SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1997 COMMISSION FILE NUMBER 0-17832
- -------------------------------------------------------------------------------
Allstate Financial Corporation
(exact name of registrant as specified in its charter)
-----------------------------------------------------------
Virginia 54-1208450
(State of Incorporation) (I.R.S. Employer Identification No)
-----------------------------------------------------------
2700 South Quincy Street, Suite 540, Arlington, VA 22206
(address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 931-2274
Indicate by the check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15 of the Securities and Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ]
No [ ]
2,318,185 Common Shares were outstanding as of November 12, 1997.
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 1-2
Consolidated Statements of Operations Three and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Statements of Shareholders' Equity Nine
Months Ended September 30, 1997 and Year Ended
December 31, 1996 4
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 1997 and 1996 5-6
Notes to Consolidated Financial Statement 7-10
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 11-19
Part II.
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signature 21
<PAGE>
PART I - FINANCIAL INFORMATION
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash .......................................... $ 2,062,321 $ 1,624,899
Receivables:
Finance, net .............................. 22,167,840 30,574,239
Purchased life insurance contracts, net ... 4,125,474 4,493,088
Other ..................................... 3,749,180 4,394,975
Prepaid expenses .............................. 122,480 154,434
Income Tax Receivable ......................... -- 1,150,289
Deferred income taxes ......................... 803,357 893,000
------- -------
TOTAL CURRENT ASSETS .......................... 33,030,652 43,284,924
FURNITURE, FIXTURES AND EQUIPMENT, Net ............. 479,320 538,164
OTHER ASSETS ....................................... 3,748,967 2,116,343
--------- ---------
$37,258,939 $45,939,431
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..... $ 464,367 $ 446,360
Notes payable ............................. 6,277,719 14,851,582
Note payable-related party ................ 103,000 103,000
Credit balances of factoring clients ...... 2,066,809 2,964,873
--------- ---------
TOTAL CURRENT LIABILITIES ................ 8,911,895 18,365,815
1
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, December 31,
1997 1996
----------- ------------
(Unaudited)
NONCURRENT PORTION OF NOTES PAYABLE:
Related parties ......................... 52,015 61,969
Convertible Subordinated Notes .......... 4,983,110 4,985,110
--------- ---------
TOTAL LIABILITIES ................... 13,947,020 23,412,894
---------- ----------
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; 3,102,328 issued, 2,318,185
outstanding at September 30, 1997 and
2,317,919 at December 31, 1996,
exclusive of shares held in the Treasury 40,000 40,000
Additional paid-in-capital .................. 18,852,312 18,852,312
Treasury Stock (784,143 shares at 9/30/97 and
784,409 at 12/31/96) .................... (5,032,589) (5,034,584)
Retained Earnings ........................... 9,452,196 8,668,809
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .............. 23,311,919 22,526,537
---------- ----------
$ 37,258,939 $ 45,939,431
============ ============
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
INCOME:
Earned discounts ............................. $ 1,546,155 $ 2,423,715 $ 5,335,750 $ 7,479,676
Fees and other income ........................ 784,451 499,802 1,809,075 1,615,052
------- ------- --------- ---------
Total Income ............................. 2,330,606 2,923,517 7,144,825 9,094,728
--------- --------- --------- ---------
EXPENSES:
Compensation and fringe benefits ............. 738,837 737,910 2,201,033 2,584,291
General and administrative expense ........... 558,515 632,985 1,598,462 2,184,707
Interest expense ............................. 201,675 360,627 829,002 1,142,970
Provision for credit losses .................. 362,621 527,341 1,038,411 5,079,570
Commission ................................... 68,332 126,248 234,444 352,034
------ ------- ------- -------
TOTAL EXPENSES .......................... 1,929,980 2,385,111 5,901,352 11,343,572
--------- --------- --------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES ................. 400,626 538,406 1,243,473 (2,248,844)
INCOME TAXES/(BENEFIT) ............................ 148,232 198,800 460,086 ( 832,400)
------- ------- ------- -----------
NET INCOME/(LOSS) ................................. $ 252,394 $ 339,606 $ 783,387 $ (1,416,444)
============ ============ ============ ============
NET INCOME/(LOSS) PER SHARE ...................... $ .11 $ 0.15 $ .34 $ ( 0.61)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES ................ 2,318,139 2,317,237 2,317,993 2,331,797
========= ========= ========= =========
</TABLE>
3
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
<CAPTION>
Common Paid in Treasury Retained
Stock Capital Stock Earnings
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
BALANCE - January 1, 1996 ................................ $ 40,000 $18,852,312 $(2,871,901) $ 9,709,953
Exchange of Convertible
Subordinated Notes for
338,275 shares of common stock ...................... -- -- (2,170,683) --
Conversion of Convertible Subordinated
Notes to 1,066 shares of Common
Stock ............................................... -- -- 8,000 --
Net Loss ............................................... -- -- -- (1,041,144)
--------- ----------- ------------ -----------
BALANCE - December 31, 1996 .............................. 40,000 18,852,312 $(5,034,584) $ 8,668,809
Conversion of Convertible Subordinated
Notes to 266 shares of Common
Stock ............................................... -- -- 1,995 --
Net Income (unaudited) ................................. -- -- -- 783,387
--------- ----------- ------------ -----------
BALANCE - September 30, 1997 ............................. $ 40,000 $18,852,312 $(5,032,589) $ 9,452,196
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) ...................... $ 783,387 $ (1,416,444)
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net ................. 146,900 97,400
Provision for credit losses ........ 1,038,411 5,079,570
Changes in operating assets and liabilities:
Decrease/(Increase) in other receivables 1,804,832 (819,484)
Decrease/(Increase) in prepaid expenses 31,954 (20,202)
(Increase)/Decrease in other assets (1,182,624) 1,226,774
Increase in accounts payable
and accrued expenses .......... 18,007 210,273
Decrease/(Increase) in income taxes receivable 1,239,932 (824,130)
--------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................... 3,880,799 3,533,757
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts (135,092,067) (142,451,717)
Collection of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts 141,218,632 139,876,073
(Decrease)/Increase in credit balances of
factoring clients .................. (898,064) 508,094
Purchase of furniture, fixtures and equipment (88,056) (51,255)
------- -------
NET CASH PROVIDED/(USED) BY
INVESTING ACTIVITIES .................... 5,140,445 (2,118,805)
--------- ----------
</TABLE>
5
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and
other borrowings ............................ 49,965,511 45,155,265
Principal payments on line of credit
and other borrowings ........................ (58,549,333) (45,830,244)
Treasury Stock Acquisition Costs ................ -- 22,683)
============ ==========
NET CASH USED IN FINANCING ACTIVITIES: ............... (8,583,822) (697,662)
---------- --------
NET INCREASE IN CASH ................................. 437,422 717,290
CASH, Beginning of period ............................ 1,624,899 754,295
--------- -------
CASH, End of period .................................. $ 2,062,321 $ 1,471,585
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid ................................... $ 818,033 $ 1,142,970
============ ============
Income taxes paid ............................... $ 300,000 $ --
============ ============
Transfer of finance and other
receivables to other assets .................. $ 1,800,000 $ --
============ ============
Issuance of Convertible Subordinated
Notes in exchange for Common Stock ........... $ -- $ 2,148,000
============ ============
Issuance of Common Stock in exchange
for Subordinated Notes ...................... $ 2,000 $ 5,000
============ ============
</TABLE>
6
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation and its wholly owned subsidiaries (the "Company") included herein
are unaudited for all periods ended September 30, 1997 and 1996; however, they
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the results for the periods presented. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Allstate Financial Corporation believes that the disclosures are
adequate to make the information presented not misleading. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results of operations to be expected for the remainder of the
year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KB for the
year ended December 31, 1996.
2. Net income per share. Net income per share of common stock has been computed
by dividing net income by the weighted average number of common shares and
common stock equivalents outstanding during the periods presented. Stock options
are considered common stock equivalents, unless determined to be anti-dilutive.
For the quarters ended September 30, 1997 and 1996, weighted average shares
outstanding were 2,318,139 and 2,317,237, respectively. At September 30, 1997
and December 31, 1996 there were 106,830 and 158,400 stock options outstanding,
at exercise prices ranging from $5.44 to $14.00 per share. During the year ended
December 31, 1996, 24,867 options were terminated without being exercised. There
were no options exercised during 1996 or during the nine months ended September
30, 1997.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 supersedes APB No. 15 to conform earnings per
share with internal standards as well as to simplify the complexity of the
computation under APB No. 15. In summary, SFAS No. 128 replaces the previous
primary earnings per share ("EPS") calculation with a basic EPS calculation. The
basic EPS differs from the primary EPS calculation in that the basic EPS does
not include any potentially dilutive securities. Fully dilutive EPS is replaced
with diluted EPS and should be disclosed regardless of its dilutive impact on
EPS. SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997. The EPS in the Statements of Operations are presented under
APB No. 15. Proforma EPS under SFAS No. 128 for the nine months ended September
30, 1997 and 1996 would not have resulted in a material difference from EPS as
shown.
3. Line of credit. As of September 30, 1997, the Company had approximately $18.7
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, a $5 million sub-facility the proceeds of which may be used by the
Company to make advances to clients secured by machinery and
7
<PAGE>
equipment and a $2.5 million sub-facility the proceeds of which may be used by
the Company to make advances to clients secured by inventory. Borrowings under
the credit facility bear interest at a spread over the bank's base rate or a
spread over LIBOR, at the Company's election. The Company is subject to
covenants which are typical in revolving credit facilities of this type. The
maturity date on this credit facility is May 27, 2000.
4. Convertible Subordinated Notes Payable. As of September 30, 1997, included in
Notes Payable the Company had outstanding $4,976,000 in aggregate principal
amount of Convertible Subordinated Notes. The Notes (I) mature on September 30,
2000; (ii) currently bear interest at the rate of 9.5% 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.
5. New Financial Accounting Standards. In September 1996, SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities, based on a financial-components approach that focuses on control.
Under this approach, after a transfer of financial assets, financial and
servicing assets are recognized if controlled or liabilities are recognized if
incurred. Financial and servicing assets are removed from the balance sheet when
control has been surrendered and liabilities are removed when extinguished. SFAS
No. 125 was effective and adopted on January 1, 1997 and will be applied
prospectively. The Company does not anticipate any material effect on its
financial position from this implementation.
6. Certain Contingencies. 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, among other
things, fraudulent transfer and breach of contract. 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 $300,000 previously paid by the Company was returned to
the Company in April 1996. The matter is currently being litigated in the
District Court. Management does not believe at this time that the Company has a
material exposure significantly in excess of the previously agreed upon
settlement amount.
8
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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 asserts, among other things, that the purchasers of
Lyons breached their purchase agreement with Sherwin-Williams by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. In response to the complaint, the Company filed
a motion to dismiss all claims. In March 1997, a federal magistrate recommended
to the District Court that the Company's motion to dismiss the claims contained
in the original complaint held against the Company be granted. However, the
magistrate recommended that the Company's motion to dismiss two new claims
contained in an amended complaint be denied. The District Court has not yet
ruled on the magistrate's recommendation. 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 is a counterclaim defendant in Allstate Financial Corporation
v. A.G. Construction, Inc. (n/k/a A.G. Plumbing, Inc.), American General
Construction Corp., Adam Guziczek and Cheryl Lee Guziczek pending in the United
States Bankruptcy Court for the Southern District of New York. The Company
provided receivable financing to A.G. Construction, Inc. (n/k/a/ A.G. Plumbing,
Inc.) in 1988 and to American General Construction Corp. (hereinafter, A.G.
Construction, Inc. (n/k/a/ A.G. Plumbing) and American General Construction
shall be collectively referred to as "AG") in 1991. AG's primary business was
renovation of public housing for the City of New York. Adam and Cheryl Guziczek
(hereinafter collectively referred to as "Guziczek") personally guaranteed the
obligation due the Company under the financing arrangement. In 1993, AG
defaulted on its obligations under the financing arrangement with the Company.
Thereafter, the Company confessed judgment against AG and Guziczek in Virginia
and commenced actions in New York to enforce the guaranties and to attempt
recovery on the confessed judgments. In one of the actions an answer and
counterclaim against the Company was filed. The counterclaim asserted claims for
usury, diversion of proceeds of public improvement contracts and overpayments to
the Company by AG in excess of $2,000,000.00 (hereinafter the "Counterclaims").
No specific damage claim amount was set forth in the counterclaim. On August 1,
1994, Guziczek filed a voluntary Chapter 11 petition under the United States
Bankruptcy code and on June 14, 1995 the case was converted to a Chapter 7
proceeding. On January 3, 1996, AG filed a separate voluntary Chapter 7
petition. No action was ever taken by the trustee in the Guziczek or AG
bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the Trustee
for the AG bankruptcy estate filed a motion to abandon certain claims against
the Company, including all claims that the Company diverted proceeds of public
improvement contracts. On October 7, 1997, New York Surety Company (hereinafter
referred to as the "Surety") filed pleadings objecting to the abandonment of
such claims against the Company. The Surety provided the payment and performance
bond to AG in connection with the construction jobs performed for the City of
New York. In its pleadings the Surety asserts that it is subrogated to
9
<PAGE>
AG's claims and thereby seeks to intervene and file an intervenor's complaint
against the Company. The proposed complaint adopts the Counterclaims and seeks
an accounting. The Surety asserts damages of approximately $4,000,000.00. A
hearing on the motion for intervention has been scheduled for January 14, 1998.
The Company believes it has meritorious defenses to the Counterclaims and
intends to vigorously defend all claims. However, the litigation is in the
preliminary stage and the probability of a favorable or unfavorable outcome and
the potential amount of loss, if any, cannot be determined or estimated at this
time.
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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain disclosures contained in this Form 10-QSB contain forward looking
information based on current information and expectations of the Company that
involve a number of risks, uncertainties and assumptions, including the overall
state of the economy, competition among financial institutions, the credit
quality of the Company's clients and account debtors, and the Company's ability
to generate growth in earning assets through the generation of new business.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual outcomes could vary materially
from those expected.
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 advances to its clients collateralized by inventory,
equipment, real estate and other assets ("Collateralized Advances"). 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 $75,000,000. Historically, the
Company's clients have not qualified 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. Banks and other asset-based lenders
have, however, started to lend to the Company's traditional, high risk type of
client. Given the Company's typical client profile, there is a significant risk
of default and client failure inherent in the Company's business.
Continuing competition within the marketplace from banks, asset-based
lenders and newly created finance 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 extensive 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. 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 full recourse accounts receivable) the
making of
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Collateralized Advances and by expanding into logically related product lines
such as the traditional non-recourse factoring of accounts receivable through
the Company's Allstate Factors division.
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 historically tended to change significantly over time. More
recently, 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. In addition, the Company's Allstate Factors division is expected to
provide a more stable client base than the Company's traditional client base.
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, provided
financial assistance to individuals facing life-threatening illness by
purchasing their life insurance policies at a discount from face value. 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. Lifetime Options has curtailed its
operations. This decision enables management to better focus on the Company's
core commercial finance business at a time when competition has reduced yields,
and medical advances have created a certain degree of uncertainty, in Lifetime
Options' business. Lifetime Options is currently exploring the sale of some or
all of the life insurance policies in its portfolio.
RESULTS OF OPERATIONS
The following table sets forth certain items of income and expense for
the periods indicated and indicates the percentage relationship of each item to
total income.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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For the Three Months Ended September 30,
----------------------------------------
1997 1996
------------------ ------------------
(Unaudited) (Unaudited)
INCOME
Earned discounts ................. $1,546,155 66.3% $2,423,715 82.9%
Fees and other income ............ 784,451 33.7 499,802 19.1
------- ---- ------- ----
TOTAL INCOME ................ 2,330,606 100.0% 2,923,517 100.0%
--------- ----- --------- -----
EXPENSES
Compensation and fringe benefits . 753,637 32.3% 737,910 25.3
General and administrative expense 543,715 23.3 632,985 21.7
Interest expense ................. 201,675 8.7 360,627 12.3
Provision for credit losses ...... 362,621 15.6 527,341 18.0
Commissions ...................... 68,332 2.9 126,248 4.3
------ --- ------- ---
TOTAL EXPENSES ............. 1,929,980 82.8 2,385,111 81.6
--------- ---- --------- ----
INCOME BEFORE INCOME TAXES .......... 400,626 17.2 538,406 18.4
INCOME TAXES ........................ 148,232 6.4 198,800 6.8
------- --- ------- ---
NET INCOME .......................... $ 252,394 10.8% $ 339,606 11.6%
========== ==== =========== ====
NET INCOME PER SHARE ................ $ 0.11 $ 0.15
====== ========
WEIGHTED AVERAGE NUMBER OF SHARES ... 2,318,139 2,317,237
========= =========
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
------------------- -------------------
(Unaudited) (Unaudited)
INCOME
Earned discounts .................. $ 5,335,750 74.7% $ 7,479,676 82.2%
Fees and other income ............. 1,809,075 25.3 1,615,052 17.8
--------- ---- --------- ----
TOTAL INCOME ................... 7,144,825 100.0% 9,094,728 100.0%
--------- ----- --------- -----
EXPENSES
Compensation and fringe benefits .. 2,215,833 31.0 2,584,291 28.4
General and administrative expense 1,583,662 22.2 2,184,707 24.0
Interest expense .................. 829,002 11.6 1,142,970 12.6
Provision for credit losses ....... 1,038,411 14.5 5,079,570 55.8
Commissions .................... 234,444 3.3 352,034 3.9
------- --- ------- ---
TOTAL EXPENSES ................. 5,901,352 82.6 11,343,572 124.7
--------- ---- ---------- -----
INCOME (LOSS) BEFORE INCOME TAXES .... 1,243,473 17.4 (2,248,844)(24.7)
INCOME TAXES (BENEFIT) ............... 460,086 6.4 (832,400) 9.2
------- --- -------- ---
NET INCOME (LOSS) .................... $ 783,387 11.0% $(1,416,444)(15.5)
============ ==== =========== =====
NET INCOME (LOSS) PER SHARE $0.34 $(0.61)
===== ======
WEIGHTED AVERAGE NUMBER OF SHARES 2,317,993 2,331,797
========= =========
13
<PAGE>
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 income from Collateralized Advances. "Fees
and other income" consist primarily of application fees, commitment or facility
fees, other related financing fees, revenue recognized on the collection of
certain non-performing assets 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.
For the Three Months Ended September 30,
1997 1996
(Unaudited) (Unaudited)
-------------------- --------------------
Earned % of Total Earned % of Total
Type of Transaction Income Income Income Income
------------------- ---------- ------- ----------- ------
Discount on Factored
Accounts Receivable ....... $1,100,130 47.2% $1,470,677 50.4%
Earnings on Collateralized
Advances .................. 238,308 10.2 685,778 23.4
Earnings on Purchased Life
Insurance Policies ........ -- -- 149,172 5.1
Other Earnings ................. 207,717 8.9 118,088 4.0
------- --- ------- ---
Total ..................... 1,546,155 66.3 2,423,715 82.9
Fees and Other Income .......... 784,451 33.7 499,802 17.1
------- ---- ------- ----
Total Income .............. $2,330,606 100.0% $2,923,517 100.0%
========== ===== ========== =====
For the Nine Months Ended September 30,
1997 1996
(Unaudited) (Unaudited)
------------------- -------------------
Earned % of Total Earned % of Total
Type of Transaction Income Income Income Income
------------------- --------- -------- ---------- -------
Discount on Factored
Accounts Receivable ......... $3,582,944 50.1% $4,033,922 44.3%
Earnings on Collateralized
Advances .................... 697,856 9.8 2,345,413 25.8
Earnings on Purchased Life
Insurance Policies .......... 200,000 2.8 491,244 5.4
Other Earnings ................... 854,950 12.0 609,097 6.7
------- ---- ------- ---
14
<PAGE>
1997 1996
(Unaudited) (Unaudited)
-------------------- -------------------
Total ....................... 5,335,750 74.7 7,479,676 82.2
Fees and Other Income ............ 1,809,075 25.3 1,615,052 17.8
--------- ---- --------- ----
Total Income ................ $7,144,825 100.0% $9,094,728 100.0%
========== ===== ========== =====
Total income decreased 21.4% in the first nine months of 1997 from the
same period in 1996, from $9.1 million to $7.1 million; total income decreased
21.9% for the third quarter of 1997 over the same period in 1996, from $2.9
million to $2.3 million. Earned discounts from factored accounts receivable
decreased, from $4.0 million to $3.6 million in the first nine months of 1997
versus the first nine months of 1996. In the third quarter of 1997 earned
discounts from factored accounts receivable decreased $1.1 million from $1.5
million. The decline in earned discounts from factored accounts receivable in
the nine months ended September 30, 1997 is, in part, attributable to the loss
of volume from several large clients that paid their obligations in full at the
beginning of the year. During the third quarter of 1997, however, the Company
funded seven new clients. Revenue from these accounts should enhance performance
in the fourth quarter of 1997. In addition, competition in the marketplace has
continued to exert downward pressure on earned discounts. Earned discounts from
factored accounts receivable as a percentage of total factored accounts
receivable purchased were 3.0% and 3.4%, respectively, in the first nine months
of 1997 and 1996. In the third quarters of 1997 and 1996, earned discounts were
3.0% and 3.4%, respectively, of factored accounts receivable. In the first nine
months of 1997 and 1996, earned discounts from factored accounts receivable
accounted for 50.1% and 44.3%, respectively, of total income. In the third
quarters of 1997 and 1996 earned discounts from factored accounts receivable
accounted for 47.2% and 50.4%, respectively, of total income.
Earned discounts from Collateralized Advances decreased approximately
70.2% in the first nine months of 1997 versus the comparable period in 1996, to
approximately $1.0 million from $2.4 million and decreased approximately 65.2%
in the third quarter of 1997 over the same quarter in 1996, to approximately
$238 thousand from $686 thousand. In the first nine months of 1997 and 1996,
earned discounts from Collateralized Advances constituted approximately 9.8% and
25.8%, respectively, of total income. The decline in earned discounts from
Collateralized Advances in 1997 does not reflect a strategic move away from
Collateralized Advances. Rather, it reflects a reduction in the average amount
of Collateralized Advances outstanding during the relevant periods. In the third
quarters of 1997 and 1996, earned discounts from Collateralized Advances
constituted 10.2% and 23.4%, respectively, of total income. Collateralized
Advances currently bear interest at a rate, on average, of approximately 2% per
month calculated generally on the average 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 Provision for
Credit Losses below.)
As of September 30, 1997 and December 31, 1996, factored accounts
receivable included on the Company's balance sheet were $20.1 million (65.8%)
and $22.4 million (59.6%), respectively, of gross finance receivables. As of
September 30, 1997 and December 31, 1996, Collateralized Advances included on
the Company's balance sheet were $4.4 million (15.4%) and $8.8 million (23.4%),
respectively, of gross finance receivables.
15
<PAGE>
Fees and other income increased 12.5% to approximately $1.8 million in
the first nine months of 1997 as compared to $1.7 million in the same period in
1996. In the third quarter of 1997, fees and other income were $784 thousand
compared to $500 thousand, an increase of 56.8% in the third quarter of 1997.
The increase in fees and other income in 1997 is primarily attributable to
revenue recognized on the collection of certain non-performing assets offset, in
part, by a reduction in facility fees and one-time fees received in 1996.
Compensation and Fringe Benefits. In the first nine months of 1997 and
1996, compensation and fringe benefits were $2.2 million (31.0% of total income)
and $2.6 million (28.4% of total income), respectively. For the third quarters
of 1997 and 1996, compensation and fringe benefits were $754 thousand (32.3% of
total income) and $738 thousand (25.2% of total income), respectively. Within
compensation and fringe benefits, executive compensation decreased in the first
nine months of 1997 as compared to the same period in 1996, from $904 thousand
(9.9% of total income) to $652 thousand (9.1% of total income). Executive
compensation increased in the third quarter of 1997 as compared to the same
period in 1996, from $190 thousand (6.5% of total income) to $220 thousand (9.5%
of total income). The higher compensation and fringe benefits (including
executive compensation) during the first nine months of 1996 were chiefly the
result of expenses associated with the severance of a key employee and costs
associated with replacing that employee.
General and Administrative Expense. General and administrative expense
was $1.6 million (22.4% of total income) as compared to $2.2 million (24.0% of
total income) for the first nine months of 1997 and 1996, respectively. For the
third quarters of 1997 and 1996, general and administrative expense was $559
thousand (24.0% of total income) and $633 thousand (21.7% of total income),
respectively. The decrease for the first nine months and the third quarter of
1997 was primarily attributable to a decrease in professional fees, offset in
part by increases in depreciation. Professional fees were $432 thousand (6.0% of
total income) in the first nine months of 1997 versus $980 thousand (10.8% of
total income) in the first nine months of 1996 and were $14.2 thousand (6.1% of
total income) in the third quarter of 1997 versus $226 thousand (7.7% of total
income) in the third quarter of 1996. The decrease in professional fees in 1997
is attributable, in part, to the final resolution of legal proceedings in prior
years. General and administrative expense (other than professional fees) for the
nine months ended September 30, 1997 and 1996 was $1.2 million (16.3%) and $1.2
million (13.2%), respectively. For the three months ended September 30, 1997 and
1996, general and administrative expense (other than professional fees) was $417
thousand (17.9%) and $407 thousand (13.9%), respectively.
Interest Expense. Interest expense was $829 thousand (11.6% of total
income) versus $1.1 million (12.6% of total income) for the first nine months of
1997 and 1996, respectively, and $202 thousand (8.7% of total income) versus
$360 thousand (12.3% of total income) for the third quarters of 1997 and 1996,
respectively. The decrease in interest expense is attributable to a decrease in
the average daily balance outstanding on the Company's revolving lines of credit
and to more favorable borrowing rates negotiated by the Company in May 1997. The
average daily outstanding balance on the Company's revolving lines of credit was
$4.9 million and $10.4 million for the first nine months of 1997 and 1996,
respectively, and $3.7 million and $9.5 million for the three months ended
September 30, 1997 and 1996, respectively. The average interest rate paid on the
Company's revolving lines of credit decreased to 8.89% during the first nine
months of 1997 from 9.12% during the first nine months of 1996 and was 8.45%
during the third quarter of 1997 as compared to 9.28% during the third quarter
of 1996.
16
<PAGE>
Interest expense on the Company's Convertible Subordinated Notes was
approximately $118,000 in the third quarters of 1997 and 1996 and $355,000 for
the first nine months of 1997 and 1996.
Provision for Credit Losses. The provision for credit losses decreased
from $5.1 million (55.9% of total income) in the first nine months of 1996 to
$1.0 million (14.5% of total income) in the first nine months of 1997. The
provision for credit losses during the first nine months of 1996 included a
provision of $3.9 million in the second quarter of 1996 associated with
management's decision to write-off or write-down nine non-performing assets
totaling $4.2 million. As of September 30, 1997 and December 31, 1996 the
allowance for credit losses was 10.0% ($2.8 million) and 6.9% ($2.6 million) of
gross finance receivables, respectively. At September 30, 1997 the accrual of
earnings was suspended on $1.9 million of gross finance receivables as compared
to $4.5 million of gross finance receivables at December 31, 1996. In addition,
"other receivables" and "other assets" appearing on the Company's balance sheet
typically do not accrue earnings for financial statement purposes. The following
table provides a summary of the Company's gross finance receivables (which
includes primarily factored accounts receivable, Collateralized Advances and
non-earning receivables), "other receivables" and "other assets" and information
regarding the allowance for credit losses as of the dates indicated.
<TABLE>
<CAPTION>
As of (or for As of (or for the Nine
the Year Ended) Months Ended) September 30,
December 31, 1996 1997 1996
----------------- -------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Gross Finance Receivables, Other
Receivables and Other Assets Data:
Gross Finance Receivables ............................. $ 37,600 $ 28,314 $ 35,416
Non-Earning Receivables (also included
in Gross Finance Receivables) ....................... 4,548 1,895 313
Other Receivables ..................................... 4,390 3,748 3,565
Other Assets (excluding
miscellaneous) ........................................ 1,884 3,481 590
Allowance for credit
losses:
Balance, January 1 .................................... 2,351 2,579 2,351
Provision for credit
losses .............................................. 5,878 1,038 5,080
Receivables charged off ............................... (5,711) (1,120) (5,708)
Recoveries ............................................ 61 330 15
-- --- --
Ending Balance ........................................ $ 2,579 $ 2,827 $ 1,738
======== ======== ========
Allowance for Credit Losses
as a percent of:
Gross Finance Receivables ............................. 6.9% 10.0% 4.9%
Non-Earning Receivables ............................... 56.7% 149.2% 555.3%
Non-Earning Receivables, Other
Receivables and Other Assets ........................ 28.3% 31.0% 39.0%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of (or for As of (or for the Nine
the Year Ended) Months Ended) September 30,
December 31, 1996 1997 1996
----------------- -------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
As a percent of the sum of Gross
Finance Receivables, Other
Receivables and Other Assets:
Non-Earning
Receivables .................................... 10.4% 5.3% 0.1%
Other Receivables ................................ 10.0% 10.5% 9.0%
Other Assets ..................................... 4.3% 9.8% 0.9%
</TABLE>
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.
COMMISSIONS. Commission expense was $234 thousand (3.3% of total
income) in the first nine months of 1997 as compared to $352 thousand (3.9% of
total income) in the first nine months of 1996. For the quarter ended September
30, 1997, commission expense was $68 thousand (2.9% of total income) versus $126
thousand (4.3% of total income) for the same quarter in 1996. The reduction in
commission expense is related, in part, to the decrease in earned discounts and,
in part, to certain new business acquired from non-commissioned referral
sources.
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 charged. Rising interest rates
would, however, increase the Company's cost of borrowed funds based on its
current borrowing arrangements which are prime or LIBOR adjusted credit
facilities.
CHANGES IN FINANCIAL CONDITION
The Company's total assets decreased 18.9% to $37.3 million at
September 30, 1997 from $45.9 million at December 31, 1996. The decrease is
primarily the result of a decrease in net finance receivables. The Company's
assets have increased 24.7% from June 30, 1997 to September 30, 1997. The
increase is primarily due to the increase in net finance receivables.
18
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal funding sources are the collection of factored
accounts receivable, retained cash flow and external borrowings. For additional
detail regarding external borrowings, see Notes 3 and 4 to the unaudited
financial statements contained in this Form 10- QSB.
The Company believes that internally generated funds and borrowings
under its revolving credit facility will be sufficient to finance the Company's
funding requirements for the next 12 months.
At September 30, 1997 and December 31, 1996, the Company had working
capital of $24.1 million and $24.9 million, respectively, and a ratio of current
assets to current liabilities of 3.7 to 1 and 2.36 to 1, respectively.
[THIS SPACE INTENTIONALLY LEFT BLANK]
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. -LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 6, Certain
Contingencies, to the unaudited financial statements contained in this Form
10-QSB.
ITEM 6(a). - EXHIBITS
EXHIBIT 10.1 MATERIAL CONTRACTS
Factoring Agreement with Republic Business Credit
EXHIBIT 10.9. EMPLOYMENT CONTRACTS
Hotsenpiller, Employment Agreement
EXHIBIT 27. FINANCIAL DATA SCHEDULE
ITEM 6(b). - REPORTS ON FORM 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
By: /s/ Lawrence M. Winkler
-----------------------
Lawrence M. Winkler
Date: November 14, 1997 /s/ Lawrence M. Winkler
-----------------------
Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2062321
<SECURITIES> 0
<RECEIVABLES> 24994577
<ALLOWANCES> 2826737
<INVENTORY> 0
<CURRENT-ASSETS> 33030652
<PP&E> 1229836
<DEPRECIATION> 750516
<TOTAL-ASSETS> 37258939
<CURRENT-LIABILITIES> 8911895
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 23271919
<TOTAL-LIABILITY-AND-EQUITY> 37258939
<SALES> 0
<TOTAL-REVENUES> 7144825
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4033939
<LOSS-PROVISION> 1038411
<INTEREST-EXPENSE> 829002
<INCOME-PRETAX> 1243473
<INCOME-TAX> 460086
<INCOME-CONTINUING> 783387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 783387
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
EMPLOYMENT AND COMPENSATION AGREEMENT
This EMPLOYMENT AND COMPENSATION AGREEMENT ("Agreement") is made as of
the 1st day of July, 1997, by and between ALLSTATE FINANCIAL CORPORATION, a
Virginia corporation having its principal place of business at 2700 South Quincy
Street, Suite 540, Arlington, Virginia 22206 (the "Company"), and Wade
Hotsenpiller (the "Employee"). The Company and the Employee in consideration of
the mutual premises contained herein, mutually agree as follows:
1. EMPLOYMENT. The Company employs the Employee and the Employee agrees
to serve the Company as Senior Vice President and Chief Operating Officer. The
Employee shall devote the Employee's full business time and best efforts to the
affairs of the Company, except as may otherwise be consented to by the Board of
Directors. Employee shall perform such other duties commensurate with the
Employee's position as may be specified from time to time by the President of
the corporation or the Board of Directors.
2. TERM. The term of this Agreement shall commence on the date set
forth above, and shall end at the close of business on June 30, 1998, unless
further extended or sooner terminated as hereinafter provided (the "Term").
3. SALARY. During the Term, the Company shall pay to the Employee the
Employee's salary at an annual rate of One Hundred Twenty Five Thousand and
00/100 Dollars ($125,000.00), which amount may be increased from time to time at
the discretion of the Board of Directors of the Company.
1
<PAGE>
4. OTHER COMPENSATION. The Company shall provide the Employee with the
following additional compensation: (i) Subject to meeting eligibility
provisions, any and all general Employee benefit plans, including without
limitation medical, health, life and disability insurance, pension and profit
sharing plans, now or hereafter granted by the Company to the employees of the
Company as a group, shall be granted to the Employee. If a disability insurance
plan is not provided to all employees, the Company will provide a reasonable
substitute for Employee. (ii) Employee shall be eligible to participate in any
employee stock option plans and any performance based compensation plans
(whether cash, stock or otherwise) that may be adopted by the Company. (iii)
Yearly bonuses to be paid to Employee at the discretion of the Board of
Directors of the Company. (iv) Use of a Company-owned automobile and coverage
under customary and appropriate Company-paid hazard, liability and other
insurance (or receipt of an automobile allowance of $500.00 per month).
5. REIMBURSEMENT. Usual and normal monetary allowances for bona fide
business expenses incurred by the Employee in connection with the performance of
the Employee's duties hereunder shall be reimbursed by the Company. Such
allowances shall, without limitation, include expenses such as travel,
entertainment, meals, hotels, telephone, telegraph, postage and such other
normal and customary business expenses.
2
<PAGE>
6. VACATION. The Employee shall be entitled to four (4) weeks paid
vacation per year during the term of employment hereunder. The dates of any
vacation periods shall be arranged in order that such vacation days shall not
materially hinder the normal functioning of the Company's business activities.
7. TRADE SECRETS; NON-COMPETITION.
(a) In the course of the Employee's employment, the Employee will have
access to confidential records, data, pricing information, lists of customers
and prospective customers, lists of vendors, books and promotional literature,
leases and agreements, policies and similar material and information of the
Company or used in the course of its business (hereinafter collectively referred
to as "confidential information"). All such confidential information which the
Employee shall use or come into contact with shall remain the sole property of
the Company. The Employee will not, directly or indirectly, disclose or use any
such confidential information, except as required in the course of such
employment. The Employee shall not for a period of one (1) year following the
end of the Term, disclose or use in any fashion any confidential information of
the Company or any of its subsidiaries or affiliates, whether such confidential
information is in the Employee's memory or embodied in writing or other physical
form, PROVIDED, that the foregoing requirements shall not apply to any
information (i) that (prior to disclosure by the Employee) has been disclosed by
the Company or any third party or (ii) that Employee discloses (A) to any
branch, agency or regulatory authority of any federal, state or local government
to comply with any statute, regulation, rule, order or ordinance or (B) to any
federal, state or local court, tribunal or other adjudicatory body in connection
with any suit, claim or question arising before such court, tribunal or other
adjudicatory body or otherwise.
3
<PAGE>
In the event of a breach or a threatened breach by the Employee of the
provisions of this subparagraph (a), the Company shall be entitled to an
injunction restraining the Employee from disclosing any of the aforementioned
confidential information. Nothing contained herein shall be construed as
prohibiting the Company from pursuing any other remedies available to the
Company for such breach or threatened breach, including the recovery of damages
from the Employee.
Subject to subparagraph (c) below, this provision shall survive the
termination of this Agreement.
(b) The Employee further agrees that, during the Term (or, if the
Employee's employment is terminated prior to the end of the Term (whether by the
Company or the Employee), during the period prior to such termination) and for a
period of one (1) year thereafter, the Employee will not, except with the prior
written consent of the Board of Directors, (i) be employed either as an
employee, consultant, officer or director, by any other non-bank-owned
commercial finance company, (ii) 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 the Company (or any subsidiary
or affiliate of the Company), (iii) initiate any action, either directly or
indirectly or through corporate or other entities or associates, that would
reasonably be expected to encourage or to induce any employee of the Company or
of any subsidiary or affiliate of the Company to leave the employ of the Company
or of any such subsidiary or affiliate or (iv) solicit any business from or have
any business dealings whatsoever with, either directly or indirectly or through
corporate entities or associates, any brokers or referral sources that have
within the preceding year referred
4
<PAGE>
transactions to the Company. The Employee specifically acknowledges the
necessity for this subparagraph (b), given the nature of the Company's business.
The Employee agrees that the Company shall be entitled to injunctive relief in
the event of a breach of the provisions of this subparagraph (b), the legal
remedies being inadequate to fully protect the Company. Nothing contained herein
shall be construed as prohibiting the Company from pursuing any other remedies
available to the Company for such breach, including the recovery of damages from
the Employee.
Subject to subparagraph (c) below, this provision shall survive the
termination of this Agreement.
(c) In the event of a Business Combination or Change of Control (as
defined below) involving the Company (whether or not the Company's Board of
Directors recommends such Business Combination or Change of Control for approval
by the Company's shareholders), subparagraphs (a) and (b) of this Paragraph 7
shall, at the time such Business Combination or Change of Control is
consummated, but only in the event Employee's employment is terminated in
connection therewith under the terms of subparagraph 8(c) below, be null and
void and of no further force or effect. For purposes of this Agreement,
"Business Combination" shall mean (i) a merger, consolidation or any other
business combination of the Company with any non-affiliated party, (ii) the
disposition of all or substantially all of the securities, business or assets of
the Company or (iii) a joint venture, reorganization or other transaction (or
series of transactions) as a result of which all or substantially all of the
business or assets of the Company are transferred, with or without a Change of
Control, or any other similar corporate combination or transaction (or series of
related transactions). For purposes of this Agreement, a "Change
5
<PAGE>
of Control" shall mean a transaction (or series of transactions) or other event
(or series of events) that results in the acquisition of a controlling interest
in the Company by a person or entity (or group of persons and/or entities) that
did not have a controlling interest in AFC prior to such transaction (or series
of transactions) or event (or series of events). As used in the preceding
sentence, the term "controlling interest" means possession, directly or
indirectly, of power to direct or cause the direction of management or policies
(whether through ownership of voting securities, by contract or otherwise);
provided that, in any event, any person or entity (or group of persons and/or
entities) which beneficially acquires, directly or indirectly, 25% or more (in
number of votes) of the securities having ordinary voting power for the election
of directors of the Company shall be conclusively presumed to have a controlling
interest in the Company. This provision shall be construed so that if a Business
Combination or Change of Control (as defined herein) occurs on more than one
occasion, the terms and provisions of this Agreement shall apply to the most
recent Business Combination or Change in Control.
8. PAYMENTS UPON TERMINATION. The Company shall pay to the Employee
upon termination of employment during the Term, as follows:
(a) If the Employee's employment is terminated by death, the Company
shall continue to pay and provide to the daughter (Andrea) and son (Gregory) of
the Employee for a period equal to six months, Employee's then applicable base
salary pursuant to the provisions of Paragraph 3 for such period, in bi-monthly
installments.
In addition, the Company, as soon as reasonably possible, but not past
the end of the fiscal year of the death of the Employee, shall also pay to the
daughter and son of the Employee (on a pro rata basis up to the date of the
Employee's death) compensation otherwise due and
6
<PAGE>
unpaid to the Employee as of the date of, or in connection with, the Employee's
death, pursuant and subject to the provisions of subparagraphs 4(i), 4(ii) and
4(iii) herein.
(b) In the event the Employee's employment is terminated because of
permanent disability (as defined below), for a period equal to six months, the
Company shall continue to pay and provide to the Employee the Employee's then
applicable salary for such period in bi-monthly installments, pursuant to the
provisions of Paragraph 3 herein, and benefits for such period as if the
Employee were still employed to be paid not later than the last day of such
period under subparagraphs 4(i), 4(ii) and 4(iii) herein. As used herein, the
Employee shall be deemed to be permanently disabled in the event that the
Employee has not been able (due to mental or physical illness or incapacity) to
render services required by this Agreement for a period of ninety (90)
consecutive days.
Any salary payments to be made by the Company under the provisions of
this subparagraph (b) are to be offset by payments, if any, made to the Employee
under any disability insurance plan maintained by the Company.
Payments of compensation to the Employee as set forth in this
subparagraph (b) shall be made by the Company to the Employee only if the
Employee is not otherwise subject to termination for Cause (defined below).
(c) In the event that (i) the employment of the Employee is terminated
by the Company other than under the provisions as set forth in Paragraph 8(a) or
(b) herein or (ii) following a Business Combination or Change of Control, (A)
the Employee is not offered a position with the Company that involves duties,
responsibilities, powers and functions comparable to those enjoyed by the
Employee immediately prior to such Business Combination or Change of Control
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at an annual rate of compensation at least equal to that annual rate paid to the
Employee immediately prior to such Business Combination or Change of Control and
(B) the Employee's employment is terminated prior to the end of the Term
(whether by the Employee or the Company), then the Company shall pay to the
Employee in addition to any other amounts otherwise payable to the Employee as
of the date of, or in connection with, such termination, on the date of such
termination a lump sum payment equal to the Employee's base salary (on a pro
rata basis) for six months. In addition, for six months, the Company shall
provide to the Employee benefits for such period as if the Employee were still
employed to be paid not later than the last day of such period under
subparagraphs 4(i), 4(ii) and 4(iii) hereof.
Notwithstanding anything else contained in this subparagraph (c), no
compensation shall be payable under this subparagraph (c) or subparagraph (b) if
the Employee's employment was or is terminated for Cause (as defined below). As
used herein, the term "Cause" shall mean (i) the Employee's conviction of (or
entry of a plea of nolo contendre with respect to) a felony or other crime
involving moral turpitude or (ii) a willful, substantial and continual failure
by the Employee in breach of this Agreement to perform the duties,
responsibilities or obligations assigned to the Employee pursuant to the terms
hereof and the failure to cure such breach within 15 days following written
notice from the Company containing specific findings by the Board of Directors
of the Company detailing such failures.
9. VALIDITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions and portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
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10. AMENDMENT AND WAIVER. This Agreement constitutes the entire
agreement between the parties as to employment by the Company of the Employee
and may not be changed orally but only by a written document signed by both
parties.
No waiver by either party hereto at any time of any breach by the other
party hereto of any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of any other breach by such party at
that time or any other time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not set forth expressly in this Agreement.
11. ARBITRATION. Any dispute whatsoever relating to the interpretation,
validity, or performance of this Agreement and any other dispute arising out of
this Agreement which cannot be resolved by the parties to such a dispute shall,
upon thirty (30) days written notice by either party, be settled upon
application of any such party by arbitration in Arlington County, Virginia, in
accordance with the rules then prevailing of the American Arbitration
Association, and judgment upon the award rendered by the arbitrators may be
entered in any court of competent jurisdiction. The cost of any arbitration
proceedings under this paragraph shall be shared equally by the parties to such
a dispute.
12. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of the Commonwealth of Virginia (without regard to
conflicts of law principles).
13. BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, legal
representatives, successors and assigns and shall become effective upon
execution by the Company.
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14. NOTICE. All notices, and other communications made pursuant to this
Agreement shall be made in writing and shall be deemed to have been given if
delivered personally or mailed, postage prepaid, to the applicable party hereto
at the applicable address first above written, or in either case, to such other
address as the Company or Employee shall have specified by written notice to the
other party.
15. PARAGRAPH HEADINGS. All paragraph headings are included herein for
convenience and are not intended to affect in any way the meaning or
interpretation of this Agreement.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
17. PRIOR AGREEMENTS SUPERSEDED. In the event that the Employee has
heretofore entered into an employment agreement with the Company, then this
Agreement hereby revokes, replaces and supersedes the prior employment agreement
between the Company and the Employee.
IN WITNESS WHEREOF, the parties have executed this agreement, the
Company acting herein by its duly authorized officer, the day and year first
above written.
COMPANY:
ALLSTATE FINANCIAL CORPORATION
By:
-------------------------------
Craig Fishman, President
EMPLOYEE:
-------------------------------
Wade Hotsenpiller
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REPUBLIC BUSINESS CREDIT
Republic Business Credit Corporation
452 Fifth Avenue
New York, New York 10018
FACTORING AGREEMENT
Re: Allstate Financial Corporation
2700 S. Quincy Street, Arlington, Virginia 22206
Ladies and Gentlemen:
We hereby request that you act as the sole re-factor of our Allstate
Factors Division effective as of the date of your acceptance hereof, upon the
terms and conditions set forth below. All capitalized terms shall have the
meaning given such terms in Section 15 of this Agreement ("Definitions") unless
defined elsewhere in this Agreement.
1. PURCHASE OF RECEIVABLES:
A. We agree that our Allstate Factors Division will do all of its factoring
business through you as its sole re-factor and we hereby assign and sell to you
as absolute owner all Receivables that our Allstate Factors Division acquires
from its Clients. We represent and warrant that each and every Receivable now or
hereafter assigned to you will be a bona fide and existing obligation of a
customer of a Client, owned by and owing to us, arising out of the sale and
delivery of goods by a Client or the rendition of services by a Client, free and
clear of any and all deductions, Disputes, liens, security interests and
encumbrances other than Permitted Liens.
B. You agree to and do hereby purchase without recourse to us, except as
set forth hereinafter, all Receivables approved by you in accordance with
Section IE below. You agree to and do hereby assume the risk of non-payment on
such Receivables, if nonpayment is due solely to the financial inability of the
customer to make payment at the due date of the Receivable, provided the
customer has, at such due date, and thereafter, received and finally accepted
the merchandise or services giving rise to such Receivables without any Dispute.
C. Receivables not approved by you in accordance with Section IE below are
assigned to and purchased by you with full recourse to us in the event of non-
payment thereof for any reason.
D. In addition, we hereby sell, assign and transfer to you all right, title
and interest in and to the merchandise, the sale of which resulted in creation
of Receivables, and in all such merchandise that may be returned by customers
and all causes of action and rights in connection therewith, which may now exist
or which may hereafter arise, including all rights of reclamation,
<PAGE>
replevin and stoppage in transit and all rights of an unpaid vendor of
merchandise or services as a lienor. We hereby agree upon your instruction to
promptly take any and all action necessary for you to enforce your rights of
reclamation, replevin and stoppage in transit and in the event of our failure to
do so, you shall be authorized to exercise any such right in our or the Client's
name or in any manner you deem appropriate. Any merchandise so recovered shall
be treated as returned merchandise, and shall be set aside, marked with your
name and held for your account as owner. You shall be promptly notified of all
such returned merchandise.
E. No purchase of any Receivable by you shall be deemed to be made pursuant
to Section IB above unless the sale of merchandise or rendition of services
resulting in such Receivable shall have been made with your prior written
approval of the amount and terms of such sale or rendition of services and the
credit standing of the customer, and you shall have the right to withdraw such
approval at any time before actual delivery of such merchandise or rendition of
such services. Each credit approval shall be automatically withdrawn in the
event the terms of sale are changed without your written approval or in the
event the shipment of goods or rendition of services shall not be made or
performed within thirty (30) days from the completion date specified in the
credit approval or within thirty (30) days from the date of the credit approval,
if no completion date is specified. When a credit approval specifies special
terms and conditions, the credit approval shall be deemed automatically
withdrawn when such special terms and conditions are not complied with. You
shall not be liable in any manner or respect for refusing to accept or approve
any Receivable or the credit standing of any customer or for withdrawing any
approval as provided in this Section IE.
F. On billing terms of "10 E.O.M." such terms shall mean with respect to
invoices dated from the Ist day through the 19th day of a month that the due
date of such invoice is "10 days after the end of such month"; and, with respect
to invoices dated on or after the 20th day of the month, the due date shall be
"10 days after the end of the next following month."
G. Net Sales relating to each Receivable net of any deductions, shall be
paid to us on the Settlement Date of such Receivable (less any commissions,
interest, Advances and other amounts or expenses then payable by us to you
pursuant to the terms hereof, and, if an Event of Default has occurred, all
other Obligations of ours) and such payment shall constitute payment in full of
all amounts due to us from you for such Receivable. We understand that Net Sales
will not be remitted to us on a Settlement Date if the customer remittance
constitutes an on-account or installment payment on a Receivable or if the
Receivable to which the customer remittance applies cannot be identified for
such Receivables. You may deduct from Net Sales available for payment on any
Settlement Date chargebacks, interest, fees and factoring commissions and any
other sums which are due and unpaid.
H. On the face of all bills and invoices for all Receivables assigned to
and purchased by you hereunder shall be placed the following legend: "This
Receivable has been sold and assigned to Allstate Factors, a division of
Allstate Financial Corporation and has been further assigned to and purchased by
Republic Business Credit Corporation and is owned and payable only to REPUBLIC
BUSINESS CREDIT CORPORATION AT P.O. BOX 7777, W8720, PHILADELPHIA, PA 19175-8720
OR DEPT. 49941, LOS ANGELES, CA 90088, whichever is nearer. Any objection to
this invoice must be reported to Republic Business Credit Corporation at 452
Fifth Avenue, New York, N.Y. 10018-2706."
2. ADVANCES: It is not anticipated that any advances or loans will be made
by you to or for us. If any advances or loans are at any time made by you in
your sole discretion, such loan or advance shall be due and payable on demand.
You may, in your sole discretion, hold a reserve against Receivables in such
amount as you determine to hold, and you may revise such reserve from time to
time.
3. SECURITY INTEREST: As security for any and all Obligations, you shall be
entitled to hold and we hereby grant to you a continuing general lien upon,
security interest in and to, and right of set off on or against any or all of
the following, whether now or hereafter existing or acquired, and wherever
located (collectively, the
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"Collateral"): Receivables and merchandise that may be returned by customers and
all causes of action and rights in connection which may now exist or which may
hereafter arise, including all rights of reclamation, replevin, and stoppage in
transit and all rights of an unpaid vendor of merchandise or services as a
lienor, and all proceeds of the foregoing together with all accounts,
instruments, documents, notes, bills and chattel paper, proceeds of insurance,
bank and other deposit accounts, general intangibles, all balances and sums and
any other property at any time to the credit of the Allstate Factors Division of
Allstate Financial Corporation with Republic Business Credit Corporation, books
and records, all the foregoing as they relate to any and all Receivables. No
other interest in any other assets of the Allstate Factors Division of Allstate
Financial Corporation or of Allstate Financial Corporation shall constitute
Collateral except as specifically set forth above. We represent, warrant and
covenant to you that we now have, and shall at all times continue to have, good
and marketable title to all of the Collateral, free and clear of any and all
liens, security interests and encumbrances other than Permitted Liens. You shall
have the right and are hereby irrevocably authorized at any time to charge to us
the amounts of any and all Obligations, whether or not then due. We shall
execute and deliver to you all financing statements and other documents and
instruments that you may request to perfect, protect or establish your security
interest hereunder and we authorize you to execute and file any financing
statements covering such security interest without our signature or, if you so
elect, signed in our name by you, and you are hereby irrevocably appointed our
attorney-in-fact to do so and you shall provide us with a copy of any such
filings. We shall reimburse you for, and you shall be entitled to charge us
with, all costs and expenses incurred by you in connection with the
administration and enforcement of this Agreement, or to enforce any of the
Obligations, or in the prosecution or defense of any action, involving you or
us, concerning any matter growing out of or in any manner relating to this
Agreement, the Receivables or other Collateral or any Obligation whatsoever
other than the costs of collection of Receivables acquired by you pursuant to
Section I B of this Agreement, including, without limitation, all reasonable
fees and expenses of your attorneys (including inhouse counsel), incurred in
connection with the foregoing, including, without limitation, those incurred in
connection with any state court insolvency case or proceeding or federal
bankruptcy case or proceeding, and all fees and costs in connection with public
record searches and filings, and all other costs and expenses with respect
thereto, whether or not a legal action is commenced by or against us, and if
such action is commenced, whether or not judgment is obtained other than the
initial filing fees and expenses incurred in connection with the execution of
this Agreement. Recourse to security or any Collateral shall not at any time be
required and we shall at all times remain liable for the repayment on demand to
you of all Obligations.
4. DISBURSEMENT OF FUNDS: We may from time to time give you oral,
telephonic, telefax and/or written instructions to disburse monies to us. Such
disbursement shall be made only to the following account IBJ SCHRODER BANK &
TRUST CO., NEW YOUK, NEW YORK, ABA # 026 00 7825, FOR THE ACCOUNT OF AFC, ACCT.
# 43589603, REF: ALLSTATE FACTORS. Such disbursement requests may be made by any
of our officers, employees or agents and you shall have no obligation to verify
that any request is authorized or proper. You shall charge us $15.00 in
connection with each such disbursement made electronically.
5. INTEREST: A. Interest charges to our account shall be at a rate per aMum
equal to the Republic Reference Rate, computed on the basis of a 360-day year
for the actual number of days in the interest period. The interest rate in
effect during each calendar month shall be determined using the Republic
Reference Rate in effect on the last Business Day of the preceding calendar
month. We recognize that the actual yield to you under this Agreement may exceed
the rate of interest specified in this Section 5A.
B. Interest, at the respective rates set forth in this Section 5 shall be
computed daily on the unpaid amount due to you hereunder, but only shall be
charged or credited to our account in accordance with Section 5E below.
C. In the event any sums are paid to us or credited to our account in
error, or you are required to turn over or return to the customer an
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<PAGE>
amount which was paid to us and whose risk of non-payment you did not assume in
accordance with Section IBabove, you may in your discretion charge said sum to
our account. Any such sums shall bear interest, payable by us at the rate set
forth in Section 5A above, from the Settlement Date of such sum, if a
Receivable, or otherwise from the date such sum was paid to us or credited to
our account (which date shall constitute the "Settlement Date" for such sum), up
to the date a correction is made on your records.
D. In the event Net Sales are not paid to us on the date payable pursuant
to Section IG hereof, whether by error, or because the customer remittance was
an on-account or installment payment (which payments are not credited until the
full invoice amount is paid), or because the Receivable to which the customer
remittance applied could not be identified, then the payment received by you
shall bear interest, payable by you as a credit to our account at the rate set
forth in Section 5A above, from the Settlement Date of such payment, which, if
such payment is a partial payment of a full invoice, shall be calculated based
upon the Deposit Date of such partial payment, up to the date such payment is
remitted to us.
E. Interest shall be charged or credited to our account, as the case may
be, as of the last day of the month in which the interest is accrued, and shall
be deducted from or added to the Net Sales relating to Receivables having such
Settlement Date in the following month as you shall select. If the Net Sales
payable on such Settlement Date are less than the interest payable to you, we
shall pay such interest to you on demand.
F. You shall pay us interest on Matured Funds, at a rate per annum equal to
3% below the Republic Reference Rate in effect during each day in which such
Matured Funds are retained by you. The applicable Republic Reference Rate is to
be determined in accordance with Section 5A above. You reserve the right to
remit such Matured Funds to us at any time in accordance with the provisions of
Section 4.
6. MONTHLY STATEMENTS: You will send us a monthly statement after the end
of each month prior to the end of the following month. UNLESS YOU RECEIVE OUR
WRITTEN EXCEPTIONS TO ANY STATEMENT RENDERED BY YOU WITHIN THIRTY FIVE (35) DAYS
AFTER SUCH STATEMENT IS SENT BY U.S. MAIL OR HAND DELIVERED, SUCH STATEMENT
SHALL CONSTITUTE AN ACCOUNT STATED AND BE DEEMED ACCEPTED BY US AND SHALL BE
CONCLUSIVE AND BINDING UPON US.
7. COMMISSIONS:
A. We agree to pay to you a factoring commission at the following
percentages of the gross face amount for each Receivable we acquire from a
Client, whether or not specifically assigned to you: .70% for the first
$15,000,000; .65% in excess of $15,000,000 but less than $30,000,000; .60% in
excess of $30,000,000 but less than $50,000,000 and .50% in excess of
$50,000,000. Your factoring commission as so calculated shall be charged to us
as of the last day of the month in which the Receivable was assigned.
Commissions payable under this Section shall be deducted from Net Sales. If
sufficient funds are not available on a Settlement Date to pay commissions for
any month in full, then the unpaid balance shall bear interest from the due date
of such Commissions to the date paid, at the rate set forth in Section 5 above,
and such unpaid balance plus interest shall be deducted from Net Sales on the
next Settlement Date.
B. Commissions payable to you hereunder are based upon terms which do not
exceed ninety (90) days. On any Receivable on which the terms are more than
ninety (90) days, your commissions thereon shall be increased at the rate of one
quarter of one percent (.25%) of the gross face amount of such Receivable for
each additional thirty (30) days or fraction thereof by which the terms exceed
ninety (90) days. A minimum factoring commission on each invoice shall be $3.50.
C. We may from time to time request that you credit approve sales made to
Debtors-in-Possession operating under Chapter 11 of the Bankruptcy Code ("DIP
Sales"). We agree that any such credit approval by you of DIP Sales shall be
subject to a supplemental factoring commission of 1% in addition to the regular
factoring commission charged by you except as to sales to Petrie Retail,
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Inc. and its affiliates in which case the DIP Surcharge shall be 2%.
D. Each month you shall charge us with the greater of (i) $2,500.00 or (ii)
the amount of the factoring commission provided for herein. Further, you agree,
notwithstanding the foregoing, in the event that in any Contract Year our total
commissions payable pursuant to Section 7A, 7B, and 7C hereof shall exceed
$30,000.00 and in any month you have charged us with the amount set forth in (i)
above, you agree to rebate to us any amounts paid by us pursuant to (i) above.
8. ASSIGNMENT SCHEDULES, INVOICING AND CREDITS: We will provide you with an
assignment and schedule of Receivables sold and assigned to you in form
satisfactory to you. All bills or invoices shall be mailed by us or our Clients
to customers at our or our Clients' sole expense. We will give you copies of all
bills or invoices, together with such proof of shipment or delivery as you may
from time to time require. The issuance of or any billing by us or a Client of
such bills or invoices, shall constitute an assignment thereof to you for the
Receivables represented thereby, whether or not we execute any other specific
instrument of assignment. Notwithstanding the foregoing, you shall be deemed not
to have assumed the credit risk as provided in Section IB above if we do not
supply you with a schedule and assignment of Receivables within thirty (30) days
of the creation of the Receivables involved and the risk of loss with respect to
such Receivables shall be deemed to have reverted to and been assumed by us
without any act upon your part to effect the same.
9. DISPUTES AND CHARGEBACKS: We hereby further warrant to you that the
customer in each instance has received and will accept the merchandise sold or
the services rendered and the bill or invoice therefor, and will pay the same as
and when due without any Dispute. We will notify you promptly of, and, at our
own cost and expense, including attorneys' fees and expenses, shall settle all
Disputes and will pay you promptly the amount of the Receivables affected
thereby for which you have paid us. Any Dispute not settled by us by the
sixtieth (60th) day next following the due date of the bill or invoice affected
thereby may, if you so elect, be settled, compromised, adjusted or litigated by
you directly with the customer or other complainant for us and at our risk and
upon such terms and conditions as you in your sole discretion deem advisable.
You may also in your discretion take possession of and sell or cause the sale of
any returned or recovered merchandise, at such prices, upon such terms and to
such purchasers as you deem proper (including, in the event of any public sale,
yourself) and in any event to charge the deficiency costs and expenses thereof,
including attorneys' fees and expenses, to us. In addition to all other rights
to which you are entitled hereunder, whenever there is any Dispute, or if any
Receivable not approved in accordance with Section IB is unpaid on its due date
for which you have paid us, you may charge the amount of the Receivable so
affected or unpaid to us at any time. In addition, you shall also be entitled to
charge to us the amounts you receive in payment of any Receivable not approved
in accordance with Section IB and which thereafter you are required to turn over
or return to a Client or a customer or any legal representative thereof. The
provisions of the foregoing sentence shall survive the termination of this
Agreement, and we hereby indemnify you and hold you harmless from any loss or
expense arising out of the assertion of such a claim with respect to any
Receivable not approved in accordance with Section IB, including attorneys' fees
and expenses, and the amount of such loss or expense may be charged to us. You
will automatically charge back to us deductions taken by customers. Any
chargeback of a Receivable shall not be deemed nor shall it constitute a
reassignment to us of the Receivable affected thereby, and title thereto and to
the merchandise represented thereby shall remain in you until you are fully
reimbursed. Regardless of the date or dates upon which you charge back the
amount of any Receivable with respect to which there is any Dispute, or the
amount owing from a customer which has raised any Dispute, we agree that
immediately upon the occurrence of any such Dispute, any obligation you may
otherwise have had hereunder to bear the risk of loss with respect to such
Receivable shall cease and such obligation shall be deemed to have reverted to,
and to have been assumed by, us without any act upon your part to effect the
same.
10. REMITTANCES OF FUNDS: If any remittances are made directly to us, we
shall hold
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the same in trust for you as your property and immediately deliver to you the
identical checks, monies or other forms of payment received, and you shall have
the right to endorse our name on any and all checks or other forms of
remittances received if such endorsement is necessary to effect collection.
11. MAINTENANCE OF RECORDS:
A. We agree that we will hold at our of flees and be fully responsible to
you for any and all shipping receipts evidencing delivery of goods or rendition
of services regarding Receivables purchased by you. Such shipping evidences held
by us shall be available for your inspection and for delivery to you at your
request at any time.
B. We further agree to make our records, files and books of account,
including, but not limited to, any and all bills, invoices, shipping or
transport documents, ledgers, journals, checkbooks, correspondence, memoranda,
microfilm, microfiche, computer programs and records, source materials, tapes
and discs (collectively "Documents"), available to you on request and that you
may visit our premises during normal business hours to examine such Documents
and to make copies or extracts thereof and to conduct such examinations as you
deem necessary.
12. CERTAIN COSTS AND EXPENSES:
A. If you, at our request and on our behalf, in your sole discretion, file
a claim (a OR Claim"), with respect to a Receivable which is not at your credit
risk or forward such a DR Claim to a collection agency or attorney for
collection, you shall charge us with an amount equal to ten (10%) percent of the
amount collected on the DR Claim and in addition one hundred (100~o) percent of
the actual expenses or charges incurred by you shall be charged to us when
incurred.
B. We shall be entitled to receive at no cost to us one (1) Client Detail
Aged Trial Balance for each month. For each additional Client Detail Aged Trial
Balance requested by us in that month, you shall charge us $100.00.
C. In addition to the costs and expenses provided in this Agreement, you
shall be entitled to charge our account with a one time fee of $5,000.00 to
establish this Agreement with you and to cover legal fees for such
establishment.
D. We shall pay you and we authorize you to charge us a set up fee of
$250.00 for each Client we establish with you.
E. You may modify the charges set forth in Sections 4, 7C, 12A, and 12B
above, from time to time, on not less than 180 days prior written notice.
13. TAXES: Any state, city, local or federal sales or excise taxes on sales
of Receivables hereunder and any payroll taxes, state disability premiums,
premiums for workman's compensation insurance and unemployment taxes, shall be
timely paid by us.
14. WARRANTIES AND AGREEMENTS:
A. We hereby warrant our solvency (which warranty shall be continuing
throughout the term of this Agreement) and hereby agree that we are not entitled
to and shall not pledge your credit for any purpose whatsoever except as you
shall agree to in writing. We further agree that we shall not encumber or grant
a lien on or security interest (other than Permitted Liens) in present or future
Receivables, or our other Collateral, other than to you without your prior
written consent.
B. We agree to furnish you with balance sheets, statements of profit and
loss, financial statements and such other information regarding our business
affairs and financial condition as filed with the Securities and Exchange
Commission, and in any event, a statement of our financial position for each
fiscal year prepared and certified by our regularly engaged Certified Public
Accountant. All such statements shall fairly present our financial condition as
of the dates, and the results of our operations for the periods, for which the
same are furnished.
C. This Agreement is the complete agreement between the parties hereto as
to the subject matter hereof, all prior commitments,
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proposals, negotiations concerning the subject matter hereof being merged
herein. This Agreement is entered into for the benefit of said parties, their
successors and assigns, except that we shall not assign or hypothecate our
rights under this Agreement to any other person, firm, corporation or entity
without your prior written consent. This Agreement cannot be amended, changed,
modified or terminated orally. We hereby consent to the assignment by you of
this Agreement and your rights hereunder, including the Collateral, to any
Affiliate or any other third-party. No delay or failure on your part in
exercising any right, privilege or option hereunder shall operate as a waiver
of such or of any other right, privilege or option, and no waiver whatever
shall be valid unless in writing signed by you and then only to the extent a
waiver is therein set forth.
15. DEFINITIONS: For purposes of this Agreement the following terms shall
have the respective meanings given to them below:
(a) "Advance" shall mean payment of the Net Sales relating to a
Receivable prior to its Settlement Date.
(b) "Affiliates" shall mean any person, firm or corporation directly
or indirectly controlling, controlled by or in common control with you and any
corporation the stock of which is owned or controlled directly or indirectly by,
or is under common control with, Republic New York Corporation.
(c) "Agreement" shall mean this Factoring Agreement, as amended,
modified or supplemented.
(d) "Business Day" shall mean any week day on which banking
institutions in New York, New York are open for the transaction of ordinary
banking business. If any payment or credit by you to us under this Agreement is
due on a day other than a Business Day, then such payment or credit shall be
made on the next Business Day.
(e) Client" means a seller of goods or services from whom we purchase
Receivables through our Allstate Factors Division.
(f) "Contract Year" means the twelve month period commencing on the
first day of the month after the effective date to the day immediately preceding
the anniversary of such date.
(g) "Deposit Date" shall mean with respect to a payment on a
Receivable from or on behalf of a customer made to the banking institution
receiving on your behalf such payment, the date such banking institution notes
on the item evidencing such payment or otherwise on its records as the date it
deems such payment as having been received by it.
(h) "Dispute" shall mean any dispute, claim, offset, defense,
counterclaim or any other reason for nonpayment other than a customer's
financial inability to pay, regardless of whether the same is in an amount
greater than, equal to or less than the Receivable concerned, whether bona fide
or not, and regardless of whether the same, in part or in whole, relates to an
unpaid Receivable or any other Receivable and whether or not such Dispute arises
by reason of an Act of God, civil strife, war, currency restrictions or
fluctuations, foreign political restrictions or regulations or the like.
(i) "Matured Funds" means the aggregate amounts of Net Sales that we
have elected, by notice to you, to have you retain beyond their Settlement Date,
less the amount of any unpaid Advances, interest, commissions and other amounts
or expenses then due you from us pursuant to the terms hereof and, after the
occurrence of an Event of Default, any other Obligations of ours.
(j) "Net Sales" shall mean the gross face amount of Receivables less
discounts taken by customers, and any credits received by or allowed to,
customers.
(k) "Obligations" shall mean all loans, advances, indebtedness,
liabilities, debit balances, covenants and duties and all other obligations of
whatever kind or nature at any time or from time to time owed by us to you
whether fixed or contingent, due or to become due, no matter how or when arising
and whether under this or any other Agreement or otherwise.
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(1) "Permitted Liens" shall mean any lien or security interest granted
to any financial institution which has entered into an intercreditoragreement
with you (including, without limitation, a Subordination Agreement and
Assignment of Monies Due).
(m) "Receivables" (or "Receivable" in the singular) shall mean and
include all accounts, and all other obligations of customers of Clients of our
Allstate Factors Division arising out of the sale and delivery of goods or the
rendition of services by such Clients, whether now existing or hereafter
created.
(n) "Republic Reference Rate" shall mean the lending rate established
by Republic National Bank of New York from time to time at its principal
domestic office as its reference lending rate for domestic commercial loans.
(o) "Retail Receivables" shall mean Receivables payable by retail
stores.
(p) "Settlement Date" shall mean for Receivables having a Deposit Date
of payment on Monday and Tuesday in any week, Friday of such week; and for
Receivables having a Deposit Date of payment on Wednesday through Friday,
Tuesday of the following week. For the purposes of the preceding sentence, a
Receivable on which you have assumed the risk of nonpayment under Section IB
above which remains unpaid and has not been the subject of any Dispute 120 days
with regard to Retail Receivables and 90 days with regard to Wholesale
Receivables after its due date (the "Deems Paid Date"), shall be deemed to have
a Deposit Date of payment on the Deems Paid Date.
(q) "Wholesale Receivables" shall mean any Receivable other than
Retail Receivables.
16. TERM AND EVENTS OF DEFAULT:
A. This Agreement shall continue in full force and effect until the
anniversary of the first Contract Year and from Contract Year to Contract Year
thereafter unless terminated by you or unless we notify you of our desire to
terminate this Agreement effective on the anniversary date of any Contract Year
by giving you at least sixty (60) days' prior written notice. Notwithstanding
the foregoing, we shall have the right to terminate the Agreement at any time
during the first Contract Year provided we shall have paid you commissions in
such Contract Year of not less than $30,000.00. We shall have the right to
terminate this Agreement in any subsequent Contract Year provided we have paid
you commissions in such Contract Year of not less that $30,000.00. You shall
have the right to terminate this Agreement at any time upon thirty (30) days'
prior written notice. Termination shall be effective by the mailing by certified
mail, return receipt requested of a letter of notice addressed by either of us
to the other specifying the date of termination. Notwithstanding the foregoing,
you may terminate this Agreement without notice upon the occurrence of any Event
of Default. On termination for any reason, all Obligations shall, unless and to
the extent that you otherwise elect, become immediately due and payable without
notice or demand. Any of the following events with respect to us of any
Obligations shall constitute an "Event of Default" hereunder: default in the
payment or performance of any Obligation owing to you when due, including
without limitation the failure to pay to you the amount of any net debit balance
in our account and any unpaid interest thereon after demand therefor has been
made; we commit any breach of or default in the performance of any material
covenant or agreement contained in this Agreement or in any other instrument or
agreement with or in favor of you; any representation or warranty made by us in
this Agreement or in any other instrument or agreement with or in favor of you
shall prove to be materially inaccurate or untrue; our dissolution; we shall
commence any case, proceeding or other action under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an
order for relief entered with respect to us, or seeking to adjudicate us a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to us, or seeking appointment of a receiver, trustee, custodian or other similar
official
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for us or for all or any substantial part of the assets of us, or we shall make
a general assignment for the benefit of its creditors, or there shall be
commenced against us any case, proceeding or other action of a nature referred
to in this clause; there shall be commenced against us any case, proceeding or
other action seeking issuance of a warrant of attachment, execution, distraint
or similar process against all or any substantial part of the assets of us which
results in the entry of an order for any such relief, or we shall take any
action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in this clause; we shall generally
not, or shall be unable to, or shall admit in writing its inability to, pay its
debts as they become due; entry of a judgment against us in excess of
$50,000.00; failure to pay or remit any material amount of tax when assessed or
due; making a bulk transfer or sending notice of intent to do so; granting any
security interest (other than to you or to Permitted Liens); suspension or
liquidation of the usual business of us; failing to furnish you with any
requested financial information or failing to permit inspection of books or
records in accordance with the terms hereof by you or any of your agents,
attorneys or accountants; we shall become a party to any merger or consolidation
without your prior written consent.
B. Notwithstanding any termination hereof, this Agreement shall
nevertheless continue in full force and effect as to, and be binding upon us,
after any termination, until we have fully paid, performed and satisfied all of
the Obligations, no matter how or when arising and whether under this or any
other agreement.
C. You agree that during the term of this Agreement you will not, except
with our prior written consent, solicit any business from any Client for which
we are the sole factor whose Receivables you acquired from us.
17. REMEDIES: Upon the occurrence and continuance of any Event of Default,
you shall have all of the rights and remedies of a secured party under the
Uniform Commercial Code and other applicable laws with respect to all
Collateral, such rights and remedies being in addition to all of your other
rights and remedies provided for herein or in any other agreement between us,
and further, you may, at any time or times, after the occurrence of any such
Event of Default, sell and deliver any and all other Collateral held by you or
for you at public or private sale, in one or more sales or parcels, at such
prices and upon such terms as you may deem best, and for cash or on credit or
for future delivery, without your assumption of any credit risk, and at public
or private sales, as you may deem appropriate. If reasonable notice of the time
and place of such sale is required under applicable law, such requirement shall
be met if any such notice is mailed, postage prepaid, to our address shown on
the cover page hereof, or the last shown address in your records, at least ten
(10) days before the time of the sale or disposition thereof. You may be the
purchaser at any sale, if it is public, free from any right of redemption,
which, to the extent permitted by law, we also hereby expressly waive. The
proceeds of sale shall be applied first to all costs and expenses of sale,
including attorneys' fees and disbursements, and then to the payment (in such
order as you may elect) of all Obligations. You will return any excess to us and
we shall remain liable to you for any deficiency. Your rights and remedies under
this Agreement will be cumulative and not exclusive of any other rights or
remedies which you may otherwise have. The provisions of this Section 17 shall
survive any termination of this Agreement.
18. APPLICABLE LAW, ARBITRATION, JURISDICTION, STATUTE OF LIMITATIONS,
WAIVER OF JURY TRIAL:
A. This Agreement is made in the State of New York and shall be governed by
and construed in accordance with the laws of said State, without regard to
conflict of laws principles.
B. We agree that any Claim or cause of action by us against you, or any of
your Affiliates, assigns, shareholders, directors, officers, employees, agents,
accountants or attorneys, based on, arising from or relating in any way to this
Agreement, or any supplement or amendment hereto, or any other present or future
agreement between us, or any other transaction contemplated hereby or thereby or
relating hereto or thereto, or any other matter whatsoever shall be barred
unless asserted by us by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing of a complaint within eighteen (18)
months after the first
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act, occurrence or omission upon which such Claim or cause of action, or any
part thereof, is based, and the service of a summons and complaint upon one of
your officers, within thirty (30) days after such filing. We agree that said
eighteen (18) month period is a reasonable and sufficient time for us to
investigate and act upon such Claim or cause of action. Said eighteen month
period shall not be waived, tolled or extended except by specific written
consent by you.
C. In performing your obligations under this Agreement, you shall be liable
to us for only your gross negligence or willful misconduct. No Client or other
person or entity shall be a third party beneficiary of any of our rights or
claims under this Agreement and in particular, but not by way of limitation, you
shall not be liable to any third party or for any act or omission by you or any
third party including, without limitation, the inability or failure of any third
party to effect a transfer in accordance with our instructions due to
mechanical, computer or electrical failures or for any other reason beyond your
control. You shall have no obligation to pursue, or assist us in pursuing, any
claim we may have against any third party. In no event, shall you be liable for
special, punitive, indirect or consequential damages, nor shall any action or
inaction on your part, constitute a waiver by you of any cause of action or
defense.
D. As a material part of the consideration to you to enter into this
Agreement, we (1) agree that, at your option, all actions and proceedings based
upon, arising out of or relating in any way directly or indirectly to this
Agreement shall be litigated exclusively in the Supreme Court of the State of
New York, County of New York, (2) consent to the jurisdiction of such court and
consent to the service of process in any such action or proceeding by personal
delivery, first-class mail, or any other method permitted by law, and (3) waive
any and all rights to transfer or change the venue of any such action or
proceeding to any other court.
E. The headings of various Sections of this Agreement are for convenience
of reference only and shall not modify, define, expand or limit any of the terms
or provisions of this Agreement.
F. This Agreement and the other written documents previously or now
executed in connection herewith are the entire and only agreements between us
with respect to the subject matter hereof, and all oral representations,
agreements and undertakings, previously or contemporaneously made, which are not
set forth herein or therein, are superseded hereby and thereby. The provisions
of this Section 18 shall survive any termination of this Agreement.
G. YOU AND WE EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION
BASED UPON, ARISING FROM, OR IN ANY WAY RELATING TO: (1) THIS AGREEMENT, OR ANY
SUPPLEMENT OR AMENDMENT HERETO; OR (11) ANY OTHER PRESENT OR FUTURE INSTRUMENT
OR AGREEMENT BETWEEN YOU AND US; OR (111) ANY CONDUCT, ACTS OR OMISSIONS BY YOU
OR US OR ANY OF YOUR OR OUR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH YOU OR US; IN EACH OF THE
FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
Very truly yours,
ALLSTATE FINANCIAL CORPORATION
By: /s/ Craig Fishman
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Title: President
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ACCEPTED AT NEW YORK, NEW YORK
ON July 1, 1997
REPUBLIC BUSINESS CREDIT CORPORATION
By: Marc Forscheimer
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Title: Sr. VP
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