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 SEPTEMBER 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 November 2, 2001
----- -------------------------------
Common Stock 6,849,355
THE THAXTON GROUP, INC.
FORM 10-Q
September 30, 2001
TABLE OF CONTENTS
-----------------
Item Page
----
No.
--
PART I
Financial Information
1. Financial Statements
Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 2
Consolidated Statements of Income for the three months ended September 30, 2001 and 2000 3
Consolidated Statements of Income for the nine months ended September 30, 2001 and 2000 4
Consolidated Statement of Stockholder Equity for the year ended December 31, 2000 and
the nine months ended September 30, 2001 5
Consolidated Statements of Cash Flows for the nine months ended September 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
September 30, 2001 & December 31, 2000
September 30, December 31,
------------- ------------
2001 (Unaudited) 2000
---------------- ----
Assets
------
Cash $ 2,120,129 $ 4,482,553
Finance receivables, net 173,826,126 177,943,646
Premises and equipment, net 4,487,047 5,011,856
Accounts receivable 1,265,220 2,154,637
Accounts receivable from affiliates - 801,584
Repossessed automobiles 631,606 291,057
Deposit 6,637,588 6,230,000
Goodwill and other intangible assets 33,093,150 34,812,558
Other assets 7,108,943 6,950,931
Assets of discontinued operations - 6,981,166
------------- -------------
Total assets $ 229,169,809 $ 245,659,988
============= =============
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable $ 2,213,529 $ 2,627,987
Notes payable 216,584,430 232,605,414
Notes payable to affiliates - 1,020,102
Accounts payable 538,820 265,459
Employee savings plan 395,157 627,702
Other liabilities 4,690,405 4,377,271
Liabilities of discontinued operations 125,000 376,643
------------- -------------
Total liabilities 224,547,341 241,900,578
------------- -------------
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 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 (4,286,428) (4,929,486)
------------- -------------
Total stockholders' equity 4,622,468 3,759,410
------------- -------------
Total liabilities and stockholders' equity $ 229,169,809 $ 245,659,988
============= =============
See accompanying notes to consolidated financial statements.
2
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Three Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Interest and fee income $ 18,615,606 $ 16,898,005
Interest expense 4,782,926 5,227,085
------------ ------------
Net interest income 13,832,680 11,670,920
Provision for credit losses 4,601,378 3,834,498
------------ ------------
Net interest income after provision for credit losses 9,231,302 7,836,422
Other income:
Insurance premiums and commissions, net 3,406,986 3,129,257
Other income 970,227 1,173,910
------------ ------------
Total other income 4,377,213 4,303,167
------------ ------------
Operating expenses:
Compensation and employee benefits 7,424,889 6,863,219
Telephone, computers 572,463 583,665
Net occupancy 1,652,977 1,453,522
Reinsurance claims expense 460,652 244,148
Advertising 719,572 738,966
Collection expense 142,358 62,464
Travel 330,032 345,791
Professional fees 258,812 202,260
Office expense 638,481 655,160
Amortization expense 608,181 594,610
Other 96,330 186,744
------------ ------------
Total operating expenses 12,904,747 11,930,549
------------ ------------
Income from continuing operations before income tax expense 703,768 209,040
Income tax expense 344,280 176,074
------------ ------------
Net income from continuing operations 359,488 32,966
Discontinued operations (Note 9)
Loss from discontinued operations of Paragon division(less income tax benefit of $20,777 in
2000) - (40,331)
Loss from discontinued operations of non-standard insurance division (less benefit from
income taxes of $52,289 in 2000) - (101,503)
------------ ------------
Net income (loss) 359,488 (108,868)
Dividends on preferred stock 196,236 188,235
------------ ------------
Net income (loss) applicable to common shareholders $ 163,252 $ (297,103)
============ ============
Net income (loss) per common share--basic and diluted 0.02 (0.04)
From continuing operations 0.02 (0.02)
From discontinued operations - (0.02)
See accompanying notes to consolidated financial statements.
3
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Nine months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Interest and fee income $ 54,731,895 $ 48,309,103
Interest expense 14,589,625 14,559,541
------------ ------------
Net interest income 40,142,270 33,749,562
Provision for credit losses 11,210,686 9,764,020
------------ ------------
Net interest income after provision for credit losses 28,931,584 23,985,542
Other income:
Insurance premiums and commissions, net 10,305,809 9,714,577
Other income 3,277,999 3,471,427
------------ ------------
Total other income 13,583,808 13,186,004
------------ ------------
Operating expenses:
Compensation and employee benefits 23,032,888 21,352,504
Telephone, computers 1,729,446 1,577,474
Net occupancy 4,827,373 4,054,468
Reinsurance claims expense 1,105,598 647,965
Advertising 2,207,845 1,910,467
Collection expense 471,649 189,428
Travel 878,228 853,567
Professional fees 788,655 543,761
Office expense 1,872,201 1,897,908
Amortization expense 1,823,241 1,634,490
Other 1,482,498 1,534,850
------------ ------------
Total operating expenses 40,219,622 36,196,882
------------ ------------
Income from continuing operations before income tax expense 2,295,770 974,664
Income tax expense 1,095,561 646,386
------------ ------------
Net income from continuing operations 1,200,209 328,278
Discontinued operations (Note 9)
Loss from discontinued operations of Paragon division (less benefit from income taxes of
$63,717 in 2000) - (123,685)
Loss from discontinued operations of non-standard insurance division (less benefit from
income taxes of $244,836 in 2000) - (475,268)
------------ ------------
Net income (loss) 1,200,209 (270,675)
Dividends on preferred stock 557,151 533,693
------------ ------------
Net income (loss) applicable to common shareholders $ 643,058 $ (804,368)
============ ============
Net income (loss) per common share--basic and diluted 0.09 (0.12)
From continuing operations 0.09 (0.03)
From discontinued operations - (0.09)
See accompanying notes to consolidated financial statements
4
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 2000 and Nine months Ended September 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 - - - (557,151) (557,151)
Net income - - - 1,200,209 1,200,209
------------ ------------ ------------ ------------ ------------
Balance at September 30, 2001 $ 68,493 $ 8,804 $ 8,831,599 $ (4,286,428) $ 4,622,468
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
5
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000
(Unaudited)
September 30, September 30,
------------- -------------
2001 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ 1,200,209 $ (270,675)
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 11,210,686 9,764,020
Depreciation and amortization 3,035,895 2,908,524
Deferred taxes 1,095,561 337,833
Decrease in accounts receivable 1,191,499 701,607
Non-cash compensation expense 20,000 -
Decrease in other assets (4,330,949) (8,554,997)
Increase in accrued interest payable and other liabilities (1,409,175) (40,661)
------------ ------------
Net cash provided by operating activities 12,013,726 4,845,651
------------ ------------
Cash flows from investing activities:
Net decrease(increase) in finance receivables 4,117,520 (11,635,556)
Net capital expenditures for premises and equipment (687,845) (1,463,505)
Cash paid for deposit with Voyager (407,588) -
Proceeds from sale of Thaxton RBE - 75,000
------------ ------------
Net Cash provided by (used in) investing activities 3,022,087 (13,024,061)
------------ ------------
Cash flows from financing activities:
Notes payable to affiliates (1,020,102) (491,072)
Repurchase of common stock - (10,000)
Dividends paid (557,151) (533,693)
Net increase(decrease) in notes payable (16,020,984) 14,144,343
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 (17,398,237) 13,609,578
------------ ------------
Net increase(decrease) in cash (2,362,424) 5,431,168
Cash at beginning of period 4,482,553 2,036,104
------------ ------------
Cash at end of period $ 2,120,129 $ 7,467,272
============ ============
See accompanying notes to consolidated financial statements.
6
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
September 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 September 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 nine months and quarter ended September 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 September 30, 2001. Use of the
pooling-of-interests method for those business combinations is prohibited. The
provisions of SFAS No. 141 also apply to all business combinations accounted for
by the purchase method for which the date of acquisition is July 1, 2001, or
later.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. It addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. SFAS No.
142 also addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements. Under
SFAS No. 142, goodwill and intangible assets that have indefinite useful lives
will not be amortized but 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 September 30, 2001 and
December 31, 2000:
September 30, December 31,
------------- ------------
2000 2001
---- ----
Automobile Sales Contracts $ 25,176,903 $ 31,196,711
Direct Loans 161,913,029 163,337,432
Mortgage Loans 29,460,615 29,908,119
Premium Finance Contracts 9,384,065 7,527,689
Commercial Loans 3,558,704 3,935,945
------------- -------------
Total finance receivables 229,493,316 235,905,896
Unearned interest (34,247,093) (36,841,017)
Unearned insurance premiums, net (9,701,472) (9,459,720)
Dealer Holdback and Bulk purchase discount (2,072,085) (2,406,165)
Allowance for credit losses (12,021,285) (11,630,555)
Deferred Loan Cost, net 2,374,745 2,375,207
------------- -------------
Finance receivables, net $ 173,826,126 $ 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 $20,676,750 and $2,116,085, respectively, at September 30, 2001,
and $24,034,958 and $2,310,745, respectively, at December 31, 2000.
At September 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 September 30,
2001 and 2000, and the years ended December 31, 2000 and 1999 are as follows:
September 30, December 31, September 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 - 838,017 838,017 6,276,309
Provision for credit losses 11,210,686 14,657,930 9,764,020 11,937,679
Charge-offs (12,211,504) (16,052,319) (11,746,550) (13,461,390)
Recoveries 1,391,548 1,525,588 1,080,148 1,197,912
------------ ------------ ------------ ------------
Net charge-offs (10,819,956) (14,526,731) (10,666,402) (12,263,478)
------------ ------------ ------------ ------------
Ending balance $ 12,021,285 $ 11,630,555 $ 10,596,974 $ 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 September 30, 2001 and December 31, 2000
follows:
September 30, December 31,
------------- ------------
2001 2000
---- ----
Leasehold improvements 2,266,938 $ 2,159,214
Furniture and fixtures 3,041,060 2,721,965
Equipment and automobiles 7,685,594 7,658,183
----------- -----------
Total cost 12,993,592 12,539,362
Accumulated depreciation 8,506,545 7,527,506
----------- -----------
Net premises and equipment $ 4,487,047 $ 5,011,856
=========== ===========
Depreciation expense was approximately $412,000 for the quarter ended September
30, 2001 and $1,213,000 year to date, compared to $368,000 for the quarter
ended, and $1,099,000 for the nine months ended September 30, 2000.
(4) Intangible Assets
---------------------
Intangible assets consisted of the following at September 30, 2001 and December
31, 2000. Weighted average amortization periods are shown in parentheses.
September 30, December 31,
------------- ------------
2001 2000
---- ----
Covenants not to compete (5.5 years) $ 102,022 $ 102,022
Goodwill and purchase premium (22.7 years) 37,682,329 37,578,496
Insurance expirations (17.9 years) 1,890,301 1,890,301
----------- -----------
Total cost 39,674,652 39,570,819
Less accumulated amortization 6,581,502 4,758,261
----------- -----------
Intangible assets, net $33,093,150 $34,812,558
=========== ===========
The Company acquired the majority of the intangibles in connection with our
acquisition of FirstPlus Consumer Finance. Amortization expense was
approximately $1,823,000 for the nine months and $608,000 for the quarter ended
September 30, 2001, compared to $1,634,000 for the nine months and 595,000 for
the quarter ended September 30, 2000.
(5) Notes Payable and Notes Payable to Affiliates
-------------------------------------------------
At September 30, 2001 and December 31, 2000, notes payable consisted of the
following:
September 30, December 31,
------------- ------------
2001 2000
---- ----
Senior Notes Payable/Lines of Credit $146,767,630 $178,278,386
Subordinated Notes payable to individuals with varying
maturity dates and rates ranging from 5 1/4% to 12% 67,561,238 51,721,405
Other subordinated notes payable to companies with varying
maturity dates and rates ranging from 4 1/4% to 10% 2,255,562 2,605,623
------------ ------------
Total notes payable $216,584,430 $232,605,414
============ ============
Our credit facility with FINOVA, as amended on April 4, 2001, comprises a term
loan with $21.2 million outstanding at September 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 September 30, 2001, an additional $20.9 million was available under the
terms of the revolving credit line to borrow against existing collateral, with
$31.5 million of total potential capacity available for borrowing against
qualified finance receivables generated in future periods. As of September 30,
2001, the interest rates for borrowings were 7.00% for the revolving credit
line, and 8.00% 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 $67.6 million at September 30, 2001, and $51.7 million in
notes were outstanding at December 31, 2000, and are reflected as notes payable
to individuals.
(6) Stock Issuance
------------------
In March 2001, the Company, through a private placement, issued 20,000 shares of
Cumulative Series F preferred stock for $10 per share, to C.L. Thaxton, a
director of the Company. The stock pays a dividend rate of 10% and is redeemable
by the Company at any time at a price of $10 per share.
In June 2001, the Company issued 10,000 shares of common stock at $2 per share
to an employee as compensation. Due to the non-trading nature of the Company's
common stock the value was determined by management's best estimate at the time
of issuance based upon the Company's actual and forecasted operating
performance.
(7) Earnings Per Share Information
----------------------------------
The following is a summary of the earnings per share calculation for the nine
months and quarter ended September 30, 2001 and 2000:
Nine months Ended Three Months Ended
----------------- ------------------
September 30, September 30, September 30, September 30,
------------- -------------- ------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
BASIC & DILUTED
Net income from continuing operations $ 1,200,209 $ 328,278 $ 359,488 $ 32,966
Less: Dividends on preferred stock 557,151 533,693 196,236 188,235
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders 643,058 (205,415) 163,252 (155,269)
(numerator)
Average common shares outstanding (denominator) 6,883,855 6,974,615 6,849,355 6,974,355
Income (loss) per share from continuing operations - basic
and diluted $ 0.09 $ (0.03) $ 0.02 $ (0.02)
=========== =========== =========== ===========
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 nine month period ended
September 30, 2001, and the year ended December 31, 2000:
September 30, 2001 Consumer
--------
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total Revenue $ 64,124,543 $ 3,413,510 $ 777,650 $ 68,315,703
Net Interest Income 40,141,001 (531,531) 532,800 40,142,270
Provision for credit losses 11,096,593 13,745 100,348 11,210,686
Noninterest income 10,170,324 3,413,484 - 13,583,808
Insurance premiums and
commissions, net 7,445,039 2,860,770 - 10,305,809
Noninterest expenses 36,720,243 3,323,642 175,737 40,219,622
Depreciation and
amortization 2,776,703 243,370 15,927 3,036,000
Net income 1,446,109 (291,515) 45,615 1,200,209
Balance Sheet Data
Total assets 223,404,105 2,440,738 3,324,966 229,169,809
Loans, net 170,492,051 - 3,334,075 173,826,126
Allowance for credit losses 11,796,656 - 224,629 12,021,285
Intangibles 31,754,806 1,338,344 - 33,093,150
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 230,805,263 4,087,249 3,786,310 238,678,822 - 6,981,166 245,659,988
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 been sold.
The components of the assets and liabilities of discontinued operations in the
consolidated balance sheets as of September 30, 2001 and December 31, 2000 are
as follows:
Paragon
-------
September 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 nine months ended September 30, 2001, the Company billed RBE
approximately $900,000 for services performed. RBE and the Company continue to
share common office space. During the quarter the Company paid off their net
payable to RBE.
At September 30, 2001, there were approximately $1.9 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
September 30, 2001, there were approximately $28,000 of reimbursements from RBE
to TICO Premium Finance for losses incurred by TICO Premium Finance.
During the quarter ended September 30, 2001 there was approximately $15,000 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 nine months and three-months ended September 30, 2001 and 2000.
Three Months Ended Nine months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Average Net Finance Receivables (1) $181,397,185 $180,732,384 $178,238,918 $169,682,207
Average notes payable(1) 213,647,108 200,735,936 215,640,461 193,121,081
Interest and fee income (2) 18,615,606 16,898,005 54,731,895 48,309,103
Interest expense (3) 4,622,818 5,227,085 14,058,094 14,559,541
------------ ------------ ------------ ------------
Net interest income 13,992,788 11,670,920 40,673,801 33,749,562
Average interest rate earned(1) 41.05% 37.40% 40.94% 37.96%
Average interest rate paid(1) 8.66% 10.41% 8.69% 10.05%
------------ ------------ ------------ ------------
Net interest rate spread 32.39% 26.99% 32.25% 27.91%
Net interest margin(4) 30.86% 25.83% 30.43% 26.52%
(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 Nine months Ended September 30, 2001 and 2000
Since December 31, 2000 our gross finance receivables have decreased by
$6,413,000 to $229,493,000. This decline has been due to the liquidation of a
portion of our vehicle receivables and the sale of two consumer finance
branches. Compared to September 30, 2000 our gross finance receivables have
increased $4,830,000 this increase is due to an increase in our direct loan
business and partially offset by the liquidation of our vehicle receivables. Our
net finance receivables as of September 30, 2001 were $173,826,000 compared to
$169,407,000 as of September 30, 2000, an increase of 2.6%.
Our interest income increased to $54,732,000 for the current period from
$48,309,000 for the same period last year. This is due to a full year of earning
on loans acquired late in the third quarter of 2000 along with an initiative to
increase our rates on renewals. Our interest expense is relatively unchanged
from the prior year $14,590,000 in 2001, $14,560,000 in the prior period. The
increase in payable balances has been offset by the decrease in interest rate,
we expect to see significant savings in interest expense comparative to the
prior year in the fourth quarter.
As expected with overall business growth our operating expenses also increased
from $36,197,000 in 2000 to $40,220,000 in 2001 or 11.1%. This increase is
related to normal growth of our business, an increase in salaries, and
additional offices from the prior year.
Due to our revenue growth outpacing our expense growth our net income from
continuing operations increased significantly from $328,000 in the first nine
months of 2000 to $1,200,000 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, caused our stockholders equity to
increase to $4,622,000 from $3,759,000 at year end.
Results of Operations for the Three Months Ended September 30, 2001 and 2000
For the three months ended our gross finance receivables have grown, with the
our direct loans adding significantly for the quarter, offset by some
liquidations in our vehicle portfolio. Our gross finance receivables increased
by $1,461,000 to $229,493,000 since June 30, 2001. Comparatively in 2000 for the
same period our gross receivables increased $14,006,000 to $224,663,000. This
was caused by the purchase of $13,000,000 in receivables from QuickCredit in
August of 2000. Adjusting for the purchase of the QuickCredit receivables, our
receivable growth was relatively constant between the two years.
Due to our increased receivables for the year our interest income increased to
$18,616,000 for the current period compared to $16,898,000 for the same period
last year. Our interest expense actually decreased this year to $4,783,000 from
$5,227,000 in the prior period. This is due to a drop in the prime interest rate
of approximately 3.50 points compared to the prior year period.
As to be expected with overall business growth our operating expenses also
increased from $11,931,000 in 2000 to $12,905,000 in 2001 or 8.2%. This increase
is related to normal growth of our business and an increase in salaries from the
prior year.
Due to our revenue growth outpacing our expense growth our net income from
continuing operations increased significantly from $33,000 in the third quarter
of 2000 to net income of $359,000 in the third quarter of 2001.
14
CREDIT LOSS EXPERIENCE
The following table sets forth our allowance for credit losses and credit loss
experience at or over the periods presented.
September 30, December 31,
------------- ------------
2001 2000
---- ----
Net finance receivables (1) $182,288,707 $185,638,256
Allowance for credit losses 12,021,285 11,630,555
Allowance for credit losses as a percentage of net finance receivables (1) 6.59% 6.27%
Dealer reserves and discounts on bulk purchases 2,072,085 2,406,165
Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales
Contracts at period end 8.23% 7.71%
Allowance for credit losses and dealer reserves and discount on bulk purchases (2) 14,093,370 14,036,720
Allowance for credit losses and dealer reserves as a percentage of finance receivables 7.73% 7.56%
Provision for credit losses 11,210,686 14,657,930
Charge-offs (net of recoveries) 10,819,956 14,526,731
Charge-offs (net of recoveries) as a percentage of net finance receivables (3) 7.91% 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) September 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 September 30, At December 31,
---------------- ---------------
2001 2000
---- ----
Premium finance contracts contractually past due 60 days or more(1) $ 793,472 $ 1,001,108
Premium finance contracts outstanding(1) 9,118,595 7,355,818
Premium finance contracts contractually past due 60 days or more as a percentage of
premium finance contracts 8.70% 13.61%
(1) Finance receivable balances are presented net of unearned finance charges.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2001, $20,776,000 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 October 31, 2001, $129.6 million was outstanding under our revolving
credit line. An additional $24.6 million was available under the terms of this
agreement to borrow against existing collateral, with $35.4 million of total
potential capacity available for borrowing against qualified finance receivables
generated in future periods. As of October 31, 2001, the interest rates for
borrowings were 6.50% for the revolving credit line, and 7.50% for the term
loan.
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 October 31, 2001, approximately $71.5 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 September 30, 2001. Use of the
pooling-of-interests method for those business combinations is prohibited. The
provisions of SFAS No. 141 also apply to all business combinations accounted for
by the purchase method for which the date of acquisition is July 1, 2001, or
later.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and supersedes APB Opinion No. 17, Intangible
Assets. It addresses how intangible assets that are acquired individually or
with a group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition. SFAS No.
142 also addresses how goodwill and other intangible assets should be accounted
for after they have been initially recognized in the financial statements. Under
SFAS No. 142, goodwill and intangible assets that have indefinite useful lives
will not be amortized but 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 $146.8 million at September 30, 2001. Interest on borrowings under these
facilities is based on the prime rate. Based on the outstanding balance at
September 30, 2001, a change of 1% in the prime interest rate would cause a
change in interest expense of approximately $1,468,000 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
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE THAXTON GROUP, INC.
-----------------------
(Registrant)
Date: November 5, 2001 By:/s/ JAMES D. THAXTON
-----------------------
James D. Thaxton
President and Chief Executive Officer
Date: November 5, 2001 By:/s/ ALLAN F. ROSS
--------------------
Allan F. Ross
Vice President, Treasurer, Secretary, and
Chief Financial Officer
17