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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 QUARTERLY PERIOD ENDED MARCH 31, 2003
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 (IRS Employer
incorporation or organization) Identification No.)
1524 PAGELAND HIGHWAY, LANCASTER, SOUTH CAROLINA 29720
------------------------------------------------------
(Address of principal executive offices)
803-285-4337
(Registrant's telephone number, including area code)
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 May 9, 2003
----- --------------------------
Common Stock 6,867,290
THE THAXTON GROUP, INC.
FORM 10-Q
March 31, 2003
TABLE OF CONTENTS
-----------------
Item Page
No. ----
- ----
PART I
Financial Information
1. Financial Statements
Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 2
Consolidated Statements of Income for the three months ended March 31,
2003 and 2002 3
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 2002 and the quarter ended March 31, 2003 4
Consolidated Statements of Cash Flows for the three months ended March 31,
2003 and 2002 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II
Other Information
1. Legal Proceedings 15
2. Changes in Securities and Use of Proceeds 15
3. Defaults Upon Senior Securities 15
4. Submission of Matters to a Vote of Security Holders 15
5. Other Information 15
6. Exhibits and Reports on Form 8-K 15
1
PART I
FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
THE THAXTON GROUP, INC.
Consolidated Balance Sheets
March 31, 2003 & December 31, 2002
March 31, 2003 December 31,
(Unaudited) 2002
----------- ----
Assets
Cash $ 14,337,295 $ 4,593,419
Finance receivables, net 173,322,441 188,317,826
Premises and equipment, net 5,112,905 5,169,163
Accounts receivable 810,293 1,494,919
Accounts receivable from related parties 75,467 84,590
Repossessed automobiles and properties 1,060,965 687,840
Deposit 7,968,977 7,919,667
Goodwill and other intangible assets 31,528,767 31,558,407
Deferred tax asset, net 3,300,000 3,392,000
Other assets 7,116,318 6,801,891
------------ ------------
Total assets $244,633,428 $250,019,722
============ ============
Liabilities and Stockholders' Equity
Liabilities
Accrued interest payable $2,328,269 $ 2,355,805
Notes payable 220,081,223 225,676,293
Accounts payable 2,006,819 2,377,349
Accounts payable to related parties 624,458 2,102,146
Employee savings plan 1,724,182 1,456,689
Accrued salaries and bonuses 2,107,687 1,946,970
Other liabilities 3,601,426 3,225,863
------------ ------------
Total liabilities 232,474,064 239,141,115
------------ -----------
Stockholders' Equity
Preferred Stock $.01 parvalue:
Series A: 400,000 shares authorized; issued and outstanding 10,440 shares in 2003 and
2002; liquidation value $104,400 in 2003 and 2002 104 104
Series C: 50,000 shares authorized issued and outstanding in 2003 and 2002; liquidation
value $500,000 in 2003 and 2002 500 500
Series E: 800,000 shares authorized, issued and outstanding in 2003 and 2002; liquidation
value $8,000,000 in 2003 and 2002 8,000 8,000
Series F: 100,000 shares authorized; issued and outstanding 20,000 in March 2003 and
2002; liquidation value $200,000 in 2003 and 2002 200 200
Common stock, $.01 par value, 50,000,000 shares authorized; issued and outstanding 6,867,390
in 2003; 6,868,940 shares in 2002 68,673 68,689
Additional paid-in-capital 8,836,235 8,850,169
Retained earnings 3,245,652 1,950,945
------------ ------------
Total stockholders' equity 12,159,364 10,878,607
------------ ------------
Total liabilities and stockholders' equity $244,633,428 $250,019,722
============ ============
See accompanying notes to consolidated financial statements.
2
THE THAXTON GROUP, INC.
Consolidated Statements of Income
Quarters Ended March 31, 2003 and 2002
(Unaudited)
March 31, 2003 March 31, 2002
-------------- --------------
Interest and fee income $21,195,318 $20,055,399
Interest expense 3,704,892 3,691,870
----------- -----------
Net interest income 17,490,426 16,363,529
Provision for credit losses 5,186,226 3,670,268
----------- -----------
Net interest income after provision for credit losses 12,304,201 12,693,261
Other income:
Insurance premiums and commissions, net 3,154,745 3,084,272
Other income 2,244,651 1,926,646
----------- -----------
Total other income 5,399,396 5,010,918
----------- -----------
Operating expenses:
Compensation and employee benefits 8,974,010 8,468,507
Telephone, computers 742,352 542,092
Net occupancy 1,745,586 1,617,715
Reinsurance claims expense 319,574 289,726
Advertising 859,384 686,798
Collection expense 162,544 149,576
Travel 328,664 275,547
Professional fees 344,455 269,657
Office expense 646,303 579,374
Amortization expense 99,587 149,573
Other 1,181,132 746,659
----------- -----------
Total operating expenses 15,403,591 13,775,224
----------- -----------
Income before income tax expense 2,300,006 3,928,954
Income tax expense 859,508 1,335,844
----------- -----------
Net income 1,440,498 2,593,110
Dividends on preferred stock 145,791 144,457
----------- -----------
Net income applicable to common shareholders $ 1,294,707 $ 2,448,653
=========== ===========
Net income per common share--basic and diluted $ 0.19 $ 0.36
See accompanying notes to consolidated financial statements.
3
THE THAXTON GROUP, INC.
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 2002 and Quarter Ended March 31, 2003
(Unaudited)
Additional Total
Common Preferred Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
----- ----- ------- -------- ------
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 for compensation 225 - 44,775 - 45,000
Purchase and retirement of 2,915 shares of common stock (29) - (26,205) - (26,234)
Dividends paid on preferred stock - - - (558,843) (558,843)
Net Income - - - 5,134,148 5,134,148
------- ------- ----------- ----------- -----------
Balance at December 31, 2002 68,689 8,804 8,850,169 1,950,945 10,878,607
Purchase and retirement of 1,550 shares of common stock (16) (13,934) (13,950)
Dividends paid on preferred stock - - - (145,791) (145,791)
Net income - - - 1,440,498 1,440,498
------- ------- ----------- ----------- -----------
Balance at March 31, 2003 $68,673 $ 8,804 $ 8,836,235 $ 3,245,652 $12,159,364
======= ======= =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
THE THAXTON GROUP, INC.
Consolidated Statements of Cash Flows
Quarters ended March 31, 2003 and 2002
March 31, 2003 March 31, 2002
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net income $ 1,440,498 $ 2,593,110
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for credit losses 5,186,226 3,670,268
Depreciation and amortization 551,300 547,057
Deferred taxes (46,789) 1,335,844
Increase in accounts receivable 693,749 1,025,977
Decrease in other assets (435,039) 92,722
Issuance of common stock as compensation - 45,000
Decrease in accrued interest payable and other liabilities (1,603,811) (236,594)
------------ ------------
Net cash provided by operating activities 5,786,134 9,073,384
------------ ------------
Cash flows from investing activities:
Net decrease in finance receivables 9,860,550 8,106,928
Net capital expenditures for premises and equipment (415,506) (351,100)
------------ ------------
Net cash provided by investing activities 9,445,044 7,755,828
------------ ------------
Cash flows from financing activities:
Dividends paid (145,791) (144,457)
Net decrease in notes payable (5,327,577) (18,907,806)
Repurchase of common stock (13,934) -
------------ ------------
Net cash used in financing activities (5,487,302) (19,052,263)
------------ ------------
Net decrease in cash 9,743,876 (2,223,051)
Cash at beginning of period 4,593,419 4,096,359
------------ ------------
Cash at end of period $ 14,337,295 $ 1,873,308
============ ============
See accompanying notes to consolidated financial statements.
5
THE THAXTON GROUP, INC.
Notes to Consolidated Financial Statements
March 31, 2003 and December 31, 2002
(Unaudited)
(1) Summary of Significant Accounting Policies
The Thaxton Group, Inc. (the "Company") is incorporated under the laws of the
state of South Carolina. 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 South
and North 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 Thaxton RBE ("RBE"), a related party. 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 March 31, 2003 and 2002, 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 quarter ended March 31, 2003 are not necessarily
indicative of results to be expected for the entire fiscal year.
(2) Finance Receivables
Finance receivables consisted of the following at March 31, 2003 and 2002 and
December 31, 2002 and 2001:
March 31, December 31, March 31, December 31,
2003 2002 2002 2001
---- ---- ---- ----
Direct loans $188,329,626 $208,353,717 $174,851,465 $189,163,818
Automobile sales contracts 22,739,938 23,436,046 24,044,618 23,121,113
Mortgage loans 12,673,147 13,519,222 15,115,502 16,468,209
Premium finance contracts 4,984,047 4,025,950 6,548,817 8,618,497
Commercial loans 1,873,319 1,806,263 2,671,904 3,161,875
------------ ------------ ------------ ------------
Total finance receivables 230,600,077 251,141,198 223,232,306 240,533,512
Unearned interest (34,351,174) (39,906,714) (33,247,979) (36,703,784)
Unearned insurance premiums, net (1,142,329) (1,535,772) (1,299,956) (1,798,520)
Insurance loss reserve (8,149,640) (8,109,076) (9,153,209) (9,022,167)
Dealer holdback and bulk purchase discount (1,657,324) (1,710,542) (2,251,666) (2,036,818)
Allowance for credit losses (13,999,821) (13,963,909) (10,644,885) (12,012,169)
Deferred loan cost, net 2,022,652 2,402,641 2,016,883 2,294,976
------------ ------------ ------------ ------------
Finance receivables, net $173,322,441 $188,317,826 $169,477,834 $181,255,030
============ ============ ============ ============
6
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 March 31, 2003, 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 March 31, 2003
and 2002, and the years ended December 31, 2002 and 2001, are as follows:
March 31, December 31, March 31, December 31,
2003 2002 2002 2001
---- ---- ---- ----
Beginning balance $13,963,909 $ 12,012,169 $12,012,169 $ 11,630,555
Provision for credit losses 5,186,226 21,285,161 3,670,268 16,583,919
Charge-offs (5,640,596) (21,140,964) (5,556,959) (18,024,265)
Recoveries 490,282 1,807,543 519,407 1,821,960
----------- ------------ ----------- ------------
Net charge-offs (5,150,314) (19,333,421) (5,037,552) (16,202,305)
----------- ------------ ----------- ------------
Ending balance $13,999,821 $ 13,963,909 $10,644,885 $ 12,012,169
=========== ============ =========== ============
The Company's loan portfolio primarily consists of short term loans, the
majority of which are originated or renewed during the current year.
Accordingly, the Company estimates that the fair value of the finance
receivables is not materially different from carrying value.
(3) Premises and Equipment
A summary of premises and equipment at March 31, 2003 and December 31, 2002
follows:
March 31, December 31,
2003 2002
---- ----
Leasehold improvements $ 2,391,865 $ 2,355,898
Furniture and fixtures 3,075,911 3,012,696
Equipment and automobiles 8,368,497 8,072,224
----------- -----------
Total cost 13,836,273 13,440,818
Less accumulated depreciation 8,723,368 8,271,655
----------- -----------
Net premises and equipment $ 5,112,905 $ 5,169,163
=========== ===========
Depreciation expense was approximately $452,000 for the 1/st/ quarter of 2003
and $1,802,000 for the year ended December 31, 2002.
7
(4) Intangible Assets
Intangible assets consisted of the following at March 31, 2003 and December 31,
2002:
March 31, December 31,
2003 2002
---- ----
Goodwill (not amortized) $34,582,895 $34,582,895
Insurance expirations (6.3 years) 2,034,906 2,034,906
----------- -----------
Total cost 36,617,801 36,617,801
Less accumulated amortization 5,089,034 5,059,394
----------- -----------
Intangible assets, net $31,528,767 $31,558,407
=========== ===========
The Company acquired the majority of the intangibles in connection with the
acquisition of FirstPlus Consumer Finance. Amortization expense was
approximately $100,000 for the 1/st/ quarter of 2003 and $631,000 for the year
ended December 31, 2002.
(5) Notes Payable and Notes Payable to Affiliates
At March 31, 2003, and December 31, 2002, notes payable consisted of the
following:
March 31, December 31,
2003 2002
---- ----
Senior Notes Payable/Lines of Credit $109,144,540 $123,219,272
Subordinated Notes payable to individuals with varying maturity
dates and rates ranging from 5 1/4% to 12% 108,605,041 100,125,379
Other subordinated notes payable to companies with varying
maturity dates and rates ranging from 4 1/4% to 10% 2,331,642 2,331,642
------------ ------------
Total notes payable $220,081,223 $225,676,293
============ ============
The Company finances its operations through cash flow from operations,
borrowings under its credit facility with FINOVA Capital Corporation ("FINOVA")
and the sale to public investors of its subordinated notes.
On February 24, 2003, the Company amended its credit facility with FINOVA. The
Company now only has a revolving credit line with FINOVA which it uses to
finance receivables. Advances under the revolving credit line accrue interest at
the prime rate plus 1%, or 5.25% as of March 31, 2003. 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 this
designated prime rate. Accrued interest on borrowings is payable monthly.
As of March 31, 2003 the Company had $109.1 million outstanding under the
revolving credit. Principal is due in full on the maturity date and can be
prepaid without penalty. Maximum borrowings under the credit facility as of
March 31, 2003 are limited to the lesser of $135 million, or 85% of eligible
consumer finance receivables, as defined by the agreement. As of March 31, 2003
the Company had an additional $24.8 million available to borrow against existing
collateral. The Company's maximum borrowing amount decreases on a quarterly
basis and will decrease $13.5 million during the remainder of 2003, $18 million
in 2004, $18 million in 2005 and $9 million in 2006. The credit facility matures
in 2006 and requires the Company to comply with restrictive covenants, including
financial condition covenants such as a minimums for net income, net worth, and
net cash flows, as well as a leverage ratio limit. As of March 31, 2003, the
Company met all such requirements.
Substantially all of the Company's and its subsidiaries' assets secure the
credit facility. James D. Thaxton guarantees the repayment obligations under the
credit facility.
The Company also funds its liquidity needs through the sale of subordinated
notes. In February 1998, the Company began offering subordinated notes in
several states by registering $50 million of subordinated notes with the
Securities and Exchange Commission ("SEC"). In May 2001, the Company registered
an additional $75 million offering of subordinated notes with the SEC. In
December 2002, the Company registered an additional $125 million offering of
subordinated notes. 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
8
amounts and maturity dates of the notes. Notes currently being offered carry
interest rates ranging from 6.50% 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 the Company to
comply with any financial covenants nor do they impose any material restrictions
on the operations of our business.
As of March 31, 2003, the Company had $106.4 million of these registered
subordinated notes outstanding and $2.2 million notes registered in predecessor
state registrations. To date, the Company has used the proceeds from the sale of
these notes to reduce, on a temporary basis, the amount of its revolving credit
facility with FINOVA. The Company intends 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 its
business. It enables the Company to reduce its overall borrowing costs,
particularly during periods of increasing interest rates. In addition, it allows
the Company to hedge the interest rate risk inherent in its variable rate credit
facility, and to diversify its sources of borrowed funds.
(6) Earnings Per Share Information
The following is a summary of the earnings per share calculation for the
quarters ended March 31, 2003 and 2002, and the years ended December 31, 2002
and 2001:
March 31, December 31, March 31, December 31,
2003 2002 2002 2001
---- ---- ---- ----
BASIC & DILUTED
Net income from continuing operations $1,440,498 $5,134,148 $2,593,110 $3,034,623
Less: Dividends on preferred stock 145,791 558,843 144,457 729,497
---------- ---------- ---------- ----------
Net income applicable to common shareholders (numerator) 1,294,707 4,575,305 2,448,653 2,305,126
Average common shares outstanding (denominator) 6,868,028 6,866,557 6,857,480 6,875,893
Income per share from continuing operations - basic and diluted $ 0.19 $ 0.67 $ 0.36 $ 0.34
========== ========== ========== ==========
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.
9
(7) Business Divisions
The Company has two primary divisions. The consumer finance division 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 divisions for the quarter ended March 31, 2003
and 2002, and the year ended December 31, 2002:
March 31, 2003 Consumer
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total Revenue $ 25,232,572 $1,218,982 $ 143,160 $ 26,594,714
Net Interest Income $ 17,382,098 - 108,328 17,490,426
Provision for credit losses 5,168,755 10,963 6,508 5,186,226
Noninterest income 4,180,414 1,218,982 - 5,399,396
Insurance premiums and
commissions, net 2,064,385 1,090,360 - 3,154,745
Noninterest expenses 14,147,389 1,184,793 71,409 15,403,591
Depreciation and amortization 479,712 66,476 5,112 551,300
Net income 1,472,247 (43,725) 11,976 1,440,498
Balance Sheet Data
Total assets 240,772,181 2,205,873 1,655,374 244,633,428
Loans, net 171,649,122 - 1,673,319 173,322,441
Allowance for credit losses 13,799,821 - 200,000 13,999,821
Intangibles 30,234,004 1,294,763 - 31,528,767
December 31, 2002 Consumer
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total revenue $ 98,360,774 $4,176,452 $ 647,512 $103,184,738
Net interest income 65,237,007 - 491,272 65,728,279
Provision for credit losses 20,988,326 152,820 144,015 21,285,161
Noninterest income 20,276,467 4,176,452 - 24,452,919
Insurance premiums and
commissions, net 15,460,245 3,935,906 - 19,396,151
Noninterest expenses 53,911,091 4,163,069 350,514 58,424,674
Depreciation and amortization 2,151,616 260,778 20,579 2,432,973
Net income (loss) 5,529,167 (333,469) (61,550) 5,134,148
Balance Sheet Data
Total assets 246,140,243 2,306,479 1,573,000 250,019,722
Loans, net 186,711,563 - 1,606,263 188,317,826
Allowance for credit losses 13,763,909 - 200,000 13,963,909
Intangibles 30,234,418 1,323,989 - 31,558,407
10
March 31, 2002 Consumer
Income Statement Data Finance Insurance Other Total
------- --------- ----- -----
Total Revenue $ 23,942,351 $ 919,706 $ 204,260 $ 25,066,317
Net Interest Income 16,209,355 (834) 155,008 16,363,529
Provision for credit losses 3,648,329 4,339 17,600 3,670,268
Noninterest income 4,091,212 919,706 - 5,010,918
Insurance premiums and
commissions, net 2,212,860 871,412 - 3,084,272
Noninterest expenses 12,516,946 1,071,719 186,559 13,775,224
Depreciation and amortization 476,946 64,868 5,243 547,057
Net income 2,727,422 (152,013) 17,701 2,593,110
Balance Sheet Data
Total assets 222,818,684 1,956,886 2,465,622 227,241,192
Loans, net 166,805,930 - 2,671,904 169,477,834
Allowance for credit losses 10,644,885 - - 10,644,885
Intangibles 31,062,272 1,269,810 - 32,332,082
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 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.
11
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 quarters ended March 31, 2003 & 2002 and the years ended December 31,
2002 & 2001.
March 31, December 31, March 31, December 31,
2003 2002 2002 2001
---- ---- ---- ----
Average Net Finance Receivables (1) $199,028,542 $195,696,123 $190,911,203 $179,688,836
Average notes payable(1) 222,342,409 214,057,626 211,344,567 216,824,106
Interest and fee income 21,195,318 80,939,034 20,055,399 76,137,625
Interest expense 3,704,892 15,210,755 3,691,870 19,069,792
------------ ------------ ------------ ------------
Net interest income 17,490,426 65,728,279 16,363,529 57,067,833
Average interest rate earned 42.60% 41.36% 42.02% 42.37%
Average interest rate paid 6.67% 7.11% 6.99% 8.80%
------------ ------------ ------------ ------------
Net interest rate spread 35.93% 34.25% 35.03% 33.57%
Net interest margin(2) 35.15% 33.59% 34.29% 31.76%
(1) Averages are computed using month-end balances during the year
presented and are only net of unearned interest and dealer
reserves.
(2) Net interest margin represents net interest income divided by
average Net Finance Receivables.
Results of Operations for the Three Months Ended March 31, 2003 and 2002
For the three months ended we incurred the normal liquidation of the loans we
added during the fourth quarter of the previous year. Our gross finance
receivables declined by $20,541,000 to $230,600,000 since December 31, 2002.
Comparatively in 2002 for the same period our gross receivables declined
$17,301,000 to $223,232,000. This is due to our normal business activity of our
customers paying off the loans they took out during the 4th quarter of the
previous year.
Due to this increase in our receivables our interest income increased to
$21,195,000 for the current period from $20,055,000 for the same period last
year. Our interest expense remained flat this year at $3,705,000 compared to
$3,692,000 in the prior period. A decrease in rates was offset by an increase in
average debt outstanding.
As to be expected with overall business growth our operating expenses also
increased to $15,404,000 in 2003 from $13,775,000 in 2002 or 11.8%. This
increase is related to normal growth of our business and an increase in salaries
and bonuses from the prior year.
Mainly due to our increase in the provision for loan losses over the prior year
our pretax income decreased to $2,300,000 in 2003 from $3,929,000 in 2002.
12
CREDIT LOSS EXPERIENCE
The following table sets forth our allowance for credit losses and credit loss
experience at or over the periods presented.
March 31, December 31, March 31, December 31,
2003 2002 2002 2001
---- ---- ---- ----
Net finance receivables (1) $185,448,943 $200,475,472 $172,149,738 $190,105,32
Allowance for credit losses 13,999,821 13,963,909 10,644,885 12,012,16
Allowance for credit losses as a percentage of net finance
receivables (1) 7.55% 6.97% 6.18% 6.32%
Dealer reserves and discounts on bulk purchases 1,657,324 1,710,542 2,251,666 2,036,818
Dealer reserves and discounts on bulk purchases as percentage
of Net Automobile Sales Contracts at period end 8.91% 9.03% 11.22% 10.58%
Allowance for credit losses and dealer reserves and discount on
bulk purchases 15,657,145 15,674,451 12,896,551 14,048,987
Allowance for credit losses and dealer reserves as a percentage
of finance receivables 8.44% 7.82% 7.49% 7.39%
Provision for credit losses 5,186,226 21,285,161 3,670,268 16,583,919
Charge-offs (net of recoveries) 5,150,314 19,333,421 5,037,552 16,202,305
Charge-offs (net of recoveries) as a percentage of average net
finance receivables (2) 11.11% 9.64% 10.55% 8.32%
(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 commercial finance
receivables.
(2) March 31, 2003 and 2002 are annualized for comparison purpose.
The following table sets forth certain information concerning our finance
receivables at the end of the periods indicated:
March 31, December 31,
2003 2002
---- ----
Direct Finance Receivables Contractually past due 90 days or more $ 7,884,739 $ 8,279,602
Direct Finance Receivables outstanding 156,076,082 173,357,576
Direct Finance Receivables Contractually past due 90 days or more as a percentage of
Direct Finance receivables 5.05% 4.78%
Real Estate Secured Receivables Contractually past due 90 days or more 749,666 912,571
Real Estate Secured Receivables outstanding 11,857,081 12,607,572
Real Estate Secured Receivables Contractually past due 90 days or more as a percentage
of Real Estate Secured receivables 6.32% 7.24%
Vehicle Secured Receivables Contractually past due 60 days or more 589,577 737,068
Vehicle Secured Receivables outstanding 18,602,854 18,947,831
Vehicle Secured Receivables Contractually past due 60 days or more as a percentage of
Vehicle Secured receivables 3.17% 3.89%
Premium finance contracts contractually past due 60 days or more 242,271 294,959
Premium finance contracts outstanding 4,819,278 3,900,293
Premium finance contracts contractually past due 60 days or more as a percentage of
premium finance contracts 5.03% 7.56%
Finance receivable balances are presented net of unearned finance charges.
13
LIQUIDITY AND CAPITAL RESOURCES
We 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.
On February 24, 2003, we amended our credit facility with FINOVA. We now only
have a revolving credit line with FINOVA which we use to finance receivables.
Advances under the revolving credit line accrue interest at prime rate plus 1%,
or 5.25% as of March 31, 2003. 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 this designated prime
rate. Accrued interest on borrowings is payable monthly.
As of March 31, 2003 we had $109.1 million outstanding under the revolving
credit line. Principal is due in full on the maturity date and can be prepaid
without penalty. Maximum borrowings under the credit facility as of March 31,
2003 are limited to the lesser of $135 million, or 85% of eligible consumer
finance receivables, as defined by the agreement. As of March 31, 2003 we had an
additional $24.8 million available to borrow against existing collateral. Our
maximum borrowing amount decreases on a quarterly basis and will decrease $13.5
million during the remainder of 2003, $18 million in 2004, $18 million in 2005
and $9 million in 2006. The credit facility matures in 2006 and requires us to
comply with restrictive covenants, including financial condition covenants such
as minimums for net income, net worth, and net cash flows, as well as a leverage
ratio limit. As of March 31, 2003, we met all such requirements.
Substantially all of our and our subsidiaries' assets secure the credit
facility. James D. Thaxton guarantees the repayment obligations under the credit
facility.
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. In December 2002, we registered an
additional $125 million offering of subordinated notes. 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 6.50% 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 March 31, 2003, we had $106.4 million of these registered subordinated
notes outstanding and $2.2 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 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, 2003. We estimate our cash
outflow to be approximately $25 million for 2003.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Our outstanding debt under the revolving credit line was $109.1 million at March
31, 2003. 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
March 31, 2003, a change of 1% in the prime interest rate would cause a change
in interest expense of approximately $1.1 million on an annual basis.
Our outstanding receivables are not affected by external interest rate changes
because we usually charges 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.
14
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 our interest rates may be reduced 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 the evaluation was completed.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employee savings plan document
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.
(Registrant)
Date: May 9, 2003 By: /s/ JAMES D. THAXTON
------------------------
James D. Thaxton
President and Chief Executive
Officer
Date: May 9, 2003 By: /s/ ALLAN F. ROSS
---------------------
Allan F. Ross
Vice President,
Treasurer, Secretary, and
Chief Financial Officer
15
CERTIFICATION
I, James D. Thaxton, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of The Thaxton
Group;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of 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 officers 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
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 disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
(5) The registrant's other certifying officers 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 functions):
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 officers and I have indicated in
this quarterly report whether 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: May 9, 2003
By: /s/ James D. Thaxton
--------------------
James D. Thaxton
President and Chief Executive Officer
16
CERTIFICATION
I, Allan F. Ross, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of The Thaxton
Group;
(2) Based on my knowledge, this quarterly report does not contain any
untrue statement of 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 officers 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
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 disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
(5) The registrant's other certifying officers 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 functions):
d. 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
e. 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 officers and I have indicated in
this quarterly report whether 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: May 9, 2003
By: /s/ Allan F. Ross
-----------------
Allan F. Ross,
Vice President, Treasurer, Secretary and Chief Financial Officer
17
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Thaxton Group, Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, James
D. Thaxton., Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. (S)1350, as adopted pursuant to (S)906 of the Sarbanes-Oxley Act of 2002,
that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ James D. Thaxton
----------------------------
James D. Thaxton
Chief Executive Officer
May 9, 2003
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
18
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report The Thaxton Group, Inc. (the "Company")
on Form 10-Q for the period ended March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Allan F. Ross,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. (S)1350,
as adopted pursuant to s(S)906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Allan F. Ross
-----------------------------
Allan F. Ross
Chief Financial Officer
May 9, 2003
This certification accompanies this Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
19