THIS REPORT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION VIA EDGAR
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File No. 0-22910
TFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-1306895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5425 Robin Hood Road
Suite 101 B
Norfolk, Virginia 23513
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (757) 858-1400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
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____
As of August 13, 1998, there were 11,312,335 outstanding shares of the
registrant's $.01 par value per share common stock.
<PAGE>
TFC ENTERPRISES, INC.
REPORT ON FORM 10-Q FOR THE THREE MONTHS
AND SIX MONTHS ENDED JUNE 30, 1998
Table of Contents and 10-Q Cross Reference Index
Part I - Financial Information Page No.
Financial Highlights 3
Financial Statements (Item 1)
Consolidated Balance Sheets 4
Consolidated Statements of Income 5
Consolidated Statements of Changes in Shareholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 11
Part II - Other Information
Legal Proceedings (Item 1) 17
Submission of Matters to a Vote of Security Holders (Item 4) 17
Exhibits and Reports on Form 8-K (Item 6) 17
Signatures 18
Index to Exhibits 19
<PAGE>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------- ---------------------------------- ----------------------------------
Three months Six months
(dollars in thousands, except ended June 30, ended June 30,
per share amounts) 1998 1997 1998 1997
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
<S><C>
Net income $ 962 $ 699 $1,303 $ 895
Basic net income per common share $ .09 $ .06 $ .12 $ .08
Diluted net income per common share $ .08 $ .06 $ .11 $ .08
Weighted-average common shares outstanding (in
thousands) 11,293 11,290 11,292 11,290
Adjusted weighted-average common shares and assumed
conversions (in thousands) 12,149 11,704 11,989 11,532
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Performance ratios (annualized, as
appropriate)
Return on average common equity 12.07% 9.12% 8.25% 5.90%
Return on average assets 2.43 1.87 1.68 1.18
Yield on interest-earning assets 22.73 21.73 22.18 21.34
Cost of interest-bearing liabilities 10.56 10.99 10.72 10.63
Net interest margin 15.08 13.63 14.45 13.47
Operating expense as a percentage of
average interest-earning assets 13.00 12.95 13.22 12.75
Total net charge-offs to average
gross contract receivables
net of unearned interest 15.47 19.98 16.78 20.53
60+ days delinquencies to period-end
gross contract receivables 6.20 8.13 6.20 8.13
Total allowance and nonrefundable reserve
to period-end gross contract receivables
net of unearned interest 13.44 15.66 13.44 15.66
Equity to assets, period end 19.84 21.03 19.84 21.03
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Average balances:
Interest-earning assets (a) $165,451 $149,857 $161,618 $153,814
Total assets 158,491 149,380 154,960 152,286
Interest-bearing liabilities 119,786 110,350 116,516 114,011
Equity 31,860 30,641 31,575 30,326
- ------------------------------------------------------ ----------------- ---------------- ----------------- ----------------
Note: Throughout this report, ratios are based on unrounded numbers and factors contributing to changes between periods
are noted in descending order of materiality.
(a) Average interest-bearing deposits and gross contract receivables net of unearned interest revenue and unearned discount.
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, Dec 31,
(dollars in thousands) 1998 1997
------- --------
<S><C>
Assets
Cash and cash equivalents $ 2,920 $ 1,975
Net contract receivables 144,868 128,503
Recoverable income taxes 38 1,229
Property and equipment, net 2,022 2,297
Intangible assets, net 11,524 12,070
Deferred income taxes 188 188
Other assets 1,773 1,571
------ -------
Total assets $163,333 $147,833
======== ========
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $ 114,662 $ 98,572
Subordinated notes, net 10,237 11,214
Accounts payable and accrued expenses 2,474 2,841
Income taxes 2,075 2,075
Refundable dealer reserve 1,405 1,987
Other liabilities 69 64
-------- --------
Total liabilities 130,922 116,753
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,301,807 and 11,290,308 shares
outstanding, respectively 49 49
Additional paid-in capital 55,872 55,844
Retained deficit (23,510) (24,813)
-------- -------
Total shareholders' equity 32,411 31,080
-------- -------
Total liabilities and shareholders' equity $163,333 $147,833
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six
months ended
-------------
<S><C>
June 30, June 30,
(in thousands, except per share amounts) 1998 1997
- ------------------------------------------------------------------------------- ---------------- -------------------
Interest and other finance revenue $17,921 $16,415
Interest expense 6,243 6,059
- ------------------------------------------------------------------------------- ---------------- -------------------
Net interest revenue 11,678 10,356
Provision for credit losses 320 252
- ------------------------------------------------------------------------------- ---------------- -------------------
Net interest revenue after provision for credit losses 11,358 10,104
Other revenue:
Commissions on ancillary products 481 412
Other 148 182
- ------------------------------------------------------------------------------- ---------------- -------------------
Total other revenue 629 594
- ------------------------------------------------------------------------------- ---------------- -------------------
Operating expense:
Salaries 5,443 4,836
Employee benefits 973 696
Occupancy 443 451
Equipment 616 629
Amortization of intangible assets 546 546
Other 2,663 2,645
- ------------------------------------------------------------------------------- ---------------- -------------------
Total operating expense 10,684 9,803
- ------------------------------------------------------------------------------- ---------------- -------------------
Income before income taxes 1,303 895
Provision for (benefit from) income taxes -- --
- ------------------------------------------------------------------------------- ---------------- -------------------
Net income $ 1,303 $ 895
- ------------------------------------------------------------------------------- ---------------- -------------------
Net income per common share:
Basic $ .12 $ .08
Diluted $ .11 $ .08
- ------------------------------------------------------------------------------- ---------------- -------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Three months ended
- ------------------- -------------------------- ---------------------------
June 30, March 31, June 30,
1998 1998 1997
- ------------------- -------------------------- ---------------------------
$ 9,401 $ 8,520 $ 8,140
3,163 3,080 3,032
- ------------------- -------------------------- ---------------------------
6,238 5,440 5,108
199 121 160
- ------------------- -------------------------- ---------------------------
6,039 5,319 4,948
237 243 158
64 85 160
- ------------------- -------------------------- ---------------------------
301 328 318
- ------------------- -------------------------- ---------------------------
2,761 2,682 2,393
490 483 373
221 222 214
311 305 335
273 273 273
1,322 1,341 1,262
- ------------------- -------------------------- ---------------------------
5,378 5,306 4,850
- ------------------- -------------------------- ---------------------------
962 341 416
-- -- ( 283)
- ------------------- -------------------------- ---------------------------
$ 962 $ 341 $ 699
- ------------------- -------------------------- ---------------------------
$ .09 $ .03 $ .06
$ .08 $ .03 $ .06
- ------------------- -------------------------- ---------------------------
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Six months ended
June 30,
-----------------
(in thousands) 1998 1997
---- ----
Common stock
Balance at end of period $ 49 $ 49
== ==
Additional paid-in capital
Balance at beginning of period $55,844 $55,333
Stock options exercised 28 --
Issuance of warrants -- 511
-------- --------
Balance at end of period $ 55,872 $ 55,844
======= =======
Retained deficit
Balance at beginning of period $(24,813) $(25,520)
Net income (a) 1,303 895
------- -------
Balance at end of period $(23,510) $(24,625)
======= =======
See accompanying Notes to Consolidated Financial Statements.
(a) There are no adjustments to net income to determine comprehensive income
for the periods presented. For the three months ended June 30, 1998
comprehensive income was $1.0 million.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------
<S><C>
(in thousands) 1998 1997
---- ----
Operating activities
Net income $1,303 $ 895
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of intangible assets 546 546
Depreciation and other amortization 498 457
Provision for credit losses 320 252
Changes in operating assets and liabilities:
Decrease in recoverable income taxes 1,191 4,589
Increase in other assets (150) (909)
(Decrease) increase in accounts payable and accrued expenses (367) 483
Decrease in refundable dealer reserve (582) (393)
Increase in other liabilities 5 450
----- -----
Net cash provided by operating activities 2,764 6,370
----- -----
Investing activities
Net cost of acquiring contract receivables (63,108) (48,197)
Repayment on contract receivables 46,423 52,407
Purchases of property and equipment, net (123) (147)
------- ------
Net cash (used in) provided by investing activities (16,808) 4,063
Financing activities
Net borrowings on revolving lines of credit 15,961 17,183
Payments on term notes -- (19,464)
Payments on automobile receivables-backed notes -- (9,476)
Borrowings on term note -- 400
Payments on subordinated notes (1,000) --
Decrease in restricted cash -- 1,721
Proceeds from stock options exercised 28 --
------ ------
Net cash provided by (used in) financing activities 14,989 ( 9,636)
------ -------
Increase in cash and cash equivalents 945 797
Cash and cash equivalents at beginning of period 1,975 2,688
----- -----
Cash and cash equivalents at end of period $ 2,920 $ 3,485
======= =======
Supplemental disclosures:
Interest paid $5,592 $5,533
Noncash transaction:
Issuance of stock warrants $ -- $ 511
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Organization and business
TFC Enterprises, Inc. ("TFCE") is a holding company which owns two primary
subsidiaries, The Finance Company ("TFC") and First Community Finance, Inc.
("FCF"). TFCE has no significant operations of its own. TFC specializes in
purchasing and servicing installment sales contracts originated by automobile
and motorcycle dealers in the sale of used automobiles, vans, light trucks, and
new and used motorcycles (collectively "vehicles") both on an individual basis
("point of sale" purchase) and on a portfolio basis ("portfolio" purchase).
Based in Norfolk, Virginia, TFC also has offices in Killeen, Texas;
Jacksonville, Florida; Tacoma, Washington and San Diego, California. FCF is
involved in the direct origination and servicing of small consumer loans. FCF
operates branch offices in Virginia and North Carolina.
Basis of presentation
The unaudited consolidated financial statements of the Company were prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction with
the Company's 1997 Annual Report on Form 10-K. In the opinion of management, all
normal recurring adjustments which management of the Company considers necessary
for a fair presentation of the financial position and results of operations for
the periods are reflected in the financial statements. Operating results for the
three and six months ended June 30, 1998, are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1998.
2. Contract receivables
The following is a summary of contract receivables as of June 30, 1998, and
December 31, 1997:
June 30, Dec. 31,
1998 1997
------- -------
(In thousands)
Contract receivables:
Auto finance $193,161 $171,356
Consumer finance 14,242 12,886
------- ------
Gross contract receivables 207,403 184,242
Less:
Unearned interest revenue 34,233 27,549
Unearned discount 2,727 729
Unearned commissions 692 672
Unearned service fees 993 629
Payments in process (18) 2,617
Escrow for pending acquisitions 630 514
Allowance for credit losses 744 684
Nonrefundable reserve 22,534 22,345
------ ------
Net contract receivables $144,868 $128,503
======== ========
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
2. Contract receivables (continued)
Changes in the allowance for credit losses and nonrefundable reserve for the
three and six months ended June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
<S><C>
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $22,196 $24,561 $23,029 $28,575
Provision for credit losses 199 160 320 252
Allocation for credit losses 7,370 5,635 13,623 9,625
Charge-offs (7,706) (8,592) (16,128) (17,903)
Recoveries 1,219 1,257 2,434 2,472
----- ----- ----- -----
Balance at end of period $23,278 $ 23,021 $23,278 $ 23,021
======= ======== ======= ========
</TABLE>
3. Computation of basic and diluted net income per common share
Basic and diluted net income per common share for the three and six months ended
June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
<S><C>
(in thousands, except per share amounts) 1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income $ 962 $ 699 $1,303 $ 895
Denominator for basic net income per common
share-weighted-average shares 11,293 11,290 11,292 11,290
Effect of dilutive securities:
Warrants 656 374 552 195
Employee stock options 200 40 145 47
---- ----- ------ ------
Denominator for diluted net income per
common share- adjusted weighted-average 12,149 11,704 11,989 11,532
------ ------ ------ ------
shares and assumed conversions
Basic net income per common share $ .09 $ .06 $ .12 $ .08
======== ======== ====== ======
Diluted net income per common share $ .08 $ .06 $ .11 $ .08
======== ======== ====== ======
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Cautionary statement under the "Safe-Harbor" provisions of the Private
Securities Litigation Reform Act of 1995: Included in this Report and other
written and oral information presented by management from time to time,
including but not limited to, reports to shareholders, quarterly shareholder
letters, filings with the Commission, news releases and investor presentations,
are forward-looking statements about business strategies, market potential,
potential for future point-of-sale and portfolio purchases, future financial
performance and other matters that reflect management's expectations as of the
date made. Without limiting the foregoing, the word "believes," "anticipates,"
"plans," "expects,", "seeks," and similar expressions are intended to identify
forward-looking statements. Future events and the Company's actual results could
differ materially from the results reflected in these forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation: the
Company's dependence on its line of credit, intense competition within its
markets, the fluctuating interest rates associated with its line of credit and
the impact of installment contract defaults. Please refer to a discussion of
these and other factors in this Report and the Company's other Commission
filings. The Company disclaims any intent or obligation to update these
forward-looking statements, whether as a result of new information, future
events or otherwise.
Results Of Operations
Net income for the second quarter of 1998 increased to $1.0 million, or $.09
per common share, compared to net income of $0.7 million, or $.06 per common
share, in the second quarter of 1997. Net income for the first six months of
1998 increased to $1.3 million, or $.12 per common share, compared to net income
of $0.9 million, or $.08 per common share, for the first six months of 1997. The
primary reasons for the increased 1998 income was improved performance of the
Company's contract portfolio giving rise to an increased net interest margin
resulting from an increase in yield on interest earning assets compared to the
similar period in 1997.
Volume
Gross contracts purchased or originated totaled $57.6 million in the second
quarter of 1998, or 35% above the $42.7 million purchased in the second quarter
of 1997. For the first six months of 1998, gross contracts purchased or
originated totaled $108.9 million, or 41% above the $77.0 million purchased
during the first half of 1997. The increase in gross contract purchases in the
second quarter and first six months of 1998, relative to the comparable periods
in 1997, was primarily attributable to a $38.0 million increase in point-of-sale
purchases, resulting from increased emphasis on this line of business. Although
management has not decreased emphasis on the portfolio business line, the
Company is facing increased competition in the portfolio business line which,
places an increased pressure on the market pricing and economics of portfolio
purchases.
<PAGE>
TFC ENTERPRISES, INC.
Gross contracts purchased or originated were as follows for the three months and
six ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Gross contract volume Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S><C>
Contracts purchased or originated:
Auto finance:
Point of sale $35,208 $19,448 $73,084 $35,123
Portfolio 17,427 19,412 27,652 35,817
Consumer finance 4,961 3,823 8,181 6,090
----- ----- ----- -----
Total $57,596 $42,683 $108,917 $77,030
======= ======= ======== =======
Number of contracts purchased or originated:
Auto finance:
Point of sale 2,856 1,737 5,935 3,147
Portfolio 3,767 3,811 5,690 7,083
Consumer finance 2,741 2,070 4,504 3,173
----- ----- ----- -----
Total 9,364 7,618 16,129 13,403
===== ===== ====== ======
</TABLE>
Net interest revenue
Net interest revenue for the second quarter of 1998 totaled $6.2 million, an
increase of 22% compared with $5.1 million in the prior-year period. For the
first half of 1998, net interest revenue was $11.7 million, up 13% from $10.4
million in the first six months of 1997. The increases were primarily
attributable to an increase in interest-earning assets and an increase in the
net interest spread.
The yield on interest-earning assets was 22.73%, in the second quarter 1998,
compared to 21.73% in the second quarter of 1997. For the first half of 1998,
the yield on interest earning assets was 22.18% compared to 21.34% for the first
half of 1997. The increase was primarily attributable to an increase in the
amount of contract purchase discount accreted to interest revenue as a yield
enhancement which was $0.7 for the first six months of 1998 and $0.2 million for
the first quarter of 1998.
<PAGE>
TFC ENTERPRISES, INC.
The following table summarizes net interest revenue and the net interest margin
for the three months and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Six moths ended
June 30, June 30,
(dollars in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S><C>
Average interest-earning assets (a) $ 165,451 $ 149,857 $ 161,618 $ 153,814
Average interest-bearing liabilities 119,786 110,350 116,516 114,011
-------- ------- ------- -------
Net interest-earning assets $ 45,665 $ 39,507 $ 45,102 $ 39,803
====== ====== ====== ======
Interest revenue $ 9,401 $8,140 $ 17,921 $ 16,415
Interest expense 3,163 3,032 6,243 6,059
----- ----- ----- -----
Net interest revenue $ 6,238 $5,108 $ 11,678 $ 10,356
===== ===== ======= =======
Yield on interest-earning assets 22.73% 21.73% 22.18% 21.34%
Cost of interest-bearing liabilities 10.56 10.99 10.72 10.63
----- ----- ----- -----
Net interest spread 12.17% 10.74% 11.46% 10.71%
===== ===== ===== =====
Net interest margin (b) 15.08% 13.63% 14.45% 13.47%
===== ===== ===== =====
</TABLE>
(a)Average gross contract receivables net of
unearned interest revenue and unearned discount.
(b)Net interest margin is net interest revenue
divided by average interest earning assets.
Operating expense
Operating expense was $5.4 million in the second quarter of 1998,
compared with $4.9 million in the second quarter of 1997, an increase of 10%.
For the first six months of 1998, operating expense totaled $10.7 million, an
increase of 9% compared to $9.8 million in the first half of 1997. The increases
in operating expense in the second quarter and first six months of 1998 reflects
increased salary and benefit expenses related to additional marketing personnel
as well as the operating expenses associated with the opening of three First
Community Finance branches in the last six months of 1997.
<PAGE>
Provision for income taxes
The Company recorded no income provision in the first six months of 1998.
The Company anticipates the reversal of a portion of the deferred tax
valuation allowance recorded at year end 1997 will offset the tax expense
related to the estimated income for fiscal year 1998.
Other matters
Until recently computer programs were written to store only two digits
of date-related information in order to more efficiently handle and
store data. Thus the programs were unable to properly distinguish
between the year 1900 and the Year 2000. Utilizing both internal and
external resources, the Company is in the process of defining, assessing
and converting, or replacing, various programs and hardware systems to
make them Year 2000 compatible. The Company's Year 2000 project is
comprised of business applications which consist of the Company's
computer systems, as well as the computer systems purchased from
third-party suppliers. It is estimated that the cost of addressing the
Year 2000 problem and making the Company's computer systems Year 2000
compliant will not be material.
TFC ENTERPRISES, INC.
Financial Condition
-------------------
Assets
Total assets increased by $15.5 million, or 10%, to $163.3 million at June
30, 1998, from $147.8 million at December 31, 1997. The increase was primarily
attributable to an increase in net contract receivables.
The following table summarizes net contract receivables at June 30, 1998, and
December 31, 1997:
Net contract receivables June 30, Dec. 31,
(in thousands) 1998 1997
Auto finance:
Point-of-sale $ 93,825 $ 75,197
Portfolio 38,014 41,612
Consumer finance 13,029 11,694
------ ------
Total $ 144,868 $128,503
======= =======
Liabilities
Total liabilities were $130.9 million at June 30, 1998, a increase of $14.2
million, or 12%, from December 31, 1997. The increase in liabilities from
year-end 1997 primarily reflected increased borrowings under the Company's
credit facilities, which, in turn, resulted from growth in net contract
receivables.
Credit Quality and Reserves
---------------------------
Auto finance contract receivables-Net charge-offs
Net charge-offs to the allowance for credit losses and nonrefundable dealer
reserve were $6.4 million in the second quarter of 1998, representing an
annualized rate of 16.47% of average contract receivables net of unearned
interest revenue. This compares to $7.2 million, or 21.16%, in the second
quarter of 1997. For the first six months of 1998, net charge-offs were $13.5
million, or 17.93%, of average contract receivables net of unearned interest
revenue. This compares to $15.2 million, or 21.51%, of average net contract
receivables net of unearned interest revenue in the first six months of 1997.
Both improved credit quality and servicing have impacted the reduction in
charge-off.
<PAGE>
Auto finance contract receivables-Provision for credit losses
The Company's primary business involves purchasing installment sales
contracts at a discount to the remaining principal balance. A portion of the
discount is generally held in a nonrefundable dealer reserve against which
credit losses are first applied. Additional provisions for credit losses, if
necessary, are charged to income in amounts considered by management to be
adequate to absorb future credit losses. Improved credit quality and servicing
of the Company's auto finance contracts eliminated the need for a loss provision
for all of 1997 and the first and second quarter of 1998. Provision for credit
losses is dependent on a number of factors, including the level and trend of
delinquencies and net charge-offs, the amount of nonrefundable and refundable
dealer reserves and the overall economic conditions in the markets in which the
Company operates. Due to the inherent uncertainty involved in predicting the
future performance of these factors, there can be no assurance regarding the
future level of provision for credit losses or that existing provisions will
prove to be adequate.
TFC ENTERPRISES, INC.
Auto finance contract receivables- Reserves
At June 30, 1998, the combination of the Company's allowance for credit
losses and nonrefundable dealer reserve totaled $22.5 million, or 14.2%, of
contract receivables net of unearned interest revenue. This compares to $22.3
million, or 15.5%, at December 31, 1997. In addition, the Company's refundable
dealer reserve, which is available to absorb losses relating to contracts
purchased from certain dealers, totaled $1.4 million at June 30, 1998, compared
to $2.0 million at December 31, 1997. The decrease in reserves and in the
percentage of reserves to contract receivables in 1998, compared to 1997, is the
result of the improved credit quality of the contracts.
Consumer finance charge-offs, provision for credit losses and reserves
Net charge-offs to the allowance for credit losses were $0.1 million in the
second quarter of 1998 and 1997, representing an annualized rate of 1.9% and
4.2% of average gross contract receivables net of unearned interest revenue,
respectively. For the first six months of 1998 and 1997, net charge-offs to the
allowance for credit losses were $0.2 million, representing an annualized rate
of 3.0% and 4.2%, respectively. The provision for credit losses was $0.2 million
for the second quarter of 1998 and 1997 and the allowance for credit losses was
$0.7 million or 5.3% of outstanding gross contract receivables at June 30, 1998
and December 31, 1997. For the first six months of 1998 and 1997, the provision
for credit losses was $0.3 million. Management has established the level of
allowance that it considers to be adequate based on FCF's experience through
June 30, 1998.
Charge-offs net of recoveries for the three months and six months ended June 30,
1998 and 1997, were as follows:
Net charge-offs Three months ended Six months ended
June 30, June 30,
------------------ ----------------
(in thousands)
1998 1997 1998 1997
Auto finance: ------ ---- ---- ----
Point-of-sale
Portfolio $3,499 $5,200 $ 6,954 $12,104
Consumer finance 2,843 2,031 6,482 3,143
145 106 258 186
Total ----- ----- ----- -----
$6,487 $ 7,337 $13,694 $15,433
====== ======= ======= =======
<PAGE>
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $12.4 million, or 6.4% of gross auto finance contract receivables at
June 30, 1998, compared to $15.9 million, or 9.3%, at December 31, 1997. This
improvement in delinquency was the result of improved underwriting and increased
collection efforts.
Gross consumer finance receivables that were 60 days or more past due
totaled $0.4 million, or 3.1% of gross receivables at June 30, 1998, and at
December 31, 1997.
Delinquency at June 30, 1998, and December 31, 1997, were as follows:
Delinquency June 30, Dec. 31,
(dollars in thousands) 1998 1997
----- ----
Gross contract receivables 60 days and over delinquent $12,869 $ 16,310
Gross contract receivables 207,403 184,242
Percent 6.20% 8.85%
TFC ENTERPRISES, INC.
Liquidity and Capital Resources
Liquidity management
As shown on the Consolidated Statements of Cash Flows, cash and cash
equivalents increased by $0.9 million in the first six months of 1998, to $2.9
million at June 30, 1998. The increase reflected $15.0 million of net cash
provided by financing activities and $2.8 million of net cash provided by
operating activities, partially offset by $16.8 million of net cash used in
financing activities. Net cash used in investing activities principally
reflected $16.7 million in net contract receivable purchases. Cash provided by
financing activities primarily reflected $16.0 million of net borrowings on the
Company's revolving lines of credit and subordinated debt. In the first half of
1998 and 1997, the combination of cash on hand and net cash provided by
operating and financing activities was sufficient to fund business volume.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 (FAS No. 133), "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June 15,
1999. Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Suit was filed against the Company in the case of Hinkston v The Finance Company
on May 30, 1997 in the Court of Common Pleas of Hamilton County, Ohio. Plaintiff
asserts violations of the Ohio Retail Installment Sales Act ("RISA") by the
Company. Plaintiff contends that the discount taken by the Company when
purchasing retail installment sales contracts from point-of-sale dealers should
be considered part of the finance charge, disclosed as such, and failure to make
such disclosure violates RISA. Plaintiff seeks to certify this case as a class
action with Ms. Hinkston representing a class of "All persons, excluding all
current and former officers, directors, and employees of Defendant (the
Company), who obtained financing from Defendant for the purchase in Ohio of used
vehicles in "point-of-sale" transactions during the period May 30, 1991, through
May 30, 1997." The Company will vigorously defend against these claims. A
hearing on Plaintiff's Motion for Class Certification is set for August 28,
1998.
ITEM 4. Submission of Matters to a Vote of Security Holders
The 1998 Annual Meeting of Shareholders of TFC Enterprises, Inc. was held on May
12, 1998, to consider two matters of business. The matters brought before the
shareholders and the voting results were as follows:
Election of Director
Broker
For Against Abstain Non-votes*
Andrew M. Ockershausen 9,226,443 291,885 -- --
The following directors' terms of office as a director continued after the
meeting: Douglas E. Bywater, Walter S. Boone, Robert S. Raley, Jr., Philip R.
Smiley, and Linwood R. Watson.
Ratification of the Appointment of Auditors
Broker
For Against Abstain Non-votes*
Ernst & Young LLP 9,168,540 345,980 3,800 --
* "Broker non-votes" occur where a broker holding stock in street name does not
vote those shares.
ITEM 6. Exhibits and Reports of Form 8-K
a) Exhibits
10.1 Floating Rate Debenture with Voyager Life Insurance
Company dated June 8, 1998 relating to $1.0 million in
original principal amount at prime plus 1% due January 8,
2001. Including a security agreement dated June 8, 1998
providing a security interest in credit insurance
commissions payable and contingent compensation credit.
27.1 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission for
information only and not filed.
(b) Reports on Form 8-K
None.
<PAGE>
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.
TFC ENTERPRISES, INC.
(Registrant)
Date: August 13, 1998 By:/s/ Robert S. Raley, Jr.
------------------------
Robert S. Raley, Jr.
Chairman, President and
Chief Executive Officer
and Director
Date: August 13, 1998 By:/s/ Craig D. Poppen
------------------------
Craig D. Poppen
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
of the Registrant)
<PAGE>
Index to Exhibits
Exhibit No. Description
10.1 Floating Rate Debenture with Voyager Life Insurance
Company dated June 8, 1998 relating to $1.0 million in
original principal amount at prime plus 1% due January 8,
2001. Including a security agreement dated June 8, 1998
providing a security interest in credit insurance
commissions payable and contingent compensation credit.
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information only
and not filed.
Exhibit 10.1
$1,000,000 (Principal Amount "Principal") JUNE 8, 1998
Floating Rate Debenture ("Debenture")
On JANUARY 8, 2001 as hereinafter provided, THE FINANCE COMPANY for
value received (being money borrowed), does hereby promise to pay to
VOYAGER LIFE INSURANCE COMPANY
or order, the Principal sum of
$1,000,000 Dollars and to pay interest, which will accrue from date funds are
advanced and will be payable quarterly on each January 1, April 1, July 1, and
October 1, at the rate herein stated through the end of the calendar quarter in
which this Debenture is issued, and quarterly thereafter, until the Principal
hereof shall have been fully paid, at a rate per annum 1% percent (100 basis
points) above the prime commercial lending rate as published in the Wall Street
Journal on the last business day immediately preceding the beginning of the
calendar quarter-annual interest payment period for which such rate will apply;
but at no time shall said rate be lower than 8% or higher than 12% per annum
during the term of this Debenture. The Principal and interest shall be payable
at the Administrative Office of VOYAGER LIFE INSURANCE (hereinafter "Voyager")
in currency of the United States of America as shall be at the time of payment
legal tender for the payment of public and private debts. Each payment will be
applied first to interest computed to the date of payment, with the remainder
applied to Principal. Voyager may collect interest from and after maturity upon
the unpaid Principal balance at either the maximum rate permitted by the then
applicable law or the rate of interest prevailing under this Debenture.
The Borrower may request an extension of this Debenture, provided that
the Borrower is not in default hereunder in the payment of any interest or in
the performance of any of the other covenants contained herein. Any such request
shall be made not less than 60 days prior to maturity and shall certify to
Voyager that no default exists hereunder. Voyager may make such an extension in
its sole discretion and any extension to be valid must be issued in writing by
Voyager and executed by Borrower.
Borrower may prepay this Debenture in whole or in part at anytime
without penalty including all interest accrued until date of pre-payment.
Interest will continue to accrue on any remaining Principal then outstanding.
The Borrower covenants and agrees that, so long as any portion of this
debenture remains unpaid, the Borrower:
(a) will not pay or permit any subsidiary corporation to pay any
extraordinary dividends except out of current earnings or make any distributions
in liquidation;
(b) will not materially change the business principles and practices of
the Borrower, or any subsidiary or affiliated corporations, but will continue
the same along the same general line of business as is now conducted by them;
<PAGE>
(c) will not materially suffer nor permit reduction or diminution
of its net worth as per financial statements which includes stockholder
indebtedness:
(d) will not sell its business without paying off the outstanding
indebtedness out of the proceeds of the sale ("due on sale");
(e) will furnish to Voyager, financial statements at the end of
each three months fiscal period and each fiscal year. The Financial statements
will contain a balance sheet of the Borrower at the end of such fiscal period
and fiscal year, and income and surplus statement of the Borrower, an agings
report which provides a breakdown of 1-30, 31-60, 61-90, 90+ delinquent accounts
both in total number of accounts for each catagory and total dollar amount,
amount charged off for the period, and reserve amount, beginning from the first
day of such fiscal period or fiscal year and ending on the date of such balance
sheet, which will contain a certification of the Borrower or any of its
executive officers that to the best of his knowledge, information, and belief
the same is accurate and correct, and that he has no knowledge of any inaccuracy
in the records of the Borrower, or any action or of any omission which would
constitute a default hereunder. Voyager at its option may require reviewed
financial statements;
Borrower will be in default herein if:
i. Borrower does not make any scheduled payment on time (time is of the
essence in this Debenture);
ii. Borrower is (or any other person puts Borrower) in bankruptcy, insolvency
or receivership;
iii. Any of Borrower's creditors attempt by legal process to take and keep any
material property of Borrower, including the property securing this Debenture;
iv. Borrower fails to fulfill any covenant, representation, warranty or other
promise made under this Agreement;
v. Borrower ceases writing credit insurance business with Voyager or Voyager
terminates Borrowers Agency Agreement with it for cause;
vi. Borrower is in default under any other Agreement with Voyager; or
vii. Borrower is in default with respect to any indebtedness that is senior to
this Debenture.
<PAGE>
Borrower defaults, and if such default is not cured within thirty (30) days of
written notice by certified mail, return receipt requested, of such default,
Voyager may require Borrower to repay the entire unpaid Principal balance and
any accrued interest at once. Voyager's failure to exercise or delay in
exercising any of its rights when default occurs does not constitute a waiver of
those or any other rights under this Debenture. Voyager may exercise its option
to accelerate during any default by Borrower regardless of any prior
forbearance. If default is made under this Debenture, as above provided, and if
after default the same is referred to an attorney for collection, Borrower
promises to pay all costs of collection, including a reasonable attorney's fee.
Borrower hereby consents to the jurisdiction of the Courts of the State of
Texas, should enforcement of the Debenture be necessary.
If Borrower fails to pay any scheduled payment within (10) days of its
due date, Borrower agrees to pay a late charge not to exceed 5 percent of the
unpaid portion of the payment due. Voyager may, at its option, waive any late
charge or portion thereof without waiving its right to require a late charge
with regard to any other late payment. Any funds received as payment hereunder
shall become the property of Voyager.
This Debenture may not be modified or amended nor shall any provision of it be
waived except by a written instrument signed by the Borrower and by an
authorized officer of Voyager.
IN WITNESS WHEREOF, the said Borrower has caused this Debenture to be
signed in his name or in its name by its President, attested by its Secretary,
and its corporate seal to be affixed the day and year first.
WITNESSES BORROWER
- ------------------------------- ------------------------------
(Signature)
- ------------------------------- --------------------------------
(Print name and title)
Signed and sealed ____ day of _____________, 19___.
- -------------------------------
Secretary
Corporate Seal
<PAGE>
SECURITY AGREEMENT
June 8, 1998
THE FINANCE COMPANY ( the Borrower ), and VOYAGER LIFE INSURANCE (the Secured
Party) agrees as follows:
1. Security Interest. In consideration of any extension of credit
heretofore or hereafter made by the Secured Party to THE FINANCE COMPANY
(hereinafter "the Borrower"), the Borrower and additional Pledgors hereby
pledges to the Secured Party and gives the Secured Party a security interest
(the Security Interest) in the following described property and in all increases
and profits from them, in all substitutions for them in all proceeds of them in
any form(the Collateral):
Credit Insurance Commissions Payable
and Contingent Compensation Credit
2. Indebtedness Secured. The Security Interest secures payment of all
indebtedness of every kind owing by the Borrower to the Secured Party whether
now existing or hereafter incurred, direct or indirect, and whether the
indebtedness is from time to time reduced, thereafter increased, or entirely
extinguished and immediately thereafter reincurred(the Indebtedness). The
Indebtedness includes the Debenture dated of even date herewith and any other
sums advanced and any expenses incurred by the Secured Party pursuant to this
agreement.
3. Warranties of Borrower. Borrower represents and warrants and so long as
the Indebtedness remains unpaid, Borrower shall be deemed continuously to
represent and warrant that (a) each instrument constituting Collateral is
genuine and is in all respects what it purports to be; (b) Borrower is the owner
of the Collateral free of all security interests or other encumbrances except
the Security Interest: and (c) Borrower is authorized to enter into this
Security Agreement.
4. Covenants of Borrower.So long as any of the Indebtedness remains
unpaid, the Borrower: (a) will defend the Collateral against the claims of all
persons; (b) will keep the Collateral free and clear from all security interests
or other encumbrances except the Security Interest (c) will not assign, sell,
transfer, deliver, or otherwise dispose of the Collateral or any interest
therein without the prior written consent of the Secured Party; (d) will notify
the Secured Party promptly in writing of any change in the Borrower's address;
and (e) will pay all taxes, assessments, and other charges of every nature which
may be levied or assessed against the Collateral.
<PAGE>
5. Default.
(a) Any of the following events or conditions shall constitute an
event of default under this Security Agreement and the Indebtedness: (i)
non-payment when due whether by acceleration or otherwise of the principal of or
the interest on any Indebtedness, including the Debenture dated of even date
herewith, time being of the essence, or failure by the Borrower to perform any
obligations under this agreement or any other agreement between the Borrower and
the Secured Party; (ii) filing by or against the Borrower of a petition in
bankruptcy or for reorganization under the Bankruptcy Act or for an arrangement
under the Bankruptcy Act; (iii) making a general assignment by the Borrower for
the benefit of creditors; the appointment of a receiver or trustee for the
Borrower or for any of the Borrower's assets; or the institution by or against
the Borrower of any kind of insolvency proceedings or any proceeding for the
dissolution or liquidation of the Borrower; (iv) the default or non-payment of
any indebtedness that is senior to the Indebtedness or to this agreement; (v)
the occurrence of any event described in paragraph 5(a)(i),(ii),(iii), or (iv)
hereof with respect to any endorser or guarantor or any party liable for payment
of any Indebtedness; or (vi) material falsity in any certificate, statement,
representation, warranty, or audit at any time furnished to the Secured Party by
or on behalf of the Borrower or any endorser or guarantor or any other party
liable for payment of any Indebtedness pursuant to or in connection with
Security Agreement or otherwise (including warranties in this agreement) and
including any omission to disclose any substantial contingent or liquidated
liabilities or any material adverse change in any facts disclosed by any
certificate, statement, representation, warranty, or audit furnished to the
Secured Party.
(b) Upon the happening of any event of default the Borrower has a
right to cure within thirty (30) days of written notice by certified mail,
return receipt requested.
(c) Upon the happening of any event of default the Secured Party's
rights with respect to the Collateral shall be those of a Secured Party under
the Uniform Commercial Code and any other applicable law. The Secured Party
shall also have any additional rights granted herein and in any other agreement
now or hereafter in effect between the Borrower and the Secured Party. If
requested by the Secured Party, the Borrower will assemble the Collateral and
make it available to the Secured Party at a place to be designated by the
Secured Party.
(d) The Borrower agrees that any notice by the Secured Party of the
sale or disposition of collateral or any other intended action hereunder,
whether required by the Uniform Commercial Code or otherwise, shall constitute
reasonable notice to the Borrower if the notice is mailed by certified mail,
return receipt requested, at least thirty (30) days before the action to the
Borrower's address as specified in this agreement or any other address which the
Borrower has specified in writing to the Secured Party as the address to which
notices shall be given to the Borrower.
<PAGE>
(e) If the Borrower defaults, and if such is not cured within thirty
(30) days of written notice by certified mail, return receipt requested, of such
default, the Secured Party may require Borrower to repay the entire unpaid
Principal balance and any accrued interest at once. The Borrower shall pay all
costs and expenses incurred by Secured Party in enforcing this Security
Agreement, realizing upon any Collateral and collecting any indebtedness,
including a reasonable attorney's fee whether suit is brought or not.
6. Miscellaneous.
(a) No delay or omission by the Secured Party in exercising any
right hereunder with respect to any indebtedness shall operate as a waiver of
that or any other right, and no single right, and no single or partial exercise
of any right shall preclude the Secured Party from any other or further exercise
of that right or the exercise of any other right or remedy. The Secured Party
may cure any default by the Borrower in any reasonable manner without waiving
the default so cured and without waiving any other prior or subsequent default
by the Borrower. All rights and remedies of the Secured Party under this
Security Agreement and under the Uniform Commercial Code shall be deemed
cumulative.
(b) The terms "Secured Party" and "Borrower" as used in this
Security Agreement include the successors and assigns of those parties.
(c) If more than one Borrower executes this Security Agreement, the
term "Borrower" includes each of the debtors as well as all of them, and their
obligations under this Security Agreement shall be joint and several.
(d) It is expressly understood and agreed that the provisions of
this Security Agreement shall be sufficient to create a security interest under
the Uniform Commercial Code, and no further agreements shall be required unless
requested by the Secured Party.
(e) This Security Agreement may not be modified or amended nor shall
any provision of it be waived except by a written instrument signed by the
Borrower and by an authorized officer of the Secured Party.
(f) The Security Agreement shall be governed by the laws of the
State Texas and shall be construed under the Uniform Commercial Code and any
other applicable laws in effect from time to time.
<PAGE>
(g) This Security Agreement is a continuing agreement which shall
remain in force until the Secured Party shall actually receive written notice of
its termination and thereafter, until all of the Indebtedness contracted for or
created before receipt of the notice and any extensions or renewals of the
Indebtedness (whether made before or after receipt of the notice) together with
all interest thereon both before and after the notice shall be paid in full.
THE FINANCE COMPANY
Attest:____________________ By:_________________________
(Signature)
----------------------------
(Name / Typed or Printed)
VOYAGER LIFE INSURANCE CO.
Attest:____________________ By:_________________________
(Signature)
DAVA S. CARSON
--------------
(Name / Typed or Printed)
Title: Sr.Vice President/Chief Finance Officer
---------------------------------------
Date:________________________
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,920
<SECURITIES> 0
<RECEIVABLES> 168,146
<ALLOWANCES> 23,278
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,012
<DEPRECIATION> 3,990
<TOTAL-ASSETS> 163,333
<CURRENT-LIABILITIES> 130,922
<BONDS> 0
49
0
<COMMON> 0
<OTHER-SE> 32,362
<TOTAL-LIABILITY-AND-EQUITY> 163,333
<SALES> 17,921
<TOTAL-REVENUES> 18,550
<CGS> 0
<TOTAL-COSTS> 10,684
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 320
<INTEREST-EXPENSE> 6,243
<INCOME-PRETAX> 1,303
<INCOME-TAX> 0
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<CHANGES> 0
<NET-INCOME> 1,303
<EPS-PRIMARY> .12
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