<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 September 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 November 14, 2000, there were 11,439,149 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 NINE MONTHS ENDED SEPTEMBER 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 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
---------------------------
Exhibits and Reports on Form 8-K (Item 6) 21
Signatures 22
Index to Exhibits 23
2
<PAGE>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months
September 30, ended September 30,
--------------------------------------------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 1,066 $ 1,806 $ 3,225 $ 4,958
Net income per basic common share $ 0.09 $ 0.16 $ 0.28 $ 0.43
Net income per diluted common share $ 0.09 $ 0.15 $ 0.26 $ 0.40
Average common shares outstanding (in thousands) 11,436 11,408 11,434 11,406
----------------------------------------------------------------------------------------------------------------------------
Performance ratios (annualized, as appropriate)
Return on average common equity 9.57% 18.37% 9.90% 17.57%
Return on average assets 1.85 3.70 1.94 3.53
Yield on interest-earning assets 21.96 23.93 22.46 23.63
Cost of interest-bearing liabilities 10.22 9.14 9.96 8.97
Net interest margin 14.09 17.44 15.00 17.27
Operating expense as a percentage of
average interest-earning assets 11.54 11.82 12.18 11.95
Total net charge-offs to average
gross contract receivables, net of unearned interest 15.94 13.24 15.39 13.47
60+ days delinquencies to period-end
gross contract receivables 5.63 4.92 5.63 4.92
30+ days delinquencies to period-end
gross contract receivables 8.48 7.69 8.48 7.69
Total allowance, nonrefundable reserve and unearned discount
to period end gross contract receivables,
net of unearned interest 10.73 13.39 10.73 13.39
Equity to assets, period end 18.13 20.36 18.13 20.36
----------------------------------------------------------------------------------------------------------------------------
Average balances:
Interest-earning assets (a) $ 230,369 $209,446 $224,884 $200,624
Total assets 230,382 195,080 221,076 187,428
Interest-bearing liabilities 177,246 148,740 168,369 142,356
Equity 44,526 39,319 43,428 37,626
----------------------------------------------------------------------------------------------------------------------------
</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.
3
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------------------------------------------------------------------------------
(in thousands, except share amounts) 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,216 $ 2,290
Restricted cash 29,409 9,563
Net contract receivables 201,668 182,039
Property and equipment, net 2,659 2,244
Intangible assets, net 9,159 9,887
Other assets 4,550 2,488
------------------------------------------------------------------------------------------------------
Total assets $ 248,661 $ 208,511
======================================================================================================
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $ 73,254 $ 94,866
Automobile receivables-backed notes 107,132 52,316
Subordinated notes and other debt 13,782 9,501
Accounts payable and accrued expenses 4,925 3,539
Income taxes payable and other liabilities 2,390 4,941
Refundable dealer reserve 2,108 1,519
------------------------------------------------------------------------------------------------------
Total liabilities 203,591 166,682
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,439,149 and 11,430,482 shares issued and
outstanding, respectively 50 50
Additional paid-in capital 56,096 56,080
Retained deficit (11,076) (14,301)
------------------------------------------------------------------------------------------------------
Total shareholders' equity 45,070 41,829
------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 248,661 $ 208,511
======================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and other finance revenue $37,880 $35,555
Interest expense 12,579 9,575
-------------------------------------------------------------------------------------------------------------------
Net interest revenue 25,301 25,980
Provision for credit losses 477 317
-------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 24,824 25,663
-------------------------------------------------------------------------------------------------------------------
Other revenue:
Commissions on ancillary products 435 569
Other 898 427
-------------------------------------------------------------------------------------------------------------------
Total other revenue 1,333 996
-------------------------------------------------------------------------------------------------------------------
Total net interest and other revenue 26,157 17,975
-------------------------------------------------------------------------------------------------------------------
Operating expense:
Salaries 10,504 9,251
Employee benefits 1,987 1,880
Occupancy 989 724
Equipment 1,188 1,052
Amortization of intangible assets 825 819
Other 5,056 4,249
-------------------------------------------------------------------------------------------------------------------
Total operating expense 20,549 17,975
-------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,608 8,684
Provision for income taxes 2,383 3,726
-------------------------------------------------------------------------------------------------------------------
Net income $ 3,225 $ 4,958
===================================================================================================================
Net income per common share:
Basic $ 0.28 $0.43
Diluted $ 0.26 $0.40
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
Sept. 30, June 30, March 31, Sept. 30,
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(in thousands, except per share amounts) 2000 2000 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Interest and other finance revenue $12,646 $12,764 $12,470 $12,529
Interest expense 4,530 4,239 3,810 3,398
-------------------------------------------------------------------------------------------------------------------------
Net interest revenue 8,116 8,525 8,660 9,131
-------------------------------------------------------------------------------------------------------------------------
Provision for credit losses 126 169 182 110
-------------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 7,990 8,356 8,478 9,021
Other revenue:
Commissions on ancillary products 125 155 156 192
Other 384 310 203 137
-------------------------------------------------------------------------------------------------------------------------
Total other revenue 509 465 359 329
-------------------------------------------------------------------------------------------------------------------------
Total net interest and other revenue 8,499 8,821 8,837 9,350
Operating expense:
Salaries 3,404 3,320 3,780 3,195
Employee benefits 604 614 769 610
Occupancy 266 242 481 257
Equipment 396 394 398 372
Amortization of intangible assets 278 274 273 273
Other 1,698 1,769 1,589 1,483
-------------------------------------------------------------------------------------------------------------------------
Total operating expense 6,646 6,613 7,290 6,190
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,853 2,208 1,547 3,160
Provision for income taxes 787 924 672 1,354
-------------------------------------------------------------------------------------------------------------------------
Net income $ 1,066 $ 1,284 $ 875 $ 1,806
-------------------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.09 $ 0.11 $ 0.08 $ 0.16
Diluted $ 0.09 $ 0.10 $ 0.07 $ 0.15
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Nine months ended
September 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 16 24
-------------------------------------------------------------------------------
Balance at end of period $ 56,096 $ 56,044
-------------------------------------------------------------------------------
Retained deficit
Balance at beginning of period $ (14,301) $(20,788)
Net income (a) 3,225 4,958
-------------------------------------------------------------------------------
Balance at end of period $ (11,076) $(15,830)
-------------------------------------------------------------------------------
(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>
Nine months ended
September 30,
------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities
Net income $ 3,225 $ 4,958
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets 825 819
Depreciation and other amortization 1,113 1,018
Provision for credit losses 477 317
Changes in operating assets and liabilities:
Increase in other assets (781) (161)
Increase in accounts payable and accrued expenses 1,386 733
Increase (decrease) in income taxes payable and other liabilities (2,551) 1,392
Increase in refundable dealer reserve 589 278
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,283 9,354
------------------------------------------------------------------------------------------------------------------
Investing activities
Net cost of acquiring contract receivables (113,050) (98,415)
Repayment on contract receivables 92,847 72,887
Purchase of property and equipment (1,094) (934)
Increase in restricted cash (19,846) --
-------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41,143) (26,462)
-------------------------------------------------------------------------------------------------------------------
Financing activities
Net (repayments) borrowings on revolving lines of credit (21,612) 17,915
Net borrowings on other debt, net of transaction costs 3,902 (136)
Borrowings on automobile receivables-backed notes, net of transaction costs 79,664 --
Payments on automobile receivables-backed notes (26,184) --
Proceeds from stock options exercised 16 24
------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 35,786 17,803
------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,074) 695
Cash and cash equivalents at beginning of period 2,290 1,868
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,216 $ 2,563
==================================================================================================================
</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 twenty-one branches throughout Virginia and North
Carolina. Recoveries Inc. is a third party debt collection agency. PCAC
specializes in purchasing and servicing retail consumer 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
nine months ended September 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. Restricted cash
Restricted cash includes cash reserves and cash held in trust pending
distribution on designated distribution dates related to certain asset backed
financing transactions. Following is a summary of restricted cash at September
30, 2000 and December 31, 1999:
September 30, Dec. 31,
(in thousands) 2000 1999
------------------------------------------------------------------------------
Cash reserves $ 7,257 $3,257
Amount held pending distribution 6,944 6,305
Amount held at closing pending distribution 15,208 --
------------------------------------------------------------------------------
Restricted cash $29,409 $9,562
==============================================================================
9
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
3. Contract receivables
The following is a summary of contract receivables at September 30, 2000, and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, Dec. 31,
(in thousands) 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Contract receivables:
Auto finance $ 247,006 $ 236,305
Consumer finance 27,236 21,086
----------------------------------------------------------------------------------------------------------------
Gross contract receivables 274,242 257,391
Less:
Unearned interest revenue 40,760 40,491
Unearned discount 3,933 4,613
Unearned commissions 421 441
Unearned service fees 1,062 1,074
Payments in process 5,024 4,707
Escrow for pending acquisitions 273 530
Allowance for credit losses 863 817
Nonrefundable reserve 20,238 22,679
----------------------------------------------------------------------------------------------------------------
Net contract receivables $ 201,668 $ 182,039
----------------------------------------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for credit losses and nonrefundable reserve for the
three months and nine months ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 21,307 $ 23,801 $ 23,496 $ 22,195
Provision for credit losses 126 110 477 317
Allocation for credit losses 8,844 6,995 23,071 21,738
Charge-offs (10,688) (8,446) (30,501) (24,749)
Recoveries 1,512 1,516 4,558 4,475
---------------------------------------------------------------------------------------------------------------
Balance at end of period $ 21,101 $ 23,976 $ 21,101 $ 23,976
===============================================================================================================
</TABLE>
In September 2000, $1.8 million that was reclassified from unearned
discount to non- refundable reserve is included in the allocation for
credit losses.
10
<PAGE>
Notes to Consolidated Financial Statements (continued)
4. Computation of primary and fully diluted earnings per share
Basic and diluted earnings per share for the three and nine months ended
September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 1,066 $ 1,806 $ 3,225 $ 4,958
----------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 11,436 11,408 11,434 11,406
---------------------------------------------------------------------
Effect of dilutive securities:
Employee stock options 110 258 188 193
Warrants 518 722 659 657
---------------------------------------------------------------------
Dilutive potential
common shares 628 980 847 850
---------------------------------------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 12,064 12,388 12,281 12,256
----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.09 $ 0.16 $ 0.28 $ 0.43
Diluted earnings per share $ 0.09 $ 0.15 $ 0.26 $ 0.40
</TABLE>
5. 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
11
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
5. Segments (continued)
functions not allocated to either of the business segments. All revenue is
generated from external customers in the United States.
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> <C> <C> <C>
Three months ended
September 2000
Interest revenues $ 11,171 $ 1,475 $ -- $ 12,646
--------------------------------------------------------------------------------
Interest expense $ 4,060 $ 470 $ -- $ 4,530
--------------------------------------------------------------------------------
Income (loss) before taxes: $ 2,520 $ (170) $(148) $ 2,202
Unallocated amounts:
Intangible amortization (278)
Corporate expenses (71)
-------------------
Consolidated income
before taxes $ 1,853
--------------------------------------------------------------------------------
Net contract receivables $176,992 $24,520 $ 156 $201,668
Other assets 46,993
-------------------
Total assets $248,661
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Consumer
Auto Finance Finance Other Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended
September 1999
Interest revenues $ 11,437 $ 1,092 $ -- $ 12,529
--------------------------------------------------------------------------------
Interest expense $ 3,036 $ 362 $ -- $ 3,398
--------------------------------------------------------------------------------
Income (loss) before taxes: $ 3,587 $ 102 $ (56) $ 3,633
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (200)
-------------------
Consolidated income
before taxes $ 3,160
--------------------------------------------------------------------------------
Net contract receivables $163,244 $17,605 $ 257 $181,106
Other assets 16,662
-------------------
Total assets $197,768
--------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
5. Segments (continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
(in thousands) Consumer
Auto Finance Finance Other Total
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended September 2000
Interest revenues $ 33,943 $ 3,937 $ -- $ 37,880
------------------------------------------------------------------------------------
Interest expense $ 11,355 $ 1,224 $ -- $ 12,579
------------------------------------------------------------------------------------
Income (loss) before taxes: $ 7,414 $ (226) $(440) $ 6,748
Unallocated amounts:
Intangible amortization (825)
Corporate expenses (315)
-------------------
Consolidated income
before taxes $ 5,608
------------------------------------------------------------------------------------
Contract receivables $176,992 $ 24,520 $ 156 $201,668
Other assets 46,993
-------------------
Total assets $248,661
------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Consumer
Auto Finance Finance Other Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended September 1999
Interest revenues $ 32,427 $ 3,128 $ -- $ 35,555
--------------------------------------------------------------------------------
Interest expense $ 8,605 $ 970 $ -- $ 9,575
--------------------------------------------------------------------------------
Income (loss) before taxes: $ 9,848 $ 280 $(90) $ 10,038
Unallocated amounts:
Intangible amortization (819)
Corporate expenses (535)
-------------------
Consolidated income
before taxes $ 8,684
--------------------------------------------------------------------------------
Net contract receivables $163,244 $17,605 $257 $181,106
Other assets 16,662
-------------------
Total assets $197,768
--------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
6. Automobile receivables-backed notes
At September 30, 2000 and December 31, 1999, automobile receivables-backed notes
totaled $107.1 million and $52.3 million, respectively. In September 2000, $81.0
million of notes were issued at an interest rate of 7.36%. Repayment of these
notes is based on the liquidation of the contract receivables that collateralize
the notes.
TFC utilizes wholly-owned special purposes subsidiaries to facilitate certain
asset-backed financing transactions. At September 30, 2000, these subsidiaries
had total assets of $134.4 million, of which $102.4 million represented net
contract receivables, $29.4 million represented restricted cash and $2.6 million
represented other assets, primarily deferred charges. The special purpose
subsidiary existing at December 31, 1999 had total assets of $67.2 million, of
which $56.7 million represented net contract receivables, $9.6 million
represented restricted cash and $0.9 million represented other assets, primarily
deferred charges. These assets have been pledged as collateral on the automobile
receivables-backed notes and are not available to pay other creditors of the
Company or its affiliates.
14
<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 third quarter of 2000 was $1.1 million, or $0.09 per basic
common share, compared to net income of $1.8 million, or $0.16 per basic common
share, in the third quarter of 1999. Net income for the first nine months of
2000 was $3.2 million, or $0.28 per basic common share, compared to net income
of $5.0 million, or $0.43 per basic common share, for the first nine months of
1999. The decrease in net income for the three and nine month period is
primarily attributable to a decrease in the yield on interest earning assets of
197 and 117 basis point, respectively, coupled with an increased cost of funding
of 108 and 99 basis points respectively (see discussion under the caption "Net
Interest Revenue").
Volume
Gross contracts purchased or originated totaled $59.1 million in the third
quarter of 2000, compared to $54.0 million purchased in the third quarter of
1999. For the first nine months of 2000, gross contracts purchased or originated
totaled $184.9 million compared to the $172.5 million purchased during the first
nine months of 1999.
15
<PAGE>
TFC ENTERPRISES, INC.
Gross contracts purchased or originated were as follows for the three and nine
months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Contracts purchased or originated:
Auto finance:
Point-of-sale $ 36,458 $ 27,716 $107,117 $103,462
Bulk 12,163 20,164 51,626 51,565
Consumer finance 10,513 6,131 26,151 17,437
----------------------------------------------------------------------------------------------------------------------
Total $ 59,134 $ 54,011 $184,894 $172,464
======================================================================================================================
Number of contracts purchased or originated:
Auto finance:
Point-of-sale 2,645 2,244 7,946 8,337
Bulk 2,096 3,065 9,038 9,333
Consumer finance 4,220 3,298 12,067 9,070
----------------------------------------------------------------------------------------------------------------------
Total 8,961 8,607 29,051 26,740
======================================================================================================================
</TABLE>
Net interest revenue
Net interest revenue for the third quarter of 2000 totaled $8.1 million, a
decrease of 11%, from $9.1 million for the third quarter of 1999. For the first
nine months of 2000, net interest revenue was $25.3 million, a decrease of 2%
from $26.0 million in the first nine months of 1999. The decreases were
attributable to a lower yield on average interest-earning assets and an increase
in cost of funds.
The yield on interest-earning assets was 21.96% in the third quarter of 2000,
compared to 23.93% in the third quarter of 1999. For the first nine months of
2000, the yield on interest-earning assets was 22.46% compared to 23.63% for the
first nine months of 1999. The decrease in yield reflects a more competitive
program for our dealers.
The cost of interest-bearing liabilities increased to 10.22% for the third
quarter of 2000 from 9.14% for the third quarter of 1999 and increased to 9.96%
for the first nine months of 2000, compared with 8.97% for the first nine months
of 1999. The increase was primarily attributable to general interest rate
increases on the Company's variable rate lines of credit. Additionally, the
Company has reduced its exposure to variable interest rates through the issuance
of two series of asset backed notes with fixed interest rates. The Company
continues to explore ways to reduce its interest-rate risk and the overall cost
of interest bearing liabilities.
16
<PAGE>
TFC ENTERPRISES, INC.
Net interest revenue, net interest spread, and net interest margin were as
follows for the three and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average interest earning assets (a) $ 230,369 $ 209,446 $ 224,884 $200,624
Average interest bearing liabilities 177,246 166,849 142,356
---------------------------------------------------------------------------------------------------------------------
Net interest earning assets $ 53,123 $ 60,706 $ 58,035 $ 58,268
=====================================================================================================================
Interest and other finance revenue $ 12,646 $ 12,529 $ 37,880 $ 35,555
Interest expense 4,530 3,398 12,579 9,575
---------------------------------------------------------------------------------------------------------------------
Net interest revenue $ 8,116 $ 9,131 $ 25,301 $ 25,980
=====================================================================================================================
Yield on interest-earning assets 21.96% 23.93% 22.46% 23.63%
Cost of interest-bearing liabilities 10.22 9.14 9.96 8.97
---------------------------------------------------------------------------------------------------------------------
Net interest spread 11.74% 14.79% 12.50% 14.66%
=====================================================================================================================
Net interest margin (b) 14.09% 17.44% 15.00% 17.27%
=====================================================================================================================
</TABLE>
(a) Gross contract receivables net of unearned interest revenue. Net interest
margin is annualized net interest revenue divided by average interest-
earning assets.
(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 11.54% for the third quarter of 2000 from 11.82%
for the third quarter of 1999 and increased to 12.18% for the first nine months
of 2000 from 11.95% for the first nine months of 1999. The decrease in the ratio
for the three month period over the comparable prior period is primarily
attributable to economies of scale realized through the relocation of the
Company's Jacksonville, Florida servicing facilities to Norfolk, Virginia during
the first quarter of 2000. The increase in the ratio for the nine month period
over the comparable period in the prior year is attributable to one time costs
incurred to effect this relocation of the servicing facilities.
Provision for income taxes
The effective tax rate for the third quarter and first nine months 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.
17
<PAGE>
TFC ENTERPRISES, INC.
Financial Condition
-------------------
Assets
Total assets increased by $40.2 million, or 19.3%, to $248.7 million at
September 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 September 30, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
(in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Auto finance:
Point-of-sale $ 129,147 $ 116,849
Bulk 48,001 45,672
Consumer finance 24,520 19,518
-------------------------------------------------------------------------------------------------------
Total $ 201,668 $ 182,039
=======================================================================================================
</TABLE>
Liabilities
Total liabilities were $203.6 million at September 30, 2000,an increase of $36.9
million, or 22.1%, 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
---------------------------
Charge off and reserves
Auto finance contract receivables- Net charge-offs
Net charge-offs to the allowance for credit losses and nonrefundable dealer
reserve were $9.0 million in the third quarter of 2000, representing an
annualized rate of 17.6% of average contract receivables net of unearned
interest revenue. This compares to $6.8 million, or 14.2%, in the third quarter
of 1999. For the first nine months of 2000, net charge-offs were $25.5 million,
or 16.8%, of average contract receivables net of unearned interest revenue. This
compares to $19.9 million, or 14.5%, of average contract receivables net of
unearned interest revenue in the first nine months of 1999. The increase in net
charge-offs in the third quarter of 2000 and first nine months of 2000, relative
to the comparable periods of 1999, was due primarily to previously reported
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 on both a bulk and point-of-sale
basis. A portion of the discount represents anticipated credit loss and, based
upon projected loss experience, is held in a nonrefundable dealer reserve
against which credit losses will first be applied. The remaining portion, if
any, of the discount is recorded as unearned discount and accreted to income
using the interest method over the contractual life of the related
18
<PAGE>
TFC ENTERPRISES, INC.
receivables. Additional provision for credit losses, if necessary, are charged
to income in amounts sufficient to maintain the combined allowance for credit
losses and reserves at an amount considered by management to be adequate to
absorb estimated future credit losses.
A provision for credit losses, if any, 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 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. If necessary, any assumptions used will be changed in the future to
reflect historical experience to the extent it deviates materially from that
which was assumed. In September 2000, $1.8 million was reclassified from
unearned discount to non-refundable reserves to address the increased charge-
off. This reclassification reduces the amount of unearned discount to be
accreted to income over the contractual life of the related receivables, which
impacts future interest revenue.
At September 30, 2000, the combination of TFC's allowance for credit losses,
nonrefundable dealer reserve and unearned discount totaled $23.7 million, or
11.4%, 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. Based on the static pool reserve methodology described
above, management believes reserves are adequate to cover the estimated future
losses net of estimated future recoveries.
TFC's refundable dealer reserve, is also available to absorb losses relating to
contracts purchased from certain dealers. 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. Refundable dealer reserves totaled $2.1 million at September 30,
2000 and $1.5 million at December 31, 1999.
The reserves as a percentage of gross auto finance contract receivables net of
unearned interest at September 30, 2000, of 11.4% are less than net charge-offs
as a percentage of average net contract receivables for the nine months ended
September 30, 2000, of 16.8% 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.
19
<PAGE>
TFC ENTERPRISES, INC.
Consumer finance charge-offs, provision for credit losses and reserves
Net charge-offs to the allowance for credit losses were $0.2 million in the
third quarter of 2000 and $0.1 million for the third quarter 1999, representing
an annualized rate of 2.6% and 3.0% of average gross contract receivables net of
unearned interest revenue, respectively. For the first nine months of 2000 and
1999, net charge-offs to the allowance for credit losses were $0.5 million and
$0.4 million, representing an annualized rate of 2.9%. The provision for credit
losses was $0.1 for the third quarter of 2000 and 1999 and the allowance for
credit losses was $1.1 million or 5.1% and $0.8 million or 3.8% of outstanding
gross contract receivables at September 30, 2000 and December 31, 1999,
respectively. Management has established the level of allowance that it
considers to be adequate based on the consumer finance segment's experience
through September 30, 2000.
Charge-offs net of recoveries, by line of business, for the three and nine
months ended September 30, 2000 and 1999, were as follows:
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------------------------------
(in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------
Auto finance:
Point-of-sale $ 5,433 $ 4,628 $14,591 $11,789
Bulk 3,587 2,163 10,879 8,107
Consumer finance 156 139 473 378
------------------------------------------------------------------------------
Total $9,176 $ 6,930 $ 25,943 $ 20,274
==============================================================================
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $14.7 million, or 5.95% of gross auto finance contract receivables at
September 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 $22.0 million, or 8.92% of gross auto finance contract receivables at
September 30, 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
$0.7 million, or 2.70% of gross receivables at September 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 4.52% of gross
receivables at September 30, 2000, compared to $0.9 million, or 4.36% at
December 31, 1999.
Delinquency at September 30, 2000 and December 31, 1999 was as follows:
Sept. 30, Dec. 31,
(in thousands) 2000 1999
--------------------------------------------------------------------------------
Gross contract receivables 274,242 257,391
Gross contract receivables 60+ days and over delinquent
Gross contract amount $ 15,443 $ 15,528
Percent of total gross contract receivables 5.63% 6.03%
Gross contract receivables 30+ days and over delinquent
Gross contract amount $ 23,256 $ 23,525
Percent of total gross contract receivables 8.48% 9.14%
20
<PAGE>
TFC ENTERPRISES, INC.
Liquidity and Capital Resources
-------------------------------
Liquidity management
As shown on the Consolidated Statements of Cash Flows, cash and cash equivalents
decreased by $1.1 million in the first nine months of 2000, to $1.2 million at
September 30, 2000. The decrease reflected $35.8 million of net cash provided by
financing activities and $4.3 million of net cash provided by operating
activities, offset by $41.1 million of net cash used in investing activities.
Net cash provided by financing activities reflected a net decrease in borrowings
on the revolving lines of credit, because the net proceeds from the issuance of
$5.0 million of subordinated notes in August 2000 and the issuance of $81.0
million of assets backed notes in September 2000, were used to pay down the
lines of credit. For the first nine months of 1999, net cash reflected $17.8
million of cash provided by financing activities and $9.4 million of net cash
provided by operating activities, offset by $26.5 million of net cash used in
financing. Cash provided by financing activities primarily reflected $17.8
million of net borrowings on the Company's revolving lines of credit to fund the
increase in net contracts receivable.
TFC Receivables Corporation III (TRCIII), a wholly-owned special purpose
subsidiary of TFC, was formed in September 2000 to facilitate an asset-backed
financing transaction. In this transaction, TRCIII issued $81.0 million of 7.36%
Automobile Receivables-Backed Notes, Series 2000-1. Proceeds from the issuance
were used to purchase certain assets from TFC which collateralize the notes. At
September 30, 2000, TRCIII had total assets of $93.7 million, of which $70.1
million represented net contract receivables, $22.0 million represented
restricted cash and $1.6 million represented other assets which primarily
included deferred charges. Restricted cash includes $15.2 million held in trust
for payment on October 15, 2000, the first distribution date. This amount
represents the cash collections from the June 30, 2000 cut-off date through the
closing date of September 30, 2000 on accounts included in the transaction. All
of the assets of TRCIII have been pledged as collateral on the 7.36% Automobile
Receivables-backed Notes. None of the assets of TRCIII is available to pay other
creditors of the Company or its affiliates. This transaction was treated as a
financing for financial reporting purposes in the Company's consolidated
financial statements.
In both the first nine 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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports of Form 8-K
(a) Exhibits
10.1 Purchase Agreement between The Finance Company and TFC Receivables
Corporation III dated September 26, 2000.
10.2 Sale and Servicing Agreement among The Finance Company, TFC
Automobile Receivables Trust 2000-1, TFC Receivables Corporation
III, Wells Fargo Bank Minnesota, National Association and Wells
Fargo Financial America, Inc. dated September 26, 2000.
10.3 Indenture between Wells Fargo Norwest Bank Minnesota, National
Association and TFC Automobile Receivables Trust 2000-1 dated
September 26, 2000.
10.4 Insurance and Indemnity Agreement among The Finance Company,
Financial Security Assurance Inc., TFC Automobile Receivables Trust
2000-1, TFC Receivables Corporation III, Wells Fargo Financial
America Inc., and Wells Fargo Bank Minnesota, National Association
dated September 26, 2000.
10.5 Note purchase agreement between The Finance Company and N M
Rothschild & Sons Limited dated August 24, 2000.
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.
22
<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: November 14, 2000 By: /s/ Robert S. Raley Jr.
------------------------
Robert S. Raley, Jr.
Chairman, President,
Chief Executive Officer and
Director
Date: November 14, 2000 By: /s/ Craig D. Poppen
--------------------
Craig D. Poppen
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial Officer
of the registrant)
23
<PAGE>
Index to Exhibits
Exhibit No. Description
10.1 Purchase Agreement between The Finance Company and TFC
Receivables Corporation III dated September 26, 2000.
10.2 Sale and Servicing Agreement among The Finance Company, TFC
Automobile Receivables Trust 2000-1, TFC Receivables
Corporation III, Wells Fargo Bank Minnesota, National
Association and Wells Fargo Financial America, Inc. dated
September 26, 2000.
10.3 Indenture between Wells Fargo Norwest Bank Minnesota, National
Association and TFC Automobile Receivables Trust 2000-1 dated
September 26, 2000.
10.4 Insurance and Indemnity Agreement among The Finance Company,
Financial Security Assurance Inc., TFC Automobile Receivables
Trust 2000-1, TFC Receivables Corporation III, Wells Fargo
Financial America Inc., and Wells Fargo Bank Minnesota,
National Association dated September 26, 2000.
10.5 Note purchase agreement between The Finance Company and N M
Rothschild & Sons Limited dated August 24, 2000.
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only and
not filed.
24
