UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NO.: 1-11121
TFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 54-1306895
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5425 Robin Hood Road
Suite 101B
Norfolk, Virginia 23513
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: - (757) 858-4054
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by non-affiliates of
the registrant as of March 20, 1998: Common Stock - $13,671,827
The number of shares outstanding of the registrant's common stock as of
March 20, 1998: 13,671,827.
<PAGE>
TFC ENTERPRISES, INC.
1997 FORM 10-K
TABLE OF CONTENTS
PART I........................................................................1
Item 1. Business
Item 2. Properties.......................................................13
Item 3. Legal Proceedings................................................13
Item 4. Submission of Matters to a Vote of Security Holders..............13
PART II......................................................................14
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.........................................................14
Item 6. Selected Financial Data.........................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................14
Item 8. Financial Statements and Supplementary Data.....................14
Item 9. Changes in and Disagreements with Accountants...................14
PART III.....................................................................15
Item 10. Directors and Executive Officers of the Registrant; Section
16(a) Beneficial Ownership Reporting Compliance.................15
Item 11. Executive Compensation..........................................15
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................................15
Item 13. Certain Relationship and Related Transactions...................15
PART IV......................................................................16
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................16
<PAGE>
Documents Incorporated by Reference
Portions of the registrant's Annual Report to Shareholders (the "Annual
Report") are incorporated by reference in Part II of this Form 10-K and portions
of the definitive Proxy Statement (the "1998 Proxy Statement") to be used in
connection with the 1998 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Form 10-K
PART I
This Report contains "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995. Any statements contained in
this Report that are not statements of historical fact are forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. The important factors discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made in this report and those presented elsewhere by
management from time to time. Please refer to the cautionary statement that
appears at the beginning of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information.
Item 1. Business
The Company
TFC Enterprises, Inc. (the "Company" or "TFCE") conducts its consumer
finance operations through two wholly-owned subsidiaries, The Finance Company
("TFC") and First Community Finance, Inc. ("FCF"). Through TFC, the Company is
engaged in purchasing and servicing installment sales contracts originated by
automobile and motorcycle dealers in the sale of used automobiles, vans, light
trucks, and new and used motorcycles (collectively "vehicles"). Installment
sales contracts are acquired on either an individual basis after the Company has
reviewed and approved the vehicle purchaser's credit application (a
"point-of-sale purchase"), or on a group basis through the purchase of a
dealer's portfolio of existing installment sales contracts (a "portfolio
purchase"). The Company focuses its point-of-sale business on installment sales
contracts originated by dealers with consumers who are United States military
enlisted personnel, primarily in the E-1 through E-5 grades. Portfolio purchases
are primarily from dealers who finance their own contracts with civilian
customers and sell them after origination in bulk. To achieve an acceptable rate
of return and provide for credit risks, contracts are purchased from dealers at
a discount to the remaining principal balance. Most of the discount is held in a
nonrefundable reserve against which credit losses are first applied.
The Company has been engaged in consumer finance activities since its
founding in 1977. The Company's point-of-sale purchases provide TFC with the
ability to direct the credit underwriting process at the initiation of the
installment sales contract. Participating dealers benefit by having a source of
financing for a group of customers who typically find financing difficult to
obtain, thereby increasing the number of vehicles sold and improving dealer
profitability. Consumers also benefit because the financing provided by the
Company enables them to purchase a vehicle they otherwise would not be able to
buy. As of December 31, 1997, $75.2 million, or 59% of the Company's net
contract receivables represented point-of-sale purchases, compared to $80.7
million, or 64% at December 31, 1996, and $134.3 million, or 78% at December 31,
1995.
TFC's portfolio purchase business emphasizes acquisitions of
portfolios of seasoned installment sales contracts. These contracts normally
have a payment history of at least three months. While the typical portfolio
purchase involves fewer than 100 individual contracts, TFC has, at times,
purchased portfolios totaling more than 1,000 contracts. Portfolio purchases
provide TFC with demographic diversification, as the majority of customers are
not military enlisted personnel. They also provide a payment history on which to
evaluate and price the credit risk of the contracts and a relatively efficient
mechanism for establishing dealer relationships in new areas. TFC's portfolio
purchases benefit dealers by providing an immediate source of liquidity. As of
December 31, 1997, $41.6 million, or 32% of the Company's portfolio of net
contract receivables was attributable to portfolio purchases, compared to $36.7
million, or 29% at December 31, 1996, and $32.3 million, or 19% at December 31,
1995.
Page 1
<PAGE>
The Company's operations began in 1977 in Alexandria, Virginia, with
the founding of TFC by Robert S. Raley, Jr., the Company's current Chairman of
the Board, President and Chief Executive Officer, whose career has been
exclusively within the consumer finance industry. The Company was founded
specifically for the purpose of providing direct financing for the credit needs
of individuals having limited access to traditional sources of credit,
particularly young United States military enlisted personnel. Mr. Raley
recognized that the financing needs of that market segment were being ignored by
the traditional providers of consumer credit.
With the significant increase in interest rates in the late 1970s and
early 1980s, the Company incurred operating losses as a result of the increased
costs of its funding. To offset those losses, the Company opened a used car
dealership near Fort Belvoir in northern Virginia. Within several months of
opening the northern Virginia dealership, the Company opened a second used car
dealership in Norfolk, Virginia, the home of the world's largest naval base. The
operation of these dealerships generated sufficient operating income to enable
the Company to survive and provided the Company expertise in used automobile
financing, particularly to United States military enlisted personnel. With the
reduction in interest rates that occurred in the mid-1980's, the Company sold
its used car dealerships. The Company's experience in owning and managing used
car dealerships identified the need that used automobile dealers have for a
reliable source of financing.
TFC operates two service centers: the Point-of-Sale Service Center in
Norfolk, Virginia, and the Portfolio Purchase Service Center in Jacksonville,
Florida. During 1996, TFC closed a third service center in Dallas, Texas. In
addition, TFC operates point-of-sale Loan Production Offices ("LPOs") in
Jacksonville, Florida; Killeen, Texas; San Diego, California; Norfolk, Virginia;
and a portfolio purchase Loan Production Office in Norfolk, Virginia. The
Company expects to open a point-of-sale LPO in Tacoma, Washington in May 1998.
Historically, regional service centers were responsible for purchasing
and servicing contract receivables originated by dealers in their regions.
However, during 1996, TFC transferred the underwriting functions to the
point-of-sale and portfolio purchase LPOs to improve TFC's control over the
underwriting process. Additionally, during 1996 TFC moved the responsibility for
servicing point-of-sale accounts to the Norfolk service center and all servicing
of its portfolio purchase accounts to the Jacksonville service center to improve
TFC's collection results.
Through FCF, the Company is involved in the direct origination and
servicing of small consumer loans. FCF began operations in the first quarter of
1995 with the opening of two branches in Richmond, Virginia. Four additional
branches were opened in Virginia in 1995 and four branches were opened in North
Carolina during 1996. In 1997, one additional branch was opened in Virginia and
four branches were opened in North Carolina. The Company is evaluating
additional branch openings in 1998. Net contract receivables relating to FCF at
December 31, 1997, were $11.7 million, or 9% of the Company's net contract
receivables, compared to $8.8 million, or 7% at December 31, 1996, and $4.4
million or 3% of the net contract receivables at December 31, 1995.
Industry Overview
The automobile financing industry is dominated in certain respects by
commercial banks and captive finance companies of major automobile
manufacturers. While consumer credit risk classifications are not standardized,
those institutions generally focus on consumers that could be characterized as
being "low-risk" or "medium-risk" from a credit perspective. TFC's target market
involves consumers that are characterized as being "high-risk" from a credit
perspective.
The direct served consumer loan industry established in the early
1900's has traditionally been served by major national companies, smaller
regional companies and small local independent companies. Over the last 10-15
years many of the major national companies have retreated from or reduced their
involvement in this market.
Management's focus in 1996 and continuing in 1997 has been on
redirecting the Company toward those sectors of the market in which management
believes pricing more closely reflects the risk inherent in the business. Areas
of focus include the military point-of-sale business, portfolio purchases and
small direct consumer loans.
Page 2
<PAGE>
Automobile Finance Operations
Dealer Selection and Program
Through its marketing efforts, TFC has established relationships with
dealers that originate installment sales contracts purchased by TFC, either
through point-of-sale purchases or portfolio purchases. TFC's relationships are
primarily with independent dealers that are not affiliated with an automobile
manufacturer, nor the Company.
To achieve an acceptable rate of return and provide for credit risks,
contracts are purchased from dealers at a discount to the remaining principal
balance. With respect to point-of-sale purchases, the discount is the difference
between TFC's purchase price from the dealer and the amount financed, net of the
cost of ancillary products. With respect to portfolio purchases, the discount is
the difference between TFC's purchase price and the amount of the remaining
principal balance on the contract. The amount of the discount at which contracts
are purchased reflects, among other things, a contract's interest rate, term and
credit risk. Contracts are purchased in accordance with applicable underwriting
criteria and pursuant to a Master Dealer Agreement in the case of point-of-sale
purchases, and an Asset Purchase Agreement in the case of portfolio purchases.
TFC believes that its dealer programs provide substantial benefits to
dealers by providing a source of financing for a group of customers who
typically find financing difficult to obtain, thereby increasing the number of
vehicles sold and improving dealer profitability. Additionally, TFC provides the
following services to dealers through its point-of-sale program: (1)
documentation designed to conform to applicable federal and state laws; (2)
timely response to credit applications; (3) timely payment for approved
installment contracts; and (4) access to a range of ancillary products.
Sales and Marketing
TFC markets primarily to independent used car dealers. Initial contacts
are pursued through telemarketing and followed up by personal visits to dealer
facilities by appropriate Loan Production Office marketing personnel. TFC also
establishes relationships with dealers through referrals from existing dealers
and independent marketing contractors. Other marketing efforts involve the
distribution of marketing brochures and advertisements in trade journals and
other industry publications directed to dealers. TFC also participates at
several of the Independent Automobile Dealers Association meetings and
conventions.
Competition
There are numerous providers of financing for the purchase of used
vehicles either through the direct financing of such purchases or on an indirect
basis through dealers. These financing sources include commercial banks, savings
and loans associations, consumer finance companies, credit unions, financing
divisions of automobile manufacturers, small sales contract companies and other
consumer lenders. Many of these providers of vehicle financing have
significantly greater resources than TFC and have relationships with established
dealer networks. TFC has focused on a segment of the market comprised of
consumers who typically do not meet the more stringent credit requirements of
the traditional sources of consumer financing and whose needs, as a result, have
historically not been consistently addressed by such financing sources. If,
however, the other providers of consumer finance were to assert a significantly
greater effort to penetrate TFC's targeted market segment, given their financial
strength, TFC could be materially and adversely affected by this type of
competition.
During the mid 1990's, there was a significant increase in the number
of competitors in the automobile non-prime finance industry markets in which TFC
operates and in the access to funds. The combination of increased competition
and the industry's improved access to funds resulted in a general increase in
prices offered to dealers for installment sales contracts. In certain sectors of
the market, prices increased to the point at which anticipated credit losses
relating to the contracts were not adequately reflected in prices offered to
dealers. As a result, the Company found it increasingly difficult to purchase
contracts at what it considers to be reasonable prices.
Management's focus since 1996 has been on redirecting the Company
toward those sectors of the market in which management believes pricing more
closely reflects the risk inherent in the business. Areas of focus will continue
to include the military point-of-sale and portfolio business lines. During 1996,
1997 and continuing into 1998, a number of the Company's competitors have
experienced financial problems that have restricted their ability to compete
with the Company
Page 3
<PAGE>
in its core markets. Management believes that because of the problems faced by
its competitors, the Company may have a better opportunity, in 1998, to purchase
installment contracts from dealers on terms consistent with its pricing policies
than it has had over the past two years.
Point-of-Sale Purchase Program
In its point-of-sale program, TFC establishes relationships with
dealers that meet its financial, organizational and compliance criteria. TFC
currently makes point-of-sale purchases from dealers in approximately 30 states.
TFC purchases contracts relating to its point-of-sale program pursuant
to a Master Dealer Agreement. Upon entering into a Master Dealer Agreement, TFC
provides the dealer with necessary documentation for the origination of
installment sales contracts and trains its personnel regarding the use of TFC's
documentation. The Master Dealer Agreement contains representations and
warranties by the dealer to TFC with respect to certain matters, including the
security interest in the vehicle, and sets forth the general terms upon which
installment contracts will be purchased by TFC. The agreements are nonexclusive
and do not obligate a dealer to sell, or TFC to purchase, any particular
contract or volume of contracts. The Master Dealer Agreement may be terminated
at any time by TFC or by the dealer.
Typically, a dealer will submit a customer's credit application to more
than one financing source for review. Under TFC's program, a dealer is required
to provide TFC with a completed credit application which lists the applicant's
assets, liabilities, income, credit and employment history, and other personal
information bearing on the decision to extend credit.
The application and related information are then analyzed by one of
TFC's credit analysts. A credit analyst evaluates the applicant's ability to
make regular payments and other factors, including the amount of money to be
financed in relation to the purchase price and value of the vehicle. TFC
generally determines the value of the vehicle based upon the NADA's Used Car
Guide Books on Retail and Wholesale Values and/or the Kelley Blue Book. Upon
completion of the credit application review, a credit analyst will decide
whether to approve the financing as submitted, decline the financing or
conditionally approve the financing.
Typically, installment contracts are purchased by and assigned to TFC
at a price that reflects a discount from the amount financed. Most of the
discount is held in a non-refundable reserve against which credit losses are
first applied. The assigning dealer makes certain warranties as to the validity
of the contract and compliance with certain laws and generally agrees to
indemnify TFC for any claim, defense and set-off against the dealer that may be
asserted against TFC by reason of the assignment. TFC, at the time of purchase,
requires physical damage insurance on all automobiles covered by the installment
sales contracts that it purchases through its point-of-sale program. To the
extent that material terms of a contract prove to be inaccurate, TFC generally
has the right to require the dealer to repurchase such contract under the terms
of the Master Dealer Agreement.
Portfolio Purchase Program
Many dealers finance automobile sales through the use of their own
funds. TFC currently purchases portfolios of seasoned installment contracts from
such dealers in approximately 20 states. TFC limits consideration of dealers to
those that generate sufficient business volume, employ satisfactory credit
approval procedures and adequately monitor and report loan performance data.
Portfolio purchases are made pursuant to an Asset Purchase Agreement which
requires the dealer to make representations and warranties to TFC with respect
to each contract to be purchased by TFC and with respect to security interests
in the related vehicles. Unlike a point-of-sale purchase, with respect to which
TFC has the opportunity to verify various information relating to the
installment contract prior to its purchase, portfolio purchases are made
subsequent to the origination of the installment contract. Thus, the typical
Asset Purchase Agreement provides TFC with more extensive remedies than the
Master Dealer Agreement. Generally, if a representation or warranty is breached,
TFC, under the Asset Purchase Agreement, can require the dealer to repurchase
the contract. In certain cases, a special reserve or holdback is established,
against which payment defaults on contracts can be charged.
Generally, TFC purchases that portion of the dealer's portfolio that
meets or exceeds TFC's underwriting standards. TFC's due diligence normally
begins with a review of information obtained from the dealer on TFC's standard
information- gathering forms. Additional information is then obtained to verify
the dealer's compliance with licensing, bonding and
Page 4
<PAGE>
organizational requirements. TFC then performs extensive due diligence
procedures that it has developed during its years of operation to determine
whether to do business with that particular dealer.
Within 90 days after completing a portfolio purchase, TFC confirms by
telephone various terms of most contracts with the purchaser of the vehicle. To
the extent that material terms of any contract prove to be inaccurate, TFC
generally has the right to require the dealer to repurchase such contract under
the terms of the Asset Purchase Agreement
Contract Origination and Purchase
Contracts in TFC's point-of-sale portfolio have initial durations
normally ranging from 18 to 48 months, with an average original maturity of
approximately forty months. Portfolio purchase contracts generally have an
average remaining maturity of 18 to 24 months at the time of purchase.
The following table sets forth for the periods indicated TFC's contact
volume as well as the number and average size of its contracts.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
(in thousands)
Contracts purchased or originated:
Point-of-sale $ 85,311 $ 58,623 $231,877 $145,193 $101,615
Portfolio 70,520 61,391 61,261 76,990 53,583
---------- ---------- ---------- ---------- ----------
Total $155,831 $120,014 $293,138 $222,183 $155,198
========== ========== ========== ========== ==========
Number of contracts purchased or originated:
Point-of-sale 7,411 6,154 24,095 15,610 12,228
Portfolio 14,157 11,853 14,084 21,324 15,598
--------- ---------- ---------- ---------- ----------
Total 21,568 18,007 38,179 36,952 27,826
========= ========== ========== ========== ==========
Average size of contract: (in dollars):
Point-of-sale $ 11,511 $ 9,526 $ 9,623 $ 9,301 $ 8,310
Portfolio $ 4,981 $ 5,179 $ 4,349 $ 3,607 $ 3,435
Weighted average $ 7,228 $ 6,665 $ 7,678 $ 6,013 $ 5,577
</TABLE>
The Finance Company's contract purchase volume is discussed more fully
in Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the TFC Enterprises, Inc. 1997 Annual Report, which is
incorporated herein by reference.
Ancillary Products
In connection with its point-of-sale business, TFC offers, through its
dealers in certain states, warranty products, as well as physical damage
insurance. These products are provided and underwritten by third-party vendors.
Accordingly, liabilities under the ancillary products are not obligations of
TFC. TFC offers these products to dealers so that they, in turn, may provide
vehicle purchasers a more complete line of products and services. By offering
these products, TFC is able to generate supplementary revenue without incurring
significant additional expenses. During 1997, 1996 and 1995, TFC generated gross
revenues of approximately $0.8 million, $1.2 million and $2.1 million,
respectively, from the sale of ancillary products through its dealers.
Collections
Payments on purchased installment sales contracts are received by TFC
through a number of different means. Payments are monitored by TFC to maintain
current information regarding each customer's current address and banking data.
Customers occasionally make payments in person at one of TFC's service centers
or Loan Production Offices. Collections Department personnel, at times, will
make a collection through a field visit to the customer.
Page 5
<PAGE>
Monitoring the payment history of accounts and implementing appropriate
remedial action is the responsibility of the Collections Department within each
service center. At year-end 1997, a total of 139 employees, or 52% of TFC's
total full-time equivalent employees, worked in the Collections Departments of
the two service centers.
One of the primary responsibilities of the Collections Department is to
monitor customer accounts that are delinquent in payment. Collections Department
personnel work with customers to resolve payment problems and bring accounts to
current status at the earliest possible stage of delinquency. Collections
Department employees are compensated, in part, through bonuses tied to their
monthly collection performance.
When calling a delinquent account, Collections Department personnel
utilize TFC's Collections Training Manual developed by TFC. The manual specifies
the procedure to follow in different circumstances in order to maximize the
effectiveness of the call. Specific action with respect to a delinquent account
will depend on the customer's particular circumstances as well as the past
payment history of the account. However, in all cases, the primary focus is
resolving the problem causing the delinquency, arranging a modified payment
plan, or working out a settlement agreement. At times, Collections Department
personnel meet with customers in the field or at a service center.
When TFC has difficulty locating a customer, Collections Department
personnel will attempt to find the individual through skip tracing, which
utilizes various sources of information about a customer to which TFC has
access. All communications with and efforts to locate the customer are reflected
in TFC's data files.
In certain situations, TFC will repossess a vehicle. To the extent that
a deficiency balance exists upon repossession and sale of a vehicle, TFC may
take action to obtain a judgment.
Decisions to charge off accounts are made at the end of each month.
Accounts on which there has been no significant payment activity for 90 days are
generally charged off when they are 180 days contractually past due.
Additionally, the carrying value of repossessed assets is reduced, through
charge-off, to the lower of the unpaid contract balance or anticipated
liquidation proceeds. Once an account is charged off, it is transferred to the
Recovery Unit. Customers are called regularly and attempts are made to set up
repayment plans or workout settlement agreements as appropriate to a customer's
circumstances. Each Recovery Unit employee is responsible for keeping records of
all collection activity and for following up on callback and broken promise
dates as appropriate.
The Company's charge-off and delinquency experience is discussed more
fully in Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the TFC Enterprises, Inc. 1997 Annual Report, which is
incorporated herein by reference.
Information Systems
The Company processes all data relating to its contract receivables and
financial reporting through a distributed network of computers. TFC's computer
systems are networked together to provide information to management for analysis
as well as automatic posting to the general ledger for financial reporting
purposes. The systems provide for complete contract processing from the purchase
of the contract, payment to the dealer, posting of payments and all other
collection activity from the inception date of the installment contract. The
Company has invested in technology that enables TFC to mechanically process and
score credit applications, thereby increasing capacity, reducing processing
time and improving standardization of credit underwriting without significant
staff increases. TFC's systems operate on software which has been adapted to the
specific manner in which TFC operates its business.
The TFC systems are interfaced with a predictive dialing system designed to
enhance collection activity by increasing the number of customer contacts per
collector hour. This system dials multiple telephone numbers simultaneously
based on parameters defined by the Collections Department. Calls are connected
automatically to a collector at the same time the customer's account is
displayed on the collector's computer screen. The process permits better control
of calling patterns for more effective calling and improved customer contact
rates. By eliminating busy signals, no answers and answering machines, the
system enables the collector to speak to more customers. The system also reports
collection performance by collector for improved supervision and results.
Page 6
<PAGE>
First Community Finance uses a third-party computer system designed for
the consumer loan industry. Each branch processes all data relating to that
branch on a computer within the branch. The system provides for complete
contract processing from the closing of the loan, posting of payments and all
collection activity. These systems are networked together to provide
consolidated management information and automatic posting to the Company's
general ledger for financial reporting.
The Company believes that it has sufficient management information
systems in place, or in the process of being implemented, to meet the Company's
current and near-term future requirements.
Until recently computer programs were written to store only two digits
of date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900 and
the year 2000. Utilizing both internal and external resources, the Company is in
the process of defining, assessing and converting, or replacing, various
programs and hardware systems to make them Year 2000 compatible. The Company's
Year 2000 project is comprised of business applications which consist of the
Company's computer systems, as well as the computer system purchased from
third-party suppliers. It is estimated that the cost of addressing the year 2000
problem and making the Company's computer systems year 2000 compliant will not
be material.
Consumer Finance Operations
Consumer Loan Program
In its Consumer Loan Program, First Community Finance ("FCF")
originates direct loans through a branch network. Loans are obtained through
print media, customer referrals, renewals and other sources. Applications are
primarily received directly from the consumer either by telephone or in person
at one of the branches.
Once an application has been received, a background investigation is
performed on the applicant, including such things as employment and income
verification, residence verification, direct references from other creditors and
review of credit bureau files. This information is reviewed by a branch manager
or assistant manager to determine creditworthiness. If the applicant is
approved, the applicant would visit the appropriate branch to execute necessary
documents and receive funding.
Loan Origination
Most contracts have initial durations of 36 months or less.
The following table sets forth for the periods indicated FCF's loan
volume as well as the number and average size of its loans. (FCF commenced
operations in 1995.)
1997 1996 1995
---- ---- ----
Loans originated (in thousands) $ 16,023 $13,174 $6,257
======== ======= ======
Number of loans originated 7,093 6,623 3,254
======== ======= ======
Average size of loan $ 2,259 $ 1,989 $1,923
======== ======= ======
FCF's loan volume is discussed more fully in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
TFC Enterprises, Inc. 1997 Annual Report, which is incorporated herein by
reference.
Page 7
<PAGE>
Ancillary Products
In connection with its consumer loan business, FCF offers its customers
credit life insurance, credit accident and health insurance, and property
insurance. These products are provided and underwritten by third-party vendors.
Accordingly, liabilities under the ancillary products are not obligations of the
Company. These products protect the customer as well as providing supplementary
revenue to FCF. During 1997 and 1996, FCF generated gross revenues of
approximately $0.3 million and $0.1 million, respectively, from the sale of
ancillary products. Such revenues in 1995, FCF's first year of operation, were
not significant.
Collections
Payments on consumer loans are received by FCF primarily through the
mail or the customer pays at the appropriate branch. Each branch monitors
payments to maintain current information regarding each customer's current
address and banking data. Branch personnel, at times, will make a collection
through a field visit to the customer. Monitoring the payment history of the
accounts and implementing appropriate remedial action is the responsibility of
the branch.
One of the primary responsibilities of the branch is to monitor
customer accounts that are delinquent in payment. Branch personnel work with
customers to resolve payment problems and bring accounts to current status at
the earliest possible stage of delinquency. Specific action with respect to a
delinquent account will depend on the customer's particular circumstances as
well as the past payment history of the account. However, in all cases the
primary focus is resolving the problem causing the delinquency, arranging a
modified payment plan or working out a settlement. At times branch personnel
meet with the customers in the field or at the branch. When FCF has difficulty
locating a customer, collections personnel will attempt to locate the individual
through skip tracing, which utilizes various sources of information about a
customer to which FCF has access. All communications with and efforts to locate
the customer are reflected in FCF's data files.
Decisions to charge off accounts are made at the end of each month.
Accounts that reach a 180 day contractually past due status are generally
charged off. Once an account is charged off, collection activity will continue.
The Company's charge off and delinquency experience is discussed more fully in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the TFC Enterprises, Inc. 1997 Annual Report, which is
incorporated herein by reference.
Recoveries, Inc.
To capitalize on its collections expertise, the Company, in 1997,
formed a new subsidiary named Recoveries, Inc. which is designed to collect
debts for others. The Company is currently in the process of obtaining licenses
to enable it to operate in most states. Although management's plans are still
being formulated, Recoveries, Inc. is currently attempting to offer its debt
collection services to medical organizations and other third parties. During
1997, Recoveries, Inc. generated insignificant revenue, and operated at a loss.
Management cannot offer any assurance that Recoveries will generate revenue or
be profitable during 1998.
Regulation
The Company's businesses are subject to regulation and licensing under
various federal, state and local statutes and regulations. Most of the states in
which the Company operates limit the interest rate, fees and other charges that
may be collected. In addition, many states prescribe certain terms in the
contract.
Numerous federal and state consumer protection laws and related
regulations impose substantive disclosure requirements upon lenders and
servicers involved in motor vehicle financing. Some of the federal laws and
regulations include the Truth-in-Lending Act, the Equal Credit Opportunity Act,
the Federal Trade Commission Act, the Fair Credit Reporting Act, the Fair Debt
Collection Practices Act, the Motor Vehicle Information and Cost Savings Act,
the Magnuson- Moss Warranty Act, the Federal Reserve Board's Regulations B and
Z, and the Soldiers' and Sailors' Civil Relief Act.
In addition, the Federal Trade Commission ("FTC") has adopted the
holder-in-due-course rule, which has the effect of subjecting persons that
finance consumer credit transactions (and certain related lenders and their
assignees) to all claims
Page 8
<PAGE>
and defenses which the purchaser could assert against the seller of the goods
and services. With respect to used automobiles specifically, the FTC's rule on
Sale of Used Vehicles requires that all sellers of used vehicles prepare,
complete and display a Buyer's guide which explains the warranty coverage for
such vehicles. The Credit Practices Rules of the FTC impose additional
restrictions on sales contract provisions and credit practices.
Certain states where the Company operates have adopted motor vehicle
retail installment sales acts or variations thereof and consumer finance acts.
Such laws regulate, among other things, the interest rates and terms and
conditions of motor vehicle retail installment sales contracts and also impose
restrictions on consumer transactions and require sales contract disclosures in
addition to the requirements under federal law. Those requirements impose
specific statutory liabilities upon creditors who fail to comply.
The Company believes that it is in compliance with all applicable laws
and regulations.
Employees
At December 31, 1997, the Company had 331 full-time equivalent
employees. No employees are currently covered by collective bargaining
agreements. The Company believes that its employee relations are excellent.
The Company was incorporated under the laws of Delaware. The Company's
principal executive and administrative offices are located at 5425 Robin Hood
Road, Norfolk, Virginia 23513, and the Company's telephone number is (757)
858-4054. References to the Company include the Company's wholly owned
subsidiaries.
Risk Factors
In evaluating the Company, individuals should consider carefully all of
the information set forth throughout this Report and, in particular, should
evaluate the following risk factors.
Fluctuating Interest Rates and Dependence on Line of Credit
The Company's operations require substantial borrowing to provide
funding for the installment contracts purchased by TFC and originated by FCF.
Consequently, profitability is impacted by the difference between the rate of
interest paid on the funds it borrows and the rate of interest charged on the
installment contracts, which rate in some states is limited by law. Currently,
the principal source of borrowing by the Company is its revolving line of
credit, guaranteed by TFCEI (the "Line of Credit") with General Electric Capital
Corporation ("G.E. Capital"). The maximum amount of borrowings available under
the Line of Credit was $110 million at December 31, 1997. At December 31, 1997,
TFC had $89.6 million outstanding under the Line of Credit. The floating
interest rate for borrowings under the Line of Credit is equal to the average
30-day London Interbank Offered Rate ("LIBOR") plus 4.00%. Thus, future
increases in interest rates could adversely affect the Company's profitability.
In an effort to reduce its exposure to an increase in interest rates, TFC has
purchased an interest rate cap which ensures that the interest rate on $75
million of the borrowings under the Line of Credit will not exceed a LIBOR
ceiling of 6.5%. This interest rate cap expires September 30, 1998. In addition
to the purchase of interest rate caps, the Company believes it has certain
flexibility to increase the discount at which installment contracts are
purchased, or to increase the rate of interest charged on future installment
contracts (to the extent not limited by state law), in order to offset the
adverse impact of any interest rate increase on profitability.
The Finance Company has maintained a Line of Credit with G.E. Capital
since 1992. The current Line of Credit was executed in December 1996, amended in
April 1997 and Febraury 1998, and expires January 1, 1999. There is no assurance
that a new Line of Credit will be executed when the current Line of Credit
expires. If the new Line of Credit is not executed, TFC would be required to
seek alternative financing sources and repay its outstanding balance on or
before the expiration of the current Line of Credit on January 1, 1999. No
assurance can be given that alternative financing sources would be available in
such event. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resource."
Page 9
<PAGE>
Defaults on Installment Contracts
The Company is engaged primarily in purchasing installment contracts
entered into by dealers with consumers who have limited access to traditional
sources of consumer credit. The inability of an individual to finance a used
automobile purchase by means of traditional credit sources is generally due to
such individual's past credit history or insufficient cash to make the required
down payment on an automobile. As a result, installment contracts purchased by
the Company are generally with purchases of automobiles who are considered to
have a higher risk of default on an installment contract than certain other
automobile purchasers. Accordingly, the consumer loan activities engaged in by
the Company typically have a higher risk of loss than those of other consumer
financings. While the Company believes that its expertise in used automobile
financing, particularly for United States military enlisted personnel, enables
it to evaluate and price accurately the higher risk associated with the
Company's business, a significant economic downturn in the markets in which the
Company operates could materially increase the number of charged off and
delinquent installment contracts experienced by TFC as compared to its
historical losses. If TFC were to experience a material increase in charge-offs
or delinquencies, its profitability could be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Credit Losses and Delinquency."
Dependence Upon Key Executive
The Company's growth and development to date have been largely
dependent upon the services of Robert S. Raley, Jr., Chairman of the Board,
President and Chief Executive Officer. The loss of Mr. Raley's services could
have a material adverse effect on the Company.
Competition
There are numerous providers of financing for the purchase of used
automobiles either through the direct financing of such purchases or on an
indirect basis through a dealer. Those financing sources include commercial
banks, savings and loan associations, consumer finance companies, credit unions,
financing divisions of automobile manufacturers or automobile retailers, small
sales contract companies and other consumer lenders. Many of those providers of
automobile financing have significantly greater financial resources than TFC and
have relationships with established dealer networks. The Company has focused on
a segment of the market composed of consumers who typically do not meet the more
stringent credit requirements of the traditional consumer financing sources and
whose needs, as a result, have not been addressed consistently by such financing
sources. If, however, the other providers of consumer finance were to assert a
significantly greater effort to penetrate TFC's targeted market segment, TFC
could be materially and adversely affected.
Regulation
The Company's business is subject to regulation and licensing under
various federal, state and local statutes and regulations. The Company's
business operations are conducted in approximately 30 states and, accordingly,
the laws and regulations of such states govern the Company's operations
conducted in those states. Most states where the Company operates limit the
interest rate, fees and other charges that may be imposed by, or prescribe
certain other terms of, the contracts that the Company purchases and define the
Company's rights to repossess and sell collateral. In addition, the Company is
required to be, and is, licensed to conduct its operations in certain states. As
the Company expands its operations into other states, it will be required to
comply with the laws of such states.
An adverse change in those laws or regulations could have a material
adverse effect on the Company's profitability by, among other things, limiting
the states in which the Company may operate or the interest rate that may be
charged on installment contracts or restricting the Company's ability to realize
the value of any collateral securing contracts. The Company is not aware of any
materially adverse legislation currently pending in any jurisdiction where it
currently transacts business.
Restrictions on the Payment of Dividends
The Company currently intends to retain its earnings to finance the
growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future dividend
payments will depend upon the financial condition, funding requirements and
earnings as well as other factors that the Company's Board of
Page 10
<PAGE>
Directors may deem relevant. As the Company is a legal entity separate and
distinct from TFC and as its revenues depend on the payment of dividends by TFC,
limitations on the ability of TFC to pay dividends to the Company will in turn
limit the ability of the Company to pay dividends to its stockholders. There are
certain restrictions on the payment of dividends in the form of various
affirmative and negative covenants included in the TFC's Line of Credit and the
Note Purchase Agreement relating to the Subordinated Non-Convertible Notes due
October 15, 1998 and the Note Purchase agreement relating to the Senior
Subordinated Notes due June 30, 2002.
Effect of Certain Charter, Bylaw and Statutory Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws") could delay or frustrate the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy contest
involving the Company, even if such events could be beneficial, in the short
term, to the interest of the stockholders. For example, the Certificate of
Incorporation provides for a classified Board of Directors and for certain
limitations on the calling of a special meeting of stockholders and the Bylaws
require advance notice of stockholder proposals and nominations of directors.
The Company also is subject to provisions of Delaware corporation law that
prohibit a publicly-held Delaware corporation from engaging in a broad range of
business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's common stock (an "interested
stockholder") for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. Those
provisions could discourage or make more difficult a merger, tender, offer or
similar transaction, even if favorable to the Company's stockholders.
Authorized Preferred and Common Stock
Pursuant to the Certificate of Incorporation, shares of preferred stock
and Common Stock may be issued in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
any preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporation transactions, could have the effect of making
it more difficult for a third party to acquire, or effectively preventing a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of preferred
stock.
Executive Officers of the Company
The executive officers of TFCE, TFC and FCF are as follows:
<TABLE>
<CAPTION>
Name Age* Position
<S> <C>
Robert S. Raley, Jr. 60 Chairman of the Board of Directors of TFCE, TFC and FCF,
President and Chief Executive Officer of TFCE and TFC, and
Executive Vice President of FCF
Ronald G. Tray 56 Vice President of TFCEI and Director of Management
Information Systems, Executive Vice President and Chief
Operating Officer of TFC
Craig D. Poppen 39 Vice President, Treasurer and Chief Financial Officer of
TFCEI and FCF, Executive Vice President, Treasurer and
Chief Financial Officer of TFC
Rick S. Lieberman 41 Senior Vice President and Chief Lending Officer of TFC
G. Kent Brooks 61 President and Chief Executive Officer of FCF
Fletcher A. Cooke 54 General Counsel and Secretary of TFCEI and TFC
*As of December 31, 1997
</TABLE>
Robert S. Raley, Jr. founded TFC in 1977. From that time through
December 1992, he served as Chief Executive Officer of TFC. In 1996, Mr. Raley
was appointed President and Chief Executive Officer of TFCE and was reappointed
to
Page 11
<PAGE>
that position for TFC. Prior to founding TFC, Mr. Raley was employed by Major
Financial Services, Silver Spring, Maryland, for 17 years in various positions,
including Vice President and Director of Operations. Mr. Raley was a Director
of TFCE from 1984 through April 1990 and has been a Director of TFCE since May
1990. Mr. Raley currently serves as Chairman of the Board.
Ronald G. Tray joined TFC as a Vice President and Director for
Management Information Systems in 1989. Mr. Tray was appointed Chief Operating
Officer of TFC in 1996. Prior to joining TFC, Mr. Tray was President of the Mid-
Atlantic Division, Mtech Corporation, a data processing service bureau for
banks, located in Fairfax, Virginia. In 1996, Mr. Tray resigned as a Director of
TFCE, a position he had held since 1993.
Craig D. Poppen, CPA, joined TFC as Chief Financial Officer in 1998.
From 1988 until 1995, Mr. Poppen was employed by Ernst & Young LLP. From 1995
until 1997, Mr. Poppen was employed by KPMG Peat Marwick LLP, and from 1997
until January 1998, Mr. Poppen was employed by New Dominion Pictures, Inc., a
television production company where he served as Chief Financial Officer.
Rick S. Lieberman, Senior Vice President and Chief Lending Officer of
TFC. Mr. Lieberman joined TFC in 1989 and has served the Company in several
capacities, including General Manager, Vice President of the Norfolk Regional
Service Center. Prior to joining TFC, he was with ITT Consumer Financial
Corporation for 8 years.
G. Kent Brooks joined FCF in 1994 as President. Prior to that, he was
with Peoples Finance Corporation, Richmond, Virginia, from 1956 to 1980, the
last eight years of which he served as President. From 1980 to 1992, Mr. Brooks
served as a Senior Vice President and Regional Manager for Provident Financial
Corporation, subsequent to its acquisition of Peoples Financial Corporation.
From 1992 to 1993, Mr. Brooks was with American General Finance, subsequent to
its acquisition of Provident Financial Corporation. Mr. Brooks has been a
Director of FCF since 1994.
Fletcher A. Cooke joined TFC in 1997 as General Counsel. Prior to
that, he was with A.T. Massey Coal Company, Inc. as Assistant General Counsel
and Corporate Secretary from January 1991 to April 1996. Mr. Cooke was
Associate General Counsel with The Pittston Company from 1980 to 1991.
Item 2. Properties
The Company's principal executive offices and Point-of-Sale Service
Center, Point-of-Sale Loan Production Office and Portfolio Loan Production
Office located in Norfolk, Virginia consist of approximately 27,000 square feet
of space pursuant to a lease expiring in 2006. The Company's Portfolio Service
Center and Point-of-Sale Loan Production Office located in Jacksonville, Florida
consists of approximately 17,000 square feet of space pursuant to a lease
expiring in 2001. The Company's Point-of-Sale Loan Production Office in Killeen,
Texas consists of approximately 2,300 square feet of space pursuant to a lease
expiring in January 1999. The Company's Point-of-Sale Loan Production Office in
San Diego, California, consists of approximately 1,100 square feet of space
pursuant to a month-to-month lease. The Company's planned Point- of-Sale Loan
Production Office in Tacoma, Washington, consists of approximately 1,500 square
feet of space pursuant to a lease that commences in April 1998 and expires in
March 1999. First Community Finance, Inc.'s branch offices, on a combined basis,
total approximately 18,400 square feet of space pursuant to leases expiring in
1998 to 2000.
The Company believes that its facilities are adequate for its current
and near-term future requirements.
Item 3. Legal Proceedings
The Company is a party to several legal actions which are ordinary,
routine litigation incidental to its business. The Company believes that none of
those actions, either individually or in the aggregate, will have a material
adverse effect on the results of operations or financial position of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1997.
Page 12
<PAGE>
PART II
The information required by Part II, Items 5, 6, 7 and 8 has been
incorporated herein by reference to the TFC Enterprises, Inc. 1997 Annual Report
as set forth below, in accordance with General Instruction G(2) of Form 10-K.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since December 22, 1993, TFC Enterprises, Inc. Common Stock has traded
on the NASDAQ National Market System under the symbol "TFCE." Share price
information with respect to the Common Stock is set forth in the "Selected
Quarterly Data" table included in the TFC Enterprises, Inc. 1997 Annual Report,
which is incorporated herein by reference.
As of March 20, 1998, there were approximately 2,194 holders of the
Common Stock, including approximately 122 holders of record. No cash dividends
have been paid with respect to the Common Stock since issuance. The Company has
no current plans to pay any cash dividends relating to the Common Stock in the
foreseeable future, although any dividends on the Common Stock will be at the
sole discretion of the Company's Board of Directors and will depend upon the
Company's profitability and financial condition, capital requirements, statutory
restrictions, requirements of the Company's lenders, future prospects and other
factors deemed relevant by the Company's Board of Directors. If any dividends
are paid to the holders of Common Stock, all holders will share equally on a per
share basis.
The Company has not issued any of its authorized preferred stock.
Item 6. Selected Financial Data
Information included in the section entitled "Five-Year Summary of
Selected Financial Data" in the TFC Enterprises, Inc. 1997 Annual Report is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Information included in the section entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the TFC
Enterprises, Inc. 1997 Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of TFC Enterprises, Inc.,
including notes thereto, are presented in the TFC Enterprises, Inc. 1997 Annual
Report and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants
None.
Page 13
<PAGE>
PART III
The information required by Part III, Items 10, 11, 12, and 13 has been
incorporated herein by reference to the Company's 1998 Proxy Statement as set
forth below, in accordance with General Instruction G(3) of Form 10-K.
Item 10. Directors and Executive Officers of the Registrant; Section 16(a)
Beneficial Ownership Reporting Compliance
Information relating to directors of the Company and compliance with
Section 16(a) of the Exchange Act is set forth in the sections entitled
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's 1998 Proxy Statement and is incorporated herein by
reference. Pursuant to General Instruction G(3) of Form 10-K, certain
information concerning the executive officers of the Company is set forth under
the caption entitled "Executive Officers of the Company" in Part I, Item 1, of
this Form 10-K.
Item 11. Executive Compensation
Information regarding compensation of officers and directors of the
Company is set forth in the section entitled "Executive Compensation" in the
Company's 1998 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding ownership of certain of the Company's securities
is set forth in the section entitled "Security Ownership of Management and
Certain Beneficial Owners" in the Company's 1998 Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationship and Related Transactions
Information regarding certain relationships and related transactions
with the Company is set forth in the section entitled "Certain Relationships and
Related Transactions" in TFC's 1998 Proxy Statement and is incorporated herein
by reference.
Page 14
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
The Consolidated Financial Statements of TFC
Enterprises, Inc. and the Auditor's Report thereon, are incorporated herein by
reference. Applicable pages in the TFC Enterprises, Inc. 1997 Annual Report are
as follows:
Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity
for the Years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Report of Ernst & Young LLP, Independent Auditors, on
Schedule I
Schedule I - Financial Information of Registrant -
TFC Enterprises, Inc.
All other schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are inapplicable and
therefore have been omitted.
(3) Exhibits
The exhibits listed on the accompanying Exhibit Index
are filed or incorporated by reference as part of this Form 10-K and
such Exhibit Index is incorporated herein by reference.
(b) Reports on Form 8-K (filed during the fourth quarter of 1997):
None.
Page 15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/Robert S. Raley, Jr.
------------------------------------------
Robert S. Raley, Jr.
Chairman of the Board, President and
Chief Executive Officer
Dated March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date:
<S> <C>
/s/Robert S. Raley, Jr. Chairman of the Board March 31, 1998
- ------------------------------------ and Director, President
and Chief Executive Officer
/s/Walter S. Boone, Jr. Director March 31, 1998
- ------------------------------------
Walter S. Boone, Jr.
/s/Douglas B. Bywater Director March 31, 1998
- ------------------------------------
Douglas B. Bywater
/s/Andrew M. Ockershausen Director March 31, 1998
- ------------------------------------
Andrew M. Ockershausen
/s/Phillip R. Smiley Director March 31, 1998
- ------------------------------------
Phillip R. Smiley
/s/Linwood R. Watson Director March 31, 1998
- ------------------------------------
Linwood R. Watson
/s/Craig D. Poppen Chief Financial Officer March 31, 1998
- ------------------------------------ (Principal Accounting and
Craig D. Poppen Financial Officer)
</TABLE>
Page 16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of TFC *
Enterprises, Inc. (Incorporated by reference to the
Registrant's Registration Statement on Form S-1, Commission File
No. 33-70638, previously filed with the Commission on October
21, 1993.)
3.2 Amended and Restated Bylaws of TFC Enterprises, Inc. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 33-70638,
previously filed with the Commission on October 21, 1993.)
3.3 Second Amendment to Amended and Restated Bylaws of TFC *
Enterprises, Inc. regarding the number of directors comprising
the Board of TFC Enterprises, Inc. (Incorporated by reference to
the Registrant's Form 10-K for the fiscal year ended December
31, 1995, Commission File No. 1-11121, previously filed with the
Commission.)
4 Form of Common Stock Certificate of the TFC Enterprises, Inc. *
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Commission File No. 33-70638, previously
filed with the Commission on October 21, 1993.)
10.1 Form of Master Dealer Agreement. **
10.2 Form of Asset Purchase Agreement. **
10.3 Form of Motor Vehicle Installment Sale Contract, *
Truth-in-Lending Disclosure, Promissory Note and Security
Agreement. (Incorporated by reference to the Registrant's
Registration Statement on Form S-1, Commission File No.
33-70638, previously filed with the Commission on October 21,
1993.)
10.4 Note Purchase Agreement among TFCEI Acquisition Corp. and *
Connecticut General Life Insurance Company (("CIGNA") and
certain affiliates of CIGNA dated October 24, 1988, relating to
$6,500,000 in original principal amount of 14% Senior Notes due
October 15, 1988, and Amendment Nos. 1 and 2. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, Commission File No. 33-70638, previously filed with the
Commission on October 21, 1993.)
10.5 Note Purchase Agreement among The Finance Company and CIGNA and
certain affiliates of CIGNA dated October 25, 1988, relating *
to $6,435,000 in original principal amount of 13.5% Subordinated
Non-Convertible Notes due October 15, 1998, and $65,000 in
original principal amount of 13.5% Subordinated Convertible
Notes due October 15, 1998, and Amendment Nos. 1, 2, 3, and 4.
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Commission File No. 33-70638, previously
filed with the Commission on October 21, 1993.)
10.6 Amendment No. 5 to Note Purchase Agreement among The Finance
Company and CIGNA and certain affiliates of CIGNA dated October
25, 1998, relating to $6,435,000 in original principal amount
of 13.5% Subordinated Non-Convertible Notes due October 15,
1998, adn $65,000 in original principal amount of 13.5%
Subordinated Convertible Notes due October 14, 1998.
10.7 Employment Agreement between The Finance Company and Robert S. Raley, Jr. dated *
October 22, 1992. (Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Commission File No. 33-70638, previously filed with the Commission on
October 21, 1993.)
</TABLE>
Page 1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
<S> <C>
10.7 The Finance Company 401(k) Savings Plan dated May 1, 1991, and *
Amendment No. 1 dated August 1, 1993. (Incorporated by
reference to the Registrant's Registration Statement on Form
S-1, Commission File No. 33-70638, previously filed with the
Commission on October 21, 1993.)
10.9 TFCEI Employee Stock Purchase Plan dated December 20, 1993. *
(Incorporated by reference to the Registrant's Registration
Statement on Form S-1, Commission File No. 33- 70638, previously
filed with the Commission on October 21, 1993.)
10.10 Forms of Junior Subordinated Promissory Notes. (Incorporated by reference to the *
Registrant's Registration Statement on Form S-1, Commission File No. 33-70638,
previously filed with the Commission on October 21, 1993.)
10.11 Employment Agreement between Ronald G. Tray and The Finance
Company dated January 1, 1995. (Incorporated by reference to the
Registrant's Form 10-K for the fiscal year ended December 31,
1994, Commission File No. 1-11121, previously filed with the
Commission.)
10.12 TFC Enterprises, Inc. 1995 Long-Term Incentive Plan.. (Incorporated by reference to the *
Registrant's Form 10-K for the fiscal year ended December 31, 1994, Commission File No.
1-11121, previously filed with the Commission.)`
10.13 Stock Option Award Agreement between George R. Kouri and TFC Enterprises, Inc. dated *
October 27, 1994. (Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, Commission File No. 1-11121, previously filed with the
Commission.)
10.14 Stock Option Award Agreement between Joseph R. Becka and TFC Enterprises, Inc. dated *
October 27, 1994. (Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, Commission File No. 1-11121, previously filed with the
Commission.)
10.15 Stock Option Award Agreement between Preston K. Gnagey and TFC Enterprises, Inc. dated *
October 27, 1994. (Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, Commission File No. 1-11121, previously filed with the
Commission.)
10.16 Stock Option Award Agreement between Ronald G. Tray and TFC Enterprises, Inc. dated *
October 27, 1994. (Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, Commission File No. 1-11121, previously filed with the
Commission.)
10.17 Stock Option Award Agreement between Charles M. Johnston and TFC Enterprises, Inc. *
dated October 27, 1994. (Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1994, Commission File No. 1-11121, previously filed with
the Commission.)
10.18 Office Lease, dated June 1, 1995, by and between AFW No. 39 *
Corporation and The Finance Company. (Incorporated by
reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1994, Commission File No. 1-11121, previously
filed with the Commission.)
10.19 Lease Agreement, dated April 28, 1995, between Three Oaks Plaza, Ltd. and The Finance *
Company, Inc. (Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended March 31, 1995, Commission File No. 1-11121, previously filed with the
Commission.)
10.20 Note purchase agreement among The Finance Company and *
Connecticut General Life Insurance Company ("CIGNA") and
certain affiliates of CIGNA dated June 30, 1995, relating to
$10,000,000 in original principal amount of 9.38% Senior
Subordinated Notes due June 30, 2003. (Incorporated by reference
to the Registrant's Form 10-Q for the quarter ended June 30,
1995, Commission File No. 1-11121, previously filed with the
Commission.)
10.21 Lease Agreement as of June 6, 1995, between Professors' Fund III *
Limited Partnership and The Finance Company regarding the
premises located at 6170 Cornerstone Court East, San Diego,
California. (Incorporated by reference to the Registrant's Form
10-Q for the quarter ended June 30, 1995, Commission File No.
1-11121, previously filed with the Commission.)
</TABLE>
Page 2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
<S> <C>
10.22 Amendment to Employment Agreement between The Finance Company *
and Ronald G. Tray dated July 27, 1995 (effective as of
January 1, 1995). (Incorporated by reference to the Registrant's
Form 10-Q for the quarter ended June 30, 1995, Commission File
No. 1-11121, previously filed with the Commission.)
10.23 Amendment No. 1 to note purchase agreement, dated as of June 30, *
1995, by and between The Finance Company and Connecticut
General Life Insurance Company ("CIGNA") regarding CIGNA's
consent to the Company's $25 million credit facility with
NationsBank. (Incorporated by reference to the Registrant's Form
10-Q for the quarter ended September 30, 1995, Commission File
No. 1-11121, previously filed with the Commission.)
10.24 Amendment No. 8 to Note Purchase Agreement, dated as of October *
25, 1988, by and between The Finance Company and CIGNA
regarding CIGNA's consent to the Company's $25 million credit
facility with NationsBank. (Incorporated by reference to the
Registrant's Form 10-Q for the quarter ended September 30, 1995,
Commission File No. 1-11121, previously filed with the
Commission.)
10.25 Second Amendment to Employment Agreement between Ronald G. Tray *
and The Finance Company dated January 1, 1996. (Incorporated
by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995, Commission File No. 1-11121, previously
filed with the Commission.)
10.26 Amendment No. 9 and Waiver and Forbearance Agreement by and *
among The Finance Company, CIGNA, and certain affiliates of
CIGNA, dated as of January 31, 1996, relating to 13.5% Senior
Subordinated Notes. (Incorporated by reference to the
Registrant's Form 10-K for the fiscal year ended December 31,
1995, Commission File No. 1-11121, previously filed with the
Commission.)
10.27 Amendment No. 2 and Waiver and Forbearance Agreement by and *
among The Finance Company, CIGNA, and certain affiliates of
CIGNA, dated as of January 31, 1996, relating to 9.38% Senior
Subordinated Notes, dated as of January 31, 1996. (Incorporated
by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1995, Commission File No. 1-11121, previously
filed with the Commission.)
10.28 Amended and Restated Motor Vehicle Installment Contract Loan and *
Security Agreement dated December 20, 1996 between The Finance
Company and General Electric Capital Corporation. (Incorporated
by reference to the Registrant's Form 10-K for the fiscal year
ended December 31, 1996, Commission File No. 1-11121, previously
filed with the Commission.)
10.29 Amendment No. 1 to Amended and Restated Motor Vehicle *
Installment Contract Loan and Security Agreement dated April
4, 1997 by and between The Finance Company and General Electric
Capital Corporation. (Incorporated by reference to the
Registrant's Form 10-K for the fiscal year ended December 31,
1996, Commission File No. 1-11121, previously filed with the
Commission.)
10.30 TFC Enterprises, Inc. Warrant to Purchase Common Stock dated *
December 20, 1996. (Incorporated by reference to the
Registrant's Form 10-K for the fiscal year ended December 31,
1996, Commission File No. 1-11121, previously filed with the
Commission.)
10.31 Allonge to Warrant to Purchase Common Stock dated April 4, 1997. *
(Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
10.32 TFC Enterprises, Inc. Warrant to Purchase Common Stock dated *
April 4, 1997. (Incorporated by reference to the Registrant's
Form 10-K for the fiscal year ended December 31, 1996,
Commission File No. 1-11121, previously filed with the
Commission.)
10.33 Amended and Restated Registration Rights dated April 4, 1997 *
between TFC Enterprises, Inc. and General Electric Capital
Corporation. (Incorporated by reference to the Registrant's Form
10-K for the fiscal year ended December 31, 1996, Commission
File No. 1-11121, previously filed with the Commission.)
</TABLE>
Page 3
<PAGE>
<TABLE>
<CAPTION>
Exhibit Sequential
No. Description Page No.
<S> <C>
10.34 TFC Enterprises, Inc. Guaranty dated April 4, 1997. *
(Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
10.35 First Community Finance, Inc. Guaranty dated April 4, 1997.
(Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
10.36 The Insurance Agency, Inc. Guaranty dated April 4, 1997. *
(Incorporated by reference to the Registrant's Form 10-K for
the fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
10.37 Securities Pledge Agreement dated April 4, 1997 by TFC *
Enterprises, Inc. and General Electric Capital Corporation.
(Incorporated by reference to the Registrant's Form 10-K for the
fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
10.38 Security Agreement dated April 4, 1997 between TFC Enterprises, *
Inc., The Finance Company, First Community Finance, Inc., The
Insurance Agency, Inc., and its subsidiaries and General
Electric Capital Corporation (Incorporated by reference to the
Registrant's Form 10-K for the fiscal year ended December 31,
1996, Commission File No. 1-11121, previously filed with the
Commission.)
10.39 Amendment No. 3 and Waiver of Note Agreement by and among The *
Finance Company, CIGNA, and certain affiliates of CIGNA, dated
as of April 4, 1997, relating to 13.5% Senior Subordinated
Notes. (Incorporated by reference to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
10.40 Amendment No. 10 and Waiver of Note Agreement by and among The *
Finance Company, CIGNA, and certain affiliates of CIGNA, dated
as of April 4, 1997, relating to 9.375% Senior Subordinated
Notes. (Incorporated by reference to the Registrant's Form 10-K
for the fiscal year ended December 31, 1996, Commission File No.
1-11121, previously filed with the Commission.)
**13 Annual report to security holders.
**21 List of subsidiaries of TFC Enterprises, Inc.
**23 Consent of Ernst & Young LLP.
**99.1 The Financial Statements and notes thereto which appear on pages
___ through ___ of TFC Enterprises, Inc. 1997 Annual Report to
Shareholders (filed as Exhibit 13 to this Form 10-K) are
incorporated herein by reference.
**99.2 Financial Statement Schedule I.
</TABLE>
- --------------------------------------------------------
* (Not filed herewith. In accordance with Rule 12b-32 of the General
Rules and Regulations under the Securities Exchange Act of 1934, the
exhibit is incorporated by reference).
** Filed herewith.
Page 4
THE FINANCE COMPANY
MASTER DEALER AGREEMENT
Revised February, 1998
<PAGE>
MASTER DEALER AGREEMENT
THIS MASTER DEALER AGREEMENT (the "Agreement"), dated as of
, by and between
, a
(corporation, partnership, sole proprietorship) with its principal office
located at
, (hereinafter referred to as "Dealer"), and The
Finance Company, a Virginia corporation, with its principal office located at
5425 Robin Hood Road, Suite 101-B, Norfolk, Virginia 23513 (hereinafter referred
to as "TFC").
W I T N E S S E T H:
WHEREAS, Dealer is engaged in the business of the retail sale of motor
vehicles, accessories and/or services to consumers evidenced by installment
sales contracts, sales agreements or similar instruments (hereinafter more
clearly defined and referred to as "Contracts"); and
WHEREAS, Dealer wishes to sell to TFC certain such Contracts arising
out of the retail sale of motor vehicles, accessories and/or services by Dealer
as are acceptable to TFC; and
WHEREAS, TFC wishes to purchase certain such Contracts as Dealer may
offer to TFC which are acceptable to TFC;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, Dealer and TFC hereby agree as follows:
1. General.
(a) The definitions of certain capitalized terms
used throughout this Agreement are set forth in Section 32.
(b) Prior to the purchase of any Contract TFC
must, in its sole and absolute discretion, preliminarily pre-approve the
prospective Account Debtor's credit and the terms of the Contract after first
reviewing the information contained in the credit application submitted by a
prospective Account Debtor to Dealer. All such Contracts submitted for purchase
must be in a form satisfactory to TFC and will be subject to review for legal
sufficiency in the opinion of TFC's legal counsel, but any such review and/or
acceptance thereof shall not waive any representation or warranty of Dealer
herein. TFC's issuance of a preliminary
Revised February, 1998
1
<PAGE>
approval shall not be deemed to be acceptance or purchase of a Contract
hereunder.
(c) Acceptance of a Contract as a Receivable
shall occur only at such time as TFC receives, and in its sole and arbitrary
judgment approves, the related Receivable File. Upon such approval by TFC of the
Receivable File, the transfer, sale and assignment of the Contract and of
Dealer's security interest in the Financed Vehicle shall be deemed to have
occurred.
(d) Upon the request of TFC, Dealer will furnish
TFC with any additional powers of attorney and other documents that TFC deems
necessary or appropriate to enable TFC to exercise its rights and duties
pursuant to such purchased Receivable.
2. Representations, Warranties and Covenants of Dealer. Dealer hereby
represents, warrants and covenants and upon the submission for approval of each
Contract thereby reaffirms each of the following representations, warranties and
covenants as of the date of such submission:
(a) Organization and Good Standing. Dealer is
duly organized and is validly existing as a corporation, or other business
entity recognized under state law, and is in good standing under the laws of the
state of its organization, with full power and authority to own its properties
and to conduct its business. Dealer has had at all relevant times the power,
authority and legal right to acquire and own the Receivables, and is duly
qualified to do business in each state in which Receivables are originated.
(b) Authorization of Agreement. The Dealer has
full power and authority (including full corporate power and authority if Dealer
is a corporation) to execute and deliver this Agreement and to perform its
obligations hereunder. This Agreement constitutes the valid and legally binding
obligation of the Dealer, enforceable in accordance with its terms and
conditions.
(c) Business/Financial Information. All
information regarding Dealer's business set forth in that document titled
"Dealer Application" identified as Exhibit A which is attached hereto and made a
part of this Agreement is true, accurate and complete. Dealer covenants and
agrees to advise TFC of any material changes to Exhibit A and further to certify
within thirty (30) days of each anniversary date of this Agreement that all
information contained in Exhibit A is current, true, accurate and complete. Such
certification shall be in the form set forth in Exhibit B, attached hereto and
made a part hereof, which Exhibit B shall
Revised February, 1998
2
<PAGE>
be executed by a representative of Dealer with legal authority to bind Dealer
with a copy to the Guarantor executing this Agreement.
(d) Compliance with Laws. Dealer has complied
with all applicable laws (including, but not limited to, rules, regulations,
codes, plans, injunctions, judgments, orders, decrees, rulings, and charges
thereunder) of federal, state, local and foreign governments (and all agencies
thereof) applicable to it, the Contracts, the Receivables and/or the Financed
Vehicles. All Permits are in full force and effect, no violations are or have
been recorded with respect to any such Permits and no proceedings are pending
or, to Dealer's knowledge, threatened to terminate, revoke or limit any of such
Permits. THE CASH PRICE OF THE FINANCED VEHICLE AS SHOWN IN EACH CONTRACT IS THE
"CASH PRICE" AS DEFINED BY THE FEDERAL TRUTH-IN-LENDING ACT AND BY APPLICABLE
STATE LAW. THE PRICE OF THE FINANCED VEHICLE IS THE PRICE CHARGED BY THE DEALER
FOR SUBSTANTIALLY SIMILAR VEHICLES IN CASH TRANSACTIONS, AND WAS NOT INCREASED
BECAUSE THE FINANCED VEHICLE WAS SOLD IN A CREDIT TRANSACTION OR BECAUSE THE
CONTRACT WAS TO BE PURCHASED BY TFC AT A DISCOUNT. DEALER HAS MADE NO STATEMENTS
TO THE ACCOUNT DEBTOR REGARDING ANY CHANGES TO THE CASH PRICE RELATED TO THE
FINANCING OF THE FINANCED VEHICLE. The purchase price of vehicle accessories,
service contracts, extended warranties, limited physical damage insurance,
credit life and disability insurance, motor club memberships, or any other
products or services is the fair market retail value of such goods and services,
has not been overstated or inflated in any way, and represents the price for
such goods and services imposed by the Dealer in cash sales of such goods and
services.
(e) Characteristics of Contracts. Each Contract
submitted to TFC for review and purchase under this Agreement does and shall
fulfill all Receivable Specifications in Section 4.
(f) Characteristics of Receivables. Each
Receivable was originated by Dealer for the sale of a Financed Vehicle in the
ordinary course of Dealer's business, was fully and properly executed by the
parties thereto, and contains customary and enforceable provisions for an
installment sale of a motor vehicle in the state in which the Account Debtor is
located. Each Receivable is in compliance with all applicable consumer laws and
regulations without limitation. The stated rate of interest on each Receivable
is not usurious under applicable law.
(g) Customer Warranties. Dealer will honor and
cause to be performed any and all warranties pertaining to the Financed
Vehicles, and to any
Revised February, 1998
3
<PAGE>
goods or services described in each Contract, and will make all reasonable
efforts to resolve any and all Account Debtor complaints thereunder.
(h) Lawful Assignment. No Receivable has been
originated in, or is subject to the laws of, any jurisdiction under which the
assignment of such obligation as contemplated under this Agreement would be
unlawful, void or voidable.
(i) One Original. There is only one executed
original of each Receivable.
(j) Disclosure of Material Facts. The
representations and warranties contained in this Agreement or in any other
agreement, schedule, exhibit or other document delivered pursuant hereto do not
contain any untrue statements of a material fact or omit to state any material
fact necessary to make the statements contained herein or therein not misleading
under the circumstances under which they are or were made.
(k) Survival of Representations and Warranties.
All of the Dealer's representations and warranties contained in this Agreement
shall survive the acceptance of each Contract purchased hereunder as a
Receivable, and the closing of each transaction.
3. Credit Report. Dealer understands that TFC is not a consumer
reporting agency, as defined in the Fair Credit Reporting Act; accordingly,
Dealer covenants to notify each prospective Account Debtor in any proposed
transaction that the prospective Account Debtor's credit application is being
submitted to the appropriate TFC location processing their credit application
for credit approval. If TFC declines to purchase a Contract on the terms
offered, or offers credit on different terms and a prospective Account Debtor
does not accept, TFC will prepare the appropriate Notice of Adverse action and
send the same directly to the prospective Account Debtor at the address shown on
the credit application, which Dealer represents and warrants to be true and
correct.
4. Receivable Specifications. Dealer shall not submit a Contract to TFC
for purchase unless it meets each of the following specifications:
(a) the Contract has not been rescinded and is a
valid, binding, enforceable, and undisputed obligation of the Account Debtor and
the Account Debtor has taken delivery and has possession of the Financed
Vehicle;
(b) the Contract complied at the time originated
or made, and is currently in compliance in all respects, with all requirements
of applicable
Revised February, 1998
4
<PAGE>
federal, state and local laws, and regulations thereunder, including, but not
limited to, applicable usury laws, the Federal Truth-in-Lending Act, the Equal
Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Fair Debt Collection Practices Act, the Federal Trade Commission Act,
the Magnuson-Moss Warranty Act, Federal Reserve Board Regulations B, M and Z,
state adaptations of the National Consumer Act and of the Uniform Consumer
Credit Code and any other federal or state consumer credit, equal opportunity or
other laws or regulations;
(c) all representations and warranties contained
in the assignment section of the Contract are true and correct as of the date of
transfer to TFC;
(d) Dealer received the cash down payment or
trade-in described in the Contract and other documents as prescribed by TFC;
(e) the Financed Vehicle was sold to the Account
Debtor in satisfactory operating condition with no material defects known to
Dealer which were not disclosed to the Account Debtor and TFC;
(f) all amounts indicated in the Contract to be
paid by Dealer to any third party have been paid, or will be paid within 30 days
of the date of the Contract (or sooner if required by law) including, but not
limited to, all title fees, license plate fees, sales taxes, insurance premiums
and/or extended warranty or service contract premiums, auto club fees or any
other ancillary product or service costs or any other fees of any kind; and
(g) at the time the Contract was executed, all
Account Debtors were in fact at least eighteen (18) years of age or such later
age as may be required to execute a binding contract under the laws of the state
in which the Contract was made and the Account Debtor currently has a valid
driver's license.
5. Acquisition Payment. The amount financed of each Contract will be
discounted at a percentage rate to be agreed upon at the time of TFC's purchase
of each Contract, by Dealer and TFC, which discount will be subtracted and
withheld from the sums paid Dealer by TFC for the Contract. An additional
discount in the amount of One Hundred Fifty Dollars ($150.00) will be subtracted
and withheld from the sums paid Dealer by TFC for the Contract. Contracts
purchased by, and assigned to, TFC shall be with recourse or without recourse to
the Dealer, as defined in Section 6.1(d), below, as Dealer and TFC may agree
with respect to specific Contracts at the time TFC purchases the same.
Agreements between Dealer and TFC as to acceptable interest rates, discounts,
processing charges, and recourse with respect to Contracts previously purchased
shall not
Revised February, 1998
5
<PAGE>
thereafter be modified or changed except pursuant to the written consent of both
Dealer and TFC; however, agreements with respect to previously purchased
Contracts shall not be binding on either party with respect to Contracts
thereafter offered and purchased by TFC unless the parties so agree, at the time
of purchase, with respect to the Contracts then being purchased.
6. Contract Repurchase
6.1 Obligation to Repurchase. Dealer shall become obligated
to, and Dealer hereby covenants and agrees to repurchase from TFC any and all
Contracts sold to TFC by Dealer under this Agreement upon the occurrence of any
one or more of the following events pertaining to such Contract:
(a) Account Debtor asserts any valid claim or
defense against TFC, which Account Debtor could assert against Dealer, with
regard to the merchandise and/or services described in the Contract or his, her
or their obligations under the Contract, pursuant to any federal or state law,
rule or regulation relating to consumer sales, credit, warranties, claims and
defenses.
(b) The Account Debtor, or any other party
purported to be obligated on a Contract is not legally obligated to pay the
obligation evidenced by the Contract.
(c) Dealer (including its employees, agents and
representatives) breaches any provisions of this Agreement or any provisions in
or relating to any Contract, or if any form of assignment by which any Contract
was conveyed to TFC is incorrect or invalid.
(d) With respect to any and all Contracts
purchased by TFC "with recourse" to the Dealer, each and every time an Account
Debtor fails for any reason to promptly pay and satisfy in full each, any and
all of its obligations thereunder in accordance with the Contract terms, Dealer
shall repurchase any and all such Contracts from TFC upon TFC's demand.
6.2 Terms of Repurchase. Contracts repurchased by Dealer from
TFC pursuant to Section 6.1 shall be repurchased in cash for an amount equal to
the balance due and owing on the Contract at the time of repurchase as if the
Account Debtor had prepaid the obligation in full on that date. Such repurchase
shall be made within five (5) days after oral or written notice of said
repurchase obligation is given by TFC to Dealer. Failure of Dealer to repurchase
any such Contract within said five (5) day period shall constitute an Event of
Default, as set forth in Section 14 of this Agreement. If such Event of Default
occurs, and if at
Revised February, 1998
6
<PAGE>
the time the Account Debtor is in default under the applicable Contract in
addition to the remedies set forth in Section 16 of this Agreement, TFC shall
have as its option, but not as an obligation, the right to repossess the secured
collateral, sell such collateral in a commercially reasonable manner in
accordance with the Uniform Commercial Code, and apply the proceeds from such
sale first against Collection Costs and then against the Dealer's repurchase
obligation. The Dealer shall remain liable to TFC for any portion of its
repurchase obligations not satisfied by such sale of the collateral. Contracts
repurchased by Dealer from TFC pursuant to this Section 6 are to be reassigned
and sold back to Dealer without recourse and/or without warranties of any kind
or nature by TFC, except as to the amounts it has been paid on the obligation by
the Account Debtor. If the Dealer is required to repurchase any Contract sold to
TFC under this Section 6, TFC may, at its option, deduct the repurchase amounts
from the sums to be paid Dealer on new Contracts then being purchased by TFC for
credit to or benefit of Dealer, to satisfy, in whole or in part, Dealer's
repurchase obligations. In the event of any repurchase under this Section 6, the
Dealer shall protect, defend and indemnify TFC and hold TFC harmless from,
against and for any claim, action, cause of action, judgment, award, settlement,
cost or expense, including reasonable attorneys' fees, of every kind or nature,
arising out of or connected with the transaction upon the occurrence of any one
or more of the events described in Section 6.1.
7. Dealer's Collection of Receivable Payments. If any payments on a
Receivable are made to Dealer after such Receivable is accepted by and sold to
TFC under this Agreement, Dealer will, no later than by the close of the
following business day, forward such payment to TFC.
8. TFC's Collection of Receivable Payments. The presentation, demand,
protest, notice of protest and dishonor and diligence in collecting the
Receivables are each and all hereby waived by Dealer.
9. Returned or Abandoned Financed Vehicles. In the event any Financed
Vehicles are returned to Dealer or Dealer is notified of the location of any
Financed Vehicles which have been abandoned, Dealer shall notify TFC within
three (3) business days of the location of such Financed Vehicle. If such
Financed Vehicle is in the possession of Dealer, Dealer shall act as bailee of
said Financed Vehicle, securing such Financed Vehicle from damage or theft,
until TFC or its agent or contractor takes possession of such Financed Vehicle.
10. Physical Damage Insurance. Dealer shall require that each Account
Debtor shall have obtained adequate insurance covering damage, destruction and
theft of the Financed Vehicle.
7
<PAGE>
11. Security Interest/Title. Simultaneously with the purchase by TFC
from Dealer of a Contract hereunder and the assignment of such Contract from
Dealer to TFC, Dealer shall transfer and assign to TFC a first and prior
perfected security interest in the Financed Vehicle or provide TFC with evidence
that a first and prior perfected security interest has been applied for. Such
security interest shall secure the obligations of the Account Debtor under the
Contract. Dealer will provide a negotiable title with TFC's perfected security
interest in the Financed Vehicle within sixty (60) days after the purchase of
the Contract. Failure of Dealer to fully comply with the requirements of this
Section 11 shall be considered a breach of such Contract and a breach of this
Agreement obligating Dealer to repurchase said Contract pursuant to Section
6.1(c) of this Agreement, such repurchase to be in accordance with the terms set
forth in Section 6.2 of this Agreement. Such a failure to comply with the terms
of this Section 11 shall also be an Event of Default under Section 14(c) and (d)
of this Agreement.
12. Indemnities. Dealer shall defend, indemnify, and hold harmless TFC
from and against any and all amounts incurred in connection with all actions,
proceedings, suits, hearings, investigations, charges, complaints, claims,
demands, injunctions, judgments, orders, decrees, and rulings, including all
damages, dues, penalties, fines, costs, amounts paid in settlement, liabilities,
obligations, taxes, liens, losses, expenses, and fees, including court costs,
attorneys' fees and related costs TFC may suffer through and after the date of
the claim for indemnification resulting from, arising out of, relating to, in
the nature of, or caused by:
(a) any breach of any of the representations,
warranties, covenants, or agreements made by Dealer in this Agreement (or in the
event any third party alleges facts that, if true, would mean Dealer has so
breached); and/or
(b) any taxes that may at any time be asserted
against TFC with respect to the transactions contemplated herein (other than
taxes measured by the net income of TFC or taxes or fees imposed upon TFC's
registration, qualification or licensing), including any sales, use, gross
receipts, tangible or intangible personal property, or ad valorem taxes and
costs and expenses in defending against same;
(c) an Event of Default, and/or
8
<PAGE>
(d) activities, operation or conduct of Dealer.
13. Termination. The parties may terminate this Agreement in accordance
with the following terms and conditions provided, however, the terms and
conditions of this Agreement shall survive such termination with respect to all
Receivables purchased by TFC prior to the effective date of such termination:
(a) TFC may terminate this Agreement with
respect to acceptance of all future Receivables upon thirty (30) days' written
notice to Dealer.
(b) So long as there is no Event of Default or
an event which, with the lapse of time, giving of notice or both would become an
Event of Default, Dealer may terminate this Agreement with respect to all future
Receivables upon thirty (30) days' prior written notice to TFC.
(c) TFC may, at its option, terminate this
Agreement immediately upon the occurrence of one or more of the Events of
Default identified in Section 14.
14. Events of Default. An Event of Default means the
occurrence or existence of one or more of the following events or conditions
(whatever the reason for the Event of Default and whether voluntary, involuntary
or caused by operation of law) which is not waived in writing by TFC:
(a) assignment by Dealer of its rights or the
delegation of its duties under this Agreement, or any change in the ownership or
control of Dealer without the prior written consent of TFC; provided, however,
that TFC shall not unreasonably withhold consent to any assignment by Dealer of
its rights to receive Acquisition Payments under this Agreement; or
(b) failure on the part of Dealer to submit to
TFC on a timely basis in accordance with Section 6 any payment in satisfaction
of Dealer's repurchase obligation to TFC; or
(c) failure on the part of Dealer duly to
observe or to perform any covenant or agreement set forth in this Agreement; or
(d) the breach by Dealer of any representation,
warranty, covenant or agreement set forth in this Agreement (or in the event any
third party alleges facts that, if true, would mean Dealer has so breached) or
in any Contracts sold to TFC from time to time, including, without limitation,
representations regarding cash down payments or trade-in values; or
9
<PAGE>
(e) the misrepresentation by Dealer in any
respect of any facts or circumstances relating to a Contract submitted to TFC or
to any Account Debtor or Financed Vehicle covered by such Contract; or
(f) the entry of a decree or order by a court or
agency or supervisory authority for the appointment of a conservator, receiver
or liquidator for the Dealer in any bankruptcy, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings, or for the
winding up or liquidation of its affairs, and the continuance of any such decree
or order unstayed and in effect for a period of 60 consecutive days.
15. Right to Cure. Upon notification by TFC to Dealer of the occurrence
of an Event of Default as set forth under Section 14, Dealer shall have five (5)
calendar days to cure the default before TFC exercises one or more of its rights
and remedies set forth in Section 16 of this Agreement.
16. Remedies. Dealer shall promptly notify TFC of the occurrence of any
Event of Default hereunder. Upon the occurrence of any Event of Default not
cured as provided in Section 15, then, in conjunction with, or in addition to,
any other rights and remedies of TFC, TFC shall have the following rights and
remedies:
(a) The right at TFC's discretion and without
notice to terminate this Agreement as provided in Section 13(c).
(b) The right to receive Collection Costs in
addition to any and all damages incurred by TFC as a consequence of and arising
out of such Event of Default.
(c) The right to obtain such injunctive relief,
specific performance, or such other relief legally appropriate and available.
17. Rights Cumulative. All rights and remedies conferred upon or
reserved to TFC are cumulative, and none is intended to be exclusive of another
or of any right or remedy which it may have at law or in equity. No delay or
omission by TFC in insisting upon the strict observance or performance of any
provision of this Agreement, or in exercising any right or remedy, shall be
construed as a waiver or relinquishment of such provision, nor shall it impair
such right or remedy. No waiver shall be effective unless it is in writing,
specifies the waiver, and is signed by the waiving party. Every right and remedy
shall be exercisable from time to time and as often as deemed appropriate.
10
<PAGE>
18. Examination of Records/Right to Audit. Upon any Event of Default,
as determined by TFC, TFC and its agents and/or representatives may during
normal business hours (typically 9:00 a.m. to 6:00 p.m.) physically inspect any
documents, files or other records including computer system records, relating to
the Contracts and discuss the same with Dealer's officers and employees. Dealer
shall supply copies of any such documents, files, or other records upon request.
TFC shall have the right to routinely phone audit any customer to verify
accuracy of account information and to inquire about the performance of Dealer.
Any charges incurred by outside auditors or lenders in performance of any audit
will be borne 50% to the Dealer and 50% to TFC.
19. Notices. All demands, notices and communications under this
Agreement shall be sufficient if in writing and delivered personally or sent by
certified mail, return receipt requested, first-class postage prepaid, by
regular mail, by overnight delivery service providing evidence of delivery, or
by telecopier and shall be deemed to have been duly given upon first attempted
delivery if sent by certified mail or overnight delivery service and upon
receipt if delivered personally or sent by regular mail or telecopier, at the
following address or at such other address as shall be designated in writing by
a party:
a. If to Purchaser:
The Finance Company
5425 Robin Hood Road, Suite 101-B
Norfolk, VA 23513
Attn: General Counsel
b. If to Seller:
Attn:
20. Assignment. This Agreement shall be assignable by TFC. This
Agreement shall not be assignable by Dealer without the prior written consent of
TFC and its permitted successors and assigns.
21. Delegation of Duties: Liability. TFC may execute any of its duties
under this Agreement by or through agents, nominees or attorneys-in-fact and
11
<PAGE>
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. TFC shall not be responsible for the negligence or misconduct of any
agents, nominees or attorneys-in-fact selected by it with reasonable care.
Neither TFC nor any of its officers, directors, employees, nominees,
attorneys-in-fact or affiliates shall be liable for any action lawfully taken or
omitted to be taken by it or any such Person under or in connection with this
Agreement (except for its or such Person's own gross negligence or willful
misconduct).
22. Setoff. TFC may, at any time and from time to time, at its option,
set off and apply against any amounts payable to Dealer any amounts which Dealer
owes or may owe to TFC under this Agreement or otherwise.
23. Subordination. Notwithstanding any other provisions of this
Agreement, the Dealer's right to receive payments pursuant to this Agreement
shall be fully subordinated to the rights of any senior secured lender of TFC
which has a security interest in any Receivable purchased by TFC hereunder (the
"Secured Lender"), except that TFC shall make and the Dealer may receive any
payments which become due unless the Secured Lender shall have accelerated
repayment in full satisfaction of all amounts owed it by TFC (a "Debt
Acceleration"). If a Debt Acceleration occurs, Dealer shall not be entitled to
receive any further payments hereunder until all amounts owed by TFC to the
Secured Lender have been paid in full.
24. Relationship of Parties. Notwithstanding any provision to the
contrary elsewhere in this Agreement, TFC is acting independently of Dealer, and
shall have no duties or responsibilities to Dealer, except those expressly set
forth herein, or any fiduciary relationship with Dealer, and no implied
covenants, functions, responsibilities, duties, obligations, liabilities, joint
venture or partnership arrangement shall be read into this Agreement or
otherwise exist between TFC and Dealer.
25. Prohibited Activities. Dealer shall not engage in any activities
the purpose of which is to collect payments from Account Debtors on Receivables
without the prior written consent of TFC. Such activities shall include, but not
be limited to, repossession of Financed Vehicles, calling, writing, meeting with
visiting or instituting legal action against Account Debtors. Such activities
conducted by Dealer, its employee, agent or contractor, without TFC's prior
written consent shall constitute an Event of Default within the meaning of
Section 14(c) of this Agreement and Dealer shall be obligated to indemnify TFC
against any liabilities arising therefrom pursuant to Section 12(a) of this
Agreement.
26. Interest. Any delinquent payments or unpaid amounts due and owing
to TFC by Dealer under this Agreement shall accrue interest at the lesser of ten
percent (10%) per annum or the maximum legal interest rate allowable for such
debt under the laws of the applicable jurisdiction.
12
<PAGE>
27. Complete Agreement. This Agreement contains the complete agreement
of the parties hereto, and supersedes any and all prior agreements between the
parties (whether oral or written), including all prior dealer agreements entered
into between TFC and Dealer. This Agreement may be amended from time to time by
written notice from TFC. Any such amendment shall be effective only as to
Contracts submitted for purchase after the date of such notice. Should any
provision of this Agreement be in conflict with any provision of any Receivable,
the provision set forth in this Agreement shall govern as between the parties to
this Agreement, and the conflicting provision in the Receivable shall be deemed
deleted to the extent of such conflict.
28. Severability of Provisions. If any one or more of the provisions of
this Agreement shall be for any reason whatsoever held invalid, then such
provisions shall be deemed severable from the remaining provisions of this
Agreement or the rights of Dealer or TFC.
29. Governing Law; Venue. This Agreement shall be deemed made under the
laws of the Commonwealth of Virginia and shall be construed and enforced in
accordance with and governed by the laws of the Commonwealth of Virginia and the
laws of the United States of America, except with respect to specific liens, or
the perfection thereof, evidenced by loan documents covering personal property
that by the laws applicable thereto are required to be construed under the laws
of another jurisdiction. Dealer hereby irrevocably submits to the jurisdiction
of Norfolk and Virginia Beach state court and the Eastern District of Virginia,
Norfolk Division 1 to any federal action and agrees and consents that service of
process may be made upon it in any legal proceeding relating to this Agreement
by any means allowed under Virginia or federal law.
30. Usage of Terms. With respect to all terms in this Agreement, the
singular includes the plural and the plural the singular; words importing any
gender include the other gender; references to agreements and other contractual
instruments include all subsequent amendments thereto or changes therein entered
into in accordance with their respective terms and not prohibited by this
Agreement; references to Persons include their permitted successors and assigns;
and the term "including" means "including without limitation."
31. Headings. The headings herein are for convenience of
reference only and shall not control or affect the meaning or construction of
any provisions hereof.
13
<PAGE>
32. Definitions. Whenever used in this Agreement, the following
words and phrases, unless the context otherwise requires, shall have the
following meanings:
"Account Debtor" on a Receivable means the purchaser or co-
purchaser of a Financed Vehicle or any other person who owes or guarantees
payments under the Receivable.
"Acquisition Payment" means the amount paid to or on behalf of
Dealer pursuant to Section 5.
"Agreement" means this Dealer Agreement as executed by TFC and
Dealer and all amendments and supplements hereto.
"Collection Costs" means all out of pocket costs of TFC
associated with a Receivable, including, but not limited to, the costs of
repossessing, storing, selling and preparing for sale any Financed Vehicle,
agency fees, attorney's fees, NSF check fees and late charges, court costs,
filing fees and other related costs. Collection Costs also include amounts
charged to the Account Debtor or on the Account Debtor's or TFC's behalf to
maintain any insurance upon a Financed Vehicle.
"Contract" means a retail installment sales contract,
conditional sales contract, security agreement or other document under which a
potential Account Debtor is financing the acquisition of a motor vehicle from
Dealer.
"Event of Default" means an event specified in Section 14.
"Financed Vehicle" means a motor vehicle together with all
accessions thereto, securing an Account Debtor's indebtedness and obligations
under a Receivable.
"Permits" means any and all permits necessary for the conduct
of Dealer's business.
"Person" means a legal person, including any individual,
limited liability company, corporation, sole proprietorship, estate,
partnership, joint venture, association, joint stock company, trust,
incorporated organization, or government or any agency or political subdivision
thereof.
"Receivable" means a Contract that meets the Receivable
Specifications and TFC's credit standards and that has been purchased by TFC
from Dealer under this Agreement.
14
<PAGE>
"Receivable File" means all original writings (including the
executed Contract) and business records relating to a Receivable.
"Receivable Specifications" has the meaning set forth in
Section 4.
"With Recourse" means TFC may require the Dealer to repurchase
any and all Contracts upon the happening of any of the occurrences set forth in
Section 6.1 of this Agreement pursuant to the terms set forth in Section 6.2 of
this Agreement.
Revised February, 1998
15
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year written below by their duly authorized
representatives in the spaces provided below.
DEALER:
By:
(Signature)
Printed or Typed Name
Title of Authorized Representative
SUBSCRIBED and sworn to before me this day of , 19 .
--------- ------------ -----
My commission expires:
Notary Public
GUARANTOR: The full and prompt performance by the Dealer of all of its
obligations and the payment of all sums due or to become due by Dealer to TFC
under this Agreement is hereby unconditionally and personally Guaranteed by the
undersigned, Guarantor hereby consenting in advance to such agreements as Dealer
may hereafter make with TFC pursuant to any section of the within Agreement.
Guarantor (Print or Type) Guarantor (Print or Type)
Guarantor (Signature) Guarantor (Signature)
SUBSCRIBED and sworn to before me this day of , 19 .
-------- --------------- -----
16
<PAGE>
My commission expires:
Notary Public
ACCEPTED: THE FINANCE COMPANY
(Signature)
By:
Title:
Date:
SUBSCRIBED and sworn to before me this day of , 19 .
--------- --------------- ---
My commission expires:
Notary Public
Revised February, 1998
17
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT dated as of , ("Agreement") by and
between (hereinafter "Seller"), a (corporation, partnership, sole
proprietorship) with its principal office at , and The Finance Company
(hereinafter "Purchaser"), a Virginia corporation, located at 5425 Robin Hood
Road, Suite 101B, Norfolk, Virginia 23513.
WHEREAS, Seller is engaged in the business of selling motor vehicles
and/or services and owns certain receivables arising out of the financing of the
purchase of such motor vehicles and/or services evidenced by retail installment
sales contracts, sales agreements or similar instruments, or is engaged in the
business of purchasing such evidences of indebtedness from the sellers of motor
vehicles and/or services, which receivables are now owned by Seller; and,
WHEREAS, Seller desires to sell and Purchaser desires to purchase said
receivables upon the terms, provisions and conditions hereinafter stated:
NOW, THEREFORE, in consideration of the premises, and the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Price. The Seller agrees to sell, assign, convey, transfer, and
deliver and the Purchaser agrees to buy those retail sales installment contracts
listed on Exhibit 1 attached hereto and made a part hereof, all such contracts
being referred to herein as the "Contracts," for the Purchase Price of percent
(%) of the ledger card balance subject, however, to the terms and conditions of
this Agreement.
The above Purchase Price shall also include and be payment for all
account cards, records, forms, papers, chattel mortgages, federal odometer
statements, security agreements, finance statements, installment sales
contracts, conditional sales contracts, certificates of title, all claims,
judgements, liens, and other forms of security held by Seller in connection with
the said Contracts sold hereunder. In addition, the above Purchase Price shall
include all life, disability, credit, collateral property damage or loss, and
other insurance policies issued in connection with or relating to the Contracts
purchased hereunder with respect to which Seller or the vendor of the goods
and/or services was designated as a beneficiary or co-insured and the premium
for which was financed, together with any and all rights to premiums that may be
rebated upon termination of the said policies.
Revised February, 1998
1
<PAGE>
Seller further agrees that any payments received by the Seller on said
Contracts listed on Exhibit 1 from and after the close of business to the
Closing of this Purchase Agreement shall be turned over and delivered to the
Purchaser at the time of Closing of this Purchase Agreement.
2. Representations, Warranties and Covenants of Seller. Seller hereby
makes the following representations, warranties and covenants as of the date of
this Agreement which representations, warranties and covenants shall continue
through the date of Closing until each contract has been paid and performed in
full:
(a) Organization and Good Standing. Seller is duly
organized and is validly existing as a corporation,
or other business entity recognized under state law,
and is in good standing under the laws of the state
of its organization, with full power and authority to
own its properties and to conduct its business.
Seller has had at all relevant times the power,
authority and legal right to acquire and own the
contracts, and is duly qualified to do business in
each state in which contracts are originated.
(b) Authorization of Agreement. Seller has full power and
authority (including full corporate power and
authority if Seller is a corporation) to execute and
deliver this Agreement and to perform its obligations
hereunder. The person or persons executing this
Agreement has/have the power and authority to execute
and deliver this Agreement on behalf of Seller.
(c) Seller has complied with all Federal and State laws,
rules and regulations in regard to the sale of the
motor vehicles creating the Contracts and the
Contracts themselves.
(d) Seller owns outright and has full and perfected title
to all said Contracts free and clear of all claims,
liens, pledges and other encumbrances of any kind
whatsoever.
(e) There are no bankruptcies, filed or pending, in
connection with said Contracts as of the Closing date
of this Agreement.
(f) Seller has full power and authority to sell, assign,
transfer and convey all said Contracts to the
Purchaser; and all other necessary actions by Seller
have been duly taken, including the authority to
complete this sale.
Revised February, 1998
2
<PAGE>
(g) All of said Contracts, together with any "Assets",
including but not limited to any security instruments
securing the same, were made for full and valuable
consideration and also all notes, installment sales
contracts, security agreements pertaining to said
Contracts now constitute valid and enforceable
obligations and indebtedness of the respective real
persons shown to be indebted in respect thereof on
the records of the Seller. Contract Obligors have
possession of all of the property enumerated or
described herein with right to create a security
interest.
(h) There are no defenses with respect to said Contracts
such as set- offs, usury, unrecorded credits,
counterclaims, lack of consideration, fraud,
violations of Truth-in-Lending or other Federal or
State laws pertaining to said Contracts, forgery,
alterations, or undisclosed agreements with Contract
Obligors or with third-parties. All payments
credited upon said Contracts, were paid by or on
behalf of the Contract Obligors. Seller has made no
payments on behalf of Contract Obligors.
(i) The amounts shown on Exhibit 1 to be owing and unpaid
on the respective Contracts represent the true and
correct amounts owing and unpaid thereon at the close
of business on .
(j) The ledger cards and other books, records and
documents relating to the Contracts fairly,
accurately and completely set forth the names and
last known addresses of all the respective Contract
Obligors, the terms of the Contracts, the amounts
initially and presently outstanding thereon, the
amount of all payments made on the Contracts and the
dates on which payments on the Contracts were made,
and the security, therefore.
3. Unqualified Contracts. If contrary to its representations in Section
2, above, Seller is not in possession of or is otherwise unable to deliver at
Closing the motor vehicle Certificate of Title duly issued to the Contract
Obligor with the Seller shown as the "First Lienholder" as to any Contract (an
"Unqualified Contract"), the Purchaser may, at its sole election and in reliance
upon Seller's representations that the unavailability of such Certificate(s) of
Title is due solely to the fact that the same is being processed by state
authorities, close on the purchase of the other Qualified Contracts listed on
Exhibit 1 and withhold from the funds to be delivered to Seller at Closing an
amount equal to the Purchase Price that would have been payable on the ledger
card balance of each and all such Unqualified Contracts. Provided Seller
delivers to Purchaser, within sixty (60) days of the Closing Date hereunder, a
motor
Revised February, 1998
3
<PAGE>
vehicle Certificate of Title duly issued to the Contract Obligor with the Seller
shown as the "First Lienholder," Purchaser shall deliver to Seller the Purchase
Price payable on the ledger card balance of the Contract in question. The
Contract shall be deemed to have been purchased by the Purchaser, under the
terms of this Agreement, as of the date of Closing if the title is received
within said 60 day period after the Closing Date and all payments made by the
Contract Obligor subsequent to the Closing Date shall be retained by or
delivered to the Purchaser and applied against the Contract Obligor's
indebtedness.
If the Seller fails for any reason to deliver to the Purchaser
the above described Certificate of Title within the 60 day period of time after
the Closing Date, then, in such event, Purchaser may, at its sole option, strike
the Unqualified Contract(s) from Exhibit 1, return the Unqualified Contract(s),
together with all Assets associated therewith, to the Seller; and, thereupon,
such Unqualified Contract shall be deemed not to have been purchased pursuant to
this Agreement. Any payments received by Purchaser from Contract Obligors on
returned Unqualified Contracts will be promptly remitted by Purchaser to, and
receipted for by, Seller.
4. Fees. Seller agrees that Purchaser shall deduct from the Purchase
Price the sum of $ for each Contract set forth on Exhibit 1 to reimburse
Purchaser for its direct expenses in having the Certificate of Title to the
vehicle reissued to show the Purchaser as the first lienholder.
5. Reserves. Seller agrees that Purchaser shall deduct from the
Purchase Price a sum equal to percent ( %) of the ledger card balances of the
Contracts set forth in Exhibit 1, which sum shall be held in a Reserve as a
liability owing Seller, but Purchaser shall in no event be liable for any
interest thereon. The Reserve shall be held by Purchaser for a period of either:
(i) days after the Closing Date (the "Limited Reserve Period") or (ii) until all
Contracts set forth in Exhibit 1 are paid in full (the "Term Reserve Period").
With respect to the Contracts listed and identified as Exhibit 1,
Seller and Purchaser hereby agree that the period of the Reserve shall be
(initial one):
Limited Reserve Period
---
Term Reserve Period
---
Purchaser may, at Purchaser's sole discretion, charge against and
deduct from the Reserve under the following circumstances:
(a) Upon the happening of any of the following "Events of
NonCompliance" with respect to any of the Contracts:
Revised February, 1998
4
<PAGE>
(i) The Purchaser is unable, after a good faith
reasonable effort, to verify the Contract Obligor's
employment or residence at the place furnished by
Seller;
(ii) Any Contract Obligor files bankruptcy;
(iii) The Financed Vehicle is repossessed;
(iv) The Contract Obligor asserts that there are
major mechanical problems with the Motor Vehicle;
(v) Purchaser determines, in Purchaser's sole
discretion, that the Contract Obliger will not make
contractual payments due to Purchaser in accordance
with the terms of the Contract.
Upon the occurrence of any of the Events of Non-Compliance identified
above, Purchaser shall have the right to deduct from the Reserve the
amount of the Purchase Price of that Contract received by Seller from
Purchaser, less any principal reduction applied to the Contract's
account plus the interest that would have been earned on the Contract
for the period the Contract was held by the Purchaser at the rate of
interest charged under the Contract to the customer, or if no interest
is charged under the Contract, at the rate of 20% per annum.
(b) Seller breaches any representations, warranties, covenants
or any other provisions of this Agreement, provided, however,
any deductions or charges against the Reserve under this
provision for breach of the Agreement shall not relieve Seller
of Seller's obligation to repurchase any Contracts as set
forth in Section 6.1 of this Agreement. In addition, upon
deduction from the Reserve by Purchaser under this provision
for breach of the Agreement, upon notification by Purchaser to
Seller of such deduction or charge, Seller shall submit to
Purchaser within five (5) calendar days a sum sufficient to
refund the Reserve to the amount prior to such deduction or
charge, it being understood and agreed between Seller and
Purchaser that the primary purpose of the Reserve is to
provide security for the Events of Non-Compliance set forth
above and deduction from or charges against the Reserve for
breaches of the Agreement provides Purchaser additional
security to compensate Purchaser for the effect of such
breaches, but Seller is obligated to refund the Reserve in the
event such charges are taken. Upon the occurrence of a breach
of the Agreement, Purchaser shall have the right, but not the
obligation, to deduct from the Reserve the balance due and
Revised February, 1998
5
<PAGE>
owing on any Contract which is the subject of such breach at
the time as if the Contract Obligor on the Contract had
prepaid the obligation in full on that date (the net-payoff
balance).
At the end of the Limited Reserve Period or Term Reserve Period,
whichever is applicable, if Seller is not in any known default with respect to
any provision of this Agreement, and there are no known Events of Non-Compliance
with respect to any of the Contracts, Purchaser shall remit to Seller the
remaining balance, if any, of Reserve to Seller, provided, however: (i) if prior
to such date, Purchaser is investigating a potential breach of the Agreement or
Event of Non-Compliance of a Contract, Purchaser shall have the right to retain
so much of the Reserve as would be necessary to satisfy such a deduction from
the Reserve for such a breach or Event of Non-Compliance; (ii) if, prior to such
date, the balance remaining in the Reserve is inadequate to fund the repurchase
of a Contract or compensate for the breach of the Agreement, Purchaser may
retain the balance remaining in the Reserve and retain the Contract until Seller
pays to Purchaser the balance of the repurchase amount owed to Purchaser for
such Contract; (iii) if Purchaser discovers any Event of NonCompliance that
occurred during the Reserve Period subsequent to return to the Reserve balance
to Seller, upon Purchaser's request Seller shall remit to Purchaser the amount
necessary to cover such Non-Compliance up to the amount of Reserve returned to
Seller.
6. Contract Repurchases
6.1 Obligation to Repurchase. Seller shall become obligated
to, and Seller hereby covenants and agrees to repurchase from Purchaser any and
all Contracts sold to Purchaser by Seller under this Agreement upon the
occurrence of any one or more of the following events pertaining to any
Contracts:
(a) Contract Obligor asserts any valid claim or defense
against Purchaser, which Contract Obligor could assert against
Seller, with regard to the Financed Vehicle and/or services
described in the Contract or his, her or their obligations
under the Contract, pursuant to any federal or state law, rule
or regulation relating to consumer sales, credit, warranties,
claims and defenses.
(b) The Contract Obligor, or any other party purported to be
obligated on a Contract is not legally obligated to pay the
obligation evidenced by the Contract.
(c) Seller (including its employees, agents and
representatives) breaches any provisions in or relating to
this Agreement or any Contract, or if any
Revised February, 1998
6
<PAGE>
form of assignment by which any Contract was conveyed to
Purchaser is incorrect or invalid.
(d) With respect to any and all Contracts purchased by
Purchaser "with recourse" to the Seller, each and every time a
Contract Obligor fails for any reason to promptly pay and
satisfy in full each, any and all of its obligations
thereunder in accordance with the Contract terms, including,
but not limited to, Contract Obligor becoming sixty (60) or
more days contractually past due, Seller shall repurchase any
and all such Contracts from Purchaser upon Purchaser's demand.
6.2 Terms of Repurchase. Contracts repurchased by Seller from
Purchaser pursuant to Section 6.1 shall be repurchased in cash for an amount
equal to the amount of the balance due and owing on such Contract at the time of
the occurrence of the event creating the obligation to repurchase as if the
Contract Obligor had prepaid the Contract payment obligation in full on that
date (the netpayoff balance). Such repurchase shall be made within five (5)
calendar days after oral or written notice of said repurchase obligation is
given by Purchaser to Seller. Failure of Seller to repurchase any such Contract
within said five (5) calendar day period shall constitute an Event of Default,
as set forth in Section 14 of this Agreement. If such Event of Default occurs,
in addition to the remedies set forth in Section 15 of this Agreement, Purchaser
shall have as its option, but not as an obligation, the right to repossess the
secured collateral, sell such collateral in a commercially reasonable manner in
accordance with the Uniform Commercial Code, and apply the proceeds from such
sale against the Seller's repurchase obligation. The Seller shall remain liable
to Purchaser for any portion of its repurchase obligations not satisfied by such
sale of the collateral. Contracts repurchased by Seller from Purchaser pursuant
to this Section 6 are to be reassigned and sold back to Seller without recourse
and/or without warranties of any kind or nature by Purchaser, except as to the
amount that has been paid on the obligation by the Contract Obligor. In the
event of any repurchase under this Section 6, the Seller shall protect, defend
and indemnify Purchaser and hold Purchaser harmless from, against and for any
claim, action, cause of action, judgment, award, settlement, cost or expense,
including reasonable attorneys' fees, of every kind or nature, arising out of or
connected with the transaction upon the occurrence of any one or more of the
events described in Section 6.1
7. Assignment and Recourse. It is understood and agreed that all
Contracts are assigned, transferred and conveyed to Purchaser pursuant hereto
(initial one):
"with recourse"
-----
"without recourse"
-----
Revised February, 1998
7
<PAGE>
If assigned "with recourse," the Seller hereby additionally guarantees to the
Purchaser that the Contract Obligor of each and every Contract shall promptly
and fully pay and satisfy all payments owing under the Contract when and as the
same become due and payable. If assigned "without recourse," the Seller does not
guarantee to the Purchaser that any Contract Obligor shall make the payments due
and payable in accordance with his or her Contract; however, regardless of
whether Contracts are assigned pursuant hereto "with recourse" or "without
recourse," nothing in this Section 7 is intended or shall be interpreted so as
to excuse or modify any of Seller's obligations to repurchase Contracts pursuant
to any other Section of this Agreement; nor as requiring or prohibiting
Purchaser to or from applying available Reserve balances pursuant to Section 5,
above, such Reserve rights being in addition to, but not in lieu of, any rights
Purchaser may have by reason of the recourse type of assignment.
8. Duty to Accept and Remit Payments. In the event that, subsequent to
the Closing Date, payments for any of the Contracts listed on Exhibit 1 are
submitted by or on behalf of the Contract Obligors to Seller, or any of its
respective officers, employees, or agents, Seller shall accept such payments on
behalf of Purchaser and, within the next business day submit such payments to
Purchaser, without deduction or offset, in precisely the form received, (with
the exception of cash, in which event a check from Seller will comply with this
provision) endorsed by Seller where necessary, and until so turned over such
payments shall not be commingled with any other funds or property of Seller, and
shall be deemed to be held in trust by Seller for and as the property of
Purchaser.
9. Payment of Certain Taxes. Seller shall be solely responsible for any
and all taxes, fees and other charges which shall become due or shall have
accrued (i) on account of the operation and conduct of the business of Seller or
(ii) on account of the acquisition, holding, administering or ownership of any
of the Assets prior to the Closing Date.
10. Insurance. Seller shall assist Purchaser, in any reasonable manner
requested by Purchaser, to process and obtain payment for any and all eligible
claims which may arise with respect to the Insurance Policies. With respect to
the Seller Financed Insurance Policies, claims will be submitted by Purchaser
directly to the insurance carriers. Seller shall be responsible for making all
refunds of insurance premiums or portions thereof with respect to the Seller
Financed Insurance Policies required to be made to any of the Contract Obligors
as the result of prepayments (whether voluntary or involuntary) or refinancing
of Contracts.
11. Non-assumption of Seller's Liabilities. It is understood and hereby
covenanted by Seller that Purchaser will not assume, and shall not in any manner
become liable for, any debt, obligation, or liability of Seller by reason of
this
Revised February, 1998
8
<PAGE>
transaction, the provisions hereof or the operation of law.
12. Power of Attorney. Seller hereby constitutes and appoints
Purchaser, its successors and assigns, the true and lawful attorney-in-fact of
Seller, with full power of substitution in the name and stead of Seller, but on
behalf of and for the benefit of Purchaser, its successors and assigns, to do
any and all the following:
(a) To endorse the name of Seller upon all notes, powers
and other forms of exchange received in payment on
any of said Contracts, forms or papers or in
connection with any insurance policies insuring the
Financed Vehicle or lives and health of borrowers
whether for claims or premium refunds or otherwise
for benefit of Buyer.
(b) To demand, collect and receive any and all of said
Contracts and to enforce any of the rights in respect
thereof and to give releases for and in respect of
same.
(c) To endorse or assign any of said Contracts and/or
Certificates of Title in the name of Seller.
(d) To institute and prosecute in the same name of
Seller, at the expense and for the benefits of Buyer,
its successors and assigns, any and all proceedings
at law, in equity or otherwise which Purchaser, its
successors or assigns may deem proper for the
collection and enforcement of any claim or right or
action of any kind hereby granted, bargained, sold,
assigned and transferred.
Seller hereby declares that the foregoing powers are coupled with an
interest and shall be irrevocable by Seller.
13. Survival of Representations and Warranties, Remedies Cumulative.
All representations and warranties and covenants herein contained shall survive
this Agreement. All remedies of Purchaser herein shall be deemed to be
cumulative and not exclusive, and the exercise or enforcement of any one or more
remedies shall not preclude the exercise or enforcement of any other remedy or
remedies.
14. Events of Default. An Event of Default means the occurrence or
existence of one or more of the following events or conditions (whatever the
reason for the Event of Default and whether voluntary, involuntary or caused by
operation of law) which is not waived in writing by the Purchaser:
(a) failure on the part of Seller to submit to Purchaser on a
timely basis
Revised February, 1998
9
<PAGE>
in accordance with Section 6 any payment in satisfaction of
Seller's repurchase obligation to Purchaser; or
(b) failure on the part of Seller to observe or to perform any
covenant or agreement set forth in this Agreement; or
(c) the breach by Seller of any representation, warranty,
covenant or agreement set forth in this Agreement or any
Contracts sold to Purchaser; or
(d) the misrepresentation by Seller in any respect of any
facts or circumstances relating to a Contract submitted to
Purchaser or to any Contract Obligor or Financed Vehicle
covered by such Contract.
15. Remedies. Seller shall promptly notify Purchaser of the occurrence
of any Event of Default hereunder. Upon the occurrence of any Event of Default
then, in conjunction with, or in addition to, any other rights and remedies of
Purchaser, Purchaser shall have the following rights and remedies:
(a) The right to require Seller to repurchase the Contract
from Purchaser pursuant to Section 6 of this Agreement; and/or
(b) The right to charge against and deduct from the Reserve
such amount as may be required to cure the Event of Default
pursuant to Section 5 of this Agreement and maintain ownership
of the Contract until Seller refunds the Reserve in the amount
so deducted or charged, Seller not being relieved of Seller's
obligation to repurchase until such refunding of the Reserve
is satisfied; and/or
(c) The right to bring suit against Seller for damages
incurred by Purchaser as a consequence of and arising out of
such Event of Default, and/or,
(d) The right to obtain such injunctive relief, specific
performance, or such other relief legally appropriate and
available.
16. Indemnification. Seller shall defend, indemnify and hold harmless
Purchaser from and against any and all amounts incurred in connection with all
actions, proceedings, suits, hearings, investigations, charges, complaints,
claims, demands, injunctions, judgments, orders, decrees and rulings, including
all damages, dues, penalties, fines, costs, amounts pain in settlement,
liabilities, obligations, taxes, liens, losses, expenses and fees, including
court costs, attorneys' fees and related costs Purchaser may suffer through and
after the date of claim for indemnification
Revised February, 1998
10
<PAGE>
resulting from, arising out of, relating to, or in the nature or caused by:
(a) Any breach of the representations, warranties, covenants
or any agreements made by Seller in this Agreement (or in the
event any third party alleges facts that, if true, would mean
Seller has so breached); and/or
(b) an Event of Default; and/or
(c) activities, operations, or conduct of Seller.
17. Miscellaneous.
17.1 Brokers. If a broker is utilized, the party utilizing
such broker shall be responsible for such broker's fee. Each party agrees to
indemnify and save the other harmless from and against the claims of any broker
claiming to have acted on behalf of such party.
17.2 Notices. All demands, notices and communications under
this Agreement shall be sufficient if in writing and delivered personally or
sent by certified mail, return receipt requested, first-class postage prepaid,
by regular mail, by overnight delivery service providing evidence of delivery,
or by telecopier and shall be deemed to have been duly given upon first
attempted delivery if sent by certified mail or overnight delivery service and
upon receipt if delivered personally or sent by regular mail or telecopier, at
the following addresses, or at such other address as shall be designated in
writing by a party:
a. If to Purchaser:
The Finance Company
5425 Robin Hood Road, Suite 101B
Norfolk, Virginia 23513
Attn: General Counsel
b. If to Seller:
----------------------------
----------------------------
----------------------------
Attn:______________________
17.3 Headings. The headings in this Agreement and the Exhibits
hereto are intended solely for convenience of reference and shall be given no
effect in the
Revised February, 1998
11
<PAGE>
construction or interpretation of this Agreement.
17.4 Waivers. No waiver of any provision hereof, in part or in
whole, shall be effective unless particularly stated in a writing addressed and
delivered to the other party and duly signed on behalf of the party against whom
the waiver is sought to be enforced. Any waiver so granted shall apply solely to
the event occasioning the necessity for a waiver and with respect only to the
provision or provisions hereof applicable thereto, but shall not apply to any
other events or to reoccurrence of the same or similar event nor to any other
provisions hereof.
17.5 Applicable Law. This Agreement shall be controlled,
construed and enforced in accordance with the laws of the Commonwealth of
Virginia, it being agreed that the courts of that state shall have jurisdiction
over the parties hereto and this Agreement in addition to such other courts as
may have such jurisdiction.
17.6 Entire Agreement. This Agreement represents the entire
agreement and understanding of the parties, superseding any and all oral or
written representations, understandings or agreements with respect to the
transaction herein contemplated if not set forth herein, and no modification
hereof or additions hereto have been agreed to, or will be binding upon any
party or its successors or assigns,
unless specifically set forth in writing in a document executed by the party
against whom the modification of addition is sought to be enforced.
17.7 Binding Agreement; Assignment. This Agreement shall be
binding upon the parties hereto and their successors and assigns; provided,
however, no assignment hereof shall excuse, release or constitute a waiver of
any duty or obligation the assignor may have to the other party hereunder unless
excused, released or a waiver is granted in writing by the other party upon the
assignee's written assumption of all of the assignor's duties and obligations
hereunder.
17.8 Attorney Fees. In the event of the institution of legal
proceedings based upon breach of any of the terms or conditions of this
Agreement by either party hereto, the prevailing party shall be entitled to
reimbursement for reasonable attorney fees, court costs and other expenses
incurred in connection therewith.
17.9 Contracts Inadvertently Purchased. Should Purchaser
discover during the conversion of Seller's accounts onto its computer system
that: (i) any Contract at the time of purchase was more contractually past due
than represented by Seller because of an aging error either by Seller or
Purchaser; or (ii) any contract listed on Exhibit 1 is with a Contract Obligor
or a co-Obligor who has or had an account with the Purchaser which was charged
off as uncollectible or was previously returned and/or repurchased by the Seller
from the Purchaser, Seller shall, upon
Revised February, 1998
12
<PAGE>
Purchaser's demand, promptly repurchase such Contract(s) at a price equal to the
amount paid by Purchaser. The repurchase obligation under this section is in
addition to the Reserve established in Section 5 of this Agreement and the
monies held in Reserve are not intended to satisfy Seller's obligation under
this Section 17.9.
17.10 Collateral Repossessed. Seller agrees that with respect
to any Contract for which Seller has repossessed the Financed Vehicle prior to
Closing or which Seller repossess after Closing without the authorization of
Purchaser, Seller shall, upon Purchaser's demand, promptly repurchase such
Contract(s) at a price equal to the amount due and owing on the Contract at the
time of repossession as if the Contract Obligor on the Contract had prepaid the
obligation in full on that date (the net-payoff balance). The repurchase
obligation under this section is in addition to the
Reserve established in Section 5 of this Agreement and monies held in the
Reserve are not intended to satisfy Seller's obligation under this Section
17.10.
17.11 Consumer Finance Acts. Purchaser agrees to make all
records and other documents relating to the Assets available for inspection by
governmental authority and to maintain all such records and documents for the
period of time required to comply with the laws of the state in which the
Contracts were made and are to be performed.
17.12 Offset. Seller agrees that Purchaser shall be entitled
to offset any monies held by it, including any amounts held in the Reserve,
against any monies owed to Purchaser by Seller in connection with this Agreement
or any other agreement between Seller and Purchaser.
17.13 Interest. Any delinquent payments or unpaid amounts due
and owing to Purchaser by Seller under this Agreement shall accrue interest at
the lesser of ten percent (10%) per annum or the maximum legal interest rate
allowable for such debt under the laws of the applicable jurisdiction.
18. Guaranty. To induce the Purchaser to purchase the Assets as
provided herein, the undersigned Guarantor(s), jointly and severally if more
than one, do hereby guarantee to the Purchaser, its successors and assigns,
payment of all sums due or to become due under the terms and conditions of this
Agreement and the performance by Seller of all of the undertakings, obligations
and liabilities imposed upon Seller by this Agreement. The liability of the
guarantors hereunder shall be unconditional and shall not, in any manner, be
affected by any indulgence whatsoever granted or consented to by the Purchaser,
including, but not limited to, any extension of time, renewal, waiver or other
modification.
Revised February, 1998
13
<PAGE>
19. Definitions. Whenever used in this Agreement, the following words
and phrases, unless the context otherwise requires, shall have the following
meanings:
"Agreement" means this Asset Purchase Agreement as executed by
Purchaser and Seller and all amendments and supplements hereto.
"Assets" means that which is purchased by Purchaser from
Seller under this Agreement which shall include, but not be limited to, the
Contracts and all data, documentation, property, and rights associated therewith
including, but not limited to, all Notes, installment sales contracts, security
instruments securing the collateral purchased pursuant to said contracts,
financing statements, guarantees, Certificates of Title and any and all other
property relating to the sale of said Contracts.
"Closing" means the date, time and place when Seller delivers
to Purchaser all Contracts and Assets identified in Exhibit 1 with all necessary
documentation for the legal, proper and complete assignment of such Contracts
and Assets to Purchaser and Purchaser delivers to Seller the consideration for
such transaction.
"Contract" means each retail installment sales contract,
conditional sales contract, security agreement or other document relating to the
sale of a motor vehicle to the Contract Obligor which is listed and/or
identified on Exhibit 1 which has been sold and assigned by Seller to Purchaser.
"Contract File" means all original writings (including the
executed Contract) and business records relating to a Contract.
"Contract Obligor" on a Contract means the purchaser or
co-purchaser of a Financed Vehicle or any other person who owes or guarantees
payments under the Contract.
"Event of Default" means an event specified in Section 14.
"Financed Vehicle" means a motor vehicle together with all
accessories thereto, securing a Contract Obligor's indebtedness and obligations
under a Contract.
"Person" means a legal person, including any individual,
limited liability company, corporation, sole proprietorship, estate partnership,
joint venture, association, joint stock company, trust, incorporated
organization, or government or any agency or political subdivision thereof.
"Purchase Price" means the amount paid to Seller by Purchaser
pursuant to Section 1 for the assignment of the Contracts listed on Exhibit 1.
Revised February, 1998
14
<PAGE>
"Unqualified Contract" has the meaning set forth in Section 3.
Revised February, 1998
15
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered on
behalf of the parties hereto by their duly authorized officers or authorized
representatives, all as of the date first above written.
SELLER:
By:____________________________________________________
(Signature)
_______________________________________________________
Printed or Typed Name
_______________________________________________________
Title of Authorized Representative
SUBSCRIBED and sworn to before me this day of ,
-------------- ---------------
19
-----
My commission expires:
--------------- -----------------
Notary Public
GUARANTOR: The full and prompt performance by the Seller of all of its
obligations and the payment of all sums due or to become due by Seller to TFC
under this Agreement is hereby unconditionally and personally Guaranteed by the
undersigned, Guarantor hereby consenting in advance to such agreements as Seller
may hereafter make with TFC pursuant to any section of the within Agreement.
- ---------------------------------------- ----------------------------
Guarantor (Print or Type) Guarantor (Print or Type)
- ---------------------------------------- ----------------------------
Guarantor (Signature) Guarantor (Signature)
SUBSCRIBED and sworn to before me this day of ,
--------------- ---------------
19 .
-----
My commission expires:
------------------------- ----------------------
Revised February, 1998
16
<PAGE>
Notary Public
ACCEPTED: THE FINANCE COMPANY
- -----------------------------------------------------------------------------
(Signature)
By:
- -----------------------------------------------------------------------------
Title:
- -----------------------------------------------------------------------------
Date:
- -----------------------------------------------------------------------------
SUBSCRIBED and sworn to before me this day of ,
--------------- ---------------
19 .
-----
My commission expires:
----------------------- -----------------------
Notary Public
Revised February, 1998
17
<<<TO COME>>>>
TFC ENTERPRISES, INC.
1997 Annual Report
<PAGE>
To Our Shareholders:
TFC Enterprises, Inc.'s mission in 1997 was to continue improving on the goals
established in 1996 and to rebuild the Company's volume of business. I am
pleased to report significant progress was accomplished during 1997. TFC
Enterprises, Inc., returned to profitability reporting a net income of $0.7
million, or $0.06 per share as compared to a net loss of $(7.6) million, or
$(0.67) per share in 1996, and a net loss of $(6.5) million or $(0.57) per share
in 1995.
Business volume at The Finance Company (TFC) during 1997 was $155.9 million
compared to $120.0 million during 1996, a 30% increase. Our decision to utilize
regional loan production offices was a primary reason for this increase in new
business acquired. Each of these five loan production offices located in
Killeen, Texas; San Diego, California; Jacksonville, Florida; and two in
Norfolk, Virginia, are managed by seasoned professionals who deserve recognition
for their accomplishments.
TFC's net contract receivables balance at December 31, 1997 represents a slight
decrease of $0.6 million from December 31, 1996. This compares with a decrease
in receivables during 1996 of $49.2 million. Receivables actually grew during
the fourth quarter of 1997 by $5.3 million. It is significant that receivables
generated during 1995 and prior years have liquidated to $20.6 million at
December 31, 1997, and represent only 12% of total receivables. By the end of
1998, receivables acquired prior to 1996 will be a small percentage of the total
outstanding.
During this period of growth, TFC's 60 day and over delinquency declined from
10.28% at year end 1996 to 9.28% at year end 1997. Also, net charged off of
loans declined from $40.1 million during 1996 to $27.5 million during 1997. This
improvement in large part was attributable to the Point-of-Sale Service Center
located in Norfolk, Virginia. Under the direction of our General Manager and an
excellent staff, the service center continued to show substantial improvement in
reducing delinquency and charge-off.
Another of our subsidiaries, First Community Finance, was a steady producer.
First Community Finance, which extends small direct consumer loans, grew its
volume from $13.2 million in 1996 to $16 million in 1997, a 21% increase, and
increased its net outstanding receivables from $8.8 million at year end 1996 to
$11.7 million at year end 1997, a 33% increase. The number of branch offices
increased from ten at year end 1996 to 15 at year end 1997. Sixty (60) day and
over delinquency ended 1997 at 3.14% as compared to 2.75% at year end 1996, a
slight increase.
Thinking back to early 1996 when I resumed the position of President and CEO, we
were faced with many challenges: inappropriate underwriting and inadequate
pricing resulted in more than a $30 million charge to equity to cover the
charge-off of loans made during late 1994 and throughout 1995; the Company's
servicing abilities were strained because of a serious delinquency problem;
operating expenses had grown to an all time high; and, the management team
needed to be re-evaluated to ensure the strongest possible team would be in
place to move the Company forward. Because of the experience and strength of the
new management team, the Company met these challenges.
All in all, 1997 proved to be a solid year in our rebuilding process. In
addition to all of the positive trends mentioned above, 1997 was a year where we
continued to see a number of our competitors experience problems. This has
resulted in many of these companies either suspending or curtailing their loan
acquisitions.
Our objectives for 1998 will be to maintain solid underwriting standards, while
showing patience in increasing our business volume, continue our efforts to
increase our yields through improved pricing, and further reduce delinquency and
charge-off. Additionally, we will attempt to improve our cost of funds, increase
our credit lines and increase our capital base to accommodate the growth
opportunities that will surely surface during 1998.
Your support in the past is greatly appreciated. We look forward to meeting the
opportunities of 1998 and beyond.
Robert S. Raley, Jr.
Chairman of the Board, President and
Chief Executive Officer
1
<PAGE>
The Year in Review
TFC Enterprises, Inc., reported a net income of $0.7 million, or $0.06 per
common share, in 1997, compared to a net loss of $(7.6) million, or $(0.67) per
common share, in 1996, and net loss of $(6.5) million, or $(0.57) per common
share, in 1995.
TFC Enterprises, Inc., achieved success in a number of areas during 1997.
Highlights for 1997 included:
o The Company returned to profitability. The Company achieved these
results while absorbing the cost of opening six new offices, four of
which were in the fourth quarter.
o We purchased $171.9 million of contracts as compared to $133.2 million
in 1996.
o The performance of the entire contract portfolio through year end, with
charge-offs totaling 18.6% of gross contracts purchased compared to
22.3% for 1996 and 60-day delinquency rates at 8.9% compared to 9.9%
for 1996, indicates that our underwriting and collection performance
has returned to acceptable levels.
o In the Fourth Quarter, a Point-of-Sale Loan Production Office was
opened in Jacksonville, Florida. The office shares existing leased
space with the Jacksonville Portfolio Service Center. Loans purchased
by this office are serviced at our Point-of-Sale Service Center in
Norfolk, Virginia. Early results from this office are very favorable.
o In December, the Point-of-Sale Loan Production Office was re-located to
Killeen, Texas from Dallas, Texas. This re-location positioned the
office much closer to the largest concentration of military personnel
in the Southwest. This move immediately resulted in an increase in
business from the Killeen area with no reduction in business from the
other geographic areas that had been served from the Dallas office.
o Our consumer finance company, First Community Finance (FCF), completed
another successful year of continued expansion in Virginia and North
Carolina, growing from ten to 15 branches. FCF has proven that it can
originate high quality contracts while expanding rapidly, finishing
1997 with a 60-day delinquency rate of 3.1% and total charge-off during
the year representing 4.0% of average receivables. Additional expansion
of new branches in 1998 is being evaluated.
Additional areas of focus in 1998 will include:
o Controlling credit quality. The Company continues its centralized
control of the underwriting function under its chief lending officer,
who closely monitors the contract origination activity of all loan
production offices. This control is enhanced by utilization of TFC's
Automated Application Processing system, which permits on-line review
of all contract application processing from corporate headquarters in
Norfolk.
o Pricing strategy. In order to improve earnings the Company is
implementing a strategy to improve pricing. Given the decrease in
competition, management feels this will be achievable.
o Collections. To continue to improve collections, the Company will focus
on employee retention through better benefits, employee rewards
programs, and training. The Company will continue to aggressively
pursue recovery of charged-off accounts.
o Expansion. Additional TFC Loan Production Offices and FCF Branches are
being evaluated. Given the decrease in competition within our industry,
new offices are expected to generate increased volume levels while
maintaining credit quality.
o Improving liquidity and funding. With the Company's improved
performance in 1997, we are committed to evaluating alternative funding
sources to allow us to improve the interest margin. The Company is
currently evaluating capital sources, securitizations, participating
lenders, and subordinated debt.
2
<PAGE>
FINANCIAL HIGHLIGHTS
(dollars in thousands, except
per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
For the year 1997 1996 1995
<S> <C>
Net income (loss) $ 707 $ (7,596) $ (6,461)
Net income (loss) per common basic/diluted share 0.06 (0.67) (0.57)
Average common and common equivalent
shares outstanding (in thousands) 11,290 11,290 11,283
- --------------------------------------------------------------- ---------------- ------------------ ------------------
Performance ratios:
Return on average common equity 2.30% NM NM
Return on average assets 0.47 NM NM
Yield on interest earning assets 21.30 21.51% 23.16%
Cost of interest bearing liabilities 10.85 9.54 8.61
Net interest margin 13.38 14.36 17.28
Operating expense as a percentage of
average interest earning assets (a) 13.17 12.83 10.62
Total net charge-offs to average
gross contract receivables
net of unearned interest 18.60 22.25 21.22
60 day delinquencies to period end
gross contract receivables 8.85 9.89 6.80
Total allowance and nonrefundable
reserve to period end gross contract
receivables net of unearned interest 14.70 17.88 19.66
Equity to assets, period end 21.02 18.83 16.92
- --------------------------------------------------------------- ---------------- ------------------ ------------------
Average balances:
Interest earning assets (b) $151,743 $188,239 $213,154
Total assets 148,932 186,040 205,509
Interest bearing liabilities 110,812 140,943 145,540
Equity 30,731 36,386 45,539
- --------------------------------------------------------------- ---------------- ------------------ ------------------
</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) Excludes a $1.8 million charge for severance benefits and a $0.6 million
charge for restructuring in 1996.
(b) Average interest-bearing deposits and gross contract receivables, net of
unearned interest revenue and unearned discount.
3
<PAGE>
The Five-Year Summary of Selected Financial Data should be reviewed in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and with the accompanying Consolidated Financial
Statements of TFC Enterprises, Inc., including notes thereto.
Five-Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
Years ended December 31
(in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Statement of Operations data:
Net interest revenue $20,298 $27,033 $36,825 $27,958 $19,401
Provision for credit losses 719 8,733 26,500 53 1,688
-------- -------- ------ -------- -------
Net interest revenue after provision
for credit losses 19,579 18,300 10,325 27,905 17,713
Other revenue 1,105 1,436 2,292 2,685 2,238
Operating expense:
Amortization of intangible assets 1,091 1,091 1,091 1,091 1,267
Contingent interest on convertible notes (a) - - - - 2,994
Contingent earnout payments (b) - - - - 1,645
Severance benefits - 1,804 - - -
Restructuring charge - 590 - - -
Other 18,886 23,055 21,551 17,389 13,315
------ ------ ------ ------ ------
Total operating expense 19,977 26,540 22,642 18,480 19,221
------ ------ ------ ------ ------
Income (loss) before income taxes 707 (6,804) (10,025) 12,110 730
Provision for (benefit from) income taxes - 792 (3,564) 4,879 2,472
----- -------- -------- ------- -------
Net income (loss) $ 707 $(7,596) $(6,461) $ 7,231 $(1,742)
======== ======== ======== ======= ========
</TABLE>
4
<PAGE>
Five-Year Summary of Selected Financial Data (continued)
<TABLE>
<CAPTION>
Years ended December 31
(dollars in thousands, except per share) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C>
Net income (loss) per common share :
Basic $0.06 $(0.67) $(0.57) $0.64 NA
Diluted $0.06 $(0.67) (0.57) $0.64 NA
Pro forma net income (loss) per
common share: (c)
Primary (d) - - - - $(0.11)
Supplemental (e) - - - - 0.41
Balance Sheet data:
Net contract receivables $128,503 $126,252 $171,051 $139,176 $ 93,193
Total assets 147,833 156,508 215,146 166,552 126,396
Total debt 109,786 120,378 170,459 115,531 87,997
Shareholders' equity 31,080 29,862 36,404 42,845 28,459
</TABLE>
(a) Contingent interest expense reflects the change in value of the put/call
option relating to the Company's 13.50% Subordinated Convertible Notes,
which were retired with the proceeds of the Company's initial public
offering. See Note 5 of the Notes to Consolidated Financial Statements.
(b) Contingent earnout payments reflect the amount of earnout payments in
excess of the amount that was accrued at May 1, 1990, when RSR Associates
acquired 100% of the common stock of TFC Enterprises, Inc.
(c) Pursuant to a Securities and Exchange Commission requirement, historical
earnings (loss) per share are not presented for periods prior to 1994,
other than on a pro forma basis, because of the lack of comparability
resulting from the significant withdrawals of capital, raised through the
initial public offering, to fund earnout payments and to purchase
contingent stock rights.
(d) Pro forma primary net income per common share for the year ended December
31, 1993, is calculated assuming the issuance, on January 1, 1993, of that
portion of the initial public offering sufficient to fund earnout payments
and to purchase contingent stock rights.
(e) Pro forma supplemental net income per common share for the year ended
December 31, 1993, is calculated assuming issuance, on January 1, 1993, of
the entire initial public offering, including the underwriter's
over-allotment of 675,000 shares.
NA - Not applicable.
5
<PAGE>
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 Securities and Exchange Commission, news releases 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, 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 Securities and Exchange
Commission filings. See "Risk Factors" below. The Company disclaims any intent
or obligation to update these forward-looking statements, whether as a result of
new information, future events or otherwise.
This section should be reviewed in conjunction with the Five-Year Summary
of Selected Financial Data and the accompanying Consolidated Financial
Statements of TFC Enterprises, Inc., including notes thereto.
General
TFC Enterprises, Inc. ("TFCE"or the "Company") conducts its consumer
finance operations through two wholly-owned subsidiaries, The Finance Company
("TFC") and First Community Finance, Inc. ("FCF"). Through TFC, the Company is
engaged in purchasing and servicing installment sales contracts originated by
automobile and motorcycle dealers in the sale of used automobiles, vans, light
trucks, and new and used motorcycles (collectively "vehicles"). The Company
focuses its business on installment sales contracts originated by dealers with
consumers who are either United States military enlisted personnel, primarily in
the E-1 through E-5 grades or, civilians with limited access to traditional
sources of consumer credit. Installment sales contracts with military personnel
are acquired primarily on an individual basis after the Company has reviewed and
approved the vehicle purchaser's credit application (a "point-of-sale
purchase"). Contracts with civilians are acquired primarily on a group basis
through purchase of a dealer's portfolio of existing installment sales contracts
(a "portfolio purchase"). To achieve an acceptable rate of return and provide
for credit risks, contracts are purchased from dealers at a discount to the
remaining principal balance. Most of the discount is held in a nonrefundable
reserve against which credit losses are first applied.
6
<PAGE>
The Company has been engaged in consumer finance activities since its
founding in 1977. From 1991 through 1995, the Company increased contract
purchase volume significantly, from $67.1 million to $299.4 million,
representing a compound annual growth rate of 45%. Due to the significant credit
losses caused by 1995 volume's poor credit quality and inadequate pricing the
Company revised its business strategy in 1996 and purchase volume totaled $133.2
million. In 1997 contract volume increased to $171.9 million. Improvement in
delinquency and charge-off in 1997 support the conclusion that this growth was
achieved without sacrificing credit quality and price.
The Company's point-of-sale business emphasizes the purchase of installment
sales contracts relating primarily to vehicles purchased by United States
military enlisted personnel. Point-of-sale purchases provide the Company with
the ability to direct the credit underwriting process at the initiation of the
installment sales contract. Participating dealers benefit by having a source of
financing for a group of customers who typically find financing difficult to
obtain, thereby increasing the number of vehicles sold and improving dealer
profitability. The military personnel also benefit because the financing
provided by the Company enables them to purchase a vehicle that they otherwise
might not be able to buy. As of December 31, 1997, $111.3 million, or 60%, of
the Company's gross contract receivables represented point-of-sale purchases,
compared to $125.6 million, or 67%, at December 31, 1996.
During 1994 and 1995, to increase volume, the Company expanded its
point-of-sale operations into the civilian market. At that time, the Company
faced significant competition in this business line. To meet the competition,
the Company purchased a substantial number of contracts at prices that, in
hindsight, did not adequately reflect the credit risk of the obligor.
Compounding this problem was the significantly greater day-to-day servicing
requirements and risk of non-payment associated with civilian point-of-sale
contracts as compared to more traditional military point-of-sale contracts. When
the Company recognized the problems in late 1995, it took action to improve the
risk adjusted returns of the Company's portfolio by redirecting the Company
toward military point-of-sale and civilian portfolio business lines.
The Company's portfolio purchase business emphasizes acquisitions of
portfolios of seasoned installment sales contracts. These contracts normally
have a payment history of at least three months. While the typical portfolio
purchase involves less than 100 individual contracts, the Company has, at times,
purchased portfolios totaling more than 1,000 contracts. Portfolio purchases
provide the Company with demographic diversification, as the majority of
customers are not military enlisted personnel. They also provide a payment
history on which to evaluate and price the credit risk of the contracts and a
relatively efficient mechanism for establishing dealer relationships in new
areas. The Company's portfolio purchases benefit dealers by providing an
immediate source of liquidity, which in turn benefits the consumers who want to
purchase vehicles from these dealers. As of December 31, 1997, $60.0 million, or
33%, of the Company's portfolio of gross contract receivables was attributable
to portfolio purchases, compared to $51.8 million, or 28%, at December 31, 1996.
7
<PAGE>
Through First Community Finance, Inc. the Company is involved in the direct
origination and servicing of consumer finance contracts. FCF began operations in
the first quarter of 1995 with the opening of two branch offices in Richmond,
Virginia. Four additional branches were opened in Virginia in 1995 and four
branches were opened in North Carolina in 1996. In 1997 one additional branch
was opened in Virginia and four branches were opened in North Carolina. The
Company is evaluating additional branch openings in 1998. Gross contract
receivables relating to FCF at December 31, 1997, were $12.9 million, or 7%, of
the Company's gross contract receivables portfolio, compared to $9.6 million, or
5%, at December 31, 1996.
Results of Operations
Net income (loss) and earnings (loss) per common share
The Company reported net income of $0.7 million, or $0.06 per common share,
in 1997, compared to a net loss of $(7.6) million, or $(0.67) per common share
in 1996, and a net loss of $(6.5) million, or $(0.57) per common share in 1995.
The Company's return to profitability was primarily the result of continuing
improvement in the performance of its contract receivables and a 24.7% reduction
in operating expenses resulting from the restructuring during 1996. The net loss
in 1996 was attributable to an $8.7 million provision for credit losses,
severance benefits of $1.8 million related to management downsizing, and
approximately $0.6 million of restructuring charges related to closing the
Company's Dallas service center. In addition, the net loss for 1996 was higher
than the 1995 net loss because of $0.8 million in tax expense recognized in 1996
compared to a tax benefit of $3.6 million recognized in 1995. (See the Provision
for income taxes section later in this "Results of Operations" discussion). The
reported loss in 1995 was attributable to a $26.5 million provision for credit
losses which resulted from a significant increase in delinquencies and credit
losses relating to the Company's Jacksonville and Dallas service centers. The
provision for credit losses and the credit quality of the Company's portfolio of
contract receivables are discussed more fully in the "Credit Quality and
Reserves" discussion.
Volume
Gross contracts purchased or originated in 1997 totaled $171.9 million,
compared to $133.2 million in 1996 and $299.4 million in 1995. The increase in
1997 volume compared to 1996 reflected growth in both the Company's
point-of-sale and portfolio business lines. Point-of-sale originations increased
$26.7 million reflecting the Company's increase in marketing efforts to the
military point-of-sale market. Portfolio purchases increased $9.1 million
reflecting a continued marketing emphasis in this business line. The decrease in
volume in 1996 compared to 1995 came as a result of tightened underwriting
standards and from discontinuation of substantially all civilian point-of-sale
business in 1996. Contract purchase volume relating to civilian point-of-sale
purchases was not significant in 1997 or 1996 as compared to 1995. The 1995
record volume, attributable to a $92.9 million increase in point-of-sale
purchases, primarily reflected growth in contract volume related to civilian,
rather than military obligors. As a result of the substantial losses incurred in
1995, as discussed above, management took action to improve the risk adjusted
8
<PAGE>
returns of the Company's portfolio of contract receivables by redirecting the
Company toward military point-of-sale and civilian portfolio purchase business
lines. As a result, contract purchase volume in 1997 and 1996 was substantially
below the 1995 levels. Also contributing to the slower growth rate in 1996
contract purchase volume was the Company's liquidity and funding situation,
which is discussed more fully in Note 5 of the Notes to Consolidated Financial
Statements.
Gross contracts purchased or originated were as follows for 1997, 1996, and
1995:
Gross contract volume
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(dollars in thousands) Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C>
Contracts purchased
or originated:
Auto finance:
Point-of-sale $ 85,311 49.7% $ 58,623 44.0% $231,877 77.4%
Portfolio 70,520 41.0 61,391 46.1 61,261 20.5
Consumer finance 16,023 9.3 13,174 9.9 6,257 2.1
------ --- ------ --- ----- ---
Total $171,854 100.0% $133,188 100.0% $299,395 100.0%
-------- ====== -------- ====== ======== ======
Number of contracts purchased or originated:
Auto finance:
Point-of-sale 7,411 25.9% 6,154 25.0% 24,095 58.2%
Portfolio 14,157 49.4 11,853 48.1 14,084 34.0
Consumer finance 7,093 24.7 6,623 26.9 3,254 7.8
----- ---- ----- ---- ----- ---
Total 28,661 100.0% 24,630 100.0% 41,433 100.0%
====== ====== ====== ====== ====== ======
</TABLE>
At year end 1997, the Company was purchasing point-of-sale motor vehicle
finance contracts through four Loan Production Offices ("LPO's") located in
Norfolk, Virginia; Killeen, Texas; Jacksonville, Florida; and San Diego,
California. In December 1997 the Company moved the Dallas LPO to Killeen to be
closer to a higher concentration of military installations. In May 1998, the
Company intends to open an LPO in Tacoma, Washington. Portfolio purchases are
acquired through the portfolio purchase LPO located in Norfolk, Virginia.
In 1997, FCF originated $16.0 million in consumer finance contracts,
compared to $13.1 million in 1996. All consumer finance contract originations
are produced and serviced by 15 FCF offices located in Virginia and North
Carolina. FCF expanded by adding one new office in Virginia and four new offices
in North Carolina during 1997. Management believes there are significant growth
opportunities in this segment of the market and is evaluating the impact of
further FCF expansion in 1998.
9
<PAGE>
Net interest revenue
<TABLE>
<CAPTION>
Years ended December 31
(dollars in thousands) 1997 1996 1995
---- ---- ----
<S> <C>
Average interest earning assets (a) $151,743 $188,239 $213,154
Average interest bearing liabilities 110,812 140,943 145,540
-------- -------- ---------
Net interest earning assets $ 40,931 $ 47,296 $ 67,614
========= ========= =========
Interest and other finance revenue $ 32,317 $ 40,484 $ 49,358
Interest expense 12,019 13,451 12,533
-------- -------- ---------
Net interest revenue $ 20,298 $ 27,033 $ 36,825
======== ======== =========
Yield on interest earning assets 21.30% 21.51% 23.16%
Cost of interest bearing liabilities 10.85 9.54 8.61
------ ------ ------
Net interest spread 10.45% 11.97% 14.55%
====== ====== ======
Net interest margin (b) 13.38% 14.36% 17.28%
====== ====== ======
</TABLE>
(a) Average interest bearing deposits and gross contract receivables, net of
unearned interest revenue and unearned discount.
(b) Net interest margin is net interest revenue divided by average interest
earning assets.
Net interest revenue
Net interest revenue decreased to $20.3 million in 1997 compared to $27.0
million in 1996 and $36.8 million in 1995. The decrease in 1997 compared to 1996
and 1996 compared to 1995 was the result of the reduction in interest-earning
assets and a decrease in the net interest spread, as shown in the table above.
Average interest-earning assets decreased in 1997 and 1996 as a result of the
lower contract purchase volume in 1996 compared to 1995 and the high level of
contract charge-offs in 1996 related to 1995 volume. The net interest spread
decreased in 1997 compared to 1996 because of the increased cost of
interest-bearing liabilities caused by the amended financing agreements signed
in 1997 described in the "Liquidity and Capital Resources" section of this
discussion. The net interest spread decreased in 1996 compared to 1995 because
of reduced yield on interest-earning assets, caused by the Company's decision to
reduce its purchases of civilian point-of-sale contracts which generally yield a
higher return than military point-of-sale contracts, increased competition of
contract purchases and the lower rate earned on the Company's restricted cash
balances. The net interest spread also decreased because of increased cost of
interest-bearing liabilities, caused by the Company's forbearance arrangements
with lenders as described in the "Liquidity and Capital Resources" section of
this discussion.
10
<PAGE>
Other revenue
Other revenue was $1.1 million in 1997, compared to $1.4 million in 1996
and $2.3 million in 1995. The decrease in 1997 compared to 1996 was caused by a
decrease in commission income on ancillary products as the result of lower sales
of warranty programs. The decrease in 1996 compared to 1995 was caused by a
decrease in commission on ancillary products as the result of reduced new
contract volume in 1996.
Operating expense
Operating expense was $20.0 million in 1997 compared to $26.5 million in
1995 and $22.6 million in 1995. The decrease of $4.1 million in 1997, excluding
the 1996 charge for severance benefits and restructuring, compared to 1996 was
attributable to a decrease in salaries of $2.2 million due to the reduction in
the number of employees after the aforementioned restructuring and a decrease of
$1.3 million in repossession expense. The increase of $3.9 million in 1996 over
1995 was caused by severance benefits of $1.8 million paid in 1996, $1.5 million
additional repossession and collection expenses in 1996, restructuring charges
of $0.6 million in 1996, and $0.7 million of higher expenses resulting from the
expansion of FCF. In connection with the termination of the employment
agreements with four senior officers with the Company during 1996, notes
receivable from these individuals in the amount of $0.4 million were forgiven
and are reported as a component of severance benefits.
Effective September 30, 1996, the Company restructured its senior
management as part of its plan to reduce operating expenses. The restructuring
involved the termination of the employment agreements of four key executives in
exchange for approximately $1.8 million in combined cash payments of $1.4
million and cancellation of certain notes receivable from these executives in
the amount of $0.4 million. The notes receivable were related to 1995 profit
sharing amounts owed to the Company.
The Company closed its Dallas service center and relocated its corporate
finance and accounting office from Manassas to Norfolk, Virginia; in November
1996, as part of its plan to reduce operating expenses. Receivables serviced
from the Dallas service center were moved to the Company's Norfolk, Virginia,
and Jacksonville, Florida, service centers. The Norfolk service center is
responsible for servicing all point-of-sale contracts. The Jacksonville service
center is responsible for servicing all portfolio purchase contracts. The total
cost of restructuring the operations of the service centers and the finance and
accounting office was approximately $0.6 million.
Operating expense as a percentage of average interest-earning assets
increased to 13.17% in 1997 compared to 12.83% in 1996 excluding severance
benefits and restructuring charges and 10.62% in 1995. The increase in the
operating expense ratio in 1997 resulted from the decrease in average
interest-earning assets which is attributable to the decrease in net contract
receivables. The increase in the operating expense ratio in 1996 resulted from
the increase in operating expenses described above and the decrease in net
contract receivables in 1996 compared to 1995.
11
<PAGE>
Provision for income taxes
The Company recorded no income tax provision in 1997, compared to a tax
provision of $0.8 million in 1996 and a tax benefit of $3.6 million in 1995. No
income tax expense was provided for 1997 due to the reversal of a portion of a
deferred tax valuation allowance recorded at year-end 1996. The tax expense in
1996 provided on a pre-tax loss of $6.8 million was caused primarily by the fact
that no tax benefit could be recognized on most of the $8.7 million provision
for credit losses recorded in 1996 pending the reporting of sufficient future
profits by the Company. The tax benefit of $3.6 million in 1995 was attributable
to a significantly higher level of provision for credit losses in 1995, while
the Company's cumulative profitability still was sufficient to permit
recognition of the tax benefit.
At December 31, 1997, recoverable taxes totaled $1.2 million, which
represented the benefit of state net operating loss carrybacks available to the
Company as a result of a tax-basis loss in 1996. At December 31, 1996,
recoverable income taxes totaled $5.8 million, which represented the benefit of
net operating loss carrybacks available to the Company as the result of a
tax-basis loss incurred in 1996. At December 31, 1995, recoverable income taxes
totaled $6.0 million, which primarily included the Company's 1995 federal
quarterly estimated tax payments of $3.5 million and the $2.4 million benefit of
net operating loss carrybacks available to the Company as a result of the
tax-basis loss incurred in 1995. In early 1996, the Company filed a request with
the Internal Revenue Service for an accelerated refund of its $3.5 million in
1995 estimated tax payments. These estimated tax payments were received in the
first quarter of 1996. Most of the refund balance due from the 1995 net
operating loss carryback was received in the second quarter of 1997. Proceeds
from these tax refunds were used to reduce the Company's indebtedness.
In 1993, contingent interest on the Company's convertible notes was treated
as non-deductible for Federal income tax purposes. To the extent that the
contingent interest on convertible notes is ultimately determined to be
deductible for Federal income tax purposes, the benefit, which totals $2.1
million, will be recognized in the period that the determination is made.
Other matters
Until recently computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900 and
the year 2000. Utilizing both internal and external resources, the Company is in
the process of defining, assessing and converting, or replacing, various
programs and hardware systems to make them Year 2000 compatible. The Company's
Year 2000 project is comprised of business applications which consist of the
Company's computer systems, as well as the computer systems purchased from
third-party suppliers. It is estimated that the cost of addressing the year 2000
problem and making the Company's computer systems year 2000 compliant will not
be material.
12
<PAGE>
Financial Condition
Assets
Total assets decreased by $10.8 million, or 7%, to $147.8 million at
December 31, 1997, from $158.6 million at December 31, 1996. The decrease was
due primarily to the reduction in restricted cash and recoverable income taxes.
Net contract receivables
Net contract receivables were $128.5 million, or 87% of total assets at
December 31, 1997, compared to $126.3 million, or 80% of total assets at
December 31, 1996. The increase in auto finance receivables in 1997 was
attributable to portfolio purchases, resulting from increased management
emphasis on this line of business. Consumer finance volume also increased in
1997 due to a 27% increase in volume from the four offices opened in 1996 and
the five offices opened in 1997.
Net contract receivables
December 31,
(dollars in thousands) 1997 1996
---- ----
Auto finance:
Point-of-sale $ 75,197 $ 80,725
Portfolio 41,612 36,711
Consumer finance 11,694 8,816
------ ------
Total $128,503 $126,252
======== ========
Liabilities
Total liabilities were $116.8 million at December 31, 1997, a decrease of
$11.9 million, or 9%, from $128.7 million at December 31, 1996. The decrease in
liabilities in 1997 was primarily attributable to the repayment of the Company's
Automobile Receivables-Backed notes and term notes offset partially by the
increase in the revolving line of credit as described in the "Liquidity and
Capital Resources" section of this discussion. As a percentage of total
liabilities and equity, liabilities represented 79% and 81%, respectively, at
December 31, 1997 and 1996.
13
<PAGE>
Credit Quality and Reserves
Net charge-offs of auto finance contract receivables
Net charge-offs to the allowance for credit losses and nonrefundable
reserve were $27.5 million in 1997, or 19.7% of average net contract
receivables, compared to $40.1 million, or 23.0%, in 1996, and $45.5 million, or
21.2% in 1995. The relatively high level of net charge-offs in 1996 and 1995, as
compared to 1997, was primarily attributable to higher net charge-offs relating
to receivables purchased in 1995 in the Jacksonville and Dallas service centers.
The dramatic rise in delinquencies and resultant charge-offs in 1995
reflected in part the aggressive competition among buyers of installment sales
contracts that resulted in a substantial number of contracts, especially
civilian point-of-sale installment sales contracts, being purchased at prices
that, in hindsight, did not adequately reflect the credit risk of the obligor.
In response to this competition, management redirected the Company toward the
military point-of-sale and civilian portfolio purchase business lines. These
programs are focused on sectors of the market in which management believes the
pricing more closely reflects the risk inherent in the business.
Also among the factors contributing to the increase in charge-offs of
contracts purchased in 1995 was the difficulty in servicing the substantially
higher volume of installment sales contracts, specifically civilian
point-of-sale contracts which involve more risk than military point-of-sale
contracts. During 1994 and 1995, the composition of the Company's portfolio of
contract receivables shifted from predominantly military point-of-sale contracts
to civilian point-of-sale contracts. The day-to-day servicing requirements and
risks of non-payment associated with civilian point-of-sale contracts are
significantly greater than the Company's more traditional military point-of-sale
contracts. As a result of the Company's dramatic growth during 1994 and 1995,
the civilian point-of-sale contracts were not adequately serviced by the
Company's personnel. Management took action to improve the servicing of the
Company's portfolio of contract receivables. These actions included expanding
the number of Collection Department personnel assigned to troubled credits,
tripling the automatic dialing capacity of the Company through investment in two
new automatic dialers, increasing senior management involvement in the credit
decision process, closing the Southwest Regional Service Center in Dallas in
order to consolidate all servicing in the Point-of-Sale and Portfolio Service
Centers, located in Norfolk and Jacksonville, respectively, and temporarily
transferring the underwriting function of the Southern region to the Norfolk LPO
(subsequently moved to the new Jacksonville LPO). The latter action improved the
Company's control over the underwriting process by reducing the number of
locations at which contracts are purchased and increased focus on the collection
process. Unfortunately the disruptions associated with the consolidation of
servicing in late 1996 led to an increase in delinquencies and charge-offs
during the fourth quarter of 1996 and early 1997, which, in turn, combined with
the other factors mentioned in this report, caused the Company to provide an
additional $6 million reserve for credit losses as of year-end 1996.
14
<PAGE>
An additional factor which contributed to the increase in net charge-offs
on the 1995 contract portfolio was a modest tightening of the Company's
charge-off guidelines. Prior to the change in charge-off guidelines, credits on
which no payments had been received for 120 days were generally charged off when
they became 180 days contractually past due. In the second half of 1995, the
payment recency guideline was reduced from 120 days to 90 days.
Provision for credit losses on auto finance contract receivables
The Company's primary business involves purchasing installment sales
contracts at a discount to the remaining principal balance. An amount ranging
from 80 percent to 100 percent of the discount, based on experience, is held in
a nonrefundable reserve against which credit losses are first applied.
Additional provisions for credit losses, if necessary, are charged to income in
amounts considered by management to be adequate to absorb future credit losses
on the outstanding contract receivables. Improved credit quality and servicing
of the Company's auto finance contracts eliminated the need for an additional
loss provision on auto finance receivables in 1997 compared to $8.4 million in
1996 and $26.3 million in 1995. The higher provision for credit losses in 1995,
compared with 1996 and 1997, resulted from the dramatically higher level of
delinquencies and charge-offs experienced primarily on contracts purchased in
1995. The $8.4 million provision for credit losses in 1996 resulted from a $6
million provision for credit losses at year-end 1996 primarily related to
contracts purchased in 1995 that was caused by the increased fourth quarter
delinquencies and charge-offs resulting from service disruptions due to the
closing of the Southwest Regional Service Center and relocation of the servicing
of those contracts.
Provision for credit losses is dependent on a number of factors, including,
but not limited to, the level and trend of delinquencies and net charge-offs,
the amount of nonrefundable and refundable dealer reserves and the overall
economic conditions in the markets in which the Company operates. Due to the
inherent uncertainty involved in predicting the future performance of these
factors, there can be no assurance regarding the future level of provision for
credit losses.
Reserves on auto finance contract receivables
At December 31, 1997, the combination of allowance for credit losses and
nonrefundable reserve totaled $22.3 million, or 15.5%, of gross auto finance
contract receivables, net of unearned interest revenue compared to $28.2
million, or 18.7% at December 31, 1996. The decrease in reserves and in the
percentage of reserves to contract receivables in 1997 compared to 1996 is the
result of the improved credit quality and servicing. The decrease in reserves
and in the percentage of reserves to contract receivables in 1996 compared to
1995 is the result of the decrease in contract receivables outstanding in 1996
compared to 1995 and to the improved credit quality of the contracts purchased
in 1996 compared to 1995.
The Company's refundable dealer reserve decreased to $2.0 million at
December 31, 1997, compared with $2.2 million at December 31, 1996. Under
certain of the Company's programs,
15
<PAGE>
contracts from dealers are purchased under a refundable, rather than
nonrefundable reserve relationship. Under certain circumstances, the Company may
have to remit some or all of the refundable reserve back to the dealer. No such
liability exists under a nonrefundable reserve relationship. Accordingly, the
refundable reserve is carried as a liability on the Company's Consolidated
Balance Sheet and is not included in the calculation of the Company's reserve
ratio.
Consumer finance charge-offs and reserves
Net charge-offs of consumer finance contracts totaled $0.4 million or 4.00%
in 1997 compared to $0.2 million or 7.45% in 1996. The provision for credit
losses was $0.7 million in 1997 compared to $0.3 million in 1996, and the
allowance for credit losses was $0.7 million or 5.31% of outstanding gross
contract receivables at December 31, 1997, compared to $0.4 million or 4.04% of
contract receivables at December 31, 1996. Management has established the level
of the allowance that it considers to be adequate based on FCF's experience
through December 31, 1997.
16
<PAGE>
Allowance and reserves for contract receivables
<TABLE>
<CAPTION>
Years ended December 31
(dollars in thousands) 1997 1996 1995
---- ---- ----
<S> <C>
Beginning of period $ 28,575 $ 43,482 $ 29,840
Provision for credit losses 719 8,733 26,500
Charge-offs (32,556) (46,916) (48,360)
Allocation for credit losses 21,635 16,620 32,672
Recoveries 4,656 6,656 2,830
------ ------ -------
End of period $23,029 $28,575 $43,482
======= ======= =======
Average net contract receivables (a) $149,982 $180,950 $214,528
End of period net contract receivables (a) $156,693 $159,833 $221,161
Total net charge-offs as a percent of average
net contract receivables 18.60% 22.25% 21.22%
====== ====== ======
Allowance and nonrefundable reserve as a percent
of net contract receivables (period end) 14.70% 17.88% 19.66%
====== ====== ======
(a) Gross contract receivables, net of unearned interest revenue.
Net charge-offs by line of business for 1997, 1996, and 1995 were as follows:
Years ended December 31
(in thousands) 1997 1996 1995
---- ---- ----
Auto finance:
Point-of-sale $19,192 $34,064 $35,247
Portfolio 8,283 6,034 10,280
Consumer finance 425 162 3
------- ------- -------
Total $27,900 $40,260 $45,530
------- ------- -------
</TABLE>
17
<PAGE>
Delinquencies
Gross auto finance contract receivables that were 60 days or more past due
totaled $15.9 million, or 9.28% of gross auto finance contract receivables at
December 31, 1997, compared to $18.2 million, or 10.28%, at December 31, 1996.
This improvement in delinquency was the result of improved underwriting and
increased collection efforts.
Gross consumer finance receivables that were 60 days or more past due
totaled $0.4 million, or 3.1% of gross receivables at December 31, 1997,
compared to $0.3 million, or 2.8% at December 31, 1996.
Consistent with standard industry practice, the Company measures
delinquency at each month end by classifying a contract that is unpaid for two
monthly payments as 30 days delinquent and a contract that is unpaid for three
monthly payments as 60 days delinquent.
<TABLE>
<CAPTION>
Delinquency
Years ended December 31
<S> <C>
(dollars in thousands) 1997 1996 1995
---- ---- ----
Gross contract receivables
60 days and over delinquent $ 16,310 $ 18,495 $ 18,441
Gross contract receivables 184,242 187,033 271,039
Percent 8.85% 9.89% 6.80%
</TABLE>
Liquidity and Capital Resources
Liquidity management
As shown on the Consolidated Statements of Cash Flows, cash and cash
equivalents decreased by $0.7 million in 1997, to $2.0 million at December 31,
1997. The decrease reflected $4.8 million of net cash used in financing
activities and $3.3 million in net cash used in investing activities, partially
offset by $7.4 million of net cash provided by operating activities. Net cash
used for financing activities reflected a $15.8 million repayment on borrowings
on automobile receivables-backed notes, $19.5 million repayment on term notes,
and $1.3 million in repayments of other debt, offset in part by $26.3 million in
net borrowings under the Company's revolving line of credit facility and a
decrease in restricted cash of $5.5 million. Net cash used by investing
activities reflected the net cost of acquiring contract receivables in excess of
the repayments received on contract receivables.
18
<PAGE>
Net cash used for financing activities totaled $44.8 million in 1996
principally reflecting a $31.4 million repayment on borrowings on automobile
receivables-backed notes, $30.5 million repayment on term notes, and $1.3
million in repayments of other debt, offset in part by $13.5 million in net
borrowings under the Company's revolving line of credit facility. Net cash
provided by financing activities totaled $44.4 million in 1995, principally
reflecting $47.2 million increase in net borrowings on automobile
receivables-backed notes, $25.0 million in borrowings on a term note, and $7.9
million in net borrowings on other debt, offset in part by $25.3 million in net
payments under the Company's revolving line of credit facility.
The Company has subordinated debt principal payments due in June and October
1998 of $2,000,000 and $1,287,000, respectively. The Company intends to fund
these payments through cash flow from operations. These payments do however
impact the availability under the Company's primary line of credit and could
limit the Company's ability to grow its portfolio of contract receivables. With
the improved performance in 1997, the Company is committed to evaluating
alternative funding sources to increase liquidity and improve the interest
margin. The Company is currently evaluating capital resources, securitizations
participating lenders, and additional subordinated debt.
The Company's current financial condition, caused by net operating losses
in 1995 and 1996, reduces the Company's degree of access to the credit and
capital markets for new financing in the future compared to the past. Reduced
access to those markets for new financing could have a material adverse effect
on the Company's funds availability and could limit the Company's ability to
grow its portfolio of contract receivables. This, in turn, could have a material
adverse effect on the Company's operating performance in the future.
Agreements with lenders
As a result of the reported loss of $(6.5) million in 1995 and increases in
delinquencies and credit losses, the Company was in technical default under its
revolving line of credit, term note and subordinated note agreements at December
31, 1995 and throughout 1996. To resolve the situation, the Company reached
agreement with its lenders in 1996 to forbear in the exercise of their rights
and remedies relating to the technical defaults through December 31, 1996.
The new revolving line of credit agreement with its primary lender signed
in December 1996, was amended in April 1997 to correct out-of-compliance
conditions that arose as of December 31, 1996, primarily as a result of the
provision for credit losses recorded in the fourth quarter. This amended
agreement also provided for the consolidation of substantially all of the
Company's debt under its term notes into the revolving line of credit.
Pursuant to the amended revolving line of credit agreement dated April
1997, the Company's primary lender has agreed to provide a credit line of $110
million through January 1, 1999, at 30-day LIBOR plus 4.00% and total line fees
of $0.5 million for 1997 and $0.4 million for 1998. The new terms and conditions
of this agreement included less restrictive financial covenants, as well as
several additional operational and reporting requirements. In addition, the
agreement reflects a reduction in the primary advance rate available under the
facility from 80% to 76%. The agreement also grants GECC warrants to purchase a
cumulative total of approximately 1.1 million shares of the Company's common
stock at $1 per share over a 5-year period. Pursuant to its rights under the
Amended and Restated Registration Rights Agreement, GECC has demanded that the
Company register the common stock underlying their warrants. The Company intends
to file this registration statement with the SEC in April 1998.
The Company also signed an amended credit agreement relating to its
subordinated notes. The new credit agreements cured the technical defaults that
existed during 1996, but also increased the Company's funding costs by
approximately 10 basis points for 1997 compared to
19
<PAGE>
1996. The forbearance agreements executed with the Company's lenders in 1996 had
also increased funding costs by approximately 100 basis points for 1997 and 1996
compared to 1995. A complete discussion of the Company's outstanding debt is
included in Note 5 of the Notes to Consolidated Financial Statements.
On January 31, 1998, the covenant requirement related to the 60 day delinquency
calculated on a six month rolling average dropped from 14% to 13.5%. The Company
exceeded this amount by .38%. In February 1998, the revolving line of credit
agreement with the primary lender was amended. The amendment increased the
requirement to 14.5% and reduced the primary advance rate under the facility
from 76% to 73%.
Dividends
The Company did not declare dividends on its common stock during the years
ended December 31, 1997, 1996 and 1995, nor does it anticipate paying cash
dividends in the foreseeable future. If and when the Company decides to declare
cash dividends, the amount would be limited by certain provisions of the
Company's various credit agreements.
Risk Factors
In evaluating the Company, prospective investors should consider carefully
all of the information set forth throughout this Report and, in particular,
should evaluate the following risk factors.
Fluctuating Interest Rates and Dependence on Line of Credit
The Company's operations require substantial borrowing to provide funding
for the installment contracts purchased by TFC and originated by FCF.
Consequently, profitability is impacted by the difference between the rate of
interest paid on the funds it borrows and the rate of interest charged on the
installment contracts, which rate in some states is limited by law. Currently,
the principal source of borrowing by the Company is its revolving line of
credit, guaranteed by TFCEI (the "Line of Credit") with General Electric Capital
Corporation ("G.E. Capital"). The maximum amount of borrowings available under
the Line of Credit was $110 million at December 31, 1997. At December 31, 1997,
TFC had $90 million outstanding under the Line of Credit. The floating interest
rate for borrowings under the Line of Credit is equal to the average 30-day
London Interbank Offered Rate ("LIBOR") plus 4.00%. Thus, future increases in
interest rates could adversely affect the Company's profitability. In an effort
to reduce its exposure to an increase in interest rates, TFC has purchased an
interest rate cap which ensures that the interest rate on $75 million of the
borrowings under the Line of Credit will not exceed a LIBOR ceiling of 6.5%.
This interest rate cap expires September 30, 1998. In addition to the purchase
of interest rate caps, the Company believes it has certain flexibility to
increase the discount at which installment contracts are purchased, or to
increase the rate of interest charged
20
<PAGE>
on future installment contracts (to the extent not limited by state law), in
order to offset the adverse impact of any interest rate increase on
profitability.
The Finance Company has maintained a Line of Credit with G.E. Capital since
1992. The current Line of Credit was executed in December 1996, amended in April
1997, and expires January 1, 1999. There is no assurance that a new Line of
Credit will be executed when the current Line of Credit expires. If the new Line
of Credit is not executed, TFC would be required to seek alternative financing
sources and repay its outstanding balance on or before the expiration of the
current Line of Credit on January 1, 1999. No assurance can be given that
alternative financing sources would be available in such event. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resource."
Defaults on Installment Contracts
The Company is engaged primarily in purchasing installment contracts
entered into by dealers with consumers who have limited access to traditional
sources of consumer credit. The inability of an individual to finance a used
automobile purchase by means of traditional credit sources is generally due to
such individual's past credit history or insufficient cash to make the required
down payment on an automobile. As a result, installment contracts purchased by
the Company are generally with purchases of automobiles who are considered to
have a higher risk of default on an installment contract than certain other
automobile purchasers. Accordingly, the consumer loan activities engaged in by
the Company typically have a higher risk of loss than those of other consumer
financings. While the Company believes that its expertise in used automobile
financing, particularly for enlisted military personnel, enables it to evaluate
and price accurately the higher risk associated with the Company's business, a
significant economic downturn in the markets in which the Company operates could
materially increase the number of charged-off and delinquent installment
contracts experienced by TFC as compared to its historical losses. If TFC were
to experience a material increase in charge-offs or delinquencies, its
profitability could be adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Credit Losses and
Delinquency."
Dependence Upon Key Executive
The Company's growth and development to date have been largely dependent
upon the services of Robert S. Raley, Jr., Chairman of the Board, President and
Chief Executive Officer. The loss of Mr. Raley's services could have a material
adverse effect on the Company.
21
<PAGE>
Competition
There are numerous providers of financing for the purchase of used
automobiles either through the direct financing of such purchases or on an
indirect basis through a dealer. Those financing sources include commercial
banks, savings and loan associations, consumer finance companies, credit unions,
financing divisions of automobile manufacturers or automobile retailers, small
sales contract companies and other consumer lenders. Many of those providers of
automobile financing have significantly greater financial resources than TFC and
have relationships with established dealer networks. The Company has focused on
a segment of the market composed of consumers who typically do not meet the more
stringent credit requirements of the traditional consumer financing sources and
whose needs, as a result, have not been addressed consistently by such financing
sources. If, however, the other providers of consumer finance were to assert a
significantly greater effort to penetrate TFC's targeted market segment, TFC
could be materially and adversely affected.
Regulation
The Company's business is subject to regulation and licensing under various
federal, state and local statutes and regulations. The Company's business
operations are conducted in approximately 30 states and, accordingly, the laws
and regulations of such states govern the Company's operations conducted in
those states. Most states where the Company operates limit the interest rate,
fees and other charges that may be imposed by, or prescribe certain other terms
of, the contracts that the Company purchases and define the Company's rights to
repossess and sell collateral. In addition, the Company is required to be, and
is, licensed to conduct its operations in certain states. As the Company expands
its operations into other states, it will be required to comply with the laws of
such states.
An adverse change in those laws or regulations could have a material
adverse effect on the Company's profitability by, among other things, limiting
the states in which the Company may operate or the interest rate that may be
charged on installment contracts or restricting the Company's ability to realize
the value of any collateral securing contracts. The Company is not aware of any
materially adverse legislation currently pending in any jurisdiction where it
currently transacts business.
Restrictions on the Payment of Dividends
The Company currently intends to retain its earnings to finance the growth
and development of its business and, therefore, does not anticipate paying any
cash dividends in the foreseeable future. Any future dividend payments will
depend upon the financial condition, funding requirements and earnings of TFC as
well as other factors that the Company's Board of Directors may deem relevant.
As the Company is a legal entity separate and distinct from TFC and as its
revenues depend on the payment of dividends by TFC, limitations on the ability
of TFC to pay dividends to the Company will in turn limit the ability of the
Company to pay dividends to its
22
<PAGE>
stockholders. There are certain restrictions on the payment of dividends in the
form of various affirmative and negative covenants included in the TFC's Line of
Credit and the Note Purchase Agreement relating to the Subordinated
NonConvertible Notes due October 15, 1998 and the Note Purchase agreement
relating to the Senior Subordinated Notes due June 30, 2002.
Effect of Certain Charter, Bylaw and Statutory Provisions
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") and Amended and Restated
Bylaws (the "Bylaws") could delay or frustrate the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy contest
involving the Company, even if such events could be beneficial, in the short
term, to the interest of the stockholders. For example, the Certificate of
Incorporation provides for a classified Board of Directors and for certain
limitations on the calling of a special meeting of stockholders and the Bylaws
require advance notice of stockholder proposals and nominations of directors.
The Company also is subject to provisions of Delaware corporation law that
prohibit a publicly-held Delaware corporation from engaging in a broad range of
business combinations with a person who, together with affiliates and
associates, owns 15% or more of the corporation's common stock (an "interested
stockholder") for three years after the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. Those
provisions could discourage or make more difficult a merger, tender, offer or
similar transaction, even if favorable to the Company's stockholders.
Authorized Preferred and Common Stock
Pursuant to the Certificate of Incorporation, shares of preferred stock and
Common Stock may be issued in the future without further stockholder approval
and upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporation transactions, could have the effect of making
it more difficult for a third party to acquire, or effectively preventing a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of preferred
stock.
New Accounting Standards
Statement of Financial Accounting Standards No. 128 (FAS No. 128),
"Earnings per Share," replaced the calculation of primary and fully diluted
earning per share. Unlike primary earnings per share, basic earnings per share
is based only on the weighted average number of common shares outstanding,
excluding any dilutive effects of options and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share and is based
23
<PAGE>
on the weighted average number of common and common equivalent shares, including
dilutive stock options and convertible securities outstanding during the year.
Earnings per share for all periods have been restated. FAS No. 128 was adopted
in the 4th quarter of 1997.
Statement of Financial Accounting Standards (FAS No. 130), "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, FAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards (FAS No. 131), "Disclosure
about Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. FAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
FAS No. 130 and FAS No. 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Management does not anticipate the application
of FAS No. 130 and FAS No. 131 to have a significant impact on financial
disclosures.
Common Shares and Shareholder Information
The common stock of TFC Enterprises, Inc., began trading on the NASDAQ
Stock Market under the symbol TFCE on December 23, 1993, and is designated a
National Market Security. At December 31, 1997, there were approximately 2,194
registered and beneficial owners of the security. Share price information for
the years ended December 31, 1997 and 1996 is presented in the Selected
quarterly data table on the next page.
24
<PAGE>
Selected quarterly data *
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
(dollars in thousands, except Dec. Sept. June March
per share amounts) 31 31 30 31
<S> <C>
Statements of operations:
Net interest revenue $ 5,153 $4,789 $5,108 $5,248
Provision for credit losses 253 214 160 92
Other revenue 293 218 318 276
Operating expense 5,311 4,863 4,850 4,953
------ ----- ----- -----
Income (loss) before
income taxes ( 118) (70) 416 479
Provision for (benefit
income taxes
from) income taxes -- -- (283) 283
----- ----- ----- ---
income taxes
Net income (loss) $ ( 118) $ (70) $ 699 $196
======= ===== ===== ====
Net income (loss) per basic
diluted common share $(0. 01) $(0.01) $0.06 $0.02
------------ ------------- ------------ ----------------
Performance ratios:
Return on average equity NM NM 9.12% 2.62%
Return on average assets NM NM 1.87 0.51
Yield on interest earning
assets 21.62% 21.11% 21.73 21.05
Cost of interest bearing
liabilities 11.05 11.25 10.99 10.28
Net interest margin 13.70 13.01 13.63 13.35
Operating expense as a
percentage of average
interest earning assets 14.12 13.21 12.95 12.60
Total net charge-offs to
average gross contract
receivables net of
unearned interest 16.99 16.19 19.98 21.15
60 day delinquencies to
period end gross
contract receivables 8.85 8.66 8.13 9.01
Total allowance and
nonrefundable reserve to
period end gross contract
receivables net of
unearned interest 14.70 15.17 15.66 16.60
Equity to assets, period end 21.02 21.94 21.03 19.76
- ------------------------------- ------------ ------------- ------------ ----------------
Average balances:
Interest earning assets $150,480 $147,261 $149,857 $157,236
Total assets 145,395 145,002 149,380 155,144
Interest bearing liabilities 107,839 106,001 110,350 117,777
Equity 31,143 31,277 30,641 29,944
- ------------------------------- ------------ ------------- ------------ ----------------
Common stock data:
Market price range:
High $2.00 $2.06 $2.00 $2.13
Low 0.66 1.00 1.13 1.13
Average 1.34 1.48 1.54 1.56
Close 0.94 1.34 1.38 1.31
- ------------------------------- ------------ ------------- ------------ ----------------
NM - Not meaningful.
* Unaudited.
Selected quarterly data *
1996
-----------------------------------------------------
(dollars in thousands, except Dec. Sept. June March
per share amounts) 31 31 30 31
Statements of operations:
Net interest revenue $ 5,766 $6,270 $6,840 $8,157
Provision for credit losses 6,103 130 1,500 1,000
Other revenue 53 375 454 554
Operating expense 6,023 8,069 6,162 6,286
----- ----- ----- -----
Income (loss) before
income taxes (6,307) (1,554) (368) 1,425
Provision for (benefit
income taxes
from) income taxes 749 (638) (4) 685
---- ----- ---- ---
income taxes
Net income (loss) $ (7,056) $(916) $(364) $740
======== ====== ====== ====
Net income (loss) per basic
diluted common share $ (0.63) $(0.08) $(0.03) $0.07
------------ ------------ ------------- ------------
Performance ratios:
Return on average equity NM NM NM 8.02%
Return on average assets NM NM NM 1.43
Yield on interest earning
assets 20.84% 21.45% 21.56% 22.23
Cost of interest bearing
liabilities 9.58 9.68 9.60 9.48
Net interest margin 13.69 14.24 14.41 15.09
Operating expense as a
percentage of average
interest earning assets 12.44 14.53 12.98 11.63
Total net charge-offs to
average gross contract
receivables net of
unearned interest 21.36 19.11 25.81 22.66
60 day delinquencies to
period end gross
contract receivables 9.89 7.94 7.74 9.14
Total allowance and
nonrefundable reserve to
period end gross contract
receivables net of
unearned interest 17.88 15.71 17.02 18.53
Equity to assets, period end 18.83 21.14 20.61 18.95
- ------------------------------- ------------ ------------ ------------- ------------
Average balances:
Interest earning assets $168,430 $176,097 $189,828 $216,214
Total assets 168,133 177,027 187,993 209,622
Interest bearing liabilities 125,737 131,723 141,410 162,700
Equity 34,735 36,909 37,250 36,930
- ------------------------------- ------------ ------------ ------------- ------------
Common stock data:
Market price range:
High $2.75 $2.47 $4.00 $6.13
Low 0.75 1.00 1.63 1.63
Average 1.52 1.80 2.59 3.36
Close 1.63 1.50 2.38 3.93
- ------------------------------- ------------ ------------ ------------- ------------
NM - Not meaningful.
* Unaudited.
</TABLE>
25
<PAGE>
TFC Enterprises, Inc. Report of Management
Shareholders
TFC Enterprises, Inc.
The management of TFC Enterprises, Inc. is responsible for the preparation,
content, integrity, and objectivity of the following financial statements. These
financial statements have been prepared in accordance with generally accepted
accounting principles.
Management is further responsible for maintaining a system of internal controls
designed to provide reasonable assurance as to the protection of the Company's
assets and the integrity of its financial statements. This company-wide system
of controls includes written policies and procedures, proper delegation of
authority, division of responsibility, and the selection and training of
qualified personnel. Management believes that the system of internal controls
provides reasonable assurance that financial transactions are recorded properly
to permit the preparation of reliable financial statements.
The Audit Committee of the Board of Directors is comprised of three outside
directors and has the responsibility along with the Shareholders for the
selection of the independent auditors. The Audit committee meets with management
and the independent auditors to review the scope of audits and their results,
and to discuss other matters affecting the Company's internal controls and
financial reporting. The independent auditors have free access to the Audit
Committee.
Robert S. Raley, Jr. Craig D. Poppen
Chairman, President and Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer
26
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
TFC Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of TFC Enterprises,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TFC Enterprises,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Washington, D.C.
February 12, 1998
27
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
(dollars in thousands) 1997 1996
---- ----
<S> <C>
Assets
Cash and cash equivalents $ 1,975 $ 2,688
Restricted cash - 5,532
Net contract receivables 128,503 126,252
Recoverable income taxes 1,229 5,831
Property and equipment, net 2,297 2,823
Intangible assets, net 12,070 13,161
Deferred income taxes 188 188
Other assets 1,571 2,108
----- -----
Total assets $147,833 $158,583
-------- --------
Liabilities and shareholders' equity
Liabilities:
Revolving lines of credit $ 98,572 $ 72,562
Term notes - 19,464
Automobile receivables-backed notes - 15,843
Subordinated notes 11,214 12,509
Accounts payable and accrued expenses 2,841 3,960
Income taxes 2,075 2,075
Refundable dealer reserve 1,987 2,208
Other liabilities 64 100
-- ---
Total liabilities 116,753 128,721
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value, 40,000,000 shares
authorized; 11,290,308 shares issued and outstanding in
1997 and 1996 49 49
Additional paid-in capital 55,844 55,333
Retained deficit (24,813) (25,520)
-------- --------
Total shareholders' equity 31,080 29,862
------ ------
Total liabilities and shareholders' equity $147,833 $158,583
-------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<caption
Years ended December 31
(in thousands, except per share amounts) 1997 1996 1995
---- ---- ----
<S> <C>
Interest and other finance revenue $32,317 $40,484 $49,358
Interest expense 12,019 13,451 12,533
------ ------ ------
Net interest revenue 20,298 27,033 36,825
Provision for credit losses 719 8,733 26,500
--- ----- ------
Net interest revenue after provision
for credit losses 19,579 18,300 10,325
Other revenue:
Commissions on ancillary products 780 1,341 2,124
Other 325 95 168
--- -- ---
Total other revenue 1,105 1,436 2,292
Operating expense:
Salaries 9,866 12,107 12,073
Employee benefits 1,511 1,957 2,007
Occupancy 896 1,053 712
Equipment 1,253 1,379 1,117
Amortization of intangible assets 1,091 1,091 1,091
Severance benefits - 1,804 -
Restructuring charge - 590 -
Other 5,360 6,559 5,642
----- ----- -----
Total operating expense 19,977 26,540 22,642
------ ------ ------
Income (loss) before income taxes 707 (6,804) (10,025)
Provision for (benefit from) income taxes - 792 (3,564)
- --- -------
Net income (loss) $ 707 $(7,596) $(6,461)
======== ======== ========
Net income (loss) per common share:
Basic $ 0.06 $ (0.67) $ (0.57)
========== =========== ===========
Diluted $ 0.06 $ (0.67) $ (0.57)
========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Number of Additional Retained
(in thousands) Shares Common Paid-in Earnings
Outstanding Stock Capital (Deficit) Total
<S> <C>
BALANCE AT DECEMBER 31, 1994 11,281 49 54,259 (11,463) 42,845
Net loss - - - (6,461) (6,461)
Stock options exercised 3 - 20 - 20
------ ----- ------- -------- -------
BALANCE AT DECEMBER 31, 1995 11,284 49 54,279 (17,924) 36,404
Net loss (7,596) (7,596)
Issuance of stock warrants - - 423 - 423
Stock options exercised 6 - 12 - 12
Deferred compensation termination,
net of taxes of $348,000 - - 619 - 619
------ ----- ------- -------- -------
Balance at December 31, 1997 11,290 $ 49 $55,333 $(25,520) $29,862
Net income - - - 707 707
Issuance of stock warrants - - 511 - 511
------ ----- ------- -------- -------
BALANCE AT DECEMBER 31, 1997 11,290 $ 49 $55,844 $(24,813) $31,080
====== ======== ======= ========= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31
(in thousands) 1997 1996 1995
------ ------ ------
<S> <C>
Operating activities
Net income (loss) $ 707 $ (7,596) $ (6,461)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Amortization of intangible assets 1,091 1,091 1,091
Depreciation and other amortization 1,053 1,431 1,273
(Benefit from) provision for deferred
income taxes - 6,375 (2,055)
Provision for credit losses 719 8,733 26,500
(Gain) loss on disposal of assets 3 28 (7)
Changes in operating assets and liabilities:
Decrease (increase) in recoverable income
taxes 4,602 148 (3,807)
Decrease (increase) in other assets 582 1,834 (2,709)
(Decrease) increase in accounts payable and
accrued liabilities (1,119) (186) 699
Decrease in income taxes payable - - (1,968)
(Decrease) increase in refundable dealer
reserve (221) (1,042) 1,046
(Decrease) increase in other liabilities (36) 179 331
------ ------ ------
Net cash provided by operating activities 7,381 10,995 13,933
Investing activities
Net cost of acquiring contract receivables (104,342) (86,711) (153,732)
Repayment of contract receivables 101,372 122,777 95,357
Purchase of property and equipment (367) (1,639) (1,161)
Proceeds on disposal of assets 25 - 7
----------- ------------ ----------
Net cash provided by (used in) investing
activities (3,312) 34,427 (59,529)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
Years ended December 31
(in thousands) 1997 1996 1995
- --- ---------- ---- ---- ----
<S> <C>
Financing activities
Net (payments) borrowings on the
revolving lines of credit 26,280 13,510 (25,317)
Borrowings on term notes - - 25,000
Payments on term notes (19,464) (30,536) -
Borrowings on automobile
receivables - backed notes - - 49,087
Payments on automobile
receivables - backed notes (15,843) (31,408) (1,835)
Borrowings on subordinated notes - - 10,111
Payments on subordinated notes (1,287) (1,287) (2,251)
Decrease (increase) in restricted cash 5,532 4,865 (10,397)
Proceeds from stock options exercised - 12 20
Net cash (used in) provided by financing (4,782) (44,844) 44,418
------- -------- ------
Increase (decrease) in cash and cash equivalents (713) 578 (1,178)
Cash and cash equivalents at beginning of year 2,688 2,110 3,288
------ ------ ------
Cash and cash equivalents at end of year $1,975 $2,688 $2,110
====== ====== ======
Supplemental disclosures:
Interest paid $ 11,315 $12,438 $11,724
Income taxes paid - - 4,274
Noncash transactions:
Issuance of stock warrants $ 511 $ 423 -
Deferred compensation terminated
and transferred to paid-in capital - 619 -
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of significant accounting policies
Organization and business
TFC Enterprises Inc. ("TFCE") is a holding company that 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; San Diego, California and expects to open an office in
Tacoma, Washington in May 1998. FCF is involved in the direct origination and
servicing of small consumer loans. FCF operates 15 branches throughout Virginia
and North Carolina.
Principles of consolidation
The accompanying financial statements include the accounts of TFCE and its
wholly-owned subsidiaries, TFC and FCF (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and cash equivalents
Cash and cash equivalents are defined as cash and overnight repurchase
agreements, exclusive of restricted cash.
Income recognition
Interest revenue from precomputed contract receivables, simple
interest-bearing contract receivables and revenue from insurance commissions are
recognized using the interest method.
The portion of the discount arising from purchases of contract receivables
which is not considered to be nonrefundable reserve for credit losses (see
discussion below) is recorded as a dealer discount. Dealer discounts are
deferred and accreted to income using the interest method over the contractual
life of the related receivables.
Accrual of interest revenue and accretion of dealer discounts continue
until contracts are collected in full, become ninety days contractually
delinquent, or are charged off (see discussion below) consistent with practices
generally applied by consumer finance companies.
33
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of significant accounting policies (continued)
Credit losses
The Company's primary business involves purchasing installment sales
contracts at a discount to the remaining principal balance on both a portfolio
and point-of-sale basis. A portion of this discount represents anticipated
credit loss and, based upon projected loss experience, is held in a
nonrefundable reserve against which future credit losses will first be applied.
The remaining portion, if any, of the discount is recorded as dealer discount as
discussed above. Additional provisions for credit losses, if necessary, are
charged to income in amounts sufficient to maintain the combined allowance for
credit losses and nonrefundable reserve at an amount considered by management to
be adequate to absorb estimated future credit losses.
It is generally the Company's policy to charge its nonrefundable reserve
and then the allowance for credit losses for all contract receivables which are
both 180 days past due and which have had no significant payment activity for 90
days. Any amounts collected subsequent to being charged off are restored to the
allowance for credit losses. In 1995, the Company revised its charge-off policy
to the aforementioned guidelines. Prior to the change in charge-off guidelines,
credits on which no payments had been received for 120 days were generally
charged-off when they became 180 days contractually past due.
The carrying value of repossessed assets is reduced, through charge-off, to
the lower of the unpaid contract balance or anticipated liquidation proceeds,
regardless of delinquency status.
The Company's policy related to unsecured consumer contracts originated by
FCF is to charge its allowance for credit losses for all consumer finance
receivables which are 180 days past due. Any amounts collected subsequent to
being charged off are restored to the allowance for credit losses.
Property and equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation expense is computed using the straight-line method over each
asset's estimated useful life, generally five to seven years.
Intangible assets
Intangible assets consist of a purchased dealer list and goodwill, which
are being amortized using the straight-line method over periods of 15 years and
20 years, respectively. The carrying value of goodwill is reviewed on an ongoing
basis. If this review indicates that goodwill will not be fully recoverable, as
determined based on estimated undiscounted cash flows of the Company
34
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of significant accounting policies (continued)
over the remaining life of the goodwill, its carrying value will be reduced to
the recoverable amount.
Income taxes
The Company uses the liability method to account for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between the financial statement carrying amounts and the tax
basis of assets and liabilities (i.e., temporary differences) and are measured
at the enacted rates that will be in effect when these differences reverse.
Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." The overall objective of Statement No. 128 is to simplify
the calculation of earnings per share. Unlike primary earnings per share, basic
earnings per share is based only on the weighted average number of common shares
outstanding, excluding any dilutive effects of options and convertible
securities. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share and is based on the weighted average number of
common and common equivalent shares, including dilutive stock options and
convertible securities outstanding during the year. Earnings per share for all
periods have been restated.
Interest rate protection agreements
The Company purchased an interest-rate cap agreement that is designed to
limit its exposure to increasing interest rates and is designated as a hedge of
its revolving line of credit. An interest rate cap entitles the Company to
receive a payment from the counterparty equal to the excess, if any, of the
hypothetical interest expense (strike price) on a specified notional amount at a
current market interest rate over an amount specified in the agreement. The only
amount the Company is obligated to pay to the counterparty is an initial
premium. The strike price of these agreements exceeds the current market levels
at the time they are entered into. The interest rate indices specified by the
cap agreement has been and is expected to be highly correlated with the interest
rates that Company incurs on its revolving line of credit. Payments to be
received as a result of the specified interest rate index exceeding the strike
price are accrued in other assets and are recognized as a reduction of interest
expense. The cost of the agreement is included in other assets and amortized to
interest expense ratably during the life of the agreement.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts
35
<PAGE>
Notes to Consolidated Financial Statements (continued)
1. Summary of significant accounting policies (continued)
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements in order to conform with the 1997 presentation.
2. Contract receivables
The following is a summary of contract receivables at December 31:
(in thousands) 1997 1996
---- ----
Contract receivables:
Auto finance $171,356 $177,388
Consumer finance 12,886 9,645
------ -----
Gross contract receivables 184,242 187,033
Less:
Unearned interest revenue 27,549 27,200
Unearned discount 729 504
Unearned commissions 672 1,132
Unearned service fees 629 324
Payments in process 2,617 2,560
Escrow for pending acquisitions 514 486
Allowance for credit losses 684 11,730
Nonrefundable reserve 22,345 16,845
------ ------
Net contract receivables $128,503 $126,252
======== ========
The effective rate of interest earned on contract receivables was 21.60%,
22.23%, and 23.21% for the years ended December 31, 1997, 1996, and 1995,
respectively.
At December 31, 1997, contractual maturities of contract receivables were
as follows:
(in thousands)
1998 $ 89,579
1999 52,772
2000 28,537
2001 9,259
2002 4,095
-------
Gross contract receivables $ 184,242
---------
Notes to Consolidated Financial Statements (continued)
2. Contract receivables (continued)
It has been the Company's experience that a substantial portion of the
portfolio generally is prepaid before contractual maturity dates. The above
tabulation, therefore, should not be regarded as a forecast of future cash
collections.
Changes in the allowance for credit losses and nonrefundable reserve were
as follows:
(in thousands)
1997 1996 1995
---- ---- ----
Beginning Balance $ 28,575 $43,482 $ 9,840
Allocation for credit losses 21,635 16,620 32,672
Provision for credit losses 719 8,733 26,500
Charge-offs (32,556) (46,916) (48,360)
Recoveries 4,656 6,656 2,830
-------- ---------- -------
Ending Balance $ 23,029 $28,575 $43,482
======== ========== =======
3. Property and equipment
The following is a summary of property and equipment at December 31:
(in thousands) 1997 1996
---- ----
Leasehold improvements $ 209 $ 185
Computer equipment and software 3,543 3,685
Furniture and office equipment 2,028 2,105
Automobiles 143 158
------ ------
Property and equipment 5,923 6,133
Less: accumulated depreciation and amortization 3,626 3,310
------ ------
Property and equipment, net $2,297 $2,823
====== ======
Depreciation and amortization of property and equipment for the years ended
December 31, 1997, 1996, and 1995, were $0.9 million, $0.7 million, and $0.6
million, respectively.
36
<PAGE>
Notes to Consolidated Financial Statements (continued)
Note 4. Intangible assets
The following is a summary of intangible assets at December 31:
(in thousands) 1997 1996
----- ----
Goodwill $16,265 $16,265
Dealer list 4,172 4,172
Less: accumulated amortization (8,367) (7,276)
------- -------
Intangible assets, net $12,070 $13,161
======= =======
5. Debt
Debt outstanding at December 31 consisted of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
---- ----
<S> <C>
Revolving line of credit (a) $ 98,572 $ 72,562
Term Notes:
7.92% term note - 6,964
7.56% term note - 12,500
6.14% automobile receivables-backed notes - 15,843
Subordinated Notes:
Senior subordinated notes, due annually 1998 to 2002 10,000 10,000
Subordinated non-convertible notes due
1994 with final payment due 1998 (b) 1,214 2,509
to 1998, net of discount(b)
-------- --------
Total debt $109,786 $120,378
======== ========
</TABLE>
(a) The revolving line of credit is net of unamortized discount totaling $0.7
million and $0.4 million at December 31, 1997 and 1996, respectively.
(b) The subordinated non-convertible notes are net of unamortized discount
totaling $0.1 million at December 31, 1997 and 1996.
Agreements with lenders
As a result of the reported loss of $(6.5) million in 1995 and increases in
delinquencies and credit losses, the Company was in technical default under its
revolving line of credit, term note and subordinated note agreements at December
31, 1995 and throughout 1996. To resolve the
37
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
situation, the Company reached agreement with its lenders in 1996 to forbear in
the exercise of their rights and remedies relating to the technical defaults
through December 31, 1996.
The new revolving line of credit agreement with its primary lender signed
in December 1996, was amended in April 1997 to correct out-of-compliance
conditions that arose as of December 31, 1996, primarily as a result of the
provision for credit losses recorded in the fourth quarter. This amended
agreement also provided for the consolidation of substantially all of the
Company's debt under its term notes into the revolving line of credit.
Pursuant to the amended revolving line of credit agreement dated April
1997, the Company's primary lender has agreed to provide a credit line of $110
million through January 1, 1999, at 30-day LIBOR plus 4.00% and total line
fees of $0.5 million for 1997 and $0.4 million for 1998. The new terms and
conditions of this agreement include less restrictive financial covenants, as
well as several additional operational and reporting requirements. In addition,
the agreement reflects a reduction in the primary advance rate available under
the facility from 80% to 76%. The agreement also grants GECC warrants to
purchase a cumulative total of approximately 1.1 million shares of the Company's
common stock at $1 per share over a 5-year period.
The Company also signed an amended credit agreement relating to its
subordinated notes. The new credit agreements cured the technical defaults that
existed during 1996, but also increased the Company's funding costs by
approximately 10 basis points for 1997 compared to 1996. The forbearance
agreements executed with the Company's lenders in 1996 had also increased
funding costs by approximately 100 basis points for 1997 and 1996 compared to
1995.
On January 31, 1998, the covenant requirement related to the 60 day
delinquency calculated on a six month rolling average decreased from a maximum
of 14% to 13.5%. As of January 31, 1998, the Company's six month rolling average
60 day delinquency percentage was 13.88%, which exceeded the covenant
requirement. In February 1998, the revolving line of credit agreement was
amended. The amendment increased the maximum allowable delinquency percentage to
14.5% and 14.0% for the periods through June 1998 and December 1998,
respectively, and reduced the primary advance rate under the facility from 76%
to 73%.
Revolving lines of credit
In 1995, the Company's revolving line of credit facility with its primary
lender was increased from $120.0 million to $150.0 million and the contractual
term of the facility was extended through December 1996. As indicated above, the
Company signed a new loan and security agreement in December 1996, that extended
the term of the facility through December 1998,
38
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
and then signed an amended agreement in April 1997, to correct out-of-compliance
conditions that arose as of December 31, 1996. The revolving line of credit is
secured by certain contract receivables of TFC and is guaranteed by TFC. On a
daily basis, TFC remits all cash receipts relating to those receivables to the
lender. These daily cash receipts are first applied to accrued interest on the
revolving line of credit and the remainder to principal. Borrowings under the
revolving line of credit, totaled $73.0 million and $59.5 million at December
31, 1997 and 1996, respectively. The advance rate used to determine availibility
on this line is limited to a percentage of eligible collateral as specified in
this amended decreased from 80% to 76% during 1997. Unused availability under
this facility totaled $6.0 million and $11.4 million at December 31, 1997 and
1996, respectively, based on collateral in existence at that time.
Interest on the revolving line of credit is paid at a floating rate
equivalent to 30-day LIBOR plus a borrowing spread.
The borrowing spread on the Company's revolving line of credit was as
follows for the years ended December 31, 1997, 1996, and 1995:
Borrowing
Spread
-------
January 1, 1995 to September 30, 1995 1.45%
October 1, 1995 to December 31, 1995 2.25
January 1, 1996 to January 31, 1996 3.00
February 1, 1996 to December 31, 1997 4.00
For the period January 1, 1995 through September 30, 1995, the borrowing
spread was temporarily reduced to 1.45% in conjunction with negotiations with
the Company's primary lender regarding a new credit facility. These negotiations
with the Company's primary lender were terminated in June 1995. Consequently,
the borrowing spread increased as noted above.
On January 1, 1996, the borrowing spread returned to 3.00%, the level in
effect prior to the initiation of the negotiations. The borrowing spread was
increased to 4.00% effective February 1, 1996, as a result of the forbearance
agreement executed in March 1996, and continued at that rate under the new
contract and security agreement signed in December 1996 and amended in April
1997.
39
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
The average outstanding balance on the revolving line of credit totaled
$82.8 million, $60.7 million, and $98.3 million, respectively, in 1997, 1996,
and 1995. The average interest rate paid on the revolving line of credit was
9.63% in 1997, 9.23% in 1996, and 7.63% in 1995. At December 31, 1997, 1996, and
1995, respectively, one-month LIBOR was 5.71%, 5.40%, and 5.83% and the total
interest rate was 9.71%, 9.40%, and 8.08%. At December 31, 1997 the used line of
credit totaled $89.8 million.
In March 1997, the Company signed a $15 million line of credit with another
lender. At December 31, 1997, the used line of credit totaled $9.5 million. The
average outstanding balance on the revolving line of credit totaled $8.2
million. The average interest paid on the revolving line of credit was 9.50% in
1997.
7.92% Term Note
In August 1995, TFC issued a $12.5 million two-year term note. Borrowings
under the facility totaled $7.0 million and $12.5 million at December 31, 1996
and 1995, respectively. As part of the forbearance agreement relating to this
note, the interest rate on this note was increased to 9.08% effective January 1,
1996. The debt due under this note was consolidated into the revolving line of
credit in April 1997.
7.56% Term Note
In September 1995, TFC issued a $12.5 million two-year term note.
Borrowings under the facility totaled $12.5 million at December 31, 1996 and
1995. As part of the forbearance agreement relating to this note, the interest
rate on this note was increased to 8.72% effective January 1, 1996. The debt due
under this note was consolidated into the revolving line of credit in April
1997.
6.14% Automobile Receivables-Backed Notes
On December 7, 1995, TFC completed a debt financing consisting of $49.1
million of 6.14% Automobile Receivables-Backed Notes, Series 1995-A. The notes
were issued through TFC's wholly-owned bankruptcy remote receivables subsidiary,
TFC Receivables Corporation ("TRC"), and are rated "Aaa" by Moody's Investors
Service, Inc. and "AAA" by Standard & Poor's Ratings Services. The notes were
collateralized by the assets of TRC. Principal and interest payments under the
notes were guaranteed pursuant to a financial guaranty insurance policy issued
by Financial Security Assurance, Inc. In 1996, approximately $4.1 million of the
notes were prepaid. In August 1997, the notes were redeemed in whole. The
pay-out consisted of the restricted cash balance as of this date as well as an
additional $1.0 million advance from the revolving line of credit.
40
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
Senior Subordinated Notes, due 2002
In June 1995, the Company issued $10.0 million of 9.38% Senior Subordinated
Notes due June 30, 2002. Interest on the Senior Subordinated Notes is payable
semi-annually. The notes may be prepaid subject to a "make-whole " prepayment
penalty. Beginning in June 1998, annual principal payments of $2 million are due
with the final payment due June 2002. As part of the forbearance agreement
relating to this note, the interest rate on this note was increased to 10.38%
effective February 1, 1996. Under the terms of an amendment to the notes signed
in April 1997, the interest rate was increased to 10.48% effective April 1,
1997, and the holder agreed to waive the technical defaults and adjust various
financial and operational covenants.
Subordinated Non-Convertible Notes, due 1998
In conjunction with the financing of the purchase of the Company by Chicago
Holdings, Inc. on October 27, 1988, the Company issued 13.50% Subordinated
Non-Convertible Notes in the amount of $6.4 million and 13.50% Subordinated
Convertible Notes with an original principal amount of $65,000. The final
principal payment of $1.3 million is due October 1998. The 13.50% Subordinated
Non-Convertible Notes may be prepaid subject to a "make-whole" prepayment
penalty. As part of the forbearance agreement relating to this note, the
interest rate on this note was increased to 14.50% effective February 1, 1996.
Under the terms of an amendment to the notes signed in April 1997, the interest
rate was increased to 14.60% effective April 1, 1997, and the holder agreed to
waive the technical defaults and adjust various financial and operational
covenants.
The 13.50% Subordinated Convertible Notes allowed conversion into 20% of
the common stock of TFC, subject to certain antidilutive provisions, and
included a put/call option. The put/call option price was computed as 20% of the
greater of two times the net worth of TFC or six times TFC's operating profit,
as defined. The liability for the put/call option price was periodically
adjusted to reflect its current value with the changes charged to expense as
contingent interest on convertible notes. The holders exercised their put option
on October 18, 1993, and on December 31, 1993, the Company paid $5.5 million
received from the proceeds of the Company's initial public offering to discharge
this liability.
The Company originally recorded the fair market value of the put/call
option, which was $682,000, as debt discount. This discount was amortized, as an
adjustment to interest expense, over the term of the Subordinated
Non-Convertible Notes, resulting in an effective yield
41
<PAGE>
Notes to Consolidated Financial Statements (continued)
5. Debt (continued)
of 16.56%. The remaining unamortized discount related to these Notes, which
totaled $0.1 million at December 31, 1995, was amortized during 1996. During
1997, The Company recorded $0.1 million for additional discount related to the
April 1997 amendment.
Interest rate protection agreement
TFC has entered into an interest rate protection agreement (cap) that
limits TFC's exposure to increases in its borrowing cost relating to an increase
in the one-month LIBOR rate. As discussed above, LIBOR is the base rate used in
connection with the revolving line of credit. The agreement has a notional
principal amount of $75 million, a LIBOR ceiling of 6.5% and an expiration date
of September 30, 1998. The cap subjects the Company to credit risk that the
counterparty may fail to perform under the terms of the agreement.
Dividend restrictions
The Company did not declare dividends on its common stock during the years
ended December 31, 1997, 1996, and 1995, nor does it anticipate paying cash
dividends in the foreseeable future. If and when the Company decides to declare
cash dividends, the amount would be limited by certain provisions of the
Company's various credit agreements. Additionally, the various credit agreements
provide restrictions on TFC's ability to transfer funds to TFCE in the form of
dividends.
42
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. Income taxes
Significant components of deferred tax assets and liabilities were as
follows as of December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
----- ----
<S> <C>
Deferred tax assets:
Excess of book nonrefundable reserve over tax $ 8,493 $ 6,452
Excess of book allowance for credit losses over tax 259 4,588
Excess of tax over book product warranty income 51 66
Vacation accrual 67 -
Net operating loss 1,502 -
Other 95 191
---------- --------
Total deferred tax assets 10,467 11,297
Deferred tax liabilities:
Recognition of dealer discount income for book purposes
in advance of tax recognition 6,788 6,951
Temporary differences relating to intangible assets 775 888
Temporary difference relating to employee benefits 296 383
Excess of tax over book depreciation 202 227
--------- -------
Total deferred tax liabilities 8,061 8,449
Valuation allowance (2,218) (2,660)
-------- -------
Net deferred tax assets $ 188 $ 188
========= =======
</TABLE>
The following is a summary of the income tax provision (benefit) for the
years ended December 31:
(in thousands) 1997 1996 1995
---- ---- ----
Current provision (credit):
Federal $ - $(5,047) $(1,303)
State - (536) (206)
------- ------- -------
- (5,583) (1,509)
Deferred provision (credit):
Federal 372 3,332 (1,738)
State 70 383 (317)
---- ------ --------
442 3,715 (2,055)
Valuation allowance (442) 2,660 -
------ ------ --------
Total $ - $ 792 $(3,564)
========= ========= ========
43
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. Income taxes (continued)
The differences between income taxes computed at the statutory Federal rate
and actual amounts were as follows for the years ended December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
----- ----- -----
<S> <C>
Computed at statutory Federal rate $ 240 $(2,314) $(3,414)
State taxes, net of Federal tax benefit 28 (269) (345)
Amortization of intangible assets 277 277 277
Non-recognition of net operating
losscarryforw
carryforwardq
loss carryforward 510 510 -
Valuation allowance (442) 2,660 -
Other items (103) (72) (82)
-------- ------- ---------
Computed at effective rate $ - $ 792 $(3,564)
======== ======= ========
</TABLE>
At December 31, 1997, recoverable income taxes totaled $1.2 million, which
primarily consisted of state income tax refunds for amended 1993, 1994, 1995,
and 1996 returns for the carryback of the 1996 operating loss. At December 31,
1996, recoverable income taxes totaled $5.8 million, which primarily consisted
of Federal and state income tax refunds of $5.0 million related to amended tax
returns for 1993 and 1994.
At December 31, 1997, the Company had a Federal tax loss carryforward
totaling $3.6 million that expires beginning 2011. In 1993, contingent interest
on the Company's convertible notes was treated as non-deductible for Federal
income tax purposes. To the extent that the contingent interest on convertible
notes is ultimately determined to be deductible for Federal income tax purposes,
the benefit, which totals $2.1 million, will be recognized in the period that
the determination is made.
7. Employee benefit plan
The Company has a defined contribution savings plan covering all permanent
employees working 20 or more hours per week and with more than one year of
service. Under the terms of the plan, the Company matches 50% of employees'
contributions up to 10% of each employee's earnings as defined. In addition,
employees have the option of contributing additional amounts. The Company's plan
expense for 1997, 1996, and 1995 was $0.1 million, $0.2 million, and $0.2
million, respectively.
44
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Stock Plans
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "Stock Purchase
Plan"), which allows for options to be granted to employees, including eligible
officers, of the Company, TFC and any future majority-owned subsidiary to
purchase common stock. A total of 530,000 shares of common stock have been
reserved for issuance under the Stock Purchase Plan. The Company granted 110,000
options to certain eligible employees on February 28, 1994. These stock options
were fully vested at the date of grant. Approximately, 12,000 were exercised and
the remaining 98,000 expired in May 1996.
Any employee who is customarily employed for at least 20 hours per week and
more than five months per calendar year by the Company is eligible to
participate in the Stock Purchase Plan.
No employee is permitted to purchase shares under the Stock Purchase Plan
if such employee owns 5% or more of the total of the Company. In addition, no
employee is entitled to purchase more than $25,000 of common stock (based upon
the fair market value of the shares of common stock at the time the option is
granted) in any calendar year. The price at which shares of common stock were
sold under the Stock Purchase Plan was the lower of 85% of the fair market value
on the date of grant or the purchase date of such shares.
Long-term Incentive Plan
On October 27, 1994, the Company established the 1995 Long-Term Incentive
Plan ("Incentive Plan"), which provides incentive stock options, non-qualified
stock options and restricted stock for certain executives of the Company. The
options generally vest over a period of five years. A total of 1.5 million
shares of common stock have been reserved for issuance under the Incentive Plan.
The remaining 495,000 options granted at an exercise price of $11.50 under this
plan in 1995 expire on December 31, 1999. All other outstanding options expire
five years from the vesting date.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123 ("FAS No. 123"),
which also requires that the information be determined as if the Company has
accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighed-average assumptions: risk free interest rate of
6%; dividend yield of 0% for 1997 and 1996; volatility factor of the expected
market price of the Company's common stock of 0.789 for 1997 and 0.915 for 1996;
and a weighted-average expected life of the options ranging from 2 years to 10
years.
45
<PAGE>
Notes to Consolidated Financial Statements (continued)
8. Stock Plans (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's stock options. For purposes of
pro forma disclosures, the estimated fair value of the options was amortized to
expense over the options' vesting periods. The effects of applying FAS No. 123
for providing pro forma disclosures are not likely to be representative of the
effects on reported net income for future years. The Company's pro forma net
income (loss) (in thousands) and pro forma income (loss) per share based on
options issued during 1997, 1996 and 1995 were as follows:
Years ended December 31
-----------------------
1997 1996 1995
---- ---- ----
Pro forma net income (loss) $ 660 $(7,718) $(6,506)
Pro forma net income (loss) per share $ 0.06 $(0.68) $(0.58)
A summary of the activity for the Company's stock options with exercise
prices equal to the grant-date market value for the three years ended December
31 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
Under Average Under Average Under Average
Option Exercise Option Exercise Option Exercise
(In 000s) Price (In 000s) Price (In 000s) Price
-------------------------------------------------------------------------------------
<S> <C>
Outstanding at beginning of year 806 $10.11 1,368 $11.57 1,234 $11.11
Granted 300 1.26 150 1.17 180 13.87
Exercised - - (6) 1.86 (3) 8.08
Forfeited (80) 1.25 (706) 11.08 (43) 4.79
---- ----- ----
Outstanding at end of year 1,026 8.22 806 10.11 1,368 11.57
===== === =====
Exercisable at end of year 637 11.13 527 11.84 336 10.74
=== === ====
Weighted-average fair value of
options granted during the year
of options granted during
the year $0.84 $0.97 $7.22
</TABLE>
Notes to Consolidated Financial Statements (continued)
8. Stock Plans (continued)
For stock options outstanding at December 31, 1997, the range of exercise prices
and the weighted-average remaining contractual life were as follows:
<TABLE>
<CAPTION>
Stock Options Granted in
------------------------
1997 1996 1995
---- ---- ----
<S> <C>
Range of exercise prices $0.96-1.44 $1.125-1.25 $11.50-14.00
Weighted-average remaining contractual life 10 years 7.5 years 3 years
</TABLE>
9. Earnings (loss) per share
Earnings (loss) per share for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C>
Numerator:
Net income (loss) $707 $(7,596) $(6,461)
Denominator:
Denominator for basic earnings (loss) per 11,290,308 11,289,558 11,282,897
share-weighted- average shares
Effect of dilutive securities:
Employee stock options 38,477 10,371 7,612
Warrants 276,149 - -
------- - -
Dilutive potential common shares 314,626 10,371 7,612
------- ------ -----
Denominator for diluted earnings (loss) per
share-adjusted weighted-average shares
and assumed conversions 11,604,934 11,299,929 11,290,509
========== ========== ==========
Basic earnings (loss) per share $0.06 $(0.67) $(0.57)
===== ======= =======
Diluted earnings (loss) per share $0.06 $(0.67) $(0.57)
===== ======= =======
</TABLE>
46
<PAGE>
Notes to Consolidated Financial Statements (continued)
10. Commitments
The Company is obligated in 1998 to pay incentive compensation equal to
3.91%, in the aggregate, of TFC's pre-tax income, as defined, to certain key
executives. The chairman and chief executive officer is guaranteed the greater
of 3.00% or $300,000 with the remaining .91% relating to other key executives. .
In 1996, the chairman and chief executive officer voluntarily terminated
his deferred compensation agreement. Since the chairman and chief executive
officer is considered a principal shareholder of the Company, the voluntary
termination of the agreement and the resultant elimination of the Company's
obligation with respect thereto, aggregating $1.0 million ($0.62 million after
taxes), was reported as an equity contribution in 1996.
The Company conducts its business in leased facilities with terms of one to
eleven years with renewal options for additional periods. These leases are
classified as operating leases. Certain equipment, including automobiles, is
leased for terms of one to five years and is classified as operating leases.
Options to purchase are also included in certain equipment lease agreements.
Rent expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $0.9 million, $1.1 million, and $0.7 million, respectively.
Future minimum annual lease payments for property and equipment under lease
at December 31, 1997 were as follows:
(in thousands)
1998 $ 770
1999 703
2000 659
2001 418
2002 412
2003 through 2006 1,527
-----
Total $4,489
The Company is party to several legal actions which are ordinary, routine
litigation incidental to its business. The Company believes that none of those
actions, either individually or in the aggregate, will have a material adverse
effect on the results of operations or financial position of the Company.
47
<PAGE>
Notes to Consolidated Financial Statements (continued)
11. Related party transactions
As a result of the Company's 1995 net loss, a profit sharing payment
totaling $0.4 million, which was made to the Chief Executive Officer during
1995, was required to be repaid to the Company. The Company received an executed
note and recorded the required profit sharing repayment as a note receivable.
The note, totaling $0.4 million as of December 31, 1997 is non-interest bearing
and is due January 1, 1999 and provides that the Company may offset bonus
payments against principal and interest due under the note.
12. Financial instruments with off-balance-sheet risk and concentrations of
credit risks
In its normal course of business, the Company engages in consumer lending
activities with a significant number of consumers (obligors) throughout the
United States. In addition, the Company is party to certain off-balance-sheet
financial instruments, specifically an interest rate cap, which subjects the
Company to credit risk in the event market conditions cause the interest rate
cap to experience an unrealized gain and the counterparty to the transaction
should fail to honor the contract. The maximum risk of accounting loss from
these on- and off-balance-sheet financial instruments with these counterparties,
assuming all collateral is deemed worthless, is represented by their respective
balance sheet amounts and the replacement cost of the off-balance- sheet
financial instruments. At December 31, 1997, the replacement cost for the
Company's interest rate cap was immaterial.
At December 31, 1997, approximately 68% of the Company's contract
receivables portfolio is related to obligors in Texas (22%), Virginia (20%) ,
California (14%) and Florida (12%). Although the Company's contract receivables
portfolio includes consumers living throughout the United States, a substantial
portion of the obligors' ability to honor their obligations to the Company may
be dependent on economic conditions in these states. All such contracts, other
than contracts originated by FCF, are collateralized by the related vehicles.
The Company does not have any other material concentration of credit risk.
13. Estimated fair value of financial instruments
Statement of Financial Accounting Standards No. 107 (FAS No. 107),
"Disclosures about Fair Value of Financial Instruments," requires the disclosure
of the estimated fair value of on- and off-balance-sheet financial instruments.
A financial instrument is defined by FAS No. 107 as cash, evidence of an
ownership interest in an entity, or a contract that creates a contractual
obligation or right to deliver to or receive cash or another financial
instrument from a second entity on potentially favorable terms.
Fair value estimates are made at a point in time, based on relevant market
data and information about the financial instrument. FAS No. 107 specifies that
fair values should be
48
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Estimated fair value of financial instruments (continued)
calculated based on the value of one trading unit without regard to any premium
or discount that may result from concentrations of ownership of a financial
instrument, possible tax ramifications, estimated transaction costs that may
result from bulk sales or the relationship between various financial
instruments. Fair value estimates are based on judgments regarding current
economic conditions, interest rate risk characteristics, loss experience and
other factors. Many of these estimates involve uncertainties and matters of
significant judgment and cannot be determined with precision. Therefore, the
estimated fair value may not be realizable in a current sale of the instrument.
Changes in assumptions could significantly affect the estimates.
Fair value estimates exclude all non-financial assets and liabilities
including property and equipment, goodwill and other intangibles, prepaid
assets, deferred tax assets, accrued liabilities, taxes payable, and contract
loss reserves. Accordingly, the estimated fair value amounts of financial
instruments do not represent the entire value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments at December 31, 1997 and
1996:
Short-term financial instruments
The carrying amounts reported on the Company's balance sheet generally
approximate fair value for financial instruments that mature in 90 days or less,
with no significant change in credit risk. The carrying amounts approximate fair
value for cash and cash equivalents, restricted cash and certain other assets
and liabilities. Financial instruments included in other assets and liabilities
primarily include trade accounts receivable and payable. In addition, the 1995
profit-sharing receivable from employee of $0.4 million at December 31, 1997 and
1996, is included in other assets. Management believes the carrying amount for
this receivable approximates fair value.
Contract receivables
The estimated fair value of contract receivables was calculated using
market rates of return required for a portfolio purchase of contract receivables
with similar credit and interest rate characteristics. The estimated fair value
of contract receivables that did not meet the criteria for a portfolio purchase,
generally contracts that were more than 30 days past due, was calculated based
upon the liquidation value of the collateral.
Revolving lines of credit, term notes, automobile receivables-backed notes, and
subordinated notes
The estimated fair values for the revolving lines of credit, term notes,
automobile receivable- backed notes, and subordinated notes were based on
indicative market prices for debt with similar terms and remaining maturities
currently available to companies with similar credit ratings.
49
<PAGE>
Notes to Consolidated Financial Statements (continued)
13. Estimated fair value of financial instruments
Interest rate protection agreements
The estimated fair value of the Company's interest rate protection
agreements was based on market quotes at December 31, 1997 and 1996.
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C>
Financial assets:
Cash and cash equivalents $ 1,975 $ 1,975 $ 2,688 $ 2,688
Restricted cash - - 5,532 5,532
Net contract receivables 128,503 113,779 126,252 114,619
Other assets 825 825 844 844
--------- ----------- --------- -----------
Total financial assets $131,303 $116,579 $135,315 $123,683
======== ======== ======== ========
Financial liabilities:
Revolving lines of credit $ 98,572 $ 78,858 $ 72,562 $ 58,000
Term notes - - 19,464 15,600
Automobile receivables-backed notes - - 15,843 15,843
notes
Subordinated notes 11,214 6,728 12,509 7,500
Other liabilities 2,006 2,006 2,420 2,420
---------- ---------- ---------- ----------
Total financial liabilities $111,792 $ 87,592 $122,798 $ 99,363
======== ======== ======== =========
Off-balance-sheet financial instruments
Interest rate protection agreements $ 18 $ 5 $ 57 $ 6
</TABLE>
14. Bankruptcy remote subsidiary - TFC Receivables Corporation
TRC Receivables Corporation is a wholly-owned bankruptcy remote subsidiary
of TFC that was formed in May 1995 to facilitate certain asset-backed financing
transactions requiring a bankruptcy remote structure. Bankruptcy remote refers
to a legal structure in which it is expected that the applicable entity would
not be included in any bankruptcy filing by its parent or affiliates. In
December 1995, TRC issued $49.1 million of 6.14% Automobile Receivables-Backed
Notes, Series 1995-A. Proceeds from the issuance were used to purchase certain
assets from TFC, which collateralize the notes. In August 1997, TRC paid off the
6.14% Automobile Receivables- Backed Notes. The 6.14% Automobile
Receivables-Backed Notes are further discussed in Note 5 of the Notes to
Consolidated Financial Statements.
50
<PAGE>
TFC Enterprises, Inc. Directors, Officers and Shareholder Information
Board of Directors *
Robert S. Raley, Jr. (1)
Chairman of the Board,
President and Chief Executive
Officer
Walter S. Boone, Jr. (1)(2)
President, Virginia General
Investment, Inc.
Douglas E. Bywater (1)(3)
Partner, Tate &
Bywater, Ltd.
Andrew M. Ockershausen (3)
Director of Business
Development, Home
Team Sports
Phillip R. Smiley (2)
Field Services Regional
Manager, UNISYS
Linwood R. Watson (2)
Managing Principal,
Thompson, Greenspon
& Co., P.C.
(1) Member of Executive
Committee
(2) Member of Audit
Committee
(3) Member of
Compensation Committee
* As of March 1998
Executive Officers
Robert S. Raley, Jr.
Chairman of the Board,
President and Chief
Executive Officer
Craig D. Poppen
Vice President, Treasurer
and Chief Financial
Officer
Ronald G. Tray
Vice President and
Assistant Secretary
Fletcher A. Cooke
Secretary and General Counsel
Shareholder Contact
Craig D. Poppen
Vice President, Treasurer
and Chief Financial
Officer
5425 Robin Hood Road,
Suite 101B,
Norfolk, Virginia 23513
(757) 858-4054 ext. 355
FAX: (757) 858-4093
Transfer Agent and
Registrar
American Stock Transfer
& Trust Company
40 Wall Street
New York, New York
10005
Annual Meeting
The annual shareholders'
meeting will be held
Tuesday, May 12, 1998,
at 3:00 p.m. at the
Airport Hilton Hotel,
Norfolk, Virginia
Form 10-K
Copies of TFC Enterprises, Inc.'s Annual Report on Form 10-K are filed with the
Securities and Exchange Commission and may be obtained from the Shareholder
Relations Department, 5425 Robin Hood Road, Suite 101B, Norfolk, Virginia 23513
Stock Trading
TFC Enterprises, Inc. Common Stock trades on The NASDAQ Stock Market under the
symbol TFCE and is designated a National Market Security. The listing found in
most newspapers is TFCENT.
Independent
Auditors
Ernst & Young LLP
1225 Connecticut Ave.,
NW
Washington, DC 20036
Outside Corporate
Counsel
Clark & Stant
One Columbus Center
Suite 900
Virginia Beach, Virginia
23462
<PAGE>
The Finance Company Officers and Locations
The Finance
Company Officers*
Robert S. Raley, Jr.
Chairman of the Board,
President and Chief Executive
Officer
Craig D. Poppen
Executive Vice President,
Treasurer and Chief Financial
Officer
Ronald G. Tray
Executive Vice President,
Chief Operating Officer and
Assistant Secretary
Rick S. Lieberman
Senior Vice President
and Chief Lending Officer
Fletcher A. Cooke
Secretary and General Counsel
Delma H. Ambrose
Vice President
Timothy Ivey
Vice President
Kevin J. Obal
Vice President
M. Patricia Piccola
Vice President
David Hall
Assistant Vice President
Susan Barrett
Assistant Vice President
Guy H. Putman III
Assistant Vice President
* As of March 1998
Corporate Executive Office
5425 Robin Hood Road,
Suite 101B
Norfolk, Virginia 23513
(757) 858-4054
FAX: (757) 858-4093
Point-of- Sale
Service Center
5425 Robin Hood Road,
Suite 101A
Norfolk, Virginia 23513
(757) 858-1400
FAX: (757) 858-5499
Norfolk
Loan Production Office
5425 Robin Hood Road,
Suite 101A
Norfolk, Virginia 23513
(757) 858-1400
FAX: (757) 858-5499
Jacksonville
Loan Production Office
8000 Arlington Expressway,
Suite 400
Jacksonville, Florida 32211
(904) 725-5222
FAX: (904) 725-5833
Killeen
Loan Production Office
2201 South W.S. Young
Suite 105C
Killeen, Texas 76543
(254) 526-8390
FAX: (800) 221-8698
San Diego
Loan Production Office
6170 Cornerstone Court
East, Suite 260
San Diego, California
92121
(619) 546-1336
FAX: (619) 546-0360
Portfolio
Service Center
8000 Arlington
Expressway, Suite 400
Jacksonville, Florida 32211
(904) 725-5222
FAX: (904) 725-5833
Norfolk
Loan Production Office
5425 Robin Hood Road,
Suite 101A
Norfolk, Virginia 23513
(757) 858-1400
FAX: (757) 858-5499
<PAGE>
First Community Finance, Inc. Officers and Locations
First Community
Finance, Inc. Officers*
Robert S. Raley, Jr.
Chairman of the Board
and Executive Vice President
G. Kent Brooks
President and Chief
Executive Officer
Walter Owings
Vice President and Secretary
Robert Boykin
Vice President and
Assistant Secretary
Craig D. Poppen
Vice President, Treasurer and Chief
Financial Officer
* As of March 1998
Corporate Office
4900 Augusta Avenue
Suite 104
Richmond, Virginia 23230
(804)353-4900
FAX:(804)353-7818
Branches
71 S. Airport Drive
Highland Springs, Virginia
23075
(804) 737-8218
FAX: (804) 737-4135
9903 Hull Street Road
Richmond, Virginia 23236
(804) 745-3743
FAX: (804) 745-3898
2028 Nickerson Blvd.
Hampton, Virginia 23663
(757) 850-0670
FAX: (757) 850-0556
101-A North Brunswick Avenue
South Hill, Virginia 2970
(804) 447-5778
FAX: (804) 447-6077
1327-B West Broad Street
Waynesboro, Virginia 22980
(540) 946-2633
FAX: (540) 946-2601
150 Walker Street
Lexington, Virginia 24450
(540) 464-3160
FAX: (540) 464-1760
Washington Square
Shopping Center
5338-E George
Washington Memorial
Hwy.
Grafton, Virginia 23692
(757) 874-6775
FAX:(757)874-6090
1312-C West Grantham
Street Goldsboro, North
Carolina 27530
(919) 736-9912
FAX: (919) 736-9807
232 Greenville Blvd. S. E.
Greenville, North Carolina
27858
(919) 355-7540
FAX: (919) 355-0050
121 East Gordon Street
Kinston, North Carolina
28501
(919) 939-1665
FAX: (919) 939-9521
1060 Tiffany Square
Rocky Mount, North
Carolina 27802
(919) 977-0250
FAX: (919) 977-9649
3308 Bragg Boulevard
Suite 132
Fayetteville, North Carolina
28303
(910)868-9411
FAX:(910)868-9013
4119-D Arendell Street
Wellons Center
Morehead City, North
Carolina 28557
(919)247-2494
FAX:(919)247-1189
715 Gum Branch Center, Unit
#4
Jacksonville, North Carolina
28546
(910)455-8818
FAX:(910)455-9440
2326 Forest Hills Road
Wilson, North Carolina 27893
(919)234-2754
FAX:(919)234-2752
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
1. The Finance Company, a Virginia corporation (100%).
a. The Insurance Agency, Inc., a Virginia
corporation owned 100% by The Finance
Company.
b. TFC Receivables Corporation, a Virginia
corporation owned 100% by The Finance
Company.
2. First Community Finance, Inc., a Virginia corporation (100%).
3. Recoveries, Inc., a Virginia corporation (100%)
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of TFC Enterprises, Inc. of our report dated February 12, 1998, included in the
1997 Annual Report of TFC Enterprises, Inc.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-78376) pertaining to the TFC Enterprises, Inc. 1993 Employee
Stock Purchase Plan of our reports dated February 12, 1998 with respect to the
consolidated financial statements and consolidated financial statement schedule
of TFC Enterprises, Inc. incorporated by reference or included in the Annual
Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Washington, D.C.
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,975
<SECURITIES> 0
<RECEIVABLES> 151,523
<ALLOWANCES> 23,029
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,923
<DEPRECIATION> 3,626
<TOTAL-ASSETS> 147,833
<CURRENT-LIABILITIES> 109,786
<BONDS> 0
49
0
<COMMON> 0
<OTHER-SE> 31,080
<TOTAL-LIABILITY-AND-EQUITY> 147,833
<SALES> 32,317
<TOTAL-REVENUES> 33,422
<CGS> 0
<TOTAL-COSTS> 19,977
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 719
<INTEREST-EXPENSE> 12,019
<INCOME-PRETAX> 707
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 707
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
Exhibit 99.2
Report of Ernst & Young LLP, Independent Auditors, on Schedule I
We have audited the consolidated financial statements of TFC Enterprises, Inc.
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and have issued our report dated February 12, 1998. Our
audits also included the financial statement schedule listed in Item 14(a) of
this Form 10-K. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Washington, D.C.
February 12, 1998
<PAGE>
Schedule I- Financial Information of Registrant
TFC Enterprises, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
-----------------------
(dollars in thousands) 1997 1996
-------- --------
<S> <C>
Assets
Due from subsidiaries $21,967 $25,320
Intangible assets, net 12,070 13,161
Other assets 148 165
---------- ---------
Total assets $ 34,185 $ 38,646
========== ========
Liabilities and shareholders' equity
Liabilities:
Deficit in subsidiaries $ 1,644 $ 4,100
Accounts payable and accrued expenses 31 203
Income taxes payable 506 3,579
Deferred income taxes 924 902
---------- ----------
Total liabilities 3,105 8,784
Shareholders' equity:
Preferred stock, $.01 per value, 1,000,000 shares
authorized; none outstanding - -
Common stock, $.01 par value, 40,000,000 shares
authorized and 11,290,308 shares outstanding in 1997 and 1996 49 49
Additional paid-in capital 55,844 55,333
Retained deficit (24,813) (25,520)
-------- --------
Total shareholders' equity 31,080 29,862
---------- ---------
Total liabilities and shareholders' equity $ 34,185 $ 38,646
========= ========
</TABLE>
Page 1 of 3
<PAGE>
Schedule I- Financial Information of Registrant
TFC Enterprises, Inc.
Statements of Operations
Years ended December 31
-------------------------
(in thousands) 1997 1996 1995
---- ----- ----
Net interest revenue:
Interest revenue $ 346 $2,132 $3,404
Interest expense - - 30
-------- -------- ---------
Net interest revenue 346 2,132 3,374
Other revenue:
Equity in net income (loss)
of subsidiaries 1,945 (7,667) (7,241)
------- ------- --------
Total other revenue 1,945 (7,667) (7,241)
Operating expenses:
Amortization of intangible assets 1,091 1,091 1,091
Other 143 483 704
------- ------- ------
Total operating expense 1,234 1,574 1,795
------ ------ ------
Income (loss) before income taxes 1,057 (7,109) (5,662)
Provision for income taxes 350 487 799
-------- -------- -------
Net income (loss) $ 707 $(7,596) $(6,461)
======== ======== ========
Page 2 of 3
<PAGE>
Schedule I- Financial Information of Registrant
TFC Enterprises, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------
(in thousands) 1997 1996 1995
---- ---- ----
<S> <C>
Operating activities
Net income (loss) $ 707 $ (7,596) $ (6,461)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Equity in net (income) loss of subsidiaries (1,945) 7,667 7,241
Amortization of intangible assets 1,091 1,091 1,091
Provision for (benefit from) deferred income taxes 22 (108) (108)
Amortization of deferred charges - - 47
Changes in operating assets and liabilities:
Decrease (increase) in other assets 17 50 (80)
Decrease (increase) in due from subsidiaries 3,353 (2,455) (1,831)
(Decrease) increase in accounts payable and accrued
liabilities (172) 744 43
Increase (decrease) in income taxes payable (3,073) 595 (105)
------- -------- --------
Net cash used in operating activities - (12) (163)
Financing activities
Proceeds from stock options exercised - 12 20
------ ---- -------
Net cash provided by financing activities - 12 20
Decrease in cash - - (143)
Cash at beginning of year - - 143
------ ------ -------
Cash balance at end of year $ - $ - $ -
======= ======= =======
Noncash transactions:
Issuance of stock warrants $ 511 $ 423 $ -
Deferred compensation terminated and transferred to paid-in capital - 619 -
Conversion of due from subsidiaries to
equity in subsidiaries - - 20,000
</TABLE>
Page 3 of 3
