<PAGE>
THIS REPORT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION VIA EDGAR
___________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________
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, 2000
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 11, 2000, there were 11,433,682 outstanding shares of the
registrant's $.01 par value per share common stock.
<PAGE>
TFC ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR
THE SIX MONTHS ENDED JUNE 30, 2000
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 6
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) 21
Exhibits and Reports on Form 8-K (Item 6) 21
Signatures 23
Index to Exhibits 22
2
<PAGE>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------------------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 1,284 $ 1,751 $ 2,159 $ 3,152
Net income per basic common share $ 0.11 $ 0.15 $ 0.19 $ 0.28
Net income per diluted common share $ 0.10 $ 0.14 $ 0.18 $ 0.26
Average common shares outstanding (in thousands) 11,434 11,405 11,433 11,405
---------------------------------------------------------------------------------------------------------------------
Performance ratios (annualized, as appropriate)
Return on average common equity 11.84% 18.65% 10.07% 17.14%
Return on average assets 2.32 3.71 2.00 3.43
Yield on interest-earning assets 22.40 23.59 22.67 23.44
Cost of interest-bearing liabilities 10.00 8.74 9.82 8.85
Net interest margin 14.96 17.37 15.44 17.15
Operating expense as a percentage of
average interest-earning assets (a) 11.61 11.84 12.49 12.00
Total net charge-offs to average 14.34 12.63 15.07 13.58
gross contract receivables, net of unearned interest
60+ days delinquencies to period-end
gross contract receivables 5.67 4.67 5.67 4.67
30+ days delinquencies to period-end
gross contract receivables 8.87 6.84 8.87 6.84
Total allowance, nonrefundable reserve and unearned
discount to period end gross contract receivables,
net of unearned interest 11.69 13.56 11.69 13.56
Equity to assets, period end 19.59 19.99 19.59 19.99
---------------------------------------------------------------------------------------------------------------------
Average balances:
Interest-earning assets (b) $227,893 $201,308 $222,568 $196,505
Total assets 221,668 188,602 216,259 183,752
Interest-bearing liabilities 169,513 143,379 163,904 139,549
Equity 43,371 37,545 42,883 36,773
---------------------------------------------------------------------------------------------------------------------
</TABLE>
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) Gross contract receivables net of unearned interest revenue.
(b) After considering approximately $750 of pre-tax costs associated with the
consolidation of service centers, operating expense as a percentage of
interest earning assets decreases to 12.15%.
3
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------------------------------------------------------------------------
(in thousands, except share amounts) 2000 1999
-------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,418 $ 2,290
Restricted cash 8,125 9,563
Net contract receivables 198,152 182,039
Property and equipment, net 2,420 2,244
Intangible assets, net 9,436 9,887
Other assets 3,024 2,488
-------------------------------------------------------------------------------------------
Total assets $224,575 $208,511
-------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $128,801 $ 94,866
Automobile receivables-backed notes 34,035 52,316
Other debt 9,782 9,501
Accounts payable and accrued expenses 3,325 3,539
Income taxes payable and other liabilities 2,509 4,941
Refundable dealer reserve 2,126 1,519
-------------------------------------------------------------------------------------------
Total liabilities 180,578 166,682
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,433,682 and 11,430,482 shares issued and
outstanding, respectively 50 50
Additional paid-in capital 56,089 56,080
Retained deficit (12,142) (14,301)
-------------------------------------------------------------------------------------------
Total shareholders' equity 43,997 41,829
-------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $224,575 $208,511
-------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Interest and other finance revenue $25,234 $23,027
Interest expense 8,049 6,177
--------------------------------------------------------------------------------------
Net interest revenue 17,185 16,850
Provision for credit losses 351 207
Net interest revenue after provision for credit losses 16,834 16,643
--------------------------------------------------------------------------------------
Other revenue:
Commissions on ancillary products 311 376
Other 513 291
--------------------------------------------------------------------------------------
Total other revenue 824 667
--------------------------------------------------------------------------------------
Total net interest and other revenue 17,658 17,310
--------------------------------------------------------------------------------------
Operating expense:
Salaries 7,100 6,056
Employee benefits 1,383 1,270
Occupancy 723 466
Equipment 792 681
Amortization of intangible assets 547 546
Other 3,358 2,767
--------------------------------------------------------------------------------------
Total operating expense 13,903 11,786
--------------------------------------------------------------------------------------
Income before income taxes 3,755 5,524
Provision for income taxes 1,596 2,372
--------------------------------------------------------------------------------------
Net income $ 2,159 $ 3,152
--------------------------------------------------------------------------------------
Net income per common share:
Basic $0.19 $0.28
Diluted $0.18 $0.26
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31, June 30,
------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and other finance revenue $12,764 $12,470 $11,873
Interest expense 4,239 3,810 3,133
------------------------------------------------------------------------------------------------------
Net interest revenue 8,525 8,660 8,740
------------------------------------------------------------------------------------------------------
Provision for credit losses 169 182 109
------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit 8,356 8,478 8,631
losses
Other revenue:
Commissions on ancillary products 155 156 175
Other 310 203 184
------------------------------------------------------------------------------------------------------
Total other revenue 465 359 359
------------------------------------------------------------------------------------------------------
Total net interest and other revenue 8,821 8,837 8,990
Operating expense:
Salaries 3,320 3,780 3,009
Employee benefits 614 769 628
Occupancy 242 481 237
Equipment 394 398 367
Amortization of intangible assets 274 273 273
Other 1,769 1,589 1,446
------------------------------------------------------------------------------------------------------
Total operating expense 6,613 7,290 5,960
------------------------------------------------------------------------------------------------------
Income before income taxes 2,208 1,547 3,030
Provision for income taxes 924 672 1,279
------------------------------------------------------------------------------------------------------
Net income $ 1,284 $ 875 $ 1,751
------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $0.11 $0.08 $0.15
Diluted $0.10 $0.07 $0.14
</TABLE>
6
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Six months ended
June 30,
-----------------------------------------------------------------------------
(in thousands) 2000 1999
-----------------------------------------------------------------------------
Common stock
Balance at beginning and end of period $ 50 $ 50
-----------------------------------------------------------------------------
Additional paid-in capital
Balance at beginning of period $ 56,080 $ 56,020
Stock options exercised 9 --
-----------------------------------------------------------------------------
Balance at end of period $ 56,089 $ 56,020
-----------------------------------------------------------------------------
Retained deficit
Balance at beginning of period $(14,301) $(20,788)
Net income (a) 2,159 3,152
-----------------------------------------------------------------------------
Balance at end of period $(12,142) $(17,636)
-----------------------------------------------------------------------------
(a) There are no adjustments to net income to determine comprehensive income for
the periods presented.
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 2,159 $ 3,152
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of intangible assets 547 546
Depreciation and other amortization 883 620
Provision for credit losses 351 207
Changes in operating assets and liabilities:
(Increase) decrease in other assets (619) 447
Decrease in accounts payable and accrued expenses (214) (615)
Decrease in income taxes payable and other liabilities (2,432) (153)
Increase in refundable dealer reserve 607 2
------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,282 4,206
------------------------------------------------------------------------------------------------------
Investing activities
Net cost of acquiring contract receivables (76,894) (66,387)
Repayment on contract receivables 60,125 45,384
Purchase of property and equipment (763) (626)
Decrease in restricted cash 1,438 --
------------------------------------------------------------------------------------------------------
Net cash used in investing activities (16,094) (21,629)
------------------------------------------------------------------------------------------------------
Financing activities
Net borrowings on revolving lines of credit 33,935 18,228
Net borrowings on other debt 277 (915)
Payments on automobile receivables-backed notes (18,281) --
Proceeds from stock options exercised 9 --
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,940 17,313
------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,128 (110)
Cash and cash equivalents at beginning of period 2,290 1,868
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,418 $ 1,758
------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
8
<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 four primary
wholly-owned subsidiaries, The Finance Company ("TFC"), First Community
Finance, Inc. ("FCF"), Recoveries, Inc. ("RI") and PC Acceptance.com, Inc.
("PCAC"). 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 eleven contract production offices throughout
the United States. FCF is involved in the direct origination and servicing of
small consumer loans. FCF operates nineteen branches throughout Virginia and
North Carolina. Recoveries Inc., a third party debt collection agency, services
foreclosed or troubled loan portfolios and receivables. PCAC, specializes in
purchasing and servicing retail installment contracts affiliated with personal
computers and related equipment.
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 1999 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 six months ended June 30, 2000, are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 2000.
Certain amounts have been reclassified to conform to the current quarter's
presentation.
2. Contract receivables
The following is a summary of contract receivables at June 30, 2000, and
December 31, 1999:
June 30, Dec. 31,
(in thousands) 2000 1999
----------------------------------------------------------------------
Contract receivables:
Auto finance $248,653 $236,305
Consumer finance 23,975 21,086
----------------------------------------------------------------------
Gross contract receivables 272,628 257,391
Less:
Unearned interest revenue 40,663 40,491
Unearned discount 5,798 4,613
Unearned commissions 372 441
Unearned service fees 1,073 1,074
Payments in process 5,053 4,707
Escrow for pending acquisitions 210 530
Allowance for credit losses 904 817
Nonrefundable reserve 20,403 22,679
----------------------------------------------------------------------
Net contract receivables $198,152 $182,039
----------------------------------------------------------------------
9
<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 months and six months ended June 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $21,976 $22,599 $ 23,496 $ 22,195
Provision for credit losses 169 109 351 207
Allocation for credit losses 7,323 7,451 14,227 14,743
Charge-offs (9,683) (7,796) (19,813) (16,303)
Recoveries 1,522 1,438 3,046 2,959
-------------------------------------------------------------------------------------------------------------
Balance at end of period $21,307 $23,801 $ 21,307 $ 23,801
-------------------------------------------------------------------------------------------------------------
</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,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------------------------------------------------
(in thousands, except per share 2000 1999 2000 1999
amounts)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,284 $ 1,751 $ 2,159 $ 3,152
--------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 11,433 11,405 11,433 11,405
--------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 166 175 197 112
Warrants 660 659 741 624
--------------------------------------------------------------------
Dilutive potential common 826 834 938 736
shares
--------------------------------------------------------------------
Denominator for diluted earnings 12,259 12,239 12,371 12,190
per share-adjusted weighted-
average shares and assumed
conversions
--------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.11 $ .15 $ 0.19 $ .28
Diluted earnings per share $ 0.10 $ .14 $ 0.18 $ .26
</TABLE>
10
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments
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 involved 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. Through FCF, the Company is
involved in the direct origination and servicing of small consumer loans through
a branch network in Virginia and North Carolina. PC Acceptance.com, Inc.,
specializes in purchasing and servicing retail installment contracts affiliated
with personal computers and related equipment. FCF and PCA comprise the consumer
finance segment. The other column consists of RI and corporate support
functions not allocated to either of the business segments. All revenue is
generated from external customers in the United States.
11
<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)
Auto Finance Consumer Finance Other Total
----------------------------------------------------------------------------------------------------------------
Three months ended
June 2000
<S> <C> <C> <C> <C>
Interest revenues $ 11,474 $ 1,290 $ -- $ 12,764
----------------------------------------------------------------------------------
Interest expense $ 3,842 $ 397 $ -- $ 4,239
----------------------------------------------------------------------------------
Income (loss) before taxes: $ 2,790 $ (29) $(172) $ 2,589
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (108)
--------
Consolidated income before $ 2,208
taxes
----------------------------------------------------------------------------------
Net contract receivables $175,635 $22,347 $ 170 $198,152
Other assets 23,673
--------
Total assets $224,575
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Auto Finance Consumer Finance Other Total
----------------------------------------------------------------------------------------------------------------
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 $ 3,030
taxes
----------------------------------------------------------------------------------
Net contract receivables $159,934 $16,752 $ 5 $176,691
Other assets 15,610
--------
Total assets $192,301
----------------------------------------------------------------------------------
</TABLE>
12
<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> <C> <C> <C>
Six months ended June 2000
Interest revenues $ 22,772 $ 2,462 $ -- $ 25,234
----------------------------------------------------------------------------------
Interest expense $ 7,295 $ 754 $ -- $ 8,049
----------------------------------------------------------------------------------
Income (loss) before taxes: $ 4,893 $ (55) $(292) $ 4,546
Unallocated amounts:
Intangible amortization (546)
Corporate expenses (245)
--------
Consolidated income before $ 3,755
taxes
----------------------------------------------------------------------------------
Contract receivables $175,635 $22,347 $ 170 $198,152
Other assets 23,673
--------
Total assets $224,575
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Consumer
Auto Finance Finance Other Total
----------------------------------------------------------------------------------------------------------------
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 $ 5,524
taxes
----------------------------------------------------------------------------------
Contract receivables $159,934 $16,752 $ 5 $176,691
Other assets 15,610
--------
Total assets $192,301
----------------------------------------------------------------------------------
</TABLE>
13
<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. The
following are factors that could cause the Company's actual results to differ
materially from those expressed or implied by such forward-looking statements: a
rise in interest rates, a deterioration of credit experience, competitive
pricing and other factors, the loss of or reduction in its credit facilities, or
if the Company were to face increased competition. Investors are encouraged to
review TFC Enterprise's SEC filings for more information about the factors
affecting the Company's business. 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 2000 was $1.3 million, or $0.11 per basic
common share, compared to net income of $1.8 million, or $0.15 per basic common
share, in the second quarter of 1999. Net income for the first six months of
2000 decreased to $2.2 million, or $0.19 per basic common share, compared to net
income of $3.2 million, or $0.28 per basic common share, for the first six
months of 1999. Exclusive of the one-time charges of approximately $450,000 (net
of tax), or $0.04 per basic common share, associated with the relocation of the
Company's Bulk Service Center, from Jacksonville, Florida to Norfolk, Virginia,
net income for the first six months of 2000 would have been $0.23 per basic
common share. The primary reasons for the decreased 2000 income is the
relocation of the Company's Bulk Service Center and a decrease in net interest
margin resulting from a decrease in yield on interest earning assets as well as
an increase in the cost of funds compared to the similar period in 1999.
Volume
Gross contracts purchased or originated totaled $66.0 million in the second
quarter of 2000, compared to $59.9 million purchased in the second quarter of
1999. For the first six months of 2000, gross contracts purchased or
originated totaled $125.8 million compared to the $118.5 million purchased
during the first six months of 1999.
14
<PAGE>
TFC ENTERPRISES, INC.
Gross contracts purchased or originated were as follows for the three and six
months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
--------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contracts purchased or originated:
Auto finance:
Point-of-sale $34,277 $36,443 $ 70,659 $ 75,746
Bulk 21,964 17,097 39,463 31,401
Consumer finance 9,729 6,390 15,638 11,306
--------------------------------------------------------------------------------------------------------------
Total $65,970 $59,930 $125,760 $118,453
--------------------------------------------------------------------------------------------------------------
Number of contracts purchased or originated:
Auto finance:
Point-of-sale 2,548 2,943 5,301 6,093
Bulk 4,064 3,523 6,942 6,268
Consumer finance 4,991 3,411 7,847 5,772
--------------------------------------------------------------------------------------------------------------
Total 11,603 9,877 20,090 18,133
--------------------------------------------------------------------------------------------------------------
</TABLE>
Net interest revenue
Net interest revenue for the second quarter of 2000 totaled $8.5 million, a
decrease of 2%, from $8.7 million for the second quarter of 1999. The decrease
was attributable to a lower yield on average interest-earning assets and an
increase in cost of funds.
The yield on interest-earning assets was 22.40% in the second quarter of 2000,
compared to 23.59% in the second quarter of 1999. For the first half of 2000,
the yield on interest-earning assets was 22.67% compared to 23.44% for the first
half of 1999. The decrease in yield reflects a more competitive program for our
dealers while continuing to maintain prudent underwriting standards.
The cost of interest-bearing liabilities increased to 10.00% for the second
quarter of 2000 from 8.74% for the second quarter of 1999 and increased to 9.82%
for the first six months of 2000, compared with 8.85% for the first six months
of 1999. The increase was primarily attributable to general interest rate
increases. The Company continues to explore ways to reduce its interest-rate
risk and the overall cost of interest bearing liabilities.
15
<PAGE>
TFC ENTERPRISES, INC.
Net interest revenue, net interest spread, and net interest margin were as
follows for the three and six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-----------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average interest earning assets (a) $227,893 $201,308 $222,568 $196,505
Average interest bearing liabilities 169,513 143,379 163,904 139,549
-----------------------------------------------------------------------------------------------------------------
Net interest earning assets $ 58,380 $ 57,929 $ 58,664 $ 56,956
-----------------------------------------------------------------------------------------------------------------
Interest and other finance revenue $ 12,764 $ 11,873 $ 25,234 $ 23,027
Interest expense 4,239 3,133 8,049 6,177
-----------------------------------------------------------------------------------------------------------------
Net interest revenue $ 8,525 $ 8,740 $ 17,185 $ 16,850
-----------------------------------------------------------------------------------------------------------------
Yield on interest-earning assets 22.40% 23.59% 22.67% 23.44%
Cost of interest-bearing liabilities 10.00 8.74 9.82 8.85
-----------------------------------------------------------------------------------------------------------------
Net interest spread 12.40% 14.85% 12.85% 14.59%
-----------------------------------------------------------------------------------------------------------------
Net interest margin (b) 14.96% 17.37% 15.44% 17.15%
-----------------------------------------------------------------------------------------------------------------
</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 11.61% for the second quarter of 2000 from 11.84%
for the second quarter of 1999 and to 11.88% for the first six months of 2000
from 12.00% for the first six months of 1999. The calculation for the first six
months of 2000 has been adjusted to eliminate approximately $750,000 in pretax
costs associated with the consolidation of service centers. Excluding these
costs, operating expense as percentage of interest-earning assets would have
been 12.49% for the first six months of 2000.
Provision for income taxes
The effective tax rate for the first quarter and first half of 2000 and 1999 of
approximately 43% for book purposes is higher than the expected statutory rate
primarily due to the amortization of certain intangible assets and the effect of
state income taxes.
16
<PAGE>
TFC ENTERPRISES, INC.
Financial Condition
-------------------
Assets
Total assets increased by $16.1 million, or 7.7%, to $224.6 million at June 30,
2000, from $208.5 million at December 31, 1999. The increase was primarily
attributable to an increase in net contract receivables.
Net contract receivables were as follows at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, Dec. 31,
(in thousands) 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C>
Auto finance:
Point-of-sale $125,250 $116,849
Bulk 50,555 45,672
Consumer finance 22,347 19,518
----------------------------------------------------------------------------------------
Total $198,152 $182,039
----------------------------------------------------------------------------------------
</TABLE>
Liabilities
Total liabilities were $180.6 million at June 30, 2000, an increase of $13.9
million, or 8.3%, from $166.7 million at December 31, 1999. The increase in
liabilities was primarily attributable to increased borrowings under the
Company's credit facilities resulting from the increase 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 $8.0 million in the second quarter of 2000, representing an
annualized rate of 15.6% of average contract receivables net of unearned
interest revenue. This compares to $6.2 million, or 13.6%, in the second quarter
of 1999. For the first six months of 2000, net charge-offs were $16.5 million,
or 16.4%, of average contract receivables net of unearned interest revenue. This
compares to $13.1 million, or 14.6%, of average contract receivables net of
unearned interest revenue in the first six months of 1999. The increase in net
charge-offs in the second quarter of 2000 and first six months 2000, relative to
the comparable periods in 1999 was due primarily to servicing problems in the
Jacksonville Service Center and the anticipated impact of the transition of
servicing upon the relocation of the Jacksonville Service Center .
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. There was no loss provision related to the auto finance
contracts for any of the periods presented herein.
17
<PAGE>
TFC ENTERPRISES, INC.
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, 2000 the combination of TFC's allowance for credit losses,
nonrefundable dealer reserve and unearned discount totaled $26.2 million, or
11.7%, of contract receivables net of unearned interest revenue. This compares
to $27.3 million, or 13.0%, at December 31, 1999. The decrease in reserves and
in the percentage of reserves to contract receivables is primarily due to
increased charge-off in the Jacksonville Service Center.
TFC's refundable dealer reserve, which is available to absorb losses relating to
contracts purchased from certain dealers, totaled $2.1 million at June 30, 2000
and $1.5 million at December 31, 1999. 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, 2000, of 9.8% are less than net charge-offs as a
percentage of average net contracts receivable for the six months ended June 30,
2000, of 16.4% 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 2000 and 1999, representing an annualized rate of 2.7% and
2.8% of average gross contract receivables net of unearned interest revenue,
respectively. For the first six months of 2000 and 1999, net charge-offs to
the allowance for credit losses were $0.3 million and $0.2 million, representing
an annualized rate of 3.0% and 2.8%, respectively. The provision for credit
losses was $0.2 million for the second quarter of 2000 and $0.1 million for the
second quarter of 1999 and the allowance for credit losses was $0.9 million or
3.85% and $0.8 million or 3.84% of outstanding gross contract receivables at
June 30, 2000 and December 31, 1999, respectively. Management has established
the level of allowance that it considers to be adequate based on FCF's
experience through June 30, 2000.
18
<PAGE>
TFC ENTERPRISES, INC.
Charge-offs net of recoveries, by line of business, for the three and six months
ended June 30, 2000 and 1999, were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auto finance:
Point-of-sale $4,180 $3,458 $ 9,158 $ 7,161
Bulk 3,834 2,782 7,292 5,944
Consumer finance 147 118 317 239
------------------------------------------------------------------------------------------------------------
Total $8,161 $6,358 $16,767 $13,344
------------------------------------------------------------------------------------------------------------
</TABLE>
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $14.8 million, or 5.97% of gross auto finance contract receivables at
June 30, 2000, compared to $14.9 million, or 6.32%, at December 31, 1999. Gross
auto finance contract receivables that were 30 days or more past due totaled
$23.0 million, or 9.26% of gross auto finance contract receivables at June30,
2000, compared to $22.6 million, or 9.57%, at December 31, 1999.
Gross consumer finance receivables that were 60 days or more past due totaled
$0.6 million, or 2.62% of gross receivables at June 30, 2000, compared to $0.6
million, or 2.79% at December 31, 1999. Gross consumer finance receivables that
were 30 days or more past due totaled $1.2 million, or 4.91% of gross
receivables at June 30, 2000, compared to $0.9 million, or 4.36% at December 31,
1999.
Delinquency at June 30, 2000 and December 31, 1999 was as follows:
<TABLE>
<CAPTION>
June 30, Dec. 31,
(in thousands) 2000 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross contract receivables 272,628 257,391
Gross contract receivables 60+ days and over delinquent
Gross contract amount $ 15,447 $ 15,528
Percent of total gross contract receivables 5.67% 6.03%
Gross contract receivables 30+ days and over delinquent
Gross contract amount $ 24,188 $ 23,525
Percent of total gross contract receivables 8.87% 9.14%
</TABLE>
19
<PAGE>
TFC ENTERPRISES, INC.
Liquidity and Capital Resources
-------------------------------
Liquidity management
As shown on the Consolidated Statements of Cash Flows, cash and cash equivalents
increased by $1.0 million in the first six months of 2000, to $3.4 million at
June 30, 2000. The increase reflected $16.0 million of net cash provided by
financing activities and $1.3 million of net cash provided by operating
activities, offset by $16.1 million of net cash used in investing activities.
Net cash provided by financing activities reflected net borrowings on the
revolving lines of credit used to fund the increase in net contract receivables.
For the first six months of 1999, net cash 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. In both the first six months of 2000
and 1999, the combination of cash on hand and net cash provided by financing
activities was sufficient to fund the growth in business volume. The Company
believes cash flows provided by operating activities and current availability
under its credit facilities will be adequate to meet the Company's liquidity
requirements for fiscal 2000. Management is currently exploring additional
sources of liquidity.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The 2000 Annual Meeting of Shareholders of TFC Enterprises, Inc. was held on
May 9, 2000, to consider four 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> <C> <C> <C>
Douglas E. Bywater 10,361,516 64,695 -- --
Linwood R. Watson 10,361,516 64,695 -- --
</TABLE>
The following directors' terms of office as a director continued after the
meeting: Walter S. Boone, Peter H. Kamin , Andrew M. Ockershausen, Philip R.
Smiley, and Robert S. Raley, Jr.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes*
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Amendment of 1993 Stock
Purchase Plan 9,850,777 546,634 31,800 --
Broker
For Against Abstain Non-votes*
----------------- ----------------- ----------------- -----------------
Approval of Non-Employee
Director Stock Option Plan 9,844,389 540,507 41,315 --
</TABLE>
Ratification of the Appointment of Auditors
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes*
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Ernst & Young LLP 10,062,416 339,431 24,364 --
</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 no
filed.
(b) Reports on Form 8-K
None.
21
<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 11, 2000 By: /s/ Robert S. Raley Jr.
------------------------
Robert S. Raley, Jr.
Chairman, President,
Chief Executive Officer and
Director
Date: August 11, 2000 By: /s/ Craig D. Poppen
--------------------
Craig D. Poppen
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
of the registrant)
22
<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.
23
