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/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
Commission File No. 0-22910
T F C E N T E R P R I S E S, I N C.
(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, 1999, there were 11,404,882 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, 1999
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) 14
Part II - Other Information
Submission of Matters to a Vote of Security Holders (Item 4) 22
Exhibits and Reports on Form 8-K (Item 6) 22
Signatures 23
Index to Exhibits 24
<PAGE>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------ ----------------------------------
(in thousands, except per share amounts) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net income $ 1,751 $ 962 $ 3,152 $ 1,303
Net income per basic common share $ 0.15 $ 0.09 $ 0.28 $ 0.12
Net income per diluted common share $ 0.14 $ 0.08 $ 0.26 $ 0.11
Average common shares outstanding (in thousands) 11,405 11,293 11,405 11,292
- -----------------------------------------------------------------------------------------------------------------------------
Performance ratios (annualized, as appropriate)
Return on average common equity 18.65% 12.07% 17.14% 8.25%
Return on average assets 3.71 2.43 3.43 1.68
Yield on interest-earning assets 23.59 22.73 23.44 22.18
Cost of interest-bearing liabilities 8.74 10.56 8.85 10.72
Net interest margin 17.37 15.08 17.15 14.45
Operating expense as a percentage of
average interest-earning assets 11.84 13.00 12.00 13.22
Total net charge-offs to average gross receivables, net
of unearned interest 12.63 15.47 13.58 16.78
60+ days delinquencies to period-end
gross contract receivables 4.67 6.20 4.67 6.20
30+ days delinquencies to period-end
gross contract receivables 6.84 8.61 6.84 8.61
Total allowance and nonrefundable reserve
to period end gross contract receivables,
net of unearned interest 11.49 13.44 11.49 13.44
Equity to assets, period end 19.99 19.84 19.99 19.84
- -----------------------------------------------------------------------------------------------------------------------------
Average balances:
Interest-earning assets (a) $ 201,308 $165,451 $196,505 $161,618
Total assets 188,602 158,491 183,752 154,960
Interest-bearing liabilities 143,379 119,786 139,549 116,516
Equity 37,545 31,860 36,773 31,575
- -----------------------------------------------------------------------------------------------------------------------------
Note: Throughout this report, ratios are based on unrounded numbers and factors
contributing to changes between periods are noted in descending order of
materiality.
</TABLE>
(a) Gross contract receivables net of unearned interest revenue.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
- -------------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C>
Assets
Cash and cash equivalents $ 1,758 $ 1,868
Net contract receivables 176,691 155,895
Property and equipment, net 2,157 1,949
Intangible assets, net 10,432 10,978
Other assets 1,263 1,907
- -------------------------------------------------------------------------------------------------
Total assets $ 192,301 $ 172,597
- -------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $ 139,509 $ 121,281
Other debt 8,726 9,636
Accounts payable and accrued expenses 2,565 3,180
Income taxes and other liabilities 2,241 2,394
Refundable dealer reserve 826 824
- -------------------------------------------------------------------------------------------------
Total liabilities 153,867 137,315
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,404,882 shares issued and outstanding 50 50
Additional paid-in capital 56,020 56,020
Retained deficit (17,636) (20,788)
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 38,434 35,282
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 192,301 $ 172,597
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
- -------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Interest and other finance revenue $23,027 $17,921
Interest expense 6,177 6,243
- -------------------------------------------------------------------------------------------
Net interest revenue 16,850 11,678
Provision for credit losses 207 320
- -------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 16,643 11,358
- -------------------------------------------------------------------------------------------
Other revenue:
Commissions on ancillary products 376 481
Other 291 148
- -------------------------------------------------------------------------------------------
Total other revenue 667 629
- -------------------------------------------------------------------------------------------
Operating expense:
Salaries 6,056 5,443
Employee benefits 1,270 973
Occupancy 466 443
Equipment 681 616
Amortization of intangible assets 546 546
Other 2,767 2,663
- -------------------------------------------------------------------------------------------
Total operating expense 11,786 10,684
- -------------------------------------------------------------------------------------------
Income before income taxes 5,524 1,303
Provision for income taxes 2,372 --
- -------------------------------------------------------------------------------------------
Net income $ 3,152 $ 1,303
- -------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.28 $ 0.12
Diluted $ 0.26 $ 0.11
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30, March 31, June 30,
- ----------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Interest and other finance revenue $11,873 $11,153 $9,401
Interest expense 3,133 3,044 3,163
- ----------------------------------------------------------------------------------------------
Net interest revenue 8,740 8,109 6,238
- ----------------------------------------------------------------------------------------------
Provision for credit losses 109 98 199
- ----------------------------------------------------------------------------------------------
Net interest revenue after
provision for credit losses 8,631 8,011 6,039
Other revenue:
Commissions on ancillary products 175 201 237
Other 184 107 64
- ----------------------------------------------------------------------------------------------
Total other revenue 359 308 301
- ----------------------------------------------------------------------------------------------
Operating expense:
Salaries 3,009 3,047 2,761
Employee benefits 628 642 490
Occupancy 237 230 221
Equipment 367 313 311
Amortization of intangible assets 273 273 273
Other 1,446 1,320 1,322
- ----------------------------------------------------------------------------------------------
Total operating expense 5,960 5,825 5,378
- ----------------------------------------------------------------------------------------------
Income before income taxes 3,030 2,494 962
Provision for income taxes 1,279 1,092 --
- ----------------------------------------------------------------------------------------------
Net income $ 1,751 $ 1,402 $ 962
- ----------------------------------------------------------------------------------------------
Net income per common share:
Basic $ .15 $ .12 $ .09
Diluted $ .14 $ .12 $ .08
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
- -------------------------------------------------------------------------
(in thousands) 1999 1998
- ------------------------------------------------------------------------
<S> <C>
Common stock
Balance at beginning and end of period $ 50 $ 49
- ------------------------------------------------------------------------
Additional paid-in capital
Balance at beginning and end of period $ 56,020 $ 55,844
Stock options exercised -- 28
- ------------------------------------------------------------------------
Balance at end of period $ 56,020 $ 55,872
- ------------------------------------------------------------------------
Retained deficit
Balance at beginning of period $(20,788) $(24,813)
Net income (a) 3,152 1,303
- ------------------------------------------------------------------------
Balance at end of period $(17,636) $(23,510)
- ------------------------------------------------------------------------
</TABLE>
(a) There are no adjustments to net income to determine comprehensive income for
the periods presented.
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
- -------------------------------------------------------------------------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Operating activities
Net income $ 3,152 $1,303
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of intangible assets 546 546
Depreciation and other amortization 620 498
Provision for credit losses 207 320
Changes in operating assets and liabilities:
Decrease in recoverable income taxes -- 1,191
(Decrease) increase in other assets 447 (150)
Increase in accounts payable and accrued expenses (615) (367)
(Decrease) increase in income taxes and other liabilities (153) 5
Increase (decrease) in refundable dealer reserve 2 (582)
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,206 2,764
- -------------------------------------------------------------------------------------------
Investing activities
Net cost of acquiring contract receivables (66,387) (63,108)
Repayment on contract receivables 45,384 46,423
Purchase of property and equipment (626) (123)
- -------------------------------------------------------------------------------------------
Net cash used in investing activities (21,629) (16,808)
- -------------------------------------------------------------------------------------------
Financing activities
Net borrowings on revolving lines of credit 18,228 15,961
Net payments on other debt (915) (1,000)
Proceeds from stock options exercised - 28
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,313 14,989
- -------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (110) 945
Cash and cash equivalents at beginning of period 1,868 1,975
- -------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $1,758 $ 2,920
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<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 that operates three primary
wholly-owned subsidiaries, The Finance Company ("TFC"), First Community Finance,
Inc. ("FCF") and Recoveries, Inc. ("RI"). 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 bulk basis ("bulk"
purchase). Based in Norfolk, Virginia, TFC also has nine loan production offices
throughout the United States in communities with a large concentration of
military personnel. FCF is involved in the direct origination and servicing of
small consumer loans. FCF operates 16 branches throughout Virginia and North
Carolina. Recoveries Inc., a third party debt collection agency, services
foreclosed or troubled loan portfolios and receivables for medical organizations
and others.
Basis of presentation
The unaudited consolidated financial statements of the Company are 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
1998 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 months and six months ended June 30, 1999, are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1999.
2. Contract receivables
The following is a summary of contract receivables at June 30, 1999, and
December 31, 1998:
June 30, Dec. 31,
(in thousands) 1999 1998
- --------------------------------------------------- ----------------
Contract receivables:
Auto finance $ 230,788 $ 209,341
Consumer finance 18,066 16,472
- --------------------------------------------------- ----------------
Gross contract receivables 248,854 225,813
Less:
Unearned interest revenue 41,710 37,710
Unearned discount 4,283 3,539
Unearned commissions 551 637
Unearned service fees 1,293 1,186
Payments in process (5) 3,915
Escrow for pending acquisitions 530 736
Allowance for credit losses 827 859
Nonrefundable reserve 22,974 21,336
- --------------------------------------------------- ----------------
Net contract receivables $ 176,691 $ 155,895
- --------------------------------------------------- ----------------
<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, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C>
Balance at beginning of period $22,599 $22,196 $22,195 $23,029
Provision for credit losses 109 199 207 320
Allocation for credit losses 7,451 7,370 14,743 13,623
Charge-offs (7,796) (7,706) (16,303) (16,128)
Recoveries 1,438 1,219 2,959 2,434
- -------------------------------------------------------------------------------------------
Balance at end of period $23,801 $23,278 $23,801 $23,278
- -------------------------------------------------------------------------------------------
</TABLE>
3. Computation of primary and fully diluted earnings per share
Basic and diluted earnings per share for the three and six months ended June 30,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
- --------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S><C>
Numerator:
Net income $ 1,751 $ 962 $ 3,152 $ 1,303
- --------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 11,405 11,293 11,405 11,292
---------------------------------------------------------
Effect of dilutive securities:
Employee stock options 175 656 112 552
Warrants 659 200 624 145
---------------------------------------------------------
Dilutive potential
common shares 834 856 736 697
---------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 12,239 12,149 12,190 11,989
- --------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.15 $ .09 $ 0.28 $ .12
Diluted earnings per share $ 0.14 $ .08 $ 0.26 $ .11
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", (SFAS No.
131) which was issued by the Financial Accounting Standards Board in June 1997
and became effective for financial statements for periods beginning after
December 15, 1997. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how to allocate
resources and in assessing performance.
The Company is a specialty finance company with two business segments. Through
TFC, the auto finance segment, the Company is engaged 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") throughout the United States. This segment
consists of two business units (i) point-of-sale which contracts are acquired on
an individual basis from dealers after the Company has reviewed and approved the
purchasers credit application and (ii) bulk which contracts are acquired through
the purchase of dealer portfolios. The point-of-sale business focuses on
military enlisted personnel whereas the bulk purchases are primarily contracts
with civilian customers. Through FCF, the consumer finance segment, the Company
is involved in the direct origination and servicing of small consumer loans
through a branch network in Virginia and North Carolina. The other column
consists of corporate support functions not allocated to either of the business
segments. All revenue is generated from external customers in the United States.
Management measures segment performance based on revenue earned (yields
achieved) on the outstanding portfolio of contract receivables as well as net
income (loss) before taxes.
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments (continued)
The accounting policies are the same as those described in the summary of
significant accounting policies.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(in thousands) Consumer
Auto Finance Finance Other Total
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Three months ended June 1999
Interest revenues $ 10,840 $ 1,033 $ -- $ 11,873
----------------------------------------------------------------------
Interest expense $ 2,828 $ 305 $ -- $ 3,133
----------------------------------------------------------------------
Income (loss) before taxes: $ 3,348 $ 103 $ (45) $ 3,406
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (103)
-----------------
Consolidated income
before taxes $ 3,030
----------------------------------------------------------------------
Contract receivables $159,934 $16,752 $ 5 $ 176,691
Other assets 15,610
-----------------
Total assets $ 192,301
----------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Consumer
Auto Finance Finance Other Total
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Three months ended June 1998
Interest revenues $ 8,551 $ 850 $ -- $ 9,401
----------------------------------------------------------------------
Interest expense $ 2,883 $ 280 $ -- $ 3,163
----------------------------------------------------------------------
Income (loss) before taxes: $ 1,666 $ (133) $(189) $ 1,344
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (109)
-----------------
Consolidated income
before taxes $ 962
---------------------------------- -------------------------------------
Contract receivables $131,836 $13,030 $ 2 $ 144,868
Other assets 18,465
----------------
Total assets $ 163,333
---------------------------------- ----------------------------------
</TABLE>
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(in thousands) Consumer
Auto Finance Finance Other Total
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Six months ended June 1999
Interest revenues $ 20,990 $ 2,036 $ -- $ 23,026
--------------------------------------------------------------------------
Interest expense $ 5,569 $608 $ -- $ 6,177
--------------------------------------------------------------------------
Income (loss) before taxes: $ 6,111 $178 $ (34) $ 6,255
Unallocated amounts:
Intangible amortization (546)
Corporate expenses (185)
-------------------
Consolidated income
before taxes $ 5,524
--------------------------------------------------------------------------
Contract receivables $159,934 $16,752 $ 5 $176,691
Other assets 15,610
-------------------
Total assets $192,301
--------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Consumer
Auto Finance Finance Other Total
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Six months ended June 1998
Interest revenues $ 16,279 $ 1,642 $ -- $ 17,921
--------------------------------------------------------------------------
Interest expense $ 5,700 $ 543 $ -- $ 6,243
--------------------------------------------------------------------------
Income (loss) before taxes: $ 2,334 $ (204) $(100) $ 2,030
Unallocated amounts:
Intangible amortization (546)
Corporate expenses (181)
-------------------
Consolidated income
before taxes $ 1,303
--------------------------------------------------------------------------
Contract receivables $131,836 $13,030 $ 2 $144,868
Other assets 18,465
-------------------
Total assets $163,333
--------------------------------------------------------------------------
</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, discussions with analysts
and investor presentations, are forward-looking statements about business
strategies, market potential, potential for future point-of-sale and bulk
purchases, delinquency and charge-off rates, future financial performance and
other matters that reflect management's expectations as of the date made.
Without limiting the foregoing, the words "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, the
impact of installment contract defaults and the Year 2000 issue. 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 and earnings per basic common share
Net income for the second quarter of 1999 increased to $1.8 million, or $.15 per
basic common share, compared to net income of $1.0 million, or $.09 per basic
common share in the second quarter of 1998. Net income for the first six months
of 1999 increased to $3.2 million, or $.28 per basic common share, compared to
net income of $1.3 million, or $.12 per basic common share, for the first six
months of 1998. The primary reasons for the increased 1999 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
as well as a decrease in the cost of funds compared to the similar period in
1998.
Volume
Gross contracts purchased or originated totaled $59.9 million in the second
quarter of 1999, compared to $57.6 million purchased in the second quarter of
1998. For the first six months of 1999, gross contracts purchased or originated
totaled $118.5 million compared to the $108.9 million purchased during the first
half of 1998. Management believes that contract purchase volume for the second
quarter and first six months of 1999 grew modestly due to the aggressive
underwriting and pricing policies of our auto finance competitors.
<PAGE>
TFC ENTERPRISES, INC.
Gross contracts purchased or originated were as follows for the three months and
six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
- ---------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Contracts purchased or originated:
Auto finance:
Point-of-sale $ 36,443 $ 35,208 $ 75,746 $ 73,084
Bulk 17,097 17,427 31,401 27,652
Consumer finance 6,390 4,961 11,306 8,181
- ---------------------------------------------------------------------------------------------------------
Total $ 59,930 $ 57,596 $118,453 $108,917
- ---------------------------------------------------------------------------------------------------------
Number of contracts purchased or originated:
Auto finance:
Point-of-sale 2,943 2,856 6,093 5,935
Bulk 3,523 3,767 6,268 5,690
Consumer finance 3,411 2,741 5,772 4,504
- ---------------------------------------------------------------------------------------------------------
Total 9,877 9,364 18,133 16,129
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Net interest revenue
Net interest revenue for the second quarter of 1999 totaled $8.7 million, an
increase of 40%, from $6.2 million in the prior year period. For the first half
of 1999, net interest revenue was $16.9 million, up 44% from $11.7 million in
the first six months of 1998. The increase was attributable to higher average
interest-earning assets and improvement in the yield on interest-earning assets.
The yield on interest-earning assets was 23.59% in the second quarter of 1999,
compared to 22.73% in the second quarter of 1998. For the first half of 1999,
the yield on interest-earning assets was 23.44% compared to 22.18% for the first
half of 1998. The increase in yield was attributable to improved pricing.
The cost of interest-bearing liabilities decreased to 8.74% for the second
quarter of 1999 from 10.56% for the second quarter of 1998 and decreased to
8.85% for the first six months of 1999, compared with 10.72% for the first
quarter of 1998. The decrease was primarily attributable to a 50 basis point
decrease in the rate on the Company's primary line of credit and a decrease in
the one-month LIBOR rate. Additionally, interest expense for 1998 included the
costs related to warrants and structuring fees that were fully amortized at
December 31, 1998. The Company continues to explore ways to reduce its overall
cost of interest bearing liabilities.
<PAGE>
TFC ENTERPRISES, INC.
Net interest revenue, net interest spread, and net interest margin were as
follows for the three months ended and six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
- ----------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C>
Average interest earning assets (a) $ 201,308 $165,451 $196,505 $161,618
Average interest bearing liabilities 143,379 119,786 139,549 116,516
-----------------------------------------------------------------------------------------------------
Net interest earning assets $ 57,929 $ 45,665 $ 56,956 $ 45,102
-----------------------------------------------------------------------------------------------------
Interest and other finance revenue $ 11,873 $9,401 $ 23,027 $ 17,921
Interest expense 3,133 3,163 6,177 6,243
-----------------------------------------------------------------------------------------------------
Net interest revenue $ 8,740 $ 6,238 $ 16,850 $11,678
-----------------------------------------------------------------------------------------------------
Yield on interest-earning assets 23.59% 22.73% 23.44% 22.18%
Cost of interest-bearing liabilities 8.74 10.56 8.85 10.72
-----------------------------------------------------------------------------------------------------
Net interest spread 14.85% 12.17% 14.59% 11.46%
-----------------------------------------------------------------------------------------------------
Net interest margin (b) 17.37% 15.08% 17.15% 14.45%
-----------------------------------------------------------------------------------------------------
</TABLE>
(a) Gross contract receivables net of unearned interest revenue.
(b) Net interest margin is annualized net interest revenue divided by average
interest-earning assets.
Operating expense
Operating expense as a percentage of interest-earning assets, calculated on an
annualized basis, decreased to 11.84% for the second quarter of 1999 from 13.00%
for the second quarter of 1998 and to 12.00% for the first six months of 1999
from 13.22% for the first six months of 1998.
Provision for income taxes
The effective tax rate for the second quarter of 1999 is higher than the
expected statutory rates primarily due to the amortization of certain intangible
assets. The Company recorded no income tax provision in the first six months of
1998 due to the anticipation of the reversal of the deferred tax valuation
allowance recorded at year end 1997 which substantially offset the tax expense
related to the estimated income for fiscal year 1998.
<PAGE>
TFC ENTERPRISES, INC.
Other matter - Year 2000
As has been widely reported, the Year 2000 problem is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions and/or engaging in similar normal
business activities.
State of readiness
The Company determined that it needed to modify or replace significant
portions of its software and certain hardware so those systems will
properly utilize dates beyond December 31, 1999. The Company presently
believes that with modifications or replacements of existing software and
certain hardware that have been completed the Year 2000 problem has been
mitigated as it relates to its internal systems. Therefore, because of
the modifications and replacements that have been made, the Year 2000
problem should not have a material adverse impact on the Company's
business, financial condition and results of operations.
The Company's plan to resolve the Year 2000 problem involved the
following four phases: assessment, remediation, testing and
implementation. To date, the Company has completed each phase for all
systems that could be significantly affected by the Year 2000 problem. In
addition, the Company has gathered information about the Year 2000
compliance status of its significant third party vendors and continues to
monitor their compliance.
The Company has completed each phase for the Company's loan servicing
systems, automated application systems and accounting systems. Testing
and implementation of affected equipment and software was completed on
June 30, 1999.
Additionally, the Company is has completed each phase for operating
equipment, such as the phone systems, fax machines, etc. Testing of this
equipment was primarily dependent upon the vendors' ability to confirm
that the proper changes have been made and the system will function
correctly. Testing and implementation of affected equipment was completed
on June 30, 1999.
The Company has queried its significant vendors regarding their Year 2000
compliance status. To date, the Company is not aware of any external
agent with a Year 2000 problem that would materially impact the Company's
business, financial condition, or results of operations. The Company does
not share information systems with any significant external agent.
However, the Company has no means of ensuring that external agents will
be Year 2000 ready. The effect of non-compliance by external agents is
not determinable.
Cost to Address the Company's Year 2000 Problem
The Company has utilized both internal and external resources to
reprogram, or replace, test and implement the software and operating
equipment for Year 2000 modifications. The total cost of the Year 2000
project was approximately $0.8 million, which consisted of new systems
and equipment. An operating lease was used to fund approximately $0.6
million with the remainder funded out of operating cash flows.
<PAGE>
TFC ENTERPRISES, INC.
Risks
Management believes it has completed all necessary phases of an effective
program to resolve issues affecting internal systems impacted by the Year
2000 problem. However, the Company has no means of ensuring that external
agents will be Year 2000 ready. The effect of non-compliance by external
agents is not determinable.
Contingency Plans
The Company has contingency plans for certain critical applications.
These contingency plans involve, the manual processing of new business
applications, and collections maintained through a more manual and
elementary process until affected systems can be corrected.
Financial Condition
Assets
Total assets increased by $19.7 million, or 11%, to $192.3 million at June 30,
1999, from $172.6 million at December 31, 1998. The increase was primarily
attributable to an increase in net contract receivables.
Net contract receivables were as follows at June 30, 1999 and December 31, 1998:
June 30, Dec. 31,
(in thousands) 1999 1998
------------------------------------------------------------------------------
Auto finance:
Point-of-sale $ 122,040 $ 104,125
Bulk 37,894 36,649
Consumer finance 16,757 15,121
------------------------------------------------------------------------------
Total $ 176,691 $ 155,895
------------------------------------------------------------------------------
Liabilities
Total liabilities were $153.9 million at June 30, 1999, an increase of $16.6
million, or 12%, from $137.3 million at December 31, 1998. The increase in
liabilities compared with year-end 1998 primarily reflected increased borrowings
under the Company's credit facilities which, in turn, resulted in a increase in
net contract receivables.
<PAGE>
TFC ENTERPRISES, INC.
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 $6.2 million in the second quarter of 1999, representing an
annualized rate of 13.6% of average contract receivables net of unearned
interest revenue. This compares to $6.4 million, or 16.5%, in the second quarter
of 1998. For the first six months of 1999, net charge-offs were $13.1 million,
or 14.6%, of average contract receivables net of unearned interest revenue. This
compares to $13.5 million, or 17.9%, of average contract receivables net of
unearned interest revenue in the first six months of 1998. The decrease in net
charge-offs in the first quarter of 1999 and first six months 1999, relative to
the comparable periods in 1998 was due to improved credit quality, servicing and
recoveries.
Auto finance contract receivables- Provision for credit losses
TFC'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 TFC's auto
finance contracts eliminated the need for a loss provision for all of 1998 and
the first six months of 1999.
Provision for credit losses is dependent on a number of factors, including, but
not limited to, 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 TFC 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.
Auto finance contract receivables- Reserves
The static pool reserve methodology is used to analyze and reserve for TFC's
credit losses. This methodology allows TFC to stratify its portfolio into
separate and identifiable annual pools. The loss performance of these annual
pools is analyzed monthly to determine the adequacy of the reserves. The loss
performance to date combined with estimated future losses by pool year
establishes the gross estimated loss for each pool year. The combined expected
losses are reduced by estimated future recoveries that are based on historical
recovery performance to establish the estimated required reserve for credit
losses.
At June 30, 1999, the combination of TFC's allowance for credit losses and
nonrefundable dealer reserve totaled $23.0 million, or 12.2%, of contract
receivables net of unearned interest revenue. This compares to $21.3 million, or
12.4%, at December 31, 1998. The decrease in reserves and in the percentage of
reserves to contract receivables is the result of the improved credit quality,
servicing and recoveries.
TFC's refundable dealer reserve, which is available to absorb losses relating to
contracts purchased from certain dealers, totaled $0.8 million at June 30, 1999
and December 31, 1998. Under certain of TFC's programs, contracts from dealers
were purchased under a refundable, rather than nonrefundable reserve
relationship. Under certain circumstances, TFC may have to remit some or all of
the refundable reserve back to the dealer. No such liability exists under a
nonrefundable reserve relationship. Accordingly, the refundable reserve is
carried as a liability on the Company's Consolidated Balance Sheets.
The reserves as a percentage of gross auto finance contract receivables net of
unearned interest at June 30, 1999, of 12.2% are less than net charge-offs as a
percentage of average net contracts receivable for the six months ended June 30,
1999, of 14.7% on an annualized basis. This difference exists because the
reserves include an estimate of future recoveries on prior year charge-offs and
future recoveries on current year charge-offs that are not reflected in the
current year charge-off percentage. These estimated future recoveries are based
on historical recovery performance and this estimate is an integral part of the
evaluation of the adequacy of the reserves performed by management quarterly.
Consumer finance charge-offs, provision for credit losses and reserves (FCF)
Net charge-offs to the allowance for credit losses were $0.1 million in the
second quarter of 1999 and 1998, representing an annualized rate of 2.8% and
4.3% of average gross contract receivables net of unearned
<PAGE>
TFC ENTERPRISES, INC.
interest revenue, respectively. For the first six months of 1999 and 1998, net
charge-offs to the allowance for credit losses were $0.2 million, representing
an annualized rate of 2.8% and 3.9%, respectively. The provision for credit
losses was $0.1 million for the second quarter of 1999 and $0.2 million for the
second quarter of 1998 and the allowance for credit losses was $0.8 million or
4.6% and $0.9 million or 5.2% of outstanding gross contract receivables at June
30, 1999 and December 31, 1998. Management has established the level of
allowance that it considers to be adequate based on FCF's experience through
June 30, 1999.
Charge-offs net of recoveries, by line of business, for the three months and six
months ended June 30, 1999 and 1998, were as follows:
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------------------------------
(in thousands) 1999 1998 1999 1998
-------------------------------------- --------------------------------------
Auto finance:
Point-of-sale $ 3,458 $ 3,499 $ 7,161 $ 6,954
Bulk 2,782 2,843 5,944 6,482
Consumer finance 118 145 239 258
-----------------------------------------------------------------------------
Total $ 6,358 $ 6,487 $ 13,344 $ 13,694
-----------------------------------------------------------------------------
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $11.1 million, or 4.8% of gross auto finance contract receivables at
June 30, 1999, compared to $12.9 million, or 6.2%, at December 31, 1998. 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
$0.5 million, or 2.7% of gross receivables at June 30, 1999, compared to $0.4
million, or 2.9% at December 31, 1998.
Delinquency at June 30, 1999 and December 31, 1998 was as follows:
June 30, Dec. 31,
(in thousands) 1999 1998
- --------------------------------------------------------------------------------
Gross contract receivables 60 days
and more delinquent $ 11,621 $13,347
Gross contract receivables 248,854 225,813
Percent 4.67% 5.91%
Liquidity and Capital Resources
Liquidity management
As shown on the Consolidated Statements of Cash Flows, cash and cash equivalents
decreased by $0.1 million in the first six months of 1999, to $1.8 million at
June 30, 1999. The decrease reflected $17.3 million of net cash provided by
financing activities and $4.2 million of net cash provided by operating
activities, offset by $21.6 million of net cash used in financing activities.
Net cash used in investing activities principally reflected $20.9 million in net
contract receivable purchases. Cash provided by financing activities primarily
reflected $17.3 million of net borrowings on the Company's revolving lines of
credit and other debt. For the first six months of 1998, net cash 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
<PAGE>
TFC ENTERPRISES, INC.
reflected $16.7 million in net contract receivable purchases. Cash provided by
financing activities primarily reflected $15.0 million of net borrowings on the
Company's revolving lines of credit and subordinated debt. In both the first six
months of 1999 and 1998, the combination of cash on hand and net cash provided
by financing activities was sufficient to fund the growth in business volume.
Management is currently exploring additional sources of liquidity. The $130
million credit facility related to TFC has $126.2 million outstanding at June
30, 1999 and the $15 million credit facility related to FCF has $13.3 million
outstanding at June 30, 1999.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Shareholders of TFC Enterprises, Inc. was held
on May 11, 1999, to consider two matters of business. The matters brought before
the shareholders and the voting results were as follows:
Election of Directors
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes*
--- ------- ------- ----------
<S> <C>
Douglas E. Bywater 10,137,607 5,635 -- --
Robert S. Raley, Jr. 10,137,607 5,635 -- --
Philip R. Smiley 10,137,607 5,635 -- --
</TABLE>
The following directors' terms of office as a director continued after the
meeting: Andrew M. Ockershausen, Walter S. Boone, and Linwood R. Watson.
Ratification of the Appointment of Auditors
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes*
--- ------- ------- ----------
<S> <C>
Ernst & Young LLP 10,131,778 8,535 2,929 --
</TABLE>
* "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
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 20, 1999 By:/s/ Robert S. Raley, Jr.
------------------------
Robert S. Raley, Jr.
Chairman, President and
Chief Executive Officer and
Director
Date: August 20, 1999 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
- ----------- -----------
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TFC ENTERPRISES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,758
<SECURITIES> 0
<RECEIVABLES> 199,665
<ALLOWANCES> 22,974
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,534
<DEPRECIATION> 4,377
<TOTAL-ASSETS> 192,301
<CURRENT-LIABILITIES> 153,867
<BONDS> 0
50
0
<COMMON> 0
<OTHER-SE> 38,384
<TOTAL-LIABILITY-AND-EQUITY> 38,434
<SALES> 23,027
<TOTAL-REVENUES> 23,694
<CGS> 0
<TOTAL-COSTS> 11,786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 207
<INTEREST-EXPENSE> 6,177
<INCOME-PRETAX> 5,524
<INCOME-TAX> 2,372
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,152
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.26
</TABLE>
