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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 SEPTEMBER 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 000-27086
 
 
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 November 11, 2002
Common Stock
     
6,870,390
 
 

Table of Contents
 
THE THAXTON GROUP, INC.
FORM 10-Q
September 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
4.
      
16
    
PART II
     
    
Other Information
     
6.
      
16
    
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     

1

Table of Contents
Item 1: FINANCIAL STATEMENTS
 
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
September 30, 2002 & December 31, 2001
 
    
September 30, 2002
   
December 31, 2001
  
    
(Unaudited)
       
Assets
                
Cash
   
$
7,787,673
   
$
4,096,359
 
Finance receivables, net
   
 
178,011,344
   
 
181,255,030
 
Premises and equipment, net
   
 
4,745,363
   
 
4,246,816
 
Accounts receivable
   
 
1,007,093
   
 
1,813,743
 
Accounts receivable from affiliates
   
 
69,344
   
 
113,185
 
Repossessed automobiles
   
 
775,810
   
 
952,153
 
Deposit
   
 
7,866,842
   
 
6,710,692
 
Goodwill and other intangible assets
   
 
32,255,726
   
 
32,481,654
 
Deferred tax asset, net
   
 
2,910,000
   
 
2,752,000
 
Other assets
   
 
7,353,350
   
 
8,138,673
 
    
  
Total assets
   
$
242,782,545
   
$
242,560,305
 
    
  
Liabilities and Stockholders’ Equity
                
Liabilities
                
Accrued interest payable
   
$
2,201,081
   
$
2,194,814
 
Notes payable
   
 
216,706,678
   
 
225,033,166
 
Accounts payable
   
 
2,023,194
   
 
1,361,490
 
Accounts payable to related parties
   
 
1,944,625
   
 
254,043
 
Income taxes payable
   
 
2,356,953
   
 
2,270,068
 
Employee savings plan
   
 
1,595,950
   
 
1,083,594
 
Other liabilities
   
 
5,457,229
   
 
4,078,594
 
    
  
Total liabilities
   
 
232,285,710
   
 
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 6,870,390 in 2002; 6,849,355 shares in 2001
   
 
68,704
   
 
68,493
 
Additional paid-in-capital
   
 
8,863,203
   
 
8,831,599
 
Retained earnings (accumulated deficit)
   
 
1,556,124
   
 
(2,624,360
)
    
  
Total stockholders’ equity
   
 
10,496,835
   
 
6,284,536
 
    
  
Total liabilities and stockholders’ equity
   
$
242,782,545
   
$
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 September 30, 2002 and 2001
(Unaudited)
 
    
2002
   
2001
Interest and fee income
   
$
19,759,409
   
$
18,615,606
Interest expense
   
 
3,732,900
   
 
4,782,926
    
  
Net interest income
   
 
16,026,509
   
 
13,832,680
Provision for credit losses
   
 
5,291,894
   
 
4,601,378
    
  
Net interest income after provision for credit losses
   
 
10,734,615
   
 
9,231,302
Other income:
              
Insurance premiums and commissions, net
   
 
3,888,665
   
 
3,406,986
Other income
   
 
634,296
   
 
970,227
    
  
Total other income
   
 
4,522,961
   
 
4,377,213
    
  
Operating expenses:
              
Compensation and employee benefits
   
 
7,900,415
   
 
7,424,889
Telephone, computers
   
 
698,275
   
 
572,463
Net occupancy
   
 
1,672,285
   
 
1,652,977
Reinsurance claims expense
   
 
642,459
   
 
460,652
Advertising
   
 
713,579
   
 
719,572
Collection expense
   
 
161,535
   
 
142,358
Travel
   
 
371,845
   
 
330,032
Professional fees
   
 
343,031
   
 
258,812
Office expense
   
 
728,888
   
 
638,481
Amortization expense
   
 
170,007
   
 
608,181
Other
   
 
167,183
   
 
96,330
    
  
Total operating expenses
   
 
13,569,502
   
 
12,904,747
    
  
Income before income tax expense
   
 
1,688,074
   
 
703,768
Income tax expense
   
 
573,954
   
 
344,280
    
  
Net income
   
 
1,114,120
   
 
359,488
Dividends on preferred stock
   
 
102,014
   
 
196,236
    
  
Net income applicable to common shareholders
   
$
1,012,106
   
$
163,252
    
  
Net income per common share—basic and diluted
   
$
0.15
   
$
0.02
 
See accompanying notes to consolidated financial statements.

3

Table of Contents
 
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Nine-Months Ended September 30, 2002 and 2001
(Unaudited)
 
    
2002
   
2001
Interest and fee income
   
$
58,125,642
   
$
54,731,895
Interest expense
   
 
11,046,329
   
 
14,589,625
    
  
Net interest income
   
 
47,079,313
   
 
40,142,270
Provision for credit losses
   
 
13,663,566
   
 
11,210,686
    
  
Net interest income after provision for credit losses
   
 
33,415,747
   
 
28,931,584
Other income:
              
Insurance premiums and commissions, net
   
 
11,720,577
   
 
10,305,809
Other income
   
 
2,815,955
   
 
3,277,999
    
  
Total other income
   
 
14,536,532
   
 
13,583,808
    
  
Operating expenses:
              
Compensation and employee benefits
   
 
24,286,603
   
 
23,032,888
Telephone, computers
   
 
1,804,786
   
 
1,729,446
Net occupancy
   
 
4,932,346
   
 
4,827,373
Reinsurance claims expense
   
 
1,574,880
   
 
1,105,598
Advertising
   
 
2,225,497
   
 
2,207,845
Collection expense
   
 
470,437
   
 
471,649
Travel
   
 
935,413
   
 
878,228
Professional fees
   
 
962,477
   
 
788,655
Office expense
   
 
1,871,277
   
 
1,872,201
Amortization expense
   
 
470,331
   
 
1,823,241
Other
   
 
1,488,589
   
 
1,482,498
    
  
Total operating expenses
   
 
41,022,636
   
 
40,219,622
    
  
Income before income tax expense
   
 
6,929,643
   
 
2,295,770
Income tax expense
   
 
2,356,951
   
 
1,095,561
    
  
Net income
   
 
4,572,692
   
 
1,200,209
Dividends on preferred stock
   
 
392,207
   
 
557,151
    
  
Net income applicable to common shareholders
   
$
4,180,485
   
$
643,058
    
  
Net income per common share—basic and diluted
   
$
0.61
   
$
0.09
 
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 Nine-Months Ended September 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
   
 
(14
)
   
 
—  
   
 
(13,171
)
   
 
—  
 
   
 
(13,185
)
Dividends paid on preferred stock
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
(392,208
)
   
 
(392,208
)
Net income
   
 
—  
 
   
 
—  
   
 
—  
 
   
 
4,572,692
 
   
 
4,572,692
 
    
  
  
  
  
Balance at September 30, 2002
   
$
68,704
 
   
$
8,804
   
$
8,863,203
 
   
$
1,556,124
 
   
$
10,496,835
 
    
  
  
  
  
See accompanying notes to consolidated financial statements.

5

Table of Contents
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Nine-Months ended September 30, 2002 and 2001
(Unaudited)
 
    
September 30,
2002
     
September 30,
2001
  
Cash flows from operating activities:
                  
Net income
   
 
4,572,692
 
   
$
1,200,209
 
Adjustments to reconcile net income to
net cash provided by operating activities
                  
Provision for credit losses
   
 
13,663,566
 
   
 
11,210,686
 
Depreciation and amortization
   
 
1,670,428
 
   
 
3,035,895
 
Deferred taxes
   
 
2,356,953
 
   
 
1,095,561
 
Decrease in accounts receivable
   
 
850,491
 
   
 
1,191,499
 
Non-cash compensation expense
   
 
45,000
 
   
 
20,000
 
Decrease (increase) in other assets
   
 
(535,925
)
   
 
(4,330,949
)
Increase in accrued interest payable and other liabilities
   
 
1,384,902
 
   
 
(1,409,175
)
    
  
Net cash provided by operating activities
   
 
24,008,107
 
   
 
12,013,726
 
    
  
Cash flows from investing activities:
                  
Net decrease in finance receivables
   
 
(10,419,880
)
   
 
4,117,520
 
Net capital expenditures for premises and equipment
   
 
(1,699,464
)
   
 
(687,845
)
Cash paid for deposit with Voyager
   
 
(1,156,150
)
   
 
(407,588
)
    
  
Net cash provided by investing activities
   
 
(13,275,494
)
   
 
3,022,087
 
    
  
Cash flows from financing activities:
                  
Notes payable to affiliates
   
 
1,690,582
 
   
 
(1,020,102
)
Repurchase of common stock
   
 
(13,185
)
   
 
—
 
Dividends paid
   
 
(392,208
)
   
 
(557,151
)
Net decrease in notes payable
   
 
(8,326,488
)
   
 
(16,020,984
)
Issuance of preferred stock
   
 
-
 
   
 
200,000
 
    
  
Net cash used by financing activities
   
 
(7,041,299
)
   
 
(17,398,237
)
    
  
Net increase (decrease) in cash
   
 
3,691,314
 
   
 
(2,362,424
)
Cash at beginning of period
   
 
4,096,359
 
   
 
4,482,553
 
    
  
Cash at end of period
   
$
7,787,673
 
   
$
2,120,129
 
    
  
 
See accompanying notes to consolidated financial statements.

6

Table of Contents
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
September 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. Substantially all of the Company’s premium finance business has been derived from customers of the 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., and Soco Reinsurance, Inc. Through a 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 accounting principles, generally accepted in the United States of America, 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 September 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 nine-months ended September 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 September 30, 2002 & 2001, and December 31, 2001 & 2000:
 
    
September 30,
2002
     
December 31, 2001
     
September 30,
2001
     
December 31, 2000
  
Automobile sales contracts
   
$
23,493,567
 
   
$
23,121,113
 
   
$
25,176,903
 
   
$
31,196,711
 
Direct loans
   
 
191,942,458
 
   
 
189,163,818
 
   
 
173,913,029
 
   
 
172,506,592
 
Mortgage loans
   
 
14,284,247
 
   
 
16,468,209
 
   
 
17,460,615
 
   
 
20,738,959
 
Premium finance contracts
   
 
4,225,208
 
   
 
8,618,497
 
   
 
9,384,065
 
   
 
7,527,689
 
Commercial loans
   
 
1,792,733
 
   
 
3,161,875
 
   
 
3,558,704
 
   
 
3,935,945
 
    
  
  
  
Total finance receivables
   
 
235,738,213
 
   
 
240,533,512
 
   
 
229,493,316
 
   
 
235,905,896
 
Unearned interest
   
 
(35,541,614
)
   
 
(36,703,784
)
   
 
(34,247,093
)
   
 
(36,841,017
)
Unearned insurance premiums, net
   
 
(1,297,961
)
   
 
(1,798,520
)
   
 
(1,276,418
)
   
 
(1,966,062
)
Insurance loss reserve
   
 
(9,123,371
)
   
 
(9,022,167
)
   
 
(8,425,054
)
   
 
(7,493,658
)
Dealer holdback and bulk purchase discount
   
 
(1,929,796
)
   
 
(2,036,818
)
   
 
(2,072,085
)
   
 
(2,406,165
)
Allowance for credit losses
   
 
(12,414,594
)
   
 
(12,012,169
)
   
 
(12,021,285
)
   
 
(11,630,555
)
Deferred loan cost, net
   
 
2,580,467
 
   
 
2,294,976
 
   
 
2,374,745
 
   
 
2,375,207
 
    
  
  
  
Finance receivables, net
   
$
178,011,344
 
   
$
181,255,030
 
   
$
173,826,126
 
   
$
177,943,646
 
    
  
  
  

7

Table of Contents
 
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. 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.
 
At September 30, 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 as of, and for the quarters ended, September 30, 2002 and 2001, and the years ended December 31, 2001 and 2000, are as follows:
 
    
September 30,
2002
     
December 31,
2001
     
September 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
   
 
13,663,566
 
   
 
16,583,919
 
   
 
11,210,686
 
   
 
14,657,930
 
Charge-offs
   
 
(14,630,338
)
   
 
(18,024,265
)
   
 
(12,211,504
)
   
 
(16,052,319
)
Recoveries
   
 
1,369,197
 
   
 
1,821,960
 
   
 
1,391,548
 
   
 
1,525,588
 
    
  
  
  
Net charge-offs
   
 
(13,261,141
)
   
 
(16,202,305
)
   
 
(10,819,956
)
   
 
(14,526,731
)
    
  
  
  
Ending balance
   
$
12,414,594
 
   
$
12,012,169
 
   
$
12,021,285
 
   
$
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 September 30, 2002 and December 31, 2001 follows:
 
    
September 30,
2002
   
December 31,
2001
Leasehold improvements
   
$
2,429,466
   
$
2,289,105
Furniture and fixtures
   
 
3,109,512
   
 
3,054,216
Equipment and automobiles
   
 
8,215,395
   
 
7,680,873
    
  
Total cost
   
 
13,754,373
   
 
13,024,194
Accumulated depreciation
   
 
9,009,010
   
 
8,777,378
    
  
Net premises and equipment
   
$
4,745,363
   
$
4,246,816
    
  
 
Depreciation expense was approximately $393,000 for the quarter ended September 30, 2002 and $1,200,000 year to date, compared to $410,000 for the quarter ended, and $1,213,000 for the nine-months ended September 30, 2001.

8

Table of Contents
 
(4) Intangible Assets
 
Intangible assets consisted of the following at September 30, 2002 and December 31, 2001.
 
    
September 30,
2002
   
December 31, 2001
Goodwill and purchase premium
   
 
37,787,321
   
 
37,683,318
Insurance expirations
   
 
2,030,601
   
 
1,890,301
    
  
Total cost
   
 
39,817,922
   
 
39,573,619
Less accumulated amortization
   
 
7,562,196
   
 
7,091,965
    
  
Intangible assets, net
   
$
32,255,726
   
$
32,481,654
    
  
 
The Company acquired the majority of the intangibles in connection with our acquisition of FirstPlus Consumer Finance. Amortization expense was approximately $470,000 for the nine-months and $170,000 for the quarter ended September 30, 2002, compared to $1,823,000 for the nine-months and $608,000 for the quarter ended September 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 $1.8 million for the nine-months ended September 30,2002.
 
(5) Notes Payable
 
At September 30, 2002 and 2001 and December 31, 2001 and 2000, notes payable consisted of the following:
 
    
September 30,
2002
   
December 31, 2001
   
September 30,
2001
   
December 31, 2000
Senior Notes Payable/Lines of Credit
   
$
121,314,569
   
$
151,234,760
   
$
146,767,630
   
$
178,278,386
Subordinated Notes payable to individuals with varying maturity dates and rates ranging from 5 ¼% to 12%
   
 
93,060,467
   
 
71,542,844
   
 
67,561,238
   
 
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
   
 
2,255,562
   
 
2,605,623
    
  
  
  
Total notes payable
   
$
216,706,678
   
$
225,033,166
   
$
216,584,430
   
$
232,605,414
    
  
  
  
 
We generally finance our operations through cash flow from operations, borrowings under our credit facility with Finova and the sale to public investors of our subordinated notes. As of December 31, 2001 and September 30, 2002, we had $151.2 and $121.3, respectively, outstanding under our credit facility.
 
Our credit facility with Finova includes a term loan and a revolving credit line used to finance receivables. Advances under the term loan accrue interest at the prime rate plus 2%, or 6.75%, as of September 30, 2002. Advances under the revolving credit line accrue interest at the prime rate plus 1%, or 5.75%, as of September 30, 2002. The prime rate is the prime rate published by Citibank, N.A., or other money center bank as Finova may select. The interest rates are adjusted monthly to reflect fluctuations in the designated prime rate. Accrued interest on borrowings is payable monthly.
 

9

Table of Contents
The term loan is payable in twenty-three equal monthly principal and interest payments of $600,000, which began on April 15, 2001, with the remaining principal balance due on March 31, 2003. The outstanding balance under the term loan was $7.9 million as of September 30, 2002, which reflects an $11.9 million reduction since December 31, 2001. The revolving credit line matures on July 31, 2006. Under the revolving credit line, 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 term loan and the revolving credit facility, which requires us to comply with restrictive covenants, including financial condition covenants. As of September 30, 2002, the Company met all such requirements. James D. Thaxton guarantees both the term loan and the revolving loan.
 
The maximum amount we could borrow under the revolving credit line was $165 million on December 31, 2001. As of September 30, 2002, the maximum amount we could borrow under the revolving credit line was $146 million and an additional $7.8 million was available for borrowing against existing collateral, with $33.0 million of total potential capacity available for borrowing against qualified finance receivables generated in future periods.
 
Beginning in 2002, the maximum borrowing amount under our revolving credit line decreases on a quarterly basis. The annual decreases will be $22 million in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005 and $9 million in 2006.
 
We also fund our liquidity needs through the sale of subordinated notes. 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 December 31, 2001, we had $65.0 million of these registered subordinated notes outstanding and $6.5 million of outstanding subordinated notes registered in predecessor state registrations. As of September 30, 2002, we had $89.2 million of these registered subordinated notes outstanding and $3.9 million of notes outstanding 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. Although the maximum borrowing amount under our revolving credit facility will be decreasing, we anticipate that our cash flow from operations, the available borrowing amount under our senior credit facility from time to time 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 nine months and quarter ended September 30, 2002 and 2001:
 
    
Nine-Months Ended
   
Three Months Ended
    
Sept. 30,
2002
   
Sept. 30,
2001
   
Sept. 30,
2002
   
Sept. 30,
2001
BASIC & DILUTED
                            
Net income from continuing operations
   
$
4,572,692
   
$
1,200,209
   
$
1,114,120
   
$
359,488
Less:    Dividends on preferred stock
   
 
392,207
   
 
557,151
   
 
102,014
   
 
196,236
    
  
  
  
Net income applicable to common shareholders (numerator)
   
 
4,180,485
   
 
643,058
   
 
1,012,106
   
 
163,252
Average common shares outstanding (denominator)
   
 
6,865,642
   
 
6,883,855
   
 
6,870,698
   
 
6,849,355
Income per share from continuing operations – basic and diluted
   
$
0.61
   
$
0.09
   
$
0.15
   
$
0.02
    
  
  
  
 
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 Divisions
 
The Company has two primary divisions. The consumer finance segment provides financing to consumers with limited credit histories, low incomes or past credit problems. Income 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. Income 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 nine-months ended September 30, 2002 and 2001, and the year ended December 31, 2001:
 
September 30, 2002
Income Statement Data
   
Consumer
Finance
   
Insurance
     
Other
     
Total
Total Revenue
   
$
69,840,163
   
$
3,114,317
 
   
$
507,694
 
   
$
72,662,174
Net Interest Income
   
 
46,698,458
   
 
(3,847
)
   
 
384,702
 
   
 
47,079,313
Provision for credit losses
   
 
13,575,433
   
 
30,333
 
   
 
57,800
 
   
 
13,663,566
Noninterest income
   
 
12,222,215
   
 
3,114,317
 
   
 
-
 
   
 
14,536,532
Insurance premiums and commissions, net
   
 
9,576,392
   
 
2,944,185
 
   
 
-
 
   
 
11,720,577
Noninterest expenses
   
 
37,956,534
   
 
3,354,238
 
   
 
511,864
 
   
 
41,022,636
Depreciation and amortization
   
 
1,459,184
   
 
195,777
 
   
 
15,467
 
   
 
1,670,428
Net income
   
 
4,816,783
   
 
(239,921
)
   
 
(4,170
)
   
 
4,572,692
Balance Sheet Data
                                
Total assets
   
 
239,090,335
   
 
2,187,006
 
   
 
1,505,204
 
   
 
242,782,545
Loans, net
   
 
176,456,018
   
 
-
 
   
 
1,555,326
 
   
 
178,011,344
Allowance for credit losses
   
 
12,177,187
            
 
237,407
 
   
 
12,414,594
Intangibles
   
 
30,902,510
   
 
1,353,216
 
   
 
-
 
   
 
32,255,726
                                 
December 31, 2001
Income Statement Data
   
Consumer
Finance
   
Insurance
     
Other
     
Total
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
Intangibles
   
 
31,184,955
   
 
1,296,699
 
   
 
-
 
   
 
32,481,654

11

Table of Contents
September 30, 2001
Income Statement Data
   
Consumer Finance
   
Insurance
     
Other
   
Total
Total Revenue
   
$
64,124,543
   
$
3,413,510
 
   
$
777,650
   
$
68,315,703
Net Interest Income
   
 
40,141,001
   
 
(531,531
)
   
 
532,800
   
 
40,142,270
Provision for credit losses
   
 
11,096,593
   
 
13,745
 
   
 
100,348
   
 
11,210,686
Noninterest income
   
 
10,170,324
   
 
3,413,484
 
   
 
-
   
 
13,583,808
Insurance premiums and commissions, net
   
 
7,445,039
   
 
2,860,770
 
   
 
-
   
 
10,305,809
Noninterest expenses
   
 
36,720,243
   
 
3,323,642
 
   
 
175,737
   
 
40,219,622
Depreciation and amortization
   
 
2,776,703
   
 
243,370
 
   
 
15,927
   
 
3,036,000
Net income
   
 
1,446,109
   
 
(291,515
)
   
 
45,615
   
 
1,200,209
Balance Sheet Data
                              
Total assets
   
 
223,404,105
   
 
2,440,738
 
   
 
3,324,966
   
 
229,169,809
Loans, net
   
 
170,492,051
   
 
-
 
   
 
3,334,075
   
 
173,826,126
Allowance for credit losses
   
 
11,796,656
   
 
-
 
   
 
224,629
   
 
12,021,285
Intangibles
   
 
31,754,806
   
 
1,338,344
 
   
 
-
   
 
33,093,150
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
We are a diversified consumer financial services company. The primary divisions of our business include:
 
 
•
 
origination and servicing of direct consumer loans made to credit-impaired borrowers,
 
 
•
 
used automobile lending through the purchase and servicing of used automobile sales contracts,
 
 
•
 
insurance premium finance lending through the purchase of insurance premium finance contracts,
 
 
•
 
selling insurance products on an agency basis, and the factoring of accounts receivable and
 
 
•
 
the origination and servicing of small commercial loans to small- and medium-sized businesses.

12

Table of Contents
 
NET INTEREST MARGIN
 
The following table presents important data relating to our net interest margin for the nine-months and three-months ended September 30, 2002 and 2001.
 
    
Three-Months Ended
     
Nine-Months Ended
  
    
Sept. 30, 2002
     
Sept. 30, 2001
     
Sept. 30,
2002
     
Sept. 30,
2001
  
Average net finance receivables (1)
   
$
196,565,954
 
   
$
181,397,185
 
   
$
192,342,547
 
   
$
178,238,918
 
Average notes payable (1)
   
 
213,472,239
 
   
 
213,647,108
 
   
 
210,951,115
 
   
 
215,640,461
 
Interest and fee income
   
 
19,759,409
 
   
 
18,615,606
 
   
 
58,125,642
 
   
 
54,731,895
 
Interest expense
   
 
3,732,900
 
   
 
4,782,926
 
   
 
11,046,329
 
   
 
14,589,625
 
    
  
  
  
Net interest income
   
 
16,026,509
 
   
 
13,832,680
 
   
 
47,079,313
 
   
 
40,142,270
 
Average interest rate earned (1)
   
 
40.21
%
   
 
41.05
%
   
 
40.29
%
   
 
40.94
%
Average interest rate paid (1)
   
 
6.99
%
   
 
8.95
%
   
 
6.98
%
   
 
9.02
%
    
  
  
  
Net interest rate spread
   
 
33.22
%
   
 
32.10
%
   
 
33.31
%
   
 
31.92
%
Net interest margin (2)
   
 
32.61
%
   
 
30.50
%
   
 
32.64
%
   
 
30.03
%
 
 
(1)
 
Averages are computed using month-end balances during the year presented.
 
(2)
 
Net interest margin represents net interest income divided by average Net Finance Receivables.
 
The principal component of our profitability is our net interest margin, which is the difference between interest earned on finance receivables and interest expense paid on borrowed funds. Statutes in some states regulate the interest rates that we may charge our borrowers while in other states competitive market conditions establish the interest rates borrowers may be charged. Significant differences exist in the interest rates earned on the various components of our finance receivable portfolio. The interest rates earned on used automobile sales contracts and real estate secured loans generally are lower than the interest rates earned on direct consumer loans due to competition from other lenders, superior collateral and longer terms. The interest rates earned on premium finance contracts are state regulated and vary based on the type of underlying insurance and the term of the contract.
 
Unlike our interest income, our interest expense is sensitive to general market fluctuations in interest rates. The interest rates paid to our primary lender, Finova, are based upon a published prime rate plus set percentages. Thus, general market fluctuations in interest rates directly impact our cost of funds. Our general inability to increase the interest rates earned on finance receivables may impair our ability to adjust to increases in the cost of funds resulting from changes in market conditions. Accordingly, increases in market interest rates generally will narrow our interest rate spread and lower our profitability, while decreases in market interest rates generally will widen our interest rates spreads and increase our profitability.
 
Results of Operations for the Nine Months Ended September 30, 2002 and 2001
 
Since December 31, 2001 our gross finance receivables have decreased approximately $4.8 million. This decrease is due mainly to the decision in our Premium Finance division to just finance captive contracts along with the slow liquidation of our Commercial loan division and real estate secured loans. The declines in these areas was offset by growth in our more profitable direct loans.
 
The growth in our direct loan business, coupled with the addition of new fees in states such as Tennessee and Texas, our interest and fee income has grown for the nine-month period ended September 30, 2002 by approximately $3.4 million to $58.1 million, or 6.2%. We expect this trend to continue as we move to a more direct loan based business. Our interest expense decreased significantly for the period, based on the decrease in the prime interest rate. Quantified this decrease was approximately $3.5 million or 24.3%. We expect the level of interest expense to remain constant as long as the prime interest rate remains constant.
 
Costs associated with our normal business growth caused our operating expenses to increase 3.0% from $40,220,000 during the nine months of 2001 to $41,023,000 during the same period in 2002. The major component of these expenses is personnel expense.
 
The increase in our operating expenses was offset by our adoption of SFAS 142 accounting for Goodwill. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed at least annually for impairment. The effect of not amortizing goodwill will be an expense savings of approximately $2.4 million for the full year, and was approximately $1.8 million for the nine-months ended September 30, 2002.
 
The aforementioned expense savings and increases in revenues have substantially increased our pretax net income from approximately $2.3 million for the nine-months ended September 30, 2001 to $6.9 million for the same period ended September 30, 2002. This income, offset by our income taxes expense and dividends paid has increased our total stockholders equity to $10.5 million at September 30, 2002 from $6.3 million at December 31, 2001.

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Table of Contents
 
Results of Operations for the Three-Months Ended September 30, 2002 and 2001
 
For the three months ended our gross finance receivables have increased in our automobile secured loans and direct loan portfolios, by approximately $2.1 million and $5.5 million, respectively. These increases are due to the continued focus on these more profitable lines of business, and we expect this trend to continue through the fourth quarter.
 
The change in mix and growth of our receivables has caused our interest income to increase from $18.6 million for the three-months ended September 30, 2001 to $19.8 million for the same period ended September 30, 2002, or 6.1%. Interest expense also declined for the period by approximately $1.0 million, or 22.0%. This decline was due to the decrease of the prime rate due to the majority of our debt being linked to the prime interest rate.
 
Our operating expenses increased by approximately $1.4 million for the three months ended September 2002, compared to 2001. The increases were mainly in personnel and reinsurance expense.
 
CREDIT LOSS EXPERIENCE
The following table sets forth our allowance for credit losses and credit loss experience at or over the periods presented.
 
    
Sept. 30,
2002
     
December 31, 2001
     
Sept. 30,
2001
     
December 31, 2000
  
Net finance receivables (1)
   
$
190,425,938
 
   
$
190,105,324
 
   
$
182,288,707
 
   
$
185,638,256
 
Allowance for credit losses
   
 
12,414,594
 
   
 
12,012,169
 
   
 
12,021,285
 
   
 
11,630,555
 
Allowance for credit losses as a percentage of net finance receivables (1)
   
 
6.52
%
   
 
6.32
%
   
 
6.59
%
   
 
6.27
%
Dealer reserves and discounts on bulk purchases
   
 
1,929,796
 
   
 
2,036,818
 
   
 
2,072,085
 
   
 
2,406,165
 
Dealer reserves and discounts on bulk purchases as percentage of Net Automobile Sales Contracts at period end
   
 
10.35
%
   
 
10.58
%
   
 
8.23
%
   
 
10.89
%
Allowance for credit losses and dealer reserves and discount on bulk purchases
   
 
14,344,390
 
   
 
14,048,987
 
   
 
14,093,370
 
   
 
14,036,720
 
Allowance for credit losses and dealer reserves as a percentage of finance receivables
   
 
7.53
%
   
 
7.39
%
   
 
7.73
%
   
 
7.56
%
Provision for credit losses
   
 
13,663,566
 
   
 
16,583,919
 
   
 
11,210,686
 
   
 
14,657,930
 
Charge-offs (net of recoveries)
   
 
13,261,141
 
   
 
16,202,305
 
   
 
10,819,956
 
   
 
14,526,731
 
Charge-offs (net of recoveries) as a percentage of average net finance receivables (2)
   
 
9.19
%
   
 
8.32
%
   
 
7.91
%
   
 
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)
 
September 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:
 
    
Sept. 30, 2002
     
December 31, 2001
  
Direct finance receivables contractually past due 90 days or more
   
$
8,469,232
 
   
$
7,373,910
 
Direct finance receivables outstanding
   
 
157,194,656
 
   
 
148,214,621
 
Direct finance receivables contractually past due 90 days or more as a percentage of Direct finance receivables
   
 
5.39
%
   
 
4.98
%
Real estate secured receivables contractually past due 90 days or more
   
 
1,195,075
 
   
 
1,632,483
 
Real estate secured receivables outstanding
   
 
13,307,002
 
   
 
15,732,857
 
Real estate secured receivables contractually past due 90 days or more as a percentage of real estate secured receivables
   
 
8.98
%
   
 
10.38
%
Vehicle secured receivables contractually past due 60 days or more
   
 
1,658,068
 
   
 
1,090,032
 
Vehicle secured receivables outstanding
   
 
18,641,591
 
   
 
17,782,135
 
Vehicle secured receivables contractually past due 60 days or more as a percentage of vehicle secured receivables
   
 
8.89
%
   
 
6.13
%
Premium finance contracts contractually past due 60 days or more
   
 
375,628
 
   
 
679,091
 
Premium finance contracts outstanding
   
 
4,095,455
 
   
 
8,375,711
 
Premium finance contracts contractually past due 60 days or more as a percentage of premium finance contracts
   
 
9.17
%
   
 
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 and the sale to public investors of our subordinated notes. As of December 31, 2001 and September 30, 2002, we had $151.2 and $121.3, respectively, outstanding under our credit facility.
 
Our credit facility with Finova includes a term loan and a revolving credit line used to finance receivables. Advances under the term loan accrue interest at the prime rate plus 2%, or 6.75%, as of September 30, 2002. Advances under the revolving credit line accrue interest at the prime rate plus 1%, or 5.75%, as of September 30, 2002. The prime rate is the prime rate published by Citibank, N.A., or other money center bank as Finova may select. 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 of $600,000, which began on April 15, 2001, with the remaining principal balance due on March 31, 2003. The outstanding balance under the term loan was $7.9 million as of September 30, 2002, which reflects an $11.9 million reduction since December 31, 2001. The revolving credit line matures on July 31, 2006. Under the revolving credit line, 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 term loan and the revolving credit facility, which requires us to comply with restrictive covenants, including financial condition covenants. As of September 30, 2002, the Company met all such requirements. James D. Thaxton guarantees both the term loan and the revolving loan.
 
The maximum amount we could borrow under the revolving credit line was $165 million on December 31, 2001. As of September 30, 2002, the maximum amount we could borrow under the revolving credit line was $146 million and an additional $7.8 million was available for borrowing against existing collateral, with $33.0 million of total potential capacity available for borrowing against qualified finance receivables generated in future periods.
 
Beginning in 2002, the maximum borrowing amount under our revolving credit line decreases on a quarterly basis. The annual decreases will be $22 million in 2002, $16.5 million in 2003, $18 million in 2004, $18 million in 2005 and $9 million in 2006.
 
We also fund our liquidity needs through the sale of subordinated notes. 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 December 31, 2001, we had $65.0 million of these registered subordinated notes outstanding and $6.5 million of outstanding subordinated notes registered in predecessor state registrations. As of September 30, 2002, we had $89.2 million of these registered subordinated notes outstanding and $3.9 million of notes outstanding 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. Although the maximum borrowing amount under our revolving credit facility will be decreasing, we anticipate that our cash flow from operations, the available borrowing amount under our senior credit facility from time to time 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.

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Table of Contents
 
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
 
Our outstanding debt under the revolving credit line and term loan was $151.2 million at December 31, 2001 and $121.3 million at September 30, 2002. Interest on borrowings under these facilities is based on the prime rate. Because our profitability depends on our net interest margin, changes in the prime rate will affect on our profitability. Increases in the prime rate would adversely affect our profitability. Based on the outstanding balance at September 30, 2002, a change of 1% in the prime interest rate would cause a change in interest expense of approximately $1.2 million on an annual basis. Based on the outstanding balance at December 31, 2001, a change of 1% in the prime interest rate would have caused a change in interest expense of approximately $1.5 million on an annual basis.
 
Our outstanding receivables are not affected by external interest rate changes because we usually charge rates typically fixed at the maximum rate allowable by law or, in states 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 credit impaired borrowers. This causes the interest rate risk on our outstanding receivables to be minimal.
 
Interest rates being charged by competitors, even those outside our markets, also influence the interest rates we are able to charge customers. A decrease in the interest rates being charged by others in the market could impact our ability to attract new customers and/or retain the customers we currently serve. Similarly, new market entrants and the resulting increased competition for customers in our market could adversely affect our profitability.
 
Additionally, changes in the maximum interest rate allowable by law would affect our profitability. A decrease in the maximum rate would cause the interest rates we are able to charge to be commensurately decreased and, as a result, our interest rate margin would be reduced. A legally imposed maximum interest rate adopted by a state where we operate that previously did not have a limit could also impair our profitability because we may be required to reduce our interest rates to fall within the legal limit.
 
ITEM 4: Controls and Procedures
 
Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer have concluded that the design and operation of our disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation was completed.
 
PART II
 
Item 6. Exhibits and Reports on Form 8-K
 
(a) Exhibits
 
99.1
   
Certification of James D. Thaxton pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2
   
Certification of Allan F. Ross pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
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.
Date: November 14, 2002
  
By: /s/ JAMES D. THAXTON
   
James D. Thaxton
President and Chief Executive Officer
 
 
Date: November 14, 2002
  
By: /s/ ALLAN F. ROSS
   
Allan F. Ross
Vice President, Treasurer, Secretary, and
Chief Financial Officer
 
CERTIFICATION
 
I, James D. Thaxton, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of The Thaxton Group, Inc.;
 
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date: November 14, 2002
 
By:
  
/S/    JAMES D. THAXTON        
   
James D. Thaxton,
President and Chief Executive Officer
 
CERTIFICATION
 
I, Allan F. Ross, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of The Thaxton Group, Inc.;
 
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date: November 14, 2002
 
By:
  
/s/    ALLAN F. ROSS        
   
Allan F. Ross,
Vice President, Treasurer, Secretary and
Chief Financial Officer
 

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