TFC ENTERPRISES, INC.
1998 ANNUAL REPORT
IN MEMORY OF
COL. MATTHEW ADAM CLARY, JR.
U.S.M.C. (RET.)
In 1998, I lost one of my dearest friends and inspiring advisor. Colonel Matthew
A. Clary, who served as General Counsel to TFCE for many years prior to his
retirement, passed away on November 8, 1998. In his memory and for his many
contributions to TFCE, I dedicate the 1998 Annual Report to the Colonel.
Thank you Colonel, so much, for your friendship and advice. You are and will
continue to be missed.
R.S. Raley, Jr.
Chairman of the Board
o Net income increased to $4.0 million, or $0.36 per basic common share.
o Gross contract purchases totaled $218.5 million an increase of 27% over 1997.
o Total net charge-offs to average gross contract receivables, net of unearned
interest decreased to 16.59% from 18.60%.
o 60+ days delinquencies to gross contract receivables, at period-end decreased
from 8.85% from 5.91%.
o Gross contract receivables increased to $225.8 million from $184.2
million in 1997, an increase of 23%.
Gross Contract Volume
[GRAPH]
1996 $133.2
1997 $171.9
1998 $218.5
Net Income
[GRAPH]
1996 ($7.6)
1997 $0.7
1998 $4.0
To our shareholders:
It gives me tremendous pleasure to share our results for 1998. Hard work,
perseverance and adherence to our recovery plan has without a doubt paid off.
Earnings per share soared 500% over 1997. Volume increased by 27% over 1997, 30
day plus and 60 day plus delinquency improved to 8.79% and 5.91% respectively,
from 12.56% and 8.85% at year end 1997. Additionally, we extended our primary
credit facility for two more years. The enthusiasm at TFC Enterprises, Inc.'s
(TFCE) operating companies can be felt throughout the entire organization and is
largely responsible for a tremendous year.
Before we report the numerous accomplishments of 1998, let's look back at the
exciting achievements of the past three years. In the 1995 report to
shareholders, I reported the extremely disappointing results for that year. I
also advised you that I had come out of retirement and would focus my efforts at
improving the Company's operating performance and returning to profitability as
soon as possible. Further, I acknowledged the challenges were enormous, however,
we were confident, given the talent and dedication of the entire TFCE staff,
regarding the future. As a result of the bad news reported for 1995, the Wall
Street analysts pronounced TFCE dead on arrival, delivered our eulogy, and
erected our tombstone.
During 1996, we accomplished what we set out to do. The first step was to
restructure and downsize. Expenses had to be brought into line and operating
results improved. 1996 saw considerable reorganization and significant headway
in cleaning up the delinquency and charge off remaining from 1995. In the 1996
report, the shareholders were told our challenge during 1997 would be to rebuild
profitability, increase volume, improve pricing, lower operating expenses,
improve delinquency, lower charge off and position the Company to reduce our
cost of funds. Even though the results of 1996 improved over 1995, the Wall
Street analysts were not convinced that TFCE could survive.
Well, guess what? Not only did we survive 1997, but substantive progress
was made. One needs only to reread the 1997 annual report to see we
accomplished everything we vowed to do in the 1996 annual report. We:
o Returned to profitability
o Increased purchase volume
o Reduced charge-off and delinquency
o Lowered expenses
o Increased yields on earning assets; and
o Completed a new revolving loan agreement.
Gross Contracts Receivables
[GRAPH]
1996 $187.0
1997 $184.2
1998 $225.8
Did we regain the attention and confidence of the investment community? No! They
still were not convinced that TFCE was healthy. In the 1997 Annual Report,
management stated its objectives for 1998. The Company was to maintain solid
underwriting standards, increase business volume, improve pricing, continue to
reduce delinquency and charge off, improve our cost of funds, increase our
credit lines and increase our capital base.
Once again, we accomplished nearly everything set forth in my letter to
shareholders in the 1997 Annual Report. I am pleased, no I am ecstatic, about
TFCE's accomplishments during 1998. We:
o Increased purchase volume while maintaining underwriting standards
o Increased yields by improving pricing
o Continued to reduce delinquency and
charge off
o Improved our cost of funds; and
o Improved our credit facilities.
We did not bend our underwriting standards, we continued to steer the ship along
the course the Company followed most of its twenty-two year existence. Pricing
was improved resulting in the yields on average earning assets growing from
21.30% during 1997 to 23.08% for 1998. This was accomplished despite continuing
heavy competition.
Business volume grew 27% over 1997 with 1998's volume ending at $218.5 million
compared to $171.9 million for 1997. Both our operating companies, The Finance
Company and First Community Finance, accomplished impressive growth in their
business volume.
60+ Delinquency
[GRAPH]
1996 9.89%
1997 8.85%
1998 5.91%
Delinquency once again was reduced significantly. The sixty day and over
delinquency fell from 8.85% at year end 1997 to 5.91% at year end 1998. This
reflects a 33% improvement. Net loans charged off as a percentage of average net
receivables ended 1998 at 16.59% as compared to same period 1997 at 18.60%. This
represents an 11.00% improvement.
Net Charge-Offs
[GRAPH]
1996 22.25%
1997 18.60%
1998 16.59%
A new credit facility was successfully negotiated with the Company's primary
lender extending our relationship through the year 2000. The total line was
increased to $130 million, the rate reduced by twenty-five basis points and we
maintained flexibility in the other restrictions and covenants. Throughout these
negotiations, it was management's belief, that this lender had regained its
confidence in the Company and recognized the tremendous accomplishments and
improvements that have taken place over the last three years.
Our last stated objective for 1998 was to increase our capital base, an
objective that was partially accomplished through earnings and the obtaining of
$1.7 million of new subordinated debt. Yes, there were opportunities to bring in
additional capital, however, we believe the price was excessive. Your management
and Board of Directors agreed we were not willing to give the Company away to
raise additional capital. Let me assure you, this objective remains high on our
list for 1999.
As a result of our meeting or exceeding nearly all of our objectives, 1998's net
income was significant at thirty-six cents per share. This compares with six
cents per share for 1997. Additionally, the Company has achieved net income in
seven of the last eight quarters and management believes this splendid positive
trend will continue.
It should be abundantly clear to everyone, including the Wall Street experts who
erected our tombstone three years ago, that TFCE has returned. The Company has
reachieved profitability and stability. I believe it is time for the Wall Street
analysts, who were quick to give this Company plenty of press during the bad
times, to note our success as the Company prospers. We did not die as most
predicted. We did not fail as many in this industry did.
The results of our turnaround were not luck.
When I returned to the helm of the Company, it was clear to me what it would
take to return stability and profitability to TFCE. Luck was never on my list,
but an experienced reconstituted management team, honesty, hard work, solid
underwriting and pricing policies, and improved servicing capabilities among
others were!
We have, in this message, talked about my return, an experienced and highly
qualified management team and the Board of Directors who certainly are the
captain and navigators of our ship. However, the ship could not have set sail
for calmer seas without engines, sails, or oars, that is, our people! They did
not desert the ship. Believe me when I tell you the captain and navigators could
not have accomplished this extraordinary turn around without all of our loyal,
dedicated, and proficient staff. I for one personally thank all of them.
Enough about the past, let's look to the future. 1999 will be another
exhilarating year for the Company. Our objectives will remain the same; continue
solid underwriting and pricing guidelines, grow receivables, maintain good
delinquency and charge off results, and continue to improve our cost of funds.
Additionally, we will explore the securitization and commercial paper markets
with an eye towards improving liquidity. Certainly, we will continue to explore
ways to improve our capital base.
Through our newest subsidiary, Recoveries, Inc., a third party collection
agency, it is our goal to service many of the troubled portfolios that exist
today. With our efficient servicing capabilities, we expect to be successful in
this area during 1999. As we reported in the March 1999 news release, we
successfully completed negotiations to assume the servicing of a $10 million
dollar portfolio that required no capital outlay on our part. It is anticipated
this transaction will generate meaningful revenues with minimal additional
operating expense.
Finally, it is our objective to increase shareholder value by embarking on an
aggressive campaign to convince Wall Street that TFCE is a solid investment. We
will no longer wait for Wall Street to wake up and recognize the pivotal
turnaround of TFCE. We will instead, take the alarm clock to them. It is our
intention to take our story to as many securities companies as is humanly
possible.
We wish it were possible for every existing shareholder to personally visit our
facilities to experience the enthusiasm and exhilaration that permeates the
organization. Whether you can visit or not, please understand how appreciative
we are of your continued loyalty and support.
It is with great pleasure that I submit TFCE's Annual Report.
/s/ Robert S. Raley, Jr.
Robert S. Raley, Jr.
Chairman of the Board, President
and Chief Executive Officer
- -----------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------
FOR THE 1998 1997 1996
YEAR
Net income (loss) $ 4,025 $ 707 $ (7,596)
Net income (loss) per common share:
Basic 0.36 0.06 (0.67)
Diluted 0.33 0.06 (0.67)
- ----------------------------------------------------- ------------ -------------- -------------
Average common shares outstanding (in thousands) 11,330 11,290 11,290
- ----------------------------------------------------- ------------ -------------- -------------
PERFORMANCE RATIOS:
Return on average common equity 12.30% 2.30% NM
Return on average assets 2.49 0.47 NM
Yield on interest earning assets 23.08 21.30 21.51%
Cost of interest bearing liabilities 10.58 10.85 9.54
Net interest margin 15.43 13.38 14.36
Operating expense as a percentage of
average interest earning assets (a) 12.89 13.17 12.83
Total net charge-offs to average
gross contract receivables,
net of unearned interest 16.59 18.60 22.25
60 day delinquencies to period end
gross contract receivables 5.91 8.85 9.89
Total allowance and nonrefundable
reserve to period end gross contract
receivables, net of unearned interest 11.80 14.70 17.88
Equity to assets, period end 20.44 21.02 18.83
- ----------------------------------------------------- ------------ -------------- -------------
AVERAGE BALANCES:
Interest earning assets (b) $169,340 $151,743 $188,239
Total assets 161,747 148,932 186,040
Interest bearing liabilities 122,479 110,812 140,943
Equity 32,723 30,731 36,386
- ----------------------------------------------------- ------------ -------------- -------------
NOTE: Throughout this report, ratios are based on unrounded numbers.
NM - Not Meaningful.
(a) Excludes a $0.4 million charge for securitization costs in 1998 and a $1.8
million charge for severance benefits and a $0.6 million charge for
restructuring in 1996.
(b) Average interest-bearing deposits and gross contract
receivables, net of unearned interest revenue and unearned discount.
The Five-Year Summary of Selected Financial Data should be reviewed in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and with the accompanying Consolidated Financial
Statements of TFC Enterprises, Inc., including notes thereto.
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
Years ended December 31
(IN THOUSANDS) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operations data:
Net interest revenue $26,133 $20,298 $27,033 $36,825 $27,958
Provision for credit losses 737 719 8,733 26,500 53
------- ------- ------- ------- --------
Net interest revenue after provision
for credit losses 25,396 19,579 18,300 10,325 27,905
Other revenue 1,062 1,105 1,436 2,292 2,685
Operating expense:
Amortization of intangible assets 1,092 1,091 1,091 1,091 1,091
Severance benefits -- -- 1,804 -- --
Restructuring charge -- -- 590 -- --
Securitization costs 448 -- -- -- --
Other 20,743 18,886 23,055 21,551 17,389
------ ------ ------ ------ ------
Total operating expense 22,283 19,977 26,540 22,642 18,480
------ ------ ------ ------ ------
Income (loss) before income taxes 4,175 707 (6,804) (10,025) 12,110
Provision for (benefit from) income taxes 150 -- 792 (3,564) 4,879
------- ------ ------ ------- ------
Net income (loss) $ 4,025 $ 707 $(7,596) $(6,461) $ 7,231
======= ===== ======= ======== =======
Net income (loss) per common share :
Basic $0.36 $0.06 $(0.67) $(0.57) $0.64
Diluted $0.33 $0.06 $(0.67) (0.57) $0.64
Balance Sheet data:
Net contract receivables $155,895 $128,503 $126,252 $171,051 $139,176
Total assets 172,597 147,833 156,508 215,146 166,552
Total debt 130,917 109,786 120,378 170,459 115,531
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, future financial performance and other matters that reflect
management's expectations as of the date made. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "seeks," and similar
expressions are intended to identify forward-looking statements. Future events
and the Company's actual results could differ materially from the results
reflected in these forward-looking statements. There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. These factors include,
without limitation: the Company's dependence on its line of credit, intense
competition within its markets, the fluctuating interest rates associated with
its line of credit, the impact of installment contract defaults and the Year
2000 issue. Please refer to a discussion of these and other factors in this
Report and the Company's other Commission filings. The Company disclaims any
intent or obligation to update these forward-looking statements, whether as a
result of new information, future events or otherwise.
This section should be reviewed in conjunction with the Five-Year Summary of
Selected Financial Data and the accompanying Consolidated Financial Statements
of TFC Enterprises, Inc., including notes thereto.
GENERAL
TFC Enterprises, Inc. ("TFCE"or the "Company") conducts its consumer
finance operations through two wholly-owned subsidiaries, The Finance Company
("TFC") and First Community Finance, Inc. ("FCF"). Through TFC, the Company is
engaged in purchasing and servicing installment sales contracts originated by
automobile and motorcycle dealers in the sale of used automobiles, vans, light
trucks, and new and used motorcycles (collectively "vehicles"). Installment
sales contracts are acquired on either an individual basis after the Company has
reviewed and approved the vehicle purchaser's credit application (a
"point-of-sale purchase"), or on a group basis through the purchase of a
dealer's portfolio of existing installment sales contracts (a "bulk purchase").
The Company focuses its point-of-sale business on installment sales contracts
originated by dealers with consumers who are United States military enlisted
personnel, primarily in the E-1 through E-5 grades. Bulk purchases are primarily
from dealers who finance their own contracts with civilian customers and sell
them after origination in bulk. To achieve an acceptable rate of return and
provide for credit risks, contracts are purchased from dealers at a discount to
the remaining principal balance. Most of the discount is held in a nonrefundable
reserve against which credit losses are first applied.
The Company has been engaged in consumer finance activities since its
founding in 1977. From 1991 through 1995, the Company increased contract
purchase volume significantly, from $67.1 million to $299.4 million,
representing a compound annual growth rate of 45%. Due to the significant credit
losses caused by 1995 volume's poor credit quality and inadequate pricing the
Company revised its business strategy in 1996 and purchase volume totaled $133.2
million. In 1997 contract volume increased to $171.9 million. This positive
trend continued throughout 1998 when contract volume increased to $218.5
million. Improvement in delinquencies and charge-offs in 1997 and 1998 support
the conclusion that this growth was achieved without sacrificing credit quality
and price.
The Company's point-of-sale business emphasizes the purchase of installment
sales contracts relating primarily to vehicles purchased by United States
military enlisted personnel. Point-of-sale purchases provide the Company with
the ability to direct the credit underwriting process at the initiation of the
installment sales contract. Participating dealers benefit by having a source of
financing for a group of customers who typically find financing difficult to
obtain, thereby increasing the number of vehicles sold and improving dealer
profitability. The military personnel also benefit because the financing
provided by the Company enables them to purchase a vehicle that they otherwise
might not be able to buy. As of December 31, 1998, $159.8 million, or 71%, of
the Company's gross contract receivables represented point-of-sale purchases,
compared to $111.3 million, or 60%, at December 31, 1997.
During 1994 and 1995, to increase volume, the Company expanded its
point-of-sale operations into the civilian market. At that time, the Company
faced significant competition in this business line. To meet the competition,
the Company purchased a substantial number of contracts at prices that, in
hindsight, did not adequately reflect the credit risk of the obligor.
Compounding this problem was the significantly greater day-to-day servicing
requirements and risk of non-payment associated with civilian point-of-sale
contracts as compared to more traditional military point-of-sale contracts. When
the Company recognized the problems in late 1995, it took action to improve the
risk adjusted returns of the Company's portfolio by redirecting the Company
toward military point-of-sale and civilian bulk business lines.
The Company's bulk purchase business emphasizes acquisitions of portfolios
of seasoned installment sales contracts. These contracts normally have a payment
history of at least three months. While the typical bulk purchase involves less
than 100 individual contracts, the Company has, at times, purchased portfolios
totaling more than 1,000 contracts. Bulk purchases provide the Company with
demographic diversification, as the majority of customers are not military
enlisted personnel. They also provide a payment history on which to evaluate and
price the credit risk of the contracts and a relatively efficient mechanism for
establishing dealer relationships in new areas. The Company's bulk purchases
benefit dealers by providing an immediate source of liquidity, which in turn
benefits the consumers who want to purchase vehicles from these dealers. As of
December 31, 1998, $49.5 million, or 22%, of the Company's gross contract
receivables was attributable to bulk purchases, compared to $60.0 million, or
33%, at December 31, 1997.
Through FCF, the Company is involved in the direct origination and servicing
of consumer finance contracts. FCF began operations in the first quarter of 1995
with the opening of two branch offices in Richmond, Virginia. Four additional
branches were opened in Virginia in 1995 and four branches were opened in North
Carolina in 1996. In 1997 one additional branch was opened in Virginia and four
branches were opened in North Carolina. In 1998 two additional branches were
opened in North Carolina and one was closed in Virginia. The Company is
evaluating additional branch openings in 1999. Gross contract receivables
relating to FCF at December 31, 1998, were $16.5 million, or 7%, of the
Company's gross contract receivables portfolio, compared to $12.9 million, or
7%, at December 31, 1997.
RESULTS OF OPERATIONS
---------------------
NET INCOME (LOSS) AND EARNINGS (LOSS) PER BASIC COMMON SHARE
The Company reported net income of $4.0 million, or $0.36 per basic common
share, in 1998, compared to net income of $0.7 million, or $0.06 per basic
common share in 1997, and a net loss of $(7.6) million, or $(0.67) per basic
common share in 1996. The Company's profitability is primarily the result of
continuing improvement in the performance of its contract receivables. The net
loss in 1996 was attributable to an $8.7 million provision for credit losses,
severance benefits of $1.8 million related to management downsizing, and
approximately $0.6 million of restructuring charges related to closing the
Company's Dallas service center.
VOLUME
Gross contracts purchased or originated in 1998 totaled $218.5 million,
compared to $171.9 million in 1997 and $133.2 million in 1996. The increase in
1998 volume compared to 1997 reflected growth in the point-of-sale business
line. Point-of-sale purchases increased $56.9 million over 1997 levels
reflecting the Company's continued marketing efforts to the military
point-of-sale market. Bulk purchases representing acquisitions from dealer
generated receivables decreased $15.6 million due to more emphasis placed on the
point-of-sale business line and more selective purchasing of bulks. The increase
in 1997 volume compared to 1996 reflected growth in both the Company's
point-of-sale and bulk business lines. Point-of-sale purchases in 1997 increased
$26.7 million over 1996 levels reflecting the Company's increase in marketing
efforts to the military point-of-sale market. Bulk purchases in 1997 increased
$9.1 million over 1996 levels reflecting a continued marketing emphasis in this
business line.
GROSS CONTRACT VOLUME
Gross contracts purchased or originated were as follows for 1998, 1997, and
1996:
1998 1997 1996
---- ---- ----
(DOLLARS IN THOUSANDS) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Contracts purchased
or originated:
Auto finance:
Point-of-sale $142,221 65.1% $ 85,311 49.7% $ 58,623 44.0%
Bulk 54,929 25.1 70,520 41.0 61,391 46.1
Consumer finance 21,391 9.8 16,023 9.3 13,174 9.9
------ --- ------ --- ------ ----
Total $218,541 100.0% $171,854 100.0% $133,188 100.0%
======== ====== ======== ====== ======== ======
Number of contracts
purchased or originated:
Auto finance:
Point-of-sale 11,478 32.7% 7,411 25.9% 6,154 25.0%
Bulk 11,711 33.4 14,157 49.4 11,853 48.1
Consumer finance 11,864 33.9 7,093 24.7 6,623 26.9
------ ---- ----- ----- ------ -----
Total 35,053 100.0% 28,661 100.0% 24,630 100.0%
====== ====== ====== ===== ====== =====
At year end 1998, the Company was purchasing point-of-sale motor vehicle
finance contracts through seven Loan Production Offices ("LPO's") located in
Norfolk, Virginia; Killeen, Texas; Jacksonville, Florida; San Diego, California;
Tacoma, Washington; Clarksville, Tennessee; and Columbus, Georgia. Bulk
purchases are acquired through the bulk purchase LPO located in Norfolk,
Virginia.
In 1998, FCF originated $21.4 million in consumer finance contracts,
compared to $16.0 million in 1997. All consumer finance contract originations
are produced and serviced by 16 FCF offices located in Virginia and North
Carolina. FCF added two new offices in North Carolina and closed one office in
Virginia during 1998. Management believes there are significant growth
opportunities in this segment of the market and is evaluating the impact of
further FCF expansion in 1999.
NET INTEREST REVENUE
Years ended December 31
-----------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
---- ---- ----
Average interest earning assets (A) $169,340 $151,743 $188,239
Average interest bearing liabilities 122,479 110,812 140,943
-------- -------- --------
Net interest earning assets $ 46,861 $ 40,931 $ 47,296
========= ========= =========
Interest and other finance revenue $ 39,085 $ 32,317 $ 40,484
Interest expense 12,952 12,019 13,451
-------- -------- --------
Net interest revenue $ 26,133 $ 20,298 $ 27,033
======== ======== ========
Yield on interest earning assets 23.08% 21.30% 21.51%
Cost of interest bearing liabilities 10.58 10.85 9.54
------- -------- ------
Net interest spread 12.50% 10.45% 11.97%
====== ====== ======
Net interest margin (B) 15.43% 13.38% 14.36%
====== ====== ======
(a) Average interest bearing deposits and gross contract receivables, net of
unearned interest revenue and unearned discount.
(b) Net interest margin is net interest revenue divided by average interest
earning assets.
NET INTEREST REVENUE
Net interest revenue was $26.1 million in 1998 compared to $20.3 million in
1997 and $27.0 million in 1996. The increase in 1998 compared to 1997 was the
result of an increase in interest-earning assets. The yield on interest-earning
assets was 23.08% for 1998 compared to 21.30% for the year of 1997. The
improvement was primarily attributable to an increase in the amount of contract
purchase discount accreted to interest revenue as a yield enhancement resulting
from increased discounts on bulk purchases and overall improved delinquency and
charge-off experience. The Company periodically reassesses the amount of
contract purchase discount accreted to interest revenue to reflect changes in
delinquency and charge-off experience. The cost of interest-bearing liabilities
was 10.58% for 1998, compared to 10.85% for 1997. The decrease is primarily
attributable to a 25 basis point reduction in the interest rate related to the
Company's primary line of credit and to the decrease in LIBOR during the year.
The decrease in net interest revenue in 1997 compared to 1996 was the result of
the reduction in interest-earning assets and a decrease in the net interest
spread, as shown in the table above. Average interest-earning assets decreased
in 1997 as a result of the lower contract purchase volume in 1996 and the high
level of contract charge-offs related to 1995 volume. The net interest spread
decreased in 1997 compared to 1996 because of the increased cost of
interest-bearing liabilities caused by the amended financing agreements signed
in 1997.
OTHER REVENUE
Other revenue was $1.1 million in 1998 and 1997, compared to $1.4 million in
1996. The decrease in 1998 and 1997 compared to 1996 was caused by a decrease in
commission income on ancillary products as the result of lower sales of those
programs.
OPERATING EXPENSE
Operating expense was $22.3 million in 1998 compared to $20.0 million in
1997 and $26.5 million in 1996. The increase of $2.3 million in 1998 was
primarily attributable to: a one time $0.4 million charge in the fourth quarter
for expenses incurred for a securitization which was not completed due to the
market conditions that existed during the fourth quarter, expenses incurred for
The Finance Company to start a national sales department and open three new loan
production offices, an increase in the number of branch offices for First
Community Finance, and the expansion of the Company's employee benefit programs.
The decrease of $4.1 million in 1997, excluding the 1996 charge for severance
benefits and restructuring, compared to 1996 was attributable to a decrease in
salaries of $2.2 million due to the reduction in the number of employees after
the aforementioned restructuring and a decrease of $1.3 million in repossession
expense. In connection with the termination of the employment agreements with
four senior officers with the Company during 1996, notes receivable from these
individuals in the amount of $0.4 million were forgiven and are reported as a
component of severance benefits.
Effective September 30, 1996, the Company restructured its senior management
as part of its plan to reduce operating expenses. The restructuring involved the
termination of the employment agreements of four key executives in exchange for
approximately $1.8 million in combined cash payments of $1.4 million and
cancellation of certain notes receivable from these executives in the amount of
$0.4 million. The notes receivable were related to 1995 profit sharing amounts
owed to the Company.
The Company closed its Dallas service center and relocated its corporate
finance and accounting office from Manassas to Norfolk, Virginia in November
1996, as part of its plan to reduce operating expenses. Receivables serviced
from the Dallas service center were moved to the Company's Norfolk, Virginia,
and Jacksonville, Florida, service centers. The Norfolk service center is
responsible for servicing all point-of-sale contracts. The Jacksonville service
center is responsible for servicing all bulk purchase contracts. The total cost
of restructuring the operations of the service centers and the finance and
accounting office was approximately $0.6 million.
Operating expenses as a percent of interest earning assets decreased to
12.89% for 1998 from 13.17% in 1997. The 1998 percentage excludes a 0.27% effect
of a one time $0.4 million charge in the fourth quarter for expenses incurred
for a securitization which was not completed due to the market conditions that
existed during the fourth quarter. The decrease in the operating expense ratio
in 1998 resulted from the increase in average interest-earning assets which is
attributable to the increase in net contract receivables. Operating expense as a
percentage of average interest-earning assets increased to 13.17% in 1997
compared to 12.83% in 1996 excluding severance benefits and restructuring
charges. The increase in the operating expense ratio in 1997 resulted from the
decrease in average interest-earning assets which is attributable to the
decrease in net contract receivables.
PROVISION FOR INCOME TAXES
The Company recorded a $0.2 million tax provision, compared to no tax
provision in 1997 and a tax provision of $0.8 million in 1996. The small tax
provision in 1998 relative to income and no tax provision in 1997 is due to the
reversal of a portion of a deferred tax valuation allowance recorded at year-end
1996. The tax expense in 1996, provided on a pre-tax loss of $6.8 million, was
caused primarily by the fact that no tax benefit could be recognized on most of
the $8.7 million provision for credit losses recorded in 1996 pending the
reporting of sufficient future profits by the Company.
During 1998, the $1.2 million in refunds recorded as recoverable taxes at
December 31, 1997, which represented the benefit of state net operating loss
carrybacks available to the Company as a result of a tax-basis loss in 1996 was
received. At December 31, 1996, recoverable income taxes totaled $5.8 million,
which represented the benefit of net operating loss carrybacks available to the
Company as the result of a tax-basis loss incurred in 1996. In early 1996, the
Company filed a request with the Internal Revenue Service for an accelerated
refund of its $3.5 million in 1995 estimated tax payments. These estimated tax
payments were received in the first quarter of 1996. Most of the refund balance
due from the 1995 net operating loss carryback was received in the second
quarter of 1997. Proceeds from these tax refunds were used to reduce the
Company's indebtedness.
In 1993, contingent interest on the Company's convertible notes was
considered as deductible for Federal income tax purposes but was treated as
non-deductible for income tax expense in the Company's financial statements. To
the extent that the contingent interest on convertible notes is ultimately
determined to be deductible for Federal income tax purposes, the benefit, which
totals $2.1 million, will be recognized in the period that the determination is
made. During 1998, the Company and the IRS continued discussions regarding the
audit of its 1992-1996 income tax years. The Company, in order to reflect the
estimated outcome of those discussions, has utilized the net operating losses
reflected in its 1997 financial statements to offset adjustments to taxable
income in prior years. Accordingly, the Company does not have any net operating
loss carryforward at December 31, 1998.
OTHER MATTER - YEAR 2000
The Year 2000 problem is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions and/or engaging in similar normal business activities.
State of readiness
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and
certain hardware so those systems will properly utilize dates beyond
December 31, 1999. The Company presently believes that with modifications
or replacements of existing software and certain hardware, the Year 2000
problem can be mitigated. However, if such modifications and replacements
are not made, or are not completed in a timely manner, the Year 2000
problem could have a material adverse impact on the Company's business,
financial condition and results of operations.
The Company's plan to resolve the Year 2000 problem involves the following
four phases: assessment, remediation, testing and implementation. To date,
the Company has completed its assessment of all systems that could be
significantly affected by the Year 2000 problem. The assessment indicated
that most of the Company's significant information technology systems
could be affected, particularly the loan servicing systems. In addition,
the Company has gathered information about the Year 2000 compliance status
of its significant third party vendors and continues to monitor their
compliance.
To date, the Company is approximately 75% complete on the remediation
phase for the Company's loan servicing systems, and expects to complete
software reprogramming, testing and replacement no later than March 31,
1999. Once software is reprogrammed or replaced, the Company will begin
implementation. To date the Company has completed approximately 65% of its
testing and has implemented approximately 60% of its remediated systems.
Completion of the testing phase for all significant systems is expected by
March 31, 1999 with all remediated systems fully tested and implemented by
June 30, 1999.
To date, the Company is approximately 75% complete on the remediation
phase for operating equipment, such as the phone systems, fax machines,
etc. Testing of this equipment is primarily dependent upon the vendor to
confirm that the proper changes have been made and the system will
function correctly. To date, testing of the remediated operating equipment
is approximately 50% complete. Once testing is complete, the equipment is
ready for immediate use. Testing and implementation of affected equipment
is expected to be completed by June 30, 1999.
The Company has queried its significant vendors regarding their Year 2000
compliance status. To date, the Company is not aware of any external agent
with a Year 2000 problem that would materially impact the Company's
business, financial condition, or results of operations. The Company does
not share information systems with any significant external agent.
However, the Company has no means of ensuring that external agents will be
Year 2000 ready. The effect of non-compliance by external agents is not
determinable.
Cost to Address the Company's Year 2000 Problem
The Company will utilize both internal and external resources to
reprogram, or replace, test and implement the software and operating
equipment for Year 2000 modifications. The total cost of the Year 2000
project is estimated at $0.7 million and is being funded through operating
cash flows and a long-term lease for certain hardware and software. To
date, the Company has capitalized approximately $0.2 million for new
systems and equipment related to all phases of the Year 2000 project. Of
the total remaining project costs, most is attributable to the purchase of
new software and operating equipment, which will be capitalized.
Risks
Management believes it has an effective program in place to resolve the
Year 2000 issue in a timely manner. As noted above, the Company has not
yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company may
be unable to effectively book loans and collect payments. The amount of
potential liability and lost revenue cannot be reasonably estimated at
this time.
Contingency Plans
The Company has contingency plans for certain critical applications. These
contingency plans involve, the manual processing of new business
applications, and collections maintained through a more manual and
elementary process until affected systems can be corrected.
FINANCIAL CONDITION
-------------------
ASSETS
Total assets increased by $24.9 million, or 17%, to $172.6 million at
December 31, 1998, from $147.8 million at December 31, 1997. The increase was
primarily attributable to an increase in net contract receivables.
NET CONTRACT RECEIVABLES
Net contract receivables were $155.9 million, or 90% of total assets at
December 31, 1998, compared to $128.5 million, or 87% of total assets at
December 31, 1997. The increase in auto finance receivables in 1998 was
attributable to point-of-sale purchases, resulting from increased management
emphasis on this line of business.
NET CONTRACT RECEIVABLES
December 31,
(DOLLARS IN THOUSANDS) 1998 1997
---- ----
Auto finance:
Point-of-sale $104,125 $ 75,197
Bulk 36,649 41,612
Consumer finance 15,121 11,694
------ ------
Total $155,895 $128,503
======== ========
LIABILITIES
Total liabilities were $137.3 million at December 31, 1998, an increase of
$20.5 million, or 18%, from $116.8 million at December 31, 1997. The increase in
liabilities in 1998 reflected increased borrowings under the Company's credit
facilities as the result of the increase in net contract receivables. As a
percentage of total liabilities and equity, liabilities represented 80% and 79%,
respectively, at December 31, 1998 and 1997.
CREDIT QUALITY AND RESERVES
---------------------------
NET CHARGE-OFFS OF AUTO FINANCE CONTRACT RECEIVABLES
Net charge-offs to the allowance for credit losses and nonrefundable reserve
were $27.9 million in 1998, or 17.7% of average net contract receivables,
compared to $27.5 million, or 19.7%, in 1997, and $40.1 million, or 23.0% in
1996. The relatively high level of net charge-offs in 1996, as compared to 1998
and 1997, was primarily attributable to higher net charge-offs relating to
receivables purchased in 1995 in the Jacksonville and Dallas service centers.
The dramatic rise in delinquencies and resultant charge-offs in 1995
reflected in part the aggressive competition among buyers of installment sales
contracts that resulted in a substantial number of contracts, especially
civilian point-of-sale installment sales contracts, being purchased at prices
that, in hindsight, did not adequately reflect the credit risk of the obligor.
In response to this competition, management redirected the Company toward the
military point-of-sale and civilian portfolio purchase business lines. These
programs are focused on sectors of the market in which management believes the
pricing more closely reflects the risk inherent in the business.
Also among the factors contributing to the increase in charge-offs of
contracts purchased in 1995 was the difficulty in servicing the substantially
higher volume of installment sales contracts, specifically civilian
point-of-sale contracts which involve more risk than military point-of-sale
contracts. During 1994 and 1995, the composition of the Company's portfolio of
contract receivables shifted from predominantly military point-of-sale contracts
to civilian point-of-sale contracts. The day-to-day servicing requirements and
risks of non-payment associated with civilian point-of-sale contracts are
significantly greater than the Company's more traditional military point-of-sale
contracts. As a result of the Company's dramatic growth during 1994 and 1995,
the civilian point-of-sale contracts were not adequately serviced by the
Company's personnel. Management took action to improve the servicing of the
Company's portfolio of contract receivables. These actions included expanding
the number of Collection Department personnel assigned to troubled credits,
tripling the automatic dialing capacity of the Company through investment in two
new automatic dialers, increasing senior management involvement in the credit
decision process, closing the Southwest Regional Service Center in Dallas in
order to consolidate all servicing in the Point-of-Sale and Bulk Service
Centers, located in Norfolk and Jacksonville, respectively, and temporarily
transferring the underwriting function of the Southern region to the Norfolk LPO
(subsequently moved to the new Jacksonville LPO). The latter action improved the
Company's control over the underwriting process by reducing the number of
locations at which contracts are purchased and increased focus on the collection
process. Unfortunately the disruptions associated with the consolidation of
servicing in late 1996 led to an increase in delinquencies and charge-offs
during the fourth quarter of 1996 and early 1997, which, in turn, combined with
the other factors mentioned in this report, caused the Company to provide an
additional $6 million reserve for credit losses as of year-end 1996.
PROVISION FOR CREDIT LOSSES ON AUTO FINANCE CONTRACT RECEIVABLES
The Company's primary business involves purchasing installment sales
contracts at a discount to the remaining principal balance. An amount ranging
from 80 percent to 100 percent of the discount, based on experience, is held in
a nonrefundable reserve against which credit losses are first applied.
Additional provisions for credit losses, if necessary, are charged to income in
amounts considered by management to be adequate to absorb future credit losses
on the outstanding contract receivables. Improved credit quality and servicing
of the Company's auto finance contracts eliminated the need for an additional
loss provision on auto finance receivables in 1998 and 1997 compared to $8.4
million in 1996. The $8.4 million provision for credit losses in 1996 resulted
from a $6 million provision for credit losses at year-end 1996 primarily related
to contracts purchased in 1995 that was caused by the increased fourth quarter
delinquencies and charge-offs resulting from service disruptions due to the
closing of the Southwest Regional Service Center and relocation of the servicing
of those contracts.
Provision for credit losses is dependent on a number of factors, including,
but not limited to, the level and trend of delinquencies and net charge-offs,
the amount of nonrefundable and refundable dealer reserves and the overall
economic conditions in the markets in which the Company operates. Due to the
inherent uncertainty involved in predicting the future performance of these
factors, there can be no assurance regarding the future level of provision for
credit losses.
RESERVES ON AUTO FINANCE CONTRACT RECEIVABLES
The static pool reserve methodology is used to analyze and reserve for
the Company's credit losses. This methodology allows the Company to stratify its
portfolio into separate and identifiable annual pools. The loss performance of
these annual pools is analyzed monthly to determine the adequacy of the
reserves. The loss performance to date combined with estimated future losses by
pool year establishes the gross estimated loss for each pool year. The combined
expected losses are reduced by estimated future recoveries that are based on
historical recovery performance to establish the estimated required reserve for
credit losses.
At December 31, 1998, the combination of allowance for credit losses and
nonrefundable reserve totaled $21.3 million, or 12.4%, of gross auto finance
contract receivables, net of unearned interest revenue compared to $22.3
million, or 15.5% at December 31, 1997. The decrease in reserves and in the
percentage of reserves to contract receivables in 1998 compared to 1997 is the
result of the improved credit quality, servicing and recoveries.
The Company's refundable dealer reserve decreased to $0.8 million at
December 31, 1998, compared with $2.0 million at December 31, 1997. Under
certain of the Company's programs, contracts from dealers are purchased under a
refundable, rather than nonrefundable reserve relationship. Under certain
circumstances, the Company 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. Programs with refundable
reserves were eliminated near the end of 1997.
The reserves as a percentage of gross auto finance contract receivables
net of unearned interest at December 31, 1998, of 12.4% are less than net
charge-offs as a percentage of average net contracts receivable for 1998, of
17.7%. This difference exists because the reserves include an estimate of
future recoveries on prior year charge-offs and future recoveries on current
year charge-offs that are not reflected in the current year charge-off
percentage. These estimated future recoveries are based on historical recovery
performance and this estimate is an integral part of the evaluation of the
adequacy of the reserves performed by management quarterly.
CONSUMER FINANCE CHARGE-OFFS AND RESERVES (FCF)
Net charge-offs of consumer finance contracts totaled $0.6 million or 3.98%
in 1998 compared to $0.4 million or 4.00% in 1997 and $0.2 million or 7.45% in
1996. The provision for credit losses was $0.7 million in 1998 and 1997, and
$0.3 million in 1996. The allowance for credit losses was $0.9 million or 5.24%
of outstanding gross contract receivables at December 31, 1998, compared to $0.7
million or 5.31% of contract receivables at December 31, 1997 and $0.4 million
or 4.04% of contract receivables at December 31, 1996. Management has
established the level of the allowance that it considers to be adequate based on
FCF's experience through December 31, 1998.
CONSOLIDATED ALLOWANCE AND RESERVES FOR CONTRACT RECEIVABLES
Years ended December 31
-----------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
---- ---- ----
Beginning of period $ 23,029 $ 28,575 $ 43,482
Provision for credit losses 737 719 8,733
Charge-offs (33,548) (32,556) (46,916)
Allocation for credit losses 26,915 21,635 16,620
Recoveries 5,062 4,656 6,656
----- ----- -----
End of period $22,195 $23,029 $28,575
======= ======= =======
Average net contract receivables (A) $171,751 $149,982 $180,950
End of period net contract receivables (A) $188,103 $156,693 $159,833
Total net charge-offs as a percent of average
net contract receivables 16.59% 18.60% 22.25%
====== ====== ======
Allowance and nonrefundable reserve as a
percent of net contract receivables (period 11.80% 14.70% 17.88%
end) ====== ====== ======
(A) GROSS CONTRACT RECEIVABLES, NET OF UNEARNED INTEREST REVENUE.
NET CHARGE-OFFS BY LINE OF BUSINESS
Years ended December 31
-----------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
---- ---- ----
Auto finance:
Point-of-sale $14,199 $19,192 $34,064
Bulk 13,727 8,283 6,034
Consumer finance 560 425 162
------- ------- --------
Total $28,486 $27,900 $40,260
======= ======= =======
DELINQUENCIES
Gross auto finance contract receivables that were 60 days or more past due
totaled $12.9 million, or 6.15% of gross auto finance contract receivables at
December 31, 1998, compared to $15.9 million, or 9.28%, at December 31, 1997.
This improvement in delinquency was the result of improved underwriting and
increased collection efforts.
Gross consumer finance receivables that were 60 days or more past due
totaled $0.4 million, or 2.9% of gross receivables at December 31, 1998,
compared to $0.4 million, or 3.1% at December 31, 1997.
Consistent with standard industry practice, the Company measures delinquency
at each month end by classifying a contract that is unpaid for two monthly
payments as 30 days delinquent and a contract that is unpaid for three monthly
payments as 60 days delinquent.
CONSOLIDATED DELINQUENCY
Years ended December 31
-----------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
---- ---- ----
Gross contract receivables
60 + days and over delinquent $ 13,347 $ 16,310 $18,495
Gross contract receivables 225,813 184,242 187,033
Percent 5.91% 8.85% 9.89%
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY MANAGEMENT
As shown on the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased by $0.1 million in 1998, to $1.9 million at December 31,
1998. The decrease reflected $7.9 million of net cash provided by operating
activities and $20.6 million in net cash provided by financing, offset by $28.6
million of net cash used in investing activities. Net cash used in investing
activities principally reflected $28.1 million in net purchases of contract
receivables. Net cash provided by financing activities reflected $22.0 million
of net borrowings on the Company's revolving lines of credit, $1.7 million of
new subordinated debt and $3.3 million paid on outstanding subordinated debt.
As shown on the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased by $0.7 million in 1997, to $2.0 million at December 31,
1997. The decrease reflected $4.8 million of net cash used in financing
activities and $3.3 million in net cash used in investing activities, partially
offset by $7.4 million of net cash provided by operating activities. Net cash
used for financing activities reflected a $15.8 million repayment on borrowings
on automobile receivables-backed notes, $19.5 million repayment on term notes,
and $1.3 million in repayments of other debt, offset in part by $26.3 million in
net borrowings under the Company's revolving line of credit facility and a
decrease in restricted cash of $5.5 million. Net cash used by investing
activities reflected the net cost of acquiring contract receivables in excess of
the repayments received on contract receivables.
Effective January 1, 1999, the primary credit facility was renewed for an
additional two years through January 1, 2001 and increased to a maximum of
$130.0 million. Interest accrues at a floating rate equivalent to one-month
LIBOR plus a borrowing spread of 3.50%. The advance rate on eligible receivables
is 73% and flexibility was maintained relative to the restrictive covenants.
The Company has a $2.0 million subordinated debt principal payment due in
June 1999. The Company intends to fund this payment through cash flow from
operations. This payment, does however, impact the availability under the
Company's primary line of credit and could limit the Company's ability to grow
its portfolio of contract receivables.
With the improved performance in 1997 and 1998, the Company is committed
to evaluating alternative funding sources to increase the available credit
facilities to fund planned growth, increase liquidity and improve the interest
margin. The Company is currently evaluating capital sources, securitizations,
supplemental credit lines and additional subordinated debt.
Inability to access these sources for additional funding could have a
material adverse effect on the Company's ability to grow its portfolio of
contract receivables. This, in turn, could have a material adverse effect on the
Company's operating performance in the future.
DIVIDENDS
The Company did not declare dividends on its common stock during the years
ended December 31, 1998, 1997 and 1996, nor does it anticipate paying cash
dividends in the foreseeable future. If and when the Company decides to declare
cash dividends, the amount would be limited by certain provisions of the
Company's various credit agreements.
NEW ACCOUNTING STANDARDS
------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS No. 133) requires that all
derivatives be recorded on the balance sheet as assets and liabilities at their
fair value. In addition, it significantly changes the accounting for derivatives
used for hedging purposes and for financial instruments with certain types of
embedded derivatives. SFAS No. 133 is effective for financial statements for
periods beginning after June 15, 1999. Management does not anticipate the
application of SFAS No. 133 to have a significant impact on the Company's
financial statements.
MARKET RISK DISCLOSURE AND RISK FACTORS
---------------------------------------
In evaluating the Company, prospective investors should consider carefully
all of the information set forth throughout this Report and, in particular,
should evaluate the following risk factors.
FLUCTUATING INTEREST RATES AND DEPENDENCE ON LINE OF CREDIT
The Company's operations require substantial borrowing to provide funding
for the installment contracts purchased by TFC and originated by FCF.
Consequently, profitability is impacted by the difference between the rate of
interest paid on the funds it borrows and the rate of interest charged on its
installment contracts, which rate in some states is limited by law. Currently,
the principal source of borrowing by the Company is its revolving line of
credit, guaranteed by TFCEI (the "Line of Credit") with General Electric Capital
Corporation ("GECC"). The maximum amount of borrowings available under the Line
of Credit was $115 million at December 31, 1998. At December 31, 1998, TFC had
$109 million outstanding under the Line of Credit. The floating interest rate
for borrowings under the Line of Credit is equal to the average one-month London
Interbank Offered Rate ("LIBOR") plus 3.75%. Thus, future increases in interest
rates could adversely affect the Company's profitability. In an effort to reduce
its exposure to an increase in interest rates, TFC has purchased an interest
rate cap which ensures that the interest rate on $75 million of the borrowings
through January 3, 1999, $85 million from January 4 through March 31,1999, $100
million from April 1 through June 30, 1999, and $75 million from July 1 through
September 30, 1999 under the Line of Credit will not exceed the one-month LIBOR
ceiling of 5.75%. This interest rate cap expire September 30, 1999. In addition
to the purchase of interest rate caps, the Company believes it has certain
flexibility to increase the rate of interest charged on future installment
contracts (to the extent not limited by state law), in order to offset the
adverse impact of any interest rate increase on profitability. If one-month
LIBOR averaged 10% more in 1999 than in 1998, net income would decrease by
approximately $0.2 million after considering the effects of interest rate caps.
These amounts are determined by considering the impact of the hypothetical
interest rates on the Company's borrowing cost, short-term investment balances,
and interest rate swap and cap agreements. These analyses do not consider the
effects of the reduced level of overall economic activity that could exist in
such an environment. Further, in the event of a change of such magnitude,
management would likely take actions to further mitigate its exposure to the
change. However, due to the uncertainty of the specific actions that would be
taken and their possible effects, the sensitivity analysis assumes no changes in
the Company's financial structure.
The Finance Company has maintained a Line of Credit with GECC since
1992. The current Line of Credit expired December 31, 1998. Effective January 1,
1999, TFC renewed its existing credit facility for an additional two years,
through January 1, 2001. The renewal increased the credit limit to $130 million
from $115 million and reduced the interest rate to 3.50% over one-month LIBOR
from 3.75%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DEFAULTS ON INSTALLMENT CONTRACTS
The Company is engaged primarily in purchasing installment contracts
entered into by dealers with consumers who have limited access to traditional
sources of consumer credit. The inability of an individual to finance a used
automobile purchase by means of traditional credit sources is generally due to
such individual's past credit history or insufficient cash to make the required
down payment on an automobile. As a result, installment contracts purchased by
the Company are generally with purchasers of automobiles who are considered to
have a higher risk of default on an installment contract than certain other
automobile purchasers. Accordingly, the consumer loan activities engaged in by
the Company typically have a higher risk of loss than those of other consumer
financings. Although the Company believes that its expertise in used automobile
financing, particularly for United States military enlisted personnel, enables
it to evaluate and price accurately the higher risk associated with the
Company's business, a significant economic downturn in the markets in which the
Company operates could materially increase the number of charged off and
delinquent installment contracts experienced by TFC as compared to its
historical losses. If TFC were to experience a material increase in charge-offs
or delinquencies, its profitability could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Losses and Delinquency."
COMPETITION
There are numerous providers of financing for the purchase of used
automobiles. Those financing sources include banks, savings and loan
associations, consumer finance companies, credit unions, financing divisions of
automobile manufacturers or automobile retailers. Many of those providers of
automobile financing have significantly greater financial resources than TFC and
have relationships with established dealer networks. The Company has focused on
a segment of the market composed of consumers who typically do not meet the more
stringent credit requirements of the traditional consumer financing sources and
whose needs, as a result, have not been addressed consistently by such financing
sources. If, however, the other providers of consumer finance were to assert a
significantly greater effort to penetrate TFC's targeted market segment, TFC
could be materially and adversely affected.
REGULATION
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. The Company's
business operations are conducted in approximately 30 states and, accordingly,
the laws and regulations of such states govern the Company's operations
conducted in those states. Most states where the Company operates limit the
interest rate, fees and other charges that may be imposed by, or prescribe
certain other terms of the contracts that the Company purchases and define the
Company's rights to repossess and sell collateral. In addition, the Company is
required to be, and is, licensed to conduct its operations in certain states. As
the Company expands its operations into other states, it will be required to
comply with the laws of such states.
An adverse change in those laws or regulations could have a material
adverse effect on the Company's profitability by, among other things, limiting
the states in which the Company may operate or the interest rate that may be
charged on installment contracts or restricting the Company's ability to realize
the value of any collateral securing contracts. The Company is not aware of any
materially adverse legislation currently pending in any jurisdiction where it
currently transacts business.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
The Company currently intends to retain its earnings to finance the
growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future dividend
payments will depend upon the financial condition, funding requirements and
earnings as well as other factors that the Company's Board of Directors may deem
relevant. Because the Company is a legal entity separate and distinct from TFC
and because its revenues depend on the payment of dividends by TFC, limitations
on the ability of TFC to pay dividends to the Company will in turn limit the
ability of the Company to pay dividends to its stockholders. There are certain
restrictions on the payment of dividends in the form of various affirmative and
negative covenants included in TFC's Line of Credit and Subordinated Debt.
EFFECT OF CERTAIN CHARTER, BYLAW AND STATUTORY PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws") could delay or frustrate the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy contest
involving the Company, even if such events could be beneficial, in the short
term, to the interest of the stockholders. For example, the Certificate of
Incorporation provides for a classified Board of Directors and for certain
limitations on the calling of a special meeting of stockholders and the Bylaws
require advance notice of stockholder proposals and nominations of directors.
The Company also is subject to provisions of Delaware corporation law that
prohibit a publicly-held Delaware corporation from engaging in a broad range of
business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's common stock (an "interested
stockholder") for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. Those
provisions could discourage or make more difficult a merger, tender offer or
similar transaction, even if favorable to the Company's stockholders.
AUTHORIZED PREFERRED AND COMMON STOCK
Pursuant to the Certificate of Incorporation, shares of preferred stock
and Common Stock may be issued in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
any preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporation transactions, could have the effect of making
it more difficult for a third party to acquire, or effectively preventing a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of preferred
stock.
DEPENDENCE UPON KEY EXECUTIVE OFFICERS
The Company's growth and development to date have been largely dependent
upon the services of key executive officers. The loss of a significant number of
these officers could have a material adverse effect on the Company.
COMMON SHARES AND SHAREHOLDER INFORMATION
-----------------------------------------
The common stock of TFC Enterprises, Inc., began trading on the NASDAQ Stock
Market under the symbol TFCE on December 23, 1993, and is designated a National
Market Security. At March 1, 1999, there were approximately 2,194 registered and
beneficial owners of the security. Share price information for the years ended
December 31, 1998 and 1997 is presented in the Selected quarterly data table on
the next page.
SELECTED QUARTERLY DATA * (UNAUDITED)
- ------------------------- ---------------------------------------- ------------------------------------------
1998 1997
- ------------------------- ---------------------------------------- ------------------------------------------
(dollars in thousands, Dec. Sept. June March Dec. Sept. June March
except per share amounts) 31 30 30 31 31 30 30 31
-- -- -- -- -- -- -- --
Statements of
operations:
Net interest revenue $ 7,708 $6,747 $6,238 $5,440 $ 5,153 $4,789 $5,108 $5,248
Provision for credit
losses 246 171 199 121 253 214 160 92
Other revenue 181 252 301 328 293 218 318 276
Operating expense 6,119 5,479 5,378 5,306 5,311 4,863 4,850 4,953
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes 1,524 1,349 962 341 (118) (70) 416 479
Provision for (benefit
income taxes 150 -- -- -- -- -- (283) 283
Net income (loss) 1,374 $1,349 $ 962 $341 $(118) $(70) $ 699 $196
===== ====== ====== ====== ====== ===== ====== =====
Net income (loss) per
basic common share $0.12 $0.12 $0.09 $0.03 $(0.01) $(0.01) $0.06 $0.02
Net income (loss) per
diluted common share $0.11 $0.11 $0.08 $0.03 $(0.01) $(0.01) $0.06 $0.02
Performance ratios:
Return on average equity 15.92% 16.28% 12.07% 4.37% NM NM 9.12% 2.62%
Return on average assets 3.20 3.24 2.43 0.90 NM NM 1.87 0.51
Yield on interest 23.26 23.17 22.73 21.64 21.62% 21.11% 21.73 21.05
earning assets
Cost of interest bearing 10.28 10.52 10.56 10.91 11.05 11.25 10.99 10.28
liabilities
Net interest margin 15.81 15.49 15.08 13.82 13.70 13.01 13.63 13.35
Operating expense as a 12.56 12.58 13.00 13.48 14.12 13.21 12.95 12.60
percentage of average
interest earning assets
Total net charge-offs to 15.09 17.69 15.47 18.20 16.99 16.19 19.98 21.15
average gross contract
receivables net of
unearned interest
60 day delinquencies to 5.91 5.57 6.20 7.35 8.85 8.66 8.13 9.01
period end gross
contract receivables
Total allowance and 11.80 12.53 13.44 13.70 14.70 15.17 15.66 16.60
nonrefundable reserve to
period end gross contract
Equity to assets, 20.44 19.85 19.84 20.37 21.02 21.94 21.03 19.76
period end
Average balances:
Interest earning assets $180,613 $174,249 $165,451 $157,459 $150,480 $147,261 $149,857 $157,236
Total assets 171,708 166,337 158,491 151,244 145,395 145,002 149,380 155,144
Interest bearing 130,908 127,187 119,786 112,972 107,839 106,001 110,350 117,777
liabilities
Equity 34,536 33,135 31,860 31,252 31,143 31,277 30,641 29,944
Common stock data:
Market price range:
High $2.38 $3.00 $3.00 $1.81 $2.00 $2.06 $2.00 $2.13
Low 1.38 1.19 1.44 1.00 0.66 1.00 1.13 1.13
Average 1.90 2.22 2.37 1.50 1.34 1.48 1.54 1.56
Close 1.63 1.75 2.63 1.56 0.94 1.34 1.38 1.31
- ------------------------- --------- --------- --------- ---------- -------- ---------- ----------- -----------
* The fourth quarter of 1998 includes a $0.4 million charge, to operating
expense, incurred for a securitization which was not completed due to the market
conditions that existed during the fourth quarter. Also, net interest revenue
includes a positive $0.5 million adjustment for dealer discount and fees which
were earned during 1998.
TFC ENTERPRISES, INC. REPORT OF MANAGEMENT
SHAREHOLDERS
TFC ENTERPRISES, INC.
The management of TFC Enterprises, Inc. is responsible for the preparation,
content, integrity, and objectivity of the following financial statements. These
financial statements have been prepared in accordance with generally accepted
accounting principles.
Management is further responsible for maintaining a system of internal controls
designed to provide reasonable assurance as to the protection of the Company's
assets and the integrity of its financial statements. This company-wide system
of controls includes written policies and procedures, proper delegation of
authority, division of responsibility, and the selection and training of
qualified personnel. Management believes that the system of internal controls
provides reasonable assurance that financial transactions are recorded properly
to permit the preparation of reliable financial statements.
The Audit Committee of the Board of Directors is comprised of three outside
directors and has the responsibility along with the Shareholders for the
selection of the independent auditors. The Audit Committee meets with management
and the independent auditors to review the scope of audits and their results,
and to discuss other matters affecting the Company's internal controls and
financial reporting. The independent auditors have free access to the Audit
Committee.
/s/ Robert S. Raley, Jr. /s/ Craig D. Poppen
Robert S. Raley, Jr. Craig D. Poppen
Chairman, President and Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
TFC ENTERPRISES, INC.
We have audited the accompanying consolidated balance sheets of TFC Enterprises,
Inc. as of December 31, 1998 and 1997, and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TFC Enterprises,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
February 23, 1999
CONSOLIDATED BALANCE SHEETS
December 31
------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Cash and cash equivalents $ 1,868 $ 1,975
Net contract receivables 155,895 128,503
Recoverable income taxes -- 1,229
Property and equipment, net 1,949 2,297
Intangible assets, net 10,978 12,070
Other assets 1,907 1,759
----- -----
Total assets $172,597 $147,833
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Revolving lines of credit $121,281 $ 98,572
Subordinated notes 9,636 11,214
Accounts payable and accrued expenses 3,180 2,841
Income taxes and other liabilities 2,394 2,139
Refundable dealer reserve 824 1,987
-------- --------
Total liabilities 137,315 116,753
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,404,882 and 11,290,308 shares
issued and outstanding in 1998 and 1997,
respectively 50 49
Additional paid-in capital 56,020 55,844
Retained deficit (20,788) (24,813)
-------- --------
Total shareholders' equity 35,282 31,080
------ ------
Total liabilities and shareholders' equity $172,597 $147,833
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
---- ---- ----
Interest and other finance revenue $39,085 $32,317 $40,484
Interest expense 12,952 12,019 13,451
------ ------ ------
Net interest revenue 26,133 20,298 27,033
Provision for credit losses 737 719 8,733
--- --- -----
Net interest revenue after provision
for credit losses 25,396 19,579 18,300
Other revenue:
Commissions on ancillary products 845 780 1,341
Other 217 325 95
--- --- --
Total other revenue 1,062 1,105 1,436
Operating expense:
Salaries 11,077 9,866 12,107
Employee benefits 2,003 1,511 1,957
Occupancy 910 896 1,053
Equipment 1,233 1,253 1,379
Amortization of intangible assets 1,092 1,091 1,091
Severance benefits -- -- 1,804
Restructuring charge -- -- 590
Securitization costs 448 -- --
Other 5,520 5,360 6,559
----- ----- -----
Total operating expense 22,283 19,977 26,540
------ ------ ------
Income (loss) before income taxes 4,175 707 (6,804)
Provision for income taxes 150 -- 792
-- -- --
Net income (loss) $ 4,025 $ 707 $(7,596)
======= ====== ========
Net income (loss) per common share:
Basic $ 0.36 $ 0.06 $ (0.67)
======= ======= ========
Diluted $ 0.33 $ 0.06 $ (0.67)
======= ======= ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Number of Additional
Shares Common Paid-in Retained
(IN THOUSANDS) Outstanding Stock Capital (Deficit) Total
----------- ----- ------- --------- -----
BALANCE AT DECEMBER 31, 1995 11,284 $49 $54,279 $(17,924) $36,404
Net loss -- -- -- (7,596) (7,596)
Issuance of stock warrants -- -- 423 -- 423
Stock options exercised 6 -- 12 -- 12
Deferred compensation
termination, net of taxes
of $348,000 -- -- 619 -- 619
-- -- --- -- ---
BALANCE AT DECEMBER 31, 1996 11,290 49 55,333 (25,520) 29,862
Net income -- -- -- 707 707
Issuance of stock warrants -- -- 511 -- 511
-- -- --- -- ---
BALANCE AT DECEMBER 31, 1997 11,290 49 55,844 (24,813) 31,080
Net income -- -- -- 4,025 4,025
Stock options exercised 115 1 176 -- 177
--- - --- -- ---
BALANCE AT DECEMBER 31, 1998 11,405 $ 50 $56,020 $(20,788) $35,282
====== ===== ======= ========= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
-----------------------
(IN THOUSANDS) 1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES
Net income (loss) $ 4,025 $ 707 $(7,596)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Amortization of intangible assets 1,092 1,091 1,091
Depreciation and other amortization 1,613 1,053 1,431
Provision for deferred income taxes 150 -- 6,375
Provision for credit losses 737 719 8,733
Changes in operating assets and liabilities:
Decrease in recoverable income taxes
1,229 4,602 148
Decrease (increase) in other assets (397) 582 1,834
(Decrease) increase in accounts payable and
accrued expenses 339 (1,119) (186)
Decrease in refundable dealer reserve
(1,163) (221) (1,042)
(Decrease) increase in income taxes and
other liabilities 255 (36) 179
--- ---- ---
Net cash provided by operating activities 7,880 7,378 10,967
INVESTING ACTIVITIES
Net cost of acquiring contract receivables (126,003) (104,342) (86,711)
Repayment of contract receivables 97,874 101,372 122,777
Purchase of property and equipment (434) (339) (1,611)
----- ----- -------
Net cash provided by (used in) investing
activities (28,563) (3,309) 34,455
FINANCING ACTIVITIES
Net borrowings on the revolving lines of credit 22,016 26,280 13,510
Payments on term notes -- (19,464) (30,536)
Payments on automobile receivables - backed notes -- (15,843) (31,408)
Borrowings on subordinated notes 1,670 -- --
Payments on subordinated notes (3,287) (1,287) (1,287)
Decrease in restricted cash -- 5,532 4,865
Proceeds from stock options exercised 177 -- 12
------- ------- ------
Net cash (used in) provided by financing 20,576 (4,782) (44,844)
activities
Increase (decrease) in cash and cash equivalents (107) (713) 578
Cash and cash equivalents at beginning of year 1,975 2,688 2,110
------- ------ ------
Cash and cash equivalents at end of year $1,868 $1,975 $2,688
======= ======= ======
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 11,618 $ 11,315 $12,438
Income taxes paid -- -- --
NONCASH TRANSACTIONS:
Issuance of stock warrants -- $ 511 $ 423
Deferred compensation terminated
and transferred to paid-in capital -- -- $ 619
See accompanying notes to consolidated financial statements.
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 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 eight loan production
offices throughout the United States in communities with a large concentration
of military personnel. FCF is involved in the direct origination and servicing
of small consumer loans. FCF operates 16 branches throughout Virginia and North
Carolina.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of TFCE and its
wholly-owned subsidiaries, TFC and FCF (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and overnight repurchase
agreements.
CONTRACT RECEIVABLES
Contract receivables that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding unpaid principal balances reduced by any charge-off or specific
valuation accounts and net of any unamortized deferred service fees and
unamortized discounts on purchased loans.
CREDIT LOSSES
The Company'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 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, if any, of the discount is recorded as dealer discount as discussed
below. Additional provisions for credit losses, if necessary, are charged to
income in amounts sufficient to maintain
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the combined allowance for credit losses and nonrefundable reserve at an amount
considered by management to be adequate to absorb estimated future credit
losses.
Management evaluates the reasonableness of the assumptions used in
projecting the loss experience by reviewing historical credit loss experience,
delinquencies, repossessions trends, the size of the finance contract portfolio
and general economic conditions and trends. Historical credit loss experience is
monitored on a static pool basis. Contract originations and subsequent
charge-offs are assigned to annual pools and the pool performance is monitored
separately. 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.
It is generally the Company's policy to charge its nonrefundable reserve and
then the allowance for credit losses for all contract receivables which are 180
days past due. In August 1998, the Company revised its charge-off policy to the
aforementioned guidelines. Prior to the change in guidelines, the Company's
policy was to charge its nonrefundable reserve and then the allowance for credit
losses for all contract receivables which are both 180 days past due and which
have had no significant payment activity for 90 days. Any amounts collected
subsequent to being charged off are restored to the allowance for credit losses.
The carrying value of repossessed assets is reduced, through charge-off, to
the lower of the unpaid contract balance or anticipated liquidation proceeds.
The Company's policy related to unsecured consumer contracts originated by
FCF is to establish and maintain, through a charge to income, an allowance for
credit losses, based on historical credit experience of FCF and the industry.
All consumer finance receivables which are 180 days past due are charged against
this allowance for credit losses. Any amounts collected subsequent to being
charged off are restored to the allowance for credit losses.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation expense is computed using the straight-line method over each
asset's estimated useful life, generally five to seven years.
INTANGIBLE ASSETS
Intangible assets consist of a purchased dealer list and goodwill, which are
being amortized using the straight-line method over periods of 15 years and 20
years, respectively. The carrying values of intangibles are reviewed on an
ongoing basis. If this review indicates that the intangibles will not be fully
recoverable, as determined based on estimated undiscounted cash flows generated
by the intangibles over their remaining life, their carrying value will be
reduced to the recoverable amount using discounted cashflows. No impairment
losses have been recorded for any period presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company uses the liability method to account for income taxes. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities (i.e., temporary differences) and are measured at the
enacted rates that will be in effect when these differences reverse.
INTEREST RATE PROTECTION AGREEMENTS
The Company purchased an interest-rate cap agreement that is designed to
limit its exposure to increasing interest rates and is designated as a hedge of
its revolving line of credit. An interest rate cap entitles the Company to
receive a payment from the counterparty equal to the excess, if any, of the
hypothetical interest expense (strike price) on a specified notional amount at a
current market interest rate over an amount specified in the agreement. The only
amount the Company is obligated to pay to the counterparty is an initial
premium. The strike price of these agreements exceeds the current market levels
at the time they are entered into. The interest rate index specified by the cap
agreement has been and is expected to be highly correlated with the interest
rates the Company incurs on its revolving line of credit. Payments to be
received as a result of the specified interest rate index exceeding the strike
price are accrued in other assets and are recognized as a reduction of interest
expense. The cost of the agreement is included in other assets and amortized to
interest expense ratably during the life of the agreement.
INCOME RECOGNITION
Interest revenue from precomputed contract receivables, simple
interest-bearing contract receivables and revenue from insurance commissions are
recognized using the interest method. Loan origination and service fees and
certain direct costs are capitalized and recognized as an adjustment to the
yield of the related loan.
The portion of the discount arising from purchases of contract receivables
which is not considered to be nonrefundable reserve for credit losses (see
discussion above) is recorded as a dealer discount. Dealer discounts are
deferred and accreted to income using the interest method over the contractual
life of the related receivables. The Company periodically reassesses the amount
of contract purchase discount accreted to interest revenue to reflect changes in
delinquency and charge-off experience.
Accrual of interest revenue and accretion of dealer discounts continue
until contracts are collected in full, become ninety days contractually
delinquent, or are charged-off (see discussion above) consistent with practices
generally applied by consumer finance companies.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
On January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," (SFAS No. 130) which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The adoption
of this statement had no impact on the Company's net income or shareholders'
equity.
STOCK-BASED COMPENSATION
In fiscal 1997, the Company adopted the disclosure-only requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). As permitted by the provisions of SFAS No. 123,
the Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding, excluding any dilutive effects of options and convertible
securities. Diluted earnings per share is based on the weighted average number
of common and common equivalent shares, including dilutive stock options and
convertible securities outstanding during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
In its normal course of business, the Company encounters two significant
types of risk: economic and regulatory. There are three components of economic
risk: interest rate risk, credit risk and market risk. The Company is subject to
interest rate risk to the degree that its interest-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
bearing liabilities mature or reprice more rapidly or on a different basis than
its interest-earning assets. Credit risk is the risk of default on the Company's
loan portfolio that results from the borrowers' inability or unwillingness to
make contractually required payments. Market risk reflects changes in the value
of collateral underlying contracts receivable.
The determination of the allowance for loan losses is particularly
susceptible to significant changes in the economic, environment and market
conditions. Management believes that, as of December 31, 1998, the allowance for
loan losses is adequate based on information currently available. A worsening or
protracted economic decline or substantial increase in interest rates, would
increase the likelihood of losses due to credit and market risks and could
create the need for substantial increases to the allowance for loan losses.
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. Most states where the
Company operates limit the interest rate, fees and other charges that may be
imposed by, or prescribe certain other terms of, the contracts that the Company
purchases and define the Company's rights to repossess and sell collateral. An
adverse change in those laws or regulations could have a material adverse effect
on the Company's profitability by, among other things, limiting the states in
which the Company may operate or the interest rate that may be charged on
installment contracts or restricting the Company's ability to realize the value
of any collateral securing contracts. The Company is not aware of any materially
adverse legislation currently pending in any jurisdiction where it currently
transacts business.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1996 financial
statements in order to conform with the 1998 presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONTRACT RECEIVABLES
The following is a summary of contract receivables at December 31:
(IN THOUSANDS) 1998 1997
----- ----
Contract receivables:
Auto finance $209,341 $171,356
Consumer finance 16,472 12,886
------- ------
Gross contract receivables 225,813 184,242
Less:
Unearned interest revenue 37,710 27,549
Unearned discount 3,539 729
Unearned commissions 637 672
Unearned service fees 1,186 629
Payments in process 3,915 2,617
Escrow for pending acquisitions 736 514
Allowance for credit losses 859 684
Nonrefundable reserve 21,336 22,345
------ ------
Net contract receivables $155,895 $128,503
========= ========
The effective rate of interest earned on contract receivables was 23.08%,
21.60%, and 22.23% for the years ended December 31, 1998, 1997, and 1996,
respectively.
At December 31, 1998, contractual maturities of contract receivables were as
follows:
(IN THOUSANDS)
1999 $101,835
2000 69,548
2001 40,285
2002 11,744
2003 2,401
-----
Gross contract receivables $ 225,813
=========
It has been the Company's experience that a substantial portion of the
portfolio generally is prepaid before contractual maturity dates. The above
tabulation, therefore, should not be regarded as a forecast of future cash
collections.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONTRACT RECEIVABLES (CONTINUED)
Changes in the allowance for credit losses and nonrefundable reserve were as
follows:
(IN THOUSANDS)
1998 1997 1996
---- ---- ----
Beginning Balance $ 23,029 $ 28,575 $43,482
Allocation for credit losses 26,915 21,635 16,620
Provision for credit losses 737 719 8,733
Charge-offs (33,548) (32,556) (46,916)
Recoveries 5,062 4,656 6,656
------- ------- -------
Ending Balance $ 22,195 $ 23,029 $28,575
======= ======== =======
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31:
(IN THOUSANDS) 1998 1997
---- ----
Leasehold improvements $ 255 $ 209
Computer equipment and software 3,721 3,543
Furniture and office equipment 2,136 2,028
Automobiles 154 143
----- -----
Property and equipment 6,266 5,923
Less: accumulated depreciation and amortization 4,317 3,626
----- -----
Property and equipment, net $1,949 $2,297
====== ======
Depreciation and amortization of property and equipment for the years ended
December 31, 1998, 1997, and 1996, was $0.8 million, $0.9 million, and $0.7
million, respectively.
NOTE 4. INTANGIBLE ASSETS
The following is a summary of intangible assets at December 31:
(IN THOUSANDS) 1998 1997
----- ----
Goodwill $16,265 $16,265
Dealer list 4,172 4,172
Less: accumulated amortization (9,459) (8,367)
-------- -------
Intangible assets, net $ 10,978 $ 12,070
========= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT
Debt outstanding at December 31 consisted of the following:
(IN THOUSANDS) 1998 1997
---- ----
Revolving lines of credit (A) $ 121,281 $ 98,572
Subordinated Notes (B) 9,636 11,214
------- ------
Total debt $130,917 $109,786
======== ========
(A) THE REVOLVING LINES OF CREDIT ARE NET OF UNAMORTIZED DISCOUNT TOTALING $0.7
MILLION DECEMBER 31, 1997.
(B) THE SUBORDINATED NOTES ARE NET OF UNAMORTIZED DISCOUNT TOTALING $34 THOUSAND
AND $73 THOUSAND AT DECEMBER 31, 1998 AND 1997, RESPECTIVELY.
Debt maturity schedule at December 31, 1998:
(IN THOUSANDS) 1999 2000 2001 2002 Total
---- ---- ---- ---- -----
Senior Subordinated Note $ 2,000 $ 2,000 $ 2,000 $ 2,000 $ 8,000
Revolving lines of credit -- 12,331 108,950 -- 121,281
Debenture -- -- 1,000 -- 1,000
15% Subordinated Notes -- -- 670 -- 670
-- -- --- -- ---
Total $ 2,000 $14,331 $112,620 $2,000 $130,951
======= ======= ======== ====== ========
REVOLVING LINES OF CREDIT
Pursuant to the amended revolving line of credit agreement dated April 1997,
the Company's primary lender agreed to provide a credit line of $110 million
(increased to $115 million on October 22, 1998) through January 1, 1999. The
revolving line of credit is secured by certain contract receivables of TFC and
is guaranteed by TFCE. On a daily basis, TFC remits all cash receipts relating
to those receivables to the lender. These daily cash receipts are first applied
to accrued interest on the revolving line of credit and the remainder to
principal. Borrowings under this revolving line of credit, totaled $109.0
million and $89.8 million at December 31, 1998 and 1997, respectively. The
advance rate used to determine availability on this line is limited to a
percentage of eligible collateral as specified in this amended agreement
decreased from 80% to 76% during 1997 and from 76% to 73% during 1998. Unused
availability under this facility totaled $6.0 million and $8.1 million at
December 31, 1998 and 1997, respectively, based on collateral in existence at
that time. The 1997 amended agreement along with the December 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
amended agreement granted the lender warrants to purchase a cumulative total of
approximately 1.1 million shares of the Company's common stock at $1 per share
over a 5-year period. The issuance of these warrants was recorded as additional
paid-in capital and as a discount to the line of credit. The amount, $0.5
million in 1997 and $0.4 million in 1996, was amortized into interest expense
over the term of the 1997 amended agreement. These amounts are fully amortized
as of December 31, 1998. The amount included in interest expense was $0.5
million and $0.4 million in 1998 and 1997, respectively.
Interest on the revolving line of credit is paid at a floating rate
equivalent to one-month LIBOR plus a borrowing spread and line fees of $0.4
million for 1998 and $0.5 million for 1997.
The borrowing spread on the Company's revolving line of credit was as
follows for the years ended December 31, 1998, 1997, and 1996:
Borrowing
Spread
January 1, 1996 to January 31, 1996 3.00
February 1, 1996 to March 31, 1998 4.00
April 1, 1998 to December 31, 1998 3.75
On January 1, 1996, the borrowing spread was 3.00%. The borrowing spread was
increased to 4.00% effective February 1, 1996, as a result of the forbearance
agreement executed in March 1996, and continued at that rate under the new
contract and security agreement signed in December 1996 and amended in April
1997. As of April 1,1998, the Company met certain operating goals set in the
Line of Credit agreement and the spread was reduced 25 basis points to 3.75%.
The average outstanding balance on the revolving line of credit totaled
$102.9 million, $82.8 million, and $60.7 million, respectively, in 1998, 1997,
and 1996. The average interest rate paid on the revolving line of credit was
9.41% in 1998, 9.63% in 1997 and 9.23% in 1996. At December 31, 1998, 1997, and
1996 respectively, one-month LIBOR was 5.24%, 5.71% and 5.40% and the total
interest rate was 8.99%, 9.71% and 9.40%.
In March 1997, the Company signed a $15 million line of credit agreement
with another lender. Borrowings under the revolving line of credit, totaled
$12.3 million and $9.5 million at December 31, 1998 and 1997. The advance rate
used to determine availability on this line is limited to 80% of eligible
collateral as specified in the agreement. Interest on the revolving line of
credit is prime plus 1.25%. There was no unused availability under this facility
in 1998 or 1997. The average outstanding balance on the revolving line of credit
totaled $10.5 million and $8.2 million, respectively, in 1998 and 1997. The
average interest rate paid on the revolving line of credit was 9.60% and 9.50%,
respectively in 1998 and 1997.
Effective January 1, 1999, the primary credit facility was renewed for an
additional two years through January 1, 2001. The renewal increases the credit
limit to $130 million and reduces the interest rate to 3.50% over one-month
LIBOR.
SUBORDINATED DEBT
Senior Subordinated Notes, due 2002
In June 1995, the Company issued $10.0 million of 9.38% Senior Subordinated
Notes due June 30, 2002. Interest on the Senior Subordinated Notes is
payable semi-annually. The notes may be prepaid subject to a "make-whole "
prepayment penalty. Principal payments of $2 million are due annually with
the final payment due June 2002. Under the terms of an amendment to the
notes signed in April 1997, the interest rate was increased to 10.48%
effective April 1, 1997, and the holder agreed to waive the technical
defaults and adjust various financial and operational covenants.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
Subordinated Debenture, due 2001
In June, 1998, the Company signed a $1 million subordinated floating rate
debenture with a subsidiary of a large U.S. based insurance company who is a
major provider of credit insurance products to this industry. The debenture
matures in January 2001, with interest adjusted quarterly and payable
quarterly at 1% over prime. The weighted-average interest rate was 9.375%
for 1998.
15% Subordinated Notes, due 2001
From July 1998 to December 1998, the Company issued $0.7 million of
unsecured subordinated debt due three years from origination. These notes
were offered pursuant to a private placement to a limited number of
prospective investors, including but not limited to, the board of directors,
officers and certain existing shareholders of the Company. The unsecured
notes bear interest at 15% per year.
Subordinated Non-Convertible Notes, due 1998
On October 27, 1988, the Company issued 13.50% Subordinated Non-Convertible
Notes in the amount of $6.4 million. The final principal payment of $1.3
million was paid in October 1998. Under the terms of an amendment to the
notes signed in April 1997, the interest rate was increased to 14.60%
effective April 1, 1997, and the holder agreed to waive the technical
defaults and adjust various financial and operational covenants.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
The revolving lines of credit agreements and the Senior Subordinated Note
agreement provide for certain covenants and restrictions regarding, among other
things, minimum net worth and interest coverage, maximum debt to equity ratio,
maximum delinquency and charge-off and minimum reserve requirements. At December
31, 1998 the Company was in compliance with all covenants.
INTEREST RATE PROTECTION AGREEMENT
TFC has entered into an interest rate protection agreement (cap) that limits
TFC's exposure to increases in its borrowing cost relating to an increase in the
one-month LIBOR rate. As discussed above, LIBOR is the base rate used in
connection with the revolving line of credit. The agreement has a notional
principal amount of $75 million through January 3, 1999, $85 million from
January 4, 1999 through March 31, 1999, $100 million from April 1, 1999 through
June 30, 1999 and $75 million from July 1, 1999 through September 30, 1999, a
LIBOR ceiling of 5.75% and an expiration date of September 30, 1999. The cap
subjects the Company to credit risk that the counterparty may fail to perform
under the terms of the agreement.
DIVIDEND RESTRICTIONS
The Company did not declare dividends on its common stock during the years
ended December 31, 1998, 1997, and 1996, nor does it anticipate paying cash
dividends in the foreseeable future. If and when the Company decides to declare
cash dividends, the amount would be limited by certain provisions of the
Company's various credit agreements. Additionally, the various credit agreements
provide restrictions on TFC's ability to transfer funds to TFCE in the form of
dividends.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Significant components of deferred tax assets and liabilities were as
follows as of December 31:
(IN THOUSANDS) 1998 1997
---- ----
DEFERRED TAX ASSETS:
Excess of book nonrefundable reserve over $ 9,914 $ 8,493
tax
Excess of book allowance for credit losses over tax 326 259
Net operating loss -- 1,502
Temporary difference relating to employee benefits 262 --
Contingent interest 296 --
Other 73 213
----- ------
Total deferred tax assets 10,871 10,467
====== ======
DEFERRED TAX LIABILITIES:
Recognition of dealer discount income for book purposes
in advance of tax recognition 9,999 6,788
Temporary differences relating to intangible assets 669 775
Temporary difference relating to employee benefits -- 296
Excess of tax over book depreciation 165 202
---- -----
Total deferred tax liabilities 10,833 8,061
Valuation allowance -- (2,218)
------ -------
NET DEFERRED TAX ASSETS (LIABILITIES) $ 38 $ 188
====== =======
The following is a summary of the income tax provision for the years ended
December 31:
(IN THOUSANDS) 1998 1997 1996
---- ---- ----
Current provision (credit):
Federal $ -- $ -- $(5,047)
State -- -- (536)
----- ----- -----
-- -- (5,583)
Deferred provision (credit):
Federal 1,335 372 3,332
State 250 70 383
------ ----- -----
1,585 442 3,715
Valuation allowance (1,435) (442) 2,660
------- ----- -----
Total $150 $ -- $ 792
======= ===== =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The differences between income taxes computed at the statutory Federal rate and
actual amounts were as follows for the years ended December 31:
(IN THOUSANDS) 1998 1997 1996
----- ----- ----
Computed at statutory Federal rate $ 1,393 $ 240 $(2,314)
State taxes, net of Federal tax benefit 196 28 (269)
Amortization of intangible assets 277 277 277
Non-recognition of net operating
loss carryforward -- -- 510
Contingent interest (296) -- --
Other items 15 (103) (72)
Valuation allowance (1,435) (442) 2,660
------- ----- -----
Computed at effective rate $150 $ -- $792
====== ====== ====
At December 31, 1997, recoverable income taxes totaled $1.2 million, which
primarily consisted of state income tax refunds for amended 1993, 1994, 1995,
and 1996 returns for the carryback of the 1996 operating loss. At December 31,
1996, recoverable income taxes totaled $5.8 million, which primarily consisted
of Federal and state income tax refunds of $5.0 million related to amended tax
returns for 1993 and 1994.
In 1993, contingent interest on the Company's convertible notes was
considered as deductible for Federal income tax purposes but was treated as
non-deductible for income tax expense in the Company's financial statements. To
the extent that the contingent interest on convertible notes is ultimately
determined to be deductible for Federal income tax purposes, the benefit, which
totals $2.1 million, will be recognized in the period that the determination is
made. During 1998, the Company and the IRS continued discussions regarding the
audit of its 1992-1996 income tax years. The Company, in order to reflect the
estimated outcome of those discussions, has utilized the net operating losses
reflected in its 1997 financial statements to offset adjustments to taxable
income in prior years. Accordingly, the Company does not have any net operating
loss carryforward at December 31, 1998.
7. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution savings plan covering all permanent
employees working 20 or more hours per week and with more than one year of
service. Under the terms of the plan, the Company matches 50% of employees'
contributions up to 10% of each employee's earnings as defined. In addition,
employees have the option of contributing additional amounts. The Company's plan
expense for 1998, 1997, and 1996 was $0.2 million, $0.1 million, and $0.2
million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS
The Company has an Employee Stock Purchase Plan (the "Stock Purchase Plan"),
which allows for options to be granted to employees, including eligible
officers, of the Company, TFC and any future majority-owned subsidiary to
purchase common stock. A total of 530,000 shares of common stock have been
reserved for issuance under the Stock Purchase Plan.
Through the Stock Purchase Plan, the Company granted 508,700 options to
certain eligible employees on June 1, 1998. These stock options were fully
vested at the date of grant. Approximately, 114,600 were exercised and the
remaining 394,100 expired on September 30, 1998.
Any employee who is customarily employed for at least 20 hours per week and
more than five months per calendar year by the Company and has more than two
years of service is eligible to participate in the Stock Purchase Plan. No
employee is permitted to purchase shares under the Stock Purchase Plan if such
employee owns 5% or more of the total of the Company. In addition, no employee
is entitled to purchase more than $25,000 of common stock (based upon the fair
market value of the shares of common stock at the time the option is granted) in
any calendar year. The price at which shares of common stock were sold under the
Stock Purchase Plan was the lower of 85% of the fair market value on the date of
grant or the purchase date of such shares.
On October 27, 1994, the Company established the 1995 Long-Term Incentive
Plan ("Incentive Plan"), which provides incentive stock options, non-qualified
stock options and restricted stock for certain executives of the Company. The
options generally vest over a period of five years. A total of 1.5 million
shares of common stock have been reserved for issuance under the Incentive Plan.
On June 1, 1998, 104,679 options granted in 1995 and 1996 were canceled and
reissued at an exercise price equal to the then fair market value of the
Company's common stock of $2.94 with vesting beginning January 1, 1999 over 5
years. The remaining 436,446 options granted under this plan in 1994 at an
exercise price of $11.50 expire on December 31, 1999. On June 1, 1998, 483,750
options were granted at an exercise price of $2.94 to certain employees. These
options vest over a period of 5 years, beginning on January 1, 1999.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighed-average assumptions: risk free interest rate of
6% for 1998 and 1997; dividend yield of 0% for 1998 and 1997; volatility factor
of the expected market price of the Company's common stock of 1.92 for shares
whose exercise price equals the stock price and 0.74 for shares whose exercise
price is less than the stock price for 1998 and 0.789 for 1997; and a
weighted-average expected life of the options ranging from 1 to 7.5 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's stock options. For purposes of pro
forma disclosures, the estimated fair value of the options was amortized to
expense over the options' vesting periods. The compensation expense recognized
in pro forma net income for 1998, 1997, and 1996 may not be representative of
the effects on pro forma net income for future years.
The Company's pro forma net income (loss) (in thousands) and pro forma income
(loss) per share based on options issued during 1998, 1997 and 1996 were as
follows:
Years ended December 31
1998 1997 1996
---- ---- ----
Pro forma net income (loss) $3,742 $651 $(7,601)
Pro forma net income (loss) per basic share 0.33 0.06 (0.67)
A summary of the activity for the Company's stock options with exercise
prices equal to the grant-date market value for the three years ended December
31 was as follows:
1998 1997 1996
----------------------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
(In 000s) Price (In 000s) Price (In 000s) Price
----------------------------------------------------------------------------------
Outstanding at beginning of 1,026 11.18 806 $10.11 1,368 $11.57
year
Granted 1,105 2.77 300 1.26 150 1.17
Exercised (115) 1.55 -- -- (6) 1.86
Forfeited and expired (649) 9.45 (80) 1.13 (706) 11.08
------ ----
OUTSTANDING AT END OF YEAR 1,367 8.86 1,026 11.18 806 10.11
====== ===== ===
EXERCISABLE AT END OF YEAR 576 9.02 637 11.13 527 11.84
=== === ===
Weighted-average fair value
of options granted during
the year $1.63 $0.84 $0.97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS (CONTINUED)
For stock options outstanding at December 31, 1998, the range of exercise prices
and the weighted-average remaining contractual life were as follows:
Stock Options Granted in
1998 1997 1996
---- ---- ----
Range of exercise prices 2.55-2.94 $0.91-1.44 $1.125-1.25
Weighted-average remaining contractual
life 5 years 10 years 7.5 years
9. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for the years ended December 31 were as follows:
(AMOUNTS IN THOUSANDS) 1998 1997 1996
---- ---- ----
Numerator:
Net income (loss) $4,025 $707 $(7,596)
Denominator:
Denominator for basic earnings (loss) 11,330 11,290 11,290
per share-weighted- average shares
Effect of dilutive securities:
Employee stock options 150 39 10
Warrants 549 276 -
--- --- -
Dilutive potential common shares 699 315 10
--- --- --
Denominator for diluted earnings (loss)
per share-adjusted weighted-average 12,029 11,605 11,300
shares and assumed conversions ====== ====== ======
Basic earnings (loss) per share $0.36 $0.06 $(0.67)
====== ===== ======
Diluted earnings (loss) per share $0.33 $0.06 $(0.67)
===== ===== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS
The Company conducts its business in leased facilities with original terms
of one to eleven years with renewal options for additional periods. These leases
are classified as operating leases. Certain equipment, including automobiles, is
leased for original terms of one to five years and the agreements are classified
as operating leases. Options to purchase are also included in certain equipment
lease agreements. Rent expense for the years ended December 31, 1998, 1997, and
1996 was approximately $0.9 million, $0.9 million, and $1.1 million,
respectively.
Future minimum annual lease payments for property and equipment under lease
at December 31, 1998 were as follows:
(IN THOUSANDS)
1999 $ 862
2000 757
2001 475
2002 419
2003 428
2004 through 2006 1,099
-----
Total $4,040
======
The Company is party to several legal actions which are ordinary, routine
litigation incidental to its business. The Company believes that none of those
actions, either individually or in the aggregate, will have a material adverse
effect on the results of operations or financial position of the Company.
11. RELATED PARTY TRANSACTIONS
As a result of the Company's 1995 net loss, a profit sharing payment
totaling $0.4 million, which was made to the Chief Executive Officer during
1995, was required to be repaid to the Company. The Company received an
executed note and recorded the required profit sharing repayment as a note
receivable. The note, totaling $0.4 million as of December 31, 1998 is
non-interest bearing and is due January 1, 2000 and provides that the
Company may offset bonus payments against amounts due under the note.
In 1996, the chairman and chief executive officer voluntarily
terminated his deferred compensation agreement. Since the chairman and chief
executive officer is considered a principal shareholder of the Company, the
voluntary termination of the agreement and the resultant elimination of the
Company's obligation with respect thereto, aggregating $1.0 million ($0.62
million after taxes), was reported as an equity contribution in 1996.
Robert S. Raley, Jr., the Company's Chairman and Chief Executive
Officer purchased $200,000 and Andrew M. Ockershausen, a Company director,
purchased $100,000 of the 15% Subordinated Notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS
OF CREDIT RISKS
In its normal course of business, the Company engages in consumer lending
activities with a significant number of consumers (obligors) throughout the
United States. In addition, the Company is party to certain off-balance-sheet
financial instruments, specifically an interest rate cap, which subjects the
Company to credit risk in the event market conditions cause the interest
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISKS
rate cap to experience an unrealized gain and the counterparty to the
transaction should fail to honor the contract. The maximum risk of accounting
loss from these on- and off-balance-sheet financial instruments with these
counterparties, assuming all collateral is deemed worthless, is represented by
their respective balance sheet amounts and the replacement cost of the
off-balance-sheet financial instruments. At December 31, 1998, the replacement
cost for the Company's interest rate cap was immaterial.
At December 31, 1998, approximately 62% of the Company's contract
receivables portfolio is related to obligors in Virginia (20%), Texas (18%),
California (13%) and Florida (11%). Although the Company's contract receivables
portfolio includes consumers living throughout the United States, a substantial
portion of the obligors' ability to honor their obligations to the Company may
be dependent on economic conditions in these states. All such contracts, other
than contracts originated by FCF, are collateralized by the related vehicles.
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," (SFAS No. 107) requires the disclosure of
the estimated fair value of on- and off-balance-sheet financial instruments.
Fair value estimates are made at a point in time based on judgments
regarding current economic conditions, interest rate risk characteristics, loss
experience and other relevant market data and information about the financial
instrument. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision. Therefore, the
estimated fair value may not be realizable in a current sale of the instrument.
Changes in assumptions could significantly affect the estimates.
Fair value estimates exclude all non-financial assets and liabilities
including property and equipment, goodwill and other intangibles, prepaid
assets, accrued liabilities, taxes payable, and refundable dealer reserves.
Accordingly, the aggregate fair value of the amounts presented do not represent
the value of the Company.
The following methods and assumptions were used by the Company in estimating
the fair value of its financial instruments at December 31, 1998 and 1997:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SHORT-TERM FINANCIAL INSTRUMENTS
The carrying amounts reported on the Company's balance sheet generally
approximate fair value for financial instruments that mature in 90 days or less,
with no significant change in credit risk. The carrying amounts approximate fair
value for cash and cash equivalents and certain other assets and liabilities.
Financial instruments included in other assets and liabilities primarily include
trade accounts receivable and payable.
CONTRACT RECEIVABLES
The estimated fair value of contract receivables was calculated using market
rates of return required for a bulk purchase of contract receivables with
similar credit and interest rate characteristics. The estimated fair value of
contract receivables that did not meet the criteria for a bulk purchase,
generally contracts that were more than 30 days past due, was calculated based
upon the liquidation value of the collateral.
REVOLVING LINES OF CREDIT AND SUBORDINATED NOTES
The estimated fair values for the revolving lines of credit and subordinated
notes were based on indicative market prices for debt with similar terms and
remaining maturities currently available to companies with similar credit
ratings.
INTEREST RATE PROTECTION AGREEMENTS
The estimated fair value of the Company's interest rate protection
agreements was based on market quotes from a financial institution at December
31, 1998 and 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments at December
31, 1998 and 1997 were as follows (IN THOUSANDS):
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Amount Fair
Value Value
Financial assets:
Cash and cash equivalents $ 1,868 $ 1,868 $ 1,975 $ 1,975
Net contract receivables 155,895 148,991 128,503 113,779
Other assets 633 633 825 825
------- ------- ------- --------
Total financial assets $158,396 $151,492 $131,303 $116,579
======= ======= ======= ========
Financial liabilities:
Revolving lines of credit $121,281 $121,281 $ 98,572 $ 98,572
Subordinated notes 9,636 7,387 11,214 8,201
Other liabilities 1,719 1,719 2,006 2,006
-------- -------- -------- --------
Total financial liabilities $132,636 $130,387 $111,792 $108,779
======== ======= ======= =======
OFF-BALANCE-SHEET FINANCIAL
INSTRUMENTS INSTRUMENTS:
Interest rate protection $ 21 $ 14 $ 18 $ 5
agreements
14. SEGMENTS
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", (SFAS No.
131) which was issued by the Financial Accounting Standards Board in June 1997
and became effective for financial statements for periods beginning after
December 15, 1997. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision makers in deciding how to allocate
resources and in assessing performance.
The Company is a specialty finance company with two business segments. Through
TFC, the auto finance segment, the Company is engaged in purchasing and
servicing installment sales contracts originated by automobile and motorcycle
dealers in the sale of used automobiles, vans, light trucks, and new and used
motorcycles (collectively "vehicles") throughout the United States. This segment
consists of two business units (i) point-of-sale which contracts are acquired on
an individual basis from dealers after the Company has reviewed and approved the
purchasers credit application and (ii) bulk which contracts are acquired through
the purchase of dealer portfolios. The point-of-sale business focuses on
military enlisted personnel whereas the bulk purchases are primarily contracts
with civilian customers. Through FCF, the consumer finance segment, the Company
is involved in the direct origination and servicing of small consumer loans
through a branch network in Virginia and North Carolina. The other column
consists of corporate support
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENTS (CONTINUED)
functions not allocated to either of the business segments. All revenue is
generated from external customers in the United States.
Management measures segment performance based on revenue earned (yields
achieved) on the outstanding portfolio of contract receivables as well as net
income before taxes.
The accounting policies are the same as those described in the summary of
significant accounting policies.
(In thousands) Auto Finance Consumer Finance Other Total
- --------------------------- --------------- ----------------- ------------ ----------
1998
Interest revenues $35,599 $3,486 $-- $39,085
---------------------------------------------------------------------
Interest expense $11,825 $1,127 $-- $12,952
---------------------------------------------------------------------
Income (loss) before $6,145 $(347) $(197) $5,601
taxes:
---------------------------------------------------------------------
Unallocated amounts:
Intangible amortization (1,092)
Corporate expenses (334)
-------------
Consolidated
income before taxes $4,175
=============
Contract receivables $140,774 $15,118 $3 $155,895
------------------------------------------------------
Other assets 16,702
------------
Total assets $172,597
============
Auto Finance Consumer Finance Other Total
- --------------------------- -------------- ------------------ --------- ------------
1997
Interest revenues $29,631 $2,686 $-- $32,317
-------------------------------------------------------------------------
Interest expense $11,366 $653 $-- $12,019
-------------------------------------------------------------------------
Income (loss) before $1,822 $(228) $346 $1,940
taxes:
-------------------------------------------------------------------------
Unallocated amounts:
Intangible amortization (1,091)
Corporate expenses (142)
---------------
Consolidated
income before $707
taxes
===============
Contract receivables $116,809 $11,694 $-- $128,503
----------------------------------------------------------
Other assets 19,330
---------------
Total assets $147,833
===============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SEGMENTS (CONTINUED)
1996
Interest revenues $38,716 $1,768 $-- $40,484
------------------------------------------------------------------------
Interest expense $12,868 $583 $-- $13,451
------------------------------------------------------------------------
Income (loss) before $(7,076) $(287) $2,133 $(5,230)
taxes:
---------------------------------------------------------
Unallocated amounts:
Intangible amortization (1,091)
Corporate expenses (483)
-------------
Consolidated (loss)
before taxes $(6,804)
=============
Contract receivables $117,436 $8,816 $-- $126,252
----------------------------------------------------------
Other assets 32,331
-------------
Total assets $158,583
=============
TFC ENTERPRISES, INC. DIRECTORS, OFFICERS AND SHAREHOLDER INFORMATION
BOARD OF DIRECTORS *
Robert S. Raley, Jr. (1)
Chairman of the Board,
President and Chief Executive Officer
Walter S. Boone, Jr. (1)(2)
President, Virginia General Investment, Inc.
Douglas E. Bywater (1)(3)
Partner, Tate & Bywater, Ltd.
Andrew M. Ockershausen (3)
Director of Business
Development, Home Team Sports
Phillip R. Smiley (2)
Field Services Regional
Manager, UNISYS
Linwood R. Watson (2)
Thompson, Greenspon
& Co., P.C.
(1) MEMBER OF EXECUTIVE
COMMITTEE
(2) MEMBER OF AUDIT
COMMITTEE
(3) MEMBER OF
COMPENSATION COMMITTEE
* AS OF MARCH 1999
EXECUTIVE OFFICERS
Robert S. Raley, Jr.
Chairman of the Board,
President and Chief
Executive Officer
Craig D. Poppen
Vice President, Treasurer
and Chief Financial Officer
Ronald G. Tray
Vice President and Assistant Secretary
Fletcher A. Cooke
Secretary and General Counsel
SHAREHOLDER CONTACT
Craig D. Poppen
Vice President, Treasurer and Chief Financial Officer
5425 Robin Hood Road,
Suite 101B,
Norfolk, Virginia 23513
(757) 858-4054 ext. 355
FAX: (757) 858-4093
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
ANNUAL MEETING
The annual shareholders' meeting will be held Tuesday, May 11, 1999, at 10:00
p.m. at the Airport Hilton Hotel, Norfolk, Virginia
FORM 10-K
Copies of TFC Enterprises, Inc.'s Annual Report on Form 10-K are filed with the
Securities and Exchange Commission and may be obtained from the Shareholder
Relations Department, 5425 Robin Hood Road, Suite 101B, Norfolk, Virginia 23513
STOCK TRADING
TFC Enterprises, Inc. Common Stock trades on The NASDAQ Stock Market under the
symbol TFCE and is designated a National Market Security. The listing found in
most newspapers is TFC Ent.
INDEPENDENT
AUDITORS
Ernst & Young LLP
901 East Cary Street
One James Center
Richmond, Va 23218
OUTSIDE CORPORATE
COUNSEL
Clark & Stant
One Columbus Center
Suite 900
Virginia Beach, Virginia 23462
THE FINANCE COMPANY OFFICERS AND LOCATIONS
OFFICERS*
Robert S. Raley, Jr.
Chairman of the Board,
President and Chief Executive Officer
Ronald G. Tray
Senior Executive Vice President,
Chief Operating Officer and Assistant Secretary
Craig D. Poppen
Executive Vice President,
Treasurer and Chief Financial Officer
Rick S. Lieberman
Executive Vice President
and Chief Lending Officer
Fletcher A. Cooke
Secretary and General Counsel
Delma H. Ambrose
Senior Vice President
Susan Traylor
Vice President
Marylou Hennessey
Vice President
Kevin J. Obal
Vice President
M. Patricia Piccola
Vice President
Gregory Willoughby
Vice President
Ed Conaway
Controller
David Hall
Assistant Vice President
James Ostrich
Assistant Vice President
Guy H. Putman III
Assistant Vice President
* AS OF MARCH 1999
LOCATIONS
CORPORATE EXECUTIVE OFFICE
5425 Robin Hood Road,
Suite 101B
Norfolk, Virginia 23513
(757) 858-4054
FAX: (757) 858-4093
POINT-OF-SALE
SERVICE CENTER
5425 Robin Hood Road,
Suite 101A
Norfolk, Virginia 23513
(757) 858-1400
FAX: (757) 858-5499
NORFOLK
LOAN PRODUCTION OFFICE
5425 Robin Hood Road,
Suite 101A
Norfolk, Virginia 23513
(757) 858-1400
FAX: (757) 858-5499
JACKSONVILLE LOAN
PRODUCTION OFFICE
8000 Arlington Expressway,
Suite 400
Jacksonville, Florida 32211
(904) 725-5222
FAX: (904) 725-5833
KILLEEN
LOAN PRODUCTION OFFICE
2201 South W.S. Young
Suite 106C
Killeen, Texas 76543
(254) 526-8390
FAX: (800) 221-8698
SAN DIEGO
LOAN PRODUCTION OFFICE
637 Third Avenue,
Suite I
Chula Vista, California 91910
(619) 546-1336
FAX: (619) 546-0360
TACOMA
LOAN PRODUCTION OFFICE
3640 South Cedar Street
#G
Tacoma, Washington 98409
(253) 474-6445
FAX: (253) 474-0834
CLARKESVILLE
LOAN PRODUCTION OFFICE
822 Providence Blvd
Clarkesville, Tennessee 37042
(931) 906-5595
FAX: (931) 906-5591
COLUMBUS
LOAN PRODUCTION OFFICE
2821 Warm Springs Road
Unit 2B
Columbus, Georgia 31904
(706) 323-7682
FAX: (706) 321-9029
BULK
SERVICE CENTER
8000 Arlington Expressway,
Suite 400
Jacksonville, Florida 32211
(904) 725-5222
FAX: (904) 725-5833
BULK LOAN PRODUCTION OFFICE
5425 Robin Hood Road,
Suite 101A
Norfolk, Virginia 23513
(757) 858-1400
FAX: (757) 858-5499
FIRST COMMUNITY FINANCE, INC. OFFICERS AND LOCATIONS
FIRST COMMUNITY
FINANCE, INC. OFFICERS*
Robert S. Raley, Jr.
Chairman of the Board
and Executive Vice President
G. Kent Brooks
President and Chief
Executive Officer
Walter Owings
Vice President and Secretary
Robert Boykin
Vice President and
Assistant Secretary
Craig D. Poppen
Vice President, Treasurer and Chief Financial Officer
* AS OF MARCH 1999
CORPORATE OFFICE
4900 Augusta Avenue
Suite 104
Richmond, Virginia 23230
(804)353-4900
FAX:(804)353-7818
BRANCHES
71 S. Airport Drive
Highland Springs, Virginia 23075
(804) 737-8218
FAX: (804) 737-4135
9903 Hull Street Road
Richmond, Virginia 23236
(804) 745-3743
FAX: (804) 745-3898
101-A North Brunswick Avenue
South Hill, Virginia 23970
(804) 447-5778
FAX: (804) 447-6077
1327-B West Broad Street
Waynesboro, Virginia 22980
(540) 946-2633
FAX: (540) 946-2601
150 Walker Street
Lexington, Virginia 24450
(540) 464-3160
FAX: (540) 464-1760
Washington Square Shopping Center
5338-E George Washington Memorial Hwy.
Grafton, Virginia 23692
(757) 874-6775
FAX:(757)874-6090
1312-C West Grantham Street Goldsboro,
North Carolina 27530
(919) 736-9912
FAX: (919) 736-9807
232 Greenville Blvd. S. E.
Greenville, North Carolina 27858
(252) 355-7540
FAX: (252) 355-0050
715 North Queen Street
Kinston, North Carolina 28501
(252) 939-1665
FAX: (252) 939-9521
1060 Tiffany Square
Rocky Mount, North Carolina 27804
(252) 977-0250
FAX: (252) 977-9649
3308 Bragg Boulevard Suite 132
Fayetteville, North Carolina 28303
(910)868-9411
FAX:(910)868-9013
4119-D Arendell Street
Wellons Center
Morehead City, North Carolina 28557
(252)247-2494
FAX:(252)247-1189
715 Gum Branch Center, Unit #4
Jacksonville, North Carolina 28546
(910)455-8818
FAX:(910)455-9440
2326 Forest Hills Road
Wilson, North Carolina 27893
(252)234-2754
FAX:(252)234-2752
2408 Clarendon Blvd.
Suite A
New Bern, North Carolina 28652
(252)635-9945
FAX:(252)635-9961
421 Warsaw Road
Clinton, North Carolina 28328
(910)596-0707
FAX:(910)596-0495