Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended December 31, 1996
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to __________
Commission File Number: 33-917130-A
THE THAXTON GROUP, INC.
(Name of Small Business Issuer in its charter)
South Carolina 56-0669498
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization
1524 Pageland Highway
Lancaster, South Carolina 29721
(Address of Principal Executive Offices) (Zip Code)
(803) 285-4336
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
------ -------
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB [X].
For the year ended December 31, 1996, the issuer's revenues were
$15,800,127.
The aggregate market value of the issuer's common stock (its only
outstanding class of common equity) held by non-affiliates, computed by
reference to the price at which the common equity was most recently sold, was
$7,277,000 at March 18, 1997.
As of March 15, 1997, there were 3,924,178 shares of the Registrant's
Common Stock outstanding.
Documents Incorporated by Reference: None
<PAGE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
The Company's experienced a significant increase in credit losses
during the quarter ended September 30, 1997 resulting in net charge-offs of
approximately $1.3 million for the quarter compared to $1.3 million for the
first six months of 1997. The Company increased its provision for credit losses
to $2.4 million for the quarter ended September 30, 1997 compared to $577,414
for the same quarter of the prior year. In addition, based on the Company's
allowance for credit losses model, the allowance was increased to approximately
$3.4 million at September 30, 1997. As a result of the provision for credit
losses recorded for the third quarter, management expects the Company will incur
a net loss of approximately $780,000 and $193,000, respectively, for the quarter
and nine months ended September 30, 1997. The allowance for credit losses
predicted by the Company's reserve model increased significantly from the end of
the second quarter of 1997 to the end of the third quarter of 1997 due to three
factors. First, the Company experienced a high level of charge-offs during the
third quarter that were roughly equal to those experienced during the first
half of the year. When this data was included in the reserve model, the
historical loss factors utilized by the model increased significantly. Second,
losses on the relatively large number of repossessed vehicles disposed of during
the third quarter caused dealer and bulk purchase reserves to decline below
required levels for a number of individual dealers and bulk purchases. Third,
the finance receivable portfolio experienced moderate growth during the quarter,
resulting in a corresponding increase in the allowance to provide for losses
expected on the newly originated finance receivables.
The higher than expected loss experience during the quarter was
attributable primarily to two factors in addition to some degree of general
deterioration in loan performance during the quarter. First, during the second
quarter management decided to alter the Company's strategy for dealing with
repossessed vehicles. Specifically, in order to reduce the amount of time
repossessed vehicles are typically held for sale, the Company began selling the
vehicles sooner than it had in prior periods by lowering sales prices.
As a direct result of this change in strategy, the number of vehicles held for
sale was reduced from 525 at April 30, 1997 to 300 at August 30, 1997. While
this decision resulted in a temporary increase in charge-offs due to the loss
recognition associated with the sale of repossessed collateral, management
expects the new sales strategy to reduce interest and other carrying costs
associated with repossessed vehicles in future periods. The second factor
affecting charge-offs during the third quarter of 1997 was a decision made in
connection with an internal reorganization to reduce delinquency levels at
several offices where delinquencies had increased to higher than acceptable
levels. Management estimates that approximately $40,000 in charge-offs
attributable to the accelerated disposition of repossessed vehicles and $350,000
attributable to accelerated repossessions of automobiles was charged against the
Company's allowance for credit losses during the third quarter of 1997.
HISTORICAL DEVELOPMENT AND GROWTH
Prior to 1991, the Company primarily was engaged in making and
servicing direct consumer and insurance premium finance loans to Non-prime
Borrowers. In 1991, the Company made a strategic decision to begin diversifying
its portfolio by actively seeking to finance purchases of used automobiles by
Non-prime Borrowers. Management believed that the expertise it had developed in
extending and servicing installment credit to Non-prime Borrowers would enable
it to profitably finance used automobile purchases by borrowers having similar
credit profiles. The Company facilitated its entry into this segment of the
consumer credit industry by engaging additional senior and mid-level management
personnel with substantial used automobile lending experience. Since 1991, the
Company has evolved into a diversified consumer financial services company
engaged in used automobile lending through the purchase and servicing of
Automobile Sales Contracts, the origination and servicing of Direct Loans and
Premium Finance Contracts, and selling insurance products on an agency basis.
The following table sets forth certain information with regard to
growth in the Company's finance receivable portfolio.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-----------------------------------------
1994 1995 1996 1997
---------------------------------------- --------------
AUTOMOBILE SALES CONTRACTS
<S> <C> <C> <C> <C>
Total balance at period end, net (1) $8,823,559 $22,788,837 $35,998,537 $40,499,181
Average account balance at period end 2,317 3,436 3,699 3,585
Interest income for the period 1,990,268 5,031,402 8,361,396 4,932,666
Average interest rate earned (2) 31.10 % 28.92 % 27.98 % 25.88 %
Number of accounts at period end 3,808 6,632 9,733 11,297
DIRECT LOANS
Total balance at period end, net (1) $7,107,446 $9,460,798 $9,896,100 $10,109,649
Average account balance at period end 1,175 1,405 1,324 1,454
Interest income for the period 2,305,296 2,248,168 2,941,705 1,463,215
Average interest rate earned (2) 34.66 % 31.60 % 30.01 % 30.05 %
Number of accounts at period end 6,047 6,736 7,475 6,955
PREMIUM FINANCE CONTRACTS
Total balance at period end, net (1) $1,482,009 $4,827,067 $2,846,451 $3,249,634
Average account balance at period end 272 336 287 309
Interest income for the period 151,402 484,222 737,895 246,534
Average interest rate earned (2) 13.96 % 15.35 % 17.52 % 16.25 %
Number of accounts at period end 5,442 14,378 9,931 10,532
</TABLE>
------------------
(1) Finance receivable balances are presented net of unearned
finance charges, dealer reserves on Automobile Sales Contracts
and discounts on bulk purchases.
(2) Averages are computed using beginning and ending balances for
the period presented and are annualized for periods of less than
one year.
Management believes the best opportunities for continued growth in the
Company's Automobile Sales Contract and Direct Loan portfolios lie in the
opening of new finance offices in small to medium-sized markets in the states
where the Company presently operates and contiguous states that management
believes to be under served by its competitors. The Company opened two new
finance offices in 1996 and plans to open at least two in 1997 and 1998. The
Company estimates that the capital expenditure necessary for opening each new
finance office is approximately $21,000. While there are certain risks
associated with such expansion, management believes that its ability to identify
and retain finance office management personnel having established relationships
with local independent dealers, its expertise in extending and servicing credit
to Non-prime Borrowers, and other factors will enable it to manage anticipated
growth in its finance office network and in its Automobile Sales Contract and
Direct Loan portfolios. The Company will seek to expand its Premium Finance
Contract portfolio by establishing and broadening relationships with insurance
agencies having a client base in need of premium financing. The Company also
periodically may make bulk purchases of Automobile Sales Contracts and Premium
Finance Contracts if such purchases are deemed beneficial to the Company's
competitive position and portfolio mix and will seek
<PAGE>
opportunities to expand its network of insurance offices primarily through the
acquisition of independent insurance agencies.
RECENT ACQUISITION AND EXPANSION ACTIVITIES
On October 31, 1996, the Company exchanged 300,000 shares of Common
Stock for all of the outstanding capital stock of Thaxton Insurance. At the time
of its acquisition, Thaxton Insurance had 19 insurance offices in North Carolina
and South Carolina. Thaxton Insurance continues to conduct business as a
wholly-owned subsidiary of the Company. See "Certain Transactions."
During 1996 the Company opened finance offices in Sumter, South
Carolina and Augusta, Georgia. The Augusta office was the Company's first in
Georgia. Both of the finance offices opened in 1996 are primarily devoted to the
purchase and servicing of Automobile Sales Contracts. The Company also opened a
mortgage lending office in Charlotte, North Carolina during the year. The
mortgage lending office is located in the same building as one of the Company's
insurance offices.
During 1997, the Company has opened finance offices in
Christiansburg, Virginia and Cumming, Georgia that will be devoted almost
exclusively to the purchase and servicing of Automobile Sales Contracts and
Thaxton Insurance acquired independent agencies in York, South Carolina and
Winston-Salem, North Carolina.
PROFITABILITY
The following table sets forth certain data relating to the Company's
profitability.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Average Net Finance Receivables (1) $13,712,742 $26,710,887 $43,717,445 $40,701,351 $51,035,860
Average notes payable (1) $11,447,977 $23,447,113 $37,611,963 $34,918,435 $43,873,630
Interest and fee income (2) $ 5,380,470 $ 9,024,232 $13,518,563 $ 6,548,295 $ 7,740,263
Interest expense (3) 1,114,829 2,653,614 3,841,683 1,790,959 2,133,916
Net interest income $ 4,265,641 $ 6,370,618 $ 9,676,880 $4,757,335 $ 5,606,347
Average interest rate earned (1) 39.24% 33.78% 30.92% 32.18% 30,33%
Average interest rate paid (1) 9.74 11.32 10.21 10.26 9.73
Net interest rate spread 29.50% 22.46% 20.71% 21.92% 20.60%
Net interest margin (4) 31.11% 23.85% 22.14% 23.38% 21.97%
</TABLE>
- ------------
(1) Averages are computed using month-end balances during the periods
presented and are annualized for periods of less than one year.
(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.
The principal component of the Company's profitability is its net
interest spread, the difference between interest earned on finance receivables
and interest expense paid on borrowed funds. Statutes in some states regulate
the interest rates that the Company may charge its borrowers while interest
rates in other states are unregulated and consequently are established by
competitive market conditions. At June 30, 1997, approximately 13% of Net
Finance Receivables were subject to maximum interest rates imposed by statute
and substantially all of these receivables were earning interest at the maximum
rate. There are significant differences in the interest rates earned on the
various components of the Company's finance receivable portfolio. The interest
rates earned on Automobile Sales Contracts generally are lower than the interest
rates earned on Direct Loans due to competition from other lenders, superior
collateral, and longer terms. The interest rates earned on Premium Finance
Contracts are state regulated and vary based on the type of underlying insurance
and the term of the contract.
Unlike the Company's interest income, its interest expenses are
sensitive to general market fluctuations in interest rates. The interest rates
paid to the Company's primary lender are based upon a published prime rate plus
set percentages. Thus, general market fluctuations in interest rates directly
impact the Company's cost of funds. The Company intends to explore opportunities
to fix or cap the interest rates paid on all or a portion of its
<PAGE>
borrowings; however, there can be no assurance that fixed rate financing or
suitable interest-rate hedge facilities will be available on terms acceptable to
the Company. The Company's general inability to increase the interest rates
earned on finance receivables may impair its ability to adjust to increases in
the cost of funds resulting from changes in market conditions. Accordingly,
increases in market interest rates generally will narrow the Company's interest
rate spread and lower its profitability while decreases in market interest rates
generally will widen the Company's interest rates spreads and increase
profitability.
The decline in net interest rate spreads from 1994 to 1996 is
attributable primarily to the increased level of Automobile Sales Contracts in
the Company's finance receivable portfolio. The Company expects Automobile Sales
Contracts to be the principal component of future growth in its finance
receivable portfolio. If this growth in Automobile Sales Contracts occurs, the
Company expects that its net interest spread will continue to narrow. See
"Liquidity and Capital Resources."
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO SIX MONTHS ENDED JUNE
30, 1996. Finance receivables at June 30, 1997 were $69,672,416 versus
$57,690,575 at June 30, 1996, a 21% increase. The primary component of this
increase was Automobile Sales Contracts, which increased from $41,663,164 at
June 30, 1996 to $53,636,050 at June 30, 1997, or 29%. The Company opened two
finance offices in 1996 and one in early 1997, which generated significant
additional volume of Automobile Sales Contracts during the first half of 1997.
Unearned income at June 30, 1997 was $13,877,411 versus $11,878,210 at
June 30, 1996, a 17% increase which was directly related to the higher volume of
Automobile Sales Contract originations during the first half of 1997. The
provision for credit losses established for the six months ended June 30, 1997
was $1,538,832 versus $845,940 for the comparable period of 1996, and the
allowance for credit losses increased from $1,005,365 at June 30, 1996 to
$2,390,070 at June 30, 1997. The increase in the provision was due to
strengthening the Company's allowance for credit losses in response to higher
than expected loan losses and repossessions. The allowance for credit losses as
a percentage of Net Finance Receivables increased from 2.19% at June 30, 1996 to
4.28% at June 30, 1997.
The growth in finance receivables during the six months ended June 30,
1997 versus the comparable period in 1996 resulted in higher levels of interest
and fee income. Interest and fee income for the six months ended June 30, 1997
was $7,768,199, versus $6,553,457 for the six months ended June 30, 1996, a 19%
increase. Interest expense also was higher, increasing to $2,394,340 for the six
months ended June 30, 1997 versus $2,007,050 for the comparable period of 1996,
a 34% increase. The increase in interest expense was due to the higher levels of
borrowings needed to fund finance receivable originations and the working
capital requirements of Thaxton Insurance.
Net interest income for the six months ended June 30, 1997 increased to
$5,373,859 from $4,546,407 for the comparable period of 1996, an 18% increase.
The increase in net interest income is attributable to the higher levels of
finance receivables, the interest income and fees from which more than offset
the six percent decrease in net interest spread for the six months ended
June 30, 1997 versus the comparable period of 1996.
Insurance premiums and commissions net of insurance cost decreased to
$2,529,800 for the six months ended June 30, 1997 from $2,692,098 for the
comparable period of 1996, due to reduced sales of insurance products to
borrowers. Other income increased from $554,636 for the six months ended
June 30, 1996 to $649,552 for the comparable period of 1997 due to increased`
profit-sharing payments to Thaxton Insurance from various insurance carriers.
Reinsurance claims and collections expenses remained fairly constant
for the six months ended June 30, 1997 compared to the six months ended
June 30, 1996, with reinsurance claims expense decreasing 4% and
collection expense increasing 5%.
Total operating expenses increased from $5,693,557 for the six months
ended June 30, 1996 to $6,098,467 for the comparable period of 1997, a 7 %
increase. The increase in operating expenses was due to opening new finance
offices and the additional expenses associated with insurance agency operations,
in addition to a general increase in costs associated with administering a
larger finance receivable portfolio.
<PAGE>
Net income decreased to $586,739 for the six months ended June 30, 1997
from $782,588 for the comparable period 1996. The decrease in net income was due
to the higher levels of net interest and insurance commission income being
offset by higher loss provisions and expenses.
Shareholders' equity increased from $6,371,305 at December 31, 1996 to
$6,919,440 at June 30, 1997 as a result of retained earnings from after tax
profits earned during the period.
COMPARISON OF 1996 TO 1995. Gross finance receivables at December 31,
1996 were $63,106,601 versus $47,900,234 at December 31, 1995, a 32% increase.
The primary component of this increase was Automobile Sales Contracts, which
increased from $32,455,654 at December 31, 1995 to $47,603,138 at December 31,
1996, or 47%. The Company opened four finance offices in 1995 and two in 1996,
all of which originated primarily Automobile Sales Contracts, generating a
significant additional volume of such contracts. Premium Finance Contracts
outstanding decreased from $5,046,110 at December 31, 1995 to $2,943,338 at
December 31, 1996, or 42%, due to the Company's decision to reduce origination
activities in Virginia. Direct loans increased 21%, to $12,560,126 at December
31, 1996 compared to $10,398,470 at December 31, 1995 due primarily to increased
loan demand at the Company's existing finance offices.
Unearned income at December 31, 1996 was $12,578,514 versus $9,731,532
at December 31, 1995, a 29% increase which was directly related to the higher
volume of Automobile Sales Contract originations during 1996. The provision for
credit losses established for the year ended December 31, 1996 was $3,593,399,
versus $890,337 for 1995. The increase in the provision for credit losses was
due to strengthening the Company's allowance for credit losses in response to
higher than expected loan losses and repossessions in the fourth quarter of
1996. The allowance for credit losses increased from $783,200 at December 31,
1995 to $2,195,000 at December 31, 1996. The allowance for credit losses as a
percentage of Net Finance Receivables increased from 2.1% at December 31, 1995
to 4.4% at December 31, 1996.
Cash levels decreased from $3,214,977 at December 31, 1995 to $421,465
at December 31, 1996. This decrease was due to the use of the proceeds of the
Company's public offering on December 29, 1995 to pay down the Revolving Credit
Facility on January 3, 1996.
The growth in finance receivables during the year ended December 31,
1996 versus the comparable period in 1995 resulted in higher levels of interest
and fee income. Interest and fee income for the year ended December 31, 1996 was
$13,528,881, versus $9,182,149 for the year ended December 31, 1995, a 47%
increase. Interest expense also was higher, increasing to $4,209,763 for the
year ended December 31, 1996 versus $2,985,056 for the year ended December 31,
1995, a 41% increase. The increase in interest expense was due to the higher
levels of borrowings needed to fund the larger finance receivable portfolio,
offset somewhat by reduced interest rates payable by the Company to its primary
lender under new agreements entered into in 1996.
Net interest income for the year ended December 31, 1996 increased to
$9,319,118 from $6,197,093 for 1995, a 50% increase. The increase in net
interest income is attributable to the higher levels of finance receivables, the
interest income and fees from which more than offset the 7.8% decrease in net
interest spread for the year ended December 31, 1996 versus 1995.
Insurance premiums and commissions net of insurance cost increased to
$5,893,606 for the year ended December 31, 1996 from $4,617,651 for 1995, a 28%
increase due to the higher levels of Automobile Sales Contract originations, the
triggering event for most sales of insurance products to borrowers, and
increased commissions generated on the sale of insurance policies by the agency.
Collection expense increased from $42,233 for the year ended
December 31, 1995 to $63,797 for 1996, an increase of 85% due to growth in the
Company's finance receivables. Collection expense as a percentage of average
net finance receivables remained constant at 0.2%.
<PAGE>
Reinsurance claims expense increased from $310,231 for the year ended
December 31, 1995 to $516,194 for 1996, an increase of 66%. The increase was
primarily due to a 64% increase in finance receivables outstanding, which
resulted in a corresponding increase in credit insurance sold in connection with
the origination of those receivables.
Total operating expenses increased from $8,767,241 for the year ended
December 31, 1995 to $11,974,280 for 1996, a 36% increase. The increase in
expenses was due to opening new offices and expenses generated by the
insurance agency operations during the two months following the acquisition of
Thaxton Insurance, in addition to a general increase in costs associated with
administering a significantly larger finance receivable portfolio, with average
net loans outstanding increasing 63%.
Net income decreased to $384,184 for the year ended December 31, 1996
from $1,072,598 for 1995. The decrease in net income was due to higher levels of
net interest and insurance income, offset by a higher loss provision for credit
losses and expenses.
Shareholders' equity increased from $6,315,944 at December 31, 1995 to
$6,371,305 at December 31, 1996, as a result of retained earnings from after tax
profits during the period, partially offset by the conversion of 340,000 shares
of preferred stock to subordinated debt.
<PAGE>
CREDIT LOSS EXPERIENCE
Provisions for credit losses are charged to income in amounts
sufficient to maintain the allowance for credit losses at a level considered
adequate to cover the expected future losses of principal and interest in the
existing finance receivable portfolio. Credit loss experience, contractual
delinquency of finance receivables, the value of underlying collateral and
management's judgment are factors used in assessing the overall adequacy of the
allowance and resulting provision for credit losses. The Company's reserve
methodology is designed to provide an allowance for credit losses that, at any
point in time, is adequate to absorb the charge-offs expected to be generated
by the finance receivable portfolio, based on events or losses that have
occurred or are known to be inherent in the portfolio. The model used by the
Company utilizes historical charge-off data to predict the charge-offs likely
to be generated in the future by the existing finance receivable portfolio. The
model stratifies losses by originating office and by type, and develops
historical loss factors which are applied to the current portfolio. In addition,
changes in dealer and bulk purchase reserves are analyzed for each individual
dealer and bulk purchase, and additional reserves are established for any dealer
or bulk purchase if coverage has declined below adequate levels. The Company's
charge-off policy is based on an account by account review of delinquent
receivables. Losses on finance receivables secured by automobiles are recognized
at the time the collateral is repossessed. Other finance receivables are charged
off when they become contractually past due 180 days, unless extenuating
circumstances exist leading management to believe such finance receivables will
be collectible. Finance receivables may be charged off prior to the normal
charge-off period if management deems them to be uncollectible.
Under the Company's dealer reserve arrangements, when a dealer assigns
an Automobile Sales Contract to the Company, the Company withholds a certain
percentage of the principal amount of the contract, usually between five and ten
percent (the "Discount Percentage"). The amounts withheld from a particular
dealer are recorded in a subsidiary ledger account (the "Specific Reserve
Account"). Any losses incurred on Automobile Sales Contracts purchased from that
dealer are charged against its Specific Reserve Account. If at any time the
balance of a dealer's Specific Reserve Account exceeds the amount derived by
applying the Discount Percentage to the total amount of principal and interest
due under all outstanding Automobile Sales Contracts purchased from such dealer
(the "Excess Dealer Reserve"), the dealer is entitled to receive distributions
from the Specific Reserve Account in an amount equal to the Excess Dealer
Reserve. If the Company is continuing to purchase Automobile Sales Contracts
from a dealer, distributions of Excess Dealer Reserves generally are paid
quarterly. If the Company is not continuing to purchase Automobile Sales
Contracts from a dealer, distributions of Excess Dealer Reserves are not paid
out until all Automobile Sales Contracts originated by that dealer have been
paid in full. The aggregate balance of all Specific Reserve Accounts, including
unpaid Excess Dealer Reserves, are reflected in the balance sheet as a reduction
of finance receivables. The Company's allowance for credit losses is charged
only to the extent that the loss on an Automobile Sales Contract exceeds the
originating dealer's Specific Reserve Account at the time of the loss.
The Company periodically purchases Automobile Sales Contracts in bulk.
In a bulk purchase arrangement, the Company typically purchases a portfolio of
Automobile Sales Contracts from a dealer at a discount to par upon a review and
assessment of the portfolio by the Company's management. This discount is
maintained in a separate account against which losses on the bulk portfolio
purchased are charged. To the extent losses experienced are less than the
discount, the remaining discount is accreted into income.
<PAGE>
The Company's charge-offs as a percentage of average Net Finance
Receivables increased from 3.08% for the year ended December 31, 1995 to 5.06%
for the year ended December 31, 1996. A comparable percentage increase was
incurred during the six months ended June 30, 1997 versus the same period of
1996. These increases are attributed to a general deterioration in loan
performance experienced by the Company during the latter part of 1996 and early
1997. The Company's credit policies have remained consistent, and management
believes that its charge-off experience is comparable to that experienced by
other lenders in the non-prime sector. In response to this increased loss
experience, in the second half of 1996 the Company made several operational
changes which, over the long-term, are expected to reduce the Company's
charge-offs. These changes included reducing purchases of Automobile Sales
Contracts from certain dealers for which loss experience had been
unsatisfactory, splitting several offices to obtain improved collection by
locating collection personnel in closer geographic proximity to borrowers, and
reorganizing the Company's regional structure to place more experienced
supervisory personnel in charge of certain offices with higher than average
credit loss experience. Management intends to maintain current credit quality
standards, which may result in a slower portfolio growth in the current credit
market for non-prime borrowers, which is highly competitive.
The following table sets forth the Company's allowance for credit
losses at December 31, 1994, 1995, and 1996 and the credit loss experience over
the periods presented.
<TABLE>
<CAPTION>
AT OR FOR THE SIX MONTHS
AT OR FOR THE YEARS ENDED ENDED JUNE 30,
DECEMBER 31,
----------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Net Finance Receivables (1) $17,413,014 $38,168,681 $50,447,410 $ 45,812,365 $55,795,005
Allowance for credit losses $ 424,425 $ 783,200 $ 2,195,000 $ 1,005,365 $2,390,070
Allowance for credit losses as a percentage
of Net Finance Receivables (1) 2.44 % 2.05 % 4.35% 2.19% 4.28 %
Dealer reserves and discounts on bulk $ 631,709 $1,091,979 $1,747,000 $ 1,221,475 $1,936,542
purchases
Dealer reserves and discounts on bulk
purchases as a percentage of Automobile
Sales Contracts 6.68 % 4.91 % 4.64% 3.91% 4.56 %
Allowance for credit losses and dealer
reserves and discount on bulk purchases $1,056,134 $1,875,179 $3,942,000 $ 2,226,840 $4,326,612
Allowance for credit losses and dealer
reserves and discount on bulk purchases
as a percentage of Net Finance 6.07 % 4.91 % 7.81 % 4.86 % 7.75 %
Receivables
Provision for credit losses $ 481,063 $ 890,337 $3,593,399 $ 845,940 $1,538,832
Charge-offs (net of recoveries) $ 426,624 $ 821,806 $2,210,441 $ 652,647 $1,343,762
Charge-offs (net of recoveries) as a
percentage of average net finance 3.11 % 3.08 % 5.06 % 3.20 % 5.26 %
receivables
</TABLE>
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(1) Net finance receivable balances are presented net of unearned finance
charges only.
The following table sets forth certain information concerning
Automobile Sales Contracts and Direct Loans at the end of the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------- ----------------------------
1994 1995 1996 1996 1997
----------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
Automobile Sales Contracts and Direct
Loans contractually past due 90
days or more (1) $ 110,030 $ 179,831 $ 380,569 $ 296,072 $ 490,572
Automobile Sales Contracts and Direct
Loans (1) $15,931,005 $ 32,249,635 $45,894,637 $40,316,349 $50,608,830
Automobile Sales Contracts and Direct
Loans contractually past due 90
days or more as a percentage of
Automobile Sales Contracts and
Direct Loans 0.69 % 0.56 % 0.83 % 0.73 % 0.97 %
</TABLE>
- -----------------
(1) Finance receivable balances are presented net of unearned finance charges,
dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases.
<PAGE>
The following table sets forth certain information concerning Premium
Finance Contracts at the end of the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
---------------------------------------- ----------------------------
1994 1995 1996 1996 1997
---------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Premium finance contracts contractually
past due 60 days or more (1) $ 26,418 $ 99,537 $ 100,633 $ 123,063 $ 68,269
Premium finance contracts outstanding (1) $1,482,009 $4,827,067 $2,846,451 $4,302,579 $ 3,249,634
Premium finance contracts contractually
past due 60 days or more as a
percentage of premium finance contracts 1.8 % 2.1 % 3.5 % 2.90 % 2.10 %
</TABLE>
- ----------------------------
(1) Finance receivable balances are presented net of unearned finance charges
and discounts on bulk purchases.
The Company also incurs various expenses related to the collection
of delinquent accounts. These expenses consist of miscellaneous expenses paid to
third parties for activities related to collection on delinquent accounts and
repossession of collateral. The following table sets forth certain information
concerning collection expenses for the periods indicated.
<TABLE>
<CAPTION>
For the Years ended For the Six Months
December 31, ended June 30,
-------------------------------- ----------------------
1994 1995 1996 1996 1997
-------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
Collection expenses $ 29,980 $ 42,233 $ 63,797 $ 32,610 $ 34,264
Collection expenses as a percentage of average Net
Finance Receivables 0.22% 0.16% 0.15% 0.16% 0.13%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generally finances its operations and new offices through
cash flow from operations and borrowings under the Revolving Credit Facility.
The Revolving Credit Facility, which was restructured on September 3, 1997 to
increase the maximum borrowings available thereunder from $80 million to $100
million, is extended by Finova and matures on August 31, 1999. The facility
consists of six tranches. The primary tranche is used to finance consumer
receivables and provides for advances of up to $100 million, less any amounts
advanced under the secondary tranches. Tranche B also is used to finance
consumer receivables and allows the Company to borrow up to $10 million against
a higher percentage of Net Finance Receivables than under the primary tranche.
The Company borrows against Tranche B only when it has exhausted available
borrowings under the primary tranche. As of June 30, 1997, $45.4 million was
outstanding under the Revolving Credit Facility, $44.6 million of which had been
advanced under the primary tranche and $775,000 of which had been advanced under
Tranche B. Under the terms of the Revolving Credit Facility, the Company's Net
Finance Receivables at June 30, 1997 would have allowed it to borrow an
additional $5.1 million against existing collateral, with $38.8 million of total
potential borrowing capacity available under the $80 million limit in place on
such date. The interest rate for borrowings is the prime rate published by
Citibank, N.A. (or other money center bank designated by Finova) plus one
percent per annum for the primary tranche and the plus five percent per annum
for Tranche B. Interest rates on borrowings under the other tranches range from
prime plus one percent per annum to prime plus five percent per annum. The
Revolving Credit Facility imposes several financial and other covenants which
may be amended from time to time, including leverage tests, dividend
restrictions, and minimum net worth requirements. The Company presently is in
compliance with each of these covenants and management does not believe they
will materially restrict implementation of the Company's its business or its
expansion strategy.
Cash flows from financing activities during the years ended December
31, 1994, 1995 and 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1994 1995 1996
------------- ------------- ------------
<S> <C> <C> <C>
Revolving Credit Facility $5,851,419 $16,538,315 $ 8,941,444
Other notes payable 82,672 (746,058) 1,292,851
Dividends paid on preferred stock (52,500) (17,500) ---
Common Stock --- 3,210,133 ---
------------- ------------- ------------
Total $5,881,591 $18,984,890 $10,234,295
============= ============= ============
</TABLE>
Management believes that the recent increase in the maximum borrowings
available under the Revolving Credit Facility, in addition to cash expected to
be generated from operations and the Offering, will provide the resources
necessary to pursue the Company's business and growth strategy through 1997. The
Company is currently investigating several options for raising additional funds
to support growth in future years, including the sale of up $10 million in
short-term, subordinated notes payable. See "Business -- Financing."
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although management does not believe that inflation has a direct
material adverse effect on the Company's financial condition or results of
operations, increases in the inflation rate generally are associated with
increased interest rates. Because the Company borrows funds on a floating rate
basis and generally extends credit at the maximum interest rates permitted by
law or market conditions, increased interest rates would increase the Company's
cost of funds and could materially impair the Company's profitability. Inflation
also can affect the Company's operating expenses. The Company's business could
be affected by other general economic conditions in
<PAGE>
the United States, including economic factors affecting the ability of its
customers or prospective customers to purchase used automobiles and to obtain
and repay loans.
<PAGE>
Item 8--Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Thaxton Group, Inc.
We have audited the accompanying consolidated balance sheets of The Thaxton
Group, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Thaxton Group,
Inc. and subsidiaries at December 31, 1995 and 1996, and the results of their
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Greenville, South Carolina
March 14, 1997 KPMG Peat Marwick LLP
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- JUNE 30,
1995 1996 1997
---------------- ---------------- --------------------
(UNAUDITED)
<S> <C> <C> <C>
Assets
Cash $ 3,214,977 $ 421,465 $ 795,169
Finance receivables, net 36,293,502 46,546,087 51,468,393
Premises and equipment, net 1,184,844 1,947,210 1,961,699
Accounts receivable 1,371,313 1,269,384 1,651,859
Repossessed automobiles 500,300 1,166,495 810,011
Goodwill and other intangible assets 2,989,217 3,463,814 3,948,002
Other assets 1,205,333 1,867,112 2,073,004
------------- ----------- -------------
Total assets $46,759,486 $56,681,567 $ 62,708,137
=========== =========== =============
Liabilities and Stockholders' Equity
Accrued interest payable $ 408,854 $ 387,237 $ 379,427
Notes payable 36,898,376 46,345,883 51,634,290
Notes payable to affiliates 401,277 743,621 737,621
Accounts payable 1,583,880 1,350,306 945,284
Employee savings plan 818,115 1,098,457 1,255,746
Other liabilities 333,040 384,758 836,329
------------ ------------ ------------
Total liabilities 40,443,542 50,310,262 55,788,697
------------ ------------ ------------
Preferred Stock, $1.00 par value,
5,000,000 shares authorized,
340,000 shares outstanding in 1995,
no shares outstanding in 1996 and 1997 340,000 - -
Common stock, $ .01 par value; authorized
50,000,000 shares, issued and outstanding
3,938,284 shares in 1995, 3,932,178 shares in
1996 and 3,924,382 shares in 1997 39,383 39,322 39,244
Additional paid-in-capital 3,563,681 3,504,027 3,420,500
Deferred stock award (810,000) (720,000) (675,000)
Unrealized loss on marketable securities (6,392) - -
Retained earnings 3,189,272 3,547,956 4,134,696
--------- --------- ---------
Total stockholders' equity 6,315,944 6,371,305 6,919,440
--------- --------- ---------
Total liabilities and stockholders' equity $ 46,759,486 $ 56,681,567 $ 62,708,137
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------------------
1995 1996 1996 1997
---------------- --------------- -------------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Interest and fee income $9,182,149 $13,528,881 $6,553,457 $ 7,768,199
Interest expense 2,985,056 4,209,763 2,007,050 2,394,340
--------------- -------------- ------------- -------------
Net interest income 6,197,093 9,319,118 4,546,407 5,373,859
Provision for credit losses 890,337 3,593,399 845,940 1,538,832
--------------- -------------- ------------- -------------
Net interest income after
provision for credit losses 5,306,756 5,725,719 3,700,467 3,835,027
Other income:
Insurance premiums and
commissions, net 4,617,651 5,893,606 2,692,098 2,529,800
Other income 579,599 985,763 554,636 649,552
--------------- -------------- ------------- -------------
Total other income 5,197,250 6,879,369 3,246,734 3,179,352
Operating expenses:
Compensation and employee
benefits 4,659,148 5,602,895 2,743,228 3,022,796
Telephone, postage, and supplies 987,229 1,126,599 551,408 661,505
Net occupancy 1,071,612 1,228,414 595,523 714,864
Reinsurance claims expense 310,231 516,194 224,952 215,956
Insurance 120,979 193,670 87,705 137,292
Collection expense 42,233 63,797 32,610 34,264
Travel 115,442 158,513 66,314 60,265
Professional fees 162,897 175,821 56,462 86,407
Other 1,297,470 2,908,377 1,335,355 1,165,118
--------------- -------------- --------- -------------
Total operating expenses 8,767,241 11,974,280 5,693,557 6,098,467
--------------- -------------- --------- -------------
Income before income tax
expense 1,736,765 630,808 1,253,644 915,912
Income tax expense 664,167 246,624 471,056 329,173
--------------- -------------- ------------- -------------
Net income $1,072,598 $ 384,184 782,588 $ 586,739
========== ============ ============= =============
Dividends on preferred stock $ 60,000 $ 25,500 $ 17,000 $ -
============ ============= =========== ============
Net income applicable to common
shareholders $1,012,598 $ 358,684 $ 765,588 $ 586,739
========== ============ ========== =============
Net income per common share $ 0.31 $ 0.09 $ 0.19 $ 0.15
============= =========== ============= =============
Weighted average shares
outstanding 3,312,559 3,830,472 3,938,236 3,927,455
========= ============== ============= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL DEFERRED GAIN ON TOTAL
COMMON PREFERRED PAID-IN- STOCK MARKETABLE RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL AWARD SECURITIES EARNINGS EQUITY
----------- ------------ ------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Thaxton Group, Inc. $ 31,480 $ 700,000 $ 64,720 $ - $ $ 1,877,988 $ 2,674,188
Thaxton Insurance Group,
Inc. 400 748,332 - - 3,071 (463,315) 288,488
----------- ------------ ------------- ------------ ------------ ------------ -------------
Balance at December 31, 1994 31,880 1,448,332 64,720 - 1,414,673 2,962,676
3,071
Pooling adjustments 2,600 (658,332) (356,269) - - 762,001 (250,000)
----------- ------------ ------------- ------------ ------------ ------------ -------------
Restated Balance December
31, 1994 34,480 790,000 (291,549) - 3,071 2,176,674 2,712,676
Issued 334,724 shares of
common stock in public 3,348 - 2,456,785 - - - 2,460,133
offering
Dividends paid on preferred
stock ($.025) - - - - - (60,000) (60,000)
Conversion of 450,000
shares of preferred
stock to $450,000 of
subordinated debt - (450,000) - - - - (450,000)
Issuance of 100,00 shares
as a restricted stock
award 1,000 - 899,000 (900,000) - - -
Vesting of 10,000 shares of
stock award - - - 90,000 - - 90,000
Conversion of $500,000
subordinated debt into
55,556 shares of stock 555 - 499,445 - - - 500,000
Unrealized loss on
marketable securities - - - - (9,463) - (9,463)
Net income - - - - - 1,072,598 1,072,598
----------- ------------ ------------- ------------ ------------ ------------ -------------
Balance at December 31, 1995 39,383 340,000 3,563,681 (810,000) (6,392) 3,189,272 6,315,944
Employee stock grant 17 - 16,828 - - - 16,845
Purchase and retirement of
7,786 shares of stock (78) - (76,482) - - - (76,560)
Conversion of 340,000
shares of preferred
stock to $340,000 of
subordinated debt - (340,000) - - - - (340,000)
Dividends on preferred stock - - - - - (25,500) (25,500)
Vesting of 10,000 shares of
stock award - - - 90,000 - - 90,000
Unrealized gain on
marketable securities - - - - 6,392 - 6,392
Net income - - - - - 384,184 384,184
----------- ------------ ------------- ------------ ------------ ------------ -------------
Balance at December 31, 1996 39,322 - 3,504,027 (720,000) 3,547,956 6,371,305
Vesting of 5,000 shares of
stock award - - - 45,000 - - 45,000
Purchase and retirement of
10,600 shares of stock (106) - (111,927) - - - (112,033)
Issuance of 2,007 shares
of restricted stock 20 - 22,057 - - - 22,077
Issuances of 797 shares of
stock under Employee
stock purchase plan 8 - 6,343 - - - 6,351
Net income - - - - 586,739 586,739
=========== ============ ============= =========== ============ =========== =============
Balance at June 30, 1997 $ 39,244 - $ 3,420,500 $ (675,000) - $4,134,696 $6,919,440
=========== ============ ============= ============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------- --------------------------------
1996 1997
1995 1996 (UNAUDITED) (UNAUDITED)
--------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $1,072,598 $ 384,184 $ 782,588 $ 586,739
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for credit losses 890,337 3,593,399 845,940 1,538,832
Depreciation and amortization 608,929 756,791 332,426 452,444
Deferred taxes (93,868) (26,715) (22,098) (32,050)
Vesting of stock awards 90,000 90,000 45,000 45,000
Compensatory grant of stock to
employees - 16,845 16,845 28,428
Unrealized (gain) loss on
marketable securities (9,462) 6,392 6,392 -
(Gain) loss on sale of premises
and equipment (12,325) (25,301) (5,532) (16,530)
Gain on sale of investment (75,957) - - (10,859)
Increase (decrease) in other
assets 528,629 (2,026,919) (1,082,681) (761,359)
Increase (decrease) in accrued
interest payable and other
liabilities 1,396,601 76,869 (10,045) 228,078
---------- ---------- ----------- ----------
Net cash provided by operating
activities 4,395,481 2,845,545 908,835 2,058,723
---------- ---------- ---------- ----------
Cash flow from investing activities:
Net increase in finance receivables (20,195,250) (13,845,854) (8,012,393) (6,461,138)
Capital expenditures for premises
and equipment (628,435) (1,295,387) (228,221) (303,863)
Proceeds from sale of premises and
equipment 17,200 79,907 23,440 25,750
Proceeds from the sale of investments 283,698 - - 17,273
Acquisitions, net of acquired
cash equivalents (1,336,338) (752,973) (638,941) (133,415)
Purchase of securities (1,333,942) (68,843) (14,739) -
Notes receivable (affiliate) (810,907) 896,432 1,264,815 -
---------- ---------- ---------- -----------
Net cash used by investing
activities (24,003,974) (14,986,848) (7,606,039) (6,855,393)
------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from the issuance of
common stock 2,460,133 - - -
Repurchase of common stock - (76,560) - (112,033)
Dividends paid (60,000) (25,500) - -
Net increase in line of credit 20,002,676 9,449,851 4,090,262 4,484,000
Proceeds from issuance of notes
payable - - - 798,407
---------- ---------- ----------- -----------
Net cash provided by financing
activities 22,402,809 9,347,791 4,090,262 5,170,374
---------- ---------- ---------- ----------
Net increase (decrease) in cash 2,794,316 (2,793,512) (2,606,942) 373,704
Cash at beginning of period 420,661 3,214,977 3,214,977 421,465
---------- ---------- ---------- ----------
Cash at end of period $3,214,977 $ 421,465 $ 608,035 $ 795,169
========== ========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the period
for:
Interest $2,813,715 $3,805,229 $1,823,367 $2,083,934
Income taxes 844,658 554,651 216,810 22,000
========== ========== ========== ==========
Noncash financing activities:
Conversion of preferred stock to
notes payable 450,000 340,000 - -
Conversion of subordinated debt to
common stock 500,000 - - -
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1996 AND 1997 (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Thaxton Group, Inc. (the "Company") is incorporated under the laws
of the state of South Carolina and operates branches in South Carolina, North
Carolina, Georgia, Virginia and Tennessee. The Company is a diversified consumer
finance company that is engaged primarily in purchasing and servicing retail
installment contracts purchased from independent used car dealers and making and
servicing personal loans to borrowers with limited credit histories, low incomes
or past credit problems. The Company also offers insurance premium financing to
such borrowers. A substantial amount of the Company's premium finance business
has been derived from customers of the independent insurance agencies owned by
Thaxton Insurance Group, Inc. ("Thaxton Insurance"), which was acquired by the
Company in 1996. The Company provides reinsurance through a wholly-owned
subsidiary, TICO Reinsurance, Ltd. ("TRL"). 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 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.
Prior year consolidated financial statements have been restated to
include the balances of companies combined and accounted for as
poolings-of-interests as discussed in Note 2. Certain amounts for 1995 have been
reclassified to conform to the 1996 presentation. These reclassifications have
no effect on shareholders' equity or net income as previously reported.
The following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting its
financial statements.
(a) INTEREST AND FEE INCOME
Interest income from finance receivables is recognized using the
interest (actuarial) method on an accrual basis. Accrual of income on finance
receivables continues until the receivable is either paid off in full or is
charged off. Fee income consists primarily of late fees which are credited to
income when they become due from borrowers. For receivables which are renewed,
interest income is recognized using a method similar to the interest method.
(b) ALLOWANCE FOR CREDIT LOSSES
Additions to the allowance for credit losses are based on management's
evaluation of the finance receivables portfolio considering current economic
conditions, overall portfolio quality, charge-off experience, and such other
factors which, in management's judgment, deserve recognition in estimating
credit losses. Loans are charged-off when, in the opinion of management, such
loans are deemed to be uncollectible or six months has elapsed since the date of
the last payment, whichever occurs first. While management uses the best
information available to make such evaluations, future adjustments to the
allowance may be necessary if conditions differ substantially from the
assumptions used in making the evaluations.
(c) NON-FILE INSURANCE
Non-file insurance is written in lieu of recording and perfecting the
Company's security interest in the assets pledged to secure certain loans.
Non-file insurance premiums are collected from the borrower on certain loans at
inception and renewal and are remitted directly to an unaffiliated insurance
company. Certain losses related to such loans, which are not recoverable through
life, accident and health, or property insurance claims, are reimbursed through
non-file insurance claims subject to policy limitations. Any remaining losses
are charged to the allowance for credit losses.
<PAGE>
(D) PREMISES AND EQUIPMENT
Premises and equipment are reported at cost less accumulated
depreciation which is computed using the straight-line method for financial
reporting and accelerated methods for tax purposes. Maintenance and repairs are
charged to expense as incurred and improvements are capitalized.
(e) INSURANCE
The Company remits a portion of credit life, accident and health,
property and auto insurance premiums written in connection with certain loans to
an unaffiliated insurance company at the time of origination. Any portion of the
premiums remitted to this insurance company which are not required to cover
their administrative fees or to pay reinsurance claims expense are returned to
the Company through its reinsurance subsidiary, TRL, and are included in
insurance premiums and commissions in the accompanying consolidated statements
of income. Unearned insurance commissions are accreted to income over the life
of the related insurance contracts using a method similar to that used for the
recognition of finance charges.
Insurance commissions earned by Thaxton Insurance are recognized as
services are performed in accordance with Thaxton Insurance's contractual
obligations with the underwriters, but not before protection is placed with
insurers.
(f) EMPLOYEE SAVINGS PLAN
The Company offers a payroll deduction savings plan to all its
employees. The Company pays interest monthly at an annual rate of 10% on the
prior month's ending balance. Employees may withdraw savings on demand.
(g) INCOME TAXES
The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (Statement 109),
requires a change from the deferred method of accounting for income taxes of APB
Opinion 11 to the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(h) EARNINGS PER SHARE
Earnings per share is calculated using the weighted average shares
outstanding of 3,312,559 and 3,830,472 for 1995 and 1996, respectively. Such
share amounts have been adjusted for the 10,025.48 for one stock split declared
by the board of directors on September 8, 1995. All share and per share data
have been retroactively adjusted for the stock split. The effect of common stock
equivalent shares applicable to stock option plans has not been included in the
calculation of net income per share because such effect is not materially
dilutive.
(i) INTANGIBLE ASSETS
Intangible assets include goodwill, expiration lists, and covenants not
to compete related to the purchase of insurance agencies. Goodwill represents
the excess of the cost of insurance agencies over the fair value of its assets
at the date of acquisition. Goodwill is amortized on a straight-line basis over
a fifteen to twenty year period. The expiration lists are amortized over their
estimated useful life of twenty years on a straight-line basis. Covenants not
to compete are amortized according to the purchase contract over five to six
years on a straight-line basis. Intangible assets also include the premium paid
to acquire Eagle Premium Finance, which is being amortized on a straight-line
basis over ten years. Recoverability of recorded intangibles is evaluated by
using undiscounted cash flows.
<PAGE>
(j) STOCK OPTIONS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
which requires that the fair value of employee stock-based compensation plans be
recorded as a component of compensation expense in the statement of income or
the impact of such fair value on net income and earnings per share be disclosed
on a pro forma basis in a footnote to the financial statements if the Company
continues to use the intrinsic value method in accordance with APB 25. The
Company will continue such accounting under the provisions of APB 25.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial assets of the Company are short term in nature and all
liabilities are substantially at variable rates of interest. As such, the
carrying values of these financial assets and liabilities approximate their fair
value.
(l) REPOSSESSED ASSETS
Repossessed assets are recorded at their estimated fair value less
costs to dispose. Any difference between the loan balance and the fair value of
the collateral on the date of repossession is charged to the allowance for
credit losses.
(m) UNAUDITED INTERIM FINANCIAL INFORMATION
Information with respect to June 30, 1996 and 1997, 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.
NOTE 2 - BUSINESS COMBINATIONS
The Company acquired all of the outstanding capital stock of Thaxton
Insurance on October 31, 1996 in exchange for 300,000 shares of the Company's
stock. Thaxton Insurance is incorporated under the laws of the State of South
Carolina and licensed as an insurance agency in the states of North Carolina
and South Carolina.
The financial statements were previously reported by combining the
assets, liabilities and stockholders' equity of the separate companies at the
date of acquisition at their historical cost basis. In addition, the results
of operations and cash flows of Thaxton Insurance were included in the
consolidated financial statements from the date of acquisition. Upon further
consideration, the Company determined that the periods prior to the the date
of acquisition should be restated under the "as if" pooling method. Accordingly,
the consolidated financial statements for periods prior to the combination have
been restated to include the assets, liabilities and equity and results of
operation and cash flows of Thaxton Insurance. Total assets and stockholders'
equity in 1995 were previously reported as $40,691,506 and $7,177,890,
respectively. Net income per common share and net income in 1995 were previously
reported as $0.29 and $921,069, respectively and $0.18 and $666,399,
respectively in 1996.
In accordance with poolings-of-interests accounting, the financial
statements of the Company have been restated to reflect the acquisition as if it
had been effective as of the earliest period presented. The respective
contributions of the pooled entities to consolidated total income, net interest
income after provision for loan losses and net income for the years ended
December 31, 1995 and 1996 were as follows:
<PAGE>
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
Total income:
The Thaxton Group, Inc. $ 9,731,080 15,800,127
Thaxton Insurance 4,648,319 4,608,123
=============== ==============
Combined $ 14,379,399 20,408,250
=============== ==============
Net interest income after provision for
credit losses:
The Thaxton Group, Inc. $ 5,480,281 6,083,481
Thaxton Insurance (173,525) (357,762)
=============== ==============
Combined $ 5,306,756 5,725,719
=============== ==============
Net income:
The Thaxton Group, Inc. $ 921,069 666,399
Thaxton Insurance 151,529 (272,215)
=============== ==============
Combined $ 1,072,598 $ 384,184
=============== ==============
</TABLE>
The Company's total income and net interest income after provision for
credit losses has been adjusted from amounts previously reported to reflect
certain reclassifications from noninterest income and expense to interest income
and expense, in accordance with accounting classifications followed by the
Company.
The Company acquired all of the outstanding capital stock of Eagle
Premium Finance (Eagle) on September 1, 1995 in a cash purchase. Eagle is a
one-office consumer finance company located in Norfolk, Virginia that
specializes in financing premiums for personal lines of automobile insurance. At
the date of purchase, Eagle had total finance receivables of approximately
$1,921,000 and the Company recorded an intangible asset of approximately
$350,000. The remaining intangible asset was approximately $337,000, $302,000,
and $284,966 at December 31, 1995, December 31, 1996 and June 30, 1997,
respectively, and is included in goodwill and other intangible assets in the
accompanying consolidated balance sheets.
NOTE 3 - FINANCE RECEIVABLES
Finance receivables consist of the following at December 31, 1995 and
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------
1995 1996 1997
-------------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
Automobile Sales Contracts $ 32,455,654 $ 47,603,138 $ 53,636,050
Direct Loans 10,398,470 12,560,126 12,655,681
Premium Finance Contracts 5,046,110 2,943,337 3,380,685
--------- ---------- ---------
Total finance receivables 47,900,234 63,106,601 69,672,416
Unearned interest (9,325,101) (12,445,781) (13,775,488)
Unearned insurance premiums, net (406,431) (132,733) (101,923)
Bulk purchase discount (416,000) (1,014,000) (921,313)
Dealer hold back (676,000) (773,000) (1,015,229)
Allowance for credit losses (783,200) (2,195,000) (2,390,070)
------------- ------------- -------------
Finance receivables, net $ 36,293,502 $ 46,546,087 $ 51,468,393
============ ============ ============
</TABLE>
Consumer loans include bulk purchases of receivables, auto dealer
receivables under holdback arrangements, and small consumer loan receivables.
With bulk purchase arrangements, the Company typically purchases a group of
receivables from an auto dealer or other retailer at a discount to par based on
management's review and assessment of the portfolio to be purchased. This
discount amount is then maintained in an unearned income account to which losses
on these loans are charged. To the extent that losses from a bulk purchase
exceed the purchase discount, the allowance for credit losses will be charged.
To the extent losses experienced are less than the purchase discount, the
remaining discount is accreted into income. The amount of bulk purchased
receivables, net of unearned interest and insurance, and the related purchase
discount outstanding were approximately
<PAGE>
$3,710,000 and $416,000, respectively, at December 31, 1995; approximately
$7,371,000 and $1,014,000, respectively, at December 31, 1996; and approximately
$7,769,780 and $921,313, respectively, at June 30, 1997.
With holdback arrangements, an automobile dealer or other retailer will
assign receivables to the Company on a loan-by-loan basis, typically at par. The
Company will withhold a certain percentage of the proceeds, generally 5% to 10%,
as a dealer reserve to be used to cover any losses which occur on these loans.
The agreements are structured such that all or a portion of these holdback
amounts can be reclaimed by the dealer based on the performance of the
receivables. To the extent that losses from these holdback receivables exceed
the total remaining holdback amount for a particular dealer, the allowance for
credit losses will be charged. The amount of holdback receivables, net of
unearned interest and insurance, and the related holdback amount outstanding
were approximately $20,320,700 and $676,000, respectively, at December 31, 1995,
approximately $31,451,000 and $773,000, respectively, at December 31, 1996, and
approximately $33,571,649 and $1,015,229, respectively, at June 30, 1997.
At December 31, 1996 and June 30, 1997, 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.
<PAGE>
Changes in the allowance for credit losses for the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ --------------------------------
1995 1996 1996 1997
------------ -------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Beginning balance $424,425 $ 783,200 $ 783,200 $2,195,000
Valuation allowance for acquired loans 290,244 28,842 28,872 -
Provision for credit losses 890,337 3,593,399 845,940 1,538,832
Charge-offs (924,620) (2,526,231) (788,368) (1,436,203)
Recoveries 102,814 315,790 135,721 92,441
------- ----------- ------- --- ------
Net charge-offs (821,806) (2,210,441) (652,647) (1,343,762)
--------- ----------- --------- -----------
Ending balance $783,200 $ 2,195,000 $1,005,365 $2,390,070
======= ========== ========== ==========
</TABLE>
The valuation allowance for acquired loans relates to the acquisition
of approximately $3,425,000 and $748,000 of receivables in 1995 and 1996,
respectively.
The Company's loan portfolio primarily consists of short term loans,
the majority of which are originated or renewed during the current year.
Accordingly, the Company estimates that fair value of the finance receivables is
not materially different from carrying value.
NOTE 4 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1995 and 1996
follows:
<TABLE>
<CAPTION>
1995 1996
---------------- -------------------
<S> <C> <C>
Leasehold improvements $ 444,096 $ 504,328
Furniture and fixtures 541,061 477,158
Equipment and automobiles 1,609,586 2,762,214
--------- ---------
Total cost 2,594,743 3,743,700
Accumulated depreciation 1,409,899 1,796,490
--------- ----------------
Net premises and equipment $ 1,184,844 $1,947,210
================ ===================
</TABLE>
NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
-------------------- ---------------------
<S> <C> <C>
Covenants not to compete $ 47,995 $ 102,022
Goodwill 1,782,932 2,036,563
Insurance expirations 1,732,227 2,135,098
Purchase premium 348,938 348,938
------- -------
Total cost 3,912,092 4,622,621
Less accumulated amortization 922,875 1,158,807
------- ---------
Intangible assets, net $ 2,989,217 $3,463,814
=========== ==========
</TABLE>
<PAGE>
The majority of the intangibles were acquired by the Company in
connection with its acquisition of Thaxton Insurance.
Amortization expense was approximately $179,741 and $105,000 in 1995
and 1996, respectively.
NOTE 6 - LEASES
The Company conducts all of its operations from leased facilities. It
is expected that in the normal course of business, leases that expire will be
renewed at the Company's option or replaced by other leases or acquisitions of
other properties. Total rental expense was approximately $440,000 in 1995 and
$304,000 in 1996.
The future minimum lease payments under noncancelable operating leases
as of December 31, 1996, are as follows:
1997 $446,559
1998 270,670
1999 178,358
2000 52,296
2001 30,100
--------
Total minimum lease payments $977,983
=======
Four of the office buildings in which the Company conducts business are
owned by related parties. These premises are leased to the Company for a total
monthly rental rate of $4,350.
<PAGE>
NOTE 7 - NOTES PAYABLE
At December 31, 1995 and 1996, notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1996
------------------- -------------------
<S> <C> <C>
Note payable to insurance company maturing in May, 1998 and bearing
interest at prime plus 2% and is reset quarterly $ 300,000 $ 500,000
Note payable to insurance company payable within sixty days after written demand
by the lender. The note bears interest at prime plus 2%
and is reset monthly - 250,000
Lines of credit 34,632,281 42,615,947
Note payable to finance company due in monthly installments of $9,091 through
July, 2003 including interest at 8.99%. This note is secured by
an aircraft purchased with the funds - 540,600
Note payable to insurance agency due annually on July 1 in installments of
$78,022 through July 1997, including interest at a rate of 9% and secured by
agency purchased with funds and various individual stockholders' assets 137,248 71,578
Note payable to individual due annually on January 1 in installments of $23,496
through January 2001, including interest at a rate of 8% and secured by agency
purchased with funds and various individual stockholders' assets 93,814 93,814
Note payable to individual due annually on June 1 in installments of $40,000
through June 1998, including interest at a rate of 7% and secured by stock
purchased with funds and various individual stockholders' assets 104,973 72,321
Note payable to individual due on January 1, 1997 plus interest at a rate of 7%.
Secured by agency purchased with funds and various individual stockholders' assets 60,000 60,000
Note payable to individual due in monthly installments of $3,607 through
January 1999, including interest at a rate of 6% and secured by agency
purchased with funds and various individual stockholders' assets 116,182 79,012
Note payable to individual due in monthly installments of $9,478,
through March 2001, including interest at a rate of 6% - 423,449
Notes payable to individuals with varying maturity dates and rates
ranging from 8-12% 1,421,637 1,639,162
Note payable to individual due in 1996, plus interest at a rate of 12%
unsecured 32,241 -
---------- ----------
$ 36,898,376 $ 46,345,883
========== ==========
</TABLE>
<PAGE>
A schedule of maturities of long-term debt is as follows:
YEAR ENDING
DECEMBER 31 AMOUNT
- ------------------------------------------- ------------------------
1997 $ 1,256,603
1998 44,261,706
1999 315,870
2000 211,126
2001 140,129
Thereafter 160,449
Total $ 46,345,883
===========
At December 31, 1996, the Company maintained a line of credit agreement
with a commercial finance company for $80 million, maturing on July 31, 1998. At
December 31, 1996, the Company's net finance receivables would have allowed it
to borrow an additional $5.6 million against existing collateral, with
approximately $39 million of total potential borrowing capacity available under
the $80 million limit in place on such date. The outstanding balance under this
line of credit was $41,166,000 at December 31, 1996. There are two tranches
under this agreement, Tranche A and Tranche B. The total line of credit under
Tranche A is $70,000,000 of which $30,159,000 is available at December 31, 1996.
This tranche bears interest at the lender's prime rate plus 1% (9.25% at
December 31, 1996). The total line of credit under Tranche B is $10,000,000, of
which $8,675,000 is available at December 31, 1996. This tranche bears interest
at the lender's prime rate plus 5% (13.25% at December 31, 1996). Interest on
the outstanding line of credit balance is payable monthly.
The terms of the line of credit agreement provide that the finance
receivables are pledged as collateral for the amount outstanding. The agreement
requires the Company to maintain certain financial ratios at established levels
and comply with other non-financial requirements which may be amended from time
to time. Also, the Company may pay dividends up to 50% of the current year's
net income. As of December 31, 1996, the Company met all such ratios and
requirements (see Note 11).
Thaxton Insurance maintains a line of credit agreement with the same
commercial finance company for $3 million maturing June 30, 1998. Of this
amount, approximately $1,686,000 was available at December 31, 1996. The
outstanding balance under this line of credit was $1,314,000 at December 31,
1996. Borrowings under this arrangement bear interest at the lender's prime rate
plus 3% (11.25% at December 31, 1996), payable monthly.
Thaxton Insurance also has a line of credit agreement with a commercial
bank whereby the Company can borrow up to $400,000. The principal is payable on
demand, and interest is payable quarterly at the bank's prime rate plus one
percent (9.25% at December 31, 1996). The amount outstanding as of December 31,
1996 was approximately $136,000. The line of credit is secured by certain real
estate, furniture, fixtures, equipment and investments owned by Thaxton
Insurance and individual shareholders. Thaxton Insurance also has a sweep
account with the bank. The bank requires Thaxton Insurance to maintain a $55,000
balance in the account. If the account drops below $55,000 the bank
automatically advances money from the line-of-credit to increase the account to
$55,000.
NOTE 8 - NOTES PAYABLE TO AFFILIATES
The Company had approximately $744,000 of notes payable to affiliates
at December 31, 1996. At December 31, 1995, the Company had notes payable to
affiliates of $401,277. During 1995, $500,000 of notes payable to affiliates
were converted to common stock and an additional $500,000 was repaid from
proceeds of the public stock offering.
During 1996, 340,000 shares of Preferred Stock B of Thaxton Insurance
Group were converted to $340,000 of notes payable.
<PAGE>
NOTE 9 - BENEFITS
In 1995 the Board of Directors of the Company adopted the Thaxton
Group, Inc. 1995 Stock Incentive Plan (the "Incentive Plan"), under which
620,000 shares of common stock were available for grants to key employees of the
Company. Awards under the Incentive Plan may include, but are not limited to,
stock options, stock appreciation rights, restricted stock, performance awards
and other common stock and common stock-based awards. Stock options granted
under the Incentive Plan may be either incentive stock options or non-qualified
stock options. During 1996, the Company granted 20,000 options to employees
under the Incentive Plan at an exercise price of $9.00 per share. The options
vest and become exercisable in installments of 20% of the shares on each of the
first, second, third, fourth, and fifth anniversary dates of the grant. None of
the options outstanding at December 31, 1996 were exercisable. All options
granted in 1996 have a contractual maturity of ten years. The grant date fair
value of options granted during 1996 was $3.90 per share as determined by using
the Black-Scholes option pricing model with the following assumptions: (1)
risk-free interest rate of 6.25%; (2) expected life of 5 years; (3) expected
volatility of 10.40%; and (4) no expected dividends.
Under the Incentive Plan, the Company granted a restricted stock award
of 100,000 shares of common stock to an executive officer of the Company. The
stock award became effective December 29, 1995 ("Vesting Date") with 10,000
shares vesting at that time. The remaining shares become vested at the rate of
10,000 shares per year on the first through the ninth anniversaries of the
Vesting Date only if the executive officer is employed by the Company on the
applicable anniversary date. The Company will record compensation expense over
the vesting period based on the market value at the date of grant.
During 1995 the Board of Directors of the Company also adopted the
Thaxton Group, Inc. Employee Stock Purchase Plan (the "Stock Purchase Plan"),
under which 100,000 shares of common stock are available for purchase by
substantially all employees. The Stock Purchase Plan enables eligible employees
of the Company, through payroll deductions, to purchase at twelve-month
intervals specified in the Stock Purchase Plan, shares of common stock at a 15%
discount from the lower of the fair market value of the common stock on the
first day or the last day of the year. The Stock Purchase Plan allows for
employee contributions up to 3% of the participant's annual compensation and
limits the aggregate fair value of common stock that may be purchased by a
participant during any calendar year to $25,000. As of December 31, 1996 no
purchases had been made under this Stock Purchase Plan.
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock based compensation benefit plans as permitted under
SFAS No. 123. In accordance with APB 25, no compensation expense is recognized
by the Company when stock options are granted because the exercise price of the
Company's stock option equals the market price of the underlying stock on the
date of grant. Had compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net income and net income
per share would not have been materially different than reported.
NOTE 10 - INCOME TAXES
Income taxes consist of the following:
CURRENT DEFERRED TOTAL
1995:
Federal $ 652,927 $(88,504) $564,423
State 105,108 (5,364) 99,744
--------- ------ ------
$ 758,035 $(93,868) $664,167
======== ======= =======
1996:
Federal $ 234,067 $(22,487) $211,580
State 39,272 (4,228) 35,044
--------- ------ ------
$ 273,339 $(26,715) $246,624
======== ======= =======
<PAGE>
A reconciliation of the Company's income tax provision and the amount
computed by applying the statutory federal income tax rate of 34% to net income
before income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Statutory rate applied to net income before taxes $ 590,500 $ 214,475
Increase (decrease) in income resulting from:
Goodwill amortization 28,208 50,809
TRL nontaxable income (84,712) (79,132)
State taxes, less related federal benefit 65,832 23,129
Other 64,339 37,343
---------- ----------
Income taxes $ 664,167 $ 246,624
========== ==========
</TABLE>
The effective tax rate was 39.1% and 38.2% for the years ended December
31, 1996 and 1995, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 1995 and
1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 361,416 $ 872,213
Intangibles 22,591
Unearned interest and fees 187,414 28,856
Other 94,380 34,016
----------- -----------
Total gross deferred tax assets 665,801 935,085
----------- -----------
Less valuation allowance - -
----------- ----------
Net deferred tax assets 665,801 935,085
----------- -----------
Deferred tax (liabilities)
Prepaid insurance (173,743) (300,525)
Depreciable basis of fixed assets (38,000) (92,144)
Deferred loan costs - (88,232)
Intangibles - (146,667)
Other - (4,705)
----------- ------------
Total gross deferred tax liability (211,743) (632,273)
------------ -----------
Net deferred tax asset $ 454,058 $ 302,812
=========== ===========
</TABLE>
The Company recorded deferred tax liabilities of $177,961 related to
its 1996 acquisition of Williams Agency, Inc. The balance of the change in the
net deferred tax asset is reflected as a deferred income tax benefit in the
accompanying consolidated statements of income.
There was no valuation allowance for deferred tax assets as of
January 1, 1996 or 1995 and no net change in the allowance during 1996
or 1995. It is management's opinion that realization of the net deferred tax
asset is more likely than not based upon the Company's history of taxable income
and estimates of future taxable income. The Company's income tax returns for
1993 and subsequent years are subject to review by taxing authorities.
<PAGE>
NOTE 11 - SUBSEQUENT EVENT (UNAUDITED)
During the quarter ended September 30, 1997, the Company experienced a
significant increase in finance receivable charge-offs. The net charge-offs for
the quarter were $1,296,370 compared to net charge-offs for the first six months
of 1997 of $1,343,762 and net charge-offs of $503,180 during the comparable
quarter of 1996. This increase in net charge-offs resulted in a significant
increase in the provision for credit losses to $2,346,980 for the quarter ended
September 30, 1997 as compared to provision for the first six months of 1997 and
the comparable quarter of 1996 of $1,538,832 and $577,414, respectively. As a
result, the allowance for credit losses was increased to $3,440,680 at September
30, 1997 or 5.86% of net finance receivables as compared to $2,390,020 or 4.28%
of net finance receivables at June 30, 1997.
As a result of the increase in the provision for credit losses, the
Company will incur a loss for the quarter ended September 30, 1997 and for the
nine months then ended. This loss will not result in any violations of the
financial covenants of the $80 million line of credit agreement, as amended,
discussed in Note 7.
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE THAXTON GROUP, INC.
By: /s/ KENNETH H. JAMES
---------------------------------------
Kenneth H. James
Chief Financial Officer
Date: November 10, 1997
