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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from______ to ______
Commission file number 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 29721
(Address of principal executive offices)
Issuer's telephone number: 803-285-4336
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered under Section 12(g) of the exchange Act:
Title of each class
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 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 registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB
or any amendment to this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year. $15,800,127
At March 18, 1997, there were 3,924,178 shares of common stock
outstanding. The aggregate market value of the shares held by non-affiliates of
the registrant, based upon the price at which the stock was most recently sold,
is approximately $7,277,000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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THE THAXTON GROUP, INC.
FORM 10-KSB
TABLE OF CONTENTS
Item
Page
No.
PART I
1. Description of Business 3
2. Description of Property 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Common Equity and Related Stockholder Matters 15
6. Management's Discussion and Analysis 15
7. Financial Statements 24
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 42
10. Executive Compensation 43
11. Security Ownership of Certain Beneficial Owners and Management 44
12. Certain Relationships and Related Transactions 44
13. Exhibits and Reports on Form 8-K 45
Index to Exhibits is on page 47
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 primarily 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 Thaxton
Insurance Group, Inc. ("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 is headquartered in Lancaster, South Carolina and currently
has 14 finance offices located in South Carolina, two in North Carolina and
Virginia and one each in Georgia and Tennessee and 19 insurance offices in North
and South Carolina.
Until 1991, when the Company began purchasing Automobile Sales Contracts,
the Company was engaged primarily in the Direct Loans and Premium Finance
business. As of December 31, 1996, the Company had a total portfolio of 9,733
Automobile Sales Contracts, representing approximately 74% of finance
receivables outstanding, net of unearned finance charges, dealer reserves on
Automobile Sales Contracts, and discounts on bulk purchases, and before
allowance for credit losses ("Net Finance Receivables"). Direct Loans and
Premium Finance receivables represented approximately 20% and 6%, respectively,
of Net Finance Receivables at such date.
THE INDUSTRY
The segment of the consumer finance industry in which the Company
operates, which is commonly called the "non-prime credit market," provides
financing to consumers with limited credit histories, low incomes or past credit
problems. These consumers generally do not have access to the same variety of
sources of consumer credit as borrowers with long credit histories, no defaults
and stable employment, because they do not meet the stringent objective credit
standards imposed by most traditional lenders. The Company, like its competitors
in the same segment of the consumer finance industry, generally charges interest
to such Non-prime Borrowers at the maximum rate permitted by law or, in states
such as South Carolina where there are no legal maximum rates, at competitive
rates commensurate with the increased default risk and the higher cost of
servicing and administering a portfolio of loans to Non-prime Borrowers. By
contrast, commercial banks, captive financing subsidiaries of automobile
manufacturers and other traditional sources of consumer credit to prime
borrowers typically impose more stringent credit requirements and generally
charge lower interest rates.
The non-prime credit market is highly fragmented, consisting of many
national, regional and local competitors, is characterized by relative ease of
entry and, in the case of used automobile financing, by the recent arrival of a
number of well capitalized publicly-held companies. The Company believes that
most of these companies are concentrating their activities on providing
financing to Non-prime Borrowers purchasing late model used cars (coming off
lease or former rental cars) from franchised automobile dealers. By contrast,
the Company concentrates on providing financing to Non-prime Borrowers who
frequently have more extensive credit problems and are purchasing lower-priced,
older model automobiles from Dealers selling exclusively used automobiles and
making Direct Loans to Non-prime Borrowers to meet short-term cash needs.
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The Premium Finance industry for personal lines of insurance is also
highly fragmented. Insurance companies that engage in direct writing of
insurance policies generally provide financing to their customers who need the
service. Numerous small independent finance companies such as the Company are
engaged in providing Premium Finance for personal lines of insurance purchased
by Non-prime Borrowers through independent insurance agents. Because the rates
they charge are highly regulated, these companies compete primarily on the basis
of efficiency in providing the financing and servicing the loans. A significant
number of independent insurance agents provide Premium Finance to their
customers either directly or through affiliated entities. As banks are allowed
to enter the insurance business, they also are increasingly engaging in the
Premium Finance business.
Independent insurance agencies represent numerous insurance carriers, and
will place a customers business with the carrier whose combination of features
and price best match the customers needs. In comparison, direct agents represent
only one carrier. Most carriers find use of independent agencies to be a more
cost effective method of selling their products than using a direct agent force.
In 1995 total premiums written by carriers in the United States was
approximately $263 billion. Of that amount, approximately 54% was written by
independent agents.
The independent insurance agency industry is also highly competitive.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers located in some of the markets. The Company competes primarily
on the basis of service and convenience. The Company attempts to develop and
maintain long-term customer relationships through low employee turnover and
responsive service representatives and offers virtually all types of insurance
coverage.
BUSINESS AND GROWTH STRATEGY
In order to achieve its recent growth and operating results, the Company
has successfully implemented and intends to continue to pursue a business
strategy based on its (i) in-depth understanding of the consumer finance
business, (ii) ability to evaluate credit risks associated with the non-prime
credit market, (iii) substantial experience with Dealers' financing requirements
for Non-prime Borrowers(iv) efficient and effective servicing and collection of
its finance receivables, and, (v) diversification into additional financial
services activities. The principal components of the Company's business and
growth strategy include:
o COMMITMENT TO DIVERSIFICATION -- Unlike many of its competitors who
specialize in used automobile finance, the Company is a diversified
consumer financial services company and intends to remain such. Although
management anticipates that a significant portion of the Company's growth
over the next 12 to 18 months will be in its portfolio of Automobile Sales
Contracts, it intends to continue to emphasize growth in Direct Loans and
Premium Finance Contract origination as well. Moreover, management believes
the acquisition of TIG in October 1996 will result in significant
opportunities to cross-sell finance products to insurance customers and
insurance products to finance customers. The Company operates finance
offices in a number of markets where TIG operates insurance offices, and in
many cases the profile of a TIG insurance customer is similar to that of a
Non-prime Borrower. An incentive program designed to reward employees who
successfully pursue cross-selling opportunities was implemented during the
fourth quarter of 1996.
o EXPERIENCED MANAGEMENT -- The management team in the Company's lending
operations, including its regional supervisors and office managers,
possesses extensive experience in consumer finance, most of which has
involved lending to Non-prime Borrowers. The Company believes that the
retention of this experienced management team is critical to the Company's
ability to maintain credit quality, supervise its operations and further
expand its network of offices. The Company has also recently hired an
experienced insurance professional to manage the independent insurance
agency operations, in addition to adding other management personnel in that
division of the business.
o EXPANSION OF THE COMPANY'S OFFICE NETWORK -- The Company currently has a
total of 20 finance offices located in Georgia, North Carolina, South
Carolina, Tennessee and Virginia. The Company currently plans to open at
least two additional finance offices in 1997 and 1998, either in the states
where the Company currently operates or in adjacent southeastern states
where the Company believes that its business strategy is likely to be
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successful. In deciding where to open additional finance offices, the
Company intends to concentrate on smaller urban areas where the Company is
able to hire experienced personnel who not only have substantial experience
in the consumer finance industry but are also familiar with local market
conditions and have existing relationships with Dealers in such areas. When
management deems it to be advantageous to do so, the Company may choose to
expand its finance office network through the acquisition of other
independent finance companies. The Company will also seek opportunities to
acquire additional independent insurance agencies.
o INCENTIVE COMPENSATION FOR FINANCE OFFICE MANAGEMENT -- The Company
rewards its finance office managers for business development by providing,
in addition to a base salary, incentive compensation arrangements that are
tied to the productivity of their respective offices. To ensure credit
quality is maintained, however, finance office managers must keep their
delinquent accounts within certain parameters and maintain a certain return
on receivables before they are eligible to receive the incentive
compensation.
o STRONG DEALER RELATIONSHIPS -- The Company emphasizes service by providing
Dealers from whom it purchases Automobile Sales Contracts with a timely,
reliable and consistent source of financing for purchases of used
automobiles by Non-prime Borrowers. In hiring managers for existing and new
finance offices, the Company seeks to identify and recruit individuals with
existing relationships with Dealers in targeted areas.
o FAVORABLE CREDIT LOSS EXPERIENCES - Although the Company's credit loss
experience increased in 1996 compared to historical levels, the Company
believes that over time its credit loss experience has been favorable, the
result of its efficient servicing and collection of the Company's finance
receivables and the ability of the Company's management to evaluate credit
risks associated with the non-prime credit market. The Company believes
that its policy of servicing all aspects of borrowers' accounts at the
finance office that extended the credit, including collections, accounts
receivable tracking and delinquency resolution, is a key element of its
favorable credit loss experience.
o SUPERVISION AND MONITORING OF FINANCE OFFICES -- The Company's senior
management has established policies based on many years of experience in
the non-prime credit market for close monitoring and supervision of all
aspects of finance office operations, which serves as a counterbalance to
the Company's otherwise decentralized operations. Each of the Company's
three regional supervisors conduct unannounced visits to each finance
office within his region twice annually to conduct an extensive review of
its operations and all finance receivables recently originated. The
supervisors' findings and recommendations are reported to senior
management, and the supervisors are responsible for monitoring future
compliance by finance office managers with their recommendations.
o MANAGEMENT INFORMATION SYSTEMS -- The management information systems used
by the Company provide management with daily reports that contain critical
operational information from each finance office. This information includes
the daily volume of Automobile Sales Contracts purchased and Direct Loans
made and repossession activities. The Company's Premium Finance business is
highly automated, using a separate management information system, and the
insurance agency operations utilize one of the most widely used agency
management systems available.
o NEW BUSINESS INITIATIVES - During the latter part of 1996, the Company
entered into several new business activities. With the acquisition of The
Thaxton Insurance Group the Company began selling on an agency basis
various lines of insurance, both property and casualty and life and health,
through a network of nineteen offices located in North and South Carolina.
The Company is presently developing strategies to increase the volume of
premium generated by those agencies as well as improving profitability of
the insurance agency operations. In addition, the Company also began a
mortgage lending operation during the fourth quarter of 1996. The Company's
insurance agencies will be utilized to take applications, which will be
underwritten for credit approval at a central location. At March 1, 1997
the Company was doing mortgage lending at two locations, but the program
will be expanded to other locations during 1997. The Company expects to
originate both prime and sub-prime mortgages. Presently, all mortgage loans
are being funded by correspondent lenders, which take ownership of the loan
immediately upon closing. The Company takes no interest rate risk,
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and has no liability to the correspondent lenders in event of default by
the borrower. The Company receives a fee for originating the mortgage. The
Company does not presently service any mortgage loans. In the future, the
Company may fund the loans through a warehouse line, which may involve
interest rate risk, may retain servicing, and may hold mortgages in its own
portfolio, which would subject the Company to credit risk. The Company will
not engage in any of these activities until experienced management
personnel and computer systems have been put into place. Management
believes that mortgage lending and insurance agency operations will become
significant income producers over the next several years.
AUTOMOBILE SALES CONTRACT PURCHASES
Set forth below is a description of the process that the Company follows
in connection with its purchase of an Automobile Sales Contract from a Dealer
and the sale of ancillary insurance products in conjunction therewith.
DEALER SOLICITATION. The Company solicits business from Dealers through
the business development efforts of the manager of each office and regional
supervisors. Dealers in the area are evaluated by the office manager with a view
to ensuring that the Company purchases Automobile Sales Contracts from reputable
Dealers carrying an inventory of quality used automobiles. A relationship with a
Dealer begins only after the soundness of the Dealer's business is determined by
a credit investigation of the Dealer, checks with state regulatory agencies and
inquiries of local civic and community organizations. The Company seeks to form
relationships with Dealers that have been operating for a sufficient period of
time to have established a base of repeat customers with a track record of
paying their obligations under Automobile Sales Contracts despite an otherwise
non-prime credit history. The Company tracks the monthly performance of
borrowers' accounts by Dealer, allowing the Company to review and evaluate the
quality of the Automobile Sales Contracts purchased from each Dealer. This
procedure allows the Company to terminate business dealings with a Dealer
quickly if the Automobile Sales Contracts purchased from such Dealer have a
higher than average rate of delinquency.
DEALER AGREEMENTS. The Company enters into a non-exclusive agreement with
each Dealer (a "Dealer Agreement") which sets forth the terms and conditions
under which the Company will purchase Automobile Sales Contracts from the
Dealer. The Dealer Agreement provides that all Automobile Sales Contracts sold
to the Company are without recourse to the Dealer with respect to the credit
risk of the borrower, except for Automobile Sales Contracts for vehicles sold to
relatives or employees of the Dealer. A Dealer Agreement includes
representations and warranties of the Dealer that relate generally to such
matters as whether the Dealer has (i) filed an application for a certificate of
title showing a first lien in favor of the Company, (ii) obtained the full down
payment specified in the Automobile Sales Contract either in cash or in the form
of cash and an allowance for a vehicle trade-in and (iii) complied with
applicable state and federal consumer credit protection laws relating to
Automobile Sales Contracts. If the Dealer breaches the terms of the Dealer
Agreement with respect to any Automobile Sales Contract purchased by the Company
or if the Dealer's customer withholds payment as required under any Automobile
Sales Contract because of a claim, defense, counterclaim or setoff against the
Dealer, the Dealer is obligated to repurchase the Automobile Sales Contract on
demand by the Company for its net unpaid balance. If the purchaser of the
automobile recovers any amount from the Company as a result of a claim against
the Dealer, the Dealer Agreement provides that the Dealer will reimburse the
Company for any amounts paid the customer and for any costs incurred as a result
of such claim.
The Dealer Agreement allows the Company to withhold a specified percentage
of the principal amount of each Automobile Sales Contract purchased, an
arrangement designed to protect the Company from credit losses on Automobile
Sales Contracts. These dealer reserves, which range from five to 10% of the net
amount of each Automobile Sales Contract purchased, are negotiated on a
Dealer-by-Dealer basis and are subject to change based upon the collection
history of the Automobile Sales Contracts purchased from each Dealer. At
December 31, 1996, the aggregate balance of dealer reserves was approximately
2.0% of the financed portion of the Automobile Sales Contracts purchased by the
Company. As of December 31, 1996, the Company had purchased Automobile Sales
Contracts from approximately 420 Dealers. See "Management's Discussion and
Analysis -- Credit Loss Experience."
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ORIGINATION OF AUTOMOBILE SALES CONTRACTS. Automobile Sales Contracts
purchased by the Company are originated by Dealers when they sell a used car at
retail to a customer. The Dealer completes and the customer signs a retail
installment contract and security agreement (giving the Dealer a security
interest in the vehicle financed) on a printed form provided by the Company,
which includes the extensive disclosures required by state and federal law
regarding such matters as the annual percentage rate, the finance charge, the
amount financed, the total amount of all scheduled payments and the total sale
price. The contract also includes a section where the customer may indicate
whether he or she desires to purchase credit life and credit accident and health
insurance, the premiums for which are included in the amount financed if the
customer elects to purchase credit insurance. The printed form identifies the
Company as the intended assignee of the contract and the terms and conditions of
the assignment to the Company are printed on the back of the form. The form
specifically provides that the terms of the assignment are subject to the terms
of the Dealer Agreement between the Company and the Dealer.
The maximum interest rates on Automobile Sales Contracts originated in
South Carolina are based upon the maximum rate filed by the originating Dealer
with state regulatory authorities. Such rates are not subject to a statutory
maximum. The maximum interest rates on Automobile Sales Contracts originated in
North Carolina are subject to a statutory maximum based on the model year of the
vehicle. Rates on used automobile purchases range from 18% per annum on vehicles
one or two model years old to 29% per annum on vehicles more than four model
years old. Interest rates on Automobile Sales Contracts originated in Virginia,
Georgia and Tennessee are not subject to regulation. The actual interest rate on
an Automobile Sales Contract is set within statutory limits, if applicable,
based upon the credit profile of the borrower, the make, model and condition of
the collateral and market conditions.
CREDIT EVALUATION AND APPROVAL PROCEDURES. The Company applies
underwriting standards in purchasing Automobile Sales Contracts that take into
account principally the degree of a proposed buyer's creditworthiness and the
collateral value of the vehicle being financed. If a borrower elects to finance
the purchase of an automobile through a Dealer with whom the Company has an
established relationship, which is typically the case, the Dealer will submit
the borrower's credit application to the Company for review and proposed
transaction terms. The office manager, or other office personnel under the
manager's supervision, conducts the credit evaluation review. This review
generally takes into account, among other things, the borrower's credit history,
ability to pay, stability of residence, employment history, income,
discretionary income and debt service ratio, as well as the collateral value of
the vehicle. The borrower's credit history is assessed principally through the
evaluation of a credit bureau report which is obtained immediately after receipt
of an application from a Dealer. The Company uses a standard application
analysis score sheet to conduct a credit evaluation that incorporates the
factors described above. Unless the borrower's total score falls below a
specified cutoff point, the office manager has the authority to approve the
purchase of the Automobile Sales Contract, up to his credit limit, with no
further review. If the borrower's total score falls below the specified cut-off
point, the office manager must receive approval from a regional supervisor
before approving the application for credit.
Generally, the Company will not finance more than 100% of the average
trade-in value of the automobile as set forth in the current edition of the
National Association of Automobile Dealers Official Used Car Guide and requires
that a borrower make a down payment of at least 10% of the purchase price. In
certain limited instances when the borrower is unable to make a sufficiently
large down payment, the Company will agree to purchase the Automobile Sales
Contract but will issue to the Dealer a "deferred certificate" for the
difference between the average trade-in value of the automobile and the portion
of the sale price not covered by the borrower's down payment. Only when the
borrower has paid the entire balance of the Automobile Sales Contract is the
Company obligated to pay to the Dealer the amount of the deferred certificate.
AUTOMOBILE SALES CONTRACT PURCHASE. Upon consummation of the sale of the
automobile to the borrower, the Dealer delivers all required documentation to
the Company's office. The required documentation includes the executed
Automobile Sales Contract, proof of title indicating the Company's lien, an
odometer statement confirming the vehicle's mileage, proof that the automobile
is insured with the Company designated as loss payee and any supporting
documentation the Company specified in its conditional approval of the purchase.
Only when compliance with these requirements is verified, does the Company remit
funds to the Dealer.
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BULK PURCHASES OF AUTOMOBILE SALES CONTRACTS. From time to time the
Company purchases Automobile Sales Contracts in bulk from Dealers who have
originated and accumulated contracts over a period of time. By doing so, the
Company is able to obtain large volumes of Automobile Sales Contracts in a
cost-effective manner. The Company applies underwriting standards in purchasing
Automobile Sales Contracts that take into account principally the borrowers'
payment history and the collateral value of the automobiles financed. Such
purchases are typically made at discounts ranging from 25% to 50% of the
financed portion of the Automobile Sales Contracts. There generally are no
dealer reserve arrangements on bulk purchases. In connection with such bulk
purchases, the Company reviews all credit evaluation information collected by
the Dealer and reviews the servicing and collection history of the Automobile
Sales Contracts and obtains the required supporting documents. At December 31,
1996, Automobile Sales Contracts which the Company had purchased in bulk had a
net principal balance of $7.4 million, representing 20.5% of the Company's total
portfolio of Automobile Sales Contracts at such date.
SALES OF INSURANCE PRODUCTS IN FINANCE OFFICES. In connection with the
origination of Automobile Sales Contracts, the Company offers, as agent, credit
life, and credit accident and health insurance. Borrowers under Automobile Sales
Contracts and Direct Loans secured by automobiles generally must obtain
comprehensive collision insurance on the automobile that designates the Company
as loss payee. If the borrower allows such insurance to lapse during the term of
the contract or loan, the Company will purchase a vendors' single interest
insurance policy, which insures the Company against a total loss on the
automobile, and add the cost of the premium to the borrower's account balance.
The Company also recently began offering, as agent, limited physical damage
insurance, which satisfies the requirement that the borrower purchase
comprehensive collision insurance. Limited physical damage insurance is a
modified form of collision insurance that will pay the borrower or the Company
the lesser of (i) the cost of repairs, less a designated deductible amount, (ii)
the actual cash value of the automobile, less a designated deductible amount or
(iii) the net unpaid contract or loan balance, less any delinquent payments. The
Company receives commissions on the sales of insurance equal to 20% of the
premiums on credit life, and credit accident and health insurance and 25% of the
premiums on limited physical damage coverage.
DIRECT LOANS PROGRAM
The Company has been in the business of making Direct Loans to Non-prime
Borrowers since 1985. The Company's Direct Loans are typically sought by such
borrowers to meet short-term cash needs, finance the purchase of consumer goods
or refinance existing indebtedness. Approximately 7.6% of the Company's Direct
Loans at December 31, 1996 were secured by first or second liens on real
property. The remainder were secured by personal property or were unsecured.
The average account balance of Direct Loans outstanding at December 31,
1996 was approximately $1,324. The typical original term on a Direct Loan is 15
months. In South Carolina and Tennessee, where there is no limit on the maximum
interest rate the Company may charge on Direct Loans, the Company has a posted
maximum rate of 69% per annum, which it may not exceed until the Company files a
higher maximum rate with the state regulatory authorities. In North Carolina,
the Company generally charges the maximum interest rates permitted by law for
such loans, which range from 18% to 30% per annum, depending upon the amount
financed. The Company currently does not make Direct Loans in Georgia or
Virginia. The actual interest rate on a Direct Loan is set within statutory
limits, if applicable, based upon the credit profile of the borrower, the type
and value of any collateral and market conditions.
The credit evaluation procedures employed by the Company in connection
with Direct Loans are, with the exception of loans secured by real estate,
similar to the credit evaluation procedures employed in connection with the
purchase of Automobile Sales Contracts. The value of the collateral, if any,
however, is a far less significant factor in the Company's credit evaluation of
a Direct Loan. Instead, the Company places its primary emphasis on the ratio of
the anticipated debt service to the borrower's disposable income. Direct Loans
not secured by real estate are approved by office managers. If the loan is to be
secured by real estate, the Company obtains an appraisal of the property,
obtains a title opinion from an attorney and verifies filing of a mortgage or
deed of trust before disbursement of funds to the borrower. The Company
generally will not loan an amount in excess of 50% of the appraised value of the
real estate or, in the case of a home equity loan, 50% of the borrower's equity
in the
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property. All applications for Direct Loans secured by real estate must
be approved by the Company's President or Executive Vice President.
In connection with making Direct Loans, the Company also offers, as agent,
credit life and credit accident and health insurance on terms and conditions
similar to those on which it sells such credit insurance in conjunction with the
purchase of Automobile Sales Contracts. On all Direct Loans that are secured by
personal property other than a used car, the Company, in lieu of filing
financing statements to perfect its security interest in the collateral,
purchases non-filing insurance from an unaffiliated insurer. The Company charges
its customers on such loans an amount approximately equal to the filing fees
that would have been charged to the customer if the Company had filed financing
statements to perfect its security interest, which amount is typically included
in the amount of the loan. The Company uses such amount to pay premiums for
non-filing insurance against losses resulting from failure to file. Under the
Company's non-filing insurance arrangements, approximately 90% of the premiums
paid are refunded to the Company on a quarterly basis and are netted against
charge-offs for the period.
SERVICING AND COLLECTION OF AUTOMOBILE SALES CONTRACTS AND DIRECT LOANS
The Company has more than ten years of experience in servicing and
collecting receivables from Non-prime Borrowers. Its staff of experienced
personnel collect, account for and post all payments received using a
computerized management information system to track each borrower's account
activity. The Company's computer system provides office personnel with access to
all information contained in the customer's contract including the amount of the
contract, maturity, interest rate, vehicle and reference information and payment
history. Customer service personnel in each office also respond to borrower
inquiries, investigate delinquencies and communicate with borrowers to obtain
timely payments, monitor the insurance coverage of the automobile serving as
collateral, and, when necessary, repossess financed automobiles.
When an Automobile Sales Contract is purchased or a Direct Loan is made,
the office personnel follow procedures that are designed to ensure that
borrowers understand their obligations and the terms of the Automobile Sales
Contract or Direct Loan. Particular emphasis is placed on the amount and due
date of each payment, the Company's expectations regarding the timely receipt of
payments and maintenance of insurance coverage and the Company's delinquency and
repossession policies. The Company provides payment coupon books to borrowers to
remind them of their monthly payment obligations.
Office personnel typically contact borrowers by telephone whose payments
are not received within one or two days after the due date of a payment. A
customer service representative in the office continues to contact the
delinquent borrower by telephone and, in some instances by mail, until payment
has been received. When a delinquent borrower brings his account current, the
Company places special emphasis on getting assurances from the borrower that he
or she will make the next payment on the due date. The Company believes that
early and frequent contact with delinquent borrowers reinforces their
recognition of their obligation and the Company's expectation for timely
payment. The Company's policy for payment deferments is to permit no more than
two in a twelve-month period on Direct Loans. Payment deferments on Automobile
Sales Contracts are granted only upon review by the office manager of the
Company's equity position and the borrower's needs.
The Company's repossession policy on Automobile Sales Contracts and Direct
Loans secured by automobiles is administered on a case-by-case basis. The
Company's policy is to work with a delinquent borrower for a brief period to
permit the customer to keep the car and continue making payments to the Company.
However, should a borrower become seriously delinquent or should the office
personnel determine the borrower is not dealing in good faith, the Company
repossesses the borrower's car. In most instances, repossessions are handled by
the Company's employees. Most automobiles are repossessed 30-45 days after the
account initially becomes delinquent, although in some cases repossessions occur
in less than 30 days. Repossessed vehicles are generally sold by Dealers on a
consignment basis for the Company or through wholesale automobile auctions. See
"Management's Discussion and Analysis -- Credit Loss Experience."
9
<PAGE>
PREMIUM FINANCE BUSINESS
Under the name TICO Premium Finance Company, the Company is engaged in the
business of providing short-term financing of insurance premiums, primarily for
personal lines of insurance such as automobile insurance purchased by Non-prime
Borrowers, indirectly through independent insurance agents. Most agents who
refer Premium Finance business to the Company are located in North Carolina,
South Carolina and Virginia and represent insurance companies that either have a
rating of C+ or better from A.M. Best & Company or participate in
state-guaranteed reinsurance facilities. A small amount of the Company's
business involves financing premiums for commercial lines of insurance for small
businesses, including property and casualty, business automobile, general
liability and workers' compensation. The Company also periodically makes bulk
purchases of Premium Finance Contracts. At December 31, 1996, the average
Premium Finance Contract account balance was $287. A substantial amount of the
Company's Premium Finance business is derived from customers of the 19
independent insurance agencies owned by TIG which was acquired by the Company on
October 31, 1996. At December 31, 1996 approximately 43% of Premium Finance
Contracts outstanding were attributable to customers of TIG.
When an individual purchasing insurance through an agent with whom the
Company has an established relationship is unable to pay the full amount of the
premium, the agent will offer a Premium Finance Contract that allows the insured
to make a down payment and finance the balance of the premium. Because the
Company is able to cancel the insurance policy generally within a period of 23
to 28 days after the due date of a delinquent payment and receive a refund of
the unearned portion of the premium, the creditworthiness of the insured is a
less important factor than the size of the down payment and an efficient and
effective system for servicing and collecting the portfolio of Premium Finance
Contracts.
The typical term of a Premium Finance Contract ranges from three to eight
months depending primarily upon the term of the underlying insurance policy,
which in most cases is six months but in some cases may be as long as 12 months.
The required down payment ranges from 20% to 50% of the premium depending upon
the state in which the insured resides, the term of the underlying insurance
contract, the identity of the agency and the insured's financial circumstances.
The smaller the down payment by the customer on a Premium Finance Contract (and
the resulting higher original principal balance of the loan), the greater the
Company's risk that the amount of the unearned premium at the time of a payment
default will not be sufficient to cover the unpaid principal balance of the
loan. Conversely, the higher the down payment (and the resulting lower original
principal balance of the loan), the lower the Company's risk of loss in the
event of a payment default. The Company allows a down payment of 20% only on
Premium Finance Contracts for policies sold by certain "non-standard" insurance
agencies operated by TIG in North Carolina. At December 31, 1996, such Premium
Finance Contracts represented approximately $1.1 million, or 36%, of total
Premium Finance Contracts outstanding. Because the original principal balance of
such Premium Finance Contracts is larger than it would be if higher percentage
down payments were required, the Company's risk of loss is increased.
The Company generally imposes the maximum finance charges and late fees
permitted by law for Premium Finance Contracts, which are subject to extensive
regulation in the states where the Company engages in this business. All of the
states in which the Company operates permit assessment of a fee of up to $15 on
each Premium Finance Contract and a maximum interest rate of 12% per annum.
After the Premium Finance Contract is originated, the Company sends the insured
a payment coupon book to serve as a reminder of the payment due dates. Although
most payments are received by mail, in some instances payments are made directly
to the agent who wrote the underlying insurance contract and then forwarded to
the Company. If a payment is not received by the sixth day after the due date, a
late fee is added to the past due payment and a notice of intent to cancel the
underlying insurance policy is mailed to the insured. If payment is not received
by the tenth day after the notice of intent to cancel is mailed (the 15th day in
South Carolina), the Company mails a notice of cancellation advising the insured
that the Company will cancel the underlying insurance policy in seven days
unless payment is received. If the insured fails to make payment by the seventh
day, using a power of attorney provided by the insured at the time the insurance
was purchased, the Company notifies the insurance company to cancel the
underlying insurance policy. Upon receipt of this notice the insurance company
remits to the Company the unearned portion of the premium, if any. The Company's
procedures for providing notices to borrowers are set up to provide a parallel
set of notices to the agent who wrote the underlying insurance policy.
10
<PAGE>
INSURANCE AGENCY OPERATIONS
With the acquisition of TIG on October 31, 1996, the Company began selling
on an agency basis various lines of automobile, property and casualty, life and
accident and health insurance. The Company does not assume any underwriting risk
in connection with its insurance agency activities. All underwriting risk is
assumed by the insurance companies TIG represents. The Company is paid a
commission by the insurance company for which business is placed. On some
policies the Company is eligible for additional commission payments (profit
sharing) if the loss experience on the business falls below specified levels. In
1996, profit sharing represented 2.2% of revenues. Future profit sharing
percentages may be higher or lower, depending upon the performance of the
underlying policies. The Company currently has approximately 28,500 insurance
customers.
FINANCING
The maintenance of sufficient capital resources to support its operations
is integral to the Company's business and growth strategy. The Company's
external capital resources presently consist of two credit facilities extended
by Finova Capital Corporation ("Finova"), a note secured by the Company's
airplane and unsecured notes payable to two insurance companies and certain
unrelated individuals. See "Management's Discussion and Analysis -- Liquidity
and Capital Resources."
The Company's revolving credit facility (the "Revolving Credit Facility")
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. 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 interest rate is adjusted monthly to reflect
fluctuations in the designated prime rate. As of March 14, 1997, the interest
rate was 9.25% for the primary tranche and 13.25% for the secondary tranche.
Accrued interest on borrowings is due monthly. Principal is due in full on the
maturity date and can be prepaid without penalty. The Revolving Credit Facility
is secured by substantially all of the Company's assets other than its TIG stock
and requires the Company to comply with certain restrictive covenants, including
covenants to maintain a certain debt to equity ratio, tangible net worth, annual
net income within prescribed limits, and a covenant to limit annual
distributions to shareholders to 50% of net income.
TIG, also maintains a credit facility with the Finova. The Insurance
Facility is used to provide operating liquidity and fund agency acquisitions.
The Insurance Facility provides for borrowings of up to $3 million through March
31, 1998. As of March 14, 1997, $1.6 million was outstanding under the Insurance
Facility and $1.4 million was available for additional borrowing. Funds borrowed
under the Insurance Facility bear interest at a rate equal to a designated prime
rate plus three percent per annum. At March 14, 1997, the interest rate on
borrowings under the facility was 11.25%. Amounts outstanding may not exceed
specified percentages of net insurance commissions. The insurance facility is
secured by substantially all of TIG's assets.
At March 14, 1997, the Company had approximately $1.0 million of unsecured
debt. This debt includes a note payable to American Bankers Insurance Company of
Florida in the amount of $500,000 which matures on May 16, 1998 and bears
interest at the prime rate reported in The Wall Street Journal plus two percent,
which is adjusted quarterly to reflect fluctuations in the prime rate, and a
note payable to Kramer-Wilson Company Insurance Services in the amount of
$250,000 which is callable upon 60 days notice and bears interest at a
designated prime rate plus two percent, adjusted monthly. The balance of the
Company's unsecured debt on such date consisted of notes payable to certain
unrelated individuals. These notes bear interest at 8-12% per annum payable on a
quarterly or annual basis. In addition, at December 31, 1996 the Company had a
note payable to Green Tree Financial Servicing Corporation in the amount of
$540,600. This note bears interest at 8.99% per annum, payable monthly, and is
secured by an airplane owned by the Company.
11
<PAGE>
COMPETITION
The non-prime consumer credit market for used automobile finance and
personal loans is highly competitive and fragmented. Historically, commercial
banks, savings and loans, credit unions, financing arms of automobile
manufacturers and other lenders providing traditional consumer financing have
not consistently served the non-prime segment of the consumer finance market.
Recently, however, several large bank holding companies have acquired used car
finance companies in an effort to recapture some of the customers they have
rejected on the basis of their rigid credit scoring systems. The Company faces
increasing competition from a number of companies providing similar financing to
individuals that cannot qualify for traditional financing. These include a
number of well-capitalized public companies which have only recently entered the
business of purchasing Automobile Sales Contracts and are seeking to rapidly
expand their business. The Company believes that currently its primary
competitor is TransSouth Financial Corporation, a financial services company,
which operates in most of the markets where the Company operates. The Company
also competes with numerous small, regional consumer finance companies. Many of
these competitors or potential competitors, including TransSouth Financial
Corporation, have significantly greater resources than the Company and have
pre-existing relationships with established networks of Dealers. To the extent
that any of such lenders significantly expand their activities in the markets
where the Company operates or plans to operate, the Company could be materially
adversely effected. The basis on which the Company competes with others in used
car financing is primarily the price paid for Automobile Sales Contracts, which
is a function of the amount of the dealer reserve, and the reliability of
service to participating dealers. The basis on which the Company competes with
others in making Direct Loans is the interest rate charged and customer service.
The size of the Company's average Automobile Sales Contract is
considerably smaller than that of many other companies engaged in purchasing
Automobile Sales Contracts. The Company believes this is due in large part to
the fact that most of the Company's competitors are seeking to do business
primarily with franchised dealers selling late-model, lower mileage used cars
for significantly higher prices than the cars offered for sale by the Dealers
with which the Company has relationships, which tend to be somewhat older with
higher mileage on the odometer. Because the costs of servicing and collecting a
portfolio of finance receivables increases with the number of receivables
included in the portfolio, the Company believes that many apparent potential
competitors will choose not to do business with the type of Dealer targeted by
the Company.
The Premium Finance business, particularly for personal lines of
insurance, is also highly fragmented and competitive. Because interest rates are
highly regulated, competition is primarily on the basis of customer service,
response time and the required amount of down payment. There are numerous
independent finance companies specializing in Premium Finance for personal lines
of insurance. In addition, many independent insurance agencies finance premiums
for their customers either directly or through an affiliate. Some bank holding
companies have subsidiaries that finance premiums on insurance sold by other
subsidiaries of the holding company as well as by independent agents.
The independent insurance agency industry is also highly competitive.
There are numerous other independent agencies in most of the markets where the
Company's insurance offices are located. There are also direct agents for
various insurers located in some of the markets. The Company competes primarily
on the basis of service and convenience. The Company attempts to develop and
maintain long-term customer relationships through low employee turnover and
responsive service representatives and offers virtually all types of insurance
coverage.
REGULATION
Consumer finance companies are subject to extensive supervision and
regulation under state and federal statutes and regulations. Depending upon the
nature of the transactions entered into by the consumer finance company and the
states in which it does business, governmental statutes and regulations may
require the lender to obtain licenses and meet specified minimum qualifications,
limit the interest rates, fees and other charges for which the borrower may be
assessed, limit or prescribe certain other terms and conditions of the
financing, govern the sale and terms of related insurance products and define
and limit the right to repossess and sell collateral.
12
<PAGE>
The relevant federal statutes include the Truth In Lending Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act and the Real Estate
Settlement Procedures Act ("RESPA"). These statutes generally are enforced
against consumer finance companies by the Federal Trade Commission and are
supplemented by regulations promulgated by this and other federal agencies. In
general, these laws require the Company to provide certain disclosures to
prospective borrowers, prohibit misleading advertising, protect against
discriminatory lending practices and prohibit unfair credit practices. Among the
principal disclosure items under the Truth In Lending Act are the terms of
repayment, the final maturity, the total finance charge and the annual
percentage rate charged on each loan. The Equal Credit Opportunity Act prohibits
creditors from discriminating against loan applicants on the basis of race,
color, sex, age or marital status. Pursuant to Regulation B promulgated under
the Equal Credit Opportunity Act, creditors are required to make certain
disclosures regarding consumer rights and advise consumers whose credit
applications are not approved of the reasons for the rejection. The Fair Credit
Reporting Act requires the Company to provide certain information to consumers
whose credit applications are not approved on the basis of a report obtained
from a consumer credit reporting agency. Regulations promulgated by the Federal
Trade Commission limit the types of property a creditor may accept as collateral
to secure a consumer loan and provide for the preservation of the consumer's
claims and defenses when a consumer obligation such as an Automobile Sales
Contract is assigned to a subsequent holder such as the Company. RESPA imposes
specific disclosure requirements, escrow account and borrower inquiry procedures
and kickback and referral fee prohibitions upon lenders whose portfolio of
receivables secured by first or second liens on residential real property
exceeds a specified dollar amount.
The Company presently purchases Automobile Sales Contracts in Georgia,
North Carolina, South Carolina, Tennessee and Virginia, originates Direct Loans
in South Carolina and North Carolina and Tennessee, and originates Premium
Finance Loans in North Carolina, South Carolina and Virginia. Interest rates on
Premium Finance Contracts are subject to statutory ceilings in all three states.
See "Premium Finance." Interest rates on Automobile Sales Contracts are subject
to statutory ceilings only in North Carolina. See "Automobile Sales Contract
Purchases -- Origination of Automobile Sales Contracts." Direct Loans are
subject to statutory ceilings only in North Carolina and Tennessee. See "Direct
Loans Program." Each state regulates other aspects of the Company's business,
such as charges for insurance, forms of collateral, application of payments,
default charges, repossession and disclosure matters, in varying degrees. Such
regulations may require the licensing of the Company or one or more of its
offices. The Company's offices also may be subject to periodic examination by
the division of state government charged with enforcing consumer finance
statutes and regulations. In some instances, state statutes and regulations
impose more stringent disclosure and antidiscriminatory provisions than
comparable federal provisions and may impose specific statutory liabilities upon
and create causes of action against creditors who fail to comply with such
provisions.
The Company also is subject to state statutes and regulations governing
insurance agents in connection with its sales of credit and other insurance,
which may require that officers and employees involved in the sale of insurance
products be licensed, govern the commissions that may be paid to agents in
connection with the sale of credit insurance and limit the premium amount
charged for insurance.
The Company believes that it operates in substantial compliance with all
applicable statutes and regulations relevant to its consumer finance and
insurance activities and that Automobile Sales Contracts purchased individually
or in bulk have been originated in compliance with these provisions. Violations
of the provisions described above may result in private actions for damages,
claims for refunds of payments made, certain fines and penalties, injunctions
against prohibited practices, the potential forfeiture of rights to repayment of
loans and the revocation of licenses granted by state regulatory authorities.
Adverse changes in the statutes and regulations to which the Company's business
is subject, or in the enforcement or interpretation thereof, could have a
material adverse effect on the Company's business. Moreover, a reduction in the
existing statutory maximum rates or the imposition of maximum rates below those
presently charged by the Company in unregulated jurisdictions would directly
impair the Company's profitability.
13
<PAGE>
EMPLOYEES
As of December 31, 1996, the Company employed 198 persons, none of whom
was covered by a collective bargaining agreement. Of that total, 26 were located
in the Company's headquarters in Lancaster, South Carolina and 172 were located
in the Company's other offices. The Company generally considers its
relationships with its employees to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive offices are located in Lancaster, South Carolina
in a leased office facility of approximately 12,000 square feet. The lease
expires in September 1999, but includes an option to renew for an additional
five-year term. The Company leases the facilities, in some instances from
affiliates, in which its branch offices are located. These offices range in size
from approximately 800 square feet to 2,200 square feet, and are under leases
expiring on dates ranging from April 1997 to December 2001, most of which
include renewal options for periods ranging from two to five years. The monthly
rental rates for such offices range from $300 to $5,100 per month. Since most of
the Company's business with Dealers is conducted by facsimile machine and
telephone, the Company does not believe that the particular locations of its
finance offices are critical to its business of purchasing Automobile Sales
Contracts or its premium finance operations. Location is somewhat more important
for the Company's Direct Loan and insurance agency operations. However, other
satisfactory locations are generally available for lease at comparable rates and
for comparable terms in each locality served by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any legal proceedings nor is it
aware of any material threatened litigation against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters during the fourth quarter of 1996 submitted to a
vote of shareholders.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Due to the relatively small number of shares held by non-affiliates of the
Company, there is no active and liquid trading market for the Company's common
stock. The common stock does trade occasionally in the over-the-counter market
and is quoted in the OTC Bulletin Board service operated by the National
Association of Securities Dealers. At March 14, 1997 there were 283 stockholders
of record based on information provided to the company. The following table
presents high and low bid information for the common stock during the periods
indicated. These quotations reflect prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
High Low
First quarter 1996 $10.00 $9.13
Second quarter 1996 10.25 8.75
Third quarter 1996 10.25 9.00
Fourth quarter 1996 11.00 10.00
The Company has not paid any dividends on common stock during the past two
years. At the present time, there are no plans to pay any cash dividends on
common stock. The Company plans to retain its earnings to finance the growth of
the business. The Revolving CreditFacility restricts the Company from paying any
cash dividends in excess of 50% of net income for the year.
ITEM 6. 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.
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.
15
<PAGE>
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 Company's business has experienced significant growth over the past
three years. The following table sets forth certain information with regard to
growth in the Company's finance receivable portfolio.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
AUTOMOBILE SALES CONTRACTS
Total balance at year end, net (1) $35,998,537 $22,788,837 $8,823,559
Average account balance at year end 3,699 3,436 2,317
Interest income for the year 8,361,396 5,031,402 1,990,268
Average interest rate earned(2) 27.98% 28.92% 31.10%
Number of accounts at year end 9,733 6,632 3,808
DIRECT LOANS
Total balance at year end, net (1) $9,896,100 $9,460,798 $7,107,446
Average account balance at year end 1,324 1,405 1,175
Interest income for the year 2,941,705 2,248,168 2,305,296
Average interest rate earned(2) 30.01% 31.60% 34.66%
Number of accounts at year end 7,475 6,736 6,047
PREMIUM FINANCE CONTRACTS
Total balance at year end, net (1) $2,846,451 $4,827,067 $1,482,009
Average account balance at year end 287 336 272
Interest income for the year 737,895 484,222 151,402
Average interest rate earned(2) 17.52% 15.35% 13.96%
Number of accounts at year end 9,931 14,378 5,442
</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.
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.
16
<PAGE>
RECENT ACQUISITION AND EXPANSION ACTIVITIES
On October 31, 1996, the Company acquired The Thaxton Insurance Group,
Inc. ("TIG") by exchanging 300,000 shares of common stock in a private placement
for all outstanding shares of capital stock of TIG. Pursuant to this
acquisition, the Company acquired all of the property, plant and equipment of
TIG, which operates 19 independent insurance agencies in North and South
Carolina. The number of shares issued in the transaction was determined based
upon a multiple of gross commissions collected by TIG during the twelve month
period ended December 31, 1995, which were approximately $3.7 million, and the
market value of the Company's shares issued in this transaction, taking into
account the transferability restrictions applicable thereto. The shares were
acquired from James D. Thaxton, William H. Thaxton, and Calvin L. Thaxton, Jr.
James D. Thaxton is an executive officer, director and majority shareholder of
the Company. William and Calvin Thaxton are James D. Thaxton's brothers. The
Company operates TIG as a separate subsidiary.
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 branch offices opened in 1996 are primarily focused upon Automobile
Sales Contract origination. The Company also opened a mortgage lending office in
Charlotte, North Carolina.
PROFITABILITY
The following table sets forth certain data relating to the Company's
profitability.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Average Net Finance Receivables(1) $43,717,445 $26,710,887 $13,712,742
Average notes payable(1) 37,611,963 23,447,113 11,447,977
Interest and fee income 13,518,563 9,024,232 5,380,470
Interest expense 3,841,683 2,653,614 1,114,829
--------- --------- ---------
Net interest income 9,676,880 6,370,618 4,265,641
Average interest rate earned(1) 30.92% 33.78% 39.24%
Average interest rate paid(1) 10.21 11.32 9.74
------ ----- ------
Net interest rate spread 20.71 22.46 29.50
Net interest margin(2) 22.14% 23.85% 31.11%
</TABLE>
- -------------
(1) Averages are computed using month-end balances during the year
presented.
(2) 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. There are significant differences in the interest rates
earned on the various components of the Company's finance receivable portfolio.
The interest rate earned on Automobile Sales Contracts generally is 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.
17
<PAGE>
Unlike the Company's interest income, its interest expenses are sensitive
to general market fluctuations in interest rates. The interest rate paid to the
Company's primary lender is based upon a published prime rate plus a set
percentage. 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 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 spread 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 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 $31,149,674 at December 31, 1995 to $47,603,138 at December 31,
1996, or 53%. 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 7.3%, to $12,560,126 at December
31, 1996 compared to $11,704,450 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 $9,731532 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 4.5% at December 31, 1996.
Cash levels decreased from $1,828,484 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 following balance sheet amounts increased primarily due to the
consolidation of TIG with the Company; premises and equipment, accounts
receivable, goodwill and intangibles, notes payable to affiliates, accounts
payable and employee savings.
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
$13,518,563, versus $9,024,232 for the year ended December 31, 1995, a 50%
increase. Interest expense also was higher, increasing to $3,841,683 for the
year ended December 31, 1996 versus $2,653,614 for the year ended December 31,
1995, a 45% 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.
18
<PAGE>
Net interest income for the year ended December 31, 1996 increased to
$9,676,880 from $6,370,618 for 1995, a 52% 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 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
$2,145,423 for the year ended December 31, 1996 from $676,766 for 1995, a 217%
increase due to the higher levels of Automobile Sales Contract originations, the
triggering event for most sales of insurance products to borrowers, and
commissions generated on the sale of insurance policies by the insurance agency
operations during the two months of 1996 following the acquisition of TIG.
Operating expenses increased from $4,755,094 for the year ended December
31, 1995 to $7,395,640 for 1996, a 56% 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 TIG, 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 $666,399 for the year ended December 31, 1996 from
$921,069 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.
Stockholders' equity decreased from $7,177,890 at December 31, 1995 to
$6,271,305 at December 31, 1996, as a result of retained earnings from after tax
profits during the period, offset by the purchase of approximately 140,000
shares of the Company's common stock which was owned by TIG at the time of the
acquisition of TIG.
COMPARISON OF 1995 TO 1994. Gross finance receivables at December 31, 1995
were $47,900,234 versus $22,450,280 at December 31, 1994, a 113% increase. The
primary component of this increase was Automobile Sales Contracts, which
increased from $11,879,474 at December 31, 1994 to $32,455,654 at December 31,
1995, or 173%. The Company opened four branch offices in 1995, which generated a
significant volume of Automobile Sales Contracts. Premium Finance Contracts were
up 226%, primarily due to the purchase of Eagle Premium Finance Company in
September of 1995.
Unearned income at December 31, 1995 was $9,731,532 versus $4,405,266 at
December 31, 1994, a 121% increase which was directly related to the higher
volume of Automobile Sales Contract originations during 1995. The provision for
credit losses established for the year ended December 31, 1995 was $890,337,
versus $481,063 for 1994, an 85% increase. The percentage increase in the
provision for credit losses was less than the percentage increase in Net Finance
Receivables because the primary component of the increase in Net Finance
Receivables was Automobile Sales Contracts, which generally result in lower
charge-offs than Direct Loans due to dealer reserves and the relative importance
of automobiles versus other assets used by Non-prime Borrowers to collateralize
their short-term debts. The allowance for credit losses as a percentage of Net
Finance Receivables decreased from 2.4% at December 31, 1994 to 2.1% at December
31, 1995.
Cash levels increased from $248,842 at December 31, 1994 to $1,828,484 at
December 31, 1995. This increase was due to the receipt of the proceeds of the
Company's public offering on December 29, 1995. The excess cash was used to pay
down the Revolving Credit Facility on January 3, 1996.
Notes payable to affiliates decreased from $1,046,058 at December 31, 1994
to zero at December 31, 1995, due to repayment of affiliated indebtedness and
conversion of affiliated indebtedness to equity. See "Item 12 Certain
Relationships and Related Transactions-Conversion and Repayment of Subordinated
Debt"
The growth in finance receivables during the year ended December 31, 1995
versus the comparable period in 1994 resulted in higher levels of interest and
fee income. Interest and fee income for the year ended December 31, 1995 was
$9,024,232, versus $5,380,470 for the year ended December 31, 1994, a 68%
increase. Interest expense also was higher, increasing to $2,653,614 for the
year ended December 31, 1995 versus $1,114,829 for the year
19
<PAGE>
ended December 31, 1994, a 138% increase. The increase in interest expense was
due to the higher levels of borrowings needed to fund finance receivable
originations and a higher cost of funds due to increases in the prime rate and
in the contract rate in excess of the prime rate paid to the Company's primary
lender.
Net interest income for the year ended December 31, 1995 increased to
$6,370,618 from $4,265,641 for 1994, a 49% 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 24% decrease in net
interest spread for the year ended December 31, 1995 versus 1994.
Insurance commissions net of insurance cost increased to $676,766 for the
year ended December 31, 1995 from $375,720 for 1994, a 80% increase primarily
due to the higher levels of Automobile Sales Contract originations, the
triggering event for most sales of insurance products to borrowers.
Operating expenses increased from $2,888,819 for the year ended December
31, 1994 to $4,755,094 for 1995, a 64% increase. The increase in expenses was
due to opening new offices and expenses associated with the Company's initial
public offering, including one additional executive officer, in addition to a
general increase in costs associated with administering a significantly larger
finance receivable portfolio.
Net income increased to $921,069 for the year ended December 31, 1995 from
$816,352 for 1994. The increase in net income was due to higher levels of net
interest and insurance income, partially offset by higher loss provisions and
expenses.
Stockholders' equity increased from $2,674,188 at December 31, 1994 to
$7,177,890 at December 31, 1995, a 168% increase, as a result of the proceeds of
the initial public offering, conversion of subordinated debt to equity, and
retained earnings from after tax profits during the period, offset in part by
the conversion of $700,000 in preferred stock to debt during the second quarter
of 1995. The Company completed a "best efforts" initial public offering on
December 29, 1995. The Company offered for sale up to 1,400,000 shares, with a
minimum of 350,000 shares, at a price of $9 per share. The offering resulted in
the sale of 418,057 shares, including 138,890 shares purchased by TIG. The
proceeds of the offering, net of expenses, were $3,210,133.
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.
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
20
<PAGE>
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 Installment 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.
The following table sets forth the Company's allowance for credit losses
at December 31, 1996, 1995, and 1994 and the credit loss experience over the
periods presented.
<TABLE>
<CAPTION>
At or for the Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Net finance receivables (1) $50,447,410 $38,168,681 $17,413,014
Allowance for credit losses 2,195,000 783,200 424,425
Allowance for credit losses as a percentage of 4.35% 2.05% 2.44%
net finance receivables (1)
Dealer reserves and discounts on bulk purchases 1,747,000 $1,091,979 $631,709
Dealer reserves and discounts on bulk purchases 4.64% 4.91% 6.68%
as percentage of Net Automobile Sales Contracts
at period end
Allowance for credit losses and dealer reserves $3,942,000 $1,875,179 $1,056,134
and discount on bulk purchases
Allowance for credit losses and dealer reserves 7.81% 4.91% 6.07%
and discount on bulk purchases as a percentage
of finance receivables
Provision for credit losses $3,593,399 $890,337 $481,063
Charge-offs (net of recoveries) 2,210,441 821,806 426,624
Charge-offs (net of recoveries) as a percentage 5.06% 3.08% 3.11%
of average net finance receivables
</TABLE>
- ---------------------
(1) Net finance receivable balances are presented net of unearned finance
charges only
21
<PAGE>
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,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Automobile Sales Contracts and Direct $470,1430 $179,8315 $110,030
Loans contractually past due 90 days or
more(1)
Automobile Sales Contracts and Direct 45,894,637 32,249,635 15,931,005
Loans (1)
Automobile Sales Contracts and Direct 1.02% 0.56% .69%
Loans contractually past due 90 days or
more as a percentage of Automobile
Sales Contracts and Direct Loans
</TABLE>
- ----------------------
(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:
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premium finance contracts contractually $100,633 $99,537 $26,418
past due 60 days or more(1)
Premium finance contracts outstanding(1) 2,846,451 4,827,067 1,482,009
Premium finance contracts contractually
past due 60 days or more as a percentage of 3.5% 2.1% 1.8%
premium finance contracts
</TABLE>
- ----------------------------
(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 February
28, 1997, $41.3 was outstanding under the Revolving Credit Facility and there
was $38.7 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.
22
<PAGE>
Cash flows from financing activities during the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revolving Credit Facility $8,941,444 $16,538,315 $5,851,419
Other Notes Payable 1,292,851 (746,058) 82,672
Dividends Paid on Preferred Stock -0- (17,500) (52,500)
Common Stock -0- 3,210,133
--- --------- -----------
Total $10,234,295 $18,984,890 $5,881,591
=========== =========== ==========
</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, 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.
IMPACT OF INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company does not believe that inflation directly has a
material adverse effect on its 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. The Company intends to
explore opportunities to fix or cap the interest rates on all or a portion of
its borrowings; however, there can be no assurance that fixed rate or capped
rate financing will be available on terms acceptable to the Company. Inflation
also can affect the Company's operating expenses. The Company's business could
be affected by other general economic conditions in 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.
ACCOUNTING MATTERS
The Company adopted statement of Financial Accounting Standard (SFAS) No. 121
and SFAS No. 123 during 1996. The adoption of these standards had no impact on
results of operations or financial position in 1996. In addition, the Financial
Accounting Standards Board has issued SFAS No. 125, as amended by SFAS No. 127,
which the Company will adopt in 1997. Based on the Company's current operations,
adoption of these standards is not expected to have a material impact on the
Company's financial statements.
23
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE>
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting principles.
March 14, 1997 KPMG Peat Marwick LLP
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Cash $ 421,465 1,828,484
Finance receivables, net 46,546,087 36,293,502
Premises and equipment, net 1,947,210 706,301
Accounts receivable 1,269,384 266,354
Repossessed automobiles 1,166,495 500,300
Goodwill and other intangible assets 3,463,814 337,307
Other assets 1,867,112 759,258
-------------- ---------------
Total assets $ 56,681,567 40,691,506
============== ===============
Liabilities and Stockholders' Equity
Accrued interest payable 387,237 350,793
Notes payable 46,345,883 32,503,000
Notes payable to affiliates 743,621 -
Accounts payable 1,350,306 231,122
Employee savings plan 1,098,457 100,858
Other liabilities 484,758 327,843
-------------- ---------------
Total liabilities 50,410,262 33,513,616
Common stock, $ .01 par value; authorized 50,000,000 shares, issued and
outstanding 3,932,178 shares in 1996 and
3,777,173 shares in 1995 39,322 37,772
Additional paid-in-capital 3,504,027 5,168,561
Deferred stock award (720,000) (810,000)
Retained earnings 3,447,956 2,781,557
-------------- ---------------
Total stockholders' equity 6,271,305 7,177,890
-------------- ---------------
Total liabilities and stockholders' equity $ 56,681,567 40,691,506
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest and fee income $ 13,518,563 9,024,232 5,380,470
Interest expense 3,841,683 2,653,614 1,114,829
-------------- ------------- --------------
Net interest income 9,676,880 6,370,618 4,265,641
Provision for credit losses 3,593,399 890,337 481,063
-------------- ------------- --------------
Net interest income after provision
for credit losses 6,083,481 5,480,281 3,784,578
Other income:
Insurance premiums and commissions, net 2,145,423 676,766 375,720
Other income 136,141 30,082 9,061
--------------- ------------- --------------
Total other income 2,281,564 706,848 384,781
Operating expenses:
Compensation and employee benefits 3,748,303 2,682,129 1,719,612
Telephone, postage, and supplies 800,763 580,568 379,691
Net occupancy 739,144 457,245 307,839
Reinsurance claims expense 516,194 310,231 42,228
Insurance 193,670 120,979 103,427
Collection expense 242,985 135,002 91,472
Travel 149,389 98,368 54,309
Professional fees 175,821 162,897 47,569
Other 829,371 207,675 142,672
-------------- ------------- --------------
Total operating expenses 7,395,640 4,755,094 2,888,819
-------------- ------------- --------------
Income before income tax expense 969,405 1,432,035 1,280,540
Income tax expense 303,006 510,966 464,188
-------------- ------------- --------------
Net income $ 666,399 921,069 816,352
======== ======= =======
Earnings per share $ 0.18 0.29 0.26
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Deferred Total
Common Preferred Paid-in- Stock Retained Stockholders'
Stock Stock Capital Award Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ 31,480 700,000 64,720 - 1,131,636 1,927,836
Dividends paid on preferred
stock ($.10) - - - - (70,000) (70,000)
Net income - - - - 816,352 816,352
--------- --------- ---------- ------------ -------------- ------------
Balance at December 31, 1994 31,480 700,000 64,720 - 1,877,988 2,674,188
Issued 418,057 shares of
common stock in public offering 4,181 - 3,205,952 - - 3,210,133
Dividends paid on
preferred stock ($.025) - - - - (17,500) (17,500)
Conversion of 700,000 shares
of preferred stock to
$700,000 of debt - (700,000) - - - (700,000)
Issuance of 100,000 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 $1,000,000
subordinated debt into
111,111 shares of stock 1,111 - 998,889 - -
1,000,000
Net income - - - - 921,069 921,069
--------- --------- ---------- ------------ -------------- ------------
Balance at December 31, 1995 37,772 - 5,168,561 (810,000) 2,781,557 7,177,890
Issuance of 300,000 shares
to purchase Thaxton
Insurance Group 3,000 - (356,269) - - (353,269)
Employee stock grant 17 - 16,828 - - 16,845
Purchase and retirement
of 146,675 shares of stock (1,467) - (1,325,093) - - (1,326,560)
Vesting of 10,000 shares
of stock award - - - 90,000 - 90,000
Net income - - - - 666,399 666,399
--------- --------- ---------- ------------ ----------- ------------
Balance at December 31, 1996 $ 39,322 - 3,504,027 (720,000) 3,447,956 6,271,305
========= ========= ========= ============ ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 666,399 921,069 816,352
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 3,593,399 890,337 481,063
Depreciation and amortization 444,829 235,795 133,040
Deferred taxes (21,091) (165,968) (43,380)
Vesting of stock award 90,000 90,000 -
Compensatory grant of stock to employees 16,845 - -
(Gain) loss on sale of premises and
equipment (21,363) (3,500) 8,000
Gain on sale of investments - (11,222) -
Increase in other assets (924,896) (371,612) (51,612)
Increase in accrued interest
payable and other liabilities 65,198 414,819 45,857
-------------- ------------- --------------
Net cash provided by operating
activities 3,909,320 1,999,718 1,389,320
-------------- ------------- --------------
Cash flows from investing activities:
Net increase in finance receivables (14,512,179) (18,750,407) (6,984,394)
Capital expenditures for premises and equipment (1,187,923) (472,438) (204,466)
Proceeds from sale of premises and equipment 58,061 3,500 -
Proceeds from the sale of investments - 23,222 -
Purchase of premium finance company, net of
acquired cash equivalents - (208,843) -
Cash acquired in acquisition of Thaxton
Insurance Group 91,407 - -
--------------- ------------- -------------
Net cash used by investing activities (15,550,634) (19,404,966) (7,188,860)
--------------- ------------- --------------
Cash flows from financing activities:
Proceeds from the issuance of common stock - 3,210,133 -
Dividends paid - (17,500) (52,500)
Net increase in line of credit 8,941,444 16,538,315 5,851,419
Proceeds from issuance of notes payable 1,567,440 - 82,672
Repayments of notes payable (274,589) (746,058) -
-------------- ------------- -------------
Net cash provided by financing
activities 10,234,295 18,984,890 5,881,591
-------------- ------------- --------------
Net increase (decrease) in cash (1,407,019) 1,579,642 82,051
Cash at beginning of year 1,828,484 248,842 166,791
-------------- ------------- --------------
Cash at end of year $ 421,465 1,828,484 248,842
============== ============= ==============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 3,805,239 2,469,372 1,042,900
Income taxes $ 554,651 834,325 577,397
Noncash financing activities:
Issuance of common stock to effect acquisition 353,269 - -
Conversion of preferred stock to notes payable - 700,000 -
Conversion of subordinated debt to common stock - 1,000,000 -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
(Continued)
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(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. (TIG), 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.
Reclassifications of certain amounts in the 1995 and 1994 consolidated
financial statements have been made to conform with the financial
statement presentation for 1996. The reclassifications have no effect on
net income or shareholders' equity 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.
<PAGE>
THE THAXTON GROUP, INC.
Notes to Financial Statements
(Continued)
(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 the 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.
(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.
<PAGE>
(h) EARNINGS PER SHARE
Earnings per share is calculated using the weighted average shares
outstanding of 3,803,620, 3,151,448 and 3,148,000 for 1996, 1995
and 1994, 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.
(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.
<PAGE>
(2) Business Combinations
The Company acquired all of the outstanding capital stock of TIG on
October 31, 1996 in exchange for 300,000 shares of the Company's stock.
TIG was considered to be under common control by the majority shareholder
of the Company. As a result, the acquisition has been accounted for using
the as if pooling method whereby the assets and liabilities of TIG were
transferred to the Company at the carrying value as of the date of
acquisition. On the date of acquisition, TIG had total assets of
$6,219,000, net intangibles of $3,207,000, total debt of $4,352,000, and
a stockholders' deficit of $353,269. TIG is incorporated under the laws
of the State of South Carolina and licensed as an insurance agency in the
states of North and South Carolina. TIG operates a general insurance
division with offices in North and South Carolina.
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 $302,000 and $337,000 at December 31, 1996 and 1995,
respectively, and is included in goodwill and other intangible assets in
the accompanying consolidated balance sheets.
(3) Finance Receivables
Finance receivables consist of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Consumer $ 58,818,195 41,755,823
Real estate secured 959,365 825,537
Insurance premium finance 2,943,338 5,046,110
Wholesale loans 385,703 272,764
-------------- ----------------
Total finance receivables 63,106,601 47,900,234
Unearned interest (12,445,781) (9,325,101)
Unearned insurance premiums, net (132,733) (406,431)
Bulk purchase discount (1,014,000) (416,000)
Dealer hold back (733,000) (676,000)
Allowance for credit losses (2,195,000) (783,200)
-------------- ----------------
Finance receivables, net $ 46,546,087 36,293,502
============== ================
</TABLE>
<PAGE>
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 $7,371,000 and $1,014,000, respectively,
at December 31, 1996 and approximately $3,710,000 and $416,000,
respectively, at December 31, 1995.
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 $31,451,000 and $773,000, respectively, at
December 31, 1996 and approximately $20,320,700 and $676,000,
respectively, at December 31, 1995.
At December 31, 1996, 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 years ended December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 783,200 424,425 369,986
Valuation allowance for acquired loans 28,842 290,244 -
Provision for credit losses 3,593,399 890,337 481,063
Charge-offs (2,526,231) (924,620) (499,997)
Recoveries 315,790 102,814 73,373
-------------- ------------ -----------
Net charge-offs (2,210,441) (821,806) (426,624)
------------- ------------ -----------
Ending balance $ 2,195,000 783,200 424,425
============= ============ ===========
</TABLE>
The valuation allowance for acquired loans relates to the acquisition
of approximately $748,000 and $3,425,000 of
receivables in 1996 and 1995, respectively.
<PAGE>
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.
(4) Premises and Equipment
A summary of premises and equipment at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Leasehold improvements $ 504,328 274,992
Furniture and fixtures 477,158 271,308
Equipment and automobiles 2,762,214 939,531
------------- --------------
Total cost 3,743,700 1,485,831
Accumulated depreciation 1,796,490 779,530
------------- --------------
Net premises and equipment $ 1,947,210 706,301
============= ==============
</TABLE>
(5) Intangible Assets
Intangible assets consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Covenants not to compete $ 102,022 -
Goodwill 2,036,563 -
Insurance expirations 2,135,098 -
Purchase premium 348,938 348,938
------------- ----------
Total cost 4,622,621 348,938
Less accumulated amortization 1,158,807 11,631
------------- ----------
Intangible assets, net $ 3,463,814 337,307
============= ==========
</TABLE>
The majority of the intangibles were acquired by the Company in
connection with its acquisition of TIG.
Amortization expense was approximately $105,000 and $12,000 in 1996 and
1995, respectively.
(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
$304,000 in 1996, $170,000 in 1995 and $125,000 in 1994.
<PAGE>
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.
(7) Notes Payable
At December 31, 1996 and 1995, notes payable consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Note payable to insurance company maturing in May, 1998 and
bearing interest at prime plus 2% and is reset quarterly. $ 500,000 300,000
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 42,615,947 32,203,000
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. 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 -
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. 72,321 -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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 -
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. 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%. 1,639,162 -
-------------- --------------
$ 46,345,883 32,503,000
============== ==============
</TABLE>
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
--------------
$ 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. Of this amount, approximately $39 million was available at December
31, 1996. 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.
Also, the Company may pay dividends up to 50% of the current years net
income. As of December 31, 1996, the Company met all such ratios and
requirements.
<PAGE>
TIG maintains a line of credit agreement with the same commercial finance
company for $3 million maturing March 31, 1998. Of this amount,
approximately $1,686,000 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.
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 (9.25% 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 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.
(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 no notes payable
to affiliates as $1,000,000 of notes were converted to common stock
during 1995 and an additional $1,000,000 was repaid from proceeds of the
public stock offering.
At the time of the acquisition of Thaxton Insurance Group, 340,000 shares
of Preferred Stock B of Thaxton Insurance Group were converted to
$340,000 of notes payable. These notes are included in notes payable to
affiliates at December 31, 1996.
(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 in accordance with the Incentive Plan
and which had an exercise price of $9.
In accordance with 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.
<PAGE>
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.
(10) Income Taxes
Income taxes consist of the following:
Current Deferred Total
1996:
Federal $ 276,991 (17,753) 259,238
State 47,106 (3,338) 43,768
------------ ---------- -------------
324,097 (21,091) 303,006
============ ========== =============
1995:
Federal $ 592,100 (142,580) 449,520
State 84,834 (23,388) 61,446
------------ ---------- -------------
676,934 (165,968) 510,966
============ ========== =============
1994:
Federal $ 441,991 (37,680) 404,311
State 65,577 (5,700) 59,877
------------ ---------- -------------
507,568 (43,380) 464,188
============ ========== =============
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to net income before taxes $ 329,597 486,892 435,383
Increase (decrease) in income resulting from:
Goodwill amortization 19,745 3,955 -
TRL nontaxable income (79,132) (84,712) (29,860)
State taxes, less related federal benefit 28,887 40,554 39,518
Other 3,909 64,277 19,147
---------- ---------- ----------
Income taxes $ 303,006 510,966 464,188
========== ========== ==========
</TABLE>
The effective tax rate was 31.3%, 35.7% and 36.2% for the years
ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 872,213 341,416
Intangibles - 22,591
Unearned interest and fees 28,856 187,414
Other 34,016 78,380
----------- -----------
Total gross deferred tax assets 935,085 629,801
Less valuation allowance - -
Net deferred tax assets 935,085 629,801
Deferred tax (liabilities)
Prepaid insurance (300,525) (173,743)
Depreciable basis of fixed assets (92,144) -
Deferred loan costs (88,232) -
Intangibles (146,667) -
Other (4,705) -
----------- ----------
Total gross deferred tax liability (632,273) (173,743)
----------- -----------
Net deferred tax asset $ 302,812 456,058
=========== ===========
</TABLE>
The Company recorded deferred tax liabilities of $174,337 related to its
1996 acquisition of Thaxton Insurance Group, 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.
24
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company did not change accounting firms and had no disagreements on
accounting or financial disclosure matters with its independent certified public
accountants to report under this Item.
25
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's directors and executive officers and their ages as of March
11, 1997 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James D. Thaxton ..................... 50 Chairman of the Board, President and Chief
Executive Officer
Robert L. Wilson...................... 56 Executive Vice President, Chief
Operating Officer and Director
Kenneth H. James...................... 44 Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
C. L. Thaxton, Sr..................... 73 Director
Jack W. Robinson*..................... 66 Director
Perry L. Mungo*....................... 59 Director
</TABLE>
*Members of Audit and Compensation Committees
JAMES D. THAXTON has served as Chairman of the Board, President and
Chief Executive Officer of the Company since it was founded. Prior to joining
the Company, Mr. Thaxton was an insurance agent at C.L. Frates & Company in
Oklahoma City, Oklahoma from 1974 to 1976. From 1972 to 1973, he was employed as
an underwriter by United States Fidelity and Guaranty. James D. Thaxton is the
son of C.L. Thaxton, Sr.
ROBERT L. WILSON joined the Company in January 1991 and has served since
July 1991, as its Executive Vice President, Chief Operating Officer and a
director. From October 1988 until July 1990, Mr. Wilson served as Operations
Manager of MANH - Financial Services Corp. For more than 25 years prior thereto,
Mr. Wilson served in various positions with American Credit Corporation and its
successor, Barclays American Corporation, including as Southeastern Regional
Manager and Executive Vice President of Barclays American Credit Division.
KENNETH H. JAMES joined the Company in August 1995. Prior thereto, he
was employed by General Electric Capital Mortgage Corporation since 1980,
holding the positions of First Vice President and Comptroller of the Mortgage
Insurance group. From 1979 to 1980 Mr. James was employed by the North Carolina
Department of Insurance as an Insurance Company Examiner. From 1975 to 1979 Mr.
James was employed by FCX, Inc., holding the positions of Assistant Controller,
Tax Manager and Internal Auditor.
C.L. THAXTON, SR. has served on the Board of Directors of the Company
since it was founded. Mr. Thaxton is a director of Thaxton Insurance, which he
founded in 1950 and is the manager of its Pageland branch office. Mr. Thaxton is
the father of James D. Thaxton.
JACK W. ROBINSON, who became a director in August 1995, is the
President, Chief Executive Officer and principal owner of MMC Holding, Inc.,
which through its principal subsidiary is engaged in mica mining.
PERRY L. MUNGO, who became a director in August 1995, is the President,
Chief Executive Officer and principal owner of P.F. & P.L. Mungo, Inc., a
privately-owned industrial and commercial construction company.
26
<PAGE>
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. The Company's
executive officers are appointed by and serve at the discretion of the Board of
Directors.
The Board of Directors has established a Compensation Committee which
makes recommendations concerning salaries and incentive compensation for
executive officers and other employees of the Company and administers the
Company's stock plans. The Board has also established an Audit Committee, which
recommends to the Board of Directors the selection of the Company's independent
auditors and reviews the results and scope of the audit and other services
provided by the independent auditors. Messrs. Robinson and Mungo are the members
of the Compensation and Audit Committees. Directors do not receive any
compensation from the Company for their service as members of the Board of
Directors. All directors are reimbursed for reasonable expenses incurred by them
in attending Board and Board committee meetings.
ITEM 10. EXECUTIVE COMPENSATION
The table below shows the compensation paid or accrued by the Company, for
the year ended December 31, 1996, to or for the account of the Chief Executive
Officer and its only other executive officer whose total salary and bonus
exceeded $100,000 during 1996 (together, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
RESTRICTED
NAME AND PRINCIPLE POSITION YEAR SALARY BONUS STOCK AWARD
($) ($) ($)
<S> <C> <C> <C>
James D. Thaxton, President 1996 83,908 66,037 --
and Chief Executive Officer 1995 74,513 10,100 --
Robert L. Wilson, Executive 1996 130,507 127,747 --
Vice President 1995 123,076 32,985 900,000(1)
</TABLE>
(1) Upon the closing of the Company's initial public offering on December 29,
1995, Mr. Wilson was awarded 100,000 shares of restricted common stock.
Subject to his continued employment by the Company, the award will vest in
ten annual installments which commenced on the date of the grant. At
December 31, 1996, 80,000 shares of the award remained subject to
restriction and, not withstanding such restriction, had a market value of
$880,000 on that date. Mr. Wilson is entitled to vote and receive dividends
on restricted shares.
27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the common stock at March 7, 1997 by: (i) the only
person who is the beneficial owner of more than five percent of the outstanding
common stock; (ii) each director; and (iii) directors and officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
NATURE OF BENEFICIAL PERCENTAGE OF COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP STOCK OUTSTANDING(1)
<S> <C> <C>
James D. Thaxton 3,148,000(2) 80.2
Robert L. Wilson 100,000 2.5
Kenneth H. James 1,111 *
C. L. Thaxton, Sr. 55,555(3) 1.4
Jack W. Robinson 112,553(4) 2.9
Perry L. Mungo 29,000 *
Directors and officers 3,446,219 87.8
as a group(6)
</TABLE>
- -------------------------------
(1) An asterisk (*) indicates less than one percent
(2) Includes 1,112,828 shares held by a family limited partnership as to which
Mr. Thaxton shares voting and investment power.
(3) Includes 37,222 shares held of record by Mr. Thaxton's spouse, Katherine
D. Thaxton, as to which Mr. Thaxton shares voting and investment power.
(4) Includes 4,150 shares held of record by Mr. Robinson's spouse, Kathryn H.
Robinson, as to which Mr. Robinson shares voting and investment power.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONVERSION AND REPAYMENT OF SUBORDINATED DEBT
Concurrent with the closing of the Company's initial public offering on
December 29, 1995, $1.0 million of subordinated debt held by affiliates of the
Company was converted into 111,111 shares of Common Stock. Of that number,
55,556, 18,333 and 37,222 shares were issued to TIG, C. L. Thaxton, Sr. and
Katherine D. Thaxton, respectively. James D. Thaxton owned a one-third interest
in TIG at the time of the conversion. C. L. Thaxton, Sr. is a director of the
Company and Katherine D. Thaxton is his spouse.
On December 29, 1995, the Company repaid $1.0 million of subordinated debt
to TIG.
The subordinated debt converted into Common Stock represented notes
payable that were to mature in August 1997 and April 1998. The notes paid
interest at ten percent, or the prime rate of a specified bank plus one percent
whichever amount was greater. The Company had used the proceeds of the
subordinated notes to fund the growth of its portfolio of finance receivables.
ACQUISITION OF THAXTON INSURANCE GROUP, INC.
On October 31, 1996, the Company acquired The TIG by exchanging 300,000
shares of common stock in a private placement for all outstanding shares of
capital stock of TIG. Pursuant to this acquisition, the Company acquired all of
the property, plant and equipment of TIG, which operates 19 independent
insurance agencies in North and South Carolina. The number of shares issued in
the transaction was determined based upon a multiple of gross commissions
collected by TIG during the twelve month period ended December 31, 1995 which
were approximately $3.7 million, and the market value of the Company's shares
issued in this transaction, taking into account the transferability restrictions
applicable thereto.
28
<PAGE>
The shares were acquired from James D. Thaxton, William H. Thaxton, and
Calvin L. Thaxton, Jr. James D. Thaxton is an executive officer, director and
majority shareholder of the Company. William H. and Calvin L. Thaxton are James
D. Thaxton's brothers.
ITEM 13. 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
The Company filed one current report on form 8-K during the quarter ended
December 31,1996. The report, dated October 31, 1996, reported the acquisition
of TIG by the Company. No financial statements were required to be filed with
the form.
29
<PAGE>
SIGNATURES
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.
(Registrant)
Date: March 26, 1997 By:/s/ KENNETH H. JAMES
--------------------
Kenneth H. James
Vice President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
<S> <C> <C>
/s/ JAMES D. THAXTON President, Chief Executive Officer March 26, 1997
James D. Thaxton and Chairman of the Board of Directors
/s/ KENNETH H. JAMES Vice President, Chief March 26, 1997
- --------------------
Kenneth H. James Financial Officer(Principle Accounting
and Financial Officer) and Director
/s/ ROBERT L. WILSON Executive Vice President and Director March 26, 1997
- --------------------
Robert L. Wilson
/s/ C. L. THAXTON, SR. Director March 26, 1997
C. L. Thaxton, Sr.
/s/ JACK W. ROBINSON Director March 26, 1997
Jack W. Robinson
/s/ PERRY L. MUNGO Director March 26, 1997
Perry L. Mungo
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
No annual report or proxy statement has been sent to security holders. An annual
report will be furnished to security holders subsequent to the filing of the
annual report on this Form.
30
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
<S> <C>
2 Stock Purchase Agreement, dated as of September 1, 1995 with Eagle Premium --
Finance Company, Inc.(1)
3.1 Amended and Restated Articles of Incorporation of The Thaxton Group, Inc.(1) --
3.2 Bylaws of the Thaxton Group,Inc.(1) --
10.1 Amended and Restated Loan and Security Agreement dated March 27, 1995 between --
Finova Capital Corporation and the Company(1)
10.2 Loan Agreement dated May 16, 1994 between the American Bankers Insurance --
Company of Florida and the Company(1)
10.3 Promissory note dated April 1, 1995 payable in the amount of $250,000 to --
Thaxton Insurance Group(1)
10.4 Promissory note dated April 1, 1995 payable in the amount of $165,000 to C. L. --
Thaxton, Sr. (1)
10.5 Promissory note dated April 1, 1995 payable in the amount of $250,000 to --
Katherine D. Thaxton(1)
10.6 Promissory note dated April 1, 1995 payable in the amount of $35,000 to --
Katherine D. Thaxton (1)
10.7 Promissory note dated May 1, 1995 payable in the amount of $350,000 to Thaxton --
Insurance Group(1)
10.8 Promissory note dated August 21, 1995 payable in the amount of $100,000 to --
Katherine D. Thaxton(1)
10.9 Security Agreement dated January 19, 1995 between the Company and Oakland Auto --
Sales, including Guaranty by Thaxton Insurance Group, Inc.(1)
10.10 Form of Restricted Stock Award between the Company and Robert L Wilson --
10.11 The Thaxton Group, Inc. 1995 Stock Incentive Plan(1) --
10.12 The Thaxton Group, Inc. Employee Stock Purchase Plan(1) --
10.13 Form of Note Conversion Agreement(1) --
10.14 Amended and Restated Schedule to Loan and Security Agreement dated February 23, --
1996 between Finova Capital Corporation and the Company(2)
10.15 Incentive Stock Option Agreement between Kenneth H. James and the Company (2) --
10.16 Incentive Stock Option Agreement between James A. Cantley and the Company(2) --
10.17 Loan Agreement dated March 18, 1996 between the American Bankers Insurance --
Company of Florida and the Company(2)
10.18 Amended and Restated Schedule to Loan and Security Agreement dated July 29, --
1996 between Finova Capital Corporation and the Company(3)
10.19 Aircraft Sales Agreement between Corporate Aircraft Marketing and The Company --
dated July 16, 1996(3)
10.20 Share Exchange Agreement by and among The Thaxton Group, Inc., Thaxton --
Insurance Group, Inc., James D. Thaxton, William H. Thaxton and Calvin L.
Thaxton, Jr.(4)
10.21 Promissory note payable by the Company to Kramer-Wilson Insurance Services 49
11 Statement re: computation of per share earnings 32
21 Subsidiaries of The Thaxton Group, Inc. 50
27 Financial Data Schedule 51
</TABLE>
- -----------
(1) Incorporated by reference from Registration Statement on Form SB-2,
Commission File No. 33-97130-A
(2) Incorporated by reference from 1995 Annual Report on Form 10-KSB
31
<PAGE>
(3) Incorporated by reference from Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996
(4) Incorporated by reference from Report on Form 8-K dated October 31,
1996
32
<PAGE>
EXHIBIT 10.21
PROMISSORY NOTE
$250,000.00 North Hollywood, California
Sixty (60) days after written demand, THE THAXTON GROUP, INC.("Maker"),
promises to pay to the order of KRAMER-WILSON COMPANY INSURANCE SERVICES, a
California corporation ("Payee"), at its offices located at 12200 Sylvan Street,
North Hollywood, California, or at such other address as Payee may from time to
time designate, the principal sum of Two Hundred and Fifty Thousand and no/100
Dollars ($250,000), with interest thereon commencing on the date of this Note
and continuing until all sums are paid in full.
Maker agrees to pay interest on the unpaid balance at the rate of two
per cent (2%) above the most recently published reference rate of Bank of
America, N.T.&S.A. as of the date of this Note. On each interest due date
specified in the immediately succeeding paragraph, the rate of interest on this
Note shall be adjusted to that rate which is two per cent (2%) above the then
most recently published reference rate of Bank of America, N.T.&S.A. as of such
interest due date. Upon adjustment, such rate shall continue until the next
interest adjustment date.
All accrued interest shall be due on the first day of each month while
any portion of the principal balance of this Note shall remain unpaid. Interest
payments shall commence on September 1, 1996. Principal and interest are payable
in lawful money of the United States. All payments received shall be credited
first to interest due, balance to principal.
If any payment or interest or principal is not made within ten (10)
days of when due, then there shall be immediately due and payable from Maker to
Payee a late charge in the amount of ten per cent (10%) of the amount not timely
paid, which amount shall be owing whether or not Payee shall exercise any right
to accelerate this Note or exercise any other remedy. In addition, if any
payment of interest or principal is not made within ten (10) days of when due,
Payee shall have the right and option to declare the entire principal sum and
all accrued interest immediately due and payable.
Maker waives presentment, protest and demand, notice of protest, demand
and dishonor and nonpayment and agrees the due date of this Note or any
installment may be extended without affecting any liability hereunder, and
further promises to pay all reasonable cost and expenses, including attorney's
fees, incurred by Payee in connection with any default or in any proceeding to
enforce any provision of this Note or any instrument by which it is secured.
MAKER
/S/ JAMES D. THAXTON August 6, 1996
-------------------- --
James D. Thaxton, President
The Thaxton Group, Inc.
33
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Tico Reinsurance, Ltd., a Turks and Caicos Islands, British West Indies
limited liability company
Eagle Premium Finance Company, Inc., a Virginia corporation
CFT Financial Corp., a North Carolina corporation
Thaxton Insurance Group, a South Carolina corporation
34
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 421,465
<SECURITIES> 0
<RECEIVABLES> 48,741,087
<ALLOWANCES> 2,195,000
<INVENTORY> 0
<CURRENT-ASSETS> 46,967,552
<PP&E> 3,743,700
<DEPRECIATION> 1,796,490
<TOTAL-ASSETS> 56,681,567
<CURRENT-LIABILITIES> 2,222,301
<BONDS> 0
0
0
<COMMON> 39,322
<OTHER-SE> 6,231,983
<TOTAL-LIABILITY-AND-EQUITY> 56,681,567
<SALES> 0
<TOTAL-REVENUES> 15,800,127
<CGS> 0
<TOTAL-COSTS> 7,395,640
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,593,399
<INTEREST-EXPENSE> 3,841,683
<INCOME-PRETAX> 969,405
<INCOME-TAX> 303,006
<INCOME-CONTINUING> 666,399
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 666,399
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
