UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
( ) 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 29270
-----------------------------------------------------
(Address of principal executive offices)
Issuers telephone number: 803-285-4337
Indicate by check mark whether the issuer (1) has filed all reports required to
by filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months(or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
OUTSTANDING AT
CLASS JULY 31, 1998
----- -------------
COMMON STOCK 3,751,652
1
<PAGE>
THE THAXTON GROUP, INC.
FORM 10-QSB
JUNE 30, 1998
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at June 30, 1998 and 3
December 31, 1997
Consolidated Statements of Income for the six months
ended June 30, 1998 and 1997 4
Consolidated Statements of Income for the three months
ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
June 30, December 31,
1998 1997
---- ----
Assets (Unaudited)
- ------
Cash $ 600,433 1,162,793
Finance receivables, net 47,456,364 48,662,228
Premises and equipment, net 1,928,233 2,003,787
Accounts receivable 1,208,298 1,616,570
Repossessed automobiles 621,282 744,030
Goodwill and other intangible assets 3,732,908 3,894,956
Other assets 3,688,334 2,881,308
----------- ----------
Total assets 59,235,852 60,965,672
=========== ==========
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable 354,754 420,863
Notes payable 49,380,503 51,071,066
Notes payable to affiliates 1,037,935 1,015,358
Accounts payable 1,681,685 1,357,739
Employee savings plan 973,959 1,045,533
Other liabilities 325,241 85,796
----------- ----------
Total liabilities 53,754,077 54,996,355
Stockholders' Equity
Preferred Stock $ .01 par value,
Series A: 400,000 shares authorized,
178,014 shares issued and outstanding 1,780 1,780
Series B: 27,076 shares authorized, issued and
outstanding 271 271
Series C: 50,000 shares authorized, issued and
outstanding in 500 500
Common stock, $ .01 par value; authorized 50,000,000
shares, issued and outstanding 3,780,900 shares at
June 30,1998, 3,780,900 shares at December 31, 1997 37,809 37,956
Additional paid-in-capital 4,283,919 4,521,354
Deferred stock award (540,000) (630,000)
Retained earnings 1,697,496 2,037,456
----------- ----------
Total stockholders' equity 5,481,775 5,969,317
----------- ----------
Total liabilities and stockholders' equity $59,235,852 60,965,672
=========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income (Unaudited)
Six Months Ended June 30
1998 1997
---- ----
Interest and fee income $7,521,980 7,768,199
Interest expense 2,412,853 2,394,340
---------- -------
Net interest income 5,109,127 5,373,859
Provision for credit losses 1,967,042 1,538,832
---------- -------
Net interest income after provision for credit losses 3,142,085 3,835,027
Other income:
Insurance premiums and commissions, net 2,852,950 2,529,800
Other income 473,133 649,552
---------- -------
Total other income 3,326,083 3,179,352
---------- -------
Operating expenses:
Compensation and employee benefits 3,371,390 3,022,796
Telephone, postage, and supplies 830,160 661,505
Net occupancy 810,384 714,864
Reinsurance claims expense 126,560 215,956
Insurance 66,340 137,292
Collection expense 79,931 82,393
Travel 63,405 60,265
Professional fees 114,737 86,407
Other 1,353,050 1,116,989
---------- -------
Total operating expenses 6,815,957 6,098,467
---------- -------
Income (loss) before income tax expense (347,789) 915,912
Income tax expense (benefit) (113,031) 329,173
---------- -------
Net income (loss) $ (234,758) 586,739
========== =======
Dividends on preferred stock $ 105,202 -
========== =======
Net income (loss) applicable to common shareholders $(339,960) 586,739
========== =======
Net income (loss) per common share -- basic $ (0.09) 0.15
========== =======
Net income (loss) per common share -- diluted $ (0.09) 0.15
========== =======
Weighted average shares outstanding -- basic 3,787,892 3,927,455
========== =======
Weighted average shares outstanding -- diluted 3,787,892 3,927,455
========== =======
See accompanying notes to consolidated financial statements.
4
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30
1998 1997
---- ----
Interest and fee income $3,840,088 4,248,988
---------- ---------
Interest expense 1,335,438 1,245,544
Net interest income 2,504,650 3,003,444
Provision for credit losses 933,588 809,065
---------- ---------
Net interest income after provision for credit losses 1,571,062 2,194,379
Other income:
Insurance premiums and commissions, net 1,468,398 1,322,143
Other income 248,650 200,690
---------- ---------
Total other income 1,717,048 1,522,833
---------- ---------
Operating expenses:
Compensation and employee benefits 1,555,698 1,593,322
Telephone, postage, and supplies 442,871 344,230
Net occupancy 453,388 359,330
Reinsurance claims expense 58,451 92,301
Insurance 26,833 80,331
Collection expense 42,689 39,082
Travel 30,520 27,858
Professional fees 83,117 52,937
Other 623,304 694,878
---------- ---------
Total operating expenses 3,316,871 3,284,269
---------- ---------
Income (loss) before income tax expense (28,761) 432,943
Income tax expense (benefit) (9,347) 160,480
---------- ---------
Net income (loss) $ (19,414) 272,463
========== =========
Dividends on preferred stock $ 50,954 -
========== =========
Net income (loss) applicable to common
shareholders $(70,368) 272,463
========== =========
Net income (loss) per common share -- basic $ (0.02) 0.07
========== =========
Net income (loss) per common share -- diluted $ (0.02) 0.07
========== =========
Weighted average shares outstanding -- basic 3,781,846 3,925,507
========== =========
Weighted average shares outstanding -- diluted 3,781,846 3,925,507
========== =========
See accompanying notes to consolidated financial statements.
5
<PAGE>
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1998 and 1997
1998 1997
---- ----
Cash flows from operating activities $ 2,375,535 2,058,723
Cash flows from investing activities (1,017,125) (6,855,393)
Cash flows from financing activities (1,920,770) 5,170,374
Net increase (decrease) in cash (562,360) 373,704
Cash at beginning of period 1,162,793 421,465
Cash at end of Period $ 600,433 795,169
6
<PAGE>
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina and operates branches in South Carolina, North Carolina,
Georgia, Virginia and Tennessee. The Company is a diversified consumer finance
company that is engaged primarily in purchasing and servicing retail installment
contracts purchased from independent used car dealers and making and servicing
personal loans to borrowers with limited credit histories, low incomes or past
credit problems. The Company also offers insurance premium financing to such
borrowers. A substantial amount of the Company's premium finance business has
been derived from customers of the independent insurance agencies owned by
Thaxton Insurance Group, Inc. ("Thaxton Insurance"). The Company provides
reinsurance through a wholly owned subsidiary, TICO Reinsurance, Ltd. ("TRL").
Through a wholly owned subsidiary, CFT Financial Corporation, the Company is
also engaged in mortgage banking, originating mortgage loans to individuals. The
Company sells substantially all mortgage loans it originates to independent
third parties. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
Information with respect to June 30, 1998 and 1997, and the periods then ended,
have not been audited by the Company's independent auditors, but in the opinion
of management, reflect all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the operations of the
Company. Users of financial information produced for interim periods are
encouraged to refer to the footnotes contained in the Company's Annual Report on
Form 10-KSB when reviewing interim financial statements. The results of
operations for the six months and quarter ended June 30, 1998 are not
necessarily indicative of results to be expected for the entire fiscal year.
Effective January 1, 1998, the Company adopted the provisions of SFAS Number
130, "Reporting Comprehensive Income." This Statement establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. The objective of the Statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events during the period other than transactions with owners.
Comprehensive income is divided into net income and other comprehensive income.
Adoption of this Statement will not change total shareholders' equity as
previously reported. The Company's adoption of this Statement had no effect on
the presentation of income in the Company's financial statements for the periods
ending June 30, 1998 and 1997, as comprehensive income equals net income.
7
<PAGE>
(2) Finance Receivables
Finance receivables consist of the following at June 30, 1998 and December
31,1997:
June 30, December 31,
1998 1997
----------- ----------
Automobile Sales Contracts $42,533,244 48,098,657
Direct Loans 17,798,070 15,449,004
Premium Finance Contracts 4,527,204 4,010,608
Commercial 268,429 0
----------- ----------
Total finance receivables 65,126,947 67,558,269
Unearned interest (11,659,115) (12,902,552)
Unearned insurance premiums, net (117,424) (155,514)
Bulk purchase discount (462,490) (359,945)
Dealer hold back (610,954) (668,630)
Allowance for credit losses (4,820,600) (4,809,400)
----------- ----------
Finance receivables, net $47,456,364 48,662,228
=========== ==========
Consumer loans include bulk purchases of receivables, auto dealer
receivables under holdback arrangements, and small consumer loan
receivables. With bulk purchase arrangements, the Company typically
purchases a group of receivables from an auto dealer or other retailer at a
discount to par based on management's review and assessment of the
portfolio to be purchased. This discount amount is then maintained in an
unearned income account to which losses on these loans are charged. To the
extent that losses from a bulk purchase exceed the purchase discount, the
allowance for credit losses will be charged. To the extent losses
experienced are less than the purchase discount, the remaining discount is
accreted into income. The amount of bulk purchased receivables, net of
unearned interest and insurance, and the related purchase discount
outstanding were approximately $6,121,000 and $462,000, respectively, at
June 30, 1998 and approximately $8,328,000 and $360,000, respectively, at
December 31, 1997.
With holdback arrangements, an automobile dealer or other retailer will
assign receivables to the Company on a loan-by-loan basis, typically at
par. The Company will withhold a certain percentage of the proceeds,
generally 5% to 10%, as a dealer reserve to be used to cover any losses
which occur on these loans. The agreements are structured such that all or
a portion of these holdback amounts can be reclaimed by the dealer based on
the performance of the receivables. To the extent that losses from these
holdback receivables exceed the total remaining holdback amount for a
particular dealer, the allowance for credit losses will be charged. The
amount of holdback receivables, net of unearned interest and insurance, and
the related holdback amount outstanding were approximately $27,671,000 and
$611,000, respectively, at June 30, 1998 and approximately $31,593,000 and
$669,000, respectively, at December 31, 1997.
At June 30, 1998, there were no significant concentrations of receivables
in any type of property or to one borrower.
These receivables are pledged as collateral for a line of credit agreement
(see note 3).
8
<PAGE>
Changes in the allowance for credit losses for the six months ended June
30, 1998 and 1997 are as follows:
1998 1997
---- ----
Beginning balance $ 4,809,400 2,195,000
Provision for credit losses 1,967,042 1,538,832
Charge-offs (2,042,751) (1,436,203)
Recoveries 86,909 92,441
------------- -----------
Net charge-offs (1,955,842) (1,343,762)
------------- -----------
Ending balance $ 4,820,600 2,390,070
============ ==========
The Company's loan portfolio primarily consists of short term loans, the
majority of which are originated or renewed during the current year.
Accordingly, the Company estimates that fair value of the finance
receivables is not materially different from carrying value.
(3) Notes Payable
At June 30, 1998, the Company maintained a line of credit agreement with a
commercial finance company for $100 million, maturing on August 31, 1999. At
June 30, 1998, the Company's net finance receivables would have allowed it to
borrow an additional $7.6 million against existing collateral. The outstanding
balance under this line of credit was $41,533,000 at June 30, 1998. There are
six tranches under this agreement, Tranche A, B, C, D, E and F. The total line
of credit, amount of credit line available at June 30, 1998, and interest rate
for each Tranche is summarized below:
Tranche A: $100,000,000; $58,608,000; 9.5% (Lender's prime rate + 1%)
Tranche B: $ 10,000,000; $10,000,000; 13.5% (Lender's prime rate + 5%)
Tranche C: $ 5,000,000; $ 4,859,000; 9.5% (Lender's prime rate + 1%)
Tranche D: $ 10,000,000; $10,000,000; 10.5% (Lender's prime rate + 2%)
Tranche E: $ 7,000,000; $ 7,000,000; 13.5% (Lender's prime rate + 5%)
Tranche F: $ 25,000,000; $25,000,000; 9.5% (Lender's prime rate + 1%)
The borrowing availability under certain Tranches is also limited by amounts
borrowed under other Tranches, outstanding receivables, insurance premiums
written, and in some cases, additional restrictions. As a result of these
additional restrictions, the Company had approximately $58 million total
potential borrowing capacity, and actual borrowing capacity of approximately
$7.6 million as of June 30, 1998.
The terms of the line of credit agreement provide that the finance receivables
are pledged as collateral for the amount outstanding. The agreement requires the
Company to maintain certain financial ratios at established levels and comply
with other non-financial requirements which may be amended from time to time.
Also, the Company may pay dividends up to 25% of the current year's net income.
As of June 30, 1998, the Company met all such ratios and requirements or
obtained waivers for any instances of non-compliance.
(4) Deferred Stock Award
One of the Company's executive officers has notified the Company that he does
not intend to accept 10,000 shares of common stock previously granted under the
Company's deferred stock compensation plan which were scheduled to vest on
December 30, 1998. Accordingly, no compensation expense related to the vesting
of those shares has been recognized for the period ended June 30, 1998. The
common stock, paid-in-capital, and deferred stock award accounts have been
adjusted to reflect cancellation of those shares.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a diversified consumer financial services company that,
operating in Georgia, North Carolina, South Carolina, Tennessee and Virginia
under the name "TICO Credit Company," is engaged in purchasing and servicing
retail installment contracts ("Automobile Sales Contracts") originated by
independent used automobile dealers ("Dealers") and making and servicing
personal loans ("Direct Loans") to persons with limited credit histories, low
incomes or past credit problems ("Non-prime Borrowers"). Under the name "TICO
Premium Finance Company" in North Carolina and South Carolina and "Eagle Premium
Finance" in Virginia, the Company finances insurance premiums ("Premium Finance
Contracts"), primarily for personal lines of insurance purchased by Non-prime
Borrowers through independent agents ("Premium Finance"). The Company also
sells, on an agency basis, various lines of automobile, property and casualty,
life and accident and health insurance, and also sells 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.
BUSINESS AND GROWTH STRATEGY
In order to expand its business and improve operating results, the Company
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 automobile 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 continue to diversify. Although
management anticipates that some of the Company's growth over the next 12 to
18 months will be in its portfolio of Automobile Sales Contracts, Direct
Loan, Premium Finance Contract origination, and the origination of
residential mortgage loans will be emphasized as well. Moreover, management
believes the customer base of Thaxton Insurance will continue to provide
significant opportunities to cross-sell the Company's various financial
products and services. The Company operates finance offices in a number of
markets where Thaxton Insurance operates, and in many cases the profile of a
Thaxton Insurance customer is similar to that of a Non-prime Borrower. An
incentive program that rewards employees who successfully pursue
cross-selling opportunities has been in place since 1996. The Company
actively seeks to enter other financial services businesses.
o EXPERIENCED MANAGEMENT -- The management team for 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
finance offices. The management team for the Company's insurance agency
activities also has extensive experience in insurance agency operations.
o EXPANSION OF THE COMPANY'S OFFICE NETWORK -- The Company currently has a
total of 24 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 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 successful. The
Company will also seek opportunities to expand its insurance office network
through acquisition of additional independent insurance agencies in markets
management believes are attractive.
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.
10
<PAGE>
PROFITABILITY
The following table sets forth certain data relating to the Company's
profitability.
<TABLE>
<CAPTION>
<S> <C>
For the Six Months For the Three Months
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Average Net Finance Receivables (1) $51,660,489 $51,035,860 $51,358,505 $52,289,595
Average notes payable 44,368,573 43,873,630 43,947,486 44,758,058
Interest and fee income 7,520,068 7,740,263 3,838,176 4,039,702
Interest expense (2) 2,112,561 2,133,916 1,066,160 1,111,725
----------- ----------- ----------- -----------
Net interest income 5,407,507 5,606,347 2,772,016 2,927,977
=========== =========== =========== ===========
Average interest rateearned (1) 29.11% 30.33% 29.89% 30.90%
Average interest rate paid (1) 9.52 9.73 9.70 9.94
Net interest spread 19.59 20.60 20.19 20.96
=========== =========== =========== ===========
Net interest margin (3) 20.93% 21.97% 21.59% 22.40%
</TABLE>
(1) Averages are computed using month-end balances during the periods
presented.
(2) Excludes TIG interest income and expense.
(3) Net interest margin represents net interest income divided by average Net
Finance Receivables.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Finance Receivables at June 30, 1998 were $65,126,947 versus $69,672,416
at June 30, 1997, a 7% decrease. The decline is due primarily to a decline in
volume associated with the company's tightened underwriting policies instituted
in the third quarter of 1997 designed to reduce credit losses.
Unearned income at June 30, 1998 was $11,776,539 versus $13,877,411 at
June 30, 1997, a 15% decrease which was directly related to the lower receivable
level. The provision for credit losses established for the six months ended June
30, 1998 was $1,967,042 versus $1,538,832 for 1997, and the allowance for credit
losses increased from $2,390,070 at June 30, 1997 to $4,820,600 at June 30,
1998. The increase in the provision is due to the Company's strengthening of its
allowance for credit losses in response to higher than expected loan losses. The
allowance for credit losses as a percentage of average Net Finance Receivables
increased from 4.68% at June 30, 1997 to 9.33% at June 30, 1998.
Interest and fee income for the six months ended June 30, 1998 was
$7,521,980, versus $7,768,199 for the six months ended June 30, 1997, a 3%
decrease. This decrease is the result of lower average earning receivables in
1998 due to tightened underwriting established in the third quarter of 1997 and
a corresponding increase in the average age of the portfolio. Interest expense
increased slightly to $2,412,853 for the six months ended June 30, 1998 versus
$2,394,340 for the six months ended June 30, 1997, a 1% increase, the direct
result of a slightly higher level of outstandings. As a result of the lower
interest and fee income and higher interest expense, net interest income for the
six months ended June 30, 1998 decreased to $5,109,127 from $5,373,859 for the
comparable period of 1997, a 5% decrease.
Insurance commissions net of insurance cost increased to $2,852,950 for
the six months ended June 30, 1998 from $2,529,800 for 1997, due to a higher
penetration rate for the product. Other income decreased from $649,552 at June
30, 1997 to $473,133 at June 30, 1998 due to a timing difference in the
recognition of insurance profit sharing payments from the Company's carriers.
Operating expenses increased from $6,098,467 for the six months ended June
30, 1997 to $6,815,957 for 1998, a 12% increase. The increase in expenses was
due to additional expenses incurred as a result of a larger branch network and
increased home office expenses associated primarily with the Company's mortgage
banking business.
11
<PAGE>
As a result of the above, the company posted a $234,758 loss for the six
months ended June 30, 1998, versus net income of $586,739 for 1997.
Stockholders' equity decreased from $5,969,317 at December 31, 1997 to
$5,481,775 at June 30, 1998, an 8% decrease, as a result of a reduction in
retained earnings from after tax losses during the period combined with
preferred stock dividends paid and legal expenses associated with the preferred
stock offering.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Interest and fee income for the three months ended June 30, 1998 was
$3,840,088, versus $4,248,988 for the three months ended June 30, 1997, a 10%
decrease. This decrease is the result of lower average receivables in 1998 due
to tightened underwriting established in the third quarter 1997. Interest
expense increased to $1,335,438 for the three months ended June 30, 1998 versus
$1,245,544 for the three months ended June 30, 1997, a 7% increase, the direct
result of a higher level of borrowings. As a result of the lower interest and
fee income and higher interest expense, net interest income for the three months
ended June 30, 1998 decreased to $2,504,650 from $3,003,444 for the comparable
period of 1997, a 17% decrease.
Insurance commissions net of insurance cost increased to $1,468,398 for
the three months ended June 30, 1998 from $1,322,143 for 1997, due to a higher
penetration rate for the product. Other income increased from $200,690 for the
three months ended June 30, 1997 to $248,650 for the three months ended June 30,
1998 due to a timing difference in the recognition of insurance profit sharing
payments from the Company's carriers.
Operating expenses increased from $3,284,269 for the three months ended
June 30, 1997 to $3,316,871 for 1998, a 1% increase.
As a result of the above, the company posted a $19,414 loss for the three
months ended June 30, 1998, versus net income of $272,463 for 1997.
CREDIT LOSS EXPERIENCE
Provisions for credit losses are charged to income in amounts sufficient
to maintain the allowance for credit losses at a level considered adequate to
cover the expected future losses of principal and interest in the existing
finance receivable portfolio. Credit loss experience, contractual delinquency of
finance receivables, the value of underlying collateral, and management's
judgment are factors used in assessing the overall adequacy of the allowance and
resulting provision for credit losses. The Company's reserve methodology is
designed to provide an allowance for credit losses that, at any point in time,
is adequate to absorb the charge-offs expected to be generated by the finance
receivable portfolio, based on events or losses that have occurred or are known
to be inherent in the portfolio. The methodology used by the company utilizes
historical charge-off data to predict the charge-offs likely to be generated in
the future by the existing finance receivable portfolio. Loss and portfolio
history are stratified by office and by type of loan, and reserve requirements
are set based upon historical loss factors applied to individual offices as well
as the aggregate portfolio. In addition, changes in dealer and bulk purchase
reserves are analyzed for each individual dealer or bulk purchase, and
additional general reserves are established if aggregate dealer and bulk
purchase reserves are deemed to be inadequate. 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.
12
<PAGE>
The following table sets forth the Company's allowance for credit losses at
June 30, 1998, and 1997 and the credit loss experience over the periods
presented.
<TABLE>
<CAPTION>
<S> <C>
For the Six Months For the Three
Ended June 30, Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Net finance receivables(1) $53,350,408 $55,795,005 $53,350,408 $55,795,005
Allowance for credit losses 4,820,600 2,390,070 4,820,600 2,390,070
Allowance for credit losses as a
percentage of net finance
receivables (1) 9.04% 4.28% 9.04% 4.28%
Dealer reserves and discounts on
bulk purchases $1,073,444 1,936,542 1,073,444 1,936,542
Dealer reserves and discounts on
bulk purchases as percentage of
Automobile Sales Contracts at
period end(2) 3.18% 4.56% 3.18% 4.56%
Allowance for credit losses and
dealer reserves and discount on
bulk purchases as a percentage
of net finance receivables (1) 11.05% 7.75% 11.05% 7.75%
Provision for credit losses $1,967,042 1,538,832 933,588 809,065
Charge-offs (net of recoveries) 1,955,842 1,343,762 874,788 704,053
Charge-offs (net of recoveries)
as a percentage of average net
finance receivables (1) 7.57% 5.26% 6.81% 5.38%
- ---------------------
</TABLE>
(1) Finance Receivable balances are presented net of unearned finance charges.
Averages are computed using month-end balances of Net Finance Receivables
during the period presented.
(2) Percentages are computed using Automobile Sales Contracts, net of unearned
finance charges only.
The following table presents an allocation of the Company's reserves and
allowances for credit losses, by type of receivable. The allowance for credit
losses has been allocated on an approximate basis between Direct Loans and
Premium Finance Contracts because losses on Automobile Sales Contracts are
charged against dealer reserves if the originating dealer's Specific Reserve
Account is adequate to cover the loss. The entire allowance is, however,
available to absorb losses occurring on any type of finance receivable. The
allocation is not indicative of future losses.
At June 30,
-----------
1998 1997
---- ----
Dealer reserves and discounts on bulk
purchases on Automobile Sales Contracts $1,073,444 $1,936,542
Allowance for credit losses:
Direct Loans 4,593,616 2,163,086
Premium Finance Contracts 226,984 226,984
---------- ----------
Subtotal 4,820,600 2,390,070
---------- ----------
Total $5,894,044 $4,326,612
========== ==========
13
<PAGE>
The following table sets forth certain information concerning Automobile Sales
Contracts and Direct Loans at the end of the periods indicated:
At June 30,
-----------
1998 1997
---- ----
Automobile Sales Contracts and Direct Loans
contractually past due 90 days or more(1) $475,292 $490,572
Automobile Sales Contracts and Direct Loans (1) 47,910,807 50,608,830
Automobile Sales Contracts and Direct Loans
contractually past due 90 days or more as a
percentage of Automobile Sales Contracts
and Direct Loans .99% .97%
- -------------------------
(1) Finance receivable balances are presented net of unearned finance
charges, dealer reserves on Automobile Sales Contracts and discounts on bulk
purchases.
The following table sets forth certain information concerning Premium Finance
Contracts at the end of the periods indicated:
At June 30,
-----------
1998 1997
---- ----
Premium finance contracts contractually
past due 60 days or more(1) $126,985 $68,269
Premium finance contracts outstanding(1) 4,366,157 3,249,634
Premium finance contracts contractually
past due 60 days or more as a
percentage of premium finance contracts 2.91% 2.1%
- -------------------------------------------
(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 six tranches.
The primary tranche provides for advances of up to $100 million and the
secondary tranches provides for advances from $5 million to $25 million during
their respective terms, all of which expire on August 31, 1999, 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 June 30, 1998, $42 million was outstanding under the Revolving Credit
Facility and there was $58 million 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 ranges from plus one to five percent per annum for the
secondary tranches. The Revolving Credit Facility agreement, amended on
September 3, 1997, provides for a lower fixed percentage over prime for certain
secondary tranches than did the previous agreement. The Revolving Credit
Facility imposes several financial and other covenants, including leverage
tests, dividend restrictions, and minimum net worth requirements. The Company
does not believe these covenants will materially limit its business or its
expansion strategy.
Management believes that the recent increase in the maximum borrowings
available under the Revolving Credit Facility, in addition to cash expected to
be generated from operations, will provide the resources necessary to pursue the
Company's business and growth strategy through 1998. The company is currently
investigating several options for raising additional funds to support growth in
future years.
14
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Information in response to this item is incorporated by reference
from the attached Index to Exhibits.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K during the quarter ended June 30,
1998.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE THAXTON GROUP, INC.
-----------------------
(Registrant)
Date: August 14, 1998 /s/ JAMES D. THAXTON
-------------------
James D. Thaxton
President and Chief Executive Officer
Date: August 14, 1998 /s/ ALLAN F. ROSS
----------------
Allan F. Ross
Vice President, Treasurer,
Secretary, and Chief Financial Officer
15
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ----------- --------
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 (5) --
11 Statement re: computation of per share earnings 8
21 Subsidiaries of The Thaxton Group, Inc. (5) --
27 Financial Data Schedule 21
(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
(3) Incorporated by reference from Quarterly Report on Form (3) 10-QSB for
the quarter ended September 30, 1996
16
<PAGE>
(4) Incorporated by reference from Report on Form 8-K dated
October 31, 1996
(5) Incorporated by reference from the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996
(6) Incorporated by reference from the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 MAR-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 600,433 600,433
<SECURITIES> 0 0
<RECEIVABLES> 52,276,964 52,276,964
<ALLOWANCES> 4,820,600 4,820,600
<INVENTORY> 0 0
<CURRENT-ASSETS> 48,056,797 48,056,797
<PP&E> 3,005,863 3,005,863
<DEPRECIATION> 1,462,440 1,462,440
<TOTAL-ASSETS> 59,235,852 59,235,852
<CURRENT-LIABILITIES> 2,361,680 2,361,680
<BONDS> 0 0
0 0
0 0
<COMMON> 37,809 37,809
<OTHER-SE> 5,443,966 5,443,966
<TOTAL-LIABILITY-AND-EQUITY> 59,235,852 59,235,852
<SALES> 0 0
<TOTAL-REVENUES> 10,848,063 5,557,136
<CGS> 0 0
<TOTAL-COSTS> 6,815,957 3,316,871
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,967,042 933,588
<INTEREST-EXPENSE> 2,412,853 1,335,438
<INCOME-PRETAX> (347,789) (28,761)
<INCOME-TAX> (113,031) (9,347)
<INCOME-CONTINUING> (234,758) (19,414)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (234,758) (19,414)
<EPS-PRIMARY> (0.09) (0.02)
<EPS-DILUTED> (0.09) (0.02)
</TABLE>
