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 PERIOD ENDED JUNE 30, 2001
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
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(Address of principal executive offices)
Issuer's telephone number: 803-285-4337
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 August 10, 2001
----- ------------------------------
Common Stock 6,849,355
THE THAXTON GROUP, INC.
FORM 10-Q
June 30, 2001
TABLE OF CONTENTS
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Item Page
----
No.
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PART I
Financial Information
1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 2
Consolidated Statements of Income for the three months ended June 30, 2001 and 2000 3
Consolidated Statements of Income for the six months ended June 30, 2001 and 2000 4
Consolidated Statement of Stockholder Equity for the year ended December 31, 2000
and the six-months ended June 30, 2001 5
Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II
Other Information
1. Legal Proceedings 17
2. Changes in Securities and Use of Proceeds 17
3. Defaults Upon Senior Securities 17
4. Submission of Matters to a Vote of Security Holders 17
5. Other Information 17
6. Exhibits and Reports on Form 8-K 17
1
Item 1: FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
June 30, 2001 & December 31, 2000
June 30, 2001 December 31,
------------- ------------
(Unaudited) 2000
----------- ------------
Assets
- ------
Cash $ 1,335,504 $ 4,482,553
Finance receivables, net 173,120,891 177,943,646
Premises and equipment, net 4,532,038 5,011,856
Accounts receivable 1,472,520 2,154,637
Accounts receivable from affiliates 819,502 801,584
Repossessed automobiles 595,417 291,057
Deposit 6,519,226 6,230,000
Goodwill and other intangible assets 33,655,630 34,812,558
Other assets 8,909,103 8,839,056
Assets of discontinued operations - 6,981,166
------------ ------------
Total assets $230,959,831 $247,548,113
============ ============
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable $ 2,100,750 $ 2,627,987
Notes payable 212,907,218 232,605,414
Notes payable to affiliates 3,733,536 1,020,102
Accounts payable 2,171,394 2,153,584
Employee savings plan 630,072 627,702
Other liabilities 4,832,645 4,377,271
Liabilities of discontinued operations 125,000 376,643
------------ ------------
Total liabilities 226,500,615 243,788,703
------------ ------------
Stockholders' Equity
Preferred Stock $.01 par value:
Series A: 400,000 shares authorized; issued and outstanding 10,440 shares in 2001, 10,440
shares in 2000; liquidation value $104,400 in 2001 and 2000 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 June 2001;
liquidation value $200,000 in 2001. 200 -
Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding
6,849,355 in 2001; 6,974,355 shares in 2000 68,493 69,743
Additional paid-in-capital 8,831,599 8,610,549
Accumulated deficit (4,449,680) (4,929,486)
------------ ------------
Total stockholders' equity 4,459,216 3,759,410
------------ ------------
Total liabilities and stockholders' equity $230,959,831 $247,548,113
============ ============
See accompanying notes to consolidated financial statements.
2
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Three Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Interest and fee income $17,586,979 $15,350,284
Interest expense 4,334,075 4,636,922
----------- -----------
Net interest income 13,252,904 10,713,362
Provision for credit losses 3,634,475 2,804,951
----------- -----------
Net interest income after provision for credit losses 9,618,429 7,908,411
Other income:
Insurance premiums and commissions, net 3,339,247 3,247,669
Other income 1,108,392 1,196,191
----------- -----------
Total other income 4,447,639 4,443,860
----------- -----------
Operating expenses:
Compensation and employee benefits 7,779,543 7,398,871
Telephone, computers 558,176 466,674
Net occupancy 1,609,346 1,290,317
Reinsurance claims expense 419,299 110,255
Advertising 834,540 627,582
Collection expense 225,969 62,295
Travel 325,938 335,512
Professional fees 258,868 125,431
Office expense 621,196 706,465
Amortization expense 606,637 531,829
Other 260,034 643,260
----------- -----------
Total operating expenses 13,499,546 12,298,491
----------- -----------
Income from continuing operations before income tax expense 566,522 53,780
Income tax expense 297,619 163,700
----------- -----------
Net income(loss) from continuing operations 268,903 (109,920)
----------- -----------
Discontinued operations (Note 9)
Gain from discontinued operations of Paragon division(less income tax expense of $56,252 in
2000) - 109,610
Loss from discontinued operations of non-standard insurance division (less benefit from
income taxes of $35,299 in 2000) - (68,521)
Net income (loss) 268,903 (68,831)
Dividends on preferred stock 189,568 177,612
----------- -----------
Net income (loss) applicable to common shareholders $ 79,335 $ (246,443)
----------- -----------
Net income (loss) per common share--basic and diluted 0.01 (0.03)
From continuing operations 0.01 (0.04)
From discontinued operations - 0.01
See accompanying notes to consolidated financial statements.
3
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Six Months Ended June 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Interest and fee income $36,116,289 $31,411,098
Interest expense 9,806,699 9,332,456
----------- -----------
Net interest income 26,309,590 22,078,642
Provision for credit losses 6,609,308 5,929,522
----------- -----------
Net interest income after provision for credit losses 19,700,282 16,149,120
Other income:
Insurance premiums and commissions, net 6,898,823 6,585,320
Other income 2,307,772 2,297,517
----------- -----------
Total other income 9,206,595 8,882,837
----------- -----------
Operating expenses:
Compensation and employee benefits 15,607,999 14,489,285
Telephone, computers 1,156,983 993,809
Net occupancy 3,174,396 2,600,946
Reinsurance claims expense 644,946 403,817
Advertising 1,488,273 1,171,501
Collection expense 329,291 126,964
Travel 548,196 507,776
Professional fees 529,843 341,501
Office expense 1,233,720 1,242,748
Amortization expense 1,215,060 1,039,880
Other 1,386,168 1,348,106
----------- -----------
Total operating expenses 27,314,875 24,266,333
----------- -----------
Income from continuing operations before income tax expense 1,592,002 765,624
Income tax expense 751,281 470,312
----------- -----------
Net income from continuing operations 840,721 295,312
----------- -----------
Discontinued operations (Note 9)
Loss from discontinued operations of Paragon division (less benefit from income taxes of
$42,941 in 2000) - (83,355)
Loss from discontinued operations of non-standard insurance division (less benefit from
income taxes of $193,000 in 2000) - (373,766)
Net income (loss) 840,721 (161,809)
Dividends on preferred stock 360,915 345,458
----------- -----------
Net income (loss) applicable to common shareholders $ 479,806 $ (507,267)
=========== ===========
Net income (loss) per common share--basic and diluted 0.07 (0.07)
From continuing operations 0.07 (0.01)
From discontinued operations - (0.06)
See accompanying notes to consolidated financial statements.
4
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 2000 and Six Months Ended June 30, 2001
(Unaudited)
Additional Total
Common Preferred Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
----- ----- ------- -------- ------
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 as compensation 100 - 19,900 - 20,000
Dividends paid on preferred stock - - - (360,915) (360,915)
Net income - - - 840,721 840,721
-------- ------- ----------- ----------- -----------
Balance at June 30, 2001 $ 68,493 $ 8,804 $ 8,831,599 $(4,449,680) $ 4,459,216
======== ======= =========== =========== ===========
See accompanying notes to consolidated financial statements.
5
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Six Months ended June 30, 2001 and 2000
(Unaudited)
June 30, June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ 840,721 $ (161,809)
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 6,609,308 5,929,522
Depreciation and amortization 2,016,421 1,860,539
Deferred taxes 751,281 470,312
Decrease in accounts receivable 690,643 568,062
Non-cash compensation expense 20,000 -
Decrease in other assets 194,846 280,829
Increase in accrued interest payable and other liabilities 2,212,315 590,787
------------ ------------
Net cash provided by operating activities 13,335,535 9,538,242
------------ ------------
Cash flows from investing activities:
Net decrease in finance receivables 3,913,895 3,779,559
Net capital expenditures for premises and equipment (248,142) -
Cash paid for deposit with Voyager (289,226) -
Proceeds from sale of Thaxton RBE - 75,000
------------ ------------
Net Cash provided by investing activities 3,376,527 3,854,559
------------ ------------
Cash flows from financing activities:
Notes payable to affiliates - (491,072)
Repurchase of common stock - (10,000)
Dividends paid (360,915) (345,458)
Net decrease in notes payable (19,698,196) (13,930,505)
Proceeds from sale of Thaxton RBE stock by Thaxton RBE - 2,000,000
Issuance (repurchase) of preferred stock 200,000 (1,500,000)
------------ ------------
Net cash used by financing activities (19,859,111) (14,277,035)
------------ ------------
Net decrease in cash (3,147,049) (884,234)
Cash at beginning of period 4,482,553 2,036,104
------------ ------------
Cash at end of period $ 1,335,504 $ 1,151,870
============ ============
See accompanying notes to consolidated financial statements.
6
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
June 30, 2001 and December 31, 2000
(Unaudited)
(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 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., and Thaxton 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 June 30, 2001 and 2000, 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, 2001 are not
necessarily indicative of results to be expected for the entire fiscal year.
Recent Accounting Pronouncements
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
one method, the purchase method. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 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 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 expects to adopt the provisions of SFAS No. 142 effective January 1,
2002. The Company is in the process of determining the impact the adoption of
the provisions of SFAS No. 142 will have on financial position and results of
operations.
7
(2) Finance Receivables
- ------------------------
Finance receivables consisted of the following at June 30, 2001 and December 31,
2000:
June 30, December 31,
-------- ------------
2001 2000
---- ----
Automobile Sales Contracts $ 28,182,493 $ 31,196,711
Direct Loans 156,856,723 163,337,432
Mortgage Loans 29,803,095 29,908,119
Premium Finance Contracts 9,403,259 7,527,689
Commercial Loans 3,786,741 3,935,945
------------- -------------
Total finance receivables 228,032,311 235,905,896
Unearned interest (34,168,838) (36,841,017)
Unearned insurance premiums, net (9,420,605) (9,459,720)
Dealer Holdback and Bulk purchase discount (2,373,297) (2,406,165)
Allowance for credit losses (11,289,585) (11,630,555)
Deferred Loan Cost, net 2,340,905 2,375,207
------------- -------------
Finance receivables, net $ 173,120,891 $ 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 assigns
receivables to us, either with or without recourse back to the dealer, on a
loan-by-loan basis. We withhold a certain percentage of the proceeds, generally
10% to 20%, of the amount financed, as a reserve, which is used to cover any
losses which occur on these loans. The agreements are structured such that, a
dealer may reclaim a portion of these holdback reserves depending on the
performance of the receivables. To the extent that losses from these holdback
receivables occur, 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 $24,330,909 and $2,395,147, respectively, at June 30, 2001, and
$24,034,958 and $2,310,745, respectively, at December 31, 2000.
At June 30, 2001, 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 June 30, 2001
and 2000, and the years ended December 31, 2000 and 1999 are as follows:
June 30, December 31, June 30, December 31,
-------- ------------ -------- ------------
2001 2000 2000 1999
---- ---- ---- ----
Beginning balance $ 11,630,555 $ 10,661,339 $10,661,339 $ 4,710,829
Valuation allowance for acquired loans - 838,017 - 6,276,309
Provision for credit losses 6,609,308 14,657,930 5,929,522 11,937,679
Charge-offs (7,914,695) (16,052,319) (7,218,682) (13,461,390)
Recoveries 964,417 1,525,588 671,382 1,197,912
------------ ------------ ------- ------------
Net charge-offs (6,950,278) (14,526,731) (6,547,300) (12,263,478)
------------ ------------ ----------- ------------
Ending balance $ 11,289,585 $ 11,630,555 $10,043,561 $ 10,661,339
============ ============ =========== ============
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.
8
(3) Premises and Equipment
- ---------------------------
A summary of premises and equipment at June 30, 2001 and December 31, 2000
follows:
June 30, December 31,
-------- ------------
2001 2000
---- ----
Leasehold improvements $ 2,210,776 $ 2,159,214
Furniture and fixtures 2,797,163 2,721,965
Equipment and automobiles 7,852,966 7,658,183
----------- -----------
Total cost 12,860,905 12,539,362
Accumulated depreciation 8,328,867 7,527,506
----------- -----------
Net premises and equipment $ 4,532,038 $ 5,011,856
=========== ===========
Depreciation expense was approximately $400,000 for the quarter ended June 30,
2001 and $801,000 year to date, compared to $335,000 for the quarter ended, and
$664,000 for the six-months ended June 30, 2000.
(4) Intangible Assets
- ----------------------
Intangible assets consisted of the following at June 30, 2001 and December 31,
2000. Weighted average amortization periods are shown in parentheses.
June 30, December 31,
-------- ------------
2001 2000
---- ----
Covenants not to compete (5.5 years) $ 102,022 $ 102,022
Goodwill and purchase premium (22.7 years) 37,636,628 37,578,496
Insurance expirations (17.9 years) 1,890,301 1,890,301
----------- -----------
Total cost 39,628,951 39,570,819
Less accumulated amortization 5,973,321 4,758,261
----------- -----------
Intangible assets, net $33,655,630 $34,812,558
=========== ===========
The Company acquired the majority of the intangibles in connection with our
acquisition of FirstPlus Consumer Finance. Amortization expense was
approximately $1,215,000 for the six-months and $606,000 for the quarter ended
June 30, 2001, compared to $1,040,000 for the six-months and 532,000 for the
quarter ended June 30, 2000.
(5) Notes Payable and Notes Payable to Affiliates
- --------------------------------------------------
At June 30, 2001 and December 31, 2000, notes payable consisted of the
following:
June 30, December 31,
-------- ------------
2001 2000
---- ----
Senior Notes Payable/Lines of Credit $150,218,344 $178,278,386
Subordinated Notes payable to individuals with varying
maturity dates and rates ranging from 5 1/4% to 12% 60,402,037 51,721,405
Other subordinated notes payable to companies with varying
maturity dates and rates ranging from 4 1/4% to 10% 2,286,837 2,605,623
------------ ------------
Total notes payable $212,907,218 $232,605,414
============ ============
Our credit facility with FINOVA, as amended on April 4, 2001, comprises a term
loan with $22.5 million outstanding at June 30, 2001, and a revolving credit
line used to finance consumer receivables. Maximum borrowings under the
revolving credit line are limited to the lesser of $157 million, or 85% of
eligible consumer finance receivables as defined by the agreement.
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 2004. The interest
rates are adjusted monthly to reflect fluctuations in the designated prime rate.
Accrued interest on borrowings is payable monthly.
9
The term loan amortizes with twenty-three equal monthly principal and interest
payments, beginning 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 this revolving credit facility, which require us to
comply with restrictive covenants, including financial condition covenants. As
of December 31, 2000, the Company met all such requirements or obtained waivers
for any instances of non-compliance through the signing of the new agreement.
As of June 30, 2001, an additional $17.1 million was available under the terms
of the revolving credit line to borrow against existing collateral, with $29.3
million of total potential capacity available for borrowing against qualified
finance receivables generated in future periods. As of June 30, 2001, the
interest rates for borrowings were 7.75% for the revolving credit line, and
8.75% for the term loan.
In February 1998, the Company terminated its intrastate offering in South
Carolina and registered a $50.0 million continuous offering of subordinated
notes with the Securities and Exchange Commission. In May 2001, the Company
registered a $75.0 million continuous offering of subordinated notes with the
Securities and Exchange Commission. The notes are offered primarily to
individual investors. The maturity terms range from daily notes to sixty month
notes, and term notes with maturities of one-month or more renew automatically
unless the holder notifies the Company of his desire to redeem at maturity.
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%. Approximately $60.4 million at June 30, 2001, and $51.7 million in notes
were outstanding at December 31, 2000, and are reflected as notes payable to
individuals.
(6) Preferred Stock
- --------------------
In March 2001, the Company, through a private placement, issued 10,000 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.
(7) Earnings Per Share Information
- -----------------------------------
The following is a summary of the earnings per share calculation for the six
months and quarter ended June 30, 2001 and 2000:
Six Months Ended Three Months Ended
---------------- ------------------
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
2001 2000 2001 2000
---- ---- ---- ----
BASIC & DILUTED
Net income (loss) from continuing operations $ 840,721 $ 295,312 $ 268,903 $ (109,920)
Less: Dividends on preferred stock 360,915 345,458 189,568 177,612
---------- ---------- ---------- ---------
Net income (loss) applicable to common shareholders (numerator) 479,806 (50,146) 79,335 (287,532)
Average common shares outstanding (denominator) 6,898,641 6,974,465 6,841,855 6,974,355
Income (loss) per share from continuing operations - basic and diluted $ 0.07 $ (0.01) $ 0.01 $ (0.04)
========== ========== ========== ==========
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.
(8) 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.
10
The Company reports its results of operations in four primary segments: consumer
finance; mortgage banking; insurance agency; and insurance non-standard risk
bearing. 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 could 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. 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 company 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.
The following table summarizes certain financial information concerning the
Company's reportable operating segments for the quarter ended June 30, 2001, and
the year ended December 31, 2000:
June 30, 2001 Consumer
--------
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total Revenue $42,330,306 $2,474,891 $ 517,687 $45,322,884
Net Interest Income 26,332,843 (371,423) 348,170 26,309,590
Provision for credit losses 6,561,570 7,738 40,000 6,609,308
Noninterest income 6,731,704 2,474,891 - 9,206,595
Insurance premiums and
commissions, net 4,974,164 1,924,659 - 6,898,823
Noninterest expenses 24,770,315 2,252,121 292,439 27,314,875
Depreciation and amortization 1,842,801 163,001 10,619 2,016,421
Net income 902,049 (98,111) 36,783 840,721
Balance Sheet Data
Total assets 224,034,767 3,339,748 3,585,316 230,959,831
Loans, net 169,519,413 - 3,601,478 173,120,891
Allowance for credit losses 11,124,585 - 165,000 11,289,585
Intangibles 32,275,640 1,379,990 - 33,655,630
Consumer Insurance Mortgage
-------- --------- --------
Finance Insurance Other Total RBE Banking Total
------- --------- ----- ----- --- ------- -----
December 31, 2000 Continuing (Discontinued (Discontinued
Income Statement Data Operations Operations) Operations)
Total Revenue $ 79,536,374 $4,284,716 $1,060,693 $ 84,881,783 $1,875,013 $ 5,733,973 $ 92,490,769
Net Interest Income 44,823,340 (841,657) 671,132 44,652,815 (91,038) 87,853 44,649,630
Provision for credit losses 14,517,240 - 140,690 14,657,930 3,265 1,278,938 15,940,133
Noninterest income 14,982,787 4,284,716 - 19,267,503 1,875,013 4,424,051 25,566,567
Insurance premiums and
commissions, net 12,559,586 3,718,756 - 16,278,342 1,836,695 - 18,115,037
Noninterest expenses 43,772,059 4,885,507 451,462 49,109,028 2,478,255 8,778,129 60,365,412
Depreciation and amortization 3,331,621 360,225 19,619 3,711,465 148,726 1,448,554 5,308,745
Net income (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
11
(9) Discontinued Operations
- ----------------------------
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 either been sold, or are being held for
ultimate sale or disposal.
The components of the assets and liabilities of discontinued operations in the
consolidated balance sheets as of June 30, 2001 and December 31, 2000 are as
follows:
Paragon
-------
June 30, December 31,
-------- ------------
2001 2000
---- ----
(1)Assets
Accounts receivable.................. $ ----- $ 8,526
Loans held for Sale.................. ----- 6,837,912
Allowance for credit losses.......... ----- (1,278,938)
Premises and equipment, net.......... ----- 72,040
Intangibles, net..................... ----- -----
Other assets......................... ----- 1,341,626
-------- -----------
Total assets of discontinued operations...... $ ----- $ 6,981,166
======== ===========
Liabilities
Accounts payable..................... $ ----- $ 2,762
Other liabilities.................... 125,000 373,881
-------- -----------
Total liabilities of discontinued operations $125,000 $ 376,643
======== ===========
(10) Related Party Balances
----------------------
During the six-months ended June 30, 2001, the Company billed RBE approximately
$750,000 for services performed. Furthermore, RBE and the Company continued to
share common office space after the disposition and maintained a combined cash
management arrangement. Due to these arrangements the Company had both a payable
to RBE of approximately $3.7 million as well as a receivable from RBE for
approximately $800,000 at June 30, 2001.
At June 30, 2001, there were approximately $2.0 million in outstanding premium
finance receivables recorded by TICO Premium Finance that relate to insurance
policies underwritten by RBE. In addition, for the quarter ended June 30, 2001,
there were approximately $55,000 of reimbursements from RBE to TICO Premium
Finance for losses incurred by TICO Premium Finance.
During the quarter ended June 30, 2001 there was approximately $13,000 of
insurance commissions recognized by Thaxton Insurance Group on non-standard
insurance policies that were issued through Thaxton Insurance Group as agent.
12
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.
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.
13
NET INTEREST MARGIN
The following table presents important data relating to our net interest margin
for the six-months and three-months ended June 30, 2001 and 2000.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2001 June 30, 2000 June 30, 2001 June 30, 2000
------------- ------------- ------------- -------------
Average Net Finance Receivables (1) $177,721,131 $165,466,874 $176,659,438 $162,925,723
Average notes payable(1) 214,041,846 204,542,283 216,637,138 204,572,821
Interest and fee income (2) 17,586,979 15,350,284 36,116,289 31,411,098
Interest expense (3) 4,334,075 4,636,922 9,806,699 9,332,456
----------- ------------ ------------ ------------
Net interest income 13,252,904 10,713,362 26,309,590 22,078,642
Average interest rate earned(1) 39.58% 37.11% 40.89% 38.56%
Average interest rate paid(1) 8.10% 9.07% 9.05% 9.12%
----------- ------------ ------------ ------------
Net interest rate spread 31.48% 28.04% 31.84% 29.44%
Net interest margin(4) 29.83% 25.90% 29.79% 27.10%
(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 Six Months Ended June 30, 2001 and 2000
Since December 31, 2000 we have experienced our normal liquidation of the loans
we added during the fourth quarter of 2000 and have begun to build our
receivable base back. Since December 31, 2000 our gross finance receivables have
decreased by $7,874,000 to $228,032,000. In the comparative six-month period
ended June 30, 2000, our gross receivables declined $2,512,000 to $210,658,000.
This decline is due to the normal liquidation of our receivables from our
increased year end activity and the sale of two consumer finance branches. The
increase in the decline year from the prior year is due to an increase in our
shorter term loan volume.
Our net finance receivables as of June 30, 2001 were $173,121,000 compared to
$161,122,000 as of June 30, 2000, an increase of 7.4%. This increase is due to
the addition of approximately $10 million of loans associated with the Quick
Credit purchase during the third quarter of 2000 and growth of our current
portfolio.
Due to this increase in our receivables our interest income increased to
$36,116,000 for the current period from $31,411,000 for the same period last
year. Our interest expense also increased this year to $9,807,000 from
$9,332,000 in the prior period. The increase in expense was due to our increased
volume, the average rate has declined slightly year over year.
As expected with overall business growth our operating expenses also increased
from $24,266,000 in 2000 to $27,315,000 in 2001 or 12.6%. This increase is
related to normal growth of our business, an increase in salaries, and
additional offices from the prior year.
Due to our revenues growth outpacing our expense growth our net income from
continuing operations increased significantly from $295,000 in the first six
months of 2000 to $841,000 in 2001. The aforementioned reasons contributed to
this increase.
The income along with the issuance of Series F Preferred Stock during the year
and offset by the preferred dividends paid, our stockholders equity increased to
$4,459,000 from $3,759,000 at year end.
Results of Operations for the Three Months Ended June 30, 2001 and 2000
For the three months ended our gross finance receivables have grown due to the
slowing of the normal liquidation of our year end business and the increase in
new receivables being added. Our gross finance receivables increased by
$6,451,000 to $228,032,000 since March 31, 2001. Comparatively in 2000 for the
same period our gross receivables increased $11,918,000 to $210,658,000.
Due to this increase in our receivables our interest income increased to
$17,587,000 for the current period from $15,350,000 for the same period last
year. Our interest expense actually decreased this year to $4,334,000 from
$4,636,000 in the prior period. This is due to the drop in the prime interest
rate of approximately 1.75 points.
As to be expected with overall business growth our operating expenses also
increased from $12,298,000 in 2000 to $13,500,000 in 2001 or 9.8%. This increase
is related to normal growth of our business and an increase in salaries from the
prior year.
Due to our revenues growth outpacing our expense growth our net income from
continuing operations increased significantly from a loss of $110,000 in the
second quarter of 2000 to net income of $269,000 in the second quarter of 2001.
The aforementioned reasons contributed to this increase.
14
CREDIT LOSS EXPERIENCE
The following table sets forth our allowance for credit losses and credit loss
experience at or over the periods presented.
June 30, December 31,
-------- ------------
2001 2000
---- ----
Net finance receivables (1) $180,623,735 $185,638,256
Allowance for credit losses 11,289,585 11,630,555
Allowance for credit losses as a percentage of net finance receivables (1) 6.25% 6.27%
Dealer reserves and discounts on bulk purchases 2,373,297 2,406,165
Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales
Contracts at period end 8.42% 7.71%
Allowance for credit losses and dealer reserves and discount on bulk purchases (2) 13,662,882 14,036,720
Allowance for credit losses and dealer reserves as a percentage of finance receivables 7.56% 7.56%
Provision for credit losses 6,609,308 14,657,930
Charge-offs (net of recoveries) 6,950,278 14,526,731
Charge-offs (net of recoveries) as a percentage of average net finance receivables (3) 7.70% 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) June 30, 2001 is annualized for comparison purpose.
The following table sets forth certain information concerning our premium
finance contracts at the end of the periods indicated:
At December 31,
---------------
At June 30, 2001 2000
---------------- ----
Premium finance contracts contractually past due 60 days or more(1) $ 765,386 $1,001,108
Premium finance contracts outstanding(1) 9,147,346 7,355,818
Premium finance contracts contractually past due 60 days or more as a percentage of
premium finance contracts 8.37% 13.61%
(1) Finance receivable balances are presented net of unearned finance charges.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 2001, $22,091,493 was outstanding on our term loan. This loan
amortizes with twenty-three equal monthly principal and interest payments of
$600,000, with the remaining principal balance due one month thereafter.
As of July 31, 2001, $132.6 million was outstanding under our revolving credit
line. An additional $21.8 million was available under the terms of this
agreement to borrow against existing collateral, with $24.4 million of total
potential capacity available for borrowing against qualified finance receivables
generated in future periods. As of July 31, 2001, the interest rates for
borrowings were 7.75% for the revolving credit line, and 8.75% for the term
loan.
FINOVA has filed for Chapter 11 protection under the US Bankruptcy laws. On June
13, 2001 a plan was approved by a Federal Bankruptcy Court which provides for
the orderly takeover of control of the company by a joint venture company owned
by Berkshire Hathaway Inc., and Leucadia National Corporation. As noted above,
our lending facility has just been amended, and our contract expiration date of
2004 been re-confirmed. All indications are that the plan will be accepted by
FINOVA's creditors, and an orderly transition of ownership will be in place.
In May 2001, we registered under the Securities Act of 1933, as amended, a
continuous offering of up to $75 million of subordinated notes which are sold
primarily to individual investors in South Carolina, Ohio, and North Carolina.
The maturities of the notes range from a daily (or demand) note to a sixty month
note. Interest rates vary in accordance with the fixed rates offered by us from
time to time. The notes are currently offered at rates ranging from 6.5% to
8.0%. As of July 31, 2001, approximately $64.7 million of notes were
outstanding, all of which were issued under this federal registration or under
predecessor intra-state offerings of subordinated notes. The net proceeds from
the sale of these notes are used to temporarily reduce the borrowings under our
credit facilities with FINOVA.
Management believes that the maximum borrowings available under our credit
facilities with FINOVA, the net proceeds from the continued sale of subordinated
notes, together with cash expected to be generated from operations, will provide
the resources necessary to fund our liquidity and capital needs through 2001.
15
Recent Accounting Pronouncements
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
one method, the purchase method. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 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 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 expects to adopt the provisions of SFAS No. 142 effective January 1,
2002. The Company is in the process of determining the impact the adoption of
the provisions of SFAS No. 142 will have on financial position and results of
operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's outstanding debt under the Revolving Credit Facility and Term Loan
was $150.2 million at June 30, 2001. Interest on borrowings under these
facilities is based on the prime rate. Based on the outstanding balance at June
30, 2001, a change of 1% in the prime interest rate would cause a change in
interest expense of approximately $1,502,000 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.
16
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On June 1, 2001, the Company issued 10,000 shares of Class A common stock to
Grover Todd, an employee of the company, for compensation purposes. The stock
was valued at $2.00 per share.
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: August 10, 2001 By: /s/ JAMES D. THAXTON
------------------------
James D. Thaxton
President and Chief Executive Officer
Date: August 10, 2001 By: /s/ ALLAN F. ROSS
---------------------
Allan F. Ross
Vice President,
Treasurer, Secretary, and
Chief Financial Officer
17