SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-27086
THE THAXTON GROUP, INC.
(Exact name of small business issuer 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 29271
(Address of principal executive offices)
Issuers telephone number including area code: 803-285-4336
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 issuer was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days.
Yes __X__ No _____
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class October 28, 1997
----- ----------------
Common Stock 3,911,682
<PAGE>
The Thaxton Group, Inc.
Form 10-QSB
September 30, 1997
Table of Contents
Page No.
--------
Part I Financial Information
Item 1. Financial Statements (Unaudited, except December 31, 1996)
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income for the three months
ended September 30, 1997 and 1996 4
Consolidated Statements of Income for the nine months
ended September 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Part II Other Information
Item 4. Submission of Matters to a vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
2
<PAGE>
Part I
Item 1. Financial Statements
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Assets September 30, December 31,
- ----- 1997 1996
(Unaudited)
<S> <C> <C>
Cash $ 683,522 $ 421,465
Finance receivables, net 52,174,806 46,546,087
Premises and equipment, net 2,003,245 1,947,210
Accounts receivable 2,461,565 1,269,384
Repossessed automobiles 877,603 1,166,495
Goodwill and other intangible assets 4,128,432 3,463,814
Other assets 1,770,595 1,867,112
------------ ------------
Total assets $ 64,099,768 $ 56,681,567
============ ============
Liabilities and Stockholders' Equity
- ------------------------------------
Notes payable $ 53,066,540 $ 46,345,883
Accrued interest payable 416,374 387,237
Notes payable to affiliates 1,022,879 743,621
Accounts payable 1,240,901 1,350,306
Employee savings plan 1,382,679 1,098,457
Other liabilities 891,451 384,758
------------ ------------
Total liabilities 58,020,824 50,310,262
Common stock, $.01 par value; authorized 50,000,000
shares, issued and outstanding 3,911,682 shares at
September 1997 and 3,932,178 at December 1996 39,117 39,322
Additional paid-in-capital 3,339,677 3,504,027
Retained earnings 3,365,150 3,547,956
Deferred stock award (665,000) (720,000)
------------ ------------
Total stockholders' equity 6,078,944 6,371,305
------------ ------------
Total liabilities and
stockholders' equity $ 64,099,768 $ 56,681,567
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income
(Unaudited)
Three Months Ended September 30
1997 1996
----------- -----------
Interest and fee income $ 4,068,983 $ 3,550,869
Interest expense 1,312,430 1,039,114
----------- -----------
Net interest income 2,756,553 2,511,755
Provision for credit losses 2,346,592 577,414
----------- -----------
Net interest income after provision
for credit losses 409,961 1,934,341
Other income:
Insurance premiums and
commissions, net 1,432,139 1,466,075
Other income 194,245 240,962
----------- -----------
Total other income 1,626,384 1,707,037
Operating expenses:
Compensation and employee benefits 1,516,063 1,460,358
Telephone, postage, and supplies 395,246 272,138
Net occupancy 398,541 324,284
Insurance 73,856 53,358
Collection expense 64,331 48,072
Travel 43,416 33,954
Professional fees 79,782 55,054
Reinsurance claims expense 60,995 141,954
Other 614,875 567,176
----------- -----------
Total operating expenses 3,247,105 2,956,348
----------- -----------
Net income (loss) before income tax
expense (1,210,760) 685,030
Income tax expense (benefit) (441,215) 261,091
----------- -----------
Net income (loss) $ (769,545) $ 423,939
=========== ===========
Dividends on preferred stock -0- $ 8,500
=========== ===========
Net income (loss) applicable to
common shareholders $ (769,545) $ 415,439
=========== ===========
Net income (loss) per common share $ (.20) $ .11
=========== ===========
Weighted average shares outstanding 3,923,632 3,934,178
=========== ===========
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income
(Unaudited)
Nine Months Ended September 30
1997 1996
------------ ------------
Interest and fee income $ 11,837,182 $ 10,104,327
Interest expense 3,706,770 3,046,164
------------ ------------
Net interest income 8,130,412 7,058,163
Provision for credit losses 3,885,424 1,423,355
------------ ------------
Net interest income after provision
for credit losses 4,244,988 5,634,808
Other income:
Insurance premiums and
commissions, net 3,961,939 4,158,173
Other income 843,797 795,598
------------ ------------
Total other income 4,805,736 4,953,771
Operating expenses:
Compensation and employee benefits 4,538,859 4,203,585
Telephone, postage, and supplies 1,056,751 823,545
Net occupancy 1,113,405 919,806
Insurance 211,148 141,063
Collection expense 146,724 142,490
Travel 103,681 100,268
Professional fees 166,188 111,517
Reinsurance claims expense 276,952 371,851
Other 1,731,864 1,845,342
------------ ------------
Total operating expenses 9,345,572 8,659,467
------------ ------------
Net income (loss) before income
tax expense (294,848) 1,929,112
Income tax expense (benefit) (112,042) 727,715
------------ ------------
Net income (loss) $ (182,806) $ 1,201,397
============ ============
Dividends on preferred stock -0- $ 25,500
============ ============
Net income (loss) applicable to
common shareholders $ (182,806) $ 1,175,897
============ ============
Net income (loss) per common share $ (.05) $ .30
============ ============
Weighted average shares outstanding 3,925,973 3,938,236
============ ============
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30
1997 1996
------------ ------------
Cash flows from operating activities $ 4,286,969 $ 703,119
Cash flows from investing activities (10,886,844) (12,104,087)
Cash flows from financing activities 6,861,932 8,441,977
------------ ------------
Net (decrease) increase in cash 262,057 (2,958,991)
Cash at beginning of period 421,465 3,214,977
------------ ------------
Cash at end of period $ 683,522 $ 255,986
============ ============
See accompanying notes to consolidated financial statements.
6
<PAGE>
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1997 and 1996
(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, and with the
acquisition of Thaxton Insurance Group, Inc.("TIG") in 1996 began selling
on an agency basis various lines of automobile, property and casualty, life
and accident and health insurance. The Company provides reinsurance through
a wholly-owned subsidiary, TICO Reinsurance, Ltd. ("TRL"). All significant
inter-company 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-interest. Certain amounts for 1996 have been reclassified to
conform to the 1997 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.
7
<PAGE>
(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.
(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 TIG are recognized as services are
performed in accordance with TIG's contractual obligations with the
underwriters, but not before protection is placed with insurers.
8
<PAGE>
(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 Accounting Principles Board ("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 3,925,973 and 3,938,236 for the nine months
ended September 30, 1997 and 1996, and 3,923,632 and 3,934,178 for
the three months ended September 30, 1997 and 1996 respectively. 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 Company, which is being amortized on
a straight-line basis over ten years. Recoverability of recorded
intangibles is evaluated by using undiscounted cash flows.
9
<PAGE>
(j) Stock Options
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard 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 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) Interim Unaudited Financial Statements
Information with respect to September 30, 1997 and 1996, 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 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 three and nine month periods ended
September 30, 1997 are not necessarily indicative of the results which
may be expected for the entire fiscal year.
10
<PAGE>
(2) Finance Receivables
Finance receivables consisted of the following at September 30, 1997.
Automobile sales contracts $53,609,889
Direct loans 13,298,184
Premium finance contracts 4,082,631
-----------
Total finance receivables 70,990,704
Unearned interest (13,922,921)
Unearned insurance premiums, net (143,930)
Allowance for credit losses (3,440,680)
Bulk purchase discount (571,683)
Dealer holdback (736,684)
-----------
Finance receivables, net $52,174,806
===========
Finance receivables include bulk purchases of receivables, automobile sales
contracts under holdback arrangements, and small consumer loan receivables.
With bulk purchase arrangements, the Company typically purchases a group of
receivables from an automobile dealer 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 $8,297,508 and
$571,683, respectively, at September 30, 1997.
With holdback arrangements, an automobile dealer 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 $32,259,308 and $736,684,
respectively, at September 30, 1997.
At September 30, 1997, there were no significant concentrations of
receivables in any type of property or to one borrower.
11
<PAGE>
These receivables are pledged as collateral for a line of credit agreement.
(See note 3)
Changes in the allowance for credit losses for the nine months ended
September 30, 1997 and 1996 were as follows:
1997 1996
----------- -----------
Beginning balance $ 2,195,000 $ 783,200
Valuation allowance for acquired loans 0 28,842
Provision for credit losses 3,885,424 1,423,355
Charge-offs (2,767,660) (1,390,424)
Recoveries 127,916 234,597
----------- -----------
Net charge-offs (2,639,744) (1,155,827)
----------- -----------
Ending balance $ 3,440,680 $ 1,079,570
=========== ===========
(3) Indebtedness
On September 3, 1997 the Company restructured its Revolving Credit Facility
(the "Facility") with its primary lender. The restructure increased the
maximum borrowings available from $80 million to $100 million. The Facility
matures on August 31, 1999, and consists of six tranches. The primary
tranche is used to finance consumer receivables and provides for advances
up to $100 million, less any amounts advanced under the secondary tranches.
Tranche B is also used to finance consumer receivables and allows the
Company to borrow up to $10 million against a higher percentage of the
stated collateral than under the primary tranche. The Company borrows under
Tranche B only if it has exhausted available borrowings under the primary
tranche. As of September 30, 1997 $49.1 million was outstanding under the
Facility, $46.5 million of which had been advanced under the primary
tranche and $2.6 million of which had been advanced under secondary
tranches. At September 30, 1997, there were no advances under Tranche B.
Under the terms of the Facility, the Company's receivables at
September 30, 1997 would have allowed it to borrow an additional $4.9
million against existing collateral with $50.9 million of total potential
borrowing capacity available under the $100 million limit in effect on such
date. The interest rate for borrowings is the prime rate plus one
percent per annum for the primary tranche and plus five percent
per annum for Tranche B. Interest rates for borrowings under the other
tranches range from prime plus one percent per annum to prime plus two
percent per annum. The 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
restructured facility limits dividends on common stock to 25% of net
income. There are no restrictions on payment of preferred stock dividends.
The Company is presently in compliance with each of these covenants.
At September 30, the Company had notes payable to other non-affiliates in
the amount of $3,942,216 and affiliates in the amount of $1,022,879.
(4) Deferred Stock Awards
One of the Company's executive officers has notified the Company that he
does not intend to accept 10,000 shares of common stock previously granted
under the Company's deferred stock compensation plan which was scheduled
to vest on December 30, 1997. Accordingly, no compensation expense related
to the vesting of those shares has been recorded for the nine months ended
September 30, 1997. The common stock, paid-in-capital, and deferred stock
award accounts have been adjusted to reflect cancellation of those shares.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Profitability
The following table sets forth certain data relating to the Company's
profitability during the periods presented.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Average net finance receivables(1) $55,348,806 $45,875,230 $52,478,778 $42,598,449
Average notes payable(1) 47,026,029 39,019,732 45,038,305 36,272,503
Interest and fee income(2) 4,004,367 3,547,909 11,779,303 10,096,204
Interest expense(2) 1,181,139 929,799 3,315,055 2,720,758
----------- ----------- ----------- -----------
Net interest income 2,823,228 2,618,110 8,464,248 7,375,446
=========== =========== =========== ===========
Average interest rate earned(1) 28.94% 30.94% 29.93% 31.60%
Average interest rate paid(1) 10.05 9.53 9.81 10.00
----------- ----------- ----------- -----------
Net interest spread 18.89% 21.41% 20.12% 21.60%
=========== =========== =========== ===========
Net interest margin(3) 20.40% 22.83% 21.51% 23.09%
=========== =========== =========== ===========
</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 Thaxton Insurance fee income and interest expense on Thaxton
Insurance related debt.
(3) Net interest margin represents net interest income divided by average Net
Finance Receivables.
Results of Operations for the Nine Months Ended September 30, 1997 and 1996
Finance receivables at September 30, 1997 were $70,990,704 versus
$63,574,776 at September 30, 1996, a 12% increase. The primary component of this
increase was Automobile Sales Contracts, which increased from $48,522,580 at
September 30, 1996 to $53,609,889 at September 30, 1997, or 10%. The Company
opened two branch offices in 1996 and one in early 1997, which generated
significant additional volume of Automobile Sales Contracts during the first
nine months of 1997.
Unearned income at September 30, 1997 was $14,066,851 versus $13,461,332 at
September 30, 1996, a 5% increase which was directly related to the higher
volume of Automobile Sales Contract originations during the first nine months of
1997. The provision for credit losses established for the nine months ended
September 30, 1997 was $3,885,424 versus $1,423,355 for 1996, and the allowance
for credit losses increased from $1,079,570 at September 30, 1996 to $3,440,680
at September 30, 1997. The allowance for credit losses as a percentages of Net
Finance Receivables increased from 2.13% at September 30, 1996 to 6.04% at
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 growth in finance receivables during the nine months ended September
30, 1997 versus the comparable period in 1996 resulted in higher levels of
interest and fee income. Interest and fee income for the nine months ended
September 30, 1997 was $11,837,182, compared to $10,104,327 for the nine months
ended September 30, 1996, a 17% increase. Interest expense also was higher,
increasing to $3,706,770 for the nine months ended September 30, 1997 versus
$3,046,164 for the comparable period of 1996, a 22% 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.
13
<PAGE>
Net interest income for the nine months ended September 30, 1997 increased
to $8,130,412 from $7,058,163 for the comparable period of 1996, a 15% increase.
The increase in net interest income is attributable to the higher level of
finance receivables, the interest income and fees from which more than offset
the 7% decrease in net interest spread for the nine months ended September 30,
1997 versus the comparable period of 1996.
Insurance commissions net of insurance cost decreased to $3,961,939 for the
nine months ended September 30, 1997 from $4,158,173 for the comparable period
of 1996, due to reduced sales of insurance products to borrowers. Other income
increased from $795,598 for the nine months ended September 30, 1996 to $843,797
for the comparable period of 1997 due to increased profit sharing payments to
Thaxton Insurance from various insurance carriers.
Total operating expenses increased from $8,659,467 for the nine months
ended September 30, 1996 to $9,345,572 for the comparable period of 1997, an 8%
increase. The increase in expenses was due to opening new finance offices in
addition to a general increase in costs associated with administering a larger
finance receivable portfolio.
The Company generated a net loss from operations for the nine months ended
September 30, 1997 of $182,806 as compared to a net income of $1,201,397 for the
comparable period of 1996. The decrease in net income was due to the higher
levels of net interest and insurance commission income being offset by higher
operating expenses and increased provisions for credit losses.
Stockholders' equity decreased from $6,371,305 at December 31, 1996 to
$6,078,944 at September 30, 1997 as a result of the Company's net loss form
operations during the period.
Results of Operations for the Three Months Ended September 30, 1997 and 1996
The growth in finance receivables during the three months ended September
30, 1997 versus the comparable period of 1996 resulted in higher levels of
interest and fee income. Interest and fee income for the three months ended
September 30, 1997 was $4,068,983, versus $3,550,869 for the three months ended
September 30, 1996, a 15% increase. Interest expense also was higher, increasing
to $1,312,430 for the three months ended September 30, 1997 versus $1,039,114
for the three months ended September 30, 1996, a 26% increase. The increase in
interest expense was due to the higher levels of borrowings needed to fund
finance receivable originations.
Net interest income for the three months ended September 30, 1997 increased
to $2,756,553 from $2,511,755 for the comparable period of 1996, a 10% increase.
The increases in net interest income are attributable to the higher levels of
finance receivables, the interest income and fees from which more than offset
the 12% decrease in net interest spread for the three months ended September 30,
1997 versus the comparable period of 1996.
Insurance commissions net of insurance cost decreased to $1,432,139 for the
three months ended September 30, 1997 from $1,466,075 for the comparable period
of 1996, due to reduced sales of insurance products to borrowers. Other income
decreased from $240,962 for the three months ended September 30, 1996 to
$194,245 for 1997 due to a reduction in profit sharing payments received from
insurance carriers in the quarter.
Operating expenses increased from $2,956,348 for the three months ended
September 30, 1996 to $3,247,105 for the comparable period of 1997, a 10%
increase. The increase in expenses was due to the opening of new finance offices
in addition to a general increase in costs associated with administering a
larger finance receivable portfolio.
14
<PAGE>
The Company generated a net loss from operations of $769,545 for the three
months ended September 30, 1997 as compared to a net income of $423,939 for
the comparable period of 1996. The decrease in net income was due to the
higher levels of net interest and insurance commission income being offset by
higher operating expenses and increased provisions for credit losses.
Credit Loss Experience
The following table sets forth the Company's allowance for credit losses at
September 30, 1997, and 1996 and the credit loss experience over the periods
presented.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net finance receivables (1) $56,923,853 $50,113,444 $56,923,853 $50,113,444
Allowance for credit losses 3,440,680 1,079,570 3,440,680 1,079,570
Allowance for credit losses as a percentage of net 6.04% 2.15% 6.04% 2.15%
finance receivables
Dealer reserves and discounts on bulk purchases $ 1,308,367 $ 1,913,558 $ 1,308,367 $ 1,913,558
Dealer reserves and discounts on bulk purchases as 3.08% 5.35% 3.08% 5.35%
percentage of Automobile Sales Contracts at period
end (2)
Allowance for credit losses and dealer reserves and 8.34% 5.97% 8.34% 5.97%
discount on bulk purchases as a percentage of net
finance receivables
Provision for credit losses $ 2,346,592 $ 577,414 $ 3,885,424 $ 1,423,355
Charge-offs (net of recoveries) 1,295,683 503,181 2,639,745 1,155,827
Charge-offs (net of recoveries) as a percentage of 9.36% 4.39% 6.71% 3.62%
average net finance receivables (3)
</TABLE>
- ----------
(1) Finance receivable balances are presented net of unearned finance charges.
(2) Percentages are computed using Automobile Sales Contracts, net of unearned
finance charges only.
(3) Averages are computed using month-end balances of net finance receivables
during the period presented.
The higher than expected loss experience during the third 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 the
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.
15
<PAGE>
The following table presents an allocation of the Company's reserves and
allowances for credit losses, by type of receivable. The allowance for credit
losses has been allocated on an approximate basis between Direct Loans and
Premium Finance Contracts because losses on Automobile Sales Contracts are
charged against dealer reserves if the originating dealer's specific reserve
account is adequate to cover the loss. The entire allowance is, however,
available to absorb losses occurring on any type of finance receivable. The
allocation is not indicative of future losses.
At September 30,
----------------
1997 1996
---- ----
Dealer reserves and discounts on bulk
purchases on Automobile $1,308,367 $1,913,558
Sales Contracts Allowance for credit losses:
Direct Loans 3,213,696 875,888
Premium Finance Contracts 226,984 203,682
---------- ----------
Subtotal 3,440,680 1,079,570
---------- ----------
Total $4,749,047 $2,993,128
========== ==========
The following table sets forth certain information concerning Automobile
Sales Contracts and Direct Loans at the end of the periods indicated:
At September 30,
----------------
1996 1997
---- ----
Automobile Sales Contracts and Direct Loans
contractually past due 90 days or more(1) $ 484,772 $ 396,999
Automobile Sales Contracts and Direct Loans (1) 51,692,115 44,129,221
Automobile Sales Contracts and Direct Loans
contractually past due 90 days or more as a
percentage of Automobile
Sales Contracts and Direct Loans .94% .90%
- ----------
(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases.
16
<PAGE>
The following table sets forth certain information concerning Premium
Finance Contracts at the end of the periods indicated:
At September 30,
----------------
1997 1996
---- ----
Premium finance contracts contractually
past due 60 days or more(1) $ 60,154 $ 89,543
Premium finance contracts outstanding(1) 3,923,371 3,500,913
Premium finance contracts contractually
past due 60 days or more as a percentage
of premium finance contracts 1.53% 2.6%
- ----------
(1) Finance receivable balances are presented net of unearned finance charges
and discounts on bulk purchases
Part II
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders was held on July 24, 1997 to consider and
act upon the following matter:
To approve a plan of internal reorganization pursuant to which the Company
will transfer substantially all of the assets and operations related to its
consumer finance business to a newly formed subsidiary corporation in
exchange for the issuance to the Company of all of the outstanding capital
stock of that subsidiary corporation and the assumption by that subsidiary
corporation of certain liabilities of the Company.
The plan of reorganization was adopted as follows:
Votes in favor 3,352,005
Votes against -0-
No other matters were voted upon at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Information in response to this item is incorporated by reference from the
attached Index to Exhibits.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the quarter ended September 30,
1997.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Thaxton Group, Inc.
(Registrant)
Date: November 12, 1997 /s/James D. Thaxton
-------------------
James D. Thaxton
President and Chief Executive Officer
Date: November 12, 1997 /s/Kenneth H. James
-------------------
Kenneth H. James
Vice President, Secretary, Treasurer and
Chief Financial Officer
18
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Page No.
4.1 Certificate of Designation, Preferences and Rights
of the Series A Preferred Stock
4.2 Form of Certificate for Series A Preferred Stock
4.3 Certificate of Designation, Preferences, and
Rights of the Series B Preferred Stock
4.4 Forms of Certificate for Series B Preferred Stock
10.17 Form of Share Exchange Agreement by and between
the Company and Jack W. Robinson and affiliates*
10.18 First Amended and Restated Loan and Security
Agreement dated September 3, 1997 between Finova
Capital Corporation and the Company*
10.19 Schedule to First Amended and Restated Loan and
Security Agreement*
10.20 Fourth Amended and Restated Promissory Note*
27 Financial Data Schedule 21
- -------
* Incorporated by reference from Registration Statement on Form S-4,
Commission File No. 333-28719.
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 683,522
<SECURITIES> 0
<RECEIVABLES> 55,615,486
<ALLOWANCES> 3,440,680
<INVENTORY> 0
<CURRENT-ASSETS> 52,858,328
<PP&E> 4,141,099
<DEPRECIATION> 2,137,854
<TOTAL-ASSETS> 64,099,768
<CURRENT-LIABILITIES> 3,931,405
<BONDS> 0
0
0
<COMMON> 39,117
<OTHER-SE> 6,039,827
<TOTAL-LIABILITY-AND-EQUITY> 64,099,768
<SALES> 0
<TOTAL-REVENUES> 16,642,918
<CGS> 0
<TOTAL-COSTS> 9,345,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,885,424
<INTEREST-EXPENSE> 3,706,770
<INCOME-PRETAX> (294,848)
<INCOME-TAX> (112,042)
<INCOME-CONTINUING> (182,806)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182,806)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
