UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB A
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 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 33-97130-A
THE THAXTON GROUP, INC.
(Name of small business issuer in its charter)
SOUTH CAROLINA
57-0669498
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1524 PAGELAND HIGHWAY, LANCASTER SOUTH CAROLINA 29271
(Address of principal executive offices)
Issuers telephone number: 803-285-4336
Indicate by check mark whether the issuer (1) has filed all reports required to
by filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months(or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
Yes X No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
OUTSTANDING AT
CLASS APRIL 30, 1997
COMMON STOCK 3,925,882
<PAGE>
The Company is amending its Report on Form 10-Q for the period ended March 31,
1997, because the Company determined subsequent to the filing of the Form that
all financial statements presented should combine the accounts of the Company
with those of The Thaxton Insurance Group, Inc., which the company acquired in
October of 1996. That acquisition was accounted for as a pooling of interests,
but the Company's Form 10-Q for the period ended March 31, 1997 as originally
filed did not present combined statements for periods prior to the acquisition.
This amendment combines the accounts for all statements for all periods
presented.
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
Consolidated Balance Sheet
March 31, 1997
ASSETS
Cash $ (44,122)
Finance receivables, net 48,126,492
Premises and equipment, net 1,955,409
Accounts receivable 1,364,262
Repossessed automobiles 1,266,389
Goodwill and other intangible assets 3,840,729
Other assets 1,692,519
------------
TOTAL ASSETS $ 58,201,678
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 47,887,732
Accrued interest payable 390,098
Notes payable to affiliates 737,621
Accounts payable 854,787
Emoloyee savings plan 1,215,453
Other liabilities 572,012
------------
TOTAL LIABILITIES 51,657,703
Common stock, $.01 par value; authorized
50,000,000 shares, issued and
outstanding 3,926,382 shares 39,264
Additional paid-in-capital 3,439,980
Retained earnings 3,762,231
Deferred stock award (697,500)
------------
TOTAL STOCKHOLDERS' EQUITY 6,543,975
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 58,201,678
============
3
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Three Months Ended March 31
1997 1996
---- ----
Interest and fee income $3,519,211 $3,204,877
Interest expense 1,148,796 979,803
---------- ----------
NET INTEREST INCOME 2,370,415 2,225,074
Provision for credit losses 729,767 478,614
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 1,640,648 1,746,460
Other income:
Insurance premiums and
commissions, net 1,207,657 1,309,643
Other income 448,862 276,205
---------- ----------
TOTAL OTHER INCOME 1,656,519 1,585,848
Operating expenses:
Compensation 1,425,474 1,349,991
Telephone, postage, and supplies 317,275 277,415
Net occupancy 355,534 298,850
Insurance 56,961 47,115
Collection expense 43,311 26,962
Travel 32,407 25,444
Professional fees 37,470 18,867
Reinsurance claims expense 123,655 42,925
Other 422,111 680,084
---------- ----------
TOTAL OPERATING EXPENSES 2,814,198 2,767,653
---------- ----------
NET INCOME BEFORE TAXES 482,969 564,655
Income tax expense 168,693 213,953
---------- ----------
NET INCOME $ 314,276 $ 350,702
========== ==========
Dividends on preferred stock -- $ 8,500
========== ==========
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 314,276 $ 342,202
========== ==========
========== ==========
NET INCOME PER COMMON SHARE $ .08 $ .09
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,929,281 3,938,236
========== ==========
4
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996
1997 1996
---- ----
Cash flows from operating activities $ 881,729 $ 391,526
Cash flows from investing activities (2,883,165) (4,275,254)
Cash flows from financing activities 1,535,849 2,114,291
----------- -----------
NET DECREASE IN CASH (465,587) (1,769,436)
CASH AT BEGINNING OF PERIOD 421,465 1,828,484
----------- -----------
CASH AT END OF PERIOD $ (44,122) $ 59,048
=========== ===========
5
<PAGE>
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
March 31, 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. A
substantial amount of the Company's premium finance business has been
derived from customers of the independent insurance agencies owned by
TIG. 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.
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
6
<PAGE>
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.
7
<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 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 3,929,281 and 3,777,023 for 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, which is being amortized on
a straight-line basis over ten years. Recoverability of recorded
intangibles is evaluated by using undiscounted cash flows.
8
<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 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 and liabilities of the Company are short term
in nature or 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.
(j) INTERIM UNAUDITED FINANCIAL STATEMENTS
Information with respect to March 31, 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.
9
<PAGE>
(2) Finance Receivables
Finance receivables consisted of the following at March 31, 1997 and
1996:
1997 1996
---- -----
Consumer $ 60,607,601 $ 45,925,943
Real estate secured 917,354 820,323
Insurance premium finance 3,149,645 5,672,881
Wholesale loans 310,133 263,851
------------ ------------
Total finance receivables 64,984,733 52,682,998
Unearned interest (12,835,353) (10,082,822)
Unearned insurance premiums, net (62,783) (328,960)
Allowance for credit losses (2,285,057) (870,076)
Bulk purchase discount (890,071) (333,730)
Dealer holdback (784,977) (853,450)
------------ ------------
Finance receivables, net $ 48,126,492 $ 40,213,960
============ ============
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 $6,865,000 and $890,000, respectively, at
March 31, 1997 and approximately $3,246,000 and $334,000, respectively,
at March 31, 1996.
With holdback arrangements, an auto 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 holdback amounts, 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 $32,545,000 and $785,000, respectively, at
March 31, 1997 and approximately $24,469,000 and $853,000, respectively,
at March 31, 1996.
10
<PAGE>
At March 31, 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.
Changes in the allowance for credit losses for the three months ended
March 31, 1997 and 1996 were as follows:
1997 1996
---- ----
Beginning balance $ 2,195,000 783,200
Valuation allowance for acquired loans -0- 34,193
Provision for credit losses 729,766 478,614
Charge-offs (688,489) (498,754)
Recoveries 48,780 67,473
----------- -----------
Net charge-offs (639,709) (425,931)
----------- -----------
Ending balance $ 2,285,057 870,076
=========== ===========
The Company's loan portfolio primarily consists of short term loans, the
majority of which are originated or renewed during the current year.
Accordingly, the Company estimates that fair value of the finance
receivables is not materially different from carrying value.
(3) Indebtedness
At March 31, 1997, the Company maintained a line of credit agreement with
a commercial finance company for $80 million, maturing on July 31, 1998.
Of this amount, approximately $39 million was available at March 31,
1997. The outstanding balance under this line of credit was $41,200,000
at March 31, 1997. 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 $28,800,000 was available at March 31, 1997. This tranche bears
interest at the lender's prime rate plus 1% (9.5% at March 31, 1997). The
total line of credit under Tranche B is $10,000,000, of which the full
amount was available at March 31, 1997. This tranche bears interest at
the lender's prime rate plus 5% (13.5% at March 31, 1997). 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.
Also, the Company may pay dividends up to 50% of the current years net
income. As of March 31, 1997, the Company met all such ratios and
requirements.
TIG maintains a line of credit agreement with the same commercial finance
company for $3 million maturing March 31, 1998. Of this amount,
approximately $1,486,000
11
<PAGE>
was available at March 31, 1997. The outstanding balance under this line
of credit was $1,514,000 at March 31, 1997. Borrowings under this
arrangement bear interest at the lender's prime rate plus 3% (11.5% at
March 31, 1997), payable monthly.
TIG 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 (9.5% at March 31, 1997). The amount outstanding as of March
31, 1997 was approximately $64,000. The line of credit is secured by
certain real estate, furniture, fixtures, equipment and investments owned
by TIG and individual shareholders. TIG also has a sweep account with the
bank. The bank requires TIG 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.
At March 31, the Company had notes payable to other non affiliates in
the amount of $5,110,000 and affiliates in the amount of $738,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company is a diversified consumer financial services company that,
operating in Georgia, North Carolina, South Carolina, Tennessee and Virginia
under the name "TICO Credit Company," is engaged in purchasing and servicing
retail installment contracts ("Automobile Sales Contracts") originated by
independent used automobile dealers ("Dealers") and making and servicing
personal loans ("Direct Loans") to persons with limited credit histories, low
incomes or past credit problems ("Non-prime Borrowers"). Under the name "TICO
Premium Finance Company" in North Carolina and South Carolina and "Eagle Premium
Finance" in Virginia, the Company finances insurance premiums ("Premium Finance
Contracts"), primarily for personal lines of insurance purchased by Non-prime
Borrowers through independent agents ("Premium Finance"). The Company also sells
on an agency basis various insurance products (primarily credit life and credit
accident and health) in conjunction with the purchase of Automobile Sales
Contracts or the making of Direct Loans and, with the acquisition of TIG on
October 31, 1996, began selling on an agency basis various lines of automobile,
property and casualty, life and accident and health insurance.
The Company believes the best opportunities for continued growth in its
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, the Company believes that its ability to identify and retain finance
office management personnel having established relationships with 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 continue 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 opportunities to expand its network of independent
insurance agencies.
12
<PAGE>
RECENT ACQUISITION AND EXPANSION ACTIVITIES
During the first quarter of 1997 the Company opened a finance office in
Christiansburg, Va., which is primarily focused upon Automobile Sales Contract
origination. The Company also acquired independent insurance agencies in York,
South Carolina and Winston-Salem, North Carolina.
PROFITABILITY
The following table sets forth certain data relating to the Company's
profitability.
For the Three Months
Ended March 31
-----------------
1997 1996
---- ----
Average Net Finance Receivables (1) $49,626,047 $39,636,208
Average notes payable 42,710,080 33,382,553
Interest and fee income 3,700,561 3,202,385
Interest expense (2) 1,022,191 874,459
----------- -----------
Net interest income 2,678,370 2,327,926
Average interest rate earned (1) 29.83% 32.32%
Average interest rate paid (1) 9.57 10.48
============ =============
Net interest spread 20.26 21.84
Net interest margin (3) 24.59 23.49
======== ==========
- ------------
(1) Averages are computed using month-end balances during the periods
presented.
(2) Excludes TIG interest expense.
(3) Net interest margin represents net interest income divided by average Net
Finance Receivables.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Finance Receivables at March 31, 1997 were $64,984,733 versus $52,682,998
at March 31, 1996, a 23% increase. The primary component of this increase was
Automobile Sales Contracts, which increased from $33,438,769 at March 31, 1996
to $39,585,713 at March 31, 1997, or 18%. The Company opened two branch offices
in 1996 and one in early 1997, which generated significant additional volume of
Automobile Sales Contracts in the first quarter of 1997.
Unearned income at March 31, 1997 was $12,898,136 versus $10,411,782 at
March 31, 1996, a 24% increase which was directly related to the higher volume
of Automobile Sales Contract originations during 1997. The provision for credit
losses established for the three months ended March 31, 1997 was $729,767 versus
$478,614 for 1996, and the allowance for credit losses increased from $870,076
at March 31, 1996 to $2,285,057 at March 31, 1997. The increase in the provision
is 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 as a percentage of average Net Finance
Receivables increased from 2.06% at March 31, 1996 to 4.39% at March 31, 1997.
The growth in finance receivables during the three months ended March 31,
1997 versus the comparable period in 1996 resulted in higher levels of interest
and fee income. Interest and fee income for the three months ended March 31,
1997 was $3,519,211, versus $3,204,877 for the three months ended March 31,
1996, a 10% increase. Interest expense also was higher, increasing to $1,148,796
for
13
<PAGE>
the three months ended March 31, 1997 versus $979,803 for the three months
ended March 31, 1996, a 17% 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 March 31, 1997 increased to
$2,370,415 from $2,225,074 for the comparable period of 1996, a 7% 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 14% decrease in net interest spread for the three months ended March 31,
1997 versus 1996.
Insurance commissions net of insurance cost decreased to $1,207,657 for
the three months ended March 31, 1997 from $1,309,643 for 1996. Other income
increased from $276,205 at March 31, 1996 to $448,862 at March 31, 1997 due to
profit sharing payments received from insurance companies.
Operating expenses increased from $2,767,653 for the three months ended
March 31, 1996 to $2,814,198 for 1997, a 2% increase. The increase in expenses
was due to opening new offices, in addition to a general increase in costs
associated with administering a significantly larger finance receivable
portfolio.
Net income decreased to $314,276 for the three months ended March 31, 1997
from $350,702 for 1996. The decrease in net income was due to the higher levels
of net interest and insurance income being offset by higher loss provisions and
expenses.
Stockholders' equity increased from $6,371,305 at December 31, 1996 to
$6,543,975 at March 31, 1997, a 3% decrease, as a result of retained earnings
from after tax profits during the period.
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
judgement are factors used in assessing the overall adequacy of the allowance
and resulting provision for credit losses. 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.
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<PAGE>
The following table sets forth the Company's allowance for credit losses at
March 31, 1997, and 1996 and the credit loss experience over the periods
presented.
<TABLE>
<CAPTION>
At or for the Three Months
Ended March 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
Net finance receivables(1) $52,086,596 $42,271,216
Allowance for credit losses 2,285,057 870,076
Allowance for credit losses as a percentage of net 4.39% 2.06%
finance receivables (1)
Dealer reserves and discounts on bulk purchases $ 1,675,048 $ 1,187,180
Dealer reserves and discounts on bulk purchases as 4.23% 4.67%
percentage of Automobile Sales Contracts at period
end(2)
Allowance for credit losses and dealer reserves and 7.60% 4.87%
discount on bulk purchases as a percentage of net
finance receivables (1)
Provision for credit losses $ 729,767 $ 478,614
Charge-offs (net of recoveries) 639,709 425,931
Charge-offs (net of recoveries) as a percentage of 5.16% 4.30%
average net finance receivables (1)
</TABLE>
- ---------------------
(1) Averages are computed using month-end balances of Net Finance Receivables
during the period presented.
(2) Percentages are computed using Automobile Sales Contracts, net of
unearned finance charges only.
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<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 March 31,
1997 1996
------ -----
Dealer reserves and discounts on bulk purchases $1,675,048 $1,487,180
on Automobile
Sales Contracts Allowance for credit losses:
Direct Loans 2,069,255 553,327
Premium Finance Contracts 215,802 316,749
---------- ----------
Subtotal 2,285,057 870,076
---------- ----------
Total $3,960,105 $2,357,256
========== ==========
The following table sets forth certain information concerning Automobile
Sales Contracts and Direct Loans at the end of the periods indicated:
<TABLE>
<CAPTION>
At March 31,
----------------
1997 1996
--------------- -------------
<S> <C> <C>
Automobile Sales Contracts and Direct Loans contractually $394,144 $304,663
past due 90 days or more(1)
Automobile Sales Contracts and Direct Loans (1) 47,380,472 36,229,145
Automobile Sales Contracts and Direct Loans contractually .83% .84%
past due 90 days or more as a percentage of Automobile
Sales Contracts and Direct Loans
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(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts on
bulk purchases.
The following table sets forth certain information concerning Premium
Finance Contracts at the end of the periods indicated:
At March 31,
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1997 1996
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Premium finance contracts contractually $ 66,208 $ 124,150
past due 60 days or more(1)
Premium finance contracts outstanding(1) 3,031,076 5,390,978
Premium finance contracts contractually 2.18% 2.30%
past due 60 days or more as a percentage
of premium finance contracts
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(1) Finance receivable balances are presented net of unearned finance charges
and discounts on bulk purchases
LIQUIDITY AND CAPITAL RESOURCES
The Company generally finances its operations and new offices through cash
flow from operations and borrowings under the Revolving Credit Facility. The
Revolving Credit Facility is extended by Finova and consists of two tranches.
The primary tranche provides for advances of up to $70 million and the secondary
tranche provides for advances of up to $10 million during their respective
terms, both of which expire on July 31, 1998, subject to the limitation that
advances under each tranche of the Revolving Credit Facility may not exceed an
amount equal to specified percentages of Net Finance Receivables. As of April
30, 1997, $42.5 was outstanding under the Revolving Credit Facility and there
was $37.5 available for additional borrowing. The interest rate for borrowings
is the prime rate published by Citibank, N.A. (or other money center bank
designated by Finova) plus one percent per annum for the primary tranche and
plus five percent per annum for the secondary tranche. The Revolving Credit
Facility agreement, amended on July 28, 1996, provides for a lower fixed
percentage over prime than did the previous agreement. The Revolving Credit
Facility imposes several financial and other covenants, including leverage
tests, dividend restrictions, and minimum net worth requirements. The Company
does not believe these covenants will materially limit its business or its
expansion strategy.
Management believes that the recent increase in the maximum borrowings
available under the Revolving Credit Facility, in addition to cash expected to
be generated from operations, 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.
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