SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number 0-17832
Allstate Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1208450
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 S. Quincy Street, Arlington, VA 22206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703)931-2274
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock - No par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) 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-KSB or any amendment to this Form 10-KSB. X
-----
Revenues for year ended December 31, 1995, were $12,997,346.
The aggregate market value of the common stock held by non affiliates
as of March 20, 1996 was $12,336,280 computed by reference to the market price
at which the stock was traded on March 20, 1996.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 2,316,853 (March
20, 1996)
DOCUMENTS INCORPORATED BY REFERENCE.
NONE.
PART I
Item 1. Business
(a) Consolidation
This Form 10-KSB filing includes Allstate Financial Corporation and its
wholly owned subsidiaries. Other than Lifetime Options, Inc., a Viatical
Settlement Company, none of the Company's subsidiaries is currently engaged
in any business which could have a material effect on the Company's and its
subsidiaries' consolidated operations or financial position. Accordingly,
unless the context requires or otherwise permits, references in this Form 10-
KSB to "Company" or "Allstate" shall be references only to Allstate Financial
Corporation.
(b) Nature of Business
The Company is a specialized commercial finance company principally
engaged in providing small- to medium-sized, high risk growth companies with
capital through the discounted purchase of their accounts receivable. The
Company also makes advances to its factoring clients collateralized by
inventory, equipment, real estate and other assets (collectively,
"Collateralized Advances"). On occasion, the Company will also provide other
specialized financing structures which satisfy the unique requirements of the
Company's clients. In addition, the Company provides financial assistance to
clients in the form of guaranties, letters of credit, credit information,
receivables monitoring, collection service and customer status information.
The Company was incorporated on July 22, 1982 under the laws of the
Commonwealth of Virginia.
The Company typically enters into an accounts receivable factoring and
security agreement with each client which: (i) typically obligates the client
to sell the Company a minimum amount of receivables each month (or a minimum
amount of receivables during the term of the agreement); (ii) usually has a
term of not less than six months and, more typically, one year and (iii) is
automatically renewable. When making a Collateralized Advance, the Company
enters into such additional agreements with the client and, if appropriate,
third parties, as the Company deems necessary or desirable, based on the
type(s) of collateral securing the Collateralized Advance. The Company
purchases accounts receivable from its clients at a discount from face value
and usually requires the client's customer to make payment on the receivable
directly to the Company. The Company almost always reserves the right to seek
payment from the client in the event the client's customer fails to make the
required payment. To secure all of a client's obligations to the Company, the
Company also takes a lien on all accounts receivable of the client (to the
extent not purchased by the Company) and, whenever available, blanket liens
on all of the client's other assets (some or all of which liens may be
subordinate to other liens). When making a Collateralized Advance, the Company
almost always takes a first lien on the specific collateral securing the
Collateralized Advance. The Company may on occasion make Collateralized
Advances secured by a subordinate lien position, but only if management of the
Company determines that the equity available to the Company in a subordinate
position is adequate to secure the Collateralized Advance. The Company almost
always requires personal guaranties (either unlimited or limited to the
validity and collectibility of purchased accounts receivable) from each
client's principals. Although the Company obtains as much collateral as
possible and usually retains full recourse rights against its clients, clients
(and account debtors) may fail and there can be no assurance that the
collateral obtained and the recourse rights retained (together with personal
guaranties) will be sufficient to protect the Company against loss.
In addition to providing clients with additional working capital, the
Company believes its services enable its clients to realize improved terms on,
and broader access to, the purchase of goods and services. The Company also
believes its services benefit its clients by reducing certain of their
accounts receivable, credit, collection and bookkeeping responsibilities. In
most cases, the client's own procedures for evaluating and monitoring its
customers and receivables are less effective than those offered by the
Company. The Company believes that it can generally achieve shorter average
collection times than clients themselves would achieve and that the Company's
contacts with a client's customers can identify problems the client would not
have discovered and addressed until a later time. Through its services, the
Company can help clients to be more responsive to their customers and to
manage their businesses more efficiently. In addition, clients can devote
less manpower and resources to monitoring and collecting the accounts
receivables purchased by the Company, thus allowing them to redirect their
efforts toward the management, growth and profitability of their businesses.
Through the services it provides, the Company seeks to help its clients
achieve profitable growth, and ultimately to qualify for funding at a cost
lower than that provided by the Company. Although clients frequently
"graduate" to lower cost sources of funding, the Company believes that its
role in facilitating this transition is one of the most significant benefits
it can provide.
Lifetime Options, Inc., a Viatical Settlement Company
-----------------------------------------------------
In 1991 the Company formed Lifetime Options, Inc., a Viatical Settlement
Company ("Lifetime Options") as a wholly owned subsidiary to provide financial
assistance to individuals facing life-threatening illnesses, by the discounted
purchase of their life insurance policies. The amount of the discount is
determined by Lifetime Options based on the size of the policy being
purchased, the maximum life expectancy of the insured individual as determined
by at least one independent medical specialist, the anticipated premiums
payable with respect to the policy and Lifetime Options' expected financing
costs associated with purchasing and carrying the policy. In general, the
purchase price for a policy is between 55% and 85% of the amount of the
benefits payable under the policy. Because most of the life insurance
policies purchased by Lifetime Options are underwritten by highly rated
insurance companies (and, in many cases, backed by state guaranty funds),
Lifetime Options does not believe that credit risk is material to its
business.
Before Lifetime Options purchases a life insurance policy, the insured's
medical records are reviewed by an independent physician who provides Lifetime
Options with an opinion of the insured's life expectancy. Historically,
Lifetime Options typically required up to three independent reviews but, based
on its experience, the management of Lifetime Options no longer believes
multiple medical reviews are necessary. To date, the physician engaged by
Lifetime Options has provided life expectancies which, on average, fairly
approximate actual lifespans. However, there can be no assurance that the
physician engaged by Lifetime Options will in the future be able to perform
as he has in the past. If the physician engaged by Lifetime Options were to
systematically underestimate life expectancies or if life extending treatments
(or a cure) were found for AIDS (almost all of the life insurance policies
purchased by Lifetime Options to date have been purchased from individuals
with AIDS), there would be a material adverse effect on the earnings of
Lifetime Options. Lifetime Options relies on its independent physician to
assist in monitoring important medical advances (and potential medical
advances).
Selected Financial Data
-----------------------
The following table sets forth selected financial data for the Company and
its subsidiaries as of, and for each of the last five years ended:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Total Income $12,997 $12,030 $10,850 $11,538 $11,435
Net Income 481 148 457 3,393 2,465
Net Income per Share .16 .05 .15 1.22 1.18
Finance Receivables, net 32,671 27,503 24,674 29,971 22,349
Total Assets 44,881 41,851 36,583 39,559 26,917
Shareholders' Equity 25,730 28,121 27,974 27,343 12,326
</TABLE>
(c) The Company's Clients
The Company's clients are small- to medium-sized, high risk growth
companies with annual revenues typically between $600,000 and $50,000,000. The
Company's clients do not typically qualify for traditional bank or asset-based
financing because they are either too new, too small, undercapitalized (over-
leveraged), unprofitable or otherwise unable to satisfy the requirements of
a bank or traditional asset-based lender. Accordingly, there is a significant
risk of default and client failure inherent in the Company's business.
The following table indicates the composition of the Company's Gross
Finance Receivables (as defined below under "(d) The Company's Services") by
type of client business as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
Gross Finance Gross Finance
Business of Client Receivables Percent Receivables Percent
- - - ------------------ ------------- ------- -------------- -------
(In thousands) (In thousands)
Computer components
and software $11,049 28.4% $11,552 34.6%
Manufacturing 8,381 21.5 4,092 12.3
Publishing, direct mail
and advertising 4,652 11.9 4,013 12.0
Importing and distributing 3,923 10.0 24 0.1
Food and drug store industry 3,900 10.0 1,912 5.7
Insurance claims 2,786 7.1 2,136 6.4
Trucking and air freight 1,277 3.3 22 0.1
Construction and construction
supply 1,057 2.7 2,107 6.3
Distribution 724 1.9 - -
Graphic art 556 1.4 1,091 3.3
Engineer and health temps 347 0.9 235 0.7
Airlines 251 0.6 - -
Other 105 0.3 987 3.0
Automotive maintenance - - 990 3.0
Propane gas &
gas distribution - - 2,684 8.1
Surgical protection products - - 1,478 4.4
------- ----- ------- -----
Total $39,008 100.0% $33,323 100.0%
======= ===== ======= =====
</TABLE>
The table above reflects the composition of the Company's Gross Finance
Receivables by client industry at the dates indicated. Because the Company's
major clients tend to change significantly over time (as more fully described
below), this table is not likely to reflect the composition of the Company's
Gross Finance Receivables by client industry at other future points in time.
From time to time, a single client or single industry may account for a
significant portion of the Company's Gross Finance Receivables. As of
December 31, 1995 two clients (MGV International, Inc. and The Monroe Cable
Co., Inc. ("Monroe")) each accounted for more than 10% of the Company's Gross
Finance Receivables. Computer components and software accounted for 28.4% of
Gross Finance Receivables at December 31, 1995 and 34.6% of Gross Finance
Receivables at December 31, 1994. Two companies (Monroe and Boyd Acquisition
Co., Inc., together with its affiliate, Stateline Snacks Corp.) each accounted
for more than 10% of the Company's total income in 1995. As of December 31,
1994, a former client, Fulton Computer Products & Programming, Ltd.
("Fulton"), accounted for more than 10% of the Company's Gross Finance
Receivables and computer components and software accounted for 34.6% of Gross
Finance Receivables. Fulton also accounted for more than 10% of the Company's
total income in 1994. Although the Company carefully monitors client and
industry concentration, there can be no assurance that the risks associated
with client or industry concentration could not have a material adverse effect
on the Company.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its client would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however,
because the Company is, where necessary and appropriate, offering lower rates
than it has historically and making Collateralized Advances, it is possible
that the duration of the Company's funding relationships with its clients may
be extended. Although the Company has historically been successful in
replacing major clients, the loss of one or more major clients and an
inability to replace those clients could have a material adverse effect on the
Company.
(d) The Company's Services
The Company offers an interrelated package of financial services that meets
a variety of the funding and business needs of its clients.
Gross Finance Receivables
-------------------------
The Company's principal funding activities consist of purchasing accounts
receivable ("Factored Accounts Receivable") and the making of Collateralized
Advances and Overadvances Secured by General Liens (as defined below). "Gross
Finance Receivables" consist of Factored Accounts Receivable, Collateralized
Advances, Overadvances Secured by General Liens and Non-Earning Receivables.
See (g) Asset Quality.
Factored Accounts Receivable
----------------------------
The Company's primary funding activity is the discounted purchase of a
client's accounts receivable, typically at an initial advance to the client
equal to 70% to 90% of the face amount of the accounts receivable purchased.
The remaining 10% to 30% of the face amount of the accounts receivable
purchased is initially allocated to: (i) earned but unpaid discount (recorded
as income simultaneous with the purchase of the account receivable); (ii)
unearned discount (recorded as income at periodic intervals after the purchase
of the account receivable depending on the timing of payment) and (iii) credit
balances of factoring clients. The credit balance with respect to a
particular account receivable is generally remitted to the client when the
Company collects the account receivable in full, but the remaining unearned
discount is typically not remitted to the client until the Company has
received full payment of all accounts receivable purchased on a specific
schedule of accounts receivable. As such, the remaining unearned discount is
available to offset any uncollected payments due on other accounts receivables
purchased from the client and to offset uncollected payments due on other
types of Gross Finance Receivables or any other amounts due from the client.
The Company's range of earned discounts on Factored Accounts Receivable
purchased is from 1.3% to 12.0%. The discount rate is based on a pre-
determined sliding scale which increases over time until a Factored Account
Receivable is paid by the client's customer or repurchased by the client. The
discount rate established for the purchase of accounts receivable from a given
client depends on various considerations, such as the length of time the
accounts receivable are expected to be outstanding, the monthly volume of
accounts receivable generated by the client, the Company's anticipated
administrative costs and the perceived level of risk. The ratio of discounts
earned to Gross Finance Receivables acquired (including Gross Finance
Receivables repurchased by the Company) was approximately 5.8% for 1995.
Discounts earned include all earnings with respect to Gross Finance
Receivables. See (g) Asset Quality.
The accounts receivable factoring and security agreement between the
Company and its client typically obligates the client to sell a prearranged
monthly (or annual) volume of accounts receivable to the Company usually for
a period of not less than six months (and typically one year). The volume of
accounts receivable that the client agrees to sell is based on the client's
historical volume of accounts receivable generated and the client's growth
projections. Clients are usually charged a supplemental discount for failure
to satisfy the volume requirement. The client may, at any time upon payment
of a supplemental discount, terminate its obligation to sell additional
accounts receivable to the Company. Unless the Company is notified otherwise,
the client's obligation to sell the agreed upon volume of accounts receivable
automatically renews at the end of each term. For certain clients, a more
flexible program is available which does not require a minimum monthly sale
of accounts receivable.
Collateralized Advances
-----------------------
In addition to the purchase of accounts receivable, the Company makes
Collateralized Advances. The Company has elected to more aggressively pursue
the making of Collateralized Advances as it perceives the need by its targeted
customers for such advances and such funding is not available from many of the
Company's competitors. Prior to making any such advance, the Company, the
client and, where appropriate, third parties, enter into such additional
agreements, and the Company makes such additional public filings (if any), as
the Company deems necessary or desirable based on the type(s) of collateral
securing the Collateralized Advance. Furthermore, the Company conducts such
additional due diligence as is appropriate with respect to the client and the
type of collateral against which an advance is to be made. Advances against:
(i) equipment are typically limited to no more than 60% of forced liquidation
value; (ii) inventory are typically limited to no more than 50% of forced
liquidation value and (iii) real estate are typically limited to 60% of
current market value, less in all cases, the amount of prior encumbrances, if
any. Collateral values are determined by independent appraisers and are
reviewed periodically to determine whether loan-to-value ratios have been
maintained. When making Collateralized Advances against inventory and certain
types of equipment, the Company frequently engages a third party, at the
client's expense, to assist in monitoring the collateral. Collateralized
Advances entail different, and possibly greater, risks to the Company than the
factoring of accounts receivable. See Management's Discussion and Analysis
of Financial Condition and Results of Operations - Provision for Credit
Losses.
Overadvances Secured by General Liens
-------------------------------------
The Company may advance funds to selected clients in excess of the amounts
which would be available in accordance with the advance formulae set forth in
the agreements between the Company and its client. Such advances are usually
secured by equity (i.e., credit balances due the client and unearned
discounts) in the client's existing portfolio of Factored Accounts Receivable,
equity in other of the client's assets, other forms of collateral, including
property pledged by the client's principal(s) or accounts receivable generated
through the use of the proceeds of such secured advances (such advances,
collectively, "Overadvances Secured by General Liens"). Earned discounts on
Overadvances Secured by General Liens are usually greater than on other types
of advances and are usually required to be paid in cash no less frequently
than monthly in arrears. The principal amount thereof is typically required
to be repaid in full (either in installments or in a single, lump sum payment)
in as little as one week or as long as six months in accordance with a written
agreement between the Company and its client.
Amounts outstanding for various categories of finance receivables at the end
of the last five years are set forth in the table below.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
(In thousands)
Factored Accounts Receivable $25,170 $22,242 $22,275 $29,135 $20,189
Collateralized Advances 10,842 7,215 2,495 958 1,247
Overadvances Secured by
General Liens 1,407 279 1,340 3,524 2,649
Non-Earning Receivables 1,589 3,587 3,411 2,142 2,134
------- ------- ------- ------- -------
Gross Finance Receivables 39,008 33,323 29,521 35,759 26,219
Less: Unearned Discount (3,986) (3,309) (2,727) (4,566) (3,020)
Less: Allowance for Credit
Losses (2,351) (2,511) (2,120) (1,223) (784)
------- ------- ------- ------- -------
Finance Receivables, Net $32,671 $27,503 $24,674 $29,970 $22,415
======= ======= ======= ======= =======
</TABLE>
As reflected in the table, Gross Finance Receivables include Non-Earning
Receivables. Non-Earning Receivables are classified as such when the Company
stops accruing earned discounts on Gross Finance Receivables (other than Non-
Earning Receivables). Under certain circumstances, the Company may classify
as "Other Receivables" (as defined below under "(g) Asset Quality") Gross
Finance Receivables on which the Company has stopped accruing earned
discounts. Non-Earning Receivables may be reclassified as "Other Assets" (as
defined below under "(g) Asset Quality") on the Company's balance sheet if the
Company repossesses the collateral securing such receivables. At the time of
any such repossession, the assets repossessed are recorded at estimated fair
value at the date of repossession less estimated selling costs. See (g) Asset
Quality.
Credit Services
---------------
For a fee, the Company may use its credit standing to assist a client by
obtaining a letter of credit from a bank or issuing its own letter of
guaranty. These forms of credit enhancement are typically used by clients to
acquire finished goods to fill pre-existing orders.
The Company generally provides these services when the client: (i) has a
buyer for its products; (ii) has taken the required steps to sell the
resulting account receivable to the Company on agreed upon terms; and
(iii) has provided additional collateral to the Company to the extent the
Company deems necessary. In the typical credit enhancement transaction, the
Company maintains control over the goods from the time they are shipped until
the time they are delivered to the ultimate purchaser.
The Company may also issue guaranties to a bank to enable a client to
obtain a line of credit. In these cases, the Company obtains collateral
described below under "(h) Credit Loss Policy and Experience". The fees
charged by the Company for issuing a letter of guaranty to a bank are based
on: (i) the type and amount underlying collateral serving the guaranty; (ii)
the amount of the letter of guaranty; and (iii) the length of time that the
instrument is expected to be outstanding.
The table below sets forth the Company's outstanding commitments under
guaranties and letters of credit as of the end of each of the last five years.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
---- ---- ------ ----- ------
(In thousands)
Commitments under
guaranties and
letters of credit $727 $347 $1,794 $940 $1,498
</TABLE>
Client/Customer Information Services
------------------------------------
In addition to its funding activities, the Company: (i) advises its
clients as to potential problems with customers; (ii) provides its clients
with a monthly portfolio analysis which includes an aging of all open accounts
receivable, by customer; and (iii) supplies its clients with information as
to the creditworthiness of customers. Although the Company's agreements with
its clients do not require the Company to furnish these services, the
information provided can make it easier for a client to develop an accurate
picture of its own financial position. In addition, this information assists
the Company in its accounts receivable monitoring activities.
(e) Monitoring and Oversight
Before a client relationship is established, the Company obtains
information about the prospective client and its principals, including an on-
site review of records pertaining to the client's operations and its available
collateral. Similar on-site reviews are conducted during the year, either by
Company personnel or by independent certified public accountants or other
professionals retained by the Company. In addition, the Company arranges for
initial and periodic reviews of public records in order to monitor the filing
of any subsequent liens which could impair the value of collateral in which
the Company has an ownership or security interest.
The Company employs a legal staff, including three full-time attorneys who
prepare the documentation establishing the Company's rights with respect to
a new client and its assets, review the terms of the relationships between a
client and its customers and perform (or oversee) such other due diligence as
is appropriate for the specific transaction. Four of the Company's employees
are certified public accountants, who are responsible for the Company's
monitoring and oversight procedures.
Prior to purchasing accounts receivable with an aggregate face amount of
$10,000 or more owed by any one account debtor, the Company: (i) evaluates
that account debtor's creditworthiness, which evaluation is updated
periodically and (ii) establishes a limit on the amount of accounts receivable
owed by that particular account debtor and Company will purchase from all
clients. The Company also selectively verifies directly with account debtors
the validity and primary terms of accounts receivable to be purchased. After
purchasing accounts receivable, the Company carefully monitors whether they
are paid according to terms. If payment is due, follow-up contact is made
with the account debtor. During this follow-up contact, the Company seeks to
determine the cause of the payment delay in order to take appropriate action
at an early stage. The status of overdue accounts receivable and other
relevant information is reported to each client monthly, or sooner, if
appropriate. See (h) Credit Loss Policy and Experience.
Before making a Collateralized Advance, the Company conducts (or engages
third parties to conduct) such additional due diligence as is appropriate with
respect to the client and the type of collateral against which an advance is
to be made.
(f) Management Information Systems
The Company has developed data processing capabilities tailored to the
requirements of the Company's accounting, receivables collection, monitoring
and oversight functions. The system permits the Company to generate payment
histories and analyses with respect to clients' customers, to accumulate
accounting information and other data useful for credit analysis, to produce
information used in marketing, and to respond to account and management
inquiries. The Company's software was written specifically for the Company
and the Company believes it to be proprietary.
Although the Company believes that its computer hardware and software are
adequate for its current level of business, a completely new system with
greater capacity and more varied applications is in the final stages of
development. The new computer system was originally scheduled for completion
in late 1994. The complexity and scope of the new computer system led to
delays in the completion and implementation of the new system. Management
currently estimates that the new computer system should be fully operational
by the summer of 1996.
(g) Asset Quality
Factored Accounts Receivable Portfolio
--------------------------------------
The quality of Factored Accounts Receivable is the Company's primary
security against credit losses from its accounts receivable purchasing
activities. The Company generally does not purchase accounts receivable that
have aged significantly, except when the Company first establishes a funding
relationship with a client. Even in those circumstances, the Company will not
purchase an account receivable that is more than 90 days old unless special
circumstances lead the Company to believe that the receivable will be paid
within a reasonable time, generally not more than 60 days.
As of December 31, 1995, the Company's Gross Finance Receivables included
$25,169,997 of Factored Accounts Receivable on which approximately 2,500
entities were obligated. There is considerable variation from period to
period in the composition of account debtors and the amount of their
respective obligations to the Company. The table below provides information
about the principal account debtors obligated on Factored Accounts Receivable
(in excess of 2% of gross Factored Accounts Receivable) as of December 31,
1995 and 1994.
<TABLE>
<CAPTION>
Percent of Gross
Factored Accounts
Clients' Customers Receivable
- - - ------------------ -----------------
<S> <C> <S>
1995 1994
---- ----
Federal Government (8 agencies in 1995
and 9 in 1994) 7.0% 1.3%
KAO Information Systems 6.9 -
Office Depot 6.4 -
Comp USA 5.0 -
Professional Housewares Dist. 4.3 -
Government Technology Service 3.3 -
Bristol-Myers Squib 2.2 -
Jordan, McGrath, Case and Taylor 2.2 -
United Nations - 9.4
New York City Department of Housing
and Preservation Development - 5.2
Pemex Gas y Petroquimico - 4.9
Computer Services Corp. - 4.2
AMRE, Inc. - 2.4
</TABLE>
If the Company has not received payment on a Factored Account Receivable
within 90 days after its acquisition or if at any time prior to 90 days the
Company determines that it is unlikely to receive payment, the Company
requires the client to repay the amount the Company has advanced on the
receivable plus the amount of discount earned. This payment may be made
directly by the client from the proceeds of accounts receivables not sold by
the client or from the proceeds of accounts receivables purchased from the
client, but not yet paid to the client, or from other sources such as credit
balances or unearned discounts due the client. If follow up calls to account
debtors lead the Company to believe that a Factored Account Receivable will
be paid within a reasonable period of time, the Company may "repurchase" the
receivable. In that event, the earned discount owed on the original purchase
of the account receivable is collected from the client at the time of the
repurchase and earned discounts thereafter accrue as if the account receivable
were a newly Factored Account Receivable.
From time to time, a single account debtor or several account debtors may
be obligated on a significant portion of the Company's Gross Factored Accounts
Receivable. As of December 31, 1995, no single account debtor accounted for
more than 10% of the Company's gross Factored Accounts Receivables. Although
the Company carefully monitors account debtor concentration and regularly
evaluates the creditworthiness of account debtors, there can be no assurance
that account debtor concentration could not have a material adverse effect on
the Company.
Collateralized Advances' Portfolio
----------------------------------
As of December 31, 1995, the Company's Gross Finance Receivables included
$10,842,047 of Collateralized Advances. Prior to making such an advance, the
Company conducts additional due diligence appropriate to the type of
collateral against which such advances are to be made. In addition, the
Company carefully monitors loan-to-value ratios and may engage third parties
to assist in monitoring such collateral. Collateralized Advances secured by
fixed assets (e.g., equipment or real estate) are required to be repaid based
typically on a 36 month amortization schedule (although the amortization
schedule in certain circumstances may be significantly longer) with a final
balloon payment due not more than one year after the making of the
Collateralized Advance. If at the time the balloon payment is due the
Company's funding relationship with the client is extended, the Company will
usually continue the amortization repayment with a new balloon payment due not
more than one year after the renegotiated contract date. Collateralized
Advances secured by current assets (e.g. inventory) are subject to a daily or
weekly borrowing base formula and come due in a single, lump sum payment not
more than one year after the making of the initial such Collateralized Advance.
If at the time such payment is due the Company's funding relationship with the
client is extended, the Company will typically extend the maturity of the lump
sum payment. See (d) The Company's Services - Collateralized Advances and
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Provision for Credit Losses.
Overadvances Secured by General Liens
-------------------------------------
As of December 31, 1995, the Company's Gross Finance Receivables included
$1,407,233 of Overadvances Secured by General Liens. See (d) The Company's
Services (above) - Overadvances Secured by General Liens.
Non-Earning Receivables
-----------------------
As of December 31, 1995, the Company's Gross Finance Receivables included
$1,588,545 of Non-Earning Receivables. See (h) Credit Loss Policy and
Experience (below).
Other Receivables
-----------------
As of December 31, 1995, included on the Company's balance sheet were
$2,756,342 of "Other Receivables". Other Receivables consist primarily of
amounts receivable by the Company where the source of payment is expected to
be from legal proceedings or other collection efforts instituted against a
client's customer, guarantors and/or other third parties. Other Receivables
typically arise from the reclassification of Gross Finance Receivables. At the
time of reclassification, Other Receivables are stated at a value estimated
by management based on management's assessment of the likelihood of payment
or success on the merits, the ability of the third party(ies) to pay and other
discretionary factors. Write-downs, if any, at the time of reclassification
are charged against the allowance for credit losses. The costs of collecting
Other Receivables are generally charged to operations during the period in
which they are incurred. Management's estimates of the value of Other
Receivables are typically reviewed quarterly and as adjustments become
necessary, the effects of the change in estimates are reported in operations
in the period in which the adjustment is determined to be necessary. Other
Receivables are subject to legal and other collection processes and
contingencies over which the Company does not have exclusive control.
Accordingly, the amounts which the Company ultimately receives in payment of
Other Receivables could differ significantly from management's estimates. See
(h) Credit Loss Policy and Experience below and Management's Discussion and
Analysis of Financial Condition and Results of Operations - Provision for
Credit Losses.
Other Assets
------------
From time to time, the Company acquires assets in settlement of Finance
and Other Receivables. The assets so acquired are included in "Other Assets"
on the Company's balance sheet. As of December 31, 1995, Other Assets of
$2,049,323 were reflected on the Company's balance sheet.
Other Assets, including assets acquired in settlement of Finance and Other
Receivables consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------
<S> <C> <C>
1995 1994
---------- ----------
Assets acquired in settlement of
finance and other receivables:
Inventory held for sale $ 20,000 $ 102,508
Commercial property held for sale 862,750 697,500
Residential property held for sale 910,000 1,287,400
---------- ----------
1,792,750 2,087,408
Miscellaneous 256,573 359,675
---------- ----------
$2,049,323 $2,447,083
========== ==========
</TABLE>
Assets acquired in settlement of Finance and Other Receivables are either
under option contracts, listed with brokers or being auctioned. During 1995,
the Company wrote down inventory held for sale by $80,000 and commercial
property held for sale was written down by $487,400. One commercial property
and one residential property valued at $147,750 and $110,000, respectively,
were added to Other Assets in 1995.
Included in Commercial property held for sale and Residential property held
for sale are collateralized properties for which the Company does not hold
title, valued at $147,750 and $910,000 in 1995 and valued at $0 and $1,287,400
in 1994, respectively. The Company holds security liens against these assets
in which the client or other obligor has no equity in the collateral at its
current estimated fair value. Proceeds for repayment are expected to come only
from the sale of the collateral, and either the client or other obligor has
abandoned control of the asset or it is doubtful the client or other obligor
will rebuild equity in the collateral or repay the receivable by other means
in the foreseeable future.
The amounts the Company may ultimately recover from assets acquired in
settlement of Finance and Other Receivables could differ materially from the
amounts used in arriving at the net carrying value of the assets because of
future market factors beyond the Company's control, adversarial actions taken
by the client or other owner of the property foreclosed or changes in the
Company's strategy for recovering its investment. See (h) Credit Loss Policy
and Experience below and Management's discussion and Analysis of Financial
Condition and Results of Operations - Provision for Credit Losses.
(h) Credit Loss Policy and Experience
The Company regularly reviews its Gross Finance Receivables portfolio and
other extensions of credit to determine the adequacy of its allowance for
credit losses.
At the time an account receivable is purchased, a due date is set by
management based on the receivable's anticipated payment date. This
anticipated payment date is used to identify past due Factored Accounts
Receivable. The Company carefully monitors collections and takes follow-up
action if payment is past due. Within ninety days after the Company purchases
an account receivable which remains unpaid (or sooner if the Company deems
necessary), the Company may initiate additional actions which may involve
obtaining payment from the account debtor, requiring the client to repay the
initial advance and the amount of the earned but unpaid discount, obtaining
substitute accounts receivable from the client or charging the credit balance
due the client. In appropriate circumstances, the Company may also take
action against personal guarantors and other liens and collateral.
Gross Finance Receivables which have been identified as past due may
continue to accrue earnings if, in the opinion of management, collection of
the earnings from the account debtor, the client, guarantors or other
collateral, if any, is likely. The accrual of earned discounts is
discontinued when, in the opinion of management, the collection of additional
earnings from the account debtor, the client, guarantors or other collateral
is unlikely. The accrual of earnings was suspended on $1.6 million and $3.6
million of Gross Finance Receivables at December 31, 1995 and 1994,
respectively. If the Company concludes that it is unlikely to recover from
any of the foregoing sources the amount of its initial advance and the earned
but unpaid discount, the Company promptly increases the allowance for credit
losses or reduces the carrying value of the receivable to its estimated fair
value and makes a charge to its allowance for credit losses, in an amount
equal to the difference between the Company's investment in the receivable and
its estimated fair value. In the case of Other Receivables and Other Assets,
the accrual of earnings is usually suspended or discontinued for financial
statement purposes at the time the Other Receivable arises or the Other Asset
is acquired. As adjustments to management's estimates of the value of Other
Receivables and Other Assets become necessary, the effects of the adjustments
are either charged against valuation reserves or reported in operations in the
period in which the adjustment is determined to be necessary. See (g) Asset
Quality - Other Receivables and Other Assets. At December 31, 1995 and 1994,
the accrual of earnings was suspended on $2.7 million and $3.4 million of
Other Receivables, respectfully, and $1.8 million and $2.1 million of Other
Assets, respectfully.
Credit loss experience, the adequacy of underlying collateral, changes
in the character and size of the receivables portfolio and management's
judgment are factors used determining the provision for credit losses and in
assessing the overall adequacy of the allowance. The level of related credit
balances of factoring clients and the impact of economic conditions on the
creditworthiness of the Company's clients and account debtors are also given
consideration in determining the adequacy of the allowance. Ultimate losses
may vary from current estimates and the amount of the allowance and provision
for credit losses, may be either greater or less than actual future charge-
offs. There can be no assurance that future charge-offs will not require an
increase in the provision for credit losses which would have an adverse effect
on earnings in future periods.
To mitigate the risk of credit loss, the Company, among other things: (i)
thoroughly evaluates the collateral to be made available by each client; (ii)
usually collects its Factored Accounts Receivable directly from account
debtors, which are frequently (though not always) large, creditworthy
companies or governmental entities; (iii) purchases, or takes a first priority
security interest in, all accounts receivable of each client; (iv) takes,
whenever available, blanket liens on all of its clients' other assets and,
when making Collateralized Advances, it employs what management believes to
be conservative loan-to-value ratios based on auction or liquidation value
appraisals performed by independent appraisers; (v) almost always requires
personal guaranties (either unlimited guaranties or guarantees limited to the
validity and collectability of Factored Accounts Receivable) from its clients'
principals; and (vi) actively monitors its portfolio of Factored Accounts
Receivable, including the creditworthiness of account debtors and periodically
evaluates the value of the collateral securing Collateralized Advances.
To further mitigate possible credit losses, when the Company purchases
accounts receivable from a given client, the Company initially pays the client
an amount which is less than what is ultimately expected to be paid if such
accounts receivable are paid in full by the account debtors. The amount paid
to the client is net of the maximum discount which the Company may earn
(depending on the timing of the collection of the receivables) as well as an
additional amount which the Company uses to establish a holdback reserve
(recorded on the financial statements as credit balances of factoring
clients). If for any reason an account receivable is not paid in full, the
shortfall is charged against the holdback reserve. While the holdback reserve
with respect to a particular account receivable is generally remitted to the
client when the Company collects the receivable in full, the remaining
unearned discount is usually not remitted to the client until the Company has
received full payment on all accounts receivable purchased on a specific
schedule (a group of accounts receivable purchased from a client at a
particular time). As such, the remaining unearned discount is available to
offset any uncollected payments due on other accounts receivable purchased
from the client and to offset uncollected payments due on other types of Gross
Finance Receivables or any other amounts due from the client.
Notwithstanding the foregoing, clients (and account debtors) may fail and
the collateral available to the Company (together with personal guaranties)
may prove insufficient to protect the Company against loss. See Legal
Proceedings and Management's Discussion and Analysis of Financial Condition
and Results of Operations - Provision for Credit Losses.
The following table provides a summary of the Company's Gross Finance
Receivables, Other Receivables and Other Assets and information regarding the
allowance for credit losses for the periods indicated.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
------ ------- ------- ------- -------
(Dollars in thousands)
Gross Finance Receivables, Other
Receivables and Other Assets Data:
- - - ------------------------------------
Gross Finance Receivables $39,008 $33,323 $29,250 $35,760 $26,219
Non-Earning Receivables (also included
in Gross Finance Receivables) 1,589 3,608 3,411 2,142 2,134
Other Receivables 2,756 3,389 2,344 1,397 973
Other Assets 1,793 2,112 3,200 2,017 1,083
(excluding miscellaneous)
Allowance for credit
losses:
- - - --------------------
Balance, January 1 $2,511 $ 2,120 $ 1,223 $ 784 $ 445
Provision for credit
losses 4,982 5,359 4,858 1,361 1,885
Receivables charged off (5,194) (5,016) (4,144) (941) (1,559)
Recoveries 52 48 183 19 13
------ ------- -------- ------- ------
Balance, December 31 $2,351 $ 2,511 $ 2,120 $ 1,223 $ 784
====== ======= ======== ======= ======
Allowance for Credit Losses
as a percent of:
- - - ---------------------------
Gross Finance Receivables 6.03% 7.54% 7.25% 3.42% 2.99%
Non-Earning Receivables 148.00% 69.60% 62.15% 57.10% 36.74%
Non-Earning Receivables, Other
Receivables and Other Assets 38.30% 27.00% 23.67% 22.01% 18.71%
As a percent of the sum of Gross
Finance Receivables, Other
Receivables and Other Assets:
- - - -------------------------------
Non-Earning
Receivables 3.65% 9.29% 9.80% 5.47% 7.55%
Other Receivables 6.33% 8.73% 6.74% 3.57% 3.44%
Other Assets 4.11% 5.44% 9.20% 5.15% 3.83%
</TABLE>
See Management's Discussion and Analysis of Financial Condition and Results
of Operations - Provision for Credit Losses.
(i) Marketing
New clients are generated principally from a nation-wide referral network
of business brokers, banks, accountants, investment bankers, turnaround
managers, lawyers and independent brokers as well as from previous and
existing clients. Brokers are paid commissions calculated on the gross
earnings collected by the Company on each funded referral. Commissions and
referral fees totaled $263,100 and $155,280 in 1995 and 1994, respectively.
The increase in brokers fees in 1995 reflects the fact that a larger portion
of the Company's business in 1995 was generated by outside referral sources
as compared to 1994.
The Company employs seven full-time marketing professionals to maintain
and expand its referral network. In addition, from time to time, the Company
advertises in national and local newspapers and trade journals to increase
name recognition. The Company also increases name recognition through direct
mailings to existing and potential referral sources.
In January 1996, a wholly-owned subsidiary of the Company opened a sales
and marketing office in Los Angeles, California. The Company anticipates that
the California office will, by the second half of 1996, generate increased
business for the Company from the West Coast.
(j) Competition
Competition from banks, traditional asset-based lenders and small
independent finance companies accelerated in 1995. The Company anticipates
that competition will remain intense through all of 1996 and may continue to
exert downward pressure on pricing, especially in the Company's core factoring
business. In order to remain competitive, the Company is, where necessary and
appropriate, offering lower rates than it has historically. The Company has
also responded to increased competition (and the resulting downward pressure
on pricing in the Company's core factoring business) by putting increased
emphasis on funding relationships which include (in addition to the factoring
of accounts receivable) the making of Collateralized Advances. See (b) Nature
of Business; (g) Asset Quality and Management's Discussion and Analysis of
Financial Condition and Results of Operations - Total Income. The Company
intends to pursue this strategy. In addition, the Company believes that its
ability to respond quickly and to provide specialized, flexible and
comprehensive financial arrangements to its clients enables it to compete
effectively. Although the Company has historically been successful in
replacing major clients, competition resulting in the loss of one or more
major clients and an inability to replace those clients could have a material
adverse effect on the Company.
(k) Expansion Strategy
The Company's strategy for 1996 is to further penetrate its target market
by: (i) developing additional, active referral sources while continuing to
cultivate existing sources; (ii) identifying and marketing to new niche
markets that are currently under-serviced by competitors where the Company can
obtain higher yields on new business; (iii) expanding its marketing efforts
by establishing a direct presence in certain geographic areas of the country
which are under-serviced by either competitors or the Company; and (iv)
developing new products and programs to meet the changing needs of its
targeted market. The Company also intends to attempt to retain existing
clients as long as possible by offering new products and providing the best
service possible at competitive prices.
(l) Employees
The Company currently has 46 full-time employees, of whom 28 are employed
in providing accounts receivable and credit services (including 3 certified
public accountants), 7 are employed in marketing, 4 are in executive positions
(including one CPA and one attorney), 4 are in legal (including 2 attorneys)
and 3 are in general office capacities. The Company believes that a
substantial increase in the volume of its business would require only a
relatively modest increase in personnel. None of the Company's employees are
unionized and management considers its relations with employees to be
excellent.
(m) Termination of Sale Process
The Company had engaged Oppenheimer & Co., Inc. in the first quarter of
1995 to assist the Company in reviewing strategic alternatives to maximize
shareholder value, including the possible sale of the Company. During the
sale process, the Company received tentative offers which included deferred,
and in some cases contingent, consideration which, if realized, could have
resulted in a modest premium over the Company's then current market value.
In July 1995, the Company's Board of Directors terminated the sale process
because the Board determined that the actual consideration likely to be
received by the Company's shareholders was less than the Company's true value
and therefore not in the best interests of the Company's shareholders.
(n) Issuance of Convertible Subordinated Notes
On September 11, 1995, the Company issued an aggregate of $2,838,000 in
principal amount of Convertible Subordinated Notes due September 30, 2000 (the
"Notes") to Scoggin Capital Management, L.P. and Selig Partners, LP
(collectively, the "Scoggin Stockholders"), in exchange for 447,200 shares of
common stock of the Company owned by them. The Scoggin Stockholders: (i) have
agreed not to convert their Notes into common stock prior to March 1, 1997;
(ii) are entitled to certain demand and piggy-back registration rights; and
(iii) are entitled to nominate up to two members of the Company's Board of
Directors (depending on their level of ownership of Company securities). In
addition, on November 28, 1995, the Company commenced an exchange offer
pursuant to which the Company offered to issue to shareholders generally up
to an aggregate of $2,162,000 in additional Notes in exchange for shares of
the Company's common stock. The offer expired by its terms on January 12,
1996 and the Company issued approximately $2,160,000 in aggregate principal
amount of Notes in exchange for 338,275 shares of common stock tendered for
exchange. For a description of certain terms of the Notes, See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
Item 2. Properties
The Company's offices occupy approximately 8,000 square feet of space in
an office building in Arlington, Virginia. The Company's lease on this
property expires in December 2001. The Company believes that its present
office facilities are adequate but may need to be expanded in the near term
to accommodate the Company's continued growth. The Company has a right of
first refusal to acquire an additional, contiguous 1,500 square feet at its
present site when that space becomes available.
Item 3. Legal Proceedings
The Company is a defendant in White, Trustee v. Allstate Financial
Corporation pending in the U.S. Bankruptcy Court for the Western District of
Pennsylvania. The Company provided receivables financing and advances for
Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a
leveraged buy-out and subsequently filed a bankruptcy petition. In 1991, the
Lyon's trustee brought an action against the Company claiming, inter alia,
fraudulent transfer and breach of contract. A summary judgment was granted in
favor of the Company which reduced the fraudulent transfer claim by $1.6
million. As a consequence, the remaining fraudulent transfer claim was
approximately $1,000,000. The trustee has not actively pursued the breach of
contract claim. In late 1994, the Company reached a settlement agreement with
the Lyons trustee, subject to approval by the bankruptcy court, which would
have released the Company from all claims upon the payment of $300,000. In
connection with the settlement, the Company paid and added $300,000 to the
provision for credit losses in 1994. A creditor in the bankruptcy proceeding,
Sherwin-Williams Company, objected to the proposed settlement amount and, in
March 1995, the objection was sustained by the bankruptcy court. The Company
has appealed the order sustaining the objection. The appeal is currently
pending. Management does not believe the Company has a material exposure in
excess of the previously agreed upon and paid settlement amount.
In connection with the same transaction, the Company was also named in
January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et.
al. pending in the United States District Court for the Northern District of
Ohio. Sherwin-Williams is suing all parties with any involvement in the
transaction to recover damages allegedly incurred by Sherwin-Williams in
connection with the leveraged buy-out and the bankruptcy litigation arising
therefrom. Sherwin-Williams asserts that it has or will incur pension fund
liabilities and other liabilities as a result of the transaction in the
approximate amount of $11 million and has asserted claims against the Company
in that amount. The complaint seeks relief against the Company based upon a
claim of "misrepresentation" without a specific identification of the alleged
misrepresentation made by the Company. Management does not believe the
litigation will have a material effect on the financial position or results
of operations of the Company because, in management's opinion, the claims are
without merit. The Company has filed a motion to dismiss the claims and a
motion to stay discovery pending a ruling on the motion to dismiss. The
motion to stay discovery has been granted and the motion to dismiss is
currently pending. A hearing date on the motion to dismiss has not yet been
set.
The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee v.
Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court
in the District of Massachusetts. The Company factored the accounts
receivable of Clearpoint Research Corporation ("CRC") from late 1992 through
early 1993. In July 1993 CRC filed a petition in bankruptcy, after the
Company had collected all amounts owed to it. The bankruptcy trustee has sued
the Company seeking recovery of alleged preferential transfers made during the
course of the factoring relationship. The bankruptcy trustee alleges that the
Company did not properly perfect its security interest in the accounts
receivable. No specific damage amount is specified in the complaint but it
is assumed the bankruptcy trustee is seeking recovery of the full amount of
accounts receivables collected (approximately $4 million). The Company has
filed an answer to the complaint denying the substantive allegations asserted
by the bankruptcy trustee. The Company has also filed a motion to remove the
action to federal district court. The motion is currently pending. The
Company believes it has a number of strong defenses to the complaint and
intends to vigorously defend all claims. The litigation is in a preliminary
stage and the probability of an unfavorable outcome and the potential amount
of loss, if any, cannot be determined or estimated at this time.
As previously disclosed in the Company's Form 10-QSB for the quarter ended
March 31, 1995, the Company has reached a settlement with the Trustee in the
bankruptcy of Premium Sales Corporation, a former client of one of the
Company's wholly-owned subsidiaries. The settlement required the Company and
one of its wholly-owned subsidiaries to waive claims totalling approximately
$1.5 million and to make a cash payment of $1.4 million. On July 21, 1995, the
Company placed the full cash settlement amount in escrow in accordance with
the terms of the settlement. The settlement is intended to be a full release
of any and all claims between the Company (and its subsidiaries) and the
Trustee including, without limitation, any alleged preference liability of the
Company and its subsidiaries. The settlement was approved by the bankruptcy
court in January 1996. The settlement will become fully effective and the
settlement monies will be disbursed at the time a plan of distribution in the
Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The
impact of this settlement has been reflected in the Company's financial
statements.
Except as described above, the Company is not party to any litigation
other than routine proceedings incidental to its business, and the Company
does not expect that these proceedings will have a material adverse effect on
the Company. From time to time, the Company is required to initiate
litigation to collect amounts owed by former clients, guarantors or obligors.
In connection with such litigation, the Company periodically encounters
counterclaims by defendant(s) for material amounts. Such counterclaims are
typically without any factual basis and, management believes, are usually
asserted for defensive purposes by the litigant.
Item 4. Submission of Matters To A Vote Of Security Holders
(a) The Company's annual meeting of shareholders was held on
November 1, 1995.
(b) The shareholders voted as follows:
<TABLE>
<CAPTION>
Number of Number of Number
Votes for of Votes of Votes
Election Withheld Abstained
-------- -------- ---------
<S> <C> <C> <S>
Eugene Haskin 2,550,407 74,050 -0-
David Campbell 2,622,907 1,550 -0-
Craig Fishman 2,550,407 74,050 -0-
Alan Freeman 2,550,407 74,050 -0-
William Savage 2,622,907 1,550 -0-
James Spector 2,550,407 74,050 -0-
Lawrence Winkler 2,550,407 74,050 -0-
</TABLE>
Part II
Item 5. Market For The Registrant's Common Stock, Related
Stockholder Matters
The Company's common stock is traded on the NASDAQ National Market System
(Symbol ASFN).
The following table sets forth the range of representative high and low
bids for the Company's common stock in the over the counter market for the
period indicated, as furnished by the National Association of Securities
Dealers, Inc. These bids represent prices among dealers, do not include
retail markups, markdowns or commissions, and may not represent actual
transactions.
<TABLE>
<CAPTION>
Common Stock Bid Prices
Fiscal year ended December 31,
----------------------------------------------------------------
1995 1994 1993
---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
High Low High Low High Low
------ ------ ----- ------- ------ ------
First Quarter 7 3/16 5 9/16 7 1/8 5 3/8 19 1/4 10 1/4
Second Quarter 8 6 1/4 6 5/8 4 5/8 13 1/2 10 3/8
Third Quarter 7 1/2 5 1/2 6 5/8 5 11/16 13 3/4 4 7/8
Fourth Quarter 6 5 6/16 6 7/8 6 7 1/2 5 5/8
</TABLE>
On March 19, 1996 there were approximately 54 stockholders of record based
on information provided by the Company's transfer agent. The number of
stockholders of record does not reflect the actual number of individual or
institutional stockholders of the Company because certain stock is held in the
name of nominees. Based on the best information made available to the Company
by the transfer agent, there are approximately 849 holders of the Company's
common stock.
The Company currently intends to retain earnings for future capital
requirements and growth. The Company has not paid a dividend and does not
anticipate paying cash dividends to holders of its common stock for the
foreseeable future.
In January 1996 the Company consummated and exchange offer to holders of
its common stock. See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
Item 6. Management's Discussion And Analysis of Financial
Condition and Results of Operations
General
The Company's principal business is the discounted purchase of accounts
receivable, usually on a full recourse, full notification basis. In addition,
the Company also makes Collateralized Advances. The Company has elected to
more aggressively pursue the making of Collateralized Advances as it perceives
the need by its targeted customers for such advances and such funding is not
available from many of the Company's competitors. On occasion, the Company
will also provide other specialized financing structures which satisfy the
unique requirements of the Company's clients. The Company also provides its
clients with letters of guaranty, arranges for the issuance of letters of
credit for its clients and provides other related financial services.
The Company's clients are small- to medium-sized businesses with annual
revenues typically ranging between $600,000 and $50,000,000. The Company's
clients do not typically qualify for traditional bank or asset-based financing
because they are either too new, too small, undercapitalized (or over-
leveraged), unprofitable or otherwise unable to satisfy the requirements of
a bank or traditional, asset-based lender. Accordingly, there is a
significant risk of default and client failure inherent in the Company's
business. The Company addresses these risks in various ways, including: (i)
the Company thoroughly evaluates the collateral to be made available by each
client; (ii) the Company collects its Factored Accounts Receivable directly
from account debtors, which are frequently (though not always) large,
creditworthy companies or governmental entities; (iii) the Company purchases,
or takes a first priority security interest in, all accounts receivable of
each client; (iv) the Company takes, whenever available, blanket liens on all
of its clients' other assets and, when making Collateralized Advances, the
Company employs what management believes to be conservative loan-to-value
ratios based on auction or liquidation value appraisals performed by
independent appraisers; (v) the Company almost always requires personal
guaranties (either unlimited guaranties or validity guaranties limited to the
validity and collectability of Factored Accounts Receivable) from its clients'
principals; (vi) the Company actively monitors its portfolio of Factored
Accounts Receivable, including the creditworthiness of account debtors and
periodically evaluates the value of other collateral securing Collateralized
Advances and (vii) the Company maintains loss reserves which management
believes are adequate and appropriate for its business. Notwithstanding the
foregoing, clients (and account debtors) may fail and the collateral available
to the Company (together with personal guaranties) may prove insufficient to
protect the Company against loss.
Continuing competition within the marketplace from banks, asset-based
lenders and newly created financing companies have encroached upon the
Company's potential client base and have negatively affected earned discounts
on Factored Accounts Receivable. Additionally, the Company has attracted
larger clients which often increases the amount of time needed to negotiate
and fund new business. Also, Collateralized Advances require more in-depth
and diverse due diligence which can further delay the funding of new business.
Nonetheless, the Company believes that its ability to respond quickly and to
provide specialized, flexible and comprehensive financing structures to its
clients enables it to compete effectively. In order to remain competitive,
the Company is, where necessary and appropriate, offering lower rates than it
has historically. Although the Company's total income increased by 8.0% in
1995 over 1994, the Company believes that increased competition will continue
for the foreseeable future and will continue to exert downward pressure on
pricing, especially in the Company's core factoring business. To counter the
downward pressure on pricing, the Company intends to continue to diversify its
sources of income, primarily by continuing to place emphasis on funding
relationships which include (in addition to the factoring of accounts
receivable) the making of Collateralized Advances.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its clients would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however,
because the Company is, where necessary and appropriate, offering lower rates
and making Collateralized Advances, it is possible that the duration of the
Company's funding relationships with its clients may be extended. Even if the
Company succeeds in extending the duration of its funding relationship with
its clients, there will not be a corresponding increase in non-current assets
on the Company's balance sheet. This is because it is anticipated that the
Company's funding relationships with its clients will continue to renew no
less frequently than once a year. Although the Company has historically been
successful in replacing major clients, the loss of one or more major clients
and an inability to replace those clients could have a material adverse effect
on the Company.
Lifetime Options, a wholly-owned subsidiary of the Company, provides
financial assistance to individuals facing life-threatening illness by
purchasing their life insurance policies at a discount from face value. The
amount of the discount is determined by Lifetime Options based on the size of
the policy being purchased, the maximum life expectancy of the insured, the
amount of the anticipated premiums payable with respect to the policy being
purchased and the anticipated financing cost associated with purchasing and
carrying the policy. In general, the purchase price for a policy is between
55% and 85% of the benefits payable under the policy. Because most of the
life insurance policies purchased by Lifetime Options are underwritten by
highly rated insurance companies (and, in many cases, backed by state guaranty
funds), the management of Lifetime Options believes that credit risk is not
material to its business.
Before purchasing each policy, Lifetime Options has each insured's medical
records reviewed by at least one independent physician who provides Lifetime
Options with an opinion of the insured's life expectancy. Historically,
Lifetime Options typically required up to three independent reviews but, based
on its experience, the management of Lifetime Options no longer believes
multiple medical reviews are necessary. To date, the physicians engaged by
Lifetime Options have provided life expectancies which, on average, fairly
approximate actual lifespans. However, there is no assurance that the
physician engaged by Lifetime Options will in the future be able to perform
as he has in the past. If the physician(s) engaged by Lifetime Options were
to systematically underestimate life expectancies or if life extending
treatments (or a cure) were found for AIDS (almost all of the life insurance
policies purchased by Lifetime Options to date have been purchased from
individuals with AIDS), there would be a material adverse effect on the
earnings of Lifetime Options. Lifetime Options relies on its independent
physician to assist in monitoring important medical advances (and potential
medical advances).
Other than Lifetime Options, none of the Company's subsidiaries is
currently engaged in business which could have a material effect on the
Company.
Results of Operations
The following tables sets forth certain items of income and expense for the
periods indicated and indicates parenthetically the percentage relationship
of each item to total income.
<TABLE>
<CAPTION>
Consolidated Quarterly Summary of Operations
---------------------------------------------------------
1995
---------------------------------------------------------
<S> <C> <C> <C> <C>
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ---------- ---------- ----------
Income:
Earned Discount $3,055,687 $2,578,345 $2,420,653 $2,877,646
Fees and Other
Income 408,619 600,245 649,726 406,425
---------- ---------- ---------- ----------
Total Income 3,464,306 3,178,590 3,070,379 3,284,071
---------- ---------- ---------- ----------
Expenses:
Compensation and
Fringe Benefits 852,787 785,161 753,069 807,480
General and
Administration 776,522 642,766 730,759 608,238
Interest Expense 353,885 205,307 166,020 258,506
Provision for
Credit Losses 2,211,046 859,000 610,500 1,301,100
Commissions 63,455 64,928 72,846 61,871
---------- ---------- ---------- ----------
Total Expenses 4,257,695 2,557,162 2,333,194 3,037,195
---------- ---------- ---------- ----------
Income/(Loss) Before
Income Taxes (793,389) 621,428 737,185 246,876
Income Taxes/(Benefit) ( 260,200) 228,700 271,500 91,000
---------- ---------- ---------- ----------
Net Income/(Loss) $ (533,189) $ 392,728 $ 465,685 $ 155,876
========== ========== ========== ==========
Net Income / (Loss)
Per Share $ (.20) $ .13 $ .15 $ .05
========== ========== ========== ==========
Weighted Average
Number of Shares 2,655,128 3,009,971 3,102,328 3,102,328
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Consolidated Quarterly Summary of Operations
------------------------------------------------------
1994
------------------------------------------------------
<S> <C> <C> <C> <C>
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------ ---------- ---------- ----------
Income:
Earned Discount $ 3,284,431 $2,412,890 $2,278,236 $1,972,121
Fees and Other
Income 659,442 689,119 409,675 324,084
------------ ---------- ---------- ----------
Total Income 3,943,873 3,102,009 2,687,911 2,296,205
------------ ---------- ---------- ----------
Expenses:
Compensation and
Fringe Benefits 849,368 754,546 713,986 678,129
General and
Administration 1,053,496 552,813 586,381 481,269
Interest Expense 206,364 239,175 91,360 73,632
Provision for
Credit Losses 3,873,518 613,515 508,771 363,355
Commissions 75,051 31,403 23,585 25,241
------------ ---------- ---------- ----------
Total Expenses 6,057,797 2,191,452 1,924,083 1,621,626
------------ ---------- ---------- ----------
Income/(Loss) Before
Income Taxes (2,113,924) 910,557 763,828 674,579
Income Taxes/(Benefit) (777,900) 335,400 280,000 250,000
----------- ---------- ---------- ----------
Net Income/(Loss) $(1,336,024) $ 575,157 $ 483,828 $ 424,579
=========== ========== ========== ==========
Net Income / (Loss)
Per Share $ (.44) $ .19 $ .16 $ .14
=========== ========== ========== ==========
Weighted Average
Number of Shares 3,102,328 3,102,328 3,102,328 3,102,328
=========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- ---------------------
INCOME PERCENT INCOME PERCENT INCOME PERCENT
----------- ------- ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Earned Discounts $10,932,331 84.1% $ 9,947,678 2.7% $ 9,423,845 86.9%
Fees and Other Income 2,065,015 15.9 2,082,320 17.3 1,426,586 13.1
----------- ----- ----------- ----- ----------- -----
TOTAL INCOME 12,997,346 100.0 12,029,998 100.0 10,850,431 100.0
----------- ----- ----------- ----- ----------- -----
EXPENSES:
Compensation and Fringe Benefits 3,198,497 24.6 2,996,029 25.0 2,950,471 27.2
General and Administrative Expenses 2,758,285 21.2 2,673,959 22.2 1,961,941 18.1
Interest Expense 983,718 7.6 610,531 5.1 243,251 2.2
Provision of Credit Losses 4,981,646 38.4 5,359,159 44.5 4,858,235 44.8
Commissions 263,100 2.0 155,280 1.3 113,814 1.0
----------- ----- ----------- ----- ----------- -----
TOTAL EXPENSES 12,185,246 93.8 11,794,958 98.1 10,127,712 93.3
----------- ----- ----------- ----- ----------- -----
INCOME BEFORE TAXES 812,100 6.2 235,040 1.9 722,719 6.7
INCOME TAXES 331,000 2.5 87,500 .7 266,000 2.5
----------- ----- ----------- ----- ----------- -----
NET INCOME $ 481,100 3.7% $ 147,540 1.2% $ 456,719 4.2%
=========== ===== =========== ===== =========== =====
NET INCOME PER SHARE $ 0.16 $ 0.05 $ 0.15
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 2,966,330 3,102,328 3,116,460
=========== =========== ===========
</TABLE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total Income. Total income consists of (i) earned discounts and (ii) fees
and other income. "Earned discounts" consist primarily of income from the
purchase of accounts receivable and life insurance policies and income from
Collateralized Advances. "Fees and other income" consist primarily of closing
or application fees, commitment or facility fees, other related financing fees
and supplemental discounts paid by clients who do not sell the minimum volume
of accounts receivable required by their contracts with the Company (including
as a result of "graduating" to a lower cost source of funding).
The following table breaks down total income by type of transaction for the
periods indicated and the percentage relationship of each type of transaction
to total income.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------
1995 1994
------------------------ -----------------------
Earned % of Total Earned % of Total
Income Income Income Income
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Discount on Factored Accounts
Receivable $ 6,155,374 47.4% $ 7,572,913 63.0%
Earnings on Collateralized
Advances 2,930,731 22.5 1,195,772 9.9
Earnings on Purchased Life
Insurance Policies 947,731 7.3 605,111 5.0
Other Earnings 898,495 6.9 573,882 4.8
----------- ----- ----------- -----
Total 10,932,331 84.1 9,947,678 82.7
Fees and Other Income 2,065,015 15.9 2,082,320 17.3
----------- ----- ----------- -----
Total Income $12,997,346 100.0% $12,029,998 100.0%
=========== ===== =========== =====
</TABLE>
Total income rose 8.0% in 1995 over 1994, from $12.0 million to $13.0
million. Earned discounts from Factored Accounts Receivable decreased 18.7% in
1995 as compared to 1994, from $7.6 million to $6.2 million. Earned discounts
from Factored Accounts Receivable in 1995 as a percentage of total Factored
Accounts Receivable purchased in 1995 were 4.25%. The comparable percentage
in 1994 was 4.61%, a decrease of 7.8% from 1994 to 1995. This reduction
reflects the downward pressure on pricing from competition in the Company's
core factoring business. In 1995 and 1994, earned discounts from Factored
Accounts Receivable comprised 47.4% and 63.0%, respectively, of total income.
These percentages reflect lower average earned discounts from the Company's
core factoring business due to competition and management's decision to pursue
and increase the making of Collateralized Advances, in addition to the
Company's core factoring business.
Earned discounts from Collateralized Advances increased 145.1% in 1995 over
1994, from $1.2 million to $2.9 million. In 1995 and 1994, earned discounts
from Collateralized Advances comprised 22.5% and 9.9%, respectively, of total
income. These changes again reflect management's decision to pursue the
making of Collateralized Advances, in addition to the Company's core factoring
business. Collateralized Advances currently bear interest at a rate, on
average, of approximately 2% per month calculated generally on the highest
outstanding amount of the Collateralized Advance during the month. Earned
discounts from Collateralized Advances are required to be paid in cash monthly
in arrears. See Provisions for Credit Losses below.
Fees and other income were relatively unchanged in 1995 as compared to 1994.
In both years fees and other income were approximately $2.1 million. Increases
in 1995 in closing fees and supplemental discounts were offset by reductions
in related financing fees and the absence of a one-time finders fee of $50
thousand earned in 1994.
As of December 31, 1995 and 1994, Factored Accounts Receivable included on
the Company's balance sheet were $25.2 million (64.5%) and $22.2 million
(66.7%), respectively, of Gross Finance Receivables. As of December 31, 1995
and 1994, Collateralized Advances included on the Company's balance sheet were
$10.8 million (27.8%) and $7.2 million (21.7%), respectively, of Gross Finance
Receivables. The relative increase from the end of 1994 to the end of 1995 in
the percentage of Gross Finance Receivables comprised of Collateralized
Advances reflects management's decision to emphasize the making of
Collateralized Advances, in addition to the Company's core factoring business.
Compensation and Fringe Benefits. Compensation and fringe benefits were
$3.2 million (24.6% of total income) and $3.0 million (25.0% of total income)
in 1995 and 1994, respectively. The absolute dollar increase is chiefly the
result of increases in sales personnel and compensation. Executive
compensation in 1995 was $1.0 million (7.9% of total income) versus $1.0
million (8.5% of total income) in 1994.
General and Administrative Expense. In 1995 general and administrative
expense was $2.8 million (21.2% of total income) as compared to $2.7 million
(22.2% of total income) in 1994. The increase for 1995 was primarily
attributable to a rise in professional fees, licenses and taxes and
duplicating expense. In 1995 professional fees rose to $1.1 million (8.3% of
total income) as compared to $805 thousand (6.7% of total income) for 1994.
Professional fees have increased, in part, due to on-going litigation and, in
part, to the final resolution of legal proceedings instituted in prior years.
Also contributing to the increase in general and administrative expense were
license and tax expenditures incurred in connection with maintaining certain
assets acquired in settlement of Finance and Other Receivables. Other charges
increasing general and administrative expense were telephone and travel and
entertainment (primarily associated with new business development) which were
offset, in part, by decreases in loan amortization, office supplies and credit
and filing costs.
Interest Expense. Interest expense was $984 thousand (7.6% of total income)
versus $611 thousand (5.1% of total income) in 1995 and 1994, respectively.
The rise in interest expense is attributable in part to (i) an increase in the
average daily balance outstanding on the Company's revolving lines of credit,
(ii) the rise in the base or prime rate of interest from 1994 to 1995 and
(iii) interest expense related to the Company's Convertible, Subordinated
Notes issued in September 1995. The average daily outstanding balance on the
Company's revolving lines of credit was $8.5 million and $6.5 million for 1995
and 1994, respectively and the average interest rate paid on the Company's
revolving lines of credit rose (as a result of increases in the base or prime
rate) to 9.7% during 1995 as compared to 8.3% during 1994. Interest expense
related to the Company's Convertible Subordinated Notes was $87 thousand in
1995.
Provision for Credit Losses. Credit loss experience, the adequacy of
underlying collateral, changes in the character and size of the Company's
receivables portfolio and management's judgement are factors used in
determining the provision for credit losses and the adequacy of the allowance
for credit losses. Other factors given consideration in determining the
adequacy of the allowance are the level of related credit balances of
factoring clients and the current and anticipated impact of economic
conditions on the creditworthiness of the Company's clients and account
debtors. To mitigate the risk of credit loss, the Company, among other
things: (i) thoroughly evaluates the collateral to be made available by each
client; (ii) usually collects its Factored Accounts Receivable directly from
account debtors, which are frequently (though not always) large, creditworthy
companies or governmental entities; (iii) purchases, or takes a first priority
security interest in, all accounts receivable of each client; (iv) takes,
whenever available, blanket liens on all of its clients' other assets and,
when making Collateralized Advances, it employs what management believes to be
conservative loan-to-value ratios based on auction or liquidation value
appraisals performed by independent appraisers; (v) almost always requires
personal guaranties (either unlimited guaranties or guaranties limited to the
validity and collectability of Factored Accounts Receivable) from its clients'
principals, and (vi) actively monitors its portfolio of Factored Accounts
Receivable, including the creditworthiness of account debtors and periodically
evaluates the value of other collateral securing Collateralized Advances.
The provision for credit losses decreased slightly in 1995 from $5.4 million
(44.5% of total income) in 1994 to $5.0 million (38.4% of total income) in
1995. The Company's provision for credit losses in 1995 and 1994, included
approximately $1.4 million and $1.5 million, respectively, attributable to the
bankruptcy of Premium Sales Corporation, a former client of a wholly-owned
subsidiary of the Company. Early in the second quarter of 1995 the Company
reached a settlement with the trustee in the bankruptcy case. The settlement
required the Company and its wholly-owned subsidiary to waive claims totalling
approximately $1.5 million and to make a cash payment of $1.4 million. The
cash payment was made on July 21, 1995. The settlement is intended to be a
full release of any and all claims between the Company (and its subsidiaries)
and the Trustee including, without limitation, any alleged preference
liability for the Company and its subsidiaries. The settlement was approved by
the U.S. Bankruptcy Court in January 1996 and will become fully effective at
the time a plan of distribution in the Premium Sales Corporation bankruptcy is
approved by the U.S. Bankruptcy Court.
As of December 31, 1995 and 1994 the allowance for credit losses was 6.0%
($2.4 million) and 7.5% ($2.5 million) of Gross Finance Receivables,
respectively. At December 31, 1995 the accrual of earnings was suspended on
$1.6 million of Gross Finance Receivables as compared to $3.6 million of Gross
Finance Receivables at December 31, 1994. Other Receivables and Other Assets
typically do not accrue earnings for financial statement purposes. As of
December 31, 1995 and 1994, the allowance for credit losses as a percentage of
the sum of non-earning receivables, Other Receivables and Other Assets was 38%
and 27.6%, respectively. Although the Company maintains an allowance for
credit losses in an amount deemed by management to be adequate to cover
potential losses, no assurance can be given that the allowance will in fact be
adequate or that an inadequacy, if any, in the allowance could not have a
material adverse effect on the Company's earnings in future periods.
Furthermore, although management believes that its periodic estimates of the
value of Other Receivables and Other Assets are appropriate, no assurance can
be given that the amounts which the Company ultimately collects with respect
to Other Receivables and Other Assets will not differ significantly from
management's estimates or that those differences, if any, could not have a
material adverse effect on the Company's earnings in future periods. See (g)
Asset Quality and (h) Credit Loss Policy and Experience.
Management recognizes that Collateralized Advances entail different, and
possibly greater, risks to the Company than the factoring of accounts
receivable. Risks associated with the making of Collateralized Advances (but
not the factoring of accounts receivable) include, among others (i) certain
types of collateral securing Collateralized Advances may diminish in value
(possibly precipitously) over time (sometimes short periods of time), (ii)
repossessing, safeguarding and liquidating collateral securing Collateralized
Advances may require the Company to incur significant fees and expenses some
or all of which may not be recoverable, (iii) clients may dispose of (or
conceal) the collateral securing Collateralized Advances and (iv) clients or
natural disasters may destroy the collateral securing Collateralized Advances.
The Company attempts to manage these risks, respectively, by (i) engaging
independent appraisers to review periodically the value of collateral securing
Collateralized Advances at intervals established by management based on the
characteristics of the underlying collateral, (ii) employing conservative
loan-to-value ratios which management believes should generally enable the
Company to recover from liquidation proceeds most of the fees and expenses
incurred in connection with repossessing, safeguarding and liquidating
collateral, (iii) using its internal field examiners to inspect collateral
periodically and, when appropriate, engaging independent collateral monitoring
firms to implement appropriate collateral control systems including bonding
certain of the client's employees and (iv) requiring clients to maintain
appropriate amounts and types of insurance issued by insurers acceptable to
the Company naming the Company as the party to whom loss is paid. Although
management believes that the Company has (or third parties acting on behalf of
the Company have) the requisite skill to evaluate, monitor and manage the
risks associated with the making of Collateralized Advances, there can be no
assurance that the Company will in fact be successful in doing so.
Commissions. Commission expense was $263 thousand (2.0% of total income) in
1995 as compared to $155 thousand (1.3% of total income) in 1994. The
increase was the result of a larger portion of Gross Finance Receivables
acquired in 1995 being generated by commissioned brokers and other
professionals to whom the Company paid referral fees.
Liquidity and Capital Resources. The Company's principal funding sources
are the collection of purchased receivables, retained cash flow and external
borrowings.
As of December 31, 1995, the Company had approximately $12.7 million
available under a $25 million secured revolving line of credit. The credit
facility contains a $5.0 million sub-facility for the issuance of letters of
credit and, until December 31, 1995, contained a $5.0 million sub-facility the
proceeds of which were used to make advances to clients secured by machinery
and equipment. The balance outstanding under the equipment sub-facility is
currently being repaid by the Company, in accordance with the terms of the
revolving line of credit, in equal monthly installments based on a 36 month
amortization schedule with a balloon payment due May 13, 1997. The Company is
having discussions with its lenders with respect to a new equipment sub-
facility. Borrowings under the credit facility bear interest at the bank's
base rate plus .75%. The current maturity date of this credit facility is May
13, 1997. The Company is subject to covenants which are typical in revolving
credit facilities of this type.
As of December 31, 1995, Lifetime Options had approximately $760 thousand
available under a $2.0 million line of credit and an additional $1.5 million
available under a $4.0 million availability from the Company. Lifetime
Options' revolving line of credit: (i) is payable on demand and, if no demand
is made, on December 31, 1996; (ii) bears interest at the prime rate of
interest plus 1% and (iii) is collateralized by specific purchased life
insurance contracts.
As of December 31, 1995, the Company had outstanding an aggregate of
approximately $2,838,000 in principal amount of Notes issued to Scoggin
Stockholders on September 11, 1995, in exchange for 447,200 shares of common
stock of the Company then owned by them. The Scoggin Stockholders (i) have
agreed not to convert their Notes into common stock prior to March 1, 1997,
(ii) are entitled to certain demand and piggy-back registration rights; and
(iii) are entitled to nominate up to two members of the Company's Board of
Directors (depending on their level of ownership of Company securities). In
addition, on November 28, 1995, the Company commenced an exchange offer
pursuant to which the Company offered to issue to shareholders generally up to
an aggregate of $2,162,000 in additional Notes in exchange for the Company's
common stock. The offer expired by its terms on January 12, 1996 and the
Company issued approximately $2,160,000 in aggregate principal amount of Notes
in exchange for 338,275 shares of common stock tendered for exchange. The
Notes (i) mature on September 30, 2000; (ii) bear interest at the initial rate
of 10% per annum which rate may fluctuate in accordance with the prime rate,
but may not fall below 8% nor rise above 10% per annum; (iii) are convertible
into common stock of the Company at the rate of $7.50 per share; (iv) are
subordinated to Senior Indebtedness (as defined) of the Company and (v) were
issued pursuant to an indenture which contains certain covenants which are
less restrictive than those contained in the Company's secured revolving
credit facility. Upon the occurrence of certain change of control events,
holders of the Notes have the right to have their Notes redeemed at par.
At December 31, 1995, the Company had working capital of $26.0 million and a
ratio of current assets to current liabilities of 2.60 to 1 as compared to
December 31, 1994 working capital of $25.3 million and a ratio of current
assets to current liabilities of 2.85 to 1. As of December 31, 1995, the
Company had conditional commitments of $59.2 million to purchase accounts
receivable and make Collateralized Advances, subject to the Company's
underwriting criteria. Since many of those commitments may expire without
being drawn upon, the figure $59.2 million does not necessarily represent
future cash requirements.
A $5.0 million equipment sub-facility contained in the Company's $25.0
million secured revolving line of credit expired in accordance with its terms
on December 31, 1995. The Company is having discussions with its lenders with
respect to a new equipment sub-facility. Assuming the Company's lenders
provide a new $5.0 equipment sub-facility, the Company believes that
internally generated funds and borrowings under its current or a replacement
credit facility will be sufficient to finance the Company's future funding
requirements for the near term. If, however, the Company's lenders do not
provide a new equipment sub-facility, or if they do, but an unexpectedly high
portion of the Company's potential new business includes Collateralized
Advances (especially Collateralized Advances secured by assets other than
equipment), internally generated funds and borrowings under the Company's
existing credit facility may not be sufficient to fund such new business.
Under such circumstances the Company would attempt to negotiate the borrowing
base in its existing credit facility to allow the Company to borrow greater
amounts from its primary lender(s) and thereby support the growth in
Collateralized Advances. If those negotiations were unsuccessful, there is no
assurance that the Company could attract sufficient capital to enable the
Company to pursue its strategy of making additional Collateralized Advances.
Impact of Inflation
Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the past three years.
Changes in interest rate levels do not generally affect the income earned by
the Company in the form of discounts. Rising interest rates would, however,
increase the Company's cost of borrowed money based on its current borrowing
arrangements which are prime or base rate adjusted credit facilities.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total Income. The Company's total income, which consists of earned
discounts and fees and other income, rose 10.9% in 1994 over 1993, from $10.9
million to $12.0 million. This increase was attributable to the growth in
purchases of accounts receivables, the growth in advances secured by
inventory, equipment and real estate and the growth in the purchase of life
insurance contracts by Lifetime Options, as well as the growth in related
financial services of the Company.
Gross Finance Receivables purchased increased 4.9% to $188.9 million in 1994
from $180.0 million in 1993. Earned discounts rose 5.6% in 1994 ($9.9
million) over 1993 ($9.4 million). Expressed as a percentage of Gross Finance
Receivables purchased, earned discounts remained relatively flat in 1994 as
compared to 1993, 5.3% versus 5.2%, respectively. Earnings generated from
advances secured by inventory, equipment and real estate are included in
earned discounts.
Fees and other income increased 46.0% to $2.1 million in 1994 from $1.4
million in 1993. Fees and other income consist primarily of closing fees,
supplemental discounts paid by clients who do not sell the minimum volume of
accounts required by their contracts with the Company or who terminate their
contracts with the Company prior to the contract's expiration, commitment fees
and related financing fees. This increase was largely the result of the
growth in commitment fees, supplemental discounts, related financing fees and
a one time referral fee of $50 thousand from an investment bank.
Compensation and Fringe Benefits. Compensation and fringe benefits remained
flat in 1994, $3.0 million (25.0% of total income) as compared to $3.0 million
(27.2% of total income) in 1993. Executive compensation decreased 17.5% in
1994, from $1.2 million to $1.0 million as a result of the departure of an
executive in the fourth quarter of 1993 and the reduction in bonuses paid.
This decrease was offset by increases in employee compensation and staffing
requirements needed to support the growth of the Company.
General and Administrative Expenses. General and administrative expenses
were $2.7 million (22.2% of total income) and $2.0 million (18.1% of total
income) in 1994 and 1993, respectively. The increase was primarily
attributable to the rise in professional fees and loan amortization.
Professional fees increased from $449.0 thousand (4.1% of total income) in
1993 to $805.3 thousand (6.7% of total income) in 1994. The increase in
professional fees was attributable in part to the final resolution of certain
legal proceedings instituted in prior years. Loan amortization increased from
$172.2 thousand in 1993 to $318.5 thousand in 1994, chiefly due to the
refinancing of the Company's line of credit in the second quarter of 1994.
Other expenditures contributing to the increase in general and administrative
expenses were increases in credit and filing costs, travel and entertainment,
insurance and shareholder related expenses.
Interest Expense. Interest expense increased from $243.3 thousand in 1993
to $610.5 thousand in 1994. This increase was primarily attributable to
increases in the average daily outstanding balance of the Company's revolving
line of credit as well as increases in the prime rate of interest throughout
1994. The average daily outstanding balance under the Company's line of
credit increased from $2.4 million during 1993 to $6.5 million during 1994.
The average per annum interest rate paid on the Company's line of credit
increased from 7.25% during 1993 to 8.31% during 1994.
Provision for Credit Losses. Credit loss experience, the adequacy of
underlying collateral, changes in the character and size of the receivables
portfolio and management's judgment are factors used in assessing the overall
adequacy of the allowance and determining the provision for credit losses.
The level of related credit balances of factoring clients and the impact of
economic conditions on the creditworthiness of the Company's clients and
account debtors are also given consideration in determining the adequacy of
the allowance. To mitigate the risk of credit loss, the Company, among other
things; (i) thoroughly evaluates the collateral to be made available by each
client; (ii) collects its factored accounts receivable directly from account
debtors, which are frequently (though not always) large, creditworthy
companies or governmental entities; (iii) purchases, or takes a first priority
security interest in, all accounts receivable of each client; (iv) takes,
whenever available, blanket liens on all of its clients' assets and, when
making advances against inventory, equipment, real estate or other property,
it employs what management believes to be conservative loan-to-value ratios;
(v) requires personal guaranties (either unlimited guaranties or validity
guaranties) from its clients' principals, and (vi) actively monitors its
portfolio of factored accounts receivable, including the creditworthiness of
account debtors and periodically evaluates the value of other collateral.
Although the Company maintains an allowance for credit losses in an amount
deemed by management to be adequate to cover potential losses, no assurance
can be given that the allowance will in fact be adequate or that an
inadequacy, if any, in the allowance could not have a material adverse effect
on the Company's earnings in future periods.
The allowance for credit losses was 7.2% ($2.1 million) and 7.5% ($2.5
million) of Gross Finance Receivables at December 31, 1993 ($29.5 million) and
1994 ($33.3 million), respectively. The amount provided for credit losses
increased 10.3% in 1994, from $4.9 million in 1993 to $5.4 million in 1994.
See also Credit Loss Policy and Experience.
The size of the provision for credit losses in 1994 was adversely affected
(i.e., increased) by two significant events, one of which occurred in late
1994 and the other of which occurred in early 1995. In late 1994, a mediator
recommended a small award in a large case in which the Company is plaintiff.
The mediation was non-binding. The Company elected not to accept the
mediator's recommended award and is pursuing the case vigorously in federal
court. The Company hopes to recover in litigation significantly more than the
mediator's award. Nonetheless, in light of the mediator's award and after
year-end consultation with its independent accountants, the Company elected
for financial statement purposes to add approximately $1.7 million to the
provision for credit losses in the fourth quarter of 1994.
In early 1995, the Company received notice of certain threatened claims from
the Trustee in the bankruptcy of Premium Sales Corporation. See Legal
Proceedings. Most of the threatened claims are claims which arise in the
ordinary course of a bankruptcy proceeding. The Trustee has, however, also
threatened to assert as yet unsubstantiated, non-bankruptcy claims of fraud
against the Company and certain of its executive officers (in their corporate
as well as individual capacities). The Company and its executive officers
believed that any claim sounding in fraud would be without merit. After
thoroughly reviewing the Trustee's threatened claims with outside legal
counsel, the Company added approximately $1.5 million to the provision for
credit losses in 1994. See Legal Proceedings for resolution of the Premium
Sales matter.
Commissions. Commissions increased from $113.8 thousand (1.0% of total
income) in 1993 to $155.3 (1.3% of total income) in 1994, because a greater
proportion of gross receivables purchased in 1994 were generated by
commissioned brokers and other professionals to whom the Company paid referral
fees.
Item 7. Financial Statements (Pages 41 to 63)
Item 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosures
None.
Part III
Item 9. Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position(s)
Leon Fishman. . . . . . . . .. 64 President and Chief Executive Officer
Eugene R. Haskin. . . . . . . 66 Chairman of the Board
Lawrence M. Winkler . . . . . 60 Secretary, Treasurer, Chief Financial
Officer and Director
James C. Spector. . . . . . . 61 Director
Craig Fishman . . . . . . . . 35 Senior Vice President, General
Counsel and Director
William H. Savage . . . . . . 63 Director
David W. Campbell . . .. . . . 48 Director
Alan L. Freeman . . . .. . . . 54 Director
Leon Fishman is President and Chief Executive Officer of the Company and
served on the Company's Board of Directors until November 1995. He co-
founded the Company with Eugene Haskin in 1982. Mr. Fishman served as
Secretary and Treasurer of the Company and held other management positions
prior to being elected President and Chief Executive Officer in 1989.
Effective July 1, 1996, Mr. Fishman will resign his position as
President and Chief Executive Officer of the Company at which time Craig
Fishman will become President and Chief Executive Officer of the Company.
It is expected that Leon Fishman will have an active on-going relationship
with the company following his resignation.
Prior to co-founding the Company, Mr. Fishman had extensive experience
as the president and major shareholder of companies involved in factoring,
real estate development and manufacturing.
Eugene R. Haskin is Chairman of the Board of the Company and has served
as a director of the Company since co-founding the Company with Leon
Fishman in 1982. Mr. Haskin served as President of the Company from 1982
to 1989. Prior to co-founding the Company, Mr. Haskin was an executive
with and a major investor in companies involved in factoring, real estate
development and heating oil distribution.
Lawrence M. Winkler is Secretary, Treasurer and Chief Financial Officer
of the Company and has served as a director since 1983. Mr. Winkler began
his career at the Company in 1982 as Second Vice President, was promoted to
Senior Vice President in April 1989 and has held his current positions
since May 1989. Mr. Winkler, a certified public accountant, was a general
partner in the accounting firm of Alexander Grant and Company prior to
joining the Company. Mr. Winkler is the brother-in-law of Leon Fishman.
Craig Fishman joined the Company in 1991 as a Vice President. In
February 1993, Mr. Fishman was appointed General Counsel. In May 1994, he
was elected President of Lifetime Options and in September 1995, Mr.
Fishman was elected Senior Vice President of the Company. Mr. Fishman has
served as a director since November 1995.
The Board of Directors has elected Mr. Fishman President and Chief
Executive Officer of the Company effective July 1, 1996.
From 1987 to April 1991 Mr. Fishman was an attorney associated with the law
firm of White & Case in New York City. Craig Fishman is the son of Leon Fishman
and the nephew of Lawrence Winkler.
James C. Spector has been a member of the Board of Directors since June 1989.
Mr. Spector served as Executive Vice President of the Company from February 1991
to October 1993. Prior to joining the Company, Mr. Spector had served for many
years as an executive with Heller Financial, Inc. and certain of its related
companies, specializing in asset-based and real estate lending. His most recent
positions in that organization included Executive Vice President and Chief
Operating Officer of Heller Mortgage Corporation, from August 1984 through June
1985, and Senior Vice President of Heller Financial, Inc. from July 1985 through
September 1987.
William H. Savage has been a member of the Board of Directors since November
1995. Since 1990, Mr. Savage has been engaged in a variety of investment
ventures in real estate development and banking. Since 1991, Mr. Savage has
served as Chairman of Island Preservation Partnership, the owner and developer
of Dewees Island, a 1,200 acre ocean front, barrier island near Charleston,
South Carolina. He is the Chairman of the Board of Knights Hill Corporation,
which owns and manages timberlands in South Carolina. Since 1982, he has been
the Managing Partner of Calvert Associate which owns an apartment complex in
Alexandria, Virginia. Since 1977, he has been the President of Richard United
Corporation, a real estate investment company based in Alexandria, Virginia.
David W. Campbell has been a member of the Board of Directors since November
1995. He is currently a private investor. Mr. Campbell was formerly President
and Chief Executive Officer of Ameribanc Savings Bank ("ASB") in Annandale,
Virginia from June 1990 to March 1995. Prior to that, he was Executive Vice
President and Chief Operating Officer of ASB from 1984 to June 1990 and also a
director of ASB from 1988 to March 1995. He served as a Trustee of the Ameribanc
Investors Group from 1992 to March 1995.
Alan L. Freeman has been a member of the Board of Directors since November
1995. He is currently Managing Partner of Freeman, Buczyner & Gero, an
accounting firm. Prior to that he was a Partner with Deloitte & Touche from 1989
to 1991 and a Partner with the accounting firm Shapiro, Fleischmann & Co. from
1966 to 1989.
Directors who are not officers of the Company receive a fee of $2,000 per
board or committee meeting attended, plus reimbursement for their expenses
associated with attending these meetings. Commencing November 1994, Directors
who are not officers of the Company receive a fee of $500 per special board or
committee meeting attended by conference telephone call. Directors who are
officers of the Company receive no compensation for serving as directors, but
are reimbursed for out-of-pocket expenses related to attending board or
committee meetings.
Directors of the Company are elected to serve until the next annual meeting of
shareholders of the Company and until their respective successors are elected
and qualified. Officers serve at the pleasure of the Board.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officer and directors, and persons who own more than 10% of its common stock, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("Commission"). Officers, directors and greater than 10%
stockholders are required by the Commission to furnish the Company with copies
of all Section 19(a) forms that they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that during 1995 all filing
requirements applicable to its officers, directors and greater than 10%
stockholders were complied with.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors established an Audit Committee in 1989. The Audit
Committee currently consists of Messrs. Freeman, Haskin and Campbell. The
committee met once during the year ended December 31, 1995. The Audit Committee
reviewed the results of operations for 1994 and the status of certain specific
accounts.
The Board established a compensation committee during 1992. Messrs. Haskin,
Spector and Savage are currently serving on this committee. The Compensation
Committee met once in 1995.
The Board does not have a nominating committee. The functions of this
committee are performed by the Board of Directors.
During 1995 there were nine meetings of the Board of Directors. Each of the
directors of the Company attended 100% of the meetings of the Board of Directors
during 1995. During 1995 there were two vacancies on the Board of Directors.
Effective November 1, 1995, the Board of Directors was increased from six to
seven members.
Item 10. Executive Compensation
The following tables provide certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the four most highly compensated executive
officers of the Company whose total compensation exceeded $100,000 for the years
ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
AWARDS
Name and Other Annual Options/ All Other
Principal Position Year Salary Bonus Compensation(1) SAR Grants(7) Compensation(8)
- - - ---------------------------- ---- -------- ------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Leon Fishman President & CEO 1995 $377,885 $ -0- - - $3,000
1994 $375,000 $ -0- - - $3,000
1993 $375,000 $48,442 - - $4,717
James Spector 1995 (2) $ 82,500 $ -0- - - $ 950
1994 (3) $ 48,000 $ -0- - - $ 120
1993 (4) $183,445 $ 7,500 - - $1,507
Bret Kelly 1995 (5) $220,500 $ -0- - 10,000 (6) $3,000
Senior V.P. & COO 1994 $220,502 $ -0- - - $3,000
1993 $221,044 $15,000 - - $4,720
Lawrence Winkler 1995 $154,732 $ -0- - - $3,000
Secy/Treasurer & 1994 $143,533 $ 2,500 - - $2,889
CFO 1993 $136,786 $10,000 - - $2,936
Craig Fishman 1995 $161,177 $ -0- - - $3,000
Sr. V.P. & General Counsel 1994 $126,405 $ 2,500 - - $2,578
1993 $115,601 $15,600 - - $2,624
</TABLE>
In May 1994, the Board of Directors unanimously approved a reduction in the
exercise price of options granted in 1992 to Mr. Winkler and Craig Fishman to
$6.50 per share from $14.00 per share. The reduced exercise price of $6.50 per
share exceeded the per share market value of the Company's common stock at the
time of the reduction. The reduction in the exercise price of these options was
made to provide a supplemental performance incentive for Mr. Winkler and Craig
Fishman.
- - - --------------------------------------
1) Does not include the value of various personal benefits provided to the
executives officers. The aggregate amount of other compensation provided
to each individual did not exceed the lesser of $50,000 or 10% of his
reported compensation.
2) Engaged by the Company in November 1995 as a full time consultant on an
interim basis to fill the vacancy created by the departure of Bret Kelly
as a full-time employee. From January 1995 through October 1995, Mr.
Spector was paid unrelated consulting fees.
3) Consulting Fee.
4) Ceased employment with the Company in November 1993. See note 2 above.
5) Ceased full-time employment with the Company effective November 3, 1995.
Commencing in November 1995, Mr. Kelly is entitled to salary continuation
of $220,500 payable over 12 months.
6) Options granted in connection with cessation of full-time employment.
7) No SARs have been granted.
8) Represents contributions to 401(k) plan.
INDIVIDUAL GRANTS IN LAST FISCAL YEAR
In connection with the cessation of his full-time employment, Mr. Kelly was
granted an option to acquire 10,000 shares of the Company's common stock at an
exercise price of $5.60 per share. The exercise price of $5.60 per share
exceeded the per share market value of the Company's common stock at the time
the option was granted. The option is exercisable with respect to 5,000 shares
on or after November 3, 1997 and with respect to 5,000 shares on or after
November 3, 1998. The option expires on November 3, 1999.
AGGREGATE OPTIONS/SARS EXERCISED IN LAST FISCAL YEAR
AND F/Y END OPTION/SAR VALUE
<TABLE>
<CAPTION>
Shares Value of Unexercised
Acquired on Value Number of Unexercised In-the-Money Options/SARs
Name Exercise Realized Option/SAR at F/Y End (1) at F/Y End
- - - ---------------- ----------- -------- ------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C> <C>
Leon Fishman - - 15,000/ 2,500 $ - /$ -0-
James Spector - - 5,000/ 1,667 $ - /$ -0-
Bret Kelly - - - /10,000 $ - /$ -0-
Lawrence Winkler - - 8,334/ 1,666 $ - /$ -0-
Craig Fishman - - 1,667/ 833 $ - /$ -0-
- - - ---------------------------------------------
1) No SARs have been granted.
</TABLE>
The Company was party to an employment agreement with Lawrence Winkler, the
Company's Secretary/Treasurer and Chief Financial Officer. The contract
expired in January 1996. Under the agreement, Mr. Winkler received an annual
salary of $153,467.
The Company was party to an employment agreement with Leon Fishman, the
Company's President. The contract expired in December 1995. Under the terms
of the contract, the Company was committed to pay annual compensation of
$375,000. The agreement also provided for additional payments in the amount
of 2% of the Company's annual pre-tax net earnings between $3 million and $5
million and 3% of the Company's annual pre-tax net earnings in excess of that
amount.
OTHER TRANSACTIONS
In January 1989, a corporation wholly owned by Lawrence M. Winkler, his wife
and a son of Eugene Haskin purchased an apartment building from the Company for
consideration in the form of a demand note to the Company in the principal
amount of $100,000. The Company created this ownership structure on the advice
of counsel who advised the Company not to take direct title to real property.
While it owned the apartment building, the affiliate corporation paid to the
Company all rental income received from the apartment building. In 1995 the
apartment building was sold to an unaffiliated third party for consideration
of $20,000 cash and a note in the principal amount of $70,000. The note bears
interest at a rate of 9% per annum, is due on April 1, 2002 and is secured by
the apartment building. The $20,000 was paid to the Company and the note
payable by the unaffiliated third party (together with the collateral therefor)
have been assigned to a wholly-owned subsidiary of the Company in exchange for
cancellation of the original note payable from the Company's affiliate. At
December 31, 1995 the principal amount owing on the note was $68,284.
Certain members of the immediate families of Eugene Haskin and Leon Fishman,
directly or through trusts, have provided financing to Lifetime Options through
unsecured loans with interest payable monthly at an annual interest rate of 1%
over the prime rate. One percent (1%) over the prime rate is the same rate
paid by Lifetime Options to its unaffiliated bank lender.
Lifetime Options' total indebtedness to members of Mr. Haskin's immediate
family was $15,146 at December 31, 1995 and 1994, respectively. During 1994,
at the request of members of Mr. Haskin's family, Lifetime Options repaid
$445.4 thousand of long term indebtedness on these loans. During 1995 and
1994, Lifetime Options paid aggregate interest on these loans of $1.5 thousand
and $16.3 thousand, respectively.
Lifetime Options' total indebtedness to members of Leon Fishman's immediate
family was $43.6 thousand at December 31, 1995 and 1994, respectively. During
1995 and 1994, Lifetime Options paid aggregate interest of $4.4 thousand and
$8.8 thousand, respectively. At various times during 1994, Leon Fishman loaned
Lifetime Options a total of $265 thousand which was repaid in full by December
31, 1994. During the periods of indebtedness, Mr. Fishman received $2.5
thousand of interest. At January 1, 1994, Craig Fishman was owed $18.7
thousand by Lifetime Options. The level of borrowings from Craig Fishman
increased at various intervals during 1994 to $97.8 thousand. As of December
31, 1994 the indebtedness of $97.8 thousand was paid in full. Craig Fishman
received interest from Lifetime Options of $2.6 thousand in 1994. Neither Craig
Fishman nor Leon Fishman loaned money to Lifetime Options in 1995 and neither
of them received any interest in 1995.
In February 1994, the Company made a loan in the amount of $1 million to
Eugene Haskin, a director of the Company, and his wife. The loan was
unanimously approved by all members of the Board of Directors of the Company
(with one director absent and Mr. Haskin abstaining) and conformed to a
previous loan to an unrelated party. The loan bore interest at a rate equal
to 2% per month, was collateralized by a pledge of securities having a market
value of approximately $1.6 million and was due on or before July 15, 1994.
The loan, together with all accrued interest thereon, was repaid on March 24,
1994.
On September 11, 1995, the Company issued an aggregate of $2,838,000 in
principal amount of Convertible Subordinated Notes due September 30, 2000 to
the Scoggin Stockholders, in exchange for 447,200 shares of common stock of the
Company then owned by them. The Scoggin Stockholders (i) have agreed not to
convert their Notes into common stock prior to March 1, 1997, (ii) are entitled
to certain demand and piggy-back registration rights; and (iii) are entitled
to nominate up to two members of the Company's Board of Directors (depending
on their level of ownership of Company securities). In addition, on November
28, 1995, the Company commenced an exchange offer pursuant to which the Company
offered to issue to shareholders generally up to an aggregate of 2,162,000 in
additional Notes in exchange for shares of the Company's common stock. The
offer expired by its terms on January 12, 1996 and the Company issued
approximately $2,160,000 in aggregate principal amount of Notes. For certain
terms of the Notes, see Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
Rental payments of $24,000 were received by the Company in 1995, 1994 and
1993, respectively, from its President, for the personal use of a condominium
owned by a subsidiary of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 20, 1996, the amount of common
stock of the Company which may be deemed beneficially owned: (i) by each person
known to the Company to be the beneficial owner of more than 5% of the
aggregate shares of the Company's outstanding common stock, (ii) by each of the
named executive officers in the Summary Compensation Table, (iii) by each
director of the Company and (iv) by all officers and directors as a group.
Common Shares Percent of
Name and Address Beneficially Owned Class
- - - ---------------- ------------------ ----------
Leon Fishman
20191 E. Country Club Dr.
N. Miami Beach, FL 33180 261,250 11.20%
Eugene Haskin
4000 Island Blvd.
N. Miami Beach, FL 37160 241,834 10.43%
Bret Kelly
225 Marlborough Pt. Road
Stafford, VA 22554 10,000 0.04%
Lawrence M. Winkler
1300 Crystal Drive
Arlington, VA 22202 8,384 0.04%
James Spector
10580 SW 77 Terrace
Miami, FL 33173 5,000 0.02%
Craig Fishman
2687 Hillsman Street
Falls Church, VA 22043 4,017 0.02%
David W. Campbell
6410 Nobel Rock Court
Clifton, VA 22024 1,000 - %
William H. Savage
314 Franklin Street
Alexandria, VA 22314 1,000 - %
Timothy G. Ewing
Value Partners, Ltd.
2200 Ross Avenue
Dallas, TX 75201 661,835 26.58%
AIM Charter Fund
11 Greenway Plaza, Suite 1919
Houston, TX 77046-1173 320,000 13.81%
Schwab 100 Fund
101 Montgomery St.
San Francisco, CA 94104 119,124 5.14%
Tweedy, Browne Company L.P.
52 Vanderbilt Avenue
New York, NY 10017 223,200 9.63%
Farley Capital
655 Third Avenue
New York, NY 10015 147,000 6.35%
For all Officers and Directors as a group
(7 persons) 522,485 22.51%
Item 12. Certain Relationships and Related Transactions
See Part II, Item 7 of this 10-KSB (Financial Statements) and Part III, Item
10 of this 10-KSB (Other Transactions).
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements:
Page Number
The following Financial statements are submitted in Item 7.
Independent Auditors' Report on Consolidated Financial
Statements and Schedules 41
Consolidated Balance Sheets as of December 31, 1995 and 1994 42
Consolidated Statements of Income for the years ended
December 31, 1995, 1994, and 1993 43
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993 44
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 45 - 46
Notes to Financial Statements for the years ended
December 31, 1995, 1994 and 1993 47 - 63
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
Schedule IV Indebtedness of and to Related Parties - Not Current
for the years ended December 31, 1995, 1994 and 1993 64
Schedules other than those listed above have been omitted since
they are either not required or the information is included
elsewhere in the financial statements or notes thereto.
(b Reports on Form 8-K
None.
(c) Listing of Exhibits
Exhibit 3. Articles of Incorporation and By-laws
Documents incorporated by reference - See Registration Statement
on Form S-1 33-46748
Exhibit 4. Instruments Defining the Rights of Security Holders
Documents incorporated by reference - See Registration Statement on
Form S-1 33-46748
Documents incorporated by reference - See the Company's Quarterly
Report on Form 10-QSB for the Quarter Ended September 30, 1995
Exhibit 10. Material Contracts
Documents incorporated by reference - See Registration Statement on
Form S-1 33-46748
Documents incorporated by reference - See the Company's Annual Report
on Form 10-KSB for the Fiscal Year Ended December 31, 1994
Amendments to Exhibit 10.7 - Revolving Credit and Security Agreement
dated as of May 13, 1994 between IBJ Schroder Bank & Trust Company (as
Lender and as Agent) and Allstate Financial Corporation (as Borrower),
as amended to March 21, 1995.
Fourth Amendment and Waiver dated as of March 31, 1995
Fifth Amendment dated as of June 12, 1995
Sixth Amendment and Waiver dated as of September 7, 1995
Seventh Amendment dated as of November 1, 1995
Eighth Amendment dated as of March 4, 1996
Exhibit 10.8
Letter Agreement dated as of December 13, 1995 between Allstate
Financial Corporation and Bret Kelly
Exhibit 21. Subsidiaries of the Company
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Allstate Financial Corporation
Arlington, Virginia
We have audited the accompanying consolidated balance sheets of Allstate
Financial Corporation and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1995. Our audits also included the financial statement schedule listed in
the Index at item 13(a) 2. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule 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, such consolidated financial statements present fairly,
in all material respects, the financial position of Allstate Financial
Corporation and subsidiaries as of December 31, 1995, and 1994, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
Deloitte & Touche LLP
Washington, D.C.
March 4, 1996
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
----------------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 754,295 $ 1,763,930
Receivables:
Finance, net 32,670,706 27,502,806
Purchased life insurance contracts, net 4,292,332 4,533,952
Other 2,756,342 3,388,638
Prepaid expenses 204,823 198,091
Prepaid income taxes 722,081 628,123
Deferred income taxes 893,000 909,000
----------- -----------
TOTAL CURRENT ASSETS 42,293,579 38,924,540
PROPERTY AND EQUIPMENT, Net 537,629 479,034
OTHER ASSETS 2,049,323 2,447,083
----------- -----------
$44,880,531 $41,850,657
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 292,602 $ 303,838
Notes payable 13,516,938 11,591,718
Note payable-related party 103,000 103,000
Credit balances of factoring clients 2,333,729 1,665,038
----------- -----------
TOTAL CURRENT LIABILITIES 16,246,269 13,663,594
NONCURRENT PORTION OF NOTES PAYABLE:
Related parties 58,788 58,788
Other 2,845,110 7,110
TOTAL LIABILITIES 19,150,167 13,729,492
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding - -
Common stock, authorized 10,000,000 shares
with no par value; issued and outstanding
2,655,128 at December 31, 1995 and
3,102,328 at December 31, 1994 40,000 40,000
Additional paid-in-capital 18,852,312 18,852,312
Treasury Stock (447,200 shares) (2,871,901) -
Retained Earnings 9,709,953 9,228,853
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 25,730,364 28,121,165
----------- -----------
$44,880,531 $41,850,657
=========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31,
------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INCOME:
Earned discounts $10,932,331 $ 9,947,678 $ 9,423,845
Fees and other income 2,065,015 2,082,320 1,426,586
----------- ----------- -----------
TOTAL INCOME 12,997,346 12,029,998 10,850,431
----------- ----------- -----------
EXPENSES:
Compensation and fringe benefits 3,198,497 2,996,029 2,950,471
General and administrative 2,758,285 2,673,959 1,961,941
Interest expense 983,718 610,531 243,251
Provision for credit losses 4,981,646 5,359,159 4,858,235
Commissions 263,100 155,280 113,814
----------- ----------- -----------
TOTAL EXPENSES 12,185,246 11,794,958 10,127,712
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 812,100 235,040 722,719
INCOME TAXES 331,000 87,500 266,000
----------- ----------- -----------
NET INCOME $ 481,100 $ 147,540 $ 456,719
=========== =========== ===========
NET INCOME PER SHARE $ 0.16 $ 0.05 $ 0.15
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 2,966,330 3,102,328 3,116,460
=========== =========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
--------------------------------------------
Common Additional Treasury Retained
Stock Paid in Capital Stock Earnings
------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Balance - January 1, 1993 $40,000 $18,678,839 $ - $8,624,594
Exercise of 3,000 warrants
at $7.80 per share - 23,400 - -
Exercise of 15,332 options
at $7.125 per share - 109,242 - -
Exercise of 5,833 options
at $7.00 per share - 40,831 - -
Net Income - - - 456,719
------- ----------- ----------- ----------
Balance - December 31, 1993 40,000 18,852,312 - 9,081,313
Net Income - - - 147,540
------- ----------- ----------- ----------
Balance - December 31, 1994 40,000 18,852,312 9,228,853
Exchange of Convertible
Subordinated Notes for
447,200 shares of common stock - - (2,871,901) -
Net Income - - - 481,100
------- ----------- ----------- ----------
Balance - December 31, 1995 $40,000 $18,852,312 $(2,871,901) $9,709,953
======= =========== =========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31,
----------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 481,100 $ 147,540 $ 456,719
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net 100,093 92,801 110,534
Provision for credit losses 4,981,646 5,359,159 4,858,235
Gain on disposition of investments - - (35,253)
Changes in operating assets and liabilities;
Decrease/(Increase) in other receivables 632,296 (1,044,840) (947,163)
(Increase)/Decrease in prepaid expenses (6,732) 54,030 (74,381)
Decrease/(Increase) in other assets 397,760 997,247 (1,086,581)
(Decrease)/Increase in accounts payable
and accrued expenses (11,236) 83,200 (263,163)
Decrease in deferred income taxes - - (157,000)
Decrease in income taxes payable - - (448,000)
Increase in prepaid income taxes (93,958) (273,271) (354,852)
Decrease/(Increase) in deferred income tax asset 16,000 (307,000) (293,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,496,969 5,108,866 1,766,095
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of finance receivables,
including repurchases and life insurance
contracts (172,311,795) (188,868,852) (179,965,983)
Collections of finance receivables,
including repurchases and life insurance
contracts 162,403,869 177,854,250 179,724,147
Increase/Decrease in credit balances
of factoring clients 668,691 (246,290) (2,949,433)
Net proceeds from sale of investments - - 160,251
Purchase of property and equipment (158,691) (152,639) (249,486)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (9,397,926) (11,413,531) (3,280,504)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common
stock and exercise of warrants
and options - - 173,473
Proceeds from line of credit
and other borrowings 72,153,625 66,975,004 45,614,280
Principal payments on line of credit
and other borrowings (70,228,402) (61,691,628) (45,403,070)
Treasury Stock Acquisition costs (33,901) - -
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,891,322 5,283,376 384,683
------------ ------------ ------------
NET DECREASE IN CASH (1,009,635) (1,021,289) (1,129,726)
CASH, Beginning of year 1,763,930 2,785,219 3,914,945
------------ ------------ ------------
CASH, End of year $ 754,295 $ 1,763,930 $ 2,785,219
============ ============ ============
See Notes to Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(continued)
Years Ended December 31,
----------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $1,014,406 $ 631,187 $ 222,109
========== ========== ==========
Taxes paid $ 408,958 $ 667,919 $1,479,280
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfer of finance and other
receivables to other assets $ 267,750 $ 62,508 $1,949,100
========== ========== ==========
Issuance of Convertible Subordinated
Notes in exchange for common stock $2,838,000 $ - $ -
========== ========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accounting and reporting policies of Allstate Financial
Corporation and its subsidiaries (collectively, the "Company") conform
to generally accepted accounting principles and the general practices
within the financial services industry. Those policies that materially
affect the determination of financial position, results of operations,
and cash flows are summarized below. In preparing its financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates
shown in the consolidated balance sheet and the statement of income.
Actual results could differ significantly from those estimates. Changes
in economic conditions and other factors beyond the Company's control
could impact the determination of material estimates such as the
allowance for credit losses, the valuation of other receivables and the
valuation of assets acquired in settlement of Finance and Other
Receivables.
Consolidation
- - - -------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries after elimination of all
intercompany transactions. No segment of its business, other than
factoring and general financing is significant in relation to
consolidated total assets and revenues.
Finance Receivables and Allowance for Credit Losses
- - - ---------------------------------------------------
Finance Receivables consist of factored accounts receivable,
Collateralized Advances (as defined below), overadvances secured by
general liens and non-earning receivables. Factored accounts receivable
are stated at the face amount outstanding, net of unearned discounts and
an allowance for credit losses. Advances collateralized by inventory,
equipment, real estate and other property (collectively, "Collateralized
Advances") and overadvances secured by general liens are stated at the
aggregate principal amount outstanding plus accrued earnings, net of an
allowance for credit losses. Non-earning receivables are stated at the
amount advanced by the Company plus earnings accrued to the time the
accrual of earnings is suspended, net of an allowance for credit losses.
If the Company determines that it is not likely to recover from any
source the amount of its initial advance and the earned but unpaid
discount, then the Company promptly increases the allowance for credit
losses or reduces the carrying value of the non-earning receivable to its
estimated fair value and makes a charge to its allowance for credit
losses, in an amount equal to the difference between the Company's
investment in the non-earning receivable and its estimated fair value.
The allowance for credit losses is maintained at a level which, in
management's judgment, is sufficient to absorb losses inherent in the
finance receivables portfolio. The allowance for credit losses is based
upon management review and evaluation of the finance receivables
portfolio. Factors considered in the establishment of the allowance for
credit losses include management's evaluation of specific finance
receivables, the adequacy of underlying collateral, historical loss
experience, expectations of future economic conditions and their impact
on particular industries and individual clients, and other discretionary
factors. The allowance for credit losses is based on estimates of
potential future losses, and ultimate losses may vary from the current
estimates. These estimates are typically reviewed quarterly and as
adjustments become necessary, the effects of the change in estimates are
reported in operations in the period in which they become known. Finance
receivables may be reclassified on the Company's balance sheet as "other
receivables" or "other assets" when, in management's opinion, such a
reclassification most accurately reflects the character of the asset. At
the time of any such reclassification, the Company usually suspends or
discontinues the accrual of earnings for financial statement purposes.
If at any time the Company determines it is not likely to recover a
finance receivable in full, the receivable is appropriately written down
against the allowance. Finance Receivables are fully written off against
the allowance when the Company has exhausted its efforts against the
client's customer, the client, guarantors and any additional collateral
retained by the Company.
Effective January 1, 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting By Creditors
for Impairment of a Loan." This statement required the Company to measure
the value of each impaired loan based on the present value of its
expected future cash flows discounted at the loan's effective interest
rate or, as a practical expedient, the loan's observable market price or
the fair value of the collateral if the loan is collateral dependent.
Effective January 1, 1995, the Company adopted SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." This Statement amends SFAS No. 114, to allow creditors to
use existing methods for recognizing interest income on impaired loans.
The Company's adoption of these Statements did not have a material impact
on its financial position or results of operations.
Purchased Life Insurance Contracts
- - - ----------------------------------
The Company purchases life insurance contracts, at a discount, from
individuals facing life threatening illnesses. The life insurance
contracts are purchased after a review of the insured's medical records
by an independent physician who verifies the insured's physical condition
and estimates his or her life expectancy. Historically, the Company
required up to three independent medical reviews but, based on its
experience, management no longer believes multiple medical reviews are
necessary. Life insurance contracts are purchased from individuals who
have an anticipated life expectancy of up to sixty months. Purchase
discounts, which are accounted for as unearned discounts, are based on
the estimated life expectancy of the insured individual, as determined
by the independent physician(s). At the time of purchase, the Company
is named beneficiary of the policy. Future insurance policy premiums are
usually paid by the Company. Unearned discounts are recorded as income
using the interest method over the estimated life expectancy of the
individual insured. The Company reviews such life expectancies on a
quarterly basis and records adjustments as necessary. Actual result
could differ significantly from those estimated based on life
expectancies. Factors such as life extending treatments (or a cure) for
certain illnesses could impact the recognition of unearned discounts.
Most of the life insurance contracts purchased are underwritten by highly
rated insurance companies and, in many cases, are backed by state
guaranty funds. Accordingly, management does not believe that credit risk
is material and, therefore, no allowance for credit losses is maintained
with respect to purchased life insurance contracts.
Other Receivables
- - - -----------------
Other receivables consist primarily of amounts receivable by the
Company where the source of payment is expected to be from legal
proceedings or other collection efforts instituted against a client's
customer, guarantors and/or other third parties. Other receivables
typically arise from the reclassification of finance receivables. At the
time of reclassification, other receivables are stated at a value
estimated by management based on management's assessment of the
likelihood of payment or success on the merits, the ability of the third
party to pay and other discretionary factors. Also at the time of
reclassification, the accrual of earnings is usually suspended or
discontinued for financial statement purposes. Write-downs, if any, at
the time of reclassification are charged against the allowance for credit
losses. Management's estimates of the fair value of other receivables
are typically reviewed quarterly and as adjustments become necessary, the
effects of the change in estimates are reported in operations in the
period in which the adjustment is determined to be necessary. Other
receivables are subject to legal and other collection processes and
contingencies over which the Company does not have exclusive control.
Accordingly, the amounts which the Company ultimately receives in payment
of other receivables could differ significantly from management's
estimates.
Property and Equipment
- - - ----------------------
Property and equipment are recorded at cost. Depreciation is
computed using straight line and accelerated methods over the estimated
useful lives of the related assets.
Assets Acquired in Settlement of Finance and Other Receivables
- - - --------------------------------------------------------------
At the date of acquisition, assets acquired in settlement of Finance
and Other Receivables are recorded at fair value less estimated selling
costs. Also at the date of acquisition, the accrual of earnings is
usually suspended or discontinued for financial statement purposes.
Write-downs to fair value at the date of acquisition are charged to the
allowance for credit losses. Subsequent to acquisition, the asset is
adjusted to the lower of cost or fair value less estimated costs to sell.
Valuation reserves have been provided as necessary to adjust the assets
to the lower of cost or fair value less estimated costs to sell.
Increases or decreases in the valuation reserves, operating expenses, and
gains or losses on disposition of assets acquired in settlement of
Finance and Other Receivables are recognized in expenses in the period
incurred.
Included in Commercial property held for sale and Residential
property held for sale are collateralized properties for which the
Company does not hold title, valued at $147,750 and $910,000 in 1995 and
valued at $0 and $1,287,400 in 1994, respectively. The Company holds
security liens against these assets in which the client or other obligor
has no equity in the collateral at its current estimated fair value.
Proceeds for repayment are expected to come only from the sale of the
collateral, and either the client or other obligor has abandoned control
of the asset or it is doubtful the client or other obligor will rebuild
equity in the collateral or repay the receivable by other means in the
foreseeable future.
The amounts ultimately recovered by the Company from assets acquired
in settlement of Finance and Other Receivables could differ materially
from the amounts used in arriving at the net carrying value of the assets
because of future market factors beyond the Company's control,
adversarial actions taken by the client or other owner of the property
foreclosed or changes in the Company's strategy for recovering its
investment.
Fair value of Financial Instruments
- - - -----------------------------------
In accordance with the requirements of SFAS No. 107, "Disclosure About
Fair Value of Financial Instruments", which requires the disclosure of
fair value information about financial instruments when it is practicable
to estimate that fair value and excessive costs would not be incurred,
the following methods and assumptions were used in estimating the fair
value of financial instruments:
Cash and Cash Equivalents -- The carrying amounts for cash and cash
equivalents approximates fair value.
Finance Receivables, Purchased Life Insurance Contracts, and Other
Receivables -- The determination of the fair value of these assets is
not practicable to estimate as there is no secondary market and the
Company holds these assets to maturity.
Notes payable and commitments, which are primarily adjustable rate
notes, are recorded at book values, which approximate the respective
fair values.
Unearned and Earned Discounts on Factored Accounts Receivable
- - - -------------------------------------------------------------
At the time of purchase, the unearned discount is deducted from the
face amount of the account receivable purchased and is recorded as a
reduction to such receivable. Unearned discounts are recognized as
income in accordance with the terms of the accounts receivable factoring
and security agreement. The factoring agreement contains an earnings
schedule detailing the discount the Company is entitled to charge at
various time intervals (typically a uniform discount during the first 30
days following the purchase and an incrementally higher discount every
15 days thereafter). The Company recognizes discounts on the first day
of each time interval. The Company's method of recognizing earned
discounts does not differ materially from the interest method. At the
time an account receivable is purchased, a due date is set by management
based on the anticipated payment date. This anticipated payment date is
used to identify past due receivables. The accrual of earned discounts
is discontinued when, in the opinion of management, the collection of
additional earnings from the client's customer, the client, guarantors
or collateral held, if any, is unlikely. Accounts receivable which have
been identified as past due may continue to accrue earnings if, in the
opinion of management, collection of the earnings from the client's
customer, the client, guarantors or collateral held, if any, is likely.
When accounts receivable are placed on non-accrual status, earned
discounts accrued in the current year are charged against current year's
earnings if, in the opinion of management, the collection of such
earnings is unlikely. Earned discounts accrued in prior years are
charged to the allowance for credit losses if, the opinion of management,
the collection of such earnings is unlikely.
Earned Discounts on Collateralized Advances and Overadvances Secured by
General Liens
- - - -------------------------------------------------------------------------
Earned discounts on Collateralized Advances accrue typically on the
highest outstanding amount of the advance during each calendar month (or
fraction thereof). Earned discounts on overadvances secured by general
liens accrue typically on the outstanding amount of the overadvance
during successive 15-day intervals. In both cases, accrued earnings are
typically required to be paid in full no less frequently than monthly in
arrears.
Fees and Other Income
- - - ---------------------
Fee income includes closing or application fees, letter of credit
and guaranty fees, and commitment or facility fees received from clients.
Commitment and facility fees are deferred and recognized over the term
of the commitment or facility on a straight line basis. Closing or
application fees are paid by clients to the Company to cover the cost of
performing credit investigations and field reviews and are recognized
when received. Letter of credit and guaranty fees are usually for a
sixty- to ninety-day period and are recognized when received.
Other income includes supplemental discounts, interest income, gain
on sale of investments and miscellaneous income.
Income Taxes
- - - ------------
The Company recognizes the amount of taxes payable or refundable in
the current year and deferred tax liabilities and assets for the future
tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In addition, the Company will
reduce any deferred tax assets by the amount of any tax benefit that more
than likely will not be realized.
Net Income Per Share
- - - --------------------
Net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalent
outstanding during each period. The Company's convertible subordinated
notes payable were anti-dilutive for purposes of calculating earnings per
share in 1995.
New Accounting Pronouncements
- - - -----------------------------
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets Disposed Of." This Statement prescribes the accounting
for the impairment of long-lived assets, such as property, plant and
equipment, identifiable tangible assets and goodwill related to those
assets. An impairment loss is recorded when the undiscounted cashflows
from the use and eventual disposal of the asset is less than the carrying
value of the asset. The Company does not believe that the adoption of
this Statement will have a material impact on its financial position or
results of operations. The Company plans to adopt this Statement
effective January 1, 1996.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement
gives the Company the option of either 1) continuing to account for stock
options and other forms of stock compensation under the current
accounting rules (APB No. 25, "Accounting for Stock Issued to Employees")
while providing the disclosures required under SFAS No. 123, or 2)
adopting SFAS No. 123 accounting for all stock compensation arrangements.
The Company plans to continue to account for stock options under the
current accounting rules and provide the additional disclosures as of
January 1, 1996. The Company does not believe that the adoption of this
Statement will have a material impact on its financial condition or
results of operations.
B. RECEIVABLES
-----------
Finance receivables consist of the following:
December 31,
-----------------------------
1995 1994
----------- -----------
Factored accounts receivable $25,169,997 $22,241,911
Collateralized Advances 10,842,047 7,215,277
Overadvances and accrued earnings
collateralized by general liens 1,407,233 279,111
Non-Earning Receivables 1,588,545 3,586,784
----------- -----------
Gross Finance Receivables 39,007,822 33,323,083
Less: Unearned discount (3,986,148) (3,309,499)
Less: Allowance for credit losse (2,350,968) (2,510,778)
----------- ----------
Finance receivables, net $32,670,706 $27,502,806
=========== ===========
Factored accounts receivable usually become due within a maximum of
90 days. After this time, the Company either requires the client to
repay the amount advanced on the receivable plus the earned discount
under the full recourse provisions of its agreements or, depending on an
analysis of collectability, extends the payment terms of the receivable
through a process referred to as "repurchasing" the receivable. If at
any time the Company determines that it is unlikely to receive payment
on a factored account receivable, the Company retains the right to
require its clients to repay the amount the Company has advanced on the
receivable plus the amount of discount earned.
Collateralized Advances secured by fixed assets (e.g., equipment or
real estate) are required to be repaid based typically on a 36 month
amortization schedule (although the amortization schedule in certain
circumstances may be significantly longer) with a final balloon payment
due not more than one year after the making of the Collateralized
Advance. If at the time the balloon payment is due the Company's funding
relationship with the client is extended, the Company will typically
renegotiate the balloon payment. Collateralized Advances secured by
current assets (e.g. inventory) are subject to a daily or weekly
borrowing base formula and come due in a single, lump sum payment not
more than one year after the making of the initial such Collateralized
Advance. If at the time such payment is due the Company's funding
relationship with the client is extended, the Company will typically
extend the maturity of the lump sum payment.
Overadvances secured by general liens are required to be repaid in
full (either in installments or in a single, lump sum payment in as
little as one week or as long as six months in accordance with a written
agreement between the Company and itc client.
Purchased life insurance contracts consist of:
December 31,
------------------------
1995 1994
---------- -----------
Purchased life insurance contracts $5,155,828 $ 6,241,783
Unearned discount (861,496) (1,415,087)
Due other beneficiaries (2,000) (292,744)
---------- -----------
Purchased life insurance contracts, net $4,292,332 $ 4,533,952
========== ===========
Amounts "due other beneficiaries" represents Lifetime Options'
obligation to pay amounts to third parties upon its receipt of proceeds
from the underlying life insurance policies. Included in purchased life
insurance contracts at December 31, 1995 and 1994 are $2.0 million and
$3.4 million, respectively, of life insurance contracts insuring
individuals with life expectancies in excess of twelve months.
Other receivables consist of the following:
December 31,
-----------------------
1995 1994
---------- ----------
Notes receivable $ 68,284 $ 198,871
Notes receivable - related parties - 100,000
Miscellaneous 18,868 33,678
Third party receivables in collection 2,669,190 3,056,089
---------- ----------
$2,756,342 $3,388,638
========== ==========
Changes in the allowance for credit losses were as follows:
BALANCE, January 1, 1993 $ 1,222,773
Provision for credit losses 4,858,235
Receivables charged off (4,143,679)
Recoveries 182,798
-----------
BALANCE, December 31, 1993 2,120,127
Provision for credit losses 5,359,159
Receivables charged off (5,015,957)
Recoveries 47,449
----------
BALANCE, December 31, 1994 2,510,778
Provision for credit losses 4,981,646
Receivables charged off (5,193,525)
Recoveries 52,069
-----------
BALANCE, December 31, 1995 $ 2,350,968
===========
During 1995, the Company did not experience any impairment of
receivables which qualify for treatment under SFAS No. 114, "Accounting
by Creditors for Impairment of Loan" and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
C. PROPERTY AND EQUIPMENT
----------------------
The Company's investment in property and equipment consists of the
following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
-------- --------
<S> <C> <C>
Furniture and equipment $1,109,894 $953,666
Automobiles 181,703 181,703
Less: Accumulated depreciation (753,968) (656,335)
----------- --------
$ 537,629 $479,034
========== ========
</TABLE>
The property and equipment are pledged as collateral under a
revolving line of credit (see Note F).
D. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
---------- ----------
<S> <C> <C>
Assets acquired in settlement of
Finance and Other Receivables:
Inventory held for sale $ 20,000 $ 102,508
Commercial property held for sale 862,750 697,500
Investment in residential property 910,000 1,287,400
---------- ----------
1,792,750 2,087,408
Condominium, not used in trade or
business 232,575 225,100
Deferred loan costs 23,998 95,907
Other - 38,668
---------- ----------
$2,049,323 $2,447,083
========== ==========
</TABLE>
E. CREDIT BALANCES OF FACTORING CLIENTS
At December 31, 1995 and 1994, credit balances of factoring clients
consist of: (i) a holdback reserve of $1,242,450 and $1,029,416,
respectively, which is deducted from the amount advanced to clients and
(ii) excess cash collateral of $1,091,279 and $635,622 respectively,
which are funds retained by the Company on cash receipts that are
subsequently remitted to clients.
F. NOTES PAYABLE
Notes payable consist of:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Notes payable - related parties;
interest at 1% over prime due
December 31, 1997 and on demand $ 161,788 $ 161,788
Notes payable; interest payable
at 1% over prime due December 31,
1999 and on demand 21,827 21,827
Convertible Subordinated Notes due
September 30, 2000 at initial interest
rate of 10% annually; total authorized
amount - $5,000,000 2,838,000 -
Revolving line of credit - interest
at 3/4% over the base rate; collateralized by
finance receivables and personal property;
total line - $25,000,000 12,262,522 10,697,900
Line of credit - interest at 1% over
prime, expires December 31, 1996,
collateralized by specific purchased life
insurance policies; total line
$2,000,000 1,239,699 879,101
----------- -----------
$16,523,836 $11,760,616
=========== ===========
</TABLE>
At December 31, 1995, 1994 and 1993, the prime rate was 8.50%, 8.75%
and 6.0%, respectively.
These notes are classified on the balance sheet as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1994
----------- ----------
<S> <C> <C>
Current portion of notes payable $13,516,938 $11,591,718
Current portion of notes payable -
related party 103,000 103,000
Noncurrent portion of notes payable -
related parties 58,788 58,788
Noncurrent portion of notes payable -
other 2,845,110 7,110
----------- -----------
$16,523,836 $11,760,616
=========== ===========
</TABLE>
Aggregate annual principal payments on notes payable for five years
subsequent to December 31, 1995 are as follows:
Twelve Months Ending December 31,
---------------------------------
1996 $ 1,357,416
1997 12,262,522
1998 -
1999 65,898
2000 5,000,000*
-----------
$18,685,836
===========
* Includes $2,162,000 in additional Convertible Subordinated Notes
issued in January 1996. See Note M.
In May 1994, the Company paid off its existing $15 million credit
facility in full and replaced it with a $25 million secured credit
facility with a different lender. As of December 31, 1995, the Company
had approximately $12.7 million available for borrowing under the $25.0
million revolving line of credit. Borrowings under the credit facility
bear interest at the bank's base rate plus .75%. The current maturity
date of the credit facility is May 13, 1997. The credit facility
includes a $5 million sub-facility for the issuance of letters of credit
and included a $5 million sub-facility the proceeds of which were used
to make advances to clients secured by machinery and equipment. The $5
million sub-facility for equipment advances expired on December 31, 1995
and the balance outstanding under the sub-facility is currently being
repaid by the Company in accordance with its terms in equal monthly
installments based on a 36 month amortization schedule with a balloon
payment due May 13, 1997. The Company is having discussions with its
lenders with respect to a new equipment sub-facility. The terms of the
revolving line of credit require the Company to, among other things: (i)
maintain tangible net worth (as defined) and subordinated debt; (ii)
maintain a ratio of liabilities and contingent liabilities to tangible
net worth plus subordinated debt; (iii) limit investments in certain
subsidiaries; (iv) maintain a ratio of earnings before taxes plus
interest and certain other items to interest expense; (v) limit advances
to clients and obligors; (vi) limit indebtedness (as defined) to other
parties; (vii) restrict liens on assets and restrict sales of assets;
and (viii) limit expenditures on capital assets.
Bank commitment fee expense for the years ended December 31, 1995,
1994 and 1993 was $41.9 thousand, $24.7 thousand, and $31.9 thousand,
respectively.
During 1994 Lifetime Options, Inc., a Viatical Settlement Company
(a wholly-owned subsidiary of the Company), secured a $2 million
revolving line of credit with a local federal savings bank. This line
of credit was renewed at December 31, 1995. This revolving line of
credit: (i) bears interest at the bank's prime rate plus 1%; (ii) is
payable on demand or if no demand is made on December 31, 1996; (iii) is
collateralized by specific purchased life insurance contracts; and (iv)
entitles the bank to receive 50% of collections. As of December 31,
1995, Lifetime Options had approximately $760 thousand available under
the line of credit.
Convertible Subordinated Notes. On September 11, 1995 the Company
issued $2,838,000 in aggregate principal amount of its Convertible
Subordinated Notes due September 30, 2000 in exchange for 447,200 shares
of the Company's Common Stock (currently held by the Company as treasury
stock). The Convertible Subordinated Notes (i) mature on September 30,
2000, (ii) currently bear interest at a rate of 10% per annum, which rate
of interest may fluctuate with the prime rate, but may not fall below
8% nor rise above 10% per annum, (iii) are convertible into common stock
of the Company at $7.50 per share, (iv) are subordinated in right of
payment to the Company's obligations under its secured revolving credit
facility and (v) were issued pursuant to an indenture which contains
certain covenants which are less restrictive than those contained in the
Company's secured revolving credit facility. Upon the occurrence of
certain change of control events, the holders of the Convertible
Subordinated Notes have the right to have their notes redeemed at par.
See Note M.
The notes payable to related parties arose from cash advances to the
Company and are due to individuals and trusts related to the former
principal owners of the Company. Interest expense on notes payable to
related parties for the years ended December 31, 1995, 1994 and 1993 was
$16.2 thousand, $33.4 thousand, and $50.4 thousand, respectively.
G. SHAREHOLDERS' EQUITY
--------------------
During 1993, the Company received proceeds of $150,073 from the
exercise of 21,165 options. There were no options exercised during 1995
or 1994.
In August 1989, the Company, in connection with an initial public
offering, sold warrants to purchase an aggregate of 90,000 shares of
common stock to the underwriters and finders for a nominal price,
exercisable at $7.80 per share. These warrants were exercisable for a
period of four years commencing one year after the public sale. During
1993, 3,000 (of the remaining 6,000 unexercised) warrants were exercised
with net proceeds of $23,400. The balance of the unexercised warrants
(3,000 warrants) expired in 1994.
On September 11, 1995, the Company exchanged its Convertible
Subordinated Notes for 447,200 shares of its stock currently held in the
Company's treasury. Costs incurred in this transaction amounted to
$33,901. For details of this transaction, see Note F - Convertible
Subordinated Notes and Note M - Subsequent Events.
H. STOCK OPTION AND BENEFIT PLANS
------------------------------
The Company has reserved 175,000 shares of common stock for issuance
under its qualified stock option plan. Options to purchase common stock
are granted at a price equal to the fair market value of the stock at the
date of grant or 110% of fair market value of the stock at the date of
grant for stockholders owning 10% or more of the combined voting stock
of the Company. The stock options issued are exercisable beginning two
years after the grant date and must be exercised (if at all) within 5
years. The following table summarizes qualified stock option transactions
from 1993 through 1995.
<TABLE>
<CAPTION>
Total Option Price
Options Per Share
------- ----------------
<S> <C> <C>
Outstanding, January 1, 1993 112,870 $ 7.000 to $14.000
Granted 1,200 $ 5.875 to $6.500(1)
Forfeited (200) $14.000
Exercised (19,499) $ 7.000 to $ 7.125
-------
Outstanding, December 31, 1993 94,371 $ 7.000 to $14.000
Granted 1,200 $ 5.750 to $ 6.500(1)
Forfeited (1,134) $ 6.500 to $14.000(1)
-------
Outstanding, December 31, 1994 94,437 $ 5.750 to $14.000
Granted 1,200 $ 5.375 to $ 7.6875
Forfeited 53,470 $ 5.875 to $14.000
-------
Outstanding, December 31, 1995 42,167
=======
Exercisable, December 31, 1995 32,897
=======
</TABLE>
(1) In May 1994, 11,200 stock options issued in 1992 and 1993 at
$11.6250 to $17.000, were repriced to $6.50.
The Company has reserved 50,000 shares of common stock for issuance under
its non-qualified stock option plan. Options to purchase shares of common stock
are granted at a price equal to the fair value of the stock at the date of
grant. The options issued are exercisable two years after the grant date and
must be exercised (if at all) within 5 years. The following table summarizes
non-qualified stock option transactions from 1992 through 1995:
<TABLE>
<CAPTION>
Total Option Price
Options Per Share
------- ------------------
<S> <C> <C>
Outstanding, January 1, 1993 23,334 $ 7.125 to $14.000
Exercised (1,666) $ 7.125
------
Outstanding, December 31, 1993 21,668 $ 7.125 to $14.000
Forfeited (13,000) $ 7.125 to $14.000
-------
Outstanding, December 31, 1994 8,668 $ 7.125 to $14.000
Granted 10,000 $ 5.600
Forfeited (6,668) $ 7.125
-------
Outstanding, December 31, 1995 12,000
=======
Exercisable, December 31, 1995 1,334
=======
</TABLE>
Effective January 1, 1990, the Company adopted the "Allstate Financial
Corporation 401(k) Retirement Plan" (the Plan) for the benefit of the Company's
employees. The Plan provides for the deferral of up to 15% of a participating
employee's salary, subject to certain limitations, and a discretionary
contribution by the Company. The Company's contribution is allocated to
participating employees based on relative compensation. The Company's
contribution for the years ended December 31, 1995, 1994 and 1993 was $34,563,
$38,100 and $42,924, respectively.
I. INCOME TAXES
The tax provision consists of:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current $276,500 $394,500 $699,000
Deferred 16,000 (307,000) (433,000)
-------- -------- --------
292,500 87,500 266,000
-------- -------- --------
State:
Current 38,500 - 17,000
Deferred - - (17,000)
-------- ------- --------
38,500 - -
-------- ------- --------
TOTAL $331,000 $87,500 $266,000
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1994 1993
-------- ------- --------
<S> <C> <C> <C>
Tax Expense at
Statutory Rate $276,100 $79,900 $246,000
Increase (Decrease)
Resulting from:
State Income Taxes,
Net of Federal Income
Tax Effect 24,500 - -
Non-deductible expense 19,100 7,600 8,000
Other 11,300 - 12,000
-------- ------- --------
$331,000 $87,500 $266,000
======== ======= ========
Effective Tax Rate 40.8% 37.2% 36.8%
==== ==== ====
December 31,
-----------------------------
1995 1994
-------- --------
Deferred tax asset:
Allowance for credit losses $893,000 $909,000
======== ========
</TABLE>
J. RELATED-PARTY TRANSACTIONS
--------------------------
Certain members of the immediate families of Eugene Haskin and Leon
Fishman, directly or through trusts, have provided financing to Lifetime
Options through unsecured loans with interest payable monthly at an
annual interest rate of 1% over the prime rate. One percent (1%) over
the prime rate is the same rate paid by Lifetime Options to its
unaffiliated, bank lender.
Lifetime Options' total indebtedness to members of Mr. Haskin's
immediate family was $15,146 at December 31, 1995 and 1994. During 1995
and 1994, at the request of members of Mr. Haskin's family, Lifetime
Options repaid $-0- and $445,407, respectively, of long term
indebtedness. During 1995 and 1994, Lifetime Options paid aggregate
interest on these loans of $1,514 and $16,267, respectively.
Lifetime Options' total indebtedness to members of Leon Fishman's
immediate family was $43,642 at December 31, 1995 and 1994. During 1995
and 1994, Lifetime Options paid aggregate interest of $4,360 and $8,780,
respectively. At various times during 1994, Leon Fishman loaned Lifetime
Options a total of $265,000 which was repaid in full by December 31,
1994. During the periods of indebtedness, Mr. Fishman received $2,467
of interest. At January 1, 1994, Craig Fishman was owed $18,659 by
Lifetime Options. The level of borrowings from Craig Fishman increased
at various intervals during 1994 to $97,800. As of December 31, 1994 the
indebtedness of $97,800 was paid in full. Craig Fishman received
interest from Lifetime Options of $2,610 in 1994. Neither Craig Fishman
nor Leon Fishman loaned money to Lifetime Options in 1995 and neither of
them received any interest in 1995.
In February 1994, the Company made a loan in the amount of
$1,000,000 to Eugene Haskin, a director of the Company, and his wife.
The loan was unanimously approved by all members of the Board of
Directors of the Company (with one director absent and Mr. Haskin
abstaining) and conformed to a previous loan to an unrelated party. The
loan bore interest at a rate equal to 2% per month, was collateralized
by a pledge of securities having a market value of approximately
$1,600,000 and was due on or before July 15, 1994. The loan, together
with all accrued interest thereon, was repaid on March 24, 1994.
Rental payments of $24,000 were received by the Company in 1995,
1994 and 1993, respectively, from its President, for the personal use of
a condominium owned by a subsidiary of the Company.
K. FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT
CONCENTRATIONS
--------------------------------------------------------------------
The Company is a party to financial obligations with off-balance
sheet risk in the normal course of business to meet the financing needs
of its clients. These financial obligations include conditional
commitments to purchase receivables, obligations under guaranties issued
by the Company and reimbursement obligations under letters of credit
issued for the Company's account. These obligations involve, to varying
degrees, elements of credit risk in excess of the amount recognized in
the balance sheet.
The Company's maximum exposure to credit loss under financial
obligations with off-balance sheet risk is represented by the contractual
or notional amount of these obligations. The Company uses the same
credit policies in making conditional commitments and incurring
contingent obligations as it does for on-balance sheet obligations.
These commitments have fixed expiration dates or other termination
clauses and usually require payment of a fee by the client. Since many
of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Company receives collateral to secure letters of credit and
guaranties.
Financial obligations whose contract or notional amounts represent
credit risk are as follows:
December 31,
--------------------------
1995 1994
----------- -----------
Conditional Commitments to purchase
receivables $59,153,000 $57,157,000
Standby letters of credit and guaranties $ 726,967 $ 347,032
For the year ended December 31, 1995, gross earnings from three
clients accounted for 37% of the Company's total earned discounts. At
December 31, 1995, two clients each accounted for more than 10% of the
Company's outstanding gross finance receivables. For the year ended
December 31, 1994, gross earnings from one client accounted for 20% of
total earned discounts. At December 31, 1994, one client accounted for
more than 10% of the Company's outstanding gross finance receivables.
For the year ended December 31, 1993, gross earnings from one client
accounted for 11% of total earned discounts. At December 31, 1993, no
one customer's aggregate gross finance receivables balance exceeded 10%
of the Company's gross finance receivables balance.
L. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases office space under operating leases with Consumer
Price Index escalations and rental escalations based on increases in base
operating expenses as defined in the agreements. The lease was
renegotiated during 1995 and extended for six years from December 1, 1995
at a reduced rental. The Company also pays rent for subsidiaries and
storage space. Rent expense was $232,500, $222,000, and $242,000 in
1995, 1994 and 1993, respectively.
Future minimum rental payments are as follows:
Twelve Months Ended December 31,
--------------------------------
1996 $ 159,000
1997 164,000
1998 169,000
1999 173,000
2000 179,000
2001 184,000
----------
$1,028,000
==========
The Company is a defendant in White, Trustee v. Allstate Financial
Corporation pending in the U.S. Bankruptcy Court for the Western District
of Pennsylvania. The Company provided receivables financing and advances
for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject
of a leveraged buy-out and subsequently filed a bankruptcy petition. In
1991, the Lyon's trustee brought an action against the Company claiming,
inter alia, fraudulent transfer and breach of contract. A summary
judgment was granted in favor of the Company which reduced the fraudulent
transfer claim by $1.6 million. As a consequence, the remaining
fraudulent transfer claim was approximately $1,000,000. The trustee has
not actively pursued the breach of contract claim. In late 1994, the
Company reached a settlement agreement with the Lyons trustee, subject
to approval by the bankruptcy court, which would have released the
Company from all claims upon the payment of $300,000. In connection with
the settlement, the Company paid and added $300,000 to the provision for
credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin-
Williams Company, objected to the proposed settlement amount and, in
March 1995, the objection was sustained by the bankruptcy court. The
Company has appealed the order sustaining the objection. The appeal is
currently pending. Management does not believe the Company has a
material exposure in excess of the previously agreed upon and paid
settlement amount.
In connection with the same transaction, the Company was also named
in January 1994 as a defendant in Sherwin-Williams Company v. Robert
Castello et. al. pending in the United States District Court for the
Northern District of Ohio. Sherwin-Williams is suing all parties with
any involvement in the transaction to recover damages allegedly incurred
by Sherwin-Williams in connection with the leveraged buy-out and the
bankruptcy litigation arising therefrom. Sherwin-Williams asserts that
it has or will incur pension fund liabilities and other liabilities as
a result of the transaction in the approximate amount of $11 million and
has asserted claims against the Company in that amount. The complaint
seeks relief against the Company based upon a claim of
"misrepresentation" without a specific identification of the alleged
misrepresentation made by the Company. Management does not believe the
litigation will have a material effect on the financial position or
results of operations of the Company because, in management's opinion,
the claims are without merit. The Company has filed a motion to dismiss
the claims and a motion to stay discovery pending a ruling on the motion
to dismiss. The motion to stay discovery has been granted and the motion
to dismiss is currently pending. A hearing date on the motion to dismiss
has not yet been set.
The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee
v. Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy
Court in the District of Massachusetts. The Company factored the
accounts receivable of Clearpoint Research Corporation ("CRC") from late
1992 through early 1993. In July 1993 CRC filed a petition in
bankruptcy, after the Company had collected all amounts owed to it. The
bankruptcy trustee has sued the Company seeking recovery of alleged
preferential transfers made during the course of the factoring
relationship. The bankruptcy trustee alleges that the Company did not
properly perfect its security interest in the accounts receivable. No
specific damage amount is specified in the complaint but it is assumed
the bankruptcy trustee is seeking recovery of the full amount of accounts
receivables collected (approximately $4 million). The Company has filed
an answer to the complaint denying the substantive allegations asserted
by the bankruptcy trustee. The Company has also filed a motion to remove
the action to federal district court. The motion is currently pending.
The Company believes it has a number of strong defenses to the complaint
and intends to vigorously defend all claims. The litigation is in a
preliminary stage and the probability of an unfavorable outcome and the
potential amount of loss, if any, cannot be determined or estimated at
this time.
As previously disclosed in the Company's Form 10-QSB for the quarter
ended March 31, 1995, the Company has reached a settlement with the
Trustee in the bankruptcy of Premium Sales Corporation, a former client
of one of the Company's wholly-owned subsidiaries. The settlement
required the Company and one of its wholly-owned subsidiaries to waive
claims totalling approximately $1.5 million and to make a cash payment
of $1.4 million. On July 21, 1995, the Company placed the full cash
settlement amount in escrow in accordance with the terms of the
settlement. The settlement is intended to be a full release of any and
all claims between the Company (and its subsidiaries) and the Trustee
including, without limitation, any alleged preference liability for the
Company and its subsidiaries. The settlement was approved by the
bankruptcy court in January 1996. The settlement will become fully
effective and the settlement monies will be disbursed at the time a plan
of distribution in the Premium Sales Corporation bankruptcy is approved
by the bankruptcy court. The impact of this settlement has been
reflected in the Company's financial statements.
Except as described above, the Company is not party to any
litigation other than routine proceedings incidental to its business, and
the Company does not expect that these proceedings will have a material
effect on the Company. From time to time, the Company is required to
initiate litigation to collect amounts owed by former clients, guarantors
or obligors. In connection with such litigation, the Company
periodically encounters counterclaims by defendant(s) for material
amounts. Such counterclaims are typically without any factual basis and,
management believes, are usually asserted for defensive purposes by the
litigant.
M. SUBSEQUENT EVENTS
-----------------
On November 28, 1995 the Company commenced an exchange offer
pursuant to which the Company offered to issue to shareholders generally
up to an aggregate of $2,162,000 in additional Convertible Subordinated
Notes in exchange for common stock of the Company. The offer expired by
its terms on January 12, 1996 and the Company issued approximately
$2,160,000 in additional Convertible Subordinated Notes in exchange for
338,275 shares of the Company's common stock.
<TABLE>
<CAPTION>
SCHEDULE IV
INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT
Balance at Balance End of Period
Beginning of Amounts ---------------------
Name of Debtor Period Additions Paid Current Not Current
- - - -------------- ------------ ---------- --------- ------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995:
Various $161,788 $ - $ - $103,000 $ 58,788
======== ======== ======== ======== ========
Year Ended December 31, 1994:
Various $602,759 $377,237 $818,208 $103,000 $ 58,788
======== ======== ======== ======== ========
Year Ended December 31, 1993:
Various $803,271 $100,000 $300,512 $ 79,904 $522,855
======== ======== ======== ======== ========
</TABLE>
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.
ALLSTATE FINANCIAL CORPORATION
By: /s/ Leon Fishman
------------------------------
Leon Fishman
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.
/s/ Leon Fishman Leon Fishman
---------------------------
Date March 28, 1996 President, Chief Executive
--------------------------- Officer
/s/ Lawrence M. Winkler Lawrence M. Winkler
----------------------------
Date March 20, 1996 Secretary/Treasurer,
---------------------------- Principal Accounting and
Chief Financial Officer and
Director
/s/ Eugene R. Haskin Eugene R. Haskin
----------------------------- Director
Date March 19, 1996
-----------------------------
/s/ James Spector James Spector
-----------------------------
Date March 22, 1996 Director
-----------------------------
/s/ Craig Fishman Craig Fishman
-----------------------------
Date March 22, 1996 Sr. Vice President, General Counsel
----------------------------- and Director
Exhibit 10.7
FOURTH AMENDMENT AND WAIVER
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
FOURTH AMENDMENT AND WAIVER ("Fourth Amendment") dated as
of March 31, 1995 to Revolving Credit and Security Agreement dated
as of May 13, 1994 (as amended and waived to the dated hereof and
as may be further amended, supplemented, modified or waived from
time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL
CORPORATION, a corporation organized under the laws of the
Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST
COMPANY ("IBJS") as the lender under the Loan Agreement (IBJS, and
each of the other lenders which may now or in the future be a party
to the Loan Agreement, the "Lenders") and IBJS, as agent for the
Lenders (IBJS, in such capacity, the "Agent").
BACKGROUND
Borrower has requested that Agent and Lenders amend and
waive certain provisions of the Loan Agreement and Agent and
Lenders are willing to do so on the terms and conditions hereafter
set forth.
NOW, THEREFORE, in consideration of any loan or advance
or grant of credit heretofore or hereafter made to or for the
account of Borrower by Lenders, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
2. Amendment to Loan Agreement. Subject to
satisfaction of the conditions set forth in Section 4 below,
Section 1.2 of the Loan Agreement is amended by deleting the
defined term "EBIT" and inserting the following in lieu thereof:
"EBIT" shall mean Borrower's and its Subsidiaries' net
income before (i) interest and taxes on a consolidated basis
and (ii) any provision for credit loss and, without
duplication, any allowance for credit loss, in each case,
allocable or attributable to losses (or potential losses)
related to (x) transactions between the Borrower and/or its
Subsidiaries and Premium Sales Corporation (and its
affiliates) or (y) claims at any time pending or threatened in
connection with the insolvency of Premium Sales Corporation
(and its affiliates), provided that under no circumstances
shall EBIT at any time be increased pursuant to this clause
(ii) by more than $2,000,000.00.
3. Waiver of Specified Defaults and Events of
Default. Subject to satisfaction of the conditions set forth in
Section 4 below, the Lenders and the Agent hereby waive any and all
Defaults or Events of Default which would exist (and any and all
rights and remedies which may exist as a consequence thereof) under
or with respect to Section 7.19 of the Loan Agreement on or as of
the Fourth Amendment Effective Date (as defined in Section 4 below)
absent this Fourth Amendment.
4. Conditions of Effectiveness. This Fourth Amendment
shall become effective as of the date first above written (the
"Fourth Amendment Effective Date") upon receipt by Agent, in form
and substance satisfactory to Agent, of three (3) copies of this
Fourth Amendment executed by Borrower and consented to by each of
the Guarantors.
5. Representations and Warranties. Borrower hereby
represents and warrants as of the Fourth Amendment Effective Date
as follows:
(a) This Fourth Amendment and the Loan Agreement, as
amended and waived hereby, constitute the legal, valid and
binding obligations of Borrower and are enforceable against
Borrower in accordance with their respective terms.
(b) After giving effect to this Fourth Amendment,
Borrower hereby reaffirms all covenants, representations and
warranties made in the Loan Agreement and the Security
Agreement and agrees that all such covenants, representations
and warranties shall be deemed to have been remade as of the
Fourth Amendment Effective Date.
(c) No Event of Default or Default has occurred and is
continuing or would exist, in each case, after giving effect
to this Fourth Amendment.
(d) Borrower has no defense, counterclaim or offset to
the Obligations.
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of Sections 2 and 3 hereof,
each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import shall
mean and be a reference to the Loan Agreement as amended and
waived hereby.
(b) Except as specifically amended and waived hereby,
the Loan Agreement and all other documents, instruments and
agreements executed and/or delivered in connection therewith,
shall remain in full force and effect, and are hereby ratified
and confirmed.
(c) Except as expressly set forth herein, the execution,
delivery and effectiveness of this Fourth Amendment shall not
operate as a waiver of any right, power or remedy of Agent and
Lenders, nor constitute a waiver of any provision of the Loan
Agreement or any other documents, instruments or agreements
executed and/or delivered under or in connection therewith.
7. Governing Law. This Fourth Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns and shall be governed by
and construed in accordance with the laws of the State of New York.
8. Headings. Section headings in this Fourth Amendment
are included herein for convenience of reference only and shall not
constitute a part of this Fourth Amendment for any other purpose.
9. Counterparts; Telecopy Signatures. This Fourth
Amendment may be executed by the parties hereto in one or more
counterparts, each of which taken together shall be deemed to
constitute one and the same instrument. Any signature delivered by
a party by facsimile transmission shall be deemed to be an original
signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Fourth Amendment as of the
day and year first above written.
IBJ SCHRODER BANK & TRUST
COMPANY, as Agent and Lender
By Alfred J. Scoyni
Name: Alfred J. Scoyni
Title:Assistant Vice President
ALLSTATE FINANCIAL CORPORATION
By Craig Fishman
Name: Craig Fishman
Title: Vice President
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By Craig Fishman
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. SETTLEMENT SOLUTIONS, INC.
By Craig Fishman By Craig Fishman
Name: Craig Fishman Name: Craig Fishman
Title: Vice President Title: Vice President
RECEIVABLE FINANCING CORPORATION
By Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF AMERICA, INC.
By Craig Fishman
Name: Craig Fishman
Title: Vice President
AFC HOLDING CORPORATION
By Craig Fishman
Name: Craig Fishman
Title: Vice President
Exhibit 10.7
FIFTH AMENDMENT
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
FIFTH AMENDMENT ("Fifth Amendment") dated as of June
13, 1995 to Revolving Credit and Security Agreement dated as of
May 13, 1994, (as amended to the date hereof and as may be
further amended, supplemented or modified from time to time, the
"Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a
corporation organized under the laws of the Commonwealth of
Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS")
as the lender under the Loan Agreement (IBJS, and each of the
other lenders which may now or in the future be a party to the
Loan Agreement, the "Lenders") and IBJS, as agent for Lenders
(IBJS, in such capacity, the "Agent").
BACKGROUND
Borrower has consented to IBJS assigning to National
Canada Finance Corp. ("NCFC") a forty percent (40%) interest in
IBJS's rights under the Loan Agreement, the Revolving Credit
Note, the Other Documents, and all other instruments and
documents related thereto. In order to induce NCFC to assume the
obligations of IBJS as Lender to the extent of the Commitment
Percentage assigned, it has requested certain amendments be made
to the Loan Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of any loan or advance
or grant of credit heretofore or hereafter made to or for the
account of Borrower by Lenders, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
2. Amendment to Loan Agreement. Subject to
satisfaction of the conditions precedent set forth in Section 3
below, the Loan Agreement is hereby amended as follows:
(a) Section 1.2 of the Loan Agreement is hereby
amended as follows:
(i) clause (p) of the defined term "Eligible
Receivables" is amended by deleting "Stroudsburg Dyeing &
Finishing Company and Ellis Graphics Corporation" appearing
therein and inserting "S.O.S. Enterprises, Ltd." in lieu thereof.
(ii) the following defined terms are hereby amended in
their entirety to provide as follows:
"Required Lenders" shall mean, at any time for the
determination thereof, Lenders holding sixty six and two thirds
percent (66 2/3%) or more of the outstanding Advances at such
time or, if no Advances are outstanding at such time, sixty six
and two thirds percent (66 2/3%) or more of the Commitment
Percentages of all Lenders.
"Revolving Credit Note" shall mean the promissory
note(s) referred to in Section 2.1(a) hereof and all
replacements, substitutions and amendments of such promissory
note, including any promissory note(s) issued to any Lender.
(iii) Clause (t) of the definition of "Eligible
Receivables" is hereby amended in its entirety to provide as
follows:
"(t) notwithstanding (a) through (s) above, that
is otherwise acceptable to Required Lenders as
determined in good faith by Required Lenders in
the exercise of their discretion in a reasonable
manner."
(b) Section 2.1(a) of the Loan Agreement is hereby
amended by amending the last two sentences thereof in their
entirety to provide as follows:
"The sum of the amounts derived from Section
2.1.(a) (y) (i) at any time and from time to time
shall be referred to as the "Borrowing Base". The
Revolving Advances shall be evidenced by the
Revolving Credit Note in substantially the form
attached hereto as Exhibit 2.1(a) issued by
Borrower to each Lender in an amount equal to such
Lender's Commitment Percentage of the Maximum
Revolving Advance Amount."
(c) Section 2.1(e) of the Loan Agreement is hereby
amended in its entirety to provide as follows:
"(b) Discretionary Rights. The Advance Rates may
be (i) decreased by Agent at any time and from time
to time in the exercise of its reasonable
discretion or (ii) increased by Required lenders at
any time and from time to time in the exercise of
their reasonable discretion. Borrower consents to
any such increases or decreases and acknowledges
that decreasing the Advance Rates may limit or
restrict Advances requested by Borrower. Agent
shall give Borrower five (5) days prior written
notice of any decrease in the Advance Rates."
(d) Section 2.12 (e) of the Loan Agreement is hereby
amended by adding the following at the end thereof:
"In the event Agent Fails to remit to any Lender
such Lender's pro rata share of interest or fees to
which such Lender is entitled in a prompt manner
but in any event within one (1) Business Day of the
payment of same by Borrower to Agent, Agent shall
pay to such Lender on Demand for each day there is
a delay in payment an amount equal to the product
of (i) the Federal Funds Rate (computed on the
basis of a year of 360 days), times (ii) such
amount."
(e) The third sentence of Section 2.12 (h) is hereby
amended by deleting the reference to "this
paragraph (e)" appearing therein and inserting a
reference to "this paragraph (h)" in lieu thereof.
(f) Section 9.11 of the Loan Agreement is hereby amended
by adding the following in the second line thereof after "Fiscal
Year" the phrase ", furnish Agent".
(g) Section 11.1 of the Loan Agreement is hereby amended
by (i) deleting "at the option of Agent" in the seventh line
thereof and inserting in its place and stead "upon the declaration
of the Agent with the consent of or at the direction of Required
Lenders", and (ii) inserting in the eighth line thereof before the
word "Agent" the phrase "with the consent of or at the direction of
Required Lenders".
(h) Section 13.1 of the Loan Agreement is hereby amended
by (i) amending the second sentence thereof in its entirety so that
it provides "The Term shall be automatically extended for
successive periods of one (1) year each unless (except as provided
in the next sentence) terminated by Borrower or the Required
Lenders at the end of such initial Term or any successive Term by
giving the other parties not less than thirty (30) days prior
written notice, provided, however, if the initial Term (or any
extension thereof) is extended in accordance with the terms hereof
and any Lender (a "Terminating Lender") shall have given Borrower
not less than thirty (30) days notice prior to such extension that
such Lender does not want the Term (or any extension thereof)
extended, Borrower shall, on or before the date of such extension,
pay in full all principal amounts due the Terminating Lender (based
on such Terminating Lender's Commitment percentage of all
outstanding Advances (other than Letters of Credit) plus all
accrued interest and fees payable for the benefit of such
Terminating Lender), provided that (x) the Maximum Revolving
Advance Amount shall at the time of such payment be reduced by an
amount equal to the Terminating Lender's Commitment Percentage of
the Maximum Revolving Advance Amount as in effect immediately prior
to such extension, (y) the Commitment Percentage of each remaining
Lender shall be adjusted to equal a fraction (1) the numerator of
which is such Lender's Commitment Percentage (before give effect to
any adjustment) and (2) the denominator of which is the sum of all
remaining Lenders' Commitment percentages before giving effect to
any adjustment), and (z) Borrower shall pay to Agent an amount
equal to the amount, if any, by which outstanding Advances exceed
the maximum amount of Advances which can be outstanding pursuant to
the terms of this Agreement and (ii) inserting in the fourteenth
line thereof after the word "pays" the phrase "to Agent for the
ratable benefit of Lenders".
(i) Section 14.3 of the Loan Agreement is hereby amended
by inserting in the twelfth line thereof after the word "by" the
phrase "or on behalf of".
(j) Section 14.9 of the Loan Agreement is hereby amended
by inserting in the second line thereof after the word "from" the
phrase "or on behalf of".
(k) Section 15.2(b) of the Loan Agreement is hereby
amended by amending clauses (i) through (iv) in their entirety to
provide as follows:
"(i) increase or decrease the amount of the
Commitment Percentage of any Lender, it being understood and agreed
that this Section 15.2 (b)(i) does not (and shall not be deemed to)
require the consent of any Lender (other than a transferor Lender
or Purchasing Lender) to an increase or a decrease in the
Commitment Percentage of a transferor Lender or a Purchasing Lender
in connection with an assignment effected in accordance with
Section 15.3 (d) hereof.
(ii) change the maturity of the Revolving Credit
Note, or increase the Maximum Revolving Advance Amount, the Maximum
Equipment Value Advance Amount or the sublimit with respect to
Letters of Credit, or reduce the rate or extend the time of payment
of interest or of any fee payable by Borrower to Agent for the
ratable benefit of Lenders pursuant to this Agreement.
(iii) alter the definition of the term Required
Lenders or the eligibility standards applied by Agent to the
determination of which Receivables are Eligible Receivables.
(iv) alter, amend or modify this Section 15.2(b) or
release Collateral having a fair market value of in excess of
$100,000, it being understood and agreed that this Section 15.2(b)
(iv) does not (and shall not be deemed to) require the consent of
any Lender (or all of the Lenders) in connection with a sale,
transfer, conveyance, assignment or other disposition of any of
Borrower's properties or assets (or any of the Collateral) to the
extent any such sale, transfer, conveyance, assignment or other
disposition is authorized or permitted by the terms of this
Agreement or any Other Document.
(l) Section 15.6(B) of the Loan Agreement is hereby
amended in its entirety to provide as follows:
"(B) If to any Lender other than Agent, as
specified in the applicable Commitment Transfer
Supplement (or a schedule thereto)."
3. Conditions of Effectiveness. This Fifth Amendment
shall become effective (the "Fifth Amendment Effective Date") upon
the receipt by Agent, in form and substance satisfactory to Agent,
of each of the following: (i) four (4) copies of this Fifth
Amendment executed by Borrower and consented to by each of the
Guarantors, (ii) two (2) executed Revolving Credit Notes (one
payable to the order of IBJS in the principal amount of $15,000,000
and the other payable to the order of National Canada Finance Corp.
in the principal amount of $10,000,000) which shall replace the
Second Amended and Restated Revolving Credit Note, and (iii) a
Commitment Transfer Supplement duly executed by the Borrower,
Agent, IBJS and National Canada Finance Corp. in form and substance
satisfactory to Agent. Promptly following the effectiveness of
this Fifth Amendment, Agent shall deliver to Borrower the original
Second Amended and Restated Revolving Credit Note marked "Replaced
and Cancelled". In the event this Fifth Amendment does not become
effective by June 16, 1995 the replacement notes shall be returned
to Borrower and the Second Amended and Restated Note shall remain
in full force and effect.
4. Representations and Warranties. Borrower hereby
represents and warrants as of the Fifth Amendment Effective Date as
follows:
(a) This Fifth Amendment, the replacement Revolving
Credit Notes and the Loan Agreement, as amended hereby,
constitute legal, valid and binding obligations of
Borrower and are enforceable against Borrower in
accordance with their respective terms.
(b) Upon the effectiveness of this Fifth Amendment,
Borrower hereby reaffirms all covenants, representations
and warranties made in the Loan Agreement to the extent
the same are not amended hereby and agrees that all such
covenants, representations and warranties shall be deemed
to have been remade as of the Fifth Amendment Effective
Date.
(c) No Event of Default or Default has occurred and
is continuing or would exist after giving effect to this
Fifth Amendment.
(d) Borrower has no defense, counterclaim or offset
to the Obligations.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each
reference in the Loan Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall mean and be a
reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended or provided for
herein, the Loan Agreement and all other documents, instruments and
agreements executed and/or delivered in connection therewith, shall
remain in full force and effect, and are hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this
Fifth Amendment shall not operate as a waiver of any right, power
or remedy of Agent and Lenders, nor constitute a waiver of any
provision of the Loan Agreement, or any other documents,
instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Fifth Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns and shall be governed by
and construed in accordance with the laws of the State of New York.
7. Headings. Section headings in this Fifth Amendment
are included herein for convenience of reference only and shall not
constitute a part of this Fifth Amendment for any other purpose.
8. Counterparts; Telecopy Signatures. This Fifth
Amendment may be executed by the parties hereto in one or more
counterparts, each of which taken together shall be deemed to
constitute one and the same agreement. Any signature delivered
(BALANCE OF PAGE INTENTIONALLY LEFT BLANK)
by a party by facsimile transmission shall be deemed to be an
original signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Fifth Amendment as of the
day and year first above written.
IBJ SCHRODER BANK & TRUST
COMPANY as Agent and Lender
By: David G. Goodall
Name: David G. Goodall
Title: Vice President
ALLSTATE FINANCIAL CORPORATION
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By: Craig Fishman
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Vice President
RECEIVABLE FINANCING CORPORATION
By: Craig Fishman
Name: Craig Fishman
Title: Vice President
SIGNATURES CONTINUED ON NEXT PAGE
BUSINESS FUNDING OF AMERICA, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Vice President
AFC HOLDING CORPORATION
By: Craig Fishman
Name: Craig Fishman
Title: Vice President
SETTLEMENT SOLUTIONS, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Vice President
Exhibit 10.7
SIXTH AMENDMENT AND WAIVER
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
SIXTH AMENDMENT AND WAIVER ("Sixth Amendment") dated as of
September 7, 1995 to Revolving Credit and Security Agreement dated
as of May 13, 1994 (as amended to the date hereof and as may be
further amended, supplemented or modified from time to time, the
"Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a
corporation organized under the laws of the Commonwealth of
Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS")
and the other lenders party to the Loan Agreement (IBJS, and each
of the other lenders which may now or in the future be a party to
the Loan Agreement, the "Lenders") and IBJS, as agent for Lenders
(IBJS, in such capacity, the "Agent").
BACKGROUND
In order to enable Borrower to issue from time to time, up to
an aggregate principal amount of $5,000,000.00 in convertible,
senior subordinated notes in exchange for shares of Borrower's
common stock, Borrower has requested that Agent and the Required
Lenders amend and waive certain provisions of the Loan Agreement,
and Agent and the Required Lenders are willing to do so on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or
grant of credit heretofore and hereafter made to or for the account
of Borrower by Lenders, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise defined
herein shall have the meanings given to them in the Loan Agreement.
2. Amendments to and Waivers of Loan Agreement. Subject to
satisfaction of the conditions precedent set forth in Section 3
below, the Loan Agreement is hereby amended and waived as follows:
(a) Section 1.2 of the Loan Agreement is hereby amended
by inserting the following defined terms in the appropriate
alphabetical order:
"Convertible, Senior Subordinated Notes" shall mean
up to an aggregate principal amount of $5,000,000.00 in
convertible, senior subordinated notes issued by Borrower from time
to time pursuant to an Indenture of Trust dated as of September 11
, 1995 between Borrower and Shawmut Bank Connecticut, National
Association (as modified, supplemented or amended from time to time
in accordance with the terms thereof, the "Indenture"), which notes
(i) shall bear interest at a rate not to exceed 10% per annum
payable quarterly in arrears, (ii) shall not call for any scheduled
repayment of principal prior to September 30, 2000, (iii) shall at
all times be unsecured, (iv) shall be subordinated in right of
payment in a manner acceptable to the Agent and the Required
Lenders (as evidenced by their execution and delivery of the Sixth
Amendment) to the payment or repayment of the Obligations, and (v)
may, as specified therein, be converted from time to time into
common Stock of Borrower.
"Sixth Amendment" shall mean the Sixth Amendment and
Waiver to Revolving Credit and Security Agreement dated as of
September 7, 1995.
(b) Section 7.1(a) of the Loan Agreement is hereby
amended by inserting ", 7.7" immediately after the reference to
"Section 7.4" appearing therein.
(c) Section 7.7 of the Loan Agreement is hereby amended
by (i) deleting from subsection (a) thereof the reference to "(a)"
immediately before the phrase "subsequent to the receipt by Agent
of Borrower's annual audited financial statements", (ii) inserting
in subsection (a) thereof the word "Section" immediately before the
reference to "9.6" appearing therein, and (iii) replacing the word
"and" appearing immediately before subsection (d) thereof with ","
and inserting new subsections "(e)", "(f)", and "(g)" to read in
their entirety as follows:
"(e) Borrower may from time to time acquire,
purchase, redeem or otherwise retire common Stock of
Borrower in exchange for Convertible, Senior Subordinated
Notes, (f) Borrower may make regularly scheduled payments
of principal and interest in respect of the Convertible,
Senior Subordinated Notes in accordance with (and subject
to) the terms thereof and of the Indenture, and (g)
Borrower may from time to time issue common Stock of
Borrower upon the proper exercise of the conversion
rights contained in the Convertible, Senior Subordinated
Notes and in the Indenture (whether or not Borrower is
deemed to have received reasonably equivalent value in
connection with any such conversion)."
(d) The Agent and the Required Lenders hereby waive the
"ordinary course of business" limitation contained in Section
7.8(vii) of the Loan Agreement to the extent (but only to the
extent) necessary to enable Borrower to issue from time to time the
Convertible, Senior Subordinated Notes.
(e) The Agent and the Required Lenders hereby waive
Section 7.10 of the Loan Agreement to the extent (but only to the
extent) necessary to enable Borrower (i) to issue from time to time
the Convertible, Senior Subordinated Notes, (ii) to make regularly
scheduled payments of principal and interest in respect of the
Convertible, Senior Subordinated Notes in accordance with (and
subject to) the terms thereof and of the Indenture, and (iii) to
issue from time to time common Stock of Borrower upon the proper
exercise of the conversion rights contained therein.
(f) Section 7.17 of the Loan Agreement is hereby amended
by inserting the following provision immediately before the period
appearing at the end thereof:
"or repurchase, redeem, retire or otherwise
acquire, in whole or in part, the Convertible,
Senior Subordinated Notes prior to their final
stated maturity in the year 2000, provided that
nothing contained in this Section 7.17 shall (or
shall be deemed to) restrict or impair Borrower's
ability to issue from time to time common Stock of
Borrower upon the proper exercise of the conversion
rights contained in the Convertible, Senior
Subordinated Notes and in the Indenture."
(g) Subsection (a) of Section 7.19 of the Loan
Agreement is hereby deleted in its entirety and the following new
subsection "(a)" is inserted to read in its entirety as follows:
"(a)(i) On the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended June 30, 1994,
the ratio of (A) EBIT to (B) interest expense (other than
interest expense in respect of the Convertible, Senior
Subordinated Notes), for the four Fiscal Quarters then
ended (taken as one accounting period) shall not be less
than 3:1; and
(ii) On the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended September 30,
1995, the ratio of (A) EBIT to (B) total interest
expense, for the four Fiscal Quarters then ended (taken
as one accounting period) shall not be less than 2:1;
provided that, in the case of preceding clauses (i) and
(ii), in the event the Base Rate exceeds 8 1/2% per annum
for any period of determination hereunder then the
applicable ratio shall be reduced by a percentage equal
to the percentage by which the Base Rate exceed 8 1/2%
per annum; provided further, that in no event shall the
applicable ratio be reduced below 1.75:1."
(h) Subsection (c) of Section 7.19 of the Loan Agreement
is hereby deleted in its entirety and the following new subsection "(c)"
is inserted to read in its entirety as follows:
"(c) Tangible Net Worth shall equal or exceed
$27,000,000 on December 31, 1993, and on the last day of
any Fiscal Quarter thereafter, the sum of (i) Tangible
Net Worth and (ii) the aggregate principal amount of
Convertible, Senior Subordinated Notes then outstanding,
shall equal or exceed the sum of (x) $27,000,000 and (y)
$225,000 times the number of Fiscal Quarters elapsed from
December 31, 1993 to the end of such Fiscal Quarter."
(i) Clauses (i) and (ii) of subsection (d) of Section
7.19 of the Loan Agreement are hereby deleted in their entirety and
the following new clauses "(i)" and "(ii)" are inserted to read as
follows:
"(i) Net cash advanced to any Client by Borrower
(net of Risk Participations sold with respect to such
Client) shall not at any time exceed 25% of the sum of
(x) Borrower's Tangible Net Worth (on a consolidated
basis) and (y) the aggregate principal amount of
Convertible, Senior Subordinated Notes outstanding at
such time; and (ii) net cash advanced by Borrower (net of
Risk Participations) with respect to Receivables owed by
a single Account Debtor shall not at any time exceed 25%
of the sum of (x) Borrower's Tangible Net Worth (on a
consolidated basis) and (y) the aggregate principal
amount of Convertible, Senior Subordinated Notes
outstanding at such time."
(j) Section 10.10 of the Loan Agreement is hereby
deleted in its entirety and the following new Section 10.10 is
inserted to read in its entirety as follows:
"10.10 An "Event of Default" under (and as
defined in) the Indenture shall have occurred and be
continuing;"
3. Conditions of Effectiveness. This Sixth Amendment shall
become effective as of the date first above-written (the "Sixth
Amendment Effective Date") when each of the following conditions
has been satisfied: (i) Agent shall have received for (4) copies
of this Sixth Amendment duly executed by Borrower and the Required
Lenders and consented to by each of the Guarantors, (ii) Agent
shall have received an execution form of the Indenture which form
of Indenture shall be in form and substance reasonably satisfactory
to the Agent and (iii) Borrower shall have issued the first
Convertible, Senior Subordinated Note.
4. Representations and Warranties. Borrower hereby
represents and warrants as of the Sixth Amendment Effective Date as
follows:
(a) This Sixth Amendment and the Loan Agreement, as
amended hereby, constitute legal, valid and binding
obligations of Borrower and are enforceable against Borrower
in accordance with their respective terms.
(b) Upon the effectiveness of this Sixth Amendment,
Borrower hereby reaffirms all covenants, representations and
warranties made in the Loan Agreement to the extent the same
are not amended hereby and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of the Sixth Amendment Effective Date.
(c) No Event of Default or Default has occurred and is
continuing or would exist after giving effect to this Sixth
Amendment.
(d) Borrower has no defense, counterclaim or offset to
the Obligations.
5. Effect on the Loan Agreement and Other Documents.
(a) Upon the effectiveness of Section 2 hereof, each
reference in the Loan Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import shall mean and be a
reference to the Loan Agreement as amended hereby and each
reference in the Other Documents to the Loan Agreement (or the
Agreement) shall mean and be a reference to the Loan Agreement as
amended hereby.
(b) Except as specifically amended or provided for herein,
the Loan Agreement and all other documents, instruments and
agreements executed and/or delivered in connection therewith, shall
remain in full force and effect, and are hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this Sixth
Amendment shall not operate as a waiver of any right, power or
remedy of Agent and Lenders, nor (except as expressly set forth
herein) constitute a waiver of any instruments or agreements
executed and/or delivered under or in connection therewith.
6. Governing Law. This Sixth Amendment shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and assigns and shall be governed by and
construed in accordance with the laws of the State of New York.
7. Headings. Section headings in this Sixth Amendment are
included herein for convenience of reference only and shall not
constitute a part of this Sixth Amendment for any other purposes.
8. Counterparts; Telecopy Signatures. This Sixth Amendment
may be executed by the parties hereto in one or more counterparts,
each of which taken together shall be deemed to constitute one and
the same agreement. Any signature delivered by a party by
facsimile transmission shall be deemed to be an original signature
hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Sixth Amendment as of the
day and year first above written.
IBJ SCHRODER BANK & TRUST COMPANY,
As Agent and Lender
By: Alfred J. Scoyni
Name: Alfred J. Scoyni
Title: Assistant Vice President
NATIONAL CANADA FINANCE CORP.,
A Lender
By: Richard P. Brown
Name: Richard P. Brown
Title: VP
ALLSTATE FINANCIAL CORPORATION
By: Craig Fishman
Name: Craig Fishman
Title:
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC.,
A VIATICAL SETTLEMENT COMPANY
By:Craig Fishman
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC.
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
RECEIVABLE FINANCING CORPORATION
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF AMERICA, INC.
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
AFC HOLDING CORPORATION
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
SETTLEMENT SOLUTIONS, INC.
By:Craig Fishman
Name: Craig Fishman
Title: Vice President
Exhibit 10.6
SEVENTH AMENDMENT
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
SEVENTH AMENDMENT ("Seventh Amendment") dated as of
November 1, 1995 to Revolving Credit and Security Agreement dated
as of May 13, 1994 (as amended and waived to the dated hereof and
as may be further amended, supplemented, modified or waived from
time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL
CORPORATION, a corporation organized under the laws of the
Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST
COMPANY ("IBJS"), the other lenders party to the Loan Agreement
(IBJS, and each of the other lenders which may now or in the future
be a party to the Loan Agreement, the "Lenders") and IBJS, as agent
for the Lenders (IBJS, in such capacity, the "Agent").
BACKGROUND
Borrower has requested that Agent and Lenders amend
certain provisions of the Loan Agreement and Agent and Lenders are
willing to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance
or grant of credit heretofore or hereafter made to or for the
account of Borrower by Lenders, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
2. Amendments to Loan Agreement. Subject to
satisfaction of the conditions set forth in Section 3 below, the
Loan Agreement is hereby amended as follows:
(a) The definition of "Maximum Equipment Value Advance
Amount" appearing in Section 1.2 of the Loan Agreement is
hereby amended by deleting the date "November 18, 1995" each
place it appears therein and inserting in lieu thereof the
date "December 31, 1995".
(b) Section 2.2(a) of the Loan Agreement is hereby
amended by deleting the date "November 18, 1995" appearing
therein and inserting in lieu thereof the date "December 31,
1995".
3. Conditions of Effectiveness. This Seventh Amendment
shall become effective as of the date first above written (the
"Seventh Amendment Effective Date") upon receipt by Agent of a copy
of this Seventh Amendment duly executed by Borrower and the
Required Lenders and consented to by each of the Guarantors.
4. Representations and Warranties. Borrower hereby
represents and warrants as of the Seventh Amendment Effective Date
as follows:
(a) This Seventh Amendment and the Loan Agreement, as
amended and waived hereby, constitute the legal, valid and
binding obligations of Borrower and are enforceable against
Borrower in accordance with their respective terms.
(b) After giving effect to this Seventh Amendment,
Borrower hereby reaffirms all covenants, representations and
warranties made in the Loan Agreement and the Security
Agreement and agrees that all such covenants, representations
and warranties shall be deemed to have been remade as of the
Seventh Amendment Effective Date.
(c) No Event of Default or Default has occurred and is
continuing or would exist, in each case, after giving effect
to this Seventh Amendment.
(d) Borrower has no defense, counterclaim or offset to
the Obligations.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each
reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import shall
mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended hereby, the Loan
Agreement and all other documents, instruments and agreements
executed and/or delivered in connection therewith, shall
remain in full force and effect, and are hereby ratified and
confirmed.
(c) Except as expressly set forth herein, the execution,
delivery and effectiveness of this Seventh Amendment shall not
operate as a waiver of any right, power or remedy of Agent and
Lenders, nor constitute a waiver of any provision of the Loan
Agreement or any other documents, instruments or agreements
executed and/or delivered under or in connection therewith.
6. Governing Law. This Seventh Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns and shall be governed by
and construed in accordance with the laws of the State of New York.
7. Headings. Section headings in this Seventh Amendment
are included herein for convenience of reference only and shall not
constitute a part of this Seventh Amendment for any other purpose.
8. Counterparts; Telecopy Signatures. This Seventh
Amendment may be executed by the parties hereto in one or more
counterparts, each of which taken together shall be deemed to
constitute one and the same instrument. Any signature delivered by
a party by facsimile transmission shall be deemed to be an original
signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Seventh Amendment as of the
day and year first above written.
IBJ SCHRODER BANK & TRUST
COMPANY, as Agent and Lender
By Peter Thompson
Name:Peter Thompson
Title: VP
NATIONAL CANADA FINANCE CORP.,
a Lender
By Richard P. Brown
Name: Richard P. Brown
Title: VP
By Michael E. Williams
Name: Michael E. Williams
Title: VP
ALLSTATE FINANCIAL CORPORATION
By Craig Fishman
Name: Craig Fishman
Title: Senior Vice President
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By Craig Fishman
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. SETTLEMENT SOLUTIONS, INC.
By Craig Fishman By Craig Fishman
Name: Craig Fishman Name: Craig Fishman
Title: Vice President Title: Vice President
RECEIVABLE FINANCING CORPORATION
By Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By Craig Fishman
Name: Craig Fishman
Title: Vice President
BUSINESS FUNDING OF AMERICA, INC.
By Craig Fishman
Name: Craig Fishman
Title: Vice President
AFC HOLDING CORPORATION
By Craig Fishman
Name: Craig Fishman
Title: Vice President
Exhibit 10.7
EIGHTH AMENDMENT AND WAIVER TO
REVOLVING CREDIT AND SECURITY AGREEMENT
EIGHTH AMENDMENT AND WAIVER ("Eighth Amendment") dated as of
March 4, 1996 to Revolving Credit and Security Agreement dated as
of May 13, 1994 (as amended and waived to the date hereof and as
may be further amended, supplemented, modified or waived from
time to time, the "Loan Agreement") by and among ALLSTATE
FINANCIAL CORPORATION, a corporation organized under the laws of
the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK &
TRUST COMPANY ("IBJS"), the other lenders party to the Loan
Agreement (IBJS, and each of the other lenders which may now or
in the future be a party to the Loan Agreement, the "Lenders")
and IBJS, as agent for the Lenders (IBJS, in such capacity, the
"Agent")
BACKGROUND
Borrower has requested that Agent and Lenders amend and
waive certain provisions of the Loan Agreement and the Agent and
the Lenders are willing to do so on the terms and conditions
hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or
grant of credit heretofore or hereafter made to or for the
account of Borrower by Lenders, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction
of the conditions precedent set forth in Section 4 below, Section
7.19(c) of the Loan Agreement is hereby amended by inserting the
following immediately before the period appearing at the end
thereof:
", provided that notwithstanding the foregoing, commencing
on December 31, 1995, and on the last day of any Fiscal
Quarter thereafter, the sum of (i) Tangible Net Worth and
(ii) the aggregate principal amount of Convertible, Senior
Subordinated Notes then outstanding shall equal or exceed
the sum of (x) $28,300,000 and (y) $225,000 times the number
of Fiscal Quarters elapsed from December 31, 1995 to the end
of such Fiscal Quarter".
3. Waiver of Specified Defaults and Events of Default.
Subject to satisfaction of the conditions set forth in Section 4
below, the Lenders and the Agent hereby waive any and all
Defaults or Events of Default which would exist (and any and all
rights and remedies which may exist as a consequence thereof)
under or with respect to Section 7.19 of the Loan Agreement on or
as of December 31, 1995 (and thereafter) absent this Eighth
Amendment.
4. Conditions of Effectiveness. This Eighth Amendment
shall become effective as of the date first above written (the
"Eighth Amendment Effective Date") upon (i) receipt by the Agent
of this Eighth Amendment duly executed by Borrower and the
Required Lenders and consented to by each of the Guarantors and
(ii) payment to the Agent for the ratable benefit of the Lenders
of an amendment fee in the amount of $10,000.
5. Representations and Warranties. Borrower hereby
represents and warrants as of the Eighth Amendment Effective Date
as follows:
(a) This Eighth Amendment and the Loan Agreement, as
amended and waived hereby constitute the legal, valid and
binding obligations of Borrower and are enforceable against
Borrower in accordance with their respective terms.
(b) After giving effect to this Eighth Amendment,
Borrower hereby reaffirms all covenants, representations and
warranties made in the Loan Agreement and agrees that all
such covenants, representations and warranties shall be
deemed to have been remade as of the Eighth Amendment
Effective Date.
(c) No Event of Default or Default has occurred and is
continuing or would exist after giving effect to this Eighth
Amendment.
(d) Borrower has no defense, counterclaim or offset to
the Obligations.
6. Effect on the Loan Agreement and the Security
Agreement.
(a) Upon the effectiveness of Sections 2 and 3 hereof, each
reference in the Loan Agreement to "this Agreement," "hereunder,"
"hereof," "herein" or words of like import shall mean and be a
reference to the Loan Agreement as amended and waived hereby.
(b) Except as specifically amended and waived herein, the
Loan Agreement and all other documents, instruments and
agreements executed and/or delivered in connection therewith,
shall remain in full force and effect, and are hereby ratified
and confirmed.
(c) Except as expressly set forth herein, the execution,
delivery and effectiveness of this Eighth Amendment shall not
operate as a waiver of any right, power or remedy of Agent and
Lenders, nor constitute a waiver of any provision of the Loan
Agreement or any other documents, instruments or agreements
executed and/or delivered under or in connection therewith.
7. Governing Law. This Eighth Amendment shall be binding
upon and inure to the benefit of the parties hereto and their
respective successors and assigns and shall be governed by and
construed in accordance with the laws of the State of New York.
8. Headings. Section headings in this Eighth Amendment
are included herein for convenience of reference only and shall
not constitute a part of this Eighth Amendment for any other
purpose.
9. Counterparts; Telecopy Signatures. This Eighth
Amendment may be executed by the parties hereto in one or more
counterparts, each of which taken together shall be deemed to
constitute one and the same instrument. Any signature delivered
by a party by facsimile transmission shall be deemed to be an
original signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Eighth Amendment as of
the day and year first above written.
IBJ SCHRODER BANK & TRUST COMPANY
as Agent and Lender
By: Alfred J. Scoyni
Name: Alfred J. Scoyni
Title: Vice President
NATIONAL CANADA FINANCE CORP., a Lender
By:_______________________
Name:
Title:
By:_______________________
Name:
Title:
ALLSTATE FINANCIAL CORPORATION
By: Craig Fishman
Name: Craig Fishman
Title: Senior Vice President
[SIGNATURES CONTINUED ON NEXT PAGE]
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By: Craig Fishman
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION
By: Craig Fishman By: Craig Fishman
Name: Craig Fishman Name: Craig Fishman
Title: Senior Vice President Title: Senior Vice President
RECEIVABLE FINANCING CORPORATION
By: Craig Fishman
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF AMERICA, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Senior Vice President
SETTLEMENT SOLUTIONS, INC.
By: Craig Fishman
Name: Craig Fishman
Title: Senior Vice President
Exhibit 10.8
PERSONAL AND CONFIDENTIAL
As of December 13, 1995
Mr. Bret Kelly
225 Marlborough Pl. Rd.
Stafford, VA 22554
Dear Bret:
This letter (as in effect from time to time, the
"Agreement") sets forth the terms of our mutual understanding
concerning the termination of your employment with Allstate
Financial Corporation ("Allstate"). Accordingly, we have agreed
to the following terms:
1. Termination of Employment. We mutually agree that your
employment with Allstate terminated, effective as of November 3,
1995. You agree to furnish promptly to Allstate any requested
letter documenting your resignation as an officer of Allstate.
2. Salary Continuation. We mutually agree that Allstate
paid to you (i) on November 15, 1995, a gross payment of
$15,211.73 ($12,151.22 of which was for salary continuation) net
of applicable federal, state and local withholding and payroll
taxes and other necessary deductions and (ii) on November 29,
1995, a gross payment of $2,711.54 (all of which was for salary
continuation) net of applicable federal, state and local
withholding and payroll taxes and other necessary deductions. We
further mutually agree that Allstate will pay to you, (x) on
December 15, 1995, a gross amount for salary continuation of
$15,211.73 net of applicable federal, state and local withholding
and payroll taxes and other necessary deductions and (y)
commencing on December 27, 1995 and ending on November 1, 1996,
an additional gross amount for salary continuation of $190,425.51
in the aggregate payable in installments of $8,279.37 every two
weeks on Allstate's regular pay days, each such payment to be
paid net of all applicable federal, state and local withholding
and payroll taxes and such other withholdings as may be required
or permitted by this Agreement or applicable law. For purposes
of this Agreement, "Severance Period" shall mean the period
commencing on November 3, 1995 and ending on November 1, 1996.
3. Insurance Benefits. Allstate will provide you during
the Severance Period (at no cost to you) with the same group
health benefits as Allstate provides from time to time to its
employers. Upon the expiration of the Severance Period, you will
be entitled to continue such health benefits, at your cost, for
the balance of the time for which you are entitled to coverage
pursuant to federal COBRA law. The COBRA period begins on
December 1, 1995.
Your group life insurance coverage has terminated. You have
received information concerning an option to convert that
insurance to an individual policy.
4. Company Car. Allstate agrees to transfer to you title
to the 1993 Mercury Sable automobile (the "Vehicle") which you
currently possess, at no cost other than (i) applicable transfer
of title fees and any sales taxes or other similar charges and
(ii) income taxes resulting from your receipt of the Vehicle, all
of which shall be your sole responsibility. If you fail for any
reason to pay any applicable transfer of title fees and any sales
taxes or other similar charges when due as contemplated in the
immediately preceding sentence, the amount you fail to pay may be
deducted by Allstate from your salary continuation payments at
such time(s) as Allstate elects. Allstate agrees to maintain
insurance on the Vehicle until the date the title document to the
Vehicle is tendered to you.
5. Benefit Plans. No further contributions to Allstate's
401(k) plan may be made by you or Allstate after November 29,
1995. You have received information concerning your withdrawal
and other rights under that plan. See also Paragraph 2 below -
"Indebtedness to 401(K) Plan".
6. Stock Options. Allstate agrees to issue to you (as
soon as reasonably possible following your execution of this
Agreement) 10,000 non-qualified options (the "Options") to
acquire Allstate common stock at $5.60 per share, 5,000 of which
Options shall first be exercisable on or after November 3, 1997
and 5,000 of which Options shall first be exercisable on or after
November 3, 1998. All unexercised options will expire on
November 3, 1999. The common stock issuable upon exercise of the
Options will not be registered under any federal or state
securities laws. Accordingly, there may be restrictions on your
ability to sell or otherwise dispose of such stock. Allstate
encourages you to obtain legal advice in connection with the
foregoing. You agree that any and all options which you
currently own are hereby cancelled effective as of the date of
this Agreement.
7. Indemnification. Allstate's indemnification
obligations vis a vis its officers may change from time to time.
Allstate agrees to indemnify you against losses arising from any
matter (within the scope of your employment) in which you were
involved during your employment relationship with Allstate but
only if and to the extent that, at the time a claim for
indemnification arises, the loss would at such time be
indemnifiable if it were incurred by a then current officer of
Allstate. The intent of the foregoing is to entitle you to the
same indemnification rights as active officers of Allstate may
from time to time be entitled. Notwithstanding anything to the
contrary contained in this paragraph 7 or otherwise, the
foregoing indemnification does not apply to any losses incurred
by you as a result of any action (or threatened action) between
you and Allstate.
8. Release. Except as to such rights or claims as may be
created by, under or in connection with this Agreement, Allstate
hereby releases and forever discharges you from all causes of
action or claims of any kind that it may now have or could have
had in contract, tort or otherwise.
9. Employment References. As long as you have not
defaulted under or in connection with this Agreement, Allstate
will, upon your request to Craig Fishman, provide potential
employers with a written reference in the form of Exhibit A
attached hereto. Allstate will not provide verbal references,
provided that Allstate will provide potential employers with
verbal confirmation of (i) the length of your employment with
Allstate, i.e., 11 years and (ii) your ending salary of
$220,500.00.
10. Nondisparagement; Nondisclosure. Allstate agrees that
its officers and directors will not, and it will use its
reasonable efforts to cause its other employees not to, make
statements which may reasonably be expected to impair your
ability to obtain or maintain employment.
Allstate will refrain from making any written news
release or other written public announcement disclosing the
terms, conditions, provisions and/or existence of this Agreement
except as may be required by applicable federal or state law,
rule or regulation.
11. No Additional Benefits. You acknowledge that no
additional severance benefits or other compensation, except as
specifically set forth above, are payable by Allstate to you.
In consideration of the foregoing benefits which are over
and above those to which you would otherwise be entitled, you
agree as follows:
1. Release. Except as to such rights or claims as may be
created by, under or in connection with this Agreement, you
hereby release and forever discharge Allstate, all of its
subsidiaries and affiliated entities and all of its and their
officers, directors, and employees from all causes of action or
claims of any kind that you may now have or could have had
whether in contract, tort or otherwise, including specifically
(but without limitation) any claims of discrimination that you
may claim in connection with your employment or the termination
thereof. This includes, but is not limited to, claims arising
under the federal, state or local laws prohibiting discrimination
on the basis of one's sex, race, age, handicap, national origin,
color or religion, or claims growing out of any legal restriction
on Allstate's right to terminate its employees.
2. Indebtedness to 401(k) Plan. You acknowledge that as
of November 30, 1995 you are indebted to the Allstate 401(k) plan
in the amount of $45,476.44. You are hereby notified that the
full amount of such indebtedness is due and payable immediately.
If you do not repay this indebtedness in full, you will be deemed
to have received a distribution from the 401(k) plan, which
distribution may be subject to income tax and a penalty for early
withdrawal. Allstate will issue to you a Form 1099 reflecting
the amount of the deemed distribution. Allstate encourages you
to consult a tax advisor in connection with the foregoing.
3. Nondisclosure. You agree that you will refrain from
disclosing to any person or entity (other than tax advisers,
retained legal counsel and your spouse) the terms, conditions,
provisions and/or existence of this Agreement, and neither you
nor any person acting on your behalf shall make any written or
oral statements, news release or other announcement or
publication relating to this Agreement.
4. Confidential Information. You acknowledge that in the
course of your employment with Allstate, you have acquired
Confidential Information. "Confidential Information" as used in
this Agreement means any confidential or proprietary information
pertaining to Allstate, its subsidiaries and/or affiliates, its
and their officers, directors, employees, shareholders and
lenders, including without limitation, information received from
third parties under confidential or proprietary conditions,
information subject to Allstate's attorney-client or work-product
privilege, and other technical, business or financial
information, the use or disclosure of which might reasonably be
construed to be contrary to Allstate's interest. You agree that,
except as you may otherwise be directed under this Agreement or
as required by law, regulation or legal proceeding, you (1) will
keep such Confidential Information confidential at all times, (2)
will not disclose or communicate Confidential Information to any
third party, and (3) will not make use of Confidential
Information on your behalf or on behalf of any third party. In
the event that you become legally compelled to disclose any
Confidential Information, you agree to provide Allstate with
prompt written notice of such request or demand so that Allstate
may seek a protective order or other appropriate legal remedy to
which it may be entitled.
5. Nondisparagement. Without limiting the generally of
preceding paragraph 4, you agree that you will not make any
statements or disclose any items of information which are or
which may reasonably be considered to be adverse to the interests
of Allstate and further, that you will not disparage (i)
Allstate, any of its subsidiaries or affiliated entities, (ii)
its or their executives, officers, directors or employees or
(iii) its or their products, services or business practices.
6. Nonsolicitation. You agree that for a period of two
(2) years from the date of your termination, you will not:
(1) Solicit any business from or have any business dealings
with, either directly or indirectly or through
corporate or other entities or associates, any customer
or client of Allstate (or any subsidiary or affiliate
of Allstate) or, if known to you, any person or firm
that has contacted or has been contacted by Allstate
(or any subsidiary or affiliate of Allstate) as a
potential customer or client of Allstate; and
(2) Initiate any action, either directly or indirectly or
through corporate or other entities or associates,
which would reasonably be expected to encourage or to
induce any employee of Allstate or of any subsidiary or
affiliate of Allstate to leave the employ of Allstate
or of any such subsidiary or affiliate; and
(3) Solicit any business from or have any business dealings
whatsoever with, either directly or indirectly or
through corporate entities or associates, any of the
specified brokers and referral sources listed on
Exhibit B attached hereto. You agree that to the
extent Exhibit B hereto identifies a named individual,
the limitations set forth in this sub-paragraph 3 shall
extend to any corporation or other entity with which
such individual may at any time be or become
associated.
7. Cooperation. You agree that during the Severance
Period and thereafter you will cooperate fully with Allstate on
all matters for which your assistance is requested including, but
not limited to, trial preparation and testimony, and transition
issues. You agree to be available to Allstate in this connection
for at least an average of five (5) hours per week during the
Severance Period and you will use your best efforts to be
available for additional reasonable periods of time as requested
by Allstate (whether during the Severance Period or thereafter).
You will receive no additional compensation for any such
cooperation and assistance, provided that, in connection with
your performing under this paragraph 7, Allstate will (at
Allstate's option) either (i) arrange (and pay for) your travel,
hotels and meals, if any, at no cost to you or (ii) pay or
reimburse you for all reasonable, out-of-pocket travel and
travel-related expenses, but only to the extent such expenses
have been approved in advance by Allstate in writing.
8. Rights and Remedies. Notwithstanding anything to the
contrary contained in this Agreement, in addition to any other
rights Allstate may have, should you breach any of the terms of
this Agreement, Allstate will have the right to cease any and all
payments or provision of benefits hereunder.
9. Entire Agreement. The terms and conditions stated
herein constitute the entire agreement between the parties and
supersede any prior agreements or understandings, whether written
or oral, of any nature whatsoever. This Agreement may not be
modified other than in writing and signed by both parties.
10. Severability. If any one or more of the provisions of
this Agreement shall be held illegal or unenforceable, no other
provision shall be affected.
11. Choice of Law. This Agreement shall be subject to and
governed by the laws of the Commonwealth of Virginia without
regard to its conflicts of law principles.
12. Successors and Assigns. Allstate's rights and
obligations hereunder shall inure to the benefit of, and be
binding on, Allstate's successors and assigns.
Allstate encourages you to carefully review the terms of
this Agreement and encourages you to seek advice and counsel from
any party you wish, including your attorney and tax advisor,
before signing this Agreement. If you find the terms of this
Agreement acceptable after such review, please sign the enclosed
duplicate original and return it to me.
ALLSTATE FINANCIAL CORPORATION
______________________ By ________________________________
Dated Its
I acknowledge that I have read this Agreement, that I fully
understand its content and effect, that I have been given the
opportunity to consult with an attorney and other advisors of my
choosing and that I am knowingly and voluntarily entering into
this Agreement, without duress or coercion.
__________________ ________________________________
Date of Execution Bret Kelly
EXHIBIT A
to
Letter Agreement Dated as of December 13, 1995
between
Bret Kelly and Allstate Financial Corporation
Form of Reference Letter
Dear :
Mr. Kelly was employed by Allstate Financial Corporation
("Allstate") for ten and one half years. Mr. Kelly began his
career with Allstate as the supervisor of our Verification
Department, where he demonstrated analytical and problem solving
capabilities. Mr. Kelly was then promoted to the Marketing
Department.
While in the Marketing Department, Mr. Kelly developed into
one of Allstate's most successful sales representatives, with his
accounts comprising a significant portion of the company's
portfolio at the time. Mr. Kelly was promoted to Vice President
and National Marketing Director.
In connection with a significant restructuring of Allstate's
management team in 1989, and because of his knowledge and
understanding of Allstate's systems and procedures, Mr. Kelly was
promoted to Senior Vice President and Chief Operating Officer.
In that capacity, Mr. Kelly was responsible for the day to day
operations of the corporation, reporting directly to the
President.
Mr. Kelly was an important contributor to the growth and
success of Allstate Financial Corporation and was a true asset to
the company.
Sincerely,
ALLSTATE FINANCIAL CORPORATION
Leon Fishman
President
EXHIBIT B
to
Letter Agreement Dated as of December 13, 1995
between
Bret Kelly and Allstate Financial Corporation
Anthony Anish
Marty Ballen
Joan Carlton
Randall Carter
David Wayne Case
Joel Flig
John Fudge
Ned Gelband
Marvin Geller
Daniel H. Glick
Butch Goldstein
Russell Hindin
Lawrence N. Hurwitz
Bruce H. Jones
Walter Kolker
Charles Lane
Holly Landau
Mark J. Locher
Leonard Maclis
Michael A. Maidy
Stanton C. Marcus
Dave Menashe
Gina M. Mcaveeney
Barry G. Morganstern
Howard J. Mullin
David Niefeld
Paul Pintarch
Larry Rosenbloom
Steve Scott
Steven Smith
Thomas J. Stolz
Jeffry D. Sweet
R. M. Torre
Loran Walter
Bruce Weinstein
Asset Growth Partners
Financial Solutions Group
Select Capital Advisors
Exhibit 21 to 1995 10-KSB
Allstate Financial Corporation
Wholly-owned Subsidiary List
State of
Name Incorporation
Receivable Financing Corporation Virginia
Business Funding of Florida, Inc. Florida
Business Funding of America, Inc. Virginia
Premium Sales Northeast, Inc. Virginia
Lifetime Options, Inc., a Viatical
Settlement Company Maryland
Settlement Solutions, Inc Virginia
AFC Holding Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 754295
<SECURITIES> 0
<RECEIVABLES> 37919380
<ALLOWANCES> 2350968
<INVENTORY> 0
<CURRENT-ASSETS> 42293579
<PP&E> 1291597
<DEPRECIATION> 753968
<TOTAL-ASSETS> 44880531
<CURRENT-LIABILITIES> 19150167
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 25690364
<TOTAL-LIABILITY-AND-EQUITY> 44880531
<SALES> 0
<TOTAL-REVENUES> 12997346
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6219882
<LOSS-PROVISION> 4981646
<INTEREST-EXPENSE> 983718
<INCOME-PRETAX> 812100
<INCOME-TAX> 331000
<INCOME-CONTINUING> 481100
<DISCONTINUED> 0
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