THIS REPORT HAS BEEN FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION VIA EDGAR
- ---------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- ------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
Commission File No. 0-22910
T F C E N T E R P R I S E S, I N C.
(Exact name of registrant as specified in its charter)
Delaware 54-1306895
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5425 Robin Hood Road
Suite 101 B
Norfolk, Virginia 23513
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code -- (757) 858-1400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- -----
As of November 13, 1998, there were 11,404,882 outstanding shares of the
registrant's $.01 par value per share common stock.
<PAGE>
TFC ENTERPRISES, INC.
REPORT ON FORM 10-Q FOR THE THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Table of Contents and 10-Q Cross Reference Index
Part I - Financial Information Page No.
- ------------------------------ --------
Financial Highlights 3
Financial Statements (Item 1)
Consolidated Balance Sheets 4
Consolidated Statements of Operations 5
Consolidated Statements of Changes in Shareholders' Equity 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 2) 12
Part II - Other Information
- ---------------------------
Legal Proceedings (Item 1) 20
Exhibits and Reports on Form 8-K (Item 6) 20
Signatures 21
2
<PAGE>
TFC ENTERPRISES, INC.
FINANCIAL HIGHLIGHTS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Three months Nine months
ended ended
(dollar amounts in thousands, September 30, September 30,
except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,349 $ (70) $ 2,651 $ 825
Basic net income (loss) per common
share .12 (.01) .23 .07
Diluted net income (loss) per
common share .11 (.01) .22 .07
Weighted-average common shares
outstanding (in thousands) 11,334 11,290 11,308 11,290
Adjusted weighted-average common
shares and assumed conversions (in
thousands) 12,199 11,677 12,064 11,590
- -------------------------------------------------------------------------------------
Performance ratios (annualized,
as appropriate):
Return on average common equity 16.28% NM 11.01% 3.59%
Return on average assets 3.24 NM 2.23 .73
Yield on interest-earning assets 23.17 21.11% 22.53 21.27
Cost of interest-bearing liabilities 10.52 11.25 10.66 10.82
Net interest margin 15.49 13.01 14.82 13.32
Operating expense as a percentage
of average interest-earning assets 12.58 13.21 13.00 12.90
Total net charge-offs to average
gross contract receivables net of
unearned interest 17.69 16.19 17.11 19.10
60+ days delinquencies to
period-end gross contract
receivables 5.57 8.66 5.57 8.66
Total allowance and nonrefundable
reserve to period-end gross
contract receivables net of
unearned interest 12.53 15.17 12.53 15.17
Equity to assets, period end 19.85 21.94 19.85 21.94
- -------------------------------------------------------------------------------------
Average balances:
Interest-earning assets (a) $174,249 $147,261 $165,788 $151,609
Total assets 166,337 145,002 158,674 149,739
Interest-bearing liabilities 127,187 106,001 119,946 111,361
Equity 33,135 31,277 32,116 30,612
- -------------------------------------------------------------------------------------
</TABLE>
Note: Throughout this report, ratios are based on unrounded numbers and factors
contributing to changes between periods are noted in descending order of
materiality.
NM - Not meaningful
(a) Average interest-bearing deposits and gross contract receivables net of
unearned interest revenue and unearned discount.
3
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Sept. 30, Dec. 31,
(dollars in thousands) 1998 1997
---- ----
Assets
Cash and cash equivalents $ 1,890 $ 1,975
Net contract receivables 153,737 128,503
Recoverable income taxes 38 1,229
Property and equipment, net 1,930 2,297
Intangible assets, net 11,251 12,070
Deferred income taxes 188 188
Other assets 1,823 1,571
----- -----
Total assets $170,857 $147,833
-------- --------
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $120,037 $ 98,572
Subordinated notes 10,819 11,214
Accounts payable and accrued expenses 2,847 2,841
Income taxes 2,075 2,075
Refundable dealer reserve 1,102 1,987
Other liabilities 69 64
------- -------
Total liabilities 136,949 116,753
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
outstanding, respectively 49 49
Additional paid-in capital 56,021 55,844
Retained deficit (22,162) (24,813)
------- -------
Total shareholders' equity 33,908 31,080
------ ------
Total liabilities and shareholders' equity $170,857 $147,833
-------- --------
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended
Sept. 30, Sept. 30,
(in thousands, except per share amounts) 1998 1997
- -------------------------------------------------------------------------
Interest and other finance revenue $ 28,015 $ 24,185
Interest expense 9,590 9,040
- -------------------------------------------------------------------------
Net interest revenue 18,425 15,145
Provision for credit losses 491 466
- -------------------------------------------------------------------------
Net interest revenue after provision
for credit losses 17,934 14,679
Other revenue:
Commission on ancillary products 688 587
Other 193 226
- -------------------------------------------------------------------------
Total other revenue 881 813
- -------------------------------------------------------------------------
Operating expense:
Salaries 8,170 7,233
Employee benefits 1,485 1,086
Occupancy 671 668
Equipment 927 930
Amortization of intangibles 819 819
Other 4,092 3,931
- -------------------------------------------------------------------------
Total operating expense 16,164 14,667
- -------------------------------------------------------------------------
Income (loss) before income taxes 2,651 825
Provision for income taxes -- --
- -------------------------------------------------------------------------
Net income (loss) $ 2,651 $ 825
- -------------------------------------------------------------------------
Net income (loss) per common share:
Basic $ .23 $ .07
Diluted .22 .07
- -------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------------------------------------
Sept. 30, June 30, March 31, Sept. 30,
(in thousands, except per share amounts) 1998 1998 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest and other finance revenue $10,094 $ 9,401 $ 8,520 $ 7,770
Interest expense 3,347 3,163 3,080 2,981
- ------------------------------------------------------------------------------------------------------------------
Net interest revenue 6,747 6,238 5,440 4,789
Provision for credit losses 171 199 121 214
- ------------------------------------------------------------------------------------------------------------------
Net interest revenue after provision 6,576 6,039 5,319 4,575
fr credit losses
Other revenue:
Commission on ancillary products 208 237 243 176
Other 44 64 85 42
- ------------------------------------------------------------------------------------------------------------------
Total other revenue 252 301 328 218
- ------------------------------------------------------------------------------------------------------------------
Operating expense:
Salaries 2,727 2,761 2,682 2,397
Employee benefits 512 490 483 390
Occupancy 227 221 222 216
Equipment 311 311 305 300
Amortization of intangibles 273 273 273 273
Other 1,429 1,322 1,341 1,287
- -----------------------------------------------------------------------------------------------------------------
Total operating expense 5,479 5,378 5,306 4,863
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,349 962 341 (70)
Provision for income taxes -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,349 $ 962 $ 341 $(70)
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic $ .12 $ .09 $ .03 $(.01)
Diluted .11 .08 .03 (.01)
</TABLE>
6
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Nine months ended
Sept. 30,
(in thousands) 1998 1997
---- ----
Common stock
Balance at end of period $ 49 $ 49
Additional paid-in capital
Balance at beginning of period 55,844 55,333
Stock options exercised 177 --
Issuance of warrants -- 511
------- ---------
Balance at end of period $ 56,021 $ 55,844
======== ========
Retained deficit
Balance at beginning of period $(24,813) $(25,520)
Net income (loss) 2,651 825
-------- --------
Balance at end of period $(22,162) $(24,695)
======== ========
See accompanying Notes to Consolidated Financial Statements.
(a) There are no adjustments to net income to determine comprehensive income
for the periods presented.
7
<PAGE>
TFC ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
Sept 30,
--------
(In thousands) 1998 1997
---- ----
Operating activities
Net income $2,651 $ 825
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 819 819
Depreciation and other Amortization 1,105 647
Provision for credit losses 491 466
Changes in operating assets and liabilities:
Decrease in recoverable income taxes 1,191 4,593
Increase in other assets (326) (299)
(Decrease) increase in accounts payable and
accrued expenses 6 (1,450)
Decrease in refundable dealer reserve (885) (904)
Increase in other liabilities 5 560
----- -----
Net cash provided by operating activities 5,057 5,257
Investing activities
Net cost of acquiring contract receivables (95,925) (72,722)
Repayment on contract receivables 70,199 76,661
Purchase of property and equipment (217) (220)
------ ------
Net cash (used in) provided by investing activities (25,943) 3,719
Financing activities
Net borrowings on revolving lines of credit 21,054 19,875
Net payments on subordinated notes (430) --
Payments on term notes -- (19,864)
Payments on automobile receivables-backed notes -- (15,843)
Borrowings on term note -- 400
Decrease in restricted cash -- 5,532
Proceeds from stock options exercised 177 --
------ -------
Net cash provided by (used in) financing activities 20,801 (9,900)
Decrease in cash and cash equivalents (85) (925)
Cash and cash equivalents at beginning of period 1,975 2,688
----- -----
Cash and cash equivalents at end of period $ 1,890 $ 1,763
------- -------
Supplemental disclosures:
Interest paid $8,318 $8,317
Income taxes paid -- --
Noncash transactions:
Issuance of stock warrants $ -- $ 511
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Organization and business
TFC Enterprises, Inc. ("TFCE") is a holding company which owns two
primary 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 portfolio basis ("portfolio" purchase). Based in
Norfolk, Virginia, TFC also has offices in Killeen, Texas; Jacksonville,
Florida; Tacoma, Washington; San Diego, California; and Clarksville,
Tennessee. FCF is involved in the direct origination and servicing of
small consumer loans. FCF operates branch offices in Virginia and North
Carolina.
Basis of presentation
The unaudited consolidated financial statements of the Company were
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. These financial statements should be read in
conjunction with the Company's 1997 Annual Report on Form 10-K. In the
opinion of management, all normal recurring adjustments which management
of the Company considers necessary for a fair presentation of the
financial position and results of operations for the periods are reflected
in the financial statements. Operating results for the three and nine
months ended September 30, 1998, are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1998.
In August, The Finance Company changed its charge off policy to better
align TFC's policy with the industry. Prior to the change, it was
generally TFC's policy to charge off, through reserves, all contract
receivables which were both 180 days past due and which have had no
significant payment activity for 90 days. TFC's current policy is to
generally charge off, through reserves, all contract receivables which are
180 days past due without regard to recent payment history.
9
<PAGE>
TFC ENTERPRISES, INC.
Notes to Consolidated Financial Statements (continued)
2. Contract receivables
The following is a summary of contract receivables as of September 30,
1998 and December 31, 1997:
Sept. 30, Dec. 31,
(In thousands) 1998 1997
---- ----
Contract receivables
Auto finance $204,172 $171,356
Consumer finance 14,632 12,886
------ ------
Gross contract receivables 218,804 184,242
Less:
Unearned interest revenue 36,457 27,549
Unearned discount 3,437 729
Unearned commissions 659 672
Unearned service fees 1,134 629
Payments in process 1 2,617
Escrow for pending acquisitions 537 514
Allowance for credit losses 765 684
Nonrefundable reserve 22,077 22,345
-------- --------
Net contract receivables $153,737 $128,503
======== ========
Changes in the allowance for credit losses and nonrefundable reserve for
the three and nine months ended September 30, 1998 and 1997 were as
follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $23,278 $23,021 $23,029 $28,575
Provision for credit losses 171 214 491 466
Allocation for credit losses 7,236 4,879 20,859 14,504
Charge-offs (9,120) (7,054) (25,248) (24,957)
Recoveries 1,277 1,125 3,711 3,597
----- ----- ----- -----
Balance at end of period $22,842 $ 22,185 $22,842 $ 22,185
======= ======== ======= ========
10
<PAGE>
TFC ENTERPRISES, INC.
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
3. Computation of basic and diluted net income per common share
Basic and diluted net income per common share for the three and nine months
ended September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------- --- -------------
(in thousands, except per share amounts) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,348 $ (70) $ 2,651 $ 825
Denominator for basic net income per
common share-weighted-average shares 11,334 11,290 11,308 11,290
Effect of dilutive securities:
Warrants 626 355 579 255
Employee stock options 239 32 177 45
--- ------ ------ ------
Denominator for diluted net income
per common share-adjusted weighted-
average shares and assumed conversions 12,199 11,677 12,064 11,590
------ ------ ------ ------
Basic net income (loss) per common
share $ .12 $ (.01) $ .23 $ .07
------ ------- --- ---
Diluted net income (loss) per
common share $ .11 $ (.01) $ .22 $ .07
--------- ------ ----- -----
</TABLE>
11
<PAGE>
TFC ENTERPRISES, INC.
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations
Cautionary statement under the "Safe-Harbor" provisions of the Private
Securities Litigation Reform Act of 1995: Included in this Report and other
written and oral information presented by management from time to time,
including but not limited to, reports to shareholders, quarterly
shareholder letters, filings with the Commission, news releases,
discussions with analysts and investor presentations, are forward-looking
statements about business strategies, market potential, potential for
future point-of-sale and portfolio purchases, future financial performance
and other matters that reflect management's expectations as of the date
made. Without limiting the foregoing, the word "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 and the impact of installment contract defaults.
Please refer to a discussion of these and other factors in this Report and
the Company's other Commission filings. The Company disclaims any intent or
obligation to update these forward-looking statements, whether as a result
of new information, future events or otherwise.
Results of Operations
The net income for the third quarter of 1998 increased to $1.3
million, or $.12 per common share, compared to a net loss of $0.1 million,
or $.01 per common share, in the third quarter of 1997. Net income for the
first nine months of 1998 was $2.7 million, or $.23 per common share,
compared to a net income of $0.8 million, or $.07 per common share, for the
first nine months of 1997. The primary reasons for the increased 1998
income was continued improved performance of the Company's contract
portfolio giving rise to an increased net interest margin resulting from
the increase in yield on interest earning assets and decrease in cost of
interest bearing liabilities compared to the similar period in 1997.
Volume
Gross contracts purchased or originated totaled $56.0
million in the third quarter of 1998, or 39% above the $40.3 million
purchased in the third quarter of 1997. For the first nine months of 1998,
gross contracts purchased or originated totaled $164.8 million, or 40%
above the $117.3 million purchased during the first nine months of 1997.
The increase in gross contract purchases in the third quarter and first
nine months of 1998, relative to the comparable periods in 1997, was
primarily attributable to the $52.6 million increase in point-of-sale
purchases, resulting from continued emphasis on this line of business.
Although management has not decreased emphasis on the portfolio business
line, the Company is facing increased competition in the portfolio business
line, which places an increased pressure on the market pricing and
economics of portfolio purchases.
12
<PAGE>
TFC ENTERPRISES, INC.
Results of Operations (continued)
Gross contracts purchased or originated were as follows for the three and
nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Gross contract volume September 30, September 30,
------------- -------------
(dollars in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Auto finance:
Point of sale $35,739 $21,109 $108,823 $56,232
Portfolio 15,857 15,907 43,509 51,724
Consumer finance 4,315 3,272 12,496 9,362
------- ------- -------- --------
Total $55,911 $40,288 $164,828 $117,318
------- ------- -------- --------
Number of contracts purchased or originated:
Auto finance:
Point of sale 2,897 1,823 8,832 4,970
Portfolio 3,582 2,976 9,272 10,059
Consumer finance 2,440 1,804 6,944 4,977
----- ----- ----- -----
Total 8,919 6,603 25,048 20,006
----- ----- ------ ------
</TABLE>
Net interest revenue
Net interest revenue for the third quarter of 1998 totaled $6.7
million, an increase of 40% compared with $4.8 million in the third
quarter of 1997. For the first nine months of 1998, net interest revenue
was $18.4 million, up 22% from $15.1 million in the first nine months of
1997. The increases were primarily attributable to an increase in
interest-earning assets and an increase in the net interest spread.
The yield on interest-earning assets was 23.17%, in the third quarter
of 1998, compared to 21.11% in the third quarter of 1997. For the first
nine months of 1998, the yield on interest earning-assets was 22.53%
compared to 21.27% for the first nine months of 1997. The increase was
primarily attributable to an increase in the amount of contract purchase
discount accreted to interest revenue as a yield enhancement which was $1.5
for the first nine months of 1998 and $0.8 million for the third quarter of
1998.
The cost of interest-bearing liabilities was 10.52%, in the third
quarter 1998, compared to 11.25% in the third quarter of 1997. For the
first nine months of 1998, the cost on interest-bearing liabilities was
10.66% compared to 10.82% for the first nine months of 1997. The decrease
was primarily attributable to an interest rate reduction on the Company's
primary line of credit.
13
<PAGE>
TFC ENTERPRISES, INC.
Results of Operations (continued)
The following table summarizes net interest revenue and the net interest
margin for the three and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
(dollars in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average interest-earning assets (a) $174,249 $147,261 $165,788 $151,609
Average interest-bearing liabilities 127,187 106,001 119,946 111,361
------- ------- ------- -------
Net interest-earning assets $ 47,062 $ 41,260 $ 45,842 $ 40,248
-------- -------- -------- --------
Interest and other finance revenue $ 10,094 $ 7,770 $ 28,015 $ 24,185
Interest expense 3,347 2,981 9,590 9,040
----- ----- ----- -----
Net interest revenue $ 6,747 $ 4,789 $ 18,425 $ 15,145
------- ------- -------- --------
Yield on interest earning assets 23.17% 21.11% 22.53% 21.27%
Cost of interest bearing liabilities 10.52% 11.25% 10.66% 10.82%
----- ----- ----- -----
Net interest spread 12.65% 9.86% 11.87% 10.45%
----- ---- ----- -----
Net interest margin (b) 15.49% 13.01% 14.82% 13.32%
----- ----- ----- -----
</TABLE>
(a) Average gross contract receivables net of unearned interest revenue and
unearned discount.
(b) Net interest margin is annualized net interest revenue divided by
average interest-earning assets.
Operating expense
Operating expense for the third quarter and first nine months of 1998
was $5.5 million and $16.2 million, respectively, compared with $4.9
million and $14.7 million, respectively, in the third quarter and first
nine months of 1997. The increases in operating expense in the third
quarter and first nine months of 1998 reflects increased salary and
benefit expenses related to additional personnel in various departments.
Provision for income taxes
The Company recorded no income tax provision in the first nine months
of 1998. The Company anticipates the reversal of a portion of the deferred
tax valuation allowance recorded at year end 1997 will offset the tax
expense related to the estimated income for fiscal year 1998.
Other matters
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.
14
<PAGE>
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 timely, the Year 2000
problem could have a material adverse impact on the of 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 most its assessment of
all systems that could be significantly affected by the Year 2000 problem.
The completed portion of 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.
For its loan servicing systems, to date the Company is 75% complete on
the remediation phase 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 40% of its testing and has implemented 40% of its
remediated systems. Completion of the testing phase for all significant
systems is expected by January 31, 1999 with all remediated systems fully
tested and implemented by March 31, 1999 with 100% completion targeted for
June 30, 1999.
For operating equipment, such as the phone systems, fax machines,
etc., the Company is 75% complete on the remediation phase. 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 40% complete. Once testing
is complete, the equipment is ready for immediate use. Testing and
implementation of affected equipment is expected to be completed by
March 31, 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 $500 thousand 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 $150 thousand 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.
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.
15
<PAGE>
TFC ENTERPRISES, INC.
Financial Condition
Assets
Total assets increased by $23.0 million, or 16%, to $170.9 million at
September 30, 1998, from $147.8 million at December 31, 1997. The increase
was primarily attributable to an increase in net contract receivables.
The following table summarizes net contract receivables at September 30,
1998 and December 31, 1997:
Net contract receivables Sept. 30, Dec. 31,
(in thousands) 1998 1997
---- ----
Auto finance:
Point-of-sale $101,517 $ 75,197
Portfolio 38,795 41,612
Consumer finance 13,425 11,694
-------- --------
Total $153,737 $128,503
======== ========
Liabilities
Total liabilities were $136.9 million at September 30, 1998, an
increase of $20.2 million, or 17%, from December 31, 1997. The increase in
liabilities from year-end 1997 primarily reflected increased borrowings
under the Company's credit facilities, which, in turn, resulted from an
increase in net contract receivables.
16
<PAGE>
TFC ENTERPRISES, INC.
Credit Quality and Reserves
Auto finance contract receivables-Net charge-offs
In August, The Finance Company changed its charge off policy to better
align TFC's policy with the industry. Prior to the change, it was generally
TFC's policy to charge off, through reserves, all contract receivables
which were both 180 days past due and which had no significant payment
activity for 90 days. TFC's current policy is to generally charge off,
through reserves, all contract receivables which are 180 days past due
without regard to recent payment history.
Net charge-offs to the allowance for credit losses and nonrefundable
dealer reserve were $7.7 million in the third quarter of 1998, representing
an annualized rate of 18.88% of average contract receivables net of
unearned interest revenue. This compares to $5.8 million, or 17.12%, in the
third quarter of 1997. For the first nine months of 1998, net charge-offs
were $21.1 million, or 18.27%, of average contract receivables net of
unearned interest revenue. This compares to $21.0 million, or 20.07%, of
average net contract receivables net of unearned interest revenue in the
first nine months of 1997. The increase in net charge-offs to the allowance
for credit losses and nonrefundable dealer reserve in the third quarter are
attributable to the change in charge-off policy. Both improved credit
quality and servicing have impacted the reduction in charge-off for the
first nine months of 1998.
Auto finance contract receivables-Provision for credit losses
The Company's primary business involves purchasing installment sales
contracts at a discount to the remaining principal balance. A portion of
the discount is generally held in a nonrefundable dealer reserve against
which credit losses are first applied. Additional provisions for credit
losses, if necessary, are charged to income in amounts considered by
management to be adequate to absorb future credit losses. Improved credit
quality and servicing of the Company's auto finance contracts eliminated
the need for a loss provision for all of 1997 and the first nine months of
1998. Provision for credit losses is dependent on a number of factors,
including 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 or that existing dealer reserves will prove to
be adequate.
Auto finance contract receivables- Reserves
At September 30, 1998, the combination of
the Company's allowance for credit losses and nonrefundable dealer
reserve totaled $22.1 million, or 13.2%, of contract receivables net of
unearned interest revenue. This compares to $22.3 million, or 15.5%, at
December 31, 1997. In addition, the Company's refundable dealer
reserve, which is available to absorb losses relating to contracts
purchased from certain dealers, totaled $1.1 million at September 30,
1998, compared to $2.0 million 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 of
the contracts and recoveries.
17
<PAGE>
TFC ENTERPRISES, INC.
Consumer finance charge-offs, provision for credit losses and reserves
Net charge-offs to the allowance for
credit losses were $0.1 million in the third quarter of 1998 and 1997,
representing an annualized rate of 4.2% and 4.7% of average gross
contract receivables net of unearned interest revenue, respectively.
For the first nine months of 1998, net charge-offs to the allowance for
credit losses were $0.4 million, representing an annualized rate of
4.0%. This compares to $0.3 million, or 4.05%, in the third quarter of
1997. The provision for credit losses was $0.2 million for the third
quarter of 1998 and 1997 and the allowance for credit losses was $0.8
million and $0.7 million or 5.3% of outstanding gross contract
receivables at September 30, 1998 and December 31, 1997, respectively.
For the first nine months of 1998 and 1997, the provision for credit
losses was $0.5 million. Management has established the level of
allowance that it considers to be adequate based on FCF's experience
through September 30, 1998.
Charge-offs net of recoveries for the three months and nine months
ended September 30, 1998 and 1997, were as follows:
Net charge-offs
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
(in thousands) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Auto finance:
Point-of-sale $3,756 $3,491 $10,710 $15,594
Portfolio 3,936 2,310 10,418 5,452
Consumer finance 152 128 410 314
------ ------ ------- -------
Total $7,844 $5,929 $21,538 $21,360
====== ====== ======= =======
</TABLE>
Delinquencies
Gross auto finance contract receivables that were 60 days or
more past due totaled $11.7 million, or 5.7% of gross auto finance
contract receivables at September 30, 1998, compared to $15.9 million,
or 9.3%, at December 31, 1997. This improvement in delinquency was
primarily the result of improved underwriting and increased collection
efforts.
Gross consumer finance receivables that were 60 days or more past
due totaled $0.5 million, or 3.3% of gross receivables at September
30, 1998, compared to 3.1% at December 31, 1997.
Delinquency at September 30, 1998, and December 31, 1997, were as
follows:
Delinquency Sept 30, Dec. 31,
(dollars in thousands) 1998 1997
-------- --------
Gross contract receivables 60 days and
over delinquent $ 12,188 $ 16,310
Gross contract receivables 218,804 184,242
Percent 5.57% 8.85%
18
<PAGE>
TFC ENTERPRISES, INC.
Liquidity and Capital Resources
Liquidity management
As shown on the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased by $0.1 million in the first nine months of 1998, to
$1.9 million at September 30, 1998. The decrease reflected $25.9 million of
net cash used in investing activities, partially offset by $20.8 million of
net cash provided by financing activities and $5.1 million of net cash
provided by operating activities. Net cash used in investing activities
principally reflected $25.7 million in net purchases of contract
receivables. Net cash provided by financing activities primarily reflected
$20.6 million of net borrowings on the Company's revolving lines of credit
and subordinated notes. In the first nine months of 1998 and 1997, the
combination of cash on hand and net cash provided by operating and
financing activities was sufficient to fund business volume. The Company is
currently negotiating an extension of its current facility with its
principal lender, which expires on January 1, 1999. The Company
cannot offer any assurance that it will be able to negotiate an acceptable
facility by that date. The Company is also discussing the creation of a new
facility with other lenders. If it is unable to obtain an extended or
replacement facility(s), its business, financial condition, and results of
operations will be materially adversely effected.
Agreements with Lenders
The Company signed an amendment to the credit agreement with its
primary lender in October 1998 to increase the credit line from $110
million to $115 million through January 1, 1999.
Other
Net cash provided by financing activities reflects approximately $0.6
million of additional unsecured subordinated debt due 3 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. Robert S.
Raley, Jr., the Company's Chairman and Chief Executive Officer and Andrew
M. Ockershausen, a Company director, each purchased $100,000 of these
notes.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Suit was filed against the Company in the case of Hinkston v The
Finance Company on May 30, 1997 in the Court of Common Pleas of Hamilton
County, Ohio. Plaintiff asserts violations of the Ohio Retail Installment
Sales Act ("RISA") by the Company. Plaintiff contended that the discount
taken by the Company when purchasing retail installment sales contracts
from point-of-sale dealers should be considered part of the finance charge,
disclosed as such, and failure to make such disclosure violates RISA.
Plaintiff's motion to certify this case as a class action was denied by the
court on October 13, 1998. The Company is not a party to any other material
litigation.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 3 to its Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement with its
principal lender.
10.2 Form of Unsecured 15% Subordinated Notes relating to $0.6 million
of notes due 3 years from origination.
10.3 Robert S. Raley, Jr. $100,000 Unsecured Subordinated Note.
10.4 Andrew M. Ockershausen $100,000 Unsecured Subordinated Note.
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TFC ENTERPRISES, INC.
(Registrant)
Date: November 16, 1998 By: /s/ Robert S. Raley, Jr.
-------------------------
Robert S. Raley, Jr.
Chairman, President and
Chief Executive Officer
and Director
Date: November 16, 1998 By: /s/ Craig D. Poppen
----------------------------
Craig D. Poppen
Vice President, Treasurer
and Chief Financial
Officer (Principal Financial
Officer of the Registrant)
21
<PAGE>
Index to Exhibits
Exhibit No. Description
10.1 Amendment No. 3 to its Amended and Restated Motor Vehicle
Installment Contract Loan and Security Agreement with its
principal lender.
10.2 Unsecured 15% Subordinated Notes relating to $0.6 million
due 3 years from origination.
10.3 Robert S. Raley. Jr. $100,000 Unsecured Subordinated Note.
10.4 Andrew M. Ockershausen $100,000 Unsecured Subordinated Note.
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
Exhibit 10.1
AMENDMENT #3 TO AMENDED AND RESTATED MOTOR VEHICLE
INSTALLMENT CONTRACT
LOAN AND SECURITY AGREEMENT
This AMENDMENT NO. 3 (this "Amendment") dated as of October 22, 1998
is made by and between THE FINANCE COMPANY, a Virginia corporation ("Borrower")
and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("Lender").
RECITALS
A. Borrower and Lender are parties to an Amended and Restated Motor
Vehicle Installment Contract Loan and Security Agreement dated December 20,
1996, as amended by Amendment No. 1 thereto dated April 4, 1997 and Amendment
No. 2 thereto dated February 1, 1998 (collectively, the "Agreement"), which
Agreement restated and amended that certain Loan and Security Agreement, dated
September 24, 1992, as amended.
B. Borrower has requested that Lender increase the Available Line and
Lender has agreed to increase in consideration for, and pursuant to the terms
of, this Amendment No. 3.
C. It is the intent of Borrower and Lender that the execution and
delivery of this Amendment shall not effect a novation of the indebtedness
outstanding under the Agreement, and, except as expressly modified by this
Amendment, the Agreement shall continue, unchanged, in full force and effect.
In consideration of the mutual covenants and agreements contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged by each of the parties hereto, Borrower and
Lender agree as follows:
1. Defined Terms. Unless otherwise specified herein, all capitalized
terms used in this Amendment shall have the same meaning given to such term(s)
in the Agreement.
2. Amendments to Agreement. Effective as of the date hereof, the
Agreement is hereby amended as follows:
(a) Available Line: The definition of "Available Line" set forth in
Section 16.0 of the Agreement is hereby amended in its entirety to read as
follows:
"Available Line: One Hundred and Fifteen Million Dollars ($115,000,000)"
3. Line Fee. At the time of signing this Amendment, Borrower shall pay
to Lender $20,000, which is the Line Fee applicable to the increase in the
Available Line.
4. Incorporation of Amendment. The parties acknowledge and agree that
this Amendment is incorporated into and made a part of the Agreement, the
terms and provisions of which, unless expressly modified herein, or unless no
longer applicable by their terms, are hereby affirmed and ratified and remain
in full force and effect. To the extent that any term or provision of this
Amendment is or may be deemed expressly inconsistent with any term or
1
<PAGE>
provision of the Agreement, the terms and provisions of this Amendment shall
control. Each reference to the Agreement shall be a reference to the Agreement
as amended by this Amendment. Nothing contained herein is intended, nor shall
be construed to be a novation or an accord and satisfaction of the outstanding
Note or any of Borrower's obligations to Lender. This Amendment, taken together
with the unamended provisions of the Agreement which are affirmed and ratified
by Borrower, contains the entire agreement among the parties regarding the
transactions described herein and supersedes all prior agreements, written or
oral, with respect thereto. Nothing contained herein is intended, nor shall be
construed to be a novation or an accord and satisfaction of Borrower's
obligations to Lender.
5. Borrower Remains Liable. Borrower hereby confirms that the
Agreement and each document executed by Borrower in connection therewith
continue unimpaired and in full force and effect and shall cover and secure all
of Borrower's existing and future obligations to Lender.
6. Headings. The paragraph headings contained in this Amendment are for
convenience of reference only and shall not be considered a part of this
Amendment in any respect.
7. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Illinois. Nothing herein shall preclude
Lender from bringing suit or taking other legal action in any jurisdiction.
8. Execution in Counterparts. This Amendment may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the undersigned have entered into this Amendment
as of October 22, 1998.
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ W. Jerome McDermott
---------------------------
Title: Director Portfolio Control
THE FINANCE COMPANY
By: /s/ Craig D. Poppen
-------------------------
Title: Chief Financial Officer
2
Exhibit 10.2
THE FINANCE COMPANY
15% SUBORDINATED NOTE
DUE [_______________________]
$[-----------] [-----------], 1998
Norfolk, Virginia
The Finance Company, a Virginia corporation (hereinafter called the
"Company," which term includes any successors of the Company), for value
received, hereby promises to pay to the undersigned ("Holder") or registered
assigns, the principal sum of [___________________] Dollars ($[_______________])
on the third anniversary of this Note pursuant to the terms and conditions of
this Note.
Interest Payment Dates: April 1 and October 1; commencing October 1,
1998.
Record Dates: March 15 and September 15.
Reference is made to the further provisions of this Note hereinafter set
forth, which will, for all purposes, have the same effect as if set forth at
this place.
IN WITNESS WHEREOF, the Company and the Holder have caused this instrument
to be duly executed.
THE FINANCE COMPANY., a Virginia
corporation
By: __________________________
Name: ________________________
Title: _________________________
HOLDER:
------------------------------
Name: ________________________
------------------------------
Name: ________________________
<PAGE>
THE FINANCE COMPANY
15% SUBORDINATED NOTE
DUE [_______________________]
THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY OTHER STATE OR
JURISDICTION. THIS NOTE MAY NOT BE SOLD, PLEDGED OR OTHERWISE DISPOSED OF
WITHOUT BEING REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE
STATE SECURITIES LAWS, OR, IN LIEU THEREOF, THE SUBMISSION OF AN OPINION OF
COUNSEL, SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED.
Those capitalized terms used herein that are not defined elsewhere in this Note
are defined in paragraph 9.
1. Unsecured Obligation. This Note is a general, unsecured obligation of
the Company, and the Notes, collectively, are limited in aggregate principal
amount to $1,000,000. The registered holder of this Note, as listed on the books
and records of the Company, may be treated as the owner (the "Holder") of this
Note for all purposes, subject to the provisions herein with respect to record
dates.
2. Interest.
2.1. Interest Rate. The Finance Company, a Virginia corporation (the
"Company," which term includes any successors of the Company), promises to pay
interest on the principal amount of this Note at the rate of 15% per annum,
compounded semi-annually. To the extent it is lawful, the Company promises to
pay interest on any interest payment due but unpaid on such principal amount at
a rate of 15% per annum compounded semi-annually. The Company will pay interest
semi-annually in Legal Tender in arrears on April 1 and October 1 of each year
(each, an "Interest Payment Date"), commencing October 1, 1998. Interest on this
Note will accrue from the most recent date to which interest has been paid or,
if no interest has been paid on the Note, from August [___] 1998. Interest will
be computed on the basis of a 360-day year consisting of 12, 30-day months.
2.2. Payment of Interest. The Company shall pay interest on this
Note to its Holder at the close of business on the Record Date immediately
preceding the Interest Payment Date. The Holder must surrender this Note to the
Company to collect principal payments. The Company shall pay principal and
interest in Legal Tender. This Note will be payable as to principal, premium,
and interest by check mailed to the Holder at the address set forth in the books
and records of the Company.
3. Redemption.
3.1. Price and Timing of Redemption. After complying with the terms
of this paragraph 3, the Company may redeem this Note in whole or in part (but
only in integral multiples of $1,000 of principal) at any time, plus any accrued
but unpaid interest up to (but excluding) the Redemption Date. If redeemed
during the 24-month period that commences on the date of this Note, a redemption
fee equal to 0.25% of the then outstanding principal amount shall also be
payable.
<PAGE>
3.2. Notice of Redemption. The Company shall send a notice of
redemption ("Redemption Notice") by first class mail, at least 30 calendar days
and not more than 60 calendar days prior to the date fixed for redemption (the
"Redemption Date") to the Holder of this Note at such Holder's last address as
then shown upon the books and records of the Company. Once the Redemption Notice
is mailed, the portion of this Note called for redemption becomes due and
payable on the Redemption Date at the Redemption Price, including accrued and
unpaid interest, if any, up to (but excluding) the Redemption Date.
3.3. Selection of Notes to Be Redeemed. If less than all of the
Notes are to be redeemed pursuant to this paragraph 3, the Company shall select
the Notes to be redeemed on a pro rata basis, by lot or by such other method as
the Company shall determine to be fair and appropriate and in such manner as
complies with any applicable depositary, legal and stock exchange or automated
quotation system requirements. The Company shall make the selection from the
Notes outstanding and not previously called for redemption and, in the case of
any of the Notes selected for partial redemption, the Company shall set forth
the principal amount thereof to be redeemed. Notes in denominations of $1,000
may be redeemed only in whole. The Company may select for redemption portions
(equal to $1,000 or any integral multiple thereof) of the principal of the Notes
that have denominations larger than $1,000. If this Note is to be redeemed in
part, then upon surrender of this Note, the Company shall execute and make
available for delivery to the Holder, without service charge to the Holder, a
new Note or Notes equal in principal amount to the unredeemed portion of this
Note surrendered by the Holder.
3.4. Surrender and Redemption. On or before the Redemption Date, the
Company shall pay to the Holder the Redemption Price in Legal Tender, including
accrued and unpaid interest, if any, up to (but excluding) the Redemption Date;
provided, however, that if the Redemption Date is after a regular Record Date
and on or prior to the corresponding Interest Payment Date, then the accrued
interest shall be payable to the Holder of the redeemed Note on the relevant
Record Date; and provided, further, that if a Redemption Date is a Legal
Holiday, then payment shall be made on the next succeeding Business Day, and no
interest shall accrue for the period from such Redemption Date to such
succeeding Business Day. Concurrent with its receipt of the Redemption Price,
the Holder of this Note shall surrender this Note (or any portion thereof called
for redemption) to the Company; provided, however, that if for any reason
(including without limitation the loss, theft or destruction of this Note) the
Holder of this Note fails to surrender this Note in accordance with this
paragraph 3.4, then such Holder shall provide the Company with a lost note
affidavit, in form acceptable to the Company, and agree to indemnify and hold
harmless the Company against any claim that may be made by any person against
the Company as a result of the failure of the Holder of this Note to surrender
this Note in accordance with this paragraph 3.4. Whether or not this Note (or
any portion thereof called for redemption) is surrendered to the Company in
compliance with this paragraph 3.3 and provided payment of this Note is not
prohibited under paragraph 4, then, from and after the Redemption Date, this
Note (or any portion thereof called for redemption) will cease to bear interest,
and the only right of the Holder of this Note will be to receive payment of the
Redemption Price, plus any accrued and unpaid interest, if any, up to (but
excluding) the Redemption Date.
<PAGE>
4. Subordination. The Company and the Holder, by its acceptance of this
Note, agree that the payment of the principal of and interest on this Note and
any other payment in respect of this Note, including on account of the
acquisition or redemption of this Note by the Company is subordinated to the
prior payment in full of all Senior Indebtedness of the Company, whether
outstanding at the date of this Note or thereafter created, incurred, assumed or
guaranteed, and that this subordination provision is for the benefit of the
holders of Senior Indebtedness. This paragraph 4 shall constitute a continuing
offer to all Persons who, in reliance upon such provisions, become holders of,
or continue to hold, Senior Indebtedness, and such holders are made obligees
hereunder and any one or more of them may enforce such provisions. The Holder
also agrees to execute a Subordination Agreement with the holder of any Senior
Indebtedness.
5. Transfer and Exchange. The Holder of this Note may transfer or exchange
this Note only in accordance with the terms hereof. The Company may require a
Holder, among other things, to furnish appropriate endorsements, legal opinions
and transfer documents, and to pay any taxes and fees required by law or
permitted by the Notes.
6. Defaults and Remedies. If an Event of Default occurs and is continuing,
then the holder hereof may declare the Note to be due and payable immediately. A
Holder of a Note may not enforce this Note except as provided herein. For
purposes of this Note, "Event of Default" means any one of the following events:
6.1.1. failure to pay any installment of interest on this Note
as and when such interest becomes due and payable and the continuance of such
failure for a period of 30 calendar days, whether or not such payment is
prohibited by paragraph 4; or
6.1.2. failure to pay all or any part of the principal of, or
premium, if any, on this Note when and as the same becomes due and payable at
maturity, redemption, by acceleration or otherwise, including, without
limitation, failure to pay all or any part of the Repurchase Price on the
Repurchase Date, whether or not such payment is prohibited by paragraph 4.
7. No Recourse Against Others. No shareholder, director, officer or
employee, as such, past, present or future, of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Notes by reason of his, her or its status as such
shareholder, director, officer or employee. The Holder of this Note waives and
releases all such liability. This waiver and release are part of the
consideration for the issuance of the Notes.
8. Unclaimed Money. If money for the payment of principal or interest
under this Note remains unclaimed for two years, the Company shall retain the
money without further obligation.
9. Certain Defined Terms.
9.1. "Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday that is not a day on which banking institutions in New York, New York
are authorized or obligated by law or executive order to close.
9.2. "Capital Stock" means, with respect to any corporation, any and
all shares, interests, rights to purchase (other than convertible or
exchangeable Indebtedness), warrants, options, participations or other
equivalents of or interests (however designated) in stock issued by that
corporation.
<PAGE>
9.3. "Indebtedness" of any Person means, without duplication, (a)
all liabilities and obligations, contingent or otherwise, of any such Person,
(i) in respect of borrowed money (whether or not the lender has recourse to all
or any portion of the assets of such Person), (ii) evidenced by credit or loan
agreements, bonds, notes, debentures or similar instruments (including, without
limitation, notes or similar instruments given in connection with the
acquisition of any business, properties or assets of any kind), (iii) evidenced
by bankers' acceptances or similar instruments issued or accepted by banks, or
(iv) evidenced by a letter of credit, bank guarantee or a reimbursement
obligation of such Person with respect to any letter of credit; (b) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business); (c) all liabilities of
others of the kind described in the preceding clauses that such Person has
guaranteed or that is otherwise its legal liability, or which is secured by a
lien on property of such Person, and all obligations to purchase, redeem or
acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions,
modifications, replacements, restatements, refinancings and refundings (whether
direct or indirect) of, or any indebtedness or obligation issued in exchange
for, any liability of the kind described in any of the preceding clauses (a),
(b), or (c), or this clause (d), whether or not between or among the same
parties.
9.4. "Legal Holiday" means a Saturday, a Sunday or any day that is
not a Business Day. If a payment date is a Legal Holiday at such place, payment
may be made at such place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
9.5. "Legal Tender" is defined as such coin or currency of the
United States of America as at the time of payment shall be Legal Tender for
payment of public and private debts.
9.6. "Note" means the obligation of the Company as set forth in
this 15% subordinated promissory note.
9.7. "Notes" mean all of the 15% subordinated promissory notes dated
as of the same date as the Note that are limited, in aggregate principal amount,
to $1,000,000.
9.8. "Person" means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, unincorporated
association, governmental regulatory entity, country, state or political
subdivision thereof, trust, municipality or other entity.
9.9. "Record Date" means a record date as specified on the first
page of this Note, whether or not such record date is a Business Day.
9.10. "Senior Indebtedness" means all obligations of the Company to
pay the principal of, premium, if any, interest (including all interest accruing
subsequent to the commencement of any bankruptcy or similar proceeding, whether
or not a claim for post-petition interest is allowable as a claim in any such
<PAGE>
proceeding) and rent payable on or in connection with, and all letters of
credit, reimbursement obligations and fees, costs, expenses and other amounts
and liabilities accrued or due on or in connection with, any Indebtedness of the
Company, whether outstanding on the date of the Notes or thereafter created,
incurred, assumed, guaranteed or in effect guaranteed by the Company, unless the
instrument creating or evidencing such Indebtedness expressly provides that such
Indebtedness is not senior or superior in right of payment to the Notes or is
pari passu with, or subordinated to, the Notes; provided, however, that in no
event shall Senior Indebtedness include (a) Indebtedness of the Company owed or
owing to any Subsidiary of the Company, (b) Indebtedness of the Company
representing or with respect to any account payable or other accrued current
liability or obligation incurred in the ordinary course of business in
connection with the obtaining of materials or services, (c) any liability for
taxes owed or owing by the Company or any Subsidiary of the Company or (d) the
Notes.
9.11. "Subsidiary" with respect to any Person, means (i) a
corporation a majority of whose Capital Stock with voting power normally
entitled to vote in the election of directors is at the time, directly or
indirectly, owned by such Person, by such Person and one or more Subsidiaries of
such Person or by one or more Subsidiaries of such Person, (ii) a partnership in
which such Person or a Subsidiary of such Person is, at the time, a general
partner and owns alone or together with one or more Subsidiaries of such Person
a majority of the partnership interests, or (iii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof, has at least a majority ownership
interest.
10. Miscellaneous.
10.1. Amendment; Supplement; Waiver. Subject to specified
exceptions, the Notes may be amended or supplemented, and any existing Default
or Event of Default or compliance with any provision may be waived, with the
written consent of the Holders of a majority in aggregate principal amount of
the Notes then-outstanding. Without notice to or consent of any Holder, the
parties thereto may amend or supplement the Notes to, among other things, cure
any ambiguity, defect or inconsistency, or make any other change that does not
adversely affect the rights of any Holder of one of the Notes.
10.2. Notices. Any notices or other communications to the Company
required or permitted hereunder shall be in writing and shall be sufficiently
given if made by hand delivery, by telex, by telecopier or registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
The Finance Company, 5425 Robin Hood Road, Norfolk, Virginia 23513, Attention:
President; Telecopy (757) 858-4093. Any notice or communication to any party
shall be deemed to have been given or made as of the date so delivered, if
personally delivered; when answered back, if telexed; when receipt is
acknowledged, if telecopied; and five Business Days after mailing if sent by
registered or certified mail, postage prepaid (except that a notice of change of
address shall not be deemed to have been given until actually received by the
addressee). Any notice or communication mailed to a Holder shall be mailed to
him by first class mail or other equivalent means at his address as it appears
on the books and records of the Corporation and shall be sufficiently given to
him if so mailed within the time prescribed. Failure to mail a notice or
communication to a Holder or any defect in it shall not affect its sufficiency
with respect to other Holders. If a notice or communication is mailed in the
manner provided above, it is duly given, whether or not the addressee receives
it.
<PAGE>
10.3. Governing Law; Jurisdiction; Venue. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
VIRGINIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF
VIRGINIA. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
VIRGINIA STATE COURT SITTING IN THE CITY OF NORFOLK OR ANY FEDERAL COURT SITTING
IN THE CITY OF NORFOLK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS NOTE, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY
DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
10.4. Severability. In case any one or more of the provisions in
this Note shall be held invalid, illegal or unenforceable, in any respect for
any reason, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions shall not in any way be
affected or impaired thereby, it being intended that all of the provisions
hereof shall be enforceable to the full extent permitted by law.
10.5. Headings. The headings of the paragraphs of this Note have
been inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
Exhibit 10.3
THE FINANCE COMPANY
15% SUBORDINATED NOTE
DUE July 24, 2001
$100,000 July 24, 1998
Norfolk, Virginia
The Finance Company, a Virginia corporation (hereinafter called the
"Company," which term includes any successors of the Company), for value
received, hereby promises to pay to the undersigned ("Holder") or registered
assigns, the principal sum of One Hundred Thousand Dollars ($100,000) on the
third anniversary of this Note pursuant to the terms and conditions of this
Note.
Interest Payment Dates: April 1 and October 1; commencing October 1,
1998.
Record Dates: March 15 and September 15.
Reference is made to the further provisions of this Note hereinafter
set forth, which will, for all purposes, have the same effect as if set forth at
this place.
IN WITNESS WHEREOF, the Company and the Holder have caused this
instrument to be duly executed.
THE FINANCE COMPANY, a Virginia corporation
By: /s/ Craig D. Poppen
--------------------
Name: Craig D. Poppen
Title: Chief Financial Officer
HOLDER:
By: /s/ Robert S. Raley, Jr.
------------------------
Name: Robert S. Raley, Jr.
By: /s/ Phyllis S. Raley
-----------------------
Name: Phyllis S. Raley
<PAGE>
THE FINANCE COMPANY
15% SUBORDINATED NOTE
DUE July 24, 2001
THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY OTHER STATE OR
JURISDICTION. THIS NOTE MAY NOT BE SOLD, PLEDGED OR OTHERWISE DISPOSED OF
WITHOUT BEING REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE
STATE SECURITIES LAWS, OR, IN LIEU THEREOF, THE SUBMISSION OF AN OPINION OF
COUNSEL, SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED.
Those capitalized terms used herein that are not defined elsewhere in
this Note are defined in paragraph 9.
1. Unsecured Obligation. This Note is a general, unsecured obligation
of the Company, and the Notes, collectively, are limited in aggregate principal
amount to $1,000,000. The registered holder of this Note, as listed on the books
and records of the Company, may be treated as the owner (the "Holder") of this
Note for all purposes, subject to the provisions herein with respect to record
dates.
2. Interest.
2.1. Interest Rate. The Finance Company, a Virginia
corporation (the "Company," which term includes any successors of the Company),
promises to pay interest on the principal amount of this Note at the rate of 15%
per annum, compounded semi-annually. To the extent it is lawful, the Company
promises to pay interest on any interest payment due but unpaid on such
principal amount at a rate of 15% per annum compounded semi-annually. The
Company will pay interest semi-annually in Legal Tender in arrears on April 1
and October 1 of each year (each, an "Interest Payment Date"), commencing
October 1, 1998. Interest on this Note will accrue from the most recent date to
which interest has been paid or, if no interest has been paid on the Note, from
July 24, 1998. Interest will be computed on the basis of a 360-day year
consisting of 12, 30-day months.
2.2. Payment of Interest. The Company shall pay interest on
this Note to its Holder at the close of business on the Record Date immediately
preceding the Interest Payment Date. The Holder must surrender this Note to the
Company to collect principal payments. The Company shall pay principal and
interest in Legal Tender. This Note will be payable as to principal, premium,
and interest by check mailed to the Holder at the address set forth in the books
and records of the Company.
3. Redemption.
3.1. Price and Timing of Redemption. After complying with the
terms of this paragraph 3, the Company may redeem this Note in whole or in part
(but only in integral multiples of $1,000 of principal) at any time, plus any
accrued but unpaid interest up to (but excluding) the
<PAGE>
Redemption Date. If redeemed during the 24-month period that commences on the
date of this Note, a redemption fee equal to 0.25% of the then outstanding
principal amount shall also be payable.
3.2. Notice of Redemption. The Company shall send a notice of
redemption ("Redemption Notice") by first class mail, at least 30 calendar days
and not more than 60 calendar days prior to the date fixed for redemption (the
"Redemption Date") to the Holder of this Note at such Holder's last address as
then shown upon the books and records of the Company. Once the Redemption Notice
is mailed, the portion of this Note called for redemption becomes due and
payable on the Redemption Date at the Redemption Price, including accrued and
unpaid interest, if any, up to (but excluding) the Redemption Date.
3.3. Selection of Notes to Be Redeemed. If less than all of
the Notes are to be redeemed pursuant to this paragraph 3, the Company shall
select the Notes to be redeemed on a pro rata basis, by lot or by such other
method as the Company shall determine to be fair and appropriate and in such
manner as complies with any applicable depositary, legal and stock exchange or
automated quotation system requirements. The Company shall make the selection
from the Notes outstanding and not previously called for redemption and, in the
case of any of the Notes selected for partial redemption, the Company shall set
forth the principal amount thereof to be redeemed. Notes in denominations of
$1,000 may be redeemed only in whole. The Company may select for redemption
portions (equal to $1,000 or any integral multiple thereof) of the principal of
the Notes that have denominations larger than $1,000. If this Note is to be
redeemed in part, then upon surrender of this Note, the Company shall execute
and make available for delivery to the Holder, without service charge to the
Holder, a new Note or Notes equal in principal amount to the unredeemed portion
of this Note surrendered by the Holder.
3.4. Surrender and Redemption. On or before the Redemption
Date, the Company shall pay to the Holder the Redemption Price in Legal Tender,
including accrued and unpaid interest, if any, up to (but excluding) the
Redemption Date; provided, however, that if the Redemption Date is after a
regular Record Date and on or prior to the corresponding Interest Payment Date,
then the accrued interest shall be payable to the Holder of the redeemed Note on
the relevant Record Date; and provided, further, that if a Redemption Date is a
Legal Holiday, then payment shall be made on the next succeeding Business Day,
and no interest shall accrue for the period from such Redemption Date to such
succeeding Business Day. Concurrent with its receipt of the Redemption Price,
the Holder of this Note shall surrender this Note (or any portion thereof called
for redemption) to the Company; provided, however, that if for any reason
(including without limitation the loss, theft or destruction of this Note) the
Holder of this Note fails to surrender this Note in accordance with this
paragraph 3.4, then such Holder shall provide the Company with a lost note
affidavit, in form acceptable to the Company, and agree to indemnify and hold
harmless the Company against any claim that may be made by any person against
the Company as a result of the failure of the Holder of this Note to surrender
this Note in accordance with this paragraph 3.4. Whether or not this Note (or
any portion thereof called for redemption) is surrendered to the Company in
compliance with this paragraph 3.3 and provided payment of this Note is not
prohibited under paragraph 4, then, from and after the Redemption Date, this
Note (or any portion thereof called for redemption) will cease to bear interest,
and the only right of the Holder of this Note will be to receive payment of the
<PAGE>
Redemption Price, plus any accrued and unpaid interest, if any, up to (but
excluding) the Redemption Date.
4. Subordination. The Company and the Holder, by its acceptance of this
Note, agree that the payment of the principal of and interest on this Note and
any other payment in respect of this Note, including on account of the
acquisition or redemption of this Note by the Company is subordinated to the
prior payment in full of all Senior Indebtedness of the Company, whether
outstanding at the date of this Note or thereafter created, incurred, assumed or
guaranteed, and that this subordination provision is for the benefit of the
holders of Senior Indebtedness. This paragraph 4 shall constitute a continuing
offer to all Persons who, in reliance upon such provisions, become holders of,
or continue to hold, Senior Indebtedness, and such holders are made obligees
hereunder and any one or more of them may enforce such provisions. The Holder
also agrees to execute a Subordination Agreement with the holder of any Senior
Indebtedness.
5. Transfer and Exchange. The Holder of this Note may transfer or
exchange this Note only in accordance with the terms hereof. The Company may
require a Holder, among other things, to furnish appropriate endorsements, legal
opinions and transfer documents, and to pay any taxes and fees required by law
or permitted by the Notes.
6. Defaults and Remedies. If an Event of Default occurs and is
continuing, then the Holder hereof may declare the Note to be due and payable
immediately. A Holder of a Note may not enforce this Note except as provided
herein. For purposes of this Note, "Event of Default" means any one of the
following events:
6.1.1. failure to pay any installment of interest on
this Note as and when such interest becomes due and payable and the continuance
of such failure for a period of 30 calendar days, whether or not such
payment is prohibited by paragraph 4; or
6.1.2. failure to pay all or any part of the
principal of, or premium, if any, on this Note when and as the same becomes due
and payable at maturity, redemption, by acceleration or otherwise, including,
without limitation, failure to pay all or any part of the Repurchase Price on
the Repurchase Date, whether or not such payment is prohibited by paragraph 4.
7. No Recourse Against Others. No shareholder, director, officer or
employee, as such, past, present or future, of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Notes by reason of his, her or its status as such
shareholder, director, officer or employee. The Holder of this Note waives and
releases all such liability. This waiver and release are part of the
consideration for the issuance of the Notes.
8. Unclaimed Money. If money for the payment of principal or interest
under this Note remains unclaimed for two years, the Company shall retain the
money without further obligation.
9. Certain Defined Terms.
9.1. "Business Day" means each Monday, Tuesday, Wednesday,
Thursday and
<PAGE>
Friday that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
9.2. "Capital Stock" means, with respect to any corporation,
any and all shares, interests, rights to purchase (other than convertible or
exchangeable Indebtedness), warrants, options, participations or other
equivalents of or interests (however designated) in stock issued by that
corporation.
9.3. "Indebtedness" of any Person means, without duplication,
(a) all liabilities and obligations, contingent or otherwise, of any such
Person, (i) in respect of borrowed money (whether or not the lender has recourse
to all or any portion of the assets of such Person), (ii) evidenced by credit or
loan agreements, bonds, notes, debentures or similar instruments (including,
without limitation, notes or similar instruments given in connection with the
acquisition of any business, properties or assets of any kind), (iii) evidenced
by bankers' acceptances or similar instruments issued or accepted by banks, or
(iv) evidenced by a letter of credit, bank guarantee or a reimbursement
obligation of such Person with respect to any letter of credit; (b) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business); (c) all liabilities of
others of the kind described in the preceding clauses that such Person has
guaranteed or that is otherwise its legal liability, or which is secured by a
lien on property of such Person, and all obligations to purchase, redeem or
acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions,
modifications, replacements, restatements, refinancings and refundings (whether
direct or indirect) of, or any indebtedness or obligation issued in exchange
for, any liability of the kind described in any of the preceding clauses (a),
(b), or (c), or this clause (d), whether or not between or among the same
parties.
9.4. "Legal Holiday" means a Saturday, a Sunday or any day
that is not a Business Day. If a payment date is a Legal Holiday at such place,
payment may be made at such place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
9.5. "Legal Tender" is defined as such coin or currency of the
United States of America as at the time of payment shall be Legal Tender for
payment of public and private debts.
9.6. "Note" means the obligation of the Company as set
forth in this 15% subordinated promissory note.
9.7. "Notes" mean all of the 15% subordinated promissory notes
dated as of the same date as the Note that are limited, in aggregate principal
amount, to $1,000,000.
9.8. "Person" means any corporation, individual, limited
liability company, joint stock company, joint venture, partnership,
unincorporated association, governmental regulatory entity, country, state or
political subdivision thereof, trust, municipality or other entity.
9.9. "Record Date" means a record date as specified on the
first page of this Note, whether or not such record date is a Business Day.
<PAGE>
9.10. "Senior Indebtedness" means all obligations of the
Company to pay the principal of, premium, if any, interest (including all
interest accruing subsequent to the commencement of any bankruptcy or similar
proceeding, whether or not a claim for post-petition interest is allowable as a
claim in any such proceeding) and rent payable on or in connection with, and all
letters of credit, reimbursement obligations and fees, costs, expenses and other
amounts and liabilities accrued or due on or in connection with, any
Indebtedness of the Company, whether outstanding on the date of the Notes or
thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the
Company, unless the instrument creating or evidencing such Indebtedness
expressly provides that such Indebtedness is not senior or superior in right of
payment to the Notes or is pari passu with, or subordinated to, the Notes;
provided, however, that in no event shall Senior Indebtedness include (a)
Indebtedness of the Company owed or owing to any Subsidiary of the Company, (b)
Indebtedness of the Company representing or with respect to any account payable
or other accrued current liability or obligation incurred in the ordinary course
of business in connection with the obtaining of materials or services, (c) any
liability for taxes owed or owing by the Company or any Subsidiary of the
Company or (d) the Notes.
9.11. "Subsidiary" with respect to any Person, means (i) a
corporation a majority of whose Capital Stock with voting power normally
entitled to vote in the election of directors is at the time, directly or
indirectly, owned by such Person, by such Person and one or more Subsidiaries of
such Person or by one or more Subsidiaries of such Person, (ii) a partnership in
which such Person or a Subsidiary of such Person is, at the time, a general
partner and owns alone or together with one or more Subsidiaries of such Person
a majority of the partnership interests, or (iii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof, has at least a majority ownership
interest.
10. Miscellaneous.
10.1. Amendment; Supplement; Waiver. Subject to specified
exceptions, the Notes may be amended or supplemented, and any existing Default
or Event of Default or compliance with any provision may be waived, with the
written consent of the Holders of a majority in aggregate principal amount of
the Notes then-outstanding. Without notice to or consent of any Holder, the
parties thereto may amend or supplement the Notes to, among other things, cure
any ambiguity, defect or inconsistency, or make any other change that does not
adversely affect the rights of any Holder of one of the Notes.
10.2. Notices. Any notices or other communications to the
Company required or permitted hereunder shall be in writing and shall be
sufficiently given if made by hand delivery, by telex, by telecopier or
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows: The Finance Company, 5425 Robin Hood Road, Norfolk,
Virginia 23513, Attention: President; Telecopy (757) 858-4093. Any notice or
communication to any party shall be deemed to have been given or made as of the
date so delivered, if personally delivered; when answered back, if telexed; when
receipt is acknowledged, if telecopied; and five Business Days after mailing if
sent by registered or certified mail, postage prepaid (except that a notice of
change of address shall not be deemed to have been given until actually received
by the addressee). Any notice or communication mailed to a Holder shall be
mailed to him by first class mail or other equivalent
<PAGE>
means at his address as it appears on the books and records of the Corporation
and shall be sufficiently given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
10.3. Governing Law; Jurisdiction; Venue. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
VIRGINIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF
VIRGINIA. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
VIRGINIA STATE COURT SITTING IN THE CITY OF NORFOLK OR ANY FEDERAL COURT SITTING
IN THE CITY OF NORFOLK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS NOTE, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY
DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
10.4. Severability. In case any one or more of the provisions
in this Note shall be held invalid, illegal or unenforceable, in any respect for
any reason, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions shall not in any way be
affected or impaired thereby, it being intended that all of the provisions
hereof shall be enforceable to the full extent permitted by law.
10.5. Headings. The headings of the paragraphs of this Note
have been inserted for convenience of reference only, are not to be considered a
part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.
Exhibit 10.4
THE FINANCE COMPANY
15% SUBORDINATED NOTE
DUE August 10, 2001
$100,000 August 10, 1998
Norfolk, Virginia
The Finance Company, a Virginia corporation (hereinafter called the
"Company," which term includes any successors of the Company), for value
received, hereby promises to pay to the undersigned ("Holder") or registered
assigns, the principal sum of One Hundred Thousand Dollars ($100,000) on the
third anniversary of this Note pursuant to the terms and conditions of this
Note.
Interest Payment Dates: April 1 and October 1; commencing October 1,
1998.
Record Dates: March 15 and September 15.
Reference is made to the further provisions of this Note hereinafter
set forth, which will, for all purposes, have the same effect as if set forth at
this place.
IN WITNESS WHEREOF, the Company and the Holder have caused this
instrument to be duly executed.
THE FINANCE COMPANY, a Virginia corporation
By: /s/ Robert S. Raley, Jr.
------------------------
Name: Robert S. Raley, Jr.
Title: President & Chief Executive Officer
HOLDER:
By: /s/ Andrew M. Ockershausen
--------------------------
Name: Andrew M. Ockershausen
<PAGE>
THE FINANCE COMPANY
15% SUBORDINATED NOTE
DUE August 10, 2001
THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY OTHER STATE OR
JURISDICTION. THIS NOTE MAY NOT BE SOLD, PLEDGED OR OTHERWISE DISPOSED OF
WITHOUT BEING REGISTERED UNDER THE SECURITIES ACT OF 1933 AND ANY APPLICABLE
STATE SECURITIES LAWS, OR, IN LIEU THEREOF, THE SUBMISSION OF AN OPINION OF
COUNSEL, SATISFACTORY TO COUNSEL FOR THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED.
Those capitalized terms used herein that are not defined elsewhere in
this Note are defined in paragraph 9.
1. Unsecured Obligation. This Note is a general, unsecured obligation
of the Company, and the Notes, collectively, are limited in aggregate principal
amount to $1,000,000. The registered holder of this Note, as listed on the books
and records of the Company, may be treated as the owner (the "Holder") of this
Note for all purposes, subject to the provisions herein with respect to record
dates.
2. Interest.
2.1. Interest Rate. The Finance Company, a Virginia
corporation (the "Company," which term includes any successors of the Company),
promises to pay interest on the principal amount of this Note at the rate of 15%
per annum, compounded semi-annually. To the extent it is lawful, the Company
promises to pay interest on any interest payment due but unpaid on such
principal amount at a rate of 15% per annum compounded semi-annually. The
Company will pay interest semi-annually in Legal Tender in arrears on April 1
and October 1 of each year (each, an "Interest Payment Date"), commencing
October 1, 1998. Interest on this Note will accrue from the most recent date to
which interest has been paid or, if no interest has been paid on the Note, from
August 10, 1998. Interest will be computed on the basis of a 360-day year
consisting of 12, 30-day months.
2.2. Payment of Interest. The Company shall pay interest on
this Note to its Holder at the close of business on the Record Date immediately
preceding the Interest Payment Date. The Holder must surrender this Note to the
Company to collect principal payments. The Company shall pay principal and
interest in Legal Tender. This Note will be payable as to principal, premium,
and interest by check mailed to the Holder at the address set forth in the books
and records of the Company.
3. Redemption.
3.1. Price and Timing of Redemption. After complying with the
terms of this paragraph 3, the Company may redeem this Note in whole or in part
(but only in integral multiples of $1,000 of principal) at any time, plus any
accrued but unpaid interest up to (but excluding) the
<PAGE>
Redemption Date. If redeemed during the 24-month period that commences on the
date of this Note, a redemption fee equal to 0.25% of the then outstanding
principal amount shall also be payable.
3.2. Notice of Redemption. The Company shall send a notice of
redemption ("Redemption Notice") by first class mail, at least 30 calendar days
and not more than 60 calendar days prior to the date fixed for redemption (the
"Redemption Date") to the Holder of this Note at such Holder's last address as
then shown upon the books and records of the Company. Once the Redemption Notice
is mailed, the portion of this Note called for redemption becomes due and
payable on the Redemption Date at the Redemption Price, including accrued and
unpaid interest, if any, up to (but excluding) the Redemption Date.
3.3. Selection of Notes to Be Redeemed. If less than all of
the Notes are to be redeemed pursuant to this paragraph 3, the Company shall
select the Notes to be redeemed on a pro rata basis, by lot or by such other
method as the Company shall determine to be fair and appropriate and in such
manner as complies with any applicable depositary, legal and stock exchange or
automated quotation system requirements. The Company shall make the selection
from the Notes outstanding and not previously called for redemption and, in the
case of any of the Notes selected for partial redemption, the Company shall set
forth the principal amount thereof to be redeemed. Notes in denominations of
$1,000 may be redeemed only in whole. The Company may select for redemption
portions (equal to $1,000 or any integral multiple thereof) of the principal of
the Notes that have denominations larger than $1,000. If this Note is to be
redeemed in part, then upon surrender of this Note, the Company shall execute
and make available for delivery to the Holder, without service charge to the
Holder, a new Note or Notes equal in principal amount to the unredeemed portion
of this Note surrendered by the Holder.
3.4. Surrender and Redemption. On or before the Redemption
Date, the Company shall pay to the Holder the Redemption Price in Legal Tender,
including accrued and unpaid interest, if any, up to (but excluding) the
Redemption Date; provided, however, that if the Redemption Date is after a
regular Record Date and on or prior to the corresponding Interest Payment Date,
then the accrued interest shall be payable to the Holder of the redeemed Note on
the relevant Record Date; and provided, further, that if a Redemption Date is a
Legal Holiday, then payment shall be made on the next succeeding Business Day,
and no interest shall accrue for the period from such Redemption Date to such
succeeding Business Day. Concurrent with its receipt of the Redemption Price,
the Holder of this Note shall surrender this Note (or any portion thereof called
for redemption) to the Company; provided, however, that if for any reason
(including without limitation the loss, theft or destruction of this Note) the
Holder of this Note fails to surrender this Note in accordance with this
paragraph 3.4, then such Holder shall provide the Company with a lost note
affidavit, in form acceptable to the Company, and agree to indemnify and hold
harmless the Company against any claim that may be made by any person against
the Company as a result of the failure of the Holder of this Note to surrender
this Note in accordance with this paragraph 3.4. Whether or not this Note (or
any portion thereof called for redemption) is surrendered to the Company in
compliance with this paragraph 3.3 and provided payment of this Note is not
prohibited under paragraph 4, then, from and after the Redemption Date, this
Note (or any portion thereof called for redemption) will cease to bear interest,
and the only right of the Holder of this Note will be to receive payment of the
<PAGE>
Redemption Price, plus any accrued and unpaid interest, if any, up to (but
excluding) the Redemption Date.
4. Subordination. The Company and the Holder, by its acceptance of this
Note, agree that the payment of the principal of and interest on this Note and
any other payment in respect of this Note, including on account of the
acquisition or redemption of this Note by the Company is subordinated to the
prior payment in full of all Senior Indebtedness of the Company, whether
outstanding at the date of this Note or thereafter created, incurred, assumed or
guaranteed, and that this subordination provision is for the benefit of the
holders of Senior Indebtedness. This paragraph 4 shall constitute a continuing
offer to all Persons who, in reliance upon such provisions, become holders of,
or continue to hold, Senior Indebtedness, and such holders are made obligees
hereunder and any one or more of them may enforce such provisions. The Holder
also agrees to execute a Subordination Agreement with the holder of any Senior
Indebtedness.
5. Transfer and Exchange. The Holder of this Note may transfer or
exchange this Note only in accordance with the terms hereof. The Company may
require a Holder, among other things, to furnish appropriate endorsements, legal
opinions and transfer documents, and to pay any taxes and fees required by law
or permitted by the Notes.
6. Defaults and Remedies. If an Event of Default occurs and is
continuing, then the Holder hereof may declare the Note to be due and payable
immediately. A Holder of a Note may not enforce this Note except as provided
herein. For purposes of this Note, "Event of Default" means any one of the
following events:
6.1.1. failure to pay any installment of
interest on this Note as and when such interest becomes due and payable and the
continuance of such failure for a period of 30 calendar days, whether or not
such payment is prohibited by paragraph 4; or
6.1.2. failure to pay all or any part of
the principal of, or premium, if any, on this Note when and as the same becomes
due and payable at maturity, redemption, by acceleration or otherwise,
including, without limitation, failure to pay all or any part of the Repurchase
Price on the Repurchase Date, whether or not such payment is prohibited by
paragraph 4.
7. No Recourse Against Others. No shareholder, director, officer or
employee, as such, past, present or future, of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Notes by reason of his, her or its status as such
shareholder, director, officer or employee. The Holder of this Note waives and
releases all such liability. This waiver and release are part of the
consideration for the issuance of the Notes.
8. Unclaimed Money. If money for the payment of principal or interest
under this Note remains unclaimed for two years, the Company shall retain the
money without further obligation.
9. Certain Defined Terms.
9.1. "Business Day" means each Monday, Tuesday, Wednesday,
Thursday and
<PAGE>
Friday that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
9.2. "Capital Stock" means, with respect to any corporation,
any and all shares, interests, rights to purchase (other than convertible or
exchangeable Indebtedness), warrants, options, participations or other
equivalents of or interests (however designated) in stock issued by that
corporation.
9.3. "Indebtedness" of any Person means, without duplication,
(a) all liabilities and obligations, contingent or otherwise, of any such
Person, (i) in respect of borrowed money (whether or not the lender has recourse
to all or any portion of the assets of such Person), (ii) evidenced by credit or
loan agreements, bonds, notes, debentures or similar instruments (including,
without limitation, notes or similar instruments given in connection with the
acquisition of any business, properties or assets of any kind), (iii) evidenced
by bankers' acceptances or similar instruments issued or accepted by banks, or
(iv) evidenced by a letter of credit, bank guarantee or a reimbursement
obligation of such Person with respect to any letter of credit; (b) all
obligations of such Person issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business); (c) all liabilities of
others of the kind described in the preceding clauses that such Person has
guaranteed or that is otherwise its legal liability, or which is secured by a
lien on property of such Person, and all obligations to purchase, redeem or
acquire any Capital Stock; and (d) any and all deferrals, renewals, extensions,
modifications, replacements, restatements, refinancings and refundings (whether
direct or indirect) of, or any indebtedness or obligation issued in exchange
for, any liability of the kind described in any of the preceding clauses (a),
(b), or (c), or this clause (d), whether or not between or among the same
parties.
9.4. "Legal Holiday" means a Saturday, a Sunday or any day
that is not a Business Day. If a payment date is a Legal Holiday at such place,
payment may be made at such place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.
9.5. "Legal Tender" is defined as such coin or currency of the
United States of America as at the time of payment shall be Legal Tender for
payment of public and private debts.
9.6. "Note" means the obligation of the Company as set
forth in this 15% subordinated promissory note.
9.7. "Notes" mean all of the 15% subordinated promissory notes
dated as of the same date as the Note that are limited, in aggregate principal
amount, to $1,000,000.
9.8. "Person" means any corporation, individual, limited
liability company, joint stock company, joint venture, partnership,
unincorporated association, governmental regulatory entity, country, state or
political subdivision thereof, trust, municipality or other entity.
9.9. "Record Date" means a record date as specified on the
first page of this Note, whether or not such record date is a Business Day.
<PAGE>
9.10. "Senior Indebtedness" means all obligations of the
Company to pay the principal of, premium, if any, interest (including all
interest accruing subsequent to the commencement of any bankruptcy or similar
proceeding, whether or not a claim for post-petition interest is allowable as a
claim in any such proceeding) and rent payable on or in connection with, and all
letters of credit, reimbursement obligations and fees, costs, expenses and other
amounts and liabilities accrued or due on or in connection with, any
Indebtedness of the Company, whether outstanding on the date of the Notes or
thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the
Company, unless the instrument creating or evidencing such Indebtedness
expressly provides that such Indebtedness is not senior or superior in right of
payment to the Notes or is pari passu with, or subordinated to, the Notes;
provided, however, that in no event shall Senior Indebtedness include (a)
Indebtedness of the Company owed or owing to any Subsidiary of the Company, (b)
Indebtedness of the Company representing or with respect to any account payable
or other accrued current liability or obligation incurred in the ordinary course
of business in connection with the obtaining of materials or services, (c) any
liability for taxes owed or owing by the Company or any Subsidiary of the
Company or (d) the Notes.
9.11. "Subsidiary" with respect to any Person, means (i) a
corporation a majority of whose Capital Stock with voting power normally
entitled to vote in the election of directors is at the time, directly or
indirectly, owned by such Person, by such Person and one or more Subsidiaries of
such Person or by one or more Subsidiaries of such Person, (ii) a partnership in
which such Person or a Subsidiary of such Person is, at the time, a general
partner and owns alone or together with one or more Subsidiaries of such Person
a majority of the partnership interests, or (iii) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person or
such Person and one or more Subsidiaries of such Person, directly or indirectly,
at the date of determination thereof, has at least a majority ownership
interest.
10. Miscellaneous.
10.1. Amendment; Supplement; Waiver. Subject to specified
exceptions, the Notes may be amended or supplemented, and any existing Default
or Event of Default or compliance with any provision may be waived, with the
written consent of the Holders of a majority in aggregate principal amount of
the Notes then-outstanding. Without notice to or consent of any Holder, the
parties thereto may amend or supplement the Notes to, among other things, cure
any ambiguity, defect or inconsistency, or make any other change that does not
adversely affect the rights of any Holder of one of the Notes.
10.2. Notices. Any notices or other communications to the
Company required or permitted hereunder shall be in writing and shall be
sufficiently given if made by hand delivery, by telex, by telecopier or
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows: The Finance Company, 5425 Robin Hood Road, Norfolk,
Virginia 23513, Attention: President; Telecopy (757) 858-4093. Any notice or
communication to any party shall be deemed to have been given or made as of the
date so delivered, if personally delivered; when answered back, if telexed; when
receipt is acknowledged, if telecopied; and five Business Days after mailing if
sent by registered or certified mail, postage prepaid (except that a notice of
change of address shall not be deemed to have been given until actually received
by the addressee). Any notice or communication mailed to a Holder shall be
mailed to him by first class mail or other equivalent
<PAGE>
means at his address as it appears on the books and records of the Corporation
and shall be sufficiently given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders. If a notice or
communication is mailed in the manner provided above, it is duly given, whether
or not the addressee receives it.
10.3. Governing Law; Jurisdiction; Venue. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
VIRGINIA, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE COMMONWEALTH OF
VIRGINIA. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY
VIRGINIA STATE COURT SITTING IN THE CITY OF NORFOLK OR ANY FEDERAL COURT SITTING
IN THE CITY OF NORFOLK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS NOTE, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY
DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
10.4. Severability. In case any one or more of the provisions
in this Note shall be held invalid, illegal or unenforceable, in any respect for
any reason, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions shall not in any way be
affected or impaired thereby, it being intended that all of the provisions
hereof shall be enforceable to the full extent permitted by law.
10.5. Headings. The headings of the paragraphs of this Note
have been inserted for convenience of reference only, are not to be considered a
part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
TFC ENTERPRISES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,890
<SECURITIES> 0
<RECEIVABLES> 175,814
<ALLOWANCES> 22,842
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,100
<DEPRECIATION> 4,170
<TOTAL-ASSETS> 170,857
<CURRENT-LIABILITIES> 136,949
<BONDS> 0
0
0
<COMMON> 49
<OTHER-SE> 33,908
<TOTAL-LIABILITY-AND-EQUITY> 170,857
<SALES> 28,015
<TOTAL-REVENUES> 28,896
<CGS> 0
<TOTAL-COSTS> 16,164
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 491
<INTEREST-EXPENSE> 9,590
<INCOME-PRETAX> 2,651
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,651
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
