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THIS REPORT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION VIA EDGAR
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
Commission File No. 0-22910
T F C E N T E R P R I S E S, I N C.
(Exact name of registrant as specified in its charter)
Delaware 54-1306895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5425 Robin Hood Road
Suite 101 B
Norfolk, Virginia 23513
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (757) 858-1400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
---- -------
As of August 13, 2002, there were 11,541,033 outstanding shares of the
registrant's $.01 par value per share common stock.
TFC ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
Table of Contents and 10-Q Cross Reference Index
Part I - Financial Information Page No.
- ------------------------------ --------
Financial Highlights 3
Financial Statements- unaudited (Item 1)
Consolidated Balance Sheets 4
Consolidated Statements of Income 5-6
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
Quantitative and Qualitative Disclosures about Market Risk (Item 3) 21
Part II - Other Information
- ---------------------------
Exhibits and Reports on Form 8-K (Item 6) 22
Signatures 23
Index to Exhibits 24
2
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of change in accounting principle $ 743 $ 1,679 $ 1,783 $ 2,978
Cumulative effect of change in accounting principle -- -- $(6,777) --
Net (loss) income $ 743 $ 1,679 $(4,994) $ 2,978
Net income per basic common share before cumulative effect of change
in accounting principle $ 0.06 $ 0.15 $ 0.15 $ 0.26
Net income per diluted common share before cumulative effect of
change in accounting principle $ 0.06 $ 0.14 $ 0.15 $ 0.25
Net (loss) income per basic common share $ 0.06 $ 0.15 $( 0.43) $ 0.26
Net (loss) income per diluted common share $ 0.06 $ 0.14 $( 0.42) $ 0.25
Average common shares outstanding (in thousands) 11,539 11,457 11,537 11,454
- ---------------------------------------------------------------------------------------------------------------------------------
Performance ratios (annualized, as appropriate)
Return on average common equity (b) 5.66% 13.98% 6.85% 12.60%
Return on average assets (b) 1.27 2.56 1.50 2.28
Yield on interest-earning assets 18.98 20.77 19.04 21.15
Cost of interest-bearing liabilities 8.45 9.91 8.51 10.11
Net interest margin 12.11 13.03 12.18 13.25
Operating expense as a percentage of average interest-earning assets 9.37 9.02 9.18 9.74
Total net charge-offs to average
gross contract receivables, net of unearned interest 13.04 13.68 14.98 14.35
60+ days delinquencies to period-end gross contract receivables 4.58 5.60 4.58 5.60
30+ days delinquencies to period-end gross contract receivables 6.98 8.48 6.98 8.48
Total allowance, nonrefundable reserve and unearned discount to
period end gross contract receivables,
net of unearned interest 5.31 9.97 5.31 9.97
Equity to assets, period end (b) 23.75 18.65 23.75 18.65
- ---------------------------------------------------------------------------------------------------------------------------------
Average balances:
Interest-earning assets (a) $210,614 $259,342 $218,023 $259,186
Total assets 226,693 262,476 231,010 260,823
Interest-bearing liabilities 171,159 202,487 175,697 202,379
Equity (b) 52,481 48,038 52,050 47,290
- ---------------------------------------------------------------------------------------------------------------------------------
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) Before cumulative effect of change in accounting principle.
3
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
- ----------------------------------------------------------------------------------------
(in thousands, except share amounts) 2002 2001(a)
- ----------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,378 $ 422
Restricted cash 15,924 23,176
Net contract receivables 191,643 209,291
Equipment and leasehold improvements, net 1,860 2,094
Intangible assets, net 817 7,770
Other assets 4,184 4,033
- ----------------------------------------------------------------------------------------
Total assets $ 215,806 $246,786
========================================================================================
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $ 78,218 $117,751
Automobile receivables-backed notes 69,413 55,056
Subordinate notes and other term debt 12,957 12,927
Accounts payable and accrued expenses 2,006 2,989
Income taxes payable and other liabilities 6,633 6,254
Refundable dealer reserve 485 728
- ----------------------------------------------------------------------------------------
Total liabilities 169,712 195,705
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,541,033 and 11,534,890 shares issued and
outstanding, respectively 51 51
Additional paid-in capital 56,194 56,187
Accumulated deficit (10,151) (5,157)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 46,094 51,081
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 215,806 $246,786
========================================================================================
See accompanying Notes to Consolidated Financial Statements.
(a) Numbers are extracted from audited information.
4
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six months ended
June 30,
- --------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------
Interest and other finance revenue $ 20,755 $27,404
Interest expense 7,478 10,232
- --------------------------------------------------------------------------------------------------
Net interest revenue 13,277 17,172
Provision for credit losses 1,179 522
- --------------------------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 12,098 16,650
- --------------------------------------------------------------------------------------------------
Other revenue:
Commissions on ancillary products 373 400
Other 423 656
- --------------------------------------------------------------------------------------------------
Total other revenue 796 1,056
- --------------------------------------------------------------------------------------------------
Total net interest and other revenue 12,894 17,706
- --------------------------------------------------------------------------------------------------
Operating expense:
Salaries 4,950 6,608
Employee benefits 1,055 1,248
Occupancy 634 575
Equipment 656 762
Amortization of intangible assets 149 555
Other 2,560 2,877
- --------------------------------------------------------------------------------------------------
Total operating expense 10,004 12,625
- --------------------------------------------------------------------------------------------------
Income before income taxes 2,890 5,081
Provision for income taxes 1,107 2,103
- --------------------------------------------------------------------------------------------------
Net income before cumulative effect of change in accounting principle 1,783 2,978
- --------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting principle (Note 5) (6,777) --
- --------------------------------------------------------------------------------------------------
Net (loss) income $(4,994) $ 2,978
==================================================================================================
Net income per common share before cumulative effect of change in
accounting principle:
Basic $ 0.15 $ 0.26
Diluted $ 0.15 $ 0.25
Cumulative effect of change in accounting principle:
Basic $ (0.58) --
Diluted $ (0.57) --
Net (loss) income per common share
Basic $ (0.43) $ 0.26
Diluted $ (0.42) $ 0.25
See accompanying Notes to Consolidated Financial Statements
5
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
June 30, June 30,
- ------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001
- ------------------------------------------------------------------------------
Interest and other finance revenue $9,995 $13,464
Interest expense 3,617 5,017
- ------------------------------------------------------------------------------
Net interest revenue 6,378 8,447
- ------------------------------------------------------------------------------
Provision for credit losses 611 324
- ------------------------------------------------------------------------------
Net interest revenue after provision for credit losses 5,767 8,123
Other revenue:
Commissions on ancillary products 159 225
Other 201 346
- ------------------------------------------------------------------------------
Total other revenue 360 571
- ------------------------------------------------------------------------------
Total net interest and other revenue 6,127 8,694
Operating expense:
Salaries 2,408 3,062
Employee benefits 493 529
Occupancy 367 289
Equipment 321 349
Amortization of intangible assets 75 278
Other 1,271 1,342
- ------------------------------------------------------------------------------
Total operating expense 4,935 5,849
- ------------------------------------------------------------------------------
Income before income taxes 1,192 2,845
Provision for income taxes 449 1,166
- ------------------------------------------------------------------------------
Net income $ 743 $ 1,679
- ------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.06 $ 0.15
Diluted $ 0.06 $ 0.14
See accompanying Notes to Consolidated Financial Statements.
6
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Six months ended
June 30,
- ------------------------------------------------------------------
(in thousands) 2002 2001
- ------------------------------------------------------------------
Common stock
Balance at beginning and end of period $ 51 $ 50
==================================================================
Additional paid-in capital
Balance at beginning of period $ 56,187 $ 56,105
Stock options exercised 7 8
- ------------------------------------------------------------------
Balance at end of period $ 56,194 $ 56,113
==================================================================
Accumulated deficit
Balance at beginning of period $ (5,157) $(10,233)
Net income (loss) (a) (4,994) 2,978
- ------------------------------------------------------------------
Balance at end of period $(10,151) $ (7,255)
==================================================================
(a) There are no adjustments to net income to determine comprehensive
income for the periods presented.
See accompanying Notes to Consolidated Financial Statements.
7
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
- ----------------------------------------------------------------------------------------------
(in thousands) 2002 2001
- ----------------------------------------------------------------------------------------------
Operating activities
Net (loss) income $ (4,994) $ 2,978
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Gain on sale of branch 28 --
Amortization of intangible assets 149 555
Cumulative effect of change in accounting principle 6,777 --
Depreciation and other amortization 1,816 1,329
Provision for credit losses 1,179 522
Provision for deferred income taxes 2,294 (230)
Changes in operating assets and liabilities:
Increase in other assets (1,589) (2,417)
(Decrease) increase in accounts payable and accrued expenses (983) 2
(Decrease) increase in income taxes payable and other liabilities (1,915) 2,738
Decrease in refundable dealer reserve (243) (1,098)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,519 4,379
- ----------------------------------------------------------------------------------------------
Investing activities
Net cost of acquiring contract receivables (39,722) (73,183)
Repayment on contract receivables 56,191 68,623
Purchase of equipment and leasehold improvements (140) (211)
Decrease (increase) in restricted cash 7,252 (5,423)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 23,581 (10,194)
- ----------------------------------------------------------------------------------------------
Financing activities
Net payments on revolving lines of credit (39,533) (13,969)
Net borrowings on other debt 25 228
Borrowings on automobile receivables-backed notes 64,552 60,225
Payments on automobile receivables-backed notes (50,195) (41,635)
Proceeds from stock options exercised 7 8
- ----------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (25,144) 4,857
- ----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 956 (958)
Cash and cash equivalents at beginning of period 422 1,603
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,378 $ 645
==============================================================================================
See accompanying Notes to Consolidated Financial Statements.
8
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 with two primary wholly-owned
subsidiaries, The Finance Company ("TFC") and First Community Finance, Inc.
("FCF"). TFCE has no significant operations of its own. TFC specializes in
purchasing and servicing installment sales contracts originated by automobile
and motorcycle dealers involved in the sale of new and used automobiles, vans,
light trucks, and motorcycles (collectively "vehicles") on an individual basis
("point-of-sale" purchase). Based in Norfolk, Virginia, TFC also has contract
production offices throughout the United States. FCF specializes in the direct
origination and servicing of small consumer loans. FCF operates branches
throughout Virginia and North Carolina.
Basis of presentation
The unaudited consolidated financial statements of the Company are prepared in
accordance with accounting principles generally accepted in the United States of
America 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 2001 Annual Report on Form 10-K/A. 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
including a one-time charge for impairment of goodwill. Operating results for
the three and six months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 2002.
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, 2002, and
December 31, 2001:
June 30, Dec. 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------
Contract receivables:
Auto finance $ 217,945 $ 248,048
Consumer finance 26,432 28,616
Other 1,096 1,806
- -------------------------------------------------------------------
Gross contract receivables 245,473 278,470
Less:
Unearned interest revenue 41,022 45,236
Unearned discount 1,331 2,622
Unearned commissions 1,025 1,196
Unearned service fees, net of costs 932 1,040
Payments in process (6) 5,312
Allowance for credit losses 1,180 971
Nonrefundable reserve 8,346 12,802
- -------------------------------------------------------------------
Net contract receivables $ 191,643 $ 209,291
===================================================================
9
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, 2002 and 2001 were as follows:
Three months ended Six months ended
June 30, June 30,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001 2001 2001
- --------------------------------------------------------------------------------
Balance at beginning of period $ 10,818 $ 23,046 $ 13,773 $ 22,945
Provision for credit losses 611 324 1,179 522
Allocation for credit losses 4,959 6,373 10,905 15,817
Charge-offs (8,629) (10,496) (19,799) (21,750)
Recoveries 1,767 1,628 3,468 3,341
- --------------------------------------------------------------------------------
Balance at end of period $ 9,526 $ 20,875 $ 9,526 $ 20,875
================================================================================
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, 2002 and 2001 were as follows:
Three months ended Six months ended
June 30, June 30,
- --------------------------------------------------------------------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Numerator:
Net income before cumulative
effect of change in accounting
principle $ 734 $ 1,679 $ 1,783 $ 2,978
Cumulative effect of change in
accounting principle $ - $ - $(6,777) $ -
Net (loss) income 743 1,679 (4,994) 2,978
- --------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per
share-weighted-average shares 11,539 11,457 11,537 11,454
----------------------------------------
Effect of dilutive securities:
Employee stock options 31 55 19 43
Warrants 435 421 394 326
----------------------------------------
Dilutive potential common
shares 466 476 413 369
----------------------------------------
Denominator for diluted earnings
per share-adjusted weighted-
average shares and assumed
conversions 12,005 11,933 11,950 11,823
- --------------------------------------------------------------------------------
Basic earnings per share before
cumulative effect of change in
accounting principle $ 0.06 $ 0.15 $ 0.15 $ 0.26
Diluted earnings per share before
cumulative effect of change in
accounting principle $ 0.06 $ 0.14 $ 0.15 $ 0.25
Basic earnings per share $ 0.06 $ 0.15 $ (0.43) $ 0.26
Diluted earnings per share $ 0.06 $ 0.14 $ (0.42) $ 0.25
10
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 new and used automobiles, vans, light trucks,
and 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 were
acquired through the purchase of dealer portfolios which was phased out in March
2001. Through FCF, the consumer finance segment, the Company is involved in the
direct origination and servicing of small consumer loans through a branch
network in Virginia and North Carolina. The other column consists of smaller
subsidiaries and corporate support functions not allocated to either of the
business segments. All revenue is generated from external customers in the
United States.
11
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 as presented in the annual report at December
31, 2001.
- ---------------------------------------------------------------------
(in thousands) Auto Consumer
Finance Finance Other Total
- ---------------------------------------------------------------------
Three months ended
June 2002
Interest revenues $ 8,407 $ 1,533 $ 55 $ 9,995
-----------------------------------------
Interest expense $ 3,360 $ 245 $ 12 $ 3,617
-----------------------------------------
Income (loss) before taxes: $ 1,436 $ (5) $(85) $ 1,346
Unallocated amounts:
Intangible amortization (70)
Corporate expenses (84)
---------
Consolidated income before
taxes $ 1,192
-----------------------------------------
Net contract receivables $166,701 $23,962 $ 980 $191,643
Other assets 24,163
---------
Total assets $215,806
-----------------------------------------
--------------------------------------------------------------------
Auto Consumer
Finance Finance Other Total
- ---------------------------------------------------------------------
Three months ended
June 2001
Interest revenues $ 11,704 $ 1,566 $ 194 $ 13,464
-----------------------------------------
Interest expense $ 4,563 $ 404 $ 50 $ 5,017
-----------------------------------------
Income (loss) before taxes: $ 3,071 $ 126 $ 18 $ 3,215
Unallocated amounts:
Intangible amortization (273)
Corporate expenses (97)
---------
Consolidated income before
taxes $ 2,845
-----------------------------------------
Net contract receivables $193,697 $26,528 $2,407 $222,632
Other assets 39,583
---------
Total assets $262,215
-----------------------------------------
12
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
4. Segments (continued)
- ----------------------------------------------------------------------
(in thousands) Auto Consumer
Finance Finance Other Total
- ----------------------------------------------------------------------
Six months ended June 2002
Interest revenues $ 17,578 $ 3,049 $ 128 $ 20,755
-----------------------------------------
Interest expense $ 6,957 $ 493 $ 28 $ 7,478
-----------------------------------------
Income (loss) before taxes: $ 3,263 $ (13) $(65) $ 3,185
Unallocated amounts:
Intangible amortization (139)
Corporate expenses (156)
---------
Consolidated income before
taxes and cumulative effect
of change in accounting
principle $ 2,890
-----------------------------------------
Net contract receivables $166,701 $23,962 $ 980 $191,643
Other assets 24,163
---------
Total assets $215,806
-----------------------------------------
- ----------------------------------------------------------------------
Auto Consumer
Finance Finance Other Total
- ----------------------------------------------------------------------
Six months ended June 2001
Interest revenues $ 23,825 $ 3,090 $ 489 $ 27,404
-----------------------------------------
Interest expense $ 9,229 $ 876 $ 127 $ 10,232
-----------------------------------------
Income (loss) before taxes: $ 5,777 $ 221 $(124) $ 5,874
Unallocated amounts:
Intangible amortization (546)
Corporate expenses (247)
---------
Consolidated income before
taxes $ 5,081
-----------------------------------------
Net contract receivables $193,697 $26,528 $2,407 $222,632
Other assets 39,583
---------
Total assets $262,215
-----------------------------------------
13
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
5. Accounting Change
Effective January 1, 2002, the Company adopted FASB Statement Number 142,
Goodwill and Other Intangible Assets. As of June 30, 2002, the Company has
determined the impairment of goodwill is $6.8 million and is recorded as a
change in accounting principle. Among its provisions is a requirement to
disclose what reported net income would have been in all periods presented
exclusive of amortization expense (net of related income tax effects) recognized
in those periods related to goodwill, intangible assets no longer being
amortized, and changes in amortization periods for intangible assets that will
continue to be amortized together with related per share amounts. Per FAS 142,
no amortization expense was recognized in relation to goodwill for the first or
second quarter of 2002 compared to $0.4 million for the first six months of
2001. Additionally, net income as of March 31, 2002 has been restated to reflect
the cumulative effect of change in accounting principle. The effect of this
change in accounting principle for the three-months ended March 31, 2002
resulted in an increase in accumulated deficit and a decrease in net income of
$6.8 million, to a net loss of $5.8 million.
6. Subsequent Event
In June 2001, THE Finance Company completed a $75 million warehouse facility for
the interim financing of motor vehicle retail installment contracts. The
facility has an expiration date of January 1, 2004 with an option to extend for
one year. Interest on the facility is LIBOR plus 250 basis points. The
transaction was completed with Westside Funding Corporation, a special purpose
funding vehicle administered by Westdeutsche Landesbank Girozentrale, New York
Branch (WestLB). WestLB will assist TFC as placement agent for structuring
Securitization Transactions from the related collateral in the warehouse
facility. In July 2002, THE Finance Company (TFC), renegotiated this warehouse
credit facility. Under the amended facility the line changed from $75 million to
$40 million and expires July 2003.
14
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 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: the inability of the
Company to obtain favorable credit facilities to replace its current facility
with its principal lender, a rise in interest rates, inability to finance
through the securitization market, 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 (loss) income and earnings per basic common share
Net income for the second quarter of 2002 was $0.7 million, or $0.06 per basic
common share, compared to net income of $1.7 million, or $0.15 per basic common
share, in the second quarter of 2001. Net income before cumulative effect of
change in accounting principle for the first six months of 2002 decreased to
$1.8 million, or $0.15 per basic common share, compared to net income of $3.0
million, or $0.26 per basic common share, for the first six months of 2001. Net
(loss) income for the first six months of 2002 decreased to $(5.0) million, or
$(0.43) per basic common share, compared to net income of $3.0 million, or $0.26
per basic common share, for the first six months of 2001.
Effective January 1, 2002, the Company adopted FASB Statement Number 142,
Goodwill and Other Intangible Assets. As of June 30, 2002, the Company has
determined the impairment of goodwill is $6.8 million and is recorded as a
change in accounting principle. Among its provisions is a requirement to
disclose what reported net income would have been in all periods presented
exclusive of amortization expense (net of related income tax effects) recognized
in those periods related to goodwill, intangible assets no longer being
amortized, and changes in amortization periods for intangible assets that will
continue to be amortized together with related per share amounts. Per FAS 142,
no amortization expense was recognized in relation to goodwill for the first or
second quarter of 2002 compared to $0.4 million for the first six months of
2001. Additionally, net income as of March 31, 2002 has been restated to reflect
the cumulative effect of change in accounting principle. The effect of this
change in accounting principle for the three-months ended March 31, 2002
resulted in an increase in accumulated deficit and a decrease in net income of
$6.8 million, to a net loss of $5.8 million.
Volume
Gross contracts purchased or originated totaled $34.5 million in the second
quarter of 2002, compared to $55.6 million purchased in the second quarter of
2001. For the first six months of 2002, gross contracts purchased or originated
totaled $70.9 million compared to the $128.4 million purchased during the first
six months of 2001. As previously announced, the Company ceased purchasing
contracts in bulk acquisitions in March 2001. Point of Sale contract purchases
volume is down as a result of increased competition for the military contract
purchases and a more selective buying program in the company's non-military
purchases because of limited funding advances available under the Company's
credit facilities. First Community Finance business volume has been affected by
less consumer interest since September 11, 2001 resulting in lower volume for
the quarter.
15
TFC ENTERPRISES, INC.
Gross contracts purchased or originated were as follows for the three and six
months ended June 30, 2002 and 2001: Three months ended Six months ended
June 30, June 30,
- -------------------------------------------------------------------------------
(in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------
Contracts purchased or originated:
Auto finance:
Point-of-sale $25,756 $45,116 $57,204 $ 96,849
Bulk -- 132 -- 13,651
Consumer finance 8,738 10,313 13,713 17,877
- -------------------------------------------------------------------------------
Total $34,494 $55,561 $70,917 $128,377
===============================================================================
Number of contracts purchased or originated:
Auto finance:
Point-of-sale 1,670 3,191 3,841 8,511
Bulk -- 25 -- 622
Consumer finance 4,044 5,042 6,264 8,257
- -------------------------------------------------------------------------------
Total 5,714 8,258 10,105 17,390
===============================================================================
Net interest revenue
The yield on interest-earning assets was 18.98% in the second quarter of 2002,
compared to 20.77% in the second quarter of 2001. For the first half of 2002,
the yield on interest-earning assets was 19.04% compared to 21.15% for the first
half of 2001. The decrease in yield reflects a more competitive program for our
military dealers while continuing to maintain prudent underwriting standards as
well as a decrease in the bulk portfolio, which carried a higher yield. During
the second and first quarter of 2002, $0.4 million and $0.5 million,
respectively was not accreted to income but rather reclassified to nonrefundable
reserve. The reclassification was due to the uncertain economic conditions. This
reclassification also allows the company to maintain reserves at adequate
levels. In comparison, during the first and second quarter of 2001, $1.2 million
and $1.4 million, respectively was accreted to income from unearned discount.
The cost of interest-bearing liabilities decreased to 8.45% for the second
quarter of 2002 from 9.91% for the second quarter of 2001 and decreased to 8.51%
for the first six months of 2002, compared with 10.11% for the first six months
of 2001. Provided there are no increases in interest rates during 2002, the
Company anticipates it will further benefit from the many recent interest rate
reductions.
16
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, 2002 and 2001:
Three months ended Six months ended
June 30, June 30,
- --------------------------------------------------------------------------------
(in thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------
Average interest -earning assets (a) $210,614 $259,342 $218,023 $259,186
Average interest-bearing liabilities 171,159 202,487 175,697 202,379
- --------------------------------------------------------------------------------
Net interest earning assets $ 39,455 $ 56,855 $ 42,326 $ 56,807
================================================================================
Interest and other finance revenue $ 9,995 $ 13,464 $ 20,755 $ 27,404
Interest expense 3,617 5,017 7,478 10,232
- --------------------------------------------------------------------------------
Net interest revenue $ 6,378 $ 8,447 $ 13,277 $ 17,172
================================================================================
Yield on interest-earning assets 18.98% 20.77% 19.04% 21.15%
Cost of interest-bearing liabilities 8.45 9.91 8.51 10.11
- --------------------------------------------------------------------------------
Net interest spread 10.53% 10.86% 10.53% 11.04%
================================================================================
Net interest margin (b) 12.11% 13.03% 12.18% 13.25%
================================================================================
(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, increased to 9.37% for the second quarter of 2002 from 9.02%
for the second quarter of 2001 and decreased to 9.18% for the first six months
of 2002 from 9.74% for the first six months of 2001. Additionally, per FAS 142,
no amortization expense was recognized in relation to goodwill for the first or
second quarter of 2002 compared to $0.4 million for the first six months of
2001.
Provision for income taxes
The effective tax rate for the second quarter and first half of 2002 of
approximately 38% and the second quarter and first half of 2001 of approximately
41% 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
TFC ENTERPRISES, INC.
Financial Condition
-------------------
Assets
Total assets decreased by $31.0 million, or 12.6%, to $215.8 million at June 30,
2002, from $246.8 million at December 31, 2001. The decrease was primarily
attributable to a decrease in net contract receivables and the decrease of
goodwill due to impairment.
Net contract receivables were as follows at June 30, 2002 and December 31, 2001:
June 30, Dec. 31,
(in thousands) 2002 2001
--------------------------------------------------------------------------
Auto finance:
Point-of-sale $ 152,023 $ 156,737
Bulk 14,678 24,725
Consumer finance 24,942 27,829
--------------------------------------------------------------------------
Total $ 191,643 $ 209,291
==========================================================================
Liabilities
Total liabilities were $169.7 million at June 30, 2002, a decrease of $26.0
million, or 13.2%, from $195.7 million at December 31, 2001. The decrease in
liabilities was primarily attributable to decreased borrowings under the
Company's credit facilities resulting from the decrease in net contract
receivables.
Credit Quality and Reserves
---------------------------
Auto finance contract receivables- Net charge-offs
Net charge-offs to the allowance for credit losses and nonrefundable dealer
reserve were $6.3 million in the second quarter of 2002, representing an
annualized rate of 13.8% of average contract receivables net of unearned
interest revenue. This compares to $8.0 million, or 14.0%, in the second quarter
of 2001. For the first six months of 2002, net charge-offs were $15.2 million,
or 16.0%, of average contract receivables net of unearned interest revenue. This
compares to $17.0 million, or 14.9%, of average contract receivables net of
unearned interest revenue in the first six months of 2001.
Auto finance contract receivables- Provision for credit losses
TFC's primary business involves purchasing installment sales contracts at a
discount from the principal balance. A portion of this discount represents
anticipated credit loss and based upon projected loss experience, is held in a
nonrefundable reserve against which future credit losses will first be applied.
The remaining portion of the discount, if any, is recorded as unearned discount
and accreted to income using the interest method over the contractual life of
the related receivables. Additional amounts necessary to cover estimated future
credit losses are first reclassified from unearned discount to nonrefundable
reserve then, if necessary, an amount is charged to income sufficient to
maintain the combined allowance for credit losses and nonrefundable reserve at
an amount considered by management to be adequate to absorb estimated future
credit losses on the outstanding contract receivables.
18
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-off, the
amount of nonrefundable and refundable dealer reserves, recoveries from
charged-off accounts and the overall economic conditions in the markets in which
we operate. 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 our
credit losses. This methodology allows us to stratify our 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 estimated loss for each pool year. These combined estimated
losses are reduced by estimated future recoveries that are based on historical
recovery performance to establish the estimated required reserve for credit
losses. Estimates are reviewed regularly and if necessary, will be revised to
reflect historical experience if it deviates materially from the estimates.
At June 30, 2002 the combination of TFC's allowance for credit losses,
nonrefundable dealer reserve and unearned discount totaled $10.9 million, or
5.3%, of contract receivables net of unearned interest revenue. This compares to
$15.1 million, or 7.4%, at December 31, 2001.
TFC's refundable dealer reserve, which is available to absorb losses relating to
contracts purchased from certain dealers, totaled $0.5 million at June 30, 2002
and $0.7 million at December 31, 2001. 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, 2002, of 5.3% are less than net charge-offs as a
percentage of average net contracts receivable for the six months ended June 30,
2002, of 16.0% on an annualized basis. This difference exists primarily because
the reserves include an estimate of future recoveries on prior year charge-off
and future recoveries on current year charge-offs that are not reflected in the
current year charge-offs 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 monthly. In
addition, we have increased our penetration of ancillary products such as
warranty and other products that minimize the loss incurred because of the
difference between the debtors insurance coverage and the contract balance that
occurs when the collateral is a total loss or is stolen. Finally the ratio is
lower due to an increase in the portion of the portfolio with lower expected
loss because of the credit profile of the debtor.
Consumer finance charge-offs, provision for credit losses and reserves (FCF)
Net charge-offs to the allowance for credit losses were $0.4 million in the
second quarter of 2002 and $0.3 million in the second quarter of 2001,
representing an annualized rate of 6.1% and 4.1% of average gross contract
receivables net of unearned interest revenue, respectively. For the first six
months of 2002 and 2001, net charge-offs to the allowance for credit losses were
$0.8 million and $0.5 million, representing an annualized rate of 6.1% and 3.5%,
respectively. The provision for credit losses was $0.5
19
TFC ENTERPRISES, INC.
million for the second quarter of 2002 and $0.3 million for the second quarter
of 2001 and the allowance for credit losses and nonrefundable reserve was $1.3
million or 5.18% and $1.1 million or 3.93% of outstanding gross contract
receivables at June 30, 2002 and December 31, 2001, respectively. Management has
established the level of allowance that it considers to be adequate based on
FCF's experience through June 30, 2002.
Charge-offs net of recoveries, by line of business, for the three and six months
ended June 30, 2002 and 2001, were as follows:
Three months ended Six months ended
June 30, June 30,
---------------------------------------------------------------------------
(in thousands) 2002 2001 2002 2001
---------------------------------------------------------------------------
Auto finance:
Point-of-sale $ 5,939 $ 5,383 $13,595 $11,683
Bulk 404 2,656 1,656 5,380
Consumer finance 408 284 823 476
Other 111 545 257 870
===========================================================================
Total $ 6,862 $ 8,868 $16,331 $18,409
===========================================================================
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $9.8 million, or 4.5% of gross auto finance contract receivables at June
30, 2002, compared to $15.2 million, or 6.1%, at December 31, 2001. Gross auto
finance contract receivables that were 30 days or more past due totaled $15.0
million, or 6.9% of gross auto finance contract receivables at June 30, 2002,
compared to $22.5 million, or 9.1%, at December 31, 2001.
Gross consumer finance receivables, originated by First Community Finance, that
were 60 days or more past due totaled $1.3 million, or 4.8% of gross receivables
at June 30, 2002, compared to $1.3 million, or 4.7% at December 31, 2001. Gross
consumer finance receivables that were 30 days or more past due totaled $1.9
million, or 7.3% of gross receivables at June 30, 2002, compared to $2.0
million, or 6.8% at December 31, 2001.
Delinquency at June 30, 2002 and December 31, 2001 was as follows:
June 30, Dec. 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------------------
Gross contract receivables $245,473 $278,470
Gross contract receivables 60+ days and over delinquent
Gross contract amount $ 11,237 $ 16,732
Percent of total gross contract receivables 4.58% 6.01%
Gross contract receivables 30+ days and over delinquent
Gross contract amount $ 17,146 $ 24,830
Percent of total gross contract receivables 6.98% 8.92%
20
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 2002, to $1.4 million at
June 30, 2002. The increase reflected $23.5 million of net cash provided by
investing activities and $2.6 million of net cash provided by operating
activities, offset by $25.1 million of net cash used in financing activities.
Net cash used in financing activities reflected net payments on the revolving
lines of credit and net borrowings on automobile receivables-backed notes. For
the first six months of 2001, cash and cash equivalents decreased by $1.0
million in the first six months of 2001, to $0.6 million at June 30, 2001. The
decrease reflected $4.9 million of net cash provided by financing activities and
$4.4 million of net cash provided by operating activities, offset by $10.2
million of net cash used in investing activities. Net cash provided by financing
activities reflected net borrowings on the revolving lines of credit and net
borrowings on automobile receivables-backed notes used to fund the increase in
net contract receivables. 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 2002. Management is
currently exploring additional sources of liquidity.
Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
Our operations require substantial borrowing to provide funding for the retail
installment contracts purchased by The Finance Company and originated by First
Community Finance. Consequently, profitability is impacted by the difference
between the rate of interest paid on the funds we borrow and the rate of
interest charged on the retail installment contracts, which rate in some states
is limited by law. The floating interest rate for borrowings under the line of
credit are equal to the average one-month London Interbank Offered Rate, or
LIBOR rate, plus a spread. Thus, future increases in interest rates could
adversely affect our profitability. During 2001 and 2000, we mitigated a
substantial portion of this interest rate risk by the placement of asset backed
securities with fixed interest rates over the anticipated period required for
those receivables to liquidate.
21
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports of Form 8-K
(a) Exhibits
Exhibit 99.1 Statement of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K
None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TFC ENTERPRISES, INC.
(Registrant)
Date: August 13, 2002 By: /s/ Robert S. Raley Jr.
------------------------
Robert S. Raley, Jr.
Chairman, Chief Executive Officer
and Director
Date: August 13, 2002 By: /s/ Ronald G. Tray
-------------------
Ronald G. Tray
President and Chief Financial Officer
23
Index to Exhibits
Exhibit 99.1 Statement of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350.
24