Back to GetFilings.com



Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Period Ended June 30, 2002
 
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 333-42623
 
 
THE THAXTON GROUP, INC.
(Exact name of registrant as specified in its charter)
 
South Carolina
  
57-0669498
(State or other jurisdiction of
incorporation or organization)
  
(IRS Employer
Identification No.)
 
1524 Pageland Highway, Lancaster, South Carolina 29720
(Address of principal executive offices)
 
Issuer’s telephone number: 803-285-4337
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No  ¨
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
  
Outstanding at August 10, 2002
Common Stock
  
6,870,900
 

Table of Contents
 
THE THAXTON GROUP, INC.
 
FORM 10-Q
June 30, 2002
 
TABLE OF CONTENTS
 
Item
No.
       
Page
   
PART I
     
   
FINANCIAL INFORMATION
     
1.
  
Financial Statements
     
      
2
      
3
      
4
      
5
      
6
      
7
2.
     
12
3.
     
16
   
PART II
     
   
OTHER INFORMATION
     
1.
     
16
2.
     
16
3.
     
16
4.
     
16
5.
     
16
6.
     
16

Table of Contents
 
ITEM 1:    Financial Statements
 
THE THAXTON GROUP, INC.
 
CONSOLIDATED BALANCE SHEETS
June 30, 2002 & December 31, 2001
 
    
June 30,
2002
   
December 31,
2001
  
    
(Unaudited)
       
ASSETS
                
Cash
   
$
3,809,514
   
$
4,096,359
 
Finance receivables, net
   
 
172,219,777
   
 
181,255,030
 
Premises and equipment, net
   
 
4,390,064
   
 
4,246,816
 
Accounts receivable
   
 
1,275,578
   
 
1,813,743
 
Accounts receivable from affiliates
   
 
—  
   
 
113,185
 
Repossessed automobiles
   
 
703,545
   
 
952,153
 
Deposit
   
 
7,809,028
   
 
6,710,692
 
Goodwill and other intangible assets
   
 
32,377,219
   
 
32,481,654
 
Deferred tax asset, net
   
 
2,910,000
   
 
2,752,000
 
Other assets
   
 
8,478,323
   
 
8,138,673
 
    
  
Total assets
   
$
233,973,048
   
$
242,560,305
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Liabilities
                
Accrued interest payable
   
$
2,167,372
   
$
2,194,814
 
Notes payable
   
 
210,300,362
   
 
225,033,166
 
Accounts payable
   
 
1,880,780
   
 
1,361,490
 
Accounts payable to related parties
   
 
1,505,923
   
 
254,043
 
Income taxes payable
   
 
2,983,065
   
 
2,270,068
 
Employee savings plan
   
 
1,122,621
   
 
1,083,594
 
Other liabilities
   
 
4,521,805
   
 
4,078,594
 
    
  
Total liabilities
   
 
224,481,928
   
 
236,275,769
 
    
  
Stockholders’ Equity
                
Preferred Stock $.01 par value:
                
Series A:  400,000 shares authorized; issued and outstanding 10,440 shares in 2002, 10,440 shares in 2001; liquidation value $104,400 in 2002 and 2001
   
 
104
   
 
104
 
Series C:  50,000 shares authorized issued and outstanding in 2002 and 2001; liquidation value $500,000 in 2002 and 2001
   
 
500
   
 
500
 
Series E:  800,000 shares authorized, issued and outstanding in 2002 and 2001; liquidation value $8,000,000 in 2002 and 2001
   
 
8,000
   
 
8,000
 
Series F:  100,000 shares authorized; issued and outstanding 20,000 shares in June 2002; liquidation value $200,000 in 2002 and 2001.
   
 
200
   
 
200
 
Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding 6,871,100 in 2002; 6,849,355 shares in 2001
   
 
68,711
   
 
68,493
 
Additional paid-in-capital
   
 
8,869,586
   
 
8,831,599
 
Retained earnings (accumulated deficit)
   
 
544,019
   
 
(2,624,360
)
    
  
Total stockholders’ equity
   
 
9,491,120
   
 
6,284,536
 
    
  
Total liabilities and stockholders’ equity
   
$
233,973,048
   
$
242,560,305
 
    
  
 
See accompanying notes to consolidated financial statements.

2

Table of Contents
 
THE THAXTON GROUP, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 2002 and 2001
(Unaudited)
 
    
2002
   
2001
Interest and fee income
   
$
18,622,223
   
$
17,586,979
Interest expense
   
 
3,621,559
   
 
4,334,075
    
  
Net interest income
   
 
15,000,664
   
 
13,252,904
Provision for credit losses
   
 
4,701,404
   
 
3,634,475
    
  
Net interest income after provision for credit losses
   
 
10,299,260
   
 
9,618,429
Other income:
              
Insurance premiums and commissions, net
   
 
4,074,640
   
 
3,339,247
Other income
   
 
616,624
   
 
1,108,392
    
  
Total other income
   
 
4,691,264
   
 
4,447,639
    
  
Operating expenses:
              
Compensation and employee benefits
   
 
7,917,681
   
 
7,779,543
Telephone, computers
   
 
564,419
   
 
558,176
Net occupancy
   
 
1,642,346
   
 
1,609,346
Reinsurance claims expense
   
 
642,695
   
 
419,299
Advertising
   
 
825,120
   
 
834,540
Collection expense
   
 
159,326
   
 
225,969
Travel
   
 
288,021
   
 
325,938
Professional fees
   
 
349,789
   
 
258,868
Office expense
   
 
563,015
   
 
621,196
Amortization expense
   
 
150,751
   
 
606,637
Other
   
 
574,747
   
 
260,034
    
  
Total operating expenses
   
 
13,677,910
   
 
13,499,546
    
  
Income before income tax expense
   
 
1,312,614
   
 
566,522
Income tax expense
   
 
447,153
   
 
297,619
    
  
Net income
   
 
865,461
   
 
268,903
Dividends on preferred stock
   
 
145,736
   
 
189,568
    
  
Net income applicable to common shareholders
   
$
719,725
   
$
79,335
    
  
Net income per common share—basic and diluted
   
$
0.10
   
$
0.01
 
See accompanying notes to consolidated financial statements.

3

Table of Contents
 
THE THAXTON GROUP, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 2002 and 2001
(Unaudited)
 
    
2002
   
2001
Interest and fee income
   
$
38,366,233
   
$
36,116,289
Interest expense
   
 
7,313,429
   
 
9,806,699
    
  
Net interest income
   
 
31,052,804
   
 
26,309,590
Provision for credit losses
   
 
8,371,672
   
 
6,609,308
    
  
Net interest income after provision for credit losses
   
 
22,681,132
   
 
19,700,282
Other income:
              
Insurance premiums and commissions, net
   
 
7,831,912
   
 
6,898,823
Other income
   
 
2,181,659
   
 
2,307,772
    
  
Total other income
   
 
10,013,571
   
 
9,206,595
    
  
Operating expenses:
              
Compensation and employee benefits
   
 
16,386,188
   
 
15,607,999
Telephone, computers
   
 
1,106,511
   
 
1,156,983
Net occupancy
   
 
3,260,061
   
 
3,174,396
Reinsurance claims expense
   
 
932,421
   
 
644,946
Advertising
   
 
1,511,918
   
 
1,488,273
Collection expense
   
 
308,902
   
 
329,291
Travel
   
 
563,568
   
 
548,196
Professional fees
   
 
619,446
   
 
529,843
Office expense
   
 
1,142,389
   
 
1,233,720
Amortization expense
   
 
300,324
   
 
1,215,060
Other
   
 
1,321,406
   
 
1,386,168
    
  
Total operating expenses
   
 
27,453,134
   
 
27,314,875
    
  
Income before income tax expense
   
 
5,241,569
   
 
1,592,002
Income tax expense
   
 
1,782,997
   
 
751,281
    
  
Net income
   
 
3,458,572
   
 
840,721
Dividends on preferred stock
   
 
290,193
   
 
360,915
    
  
Net income applicable to common shareholders
   
$
3,168,379
   
$
479,806
    
  
Net income per common share—basic and diluted
   
$
0.46
   
$
0.07
 
See accompanying notes to consolidated financial statements.

4

Table of Contents
THE THAXTON GROUP, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Year Ended December 31, 2001 and Six Months Ended June 30, 2002
(Unaudited)
 
    
Common Stock
     
Preferred Stock
   
Additional Paid-in Capital
     
Retained Earnings
     
Total Stockholders’ Equity
  
Balance at December 31, 2000
   
$
69,743
 
   
$
8,604
   
$
8,610,549
 
   
$
(4,929,486
)
   
$
3,759,410
 
    
  
  
  
  
Cancelled 135,000 shares of common stock
   
 
(1,350
)
   
 
—  
   
 
1,350
 
   
 
—  
 
   
 
—  
 
Issued 20,000 shares of Series F preferred stock
            
 
200
   
 
199,800
 
   
 
—  
 
   
 
200,000
 
Issued 10,000 shares of common stock as compensation
   
 
100
 
   
 
—  
   
 
19,900
 
   
 
—  
 
   
 
20,000
 
Dividends paid on preferred stock
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
(729,497
)
   
 
(729,497
)
Net income
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
3,034,623
 
   
 
3,034,623
 
    
  
  
  
  
Balance at December 31, 2001
   
 
68,493
 
   
 
8,804
   
 
8,831,599
 
   
 
(2,624,360
)
   
 
6,284,536
 
    
  
  
  
  
Issued 22,500 shares of common stock as compensation
   
 
225
 
   
 
—  
   
 
44,775
 
   
 
—  
 
   
 
45,000
 
Repurchase of common stock
   
 
(7
)
          
 
(6,788
)
            
 
(6,795
)
Dividends paid on preferred stock
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
(290,193
)
   
 
(290,193
)
Net income
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
3,458,572
 
   
 
3,458,572
 
    
  
  
  
  
Balance at June 30, 2002
   
$
68,711
 
   
$
8,804
   
$
8,869,586
 
   
$
544,019
 
   
$
9,491,120
 
    
  
  
  
  
See accompanying notes to consolidated financial statements.
 

5

Table of Contents
 
THE THAXTON GROUP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 2002 and 2001
(Unaudited)
 
    
June 30,
2002
     
June 30,
2001
  
Cash flows from operating activities:
                  
Net income
   
$
3,458,572
 
   
$
840,721
 
Adjustments to reconcile net income to net cash provided by operating activities
                  
Provision for credit losses
   
 
8,371,672
 
   
 
6,609,308
 
Depreciation and amortization
   
 
1,107,403
 
   
 
2,016,421
 
Deferred taxes
   
 
1,782,997
 
   
 
751,281
 
Decrease in accounts receivable
   
 
651,350
 
   
 
690,643
 
Non-cash compensation expense
   
 
45,000
 
   
 
20,000
 
Decrease (increase) in other assets
   
 
(956,615
)
   
 
194,846
 
Increase in accrued interest payable and other liabilities
   
 
415,770
 
   
 
2,212,315
 
    
  
Net cash provided by operating activities
   
 
14,876,149
 
   
 
13,335,535
 
    
  
Cash flows from investing activities:
                  
Net decrease in finance receivables
   
 
663,581
 
   
 
3,913,895
 
Net capital expenditures for premises and equipment
   
 
(950,327
)
   
 
(248,142
)
Cash paid for deposit with Voyager
   
 
(1,098,336
)
   
 
(289,226
)
    
  
Net cash provided by investing activities
   
 
(1,385,082
)
   
 
3,376,527
 
    
  
Cash flows from financing activities:
                  
Notes payable to affiliates
   
 
1,251,880
 
   
 
—  
 
Repurchase of common stock
   
 
(6,795
)
   
 
—  
 
Dividends paid
   
 
(290,193
)
   
 
(360,915
)
Net decrease in notes payable
   
 
(14,732,804
)
   
 
(19,698,196
)
Issuance (repurchase) of preferred stock
   
 
—  
 
   
 
200,000
 
    
  
Net cash used by financing activities
   
 
(13,777,912
)
   
 
(19,859,111
)
    
  
Net decrease in cash
   
 
(286,845
)
   
 
(3,147,049
)
Cash at beginning of period
   
 
4,096,359
 
   
 
4,482,553
 
    
  
Cash at end of period
   
$
3,809,514
 
   
$
1,335,504
 
    
  
 
See accompanying notes to consolidated financial statements.
 

6

Table of Contents
THE THAXTON GROUP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and December 31, 2001
(Unaudited)
 
(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, primarily through subsidiaries. The Company operates consumer finance branches in 11 states, primarily under the names of TICO Credit, Southern Finance, and Covington Credit. The Company also operates insurance agency branches in North and South Carolina. The Company is a diversified financial services company that is engaged primarily in consumer lending and consumer automobile sales financing to borrowers with limited credit histories, low incomes or past credit problems. The Company also offers insurance premium financing to such borrowers. A substantial amount of the Company’s premium finance business has been derived from customers of the independent insurance agencies owned by Thaxton Insurance Group, Inc. (“Thaxton Insurance”), which was acquired by the Company in 1996. The Company provides reinsurance through wholly owned subsidiaries, TICO Reinsurance, Ltd. (“TRL”), Fitch National Reinsurance, Ltd., Soco Reinsurance, Inc. Through another wholly owned subsidiary, Thaxton Commercial Lending, Inc., the Company makes factoring loans and collateralized commercial loans to small and medium sized businesses. 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, 2002 and 2001, 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-K when reviewing interim financial statements. The results of operations for the three months and six months ended June 30, 2002 are not necessarily indicative of results to be expected for the entire fiscal year.
 
(2)    Finance Receivables
 
Finance receivables consisted of the following at June 30, 2002 and December 31, 2001:
 
    
June 30,
2002
     
December 31,
2001
     
June 30,
2001
     
December 31,
2000
  
Automobile sales contracts
   
$
21,389,986
 
   
$
23,121,113
 
   
$
28,182,493
 
   
$
31,196,711
 
Direct loans
   
 
185,416,695
 
   
 
189,163,818
 
   
 
167,290,913
 
   
 
172,506,592
 
Mortgage loans
   
 
14,046,312
 
   
 
16,468,209
 
   
 
19,368,905
 
   
 
20,738,959
 
Premium finance contracts
   
 
4,782,630
 
   
 
8,618,497
 
   
 
9,403,259
 
   
 
7,527,689
 
Commercial loans
   
 
2,103,608
 
   
 
3,161,875
 
   
 
3,786,741
 
   
 
3,935,945
 
    
  
  
  
Total finance receivables
   
 
227,739,231
 
   
 
240,533,512
 
   
 
228,032,311
 
   
 
235,905,896
 
Unearned interest
   
 
(34,341,640
)
   
 
(36,703,784
)
   
 
(34,168,838
)
   
 
(36,841,017
)
Unearned insurance premiums, net
   
 
(1,092,331
)
   
 
(1,798,520
)
   
 
(1,416,956
)
   
 
(1,966,062
)
Insurance loss reserve
   
 
(9,207,565
)
   
 
(9,022,167
)
   
 
(8,003,649
)
   
 
(7,493,658
)
Dealer holdback and bulk purchase discount
   
 
(2,250,005
)
   
 
(2,036,818
)
   
 
(2,373,297
)
   
 
(2,406,165
)
Allowance for credit losses
   
 
(11,139,966
)
   
 
(12,012,169
)
   
 
(11,289,585
)
   
 
(11,630,555
)
Deferred loan cost, net
   
 
2,512,053
 
   
 
2,294,976
 
   
 
2,340,905
 
   
 
2,375,207
 
    
  
  
  
Finance receivables, net
   
$
172,219,777
 
   
$
181,255,030
 
   
$
173,120,891
 
   
$
177,943,646
 
    
  
  
  
 
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

7

Table of Contents
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. With holdback arrangements, an automobile dealer or other retailer will assign receivables to us on a loan-by-loan basis, typically at par. We 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 bulk purchase and holdback receivables, net of unearned interest and insurance, and the related holdback and discount amount outstanding were approximately $15,675,000 and $435,000, respectively, at June 30, 2002 and $18,204,000 and $819,000, respectively at December 31, 2001.
 
At March 31, 2002, 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 5).
 
Changes in the allowance for credit losses for the quarters ended June 30, 2002 and 2001, and the years ended December 31, 2001 and 2000, are as follows:
 
    
June 30,
2002
     
December 31,
2001
     
June 30,
2001
     
December 31,
2000
  
Beginning balance
   
$
12,012,169
 
   
$
11,630,555
 
   
$
11,630,555
 
   
$
10,661,339
 
Valuation allowance for acquired loans
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
838,017
 
Provision for credit losses
   
 
8,371,672
 
   
 
16,583,919
 
   
 
6,609,308
 
   
 
14,657,930
 
Charge-offs
   
 
(10,197,365
)
   
 
(18,024,265
)
   
 
(7,914,695
)
   
 
(16,052,319
)
Recoveries
   
 
953,490
 
   
 
1,821,960
 
   
 
964,417
 
   
 
1,525,588
 
    
  
  
  
Net charge-offs
   
 
(9,243,875
)
   
 
(16,202,305
)
   
 
(6,950,278
)
   
 
(14,526,731
)
    
  
  
  
Ending balance
   
$
11,139,966
 
   
$
12,012,169
 
   
$
11,289,585
 
   
$
11,630,555
 
    
  
  
  
 
Our loan portfolio primarily consists of short-term loans, the majority of which are originated or renewed during the current year. Accordingly, we estimate that fair value of the finance receivables is not materially different from carrying value.
 
(3)    Premises and Equipment
 
A summary of premises and equipment at June 30, 2002 and December 31, 2001 follows:
 
    
June 30,
2002
   
December 31,
2001
Leasehold improvements
   
$
2,338,316
   
$
2,289,105
Furniture and fixtures
   
 
3,061,586
   
 
3,054,216
Equipment and automobiles
   
 
7,809,547
   
 
7,680,873
    
  
Total cost
   
 
13,209,449
   
 
13,024,194
Accumulated depreciation
   
 
8,819,385
   
 
8,777,378
    
  
Net premises and equipment
   
$
4,390,064
   
$
4,246,816
    
  
 
Depreciation expense was approximately $410,000 for the quarter ended June 30, 2002 and $807,000 year to date, compared to $400,000 for the quarter ended, and $801,000 for the six-months ended June 30, 2001.
 

8

Table of Contents
 
(4)    Intangible Assets
 
Intangible assets consisted of the following at June 30, 2002 and December 31, 2001.
 
    
June 30,
2002
   
December 31,
2001
Goodwill and purchase premium
   
 
37,683,318
   
 
37,683,318
Insurance expirations
   
 
2,030,601
   
 
1,890,301
    
  
Total cost
   
 
39,713,919
   
 
39,573,619
Less accumulated amortization
   
 
7,336,700
   
 
7,091,965
    
  
Intangible assets, net
   
$
32,377,219
   
$
32,481,654
    
  
 
The Company acquired the majority of the intangibles in connection with our acquisition of FirstPlus Consumer Finance. Amortization expense was approximately $300,000 for the six-months and $150,000 for the quarter ended June 30, 2002, compared to $1,215,000 for the six-months and $606,000 for the quarter ended June 30, 2001.
 
Adoption of SFAS No. 142, “Goodwill and Other Intangible Assets”
 
Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which establishes financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, “Intangible Assets.” Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment.
 
SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level at adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment would then be measured in the second step. After testing the valuation of the reporting units it was found that all reporting units fair values exceeded their carrying value, thus, there is no need to test for impairment. The effect of not amortizing goodwill will be an expense savings of approximately $2.4 million for the full year, and approximately $1.2 million for the six months ended June 30, 2002.
 
(5)    Notes Payable and Notes Payable to Affiliates
 
At June 30, 2002 and 2001 and December 31, 2001 and 2000, notes payable consisted of the following:
 
    
June 30,
2002
   
December 31,
2001
   
June 30,
2001
   
December 31,
2000
Senior Notes Payable/Lines of Credit
   
$
122,674,001
   
$
151,234,760
   
$
150,218,344
   
$
178,278,386
Subordinated Notes payable to individuals with varying maturity dates and rates ranging from 5 ¼% to 12%
   
 
85,294,719
   
 
71,542,844
   
 
60,402,037
   
 
51,721,405
Other subordinated notes payable to companies with varying maturity dates and rates ranging from 4¼% to 10%
   
 
2,331,642
   
 
2,255,562
   
 
2,286,837
   
 
2,605,623
    
  
  
  
Total notes payable
   
$
210,300,362
   
$
225,033,166
   
$
212,907,218
   
$
232,605,414
    
  
  
  
 
We generally finance our operations through cash flow from operations, borrowings under our credit facility with FINOVA Capital Corporation (“FINOVA”) and the sale, to public investors, of our subordinated notes.
 
Our credit facility with FINOVA, as amended on December 31, 2001, comprises a term loan with a balance of $11.9 million outstanding as of June 30, 2002, and a revolving credit line used to finance consumer receivables. Maximum borrowings under the revolving credit line as of June 30, 2002 are limited to the lesser of $141 million, or 85% of eligible consumer finance receivables as defined by the agreement. Our maximum borrowing amount decreases on a quarterly basis and decreases an additional $6 million in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005, and $9 million in 2006. James D. Thaxton is the guarantor for both the term loan and the revolving loan.
 

9

Table of Contents
 
Advances under the term loan accrue interest at the prime rate + 2%. Advances under the revolving credit line accrue interest at the prime rate + 1%. The prime rate is published by Citibank, N.A., or any other money center bank as FINOVA may select. The credit facility matures in 2006. The interest rates are adjusted monthly to reflect fluctuations in the designated prime rate. Accrued interest on borrowings is payable monthly.
 
The term loan is payable in twenty-three equal monthly principal and interest payments, which began on April 15, 2001, in the amount of $600,000, with the remaining principal balance due one month thereafter.
 
Under the revolving credit facility, principal is due in full on the maturity date and can be prepaid without penalty. Substantially all of our and our subsidiaries’ assets secure the revolving credit facility, which requires us to comply with restrictive covenants, including financial condition covenants. As of December 31, 2001, we met all such requirements.
 
As of June 30, 2002, an additional $12.9 million was available under the terms of the revolving credit line to borrow against existing collateral, with $30.1 million of total potential capacity available for borrowing against qualified finance receivables generated in future periods. As of June 30, 2002, the interest rates for borrowings were 5.75% for the revolving credit line, and 6.75% for the term loan.
 
In connection with the FirstPlus acquisition, the Company assumed $2.2 million of subordinated notes issued by Voyager Insurance Co. In November 1999, those notes were cancelled and re-issued in our name. We are confident that we have adequate availability under our primary credit facility to borrow adequate funds to liquidate these notes, if required.
 
In February 1998, we began offering subordinated notes in several states by registering $50 million of subordinated notes with the Securities and Exchange Commission (“SEC”). In May 2001, we registered an additional $75 million offering of subordinated notes with the SEC. The notes are sold primarily to individual investors. The maturity terms range from daily (demand) notes to sixty-month notes. Interest rates vary based on the principal amounts and maturity dates of the notes. Notes currently being offered carry interest rates ranging from 5.25% to 8.0%. The notes are unsecured and issued under an indenture which we entered into with The Bank of New York, as trustee, in February 1998. The terms of the indenture do not require us to comply with any financial covenants nor do they impose any material restrictions on the operations of our business.
 
As of June 30, 2002, we had $81.0 million of these registered subordinated notes outstanding and $4.3 million notes registered in predecessor state registrations. To date, we have used the proceeds from the sale of these notes to reduce, on a temporary basis, the amount of our revolving credit facility with FINOVA. We intend to continue this note program by seeking to register additional offerings of subordinated notes with the SEC. The sale of subordinated notes is an important aspect of the financing of our business. It enables us to reduce our overall borrowing costs, particularly during periods of increasing interest rates. In addition, it allows us to hedge the interest rate risk inherent in our variable rate senior credit facility, and to diversify our sources of borrowed funds.
 
We plan to continue to reduce borrowings under our senior credit facility and replace those borrowings with increasing levels of subordinated notes. We anticipate that our cash inflow from operations, borrowings under our senior credit facility, and the proceeds from the sale of subordinated notes will be more than adequate to meet our cash outflows to fund anticipated growth in our finance receivables, operating expenses, repayment of indebtedness, and planned capital expenditures for the year ending December 31, 2002. We estimate our cash outflow to be approximately $25 million for 2002.
 
(7)    Earnings Per Share Information
 
The following is a summary of the earnings per share calculation for the six months and quarter ended June 30, 2002 and 2001:
 
    
Six Months Ended
   
Three Months Ended
    
June 30, 2002
   
June 30, 2001
   
June 30, 2002
   
June 30, 2001
BASIC & DILUTED
                            
Net income from continuing operations
   
$
3,458,572
   
$
840,721
   
$
865,461
   
$
268,903
Less: Dividends on preferred stock
   
 
290,193
   
 
360,915
   
 
145,736
   
 
189,568
    
  
  
  
Net income applicable to common shareholders (numerator)
   
 
3,168,379
   
 
479,806
   
 
719,725
   
 
79,335
Average common shares outstanding (denominator)
   
 
6,863,533
   
 
6,898,641
   
 
6,871,666
   
 
6,841,855
Income per share from continuing operations—basic and diluted
   
$
0.46
   
$
0.07
   
$
0.10
   
$
0.01
    
  
  
  
 
The earnings per share calculation does not include 10,440 shares of Preferred Series A and 50,000 shares of Preferred Series C stock, which are convertible to common shares, because the effect is anti-dilutive.
 

10

Table of Contents
 
(8)    Business Segments
 
The Company now has two primary segments. The consumer finance segment provides financing to consumers with limited credit histories, low incomes or past credit problems. Revenues in the consumer finance business are derived primarily from interest and fees on loans, and the sale of credit related insurance products to its customers. The Company’s insurance operations consist of selling, on an agency basis, various lines of automobile, property and casualty, life and accident and health insurance. Revenue is generated through fees paid by the insurance for which business is placed.
 
The following table summarizes certain financial information concerning the Company’s reportable operating segments for the quarter ended June 30, 2002 and 2001, and the year ended December 31, 2001:
 
    
Consumer Finance
   
Insurance
     
Other
   
Total
June 30, 2002
Income Statement Data
                        
Total Revenue
   
47,229,658
   
2,035,965
 
   
364,181
   
$
49,629,804
Net Interest Income
   
30,688,623
   
—  
 
   
364,181
   
 
31,052,804
Provision for credit losses
   
8,336,472
   
—  
 
   
35,200
   
 
8,371,672
Noninterest income
   
7,977,606
   
2,035,965
 
   
—  
   
 
10,013,571
Insurance premiums and commissions, net
   
5,899,464
   
1,932,448
 
   
—  
   
 
7,831,912
Noninterest expenses
   
24,893,051
   
2,208,452
 
   
351,631
   
 
27,453,134
Depreciation and amortization
   
967,413
   
129,635
 
   
10,355
   
 
1,107,403
Net income
   
3,564,130
   
(113,841
)
   
8,283
   
 
3,458,572
Balance Sheet Data
                        
Total assets
   
229,774,606
   
2,279,914
 
   
1,918,528
   
 
233,973,048
Loans, net
   
170,329,576
   
—  
 
   
1,890,201
   
 
172,219,777
Allowance for credit losses
   
10,926,559
   
—  
 
   
213,407
   
 
11,139,966
Intangibles
   
30,994,776
   
1,382,443
 
   
—  
   
 
32,377,219
 
    
Consumer Finance
   
Insurance
     
Other
   
Total
December 31, 2001
Income Statement Data
                              
Total Revenue
   
$
93,669,290
   
$
3,819,716
 
   
$
1,031,122
   
$
98,520,128
Net Interest Income
   
 
55,201,218
   
 
(668,380
)
   
 
723,776
   
 
55,256,614
Provision for credit losses
   
 
16,428,712
   
 
25,777
 
   
 
129,430
   
 
16,583,919
Noninterest income
   
 
20,374,036
   
 
3,819,686
 
   
 
—  
   
 
24,193,722
Insurance premiums and commissions, net
   
 
15,291,211
   
 
3,262,479
 
   
 
—  
   
 
18,553,690
Noninterest expenses
   
 
53,309,207
   
 
3,933,597
 
   
 
493,990
   
 
57,736,794
Depreciation and amortization
   
 
3,724,681
   
 
323,770
 
   
 
17,444
   
 
4,065,895
Net income
   
 
3,501,713
   
 
(533,325
)
   
 
66,235
   
 
3,034,623
Balance Sheet Data
                              
Total assets
   
 
237,387,631
   
 
2,211,886
 
   
 
2,960,788
   
 
242,560,305
Loans, net
   
 
178,270,562
   
 
—  
 
   
 
2,984,468
   
 
181,255,030
Allowance for credit losses
   
 
11,834,762
   
 
—  
 
   
 
177,407
   
 
12,012,169

11

Table of Contents
Intangibles
  
31,184,955
  
1,296,699
   
—  
   
32,481,654
 
    
Consumer Finance
   
Insurance
     
Other
   
Total
June 30, 2001
Income Statement Data
                              
Total Revenue
   
$
42,330,306
   
$
2,474,891
 
   
$
517,687
   
$
45,322,884
Net Interest Income
   
 
26,332,843
   
 
(371,423
)
   
 
348,170
   
 
26,309,590
Provision for credit losses
   
 
6,561,570
   
 
7,738
 
   
 
40,000
   
 
6,609,308
Noninterest income
   
 
6,731,704
   
 
2,474,891
 
   
 
—  
   
 
9,206,595
Insurance premiums and commissions, net
   
 
4,974,164
   
 
1,924,659
 
   
 
—  
   
 
6,898,823
Noninterest expenses
   
 
24,770,315
   
 
2,252,121
 
   
 
292,439
   
 
27,314,875
Depreciation and amortization
   
 
1,842,801
   
 
163,001
 
   
 
10,619
   
 
2,016,421
Net income
   
 
902,049
   
 
(98,111
)
   
 
36,783
   
 
840,721
Balance Sheet Data
                              
Total assets
   
 
224,034,767
   
 
3,339,748
 
   
 
3,585,316
   
 
230,959,831
Loans, net
   
 
169,519,413
   
 
—  
 
   
 
3,601,478
   
 
173,120,891
Allowance for credit losses
   
 
11,124,585
   
 
—  
 
   
 
165,000
   
 
11,289,585
Intangibles
   
 
32,275,640
   
 
1,379,990
 
   
 
—  
   
 
33,655,630
 
ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
GENERAL
 
The Thaxton Group, Inc. and its subsidiaries (the “Company”) were organized in July 1978 as C.L. Thaxton & Sons, Inc., and from that date until 1991 was primarily engaged in making and servicing direct consumer loans (“Direct Loans”) and insurance premium finance loans (“Premium Finance Contracts”) to persons with limited credit histories, low incomes, or past credit problems (“Non-Prime Borrowers”). In 1991, we made a strategic decision to diversify our portfolio by actively seeking to finance credit-impaired borrowers’ purchases of used automobiles. Our management believed that the expertise it had developed in extending and servicing installment credit to credit-impaired borrowers would enable it to profitably finance used automobile purchases by borrowers having similar credit profiles. The employment of additional senior and mid-level management personnel with substantial used automobile lending experience facilitated our entry into this segment of the consumer credit industry. Since 1991, we have evolved into a diversified consumer financial services company engaged in the origination and servicing of loans made to credit-impaired borrowers; used automobile lending through the purchase and servicing of used automobile sales contracts (“Automobile Sales Contracts”); insurance premium finance lending through the purchase of insurance premium finance contracts (“Premium Finance Contracts”); and selling insurance products on an agency basis.
 
The Company operates its finance businesses in South Carolina, North Carolina, Georgia, Tennessee, Virginia, Kentucky, Alabama, Mississippi, Ohio, Oklahoma and Texas. It operates its insurance businesses in South Carolina and North Carolina.
 
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 non-prime borrowers. 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 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 such 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 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

12

Table of Contents
such as the Company are engaged in providing premium financing 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 financing 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 typically place a customer’s business with the carrier whose combination of features and price best match the customer’s 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. Competition in the independent insurance agency business is intense. 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 operating in some of these 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 a broad range of insurance products underwritten by reputable insurance companies.
 
NET INTEREST MARGIN
 
The following table presents important data relating to our net interest margin for the six-months and three-months ended June 30, 2002 and 2001.
 
    
Three Months Ended
     
Six Months Ended
  
    
June 30, 2002
     
June 30, 2001
     
June 30, 2002
     
June 30, 2001
  
Average Net Finance Receivables(1)
   
$
189,550,484
 
   
$
177,721,131
 
   
$
190,230,844
 
   
$
176,659,438
 
Average notes payable(1)
   
 
208,036,538
 
   
 
214,041,846
 
   
 
209,690,553
 
   
 
216,637,138
 
Interest and fee income(2)
   
 
18,622,223
 
   
 
17,586,979
 
   
 
38,366,233
 
   
 
36,116,289
 
Interest expense(3)
   
 
3,621,559
 
   
 
4,334,075
 
   
 
7,313,429
 
   
 
9,806,699
 
    
  
  
  
Net interest income
   
 
15,000,664
 
   
 
13,252,904
 
   
 
31,052,804
 
   
 
26,309,590
 
Average interest rate earned(1)
   
 
39.30
%
   
 
39.58
%
   
 
40.33
%
   
 
40.89
%
Average interest rate paid(1)
   
 
6.96
%
   
 
8.10
%
   
 
6.98
%
   
 
9.05
%
    
  
  
  
Net interest rate spread
   
 
32.34
%
   
 
31.48
%
   
 
33.35
%
   
 
31.84
%
Net interest margin(4)
   
 
31.66
%
   
 
29.83
%
   
 
32.65
%
   
 
29.79
%
(1)
 
Averages are computed using month-end balances during the year presented.
(2)
 
Excludes interest and fee income earned by Thaxton Insurance.
(3)
 
Excludes interest expense paid on Thaxton Insurance related debt.
(4)
 
Net interest margin represents net interest income divided by average Net Finance Receivables.
 
Results of Operations for the Six Months Ended June 30, 2002 and 2001
 
Since December 31, 2001 we have experienced our normal liquidation of the loans we added during the fourth quarter of 2001 and have begun to build our receivable base back. Since December 31, 2001 our gross finance receivables have decreased by $12,794,000 to $227,739,000. In the comparative six-month period ended June 30, 2001, our gross receivables declined $7,874,000 to $228,032,000. The greater decline is due to the change in the mix of our portfolio, with declines in automobile and real estate receivables, and gains in our shorter term direct loan receivables.
 
Due to this change in mix of our receivables our interest income increased to $38,366,000 for the current period from $36,116,000 for the same period last year. Our interest expense decreased significantly this year to $7,313,000 from $9,807,000 in the prior period. The decrease in expense was due to the sharp decline in the prime rate to which our debt is linked.
 
As expected with overall business growth our operating expenses also increased from $27,315,000 in 2001 to $28,703,000 in 2002 or 5.1%. This increase is related to normal growth of our business.
 
Due to the substantial decrease in interest expense and the accounting change to not amortize goodwill our net income increased significantly from $841,000 in the first six months of 2001 to $3,653,000 in 2002.
 
The income, offset by the preferred dividends paid, our stockholders equity increased to $9,686,000 from $6,285,000 at year-end.
 
Results of Operations for the Three Months Ended June 30, 2002 and 2001
 
For the three months ended our gross finance receivables have grown due to the slowing of the normal liquidation of our year end business and the increase in new receivables being added. Our gross finance receivables increased by $4,507,000 to $227,739,000 since March 31, 2002. Comparatively in 2001 for the same period our gross receivables increased $6,451,000 to $228,032,000.

13

Table of Contents
 
Due to the change in the mix of our receivables our interest income increased to $18,622,000 for the current period from $17,587,000 for the same period last year. Our interest expense actually decreased this year to $3,622,000 from $4,334,000 in the prior period. This is due to the drop in the prime interest rate.
 
Our operating expenses remained relatively flat, increasing from $13,500,000 in 2001 to $13,678,000 in 2002. This increase is related to normal growth of our business and an increase in salaries from the prior year offset by lower amortization expense.
 
Due to our revenues growth and the decrease in interest expense our net income increased significantly from $110,000 in the second quarter of 2001 to net income of $1,060,000 in the second quarter of 2002.
 
CREDIT LOSS EXPERIENCE
 
The following table sets forth our allowance for credit losses and credit loss experience at or over the periods presented.
 
    
June 30,
2002
     
December 31,
2001
     
June 30,
2001
     
December 31,
2000
  
Net finance receivables(1)
   
$
174,618,146
 
   
$
190,105,324
 
   
$
180,623,735
 
   
$
185,638,256
 
Allowance for credit losses
   
 
11,139,966
 
   
 
12,012,169
 
   
 
11,289,585
 
   
 
11,630,555
 
Allowance for credit losses as a percentage of net finance receivables(1)
   
 
6.38
%
   
 
6.32
%
   
 
6.25
%
   
 
6.27
%
Dealer reserves and discounts on bulk purchases
   
 
2,250,005
 
   
 
2,036,818
 
   
 
2,373,297
 
   
 
2,406,165
 
Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales Contracts at period end
   
 
14.25
%
   
 
10.58
%
   
 
8.42
%
   
 
7.71
%
Allowance for credit losses and dealer reserves and discount on bulk purchases(2)
   
 
13,389,971
 
   
 
14,048,987
 
   
 
13,662,882
 
   
 
14,036,720
 
Allowance for credit losses and dealer reserves as a percentage of finance receivables
   
 
7.67
%
   
 
7.39
%
   
 
7.56
%
   
 
7.56
%
Provision for credit losses
   
 
8,371,672
 
   
 
16,583,919
 
   
 
6,609,308
 
   
 
14,657,930
 
Charge-offs (net of recoveries)
   
 
9,243,875
 
   
 
16,202,305
 
   
 
6,950,278
 
   
 
14,526,731
 
Charge-offs (net of recoveries) as a percentage of average net finance receivables(3)
   
 
10.58
%
   
 
8.32
%
   
 
7.70
%
   
 
7.83
%
(1)
 
Net finance receivable balances are presented net of unearned finance charges, net unearned insurance premiums, dealer holdbacks and bulk purchase discounts, deferred loan costs, and exclude mortgage warehoused loans and commercial finance receivables.
(2)
 
Excludes valuation discount for acquired loans.
(3)
 
June 30, 2002 and 2001 are annualized for comparison purpose.
 
The following table sets forth certain information concerning our finance receivables at the end of the periods indicated:
 
    
June 30,
2002
     
December 31,
2001
  
Direct finance receivables contractually past due 90 days or more
   
$
7,217,087
 
   
$
7,373,910
 
Direct finance receivables outstanding
   
 
143,102,514
 
   
 
148,215,821
 
Direct finance receivables contractually past due 90 days or more as a percentage of Direct finance receivables
   
 
5.04
%
   
 
4.98
%
Real estate secured receivables contractually past due 90 days or more
   
 
1,205,086
 
   
 
1,632,483
 
Real estate secured receivables outstanding
   
 
14,046,311
 
   
 
15,731,657
 
Real estate secured receivables contractually past due 90 days or more as a percentage of real estate secured receivables
   
 
8.58
%
   
 
10.38
%
Vehicle secured receivables contractually past due 60 days or more
   
 
1,426,630
 
   
 
1,090,032
 
Vehicle secured receivables outstanding
   
 
15,789,754
 
   
 
17,782,135
 
Vehicle secured receivables contractually past due 60 days or more as a percentage of vehicle secured receivables
   
 
9.04
%
   
 
6.13
%
Premium finance contracts contractually past due 60 days or more
   
 
542,049
 
   
 
679,091
 
Premium finance contracts outstanding
   
 
4,640,351
 
   
 
8,375,711
 
Premium finance contracts contractually past due 60 days or more as a percentage of premium finance contracts
   
 
11.68
%
   
 
8.11
%
 
Finance receivable balances are presented net of unearned finance charges.

14

Table of Contents
 
LIQUIDITY AND CAPITAL RESOURCES
 
We generally finance our operations through cash flow from operations, borrowings under our credit facility with FINOVA Capital Corporation (“FINOVA”) and the sale, to public investors, of our subordinated notes.
 
Our credit facility with FINOVA, as amended on December 31, 2001, comprises a term loan with a balance of $11.9 million outstanding as of June 30, 2002, and a revolving credit line used to finance consumer receivables. Maximum borrowings under the revolving credit line as of June 30, 2002 are limited to the lesser of $141 million, or 85% of eligible consumer finance receivables as defined by the agreement. Our maximum borrowing amount decreases on a quarterly basis and decreases an additional $6 million in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005, and $9 million in 2006. James D. Thaxton is the guarantor for both the term loan and the revolving loan.
 
Advances under the term loan accrue interest at the prime rate + 2%. Advances under the revolving credit line accrue interest at the prime rate + 1%. The prime rate is published by Citibank, N.A., or any other money center bank as FINOVA may select. The credit facility matures in 2006. The interest rates are adjusted monthly to reflect fluctuations in the designated prime rate. Accrued interest on borrowings is payable monthly.
 
The term loan is payable in twenty-three equal monthly principal and interest payments, which began on April 15, 2001, in the amount of $600,000, with the remaining principal balance due one month thereafter.
 
Under the revolving credit facility, principal is due in full on the maturity date and can be prepaid without penalty. Substantially all of our and our subsidiaries’ assets secure the revolving credit facility, which requires us to comply with restrictive covenants, including financial condition covenants. As of December 31, 2001, we met all such requirements.
 
As of June 30, 2002, an additional $12.9 million was available under the terms of the revolving credit line to borrow against existing collateral, with $30.1 million of total potential capacity available for borrowing against qualified finance receivables generated in future periods. As of June 30, 2002, the interest rates for borrowings were 5.75% for the revolving credit line, and 6.75% for the term loan.
 
In connection with the FirstPlus acquisition, the Company assumed $2.2 million of subordinated notes issued by Voyager Insurance Co. In November 1999, those notes were cancelled and re-issued in our name. We are confident that we have adequate availability under our primary credit facility to borrow adequate funds to liquidate these notes, if required.
 
In February 1998, we began offering subordinated notes in several states by registering $50 million of subordinated notes with the Securities and Exchange Commission (“SEC”). In May 2001, we registered an additional $75 million offering of subordinated notes with the SEC. The notes are sold primarily to individual investors. The maturity terms range from daily (demand) notes to sixty-month notes. Interest rates vary based on the principal amounts and maturity dates of the notes. Notes currently being offered carry interest rates ranging from 5.25% to 8.0%. The notes are unsecured and issued under an indenture which we entered into with The Bank of New York, as trustee, in February 1998. The terms of the indenture do not require us to comply with any financial covenants nor do they impose any material restrictions on the operations of our business.
 
As of June 30, 2002, we had $81.0 million of these registered subordinated notes outstanding and $4.3 million notes registered in predecessor state registrations. To date, we have used the proceeds from the sale of these notes to reduce, on a temporary basis, the amount of our revolving credit facility with FINOVA. We intend to continue this note program by seeking to register additional offerings of subordinated notes with the SEC. The sale of subordinated notes is an important aspect of the financing of our business. It enables us to reduce our overall borrowing costs, particularly during periods of increasing interest rates. In addition, it allows us to hedge the interest rate risk inherent in our variable rate senior credit facility, and to diversify our sources of borrowed funds.
 
We plan to continue to reduce borrowings under our senior credit facility and replace those borrowings with increasing levels of subordinated notes. We anticipate that our cash inflow from operations, borrowings under our senior credit facility, and the proceeds from the sale of subordinated notes will be more than adequate to meet our cash outflows to fund anticipated growth in our finance receivables, operating expenses, repayment of indebtedness, and planned capital expenditures for the year ending December 31, 2002. We estimate our cash outflow to be approximately $25 million for 2002.

15

Table of Contents
 
ITEM 3:     Quantitative and Qualitative Disclosures About Market Risk
 
The Company’s outstanding debt under the Revolving Credit Facility and Term Loan was $122.7 million at June 30, 2002. Interest on borrowings under these facilities is based on the prime rate. Based on the outstanding balance at June 30, 2002, a change of 1% in the prime interest rate would cause a change in interest expense of approximately $1,227,000 on an annual basis.
 
The Company’s outstanding receivables are not affected by external interest rate changes. This is due to the fact that the Company, like most other Non-Prime lending institutions, usually charges the maximum rate allowable 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 such borrowers. This causes the interest rate risk on our outstanding receivables to be minimal.
 
PART II
 
Item 1.     Legal Proceedings
 
None
 
Item 2.     Changes in Securities and Use of Proceeds
 
None
 
Item 3.     Defaults upon Senior Securities
 
None
 
Item 4.     Submission of Matters to a Vote of Security Holders
 
None
 
Item 5.     Other Information
 
None
 
Item 6.     Exhibits and Reports on Form 8-K
 
Exhibits 99.1 and 99.2 – Sarbones/Oxley Act certification by CEO and CFO.
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
THE THAXTON GROUP, INC.
  (Registrant)
By:
  
/s/    JAMES D. THAXTON         
   
James D. Thaxton
President and Chief Executive Officer
 
Date:  August 13, 2002
 
By:
  
/s/    ALLAN F. ROSS         
   
Allan F. Ross
Vice President, Treasurer, Secretary,
and Chief Financial Officer
 
Date:  August 13, 2002

16