /s/JAMES D. THAXTON
-------------------
James D. Thaxton
President and Chief Executive Officer
Date: May 14, 1999 /s/ALLAN F. ROSS
----------------
Allan F. Ross
Vice President, Treasurer, Secretary,
and Chief Financial Officer
16